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TABLE OF CONTENTS
ROCKET FUEL INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
As filed with the Securities and Exchange Commission on September 3, 2013.
Registration No. 333-190695
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ROCKET FUEL INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
7370
(Primary Standard Industrial
Classification Code Number)
30-0472319
(I.R.S. Employer
Identification Number)
350 Marine Parkway
Marina Park Center
Redwood City, CA 94065
(650) 595-1300
(Address, including zip code and telephone number, including area code, of registrant's principal executive offices)
George H. John
Chief Executive Officer
Rocket Fuel Inc.
350 Marine Parkway
Marina Park Center
Redwood City, CA 94065
(650) 595-1300
(Name, address, including zip code and telephone number, including area code, of agent for service)
Copies to:
Steven E. Bochner
Rachel B. Proffitt
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304
(650) 493-9300
JoAnn C. Covington
General Counsel
Chief Privacy Officer
Rocket Fuel Inc.
350 Marine Parkway
Marina Park Center
Redwood City, CA 94065
(650) 595-1300
Mark C. Stevens
Jeffrey R. Vetter
James D. Evans
Fenwick & West LLP
801 California Street
Mountain View, CA 94041
(650) 988-8500
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.
box:
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement for the same offering. 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large
accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer 
Non-accelerated filer 
(Do not check if a
smaller reporting company)
Accelerated filer 
Smaller reporting company 
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 which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 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. These securities may not be sold until the
registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to
sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS
Subject to Completion, Dated September 3, 2013
Shares
Rocket Fuel Inc.
Common Stock
This is the initial public offering of the common stock of Rocket Fuel Inc. We are selling
$
shares of common stock.
Prior to this offering, there has been no public market for our common stock. The initial public offering price is expected to be between
and $
per share. We have applied to list our common stock on The NASDAQ Global Market under the symbol "FUEL".
The underwriters have the option to purchase up to
additional shares from the selling stockholders identified in this
prospectus at the initial price to the public less the underwriting discounts and commissions. We will not receive any of the proceeds from the
sale of shares by the selling stockholders.
We are an "emerging growth company" as that term is defined in the Jumpstart Our Business Startups Act of 2012 and, as such,
have elected to comply with certain reduced public company reporting requirements under the federal securities laws. Investing in our
common stock involves risks. See "Risk Factors" beginning on page 13.
Price to
Public
Per Share
Total
$
$
Underwriting
Discounts and
Commissions (1)
$
$
Proceeds to
Rocket Fuel
$
$
(1)
We have agreed to reimburse the underwriters for certain expenses, see "Underwriting."
Delivery of the shares of common stock is expected to be made on or about
, 2013.
Neither the Securities and Exchange Commission nor any other regulatory body have approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Credit Suisse
Needham & Company
Citigroup
Oppenheimer & Co.
Piper Jaffray
The date of this prospectus is
BMO Capital Markets
, 2013.
LUMA Securities
Table of Contents
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY
RISK FACTORS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
MARKET AND INDUSTRY DATA
USE OF PROCEEDS
DIVIDEND POLICY
CAPITALIZATION
DILUTION
SELECTED CONSOLIDATED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS
MANAGEMENT
EXECUTIVE COMPENSATION
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
PRINCIPAL AND SELLING STOCKHOLDERS
DESCRIPTION OF CAPITAL STOCK
SHARES ELIGIBLE FOR FUTURE SALE
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
UNDERWRITING
LEGAL MATTERS
EXPERTS
ADDITIONAL INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
1
13
38
40
41
41
42
44
46
50
84
99
109
121
124
126
130
132
136
144
144
144
F-1
Neither we, the selling stockholders nor the underwriters have authorized anyone to provide any information or make any representations
other than those contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you.
Neither we, the selling stockholders nor the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other
information that others may give you. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of common stock
only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.
Through and including
, 2013 (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 dealer's obligation
to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
For investors outside of the United States: Neither we, the selling stockholders nor 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 the United States are required to inform themselves about, and to observe any restrictions relating to, this
offering and the distribution of this prospectus outside of the United States.
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PROSPECTUS SUMMARY
The following summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the
information you should consider before investing in our common stock. You should carefully read this prospectus in its entirety before
investing in our common stock, including the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus.
Overview
Rocket Fuel is a technology company that has developed an Artificial Intelligence and Big Data-driven predictive modeling and
automated decision-making platform. Our technology is designed to address the needs of markets in which the volume and speed of
information render real-time human analysis infeasible. We are focused on the large and growing digital advertising market that faces these
challenges.
There are tens of billions of daily trades across all digital advertising exchanges, thousands of times more than the number of daily
trades executed by NASDAQ and the NYSE combined. Our Artificial Intelligence, or AI, system autonomously purchases ad spots, or
impressions, one at a time, on these exchanges to create portfolios of impressions designed to optimize the goals of our advertisers, such as
increased sales, heightened brand awareness and decreased cost per customer acquisition. We believe that our customers value our solution,
as our revenue retention rate was 134%, 175% and 180% for the years ended December 31, 2011 and 2012 and the twelve months ended
June 30, 2013, respectively. We define our "revenue retention rate" with respect to a given twelve-month period as (i) revenue recognized
during such period from customers that contributed to revenue recognized in the prior twelve-month period divided by (ii) total revenue
recognized in such prior twelve-month period.
Our solution is designed to optimize both direct-response campaigns focused on generating specific consumer purchases or responses,
as well as brand campaigns geared towards lifting brand metrics. We have successfully run advertising campaigns for products and brands
ranging from consumer products to luxury automobiles to travel. We provide a differentiated solution that is simple, powerful, scalable and
extensible across geographies, industry verticals and the display, mobile, social and video digital advertising channels. According to
MAGNA GLOBAL, the display, mobile, social and video channels for digital advertising are expected to grow from $42 billion in 2012 to
$73 billion in 2016 globally.
Increasingly, companies are attempting to leverage Big Data and data scientists to make strategic and tactical decisions. At Rocket
Fuel, rather than focusing on data analysis by humans, we have built tools to perform analysis and make decisions autonomously. The
benefit of a general platform that autonomously adapts and learns while solving multiple problems instead of solving one specific problem
at a time is that, with very little manual configuration, our platform simultaneously runs over 1,000 campaigns for advertisers with highly
diverse goals.
Our team of award-winning computer scientists developed and continues to enhance our disruptive technology. Our scientists have
backgrounds in AI, Big Data, machine learning and high-availability and distributed systems from institutions including Massachusetts
Institute of Technology, Stanford University, Indian Institute of Technology and Carnegie Mellon University. Benefiting from our unique
combination of technology and industry expertise, we have rapidly grown our business, building a diversified customer base during 2012
comprising over 65 of the Advertising Age 100 Leading National Advertisers and over 40 of the Fortune 100 companies.
As our customers realize the performance of their campaigns on our platform, we often receive feedback that we are a top performer,
and consequently, we often receive increased allocations that contribute to our revenue growth. For the years ended December 31, 2010,
2011 and 2012, our revenue
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was $16.5 million, $44.7 million and $106.6 million, respectively, representing a compound annual growth rate, or CAGR, of 154%. For the
six months ended June 30, 2012 and 2013, our revenue was $39.6 million and $92.6 million, respectively, representing period-over-period
growth of 134%. For the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, 2012 and 2013, our net loss
was $(3.2) million, $(4.3) million, $(10.3) million, $(2.5) million and $(11.9) million, respectively. For the years ended December 31, 2010,
2011 and 2012 and for the six months ended June 30, 2012 and 2013, our adjusted EBITDA was $(2.9) million, $(3.1) million, $(3.0)
million, $(1.2) million and $(4.3) million, respectively. Adjusted EBITDA is a financial measure not presented in accordance with generally
accepted accounting principles, or GAAP. For a definition of adjusted EBITDA, an explanation of our management's use of this measure
and a reconciliation of adjusted EBITDA to our net loss, see "Selected Consolidated Financial Data—Non-GAAP Financial Measures."
Our Industry
The convergence of several trends is generating demand for technology-driven solutions:
AI is increasingly becoming an accepted and important technology used to solve complex problems.
Over the last decade, AI has gained prominence in several fields, including aeronautics, securities trading, logistics, space exploration
and medical diagnosis, as well as through seminal technology events, such as IBM's Watson winning Jeopardy, NASA's Curiosity landing
itself on the surface of Mars and Google's self-driving cars operating on highways. AI-driven systems can rapidly process enormous
amounts of data and execute transactions on a large scale, enabling decision-making capabilities that generally are not otherwise feasible or
economical. The cost of computational power is rapidly decreasing, making AI solutions more practical for mainstream business
applications. We believe this trend has created a significant opportunity to harness the power of AI to make complex business decisions
autonomously.
The proliferation of data is creating new opportunities to optimize business processes.
The continuing increase in global online activity generates massive amounts of data that can be collected and analyzed to provide
valuable insights for business processes, especially given the dramatic drop in computation and storage costs. According to the IDC Digital
Universe Study, the global volume of digital information created, replicated and consumed is expected to grow from 2.8 zettabytes in 2012
to 40 zettabytes in 2020, which implies a doubling of data every two years, with 68% of all digital data created and consumed by consumers
in 2012.
The Internet is transforming consumer habits, media consumption and advertising spending allocations.
The Internet has become a primary channel for content creation, consumption, social engagement and commerce. Adults in the United
States spend more time online and on mobile devices for non-voice activities than ever before. With the rapid growth of online activity and
the proliferation of Internet-connected devices, advertisers are increasingly using the Internet to reach, influence and creatively engage
consumers. As a result, digital advertising spending as a percentage of overall advertising spending has increased substantially in recent
years.
Digital advertising is shifting to market-driven, real-time bidding systems.
Real-time advertising exchanges are emerging and growing rapidly, and have reduced the transactional friction that historically was
associated with the buying and selling of digital advertising inventory. Real-time bidding, or RTB, is the real-time purchase and sale of
advertising inventory on an impression-by-impression basis on advertising exchanges. RTB is expanding faster than any other segment of
the digital advertising industry as a result of a number of trends, including the emergence
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of programmatic buying, which enables the automated purchasing of advertising inventory; the creation of an abundance of digital
advertising inventory, which has grown substantially as consumers and content have continued to migrate online; increased use of real-time
advertising exchanges by publishers; and recognition by advertisers that using real-time advertising exchanges is an effective way to
achieve their campaign goals. Adding to these trends is the virtuous cycle that has been created as publishers increase inventory supply,
enabling better advertising results, which then increases demand for additional advertising inventory, leading to increased incentives for
publishers to make additional inventory available through real-time advertising exchanges.
Our Market Opportunity
According to MAGNA GLOBAL, display, mobile, social and video channels for digital advertising are forecast to grow from
$42 billion in 2012 to $73 billion in 2016 globally, a 14% CAGR, broken into the following segments:
•
Display. According to MAGNA GLOBAL, display advertising, excluding mobile, social and video, was a $24 billion market in
2012 and is forecast to grow to $29 billion in 2016, a 5% CAGR. Growth in display advertising, excluding mobile, social and
video, is slower than in other channels as overall display advertising growth is being driven by mobile, social and video
advertising.
•
Mobile. According to MAGNA GLOBAL, mobile advertising, including mobile search and display, but excluding social, was a
$7 billion market in 2012 and is forecast to grow to $14 billion in 2016, an 18% CAGR. We currently are focused only on the
display portion of the mobile market.
•
Social. According to MAGNA GLOBAL, social advertising, across all platforms, was a $6 billion market in 2012 and is
forecast to grow to $18 billion in 2016, a 32% CAGR.
•
Video. According to MAGNA GLOBAL, online video advertising was a $5 billion market in 2012 and is forecast to grow to
$12 billion in 2016, a 22% CAGR.
Digital advertising across these channels is bought and sold using various methods, including RTB exchanges, which, according to
IDC, is expanding faster than any other segment of the digital advertising industry.
According to MAGNA GLOBAL, advertising revenue reached $472 billion in 2012 globally. We believe that advertisers will continue
to shift advertising spending from traditional media to programmatic buying.
Challenges Faced by Digital Advertisers
Advertisers that want to conduct digital advertising campaigns face several challenges, including:
•
Achieving measurable results. Increasingly, advertisers seek to measure the results of their campaigns and expect tangible and
quantifiable business results, such as heightened brand awareness and increased sales.
•
Addressing the rapidly changing and highly-fragmented consumer environment. Consumers' digital-media habits are evolving,
with consumers accessing and consuming content across many different Internet-connected devices, resulting in
highly-fragmented audiences. As a result, advertisers are demanding the ability to adjust their advertising spending in real time
to reach and influence their prospective consumers.
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•
Navigating industry complexity. The rapid growth of the digital advertising industry has created a highly complex environment
for advertisers, with multiple channels, technologies and solutions offered by industry participants.
•
Leveraging complex data. Many large advertisers have already made significant investments in data and are struggling with the
challenge of how to most effectively make use of the sheer volume of data available to them to gain valuable timely insights.
•
Operating in real time. The massive volume and real-time creation of data generally precludes effective human review,
analysis, optimization and implementation of advertising campaigns, making it difficult and time consuming for existing
providers of digital advertising solutions to make strategic adjustments in their campaigns.
Our Solution
Driven by our disruptive AI technology, our real-time optimization engine delivers digital advertising campaigns that are effective and
efficient, and are easy for us to set up and manage. We apply our AI-driven proprietary predictive modeling and automated decision-making
technology, together with Big Data and our computational infrastructure, to create a new class of technology specifically designed for
powerful programmatic buying on real-time advertising exchanges. The key benefits of our solution for advertisers include:
•
Better results faster. Our technology considers millions of attributes to determine how to respond to the tens of billions of bid
requests for advertising impressions that we receive each day. We bid on billions of these impressions per day, in
approximately 100 milliseconds per bid request. As our engine learns which attributes best contribute to meeting campaign
goals, it adapts as campaigns run to improve performance measured against these goals. This enables us to deliver more rapid
optimization and better campaign results than the periodic manual adjustments of traditional solutions.
•
Business goal oriented. Our solution transforms the way campaigns are optimized, learning and adapting in real time, which we
refer to as "Advertising that Learns," to achieve advertisers' measurable business goals, such as reduced cost per customer
acquisition, increased sales and heightened brand awareness.
•
Comprehensive solution. Our solution delivers and optimizes both direct-response campaigns focused on generating specific
consumer purchases or responses, as well as brand campaigns geared towards lifting brand metrics. Our solution delivers
campaigns across the display, mobile, social and video digital advertising channels and is extensible across a wide range of
industry verticals on a global basis.
•
Simple and powerful. We simplify digital advertising campaign management by requiring only a limited number of initial
inputs from our advertisers. Our solution then automates advertising campaigns by analyzing petabytes of data to optimize
performance in real time and generates insights, analysis and, in many cases, superior results for advertisers.
•
Scalable. Leveraging the massive amounts of inventory available through real-time advertising exchanges, our solution enables
advertisers to efficiently connect with large audiences while it maintains a focus on results-driven optimization.
Our Competitive Strengths
We believe that the following strengths differentiate us from our competitors:
•
Disruptive AI-driven technology that delivers exceptional results for advertisers. Our AI-driven advertising solution learns and
adapts in real time with minimal human inputs.
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•
Proprietary computational infrastructure. We process and analyze massive amounts of data through our real-time optimization
engine. Our computational infrastructure is capable of processing tens of billions of events per day, which allows us to
automatically execute and optimize highly complex advertising campaigns and deliver compelling results for our advertisers.
•
Scalable comprehensive solution. Our solution enables us to run direct-responses or brand campaigns for advertisers across and
within the display, mobile, social and video digital advertising channels. We provide offerings that are extensible across
industry verticals and geographies.
•
Premier and diversified customer base. As of June 30, 2013, we had 784 active customers, including many of the world's
leading advertisers across a broad range of industry verticals.
•
Attractive and scalable financial model. We believe that we benefit from a scalable financial model that has demonstrated high
revenue growth. We have reached significant scale since our incorporation in March 2008. Our revenue was $106.6 million in
2012, representing year-over-year growth of 139%. Our net loss was $(10.3) million in 2012 and $(11.9) million for the six
months ended June 30, 2013. We recorded cumulative adjusted EBITDA of $(13.3) million from 2010 through June 30, 2013.
We have made significant investments in technology and sales and marketing, and we believe that these investments will
provide us with long-term benefits. Our revenue retention rate was 134% and 175% for the years ended December 31, 2011 and
2012, respectively. Adjusted EBITDA is a non-GAAP financial measure. For a definition of adjusted EBITDA, an explanation
of our management's use of this measure and a reconciliation of adjusted EBITDA to our net loss, see "Selected Consolidated
Financial Data—Non-GAAP Financial Measures."
•
Experienced team. We believe that the extensive experience and depth of our management team provides us with a distinct
competitive advantage. In addition, we benefit from our corporate culture, which we believe has allowed us to attract a highly
qualified employee base with substantial experience in the digital advertising and technology industries, including employees
holding PhDs and Masters degrees from many top-tier institutions, as well as two winners of the Special Interest Group of
Management and Data, or SIGMOD, best paper award and one author of a machine learning top 10 most cited academic
publication.
Our Growth Strategies
We plan to continue improving our AI-driven platform to deliver a highly differentiated and disruptive solution. Our key growth
strategies include:
•
Extending our technology leadership. We expect to continue enhancing our solution through investments in our AI technology,
new functionalities and offerings, including a self-service platform, our computational infrastructure and Big Data management
and analytics.
•
Growing awareness and increasing advertiser adoption of our solution. We intend to continue to grow our sales and marketing
organization to generate awareness and increase the adoption of our solution among existing and new advertisers.
•
Increasing our mobile, social and video market penetration. We intend to continue investing in our engineering and sales and
marketing organizations to expand our capabilities in mobile, social and video advertising to efficiently expand our advertiser
base, gain market penetration and grow revenue from these channels.
•
Continuing our global expansion. We currently operate in seven countries, and we intend to continue to expand our
international business primarily by growing our sales team in certain countries in which we currently operate and establishing a
presence in additional countries.
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•
Pursuing strategic acquisitions. We intend to evaluate opportunities to acquire complementary businesses and technologies that
are consistent with our overall growth strategy.
Key Operating and Financial Performance Metrics
The following table sets forth our key operating and financial performance metrics for the years ended December 31, 2011 and 2012
and the six months ended June 30, 2012 and 2013, respectively:
Years Ended
December 31,
2011
Revenue
Revenue less media costs (non-GAAP)*
Adjusted EBITDA (non-GAAP)*
Number of active customers
$
$
$
Six Months Ended
June 30,
2012
2012
2013
(in thousands, except number of active customers)
44,652
22,003
(3,125 )
266
$
$
$
106,589
55,920
(2,981 )
536
$
$
$
39,592
21,427
(1,179 )
341
$
$
$
92,581
51,292
(4,284 )
784
•
Revenue less media costs. We believe that revenue less media costs is a meaningful measure of operating
performance because it is frequently used for internal management purposes, indicates the performance of our
solution in balancing the goals of delivering exceptional results to advertisers while meeting our margin
objectives and facilitates a more complete period-to-period understanding of factors and trends affecting our
underlying revenue performance.
•
Adjusted EBITDA. We believe adjusted EBITDA provides useful information to understand and evaluate our
operating results.
•
Number of active customers. We believe that our ability to increase the number of active customers using our
solution is an important indicator of our ability to grow our business, although we expect this number to fluctuate
based on the seasonality in our business and other factors.
*
For a reconciliation of these Non-GAAP financial measures, see "Selected Consolidated Financial Data—Non-GAAP Financial Measures."
Risks Affecting Us
Our business is subject to numerous risks, which are highlighted in the section entitled "Risk Factors" immediately following this
prospectus summary. Some of these risks include:
•
our limited operating history makes it difficult to evaluate our business and prospects and may increase the risks associated with
your investment;
•
we have a history of losses and may not achieve or sustain profitability in the future;
•
if we are unable to attract new advertisers or sell additional offerings to our existing advertisers, our revenue growth will be
adversely affected;
•
if we do not manage our growth effectively, the quality of our solution may suffer, and our operating results may be negatively
affected;
•
we may experience fluctuations in our operating results, which make our future results difficult to predict and could cause our
operating results to fall below analysts' and investors' expectations;
•
if we fail to make the right investment decisions in our offerings and technology platform, we may not attract and retain
advertisers and advertising agencies and our revenue and results of operations may decline;
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•
if the use of "third party cookies" is rejected by Internet users, restricted or otherwise subject to unfavorable regulation, our
performance may decline and we may lose advertisers and revenue;
•
potential "Do Not Track" standards or government regulation could negatively impact our business by limiting our access to the
anonymous user data that informs the advertising campaigns we run, and as a result may degrade our performance for our
customers;
•
legislation and regulation of online businesses, including privacy and data protection regimes, could create unexpected costs,
subject us to enforcement actions for compliance failures, or cause us to change our technology platform or business model
which may have a material adverse effect on our business; and
•
we may not be able to compete successfully against current and future competitors because competition in our industry is
intense, and our competitors may offer solutions that are perceived by our customers to be more attractive than ours, which may
result in declining revenue, or inability to grow our business.
Corporate Information
We were incorporated in Delaware in 2008. Our principal executive offices are located at 350 Marine Parkway, Marina Park Center,
Redwood City, CA 94065. Our telephone number is (650) 595-1300.
Our website address is www.rocketfuel.com. The information contained on, or that can be accessed through, our website is not a part
of this prospectus.
Unless otherwise indicated, the terms "Rocket Fuel," "we," "us" and "our" refer to Rocket Fuel Inc., a Delaware corporation.
"Rocket Fuel" is our registered trademark in the United States and the European Union, and the Rocket Fuel logo, "Advertising that
Learns," and all of our solution names are our trademarks. This prospectus contains additional trade names, trademarks and service marks of
ours and of other companies. We do not intend our use or display of other companies' trade names, trademarks, or service marks to imply a
relationship with these other companies, or endorsement or sponsorship of us by these other companies. Other trademarks appearing in this
prospectus are the property of their respective holders.
Emerging Growth Company
The Jumpstart Our Business Startups Act, or the JOBS Act, was enacted in April 2012 with the intention of encouraging capital
formation in the United States and reducing the regulatory burden on newly public companies that qualify as "emerging growth companies."
We are an emerging growth company within the meaning of the JOBS Act. As an emerging growth company, we may take advantage of
certain exemptions from various public reporting requirements, including the requirement that our internal control over financial reporting
be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, certain
requirements related to the disclosure of executive compensation in this prospectus and in our periodic reports and proxy statements, and the
requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take
advantage of these exemptions until we are no longer an emerging growth company.
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
$1.0 billion or more 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; or (4) the last day of the fiscal year ending after the fifth anniversary of our initial public offering.
For certain risks related to our status as an emerging growth company, see the disclosure elsewhere in this prospectus under "Risk
Factors—Risks Related to this Offering, the Securities Markets and Ownership of Our Common Stock—We are an 'emerging growth
company,' and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our
common stock less attractive to investors."
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THE OFFERING
The following is a brief summary of certain terms of this offering. For a more complete description of the terms of our common stock,
see "Description of Capital Stock—Common Stock."
Common stock offered by us
Over-allotment option being offered by the selling
stockholders
Common stock to be outstanding after this offering
Use of proceeds
Voting Rights
Risk factors
Proposed NASDAQ symbol
shares
shares
shares
We intend to use the net proceeds we receive from this offering for general corporate
purposes, including working capital, sales and marketing activities, product development,
general and administrative matters and capital expenditures. We also may use a portion of
the net proceeds from this offering to repay outstanding indebtedness, or to acquire or
invest in technologies, solutions or businesses that complement our business, although we
have no present commitments to complete any such transactions at this time. See "Use of
Proceeds."
Following this offering, our directors, executives officers and each of our stockholders who
own greater than 5% of our outstanding common stock will beneficially own
approximately
% of the outstanding shares of common stock after this offering and will
be able to influence or control matters requiring approval of our stockholders. See
"Principal and Selling Stockholders."
See "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 common
stock.
FUEL
The number of shares of our common stock to be outstanding after this offering is based on 28,493,777 shares of our common stock
outstanding as of June 30, 2013, and excludes:
•
7,607,735 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2013 pursuant to our 2008
Equity Incentive Plan, or 2008 Plan, with a weighted-average exercise price of $6.06 per share;
•
155,000 shares of common stock issuable upon the exercise of options granted after June 30, 2013 pursuant to our 2008 Plan,
with a weighted-average exercise price of $20.05 per share;
•
40,150 shares of common stock issuable upon the vesting of restricted stock units granted after June 30, 2013 pursuant to our
2008 Plan;
•
104,997 shares of common stock issuable upon the exercise of a convertible preferred stock warrant outstanding as of June 30,
2013, with an exercise price of $0.9286 per share; and
•
7,009,437 shares of common stock reserved for future grants under our stock-based compensation plans, consisting of
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•
1,009,437 shares of common stock as of June 30, 2013 reserved for future grants under our 2008 Plan, which shares will
be added to the shares to be reserved under our 2013 Equity Incentive Plan, or 2013 Plan, which will become effective
upon the completion of the offering;
•
5,000,000 shares of common stock reserved for future grants under our 2013 Plan;
•
1,000,000 shares of common stock reserved for future issuance under our 2013 Employee Stock Purchase Plan, or ESPP,
which will become effective upon the completion of the offering; and
•
any shares of common stock that become available subsequent to the offering under our 2013 Plan and ESPP pursuant to
the provisions thereof that automatically increase the shares reserved for issuance under such plans each year, as more
fully described in "Executive Compensation—Employee Benefit and Stock Plans."
Except as otherwise indicated, all information in this prospectus assumes:
•
the effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws
in connection with the completion of this offering;
•
the automatic conversion of all shares of our convertible preferred stock outstanding as of June 30, 2013 into an aggregate of
19,478,932 shares of common stock immediately prior to the completion of this offering;
•
the automatic conversion of an outstanding warrant exercisable for 104,997 shares of our convertible preferred stock as of
June 30, 2013 into a warrant exercisable for shares of common stock upon the completion of the offering;
•
no exercise of outstanding options or warrants subsequent to June 30, 2013, except for the automatic conversion of an
outstanding warrant into an aggregate of 161,533 shares of our common stock in connection with the completion of the
offering; and
•
no exercise of the underwriters' over-allotment option.
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SUMMARY CONSOLIDATED FINANCIAL DATA AND OTHER DATA
The following tables summarize our consolidated financial data. You should read this summary consolidated financial data together
with the sections entitled "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and related notes that are included elsewhere in this prospectus.
The consolidated statements of operations data for the years ended December 31, 2011 and 2012 are derived from our audited
consolidated financial statements that are included elsewhere in this prospectus. The consolidated statements of operations data for the six
months ended June 30, 2012 and 2013 and the consolidated balance sheet data as of June 30, 2013 are derived from our unaudited
consolidated financial statements that are included elsewhere in this prospectus. The unaudited consolidated financial statements were
prepared on a basis consistent with our audited consolidated financial statements and include, in management's opinion, all adjustments,
consisting only of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in
those statements. Our historical results are not necessarily indicative of the results that may be expected in the future, and our interim results
are not necessarily indicative of the results to be expected for the full year or any other period.
Years Ended
December 31,
Consolidated Statement of Operations
Data:
Revenue(1)
Cost of revenue(2)
2011
$
Gross profit
Six Months Ended
June 30,
2012
2012
(in thousands, except per share data)
44,652
27,300
$
106,589
60,011
$
39,592
22,033
2013
$
92,581
49,652
17,352
46,578
17,559
42,929
Operating expenses:
Research and development(2)
Sales and marketing(2)
General and administrative(2)
1,545
17,256
2,336
4,876
41,069
8,403
1,538
15,542
2,570
6,123
34,649
10,952
Total operating expenses
21,137
54,348
19,650
51,724
Loss from operations
Other expense, net:
Interest expense
Other income (expense)—net
Change in fair value of convertible
preferred stock warrant liability
(3,785 )
(7,770 )
(2,091 )
(8,795 )
(250 )
33
(316 )
135
(170 )
92
(353 )
(368 )
(295 )
(2,308 )
(262 )
(2,355 )
Other expense, net
Loss before income taxes
Provision for income taxes
(512 )
(4,297 )
(28 )
(2,489 )
(10,259 )
(84 )
(340 )
(2,431 )
(39 )
(3,076 )
(11,871 )
(40 )
Net loss
$
(4,325 )
$
(10,343 )
$
(2,470 )
$
(11,911 )
Basic and diluted net loss per share
attributable to common
stockholders(3)
$
(0.57 )
$
(1.29 )
$
(0.31 )
$
(1.43 )
Basic and diluted weighted-average
shares used to compute net loss per
share attributable to common
stockholders
Basic and diluted pro forma net loss per
share attributable to common
stockholders(3)
Basic and diluted weighted-average
7,600
8,024
$
(0.29 )
27,664
7,923
8,347
$
(0.34 )
27,987
shares used to compute pro forma net
loss per share attributable to common
stockholders
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(1)
Beginning January 1, 2011, we adopted a new authoritative guidance on multiple arrangements on a prospective basis. The adoption did not materially impact
the comparability of revenue between the periods presented.
(2)
Stock-based compensation expense was as follows:
Years Ended
December 31,
2011
Cost of revenue
Research and development
Sales and marketing
General and administrative
Six Months Ended
June 30,
2012
2013
2012
$
7
8
66
83
$
$
164
$
(in thousands)
37
$
734
1,100
1,450
3,321
$
15
96
65
139
$
118
759
1,320
1,403
315
$
3,600
(3)
See Note 9 to our consolidated financial statements for a description of the method used to compute basic and diluted net loss per share attributable to common stockholders and
pro forma basic and diluted net loss per share attributable to common stockholders.
Years Ended
December 31,
2011
Other Financial Data:
Revenue less media costs(1)
Adjusted EBITDA(2)
$
$
22,003
(3,125 )
2012
(in thousands)
$
$
55,920
(2,981 )
$
$
Six Months Ended
June 30,
2012
2013
21,427
(1,179 )
$
$
51,292
(4,284 )
(1)
Revenue less media costs is a non-GAAP financial measure. We define revenue less media costs as GAAP revenue less media costs. Media costs consist of
costs for advertising impressions we purchase from real-time advertising exchanges or other third parties. Please see "Selected Consolidated Financial
Data—Non-GAAP Financial Measures" for more information as to the limitations of using non-GAAP measures and for the reconciliation of revenue less
media costs to revenue, the most directly comparable financial measure calculated in accordance with GAAP.
(2)
Adjusted EBITDA is a non-GAAP financial measure. We define adjusted EBITDA as net loss before income tax (expense) benefit, interest expense, net,
depreciation and amortization (excluding amortization of internal use software), stock based compensation expense and change in fair value of convertible
preferred stock warrant liability. Please see "Selected Consolidated Financial Data—Non-GAAP Financial Measures" for more information as to the
limitations of using non-GAAP measures and for the reconciliation of adjusted EBITDA to net loss, the most directly comparable financial measure
calculated in accordance with GAAP.
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As of June 30, 2013
Actual
Consolidated Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Debt obligations, current and non-current
Total stockholders' equity
$
$
$
$
$
21,985
41,478
99,781
21,853
32,881
Pro Forma(1)
(in thousands)
$
$
$
$
$
Pro Forma As
Adjusted(2)
21,985
41,478
99,781
21,853
37,977
(1)
The pro forma column reflects (i) the automatic conversion of all outstanding shares of preferred stock into 19,478,932 shares of common stock and (ii) the
reclassification of the preferred stock warrant liability to additional paid-in capital, each to be effective immediately prior to the closing of this offering.
(2)
The pro forma as adjusted column reflects all adjustments included in the pro forma column and gives effect to the sale by us of
shares of common
stock offered by this prospectus at an assumed initial public offering price of $
per share, the midpoint of the price range set forth on the cover page of
this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase
(decrease) in the assumed initial public offering price of $
per share would increase (decrease) each of cash and cash equivalents, working capital,
total assets, and total stockholders' equity by approximately $
, assuming that the number of shares offered by us, as set forth on the cover page of this
prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions. The pro forma as adjusted information presented in
the summary consolidated balance sheet data is illustrative only and will change based on the actual initial public offering price and other terms of this
offering determined at pricing.
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RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below,
together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before investing
in our common stock. If any of the following risks materialize, our business, financial condition, operating results and prospects could be
materially and adversely affected. In that event, the price of our common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business and Our Industry
Our limited operating history makes it difficult to evaluate our business and prospects and may increase the risks associated with your
investment.
We were incorporated in 2008 and, as a result, have only a limited operating history upon which our business and future prospects may be
evaluated. Although we have experienced substantial revenue growth in our limited history, we may not be able to sustain this rate of growth or
even maintain our current revenue levels. We have encountered and will continue to encounter risks and difficulties frequently experienced by
growing companies in rapidly developing and changing industries, including challenges related to recruiting, integrating and retaining qualified
employees; making effective use of our limited resources; achieving market acceptance of our existing and future solutions; competing against
companies with greater financial and technical resources; acquiring and retaining advertisers and advertising agency customers; and developing
new solutions. Our current operational infrastructure may require changes for us to scale our business efficiently and effectively to keep pace
with demand for our solution, and achieve long-term profitability. If we fail to implement these changes on a timely basis or are unable to
implement them effectively, or at all due to factors beyond our control, our business may suffer. We cannot assure you that we will be
successful in addressing these and other challenges we may face in the future. As a growing company in a rapidly evolving industry, our
business prospects depend in large part on our ability to:
•
build a reputation for a superior solution and create trust and long-term relationships with advertisers and advertising agencies;
•
distinguish ourselves from competitors in our industry;
•
develop and offer a competitive technology platform and offerings that meet our advertisers' needs as they change;
•
maintain and expand our relationships with the sources of quality inventory through which we execute our advertisers' advertising
campaigns;
•
respond to evolving industry standards and government regulations that impact our business, particularly in the areas of data
collection and consumer privacy;
•
prevent or otherwise mitigate failures or breaches of security or privacy;
•
expand our business internationally; and
•
attract, hire, integrate and retain qualified and motivated employees.
If we are unable to meet one or more of these objectives or otherwise adequately address the risks and difficulties that we face, our
business may suffer, our revenue may decline and we may not be able to achieve further growth or long-term profitability.
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We have a history of losses and may not achieve or sustain profitability in the future.
We incurred net losses of $(4.3) million and $(10.3) million in 2011 and 2012, respectively, and a net loss of $(11.9) million for the six
months ended June 30, 2013. As of June 30, 2013, we had an accumulated deficit of $35.5 million. We may not achieve profitability in the
foreseeable future, if at all. Although our revenue has increased significantly in recent periods, we may not be able to sustain this revenue
growth. In addition, our operating expenses have increased with our revenue growth, primarily due to substantial investments in our business
and more than doubling our headcount during 2012. We expect our cost of revenue and operating expenses to continue to increase substantially
in the foreseeable future as we continue to expand our business, including by adding sales, marketing and related support employees in existing
and new territories, adding engineering employees to support continued investments in our technology platform and adding general and
administrative employees to support our growth and expansion.
If we are unable to attract new advertisers or sell additional offerings to our existing advertisers, our revenue growth will be adversely
affected.
To sustain or increase our revenue, we must add new advertisers and encourage existing advertisers, which are often represented by
advertising agencies, to purchase additional offerings from us. As the digital advertising industry matures and as competitors introduce lower
cost or differentiated products or services that compete with or are perceived to compete with ours, our ability to sell our solution to new and
existing advertisers based on our offerings, pricing, technology platform and functionality could be impaired. Although some advertisers that
are repeat users of our solution tend to increase their spend over time, conversely, some advertisers that are newer to our solution tend to spend
less than, and may not return as frequently as, advertisers who have used our solution for longer periods of time. If we fail to retain or cultivate
the spending of our newer, lower-spending advertisers, it will be difficult for us to sustain and grow our revenue from existing advertisers.
Even with long-time advertisers, we may reach a point of saturation at which we cannot continue to grow our revenue from those advertisers
because of internal limits that advertisers may place on the allocation of their advertising budgets to digital media, to particular campaigns, to a
particular provider or for other reasons not known to us. If we are unable to attract new advertisers or obtain new business from existing
advertisers, our revenue, growth and our business may be adversely affected.
If we do not manage our growth effectively, the quality of our solution may suffer, and our operating results may be negatively affected.
Our business has grown rapidly. We rely heavily on information technology, or IT, systems to manage critical functions such as
advertising campaign management and operations, data storage and retrieval, revenue recognition, budgeting, forecasting and financial
reporting. To manage our growth effectively, we must continue to improve and expand our infrastructure, including our IT, financial and
administrative systems and controls. We must also continue to manage our employees, operations, finances, research and development and
capital investments efficiently. Our productivity and the quality of our solution may be adversely affected if we do not integrate and train our
new employees, particularly our sales and account management personnel, quickly and effectively and if we fail to appropriately coordinate
across our executive, engineering, finance, human resources, marketing, sales, operations and customer support teams. If we continue our rapid
growth, we will incur additional expenses, and our growth may continue to place a strain on our resources, infrastructure and ability to maintain
the quality of our solution. If we do not adapt to meet these evolving challenges, and if the current and future members of our management
team do not effectively scale with our growth, the quality of our solution may suffer and our corporate culture may be harmed. Failure to
manage our future growth effectively could cause our business to suffer, which, in turn, could have an adverse impact on our results of
operations and financial condition.
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We may experience fluctuations in our operating results, which make our future results difficult to predict and could cause our operating
results to fall below analysts' and investors' expectations.
Our quarterly and annual operating results have fluctuated in the past. Similarly, we expect our future operating results to fluctuate for the
foreseeable future due to a variety of factors, many of which are beyond our control. Our fluctuating results could cause our performance to fall
below the expectations of securities analysts and investors, and adversely affect the price of our common stock. Because our business is
changing and evolving rapidly, our historical operating results may not be useful in predicting our future operating results. Factors that may
increase the volatility of our operating results include the following:
•
changes in demand and pricing for our solution;
•
the seasonal nature of our customers' spending on digital advertising campaigns;
•
changes in our pricing policies, the pricing policies of our competitors and the pricing of advertising inventory or of other
third-party services;
•
the addition or loss of new advertisers and advertising agencies;
•
changes in our customers' advertising budget allocations, agency affiliations, or marketing strategies;
•
changes and uncertainty in the regulatory environment for us or our advertisers;
•
changes in the economic prospects of our advertisers or the economy generally, which could alter current or prospective
advertisers' spending priorities, or could increase the time or costs required to complete sales with advertisers;
•
changes in the availability of advertising inventory through real-time advertising exchanges or in the cost to reach end consumers
through digital advertising;
•
the introduction of new technologies product or service offerings by our competitors;
•
changes in our capital expenditures as we acquire the hardware, equipment and other assets required to support our business; and
•
costs related to acquisitions of people, businesses or technologies.
Based upon all of the factors described above and others beyond our control that we may not anticipate, we have a limited ability to forecast
our future revenue, costs and expenses, and as a result, our operating results may from time to time fall below our estimates or the expectations
of public market analysts and investors.
If we fail to make the right investment decisions in our offerings and technology platform, we may not attract and retain advertisers and
advertising agencies and our revenue and results of operations may decline.
We compete for advertisers, which are often represented by advertising agencies, who want to purchase digital media for advertising
campaigns. Our industry is subject to rapid changes in standards, technologies, products and service offerings, as well as in advertiser demands
and expectations. We continuously need to make decisions regarding which offerings and technology to invest in to meet advertiser demand
and evolving industry standards and regulatory requirements. We may make wrong decisions regarding these investments. For example, we
expect advertisers to award us credit, or attribution, for impressions that generate specific consumer purchases or responses using certain
criteria such as last ad clicked or viewed. Our technology considers these attribution models and if new attribution models are introduced by
advertisers, we may need to make changes in our technology. If new or existing competitors offer more attractive offerings, we may lose
advertisers or advertisers may decrease their spending on our solution. New advertiser demands, superior competitive offerings or
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new industry standards could render our existing solution unattractive, unmarketable or obsolete and require us to make substantial
unanticipated changes to our technology platform or business model. Our failure to adapt to a rapidly changing market or to anticipate
advertiser demand could harm our business and our financial performance.
If the use of "third party cookies" is rejected by Internet users, restricted or otherwise subject to unfavorable regulation, our performance
may decline and we may lose advertisers and revenue.
We use "cookies" (small text files) to deliver our solution. Our cookies are known as "third party cookies" because they are placed on
individual browsers when Internet users visit a website owned by a publisher, advertiser or other first party that has given us permission to
place cookies. These cookies are placed through an Internet browser on an Internet user's computer and correspond with a data set that we keep
on our servers. Our cookies record non-personal information, such as when an Internet user views an ad, clicks on an ad, or visits one of our
advertiser's websites through a browser while the cookie is active. On mobile devices, we may also obtain location based information. We use
these cookies to help us achieve our advertisers' campaign goals, to help us ensure that the same Internet user does not unintentionally see the
same advertisement, to report aggregate information to our advertisers regarding the performance of their advertising campaigns and to detect
and prevent fraudulent activity throughout our network of inventory. We also use data from cookies to help us decide whether to bid on, and
how to price, an opportunity to place an advertisement in a certain location, at a given time, in front of a particular Internet user. Without
cookie data, we may bid on advertising without as much insight into activity that has taken place through an Internet user's browser. A lack of
cookie data may detract from our ability to make decisions about which inventory to purchase for an advertiser's campaign, and undermine the
effectiveness of our solution.
Cookies may easily be deleted or blocked by Internet users. All of the most commonly used Internet browsers (Chrome, Firefox, Internet
Explorer, and Safari) allow Internet users to modify their browser settings to prevent cookies from being accepted by their browsers. Internet
users can also delete cookies from their computers at any time. Some Internet users also download free or paid "ad blocking" software that
prevents third party cookies from being stored on a user's computer. If more Internet users adopt these settings or delete their cookies more
frequently than they currently do, our business could be harmed. In addition, the Safari browser blocks third party cookies by default. The
browser manufacturer, Mozilla, which publishes Firefox, recently announced an intention to block third party cookies by default in the next
iteration of the Firefox browser. Unless such default settings in browsers are altered by Internet users to accept third party cookies, fewer of our
cookies may be set in browsers, adversely affecting our business.
In addition, in the European Union, or EU, Directive 2009/136/EC, commonly referred to as the "Cookie Directive," directs EU member
states to ensure that accessing information on an Internet user's computer, such as through a cookie, is allowed only if the Internet user has
given his or her consent. In response, some member states have adopted and implemented, and may continue to adopt and implement
legislation that negatively impacts the use of cookies for online advertising. Limitations on the use or effectiveness of cookies, whether
imposed by EU member state implementation of the Cookie Directive or otherwise, may impact the performance of our solution. We may be
required to, or otherwise may determine that it is advisable to, develop or obtain additional tools and technologies to compensate for the lack of
cookie data. We may not be able to develop or implement additional tools that compensate for the lack of cookie data. Moreover, even if we are
able to do so, such additional tools may be subject to further regulation, time consuming to develop or costly to obtain, and less effective than
our current use of cookies.
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Potential "Do Not Track" standards or government regulation could negatively impact our business by limiting our access to the
anonymous user data that informs the advertising campaigns we run, and as a result may degrade our performance for our customers.
As the use of cookies has received ongoing media attention over the past three years, some government regulators and privacy advocates
have suggested creating a "Do Not Track" standard that would allow Internet users to express a preference, independent of cookie settings in
their browser, not to have website browsing recorded. In 2010, the Federal Trade Commission, or FTC, issued a staff report criticizing the
advertising industry's self-regulatory efforts as too slow and lacking adequate consumer protections. The FTC emphasized a need for simplified
notice, choice and transparency to the consumer regarding collection, use and sharing of data, and suggested implementing a "Do Not Track"
browser setting that allows consumers to choose whether to allow "tracking" of their online browsing activities. All the major Internet browsers
have implemented some version of a "Do Not Track" setting. Microsoft's Internet Explorer 10 includes a "Do Not Track" setting that is selected
by default. However, there is no definition of "tracking," no consensus regarding what message is conveyed by a "Do Not Track" setting and no
industry standards regarding how to respond to a "Do Not Track" preference. The World Wide Web Consortium chartered a "Tracking
Protection Working Group" in 2011 to convene a multi-stakeholder group of academics, thought leaders, companies, industry groups and
consumer advocacy organizations, to create a voluntary "Do Not Track" standard for the web. The group has yet to agree upon a standard. The
FTC has stated that it will pursue a legislative solution if the industry cannot agree upon a standard. The "Do-Not-Track Online Act of 2013"
was introduced in the United States Senate in February 2013. If a "Do Not Track" browser setting is adopted by many Internet users, and the
standard either imposed by state or federal legislation, or agreed upon by standard setting groups, prohibits us from using non-personal data as
we currently do, then that could hinder growth of advertising and content production on the web generally, cause us to change our business
practices and adversely affect our business.
Legislation and regulation of online businesses, including privacy and data protection regimes, could create unexpected costs, subject us to
enforcement actions for compliance failures, or cause us to change our technology platform or business model, which may have a material
adverse effect on our business.
Government regulation may increase the costs of doing business online. U.S. and foreign governments have enacted or are considering
legislation related to online advertising and we expect to see an increase in legislation and regulation related to advertising online, the use of
geo-location data to inform advertising, the collection and use of anonymous Internet user data and unique device identifiers, such as IP address
or mobile unique device identifiers, and other data protection and privacy regulation. Such legislation could affect the costs of doing business
online, and may adversely affect the demand for our solution or otherwise harm our business, results of operations and financial condition. For
example, a wide variety of provincial, state, national and international laws and regulations apply to the collection, use, retention, protection,
disclosure, transfer and other processing of personal data. While we have not collected data that is traditionally considered personal data, such
as name, email address, address, phone numbers, social security numbers, credit card numbers, financial or health data, we typically do collect
and store IP addresses and other device identifiers, that are or may be considered personal data in some jurisdictions or otherwise may be the
subject of legislation or regulation. Evolving and changing definitions of personal data, within the EU, the United States and elsewhere,
especially relating to classification of IP addresses, machine or device identifiers, location data and other information, have in the past, and may
cause us in the future, to change our business practices, or limit or inhibit our ability to operate or expand our business. Data protection and
privacy-related laws and regulations are evolving and may result in ever-increasing regulatory and public scrutiny and escalating levels of
enforcement and sanctions. While we take measures to protect the security of information that we collect, use and disclose in the operation of
our business, and to offer certain privacy protections with respect to such information, such measures may not always be effective.
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In addition, while we take steps to avoid collecting personally identifiable data about consumers, we may inadvertently receive this information
from advertisers or advertising agencies or through the process of delivering advertising. Our failure to comply with applicable laws and
regulations, or to protect personal data, could result in enforcement action against us, including fines, imprisonment of our officers and public
censure, claims for damages by consumers and other affected individuals, damage to our reputation and loss of goodwill, any of which could
have a material adverse impact on our operations, financial performance and business. Even the perception of privacy concerns, whether or not
valid, may harm our reputation and inhibit adoption of our solution by current and future advertisers and advertising agencies.
We may not be able to compete successfully against current and future competitors because competition in our industry is intense, and our
competitors may offer solutions that are perceived by our customers to be more attractive than ours, which may result in declining revenue,
or inability to grow our business.
Competition for our advertisers' advertising budgets is intense. We also expect competition to increase as the barriers to enter our market
are low. Increased competition may force us to charge less for our solution, or offer pricing models that are less attractive to us and decrease
our margins. Our principal competitors include companies that offer demand-side platforms that allow advertisers to purchase inventory
directly from advertising exchanges or other third parties and manage their own consumer data, traditional advertising networks and advertising
agencies themselves.
We also rely predominately on advertising agencies to purchase our solution on behalf of advertisers, and certain of those agencies are
creating competitive solutions, referred to as agency trading desks. If these agency trading desks are successful in leveraging their relationships
with the advertisers we may be unable to compete even if our solution is more effective. Many agencies that we work with are also owned by
large agency holding companies. For various reasons related to the agencies' own priorities or those of their holding companies, they may not
recommend our solution, even though it may be more effective, and we may not have the opportunity to demonstrate our value to advertisers.
We also compete with services offered through large online portals that have significant brand recognition, such as Yahoo!, Google, AOL
and MSN. These large portals have substantial proprietary digital advertising inventory that may provide them with competitive advantages,
including far greater access to Internet user data, and the ability to significantly influence pricing for digital advertising inventory. We also
compete for a share of advertisers' total advertising budgets with online search advertising, for which we do not offer a solution, and with
traditional advertising media, such as direct mail, television, radio, cable and print. Some of our competitors have also established reputations
for specific services, such as retargeting with dynamic creative, for which we do not have an established market presence. Many current and
potential competitors have competitive advantages relative to us, such as longer operating histories, greater name recognition, larger client
bases, greater access to advertising inventory on premium websites and significantly greater financial, technical, sales and marketing resources.
Increased competition may result in reduced pricing for our solution, longer sales cycles or a decrease of our market share, any of which could
negatively affect our revenue and future operating results and our ability to grow our business.
We have been dependent on display advertising. A decrease in the use of display advertising, or our inability to further penetrate display,
mobile, social and video advertising channels would harm our business, growth prospects, operating results and financial condition.
Historically, our customers have predominantly used our solution for display advertising, and the substantial majority of our revenue is
derived from advertisers, typically through their agencies, that use our solution for display advertising. We expect that display advertising will
continue to be a primary channel used by our customers. Should our customers lose confidence in the value or effectiveness of
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display advertising, the demand for our solution may decline. In addition, our failure to achieve market acceptance of our solution for mobile,
social and video advertising would harm our growth prospects, operating results and financial condition.
We have historically relied, and expect to continue to rely, on a small number of customers for a significant portion of our revenue, and the
loss of any of these customers may significantly harm our business, results of operations and financial condition.
A relatively small number of customers have historically accounted for a majority of our revenue. In 2011 and 2012, our top 20 customers
accounted for 39% and 38% of our revenue, respectively. However, no customer accounted for 10% or more of our annual revenue for either
period. While we expect this reliance to decrease over time, we expect that we will continue to depend upon a relatively small number of
customers for a significant portion of our revenue for the foreseeable future. As a result, if we fail to successfully attract or retain new or
existing customers or existing customers run fewer advertising campaigns with us, defer or cancel their insertion orders, or terminate their
relationship with us altogether, whether through the actions of their agency representatives or otherwise, our business, results of operations and
financial condition would be harmed.
Our international expansion subjects us to additional costs and risks, and may not yield returns in the foreseeable future, and our
continued expansion internationally may not be successful.
Our international expansion subjects us to many challenges associated with supporting a rapidly growing business across a multitude of
cultures, customs, monetary, legal and regulatory systems and commercial infrastructures. We have a limited operating history outside of the
United States, and our ability to manage our business and conduct our operations internationally requires considerable attention and resources.
We began operations in the United Kingdom in 2011. Our UK subsidiary has employees in the United Kingdom, the Netherlands, France and
Germany. We established a subsidiary in Germany in 2013. In addition, in 2012, we entered into a strategic alliance with a third-party licensee
through which we make our solution available in Japan. We expect to significantly expand our international operations in the future.
Our international expansion and the integration of international operations present challenges and risks to our business and require
significant attention from our management, finance, analytics, operations, sales and engineering teams to support advertising campaigns
abroad. For example, as a direct result of our relationship with our Japanese licensee, we have undertaken engineering and other work to
support campaigns for Japanese advertisers and localize our technology platform for language, currency and time zone, and have made
substantial investments to train our Japanese licensee's sales team to sell our solution in Japan. Moreover, our Japanese licensee is a
wholly-owned subsidiary of a large advertising agency holding company, with other subsidiaries that may offer services that compete with us.
As a result, there is a risk that conflicts of interest may arise that may reduce our ability to gain market share in the Japanese market.
Compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business
abroad, may interfere with our ability to offer our solution competitively to advertisers and advertising agencies in one or more countries and
expose us or our employees to fines and penalties. In some cases, our advertisers may impose additional requirements on our business in efforts
to comply with their interpretation of their own or our legal obligations. These requirements may differ significantly from the requirements
applicable to our business in the United States and may require engineering and other costly resources to accommodate. Laws and regulations
that may impact us include tax laws, employment laws, data privacy regulations, U.S. laws such as the Foreign Corrupt Practices Act and local
laws prohibiting corrupt payments to governmental officials and private entities, such as the U.K. Bribery Act. Violations of these laws and
regulations could result in monetary damages, criminal sanctions against us, our officers, or our employees, and prohibitions on the conduct of
our business.
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We may incur significant operating expenses as a result of our international expansion, and it may not be successful. Our international business
also subjects us to the impact of global and regional recessions and economic and political instability, differing regulatory requirements, costs
and difficulties in managing a distributed workforce, potentially adverse tax consequences in the United States and abroad and restrictions on
the repatriation of funds to the United States. Our failure to manage these risks and challenges successfully could materially and adversely
affect our business, financial condition and results of operations.
We do not have long-term commitments from our advertisers, and we may not be able to retain advertisers or attract new advertisers that
provide us with revenue that is comparable to the revenue generated by any advertisers we may lose.
Most of our advertisers do business with us by placing insertion orders for particular advertising campaigns. If we perform well on a
particular campaign, then the advertisers, or most often, the advertising agency representing such advertisers, may place new insertion orders
with us for additional advertising campaigns. We rarely have any commitment from an advertiser beyond the campaign governed by a
particular insertion order. In accordance with the Interactive Advertising Bureau, or IAB, our insertion orders may also be cancelled by
advertisers or their advertising agencies prior to the completion of the campaign without penalty. As a result, our success is dependent upon our
ability to outperform our competitors and win repeat business from existing advertisers, while continually expanding the number of advertisers
for whom we provide services. In addition, it is relatively easy for advertisers and the advertising agencies that represent them to seek an
alternative provider for their advertising campaigns because there are no significant switching costs, and agencies, with whom we do the
majority of our business, often have relationships with many different providers, each of whom may be running portions of the same
advertising campaign. Because we do not have long-term contracts, we may not accurately predict future revenue streams, and we cannot
guarantee that our current advertisers will continue to use our solution, or that we will be able to replace departing advertisers with new
advertisers that provide us with comparable revenue.
If we fail to detect fraud or serve our advertisers' advertisements on undesirable websites, our reputation will suffer, which would harm our
brand and reputation and negatively impact our business, financial condition and results of operations.
Our business depends in part on providing our advertisers with a service that they trust, and we have contractual commitments to take
reasonable measures to prevent advertisers' advertisements from appearing on undesirable websites or on certain websites that they identify.
We use proprietary technology to detect click fraud and block inventory that we know or suspect to be fraudulent, including "tool bar"
inventory, which is inventory that appears within an application, often called a "tool bar," and that overlays a website and displaces any
advertising that would otherwise be displayed on such website. We also use third-party services in an effort to prevent our advertisers'
advertisements from appearing on undesirable websites. Preventing and combating fraud requires constant vigilance, and we may not always be
successful in our efforts to do so. We may serve advertising on inventory that is objectionable to our advertisers, and we may lose the trust of
our advertisers, which would harm our brand and reputation and negatively impact our business, financial condition and results of operations.
We may also purchase inventory inadvertently that proves to be unacceptable for advertising campaigns, in which case we are responsible for
the cost and cannot bill that cost to any campaign. If we buy substantial volumes of unusable inventory, this could negatively impact our results
of operations.
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Our revenue could decline and our growth could be impeded, if our access to quality advertising inventory is diminished or if we fail to
acquire new advertising inventory.
We must maintain a consistent supply of attractive advertising inventory, meaning the digital space on which we place advertising
impressions, including websites, proprietary social networks, such as Facebook, and mobile applications. Our success depends on our ability to
secure quality inventory on reasonable terms across a broad range of advertising networks and exchanges, including real time advertising
exchanges, such as Google's DoubleClick Ad Exchange or AppNexus; suppliers of video and mobile inventory; and social media platforms,
such as the Facebook Exchange, known as FBX.
The amount, quality and cost of inventory available to us can change at any time. Our suppliers are generally not bound by long-term
contracts. As a result, there is no guarantee that we will have access to a consistent supply of quality inventory. Moreover, the number of
competing intermediaries that purchase advertising inventory from real-time advertising exchanges continues to increase, which could put
upward pressure on inventory costs. If we are unable to compete favorably for advertising inventory available on real-time advertising
exchanges, or if real-time advertising exchanges decide not to make their advertising inventory available to us, we may not be able to place
advertisements at competitive rates or find alternative sources of inventory with comparable traffic patterns and consumer demographics in a
timely manner. Furthermore, the inventory that we access through real-time advertising exchanges may be of low quality or misrepresented to
us, despite attempts by us and our suppliers to prevent fraud and conduct quality assurance checks.
Suppliers control the bidding process for the inventory they supply, and their processes may not always work in our favor. For example,
suppliers may place restrictions on the use of their inventory, including prohibiting the placement of advertisements on behalf of certain
advertisers. Through the bidding process, we may not win the right to deliver advertising to the inventory that we select and may not be able to
replace inventory that is no longer made available to us.
If we are unable to maintain a consistent supply of quality inventory for any reason, our business, advertiser retention and loyalty,
financial condition and results of operations could be harmed.
Our growth could be impeded and our revenue could decline if our access to quality inventory in social media is diminished or if we fail to
acquire new advertising inventory in social media. Currently, our social media offering is entirely dependent on access to Facebook's
inventory through FBX.
Our social media offering is currently limited to Facebook's FBX platform, which was launched in the second half of 2012. Therefore, we
currently define our social channel as advertising delivered through FBX. We have an agreement with Facebook allowing us to integrate
directly with FBX to bid on advertising inventory on a real-time basis. We integrated with FBX in the fourth quarter of 2012. As a result, our
ability to grow our revenue in the social channel is closely tied to the availability of inventory on FBX. If we are unable to compete favorably
for advertising inventory on FBX, our social offering may not be successful. Also, there is no guarantee that Facebook will continue to make its
advertising inventory available to us at all or upon reasonable terms, and we may not be able to replace the FBX advertising inventory with
inventory that meets our advertisers' specific goals with respect to social media. In addition, advertisers may prefer to work with companies that
provide advertising on social media platforms other than FBX or that have a longer history of integration with social media platforms. If we are
unable to run advertising campaigns on the FBX platform, integrate with social media platforms that may become available in the future or find
alternative sources of quality social media inventory, our business could be harmed.
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If mobile connected devices, their operating systems or content distribution channels, including those controlled by our competitors,
develop in ways that prevent our advertising campaigns from being delivered to their users, our ability to grow our business will be
impaired.
Our success in the mobile channel depends upon the ability of our technology platform to integrate with mobile inventory suppliers and
provide advertising for most mobile connected devices, as well as the major operating systems that run on them and the thousands of
applications that are downloaded onto them. The design of mobile devices and operating systems is controlled by third parties with whom we
do not have any formal relationships. These parties frequently introduce new devices, and from time to time they may introduce new operating
systems or modify existing ones. Network carriers may also impact the ability to access specified content on mobile devices. If our solution
were unable to work on these devices or operating systems, either because of technological constraints or because a maker of these devices or
developer of these operating systems wished to impair our ability to provide advertisements on them or our ability to fulfill advertising space,
or inventory, from developers whose applications are distributed through their controlled channels, our ability to generate revenue could be
significantly harmed.
Our sales and marketing efforts require significant investment, which may not yield returns in the foreseeable future, if at all.
We have invested significant resources in our sales and marketing teams to educate potential and prospective advertisers and advertising
agencies about the value of our solution. We are often required to explain how our solution can optimize advertising campaigns in real time.
Our business depends in part upon an advertisers' confidence, and the confidence of the advertising agencies that represent those advertisers,
that our use of real-time advertising exchanges to purchase inventory is superior to other methods of purchasing digital advertising. Real-time
bidding through real-time advertising exchanges is still a small part of the overall display, mobile, social and video digital advertising markets.
We often spend substantial time and resources responding to requests for proposals from potential advertisers and their advertising agencies,
including developing material specific to the needs of such potential advertisers. We may not be successful in attracting new advertisers despite
our investment in our business development, sales and marketing organizations. In addition, our sales team is primarily trained and experienced
in selling to advertising agencies, which often control an advertiser's budget. If more of our business shifts to direct relationships with brand
advertisers, we may not have an adequately trained sales team to support that shift and to sell products effectively to those advertisers.
If we do not effectively grow and train our sales team, we may be unable to add new customers or increase sales to our existing customers
and our business will be adversely affected.
We continue to be substantially dependent on our sales team to obtain new customers and to drive sales from our existing customers. We
believe that there is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve
significant revenue growth will depend, in large part, on our success in recruiting, training, integrating and retaining sufficient numbers of sales
personnel to support our growth. New hires require significant training and it may take significant time before they achieve full productivity.
Our recent hires and planned hires may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient
numbers of qualified individuals in the markets where we do business or plan to do business. In addition, as we continue to grow rapidly, a
large percentage of our sales team will be new to the company and our solution. If we are unable to hire and train sufficient numbers of
effective sales personnel, or the sales personnel are not successful in obtaining new customers or increasing sales to our existing customer base,
our business will be adversely affected.
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Failure to comply with industry self-regulation could harm our brand, reputation and our business.
We have committed to complying with the Network Advertising Initiative's Code of Conduct and the Digital Advertising Alliance's
Self-Regulatory Principles for Online Behavioral Advertising in the United States, as well as similar self-regulatory principles in Europe
adopted by the Interactive Advertising Bureau—Europe and the European Digital Advertising Alliance. Our efforts to comply with these
principles include offering Internet users notice and transparency when advertising is served to them based, in part, on web browsing data
recorded by cookies. We also offer Internet users the ability to opt out of receiving interest-based advertisements based on a cookie we place.
However, we have made mistakes in our implementation of these guidelines in the past, and if we make mistakes in the future, or our opt out
mechanisms fail to work as designed, or if Internet users misunderstand our technology or our commitments with respect to these principles,
we may, as a result, be subject to negative publicity, government investigation, government or private litigation, or investigation by
self-regulatory bodies or other accountability groups. Any such action against us could be costly and time consuming, require us to change our
business practices, cause us to divert management's attention and our resources and be damaging to our reputation and our business.
We may experience outages and disruptions of our services if we fail to maintain adequate security and supporting infrastructure as we
scale our systems, which may harm our brand and reputation and negatively impact our revenue and results of operations.
As we grow our business, we expect to continue to invest in technology services, hardware and software, including data centers, network
services, storage and database technologies. Creating the appropriate support for our technology platform, including Big Data and our
computational infrastructure, is expensive and complex, and our execution could result in inefficiencies or operational failures and increased
vulnerability to cyber-attacks, which, in turn, could diminish the quality of our services and our performance for advertisers. Cyber-attacks
could include denial-of-service attacks impacting service availability (including the ability to deliver ads) and reliability; the exploitation of
software vulnerabilities in Internet facing applications; social engineering of system administrators (tricking company employees into releasing
control of their systems to a hacker); or the introduction of computer viruses or malware into our systems with a view to steal confidential or
proprietary data. Cyber-attacks of increasing sophistication may be difficult to detect and could result in the theft of our intellectual property
and our data or our advertisers' data. In addition, we are vulnerable to unintentional errors or malicious actions by persons with authorized
access to our systems that exceed the scope of their access rights, or unintentionally or intentionally alter parameters or otherwise interfere with
the intended operations of our platform. The steps we take to increase the reliability, integrity and security of our systems as they scale may be
expensive and may not prevent system failures or unintended vulnerabilities resulting from the increasing number of persons with access to our
systems, complex interactions within our technology platform and the increasing number of connections with third party partners and vendors'
technology. Operational errors or failures or successful cyber-attacks could result in damage to our reputation and loss of current and new
advertisers and other business partners which could harm our business. In addition, we could be adversely impacted by outages and disruptions
in the online platforms of our key business partners, such as the real-time advertising exchanges, who we rely upon for access to inventory.
Real or perceived errors or failures in our software and systems could adversely affect our operating results and growth prospects.
We depend upon the sustained and uninterrupted performance of our technology platform to operate over 1,000 campaigns at any given
time; manage our inventory supply; bid on inventory for each campaign; serve or direct a third party to serve advertising; collect, process and
interpret data; and optimize campaign performance in real time and provide billing information to our financial
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systems. If our technology platform cannot scale to meet demand, or if there are errors in our execution of any of these functions on our
platform, then our business may be harmed. Because our software is complex, undetected errors and failures may occur, especially when new
versions or updates are made. We do not have the capability to test new releases or updates to our code on a small subset of campaigns, which
means that bugs or errors in code could impact all campaigns on our platform. Despite testing by us, errors or bugs in our software have in the
past, and may in the future, not be found until the software is in our live operating environment. For example, we have experienced failures in
our bidding system to recognize or respond to budget restrictions for campaigns, resulting in overspending on media, and we may in the future
have failures in our systems that cause us to buy more media than our advertisers are contractually obligated to pay for, which could be costly
and harm our operating results. Errors or failures in our software could also result in negative publicity, damage to our brand and reputation,
loss of or delay in market acceptance of our solution, increased costs or loss of revenue, loss of competitive position or claims by advertisers
for losses sustained by them. In such an event, we may be required or choose to expend additional resources to help mitigate any problems
resulting from errors in our software. We may make errors in the measurement of our campaigns causing discrepancies with our advertisers'
measurements leading to a lack in confidence with us or, on occasion, the need for advertiser "make-goods," the standard credits given to
advertisers for campaigns that have not been delivered properly. Alleviating problems resulting from errors in our software could require
significant expenditures of capital and other resources and could cause interruptions, delays or the cessation of our business, any of which
would adversely impact our financial position, results of operations and growth prospects.
Our future success depends on the continuing efforts of our key employees, including our three founders, George John, Richard Frankel
and Abhinav Gupta, and on our ability to hire, retain and motivate additional key employees.
Our future success depends heavily upon the continuing services of our key employees, including our three founders, George John, our
Chief Executive Officer, Richard Frankel, our President, and Abhinav Gupta, our Vice President, Engineering, and on our ability to attract and
retain members of our management team and other highly skilled employees, including software engineers, analytics and operations employees
and sales professionals. The market for talent in our key areas of operations, including California, New York, Chicago and London, is intensely
competitive. Our engineering group is based in Redwood City, California, and we face significant competition for talent from large technology
companies such as Google, Facebook, LinkedIn, Twitter and Yahoo!. These companies may also provide more diverse opportunities and better
chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates than those we have to offer.
None of our founders or other key employees has an employment agreement for a specific term, and any of our employees may terminate his or
her employment with us at any time.
New employees often require significant training and, in many cases, take significant time before they achieve full productivity. As a
result, we may incur significant costs to attract and retain employees, including significant expenditures related to salaries and benefits and
compensation expenses related to equity awards, and we may lose new employees to our competitors or other companies before we realize the
benefit of our investment in recruiting and training them. Moreover, new employees may not be or become as productive as we expect, as we
may face challenges in adequately or appropriately integrating them into our workforce and culture. In addition, as we move into new
geographies, we will need to attract and recruit skilled employees in those areas. We have little experience with recruiting in geographies
outside of the United States, and may face additional challenges in attracting, integrating and retaining international employees.
Even if we are successful in hiring qualified new employees, we may be subject to allegations that we have improperly solicited such
employees while they remained employed by our competitors, that
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such employees have improperly solicited other colleagues of theirs employed by the same competitors or that such employees have divulged
proprietary or other confidential information to us in violation of their agreements with such competitors. If we are unable to attract, integrate
and retain suitably qualified individuals, our business, financial position and results of operations may be harmed.
We may require additional capital to support growth, and such capital might not be available on terms acceptable to us, if at all, which may
in turn hamper our growth and adversely affect our business.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business
challenges, including the need to develop new features or enhance our platform, improve our operating infrastructure or acquire complementary
businesses and technologies. Accordingly, we may need to engage in private equity, equity-linked or debt financings to secure additional funds.
If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant
dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock.
Any debt financing that we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial
and operational matters, including the ability to pay dividends. This may make it more difficult for us to obtain additional capital and to pursue
business opportunities, including potential acquisitions. 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 respond to business challenges could be significantly impaired, and our business may be adversely affected.
Our corporate culture has contributed to our success, and if we cannot maintain it as we grow, we could lose the innovation, creativity and
teamwork fostered by our culture, and our business may be harmed.
We are undergoing rapid growth. As of June 30, 2013, we had approximately 405 employees in the United States and 60 employees
overseas, compared with approximately 190 and 15 employees, respectively, as of June 30, 2012. We intend to further expand our overall
headcount and operations both domestically and internationally, with no assurance that we will be able to do so while effectively maintaining
our corporate culture. We believe our corporate culture has been a critical component of our success as we believe it fosters innovation,
teamwork, passion for customers and focus on execution, while facilitating knowledge sharing across our organization. As we grow and
change, we may find it difficult to preserve our corporate culture, which could reduce our ability to innovate and operate effectively. In turn,
the failure to preserve our culture could negatively affect our ability to attract, recruit, integrate and retain employees, continue to perform at
current levels and effectively execute our business strategy.
Our historical revenue growth has masked seasonal fluctuations in advertising activity. As growth declines or seasonal patterns become
more pronounced, seasonality could have a material impact on our cash flows and operating results.
Our revenue, cash flow from operations, operating results and other key operating and performance metrics may vary from quarter to
quarter due to the seasonal nature of our advertisers' spending on digital advertising campaigns. For example, advertisers tend to devote more
of their advertising budgets to the fourth calendar quarter to coincide with consumer holiday spending. Moreover, advertising inventory in the
fourth quarter may be more expensive due to increased demand for advertising inventory. Our historical revenue growth has masked the impact
of seasonality, but if our growth rate declines or seasonal spending becomes more pronounced, seasonality could have a material impact on our
revenue, cash flow, operating results and other key operating and performance metrics from period to period.
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We rely predominately on advertising agencies to purchase our solution on behalf of advertisers, and we incur the cost of an advertising
campaign before we bill for services. Such agencies may have or develop high-risk credit profiles, which may result in credit risk to us, and
because generally agencies only pay us if they receive payment from the advertiser, our ability to collect for non-payment may be limited to
the advertiser, increasing our risk of non-payment.
A substantial portion of our business is sourced through advertising agencies, and we contract with these agencies as an agent for a
disclosed principal, which is the advertiser. Typically, the advertising agency pays for our services once it has received payment from the
advertiser for our services. Our contracts typically provide that if the advertiser does not pay the agency, the agency is not liable to us, and we
must seek payment solely from the advertiser. Contracting with these agencies, which in certain cases have or may develop high-risk credit
profiles, subjects us to greater credit risk than where we contract with advertisers directly. This credit risk may vary depending on the nature of
an advertising agency's aggregated advertiser base. There can be no assurances that we will not experience bad debt in the future. Any such
write-offs for bad debt could have a materially negative effect on our results of operations for the periods in which the write-offs occur. We
have to consider the effect of credit risk in transactions with agencies or other third parties and the advertiser. Even if we are not paid, we are
still obligated to pay for the media we have purchased for the advertising campaign, and as a consequence, our results of operations and
financial condition would be adversely impacted.
Fluctuations in the exchange rates of foreign currencies could result in currency transaction losses that negatively impact our financial
results.
We currently have foreign sales denominated in British pounds, euros, Japanese yen and Canadian dollars and may, in the future, have
sales denominated in the currencies of additional countries in which we establish or have established sales offices. In addition, we incur a
portion of our operating expenses in British pounds, euros, Canadian dollars and Hong Kong dollars. We expect international sales to become
an increasingly important part of our business. Such sales may be subject to unexpected regulatory requirements and other barriers. Any
fluctuation in the exchange rates of these foreign currencies may negatively impact our business, financial condition and results of operations.
We have not previously engaged in foreign currency hedging. If we decide to hedge our foreign currency exposure, we may not be able to
hedge effectively due to lack of experience, unreasonable costs or illiquid markets. In addition, those activities may be limited in the protection
they provide us from foreign currency fluctuations and can themselves result in losses.
Our proprietary rights may be difficult to enforce, which could enable others to copy or use aspects of our solution without compensating
us, thereby eroding our competitive advantages and harming our business.
Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop under the intellectual property
laws of the United States, so that we can prevent others from using our inventions and proprietary information. If we fail to protect our
intellectual property rights adequately, our competitors might gain access to our technology, and our business might be adversely affected. We
rely on trademark, copyright, trade secret and patent laws, confidentiality procedures and contractual provisions to protect our proprietary
methods and technologies. Our patent strategy is still in its early stages and while we have a small number of pending patent applications, valid
patents may not be issued from our pending applications, and the claims eventually allowed on any patents may not be sufficiently broad to
protect our technology or offerings and services. Any issued patents may be challenged, invalidated or circumvented, and any rights granted
under these patents may not actually provide adequate defensive protection or competitive advantages to us. Additionally, the process of
obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications
at a reasonable cost or in a timely manner. Additional uncertainty may result from changes to intellectual property legislation
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enacted in the United States, including the recent America Invents Act, and other national governments and from interpretations of the
intellectual property laws of the United States and other countries by applicable courts and agencies. Accordingly, despite our efforts, we may
be unable to obtain adequate patent protection, or to prevent third parties from infringing upon or misappropriating our intellectual property.
Unauthorized parties may attempt to copy aspects of our technology or obtain and use information that we regard as proprietary. We
generally enter into confidentiality and/or license agreements with our employees, consultants, vendors and advertisers, and generally limit
access to and distribution of our proprietary information. However, we cannot assure you that any steps taken by us will prevent
misappropriation of our technology and proprietary information. Policing unauthorized use of our technology is difficult. In addition, the laws
of some foreign countries may not be as protective of intellectual property rights as those of the United States, and mechanisms for
enforcement of our proprietary rights in such countries may be inadequate. From time to time, legal action by us may be necessary to enforce
our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend
against claims of infringement. Such litigation could result in substantial costs and the diversion of limited resources and could negatively
affect our business, operating results and financial condition. If we are unable to protect our proprietary rights (including aspects of our
technology platform) we may find ourselves at a competitive disadvantage to others who have not incurred the same level of expense, time and
effort to create and protect their intellectual property.
We may be subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay
significant damages and could limit our ability to use certain technologies.
Third parties may assert claims of infringement of intellectual property rights in proprietary technology against us or against our
advertisers for which we may be liable or have an indemnification obligation. Any claim of infringement by a third party, even those without
merit, could cause us to incur substantial costs defending against the claim and could distract our management from our business.
Although third parties may offer a license to their technology, the terms of any offered license may not be acceptable and the failure to
obtain a license or the costs associated with any license could cause our business, results of operations or financial condition to be materially
and adversely affected. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same
technology licensed to us. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and
expense and ultimately may not be successful. Furthermore, a successful claimant could secure a judgment or we may agree to a settlement that
prevents us from distributing certain products or performing certain services or that requires us to pay substantial damages, including treble
damages if we are found to have willfully infringed such claimant's patents or copyrights, royalties or other fees. Any of these events could
seriously harm our business, operating results and financial condition.
Our solution relies on third-party open source software components, and failure to comply with the terms of the underlying open source
software licenses could restrict our ability to sell our solution.
Our platform, including our computational infrastructure, relies on software licensed to us by third-party authors under "open source"
licenses. The use of open source software may entail greater risks than the use of third-party commercial software, as open source licensors
generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source
licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open
source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain open
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source licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create
similar solutions with lower development effort and time and ultimately put us at a competitive disadvantage.
Although we monitor our use of open source software to avoid subjecting our products to conditions we do not intend, the terms of many
open source licenses have not been interpreted by United States 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 commercialize our services. Moreover, we cannot guarantee that our
processes for controlling our use of open source software will be effective. If we are held to have breached the terms of an open source
software license, we could be required to seek licenses from third parties to continue operating our platform on terms that are not economically
feasible, to re-engineer our platform or the supporting computational infrastructure to discontinue use of certain code, or to make generally
available, in source code form, portions of our proprietary code, any of which could adversely affect our business, operating results and
financial condition.
Our growth depends, in part, on the success of our strategic relationships with third parties, including ready access to hardware in key
locations to facilitate the delivery of our solution and reliable management of Internet traffic.
We anticipate that we will continue to depend on various third-party relationships in order to grow our business. We continue to pursue
additional relationships with third parties, such as technology and content providers, real-time advertising exchanges, market research
companies, co-location facilities and other strategic partners. Identifying, negotiating and documenting relationships with third parties requires
significant time and resources as does integrating third-party data and services. Our agreements with channel partners and providers of
technology, computer hardware, co-location facilities, content and consulting services and real-time advertising exchanges are typically
non-exclusive, do not prohibit them from working with our competitors or from offering competing services and do not typically have
minimum purchase commitments. Our competitors may be effective in providing incentives to third parties to favor their products or services
or to prevent or reduce purchases of our solution. In addition, these third parties may not perform as expected under our agreements with them,
and we may have disagreements or disputes with such third parties, which could negatively affect our brand and reputation.
In particular, our continued growth depends on our ability to source computer hardware, including servers built to our specifications, and
the ability to locate those servers and related hardware in co-location facilities in the most desirable locations to facilitate the timely delivery of
our services. Similarly, disruptions in the services provided at co-location facilities that we rely upon can degrade the level of services that we
can provide, which may harm our business. We also rely on our integration with many third-party technology providers to execute our business
on a daily basis. We must efficiently direct a large amount of network traffic to and from our servers to consider tens of billions of bid requests
per day, and each bid typically must take place in approximately 100 milliseconds. We rely on a third-party domain name service, or DNS, to
direct traffic to our closest data center for efficient processing. If our DNS provider experiences disruptions or performance problems, this
could result in inefficient balancing of traffic across our servers as well as impairing or preventing web browser connectivity to our site, which
may harm our business.
Legal claims resulting from the actions of our advertisers could damage our reputation and be costly to defend.
We do not independently verify whether we are permitted to deliver advertising to our advertisers' Internet users or that the content of the
advertisements we deliver is legally permitted. We receive representations from advertisers that the content of the advertising that we place on
their behalf is
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lawful. We also rely on representations from our advertisers that they maintain adequate privacy policies that allow us to place pixels on their
websites and collect data from users that visit those websites to aid in delivering our solution. If any of these representations are untrue and our
advertisers do not abide by federal, state or local laws governing their content or privacy practices we may become subject to legal claims
against us, we will be exposed to potential liability (for which we may or may not be indemnified), and our reputation may be damaged.
Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other
losses.
Our agreements with advertisers, advertising agencies, and other third parties may include indemnification provisions under which we
agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to
property or persons, or other liabilities relating to or arising from our products, services, or other contractual obligations. The term of these
indemnity provisions generally survives termination or expiration of the applicable agreement. Large indemnity payments could harm our
business, operating results and financial condition.
We have identified material weaknesses in our internal controls in the past, and if we do not continue to develop effective internal controls,
we may not be able to accurately report our financial results or prevent fraud, and our business may suffer as a result.
When we are no longer an "emerging growth company," we will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to
furnish a report by management on, among other things, the effectiveness of our internal controls over financial reporting. We will need to
disclose any material weaknesses identified by our management in our internal controls over financial reporting, as well as provide a statement
that our independent registered public accounting firm has issued an opinion on our internal controls over financial reporting, provided that our
independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal controls over financial
reporting until our first annual report required to be filed with the Securities and Exchange Commission, or SEC, following the later of the date
we are deemed to be an "accelerated filer" or a "large accelerated filer," each as defined in the Securities Exchange Act of 1934, as amended, or
the Exchange Act, or the date we are no longer an "emerging growth company," as defined in the Jumpstart Our Businesses Act of 2012, or the
JOBS Act.
In connection with the audit of our financial statements for the year ended December 31, 2010, certain material weaknesses were
identified in our internal controls resulting from a lack of qualified personnel within our accounting function that possessed an appropriate level
of expertise to perform certain functions. We have since remediated these material weaknesses. We are continuing to develop our internal
controls, processes and reporting systems to comply with these requirements, by, among other things, hiring qualified personnel with expertise
to perform specific functions, implementing software systems to manage our revenue and expenses and to allow us to budget and undertake
multi-year financial planning and analyses. This process has been and will be time consuming, costly and complicated. We may not be
successful in implementing these systems or in developing other internal controls, which may undermine our ability to provide accurate, timely
and reliable reports on our financial and operating results. For example, in connection with filing the registration statement of which this
prospectus forms a part, errors were identified in the unaudited consolidated statement of cash flows for the six months ended June 30, 2012.
We have since corrected these errors and concluded that such corrections are immaterial. However, if we identify additional errors that result in
material weaknesses in our internal controls over financial reporting, we may not detect errors on a timely basis and our financial statements
may be materially misstated. If we identify new material weaknesses in our internal controls over financial reporting, if we are unable to
comply with the requirements of
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Section 404 in a timely manner, if we are unable to assert that our internal controls over financial reporting are effective, or if our independent
registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting,
investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be
negatively affected. As a result of such failures, we could also become subject to investigations by the stock exchange on which our securities
are listed, the SEC, or other regulatory authorities, and become subject to litigation from investors and stockholders, which could harm our
reputation, financial condition or divert financial and management resources from our core business.
Economic downturns and political and market conditions beyond our control could adversely affect our business, financial condition and
results of operations.
Our business depends on the overall demand for advertising and on the economic health of our current and prospective advertisers.
Economic downturns or instability in political or market conditions may cause current or new advertisers to reduce their advertising budgets.
Adverse economic conditions and general uncertainty about economic recovery are likely to affect our business prospects. In particular,
uncertainty regarding the budget crisis in the United States may cause general business conditions in the United States and elsewhere to
deteriorate or become volatile, which could cause advertisers to delay, decrease or cancel purchases of our solution; and expose us to increased
credit risk on advertiser orders, which, in turn, could negatively impact our business, financial condition and results of operations. In addition,
concerns over the sovereign debt situation in certain countries in the EU as well as continued geopolitical turmoil in many parts of the world
have and may continue to put pressure on global economic conditions, which could lead to reduced spending on advertising.
Our business is subject to the risk of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by
manmade problems such as terrorism.
We maintain servers at co-location facilities in California, Georgia, Virginia, the Netherlands and Hong Kong that we use to deliver
advertising campaigns for our advertisers, and expect to add other data centers at co-location facilities in the future. Any of our facilities may
be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, tornadoes, hurricanes, wildfires, floods, nuclear
disasters, acts of terrorism or other criminal activities, infectious disease outbreaks and power outages, any of which may render it difficult or
impossible for us to operate our business for some period of time. For example, in October 2012, Hurricane Sandy caused our former data
center in New York to cease operations because of storm damage, which caused us to divert online traffic to other facilities. Our corporate
headquarters and the co-location facility where we maintain data used in our business operations are both located in the San Francisco Bay
Area, a region known for seismic activity. If we were to lose the data stored in our California co-location facility, it could take several days, if
not weeks, to recreate this data from multiple sources, which could result in significant negative impact on our business operations, and
potential damage to our advertiser and advertising agency relationships. Our facilities would likely be costly to repair or replace, and any such
efforts would likely require substantial time. Any disruptions in our operations could negatively impact our business and results of operations,
and harm our reputation. In addition, we may not carry sufficient business interruption insurance to compensate for the losses that may occur.
Any such losses or damages could have a material adverse effect on our business, financial condition and results of operations.
We may acquire other businesses, which could require significant management attention, disrupt our business, dilute stockholder value and
adversely affect our results of operations.
As part of our business strategy, we may make investments in or acquisitions of complementary companies, products or technologies.
However, we have not made any acquisitions to date, and as a result, our ability as an organization to acquire and integrate other companies,
products or technologies
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in a successful manner is unproven. We may not be able to find suitable acquisition candidates, and we may not be able to complete such
acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve
our goals, and any acquisitions we complete could be viewed negatively by our advertisers, advertising agencies and investors or could subject
us to class action law suits that often follow public company acquisitions. In addition, if we are unsuccessful at integrating employees or
technologies acquired, our revenue and results of operations could be adversely affected. Any integration process may require significant time
and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or use the acquired technology or
employees, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. We may have to pay cash,
incur debt or issue equity securities to pay for any such acquisition, each of which could adversely affect our financial condition or the value of
our common stock. The sale of equity or issuance of debt to finance any such acquisitions could result in dilution to our stockholders. The
incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede
our ability to manage our operations.
If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our
operating results could fall below the expectations of securities analysts and investors, resulting in a decline in our stock price.
The preparation of financial statements in conformity with generally accepted accounting principles, or GAAP, requires management to
make estimates and assumptions that affect the amounts reported in the consolidated 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 provided
in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," the results of which form the
basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other
sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our
assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in
our stock price. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue
recognition, stock-based compensation, contract manufacturing liabilities and income taxes.
Our loan agreement contains operating and financial covenants that may restrict our business and financing activities.
Borrowings under our loan and security agreement with Comerica Bank, or Comerica, are secured by substantially all of our assets,
including our intellectual property. Our loan and security agreement also restricts our ability to, among other things:
•
dispose of or sell our assets;
•
make material changes in our business or management;
•
consolidate or merge with other entities;
•
incur additional indebtedness;
•
create liens on our assets;
•
pay dividends;
•
make investments;
•
enter into transactions with affiliates; and
•
pay off or redeem subordinated indebtedness.
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These restrictions are subject to certain exceptions. In addition, our loan and security agreement with Comerica requires us to comply with
a minimum EBITDA covenant and maintain a minimum liquidity ratio.
The operating and financial restrictions and covenants in the loan and security agreement, as well as any future financing agreements that
we may enter into, may restrict our ability to finance our operations, engage in, expand or otherwise pursue our business activities and
strategies. We have failed to comply with certain of these covenants in the past. Although our lender has waived such defaults or agreed to
amend certain covenants in the past, there is no guarantee it will do so in the future. Our ability to comply with these covenants may be affected
by events beyond our control, and future breaches of any of these covenants could result in a default under the loan and security agreements. If
not waived, future defaults could cause all of the outstanding indebtedness under our loan and security agreement to become immediately due
and payable and terminate all commitments to extend further credit.
If we do not have or are unable to generate sufficient cash available to repay our debt obligations when they become due and payable,
either upon maturity or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all,
which may negatively impact our ability to operate and continue our business as a going concern.
Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations which could subject our
business to higher tax liability.
We may be limited in the portion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S. federal
and state income tax purposes. At December 31, 2012, we had U.S. federal net operating loss carryforwards, or NOLs, of approximately
$22.4 million and state NOLs of $17.2 million. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In
addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an "ownership
change" is subject to limitations on its ability to utilize its NOLs to offset future taxable income. We believe that we experienced an ownership
change under Section 382 of the Code in prior years that may limit our ability to utilize a portion of the NOLs. As a result of the ownership
change, we estimate that the utilization of U.S. federal NOLs of $11.7 million and state NOLs of $10.5 million are subject to annual limitations
under Section 382. In addition, future changes in our stock ownership, including this or future offerings, as well as other changes that may be
outside of our control, could result in additional ownership changes under Section 382 of the Code. Our NOLs may also be impaired under
similar provisions of state law. We have recorded a full valuation allowance related to our NOLs and other net deferred tax assets due to the
uncertainty of the ultimate realization of the future benefits of those assets. Our NOLs may expire unutilized or underutilized, which could
prevent us from offsetting future taxable income.
The forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the market in which we compete
achieves the forecasted growth, we cannot assure you our business will grow at similar rates, if at all.
Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates which may not prove to be accurate.
The forecasts in this prospectus relating to the expected growth in the digital advertising and real-time buying markets may prove to be
inaccurate. For more information regarding the forecasts of market growth included in this prospectus, see the section entitled "Market and
Industry Data."
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Risks Related to this Offering, the Securities Markets and Ownership of Our Common Stock
The price of our common stock may be volatile and the value of your investment could decline.
Technology stocks have historically experienced high levels of volatility. The trading price of our common stock following this offering
may fluctuate substantially. Following the completion of this offering, the market price of our common stock may be higher or lower than the
price you pay in the offering, depending on many factors, some of which are beyond our control and may not be related to our operating
performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause
fluctuations in the trading price of our common stock include the following:
•
announcements of new offerings, products, services or technologies, commercial relationships, acquisitions or other events by us
or our competitors;
•
price and volume fluctuations in the overall stock market from time to time;
•
significant volatility in the market price and trading volume of technology companies in general and of companies in the digital
advertising industry in particular;
•
fluctuations in the trading volume of our shares or the size of our public float;
•
actual or anticipated changes or fluctuations in our results of operations;
•
whether our results of operations meet the expectations of securities analysts or investors;
•
actual or anticipated changes in the expectations of investors or securities analysts;
•
litigation involving us, our industry, or both;
•
regulatory developments in the United States, foreign countries, or both;
•
general economic conditions and trends;
•
major catastrophic events;
•
lockup releases, sales of large blocks of our common stock;
•
departures of key employees; or
•
an adverse impact on the company from any of the other risks cited herein.
In addition, if the market for technology stocks or the stock market, in general, experience a loss of investor confidence, the trading price
of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our
common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us.
In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been brought
against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in
substantial costs and divert our management's attention and resources from our business. This could have a material adverse effect on our
business, results of operations and financial condition.
Sales of substantial amounts of our common stock in the public markets, including when the "lock-up" or "market standoff" period ends,
or the perception that sales might occur, could reduce the price of our common stock and may dilute your voting power and your ownership
interest in us.
Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that these sales
could occur, could adversely affect the market price of our common stock and may make it more difficult for you to sell your common stock at
a time and price that you deem appropriate. Based on the total number of outstanding shares of our common stock as
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of June 30, 2013, upon completion of this offering, we will have
shares of common stock outstanding. All of the shares of
common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as
amended, or the Securities Act, except for any shares held by our "affiliates" as defined in Rule 144 under the Securities Act.
Subject to certain exceptions described under the caption "Underwriting," we and all of our directors and officers and substantially all of
our stockholders have agreed not to offer, sell or agree to sell, directly or indirectly, any shares of common stock without the permission of the
representatives of the underwriters for a period of 180 days from the date of this prospectus. When the lockup period expires, we and our
locked-up security holders will be able to sell shares in the public market. In addition, the underwriters may, in their sole discretion, release all
or some portion of the shares subject to lock-up agreements prior to the expiration of the lock-up period. See the section of this prospectus
entitled "Shares Eligible for Future Sale" for more information. Sales of a substantial number of such shares upon expiration, or the perception
that such sales may occur, or early release of the lock-up, could cause our share price to fall or make it more difficult for you to sell your
common stock at a time and price that you deem appropriate.
Based on shares outstanding as of June 30, 2013, holders of up to approximately
shares, or
%, of our common stock, will
have rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in
registration statements that we may file for ourselves or other stockholders. We also intend to register the offer and sale of all shares of
common stock that we may issue under our equity compensation plans.
We may issue our shares of common stock or securities convertible into our common stock from time to time in connection with a
financing, acquisition, investments or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause
the trading price of our common stock to decline.
Insiders will continue to have substantial control over us after this offering, which could limit your ability to influence the outcome of key
transactions, including a change of control.
Our directors, executive officers and each of our stockholders who own greater than 5% of our outstanding common stock, in the
aggregate, will beneficially own approximately
% of the outstanding shares of our common stock after this offering, based on the number
of shares outstanding as of June 30, 2013. As a result, these stockholders will be able to influence or control matters requiring approval by our
stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also
have interests that differ from yours and may vote in a manner that is adverse to your interests. This concentration of ownership may have the
effect of deterring, delaying or preventing a change of control of our company, could deprive our stockholders of an opportunity to receive a
premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.
We cannot assure you that a market will develop for our common stock or what the market price of our common stock will be.
We cannot assure you that an active trading market for our common stock will develop or, if developed, that any market will be sustained.
We cannot predict the prices at which our common stock will trade. The initial public offering price of our common stock will be determined
by negotiations with the underwriters and may not bear any relationship to the market price at which our common stock will trade after this
offering or to any other established criteria of the value of our business.
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We have broad discretion in the use of net proceeds that we receive in this offering, and if we do not use those proceeds effectively, your
investment could be harmed.
The principal purposes of this offering are to raise additional capital, to create a public market for our common stock and to facilitate our
future access to the public equity markets. We have not yet determined the specific allocation of the net proceeds that we receive in this
offering. We intend to use the net proceeds that we receive in this offering for working capital and general corporate purposes, including
expansion of our sales and marketing organization, further development and expansion of our product offerings, possible acquisitions of, or
investments in, businesses, technologies or other assets or repayment of all or a portion of our indebtedness. Accordingly, our management will
have broad discretion over the specific use of the net proceeds that we receive in this offering and might not be able to obtain a significant
return, if any, on investment of these net proceeds. Investors in this offering will need to rely upon the judgment of our management with
respect to the use of proceeds. If we do not use the net proceeds that we receive in this offering effectively, our business, results of operations
and financial condition could be harmed.
The requirements of being a public company may strain our resources, divert our management's attention and affect our ability to attract
and retain qualified board members.
As a public company, we will be subject to the reporting requirements of the Exchange Act, and will be required to comply with the
applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing
requirements of The NASDAQ Stock Market and other applicable securities rules and regulations. Compliance with these rules and regulations
will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on
our systems and resources. Among other things, the Exchange Act requires that we file annual, quarterly and current reports with respect to our
business and results of operations and maintain effective disclosure controls and procedures and internal controls over financial reporting. In
order to maintain and, if required, improve our disclosure controls and procedures and internal controls over financial reporting to meet this
standard, significant resources and management oversight may be required. As a result, management's attention may be diverted from other
business concerns, which could harm our business and results of operations. Although we have already hired additional employees to comply
with these requirements, we may need to hire even more employees in the future, which will increase our costs and expenses.
We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and
officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These
factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our
Audit Committee and Compensation Committee, and qualified executive officers.
We are an "emerging growth company," and we cannot be certain if the reduced disclosure requirements applicable to emerging growth
companies will make our common stock less attractive to investors.
For so long as we remain an "emerging growth company" as defined in the JOBS Act, we may take advantage of certain exemptions from
various requirements that are applicable to public companies that are not "emerging growth companies," including not being required to
comply with the independent auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations
regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding
advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take
advantage of these exemptions for so long as we are an "emerging growth company," which could be as long as five years following the
completion of this offering. Investors may find our common stock less attractive because we rely on these exemptions. If some investors find
our common stock less
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attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile and may
decline.
In addition, Section 107 of the JOBS Act also provides that an "emerging growth company" can take advantage of an extended transition
period for complying with new or revised accounting standards. However, we chose to "opt out" of such extended transition period, and as a
result, we will comply with new or revised accounting standards on the relevant dates adoption of such standards is required for non-emerging
growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is
irrevocable.
Because the initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per
share of our outstanding common stock following this offering, new investors will experience immediate and substantial dilution.
The initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of
our common stock immediately following this offering based on the total value of our tangible assets less our total liabilities. Therefore, if you
purchase shares of our common stock in this offering, you will experience immediate dilution of $
per share, the difference between the
price per share you pay (based on the midpoint of the price range on the cover of this prospectus) for our common stock and the pro forma net
tangible book value per share of our common stock as of June 30, 2013, after giving effect to the issuance of shares of our common stock in
this offering. See the section entitled "Dilution."
If securities or industry analysts do not publish research or reports about our business, or publish inaccurate or unfavorable research
reports about our business, our share price and trading volume could decline.
The trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts
publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us should
downgrade our shares or change their opinion of our business prospects, our share price would likely decline. If one or more of these analysts
ceases coverage of our company or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause
our share price or trading volume to decline.
We do not intend to pay dividends for the foreseeable future and, consequently, your ability to achieve a return on your investment will
depend on appreciation in the price of our common stock.
We have never declared or paid any dividends on our common stock. We intend to retain any earnings to finance the operation and
expansion of our business, and we do not anticipate paying any cash dividends in the future. As a result, you may only receive a return on your
investment in our common stock if the market price of our common stock increases. In addition, one of our credit facilities contains restrictions
on our ability to pay dividends.
Our charter documents and Delaware law could discourage takeover attempts and lead to management entrenchment.
Our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect upon completion of this
offering contain provisions that could delay or prevent a change in control of our company. These provisions could also make it difficult for
stockholders to elect directors that are not nominated by the current members of our board of directors or take other corporate actions,
including effecting changes in our management. These provisions include:
•
a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the
membership of a majority of our board of directors;
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•
the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares,
including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of
a hostile acquiror;
•
the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our 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;
•
a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting
of our stockholders;
•
the requirement that a special meeting of stockholders may be called only by the chairman of our board of directors, our president,
our secretary, or a majority vote of our board of directors, which could delay the ability of our stockholders to force consideration
of a proposal or to take action, including the removal of directors;
•
the requirement for the affirmative vote of holders of at least 66 2 / 3 % of the voting power of all of the then-outstanding shares of
the voting stock, voting together as a single class, to amend the provisions of our amended and restated certificate of incorporation
relating to the management of our business or our amended and restated bylaws, which may inhibit the ability of an acquiror to
effect such amendments to facilitate an unsolicited takeover attempt;
•
the ability of our board of directors, by majority vote, to amend our amended and restated bylaws, which may allow our board of
directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquiror to amend our amended
and restated bylaws to facilitate an unsolicited takeover attempt; and
•
advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose
matters to be acted upon at a stockholders' meeting, which may discourage or deter a potential acquiror from conducting a
solicitation of proxies to elect the acquiror's own slate of directors or otherwise attempting to obtain control of us.
In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. These provisions may
prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a
certain period of time.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business," contains forward-looking statements. The words "believe," "may,"
"will," "potentially," "estimate," "continue," "anticipate," "intend," "could," "would," "project," "plan," "expect" and similar expressions that
convey uncertainty of future events or outcomes are intended to identify forward-looking statements. These forward-looking statements
include, but are not limited to, statements concerning the following:
•
our future financial and operating results;
•
our ability to maintain an adequate rate of revenue growth;
•
our business plan and our ability to effectively manage our growth and associated investments;
•
our ability to attract and retain advertisers and advertising agencies;
•
our ability to further penetrate our existing customer base;
•
our ability to maintain our competitive technological advantages against competitors in our industry;
•
our ability to timely and effectively adapt our existing technology;
•
our ability to introduce new offerings and bring them to market in a timely manner;
•
our ability to maintain, protect and enhance our brand and intellectual property;
•
our ability to continue to expand internationally;
•
the effects of increased competition in our market and our ability to compete effectively;
•
our plans to use the proceeds from this offering;
•
costs associated with defending intellectual property infringement and other claims;
•
our expectations concerning relationships with third parties;
•
the attraction and retention of qualified employees and key personnel;
•
future acquisitions of or investments in complementary companies or technologies;
•
the effects of seasonal trends on our results of operations; and
•
our ability to comply with evolving legal standards and regulations, particularly concerning data protection and consumer privacy.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Risk
Factors" and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment, and new risks
emerge from time to time. It is not possible for us 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 forward-looking events and circumstances discussed in this
prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in our forward-looking
statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected
in our forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and
circumstances described
38
Table of Contents
in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy
and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any
reason after the date of this prospectus to conform these statements to actual results or to changes in our 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 Securities and Exchange
Commission as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results,
levels of activity, performance and events and circumstances may be materially different from what we expect.
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Table of Contents
MARKET AND INDUSTRY DATA
Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate,
including our general expectations and market position, market opportunity and market size, is based on information from various sources,
including International Data Corporation, or IDC, eMarketer Inc., or eMarketer, and Magna Global USA, Inc., or MAGNA GLOBAL, on
assumptions based on such data and other similar sources, and on our knowledge of the markets for our solution. This information involves a
number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. 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 "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 the text of the prospectus is contained in independent industry publications. The sources of these independent
industry publications are provided below:
(1)
eMarketer, Consumers Spending More Time with Mobile as Growth Slows for Time Online , October 2012.
(2)
eMarketer, Worldwide Ad Spending Forecast: Emerging Markets, Mobile Provide Opportunities for Growth , January 2013.
(3)
IDC, Real-Time Bidding in the United States and Worldwide, 2011-2016 , sponsored by PubMatic, October 2012.
(4)
IDC Digital Universe Study , sponsored by EMC Corporation, December 2012.
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USE OF PROCEEDS
We estimate that the net proceeds from our sale of
shares of common stock in this offering at an assumed initial public
offering price of $
per share, the midpoint of the price range reflected on the cover page of this prospectus, after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $
million. A $1.00
increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us from this offering by
$
million, assuming the number of shares offered by us, as reflected on the cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions. The selling stockholders will sell shares in this offering only if the
overallotment option is exercised. We will not receive any proceeds from the sale of shares by the selling stockholders, although we have
agreed to pay the expenses of the selling stockholders associated with this offering other than underwriting discounts and commissions.
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our stock,
thereby enabling access to the public equity markets by our employees and stockholders, obtain additional capital, and increase our visibility in
the marketplace. We intend to use the net proceeds received from this offering primarily for general corporate purposes, including working
capital, sales and marketing activities, product development, general and administrative matters and capital expenditures. We may also use a
portion of the net proceeds to repay outstanding indebtedness, or for the acquisition of, or investment in, technologies, solutions or businesses
that complement our business, although we have no present commitments to complete any such transactions at this time. We will have broad
discretion over the uses of the net proceeds of this offering. Pending these uses, we intend to invest the net proceeds from this offering in
short-term, investment-grade interest-bearing securities such as money market accounts, certificates of deposit, commercial paper and
guaranteed obligations of the U.S. government.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common 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 common stock in the foreseeable future, if at
all. 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 loan and security agreement contains restrictions on our ability to pay dividends.
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CAPITALIZATION
The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2013, on:
•
an actual basis;
•
a pro forma basis, giving effect to the automatic conversion of all outstanding shares of preferred stock into 19,478,932 shares of
common stock and the reclassification of the preferred stock warrant liability to additional paid-in capital upon the conversion of
all of our outstanding warrants to purchase shares of preferred stock into warrants to purchase shares of common stock, each to be
effective immediately upon the consummation of this offering as if such conversion had occurred on June 30, 2013; and
•
a pro forma as adjusted basis to reflect, in addition, (1) the automatic conversion of an outstanding warrant into a total of 161,533
shares of our common stock in connection with the completion of this offering and (2) our sale of
shares of common stock
in this offering at an assumed initial public offering price of $
per share, the midpoint of the price range listed on the cover
page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses.
You should read the information in this table together with our consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus.
As of June 30, 2013
Actual
Pro Forma
Pro Forma
As Adjusted(1)
(in thousands, except share and
per share data)
Cash and cash equivalents
$
21,985
$
21,985
Debt obligations, current and non-current
Convertible preferred stock warrant liability
Stockholders' equity:
Convertible preferred stock, $0.001 par
value; 19,788,015 authorized; 19,478,932
issued and outstanding, actual; no shares
authorized, issued and outstanding pro
forma and pro forma as adjusted
Preferred Stock, $0.001 par value, no shares
authorized, issued and outstanding, actual;
100,000,000 shares authorized, no shares
issued and outstanding, pro forma and pro
forma
as adjusted
Common stock, $0.001 par value: 39,435,110
shares authorized; 8,853,312 shares issued
and outstanding, actual; 39,435,110 shares
authorized, 28,332,244 shares issued and
outstanding, pro forma;
1,000,000,000 shares
authorized,
shares issued and
outstanding, pro forma as adjusted
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
$
21,853
5,096
$
21,853
—
—
—
—
60,617
Total stockholders' equity
Total capitalization
$
8
7,835
(125 )
(35,454 )
27
73,529
(125 )
(35,454 )
32,881
37,977
59,830
$
59,830
(1)
Each $1.00 increase (decrease) in the assumed initial public offering price of $
per share, which is the midpoint of the price range set forth on the cover
page of this prospectus, would increase (decrease) each of cash and cash equivalents,
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additional paid-in capital, total stockholders' equity and total capitalization by approximately $
, assuming the number of shares offered by us, as set forth on
the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. Similarly, each increase (decrease) of
one million shares in the number of shares offered by us would increase (decrease) cash and cash equivalents, additional paid-in capital, total stockholders' equity and
total capitalization by approximately $
, assuming the assumed initial public offering price remains the same, and after deducting estimated underwriting
discounts and commissions. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering
price and other terms of this offering determined at pricing.
The number of shares of our common stock to be outstanding after this offering is based on 28,493,777 shares of our common stock
outstanding as of June 30, 2013, and excludes:
•
7,607,735 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2013 pursuant to our 2008
Equity Incentive Plan, or 2008 Plan, with a weighted-average exercise price of $6.06 per share;
•
155,000 shares of common stock issuable upon the exercise of options granted after June 30, 2013 pursuant to our 2008 Plan, with
a weighted-average exercise price of $20.05 per share;
•
40,150 shares of common stock issuable upon the vesting of restricted stock units granted after June 30, 2013 pursuant to our 2008
Plan;
•
104,997 shares of common stock issuable upon the exercise of a convertible preferred stock warrant outstanding as of June 30,
2013, with an exercise price of $0.9286 per share; and
•
7,009,437 shares of common stock reserved for future grants under our stock-based compensation plans, consisting of
•
1,009,437 shares of common stock as of June 30, 2013 reserved for future grants under our 2008 Plan, which shares will be
added to the shares to be reserved under our 2013 Equity Incentive Plan, or 2013 Plan, which will become effective upon
the completion of the offering;
•
5,000,000 shares of common stock reserved for future grants under our 2013 Plan;
•
1,000,000 shares of common stock reserved for future issuance under our 2013 Employee Stock Purchase Plan, or ESPP,
which will become effective upon the completion of the offering; and
•
any shares of common stock that become available subsequent to the offering under our 2013 Plan and ESPP pursuant to
the provisions thereof that automatically increase the shares reserved for issuance under such plans each year, as more fully
described in "Executive Compensation—Employee Benefit and Stock Plans."
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DILUTION
If you invest in our common stock, your interest will be diluted to the extent of the difference between the amount per share paid by
purchasers of shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock
immediately after the completion of this offering.
As of June 30, 2013, our pro forma net tangible book value was approximately $38.0 million, or $1.36 per share of common stock. 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 June 30, 2013, assuming the conversion of all outstanding shares
of our convertible preferred stock into shares of common stock and the reclassification of the preferred stock warrant liability to additional
paid-in capital, each immediately prior to the completion of this offering.
After giving effect to (1) the automatic conversion of an outstanding warrant into a total of 161,533 shares of our common stock in
connection with the completion of this offering and (2) our sale in this offering of
shares of our common stock, at an assumed initial
public offering price of $
per share, the midpoint of the price range reflected on the cover page of this prospectus, after deducting
estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of
June 30, 2013 would have been approximately $
million, or $
per share of our common stock. This represents an immediate
increase in pro forma as adjusted net tangible book value of $
per share to our existing stockholders and an immediate dilution of
$
per share to investors purchasing shares in this offering.
The following table illustrates this dilution:
Assumed initial public offering price per share
Pro forma net tangible book value per share as of June 30, 2013, before
giving effect to this offering
Increase in pro forma net tangible book value per share attributable to new
investors purchasing shares in this offering
$
$
1.36
Pro forma as adjusted net tangible book value per share, after giving effect to
this offering
$
Dilution per share to new investors purchasing shares in this offering
$
A $1.00 increase (decrease) in the assumed initial public offering price of $
per share, the midpoint of the price range reflected on
the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value, after giving effect to this
offering, by $
per share, and the dilution per share to new investors purchasing shares in this offering by $
per share, assuming the
number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting
discounts and commissions.
The following table summarizes, on a pro forma as adjusted basis as of June 30, 2013 after giving effect to (i) the automatic conversion of
all of our convertible preferred stock into common stock, (ii) the effectiveness of our amended and restated certificate of incorporation and
(iii) the completion of this offering at an assumed initial public offering price of $
per share, the midpoint of the price range reflected on
the cover page of this prospectus, the difference between existing stockholders and new investors with respect to the number of shares of
common stock purchased from us, the total
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consideration paid to us and the average price per share paid, before deducting estimated underwriting discounts and commissions and
estimated offering expenses:
Shares Purchased
Number
Percent
Existing
stockholders
New public
investors
Total
Total Consideration
Amount
Percent
Average Price
Per Share
%
$
%
100.0 %
$
100.0 %
$
A $1.00 increase (decrease) in the assumed initial public offering price of $
per share, the midpoint of the price range reflected on
the cover page of this prospectus, would increase (decrease) total consideration paid by new investors and total consideration paid by all
stockholders by approximately $
million, assuming that the number of shares offered by us, as set forth on the cover page of this
prospectus, remains the same.
To the extent that our outstanding warrants or any of our outstanding options are exercised, investors will experience further dilution.
Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters' over-allotment option. If the
underwriters exercise their over-allotment option in full, our existing stockholders would own
% and our new investors would
own
% of the total number of shares of our common stock outstanding upon the completion of this offering.
The number of shares of our common stock to be outstanding after this offering is based on 28,493,777 shares of our common stock
outstanding as of June 30, 2013, and excludes:
•
7,607,735 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2013 pursuant to our 2008
Equity Incentive Plan, or 2008 Plan, with a weighted-average exercise price of $6.06 per share;
•
155,000 shares of common stock issuable upon the exercise of options granted after June 30, 2013 pursuant to our 2008 Plan, with
a weighted-average exercise price of $20.05 per share;
•
40,150 shares of common stock issuable upon the vesting of restricted stock units granted after June 30, 2013 pursuant to our 2008
Plan;
•
104,997 shares of common stock issuable upon the exercise of a convertible preferred stock warrant outstanding as of June 30,
2013, with an exercise price of $0.9286 per share; and
•
7,009,437 shares of common stock reserved for future grants under our stock-based compensation plans, consisting of
•
1,009,437 shares of common stock as of June 30, 2013 reserved for future grants under our 2008 Plan, which shares will be
added to the shares to be reserved under our 2013 Equity Incentive Plan, or 2013 Plan, which will become effective upon
the completion of the offering;
•
5,000,000 shares of common stock reserved for future grants under our 2013 Plan;
•
1,000,000 shares of common stock reserved for future issuance under our 2013 Employee Stock Purchase Plan, or ESPP,
which will become effective upon the completion of the offering; and
•
any shares of common stock that become available subsequent to the offering under our 2013 Plan and ESPP pursuant to
the provisions thereof that automatically increase the shares reserved for issuance under such plans each year, as more fully
described in "Executive Compensation—Employee Benefit and Stock Plans."
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial and other data should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our audited consolidated financial statements and related notes, which are included
elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2011 and 2012 and the
consolidated balance sheet data as of December 31, 2011 and 2012 are derived from the audited consolidated financial statements that are
included elsewhere in this prospectus. The consolidated statement of operations data for the year ended December 31, 2010, as well as the
consolidated balance sheet data as of December 31, 2010, is derived from audited financial consolidated financial statements that are not
included in this prospectus. The consolidated statements of operations data for the six months ended June 30, 2012 and 2013 and the
consolidated balance sheet data as of June 30, 2013 are derived from our unaudited consolidated financial statements appearing elsewhere in
this prospectus. We have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, which we consider
necessary for a fair presentation of the financial information set forth in those 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 to be expected for the full year or any
other period.
2010
Consolidated Statement of
Operations Data:
Revenue(1)
Cost of revenue(2)
$
Six Months Ended
Years Ended December 31,
June 30,
2011
2012
2012
2013
(in thousands, except per share data)
16,527
10,875
$
44,652
27,300
$
106,589
60,011
$
39,592
22,033
$
92,581
49,652
Gross profit
5,652
17,352
46,578
17,559
42,929
Operating expenses:
Research and
development(2)
Sales and marketing(2)
General and
administrative(2)
1,039
6,071
1,545
17,256
4,876
41,069
1,538
15,542
6,123
34,649
1,521
2,336
8,403
2,570
10,952
8,631
21,137
54,348
19,650
51,724
Loss from operations
Other expense, net:
Interest expense
Other income
(expense)—net
Change in fair value of
convertible preferred
stock warrant liability
(2,979 )
(3,785 )
(7,770 )
(2,091 )
(8,795 )
(166 )
(250 )
(316 )
(170 )
(353 )
33
135
92
(368 )
(106 )
(295 )
(2,308 )
(262 )
(2,355 )
Other expense, net
Loss before income taxes
Provision for income taxes
(263 )
(3,242 )
—
(512 )
(4,297 )
(28 )
(2,489 )
(10,259 )
(84 )
(340 )
(2,431 )
(39 )
(3,076 )
(11,871 )
(40 )
Total operating expenses
9
Net loss
$
(3,242 )
$
(4,325 )
$
(10,343 )
$
(2,470 )
$
(11,911 )
Basic and diluted net loss per
share attributable to
common stockholders(3)
$
(0.48 )
$
(0.57 )
$
(1.29 )
$
(0.31 )
$
(1.43 )
Basic and diluted
weighted-average shares
used to compute net loss per
share attributable to
common stockholders
6,794
7,600
8,024
7,923
8,347
Basic and diluted pro forma
net loss per share
attributable to common
stockholders(3)
$
Basic and diluted
weighted-average shares
used to compute pro forma
net loss per share
attributable to common
stockholders
(0.29 )
27,664
46
$
(0.34 )
27,987
Table of Contents
(1)
Beginning January 1, 2011, we adopted a new authoritative guidance on multiple arrangements on a prospective basis. The adoption did not materially impact the
comparability of revenue between the periods presented.
(2)
Stock-based compensation expense was as follows:
Years Ended
December 31,
2011
2010
Cost of revenue
Research and development
Sales and marketing
General and administrative
$
—
13
20
8
$
7
8
66
83
$
41
$
164
2012
(in thousands)
$
37
734
1,100
1,450
$
3,321
Six Months Ended
June 30,
2012
2013
$
15
96
65
139
$
118
759
1,320
1,403
$
315
$
3,600
(3)
See Note 9 to our consolidated financial statements for a description of the method used to compute basic and diluted net loss per share attributable to common
stockholders and pro forma basic and diluted net loss per share attributable to common stockholders.
2010
Other Financial Data:
Revenue less media
costs(1)
Adjusted EBITDA(2)
$
$
7,209
(2,869 )
Years Ended
December 31,
2011
$
$
22,003
(3,125 )
Six Months Ended
June 30,
2012
2013
2012
(in thousands)
$
$
55,920
(2,981 )
$
$
21,427
(1,179 )
$
$
51,292
(4,284 )
(1)
Revenue less media costs is a financial measure not presented in accordance with generally accepted accounting principles, or GAAP. We define revenue less
media costs as GAAP revenue less media costs. Media costs consist of costs for advertising impressions we purchase from real-time advertising exchanges or
other third parties. Please see "—Non-GAAP Financial Measures—Revenue less media costs" for more information as to the limitations of using non-GAAP
measures and for the reconciliation of revenue less media costs to revenue, the most directly comparable financial measure calculated in accordance with GAAP.
(2)
Adjusted EBITDA is a non-GAAP financial measure. We define adjusted EBITDA as net loss before income tax (expense) benefit, interest expense, net,
depreciation and amortization (excluding amortization of internal use software), and stock-based compensation expense and change in fair value of convertible
preferred stock warrant liability. Please see "—Non-GAAP Financial Measures—Adjusted EBITDA" for more information as to the limitations of using
non-GAAP measures and for the reconciliation of adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with
GAAP.
2010
Consolidated Balance Sheet Data:
Cash and cash equivalents
Property, equipment and software, net
Working capital
Total assets
Debt obligations, current and non-current
Total stockholders' equity
$
$
$
$
$
$
8,523
2,212
11,192
17,839
2,736
10,982
As of December 31,
2011
(in thousands)
$
$
$
$
$
$
5,071
4,941
12,962
27,158
4,379
13,389
$
$
$
$
$
$
As of
June 30,
2013
2012
14,896
10,939
37,935
75,189
6,966
40,863
$
$
$
$
$
$
21,985
13,800
41,478
99,781
21,853
32,881
Non-GAAP Financial Measures
Revenue Less Media Costs
Revenue less media costs is a non-GAAP financial measure defined as GAAP revenue less media costs. Media costs consist of costs for
advertising impressions we purchase from real-time advertising
47
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exchanges or through other third parties. We present revenue less media costs as a metric used by us for evaluation and decision-making
purposes. A limitation of revenue less media costs is that it is a measure that we have defined for internal purposes that may be unique to us,
and therefore it may not enhance the comparability of our results to other companies in our industry that have similar business arrangements
but present the impact of media costs differently. Management compensates for these limitations by also relying on the comparable GAAP
financial measures of revenue, cost of revenue and total operating expenses. The following table presents a reconciliation of revenue less media
costs to revenue for each of the periods indicated:
2010
Revenue
Less: Media costs
Revenue less media
costs
Years Ended
December 31,
2011
Six Months Ended
June 30,
2012
2013
2012
(in thousands)
$
16,527
(9,318 )
$
44,652
(22,649 )
$
106,589
(50,669 )
$
39,592
(18,165 )
$
92,581
(41,289 )
$
7,209
$
22,003
$
55,920
$
21,427
$
51,292
Adjusted EBITDA
To provide investors with additional information regarding our financial results, we have presented adjusted EBITDA, a non-GAAP
financial measure. We have provided below a reconciliation of adjusted EBITDA to net loss, the most directly comparable GAAP financial
measure.
We have presented adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors to
understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, to develop short and long-term
operational plans, and to determine bonus payouts. In particular, we believe that the exclusion of the expenses eliminated in calculating
adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, adjusted EBITDA is a key
financial measure used by the compensation committee of our board of directors in connection with the determination of compensation for our
executive officers. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and
evaluating our operating results in the same manner as our management and board of directors.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis
of our financial results as reported under GAAP. Some of these limitations are as follows:
•
although depreciation and amortization of property and equipment (excluding amortization of internal use software) are non-cash
charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect
cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•
adjusted EBITDA does not reflect: (1) changes in, or cash requirements for, our working capital needs; (2) the potentially dilutive
impact of equity-based compensation; or (3) tax payments that may represent a reduction in cash available to us; and
•
other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently,
which reduces its usefulness as a comparative measure.
Because of these and other limitations, you should consider adjusted EBITDA along with other GAAP-based financial performance
measures, including various cash flow metrics, net income or loss,
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and our other GAAP financial results. The following table presents a reconciliation of adjusted EBITDA to net loss for each of the periods
indicated:
Years Ended
December 31,
Six Months Ended
June 30,
January 1,
2010 through
June 30, 2013
2010
Net loss
Adjustments:
Interest expense,
net
Provision for
income taxes
Depreciation and
amortization
expense
(excludes
amortization of
internal use
software)
Stock-based
compensation
expense
Change in fair
value of
convertible
preferred stock
warrant liability
Total adjustments
Adjusted EBITDA
2011
2012
2012
(in thousands)
2013
$ (3,242 ) $ (4,325 ) $ (10,343 ) $ (2,470 ) $ (11,911 ) $ (29,821 )
158
250
316
170
353
1,085
—
28
84
39
40
152
68
463
1,333
505
1,279
3,143
41
164
3,321
315
3,600
7,126
106
295
2,308
262
2,355
5,056
373
1,200
7,362
1,291
7,627
16,562
$ (2,869 ) $ (3,125 ) $
(2,981 ) $ (1,179 ) $
49
(4,284 ) $ (13,259 )
Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the
consolidated financial statements and the related notes to the consolidated financial statements included later in this prospectus. In addition to
historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and
expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in
these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in
this prospectus, particularly in "Risk Factors" and "Special Note Regarding Forward-Looking Statements."
Overview
Rocket Fuel is a technology company that has developed an Artificial Intelligence and Big Data-driven predictive modeling and
automated decision-making platform. Our technology is designed to address the needs of markets in which the volume and speed of
information render real-time human analysis infeasible. We are focused on the large and growing digital advertising market that faces these
challenges.
There are tens of billions of daily trades across all digital advertising exchanges, thousands of times more than the number of daily trades
executed by NASDAQ and the NYSE combined. Our Artificial Intelligence, or AI, system autonomously purchases ad spots, or impressions,
one at a time, on these exchanges to create portfolios of impressions designed to optimize the goals of our advertisers, such as increased sales,
heightened brand awareness and decreased cost per customer acquisition. We believe that our customers value our solution, as our revenue
retention rate was 134% and 175% for the years ended December 31, 2011 and 2012, respectively. We define our "revenue retention rate" with
respect to a given twelve-month period as (i) revenue recognized during such period from customers that contributed to revenue recognized in
the prior twelve-month period divided by (ii) total revenue recognized in such prior twelve-month period.
Benefiting from our unique combination of technology and industry expertise, we have rapidly grown our business, building a diversified
customer base that, during 2012, was comprised of over 65 of the Advertising Age 100 Leading National Advertisers and over 40 of the
Fortune 100 companies.
Our solution is designed to optimize both direct-response campaigns focused on generating specific consumer purchases or responses,
generally defined as cost per action goals, as well as brand campaigns geared towards lifting brand metrics, generally defined as cost-per-click
and brand survey goals. For the six months ended June 30, 2013, direct response campaigns contributed approximately two-thirds of our
revenue, with the remaining one-third of our revenue generated through brand campaigns. We have successfully run advertising campaigns for
products and brands ranging from consumer products to luxury automobiles to travel. We provide a differentiated solution that is simple,
powerful, scalable and extensible across geographies, industry verticals and advertising channels.
We generate revenue by delivering digital advertisements to consumers through our solution across display, mobile, social and video
channels. Historically, our revenue has predominantly come from display advertising because display advertising inventory was the first to be
made available for programmatic buying through real-time advertising exchanges. The digital advertising industry is rapidly adopting
programmatic buying for mobile, social and video advertising, accelerating the amount of digital advertising inventory available through
real-time advertising exchanges. We offer a single solution for advertisers across all of these channels to compete for a larger share of
advertisers' budgets. While a substantial majority of our revenue currently comes from display advertising, we are focused on offering
advertisers a comprehensive solution that addresses the display, mobile, social and video channels.
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Our contracts typically have a term of less than a year, and we recognize revenue as we deliver advertising impressions, subject to
satisfying all other revenue recognition criteria. Our revenue recognition policies are discussed in more detail under "—Critical Accounting
Policies and Estimates."
The majority of our revenue is generated in North America. We believe the markets outside of North America offer an opportunity for
growth, and we intend to make additional investments in research and development and sales and marketing to expand in these markets.
Revenue generated outside of North America was $1.2 million, $10.3 million and $11.3 million for the years ended December 31, 2011 and
2012 and for the six months ended June 30, 2013, respectively.
We plan to invest for long-term growth. We anticipate that our operating expenses will increase significantly in the foreseeable future as
we invest in research and development to enhance our solution and in sales and marketing to acquire new customers and reinforce our
relationships with existing customers. We believe that these investments will contribute to our long-term growth, although they will reduce our
profitability in the near term.
Since our incorporation in March 2008, we have achieved significant growth as we have scaled our platform and expanded our offerings.
As our customers experience the performance of their media campaigns on our platform, we often receive feedback that we are a top performer,
and consequently, we often receive increased allocations that contribute to our revenue growth. For the years ended December 31, 2010, 2011
and 2012, our revenue was $16.5 million, $44.7 million and $106.6 million, respectively, representing a compound annual growth rate, or
CAGR, of 154%. For the six months ended June 30, 2012 and 2013, our revenue was $39.6 million and $92.6 million, respectively,
representing period-over-period growth of 134%. For the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30,
2012 and 2013, our net loss was $(3.2) million, $(4.3) million, $(10.3) million, $(2.5) million and $(11.9) million, respectively. For the years
ended December 31, 2010, 2011 and 2012 and for the six months ended June 30, 2012 and 2013, our adjusted EBITDA was $(2.9) million,
$(3.1) million, $(3.0) million, $(1.2) million and $(4.3) million, respectively. Adjusted EBITDA is a non-GAAP financial measure. For a
definition of adjusted EBITDA, an explanation of our management's use of this measure and a reconciliation of adjusted EBITDA to our net
loss, see "Selected Consolidated Financial Data—Non-GAAP Financial Measures."
Key Operating and Financial Performance Metrics
We monitor the key operating and financial performance metrics set forth below to help us evaluate growth, establish budgets, measure
the effectiveness of our research and development and sales and marketing and other investments, and assess our operational efficiencies.
Revenue less media costs, adjusted EBITDA, and number of active customers are discussed immediately following the table below. Revenue is
discussed under the headings "—Components of Our Results of Operations" and "—Results of Operations."
Years Ended
December 31,
2011
Revenue
Revenue less media costs (non-GAAP)
Adjusted EBITDA (non-GAAP)
Number of active customers
$
$
$
Six Months Ended
June 30,
2012
2012
2013
(in thousands, except number of active customers)
44,652
22,003
(3,125 )
266
51
$
$
$
106,589
55,920
(2,981 )
536
$
$
$
39,592
21,427
(1,179 )
341
$
$
$
92,581
51,292
(4,284 )
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Revenue Less Media Costs
Revenue less media costs is a non-GAAP financial measure defined by us as generally accepted accounting principles, or GAAP, revenue
less media costs. Media costs consist of costs for advertising impressions we purchase from real-time advertising exchanges or through other
third parties. We believe that revenue less media costs is a meaningful measure of operating performance because it is frequently used for
internal management purposes, indicates the performance of our solution in balancing the goals of delivering exceptional results to advertisers
while meeting our margin objectives and facilitates a more complete period-to-period understanding of factors and trends affecting our
underlying revenue performance. Please see "Selected Consolidated Financial Data—Non-GAAP Financial Measures" for more information as
to the limitations of using non-GAAP measures and for a reconciliation of revenue less media costs to revenue, the most directly comparable
financial measure calculated in accordance with GAAP.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure defined by us as net loss before income tax (expense) benefit, interest expense, net,
depreciation and amortization (excluding amortization of internal use software), stock-based compensation expense and change in fair value of
convertible preferred stock warrant liability. We have presented adjusted EBITDA in this prospectus because it is a key measure used by our
management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual
budget, to develop short and long-term operating plans and to determine bonus payouts. In particular, we believe that the exclusion of the
expenses eliminated in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business.
Additionally, adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with
the determination of compensation for our executive officers. Accordingly, we believe that adjusted EBITDA provides useful information in
understanding and evaluating our operating results. Please see "Selected Consolidated Financial Data—Non-GAAP Financial Measures" for
information regarding the limitations of using adjusted EBITDA as a financial measure and for a reconciliation of adjusted EBITDA to net loss,
the most directly comparable financial measure calculated in accordance with GAAP.
Number of Active Customers
We define an active customer as a customer from whom we recognized revenue in the last three months. Each customer can be either an
advertiser who purchases our solution from us directly or an advertiser who purchases our solution through an advertising agency or other third
party. We count all advertisers within a single corporate structure as one customer even in cases where multiple brands, branches or divisions
of an organization enter into separate contracts with us. We believe that our ability to increase the number of active customers using our
solution is an important indicator of our ability to grow our business, although we expect this number to fluctuate based on the seasonality in
our business.
Factors Affecting Our Performance
We believe that the growth of our business and our future success depend on various opportunities, challenges and other factors, including
the following:
Investment in Growth
We plan to invest for long-term growth. We anticipate that our operating expenses will increase significantly in the foreseeable future as
we invest in research and development to enhance our
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solution, in sales and marketing to acquire new customers and reinforce our relationships with existing customers and in our infrastructure,
including our IT, financial and administrative systems and controls. We are also investing to further automate our business processes with the
goal of enhancing our profitability. We believe that these investments will contribute to our long-term growth, although they will reduce our
profitability in the near term. We also believe that as our sales team becomes more seasoned, we will experience an increase in sales
productivity.
Ability to Increase Penetration in All Channels
Historically, our revenue has predominantly come from display advertising. Our future performance is dependent on our continued ability
to penetrate and grow our revenue in display, as well as mobile, social and video channels.
Customer Growth and Retention
While we have a significant customer base, we must continue to attract new customers, and gain a larger amount of our current customers'
advertising budgets, to continue our growth. We believe our ability to attract new customers and retain and increase revenue from our existing
customers is an important element of our business. Our number of active customers increased from 266 as of December 31, 2011 to 536 as of
December 31, 2012, and our revenue retention rate was 175% for the year ended December 31, 2012. Of the $106.6 million of revenue for the
year ended December 31, 2012, $78.2 million, or 73%, was from customers that contributed to revenue recognized in the prior year.
Growth of the Real-time Advertising Exchange Market and Digital Advertising
Our performance is significantly affected by growth rates in both real-time advertising exchanges and the digital advertising channels that
we address. These markets have grown rapidly in the past several years, and any acceleration, or slowing, of this growth would affect our
overall performance.
Seasonality
In the advertising industry, companies commonly experience seasonal fluctuations in revenue. For example, many advertisers allocate the
largest portion of their budgets to the fourth quarter of the calendar year to coincide with increased holiday purchasing. Historically, the fourth
quarter of the year reflects our highest level of advertising activity, and the first quarter reflects the lowest level of such activity. We expect our
revenue to continue to fluctuate based on seasonal factors that affect the advertising industry as a whole.
Components of Our Results of Operations
Revenue
We generate revenue by delivering digital advertisements to consumers through the display channel and other channels. The display
channel excludes advertising delivered to mobile devices and advertising delivered through social and video channels. For the year ended
December 31, 2012 and the six months ended June 30, 2013, direct-response campaigns, which are focused on generating specific consumer
purchases or responses, contributed approximately two-thirds of our revenue, while brand campaigns, which are focused on lifting brand
metrics, contributed the remaining one-third of our revenue. We predominantly contract with advertising agencies who purchase our solution
on behalf of advertisers. When we contract with an agency, it acts as an agent for a disclosed principal, which is the advertiser. Our contracts
usually also provide that if the advertiser does not pay the agency, the agency is not liable to us, and we must seek payment solely from the
advertiser. Our contracts with advertisers, including advertising agencies representing advertisers, are generally in the form of an insertion
order.
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An insertion order is a contract that outlines the terms and conditions of an advertising campaign and its objectives. Our contracts typically
have a term of less than a year, and we recognize revenue as we deliver advertising impressions, subject to satisfying all other revenue
recognition criteria. Our revenue recognition policies are discussed in more detail under "—Critical Accounting Policies and Estimates."
Cost of Revenue
Cost of revenue consists primarily of media costs, and to a lesser extent, data center costs, personnel costs, depreciation expense,
amortization of internal use software development costs on revenue-producing technologies and allocated costs. Media costs consist primarily
of costs for advertising impressions we purchase from real-time advertising exchanges and other third parties, which are expensed when
incurred. We typically pay these advertising exchanges on a CPM basis. Personnel costs include salaries, bonuses, stock-based compensation
expense and employee benefit costs. These personnel costs are primarily attributable to individuals maintaining our servers and members of our
network operations group, which initiates, sets up and launches advertising campaigns. We capitalize costs associated with software that is
developed or obtained for internal use and amortize these costs in cost of revenue over the internal use software's useful life. Cost of revenue
also includes purchased data, third-party data center costs and depreciation of data center equipment. We anticipate that our cost of revenue
will increase in absolute dollars as our revenue increases.
Operating Expenses
We classify our operating expenses into three categories: research and development, sales and marketing and general and administrative.
Our operating expenses consist primarily of personnel costs, and, to a lesser extent, professional fees and allocated costs. Personnel costs for
each category of operating expense generally include salaries, bonuses and commissions for sales personnel, stock-based compensation
expense and employee benefit costs.
•
Research and development. Our research and development expenses consist primarily of personnel costs and professional services
associated with the ongoing development and maintenance of our technology. We believe that continued investment in technology
is critical to attaining our strategic objectives, and, as a result, we expect research and development expenses to increase in
absolute dollars in future periods.
•
Sales and marketing. Our sales and marketing expenses consist primarily of personnel costs (including commissions) and, to a
lesser extent, allocated costs, professional services, brand marketing, travel, trade shows and marketing materials. Our sales
organization focuses on (1) marketing our solution to generate awareness; (2) increasing the adoption of our solution by existing
and new advertisers; and (3) expanding our international business, primarily by growing our sales team in certain countries in
which we currently operate and establishing a presence in additional countries. As a result, we expect sales and marketing
expenses to increase in absolute dollars in future periods.
•
General and administrative. Our general and administrative expenses consist primarily of personnel costs associated with our
executive, finance, legal, human resources, compliance and other administrative personnel, as well as accounting and legal
professional services fees, allocated costs and other corporate expenses. We expect to continue to invest in corporate infrastructure
and incur additional expenses associated with being a public company, including increased legal and accounting costs, investor
relations costs, higher insurance premiums and compliance costs associated with Section 404 of the Sarbanes-Oxley Act of 2002.
As a result, we expect general and administrative expenses to increase in absolute dollars in future periods.
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Other Expense, Net
Interest expense. Interest expense is related to our credit facilities and, in previous periods, our term debt.
Other income (expense)—net. Other income (expense)—net consists primarily of interest income, gains and losses on the sale and disposal
of property, equipment and software, as well as gains and losses on foreign currency translation. We have foreign currency exposure related to
our accounts receivable that are denominated currencies other than the U.S. dollar, principally the British pound sterling and euro.
Change in fair value of convertible preferred stock warrant liability. We have two outstanding warrants to purchase shares of our capital
stock. The convertible preferred stock warrants are subject to re-measurement at each balance sheet date, and any change in fair value is
recognized as a component of other expense, net. In connection with the closing of this offering, one of the warrants will automatically be
converted into shares of common stock and the other warrant will be converted into a warrant to purchase shares of common stock. We will no
longer be required to remeasure the value of the converted common stock warrant after this offering, and therefore, no further charges or credits
related to such warrant will be made to other income and expense.
Provision for Income Taxes
Provision for income taxes consists primarily of federal and state income taxes in the United States and income taxes in foreign
jurisdictions in which we conduct business. Due to uncertainty as to the realization of benefits from our deferred tax assets, including net
operating loss carryforwards, research and development and other tax credits, we have a full valuation allowance reserved against such assets.
We expect to maintain this full valuation allowance in the near term.
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Results of Operations
The following tables set forth our consolidated results of operations and our consolidated results of operations as a percentage of revenue
for the periods presented.
Years Ended
December 31,
2011
Six Months Ended June 30,
2012
2013
2012
(in thousands)
Consolidated Statement of Operations
Data:
Revenue
Cost of revenue(1)
$
44,652
27,300
Gross profit
$
106,589
60,011
$
39,592
22,033
$
92,581
49,652
17,352
46,578
17,559
42,929
Operating expenses:
Research and development(1)
Sales and marketing(1)
General and administrative(1)
1,545
17,256
2,336
4,876
41,069
8,403
1,538
15,542
2,570
6,123
34,649
10,952
Total operating expenses
21,137
54,348
19,650
51,724
Loss from operations
Other expense, net:
Interest expense
Other income (expense)—net
Change in fair value of convertible
preferred stock warrant liability
(3,785 )
(7,770 )
(2,091 )
(8,795 )
(250 )
33
(316 )
135
(170 )
92
(353 )
(368 )
(295 )
(2,308 )
(262 )
(2,355 )
(512 )
(2,489 )
(340 )
(3,076 )
(4,297 )
(28 )
(10,259 )
(84 )
(2,431 )
(39 )
(11,871 )
(40 )
Other expense, net
Loss before income taxes
Provision for income taxes
Net loss
$
(4,325 )
$
(10,343 )
$
(2,470 )
$
(11,911 )
(1)
Stock-based compensation expense included above was as follows:
Years Ended
December 31,
2011
Cost of revenue
Research and development
Sales and marketing
General and administrative
$
7
8
66
83
$
$
164
$
56
2012
(in thousands)
37
$
734
1,100
1,450
3,321
$
Six Months Ended
June 30,
2012
2013
15
96
65
139
$
118
759
1,320
1,403
315
$
3,600
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Years Ended
December 31,
2011
Consolidated Statements of Operations
Data:*
Revenue
Cost of revenue
Six Months Ended
June 30,
2012
2013
2012
100 %
61
100 %
56
100 %
56
100 %
54
39
44
44
46
Operating expenses:
Research and development
Sales and marketing
General and administrative
3
39
5
5
39
8
4
39
6
7
37
12
Total operating expenses
47
51
50
56
Loss from operations
Other expense, net:
Interest expense
Other expense—net
Change in fair value of convertible
preferred stock warrant liability
(8 )
(7 )
(5 )
(9 )
(1 )
—
—
—
—
—
—
—
(1 )
(2 )
(1 )
(3 )
Other expense, net
(1 )
(2 )
(1 )
(3 )
Loss before income taxes
Provision for income taxes
(10 )
—
(10 )
—
(6 )
—
(13 )
—
Net loss
(10 )%
(10 )%
(6 )%
(13 )%
Gross profit
*
Certain figures may not sum due to rounding.
Comparison of the Six Months Ended June 30, 2012 and 2013
Revenue
Six Months Ended
June 30,
2012
2013
Change
(in thousands, except percentages)
Revenue
$
39,592
$
92,581
$
52,989
% Change
134 %
Revenue increased $53.0 million, or 134%, during the six months ended June 30, 2013 compared to the six months ended June 30, 2012.
Revenue from the display channel was $36.3 million, or 92%, of revenue and $78.4 million, or 85%, of revenue for the six months ended
June 30, 2012 and 2013, respectively. Revenue from other channels was $3.3 million, or 8%, of revenue and $14.2 million, or 15%, of revenue
for the six months ended June 30, 2012 and 2013, respectively. Revenue from the display channel increased by $42.1 million, or 116%, and
revenue from other channels increased by $10.9 million, or 336%, during the six months ended June 30, 2013 compared to the six months
ended June 30, 2012. Revenue from each of our other channels was less than 10% of our revenue during each of those same periods. The
increase in revenue was primarily due to a significant increase in the number of active customers adopting our solution. The number of active
customers increased from 341 as of June 30, 2012 to 784 as of June 30, 2013, resulting in an increased number of campaigns during the six
months ended June 30, 2013 compared to the six months ended June 30, 2012. Due to the higher number of campaigns, the volume of
impressions delivered increased by 187% during the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The
average CPM, or cost per mille (or cost per thousand impressions), decreased by 19%, and revenue less media costs as a
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percentage of revenue increased slightly, in each case, during the six months ended June 30, 2013 compared to the six months ended June 30,
2012. Revenue from outside of North America increased from 8% to 12% during the six months ended June 30, 2012 and 2013, respectively.
Cost of Revenue, Gross Profit and Gross Margin
Six Months Ended
June 30,
2012
2013
Change
(in thousands, except percentages)
Cost of revenue
Gross profit
Gross margin
$
$
22,033
$
17,559
$
44 %
49,652
$
42,929
$
46 %
27,619
25,370
% Change
125 %
144 %
Cost of revenue increased by $27.6 million, or 125%, during the six months ended June 30, 2013 compared to the six months ended
June 30, 2012. This increase was primarily due to an increase in media costs from $18.2 million to $41.3 million and, to a lesser extent, to an
increase in data and hosting costs of $1.5 million, an increase in depreciation and amortization of capitalized internal use software and other
fixed assets of $1.2 million and an increase in personnel costs of $0.8 million. The $23.1 million increase in media costs was due to our
increased sales volume. Media costs represented approximately 46% and 45% of revenue in the six months ended June 30, 2012 and 2013,
respectively. The decrease in media costs as a percentage of revenue was due to improvements in our AI-driven platform, which allowed us to
more efficiently deliver our solution. The increase in personnel costs was primarily driven by increased headcount. The increase in data and
hosting costs represents an increase in costs incurred to support our rapid growth. The amortization of capitalized internal use software was
$1.0 million and $1.6 million for the six months ended June 30, 2012 and 2013, respectively. Gross margin increased from 44% for the six
months ended June 30, 2012 to 46% for the six months ended June 30, 2013.
Research and Development
Six Months Ended June 30,
2012
2013
Change
(in thousands, except percentages)
Research and development
Percent of revenue
$
1,538
$
4%
6,123
$
7%
4,585
% Change
298 %
Research and development expense increased by $4.6 million, or 298%, during the six months ended June 30, 2013 compared to the six
months ended June 30, 2012. This increase was primarily due to an increase in personnel expense of $4.2 million and, to a lesser extent, to an
increase in allocated costs of $0.2 million and an increase in professional services costs of $0.2 million. The increase in personnel expense and
allocated costs was primarily due to an increase in headcount, which reflects our continued hiring of engineers to maintain our technologies and
support our research and development efforts.
We capitalized internal use software development costs of $2.0 million and $3.2 million for the six months ended June 30, 2012 and 2013,
respectively. The increase was due to additional headcount devoted to internal use software development.
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Sales and Marketing
Six Months Ended
June 30,
2012
2013
Change
(in thousands, except percentages)
Sales and marketing
$
15,542
Percent of revenue
$
34,649
39 %
$
% Change
19,107
123 %
37 %
Sales and marketing expense increased by $19.1 million, or 123%, during the six months ended June 30, 2013 compared to the six months
ended June 30, 2012. This increase was primarily due to an increase in personnel expense of $13.3 million and, to a lesser extent, to an increase
in marketing expenses of $1.6 million, an increase in travel and related expenses of $1.5 million, an increase in allocated costs of $1.5 million
and an increase in professional services costs of $0.8 million. The increase in personnel expense was primarily due to an increase in headcount
and, to a lesser extent, to an increase in commission expense related to the increase in revenue. Our headcount increased by 102% during the
six months ended June 30, 2013 compared to the six months ended June 30, 2012, primarily due to our focus on (i) marketing our solution to
generate awareness, (ii) increasing the adoption of our solution by existing and new advertisers and (iii) establishing a presence in international
markets.
General and Administrative
Six Months Ended
June 30,
2012
2013
Change
(in thousands, except percentages)
General and administrative
$
Percent of revenue
2,570
$10,952
6%
$
% Change
8,382
326 %
12 %
General and administrative expense increased by $8.4 million, or 326%, during the six months ended June 30, 2013 compared to the six
months ended June 30, 2012. This increase was primarily due to an increase in personnel expense of $4.7 million and, to a lesser extent, to an
increase in professional services of $2.2 million and an increase in allocated costs of $1.0 million. The increase in personnel costs was driven
primarily by increased stock-based compensation expense and increased headcount. The increase in third-party professional services was
related to accounting, recruiting and legal services as we continued to invest in our infrastructure and in growing our headcount in preparation
for being a public company.
Other Expense, Net
Six Months Ended
June 30,
2012
2013
(in thousands)
Interest expense
Gain (loss) on foreign currency translation
Other income (expense)—net
Change in fair value of convertible preferred stock warrant liability
Total other expense, net
59
Change
$
(170 )
—
92
(262 )
$
(353 )
(459 )
91
(2,355 )
$
(183 )
(459 )
(1 )
(2,093 )
$
(340 )
$
(3,076 )
$
(2,736 )
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The increase in other expense, net, primarily relates to revaluations of outstanding convertible preferred stock warrants and, to a lesser
extent, to foreign currency translations and interest related to our additional borrowings under our revolving line of credit and term debt. The
increase in the value of our convertible preferred stock warrant liability was due to the significant increase in the value of our common stock.
The increase in unrealized loss on foreign currency translation was due to a higher outstanding balance in foreign currency accounts receivable
for the six months ended June 30, 2013.
Provision for Income Taxes
Our provision for income taxes of $39,000 and $40,000 for the six months ended June 30, 2012 and 2013, respectively, primarily relates
to taxes due in foreign jurisdictions.
Comparison of the Years Ended December 31, 2011 and 2012
Revenue
Years Ended December 31,
2011
2012
Change
(in thousands, except percentages)
Revenue
$
44,652
$
106,589
$
61,937
% Change
139 %
Revenue increased $61.9 million, or 139%, during the year ended December 31, 2012 compared to the year ended December 31, 2011.
Revenue from the display channel was $42.8 million, or 96%, of revenue and $98.1 million, or 92%, of revenue for the years ended
December 31, 2011 and 2012, respectively. Revenue from other channels was $1.8 million, or 4%, of revenue and $8.5 million, or 8%, of
revenue for the years ended December 31, 2011 and 2012, respectively. Revenue from the display channel increased by $55.2 million, or
129%, and revenue from other channels increased by $6.7 million, or 371%, for the year ended December 31, 2012 compared to the year ended
December 31, 2011. Revenue from each of our other channels was less than 10% of our revenue for each of those same periods. The number of
active customers increased from 266 as of December 31, 2011 to 536 as of December 31, 2012, resulting in an increased number of campaigns
during the year ended December 31, 2012 compared to the year ended December 31, 2011. Due to the higher number of campaigns, the volume
of impressions delivered increased by 180% during the year ended December 31, 2012 compared to the year ended December 31, 2011. The
average CPM decreased by 15%, and revenue less media costs as a percentage of revenue increased by 3%, in each case, during the year ended
December 31, 2012 compared to the year ended December 31, 2011. Revenue from outside of North America increased from 3% to 10%
during the years ended December 31, 2011 and 2012, respectively.
Cost of Revenue, Gross Profit and Gross Margin
Years Ended December 31,
2011
2012
Change
(in thousands, except percentages)
Cost of revenue
Gross profit
$
$
Gross margin
27,300
17,352
39 %
$60,011
$46,578
$
$
32,711
29,226
% Change
120 %
168 %
44 %
Cost of revenue increased by $32.7 million, or 120%, during the year ended December 31, 2012 compared to the year ended
December 31, 2011. This increase was primarily due to an increase in media costs of $28.0 million and, to a lesser extent, to an increase in data
and hosting costs of
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$1.4 million, an increase in depreciation and amortization of capitalized internal use software and other fixed assets of $1.4 million and an
increase in personnel costs of $1.2 million. The increase in media costs from $22.6 million to $50.7 million for the years ended December 31,
2011 and 2012, respectively, was driven by the increase in revenue. The increase in data, hosting, depreciation and amortization expense
reflects costs incurred in support of our rapid growth. The increase in personnel costs was due to increased headcount. Media costs represented
approximately 51% and 48% of revenue for the years ended December 31, 2011 and 2012, respectively. Gross margin increased from 39% for
the year ended December 31, 2011 to 44% for the year ended December 31, 2012. The increase in gross margin was primarily due to a decrease
in media costs as a percentage of revenue and, to a lesser extent, to a decrease in other fixed costs. The decrease in media costs as a percentage
of revenue was driven by improvements in our AI-driven platform, which allowed us to more efficiently deliver our solution.
Research and Development
Years Ended December 31,
2011
2012
Change
(in thousands, except percentages)
Research and development
$
1,545
Percent of revenue
$
4,876
4%
$
3,331
% Change
216 %
5%
Research and development expense increased by $3.3 million, or 216%, during the year ended December 31, 2012 compared to the year
ended December 31, 2011. This increase was primarily due to an increase in personnel costs of $2.3 million and, to a lesser extent, to an
increase in professional services costs of $0.2 million and an increase in allocated costs of $0.4 million. The increase in personnel costs and
allocated costs was due to increased headcount as we continued to hire engineers to maintain our technologies and support our development
efforts.
We capitalized internal use software development costs of $2.6 million and $4.7 million for the years ended December 31, 2011 and 2012,
respectively. The increase was due to additional headcount devoted to internal use software development.
Sales and Marketing
Years Ended December 31,
2011
2012
Change
(in thousands, except percentages)
Sales and marketing
$
Percent of revenue
17,256
39 %
$
41,069
$
23,813
% Change
138 %
39 %
Sales and marketing expense increased by $23.8 million, or 138%, during the year ended December 31, 2012 compared to the year ended
December 31, 2011. This increase was primarily due to an increase in personnel costs of $16.2 million and, to a lesser extent, to allocated costs
of $2.2 million, travel and related costs of $2.6 million and costs associated with marketing activities of $2.2 million. The increase in personnel
expense was primarily due to an increase in headcount and, to a lesser extent, to an increase in commission expense related to the increase in
revenue. Our headcount increased by 117% for the year ended December 31, 2012 compared to the year ended December 31, 2011, primarily
due to our focus on (i) marketing our solution to generate awareness; (ii) increase the adoption of our solution by existing and new advertisers;
and (iii) establishing a presence in international markets. The increase in facilities and other allocated costs was also due to increased
headcount. The increase in travel and marketing activities reflects our efforts to increase awareness of our solution and support and build
customer relationships.
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Table of Contents
General and Administrative
Years Ended December 31,
2011
2012
Change
(in thousands, except percentages)
General and administrative
$
Percent of revenue
2,336
$
8,403
5%
$
% Change
6,067
260 %
8%
General and administrative expense increased by $6.1 million, or 260%, during the year ended December 31, 2012 compared to the year
ended December 31, 2011. The increase was primarily due to an increase in personnel costs of $3.5 million, an increase in professional services
costs of $1.4 million, an increase in allocated costs of $0.4 million and an increase in travel-related costs of $0.3 million. The increase in
personnel costs was due to an increase in headcount and stock-based compensation expense. The increase in third-party professional services
for accounting, recruiting and legal services was due to our investment in infrastructure and growing our headcount in preparation for being a
public company. The increase in allocated costs was also driven by headcount growth.
Other Expense, Net
Years Ended December 31,
2011
2012
(in thousands)
Interest expense
Gain (loss) on foreign currency translation
Other income (expense)—net
Change in fair value of convertible preferred stock warrant liability
Total other expense, net
Change
$
(250 )
—
33
(295 )
$
(316 )
43
92
(2,308 )
$
(66 )
43
59
(2,013 )
$
(512 )
$
(2,489 )
$
(1,977 )
The increase in other expense, net, was primarily due to the revaluation of outstanding convertible preferred stock warrants and, to a lesser
extent, to increased interest related to our additional borrowings under our revolving line of credit and term debt. The increase in the value of
our convertible preferred stock warrant liability was directly attributable to the significant increase in the value of our common stock.
Provision for Income Taxes
Our provision for income taxes of $28,000 and $84,000 for the years ended December 31, 2011 and 2012, respectively, primarily relates
to taxes due in foreign jurisdictions.
62
Table of Contents
Quarterly Results of Operations and Key Metrics
Quarterly Results of Operations Data
The following tables set forth our quarterly consolidated statements of operations data in dollars and as a percentage of total revenue for
each of the ten quarters in the period ended June 30, 2013. We have prepared the quarterly consolidated statements of operations data on a basis
consistent with the audited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the financial
information in these tables reflects all adjustments, consisting only of normal recurring adjustments, which management considers necessary
for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related
notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results for any future period.
Mar 31,
2011
Jun 30,
2011
Consolidated Statements of
Operations Data:
Revenue:
Revenue
$ 7,792 $
Cost of revenue(1)
4,576
Gross profit
Three Months Ended
Dec 31,
Mar 31,
Jun 30,
2011
2012
2012
(in thousands)
Sep 30,
2011
Sep 30,
2012
Dec 31,
2012
Mar 31,
2013
Jun 30,
2013
8,802 $ 11,616 $ 16,442 $ 16,623 $ 22,969 $ 26,902 $ 40,095 $ 38,212 $ 54,369
6,220
7,498
9,006
9,449
12,584
14,955
23,023
20,671
28,981
3,216
2,582
4,118
7,436
7,174
10,385
11,947
17,072
17,541
25,388
Operating expenses:
Research and
development(1)
Sales and marketing(1)
General and
administrative(1)
349
3,226
309
3,978
454
4,448
433
5,604
727
6,844
811
8,698
1,066
10,351
2,272
15,176
2,412
16,230
3,711
18,419
460
478
541
857
1,087
1,483
1,675
4,158
5,177
5,775
Total operating expenses
4,035
4,765
5,443
6,894
8,658
10,992
13,092
21,606
23,819
27,905
Income (loss) from
operations
(819 )
(2,183 )
(1,325 )
Other expense, net
(50 )
(176 )
(153 )
(869 )
(2,359 )
(1,478 )
(2 )
(7 )
(8 )
Net income (loss) before
income and taxes
Income tax expense
Net income (loss)
$
542
(133 )
409
(11 )
(871 ) $ (2,366 ) $ (1,486 ) $
(1,484 )
(607 )
(1,145 )
(4,534 )
(6,278 )
(2,517 )
(112 )
(228 )
(829 )
(1,320 )
(1,740 )
(1,336 )
(1,596 )
(835 )
(1,974 )
(5,854 )
(8,018 )
(3,853 )
(14 )
(25 )
(28 )
(17 )
(54 )
398 $ (1,610 ) $
(1)
Stock-based compensation expense included above was as follows:
Cost of revenue
Research and
development
Sales and marketing
General and
administrative
Three Months Ended
Dec Mar Jun
Sep
31,
31,
30,
30,
Dec 31, Mar 31, Jun 30,
2011 2012 2012 2012
2012
2013
2013
(in thousands)
3 $ 3 $ 7 $ 8 $ 5 $
17 $
27 $
91
Mar
31,
2011
Jun
30,
2011
Sep
30,
2011
$ —
$
$
1
—
8
1
17
4
20
4
21
26
45
39
51
46
100
623
904
391
512
368
808
9
26
14
33
76
63
61
1,250
635
768
$ 17
$ 45
$ 41
$ 61 $ 154 $ 161 $ 212 $ 2,794 $ 1,565 $ 2,035
63
14
(860 ) $ (2,002 ) $ (5,871 ) $ (8,072 ) $ (3,839 )
Table of Contents
Mar
31,
2011
Jun
30,
2011
Sep
30,
2011
Three Months Ended
Dec Mar
Jun
Sep
31,
31,
30,
30,
2011 2012
2012
2012
(as a percentage of revenue)
Consolidated
Statements of
Operations Data*:
Revenue:
Revenue
Cost of revenue
100 %
59
100 %
71
100 %
65
Gross profit
41
29
35
45
Operating expenses:
Research and
development
Sale and marketing
General and
administrative
4
41
4
45
4
38
7
5
Total operating expenses
52
Income (loss) from
operations
Other expense, net
Net income (loss) before
income and taxes
Jun
30,
2013
100 %
56
100 %
57
100 %
54
100 %
53
43
45
44
43
46
47
3
34
4
41
4
38
4
38
6
38
6
42
7
34
5
6
7
6
7
10
14
11
55
48
43
52
48
49
54
62
51
(11 )
(24 )
(12 )
3
(9 )
(3 )
(5 )
(11 )
(16 )
(5 )
(1 )
(3 )
(2 )
(1 )
(1 )
(2 )
(3 )
(3 )
(5 )
(2 )
(12 )
(27 )
(14 )
2
(10 )
(5 )
(8 )
(14 )
(21 )
(7 )
—
—
—
—
—
—
—
—
—
)
(4 %
)
(7 %
)
(11 %
Net income (loss)
Mar
31,
2013
100 %
55
Income tax expense
)
(27 %
)
(13 %
100 % 100 %
55
57
Dec
31,
2012
)
2 % (10 %
)
(15 %
—
)
(21 %
)
(7 %
Key Metrics(1)
$ 7,792 $
Three Months Ended
Sep 30,
Dec 31,
Mar 31,
Jun 30,
Sep 30,
Dec 31,
Mar 31,
Jun 30,
2011
2011
2012
2012
2012
2012
2013
2013
(in thousands except for customer number data)
8,802 $ 11,616 $ 16,442 $ 16,623 $ 22,969 $ 26,902 $ 40,095 $ 38,212 $ 54,369
$ 4,046 $
3,670 $
Mar 31,
2011
Revenue
Revenue less
media costs
(non-GAAP)
Adjusted
EBITDA
(non-GAAP)
Number of
active
customers
$
Jun 30,
2011
5,389 $
(729 ) $ (2,025 ) $ (1,162 ) $
150
174
217
8,899 $
8,935 $ 12,491 $ 14,448 $ 20,045 $ 21,566 $ 29,726
791 $ (1,040 ) $
266
265
(139 ) $
341
(477 ) $ (1,325 ) $ (4,625 )
406
536
560
343
784
*
Certain figures may not sum due to rounding.
(1)
For information on how we define these operational and other metrics see "—Key Operating and Financial Performance Metrics." For more information as to the limitations of using
non-GAAP measurements, see "Selected Consolidated Financial Data—Non-GAAP Financial Measures."
The following table presents a reconciliation of revenue less media costs to revenue, the most directly comparable financial measure
calculated in accordance with GAAP:
Mar 31,
Jun 30,
Sep 30,
Three Months Ended
Dec 31,
Mar 31,
Jun 30,
Sep 30,
Dec 31,
Mar 31,
Jun 30,
2011
Revenue
Less: Media
costs
Revenue
less
media
costs
2012
2012
2012
2012
2013
2013
(in thousands)
$ 7,792 $ 8,802 $ 11,616 $ 16,442 $ 16,623 $ 22,969 $ 26,902 $ 40,095 $ 38,212 $ 54,369
3,746
2011
5,132
$ 4,046 $ 3,670 $
2011
2011
6,227
7,543
7,688
5,389 $
8,899 $
8,935 $ 12,491 $ 14,448 $ 20,045 $ 21,566 $ 29,726
64
10,478
12,454
20,050
16,646
24,643
Table of Contents
The following table presents a reconciliation of adjusted EBITDA to net loss, the most directly comparable financial measure calculated in
accordance with GAAP:
Three Months Ended
Dec
Jun
Jun 30,
Sep 30,
31,
Mar 31,
30,
Sep 30,
Dec 31,
Mar 31,
Jun 30,
2011
2011
2011
2012
2012
2012
2012
2013
2013
(in thousands)
$ (871 ) $ (2,365 ) $ (1,487 ) $ 398 $ (1,610 ) $ (860 ) $ (2,002 ) $ (5,871 ) $ (8,072 ) $ (3,838 )
60
59
67
64
66
104
63
83
124
229
Mar
31,
2011
Net income (loss)
Interest expense
Income tax
expense
Change in fair
value of
preferred stock
warrants
Stock-based
compensation
Depreciation and
amortization
(excludes
amortization of
internal use
software)
Adjusted EBITDA
2
7
8
11
14
25
28
17
54
124
93
79
115
147
831
1,215
1,097
1,258
17
45
41
61
154
161
212
2,794
1,565
2,035
64
105
116
178
221
284
391
437
607
673
(1 )
$ (729 ) $ (2,025 ) $ (1,162 ) $ 791 $ (1,040 ) $ (139 ) $
(477 ) $ (1,325 ) $ (4,625 ) $
(14 )
343
Quarterly Trends and Seasonality
Our overall operating results fluctuate from quarter to quarter as a result of a variety of factors, some of which are outside our control. We
have experienced rapid growth since our incorporation in March 2008, which has resulted in a substantial increase in our revenue and a
corresponding increase in our operating expenses to support our growth. Our rapid growth in customer-related activities has impacted our
ability to deliver on campaigns and has thereby impacted gross margin. We are continuously working on enhancing our technology and our
operational abilities to maximize our margins. This rapid growth has also led to uneven overall operating results due to changes in our
investment in sales and marketing and research and development from quarter to quarter and increases in employee headcount. Our historical
results should not be considered a reliable indicator of our future results of operations.
Our quarterly revenue increased quarter-over-quarter for each period presented, except from the three months ended December 31, 2012 to
the three months ended March 31, 2013. The increases in quarterly revenue are mainly due to an increased number of advertisers as well as
increased spending from our existing advertisers. Our revenue also tends to be seasonal in nature, with the fourth quarter of each calendar year
historically representing the largest percentage of our revenue for the year. Many advertisers spend the largest portion of their advertising
budgets during the fourth quarter, in preparation for the holiday shopping season.
Operating expenses increased during every quarter presented, primarily due to increased expenses related to the continued expansion of
our technical infrastructure, and expenses related to increases in employee headcount, including allocated costs and stock-based compensation
expense.
Our adjusted EBITDA increased during the three months ended June 30, 2013 compared to the three months ended December 31, 2012
and March 31, 2013, primarily due to the seasonality of our business and the impact of our decisions to invest in our business during those
periods.
Liquidity and Capital Resources
Since our incorporation in March 2008, we have financed our operations and capital expenditures through private sales of convertible
preferred stock, lines of credit and term debt. Specifically, we issued $9.8 million in Series A convertible preferred stock and $9.9 million of
Series B convertible preferred stock between 2008 and 2010, respectively. During 2011, we received additional net proceeds of $6.5 million
from the issuance of Series C convertible preferred stock, and in 2012, we received additional net proceeds of $34.4 million from the issuance
of Series C-1 convertible preferred stock.
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Table of Contents
As of June 30, 2013, we had cash and cash equivalents of $22.0 million and $21.9 million in debt obligations relating to an accounts
receivable line of credit and a growth capital loan from Comerica Bank, or Comerica. As of June 30, 2013, we had the ability to borrow up to
an additional $28.0 million under the Comerica line of credit for purposes of financing our accounts receivable balance. Cash and cash
equivalents consist of cash and money market funds. We did not have any short-term or long-term investments as of June 30, 2013.
We believe that our existing cash and cash equivalents balance, together with the undrawn balance under the Comerica line of credit, will
be sufficient to meet our working capital requirements for at least the next 12 months. However, our liquidity assumptions may prove to be
incorrect, and we could utilize our available financial resources sooner than we currently expect. Our future capital requirements and the
adequacy of available funds will depend on many factors, including those set forth in the section of this prospectus entitled "Risk Factors."
We plan to raise additional funds to finance our operations through our initial public offering or will attempt to raise additional capital
through private equity, equity-linked or debt financing arrangements. If we raise additional funds by issuing equity or equity-linked securities,
the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of indebtedness, we will be subject
to increased fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional
debt, and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to obtain additional
funds, we would also take other measures to reduce expenses to offset any shortfall.
Our current debt obligations require us to maintain compliance with certain financial covenants, with the most significant covenant being a
requirement to maintain a specified minimum quarterly EBITDA (defined as earnings before interest expense, income tax expense,
depreciation, amortization and other noncash charges). Based on our projections, we believe we will maintain compliance with the debt
covenants through 2014. However, if future operating results are less favorable than currently anticipated, we may need to seek waivers or
further amendments to modify our debt covenants.
There can be no assurances that we will be able to raise additional capital or obtain such waivers or amendments on acceptable terms or at
all, which would adversely affect our ability to achieve our business objectives. In addition, if our operating performance during the next
twelve months is below our expectations, our liquidity and ability to operate our business could be adversely affected.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Years Ended
December 31,
2011
Consolidated Statements of Cash Flows
Data:
Cash flows used in operating activities
Cash flows used in investing activities
Cash flows provided by financing activities
Effects of exchange rates on cash
Increase (decrease) in cash and cash
equivalents
2012
(in thousands)
Six Months
Ended June 30,
2012
2013
$
(7,131 )
(4,593 )
8,282
(10 )
$
(18,803 )
(8,763 )
37,484
(93 )
$
(7,111 )
(3,298 )
35,413
(3 )
$
(2,622 )
(5,623 )
15,409
(75 )
$
(3,452 )
$
9,825
$
25,001
$
7,089
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Table of Contents
Operating Activities
Cash used in operating activities is primarily influenced by the amount of cash we invest in personnel and infrastructure to support the
anticipated growth of our business and the increase in sales to advertisers and advertising agencies representing advertisers. Cash used in
operating activities has typically been generated from net losses and further increased by changes in our operating assets and liabilities,
particularly in the areas of accounts receivable and accrued liabilities, adjusted for non-cash expense items such as depreciation, amortization
and stock-based compensation expense.
Our collection cycles can vary from period to period based on common payment practices employed by advertising agencies. However,
our contracts with advertising exchanges typically are based on standard payment terms. As a result, the timing of cash receipts and vendor
payments can significantly impact our cash provided by (used in) operations for any period presented. During the fourth quarter, our working
capital needs may increase due to the seasonality of our business. This increase is driven by the fact that we have to make timely payments to
publishers and exchanges, but customer payments may be delayed beyond the contractual terms of the customers' invoices. Due to these
factors, our day's sales outstanding was 90, 106 and 99 days as of December 31, 2011, December 31, 2012 and June 30, 2013, respectively.
Six months ended June 30, 2012 and 2013. For the six months ended June 30, 2013, cash used in operating activities was $2.6 million,
resulting from a net loss of $11.9 million, offset by non-cash expenses of $8.8 million, which included depreciation, amortization, stock-based
compensation expense and change in fair value of warrant liability. These non-cash expenses increased due to capital expenses and headcount
growth, primarily related to continued investment in our business. The remaining increase in cash of $0.5 million was from the net change in
working capital items, most notably an increase in accounts payable and accrued and other liabilities of $8.2 million and $4.1 million,
respectively, related to the timing of payments, compensation and other general expenses, as well as an increase in deferred revenue of
$0.6 million. These amounts were partially offset by an increase in accounts receivable of $12.5 million due to an increase in billings for
advertising campaigns as well as the timing of payments from domestic and international customers and agencies.
For the six months ended June 30, 2012, cash used in operating activities was $7.1 million, resulting from a net loss of $2.5 million, offset
by non-cash expenses of $2.1 million, which included depreciation, amortization, the change in fair value of preferred stock warrant liability,
stock-based compensation expense and bad debt expense. The remaining use of cash of $6.7 million was from the net change in working
capital items, most notably an increase in accounts receivable of $8.2 million resulting from our revenue growth and an increase in prepaid
expenses and other current assets of $1.0 million primarily related to the timing of payments for rent, insurance premiums and other operating
costs. There was an increase in accounts payable and accrued and other liabilities of $1.0 million and $1.2 million, respectively, related to the
timing of payments, compensation and other general expenses.
Years ended December 31, 2011 and 2012. During the year ended December 31, 2012, cash used in operating activities of $18.8 million
was the result of a net loss of $10.3 million, offset by non-cash expenses of $9.2 million, which included depreciation, amortization, the change
in the valuation of the preferred stock warrant liability and stock-based compensation expense. These non-cash expenses increased due to
capital expenses and headcount growth, primarily related to continued investment in our business. The remaining use of funds of $17.7 million
was from the net change in working capital items, most notably an increase in accounts receivable of $31.1 million resulting from our revenue
growth, and in prepaids and other assets of $1.1 million primarily related to rent, insurance and other operating expenses. These changes in
working capital were partially offset by an increase in accounts payable and accrued and other liabilities of $9.6 million and $4.4 million
respectively, related to the growth of our operations and the timing of compensation and other general expenses.
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Table of Contents
Cash used in operating activities in 2011 of $7.1 million was the result of a net loss of $4.3 million, offset by non-cash expenses of
$2.3 million which included depreciation, amortization, the change in the valuation of the preferred stock warrant liability, bad debt and
stock-based compensation expense. These non-cash expenses increased due to capital expenses and headcount growth, primarily related to
continued investment in our business. The remaining use of funds of $5.2 million was from the net change in working capital items, most
notably an increase in accounts receivable of $10.0 million resulting from our revenue growth. These items were partially offset by an increase
in accounts payable and accrued and other liabilities of $3.6 million and $1.1 million, respectively, related to the growth of our operations and
the timing of compensation and other general expenses.
Investing Activities
During 2011 and 2012 and the six months ended June 30, 2012 and 2013, investing activities consisted of purchases of property and
equipment, including technology hardware and software to support our growth as well as capitalized internal-use software development costs.
Purchases of property and equipment may vary from period-to-period due to the timing of the expansion of our operations, the addition of
headcount and the development cycles of our internal-use hosted software platform. We expect to continue to invest in property and equipment
and in the further development and enhancement of our software platform for the foreseeable future.
Financing Activities
Our financing activities have consisted primarily of net proceeds from the issuance of convertible preferred stock, net borrowings under
our Comerica line of credit, Comerica growth capital loan and the Venture Lending & Leasing, or VLL, growth capital loan, and the issuance
of shares of common stock upon the exercise of stock options.
Six months ended June 30, 2012 and 2013. During the six months ended June 30, 2013, cash provided by financing activities was
$15.4 million, consisting of $10.0 million in borrowings under our term debt, $5.0 million in borrowings under our revolving line of credit, and
$0.8 million in proceeds from the exercise of stock options, partially offset by $0.3 million in deferred offering costs and $0.1 million in cash
used to repay debt.
During the six months ended June 30, 2012, cash provided by financing activities was $35.4 million, consisting of $34.4 million in net
proceeds from the issuance of 2,932,675 shares of our Series C-1 convertible preferred stock, $3.0 million in borrowings under our term debt,
$4.0 million in borrowings under our revolving line of credit and, to a lesser extent, $0.2 million in proceeds from the exercise of stock options.
This was partially offset by $6.2 million in cash used to repay debt.
Years ended December 31, 2011 and 2012. During the year ended December 31, 2012, cash provided by financing activities was
$37.5 million, consisting of $34.4 million in net proceeds from the issuance of 2,932,675 shares of our Series C-1 convertible preferred stock,
$5.0 million in borrowings under our Comerica growth capital loan and $0.5 million in proceeds from the exercise of stock options. This was
partially offset by $2.4 million in cash used to repay debt.
During the year ended December 31, 2011, cash provided by financing activities amounted to $8.3 million, consisting of $6.5 million in
net proceeds from the issuance of 1,116,030 shares of our Series C convertible preferred stock, $2.0 million in borrowings under our Comerica
line of credit and $0.2 million in proceeds from the exercise of stock options. This was partially offset by $0.4 million in cash used to repay
debt.
Off Balance Sheet Arrangements
We did not have any off balance sheet arrangements as of December 31, 2011 or 2012, or June 30, 2013 other than the operating leases
and indemnification agreements described below.
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Table of Contents
Contractual Obligations and Known Future Cash Requirements
Indemnification Agreements
In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify
customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out
of breach of such agreements, services to be provided by us or from intellectual property infringement claims made by third parties. In addition,
we have entered into indemnification agreements with directors and certain officers and employees that will require us, among other things, to
indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands
have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a
material effect on our consolidated balance sheet, consolidated statement of operations, consolidated statements of comprehensive loss or
consolidated statements of cash flows.
Comerica Loan and Security Agreement
In April 2010, we entered into a loan and security agreement, or the Comerica Agreement, with Comerica to establish a revolving line of
credit for working capital purposes. The maximum amount available for borrowing under the revolving line of credit, as amended, is not to
exceed the lesser of $25.0 million or an amount equal to 85% of certain eligible accounts. Eligible accounts exclude accounts that have aged
over 90 days, including accounts in which 25% of the total account is aged over 90 days, and certain other accounts such as governmental,
intercompany, employee and certain foreign accounts. The revolving line of credit has a maturity date of July 26, 2014 and may be repaid and
redrawn at any time prior to such date, at which time all advances will be due and payable. Interest is charged at LIBOR plus a 2.75%
applicable margin, which was 3.25%, 2.99% and 2.95% as of December 31, 2011, December 31, 2012 and June 30, 2013, respectively. As of
December 31, 2012 and June 30, 2013, $1.9 million and $6.9 million, respectively, was outstanding under the revolving line of credit.
In March 2012, we amended the Comerica Agreement to provide for growth capital advances of up to $3.0 million. The Comerica
Agreement was further amended in February 2013 to provide for growth capital advances of up to $15.0 million. Growth capital advances are
payable in equal installments over a twenty-four month period ending on February 13, 2016. Interest on outstanding balances is charged at
LIBOR plus a 4.75% applicable margin, which was 4.99% and 4.95% as of December 31, 2012 and June 30, 2013, respectively. As of
December 31, 2012 and June 30, 2013, growth capital advances of $5.0 million and $15.0 million, respectively, were outstanding.
In June 2013, we amended the Comerica Agreement to increase the maximum amount available for borrowing on our revolving line of
credit to $35 million. The amendment also revised the definition of eligible accounts to exclude accounts that have aged over 120 days and
accounts in which 25% of the account is aged over 120 days.
Venture Lending & Leasing Loan and Security Agreement
In April 2010, we entered into a loan and security agreement, or the VLL Agreement, with VLL to provide for a growth capital loan of up
to $1.0 million, which we drew in full concurrently upon entering into the VLL Agreement. The borrowed funds were used for general
corporate purposes. The loan was payable in monthly installments of interest only for the first six months, and thereafter interest and principal
were payable in 30 equal monthly installments. Interest accrued at a fixed rate of 13%.
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Covenants. As of December 31, 2012, we were in breach of various financial and non-financial covenants under the Comerica Agreement.
However, we subsequently obtained waivers for each of the covenant violations. As of December 31, 2012, we were in breach of certain
covenants under the VLL Agreement requiring submission of monthly consolidated financial statements within 30 days of month end. As of
June 30, 2013, the VLL Agreement was terminated.
We are required to maintain certain financial covenants under the Comerica Agreement, including the following:
•
EBITDA. We are required to maintain specified quarterly and annual EBITDA, which is defined with respect to any fiscal period
as an amount equal to the sum of (1) consolidated net income (loss) in accordance with GAAP, after eliminating all extraordinary
nonrecurring items of income, plus (2) depreciation and amortization, income tax expense, total interest expense paid or accrued
and non-cash stock-based compensation expense, less (3) all extraordinary and non-recurring revenue and gains (including income
tax benefits).
•
Liquidity ratio. Under the Comerica Agreement, the ratio of (i) the sum of all cash on deposit with Comerica and 85% of all
eligible receivables accounts to (ii) all funded debt under the Comerica Agreement must be at least 1.15 to 1.00 on a monthly basis.
The terms of the Comerica Agreement also require us to comply with certain non-financial covenants. As of June 30, 2013, we were in
compliance with each of the financial and nonfinancial covenants, except for a covenant related to permitted indebtedness for a corporate credit
card account balance, for which we obtained a waiver.
Operating Leases
We lease various office facilities, including our corporate headquarters in Redwood City, California and various sales offices, under
operating lease agreements that expire through September 2024. The terms of the lease agreements provide for rental payments on a graduated
basis. We recognize rent expense on a straight-line basis over the lease periods.
Commitments
As of December 31, 2012, our principal commitments consisted of obligations under the Comerica Agreement and the VLL Agreement
that were scheduled to mature at various dates through February 2016 and operating leases for our offices. The following table summarizes our
future minimum payments under these arrangements as of December 31, 2012:
Payments Due by Period
Less Than
1 Year
Total
Operating lease
obligations
Term debt(1)
Line of credit(2)
Total minimum
payments
1–3 Years
(in thousands)
More Than
5 Years
3–5 Years
$
11,097
5,113
1,853
$
2,419
1,988
—
$
6,912
3,125
1,853
$
1,766
—
—
$
—
—
—
$
18,063
$
4,407
$
11,890
$
1,766
$
—
(1)
$5.0 million of the total term debt is attributable to the Comerica growth capital loan, which accrued interest at LIBOR, plus a 4.75% applicable margin, which
was equal to 4.99% as of December 31, 2012 and is scheduled to mature in February 2016. The remaining $0.1 million of the total term debt is attributable to the
VLL growth capital loan, which accrued interest at a fixed rate of 13%. The VLL growth capital loan was paid in full per the terms of the VLL Agreement as of
June 30, 2013.
(2)
Accrues interest at LIBOR, plus a 2.75% applicable margin, which was equal to 2.99%, as of December 31, 2012 and has a final maturity date in July 2014.
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The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding.
Obligations under contracts that we can cancel without a significant penalty are not included in the table above.
Subsequent to December 31, 2012, we entered into three new operating lease agreements. The first lease expanded our leased space at our
current headquarters. This lease expires in July 2017 and increased our total future operating lease obligations by $0.8 million. The second
lease is for a new sales office in New York, New York which expires in September 2024 and increased our total future operating lease
obligations by $25.0 million. The third lease is for a new headquarters facility in Redwood City, California which expires in December 2019
and increased our total future operating lease obligations by $25.6 million.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures.
We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other
assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
We believe that the assumptions and estimates associated with revenue recognition, internal-use software development costs, income taxes
and stock-based compensation expense have the greatest potential impact on our consolidated financial statements. Therefore, we consider
these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see the notes to
our consolidated financial statements.
Revenue Recognition
We recognize revenue when all four of the following criteria are met:
•
persuasive evidence of an arrangement exists;
•
delivery has occurred or a service has been provided;
•
customer fees are fixed or determinable; and
•
collection is reasonably assured.
Revenue arrangements are evidenced by a fully executed insertion order, or IO, with an advertiser or an advertising agency representing
an advertiser. All IOs have a fixed period of time for delivery, an agreed-upon rate and state the number of advertising impressions
(cost-per-thousand) to be delivered.
We determine collectability by performing ongoing credit evaluations and monitoring our advertisers' accounts receivable balances. For
new advertisers, we perform a credit check with an independent credit agency and may check credit references to determine creditworthiness.
We may also perform a credit check of the advertising agency if we have not done business with it before, or if past checks have revealed a
marginal credit situation. We only recognize revenue when collection is reasonably assured from both the end advertiser and advertising
agency intermediary, if any.
In the normal course of business, we contract with advertising agencies on behalf of their advertiser clients. The determination of whether
revenue should be reported on a gross or net basis is based on an assessment of whether we are acting as the principal or an agent in the
transaction. In determining whether we act as the principal or an agent, we follow the accounting guidance for principal-agent considerations.
While none of the factors identified in this guidance is individually considered presumptive or determinative, because we are the primary
obligor and are responsible for (i) fulfilling the advertisement delivery, (ii) establishing the selling prices for delivery of the advertisements, and
(iii) performing all billing and collection activities including retaining credit risk, we
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act as the principal in these arrangements and therefore report revenue earned and costs incurred on a gross basis.
On occasion, we have offered customer incentive programs which provide rebates after achieving a specified level of advertising
spending. We record reductions to revenue for estimated commitments related to these customer incentive programs. For transactions involving
incentives, we recognize revenue net of the estimated amount to be paid by rebate, provided that the rebate amount can be reasonably and
reliably estimated and the other conditions for revenue recognition have been met. Our policy requires that, if rebates cannot be reliably
estimated, revenue is not recognized until reliable estimates can be made or the program lapses.
Multiple-element arrangements. We enter into arrangements with advertisers to sell advertising that includes different media placements
or ad services that are delivered at the same time, or within close proximity of one another. We have determined that a majority of our
arrangements with customers should be classified as multiple element arrangements. Beginning on January 1, 2011, we adopted new
authoritative guidance on multiple element arrangements, using the prospective method for all arrangements entered into or materially modified
from the date of adoption. Under this new guidance, we allocate arrangement consideration in multiple-deliverable revenue arrangements at the
inception of an arrangement to all deliverables or those packages in which all components of the package are delivered at the same time, based
on the relative selling price method in accordance with the selling price hierarchy, which includes vendor-specific objective evidence, or
VSOE, if available, third-party evidence, or TPE, if VSOE is not available and best estimate of selling price, or BESP, if neither VSOE nor
TPE is available.
VSOE. We determine VSOE based on our historical pricing and discounting practices for the specific offering when sold separately. In
determining VSOE, we require that a substantial majority of the stand-alone selling prices for these services fall within a reasonably narrow
pricing range. We were not able to establish VSOE for any of our advertising offerings.
TPE. When VSOE cannot be established for deliverables in multiple element arrangements, we apply judgment with respect to whether
we can establish a selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately.
Generally, our go-to-market strategy differs from that of our peers, and our offerings contain a significant level of differentiation such that the
comparable pricing of services cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor services' selling
prices are on a stand-alone basis. As a result, we have not been able to establish selling price based on TPE.
BESP. When we are unable to establish selling price using VSOE or TPE, we use BESP in our allocation of arrangement consideration.
The objective of BESP is to determine the price at which we would transact a sale if the service were sold on a stand-alone basis. BESP is
generally used to allocate the selling price to deliverables in our multiple element arrangements. We determine BESP for deliverables by
considering multiple factors including, but not limited to, prices we charge for similar offerings, market conditions, competitive landscape and
pricing practices. In particular, we review multiple data points in order to determine BESP, including price lists used by our sales team in
pricing negotiations, historical average and median pricing achieved in prior contractual customer arrangements and input from our sales
operations department regarding what it believes the deliverables could be sold for on a stand-alone basis. BESP is determined at an advertising
unit level that is consistent with the underlying market strategy and stratified based on specific consideration of geography, industry and size as
deemed necessary.
We limit the amount of allocable arrangement consideration to amounts that are fixed or determinable and that are not contingent on
future performance or future deliverables. We will regularly review BESP. Changes in assumptions or judgments or changes to the elements in
the
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arrangement could cause a material increase or decrease in the amount of revenue that we report in a particular period.
We recognize the relative fair value of the advertising services as they are delivered, assuming all other revenue recognition criteria are
met.
Allowances for Doubtful Accounts and Returns
We make judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables when
collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not
specifically reviewed, provisions are recorded at differing rates, based upon the age of the receivable. In determining these percentages, we
analyze our historical collection experience and current economic trends. If the historical data we use to calculate the allowance for doubtful
accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the
future results of operations could be materially affected.
We also record a provision for estimated sales returns and allowances in the same period the related revenue is recorded. These estimates
are based on an analysis of credits issued for billing corrections and any other known factors. If the historical data we use to calculate these
estimates do not properly reflect future returns, then a change in the allowances would be made in the period in which such a determination is
made, and revenue in that period could be materially affected.
Internal Use Software Development Costs
We capitalize certain costs related to software developed for internal use, primarily associated with the ongoing development and
enhancement of our advertising platform. In accordance with authoritative guidance, we begin to capitalize our costs to develop software when
preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that
the project will be completed and the software will be used as intended. These costs are amortized on a straight-line basis over the estimated
useful life of the related asset, generally estimated to be three years. Costs incurred prior to meeting these criteria together with costs incurred
for training and maintenance are expensed as incurred and recorded in research and development expense on our consolidated statements of
operations. Costs incurred for enhancements that are expected to result in additional features or functionality are capitalized and expensed over
the estimated useful life of the enhancements, generally three years.
Income Taxes
We account for income taxes in accordance with authoritative guidance, which requires the use of the asset and liability method. Under
this method, deferred income tax assets and liabilities are determined based upon the difference between the consolidated financial statement
carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income in
the years in which the differences are expected to be reversed.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided when it is more likely than not
that the deferred tax assets will not be realized. We have established a full valuation allowance to offset domestic net deferred tax assets due to
the uncertainty of realizing future tax benefits from our net operating loss carry forwards and other deferred tax assets. Our valuation allowance
is attributable to the uncertainty of realizing future tax benefits from U.S. net operating losses, foreign timing differences and other deferred tax
assets.
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As of December 31, 2012, we had U.S. federal net operating loss carry forwards of approximately $22.4 million, which expire beginning
in 2029. As of December 31, 2012, we had U.S. state net operating loss carry forwards of approximately $17.2 million, expiring beginning in
2029. As of December 31, 2012, we had federal research and development tax credits of approximately $0.5 million, which expire beginning in
2029. As of December 31, 2012, we had state research and development tax credits of approximately $0.9 million, which carry forward
indefinitely.
Stock-based Compensation
We account for stock-based compensation in accordance with the guidelines outlined in the American Institute of Certified Public
Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the AICPA guidelines. Under
the fair value recognition provisions of this guidance, stock-based compensation is measured at the grant date based on the fair value of the
award and is recognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the
respective award.
Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option-pricing model to
determine the fair value of stock options. The determination of the grant date fair value of options using an option-pricing model is affected by
our estimated common stock fair value as well as assumptions regarding a number of other complex and subjective variables. These variables
include the fair value of our common stock, our expected stock price volatility over the expected term of the options, stock option exercise and
cancellation behaviors, risk-free interest rates and expected dividends, which are estimated as follows:
Fair value of our common stock. As our stock is not publicly traded, we must estimate the fair value of common stock, as discussed in
"Common Stock Valuations" below.
Expected term. The expected term was estimated using the simplified method allowed under the guidance of the Securities and Exchange
Commission.
Volatility. As we do not have a trading history for our common stock, the expected stock price volatility for our common stock was
estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the
expected term of the stock option grants. Industry peers consist of several public companies in the digital advertising industry similar in size,
stage of life cycle and financial leverage and were the same as the comparable companies used in the common stock valuation analysis. We did
not rely on implied volatilities of traded stock options in our industry peers' common stock because the volume of activity was relatively low.
We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical
information regarding the volatility of our own share price becomes available, or unless circumstances change such that the identified
companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be used in the
calculation.
Risk-free rate. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities appropriate for the term of
employee stock option awards.
Dividend yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable
future. Consequently, we used an expected dividend yield of zero.
If any of the assumptions used in the Black-Scholes model changes significantly, stock-based compensation for future awards may differ
materially compared with the stock compensation awards granted previously.
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The following table presents the assumptions used to estimate the fair value of options granted to employees during the periods presented:
Year Ended
December 31,
2011
Six Months Ended
June 30,
2012
2012
2013
(unaudited)
Expected term
(years)
Volatility
Risk-free
interest rate
Dividend yield
5.4–6.1
56.1%–66.7%
5.3–7.3
61.2%–63.4%
5.3–6.1
62.3%–63.4%
5.9–6.6
61.7%–64.9%
1.13%–3.06%
—
0.73%–1.21%
—
0.73%–0.88%
—
1.04%–1.26%
—
Common Stock Valuation
We are required to estimate the fair value of the common stock underlying our stock option awards when performing the fair value
calculations with the Black-Scholes option-pricing model. The fair value of the common stock underlying our stock option awards was
determined by our board of directors, with the input from management and contemporaneous valuations. We believe that our board of directors
has the relevant experience and expertise to determine the fair value of our common stock. As described below, the exercise price of our stock
option awards was determined by our board of directors based on the most recent valuation as of the grant date. If stock option awards were
granted a short period of time preceding the date of a valuation report, we assessed the fair value of such stock option awards used for financial
reporting purposes after considering the fair value reflected in the subsequent valuation report and other facts and circumstances on the date of
grant as discussed below. In such instances, the fair value of such stock option awards that we used for financial reporting purposes generally
exceeded the exercise price for those awards. As shown below, the valuations of common stock were determined in accordance with the
guidelines outlined in the AICPA guidelines. The assumptions that we used in these valuation models are based on future expectations
combined with management judgment. In the absence of a public trading market, our board of directors, with input from management,
exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock for
financial reporting purposes as of the grant date of each stock option award, including the following factors:
•
valuations of our common stock performed as of March 31, 2012, June 30, 2012, September 30, 2012, December 31, 2012,
March 31, 2013 and, June 30, 2013 by unrelated third-party valuation specialists;
•
the prices, rights, preferences and privileges of our preferred stock relative to our common stock;
•
the prices of our preferred stock and common stock sold to outside investors in arms-length transactions;
•
our operating and financial performance;
•
current business conditions and projections;
•
the hiring of key personnel;
•
our history and the introduction of new products or services;
•
the likelihood of achieving a liquidity event for the shares of common stock underlying these stock option awards, such as an
initial public offering or sale of our company, given prevailing market conditions;
•
any adjustment necessary to recognize a lack of marketability for our common stock;
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•
the market performance of comparable publicly traded companies; and
•
the U.S. and global capital market conditions.
The dates of our valuations were not contemporaneous with the grant dates of our stock option awards. Therefore, we considered the
amount of time between the valuation date and the grant date to determine whether to use the latest common stock valuation for the purposes of
determining the fair value of our common stock for financial reporting purposes. If stock option awards were granted a short period of time
preceding the date of the most recent valuation report, we assessed the fair value used for financial reporting purposes after considering the fair
value reflected in the subsequent valuation report and other facts and circumstances on the date of grant as discussed below. In such instances,
the fair value that we used for financial reporting purposes generally exceeded the exercise price for those awards. In reaching this conclusion,
we also evaluated whether the subsequent valuation indicated that any significant change in valuation had occurred between the previous
valuation and the grant date. The additional factors considered when determining any changes in fair value between the most recent valuation
and the grant dates included, when available, the prices paid in recent transactions involving our equity securities, as well as our stage of
development, our operating and financial performance, current industry conditions, and the market performance of comparable publicly traded
companies. There were significant judgments and estimates inherent in these valuations, which included assumptions regarding our future
operating performance, the time to completing an initial public offering or other liquidity event, and the determinations of the appropriate
valuation methods to be applied. If we had made different estimates or assumptions, our stock-based compensation expense, net loss and net
loss per common share could have been significantly different from those reported in this prospectus.
For the valuations of our common stock, our management estimated, as of each valuation date, our business enterprise value, or BEV, on a
continuing operations basis, using the market approach described in the Guideline Publicly Traded Company Analysis.
The market approach estimates the fair value of a company by applying market multiples of comparable publicly traded companies. When
considering which companies to include in our comparable analysis, we first focused on U.S.-based companies in the digital
advertising/services industry. Next, we looked at several financial characteristics, focusing on companies with revenue growth rates of greater
than 10% and companies with market capitalization of less than $1 billion, as we determined that companies with those characteristics were
most similar to us. Other characteristics such as profitability and risk were addressed in the valuation itself in the selection of inputs such as
market multiples, discount rates and volatility, as determined to be appropriate at each valuation date.
From time to time, we updated the set of comparable companies as new or more relevant information became available. The December 30,
2011, March 31, 2012 and June 30, 2012 valuations used the same comparable companies, and we added one company at September 30, 2012
and one company at December 31, 2012. In each case, the newly added company was in the digital advertising/services industry and had
recently completed its initial public offering, providing publicly available financial data from which valuation multiples could be derived. For
the March 31, 2013 valuation, we expanded our list of comparable companies to reflect several additional high-growth companies, many of
which had recently completed initial public offerings, and were similar to us in terms of industry, risk, diversification, growth and/or
profitability. For the June 30, 2013 valuation, we expanded our list of comparable companies to reflect one additional high-growth company
which had recently completed an initial public offering, and was similar in terms of industry, risk, diversification, growth and/or profitability.
The set of comparable companies was consistent with the set used in the calculation of the non-marketability discount, as well as for the inputs
for stock options and common stock valuation at each valuation date. The market multiples are based on key metrics of comparable publicly
traded companies, and, for our valuations in 2012, we primarily used the median forward 12-month revenue
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multiples from our comparable publicly traded peers, except where noted otherwise below. We applied these multiples to our current and next
fiscal year estimated revenue projections as of the valuation date to arrive at an indication of fair value. We deemed multiples of revenue to be
the most relevant metric in our industry as we are still in a growth phase. Since we have not reached normalized profitability or generated
positive historical profit, applying profit-based multiples may be more difficult or less reliable.
Our indicated BEV at each valuation date was allocated to the shares of convertible preferred stock, common stock, warrants and options
using either an option pricing method, or OPM, and/or a probability-weighted expected return method, or PWERM. An OPM treats common
stock and convertible preferred stock as call options on a business, with exercise prices based on the liquidation preference of the convertible
preferred stock. Therefore, the common stock has value only if the funds available for distribution to the stockholders exceed the value of the
liquidation preference at the time of a liquidity event, such as a merger, sale or initial public offering, assuming the business has funds available
to make a liquidation preference meaningful and collectible by the stockholders. The common stock is modeled as a call option with a claim on
the business at an exercise price equal to the remaining value immediately after the convertible preferred stock is liquidated. The OPM uses the
Black-Scholes option-pricing model to price the call option. Under a PWERM approach, the value ascribed to each share is based upon the
probability-weighted present value of expected future returns, considering each of the possible future scenarios available to the business
enterprise, as well as the rights of each class of stock. Finally, because the market approach generally results in marketable value indications,
and we are a privately-held company, we also applied a non-marketability discount in determining the fair value of our common stock for
financial reporting purposes.
The following table summarizes, by grant date, the number of shares of common stock subject to stock option awards granted from
January 1, 2012 through the date of this prospectus, as well as the associated per share exercise price, the estimated fair value per share of our
common stock on the grant date and the estimated aggregate fair value on the grant date:
Option Grant Dates
February 21, 2012
June 15, 2012
August 13, 2012
December 4, 2012
March 7, 2013
March 10, 2013
May 13, 2013
Number of Shares
Underlying Options
627,905
352,500
241,500
2,740,150
1,081,548
142,500
797,300
Common Stock
Fair Value
Per Share
at Grant Date
Exercise
Price
Per Share
$
1.07
2.97
3.55
6.58
11.21
11.21
15.33
$
2.50
2.97
5.68
9.67
14.30
14.30
17.69
Aggregate
Fair Value
at Grant Date
(in thousands)
$
1,570
1,047
1,372
26,497
15,466
2,038
14,104
In addition to the stock options granted, we also granted 13,571 shares of restricted stock in 2012.
$
Based on the initial public price of $
per share, the aggregate intrinsic value of stock options outstanding as of June 30, 2013 was
million, of which $
million related to vested options.
The following discussion relates primarily to our determination of the fair value per share of our common stock for purposes of calculating
stock-based compensation expense since January 2012. No single event caused the valuation of our common stock to increase or decrease
through December 2012. Instead, a combination of the factors described below in each period led to the changes in the fair value of our
common stock. Notwithstanding the fair value reassessments described below, we believe reliance on the valuation reports and the underlying
methodology in such reports was a
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reasonable method to determine the stock option awards exercise prices on the respective stock option awards' grant dates.
February 2012
We granted options to purchase 627,905 shares of our common stock in February 2012. Our board of directors set an exercise price of
$1.07 per share for these options based in part on a valuation report prepared as of March 15, 2011. In order to assess the fair value of the
underlying common stock for financial reporting purposes, we performed a retrospective valuation as of December 31, 2011.
During the quarter ended December 31, 2011, we generated $16.4 million in revenue compared to $11.6 million during the quarter ended
September 30, 2011, and we had 128 employees as of December 31, 2011. The valuation as of December 31, 2011 used the market approach to
determine an estimated BEV and fair value for our common stock. In this valuation, the financial performance of several publicly traded
companies in the online advertising optimization industry was examined. The valuation used a multiple of enterprise value to projected revenue
as the valuation metric, and applied the comparable companies' respective multiples to our forward revenue estimate to calculate a BEV of
$99.2 million. The OPM was used to allocate the equity value to the common stock using the following assumptions: a time to a liquidity event
of 2.0 years, risk-free rate of 0.3%, dividend yield of 0% and volatility of 57% over the time to a liquidity event. We then applied a
non-marketability discount of 25% based on our expectation that a liquidity event would occur within approximately two years. The result of
this valuation was a fair value of $2.50 per share as of December 31, 2011.
For financial reporting purposes for the awards granted in February 2012, we utilized the fair value of $2.50 per share determined in the
retrospective valuation as of December 31, 2011 for the grant date fair value of these awards.
June 2012
We granted options to purchase 352,500 shares of our common stock in June 2012. Our board of directors set an exercise price of $2.97
per share for these options based in part on a valuation report prepared as of March 31, 2012.
As of March 31, 2012, we had 265 active customers and 162 employees. In addition, during the quarter ended March 31, 2012, we
achieved modest sequential revenue growth, generating $16.6 million of revenue for the quarter. The March 31, 2012 valuation was influenced
by the issuance of our Series C-1 Preferred Stock at $11.76 per share and was based on the market transaction approach, which is also known
as the "back-solve method," for transactions in stock. Although the transaction involved a different class of stock and included other
considerations in the investment decision, such as financing considerations, the transaction involved a new investor and, therefore, was relevant
for consideration. Using the market transaction approach, we calculated a BEV of $151.8 million. The OPM was used to allocate the equity
value to the common stock using the following assumptions: a time to a liquidity event of 2.0 years, risk-free rate of 0.3%, dividend yield of
0% and volatility of 54% over the time to a liquidity event. We then applied a non-marketability discount of 25% based on our expectation that
a liquidity event would occur within approximately two years. The result of this valuation was a fair value of $2.97 per share as of March 31,
2012.
For financial reporting purposes for the awards granted in June 2012, we utilized the fair value of $2.97 per share determined in the
valuation as of March 31, 2012 for the grant date fair value of these awards.
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August 2012
We granted options to purchase 241,500 shares of our common stock in August 2012. Our board of directors set an exercise price of $3.55
per share for these options based in part on a valuation prepared as of June 30, 2012. When assessing the appropriate fair value for purposes of
calculating the related stock-based compensation expense for these awards, we evaluated the two valuations prepared as of March 31, 2012 and
September 30, 2012.
As of September 30, 2012, we had 229 employees and 406 active customers. In addition, for the quarter ended September 30, 2012, we
achieved sequential revenue growth, generating revenue of $26.9 million, which was significantly higher than our prior two quarters. The
September 30, 2012 valuation used the market approach to determine an estimated BEV and fair value for our common stock. The valuation
used a multiple of enterprise value to projected revenue as the valuation metric, and applied the comparable companies' respective multiples to
our forward revenue estimate to calculate a BEV of $241.5 million. The OPM was used to allocate the equity value to our common stock using
the following assumptions: a time to a liquidity event of 1.0 years, risk-free rate of 0.2%, dividend yield of 0% and volatility of 52% over the
time to a liquidity event. We then applied a non-marketability discount of 20% based on our expectation that a liquidity event would occur
within approximately one year. The decrease in the non-marketability discount was due to our acceleration towards an initial public offering as
well as indications from a quantitative model that specified a lower discount as the assumed time horizon and volatility decreased. Further, we
expanded our list of comparable companies as of September 30, 2012 by adding one recently public company. In addition, we considered the
purchase of common stock from certain stockholders by an outside investor in an arm's-length transaction that occurred in December 2012 in
our valuation as of September 30, 2012. The result of this valuation was a fair value of $6.58 per share as of September 30, 2012.
During the six months ended September 30, 2012, our common stock value increased $3.61 or 122%, primarily due to a change in our
selected market multiple. We selected the median forward multiple of our comparable companies based on a relative comparison of size,
growth and profitability, and our strong performance for the nine months ended September 30, 2012. This change in multiple selection
increased the share valuation by $3.17 or 107%. Further, the decrease in the non-marketability discount increased our fair value by $0.44 or
15%. During this period, we did not change our forward revenue forecast.
For financial reporting purposes for the awards granted in August 2012, we applied a straight-line calculation between the fair value of
$2.97 per share determined in the valuation as of March 31, 2012 and the fair value of $6.58 per share determined in the valuation as of
September 30, 2012 to determine the fair value of our common stock on the grant date. Using the benefit of hindsight, we determined that the
straight-line calculation would provide the most appropriate conclusion for the valuation of our common stock on the interim date between
valuations because we did not identify any single event or series of events that occurred between the months of August 2012 and September
2012 that would have caused a material change in fair value. Based on this calculation, we assessed the fair value of our common stock to be
$5.68 per share for awards granted in August 2012.
December 2012
We granted options to purchase 2,740,150 shares of our common stock in December 2012. Our board of directors set an exercise price of
$6.58 per share for these options based in part on a valuation report prepared as of September 30, 2012. When assessing the appropriate fair
value for purposes of calculating the related stock-based compensation expense for these awards, we evaluated the two surrounding valuations
prepared as of September 30, 2012 and December 31, 2012.
As discussed in the preceding section, the September 30, 2012 valuation determined that the fair value of our common stock was $6.58 per
share as of that date. As of December 31, 2012, we had
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289 employees and 536 active customers. In addition, for the quarter ended December 31, 2012, we achieved sequential revenue growth,
generating revenue of $40.1 million, which was significantly higher than our prior quarterly growth rates and also reflected our seasonally
strong fourth quarter. For the December 31, 2012 valuation, we used a Hybrid Method, which weighted the results of our OPM at 60% and our
PWERM at 40% to calculate a BEV of $462.2 million. The PWERM reflected one scenario, an initial public offering in nine months, and the
OPM contemplated a sale in 12 months. The OPM was used to allocate the equity value to the common stock using the following assumptions:
a time to a liquidity event of 1.0 years, risk-free rate of 0.2%, dividend yield of 0% and volatility of 50% over the time to a liquidity event. In
addition, we decreased the applied non-marketability discount from 20% as of September 30, 2012 to 15% as of December 31, 2012. The result
of this valuation was a fair value of $11.21 per share as of December 31, 2012.
For the three month period ended December 31, 2012, our common stock valuation increased by $4.63 per share, or 70%. Of the increase,
$2.85, or 43%, was due to the increased probability of an initial public offering and $0.94, or 14%, was due to our selected market multiple
increasing by 13% in the OPM scenario compared to the selected market multiple in the September 30, 2012 valuation. The decrease in the
non-marketability discount increased the fair value of our common stock by $0.66, or 10%. During this period, our revenue of $40.1 million
exceeded our plan and, as a result, we revised our 2013 forecast. We increased our forward revenue forecasts by 5%, which resulted in an
increase in fair value of $0.18, or 3%.
For financial reporting purposes for the awards granted in December 2012, we applied a straight-line calculation between the fair value of
$6.58 per share determined in the valuation as of September 30, 2012 and the fair value of $11.21 per share determined in the valuation as of
December 31, 2012 to determine the fair value of our common stock on the grant date. Using the benefit of hindsight, we determined that the
straight-line calculation would provide the most appropriate conclusion for the valuation of our common stock on the interim date between
valuations because we did not identify any single event or series of events that occurred during the month of December 2012 that would have
caused a material change in fair value. The two main factors that contributed to the increase in the fair value of the shares were (i) our
consistent and ongoing preparations for our initial public offering throughout the quarter and (ii) our continued revenue growth, which was
spread evenly throughout the same period. Based on this calculation, we assessed the fair value of our common stock to be $9.67 per share for
awards granted in December 2012.
March 2013
We granted options to purchase 1,224,048 shares of our common stock in March 2013. Our board of directors set an exercise price of
$11.21 per share for these options based in part on a valuation prepared as of December 31, 2012. When assessing the appropriate fair value for
purposes of calculating the related stock-based compensation expense for these awards, we evaluated the two surrounding valuations prepared
as of December 31, 2012 and March 31, 2013.
As discussed in the preceding section, the December 31, 2012 valuation determined that the fair value of our common stock was $11.21
per share as of that date. As of March 31 2013, we had 560 active customers and 382 employees. In addition, during the quarter ended
March 31, 2013, we generated $38.2 million of revenue, which nearly equaled our seasonally strong performance in the fourth quarter. For the
March 31, 2013 valuation, we used the PWERM to calculate the BEV and common stock value. Following discussions with investment
bankers, our board of directors evaluated the probability of an initial public offering in approximately six months, an initial public offering in
approximately 12 months and a merger or sale in approximately 12 months. We weighted the early initial public offering scenario at 60%, the
late initial public offering scenario at 30% and the merger or sale scenario at 10%, to calculate a BEV of $590.5 million. In addition, we
lowered the non-marketability discount from 15% as of December 31, 2012 to 13% as of March 31, 2013 to reflect
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our continued progress towards an initial public offering and the reduction in the expected time horizon to a liquidity event. The result of this
valuation was a fair value of $15.33 per share as of March 31, 2013.
From the December 31, 2012 valuation to the March 31, 2013 valuation, our common stock value increased by $4.12 per share, or 37%.
Of the increase $1.45, or 13%, was due to an increase in our forward revenue forecast by 18% based on our continued positive financial
performance relative to our operating plan. In addition, our selected market multiple increased 50%, resulting in an increase of $1.11, or 10%,
in our common stock valuation compared to prior quarter. Also, the probability weighting of an initial public offering increased from 40% to
90% because we selected underwriters and held an organizational meeting during this period. The increase in probability of an initial public
offering increased the fair value of our common stock by $1.04, or 9%. Other factors, including a decrease in the non-marketability discount,
resulted in an increased fair value of the common stock by $0.53, or 5%.
For financial reporting purposes for the awards granted in March 2013, we applied a straight-line calculation between the fair value of
$11.21 per share determined in the valuation as of December 31, 2012 and the fair value of $15.33 per share determined in the valuation as of
March 31, 2013 to determine the fair value of our common stock on the grant date. Using the benefit of hindsight, we determined that the
straight-line calculation would provide the most appropriate conclusion for the valuation of our common stock on the interim date between
valuations because we did not identify any single event or series of events that occurred during the month of March 2013 that would have
caused a material change in fair value. Based on this calculation, we assessed the fair value of our common stock to be $14.30 per share for the
awards granted in March 2013.
May 2013
We granted options to purchase 797,300 shares of our common stock in May 2013. Our board of directors set an exercise price of $15.33
per share for these options based in part on a valuation prepared as of March 31, 2013. When assessing the appropriate fair value for purposes
of calculating the related stock-based compensation expense for these awards, we evaluated the two surrounding valuations prepared as of
March 31, 2013 and June 30, 2013.
As discussed in the preceding section, the March 31, 2013 valuation determined a fair value of $15.33 per share as of that date. As of
June 30, 2013, we had 784 active customers and 466 employees. In addition, during the quarter ended June 30, 2013, we generated
$54.4 million of revenue. In the June 30, 2013 valuation, we used a PWERM, in which we weighted the early initial public offering scenario at
75%, the late initial public offering scenario at 20%, and the merger or sale scenario at 5%, to calculate a BEV of $767.5 million. In addition,
we lowered the non-marketability discount from 13% as of March 31, 2013 to 9% as of June 30, 2013 to reflect our continued progress towards
an initial public offering and the reduction in the expected time horizon to a liquidity event. The result of this valuation was a fair value of
$20.05 per share as of June 30, 2013.
From the March 31, 2013 valuation to the June 30, 2013 valuation, our common stock value increased by $4.72 per share, or 31%. This
increase was primarily due to an increase of 10% in the market multiple of comparable companies when comparing the March 31, 2013
valuation to the June 30, 2013 valuation, resulting in an increase of $3.17, or 21%, in our common stock valuation compared to prior quarter.
Further, the decrease in the non-marketability discount increased the fair value of our common stock by $0.77, or 5%, per share. Increasing the
initial public offering probability from 90% to 95%, and within the initial public offering scenarios, increasing the early initial public scenario
from 60% to 75%, resulted in an increase of $0.77, or 5%. There was no change in our forward revenue forecast and hence no impact to our
fair value from this factor.
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For financial reporting purposes for the awards granted in May 2013, we applied a straight-line calculation between the fair value of
$15.33 per share determined in the valuation as of March 31, 2013 and the fair value of $20.05 per share determined in the valuation as of
June 30, 2013 to determine the fair value of our common stock on the grant date. Using the benefit of hindsight, we determined that the
straight-line calculation would provide the most appropriate conclusion for the valuation of our common stock on the interim date between
valuations because we did not identify any single event or series of events that occurred between the months of May 2013 and June 2013 that
would have caused a material change in fair value. Based on this calculation, we assessed the fair value of our common stock to be $17.69 per
share for awards granted in May 2013.
The amortization of stock-based compensation and stock-based compensation expense related to the reassessed fair values described
above are presented in our consolidated financial statements for the year ended December 31, 2012 and the six months ended June 30, 2013.
Recently Issued and Adopted Accounting Pronouncements
Under the Jumpstart Our Business Startups Act, or JOBS Act, we qualify as an "emerging growth company." We have irrevocably elected
to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS
Act, and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not "emerging
growth companies."
In June 2011, the Financial Accounting Standards Board, or FASB, issued authoritative guidance that addresses the presentation of
comprehensive income for annual reporting of financial statements was issued. The guidance is intended to improve the comparability,
consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by
eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. Such
changes in the stockholders' equity will be required to be disclosed in either a single continuous statement of comprehensive income or in two
separate but consecutive statements. The guidance is effective for fiscal years beginning after December 15, 2011, and should be applied
retrospectively for all periods presented. Early adoption is permitted. This new guidance impacts how we report comprehensive income, and
did not have any effect on our results of operations, financial position or liquidity upon its required adoption on January 1, 2012.
In February 2013, the FASB issued guidance that addresses the presentation of amounts reclassified from accumulated other
comprehensive income. This guidance does not change current financial reporting requirements. Instead, an entity is required to cross-reference
to other required disclosures that provide additional detail about amounts reclassified out of accumulated other comprehensive income. In
addition, the guidance requires an entity to present significant amounts reclassified out of accumulated other comprehensive income by line
item of net income if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. Adoption of
this standard is required for periods beginning after December 15, 2012 for public companies. This new guidance impacts how we report
comprehensive income and will have no effect on our results of operations, financial position or liquidity upon its required adoption on
January 1, 2013.
Additionally, in May 2011, updated authoritative guidance to amend existing requirements for fair value measurements and disclosures
was issued. The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value
hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value but whose fair value must
be disclosed. It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities as well as
instruments classified in stockholders' equity. The guidance was effective for the year ended December 31, 2012 and was applied
prospectively. This
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new guidance impacts how we report on fair value measurements only, and had no effect on our results of operations, financial position or
liquidity upon our adoption on January 1, 2012.
Quantitative and Qualitative Disclosure about Market Risk
We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our
business. These risks include primarily interest rate, foreign exchange and inflation risks.
Interest Rate Fluctuation Risk
Our cash and cash equivalents consist of cash and money market funds. Our borrowings under notes payable and capital lease obligations
are generally at fixed interest rates.
The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk.
Because our cash and cash equivalents have a relatively short maturity, our portfolio's fair value is relatively insensitive to interest rate changes.
We do not believe that an increase or decrease in interest rates of 100 basis points would have a material effect on our operating results or
financial condition. In future periods, we will continue to evaluate our investment policy in order to ensure that we continue to meet our overall
objectives.
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar,
principally British pounds and euro. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy.
Although we have experienced and will continue to experience fluctuations in our net income (loss) as a result of transaction gains (losses)
related to translating certain cash balances, trade accounts receivable balances and intercompany balances that are denominated in currencies
other than the U.S. dollar, we believe such a change will not have a material impact on our results of operations. In the event our foreign sales
and expenses increase, our operating results may be more greatly affected by fluctuations in the exchange rates of the currencies in which we
do business. At this time we do not, but we may in the future, enter into derivatives or other financial instruments in an attempt to hedge our
foreign currency exchange risk. It is difficult to predict the impact hedging activities would have on our results of operations.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to
become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability
or failure to do so could harm our business, financial condition and results of operations.
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BUSINESS
Overview
Rocket Fuel is a technology company that has developed an Artificial Intelligence and Big Data-driven predictive modeling and
automated decision-making platform. Our technology is designed to address the needs of markets in which the volume and speed of
information render real-time human analysis infeasible. We are focused on the large and growing digital advertising market that faces these
challenges.
There are tens of billions of daily trades across all digital advertising exchanges, thousands of times more than the number of daily trades
executed by NASDAQ and the NYSE combined. Our Artificial Intelligence, or AI, system autonomously purchases ad spots, or impressions,
one at a time, on these exchanges to create portfolios of impressions designed to optimize the goals of our advertisers, such as increased sales,
heightened brand awareness and decreased cost per customer acquisition. We believe that our customers value our solution, as our revenue
retention rate was 134% and 175% for the years ended December 31, 2011 and 2012, respectively. We define our "revenue retention rate" with
respect to a given twelve-month period as (i) revenue recognized during such period from customers that contributed to revenue recognized in
the prior twelve-month period divided by (ii) total revenue recognized in such prior twelve-month period.
Our solution is designed to optimize both direct-response campaigns focused on generating specific consumer purchases or responses, as
well as brand campaigns geared towards lifting brand metrics. We have successfully run advertising campaigns for products and brands ranging
from consumer products to luxury automobiles to travel. We provide a differentiated solution that is simple, powerful, scalable and extensible
across geographies, industry verticals and the display, mobile, social and video digital advertising channels. According to MAGNA GLOBAL,
the display, mobile, social and video channels for digital advertising are expected to grow from $42 billion in 2012 to $73 billion in 2016
globally.
Increasingly, companies are attempting to leverage Big Data and data scientists to make strategic and tactical decisions. At Rocket Fuel,
rather than focusing on data analysis by humans, we have built tools to perform analysis and make decisions autonomously. The benefit of a
general platform that autonomously adapts and learns while solving multiple problems instead of solving one specific problem at a time is that,
with very little manual configuration, our platform simultaneously runs over 1,000 campaigns for advertisers with highly diverse goals.
Our team of award-winning computer scientists developed and continues to enhance our disruptive technology. Our scientists have
backgrounds in AI, Big Data, machine learning, and high-availability and distributed systems, from institutions including Massachusetts
Institute of Technology, Stanford University, Indian Institute of Technology and Carnegie Mellon University. Benefiting from our unique
combination of technology and industry expertise, we have rapidly grown our business, building a diversified customer base during 2012
comprising over 65 of the Advertising Age 100 Leading National Advertisers and over 40 of the Fortune 100 companies.
As our customers realize the performance of their campaigns on our platform, we often receive feedback that we are a top performer, and
consequently, we often receive increased allocations that contribute to our revenue growth. For the years ended December 31, 2010, 2011 and
2012, our revenue was $16.5 million, $44.7 million and $106.6 million, respectively, representing a compound annual growth rate, or CAGR,
of 154%. For the six months ended June 30, 2012 and 2013, our revenue was $39.6 million and $92.6 million, respectively, representing
period-over-period growth of 134%. For the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, 2012 and
2013, our net loss was $(3.2) million, $(4.3) million, $(10.3) million, $(2.5) million and $(11.9) million, respectively. For the years ended
December 31, 2010, 2011 and 2012 and for the six months ended June 30, 2012 and 2013, our adjusted EBITDA was $(2.9) million,
$(3.1) million, $(3.0) million,
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$(1.2) million and $(4.3) million, respectively. Adjusted EBITDA is a financial measure not presented in accordance with generally accepted
accounting principles, or GAAP. For a definition of adjusted EBITDA, an explanation of our management's use of this measure and a
reconciliation of adjusted EBITDA to our net loss, see "Selected Consolidated Financial Data—Non-GAAP Financial Measures."
Our Industry
The convergence of several trends is generating demand for technology-driven solutions:
AI is increasingly becoming an accepted and important technology used to solve complex problems.
Over the last decade, AI has gained prominence in several fields, including aeronautics, securities trading, logistics, space exploration and
medical diagnosis, as well as through seminal technology events, such as IBM's Watson winning Jeopardy, NASA's Curiosity landing itself on
the surface of Mars, and Google's self-driving cars operating on highways. AI-driven systems can rapidly process enormous amounts of data
and execute transactions on a large scale, enabling decision-making capabilities that generally are not otherwise feasible or economical. One of
the historical limitations of AI was its need for substantial and costly amounts of computational power. However, the cost of computational
power is rapidly decreasing, making AI solutions more practical for mainstream business applications. Just as there is a trend toward using
machine-based algorithmic trading on electronic exchanges for high frequency trading in investment securities, an increasing volume of digital
advertising is executed using programmatic buying technologies on real-time advertising exchanges. We believe this trend has created a
significant opportunity to harness the power of AI to make complex business decisions autonomously.
The proliferation of data is creating new opportunities to optimize business processes.
The continuing increase in global online activity generates massive amounts of data that can be collected and analyzed to provide valuable
insights for business processes, especially given the dramatic drop in computation and storage costs. According to the IDC Digital Universe
Study, the global volume of digital information created, replicated and consumed is expected to grow from 2.8 zettabytes in 2012 to
40 zettabytes in 2020, which implies a doubling of data every two years, with 68% of all digital data created and consumed by consumers in
2012.
The Internet is transforming consumer habits, media consumption and advertising spending allocations.
The Internet has become a primary channel for content creation, consumption, social engagement and commerce. Adults in the United
States spend more time online and on mobile devices for non-voice activities than ever before. According to eMarketer, in 2012, they spent on
average 255 minutes per day on such activities, up over 50% from 2009. Historically, advertisers have relied heavily on offline media, such as
television, newspapers, magazines and radio, to promote their brands and to sell products and services. With the rapid growth of online activity
and the proliferation of Internet-connected devices, advertisers are increasingly using the Internet to reach, influence and creatively engage
consumers. As a result, digital advertising spending as a percentage of overall advertising spending has increased substantially in recent years.
According to eMarketer, worldwide digital advertising spending is expected to grow from $72 billion in 2010 to $163 billion in 2016, or from
17.5% to 25.9% of total worldwide advertising spending, respectively.
Digital advertising is shifting to market-driven real-time bidding systems.
In the past, the market for buying and selling digital advertising was relatively simple, with advertisers and publishers transacting directly
with one another. As Internet usage increased, the number of publishers with significant advertising inventory increased. However, the vast
majority of publishers lacked the scale and capabilities to effectively monetize their inventory. As a result,
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advertising networks were built to purchase unsold advertising inventory from multiple publishers and then package and sell the inventory to
advertisers. In recent years, this trend has resulted in the emergence and rapid growth of real-time advertising exchanges, which have reduced
the transactional friction that historically was associated with the buying and selling of digital advertising inventory. Like stock exchanges for
buyers and sellers of investment securities, real-time advertising exchanges enable increased liquidity, transparency and efficiency in
transactions between advertisers and publishers.
Real-time bidding, or RTB, is the real-time purchase and sale of advertising inventory on an impression-by-impression basis on real-time
advertising exchanges. According to IDC, RTB is expanding faster than any other segment of the digital advertising industry, with total RTB
sales increasing from approximately $3 billion in 2012 to approximately $14 billion in 2016, representing a 47% CAGR. We believe the
following key factors are driving the growth of RTB:
•
Programmatic buying. Programmatic buying enables the automated buying of advertising inventory, typically using predefined
and data-driven algorithms. The widespread industry adoption of programmatic buying, which was initially available only for
display advertising inventory, has expanded to mobile, social and video inventory, and has accelerated the growth of RTB.
•
Abundance of inventory. Digital advertising inventory has substantially grown in recent years, as consumers continue to migrate
online using a multitude of devices to consume an increasing amount of digital content across display, mobile, social and video
channels, and as the number of websites and mobile applications continues to increase exponentially.
•
Publisher adoption. For publishers, digital advertising opportunities can be short lived, as users move frequently among different
websites and applications. To efficiently monetize these perishable digital advertising opportunities, publishers are seeking
solutions that expose their inventory to large pools of potential advertisers who purchase inventory through real-time advertising
exchanges. Publishers are making an increasing amount of their digital advertising inventory available through real-time
advertising exchanges because doing so enables them to derive higher prices for their inventory due to competitive bidding
dynamics. As a result of this trend, digital advertising inventory is becoming increasingly abundant, liquid and purchasable
programmatically.
•
Precision for advertisers. Real-time advertising exchanges provide advertisers with access to large pools of inventory on an
impression-by-impression basis through competitive market-driven pricing, providing the opportunity to efficiently and effectively
achieve their campaign goals.
•
Virtuous cycle. The shift of advertising budgets toward real-time advertising exchanges is creating a virtuous growth cycle. As
demand for digital advertising inventory grows, publishers increase the supply of digital advertising inventory, thereby enabling
better advertising results. As results improve, demand for additional inventory increases, which then leads to increased incentives
for publishers to make additional inventory available through real-time advertising exchanges.
Our Market Opportunity
According to MAGNA GLOBAL, display, mobile, social and video channels for digital advertising are forecast to grow from $42 billion
in 2012 to $73 billion in 2016 globally, a 14% CAGR, broken into the following segments:
•
Display. According to MAGNA GLOBAL, display advertising, excluding mobile, social and video, was a $24 billion market in
2012 and is forecast to grow to $29 billion in 2016, a 5% CAGR. Growth in display advertising, excluding mobile, social and
video, is slower than in other channels as overall display advertising growth is being driven by mobile, social and video
advertising.
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•
Mobile. According to MAGNA GLOBAL, mobile advertising, including mobile search and display, but excluding social, was a
$7 billion market in 2012 and is forecast to grow to $14 billion in 2016, an 18% CAGR. We currently are focused only on the
display portion of the mobile market.
•
Social. According to MAGNA GLOBAL, social advertising, across all platforms, was a $6 billion market in 2012 and is forecast
to grow to $18 billion in 2016, a 32% CAGR.
•
Video. According to MAGNA GLOBAL, online video advertising was a $5 billion market in 2012 and is forecast to grow to
$12 billion in 2016, a 22% CAGR.
Digital advertising across these channels is bought and sold using various methods, including RTB exchanges, which, according to IDC, is
expanding faster than any other segment of the digital advertising industry.
According to MAGNA GLOBAL, advertising revenue reached $472 billion in 2012 globally. We believe that advertisers will continue to
shift advertising spending from traditional media to programmatic buying.
Challenges Faced by Digital Advertisers
Advertisers that want to conduct digital advertising campaigns face several challenges, including:
•
Achieving measurable results. Increasingly, advertisers seek to measure the results of their campaigns and expect tangible and
quantifiable business results, such as heightened brand awareness and increased sales.
•
Addressing the rapidly changing and highly-fragmented consumer environment. Consumers' digital-media habits are evolving,
with consumers accessing and consuming content across many different Internet-connected devices, resulting in highly-fragmented
audiences, particularly due to the adoption of new digital media platforms, such as mobile applications and social networks. This
fragmentation makes it difficult for advertisers to deliver impactful and measureable campaigns to wide audiences. As a result,
advertisers are demanding the ability to adjust their advertising spending in real time to reach and influence their prospective
consumers.
•
Navigating industry complexity. The rapid growth of the digital advertising industry has created a highly complex environment for
advertisers, with multiple channels, technologies and solutions offered by industry participants.
•
Leveraging complex data. Many large advertisers have already made significant investments in data and are struggling with the
challenge of how to effectively make use of it. In order to gain valuable and timely insights and harness multiple data sources to
effectively manage advertising campaigns, advertisers need sophisticated data-integration tools and a highly complex computing
infrastructure, neither of which is typically within their core competencies. Moreover, the sheer volume of data in today's digital
world has surpassed the ability of most advertisers to manually test and derive value from that data.
•
Operating in real time. The massive volume and real-time creation of data generally precludes effective human review, analysis,
optimization and implementation of advertising campaigns. For example, advertising impressions available on real-time
advertising exchanges must be valued and bid upon in approximately 100 milliseconds. In addition, key decisions relating to the
allocation of advertising spending are typically based on human know-how and experience gained from prior advertising
campaigns. As a result, existing providers of solutions for digital advertising are typically slow to make strategic adjustments in
their campaigns and are often unable to take full advantage of the abundance of available data.
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Our Solution
Our proprietary AI-driven solution is built on our real-time optimization engine, which leverages Big Data and our computational
infrastructure to deliver highly-automated, measurable digital advertising campaigns. We offer an extensible solution that optimizes digital
advertising campaigns across geographies, industry verticals, advertiser goals and display, mobile, social and video digital channels.
We believe our solution is disrupting traditional approaches to digital advertising. The digital advertising campaigns we deliver are
designed to be effective and efficient, are easy for us to set up and manage and do not require advertisers to know or guess who their target
audiences are, nor the best digital channels through which to reach them. Instead, our AI-driven technology reaches desired consumers globally
by programmatically buying advertising inventory available through real-time advertising exchanges. The key benefits of our solution for
advertisers include:
•
Better results faster. Our technology considers millions of attributes to determine how to respond to the tens of billions of bid
requests for advertising impressions that we receive each day. We bid on billions of these impressions per day in approximately
100 milliseconds per bid request. As our engine learns which attributes best contribute to meeting campaign goals, it adapts as
campaigns run to improve performance measured against these goals. This enables us to deliver more rapid optimization and better
campaign results than the periodic manual adjustments of traditional solutions.
•
Business goal oriented. Our solution transforms the way campaigns are optimized, learning and adapting in real time, which we
refer to as "Advertising that Learns," to achieve advertisers' measurable business goals, such as reduced cost per customer
acquisition, increased sales and heightened brand awareness. In contrast, traditional solutions usually require advertisers to
manually choose target audiences, context, behavior and other variable attributes to run their campaigns.
•
Comprehensive solution. Our solution delivers and optimizes both direct-response campaigns focused on generating specific
consumer purchases or responses, as well as brand campaigns geared towards lifting brand metrics. We deliver campaigns across
and within the display, mobile, social and video digital advertising channels and is extensible across a wide range of industry
verticals on a global basis.
•
Simple and powerful. We simplify digital advertising campaign management by requiring only a limited number of initial inputs
from our advertisers. Our solution then automates advertising campaigns by analyzing petabytes of data to optimize performance
in real time, and generates insights, analysis and, in many cases, superior results for advertisers.
•
Scalable. Leveraging the massive amounts of inventory available through real-time advertising exchanges, our solution enables
advertisers to efficiently connect with large audiences while it maintains a focus on results-driven optimization. For example, our
advertisers benefit from our ability to process tens of billions of bid requests per day.
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Our Platform
The key components of our platform include:
•
AI-driven predictive modeling and automated decision-making technologies. Our predictive modeling technology estimates the
probability of a consumer performing an advertiser's desired action. Predictions are derived from campaign-specific modeling
across millions of simultaneous attributes, including third-party data, website and content-category information, time-of-day and
day-of-week components and geography. Our automated decision-making system translates these predicted consumer response
probabilities into a precise monetary value for each advertising impression. Our platform adapts in real time to fluctuations in
market prices, advertisement performance, consumer behavior and other market dynamics to bid on inventory and achieve
advertisers' campaign goals. As consumers interact with advertisements during an advertising campaign, and as we gather more
data during the course of all of our campaigns, our predictive modeling and automated decision-making technologies continually
update and refine our algorithms to increase the accuracy of our AI-driven predictions, without requiring human intervention.
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•
Big Data. Our real-time optimization engine processes tens of billions of events per day, from which we record and consider data
about online activity, including market events, consumer responses to advertisements, bids won and lost, advertising impressions
served, consumer interaction with brands and sometimes first-party data supplied by advertisers about their customers. Globally,
we maintain several petabytes of data to support our real-time optimization engine, including our AI-driven predictive modeling
and automated decision-making technologies, and are able to use data in real time to support bidding decisions on real-time
advertising exchanges for over 1,000 campaigns at a time.
•
Computational infrastructure. Our proprietary computational infrastructure, the backbone of our real-time optimization engine,
processes and logs tens of billions of events daily, accesses anonymized Internet user data nearly instantaneously and, based in part
on such data, uses our AI technology to respond to bid requests from real-time advertising exchanges in approximately 100
milliseconds.
•
Bidding adapters. Bidding adapters enable us to receive bid requests from real-time advertising exchanges, evaluate each request
and respond with a bid. The adapters then present our proposed bid and advertisement to the advertising exchange in the format
required by the exchange. Bidding adapters allow us to easily expand and adapt our platform across multiple inventory sources,
including across different channels, such as display, mobile, social and video.
Our Offerings
Our offerings serve brand and direct-response advertisers across major digital advertising channels, including display, mobile, social and
video, and are designed to solve the key challenges that advertisers face. Given the extensibility and flexibility of our solution, our offerings are
able to address the needs of advertisers across industry verticals and geographies.
Brand Booster
Our Brand Booster offering is focused on the following brand objectives:
•
Reach, frequency and engagement. Traditionally, advertisers have focused on reach, frequency and engagement goals to assess the
effectiveness of their advertising campaigns. Our platform can track, measure and optimize these goals through specific consumer
actions, such as clicks, advertisement interactions and video completions. Our real-time optimization engine values and bids on
billions of individual advertising impressions per day to maximize campaign performance measured against the goals defined by
the advertiser.
•
Brand equity lift. One of the more novel capabilities of our Brand Booster offering is our ability to track, measure and optimize
brand equity lift objectives. We use online surveys to measure these objectives, such as consumer awareness, recall, message
association, purchase consideration, favorability and recommendation intent. Our technology automatically incorporates survey
responses to improve campaign performance.
•
Offline sales. In general, the majority of interactions consumers have with a brand occur offline. We are able to connect online
activity to offline sales or responses by integrating a variety of industry-specific offline data sources, such as retail purchase
activity, coupon usage and grocery store purchase activity. Our technology can measure and optimize campaigns, while they run,
to maximize offline impact.
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Direct Response Booster
Our Direct Response Booster offering is focused on the following direct-response objectives:
•
Prospecting. Advertisers have various prospecting objectives, such as number of leads, sign-ups, registrations or sales. As with all
of our offerings, our prospecting offering tracks every impression and continuously learns from campaign results to refine our
delivery of impressions to the appropriate consumers and achieve each advertiser's direct-response objectives. As our platform
optimizes over the course of campaigns, we believe that advertisers experience steady improvement against the prospecting goals
defined by the advertiser.
•
Retargeting. As advertisers succeed in bringing consumers to their websites, our retargeting offering uses our real-time
optimization engine to help return those same or similar consumers to the advertisers' websites, focusing specifically on the
consumers most likely to perform a desired action. Unlike other retargeting solutions that merely display advertisements,
regardless of the value of such advertisements, to every consumer that has visited an advertiser's website, this offering focuses on
consumers who represent high-value opportunities for re-engagement, aiming to reach them at the best time and in the best
context, to achieve the advertiser's goals.
Other Offerings
Brand Assurance. Advertiser brand protection is a high priority for us. We have adopted a proactive approach designed to prevent us from
serving advertisements on unsafe or inappropriate websites. We have a brand-assurance team who monitors our brand safety efforts, makes
policy decisions, offers guidance to advertisers and continuously analyzes and improves our Brand Assurance offering.
Insights. We identify the key drivers of an advertising campaign's success and help advertisers improve and optimize future marketing
strategies and creative development. Our Insights offering helps advertisers understand what strategies are effective and why, and allows them
to better understand the quality, composition and characteristics of the consumers their campaigns reach, including which consumers are most
responsive to their messages.
Our Competitive Strengths
We believe that the following strengths differentiate us from our competitors:
•
Disruptive AI-driven technology that delivers exceptional results for advertisers. Our AI-driven advertising solution learns and
adapts in real time with minimal human inputs, which we believe differentiates us from other available solutions. As we deliver
more campaigns and gather more data, and as new advertising inventory sources become available, our AI-driven technology
continuously refines its predictive modeling and automated decision-making capabilities and rapidly integrates and leverages new
information and advertising inventory to continually enhance advertiser results.
•
Proprietary computational infrastructure. We process and analyze massive amounts of data through our real-time optimization
engine. Our proprietary computational infrastructure is capable of processing tens of billions of events per day, which allows us to
automatically execute and optimize highly complex advertising campaigns and deliver compelling results for our advertisers.
•
Scalable comprehensive solution. Our solution enables us to run campaigns for advertisers across and within display, mobile,
social and video digital advertising channels. We provide offerings that are extensible across industry verticals and geographies,
and, by leveraging the massive amounts of inventory available through real-time advertising exchanges, we can provide such
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offerings on a very large scale. We believe our solution contrasts with the offerings of our competitors, which are primarily focused on
singular objectives, channels or industry verticals.
•
Premier and diversified customer base. As of June 30, 2013, we had 784 active customers, including many of the world's leading
advertisers across a broad range of industry verticals, who have relied on us to manage their display, mobile, social and video
advertising across both brand and direct-response objectives. During 2012, our customers included over 65 of the Advertising Age
100 Leading National Advertisers and over 40 Fortune 100 companies. As of December 31, 2010, 2011 and 2012 and June 30,
2013, our active customers increased from 151 to 266 to 536 to 784, respectively, representing year-over-year increases of 76%,
102% and 130%, respectively.
•
Attractive and scalable financial model. We believe that we benefit from a scalable financial model that has demonstrated high
revenue growth. We have reached significant scale since our incorporation in March 2008. For example, our revenue was
$106.6 million in 2012, representing year-over-year growth of 139%. Our net loss was $(10.3) million in 2012 and $(11.9) million
in the six months ended June 30, 2013. We recorded cumulative adjusted EBITDA of $(13.3) million from 2010 through June 30,
2013. In order to grow rapidly, we have made significant investments in technology and sales and marketing. We believe that these
investments will provide us with long-term benefits, as we attract new customers, and driven by the performance of our AI-driven
technology, retain and grow spending from existing customers. Our revenue retention rate was 134% and 175% for the years ended
December 31, 2011 and 2012, respectively. Our technology investments are also intended to improve the automation of our
business processes. We believe that these investments will provide strong long-term operating leverage. Adjusted EBITDA is a
non-GAAP financial measure. For a definition of adjusted EBITDA, an explanation of our management's use of this measure and a
reconciliation of adjusted EBITDA to our net loss, see in "Selected Consolidated Financial Data—Adjusted EBITDA."
•
Experienced team. We believe that the extensive experience and depth of our management team provide us with a distinct
competitive advantage. In addition, we benefit from our corporate culture, which we believe has allowed us to attract a highly
qualified employee base with substantial experience in the digital advertising and technology industries, including an engineering
team that includes employees with PhD and Master's degrees from many top-tier institutions, as well as two SIGMOD best paper
award winners and one author of a machine learning top 10 most cited academic publication.
Our Customers
As of June 30, 2013, we had 784 active customers, including many of the world's leading advertisers. We interact with customers
primarily through advertising agencies acting on their behalf. We also work with some customers directly.
During 2012, our customers included over 65 of the Advertising Age 100 Leading National Advertisers and over 40 Fortune 100
companies. We benefit from a diverse advertiser base across industry verticals, such as automotive, cable, computer manufacturing, education,
finance and insurance, health care, hospitality and food services, retail and telecommunications. Of the Fortune 500 companies, during 2012,
our customers represented 4 of the top 5 airlines, 7 of the top 10 commercial banks, 5 of the top 10 food consumer product manufacturers, 7 of
the top 10 general merchandisers and 7 of the top 10 telecommunications providers.
For the year ended December 31, 2012, no single customer represented more than 10% of our revenue.
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Selected Advertiser Case Studies
MIRACLE WHIP Dressing
MIRACLE WHIP is an iconic brand of Kraft Foods.
Objectives. MIRACLE WHIP sought to effectively build awareness among new consumers, drive purchases and increase household
penetration through its 2012 "Keep an Open Mouth" campaign. MIRACLE WHIP wanted to attract visitors to its Facebook landing page and
drive consumers who did not currently purchase MIRACLE WHIP to submit their information through Facebook to give these consumers a
free product sample.
Results. We implemented a brand-focused digital advertising campaign for MIRACLE WHIP in display, with a focus on Facebook lift,
which:
•
attracted over 45,000 new visitors to the MIRACLE WHIP Facebook landing page, due to overall click-through rates performing
at 80% above the client-stated goal;
•
improved overall click-through rates by 112% by the end of the campaign;
•
increased click-through rates by up to 41% in targeted consumer segments including households with income over $75,000; and
•
more generally, expanded MIRACLE WHIP product trials and the MIRACLE WHIP consumer base.
Brooks
Brooks Running Company, or Brooks, is a premium running footwear and apparel brand loved by running enthusiasts. A subsidiary of
Berkshire Hathaway Inc., Brooks designs and markets high-performance men's and women's running shoes, apparel and accessories in more
than 60 countries worldwide.
Objectives. With an advertising budget substantially smaller than its competitors, Brooks sought to grow its market share through online
advertising. The company's goals included increasing online purchases through its website, growing website user engagement and building
brand awareness among established and aspiring runners, particularly in the 35- to 49-year-old age range demographic.
Results. We implemented display, video and social, including FBX, advertising campaigns for Brooks, which, according to Brooks:
•
enabled Brooks to reach close to 18 million users with potential running interests during the peak holiday shopping season in 2012;
•
achieved an 88% completion rate with its 15-second YouTube video;
•
increased scale for larger media footprint across the web including driving approximately 35,000 visits to the company's website
through a display and FBX campaign;
•
drove a significant lift in shoe and other product sales; and
•
provided key audience insights using our analytics offering.
Sky
British Sky Broadcasting Group plc, commonly known as Sky, is a British satellite broadcasting, broadband and telephone services
company headquartered in London, England. Sky is the leading home entertainment and communications company in the U.K. and Ireland,
with over 10 million customers.
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Objectives. Sky sought to drive new pay-TV broadcast customers and build product awareness among new and previously low
consideration consumers. Sky's goals included increasing first-time visit online conversions and driving lift in future purchase consideration.
Results. We implemented display and social via Facebook FBX advertising campaigns for Sky, which, according to Sky:
•
converted approximately 6,000 new pay-TV subscribers;
•
identified and delivered campaign insights that challenged the preexisting notions of segments that drive performance and new
acquisitions for Sky;
•
provided additional, customized brand safety on top of our standard brand safety solution; and
•
consistently maintained great performance at scale, even with an over 2x increase in monthly spend over the preceding year, and
cost per customer acquisition remained relatively stable.
Our Growth Strategies
We plan to continue improving our AI-driven platform to deliver a highly differentiated and disruptive solution. We believe that we
benefit from rapidly growing awareness of our company and our solution, and a large shift in the broader global advertising industry towards
digital advertising and real-time advertising exchanges. As we capitalize on these trends and further grow our business, we plan to pursue the
following initiatives:
•
Extend our technology leadership. We expect to continue enhancing our solution through investments in our AI technology, new
functionalities and offerings including a self-service platform, our computational infrastructure and Big Data management and
analytics.
•
Grow awareness and increase advertiser adoption of our solution. We intend to continue to grow our sales and marketing
organization to generate awareness and increase the adoption of our solution among existing and new advertisers.
•
Increase our mobile, social and video market share. We intend to continue investing in our engineering, sales and marketing
organizations to expand our capabilities in mobile, social and video advertising. We believe that these additional investments will
allow us to efficiently expand our advertiser base, gain market share and grow revenue from these channels.
•
Continue our global expansion. We currently operate in seven countries, including the United States and Canada in North
America; France, Germany, the Netherlands and the United Kingdom in Europe; and, through a strategic alliance with a subsidiary
of one of the largest digital advertising agencies in the world, in Japan. We intend to continue to expand our international business
primarily by growing our sales team in certain countries in which we operate and by establishing a presence in additional
countries.
•
Pursue strategic acquisitions. We plan to continue to evaluate opportunities to acquire complementary businesses and technologies
that are consistent with our overall growth strategy.
Our Technology
Since our incorporation, we have made significant investments and will continue to invest in developing our differentiated and proprietary
solution, aimed at solving the problems of advertisers in ways that traditional, manual solutions cannot. We are focused on offering a solution
that provides measurable results, driven by our real-time optimization engine. We have assembled a team of highly
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skilled engineers and computer scientists with deep expertise across a broad range of relevant disciplines. Key focus areas of our engineering
team include:
•
Artificial Intelligence. We employ AI technology, including predictive modeling and automated decision-making. Our platform
has analyzed millions of attributes from our data warehouse, as evidenced by the tens of billions of impressions and bid requests
processed daily, to determine the most effective attributes, monitored in real time, to determine expected consumer response and
precise impression value.
•
Computational infrastructure. We use a combination of proprietary and open source software to achieve a horizontally scalable,
global, distributed and fault-tolerant architecture, with the goal of enabling us to ensure the continuity of our business, regardless
of local disruptions. Our computational infrastructure currently processes tens of billions of events per day and is designed in a
way that enables us to add significant capacity to our platform as we scale our business without requiring any material design or
architecture modifications. Our technology infrastructure is hosted across five data centers in co-location facilities in California,
Georgia, Virginia, Hong Kong and the Netherlands. Our servers are custom designed by our engineering team.
•
Big Data. We have built a multi-tier Big Data management system based on proprietary and open source software to help us
maintain a variety of data in many different formats. Our data includes anonymized Internet user profile data that is accessible at
very low latencies and used to execute our campaigns. In addition, we maintain a large data warehouse with multi-petabytes of
data that we use for algorithm training and reporting.
•
User interface. Based on the latest HTML5 technologies, our user interface provides flexible reporting and interactive visualization
of the key drivers of success for each advertising campaign. We use these reporting and visualization products internally to manage
campaigns and provide advertisers with campaign insights.
Our research and development expenses were $1.0 million, $1.5 million, $4.9 million, and $6.1 million for the years ended December 31,
2010, 2011 and 2012 and in the six months ended June 30, 2013, respectively. Our capitalized internal use software development costs were
$1.5 million, $2.6 million, $4.7 million and $3.2 million for the years ended December 31, 2010, 2011 and 2012 and in the six months ended
June 30, 2013, respectively.
Sales, Customer Experience and Marketing
In North America and Europe, we sell our solution through our global direct sales team, which focuses on advertising agencies and
advertisers, as well as on other third parties. Our direct sales team is organized by geography in 16 locations, with regional offices in the United
States and offices in Canada and Europe, including France, Germany, the Netherlands and the United Kingdom. Our direct sales teams are
further divided into market segments, including agencies, advertisers and other third parties. We assign each advertiser to representatives who
manage the advertiser's relationship with us.
In Japan, we make our solution available through a strategic alliance with a third-party licensee. When the licensee sells advertising
campaigns using our solution, we earn a share of the revenue from such sales.
We are focused on managing our brand, increasing market awareness and generating new advertiser leads. To do so, we often present at
industry conferences, create custom events and invest in public relations. In addition, our marketing team advertises online, in print and in other
forms of media, creates case studies, sponsors research, authors whitepapers, publishes marketing collateral, generates blog posts and
undertakes customer research studies.
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Employees and Culture
We are proud of our "nerdy, but lovable" company culture, and believe it is one of our fundamental strengths as well as a strategic
priority. We are focused on constant technological innovation to improve our solution for advertisers. We encourage creativity and open
dialogue to improve on ideas through iteration. Our culture rewards both team and individual creativity and success. We believe we have
assembled a talented global team, and, in 2012, we received the Bay Area News Group's 2012 Top Work Places in the Bay Area award.
As of June 30, 2013, we had approximately 465 full-time employees, consisting of approximately 405 employees in the United States and
approximately 60 employees internationally. We currently use TriNet Group, Inc., a professional employer services organization, for payroll,
benefits, employee relations and other employment-related administrative matters.
Our Competition
Our industry is highly competitive and fragmented. We compete with large, well-established companies such as Google, Facebook and
Yahoo!, digital advertising networks, companies that offer demand-side platforms that allow advertisers to purchase inventory directly and
manage their own customer data, divisions of certain advertising agencies, including agency trading desks, that place digital advertising on
behalf of the agencies' clients, and other companies, many of which claim to use advanced technologies to optimize advertising campaigns. As
we introduce new offerings, as our existing offerings evolve, or as other companies introduce new products and services, we may become
subject to additional competition.
We compete for advertising revenue based on our ability to meet advertiser goals, the effectiveness and relevance of our offerings, pricing
structure, ease-of-use, scalability, cross-channel capabilities, customer service, breadth and depth of customer relationships and awareness of
our brand. While our industry is evolving rapidly and is becoming increasingly competitive, we believe that our effective, scalable and reliable
platform enables us to compete favorably on the factors described above.
Intellectual Property
The protection of our technology and intellectual property is an important component of our success. We rely on intellectual property
laws, including trade secret, copyright, trademark and patent laws in the United States and abroad, and use contracts, confidentiality
procedures, non-disclosure agreements, employee disclosure and invention assignment agreements and other contractual rights to protect our
intellectual property.
As of June 30, 2013, we had filed five non-provisional patent applications in the United States and three Patent Cooperation Treaty
applications. In addition, we maintain a trademark portfolio in the United States and abroad, including trademarks or trademark applications in
the European Union, Japan, China, Hong Kong and Singapore.
Circumstances outside of our control could pose a threat to our intellectual property rights. Effective intellectual property protection may
not be available in the United States or other countries in which we provide our solution. In addition, the efforts we have taken to protect our
intellectual property rights may not be sufficient or effective. Any impairment of our intellectual property rights could harm our business, our
ability to compete and harm our operating results.
Privacy and Interest-based Advertising
Much of the acceptance and widespread use of the Internet across the globe is attributable to the ability of Internet users to access valuable
content quickly, without friction, and free of charge. The digital media content providers, or publishers, who support the creation and
distribution of this content
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do so largely by selling advertisements on their properties, similar to the business model of television and radio broadcasters. Internet users'
online activity generates a vast amount of data, such as advertising viewed and responded to, and advertisers' websites visited, and is valuable
to advertisers seeking to reach an optimal audience. Online it is possible to serve advertisements to potential consumers based upon inferred
interests. These interests may be inferred in part based on web-browsing history. The use of web browsing history to inform advertising
purchase decisions is commonly referred to as "interest-based" or "online behavioral" advertising. Advertisers are willing to make a greater
investment in, and pay a higher rate for, digital advertising when this interest-based data can be used to inform decisions about purchasing
advertising impressions to reach desired consumers.
The use of interest-based advertising on the Internet has come under scrutiny by consumer advocacy organizations and regulatory agencies
in the U.S. and abroad that focus on online privacy. More specifically, these groups have voiced concern about the use of cookies and other
online tools to record an Internet user's browsing history, and the use of that information to deliver advertisements online based on inferred
interests of the Internet user. Because we rely upon access to large volumes of data, including web browsing history, primarily through cookies,
it is essential that we monitor developments in this area in the U.S. and globally, and that we engage in responsible privacy practices.
We recognize that privacy is important to consumers and advertisers, and have appointed a Chief Privacy Officer and dedicated resources
to design and oversee our privacy and data protection policies. Our privacy practices are described in our privacy policy, which explains the
type of data we collect and use to provide services to advertisers. Our privacy policy can be found on our website at
http://rocketfuel.com/privacy-policy. The information contained on, or that can be accessed through, our website is not a part of this prospectus.
We rely on anonymous data about Internet users. We do not attempt to associate this anonymous data with data that can be used to
identify real people, and we take steps not to collect and store personally identifiable information from any source. The definition of personally
identifiable information, or personal data, however, varies by country and is still evolving, and, as a result, our policy not to collect and store
personally identifiable information must be assessed in each country in which we do business. Therefore, we have to continually assess our
technology platform against an evolving legal landscape. Some European countries, for example, may consider IP addresses to be personal data
subject to the same data protection requirements as information traditionally understood to be personal data, such as name, phone number and
postal or email address. Our technology platform and data privacy practices have recently been evaluated by an independent third-party
certification provider who has certified our platform and practices as compliant with legal data protection quality standards designed to comply
with both the German Federal Data Protection Law and the EU directives related to data protection and privacy in force as of March 2013.
Our solution can deliver interest-based or online behavioral advertising which is advertising that may be delivered based in part on the
websites an Internet user has visited through a particular browser, if the publishers of those websites have allowed us to place a cookie
associated with their particular website, or webpage. We are members of industry self-regulatory organizations, including the Network
Advertising Initiative, or NAI, and the Digital Advertising Alliance, or DAA, and participate in the Self-Regulatory Program for Online
Behavioral Advertising coordinated by the DAA and enforced by both the Direct Marketing Association and the Council of Better Business
Bureaus. Similarly, in Europe we are signatories to the IAB Europe EU Framework for Online Behavioural Advertising and are members of the
European Digital Advertising Alliance, or EDAA. Both the European framework and the U.S. self-regulatory principles for Online Behavioral
Advertising require us to provide consumers with notice and choice, including the ability to opt out of interest-based advertising. Our privacy
policy offers consumers an easy, one-click opt-out mechanism. In addition to industry self-regulation, our compliance with our privacy policy
is also subject to regulation by the
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United States Federal Trade Commission which may bring enforcement actions under Section 5 of the Federal Trade Commission Act against
unfair and deceptive trade practices, including the violation of privacy policies. Outside of the United States, our privacy practices are subject
to regulation by data protection authorities in the countries in which we do business.
Legal Proceedings
We are not currently a party to any legal proceedings, litigation, or claims that could materially affect our business, results of operations,
cash flows, or financial position. We may, from time to time, be party to litigation and subject to claims incident to the ordinary course of
business. As our growth continues, we may become party to an increasing number of litigation matters and claims. The outcome of litigation
and claims cannot be predicted with certainty, and the resolution of any future matters could materially affect our future results of operations,
cash flows or financial position.
Facilities
We maintain our principal office, totaling approximately 30,000 square feet, in Redwood City, California, under a lease that expires in
2017, and we have an option to extend this lease for 60 months upon expiration. We maintain additional leased spaces in several locations,
including Chicago, El Segundo (Los Angeles), New York and San Francisco, domestically, as well as Hamburg and London, in Europe. We
maintain sales offices in other locations globally. We intend to add additional facilities as we grow in order to accommodate the expansion of
our operations in North America, Europe and elsewhere. Due to our rapidly expanding headcount, in August 2013, we entered into an operating
lease agreement for new office facilities in Northern California for our corporate headquarters, and in New York City. Otherwise, we believe
that our facilities are adequate to meet our needs for the immediate future, and that, should it be needed, we will be able to secure additional
space to accommodate any such expansion of our operations.
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MANAGEMENT
Executive Officers and Directors
The following table provides information regarding our executive officers and directors as of June 30, 2013:
Name
Age
Position(s)
George H. John
43
Richard Frankel
J. Peter Bardwick
Abhinav Gupta
Dominic Trigg
Susan L. Bostrom(1)
Ronald E. F. Codd(2)(3)
William Ericson(1)(3)
John Gardner(2)
Clark Kokich(2)(3)*
Monte Zweben(1)
49
54
38
45
52
57
54
51
61
49
Co-Founder, Chief Executive Officer and Chairman
of the Board of Directors
Co-Founder, President and Director
Chief Financial Officer
Co-Founder, VP, Engineering
VP and Managing Director, Europe
Director
Director
Director
Director
Director
Director
*
Lead independent director.
(1)
Member of our compensation committee.
(2)
Member of our audit committee.
(3)
Member of our nominating and governance committee.
Executive Officers
George H. John
Mr. John is a founder, and has served as a member of our board of directors since March 2008, as our Chief Executive Officer since May
2008, and as the Chairman of our board of directors since February 2013. Prior to co-founding Rocket Fuel, Mr. John was a senior director for
targeting and personalization at Yahoo! Inc., a digital media company, from 2005 to 2008; a director, product management at
salesforce.com, Inc., an enterprise cloud computing company, from 2003 to 2005; and held roles in engineering and sales at E.piphany, Inc., a
customer relationship management software company, from 1997 to 2002. Prior to E.piphany, Mr. John was a senior data-mining analyst in the
Global Business Intelligence Solutions division of IBM Corporation, an information technology solutions company, from 1995 to 1997.
Mr. John has also served on advisory boards of privately held companies and served as a reviewer for the National Science Foundation. He
earned his B.S., M.S., and Ph.D. with Distinction from the Computer Science Department of Stanford University. Mr. John's Ph.D. studies
were concentrated in Artificial Intelligence and Machine Learning and partially supported by a National Science Foundation fellowship. While
earning his Ph.D. he worked at NASA on cognitive architectures for autonomous spacecraft. Our board of directors believes that Mr. John
possesses specific attributes that qualify him to serve as a director, including the perspective and experience he brings as our Chief Executive
Officer, his expertise in computer science generally and Artificial Intelligence in particular, and his leadership roles in high-growth technology
and digital media organizations. Mr. John brings historical knowledge, operational expertise and continuity to our board of directors.
Richard Frankel
Mr. Frankel is a founder and has served as our President since May 2008, as our Chief Financial Officer from March 2008 to February
2009 and as a member of our board of directors since March
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2008. Prior to co-founding Rocket Fuel, Mr. Frankel served as Senior Director, Product Marketing at Yahoo! from November 2002 to January
2008, and as a general manager at DoubleClick Inc., an Internet advertising solutions company, from July 1999 to October 2002. From March
1996 to July 1999, Mr. Frankel served as Director, Customer Service at NetGravity Inc., an online marketing management company.
Mr. Frankel holds a B.S.E. in Mechanical & Aerospace Engineering from Princeton University and an M.A. in Classics from San Francisco
State University. Our board of directors believes that Mr. Frankel possesses specific attributes that qualify him to serve as a director, including
the perspective and experience he brings as our President and his work with digital media companies. In addition, Mr. Frankel brings historical
knowledge, operational expertise and continuity to our board of directors.
J. Peter Bardwick
Mr. Bardwick has served as our Chief Financial Officer since September 2011. Prior to joining us, Mr. Bardwick was Chief Financial
Officer at Zecco Holdings, an online stock brokerage, from May 2008 to January 2011. From April 2006 to November 2007, he served as Chief
Financial Officer at Reactrix Systems, Inc., a technology-driven out-of-home media company. Mr. Bardwick has previously served as Chief
Financial Officer and then Chief Executive Officer and board member of Digital Path, Inc., Chief Operating Officer and Chief Financial
Officer and board member of infoUSA.com, Chief Financial Officer of MarketWatch.com, Inc., a financial information website, Chief
Financial Officer at the Beasley Broadcast Group, VP Finance at Westwood One, Inc., Executive Vice President at Salomon Brothers and
Manager Corporate Finance with Citicorp Investment Bank. Mr. Bardwick is also a member of the board of directors and the compensation
committee of Healthcare Data Solutions, a healthcare direct-marketing company, and occasionally serves on advisory boards for private
companies. Mr. Bardwick holds a B.A. in Political Science, cum laude, and an M.B.A. from the University of Michigan.
Abhinav Gupta
Mr. Gupta is a founder and has served as our VP, Engineering since April 2008. Prior to co-founding Rocket Fuel, Mr. Gupta was a
Technical Director and subsequently an Engineering Director at Yahoo! from October 2004 to April 2008. Prior to Yahoo!, Mr. Gupta held
various positions with Oracle Corporation, a computer technology corporation, from March 1998 to August 2004, including as a Member,
Senior Member and Principal Member of Technical Staff. Mr. Gupta holds a B. Tech in Computer Science from the Indian Institute of
Technology Delhi and an M.S. in Computer Science from the University of Wisconsin.
Dominic Trigg
Mr. Trigg has served as our VP and Managing Director, Europe since January 2011. Prior to joining Rocket Fuel, Mr. Trigg was the Vice
President of International at TradeDoubler AB, a European advertising affiliate network, from December 2008 to December 2011. Prior to
TradeDoubler, Mr. Trigg was Managing Director for Infospace Europe Limited, a metasearch and private label search company, from April
2005 to December 2008, Director of Yahoo Europe Ltd.'s ad operations from September 2003 to April 2005, and Advertising Director for
MSN (UK) Limited and Hotmail Corporation from September 1998 to April 2001. He also served as an Advertising Director at Expedia, Inc.
from September 1998 to September 2000 and managed an online advertising team at BT Group plc, a telecommunications company, from June
1997 to September 1998. In addition, from 2003 to 2008, Mr. Trigg served as a member of the board of directors of Asia Digital
Holdings PLC, which subsequently changed its name to Deal Group Media Pty Limited. Mr. Trigg holds an HND in Business and Finance
from the College of Distributive Trades, London.
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Non-Employee Directors
Susan L. Bostrom
Ms. Bostrom has served as a member of our board of directors since February 2013. In addition to serving on our board, since February
2001, Ms. Bostrom has served as an independent director to various public and private companies, including (i) Varian Medical Systems, Inc.,
a manufacturer of medical devices and software, since February 2005; (ii) Cadence Design Systems, Inc., an electronic design software
company, first from February 2001 to March 2005 and then since February 2011; (iii) Marketo, Inc., a provider of software as a service
marketing automation solutions, since May 2012; and (iv) FedBid, Inc., a private company, since October 2012. Ms. Bostrom also serves as a
member of the board of directors of Stanford Hospital and Clinics and Georgetown University, the Advisory Board of the Stanford Institute for
Economic Policy Research and the Management Board of the Stanford Graduate School of Business. Earlier in her career, from January 2006
to January 2011, Ms. Bostrom served as Executive Vice President, Chief Marketing Officer, Worldwide Government Affairs of Cisco
Systems, Inc., a networking equipment provider. Prior to that, from 1997 to January 2006, Ms. Bostrom served in a number of positions at
Cisco, including Senior Vice President, Global Government Affairs and the Internet Business Solutions Group and Vice President of
Applications and Services Marketing. Ms. Bostrom holds a B.S. in marketing from the University of Illinois and an M.B.A. from the Stanford
Graduate School of Business. Our board of directors believes that Ms. Bostrom possesses specific attributes that qualify her to serve as a
director, including her extensive experience and leadership roles at a leading technology company, as well as her knowledge of marketing and
developing trends in networking and new media such as social media and information exchanges. Ms. Bostrom also brings to our board of
directors extensive boardroom experience serving on the board of directors of public and private technology companies, a hospital and a
university.
Ronald E. F. Codd
Mr. Codd has served as a member of our board of directors since February 2012. Mr. Codd has been an independent business consultant
since April 2002. From January 1999 to April 2002, Mr. Codd served as President, Chief Executive Officer and a director of Momentum
Business Applications, Inc., an enterprise software company. From September 1991 to December 1998, Mr. Codd served as Senior Vice
President of Finance and Administration and Chief Financial Officer of PeopleSoft, Inc., a provider of human resource management systems.
Mr. Codd has served on the board of directors of ServiceNow, Inc. since February 2012 and currently serves on the board of directors of three
other private companies. Mr. Codd has also served as a member of the board of directors of numerous information technology companies,
including most recently DemandTec, Inc., from March 2007 to February 2012, Interwoven, Inc. from July 1999 to April 2009, and Data
Domain, Inc., from October 2006 to July 2009. Mr. Codd holds a B.S. in Accounting from the University of California, Berkeley and an M.M.
in Finance and M.I.S. from the Kellogg Graduate School of Management at Northwestern University. Our board believes that Mr. Codd's
management experience and software industry experience, including his experience in finance and corporate governance matters, give him a
breadth of knowledge and valuable understanding of our industry that qualifies him to serve as a member of our board of directors.
William Ericson
Mr. Ericson has served as a member of our board of directors since May 2008. Mr. Ericson has been a General Partner at Mohr Davidow
Ventures LP, or MDV, a venture capital firm, since 2000, and has served as Managing Partner since 2008. Prior to joining MDV, Mr. Ericson
founded and operated Venture Law Group LLP's Seattle office from 1996 to 2000. Prior to that, Mr. Ericson practiced as a corporate and
securities attorney in Palo Alto, California, and New York, New York. Mr. Ericson currently serves as a member of the board of directors of
Pacific Biosciences of California, Inc., a
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publicly traded gene sequencing company, Northwestern University School of Law and a number of MDV's privately held portfolio
companies. Mr. Ericson holds a B.S.F.S. from the School of Foreign Service at Georgetown University and a J.D. from Northwestern
University School of Law. Our board of directors believes that Mr. Ericson possesses specific attributes that qualify him to serve as a director,
including his extensive experience working with leading technology companies as well as the substantial experience he acquired as a legal and
investment professional.
John Gardner
Mr. Gardner has served as a member of our board of directors since July 2011. Mr. Gardner has been a Managing Partner of Nokia
Growth Partners L.P., or NGP, a global venture capital investment firm, since April 2007. He currently serves as director of a number of NGP's
privately held portfolio companies, and manages the firm's digital advertising, marketing and analytics practice. Before NGP, he co-founded
BlueRun Ventures L.P., a Silicon Valley based venture capital firm, in 1999. Prior to that, he held a senior business development role at Nokia,
and practiced corporate law with the firm of Keating, Muething and Klekamp in Cincinnati, Ohio, primarily representing entrepreneurial clients
and investors. Mr. Gardner holds a B.Sc. from Miami University Oxford, Ohio, a J.D. from the University of Cincinnati College of Law and an
M.B.A. from the University of Chicago. Our board of directors believes that Mr. Gardner possesses specific attributes that qualify him to serve
as a director, including his experience as a co-founder and general partner of two global venture capital investment firms, as well as fifteen
years of operational and investment experience obtained in global markets and the mobile technology industry.
Clark Kokich
Mr. Kokich has served as a member of our board of directors since April 2011. Mr. Kokich has served as Chairman of Razorfish Inc., a
digital marketing and technology consulting firm, since 2009. Mr. Kokich has been with Razorfish for over ten years, serving in a number of
key positions from 1999 to 2009, including Chief Executive Officer and President. Before joining Razorfish, Mr. Kokich was President and
Chief Executive Officer of apparel retailer Calla Bay, Inc. from 1996 to 1998, head of sales and marketing for a division of McCaw Cellular
Communications, Inc., a telecommunications company, from 1992 to 1996, and Executive Vice President and General Manager of Cole &
Weber, Inc., an advertising company, from 1978 to 1987. Mr. Kokich has served on the board of directors of Acxiom Corporation since 2009,
and currently chairs its Technology & Innovation Committee. Mr. Kokich holds a B.S. in Finance from the University of Oregon. Our board of
directors believes that Mr. Kokich possesses specific attributes that qualify him to serve as a director, including his background in the field of
digital marketing and technology, his experience in traditional marketing and his years of management experience.
Monte Zweben
Mr. Zweben has served as a member of our board of directors since March 2010. Mr. Zweben is a founder of Splice Machine, Inc., a Big
Data database software company, and has served as its Chairman and Chief Executive Officer since April 2012. Mr. Zweben has also been the
Chairman of Clio Music, Inc., a music analysis and search engine, since June 2011. From January 2006 to June 2013, he was a co-founder and
served as the Chairman of SeeSaw Networks, Inc., a digital media company. Prior to SeeSaw, Mr. Zweben founded and served as the CEO of
Blue Martini Software, Inc., an e-commerce and marketing software company, from June 1998 to March 2005. Prior to Blue Martini, from
October 1996 to November 1997, Mr. Zweben served as Vice President and General Manger of PeopleSoft's Manufacturing Business Unit.
Earlier in his career, Mr. Zweben was the Deputy Branch Chief of the NASA Ames Research Center's Artificial Intelligence Branch.
Mr. Zweben currently serves on the Dean's Advisory Board for the School of Computer Science at Carnegie Mellon University. Mr. Zweben
holds a B.S. in Computer Science and Management from Carnegie Mellon
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University and an M.S. in Computer Science from Stanford University. Our board of directors believes that Mr. Zweben possesses specific
attributes that qualify him to serve as a director, including the perspective and experience he brings with his expertise in computer science, his
work with digital media companies and his years of management experience.
Our executive officers are appointed by our board of directors and serve until their successors have been duly elected and qualified. There
are no family relationships among any of our directors or executive officers.
Codes of Business Conduct and Ethics
Our board of directors has adopted a code of business conduct and ethics that applies to all of our employees, officers and directors,
including our Chief Executive Officer, Chief Financial Officer and other executive and senior financial officers. The full text of our code of
business conduct and ethics will be available on our website at www.rocketfuel.com. We intend to post any amendment to our code of business
conduct and ethics, and any waivers of such code for directors and executive officers, on the same website.
Board Composition
Our business affairs are managed under the direction of our board of directors, which is currently composed of eight members. Six of our
directors are independent within the meaning of the independent director guidelines of The NASDAQ Stock Market.
Our directors currently serve on the board pursuant to the voting provisions of a voting agreement between us and several of our
stockholders. This agreement will terminate upon the completion of this offering, after which there will be no further contractual obligations
regarding the election of our directors. Our current directors will continue to serve as directors until their resignations, removal or until their
successors are duly elected by the holders of our common stock.
In accordance with the terms of our amended and restated certificate of incorporation and bylaws that will be effective in connection with
the closing of this offering, our board of directors will be divided into three classes with staggered three-year terms. Our directors will be
divided among the three classes as follows:
•
the Class I directors will be John Gardner and Monte Zweben, and their terms will expire at the first annual meeting of
stockholders to be held after the completion of the offering;
•
the Class II directors will be William Ericson, Richard Frankel and Clark Kokich, and their terms will expire at the second annual
meeting of stockholders to be held after the completion of the offering; and
•
the Class III directors will be George H. John, Ronald E. F. Codd and Susan L. Bostrom, and their terms will expire at the third
annual meeting of stockholders to be held after the completion of the offering.
Each director's term will continue until the election and qualification of his or her successor, or his or her earlier death, resignation, or
removal. Any increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each
class will consist of one-third of the directors. The classification of our board of directors may have the effect of delaying or preventing
changes in control of our company.
Director Independence
In connection with this offering, we have applied to list our common stock on The NASDAQ Global Market. Under the rules of The
NASDAQ Stock Market, independent directors must comprise
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a majority of a listed company's board of directors within a specified period of time after the completion of an initial public offering. In
addition, the rules of The NASDAQ Stock Market require that, subject to specified exceptions, each member of a listed company's audit,
compensation and nominating and corporate governance committees be independent. Under the rules of The NASDAQ Stock Market, a
director will only qualify as an "independent director" if, in the opinion of that company's 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.
Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934,
as amended, or 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.
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 such director's ability to exercise independent judgment in carrying out his or her responsibilities.
As a result of this review, our board of directors has determined that Messrs. Codd, Ericson, Gardner, Kokich and Zweben and Ms. Bostrom
are "independent directors" as defined under the applicable rules and regulations of the Securities and Exchange Commission, or SEC, and the
listing requirements and rules of The NASDAQ Stock Market.
Lead Independent Director
Our corporate governance guidelines provide that one of our independent directors should serve as a lead independent director at any time
when our Chief Executive Officer serves as the Chairman of our board of directors or if the Chairman is not otherwise independent. Because
Mr. John is our Chairman, our board of directors has appointed Mr. Kokich to serve as our lead independent director. As lead independent
director, Mr. Kokich will preside over periodic meetings of our independent directors, serve as a liaison between our Chairman and the
independent directors and perform such additional duties as our board of directors may otherwise determine and delegate.
Committees of the Board of Directors
Our board of directors has established an audit committee, a compensation committee and a nominating and governance committee, each
of which have the composition and responsibilities described below. Members serve on these committees until their resignation or as otherwise
determined by our board of directors.
Audit Committee
Messrs. Codd, Gardner and Kokich, each of whom is a non-employee member of our board of directors, comprise our audit committee.
Mr. Codd is the chair of our audit committee. Our board of directors has determined that each of the members of our audit committee satisfies
the requirements for independence and financial literacy under the rules and regulations of The NASDAQ Stock Market and the SEC. Our
board of directors has also determined that Mr. Codd qualifies as an "audit committee financial expert," as defined in the SEC rules, and
satisfies the financial sophistication requirements of The NASDAQ Stock Market. The audit committee is responsible for, among other things:
•
appointing, overseeing, and if need be, terminating any independent auditor;
•
assessing the qualification, performance and independence of our independent auditor;
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•
reviewing the audit plan and pre-approving all audit and non-audit services to be performed by our independent auditor;
•
reviewing our financial statements and related disclosures;
•
reviewing the adequacy and effectiveness of our accounting and financial reporting processes, systems of internal control and
disclosure controls and procedures;
•
reviewing our overall risk management framework;
•
overseeing procedures for the treatment of complaints on accounting, internal accounting controls, or audit matters;
•
reviewing and discussing with management and the independent auditor the results of our annual audit, reviews of our quarterly
financial statements and our publicly filed reports;
•
reviewing and approving related person transactions; and
•
preparing the audit committee report that the SEC requires in our annual proxy statement.
Compensation Committee
Ms. Bostrom and Messrs. Ericson and Zweben, each of whom is a non-employee member of our board of directors, comprise our
compensation committee. Ms. Bostrom is the chair of our compensation committee. Our board of directors has determined that each member of
our compensation committee meets the requirements for independence under the rules of The NASDAQ Stock Market and the SEC and is an
"outside director" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code. The compensation
committee is responsible for, among other things:
•
reviewing the elements and amount of total compensation for all officers;
•
formulating and recommending any proposed changes in the compensation of our Chief Executive Officer for approval by the
board;
•
reviewing and approving any changes in the compensation for officers, other than our Chief Executive Officer;
•
administering our equity compensation plans;
•
reviewing annually our overall compensation philosophy and objectives, including compensation program objectives, target pay
positioning and equity compensation; and
•
preparing the compensation committee report that the SEC will require in our annual proxy statement.
Nominating and Governance Committee
Messrs. Codd, Ericson and Kokich, each of whom is a non-employee member of our board of directors, comprise our nominating and
governance committee. Mr. Ericson is the chair of our nominating and governance committee. Our board of directors has determined that each
member of our nominating and governance committee meets the requirements for independence under the rules of The NASDAQ Stock
Market. The nominating and governance committee is responsible for, among other things:
•
evaluating and making recommendations regarding the composition, organization and governance of our board of directors and its
committees;
•
identifying, recruiting and nominating director candidates to the board if and when necessary;
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•
evaluating and making recommendations regarding the creation of additional committees or the change in mandate or dissolution
of committees;
•
reviewing and making recommendations with regard to our corporate governance guidelines and compliance with laws and
regulations; and
•
reviewing and approving conflicts of interest of our directors and corporate officers, other than related person transactions
reviewed by the audit committee.
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 currently serves, or in the past year has served, as a member of the compensation committee or director (or other board committee
performing equivalent functions or, in the absence of any such committee, the entire board of directors) of any entity that has one or more
executive officers serving on our compensation committee or our board of directors.
Non-Employee Director Compensation
During 2012, our directors did not receive any cash compensation for their services as directors or as board committee members. The table
below shows equity compensation received by our non-employee directors during 2012. In August 2013, we adopted a policy with respect to
compensation payable to our non-employee directors for service as directors, which is described below and which will become effective on the
effective date of the registration statement, or the registration date, of which this prospectus forms a part.
Director Compensation Table
Name
Option Awards ($)
Ronald E. F. Codd(1)
William Ericson
John Gardner
Clark Kokich(3)
Monte Zweben(4)
$
186,059 (2) $
—
—
—
—
Total ($)
186,059
—
—
—
—
(1)
As of December 31, 2012, Mr. Codd held 100,000 shares of our common stock issued upon the early exercise of an option granted by our board of directors in
February 2012, at an exercise price of $1.07 per share. The shares are subject to our repurchase right that lapses in sixteen equal installments over a period of four
years with a vesting commencement date of February 21, 2012.
(2)
This amount represents the aggregate grant date fair value of this stock option as computed in accordance with Financial Accounting Standards Board Accounting
Standards Codification Topic 718. The assumptions used in calculating the grant date fair value of the stock option reported in this column are set forth in the
notes to our audited consolidated financial statements included elsewhere in this prospectus.
(3)
As of December 31, 2012, Mr. Kokich held 100,000 shares of our common stock issued upon the early exercise of an option granted on April 28, 2011, at an
exercise price of $1.07 per share. The shares are subject to our repurchase right that lapses in sixteen equal installments over a period of four years with a vesting
commencement date of April 28, 2011.
(4)
As of December 31, 2012, Mr. Zweben held an early exercisable option to purchase 213,866 shares of our common stock at an exercise price of $0.16 per share.
One-fourth ( 1 / 4 ) of the shares subject to the option vested on the first anniversary of the date of grant, which was March 4, 2010, and one forty-eighth ( 1 / 48 ) of
the shares subject to the option vest each month thereafter, such that all of the shares subject to the option will have vested on the fourth anniversary of the date of
grant.
Ms. Bostrom was appointed as a member of our board of directors subsequent to December 31, 2012. We have entered into an offer letter
with Ms. Bostrom pursuant to which we have agreed to pay Ms. Bostrom an annual retainer of $50,000. This compensation provision will be
superseded by the outside director compensation policy once it becomes effective. In addition, in March 2013, our compensation committee
granted Ms. Bostrom an early exercisable option to purchase 85,000 shares of
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our common stock at an exercise price of $11.21 per share. The shares subject to the option will vest in sixteen equal installments over a period
of four years with a vesting commencement date of February 6, 2013.
Outside Director Compensation Policy
In August 2013, the board of directors, upon the recommendation of our compensation committee, adopted a policy for the compensation
for our non-employee directors, or the Outside Directors, effective as of the registration date. Outside Directors will receive compensation in
the form of equity granted under the terms of our 2013 Equity Incentive Plan, or the 2013 Plan and cash, as described below:
Equity Compensation .
IPO grant. On the registration date, each Outside Director will be granted (i) an option to purchase 3,750 shares, or the IPO Option, and
(ii) 1,872 restricted stock units, or the IPO RSU Award. All of the shares underlying the IPO Option and IPO RSU Award will vest and, if
applicable, become exercisable on the day prior to our first annual meeting of stockholders following the registration date, subject to continued
service as a director through that date.
Initial award. Each person who first becomes an Outside Director after the registration date, will be granted (i) an option to purchase
shares having a grant date fair value equal to $100,000, or the Initial Option, and (ii) restricted stock units with a grant date fair value equal to
$100,000, or the Initial RSU Award. These awards will be granted on the date of the first meeting of our board of directors or compensation
committee occurring on or after the date on which the individual first became an Outside Director. The shares underlying the Initial Option and
Initial RSU Award will vest and, if applicable, become exercisable, as to one-third of the shares subject to such award on each anniversary of
the commencement of the individual's service as an Outside Director, subject to continued service as a director through the applicable vesting
date. If a director's status changes from an employee director to an Outside Director, he or she will not receive an Initial Option or Initial RSU
Award.
Annual award. On the date of each annual meeting of our stockholders, each Outside Director who has served on our board of directors
for at least the preceding six months will be granted (i) an option to purchase shares having a grant date fair value equal to $75,000, or the
Annual Option, and (ii) restricted stock units with a grant date fair value equal to $75,000, or the Annual RSU Award. All of the shares
underlying the Annual Option and Annual RSU Award will vest and, if applicable, become exercisable upon the earlier of (i) the day prior to
the next year's annual meeting of stockholders or (ii) one year from grant, subject to continued service as a director through the applicable
vesting date.
The exercise price per share of each stock option granted under the outside director compensation policy will be the fair market value of a
share of our common stock, as determined in accordance with our 2013 Plan, on the date of the option grant. With respect to the IPO Option,
Initial Option, and Annual Option, the grant date fair value is computed in accordance with the Black-Scholes option valuation methodology or
such other methodology our board of directors or compensation committee may determine. With respect to the IPO RSU Award, Initial RSU
Award and Annual RSU Award, the grant date fair value is computed based on the fair market value, as determined in accordance with our
2013 Plan, of the shares subject to the applicable award on the date of grant.
Cash compensation. Each Outside Director will receive an annual retainer of $25,000 in cash for serving on our board of directors, or the
Annual Fee. In addition to the Annual Fee, the lead independent director will be entitled to an additional annual retainer of $15,000 in cash.
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The chairperson and members of the three standing committees of our board of directors will be entitled to the following annual cash
retainers:
Board Committee
Chairperson Fee
Audit Committee
Compensation Committee
Nominating and Governance Committee
$
15,000
10,000
6,000
Member Fee
$
7,500
5,000
3,000
All cash retainers will be paid in quarterly installments to each Outside Director who has served in the relevant capacity for the
immediately preceding fiscal quarter no later than 30 days following the end of such preceding fiscal quarter. An Outside Director who has
served in the relevant capacity for only a portion of the immediately preceding fiscal quarter will receive a prorated payment of the quarterly
payment of the applicable annual cash fee. The first payment of cash retainers under the policy will be pro-rated for the service period between
the registration date and the end of the quarter in which the registration date occurred.
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EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides information regarding the compensation of our named executive officers during 2012. As an emerging
growth company, we have elected to comply with the executive compensation disclosure rules applicable to "smaller reporting companies," as
such term is defined in the rules promulgated under the Securities Act of 1933, as amended, or the Securities Act, which require compensation
disclosure for our principal executive officer and the two most highly compensated executive officers other than our principal executive officer.
Throughout this prospectus, these three officers are referred to as our "named executive officers."
Name and Principal
Position
George H. John,
Chief
Executive
Officer
Richard Frankel,
President
Abhinav Gupta,
VP,
Engineering
Salary
($)
Bonus
($)(1)
Option
Awards
($)(2)
Non-Equity
Incentive
Plan
Compensation
($)
Total
($)
300,000
25,000
3,289,280
150,000 (3)
3,764,280
280,000
27,000
2,393,865
145,000 (3)
2,845,865
254,400
3,000
1,644,640
19,743 (4)
1,921,783
(1)
Represents amounts paid as a one-time discretionary bonus to our Chief Executive Officer, President and VP, Engineering for exemplary performance during
2012.
(2)
Amounts represent the aggregate grant date fair value of stock options as computed in accordance with Financial Accounting Standards Board Accounting
Standards Codification Topic 718. The assumptions used in calculating the grant date fair value of the stock options reported in this column are set forth in the
notes to our audited consolidated financial statements included elsewhere in this prospectus. As required by rules of the SEC, the amounts shown exclude the
impact of estimated forfeitures related to service-based vesting conditions.
(3)
Represents the amounts earned and payable under our 2012 Executive Compensation Plan which were paid in January 2013.
(4)
Represents the amount earned under the 2012 MBO Policy for Mr. Gupta, which amount was paid to Mr. Gupta in January 2013.
Non-Equity Incentive Plan Compensation
We provide our named executive officers an opportunity to receive a year-end, formula-based incentive payment. The payment is based
on a target incentive amount for each named executive officer.
Non-Equity Incentive Payments for Messrs. John and Frankel
For 2012, the target incentive amount and year-end payments for Messrs. John and Frankel under our 2012 Executive Compensation Plan
were as follows:
Named Executive Officer
George H. John
Richard Frankel
Target Award
($)
75,000
70,000
Actual Award
Amount
($)
150,000
145,000
The 2012 Executive Compensation Plan provided for non-equity incentive compensation based upon our achievement of performance
goals for 2012. The performance goals were equally weighted between a revenue goal and an EBITDA goal. The threshold level of
achievement was 80% with respect to each goal. If we achieved 80% performance with respect to a particular goal, each participant received
50% of the target incentive allocated to that goal. If we achieved 100% or more performance with respect to a particular goal, then each
participant received 100% of the target incentive allocated to that goal. For achievement between threshold and target, the incentive payment
was pro-rated on a straight-line basis between 50% and 100%.
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In addition, if achievement was 130% or greater with respect to a particular performance goal, each participant received an
overachievement bonus of $37,500. For achievement between 100% and 130%, the overachievement payment was pro-rated on a straight-line
basis between $0 and $37,500.
Non-Equity Incentive Payments for Mr. Gupta
For 2012, the target incentive amount and total payments for Mr. Gupta under our 2012 MBO Policy were as follows:
Target Award
($)
Named Executive Officer
Abhinav Gupta
21,200
Actual Award
Amount
($)
19,743
The 2012 MBO Policy provided for non-equity incentive compensation based upon our achievement of performance goals for 2012 and
discretionary goals specific to Mr. Gupta that were established by the Chief Executive Officer. The actual incentive payment was weighted
30% toward achievement of our performance goals and 70% toward achievement of discretionary goals.
The performance goals were equally weighted between quarterly revenue goals and EBITDA goals. The threshold level of achievement of
the revenue goals was greater than 85%. If we achieved less than 85% of our revenue goal, Mr. Gupta would receive no portion of the target
incentive allocated to that goal. If we achieved 115% or more performance with respect to a revenue goal, then Mr. Gupta would receive 200%
of the target incentive allocated to that goal. For achievement of a revenue goal between the threshold and target, the incentive payment was
pro-rated on a straight-line basis between 0% and 200%. The threshold level of achievement of the EBITDA goals was greater than
$1.2 million beneath our quarterly EBITDA target. If we achieved quarterly EBITDA that was equal to $1.2 million beneath our quarterly
EBITDA target, Mr. Gupta would receive no portion of the target incentive allocated to that goal. If we achieved quarterly EBITDA that was
equal to or greater than our quarterly EBITDA target plus $1.2 million, then Mr. Gupta would receive 200% of that goal. For achievement of a
revenue goal between the threshold and target, the incentive payment was pro-rated on a straight-line basis between 0% and 200%.
The discretionary goals were weighted equally each quarter between (1) the management of employees and the establishment of a positive
culture, (2) maintaining systems uptime and functionality and (3) the development of new features for the platform. The level of achievement
of the discretionary goals was determined by the Chief Executive Officer.
Payments under the 2012 MBO Policy were made quarterly, on the month-end payroll following the last month of the quarter. Mr. Gupta
needed to remain our employee on the date that an incentive payment under the 2012 MBO Policy was actually paid in order to receive such
incentive payment.
Executive Employment Agreements
We have not entered into employment agreements with any of our named executive officers. Each of our named executive officers is a
party to an option agreement under the 2008 Equity Incentive Plan which provides for certain accelerated vesting in connection with a change
in control described in greater detail below under the heading "—Employee Benefit and Stock Plans."
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Outstanding Equity Awards at Fiscal Year-End
The following table presents certain information concerning equity awards held by our named executive officers as of December 31, 2012.
Option Awards
Number of Securities
Underlying
Unexercised Options (#)
Exercisable(2)
Name(1)
George H.
John
Richard
Frankel
Abhinav
Gupta
Option Exercise
Price ($)
Option Expiration Date
900,000 (3)
6.58
12/04/2022
655,000 (3)
6.58
12/04/2022
450,000 (3)
6.58
12/04/2022
(1)
Subsequent to December 31, 2012, we granted each of Messrs. John, Frankel and Gupta an early exercisable option to purchase 142,500 shares, 98,250 shares and
67,500 shares, respectively, of our common stock at an exercise price of $11.21 per share. One-fourth ( 1 / 4 ) of the shares subject to each option vest on the first
anniversary of the vesting commencement date, which is March 1, 2013, and one forty-eighth ( 1 / 48 ) of the shares subject to each option vest each month
thereafter, such that all of the shares subject to each option will have vested on the fourth anniversary of the vesting commencement date.
(2)
All of the options listed in this column are immediately exercisable for shares of restricted stock prior to vesting, subject to our repurchase right that lapses in
accordance with the same vesting schedule applicable to the option.
(3)
The option vests over four years in equal monthly installments with a vesting commencement date of March 25, 2012.
Employee Benefit and Stock Plans
2013 Equity Incentive Plan
In August 2013, our board of directors adopted a 2013 Equity Incentive Plan, or the 2013 Plan, and we expect our stockholders to approve
the 2013 Plan prior to the registration date. Subject to stockholder approval, the 2013 Plan will be effective one business day prior to the
effective date of the registration statement of which this prospectus forms a part, but is not expected to be utilized until after the completion of
this offering. Our 2013 Plan permits the grant of incentive stock options, within the meaning of Section 422 of the Code to our employees and
any parent and subsidiary corporations' employees, and for the grant of nonstatutory stock options, restricted stock, restricted stock units, stock
appreciation rights, performance units and performance shares to our employees, directors and consultants and our parent and subsidiary
corporations' employees and consultants.
Authorized shares. A total of 5,000,000 shares of our common stock have been reserved for issuance pursuant to the 2013 Plan, of which
no awards are issued and outstanding. In addition, the shares to be reserved for issuance under our 2013 Plan will also include shares subject to
stock options or similar awards granted under the 2008 Equity Incentive Plan, or the 2008 Plan, that, after the registration date, expire or
terminate without having been exercised in full and shares issued pursuant to awards granted under the 2008 Plan that after the completion of
the offering are forfeited to or repurchased by us (provided that the maximum number of shares that may be added to the 2013 Plan pursuant to
this sentence is 7,900,000 shares). In addition, shares may become available under the 2013 Plan under the following two paragraphs.
The number of shares available for issuance under the 2013 Plan will also include an annual increase on the first day of each fiscal year
beginning in 2014, equal to the least of:
•
4,000,000 shares;
•
5% of the outstanding shares of common stock as of the last day of our immediately preceding fiscal year; or
•
such other amount as our board of directors may determine.
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If an award expires or becomes unexercisable without having been exercised in full, is surrendered pursuant to an exchange program, or,
with respect to restricted stock, restricted stock units, performance units or performance shares, is forfeited or repurchased due to failure to
vest, the unpurchased shares (or for awards other than stock options or stock appreciation rights, the forfeited or repurchased shares) will
become available for future grant or sale under our 2013 Plan. With respect to stock appreciation rights, the net shares issued will cease to be
available under the 2013 Plan and all remaining shares will remain available for future grant or sale under the 2013 Plan. Shares used to pay the
exercise price of an award or satisfy the tax withholding obligations related to an award will become available for future grant or sale under our
2013 Plan. To the extent an award is paid out in cash rather than shares, such cash payment will not result in reducing the number of shares
available for issuance under our 2013 Plan.
Plan administration. Our board of directors or one or more committees appointed by our board of directors will administer our 2013
Plan. Our board of directors has appointed the compensation committee of our board of directors to administer our 2013 Plan. In the case of
awards intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the committee will
consist of two or more "outside directors" within the meaning of Section 162(m). In addition, if we determine it is desirable to qualify
transactions under the 2013 Plan as exempt under Rule 16b-3 of the Securities Exchange Act of 1934, as amended, or Rule 16b-3, such
transactions will be structured to satisfy the requirements for exemption under Rule 16b-3. Subject to the provisions of our 2013 Plan, the
administrator has the power to administer the plan, including but not limited to, the power to interpret the terms of our 2013 Plan and awards
granted under it, to create, amend and revoke rules relating to our 2013 Plan, including creating sub-plans, and to determine the terms of the
awards, including the exercise price, the number of shares subject to each such award, the exercisability of the awards and the form of
consideration, if any, payable upon exercise. The administrator also has the authority to amend existing awards to reduce or increase their
exercise price, to allow participants the opportunity to transfer outstanding awards to a financial institution or other person or entity selected by
the administrator and to institute an exchange program by which outstanding awards may be surrendered in exchange for awards of the same
type which may have a higher or lower exercise price or different terms, awards of a different type and/or cash.
Stock options. Stock options may be granted under our 2013 Plan. The exercise price of options granted under our 2013 Plan must at least
be equal to the fair market value of our common stock on the date of grant. The term of an incentive stock option may not exceed 10 years,
except that with respect to any participant who owns more than 10% of the voting power of all classes of our outstanding stock, the term must
not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. The administrator will
determine the methods of payment of the exercise price of an option, which may include cash, shares or other property acceptable to the
administrator, as well as other types of consideration permitted by applicable law. After the termination of service of an employee, director or
consultant, he or she may exercise his or her option for the period of time stated in his or her option agreement. Generally, if termination is due
to death or disability, the option will remain exercisable for 12 months. In all other cases, the option will generally remain exercisable for three
months following the termination of service. However, in no event may an option be exercised later than the expiration of its term. Subject to
the provisions of our 2013 Plan, the administrator determines the other terms of options.
Stock appreciation rights. Stock appreciation rights may be granted under our 2013 Plan. Stock appreciation rights allow the recipient to
receive the appreciation in the fair market value of our common stock between the exercise date and the date of grant. Stock appreciation rights
may not have a term exceeding 10 years. After the termination of service of an employee, director or consultant, he or she may exercise his or
her stock appreciation right for the period of time stated in his or her option agreement. However, in no event may a stock appreciation right be
exercised later than the expiration
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of its term. Subject to the provisions of our 2013 Plan, the administrator determines the other terms of stock appreciation rights, including when
such rights become exercisable and whether to pay any increased appreciation in cash or with shares of our common stock, or a combination
thereof, except that the per share exercise price for the shares to be issued pursuant to the exercise of a stock appreciation right will be no less
than 100% of the fair market value per share on the date of grant.
Restricted stock. Restricted stock may be granted under our 2013 Plan. Restricted stock awards are grants of shares of our common stock
that vest in accordance with terms and conditions established by the administrator. The administrator will determine the number of shares of
restricted stock granted to any employee, director or consultant and, subject to the provisions of our 2013 Plan, will determine the terms and
conditions of such awards. The administrator may impose whatever conditions to vesting it determines to be appropriate (for example, the
administrator may set restrictions based on the achievement of specific performance goals or continued service to us); provided, however, that
the administrator, in its sole discretion, may accelerate the time at which any restrictions will lapse or be removed. Recipients of restricted
stock awards generally will have voting and dividend rights with respect to such shares upon grant without regard to vesting, unless the
administrator provides otherwise. Shares of restricted stock that do not vest are subject to our right of repurchase or forfeiture.
Restricted stock units. Restricted stock units may be granted under our 2013 Plan. Restricted stock units are bookkeeping entries
representing an amount equal to the fair market value of one share of our common stock. Subject to the provisions of our 2013 Plan, the
administrator will determine the terms and conditions of restricted stock units, including the vesting criteria (which may include accomplishing
specified performance criteria or continued service to us) and the form and timing of payment. Notwithstanding the foregoing, the
administrator, in its sole discretion, may accelerate the time at which any restrictions will lapse or be removed.
Performance units and performance shares. Performance units and performance shares may be granted under our 2013 Plan.
Performance units and performance shares are awards that will result in a payment to a participant only if performance goals established by the
administrator are achieved or the awards otherwise vest. The administrator will establish organizational or individual performance goals or
other vesting criteria in its discretion, which, depending on the extent to which they are met, will determine the number and/or the value of
performance units and performance shares to be paid out to participants. After the grant of a performance unit or performance share, the
administrator, in its sole discretion, may reduce or waive any performance criteria or other vesting provisions for such performance units or
performance shares. Performance units shall have an initial dollar value established by the administrator prior to the grant date. Performance
shares shall have an initial value equal to the fair market value of our common stock on the grant date. The administrator, in its sole discretion,
may pay earned performance units or performance shares in the form of cash, in shares or in some combination thereof.
Outside directors. Our 2013 Plan provides that all non-employee directors are eligible to receive all types of awards (except for incentive
stock options) under the 2013 Plan. Our 2013 Plan provides that in any given fiscal year, a non-employee director may not receive under the
2013 Plan (i) cash-settled awards having a grant date fair value greater than $500,000, increased to $1,000,000 in connection with her or her
initial service; and (ii) stock-settled awards having a grant date fair value greater than $500,000, increased to $1,000,000 in connection with his
or her initial service, in each case, as grant fair value is determined under generally accepted accounting principles.
Non-transferability of awards. Unless the administrator provides otherwise, our 2013 Plan generally does not allow for the transfer of
awards and only the recipient of an award may exercise an award during his or her lifetime.
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Certain adjustments. In the event of certain changes in our capitalization, to prevent diminution or enlargement of the benefits or
potential benefits available under our 2013 Plan, the administrator will adjust the number and class of shares that may be delivered under our
2013 Plan and/or the number, class and price of shares covered by each outstanding award and the numerical share limits set forth in our 2013
Plan. In the event of our proposed liquidation or dissolution, the administrator will notify participants as soon as practicable and all awards will
terminate immediately prior to the consummation of such proposed transaction.
Merger or change in control. Our 2013 Plan provides that in the event of a merger or change in control, as defined under the 2013 Plan,
each outstanding award will be treated as the administrator determines, except that if a successor corporation or its parent or subsidiary does
not assume or substitute an equivalent award for any outstanding award, then such award will vest as to an additional 25% of the shares subject
to such award, all restrictions on an additional 25% of the shares subject to such award will lapse, all performance goals or other vesting criteria
applicable to an additional 25% of the shares subject to such award will be deemed achieved at 100% of target levels and an additional 25% of
the shares subject to such award will become fully exercisable, if applicable, for a specified period prior to the transaction. In no event will the
vesting of an award accelerate as to more than 100% of the award. The award will then terminate upon the expiration of the specified period of
time.
Amendment, termination. The administrator will have the authority to amend, suspend or terminate the 2013 Plan provided such action
will not impair the existing rights of any participant. Our 2013 Plan will automatically terminate in 2023, unless we terminate it sooner.
2008 Equity Incentive Plan, as Amended
Our board adopted and our stockholders approved our 2008 Plan, in September 2008, which was most recently amended in May 2013.
Authorized shares. Our 2008 Plan will be terminated in connection with this offering, and, accordingly, no further shares will be
available for issuance under this plan. Our 2008 Plan will continue to govern outstanding awards granted thereunder. As of June 30, 2013,
options to purchase 7,607,735 shares of our common stock remained outstanding under the 2008 Plan.
Plan administration. Our board or a committee thereof appointed by our board has the authority to administer our 2008 Plan. Currently,
our compensation committee administers the 2008 Plan. Subject to the provisions of the 2008 Plan, the administrator has the power to
determine the terms of awards, including the recipients, the number of shares subject to each award, the exercise price (if any), the fair market
value of a share of our common stock, the vesting schedule applicable to the awards, together with any vesting acceleration and the terms of the
award agreement for use under the 2008 Plan. The administrator also has the authority, subject to the terms of our 2008 Plan, to institute an
exchange program under which (i) outstanding awards may be surrendered or cancelled in exchange for awards of the same type (which may
have lower or higher exercise prices and different terms), awards of a different type and/or cash, (ii) participants would have the opportunity to
transfer any outstanding awards to a financial institution or other person or entity selected by the administrator and/or (iii) the exercise price of
an outstanding award is increased or reduced, to prescribe rules and regulations pertaining to the 2008 Plan, including establishing sub-plans
for the purposes of satisfying applicable foreign laws, and to construe and interpret the 2008 Plan and awards granted thereunder.
Stock options. The administrator may grant options. The exercise price per share of all options must equal at least 100% of the fair market
value per share of our common stock on the date of grant. The term of an option may not exceed ten years. An incentive stock option held by
an employee who owns more than 10% of the total combined voting power of all classes of our stock, or any parent or subsidiary corporations,
may not have a term in excess of five years and must have an exercise price of
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at least 110% of the fair market value per share of our common stock on the date of grant. The administrator will determine the methods of
payment of the exercise price of an option, which may include cash, shares, promissory notes, to the extent permitted by applicable law, or
certain other property or other consideration acceptable to the administrator. After the termination of service of an employee, director or
consultant, the participant may exercise his or her option, to the extent vested as of such date of termination, within thirty days of termination
or such longer period of time as stated in his or her option agreement. If termination is due to death or disability, the option will remain
exercisable, to the extent vested as of such date of termination, for six months or such longer period of time as stated in his or her option
agreement. However, in no event may an option be exercised later than the expiration of its term.
Restricted stock. Restricted stock may be granted under our 2008 Plan. Restricted stock awards are grants of shares of our common stock
that are subject to various restrictions, including restrictions on transferability and forfeiture provisions. Shares of restricted stock will vest, and
the restrictions on such shares will lapse, in accordance with terms and conditions established by the administrator. Recipients of restricted
stock awards will generally have rights equivalent to those of a stockholder with respect to such shares upon grant without regard to vesting.
Restricted stock units. Restricted stock units may be granted under our 2008 Plan. Restricted stock units are bookkeeping entries
representing an amount equal to the fair market value of one share of our common stock. The administrator determines the terms and
conditions of restricted stock units including the vesting criteria (which may include accomplishing specified performance criteria or continued
service to us) and the form and timing of payment. Notwithstanding the foregoing, the administrator, in its sole discretion may accelerate the
time at which any restrictions will lapse or be removed.
Stock appreciation rights. Stock appreciation rights may be granted under our 2008 Plan. Stock appreciation rights allow the recipient to
receive the appreciation in the fair market value of shares of our common stock between the exercise date and the date of grant. Subject to the
provisions of the 2008 Plan, the administrator determines the terms of stock appreciation rights, including when such rights become exercisable
and whether to pay any increased appreciation in cash or with shares of our common stock, or a combination thereof, except that the per share
exercise price for the shares to be issued pursuant to the exercise of a stock appreciation right will be no less than 100% of the fair market value
per share of our common stock on the date of grant.
Transferability of awards. Unless the administrator provides otherwise, our 2008 Plan generally does not allow for the transfer of awards
and only the recipient of an option may exercise such an award during his or her lifetime.
Certain adjustments. In the event of certain changes in our capitalization, to prevent diminution or enlargement of the benefits or
potential benefits available under our 2008 Plan, the administrator will adjust the number and class of shares that may be delivered under our
2008 Plan and/or the number, class and price of shares covered by each outstanding award. In the event of our proposed liquidation or
dissolution, the administrator will notify participants as soon as practicable, and all unexercised awards will terminate immediately prior to the
consummation of such proposed transaction.
Merger or change in control. Our 2008 Plan provides that in the event of a merger or change in control, as defined therein, each
outstanding award will be treated as the administrator determines, without a participant's consent, including, without limitation, that each award
be assumed or substituted for an equivalent award. For awards granted pursuant to our 2008 Plan prior to April 1, 2013, in the event that
awards are not assumed or substituted for, all restrictions on the shares subject to such award will lapse, all performance goals or other vesting
criteria applicable to such award will be
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deemed achieved at 100% of target levels and all of the shares subject to such award will fully vest and become fully exercisable, if applicable,
for a specified period prior to the transaction. The award will then terminate upon the expiration of the specified period of time. For awards
granted pursuant to the 2008 Plan on or after April 1, 2013, in the event that awards are not assumed or substituted for, all restrictions on an
additional 25% of the shares subject to such award will lapse, all performance goals or other vesting criteria applicable to an additional 25% of
the shares subject to such award will be deemed achieved at 100% of target levels and an additional 25% of the shares subject to such award
will fully vest and become fully exercisable, if applicable, for a specified period prior to the transaction. In no event will the vesting of an
award accelerate as to more than 100% of the award. The award will then terminate upon the expiration of the specified period of time.
Each option issued under our 2008 Plan is also subject to an option agreement that provides for the following accelerated vesting in
connection with a change in control, as defined in the 2008 Plan: (i) if the optionee has continuously been our employee for one year or more as
of the date of the change in control, the shares subject to the option that would normally vest in the final twelve months of the option's vesting
term will immediately vest upon the change in control and the remaining unvested portion of the option will continue to vest in accordance
with the original vesting schedule; (ii) if the optionee has continuously been our employee for less than one year as of the change of control,
then the shares subject to the option that would normally vest in the final twelve months of the option's vesting term will vest on the one year
anniversary of the optionee's commencement as our employee; and (iii) if, within twelve months following the change in control, the optionee's
status as a service provider is terminated by us or a successor corporation without cause, as defined in the option agreement, or the optionee
voluntarily resigns for good reason, as defined in the option agreement, then an additional number of shares subject to the option that would
normally vest (without taking into account any accelerated vesting under clause (ii), above) over the twelve month period following such
termination will immediately vest.
Each restricted stock unit award issued under our 2008 Plan is also subject to a restricted stock unit award agreement that provides for the
following accelerated vesting in connection with a change in control, as defined in the 2008 Plan: (i) if the restricted stock unit holder has
continuously been our employee for one year or more as of the date of the change in control, the restricted stock units that would normally vest
in the final twelve months of the restricted stock unit award's vesting term will immediately vest upon the change in control and the remaining
unvested portion of the restricted stock unit award will continue to vest in accordance with the original vesting schedule; (ii) if the restricted
stock unit award holder has continuously been our employee for less than one year as of the change in control, then the shares subject to the
restricted stock unit award that would normally vest in the final twelve months of the restricted stock unit award's vesting term will vest on the
one year anniversary of the restricted stock unit award holder's commencement as our employee; and (iii) if, within twelve months following
the change in control, the restricted stock unit award holder's status as a service provider is terminated by us or a successor corporation without
cause, as defined in the restricted stock unit award agreement, or the restricted stock unit award holder voluntarily resigns for good reason, as
defined in the restricted stock unit award agreement, then an additional number of restricted stock units subject to the restricted stock unit
award agreement that would normally vest (without taking into account any accelerated vesting under clause (ii), above) over the twelve month
period following such termination will immediately vest.
Amendment, termination. Our board of directors may amend our 2008 Plan at any time, provided that such amendment does not impair
the rights under outstanding awards without the award holder's written consent. As noted above, upon the completion of the offering, the 2008
Plan will be terminated and no further awards will be granted thereunder. All outstanding awards will continue to be governed by their existing
terms.
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2013 Employee Stock Purchase Plan
In August 2013, our board of directors adopted a 2013 Employee Stock Purchase Plan, or ESPP, and we expect our stockholders to
approve the ESPP prior to the registration date. The ESPP became effective upon its adoption by our board of directors but will not be in use
until the completion of this offering.
The ESPP includes a component that is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal
Revenue Code of 1986, as amended, or the 423 Component, and a component that does not comply with Section 423, or the Non-423
Component. For purposes of this disclosure, a reference to the "ESPP" will mean the 423 Component. Unless determined otherwise by the
administrator, each of our non-U.S. subsidiaries will participate in a separate offering under the Non-423 Component.
Authorized shares. A total of 1,000,000 shares of our common stock will be made available for sale. In addition, our ESPP provides for
annual increases in the number of shares available for issuance under the ESPP on the first day of each fiscal year beginning in fiscal 2014,
equal to the lesser of:
•
2% of the outstanding shares of our common stock on the first day of such fiscal year;
•
1,500,000 shares; or
•
such other amount as may be determined by our board of directors.
Plan administration. Our board of directors or a committee appointed by our board of directors will administer the ESPP. Our board of
directors has appointed our compensation committee to administer the ESPP. The administrator has authority to administer the plan, including
but not limited to, full and exclusive authority to interpret the terms of the ESPP, determine eligibility to participate subject to the conditions of
our ESPP as described below, and to establish procedures for plan administration necessary for the administration of the Plan, including
creating sub-plans.
Eligibility. Generally, all of our employees will be eligible to participate if they are employed by us, or any participating subsidiary, for at
least 20 hours per week and more than five months in any calendar year. However, an employee may not be granted an option to purchase
stock under the ESPP if such employee:
•
immediately after the grant would own stock constituting 5% or more of the total combined voting power or value of all classes of
our capital stock; or
•
holds rights to purchase stock under all of our employee stock purchase plans that accrue at a rate that exceeds $25,000 worth of
stock for each calendar year in which the option is outstanding.
Offering periods. Our ESPP will be intended to qualify under Section 423 of the Code, and provides for offering periods of
approximately six months. The offering periods generally start on the first trading day on or after June 1 and December 1 of each year and end
on the first trading day on or before May 31 and November 30 approximately six months later, except that the first offering period will
commence on the first trading day following the effective date of the registration statement of which this prospectus forms a part and will end
on the first trading day on or before May 31, 2014. The administrator may, in its discretion, modify the terms of future offering periods.
Payroll deductions. Our ESPP will permit participants to purchase common stock through payroll deductions of up to 15% of their
eligible compensation, which includes a participant's base straight time gross earnings, overtime and shift premium, but exclusive of payments
for incentive compensation, commissions, equity compensation, bonuses and other similar compensation. A participant may purchase a
maximum of 3,000 shares during an offering period.
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Exercise of option. Amounts deducted and accumulated by the participant are used to purchase shares of our common stock at the end of
each offering period of approximately six-months. The purchase price of the shares will be 85% of the lower of the fair market value of our
common stock on the first trading day of each offering period or on the exercise date. Subject to any policies we may adopt, participants may
end their participation at any time during an offering period, and will be paid their accrued payroll deductions that have not yet been used to
purchase shares of common stock. Participation ends automatically upon termination of employment with us.
Non-transferability. A participant may not transfer rights granted under our ESPP other than by will, the laws of descent and distribution,
or as otherwise provided under our ESPP.
Merger or change in control. In the event of our merger or change in control, as defined under the ESPP, a successor corporation may
assume or substitute for each outstanding option. If the successor corporation refuses to assume or substitute for the option, the offering period
then in progress will be shortened, and a new exercise date will be set. The administrator will notify each participant that the exercise date has
been changed and that the participant's option will be exercised automatically on the new exercise date unless prior to such date the participant
has withdrawn from the offering period.
Amendment, termination. Our ESPP will automatically terminate in 2033, unless we terminate it sooner. The administrator has the
authority to amend, suspend or terminate our ESPP, except that, subject to certain exceptions described in the ESPP, no such action may
adversely affect any outstanding rights to purchase stock under our ESPP.
Executive Incentive Compensation Plan
Our Executive Incentive Compensation Plan, or the Bonus Plan, was adopted by our board of directors in August 2013. The Bonus Plan
allows our compensation committee to provide cash incentive awards to selected employees, including our named executive officers, based
upon performance goals established by our compensation committee, provided that our board of directors will make any determinations under
the Bonus Plan relating to our Chief Executive Officer's participation in the Bonus Plan.
Under the Bonus Plan, our compensation committee (or our board of directors with respect to our Chief Executive Officer) determines the
performance goals applicable to any award, which goals may include, without limitation: attainment of research and development milestones,
bookings, business divestitures and acquisitions, cash flow, cash position, contract awards or backlog, customer renewals, customer retention
rates from an acquired company, business unit or division, earnings (which may include any calculation of earnings, including but not limited
to earnings before interest and taxes, earnings before taxes, earnings before interest, taxes, depreciation and amortization, earnings before taxes,
earnings before interest, taxes, depreciation, amortization and stock-based compensation, and net earnings), earnings per share, expenses, gross
margin, growth in stockholder value relative to the moving average of the S&P 500 Index or another index, internal rate of return, inventory
turns, inventory levels, market share, net income, net profit, net sales, new product development, new product invention or innovation, number
of customers, operating cash flow, operating expenses, operating income, operating margin, overhead or other expense reduction, product
defect measures, product release timelines, productivity, profit, return on assets, return on capital, return on equity, return on investment, return
on sales, revenue, revenue growth, sales results, sales growth, stock price, time to market, total stockholder return, working capital, and
individual objectives such as peer reviews or other subjective or objective criteria. Performance goals that include our financial results may be
determined in accordance with U.S. generally accepted accounting principles, or GAAP, or such financial results may consist of non-GAAP
financial measures and any actual results may be adjusted by the compensation committee for one-time items or unbudgeted or unexpected
items when determining whether the performance goals have been met. The goals may be on the basis of any factors the
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compensation committee determines relevant, and may be adjusted on an individual, divisional, business unit or company-wide basis. Any
criteria used may be measured on such basis as the compensation committee determines, including but not limited to, as applicable, (i) in
absolute terms, (ii) in combination with another performance goal or goals (for example, but not by way of limitation, as a ratio or matrix),
(iii) in relative terms (including, but not limited to, results for other periods, passage of time and/or against another company or companies or
an index or indices), (iv) on a per-share basis, (v) against our performance as a whole or a segment and/or (vi) on a pre-tax or after-tax basis.
The performance goals may differ from participant to participant and from award to award. The board of directors will determine the
performance goals applicable to any award granted to our Chief Executive Officer, which goals may include, without limitation, any goal listed
above.
For 2013, Mr. John's performance goals include revenue goals, EBITDA goals, and subjective goals specific to Mr. John; Mr. Frankel's
performance goals include revenue and EBITDA goals; and Mr. Gupta's performance goals include revenue goals, EBITDA goals, and
subjective goals. Any 2013 bonus under the Bonus Plan awarded to Messrs. John and Frankel will be paid annually and each has an annual
target bonus under the Bonus Plan of 50% of his annual base salary, as in effect on the last day of the year. For 2013, Mr. Gupta may receive
quarterly bonuses under the Bonus Plan, and he has a quarterly target bonus of 1 / 4 of his annual target bonus, which is 50% of Mr. Gupta's
annual base salary as in effect as of the last day of the applicable quarter.
Our compensation committee (or our board of directors with respect to awards to our Chief Executive Officer) may, in its sole discretion
and at any time, increase, reduce or eliminate a participant's actual award, and/or increase, reduce or eliminate the amount allocated to the
bonus pool for a particular performance period. The actual award may be below, at or above a participant's target award, in the compensation
committee's or board of director's discretion, as applicable. Our compensation committee, or our board of directors with respect to awards to
our Chief Executive Officer, may determine the amount of any reduction on the basis of such factors as it deems relevant, and it is not required
to establish any allocation or weighting with respect to the factors it considers.
Actual awards are paid in cash only after they are earned, which generally requires continued employment through the date a bonus is
paid. Payment of bonuses occurs as soon as administratively practicable after they are earned, but no later than the dates set forth in the Bonus
Plan.
Our board of directors and/or (other than with respect to our Chief Executive Officer) our compensation committee has the authority to
amend, alter, suspend or terminate the Bonus Plan provided such action does not impair the existing rights of any participant with respect to
any earned bonus.
401(k) Plan
We maintain a tax-qualified retirement plan that provides eligible employees with an opportunity to save for retirement on a tax
advantaged basis. All participants' interests in their deferrals vest pursuant to a top-heavy 6 year graded vesting schedule from the time of
contribution. In 2012, we made no matching contributions into the 401(k) plan. Pre-tax contributions are allocated to each participant's
individual account and are then invested in selected investment alternatives according to the participants' directions. The 401(k) plan is
intended to qualify under Sections 401(a) and 501(a) of the Code. As a tax-qualified retirement plan, contributions to the 401(k) plan and
earnings on those contributions are not taxable to the employees until distributed from the 401(k) plan, and all contributions are deductible by
us when made.
Limitation on Liability and Indemnification Matters
Our amended and restated certificate of incorporation and our amended and restated bylaws, each to be effective upon the completion of
this offering, will provide that we will indemnify our directors
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and officers, and may indemnify our employees and other agents, to the fullest extent permitted by the Delaware General Corporation Law,
which prohibits our amended and restated certificate of incorporation from limiting the liability of our directors for the following:
•
any breach of the director's duty of loyalty to us or to our stockholders;
•
acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;
•
unlawful payment of dividends or unlawful stock repurchases or redemptions; and
•
any transaction from which the director derived an improper personal benefit.
If Delaware law is amended to authorize corporate action further eliminating or limiting the personal liability of a director, then the
liability of our directors will be eliminated or limited to the fullest extent permitted by Delaware law, as so amended. Our amended and restated
certificate of incorporation does not eliminate a director's duty of care and in appropriate circumstances, equitable remedies, such as injunctive
or other forms of non-monetary relief, remain available under Delaware law. This provision also does not affect a director's responsibilities
under any other laws, such as the federal securities laws or other state or federal laws. Under our amended and restated bylaws, we will also be
empowered to purchase insurance on behalf of any person whom we are required or permitted to indemnify.
In addition to the indemnification required in our amended and restated certificate of incorporation and amended and restated bylaws, we
have entered into indemnification agreements with each of our current directors, executive officers and certain key employees. These
agreements will provide indemnification for certain expenses and liabilities incurred in connection with any action, suit, proceeding, or
alternative dispute resolution mechanism, or hearing, inquiry, or investigation that may lead to the foregoing, to which they are a party, or are
threatened to be made a party, by reason of the fact that they are or were a director, officer, employee, agent, or fiduciary of our company, or
any of our subsidiaries, by reason of any action or inaction by them while serving as an officer, director, agent, or fiduciary, or by reason of the
fact that they were serving at our request as a director, officer, employee, agent, or fiduciary of another entity. In the case of an action or
proceeding by, or in the right of, our company or any of our subsidiaries, no indemnification will be provided for any claim where a court
determines that the indemnified party is prohibited from receiving indemnification. We believe that these bylaw provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors and officers. We also maintain directors' and officers' liability
insurance.
The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and amended and
restated bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. They may also
reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful, might benefit us and our
stockholders. A stockholder's investment may be harmed to the extent we pay the costs of settlement and damage awards against directors and
officers pursuant to these indemnification provisions. Insofar as we may provide indemnification for liabilities arising under the Securities Act
to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion
of the SEC, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. There is no
pending litigation or proceeding naming any of our directors or officers as to which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification by any director or officer.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We describe below transactions, and series of related transactions, since January 1, 2010, to which we were or will be a party, in which:
•
the amounts involved exceeded or will exceed $120,000; and
•
any of our directors, executive officers, or beneficial holders of more than 5% of any class of our capital stock, or their immediate
family members, had or will have a direct or indirect material interest.
Other than as described below, there has not been, nor is there any currently proposed, transaction or series of related transactions to
which we have been or will be a party other than compensation arrangements, which are described where required under the headings
"Management—Director Compensation Table" and "Executive Compensation."
Equity Financings
Series A Preferred Stock Transaction
In January 2010, we sold an aggregate of 215,377 shares of our Series A preferred stock to Labrador Ventures V-B, L.P., pursuant to a
subsequent closing of our Series A preferred stock financing, at a purchase price per share of $0.9286, for an aggregate purchase price of
approximately $200,000. Labrador Ventures V-B, L.P. holds more than 5% of our outstanding capital stock.
Series B Preferred Stock Transaction
In August 2010, we sold an aggregate of 4,811,855 shares of our Series B preferred stock at a purchase price per share of $2.0782, for an
aggregate purchase price of approximately $10.0 million. The following table summarizes purchases of our Series B preferred stock by persons
who hold more than 5% of our outstanding capital stock:
Shares of
Series B
Preferred Stock
Name of Stockholder
Nokia Growth Partners II, L.P.(1)
MDV IX, L.P., as nominee for MDV IX, L.P. AND MDV
ENF IX, L.P.(2)
Labrador Ventures V-B, L.P.
Entities affiliated with Northgate Capital(3)
Total Purchase
Price ($)
2,405,928
5,000,000
1,684,149
360,889
360,889
3,499,998
750,000
750,000
(1)
John Gardner, a member of our board of directors, is a partner of Nokia Growth Partners.
(2)
William Ericson, a member of our board of directors, is a partner of Mohr Davidow Ventures, or MDV.
(3)
Affiliates of Northgate Capital holding our securities whose shares are aggregated for purposes of reporting share ownership information include NCD Investors,
A Delaware Multiple Series LLC, NCD Partners VII, L.P. and NCD SWIB Opportunities, L.P.
Series C Preferred Stock Transaction
In March 2011, we sold an aggregate of 1,116,030 shares of our Series C preferred stock at a purchase price per share of $5.869, for an
aggregate purchase price of approximately $6.6 million. The
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following table summarizes purchases of our Series C preferred stock by persons who hold more than 5% of our outstanding capital stock:
Shares of
Series C
Preferred
Stock
Name of Stockholder
Entities affiliated with Northgate Capital
MDV IX, L.P., as nominee for MDV IX, L.P. AND MDV ENF
IX, L.P.
Labrador Ventures V-B, L.P.
Nokia Growth Partners II, L.P.
Total Purchase
Price ($)
425,966
2,499,994
340,773
221,502
119,270
1,999,997
1,299,995
699,996
Series C-1 Preferred Stock Transaction
From April 2012 to June 2012, we sold an aggregate of 2,932,675 shares of our Series C-1 preferred stock at a purchase price per share of
$11.7640, for an aggregate purchase price of approximately $34.5 million. The following table summarizes purchases of our Series C-1
preferred stock by persons who hold more than 5% of our outstanding capital stock:
Shares of
Series C-1
Preferred Stock
Name of Stockholder
Entities affiliated with Northgate Capital
MDV IX, L.P., as nominee for MDV IX, L.P. AND MDV ENF
IX, L.P.
Nokia Growth Partners II, L.P.
Total Purchase
Price ($)
1,275,076
14,999,994
255,015
170,010
2,999,996
1,999,998
Investors' Rights Agreement
We are party to an investors' rights agreement which provides that certain holders of our common stock and convertible preferred stock,
including our CEO, President and each of the holders of 5% of our capital stock and entities affiliated with certain of our directors, have certain
registration rights, including the right to demand that we file a registration statement or request that their shares be covered by a registration
statement that we are otherwise filing. For a more detailed description of these registration rights, see "Description of Capital
Stock—Registration Rights."
Indemnification Agreements
We have entered into indemnification agreements with each of our current directors, executive officers and certain key employees. The
indemnification agreements and our amended and restated certificate of incorporation and amended and restated bylaws require us to indemnify
our directors and officers to the fullest extent permitted by Delaware law. See "Executive Compensation—Limitation on Liability and
Indemnification Matters."
Policies and Procedures for Related Party Transactions
We have adopted a formal written policy providing that our audit committee will be responsible for reviewing "related party transactions,"
which are transactions (i) in which we are or will be a participant, (ii) in which the aggregate amount involved exceeds or may be expected to
exceed $120,000, or such lower threshold as the audit committee may determine and (iii) in which a related person has or will have a direct or
indirect material interest. For purposes of this policy, a related person will be defined as a director, nominee for director, executive officer, or
greater than 5% beneficial owner of our common stock and their immediate family members. Under this policy, all related party transactions
may be consummated or continued only if approved or ratified by our audit
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committee. All of the transactions described above were entered into after presentation, consideration and approval by our board of directors.
The Audit Committee also considered our transactions with Razorfish Inc., or Razorfish, an advertising agency, because Mr. Kokich, one
of our directors, is an employee of Razorfish. We have entered into commercial dealings with Razorfish or its affiliates that we consider
arms-length on terms that are consistent with similar transactions with our other similarly situated advertising agencies. We entered into these
commercial dealings in the ordinary course of our business. Our relationship with Razorfish commenced prior to the date on which Mr. Kokich
became a member of our board of directors. Our board of directors determined that Mr. Kokich does not and did not have a direct or indirect
material interest in any such commercial dealings. Mr. Kokich is not in a control relationship with respect to Razorfish, he has no influence or
involvement in the negotiations of any transactions and holds no ownership interest in Razorfish. His role as chairman for Razorfish is a
non-executive role, and does not meet the definition of executive officer for the purpose of considering these transactions under the applicable
standards.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the beneficial ownership of our common stock as of June 30, 2013, as
adjusted to reflect the sale of common stock in this offering assuming full exercise of the underwriters' over-allotment option being offered by
the selling stockholders, for:
•
each of our directors;
•
each of our named executive officers;
•
all of our current directors and executive officers as a group;
•
each person, or group of affiliated persons, who beneficially owned more than 5% of our common stock; and
•
all selling stockholders.
We have determined beneficial ownership in accordance with the rules of the SEC, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Except as indicated by the footnotes below, we believe, based on information furnished to us, that
the persons and entities named in the table below have sole voting and sole investment power with respect to all shares of common stock that
they beneficially owned, subject to applicable community property laws.
Applicable percentage ownership is based on 28,493,777 shares of common stock outstanding as of June 30, 2013, assuming automatic
conversion of our convertible preferred stock into common stock and the automatic conversion of a warrant into shares of common stock in
connection with the completion of the offering. In computing the number of shares of common stock beneficially owned by a person and the
percentage ownership of such person, we deemed to be outstanding all shares of common stock subject to options held by the person that are
currently exercisable or exercisable within 60 days of June 30, 2013. However, we did not deem such shares outstanding for the purpose of
computing the percentage ownership of any other person.
Unless otherwise indicated, the address of each beneficial owner listed in the table below is c/o Rocket Fuel Inc., 350 Marine Parkway,
Marina Park Center, Redwood City, CA 94065.
Beneficial Ownership
Prior to this Offering
Beneficial Ownership
After this Offering
Shares Being
Offered
Name of Beneficial
Owner+
Directors and
Executive
Officers:
George H. John(1)
Richard Frankel(2)
Abhinav Gupta(3)
Susan L. Bostrom(4)
Ronald E. F.
Codd(5)
William Ericson(6)
John Gardner(7)
Clark Kokich(8)
Monte Zweben(9)
All current directors
and executive
officers as a
group (11
persons)(10)
Other 5%
Stockholders:
MDV IX, L.P., as
Number
Percent
3,602,301
3,009,917
2,189,167
85,000
12.2 %
10.3 %
7.6 %
*
100,000
11,433,501
2,695,208
100,000
213,866
*
40.1 %
9.5 %
*
*
23,853,960
75.7 %
11,433,501
40.1 %
Number
Percent
nominee for
MDV IX, L.P.
and MDV ENF
IX, L.P.(11)
Nokia Growth
Partners
II, L.P.(12)
Entities affiliated
with Northgate
Capital(13)
Labrador Ventures
V-B, L.P.(14)
Other Selling
Stockholders:
2,695,208
9.5 %
2,061,931
7.2 %
1,521,397
5.3 %
*
Represents beneficial ownership of less than one percent (1%).
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+
Options to purchase shares of our capital stock included in this table are generally early exercisable. To the extent any shares issued upon the early exercise of an
option remain unvested as of a given date, such shares will remain subject to a right of repurchase held by us.
(1)
Consists of (i) 2,559,801 shares held of record by Mr. John and (ii) 1,042,500 shares issuable pursuant to outstanding stock options exercisable within 60 days of
June 30, 2013, of which 318,750 shares were fully vested as of such date.
(2)
Consists of (i) 2,256,667 shares held of record by Mr. Frankel and (ii) 753,250 shares issuable pursuant to outstanding stock options exercisable within 60 days of
June 30, 2013, of which 231,979 shares were fully vested as of such date.
(3)
Consists of (i) 1,671,667 shares held of record by Mr. Gupta and (ii) 517,500 shares issuable pursuant to outstanding stock options exercisable within 60 days of
June 30, 2013, of which 159,375 shares were fully vested as of such date.
(4)
Consists of 85,000 shares issuable pursuant to an outstanding stock option exercisable by Ms. Bostrom within 60 days of June 30, 2013, of which 10,625 shares
were fully vested as of such date.
(5)
These shares were issued upon early exercise of a stock option. As of 60 days following June 30, 2013, 62,500 of these shares remain subject to further vesting.
We have a right to repurchase any unvested shares at the original exercise price if Mr. Codd ceases to provide services to us prior to the date on which all such
shares have vested.
(6)
Consists of the shares held by MDV (as defined below) as disclosed in footnote (11) below. Mr. Ericson is a Managing Director of Ninth MDV Partners, L.L.C.
and, as such, may be deemed to share voting and investment power with respect to all shares held by MDV.
(7)
Consists of the shares held by Nokia (as defined below) as disclosed in footnote (12) below. Mr. Gardner is a Managing Member of N.G. Partners II, L.L.C. and,
as such, may be deemed to share voting and investment power with respect to all shares held by Nokia.
(8)
These shares were issued upon early exercise of a stock option. As of 60 days following June 30, 2013, 43,750 of these shares remain subject to further vesting.
We have a right to repurchase any unvested shares at the original exercise price if Mr. Kokich ceases to provide services to us prior to the date on which all such
shares have vested.
(9)
Consists of 213,866 shares issuable pursuant to an outstanding stock option exercisable by Mr. Zweben within 60 days of June 30, 2013, of which 182,677 shares
were fully vested as of such date.
(10)
Consists of (i) 20,816,844 shares beneficially owned by our current directors and officers, 106,250 of which may be repurchased by us at the original exercise
price within 60 days of June 30, 2013, and (ii) 3,037,116 shares issuable pursuant to outstanding stock options exercisable within 60 days of June 30, 2013, of
which 1,127,885 shares were fully vested as of such date.
(11)
Consists of 11,433,501 shares held of record by MDV IX, L.P. as nominee for MDV IX, L.P. and MDV ENF IX, L.P., or MDV. Ninth MDV Partners, L.L.C. is
the General Partner of MDV. William Ericson and Jon Feiber, the Managing Directors of Ninth MDV Partners, L.L.C., may be deemed to share voting and
investment power with respect to the shares held of record by MDV. The address for this entity is 3000 Sand Hill Road, Bldg. 3, Suite 290, Menlo Park, CA
94025, Attention: William Ericson.
(12)
Consists of 2,695,208 shares held of record by Nokia Growth Partners II, L.P., or Nokia. N.G. Partners II, LLC is the General Partner of Nokia. John Gardner and
Paul Asel, the Managing Members of N.G. Partners II, LLC, may be deemed to share voting and investment power with respect to the shares held of record by
Nokia. The address for this entity is 545 Middlefield Road, Suite 210, Menlo Park, CA 94025, Attention: John Gardner.
(13)
Consists of (i) 908,261 shares held of record by NCD Investors, a Delaware Multiple Series LLC, (ii) 850,051 shares held of record by NCD Partners VII, L.P.
and (iii) 303,619 shares held of record by NCD SWIB Opportunities, L.P., or the Northgate Entities. Redstone Management, LLC is the Managing Member of
NCD Investors, a Delaware Multiple Series LLC, NCD Management VII, L.L.C. is the General Partner of NCD Partners VII, L.P. and NCD SWIB
Management, LLC is the General Partner of NCD SWIB Opportunities, L.P. Brent Jones, Mark Harris, Jared Stone, Thomas Vardell and Hosein
Khajeh-Hosseiny, the Managing Members of each of Redstone Management, LLC, NCD Management VII, L.L.C. and NCD SWIB Management, LLC, may be
deemed to share voting and investment power with respect to the shares held of record by the Northgate Entities. The address for these entities is 649 San Ramon
Valley Boulevard, Danville, CA 94526, Attention: Brent Jones.
(14)
Consists of 1,521,397 shares held of record by Labrador Ventures V-B, L.P., or Labrador. Labrador Ventures Management V-B, LLC is the General Partner of
Labrador. Larry Kubal and Stuart Davidson, the managing members of Labrador Ventures Management V-B, LLC, may be deemed to share voting and
investment power with respect to the shares held of record by Labrador. The address for this entity is 101 University Avenue, 4th Floor, Palo Alto, CA 94301,
Attention: Larry Kubal.
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DESCRIPTION OF CAPITAL STOCK
General
The following is a summary of the rights of our common stock and preferred stock and certain provisions of our amended and restated
certificate of incorporation and amended and restated bylaws as they will be in effect upon the completion of this offering. This summary does
not purport to be complete and is qualified in its entirety by the provisions of our amended and restated certificate of incorporation and
amended and restated bylaws, copies of which have been filed as exhibits to the registration statement of which this prospectus is a part.
Immediately following the completion of this offering, our authorized capital stock will consist of 1,100,000,000 shares, with a par value
of $0.001 per share, of which:
•
1,000,000,000 shares are designated as common stock; and
•
100,000,000 shares are designated as preferred stock.
As of June 30, 2013, we had outstanding 28,493,777 shares of common stock, held by 153 stockholders of record, assuming the automatic
conversion of all outstanding shares of our convertible preferred stock into common stock and the automatic conversion of a warrant into
shares of common stock effective immediately prior to the completion of this offering. In addition, as of June 30, 2013, we had outstanding
options to acquire 7,607,735 shares of our common stock and a warrant to purchase 104,997 shares of our common stock, assuming the
automatic conversion of the warrant exercisable for shares of convertible preferred stock into a warrant exercisable for shares of our common
stock as of immediately prior to completion of this offering.
Common Stock
The holders of common stock are entitled to one vote per share on all matters submitted to a vote of our stockholders and do not have
cumulative voting rights. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may
elect all of the directors standing for election. Subject to preferences that may be applicable to any preferred stock outstanding at the time, the
holders of outstanding shares of common stock are entitled to receive ratably any dividends declared by our board of directors out of assets
legally available. See the section entitled "Dividend Policy." Upon our liquidation, dissolution, or winding up, holders of our common stock are
entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any then-outstanding shares of
preferred stock. Holders of common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock.
Preferred Stock
After the completion of this offering, no shares of preferred stock will be outstanding. Pursuant to our amended and restated certificate of
incorporation, our board of directors will have the authority, without further action by the stockholders, to issue from time to time up to
100,000,000 shares of preferred stock in one or more series. Our board of directors may designate the powers, designations, preferences, and
relative participation, optional or other rights, if any, and the qualifications, limitations or restrictions thereof, including dividend rights,
conversion rights, voting rights, redemption rights, liquidation preference, sinking fund terms and the number of shares constituting any series
or the designation of any series. The issuance of preferred stock could have the effect of restricting dividends on the common stock, diluting the
voting power of the common stock, impairing the liquidation rights of the common stock, or delaying, deterring, or preventing a change in
control. Such issuance could have the effect of decreasing the market price of the common stock. We currently have no plans to issue any
shares of preferred stock.
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Warrants
As of June 30, 2013, a warrant to purchase 104,997 shares of our Series A preferred stock at an exercise price of $0.9286 per share was
outstanding. Upon the completion of this offering, this warrant will become exercisable for the same number of shares of common stock. The
warrant contains provisions for the adjustment of the exercise price and the number of shares issuable upon the exercise of the warrant in the
event of certain stock dividends, stock splits, reorganizations, reclassifications and consolidations. The holder of the shares issuable upon
exercise of the warrant is entitled to piggyback registration rights with respect to such shares as described in greater detail under the heading
"—Registration Rights."
Registration Rights
Following the completion of this offering, the holders of shares of our convertible preferred stock or their permitted transferees are entitled
to certain rights with respect to the registration of these shares under the Securities Act. These rights are provided under the terms of an
investors' rights agreement between us and the holders of these shares, which was entered into in connection with our convertible preferred
stock financings, and include demand registration rights, piggyback registration rights and Form S-3 registration rights, subject to certain
exceptions. In any registration made pursuant to such investors' rights agreement, all fees, costs and expenses of underwritten registrations will
be borne by us, and all selling expenses, including estimated underwriting discounts and selling commissions, will be borne by the holders of
the shares being registered.
The registration rights terminate three years following the completion of this offering or, with respect to any particular stockholder, at such
time that the stockholder can sell all of its shares during any three month period pursuant to Rule 144 of the Securities Act.
Demand Registration Rights
Following the completion of this offering, the holders of an aggregate of 28,011,094 shares of our common stock, or their permitted
transferees, are entitled to certain demand registration rights. Under the terms of the investors' rights agreement, we will be required, upon the
written request at any time more than 180 days after the completion of this offering of holders of at least 50% of the shares that are entitled to
registration rights under the investors' rights agreement, to register, as soon as practicable, all or a portion of these shares for public resale. We
are required to effect only two registrations pursuant to this provision of the investors' rights agreement. Such request for registration must
cover a number of shares with an anticipated aggregate offering price of $10,000,000 (exclusive of underwriters' discounts and commissions).
We will not be required to effect a demand registration during the period beginning 90 days prior to the filing and 180 days following the
effectiveness of a registration statement relating to a public offering of our securities.
Piggyback Registration Rights
Following the completion of this offering, the holders of an aggregate of 28,277,624 shares of our common stock or their permitted
transferees are entitled to certain piggyback registration rights. If we register any of our securities for our own account, after the completion of
this offering, the holders of these shares are entitled to include their shares in the registration. Both we and the underwriters of any underwritten
offering have the right to limit the number of shares registered by these holders for marketing reasons, subject to limitations set forth in the
investors' rights agreement.
Form S-3 Registration Rights
Following the completion of this offering, the holders of an aggregate of 28,172,627 shares of our common stock or their permitted
transferees are also entitled to certain Form S-3 registration rights. If
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we are eligible to file a registration statement on Form S-3, these holders have the right, upon their written request, to have such shares
registered by us if the proposed aggregate offering price of such shares is at least $1,000,000, subject to exceptions set forth in the investors'
rights agreement.
Anti-Takeover Effects of Delaware Law and Our Amended and Restated Certificate of Incorporation and Amended and Restated
Bylaws
Our amended and restated certificate of incorporation and amended and restated bylaws to be effective in connection with the completion
of this offering will contain provisions that could have the effect of delaying, deferring, or discouraging another party from acquiring control of
us. These provisions and certain provisions of Delaware law, which are summarized below, could discourage takeovers, coercive or otherwise.
These provisions 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.
Undesignated Preferred Stock
As discussed above under "—Preferred Stock," our board of directors will have the ability to designate and issue preferred stock with
voting or other rights or preferences that could deter hostile takeovers or delay changes in our control or management.
Limits on Ability of Stockholders to Act by Written Consent or Call a Special Meeting
Our amended and restated certificate of incorporation will provide that our stockholders may not act by written consent. This limit on the
ability of stockholders to act by written consent may lengthen the amount of time required to take stockholder actions. As a result, the holders
of a majority of our capital stock would not be able to amend the amended and restated bylaws or remove directors without holding a meeting
of stockholders called in accordance with the amended and restated bylaws.
In addition, our amended and restated bylaws will provide that special meetings of the stockholders may be called only by the chairman of
the board, the chief executive officer, the president (in the absence of a chief executive officer), or our board of directors. A stockholder may
not call a special meeting, which may delay the ability of our stockholders to force consideration of a proposal or for holders controlling a
majority of our capital stock to take any action, including the removal of directors.
Requirements for Advance Notification of Stockholder Nominations and Proposals
Our amended and restated bylaws will establish advance notice procedures with respect to stockholder proposals and the nomination of
candidates for election as directors, other than nominations made by or at the direction of our board of directors or a committee of the board of
directors. These advance notice procedures may have the effect of precluding the conduct of certain business at a meeting if the proper
procedures are not followed and may also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect its own slate
of directors or otherwise attempt to obtain control of our company.
Board Classification
Our board of directors will be divided into three classes. The directors in each class will serve for a three-year term, one class being
elected each year by our stockholders. This system of electing and removing directors may tend to discourage a third party from making a
tender offer or otherwise attempting to obtain control of us, because it generally makes it more difficult for stockholders to replace a majority
of the directors.
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Delaware Anti-takeover Statute
We will be subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. In general,
Section 203 prohibits a publicly held Delaware corporation from engaging, under certain circumstances, in a business combination with an
interested stockholder for a period of three years following the date the person became an interested stockholder unless:
•
prior to the date of the transaction, our board of directors approved either the business combination or the transaction that resulted
in the stockholder becoming an interested stockholder;
•
upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the time the transaction 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
•
at or subsequent to the date of the transaction, the business combination is approved by our board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2 / 3 % 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 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 corporation's 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 Section 203 may discourage attempts that might result in a premium over the market price for the shares of common stock held by
stockholders.
The provisions of Delaware law and the provisions of our amended and restated certificate of incorporation and amended and restated
bylaws could have the effect of discouraging others from attempting hostile takeovers and as a consequence, they might also inhibit temporary
fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover attempts. These provisions might
also have the effect of preventing changes in our management. It is also possible that these provisions could make it more difficult to
accomplish transactions that stockholders might otherwise deem to be in their best interests.
Transfer Agent and Registrar
Upon the completion of this offering, the transfer agent and registrar for our common stock will be Computershare Trust Company, N.A.
The transfer agent's address is 250 Royall Street, Canton, Massachusetts 02021, and its telephone number is (877) 373-6374.
Exchange Listing
We have applied to list our common stock on The NASDAQ Global Market under the symbol "FUEL".
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for shares of our common stock. Future sales of substantial amounts of shares of
common stock, including shares issued upon the exercise of outstanding options, in the public market after this offering, or the possibility of
these sales occurring, could adversely affect the prevailing market price for our common stock or impair our ability to raise equity capital.
Upon the completion of this offering, a total of
shares of common stock will be outstanding, assuming the automatic
conversion of all outstanding shares of preferred stock into shares of common stock in connection with the completion of this offering.
All
shares of common stock sold in this offering by us, plus any shares sold by the selling stockholders upon exercise of the
underwriters' over-allotment option, will be freely tradable in the public market without restriction or further registration under the Securities
Act of 1933, or the Securities Act, unless these shares are held by "affiliates," as that term is defined in Rule 144 under the Securities Act.
The remaining
shares of common stock will be "restricted securities," as that term is defined in Rule 144 under the
Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an
exemption from registration under Rules 144 or 701 under the Securities Act, which are summarized below.
Subject to the lock-up agreements described below and the provisions of Rules 144 and 701 under the Securities Act, these restricted
securities will be available for sale in the public market beginning more than 180 days after the date of this prospectus.
Rule 144
In general, under Rule 144 as currently in effect, once we have been subject to public company reporting requirements 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 such shares without complying with the manner of sale, volume limitation, or notice provisions of
Rule 144, subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares
proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then such person is entitled to
sell such shares without complying with any of the requirements of Rule 144.
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 agreements described below, within any three-month period beginning 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of:
•
1% of the number of shares of common stock then outstanding, which will equal approximately
after this offering; or
shares immediately
•
the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on
Form 144 with respect to such sale.
Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public information about us.
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Rule 701
Rule 701 generally allows a stockholder who purchased shares of our common stock pursuant to a written compensatory plan or contract
and who is not deemed to have been one of our affiliates during the immediately preceding 90 days 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 our affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period
requirements of Rule 144. However, all holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before
selling such shares pursuant to Rule 701.
Lock-Up Agreements
We, the selling stockholders, all of our directors and officers and the holders of substantially all of our common stock, or securities
exercisable for or convertible into our common stock outstanding immediately prior to this offering have agreed that, without the prior written
consent of Credit Suisse Securities (USA) LLC and Citigroup Global Markets Inc., on behalf of the underwriters, we and they will not, during
the period ending 180 days after the date of this prospectus:
•
offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of common stock, capital stock, or any
securities convertible into or exchangeable or exercisable for shares of common stock or other capital stock;
•
make any demand for or exercise any right with respect to the registration of any shares of common stock or other such securities;
or
•
enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership
of our common stock;
whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise, or
publicly disclose the intention to make any such offer, sale, pledge or disposition. This agreement is subject to certain exceptions. See
"Underwriting" for additional information.
Registration Rights
Upon the completion of this offering, the holders of 28,277,624 shares of common stock or their transferees will be entitled to various
rights with respect to the registration of these shares under the Securities Act. Registration of these shares under the Securities Act would result
in these shares becoming fully tradable without restriction under the Securities Act immediately upon the effectiveness of the registration,
except for shares held by affiliates. See "Description of Capital Stock—Registration Rights" for additional information.
Registration Statements on Form S-8
Upon the completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register all of the
shares of common stock issued or reserved for issuance under our equity incentive plans. Shares covered by this registration statement will be
eligible for sale in the public market, upon the expiration or release from the terms of the lock-up agreements and subject to vesting of such
shares.
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a summary of the material U.S. federal income tax consequences to non-U.S. holders (as defined below) of the ownership
and disposition of our common stock, but does not purport to be a complete analysis of all the potential tax considerations relating thereto. This
summary is based upon the provisions of the Internal Revenue Code of 1986, or the Code, U.S. Treasury regulations promulgated thereunder,
administrative rulings and judicial decisions, all as of the date hereof. These authorities may be changed, possibly retroactively, so as to result
in U.S. federal income tax consequences different from those set forth below. We have not sought, and will not seek, any ruling from the
Internal Revenue Service, or the IRS, with respect to the tax consequences discussed herein, and there can be no assurance that the IRS will not
take a position contrary to the tax consequences discussed below or that any position taken by the IRS would not be sustained.
This summary also does not address the tax considerations arising under the laws of any non-U.S., state or local jurisdiction, the potential
application of Medicare contribution tax or any tax considerations under U.S. federal gift and estate tax laws, except to the limited extent set
forth below. In addition, this discussion does not address tax considerations applicable to an investor's particular circumstances or to investors
that may be subject to special tax rules, including, without limitation:
•
banks, insurance companies or other financial institutions;
•
persons subject to the alternative minimum tax;
•
tax-exempt organizations;
•
controlled foreign corporations, passive foreign investment companies and corporations that accumulate earnings to avoid U.S.
federal income tax;
•
dealers in securities or currencies;
•
traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;
•
persons that own, or are deemed to own, more than five percent of our capital stock (except to the extent specifically set forth
below);
•
certain former citizens or long-term residents of the United States;
•
persons who hold our common stock as a position in a hedging transaction, "straddle," "conversion transaction" or other risk
reduction transaction;
•
persons who do not hold our common stock as a capital asset within the meaning of Section 1221 of the Code; or
•
persons deemed to sell our common stock under the constructive sale provisions of the Code.
In addition, if a partnership or entity classified as a partnership for U.S. federal income tax purposes holds our common stock, the tax
treatment of a partner generally will depend on the status of the partner and upon the activities of the partnership. Accordingly, partnerships
that hold our common stock and partners in such partnerships, should consult their tax advisors.
You are urged to consult your tax advisor with respect to the application of the U.S. federal income tax laws to your particular
situation, as well as any tax consequences of the purchase, ownership and disposition of our common stock arising under the U.S.
federal estate or gift tax rules or under the laws of any state, local, non-U.S. or other taxing jurisdiction or under any applicable tax
treaty .
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Non-U.S. Holder Defined
For purposes of this discussion, you are a non-U.S. holder if you are any holder other than:
•
a partnership or entity classified as a partnership for U.S. federal-tax purposes;
•
an individual citizen or resident of the United States (for tax purposes);
•
a corporation or other entity taxable as a corporation created or organized in the United States or under the laws of the United
States or any political subdivision thereof;
•
an estate whose income is subject to U.S. federal income tax regardless of its source; or
•
a trust (x) whose administration is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who
have the authority to control all substantial decisions of the trust or (y) which has made an election to be treated as a U.S. person.
Distributions
We have not made any distributions on our common stock and do not intend to do so in the foreseeable future. However, if we do make
distributions on our common stock, those payments will constitute dividends for U.S. tax purposes to the extent paid from our current or
accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those distributions exceed both our
current and our accumulated earnings and profits, they will constitute a return of capital and will first reduce your basis in our common stock,
but not below zero, and then will be treated as gain from the sale of stock. See "—Gain on Disposition of Common Stock."
Any dividend paid to you generally will be subject to U.S. withholding tax either at a rate of 30% of the gross amount of the dividend or
such lower rate as may be specified by an applicable income tax treaty. In order to receive a reduced treaty rate, you must provide us with an
IRS Form W-8BEN or other applicable version of IRS Form W-8 certifying qualification for the reduced rate. A non-U.S. holder of shares of
our common stock eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any excess
amounts withheld by filing an appropriate claim for refund with the IRS. If the non-U.S. holder holds the stock through a financial institution or
other agent acting on the non-U.S. holder's behalf, the non-U.S. holder will be required to provide appropriate documentation to the agent,
which then will be required to provide certification to us or our paying agent, either directly or through other intermediaries.
Dividends received by you that are effectively connected with your conduct of a U.S. trade or business (and, if required by an applicable
income tax treaty, attributable to a permanent establishment maintained by you in the United States) are generally exempt from such
withholding tax. In order to obtain this exemption, you must provide us with an IRS Form W-8ECI or other applicable version of IRS
Form W-8 properly certifying such exemption. Such effectively connected dividends, although not subject to withholding tax, are taxed at the
same graduated rates applicable to U.S. persons, net of certain deductions and credits. In addition, if you are a corporate non-U.S. holder,
dividends you receive that are effectively connected with your conduct of a U.S. trade or business (and, if required by an applicable income tax
treaty, attributable to a permanent establishment maintained by you in the U.S.) may also be subject to a branch profits tax at a rate of 30% or
such lower rate as may be specified by an applicable income tax treaty.
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Gain on Disposition of Common Stock
Subject to the discussion below regarding foreign accounts, you generally will not be required to pay U.S. federal income tax on any gain
realized upon the sale or other disposition of our common stock unless:
•
the gain is effectively connected with your conduct of a U.S. trade or business (and, if required by an applicable income tax treaty,
the gain is attributable to a permanent establishment maintained by you in the United States);
•
you are an individual who is present in the United States for a period or periods aggregating 183 days or more during the calendar
year in which the sale or disposition occurs and certain other conditions are met; or
•
our common stock constitutes a U.S. real property interest by reason of our status as a "United States real property holding
corporation," or USRPHC, for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding
your disposition of, or your holding period for, our common stock.
We believe that we are not currently and will not become a USRPHC. However, because the determination of whether we are a USRPHC
depends on the fair market value of our U.S. real property relative to the fair market value of our other business assets, there can be no
assurance that we will not become a USRPHC in the future. Even if we become a USRPHC, however, as long as our common stock is regularly
traded on an established securities market, such common stock will be treated as U.S. real property interests only if you actually or
constructively hold more than five percent of such regularly traded common stock at any time during the shorter of the five-year period
preceding your disposition of, or your holding period for, our common stock.
If you are a non-U.S. holder described in the first bullet above, you will be required to pay tax on the net gain derived from the sale under
regular graduated U.S. federal income tax rates, and a corporate non-U.S. holder described in the first bullet above may also be subject to the
branch profits tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty. If you are an individual non-U.S.
holder described in the second bullet above, you will be required to pay a flat 30% tax on the gain derived from the sale, which tax may be
offset by U.S. source capital losses for the year. You should consult any applicable income tax or other treaties that may provide for different
rules.
Federal Estate Tax
Our common stock beneficially owned by an individual who is not a citizen or resident of the United States (as defined for U.S. federal
estate tax purposes) at the time of their death will generally be includable in the decedent's gross estate for U.S. federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise.
Backup Withholding and Information Reporting
Generally, we must report annually to the IRS the amount of dividends paid to you, your name and address and the amount of tax
withheld, if any. A similar report will be sent to you. Pursuant to applicable income tax treaties or other agreements, the IRS may make these
reports available to tax authorities in your country of residence.
Payments of dividends or of proceeds on the disposition of stock made to you may be subject to information reporting and backup
withholding at a current rate of 28% unless you establish an exemption, for example, by properly certifying your non-U.S. status on a
Form W-8BEN or other applicable version of IRS Form W-8. Notwithstanding the foregoing, backup withholding and
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information reporting may apply if either we or our paying agent has actual knowledge, or reason to know, that you are a U.S. person.
Backup withholding is not an additional tax; rather, the U.S. income tax liability of persons subject to backup withholding will be reduced
by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund, or credit may generally be obtained from the IRS,
provided that the required information is furnished to the IRS in a timely manner.
Foreign Accounts
A U.S. federal withholding tax of 30% may apply to dividends on, and the gross proceeds of a disposition of, our common stock, paid to a
"foreign financial institution" (as specially defined for this purpose), unless such institution enters into an agreement with the U.S. government
to withhold on certain payments and to collect and provide to the U.S. tax authorities certain information regarding the U.S. account holders of
such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities
with U.S. owners). A U.S. federal withholding tax of 30% may also generally apply to dividends and the gross proceeds of a disposition of our
common stock paid to a non-financial foreign entity unless such entity provides the withholding agent with a certification identifying the direct
and indirect U.S. owners of the entity (or certifying that it does not have any "substantial U.S. owners"). The withholding provisions described
above generally will apply to dividends paid on our common stock after June 30, 2014, and to the gross proceeds from the sale or other
disposition of our common stock after December 31, 2016. Under certain circumstances, a non-U.S. holder might be eligible for refunds or
credits of such taxes. Prospective investors are encouraged to consult with their own tax advisors regarding the possible implications of these
foreign account rules on their investment in our common stock.
Each prospective investor should consult its own tax advisor regarding the particular U.S. federal, state and local and non-U.S.
tax consequences of purchasing, holding and disposing of our common stock, including the consequences of any proposed change in
applicable laws .
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting agreement dated
, we have agreed to sell
to the underwriters named below, for whom Credit Suisse Securities (USA) LLC and Citigroup Global Markets Inc. are acting as
representatives, the following respective numbers of shares of our common stock:
Underwriter
Number of Shares
Credit Suisse Securities (USA) LLC
Citigroup Global Markets Inc.
Needham & Company, LLC
Oppenheimer & Co. Inc.
Piper Jaffray & Co.
BMO Capital Markets Corp.
LUMA Securities LLC
Total
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of our common stock in this offering if
any are purchased, other than those shares covered by the over-allotment option described below. The offering of the shares 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 underwriting agreement
also provides that if an underwriter defaults the purchase commitments of non-defaulting underwriters may be increased or the offering may be
terminated.
The selling stockholders have granted to the underwriters a 30-day option to purchase on a pro rata basis up to
additional
shares at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any
over-allotments of our common stock.
The underwriters propose to offer the shares of our common stock initially at the public offering price on the cover page of this prospectus
and to selling group members at that price less a selling concession of up to $
per share. After the initial public offering, the
representatives may change the public offering price and concession.
The following table summarizes the compensation and estimated expenses we and the selling stockholders will pay:
Per Share
Without
With
Over-allotment
Over-allotment
Underwriting
Discounts and
Commissions
paid by us
Expenses payable
by us
Underwriting
Discounts and
Commissions
paid by selling
stockholders
Total
Without
Over-allotment
With
Over-allotment
$
$
$
$
$
$
$
$
$
$
$
$
We have agreed to reimburse the underwriters for all expenses and fees related to the review by the Financial Industry Regulatory
Authority up to $
.
The representatives have informed us that they do not expect sales to accounts over which the underwriters have discretionary authority to
exceed 5% of the shares of our common stock being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the SEC a
registration statement under the Securities Act, other than a
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registration statement on Form S-8, relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable
for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior
written consent of the representatives for a period of 180 days after the date of this prospectus, except issuances pursuant to the exercise of
employee stock options outstanding on the date hereof.
Our officers and directors and holders of substantially all of our outstanding stock and options have agreed that they will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, enter into a transaction that would have the same effect, or enter into any
swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock,
whether any of these transactions are to be settled by delivery of our common stock or other securities, in cash or otherwise, or publicly
disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement, without,
in each case, the prior written consent of the representatives for a period of 180 days after the date of this prospectus.
We and the selling stockholders have agreed to indemnify the several underwriters against liabilities under the Securities Act, or
contribute to payments that the underwriters may be required to make in that respect.
We have applied to list the shares of our common stock on The NASDAQ Global Market, under the symbol "FUEL".
In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering
transactions, and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934, or the Exchange Act.
•
Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified
maximum.
•
Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short
position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of
shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than
the number of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising
their over-allotment option and/or purchasing shares in the open market.
•
Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the
underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the
price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open
market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward
pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the
offering.
•
Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally
sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.
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These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market
price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result the price of our common
stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on The NASDAQ Global
Market or otherwise and, if commenced, may be discontinued at any time.
A prospectus in electronic format may be made available on the web sites maintained by one or more of the underwriters, or selling group
members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses
electronically. The representatives may agree to allocate a number of shares to underwriters and selling group members for sale to their online
brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make Internet
distributions on the same basis as other allocations.
Other Relationships
The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include 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 may in the future provide a variety of these services to us and to persons and entities with relationships with us, for which they
received or will receive customary fees and expenses.
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 our assets, securities and/or instruments (directly, as collateral securing other obligations or otherwise) and/or persons
and entities with relationships with us. 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.
Notice to Prospective Investors in the Dubai International Financial Centre
This prospectus relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority, or
DFSA. This prospectus is intended for distribution only to persons of a type specified in the Offered Securities Rules of the DFSA. It must not
be delivered to, or relied on by, any other person. The DFSA has no responsibility for reviewing or verifying any documents in connection with
Exempt Offers. The DFSA has not approved this prospectus supplement nor taken steps to verify the information set forth herein and has no
responsibility for the prospectus. The shares to which this prospectus relates may be illiquid and/or subject to restrictions on their resale.
Prospective purchasers of our common stock offered should conduct their own due diligence on the shares. If you do not understand the
contents of this prospectus you should consult an authorized financial advisor.
Notice to Prospective Investors in the European Economic Area
In relation to each Member State of the European Economic Area that has implemented the Prospectus Directive, each, a Relevant
Member State, each underwriter represents and agrees that with effect from and including the date on which the Prospectus Directive is
implemented in such Relevant
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Member State, or the Relevant Implementation Date, it has not made and will not make an offer of securities to the public in that Relevant
Member State prior to the publication of a prospectus in relation to the securities that has been approved by the competent authority in that
Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that
Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant
Implementation Date, make an offer of securities to the public in that Relevant Member State at any time:
(a) to legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose
corporate purpose is solely to invest in securities;
(b) to any legal entity that has two or more of (1) an average of at least 250 employees during the last financial year, (2) a total balance
sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts;
(c) to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining
the prior consent of the manager for any such offer; or
(d) in any other circumstances that do not require the publication by the Issuer of a prospectus pursuant to Article 3 of the Prospectus
Directive.
For the purposes of this provision, the expression an "offer of securities to the public" in relation to any securities in any Relevant Member
State means the communication in any form and by any means of sufficient information on the terms of the offer and the securities to be
offered so as to enable an investor to decide to purchase or subscribe the securities, as the same may be varied in that Member State by any
measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC
and includes any relevant implementing measure in each Relevant Member State.
Notice to Prospective Investors in the United Kingdom
Each of the underwriters severally represents, warrants and agrees as follows:
(a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or
inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000, or the FSMA)
to persons who have professional experience in matters relating to investments falling with Article 19(5) of the Financial Services and Markets
Act 2000 (Financial Promotion) Order 2005 or in circumstances in which section 21 of FSMA does not apply to us; and
(b) it has complied with, and will comply with all applicable provisions of FSMA with respect to anything done by it in relation to the
shares of common stock in, from or otherwise involving the United Kingdom.
Notice to Prospective Investors in France
Neither this prospectus nor any other offering material relating to the shares described in this prospectus has been submitted to the
clearance procedures of the Autorité des Marchés Financiers or of the competent authority of another member state of the European Economic
Area and notified to the Autorité des Marchés Financiers . Our common stock shares have not been offered or sold and will not be offered or
sold, directly or indirectly, to the public in France. Neither this prospectus nor any other offering material relating to our common stock shares
has been or will be:
•
released, issued, distributed or caused to be released, issued or distributed to the public in France; or
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Table of Contents
•
used in connection with any offer for subscription or sale of the shares to the public in France.
Such offers, sales and distributions will be made in France only:
•
to qualified investors (investisseurs qualifiés ) and/or to a restricted circle of investors ( cercle restreint d'investisseurs ), in each
case investing for their own account, all as defined in, and in accordance with articles L.411-2, D.411-1, D.411-2, D.734-1,
D.744-1, D.754-1 and D.764-1 of the French Code monétaire et financier ;
•
to investment services providers authorized to engage in portfolio management on behalf of third parties; or
•
in a transaction that, in accordance with article L.411-2-II-1°-or-2°-or 3° of the French Code monétaire et financier and
article 211-2 of the General Regulations ( Règlement Général ) of the Autorité des Marchés Financiers , does not constitute a
public offer ( appel public à l'épargne ).
Notice to Prospective Investors in Germany
Each person who is in possession of this prospectus is aware of the fact that no German sales prospectus (Verkaufsprospekt) within the
meaning of the Securities Sales Prospectus Act (Wertpapier-Verkaufsprospektgesetz, or the Act) of the Federal Republic of Germany has been
or will be published with respect to our common stock. In particular, each underwriter has represented that it has not engaged and has agreed
that it will not engage in a public offering (offentliches Angebot) within the meaning of the Act with respect to any of our common stock
otherwise than in accordance with the Act and all other applicable legal and regulatory requirements.
Notice to Prospective Investors in the Netherlands
Our common stock may not be offered, sold, transferred or delivered in or from the Netherlands as part of their initial distribution or at
any time thereafter, directly or indirectly, other than to, individuals or legal entities situated in the Netherlands who or which trade or invest in
securities in the conduct of a business or profession (which includes banks, securities intermediaries (including dealers and brokers), insurance
companies, pension funds, collective investment institution, central governments, large international and supranational organizations, other
institutional investors and other parties, including treasury departments of commercial enterprises, which as an ancillary activity regularly
invest in securities; hereinafter, Professional Investors), provided that in the offer, prospectus and in any other documents or advertisements in
which a forthcoming offering of our common stock is publicly announced (whether electronically or otherwise) in the Netherlands it is stated
that such offer is and will be exclusively made to such Professional Investors. Individual or legal entities who are not Professional Investors
may not participate in the offering of our common stock, and this prospectus or any other offering material relating to our common stock may
not be considered an offer or the prospect of an offer to sell or exchange our common stock.
Notice to Prospective Investors in Switzerland
Our common stock shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange, or SIX, or on any
other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards
for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses
under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither
this document nor any other offering or marketing material relating to the shares or the offering may be publicly distributed or otherwise made
publicly available in Switzerland.
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Neither this document nor any other offering or marketing material relating to the offering, us or our common stock shares have been or
will be filed with or approved by any Swiss regulatory authority. In particular this document will not be filed with, and the offer of shares will
not be supervised by, the Swiss Financial Market Supervisory Authority FINMA, or FINMA, and the offer of our common stock has not been
and will not be authorized under the Swiss Federal Act on Collective Investment Schemes, or CISA. The investor protection afforded to
acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of our common stock shares.
Notice to Prospective Investors in Japan
The underwriters will not offer or sell any of our common stock directly or indirectly in Japan or to, or for the benefit of any Japanese
person or to others, for re-offering or re-sale directly or indirectly in Japan or to any Japanese person, except in each case pursuant to an
exemption from the registration requirements of, and otherwise in compliance with, the Securities and Exchange Law of Japan and any other
applicable laws and regulations of Japan. For purposes of this paragraph, "Japanese person" means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan.
Notice to Prospective Investors in Hong Kong
The underwriters and each of their affiliates have not (i) offered or sold, and will not offer or sell, in Hong Kong, by means of any
document, our common stock other than (a) to "professional investors" as defined in the Securities and Futures Ordinance (Cap. 571) of Hong
Kong and any rules made under that Ordinance or (b) in other circumstances which do not result in the document being a "prospectus" as
defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that
Ordinance or (ii) issued or had in its possession for the purposes of issue, and will not issue or have in its possession for the purposes of issue,
whether in Hong Kong or elsewhere any advertisement, invitation or document relating to our common stock 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 our securities which are or are intended to be disposed of only to persons outside Hong Kong or only to
"professional investors" as defined in the Securities and Futures Ordinance any rules made under that Ordinance. The contents of this document
have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any
doubt about any of the contents of this document, you should obtain independent professional advice.
Notice to Prospective Investors in Singapore
This prospectus or any other offering material relating to the offering of our common stock has not been and will not be registered as a
prospectus with the Monetary Authority of Singapore, and our common stock will be offered in Singapore pursuant to exemptions under
Section 274 and Section 275 of the Securities and Futures Act, Chapter 289 of Singapore, or the Securities and Futures Act. Accordingly our
common stock may not be offered or sold, or be the subject of an invitation for subscription or purchase, nor may this prospectus or any other
offering material relating to our common stock be circulated or distributed, whether directly or indirectly, to the public or any member of the
public in Singapore other than (a) to an institutional investor or other person specified in Section 274 of the Securities and Futures Act, (b) to a
sophisticated investor, and in accordance with the conditions specified in Section 275 of the Securities and Futures Act or (c) otherwise
pursuant to, and in accordance with the conditions of, any other applicable provision of the Securities and Futures Act.
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Notice to Canadian Residents
Resale Restrictions
The distribution of our common stock in Canada is being made only in the provinces of Ontario, Quebec, Alberta, British Columbia and
Manitoba on a private placement basis exempt from the requirement that we and the selling stockholders prepare and file a prospectus with the
securities regulatory authorities in each province where trades of our common stock are made. Any resale of our common stock in Canada must
be made under applicable securities laws which may vary depending on the relevant jurisdiction, and which may require resales to be made
under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resale of our common stock.
Representations of Purchasers
By purchasing our common stock in Canada and accepting delivery of a purchase confirmation, a purchaser is representing to us, the
selling stockholders and the dealer from whom the purchase confirmation is received that:
•
the purchaser is entitled under applicable provincial securities laws to purchase our common stock without the benefit of a
prospectus qualified under those securities laws as it is an "accredited investor" as defined under National Instrument 45-106—
Prospectus and Registration Exemptions ;
•
the purchaser is a "Canadian permitted client" as defined in National Instrument 31-103— Registration Requirements and
Exemptions , or as otherwise interpreted and applied by the Canadian Securities Administrators;
•
where required by law, the purchaser is purchasing as principal and not as agent,
•
the purchaser has reviewed the text above under Resale Restrictions; and
•
the purchaser acknowledges and consents to the provision of specified information concerning the purchase of our common stock
to the regulatory authority that by law is entitled to collect the information, including certain personal information. For purchasers
in Ontario, questions about such indirect collection of personal information should be directed to Administrative Support Clerk,
Ontario Securities Commission, Suite 1903, Box 55, 20 Queen Street West, Toronto, Ontario M5H 3S8 or on (416) 593-3684.
Rights of Action—Ontario Purchasers
Under Ontario securities legislation, certain purchasers who purchase a security offered by this prospectus during the period of distribution
will have a statutory right of action for damages, or while still the owner of our common stock, for rescission against us and the selling
stockholders in the event that this prospectus contains a misrepresentation without regard to whether the purchaser relied on the
misrepresentation. The right of action for damages is exercisable not later than the earlier of 180 days from the date the purchaser first had
knowledge of the facts giving rise to the cause of action and three years from the date on which payment is made for our common stock. The
right of action for rescission is exercisable not later than 180 days from the date on which payment is made for our common stock. If a
purchaser elects to exercise the right of action for rescission, the purchaser will have no right of action for damages against us or the selling
stockholders. In no case will the amount recoverable in any action exceed the price at which our common stock shares were offered to the
purchaser and if the purchaser is shown to have purchased the securities with knowledge of the misrepresentation, we and the selling
stockholders, will have no liability. In the case of an action for damages, we and the selling stockholders, will not be liable for all or any
portion of the damages that are proven to not represent
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the depreciation in value of our common stock as a result of the misrepresentation relied upon. These rights are in addition to, and without
derogation from, any other rights or remedies available at law to an Ontario purchaser. The foregoing is a summary of the rights available to an
Ontario purchaser. Ontario purchasers should refer to the complete text of the relevant statutory provisions.
Enforcement of Legal Rights
All of our directors and officers as well as the experts named herein and the selling stockholders may be located outside of Canada and, as
a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial
portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a
judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of
Canada.
Taxation and Eligibility for Investment
Canadian purchasers of our common stock should consult their own legal and tax advisors with respect to the tax consequences of an
investment in our common stock in their particular circumstances and about the eligibility of our common stock for investment by the
purchaser under relevant Canadian legislation.
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LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon for us and the selling stockholders by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California. Fenwick & West LLP, Mountain View, California, is acting as counsel to
the underwriters. Certain members of, and investment partnerships comprised of members of, and persons associated with, Wilson Sonsini
Goodrich & Rosati, Professional Corporation, own an equity interest in us representing less than 0.25% of our outstanding common stock as of
June 30, 2013.
EXPERTS
The consolidated financial statements of Rocket Fuel Inc. as of December 31, 2011 and 2012 and for each of the two years in the period
ended December 31, 2012, appearing in this prospectus and registration statement have been audited by Deloitte & Touche LLP, an
independent registered public accounting firm, as stated in their report appearing herein. Such consolidated financial statements have been so
included in reliance upon the report of such firm given upon its authority as an expert in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act of 1933 with respect to the shares of common
stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information
set forth in the registration statement, some of which is contained in exhibits to the registration statement as permitted by the rules and
regulations of the SEC. For further information with respect to us and our common stock, we refer you to the registration statement, including
the exhibits filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any
other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, please see the
copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is
qualified in all respects by the filed exhibit. You may obtain copies of this information by mail from the public reference room of the SEC at
100 F Street, N.E., Room 1580, Washington, D.C. 20549, at prescribed rates. You may obtain information on the operation of the public
reference rooms by calling the SEC at 1(800) SEC-0330. The SEC also maintains an Internet website that contains reports, proxy statements
and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov.
As a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act of 1934
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 SEC's public reference facilities and the website of the
SEC referred to above. We also maintain a website at www.rocketfuel.com. Upon 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. Information contained on our
website is not a part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only.
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ROCKET FUEL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
F-2
F-3
Consolidated Statements of Operations
F-4
Consolidated Statements of Comprehensive Loss
F-5
Consolidated Statements of Stockholders' Equity
F-6
Consolidated Statements of Cash Flows
F-7
Notes to Consolidated Financial Statements
F-8
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Rocket Fuel Inc.
Redwood City, California
We have audited the accompanying consolidated balance sheets of Rocket Fuel Inc. and subsidiary (the "Company") as of December 31,
2011 and 2012, and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the
Company and subsidiary as of December 31, 2011 and 2012, and the results of their operations and their cash flows for each of the two years in
the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
May 23, 2013
(July 2, 2013 as to the effects of the restatement discussed in Note 15)
F-2
Table of Contents
Rocket Fuel Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Pro
Forma
June 30,
2013
December 31,
June 30,
2013
2011
2012
(unaudited)
Assets
Current Assets:
Cash and cash equivalents
Accounts receivable, net
Deferred tax assets
Prepaid expenses and other current assets
$
Total current assets
Property, equipment and software, net
Other assets
Total assets
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable
Accrued and other current liabilities
Deferred revenue
Current portion of long-term debt
Total current liabilities
Line of credit
Long-term debt—Less current portion
Deferred rent—Less current portion
Deferred tax liabilities
Convertible preferred stock warrant liability
Total liabilities
Commitments and contingencies (Note 11)
Stockholders' Equity
Convertible preferred stock, Series A, $0.001
par value—10,884,902 authorized;
10,618,372 issued and outstanding;
liquidation preference of $9,860
Convertible preferred stock, Series B, $0.001
par value—4,811,855 authorized;
4,811,855 issued and outstanding;
liquidation preference of $12,500
Convertible preferred stock, Series C, $0.001
par value—1,250,000 authorized as of
December 31, 2011 and 1,116,030
authorized as of December 31, 2012 and
June 30, 2013; 1,116,030 issued and
5,071
16,489
124
465
$
14,896
47,333
334
1,215
$
21,985
59,780
334
1,044
22,149
63,778
83,143
4,941
68
10,939
472
13,800
2,838
$
27,158
$
75,189
$
99,781
$
6,988
1,787
—
412
$
17,482
6,186
187
1,988
$
25,163
13,212
790
2,500
9,187
25,843
41,665
3,853
114
59
124
433
1,853
3,125
430
334
2,741
6,853
12,500
452
334
5,096
13,770
34,326
66,900
9,788
9,788
9,788
—
9,935
9,935
9,935
—
6,501
6,501
6,501
—
$
—
outstanding; liquidation preference of
$8,187
Convertible preferred stock, Series C-1,
$0.001 par value—2,975,228 authorized;
2,932,675 issued and outstanding;
liquidation preference of $34,500
Common stock, $0.001 par
value—28,250,000, 35,850,100 and
39,435,110 authorized as of December 31,
2011 and 2012 and June 30, 2013,
respectively; 7,927,771, 8,680,041 and
8,853,312 issued and outstanding as of
December 31, 2011, and 2012 and June 30,
2013, respectively; 28,493,777 shares
issued and outstanding, pro forma
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
—
Total stockholders' equity
Total liabilities and stockholders' equity
$
34,393
34,393
7
364
(7 )
(13,200 )
8
3,865
(84 )
(23,543 )
8
7,835
(125 )
(35,454 )
13,388
40,863
32,881
27,158
$
75,189
See notes to consolidated financial statements.
F-3
$
99,781
—
27
73,529
(125 )
(35,454 )
$
37,977
Table of Contents
Rocket Fuel Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except loss per share data)
Year Ended
December 31,
2011
Revenue
Cost of revenue
$
Six Months Ended
June 30,
2012
2013
(unaudited)
2012
44,652
27,300
$
106,589
60,011
$
39,592
22,033
$
92,581
49,652
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
17,352
46,578
17,559
42,929
1,545
17,256
2,336
4,876
41,069
8,403
1,538
15,542
2,570
6,123
34,649
10,952
Total operating expenses
21,137
54,348
19,650
51,724
Loss from operations
Other expense, net:
Interest expense
Other income (expense)—net
Change in fair value of convertible
preferred stock warrant liability
(3,785 )
(7,770 )
(2,091 )
(8,795 )
(250 )
33
(316 )
135
(170 )
92
(353 )
(368 )
(295 )
(2,308 )
(262 )
(2,355 )
Other expense, net
Loss before income taxes
Provision for income taxes
(512 )
(4,297 )
(28 )
(2,489 )
(10,259 )
(84 )
(340 )
(2,431 )
(39 )
(3,076 )
(11,871 )
(40 )
Net loss
$
(4,325 )
$
(10,343 )
$
(2,470 )
$
(11,911 )
Basic and diluted net loss per share
attributable to common stockholders
$
(0.57 )
$
(1.29 )
$
(0.31 )
$
(1.43 )
Basic and diluted weighted-average
shares used to compute net loss per
share attributable to common
stockholders
7,600
Basic and diluted pro forma net loss per
share attributable to common
stockholders (unaudited)
8,024
$
Basic and diluted weighted-average
shares used to compute pro forma net
loss per share attributable to common
stockholders (unaudited)
(0.29 )
27,664
See notes to consolidated financial statements.
F-4
7,923
8,347
$
(0.34 )
27,987
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Rocket Fuel Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Year Ended
December 31,
2011
Net loss
Other comprehensive loss:
Foreign currency translation
adjustments
$
Comprehensive loss
$
Six Months Ended
June 30,
2012
2013
(unaudited)
2012
(4,325 )
$
(6 )
(4,331 )
(10,343 )
$
(77 )
$
(10,420 )
$
2
$
See notes to consolidated financial statements.
F-5
(2,470 )
(2,468 )
(11,911 )
(41 )
$
(11,952 )
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Rocket Fuel Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2012 AND THE SIX MONTHS
ENDED JUNE 30, 2013 (UNAUDITED)
(In thousands, except share data)
Convertible
Preferred Stock
Accumulated
Other
Comprehensive
Loss
Common Stock
Additional
Paid-In
Capital
Shares
Balance—January 1, 2011
Issuance of Series C
convertible preferred
stock at $5.869 per
share, net of issuance
costs of $49
Issuance of common
stock upon exercises
of employee stock
options, net of
repurchases
Issuance of restricted
common stock
Stock-based
compensation
Foreign currency
translation adjustment
Net loss
Balance—December 31,
2011
Issuance of Series C-1
convertible preferred
stock at $11.764 per
share, net of issuance
costs of $107
Issuance of common
stock upon exercises
of employee stock
options, net of
repurchases
Issuance of restricted
common stock
Stock-based
compensation
Foreign currency
translation adjustment
Net loss
Balance—December 31,
2012
Issuance of common
stock upon exercises
of employee stock
options, net of
repurchases(*)
Stock-based
compensation(*)
Foreign currency
translation
adjustment(*)
Net loss(*)
Amount
15,430,227 $ 19,723
Accumulated
Deficit
Amoun
t
Shares
7,525,852
$
7
$
128
$
(1 )
$
(8,87
1,116,030
6,501
—
—
—
—
—
—
—
333,104
—
72
—
—
—
—
68,815
—
54
—
—
—
—
—
—
110
—
—
—
—
—
—
—
—
—
—
—
—
(6 )
—
16,546,257
26,224
7,927,771
7
364
(7 )
2,932,675
34,393
—
—
—
—
—
—
—
738,699
1
180
—
—
—
—
13,571
—
33
—
—
—
—
—
—
3,288
—
—
—
—
—
—
—
—
—
—
—
—
(77 )
—
—
(10,34
19,478,932
60,617
8,680,041
8
3,865
(84 )
(23,54
—
—
173,271
—
191
—
—
—
—
—
—
3,779
—
—
—
—
—
—
—
—
—
—
—
—
(41 )
—
—
(4,32
(13,20
—
(11,91
Balance—June 30, 2013(*)
19,478,932 $ 60,617
8,853,312
(*)
Unaudited
See notes to consolidated financial statements.
F-6
$
8
$
7,835
$
(125 )
$
(35,45
Table of Contents
Rocket Fuel Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months
Ended
June 30,
Year Ended
December 31,
2011
2012
2012
2013
(unaudited)
OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization
Provision for doubtful accounts
Stock-based compensation
Issuance of restricted stock
Amortization of debt discount
Loss (gain) on disposal of property, equipment and
software
Change in fair value of preferred stock warrant liability
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued and other liabilities
Deferred rent
Deferred revenue
$
(4,325 )
$
(10,343 )
$
(2,470 )
1,922
203
110
54
13
3,600
285
3,288
33
8
1,463
41
296
19
4
—
295
63
2,308
—
262
$
(11,911 )
2,882
16
3,600
—
1
(5 )
2,355
(10,005 )
(153 )
37
3,580
1,065
81
(8 )
(31,129 )
(751 )
(389 )
9,612
4,066
359
187
(8,206 )
(700 )
(250 )
991
1,238
193
8
(12,464 )
153
(137 )
8,181
4,094
10
603
(7,131 )
(18,803 )
(7,111 )
(2,622 )
(1,964 )
(2,629 )
(4,089 )
(4,674 )
(1,254 )
(2,044 )
(2,603 )
(3,020 )
(4,593 )
(8,763 )
(3,298 )
(5,623 )
FINANCING ACTIVITIES:
Proceeds from the issuance of convertible preferred stock
Issuance costs related to convertible preferred stock
Proceeds from exercise of vested common stock options
Proceeds from early exercise of unvested common stock options
Repurchases of common stock options early exercised
Payments for deferred offering costs
Borrowings from line of credit
Repayment of line of credit
Proceeds from issuance of long-term debt
Repayment of long-term debt
6,550
(49 )
28
124
(1 )
—
2,000
—
—
(370 )
34,500
(107 )
54
460
(2 )
—
4,000
(6,000 )
5,000
(421 )
34,500
(105 )
28
195
—
—
4,000
(6,000 )
3,000
(205 )
—
—
51
770
(1 )
(298 )
5,000
—
10,000
(113 )
Net cash provided by financing activities
8,282
37,484
35,413
15,409
(3 )
25,001
5,071
(75 )
7,089
14,896
Net cash used in operating activities
INVESTING ACTIVITIES:
Purchases of property, equipment and software
Capitalized internal use software development costs
Net cash used in investing activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS
CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS—Beginning of period
CASH AND CASH EQUIVALENTS—End of period
SUPPLEMENTAL DISCLOSURES OF OTHER CASH FLOW
INFORMATION:
Cash paid for income taxes
Cash paid for interest
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Purchases of property and equipment recorded in accounts payable
and accruals
Deferred offering costs recorded in accrued liabilities
Vesting of early exercised options
(10 )
(3,452 )
8,523
(93 )
9,825
5,071
$
5,071
$
14,896
$
30,072
$
21,985
$
$
—
202
$
$
—
286
$
$
—
157
$
$
123
302
$
$
$
55
—
10
$
$
$
882
15
125
$
$
$
571
—
55
$
$
$
828
1,933
140
See notes to consolidated financial statements.
F-7
Table of Contents
ROCKET FUEL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
YEARS ENDED DECEMBER 31, 2011 AND 2012
AND AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2013 (UNAUDITED)
1.
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Rocket Fuel Inc. (the "Company") was incorporated as a Delaware corporation on March 25, 2008. The Company is a provider of an
artificial-intelligence digital advertising solution. The Company is headquartered in Redwood City, California, and has offices in seven cities in
the United States. The Company established a wholly-owned subsidiary in the United Kingdom, with an office in the Netherlands, in 2011 and
a wholly-owned subsidiary in Germany in 2013.
Basis of Presentation —The accompanying consolidated financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. On a consolidated basis, the Company
incurred a net loss of $10.3 million for the year ended December 31, 2012 and an additional $11.9 million net loss (unaudited) for the six
months ended June 30, 2013. For the year ended December 31, 2012 and the six months ended June 30, 2013, the Company had negative cash
flow used in operations of $18.8 million and $2.6 million (unaudited), respectively.
The Company plans to raise additional funds to fund its operations through a planned initial public offering in the second half of 2013 or
will attempt to raise additional capital through private equity, equity-linked or debt financing arrangements.
The Company's liquidity is dependent upon its cash and cash equivalents, and the continued availability of borrowings under its financing
arrangements. The financing arrangements require the Company to maintain compliance with certain financial covenants, with the most
significant covenant being a requirement to maintain a specified minimum quarterly EBITDA (defined as earnings before interest expense,
income tax expense, depreciation, amortization and other noncash charges). Based on the Company's projections, the Company believes it will
maintain compliance with the loan covenants through 2014; however, if future operating results are less favorable than currently anticipated,
the Company may need to seek further amendments to modify its loan covenants.
There can be no assurance that the Company will be able to raise additional capital or obtain such waivers on acceptable terms, or at all,
and any failure to do so could adversely affect the Company's ability to achieve its business objectives. In addition, if the Company's operating
performance during the next twelve months is below its expectations, the Company's liquidity and ability to operate its business could be
adversely affected unless the Company were able to raise additional capital. If required, the Company would also take other measures to reduce
the Company's expenses to offset any shortfall.
In connection with the Company's initial publication of the December 31, 2012 financial statements, the Company evaluated subsequent
events for financial statement recognition purposes through May 23, 2013. In connection with the Company's reissuance of its financial
statements, the Company evaluated subsequent events for disclosure purposes through July 2, 2013. For the six months ended June 30, 2013,
the Company evaluated subsequent events through August 10, 2013, the date on which these interim financial statements were issued and
evaluated subsequent events through August 16, 2013, the date on which these interim financial statements were reissued.
Principles of Consolidation —The consolidated financial statements include the Company and its wholly-owned subsidiary, Rocket
Fuel, Ltd., an England and Wales corporation, which is engaged in marketing and selling advertising campaigns. All intercompany transactions
and balances have been eliminated in consolidation.
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Table of Contents
Use of Estimates —The preparation of consolidated financial statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Certain Significant Risks and Uncertainties —The Company is subject to those risks common in technology-driven markets, including,
but not limited to, competitive forces, dependence on key personnel, customer demand for its solution, management of growth, the successful
protection of its proprietary technologies, compliance with government regulations, and the possibility of not being able to obtain additional
financing when needed.
Unaudited Interim Consolidated Financial Information —The accompanying consolidated balance sheet as of June 30, 2013, the
consolidated statements of operations, statements of comprehensive loss and cash flows for the six months ended June 30, 2012 and 2013 and
the consolidated statement of stockholders' equity for the six months ended June 30, 2013 are unaudited. The unaudited interim consolidated
financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management,
reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position as of
June 30, 2013 and results of operations, comprehensive loss and cash flows for the six months ended June 30, 2012 and 2013. The financial
data and the other information disclosed in these notes to the consolidated financial statements related to these six month periods are unaudited.
The results of the six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the fiscal year ending
December 31, 2013 or for any other interim period or other future year.
Subsequent to the issuance of the unaudited consolidated financial statements for the six months ended June 30, 2013, a mathematical
error was identified in an underlying spreadsheet utilized to prepare the unaudited consolidated statements of cash flows for the six months
ended June 30, 2012. The Company has corrected the mathematical error by decreasing previously presented cash and cash
equivalents—beginning of period and cash and cash equivalents—end of period by $4,411 for the six months ended June 30, 2012. Further, the
Company corrected additional immaterial errors in the unaudited consolidated statements of cash flows for the six months ended June 30, 2012
and 2013 as reflected in the table below. Management has concluded that the correction of these errors is immaterial.
As Previously
Reported
Six Months Ended
June 30, 2012
Provision for doubtful accounts
Accounts receivable
Accounts payable
Net cash used in operating activities
Purchases of property, equipment and
software
Net cash used in investing activities
CASH AND CASH
EQUIVALENTS—Beginning of
period
CASH AND CASH
EQUIVALENTS—End of period
$
189
(8,354 )
1,507
(6,595 )
(1,770 )
(3,814 )
As Restated
Six Months Ended
June 30, 2012
Adjustment
$
(148 )
148
(516 )
(516 )
516
516
$
41
(8,206 )
991
(7,111 )
(1,254 )
(3,298 )
9,482
(4,411 )
5,071
34,483
(4,411 )
30,072
F-9
Table of Contents
As Previously
Reported
Six Months Ended
June 30, 2013
Purchase of property and
equipment recorded in
accounts payable and
accruals
$
As Restated
Six Months Ended
June 30, 2013
Adjustment
(55 )
$
883
$
828
Unaudited Pro Forma Consolidated Balance Sheet —Upon the consummation of the initial public offering contemplated by the
Company, all of the outstanding shares of convertible preferred stock will automatically convert into shares of common stock. The unaudited
pro forma consolidated balance sheet data as of June 30, 2013 has been prepared assuming the conversion of the convertible preferred stock
outstanding into 19,478,932 shares of common stock, as well as the reclassification of the convertible preferred stock warrant liability to
additional paid in capital.
Foreign Currency Translation —The Company's foreign subsidiary records its assets, liabilities and results of operations in its local
currency, which is their functional currency. The Company translates its subsidiary consolidated financial statements into U.S. dollars each
reporting period for purposes of consolidation.
Assets and liabilities of the Company's foreign subsidiary are translated at the period-end currency exchange rates, certain equity accounts
are translated at historical exchange rates while revenue, expenses, gains and losses are translated at the average currency exchange rates in
effect for the period, the effects of these translation adjustments are reported in a separate component of stockholders' equity titled accumulated
other comprehensive loss.
Fair Value of Financial Instruments —The Company's financial instruments consist principally of cash equivalents, accounts receivable,
accounts payable, accrued liabilities, short term payables, and a term loan. The fair value of the Company's cash equivalents is determined
based on quoted prices in active markets for identical assets for its money market funds. The recorded values of the Company's accounts
receivable, accounts payable, accrued liabilities approximate their current fair values due to the relatively short-term nature of these accounts.
The fair value of short term payables approximate their recorded amounts as the interest rates on similar financing arrangements approximate
the interest rates implied when these short term payables were originally issued and recorded. As of June 30, 2013, the Company did not have
any short term payables. The Company believes that the fair value of the term loan and line of credit approximates its recorded amount at
June 30, 2013 as the interest rate on the term loan and line of credit is variable and is based on market interest rates and after consideration of
default and credit risk.
Cash and Cash Equivalents —Cash consists of cash maintained in checking and savings accounts. All highly liquid investments
purchased with an original maturity date of 90 days or less at the date of purchase are considered to be cash equivalents. Cash equivalents
consist of money market funds.
Concentration of Credit Risk —Financial instruments, which potentially subject the Company to significant concentrations of credit risk,
consist primarily of cash and accounts receivable. A significant portion of the Company's cash is held at one major financial institution, which
management assesses to be of high credit quality. The Company has not experienced any losses in such accounts.
The Company mitigates its credit risk with respect to accounts receivable by performing credit evaluations and monitoring its customers'
accounts receivable balances. As of December 31, 2011 no single customer represented more than 10% of accounts receivable. As of
December 31, 2012 and June 30, 2013, one customer accounted for 10% of accounts receivable.
During the years ended December 31, 2011 and 2012 and the six months ended June 30, 2013, no single customer represented more than
10% of revenue. During the six months ended June 30, 2012, one customer represented 12% of revenue.
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Provision for Doubtful Accounts —The Company records a provision for doubtful accounts based on historical experience and a detailed
assessment of the collectability of its accounts receivable. In estimating the allowance for doubtful accounts, management considers, among
other factors, the aging of the accounts receivable, historical write-offs and the credit-worthiness of each customer. If circumstances change,
such as higher-than-expected defaults or an unexpected material adverse change in a major customer's ability to meet its financial obligations,
the Company's estimate of the recoverability of the amounts due could be reduced by a material amount.
The following table presents the changes in the allowance for doubtful accounts (in thousands):
Six Months
Ended
June 30,
2012
2013
(unaudited)
Year Ended
December 31,
2011
2012
Allowance for doubtful accounts:
Balance, beginning of period
Add: bad debt expense
Less: write-offs, net of recoveries
Balance, end of period
$
—
203
—
$
203
285
(20 )
$
203
41
129
$
468
16
1
$
203
$
468
$
373
$
485
Property and Equipment —Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and
amortization is computed using the straight-line method over the estimated useful lives of the related assets. Maintenance and repairs are
charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost
and accumulated depreciation and amortization are removed from the balance sheet and any resulting gain or loss is reflected in operations in
the period realized.
Leasehold improvements are amortized on a straight-line basis over the term of the lease, or the useful life of the assets, whichever is
shorter. Depreciation and amortization periods for the Company's property and equipment are as follows:
Estimated
Useful Life
Asset Classification
Computer hardware and purchased software
Capitalized internal use software costs
Office equipment, furniture and fixtures
2–3 years
2–3 years
5 years
Internal Use Software Development Costs —The Company incurs costs to develop software for internal use. The Company expenses all
costs that relate to the planning and post implementation phases of development as research and development expense. The Company
capitalizes costs when preliminary efforts are successfully completed, management has authorized and committed project funding, and it is
probable that the project will be complete and will be used as intended. Costs incurred for enhancements that are expected to result in
additional material functionality are capitalized. The Company capitalized $2.6 million and $4.7 million in internal-use software costs during
the years ended December 31, 2011 and 2012, respectively, and $2.0 million and $3.2 million for the six months ended June 30, 2012 and
2013, respectively, which are included in property, equipment and software—net on the consolidated balance sheets.
Amortization commences when the website or software for internal use is ready for its intended use and the amortization period is the
estimated useful life of the related asset, which is generally three years. Amortization expense totaled $1.5 million and $2.3 million for the
years ended December 31, 2011 and 2012, respectively, and $1.0 million and $1.6 million for the six months ended June 30, 2012 and 2013,
respectively.
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Table of Contents
Impairment of Long-lived Asset —The Company periodically reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset is impaired or the estimated useful lives are no longer appropriate. If indicators of
impairment exist and the undiscounted projected cash flows associated with such assets are less than the carrying amount of the asset, an
impairment loss is recorded to write the assets down to their estimated fair values. Fair value is estimated based on discounted future cash
flows. No impairment charges were recorded during the years ended December 31, 2011 and 2012 or during the six months ended June 30,
2012 and 2013.
Revenue Recognition —We generate revenue by delivering digital advertisements to Internet users through various channels, including
display, mobile, social and video.
The Company recognizes revenue when all four of the following criteria are met:
•
Persuasive evidence of an arrangement exists
•
Delivery has occurred or a service has been provided
•
Customer fees are fixed or determinable
•
Collection is reasonably assured
Revenue arrangements are evidenced by a fully executed insertion order ("IO"). Generally, IOs state the number and type of advertising
impressions (cost-per-thousand) to be delivered, the agreed upon rate for each delivered impression, and a fixed period of time for delivery.
The Company determines collectability by performing ongoing credit evaluations and monitoring its customers' accounts receivable
balances. For new customers and their agents, which may be advertising agencies or other third parties, the Company performs a credit check
with an independent credit agency and may check credit references to determine creditworthiness. The Company only recognizes revenue when
collection is reasonably assured.
In the normal course of business, the Company frequently contracts with advertising agencies on behalf of their advertiser clients. The
determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether the Company is acting as the
principal or an agent in the transaction. In determining whether the Company acts as the principal or an agent, the Company follows the
accounting guidance for principal-agent considerations. While none of the factors identified in this guidance is individually considered
presumptive or determinative, because the Company is the primary obligor and is responsible for (i) fulfilling the advertisement delivery,
(ii) establishing the selling prices for delivery of the advertisements, and (iii) performing all billing and collection activities including retaining
credit risk, the Company acts as the principal in these arrangements and therefore reports revenue earned and costs incurred on a gross basis.
On occasion, the Company has offered customer incentive programs which provide rebates after achieving a specified level of advertising
spending. The Company records reductions to revenue for estimated commitments related to these customer incentive programs. For
transactions involving incentives, the Company recognizes revenue net of the estimated amount to be paid by rebate, provided that the rebate
amount can be reasonably and reliably estimated and the other conditions for revenue recognition have been met. The Company's policy
requires that, if rebates cannot be reliably estimated, revenue is not recognized until reliable estimates can be made or the program lapses.
Multiple-Element Arrangements —The Company enters into arrangements to sell advertising that includes different media placements or
ad services that are delivered at the same time, or within close proximity of one another. Beginning on January 1, 2011, the Company adopted
new authoritative guidance on multiple element arrangements, using the prospective method for all arrangements entered into or materially
modified from the date of adoption. Under this new guidance, the Company allocates arrangement consideration in multiple-deliverable
revenue arrangements at the inception of an
F-12
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arrangement to all deliverables or those packages in which all components of the package are delivered at the same time, based on the relative
selling price method in accordance with the selling price hierarchy, which includes: (1) vendor-specific objective evidence ("VSOE"), if
available; (2) third-party evidence ("TPE"), if VSOE is not available; and (3) best estimate of selling price ("BESP"), if neither VSOE nor TPE
is available.
VSOE —The Company determines VSOE based on its historical pricing and discounting practices for the specific product or service
when sold separately. In determining VSOE, the Company requires that a substantial majority of the stand-alone selling prices for these
services fall within a reasonably narrow pricing range. The Company has not been able to establish VSOE for any of its advertising offerings.
TPE —When VSOE cannot be established for deliverables in multiple element arrangements, the Company applies judgment with
respect to whether it can establish a selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when
sold separately. Generally, the Company's go-to-market strategy differs from that of its peers and its offerings contain a significant level of
differentiation such that the comparable pricing of services cannot be obtained. Furthermore, the Company is unable to reliably determine the
selling prices of similar competitor services on a stand-alone basis. As a result, the Company has not been able to establish selling price based
on TPE.
BESP —When it is unable to establish selling price using VSOE or TPE, the Company uses BESP in its allocation of arrangement
consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the service were sold on a
stand-alone basis. BESP is generally used to allocate the selling price to deliverables in the Company's multiple element arrangements. The
Company determines BESP for deliverables by considering multiple factors, including, but not limited to, prices it charges for similar
offerings, market conditions, competitive landscape and pricing practices. In particular, the Company reviews multiple data points to determine
BESP, including price lists used by the Company's sales team in pricing negotiations, historical average and median pricing achieved in prior
contractual customer arrangements and input from the Company's sales operation department regarding what it believes the deliverables could
be sold for on a stand-alone basis. BESP is determined at an advertising unit level that is consistent with the Company's underlying market
strategy and stratified based on specific consideration of geography, industry and size, as deemed necessary.
The Company limits the amount of allocable arrangement consideration to amounts that are fixed or determinable and that are not
contingent on future performance or future deliverables. The Company will regularly review BESP. Changes in assumptions or judgments or
changes to the elements in the arrangement could cause a material increase or decrease in the amount of revenue that the Company reports in a
particular period.
The Company recognizes the relative fair value of advertising services as they are delivered, assuming all other revenue recognition
criteria are met. Deferred revenue is comprised of contractual billings in excess of recognized revenue and payments received in advance of
revenue recognition.
Cost of Revenue —Cost of revenue consists primarily of media cost for advertising impressions purchased from real-time advertising
exchanges and other third parties. Cost of revenue also includes third-party data center costs and the salaries and related costs of the Company's
operations group. This group sets up, initiates and monitors the Company's advertising campaigns. In addition, depreciation of the data center
equipment, rental payments to third-party vendors for data centers and amortization of capitalized internal use software are included in cost of
revenue.
F-13
Table of Contents
Research and Development —Research and development expenses include costs associated with the maintenance and ongoing
development of the Company's technology, including compensation and employee benefits and allocated costs associated with the Company's
engineering and research and development departments, as well as costs for contracted services and supplies. The Company reviews costs
incurred in the application development stage and assesses such costs for capitalization.
Sales and Marketing —Sales and marketing expenses consist primarily of compensation (including commissions) and employee benefits
of sales and marketing personnel and related support teams, allocated costs, certain advertising costs, travel, trade shows and marketing
materials. The Company incurred advertising costs of $0.1 million for the years ended December 31, 2011 and 2012 and also for the six months
ended June 30, 2012 and 2013.
General and Administrative —General and administrative expenses include facilities costs, executive and administrative compensation
and employee benefits, depreciation, professional services fees, insurance costs, bad debt and other allocated costs.
Stock-Based Compensation —The Company measures compensation expense for all stock-based payment awards, including stock
options granted to employees, based on the estimated fair values on the date of the grant. The fair value of each stock option granted is
estimated using the Black-Scholes option pricing model. Stock-based compensation is recognized on a straight-line basis over the requisite
service period, net of estimated forfeitures. The forfeiture rate is based on an analysis of the Company's actual historical forfeitures.
The Company accounts for stock options issued to nonemployees based on the fair value of the awards determined using the
Black-Scholes option pricing model. The fair value of stock options granted to nonemployees is re-measured as the stock options vest, and the
resulting change in fair value, if any, is recognized in the Company's consolidated statement of operations during the period the related services
are rendered, generally between one and four years.
Preferred Stock Warrant Liability —Freestanding warrants related to shares that are redeemable or contingently redeemable are classified
as a liability on the Company's consolidated balance sheets. The fully vested convertible preferred stock warrants are subject to
re-measurement at each balance sheet date, and any change in fair value is recognized as a component of other expense, net. The Company will
continue to adjust the liability for changes in fair value until the earlier of: (1) the exercise or expiration of the warrants or (2) the completion of
a liquidation event, including the completion of an initial public offering, at which time all convertible preferred stock warrants will be
converted into common stock or warrants to purchase common stock and the liability will be reclassified to additional paid-in capital.
Income Taxes —The Company accounts for income taxes using an asset and liability approach. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Operating loss and tax credit carryforwards are measured by applying currently enacted tax laws. Valuation allowances
are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized. As of December 31, 2011
and 2012, and as of June 30, 2013, the Company provided a full valuation allowance against its net deferred tax assets.
The Company recognizes the tax effects of an uncertain tax position only if it is more likely than not to be sustained based solely on its
technical merits as of the reporting date, and then, only in an amount more likely than not to be sustained upon review by the tax authorities.
The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic
adjustments and which may not accurately anticipate actual outcomes.
Comprehensive Income (Loss) —In June 2011, the Financial Accounting Standards Board ("FASB") issued an accounting standards
update that requires an entity to present the total of
F-14
Table of Contents
comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present the
components of other comprehensive income as part of the statement of equity. The Company retrospectively adopted these new standards in
the first quarter of 2012 and has presented a separate consolidated statement of comprehensive loss for the years ended December 31, 2011 and
2012 and the six months ended June 30, 2012 and 2013.
Deferred Offering Costs —Deferred offering costs consisted primarily of direct incremental costs related to the Company's proposed
initial public offering of its common stock. Approximately $0.1 million and $2.2 million of deferred offering costs are included in other assets
on the Company's consolidated balance sheets as of December 31, 2012 and June 30, 2013, respectively. There were no deferred offering costs
included in other assets on the Company's consolidated balance sheets as of December 31, 2011. Upon completion of the initial public offering
contemplated herein, these amounts will be offset against the proceeds of the offering. If the offering is terminated, the deferred offering costs
will be expensed.
Recently Issued Accounting Pronouncements —In June 2011, the FASB issued authoritative guidance that addresses the presentation of
comprehensive income for annual reporting of financial statements. The guidance is intended to improve the comparability, consistency and
transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option
to present components of other comprehensive income as part of the statement of changes in stockholders' equity. Such changes in
stockholders' equity will be required to be disclosed in either a single continuous statement of comprehensive income or in two separate but
consecutive statements. The guidance is effective for fiscal years beginning after December 15, 2011, and should be applied retrospectively for
all periods presented. Early adoption is permitted. This new guidance impacts how the Company reports comprehensive income, and did not
have any effect on the Company's results of operations, financial position or liquidity upon its required adoption on January 1, 2012.
In February 2013, the FASB issued guidance which addresses the presentation of amounts reclassified from accumulated other
comprehensive income. This guidance does not change current financial reporting requirements. Instead, an entity is required to cross-reference
to other required disclosures that provide additional detail about amounts reclassified out of accumulated other comprehensive income. In
addition, the guidance requires an entity to present significant amounts reclassified out of accumulated other comprehensive income by line
item of net income if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. Adoption of
this standard is required for periods beginning after December 15, 2012 for public companies. This new guidance impacts how the Company
reports comprehensive income and did not have an effect on the Company's results of operations, financial position or liquidity upon its
required adoption on January 1, 2013.
Additionally, in May 2011, updated authoritative guidance to amend existing requirements for fair value measurements and disclosures
was issued. The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value
hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value but whose fair value must
be disclosed. It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities as well as
instruments classified in stockholders' equity. The guidance was effective for the year ended December 31, 2012 and was applied
prospectively. This new guidance impacts how the Company reports on fair value measurements only, and had no effect on the Company's
results of operations, financial position or liquidity upon the Company's adoption on January 1, 2012.
F-15
Table of Contents
2.
FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received on sale of an asset or paid to transfer a liability (exit price) in an orderly
transaction between market participants at the measurement date. The FASB has established a fair value hierarchy that distinguishes between
(1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's
own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable
inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy under the guidance for fair value measurement are described below:
Level 1
Level 2
Level 3
Inputs are unadjusted quoted prices in active markets for identical assets or liabilities. Pricing inputs are based upon quoted
prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement
date. The valuations are based on quoted prices of the underlying security that are readily and regularly available in an active
market, and accordingly, a significant degree of judgment is not required. As of June 30, 2013, the Company used Level 1
assumptions for its money market funds.
Pricing inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are
observable in the market or can be corroborated by observable market data for substantially the full term of the assets or
liabilities. As of June 30, 2013, the Company did not have any Level 2 financial assets or liabilities.
Pricing inputs are generally unobservable for the assets or liabilities and include situations where there is little, if any, market
activity for the investment. The inputs into the determination of fair value require management's judgment or estimation of
assumptions that market participants would use in pricing the assets or liabilities. The fair values are therefore determined
using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. As of
June 30, 2013, the Company used Level 3 assumptions for its convertible preferred stock warrant liability.
The carrying amounts of cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued liabilities approximate
fair value due to the short-term nature of these items. Based on the borrowing rates currently available to the Company for debt with similar
terms, the carrying value of the line of credit and term-debt approximate fair value (using Level 2 inputs).
Level 3 includes convertible preferred stock warrant liability, the value of which is determined based on an option-pricing model that
takes into account the contract terms as well as multiple inputs, such as the Company's stock price, risk-free interest rates and expected
volatility. Additional quantitative information related to the convertible preferred stock warrants is included in Note 8.
The following table sets forth the Company's financial instruments that were measured at fair value on a recurring basis as of
December 31, 2011 and 2012, and June 30, 2013, by level within the fair value hierarchy. The Company's assessment of the significance of a
particular input to the fair value measurement in its entirety requires management to make judgments and consider factors
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specific to the asset or liability. The Company's fair value hierarchy for its financial assets and financial liabilities that are carried at fair value
are as follows (in thousands):
December 31, 2011
Fair Value
Money market funds (included in cash and
cash equivalents)
$
Convertible preferred stock warrant liability
$
December 31, 2012
Fair Value
Level 1
2,900
(433 )
Level 2
Level 3
$
2,900
$
—
$
—
$
—
$
—
$
(433 )
Level 1
Level 2
Level 3
Money market funds (included in cash and
cash equivalents)
$
2,900
$
2,900
$
—
$
Convertible preferred stock warrant
liability
$
(2,741 )
$
—
$
—
$
June 30, 2013
Fair Value
Level 1
Level 2
—
(2,741 )
Level 3
(unaudited)
Money market funds (included in cash
and cash equivalents)
$
2,900
$
2,900
$
—
$
Convertible preferred stock warrant
liability
$
(5,096 )
$
—
$
—
$
—
(5,096 )
Convertible Preferred Stock Warrant Liability —Warrants to purchase the Company's convertible preferred stock are classified as
liabilities in the consolidated balance sheets. The warrants are subject to remeasurement at each balance sheet date, and any change in fair value
is recognized as a component of other income (expense) in the consolidated statements of operations.
A reconciliation of the convertible preferred stock warrants measured and recorded at fair value on a recurring basis, using significant
unobservable inputs (Level 3) is as follows (in thousands):
Six Months Ended
June 30,
2012
2013
(unaudited)
Years Ended December 31,
2011
2012
3.
Balance at beginning of period
Changes in fair value of warrants
$
138
295
$
433
2,308
$
433
262
$
2,741
2,355
Balance at end of period
$
433
$
2,741
$
695
$
5,096
CASH AND CASH EQUIVALENTS
Cash and cash equivalents as of December 31, 2011 and 2012, and June 30, 2013, consist of the following (in thousands):
December 31,
June 30,
2013
2011
2012
(unaudited)
Cash and cash equivalents
Cash
Money market funds
$
2,171
2,900
$
11,996
2,900
$
19,085
2,900
Total cash and cash equivalents
$
5,071
$
14,896
$
21,985
F-17
Table of Contents
4.
PROPERTY, EQUIPMENT AND SOFTWARE
Property, equipment and software as of December 31, 2011 and 2012, and June 30, 2013, consisted of the following (in thousands):
December 31,
June 30,
2013
2011
2012
(unaudited)
Capitalized internal use software costs
Computer hardware and software
Furniture and fixtures
Leasehold improvements
Construction in progress
$
5,766
1,960
219
62
71
Total
Accumulated depreciation and amortization
$
10,441
4,281
816
656
1,126
8,078
(3,137 )
Net property, equipment and software
$
4,941
$
17,320
(6,381 )
$
10,939
13,640
7,081
1,516
811
8
23,056
(9,256 )
$
13,800
Total depreciation and amortization expense, excluding amortization of internal use software costs, was $0.5 million and $1.3 million for
the years ended December 31, 2011 and 2012, and $0.5 million and $1.3 million for the six months ended June 30, 2012 and June 30, 2013,
respectively. Amortization expense of internal use software costs was $1.5 million and $2.3 million for the years ended December 31, 2011 and
2012, and $1.0 million and $1.6 million for the six months ended June 30, 2012 and June 30, 2013, respectively. The Company held no capital
leases as of December 31, 2011 and 2012, and June 30, 2013.
5.
ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities as of December 31, 2011 and 2012, and June 30, 2013, consisted of the following (in thousands):
December 31,
June 30,
2013
2011
2012
(unaudited)
Payroll and related expenses
Accrued vacation
Professional services
Accrued credit cards
Early exercise of unvested stock options
Other accrued expenses
Total
F-18
$
896
521
17
172
110
71
$
3,357
991
268
122
451
997
$
5,701
1,681
2,113
560
1,080
2,077
$
1,787
$
6,186
$
13,212
Table of Contents
6.
OTHER INCOME (EXPENSE), NET
Other income (expense), net for the years ended December 31, 2011, and 2012, and for the six months ended June 30, 2013, consist of the
following (in thousands):
December 31,
June 30,
2013
2011
2012
(unaudited)
Gain (loss) on foreign translation
Other non-operating income (loss), net
Total
7.
$
—
33
$
43
92
$
(459 )
91
$
33
$
135
$
(368 )
DEBT
Line of Credit —In April 2010, the Company entered into a loan and security agreement (the "Comerica Agreement"), with Comerica
Bank ("Comerica"), to establish a revolving line of credit for working capital purposes. The maximum amount available for borrowing under
the revolving line of credit, as amended in June 2012, is not to exceed the lesser of $25.0 million or an amount equal to 85% of certain eligible
accounts. Eligible accounts exclude accounts that have aged over 90 days, including accounts in which 25% of the total account is aged over
90 days, and certain other accounts such as governmental, intercompany, employee and certain foreign accounts. The revolving line of credit
has a maturity date of July 26, 2014 and may be repaid and redrawn at any time prior to the maturity date, at which time all advances are due
and payable. Interest is charged at LIBOR, plus a 2.75% applicable margin, which equaled 3.25%, 2.99% and 2.95% as of December 31, 2011,
December 31, 2012 and June 30, 2013, respectively. As of December 31, 2011 and 2012, and June 30, 2013, the Company had $3.9 million,
$1.9 million and $6.9 million outstanding under the revolving line of credit, respectively.
Term-Debt —In March 2012, the Company amended the original revolving line of credit to allow for growth capital advances of up to
$3.0 million. The Comerica Agreement was further amended in February 2013 to provide for growth capital advances of up to $15.0 million.
Growth capital advances are payable in equal installments over a twenty-four month period ending on February 13, 2016. Interest on
outstanding balances is charged at LIBOR, plus a 4.75% applicable margin, which equaled 4.99% and 4.95% as of December 31, 2012 and
June 30, 2013, respectively. As of December 31, 2012 and June 30, 2013, the principal amount of $5.0 million and $15.0 million, respectively,
was outstanding under the loan.
Venture Debt —In April 2010, the Company entered into a loan and security agreement (the "VLL Agreement") to provide for a growth
capital loan of up to $1.0 million, which the Company drew in full concurrently upon entering into the VLL Agreement. The funds borrowed
were used for general corporate purposes of the Company. The loan was payable in monthly installments of interest only for the first six
months, and thereafter interest and principal was payable in 30 equal monthly installments. Interest accrued at a fixed rate of 13%. All
receivables, equipment, fixtures, deposit accounts, investment property, and all other goods and personal property of the Company, whether
tangible or intangible, were collateral on the loan. The Agreement contains certain conditions of default. As of December 31, 2011 and 2012,
the principal amount of $0.5 million and $0.1 million was outstanding under the agreement.
In March 2013, the Company repaid the VLL growth capital loan in full per the terms of the VLL Agreement, upon which VLL's security
interest in the Company's collateral was released. As such, no amounts were outstanding under the VLL Agreement as of June 30 2013. The
agreement has been terminated upon full repayment.
F-19
Table of Contents
Covenants
As of December 31, 2012, the Company was in non-compliance with respect to various financial and non-financial covenants under the
Comerica Agreement. However, the Company subsequently obtained a waiver for each of the covenant violations. As of December 31, 2012,
the Company was in breach of the covenant under the VLL Agreement requiring submission of monthly consolidated financial statements
within 30 days of month end. As of March 31, 2013, the VLL Agreement had been terminated upon repayment. Hence, a waiver was not
required.
Under the terms of the Comerica Agreement, the Company is required to comply with the following financial covenants:
1. EBITDA: The Company must maintain quarterly and annual EBITDA, which is defined with respect to any fiscal period as an amount
equal to the sum of (i) consolidated net income (loss) in accordance with GAAP, after eliminating all extraordinary nonrecurring items of
income, plus (ii) depreciation and amortization, income tax expense, total interest expense paid or accrued and non-cash stock-based
compensation expense, less (iii) all extraordinary and non-recurring revenue and gains (including income tax benefits).
2. Liquidity ratio: The ratio of (i) the sum of all cash on deposit with Comerica and 85% of eligible receivables accounts to (ii) all funded
debt under the Comerica Agreement must be 1.15:1.00, measured on a monthly basis.
The terms of the Comerica Agreement also require the Company to comply with other non-financial covenants. As of June 30, 2013, the
Company was in compliance with each of the financial and nonfinancial covenants, except for a covenant related to permitted indebtedness for
a corporate credit card account balance, for which it obtained a waiver.
Based on the Company's projections, it believes it will maintain compliance with its loan covenants; however, if future operating results
are less favorable than currently anticipated, the Company may need to seek further amendments to modify its loan covenants.
Warrants
During 2010, in conjunction with entering into the Comerica Agreement, the Company issued a warrant to purchase 104,997 shares of the
Company's Series A convertible preferred stock at an exercise price of $0.9286 per share.
During 2010, in conjunction with entering into the VLL Agreement, the Company issued a warrant to purchase 161,533 shares of the
Company's Series A convertible preferred stock at an exercise price of $0.9286 per share.
Future Payments
Future principal payments of long-term debt as of June 30, 2013 (unaudited) were as follows (in thousands):
2013 (remaining 6 months)
2014
2015
2016
$
Total
Less current portion
—
6,250
7,500
1,250
15,000
(2,500 )
Noncurrent portion of debt
$
F-20
12,500
Table of Contents
As of June 30, 2013, the $6.9 million balance outstanding under the revolving line of credit with Comerica had a maturity date of July 26,
2014, and as a result is shown as a liability in the accompanying consolidated balance sheet.
8.
STOCKHOLDERS' EQUITY
Convertible Preferred Stock —Convertible preferred stock as of December 31, 2012 and June 30, 2013 consisted of the following (in
thousands, except shares and per share data):
Shares
Authorized
Series A
Series B
Series C
Series C-1
Shares
Issued and
Outstanding
Issuance
Price Per
Share
Carrying
Value(1)
Liquidation
Preference
10,884,902
4,811,855
1,116,030
2,975,228
10,618,372 $ 0.9286 $ 9,788
4,811,855
2.0782
9,935
1,116,030
5.8690
6,501
2,932,675
11.7640
34,393
$
9,860
12,500
8,187
34,500
19,788,015
19,478,932
$
65,047
$ 60,617
(1)
Amounts are net of issuance costs.
The rights, preferences and privileges of the convertible preferred stock are as follows:
Voting —The holders of preferred stock are entitled to vote on all matters and are entitled to the number of votes equal to the number of
shares of common stock into which each share of preferred stock is then convertible, except as otherwise required by law or as set forth in the
Company's amended and restated certificate of incorporation.
Dividends —The holders of preferred stock are entitled to receive noncumulative dividends at a rate of 8% of the issue price ($0.07429,
$0.16626, $0.46952 and $0.94112 per share per annum, respectively), whenever funds are legally available and when, as, and if, declared by
the Company's board of directors (the "Board of Directors"). No dividend is to be paid on the common stock at a rate greater than the rate at
which dividends are paid on the Preferred Stock (based on the number of shares of common stock into which the preferred stock is convertible
on the date the dividend is declared). The dividend on the preferred stock is in preference to dividends paid on the common stock. To date, no
such dividends have been declared.
Liquidation Preference —In the event of any liquidation or winding-up of the Company, the holders of Series C-1 convertible preferred
stock shall be entitled to receive, prior and in preference to any distribution to the other preferred or common holders, an amount of $11.7640
per share for each share of Series C-1 convertible preferred stock, as adjusted for any recapitalization events, plus the amount of any declared
but unpaid dividends. If the distribution is insufficient to permit the payment to such holders of the full Series C-1 convertible preferred stock
preference amount, then the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the
holders of the Series C-1 convertible preferred stock, in proportion to the number of shares of Series C-1 convertible preferred stock held by
each of them.
After payment in full to the holders of the Series C-1 convertible preferred stock, the holders of Series C convertible preferred stock shall
be entitled to receive, prior and in preference to any distribution to the other preferred or common holders, an amount of $7.33625 per share for
each share of Series C convertible preferred stock, as adjusted for any recapitalization events, plus the amount of any declared but unpaid
dividends. If the distribution is insufficient to permit the payment to such holders of the full Series C convertible preferred stock preference
amount, then the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the holders of
F-21
Table of Contents
Series C convertible preferred stock, in proportion to the number of Series C convertible preferred stock held by each of them.
After payment in full to the holders of the Series C convertible preferred stock, the holders of Series B convertible preferred stock shall be
entitled to receive, prior and in preference to any distribution to the other preferred or common holders, an amount of $2.59775 per share for
each share of Series B convertible preferred stock, as adjusted for any recapitalization events, plus the amount of any declared but unpaid
dividends. If the distribution is insufficient to permit the payment to such holders of the full Series B convertible preferred stock preference
amount, then the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the holders of
Series B convertible preferred stock, in proportion to the number of Series B convertible preferred stock held by each of them.
After payment in full to the holders of the Series B convertible preferred stock, the holders of Series A convertible preferred stock shall be
entitled to receive, prior and in preference to any distribution to the common holders, an amount of $0.9286 per share for each share of Series A
convertible preferred stock, as adjusted for any recapitalization events, plus the amount of any declared but unpaid dividends. If the distribution
is insufficient to permit the payment to such holders of the full Series A convertible preferred stock preference amount, then the entire assets
and funds of the Company legally available for distribution shall be distributed ratably among the holders of Series A convertible preferred
stock, in proportion to the number of Series A convertible preferred stock held by each of them.
After payment in full to the holders of Series C-1 convertible preferred stock, Series C convertible preferred stock, Series B convertible
preferred stock and Series A convertible preferred stock, any remaining assets and funds of the Company legally available for distribution shall
be distributed to the holders of common stock, ratably in proportion to the shares of common stock then held by each.
Conversion —The preferred stock is convertible, at the option of the holder, at any time into shares of common stock. As of
December 31, 2011 and 2012, the preferred stock was convertible into common stock on a one-for-one basis. The conversion price is subject to
adjustment as provided below.
The preferred stock automatically converts into common stock at the then-applicable conversion price in the event of an underwritten
public offering of shares of common stock at a public offering price per share (net of underwriter's discounts, concessions, commissions and
expenses) that would yield a valuation of the Company of at least $100.0 million and which would result in net proceeds to the company
greater than $20.0 million (as adjusted for stock splits, dividends, recapitalizations and similar events). The preferred stock may also be
converted upon the consent of a super majority of the holders of outstanding preferred stock; provided that the Series C-1 preferred stock shall
not be converted without the consent of a majority of the holders of outstanding shares of series C-1 preferred stock.
Protective Provisions —The conversion price of the preferred stock is subject to adjustment to prevent dilution in the event that the
Company issues additional shares (other than shares or options issued to employees or consultants, lenders, suppliers, financial institutions, or
in connection with the acquisition of a company or technology (in each case as approved by the Board of Directors)) at a purchase price less
than the then-applicable conversion price. The conversion price is subject to adjustment on a broad-based weighted-average basis in the event
of issuances below the then-applicable conversion price.
Warrants —In April 2010, the Company issued a fully vested warrant to purchase 161,553 shares of Series A preferred stock at an
exercise price of $0.9286 per share. The warrant was issued in connection with the Company entering into a loan and security agreement. The
warrant expires 10 years from the date of issuance. The fair value of the warrant at issuance was $22,000 based on the
F-22
Table of Contents
Company's option-pricing model, which approximates a binomial lattice model, using the weighted-average assumptions of 0% dividend yield,
70.5% volatility, risk-free interest rate of 3.96% and contractual life of 10 years. The warrant was outstanding as of December 31, 2012 and
June 30, 2013.
In April 2010, the Company issued a fully vested warrant to purchase 104,997 shares of Series A convertible preferred stock at an exercise
price of $0.9286 per share. The warrant was issued in connection with the Company obtaining a line of credit. The warrant expires seven years
from the date of issuance. The fair value of the warrant at issuance was $10,000 based on the Company's option-pricing model, which
approximates a binomial lattice model, using the weighted-average assumptions of 0% dividend yield, 70.5% volatility, risk-free interest rate of
3.33% and contractual life of seven years. The warrant was outstanding as of December 31, 2012 and June 30, 2013.
The Company will continue to adjust the convertible preferred stock warrant liability for changes in the fair value of the warrants until the
earlier of the exercise of the warrants or the conversion of the underlying preferred stock into common stock, at which time the liability will be
reclassified to stockholders' equity, or the expiration of the warrants.
A reconciliation of the convertible preferred stock warrants measured and recorded at fair value can be found in Note 2. The Company
determined the fair value of the warrants for each period using an option-pricing model with the following assumptions:
Six Months
Ended
June 30,
Years Ended
December 31,
2011
2012
2012
2013
(unaudited)
—%
0.25 %
2.50
58.3 %
Expected dividend yield
Risk-free interest rate
Expected term (in years)
Expected volatility
—%
0.17 %
0.75
52.0 %
—%
0.27 %
1.50
56.3 %
—%
0.20 %
0.50
70.0 %
Reserved Shares of Common Stock —The Company's shares of capital stock reserved for issuance as of December 31, 2012 and June 30,
2013 were as follows:
December 31,
2012
Series A convertible preferred stock
Series B convertible preferred stock
Series C convertible preferred stock
Series C-1 convertible preferred stock
Conversion of Series A convertible preferred stock warrants
Stock options outstanding
Stock options available for grant
Total shares reserved
June 30,
2013
(unaudited)
10,618,372
4,811,855
1,116,030
2,932,675
10,618,372
4,811,855
1,116,030
2,932,675
266,530
5,832,705
14,738
266,530
7,607,735
1,009,437
25,592,905
28,362,634
2008 Equity Incentive Plan —The 2008 Equity Incentive Plan (the "2008 Plan") provides for the grant of incentive stock options and
nonqualified stock options. The compensation committee of the Board of Directors has the authority to approve the employees and
nonemployees to whom options are granted and determine the terms of each option, including (i) the number of shares of common stock
subject to the option; (ii) when the option becomes exercisable; (iii) the option exercise price, which, in the case of incentive stock options,
must be at least 100% of the fair market value of the common stock as of the date of grant; and (iv) the duration of the option (which, in the
case of incentive stock
F-23
Table of Contents
options, may not exceed 10 years). Options granted under the 2008 Plan generally vest over four years and expire no later than 10 years from
the date of grant. As of December 31, 2011 and 2012, and as of June 30, 2013, 33,080, 14,738 and 1,009,437 shares of common stock,
respectively, were available for future grant under the 2008 Plan.
Under the terms of the 2008 Plan, employees may be granted rights to exercise unvested options. Upon termination of service, an
employee's unvested shares may be repurchased by the Company at the original purchase price. As of December 31, 2011 and 2012, and as of
June 30, 2013, 170,543, 449,622 and 421,018 unvested shares, respectively, were subject to repurchase. During the years ended December 31,
2011 and 2012, and the six months ended June 30, 2012 and 2013, the Company repurchased 6,250, 8,959, 0 and 2,188 shares of unvested
stock, respectively.
The following table summarizes option award activity:
WeightedAverage
Exercise
Price
Number of
Shares
Outstanding
Balance at January 1,
2011
Options granted
(weighted
average fair
value of $0.75
per share)
Options exercised
Options forfeited
Balance at
December 31, 2011
Options granted
(weighted
average fair
value of $5.32
per share)
Options exercised
Options forfeited
Balance at
December 31, 2012
Options granted
(weighted
average fair
value of $9.72
per share)(*)
Options
exercised(*)
Options
forfeited(*)
Balance at June 30,
2013(*)
*
unaudited
1,797,283
$
1,799,350
(339,354 )
(449,917 )
2,807,362
$
9.2
$
135
0.55
8.9
$
4,212
9.1
$
44,073
8.9
$
106,453
5.20
1.02
1.64
$
2,021,348
3.65
12.84
(175,459 )
4.68
(70,859 )
4.81
7,607,735
Aggregate
Intrinsic Value
(in thousands)
0.92
0.59
0.68
3,962,055
(747,658 )
(189,054 )
5,832,705
0.20
WeightedAverage
Remaining
Contractual
Life
(Years)
$
6.06
WeightedAverage
Exercise
Price
Number of
Shares
Outstanding
Options vested and expected to
vest—December 31, 2012
Options vested and
exercisable—December 31, 2012
Options vested and expected to
vest—June 30, 2013(*)
Options vested and
exercisable—June 30, 2013(*)
WeightedAverage
Remaining
Contractual
Life
(Years)
Aggregate
Intrinsic Value
(in thousands)
5,148,950
$
3.58
9.0
$
39,307
1,510,615
$
1.97
8.2
$
13,951
6,939,126
$
5.92
8.9
$
98,064
2,198,063
$
2.40
8.0
$
38,801
*
unaudited
F-24
Table of Contents
Aggregate intrinsic value represents the difference between the Company's estimated fair value of its common stock and the exercise price
of outstanding in-the-money options. The total intrinsic value of options exercised was approximately $0.1 million and $1.1 million for the
years ended December 31, 2011 and 2012, respectively, and $1.4 million for the six months ended June 30, 2013.
A summary of options outstanding and vested as of December 31, 2012 is as follows:
Exercise Prices
Options Outstanding
WeightedAverage
Number
Life
Outstanding
(in Years)
$0.13
$0.16
$0.27
$1.07
$2.97
$3.55
$6.58
Options Vested and Exercisable
WeightedNumber
Average
Vested and
Life
Exercisable
(in Years)
50,000
613,816
603,634
1,312,855
308,250
214,000
2,730,150
6.0
7.0
7.9
8.8
9.5
9.6
9.9
50,000
449,361
327,622
305,045
250
—
378,337
6.0
7.0
7.9
8.6
9.5
—
9.9
5,832,705
9.1
1,510,615
8.2
Employee Stock-based Compensation —The fair value of options on the date of grant is estimated based on the Black-Scholes
option-pricing model using the single-option award approach with the weighted-average assumptions set forth below. Expected term represents
the period that the Company's stock-based awards are expected to be outstanding and is determined based on the simplified method. Volatility
is estimated using comparable public company volatility for similar option terms. The risk-free interest rate is determined using a U.S. Treasury
rate for the period that coincides with the expected term.
As the Company has never paid cash dividends, and at present, has no intention to pay cash dividends in the future, expected dividends are
zero. Expected forfeitures are based on the Company's historical experience. The Company uses the straight-line method for expense
recognition.
The assumptions used to value stock-based awards granted to employees were as follows:
Year Ended
December 31,
Expected term
(years)
Volatility
Risk-free
interest rate
Dividend yield
Six Months Ended June 30,
2012
2013
(unaudited)
2011
2012
5.4–6.1
56.1%–66.7%
5.3–7.3
61.2%–63.4%
5.3–6.1
62.3%–63.4%
5.9–6.6
61.7%–64.9%
1.1%–3.1%
—
0.7%–1.2%
—
0.73%–0.88%
—
1.04%–1.26%
—
F-25
Table of Contents
The following table summarizes the allocation of stock-based compensation and restricted stock for employees and non-employees in the
accompanying consolidated statements of operations (in thousands):
Years Ended
Six Months
December 31,
Ended June 30,
2011
2012
2012
2013
(in thousands)
(unaudited)
Cost of revenue
Research and development
Sales and marketing
General and administrative
Total(*)
$
7
8
66
83
$
37
734
1,100
1,450
$
15
96
65
139
$
118
759
1,320
1,403
$
164
$
3,321
$
315
$
3,600
(*)
The table above includes the impact of the issuance of restricted stock at fair value.
As of December 31, 2011 and 2012, and as of June 30, 2013, unamortized stock-based compensation expense related to unvested common
stock options was $0.7 million, $12.5 million and $24.6 million, respectively. The weighted-average period over which such stock-based
compensation expense will be recognized is approximately 3.4 years.
Options to Nonemployees —The Company did not grant any stock options to nonemployees for the years ended December 31, 2011 and
2012, or for the six months ended June 30, 2012. For the six months ended June 30, 2013, the Company granted options to purchase a total of
7,000 shares of common stock to nonemployees. The definition of an employee includes a nonemployee director of the Company.
The Company recorded stock-based compensation expense for options issued to non-employees under the 2008 Plan of approximately $0
and $0.1 million for the years ended December 31, 2011 and 2012, respectively, and $0 and $0.1 million for the six months ended June 30,
2012 and 2013, respectively. Options to nonemployees of 12,400 and 7,400 were outstanding as of December 31, 2012 and June 30, 2013,
respectively.
Restricted Stock —Pursuant to restricted stock purchase agreements, the Company issued a total of 68,815 and 13,571 shares for the year
ended December 31, 2011 and 2012, respectively, and 11,571 and no shares for the six months ended June 30, 2012 and 2013, respectively.
9.
NET INCOME (LOSS) PER SHARE AND UNAUDITED PRO FORMA EARNINGS PER SHARE
The Company calculates its basic and diluted net loss per share attributable to common stockholders in conformity with the two-class
method required for companies with participating securities. Under the two-class method, in periods when the Company has net income, net
income attributable to common stockholders is determined by allocating undistributed earnings, calculated as net income less current period
convertible preferred stock non-cumulative dividends, between common stock and convertible preferred stock. In computing diluted net
income attributable to common stockholders, undistributed earnings are re-allocated to reflect the potential impact of dilutive securities. The
Company's basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common
stockholders by the weighted-average number of shares of common stock outstanding for the period. The diluted net loss per share attributable
to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For
purposes of this calculation, convertible preferred stock, options to purchase common stock and preferred stock warrants are considered
common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as
their effect is antidilutive. In contemplation of an initial public offering, the Company has presented the
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unaudited pro forma basic and diluted net loss per share attributable to common stockholders for the year ended December 31, 2012, and for
the six months ended June 30, 2013 which have been computed to give effect to the automatic conversion of the convertible preferred stock
into shares of common stock as of the beginning of the respective period.
Basic loss per share is calculated by dividing net loss by the weighted-average number of shares of common stock outstanding during the
period, less shares subject to repurchase, and excludes any dilutive effects of employee stock-based awards and warrants. Diluted net income
per common share is computed giving effect to all potential dilutive common shares, including common stock issuable upon exercise of stock
options, and unvested restricted common stock. As the Company had net losses for the years ended December 31, 2011 and 2012, and for the
six months ended June 30, 2012 and 2013, all potential common shares were determined to be anti-dilutive.
The following table sets forth the computation of net loss per common share (in thousands, except per share amounts):
Years Ended December 31,
2011
2012
Net loss
Weighted-average shares used to compute basic and diluted net loss
per share
$
Basic and diluted net loss per share
$
(4,325 )
$
7,600
(0.57 )
Six Months Ended June 30,
2012
2013
(unaudited)
(10,343 )
$
8,024
$
(1.29 )
(2,470 )
$
7,923
$
(0.31 )
(11,911 )
8,347
$
(1.43 )
The following securities were excluded from the calculation of diluted net loss per share attributable to common stockholders because
their effect would have been anti-dilutive for the periods presented (in thousands):
Years Ended December 31,
2011
2012
Convertible preferred stock
Employee stock options
Convertible preferred stock warrants
Six Months Ended June 30,
2012
2013
(unaudited)
16,546
2,797
267
19,479
5,830
267
19,479
3,270
267
19,479
7,607
267
19,610
25,576
23,016
27,353
Unaudited Pro Forma Earnings Per Share —Pro forma basic and diluted net loss per share were computed to give effect to the conversion
of the Series A, Series B, Series C and Series C-1 convertible preferred stock using the as-if converted method into common shares as though
the conversion had occurred as of the beginning of the period or the original date of issuance, if later. Also, the numerator has been adjusted to
reverse the fair value adjustments related to the convertible preferred stock warrants as they will become warrants to purchase common stock
and at such time will no longer require periodic revaluation.
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The following table presents the calculation of pro forma basic and diluted net loss per share (in thousands, except per share data):
Six Months
Ended
June 30,
2013
(unaudited)
Year Ended
December 31,
2012
Net loss
Pro forma adjustment to reflect change in fair value of preferred stock warrant liability
Pro forma net loss
$
(10,343 )
2,308
$
(11,911 )
2,355
$
(8,035 )
$
(9,556 )
Shares:
Weighted-average shares used to compute basic net loss per share
Pro forma adjustment to reflect assumed conversion of convertible preferred stock to occur upon
consummation of the Company's expected initial public offering
Pro forma adjustment to reflect assumed conversion of warrants to acquire convertible preferred
stock to occur upon consummation of the Company's expected initial public offering
Weighted-average shares used to compute basic and diluted pro forma net loss per share
Pro forma basic and diluted net loss per share
$
8,024
8,347
19,479
19,479
161
161
27,664
27,987
(0.29 )
$
(0.34 )
10. INCOME TAXES
The Company accounts for income taxes in accordance with authoritative guidance, which requires the use of the asset and liability
method. Under this method, deferred income tax assets and liabilities are determined based upon the difference between the consolidated
financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to
taxable income in the years in which the differences are expected to be reversed.
The following table presents domestic and foreign components of income (loss) before income taxes for the periods presented (in
thousands):
Years Ended
December 31,
2011
Domestic
International
Total
F-28
2012
$
(4,401 )
104
$
(10,637 )
378
$
(4,297 )
$
(10,259 )
Table of Contents
The components of income tax (expense) benefit were as follows (in thousands):
Years Ended
December 31,
2011
2012
Current:
Federal
State
Foreign
Total provision
$
—
2
26
$
—
11
73
$
28
$
84
The following table presents a reconciliation of the statutory federal rate and the Company's effective tax rate for the periods presented:
Years Ended
December 31,
2011
Tax benefit at federal statutory rate
State income taxes, net of federal effect
Foreign rate differential
Change in valuation allowance
Other non-deductible expenses
Other
2012
34.00 %
(0.04 )
0.04
(35.29 )
(4.16 )
4.72
Total provision
34.00 %
(0.07 )
0.54
(25.16 )
(9.90 )
(0.23 )
(0.73 )%
(0.82 )%
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. The following table presents the significant components of the
Company's deferred tax assets and liabilities for the periods presented (in thousands):
December 31,
2011
Deferred tax assets:
Tax credit carryforwards
Net operating loss carryforwards
Start-up costs
Accrued liabilities and allowances
$
Gross deferred tax asset
Valuation allowance
Net deferred tax assets
$
Deferred tax liability:
Depreciation and amortization
Gross deferred tax liability
Net deferred tax assets (liabilities)
$
2012
609
6,142
54
566
$
843
8,377
—
2,292
7,371
(5,647 )
11,512
(8,831 )
1,724
2,681
(1,724 )
(2,681 )
(1,724 )
(2,681 )
—
$
—
A valuation allowance is provided for deferred tax assets where the recoverability of the assets is uncertain. The determination to provide
a valuation allowance is dependent upon the assessment of whether it is more likely than not that sufficient future taxable income will be
generated to utilize the deferred tax assets. Based on the weight of the available evidence, which includes the Company's
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historical operating losses, lack of taxable income and the accumulated deficit, the Company provided a full valuation allowance against the
deferred tax assets resulting from the tax loss and credits carried forward. As of December 31, 2012, the Company had net operating loss
carryforwards of approximately $22.4 million for federal income taxes and $17.2 million for state income taxes. If not utilized, these
carryforwards will begin to expire in 2029 for both federal purposes and state purposes.
As of December 31, 2012, the Company had research and development credit carryforwards of approximately $0.5 million and
$0.9 million for federal and state income taxes, respectively. If not utilized, the federal carryforwards will begin to expire in various amounts
beginning in 2029. The state tax credit can be carried forward indefinitely.
Internal Revenue Code Section 382 limits the use of net operating loss and tax credit carryforwards in certain situations where changes
occur in the stock ownership of a company. In the event that the Company had a change of ownership, utilization of the net operating loss and
tax credit carryforwards may be restricted.
The table below provides a reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and
penalties) for the years ended December 31, 2011 and 2012 (in thousands):
December 31,
2011
2012
Unrecognized benefit—beginning of period
Gross increases—prior year tax positions
Gross increases—current year tax positions
$
83
—
101
$
184
10
78
Unrecognized benefit—end of period
$
184
$
272
The unrecognized tax benefits of $0.2 million as of December 31, 2012 would have no impact on the Company's effective tax rate if
recognized.
At December 31, 2012, the Company had no cumulative interest and penalties related to the uncertain tax position.
The Company is currently unaware of any uncertain tax positions that could result in significant additional payments, accruals, or other
material deviation in this estimate over the next 12 months.
The Company's tax returns remain open to examination as follows: U.S. federal, 2009 through 2012; U.S. states, generally 2008 through
2012; and United Kingdom, 2011 through 2012.
11. COMMITMENTS AND CONTINGENCIES
Operating Leases —The Company has operating lease agreements for office, research and development and sales and marketing space in
the United States that expire at various dates, with the latest expiration date being April 20, 2018.
The Company recognizes rent expense on a straight-line basis over the lease term and records the difference between cash rent payments
and the recognition of rent expense as a deferred rent liability. Rent expense was $0.7 million and $1.6 million for the years ended
December 31, 2011 and 2012, respectively, and $0.6 million and $1.4 million for the six months ended June 30, 2012 and 2013, respectively.
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Approximate remaining future minimum lease payments under these non-cancelable operating leases as of December 31, 2012 were as
follows (in thousands):
Year ending December 31,
Future Payments
2013
2014
2015
2016
2017
Thereafter
$
2,419
2,392
2,234
2,286
1,649
117
$
11,097
Letter of Credit —As of December 31, 2011 and 2012, and as of June 30, 2013, the Company had irrevocable letters of credit outstanding
in the amount of $0.1 million, $0.2 million and $0.2 million for the benefit of a landlord related to noncancelable facilities leases. The letters of
credit have an expiration date of February 2017.
Indemnification Agreements —In the ordinary course of business, the Company may provide indemnifications of varying scope and
terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses
arising out of breach of such agreements, services to be provided by the Company or from intellectual property infringement claims made by
third parties. In addition, the Company has entered into indemnification agreements with directors and certain officers and employees that will
require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as
directors, officers or employees. No demands have been made upon the Company to provide indemnification under such agreements, and thus
there are no claims that the Company is aware of that could have a material effect on the Company's consolidated balance sheet, consolidated
statement of operations, consolidated statements of comprehensive loss, or consolidated statements of cash flows.
Legal Proceedings —From time to time, the Company is subject to various legal proceedings and claims, either asserted or unasserted,
that arise in the ordinary course of business. Although the outcome of the various legal proceedings and claims cannot be predicted with
certainty, the Company has not had a history of outcomes to date that have been material to the statement of operations and does not currently
believe that any of these proceedings or other claims will have a material adverse effect on the Company's business, consolidated financial
condition, results of operations or cash flows.
12. RETIREMENT PLANS
The Company has established a 401(k) plan to provide tax deferred salary deductions for all eligible employees. Participants may make
voluntary contributions to the 401(k) plan, limited by certain Internal Revenue Service restrictions. The Company is responsible for the
administrative costs of the 401(k) plan. The Company does not match employee contributions.
13. SEGMENTS
The Company considers operating segments to be components of the Company in which separate financial information is available that is
evaluated regularly by the Company's chief operating decision maker in deciding how to allocate resources and in assessing performance. The
chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews financial information
presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company has one business
activity, and there are no segment managers who are held accountable for operations, operating results or plans for levels or components below
the
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consolidated unit level. Accordingly, the Company has determined that it has a single operating and reportable segment. The following table
summarizes total revenue generated through sales personnel located in the respective locations (in thousands):
Years Ended December 31,
2011
2012
North America
All Other Countries
Total revenue
Six Months Ended June 30,
2012
2013
(unaudited)
$
43,415
1,237
$
96,289
10,300
$
36,518
3,074
$
81,246
11,335
$
44,652
$
106,589
$
39,592
$
92,581
The following table summarizes total long-lived assets in the respective locations (in thousands):
December 31,
June 30,
2013
2011
2012
(unaudited)
North America
All Other Countries
Total long-lived assets
$
4,736
205
$
9,959
980
$
12,730
1,070
$
4,941
$
10,939
$
13,800
As of December 31, 2011, no single customer represented more than 10% of accounts receivable. As of December 31, 2012 and June 30,
2013, one customer accounted for 10% of accounts receivable.
During the years ended December 31, 2011 and 2012 and the six months ended June 30, 2013, no single customer represented more than
10% of revenue. During the six months ended June 30, 2012, one customer represented 12% of revenue.
14. SUBSEQUENT EVENTS
In April 2013, the Company drew an additional $5.0 million from its existing line of credit. As of May 23, 2013, a total of $6.9 million of
the maximum advance amount of $25.0 million was outstanding under the line of credit.
In May 2013, the Company amended and restated the certificate of incorporation to increase the total authorized common shares from
35,850,100 to 39,435,110.
In May 2013, the Company increased the number of shares reserved for future grants under the 2008 Equity Incentive Plan by 1,743,000
shares of common stock.
Unaudited
In August 2013, the Company entered into an operating lease for a new sales office in New York, New York which expires in September
2024 and increased the Company's total future operating lease obligations by $25.0 million. In conjunction with this noncancelable lease, the
Company obtained an irrevocable letter of credit in the amount of $1.2 million, to the benefit of the landlord.
In August 2013, the Company entered into an operating lease for a new headquarters facility in Redwood City, California which expires in
December 2019 and increased the Company's total future operating lease obligations by $25.6 million. In conjunction with this noncancelable
lease, the Company obtained an irrevocable letter of credit in the amount of $1.6 million, to the benefit of the landlord.
In August 2013, subject to stockholder approval, the Company's board of directors adopted a 2013 Equity Incentive Plan and a 2013
Employee Stock Purchase Plan.
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Table of Contents
15. CONSOLIDATED FINANCIAL STATEMENTS CORRECTION
Subsequent to the issuance of the Company's fiscal 2012 consolidated financial statements, the Company determined that the presentation
of its borrowings and repayments associated with its line of credit for the year ended December 31, 2012 were incorrectly presented on a net
basis, rather than on a gross basis in accordance with the FASB Accounting Standards Codification 230, "Statement of Cash Flows."
Accordingly, the Company has corrected the consolidated statement of cash flows relating to borrowings from the line of credit and repayment
of the line of credit for the year ended December 31, 2012.
Additionally, the Company determined that $4,052 of previously disclosed future minimum lease payments due from 2016 through 2018
was presented as due in 2016. The disclosure of future minimum lease payments of $2,286, $1,649 and $117 due in 2016, 2017 and thereafter,
respectively, has been correctly presented in Note 11. Management has concluded that the correction of these errors is immaterial.
******
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Table of Contents
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 the Registrant, other than underwriting discounts and commissions, in connection
with this offering. All amounts shown are estimates except for the SEC registration fee and the FINRA filing fee.
SEC registration fee
FINRA filing fee
Exchange listing fee
Printing and engraving
Legal fees and expenses
Accounting fees and expenses
Blue sky fees and expenses (including legal fees)
Transfer agent and registrar fees
Miscellaneous
Total
$
13,640
15,500
*
*
*
*
*
*
*
$
*
*
To be filed by amendment.
ITEM 14.
Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a corporation's board of directors to grant, and authorizes a court to
award, indemnity to officers, directors and other corporate agents.
On completion of this offering, as permitted by Section 102(b)(7) of the Delaware General Corporation Law, the Registrant's amended and
restated certificate of incorporation will include provisions that eliminate the personal liability of its directors and officers for monetary
damages for breach of their fiduciary duty as directors and officers.
In addition, as permitted by Section 145 of the Delaware General Corporation Law, the amended and restated certificate of incorporation
and amended and restated bylaws of the Registrant will provide that:
•
The Registrant shall indemnify its directors and officers for serving the Registrant in those capacities or for serving other business
enterprises at the Registrant's request, to the fullest extent permitted by Delaware law. Delaware law provides that a corporation
may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Registrant and, with respect to any criminal proceeding, had no reasonable cause to believe
such person's conduct was unlawful.
•
The Registrant may, in its discretion, indemnify employees and agents in those circumstances where indemnification is permitted
by applicable law.
•
The Registrant is required to advance expenses, as incurred, to its directors and officers in connection with defending a proceeding,
except that such director or officer shall undertake to repay such advances if it is ultimately determined that such person is not
entitled to indemnification.
•
The Registrant will not be obligated pursuant to the amended and restated bylaws to indemnify a person with respect to
proceedings initiated by that person, except with respect to proceedings authorized by the Registrant's board of directors or brought
to enforce a right to indemnification.
II-1
Table of Contents
•
The rights conferred in the amended and restated certificate of incorporation and amended and restated bylaws are not exclusive,
and the Registrant is authorized to enter into indemnification agreements with its directors, officers, employees and agents and to
obtain insurance to indemnify such persons.
•
The Registrant may not retroactively amend the bylaw provisions to reduce its indemnification obligations to directors, officers,
employees and agents.
The Registrant's policy is to enter into separate indemnification agreements with each of its directors and officers that provide the
maximum indemnity allowed to directors and executive officers by Section 145 of the Delaware General Corporation Law and also to provide
for certain additional procedural protections. The Registrant also maintains directors and officers insurance to insure such persons against
certain liabilities.
These indemnification provisions and the indemnification agreements entered into between the Registrant and its officers and directors
may be sufficiently broad to permit indemnification of the Registrant's officers and directors for liabilities (including reimbursement of
expenses incurred) arising under the Securities Act of 1933, as amended, or the Securities Act.
The underwriting agreement filed as Exhibit 1.1 to this registration statement provides for indemnification by the underwriters of the
Registrant and its officers and directors for certain liabilities arising under the Securities Act and otherwise.
ITEM 15.
Recent Sales of Unregistered Securities .
During the last three years, the Registrant has issued the following unregistered securities:
Sales of Preferred Stock
In August 2010, the Registrant sold an aggregate of 4,811,855 shares of its Series B preferred stock to a total of four accredited investors
at a purchase price of $2.0782 per share, for an aggregate purchase price of approximately $10,000,000.
In March 2011, the Registrant sold an aggregate of 1,116,030 shares of its Series C preferred stock to a total of five accredited investors at
a purchase price of $5.869 per share, for an aggregate purchase price of approximately $6,550,000.
From April 2012 to June 2012, the Registrant sold an aggregate of 2,932,675 shares of its Series C-1 preferred stock to a total of 11
accredited investors at a purchase price of $11.764 per share, for an aggregate purchase price of approximately $34,500,000.
Stock Option and Common Stock Issuances
From July 1, 2010 through June 30, 2013, pursuant to the terms of our 2008 Equity Incentive Plan, or 2008 Plan, the Registrant granted to
its officers, directors, employees, consultants and other service providers options to purchase an aggregate of 8,449,753 shares of common
stock at exercise prices ranging from $0.27 to $15.33 per share.
From July 1, 2010 through June 30, 2013, pursuant to the terms of our 2008 Plan, the Registrant granted to its officers, directors,
employees, consultants and other service providers an aggregate of 104,774 shares of common stock in exchange for services, for an aggregate
dollar value of $92,342.78.
From July 1, 2010 through June 30, 2013, pursuant to the terms of our 2008 Plan, the Registrant issued and sold to its officers, directors,
employees, consultants and other service providers an aggregate of 1,385,596 shares of common stock upon the exercise of options at exercise
prices ranging from $0.13 to $15.33 per share, for an aggregate exercise price of $1,516,665.86.
None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering. The
Registrant believes the offers, sales and issuances of the above
II-2
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securities were exempt from registration under the Securities Act by virtue of (i) Section 4(2) of the Securities Act as transactions not involving
a public offering or (ii) Rule 701 promulgated under the Securities Act as transactions pursuant to compensatory benefit plans or contracts
relating to compensation as provided under such rule. The recipients of the securities in each of these transactions represented their intentions
to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate
legends were placed upon the stock certificates issued in these transactions. All recipients had adequate access, through their relationships with
the Registrant, to information about the Registrant. The sales of these securities were made without any general solicitation or advertising.
ITEM 16.
Exhibits and Financial Statement Schedules
(a) Exhibits. We have filed the exhibits listed on the accompanying Exhibit Index of this Registration Statement.
(b) Financial Statement Schedules. All financial statement schedules are omitted because the information called for is not required or is
shown either in the consolidated financial statements or in the notes thereto.
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 of 1933 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 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 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 of 1933, 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 of 1933, 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-3
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amendment to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City of Redwood City, State of California, on September 3, 2013.
ROCKET FUEL INC.
By:
/s/ GEORGE H. JOHN
George H. John
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment to registration statement has been signed by the following
persons in the capacities and on the dates indicated.
Signature
Title
Date
/s/ GEORGE H. JOHN
Co-Founder, Chief
Executive Officer and
Chairman of the Board
of Directors
(Principal Executive
Officer)
September 3, 2013
Chief Financial Officer
(Principal Accounting and
Financial Officer)
September 3, 2013
Co-Founder, President
and Director
September 3, 2013
Director
September 3, 2013
Director
September 3, 2013
Director
September 3, 2013
Director
September 3, 2013
Director
September 3, 2013
George H. John
/s/ J. PETER BARDWICK
J. Peter Bardwick
*
Richard Frankel
*
Susan L. Bostrom
*
Ronald E. F. Codd
*
William Ericson
*
John Gardner
*
Clark Kokich
*
Director
Monte Zweben
*by:
/s/ GEORGE H. JOHN
George H. John
As Attorney-in-fact
II-4
September 3, 2013
Table of Contents
EXHIBIT INDEX
Exhibit
No.
Description of Exhibit
1.1 *
Form of Underwriting Agreement.
3.1 #
Sixth Amended and Restated Certificate of Incorporation of the Registrant, as amended and
currently in effect.
3.2 #
Form of Amended and Restated Certificate of Incorporation of the Registrant, to be in effect
upon completion of the offering.
3.3 #
Bylaws of the Registrant, as currently in effect.
3.4 #
Form of Amended and Restated Bylaws of the Registrant, to be in effect upon completion of the
offering.
4.1 *
Form of the Registrant's common stock certificate.
5.1 *
Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1 #
Form of Indemnification Agreement between the Registrant and each of its directors and
executive officers.
10.2 #
Warrant to Purchase Stock issued to Comerica Bank, dated as of April 7, 2010.
10.3 #
Loan and Security Agreement by and between the Registrant and Comerica Bank, dated as of
April 7, 2010, as amended and currently in effect.
10.4
Lease, dated as of February 17, 2009, by and between 350 Marine Parkway LLC, Gillikin
Trade LLC, Lewis Trade LLC, Spiegl Trade LLC, Welsh Trade LLC, and the Registrant, as
amended and currently in effect.
10.5
Office Lease, dated as of August 7, 2013, by and between VII Pac Shores Investors, L.L.C. and
the Registrant.
10.6
Lease, dated as of July 31, 2013, by and between VNO 100 West 33rd Street LLC, and the
Registrant.
10.7 #
The Registrant's 2008 Equity Incentive Plan, including form agreements, as amended and
currently in effect.
10.8 #
The Registrant's 2013 Equity Incentive Plan, including form agreements, to be in effect upon
completion of the offering.
10.9
The Registrant's 2013 Employee Stock Purchase Plan, including form agreements, to be in effect
upon the completion of the offering.
10.10 #
Executive Incentive Compensation Plan.
10.11
Outside Director Compensation Policy.
10.12 #
Offer Letter between the Registrant and Monte Zweben, dated as of January 29, 2010.
10.13 #
Offer Letter between the Registrant and Clark Kokich, dated as of April 5, 2011.
10.14 #
Offer Letter between the Registrant and Ronald E.F. Codd, dated as of February 16, 2012.
10.15 #
Offer Letter between the Registrant and Susan L. Bostrom, dated as of February 4, 2013.
10.16 #
Fourth Amended and Restated Investors' Rights Agreement, dated as of June 15, 2012, by and
among the Registrant, George H. John, Richard Frankel, Abhinav Gupta and the investors listed
on Exhibit A attached thereto.
21.1 #
List of subsidiaries of the Registrant.
Table of Contents
Exhibit
No.
Description of Exhibit
23.1 *
Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in
Exhibit 5.1).
23.2
Consent of Deloitte & Touche LLP, independent registered public accounting firm.
24.1 #
Power of Attorney.
*
To be filed by amendment.
#
Previously filed.
Exhibit 10.4
LEASE
BETWEEN
350 MARINE PARKWAY LLC, GILLIKIN TRADE LLC,
LEWIS TRADE LLC, SPIEGL TRADE LLC, and
WELSH TRADE LLC, LESSOR
AND
ROCKET FUEL, INC., LESSEE
Suite 220
350 Marine Parkway
Redwood City, California 94065
February 17, 2009
TABLE OF CONTENTS
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Page
Lease
Initial Term
Option to Extend
Monthly Base Rent
Additional Rent; Increases in Operating Expenses and Taxes
Payment of Rent
Security Deposit
Use
Environmental Matters
Taxes on Lessee’s Property
Insurance
Indemnification
Tenant Improvement Work
Maintenance and Repairs; Alterations; Surrender and Restoration
Utilities and Services
Liens
Assignment and Subletting
Non-Waiver
Holding Over
Damage or Destruction
Eminent Domain
Remedies
Lessee’s Personal Property
Notices
Estoppel Certificates
Parking
Signage; Roof Rights
Real Estate Brokers
Subordination; Attornment
Breach by Lessor
Lessor’s Entry
Financial Statements
Attorneys’ Fees
Quiet Enjoyment
Lessee’s Expansion Rights
General Provisions
SCHEDULE OF EXHIBITS
EXHIBIT “A”
EXHIBIT “B”
EXHIBIT “C”
EXHIBIT “D”
Legal Description
The Premises
Lessor’s Furniture Inventory
Commencement Memorandum
LEASE
Suite 220
350 Marine Parkway
Redwood City, California 94065
THIS LEASE (“this Lease”), dated for reference purposes as of February 17, 2009, is made and entered into by and between 350
MARINE PARKWAY LLC, a California limited liability company, GILLIKIN TRADE LLC, California limited liability company, LEWIS
TRADE LLC, California limited liability company, SPIEGL TRADE LLC, California limited liability company, and WELSH TRADE LLC,
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California limited liability company, hereafter referred to as “Lessor,” and ROCKET FUEL, INC., a Delaware corporation, hereafter referred to
as “Lessee.”
RECITALS :
A.
Lessor is the owner of the real property located in Redwood City, California 94065, commonly referred to as 350
Marine Parkway, Redwood City, California 94065, more particularly described on Exhibit “A” attached hereto and incorporated by reference
herein, consisting of a parcel of land containing approximately 2.946 acres, together with all easements and appurtenances thereto (the “Land”)
and a building thereon containing approximately 34,452 rentable square feet (the “Building”), and all other improvements located thereon
(collectively, the “Improvements”). The real property referred to above, together with the Building and all other improvements thereon, is
hereafter called the “Complex.”
B.
The portions of the Complex not covered by the Building are hereafter called the “Outside Areas.”
C.
Lessor and Lessee wish to enter into this Lease of certain premises located on the floor of the Building upon the terms
and conditions set forth herein.
NOW, THEREFORE, the parties agree as follows:
1.
Lease .
(a)
Lessor hereby leases to Lessee, and Lessee leases and hires from Lessor, those certain premises consisting of
approximately five thousand one hundred eighty-seven (5,187) rentable square feet (the “Premises”) located on the second floor of the
Building. This Lease shall be for the term, at the rental, and upon the covenants and conditions contained herein. The Premises are shown on
Exhibit “B” attached hereto and incorporated by reference herein.
(b)
“Lessee’s Share” as used in this Lease shall mean the percentage calculated by dividing the total number of
rentable square feet of the Premises by the total number of rentable square feet in the Complex (34,452 rentable square feet). The parties agree
that Lessee’s Share shall be 15.06% based upon the Premises consisting of approximately five thousand one hundred eighty-seven (5,187)
rentable square feet (5,187/34,452).
(c)
All existing workstation furniture described on Exhibit “C” attached hereto and incorporated by reference
herein located on the Premises on the date of the execution and delivery of this Lease shall remain on the Premises and may be used by Lessee
during the term of this Lease without additional charge to Lessee. All of the existing workstation furniture located on the Premises and
provided by Lessor pursuant to this subparagraph (c) shall remain the property of Lessor and shall be returned by Lessee to Lessor upon the
expiration or earlier termination of the Lease term in serviceable condition and repair, normal wear and tear excepted.
2.
Initial Term .
(a)
The initial term of this Lease (the “initial term”) shall commence on or about March 15, 2009 (the
“Commencement Date”), subject to the prior satisfaction of the conditions set forth in Paragraph 2(c). The Commencement Date shall be
confirmed in writing by Lessor and Lessee by the execution and delivery of the Commencement Memorandum in the form attached hereto as
Exhibit “D” and incorporated by reference herein. Provided this Lease has been executed and delivered by the parties by 5:00 PM Pacific time
on Wednesday, February 18, 2009, if Lessor has not substantially completed Lessor’s Tenant Improvement Work in the Premises referred to in
Paragraph 13(a) on or before March 31, 2009, Lessee shall have the right to terminate this Lease by giving written notice of termination to
Lessor.
(b)
The initial term of this Lease shall expire on May 14, 2011 (the “Expiration Date”), unless sooner terminated
in accordance with the provisions hereof.
(c)
The commencement of the initial term of this Lease on the Commencement Date specified in Paragraph
2(a) shall be subject to the prior satisfaction of the following conditions: (1) the prior execution and delivery of this Lease by the parties, (2) the
payment by Lessee to Lessor upon the execution and delivery of this Lease, of the sum of Thirteen Thousand Seven Hundred Forty-five and
Fifty-five Hundredths Dollars ($13,745.55) representing the Monthly Base Rent for the fourth month of the initial term, (3) the payment by
Lessee to Lessor concurrently with the execution and delivery of this Lease of the sum of Twenty-eight Thousand Five Hundred Twenty-eight
and Fifty Hundredths Dollars ($28,528.50) representing the Security Deposit referred to in Paragraph 7(a), and (4) substantial completion of
Lessor’s Tenant Improvement Work to be performed by Lessor in the Premises referred to in Paragraph 13(a). Lessor warrants that on the
Commencement Date the Premises and the Building will be in compliance with the Americans With Disabilities Act (ADA), applicable
building codes, and all other applicable orders, regulations, rules, laws, statutes, ordinances and requirements of all governmental agencies or
authorities (collectively, “Laws”), and with the roof membrane and roof structure and all of the systems of the Building in good operating
condition and repair, including, but not limited to, the HVAC, mechanical, lighting, electrical, life safety, and plumbing systems, with the
ceiling tiles in good condition, and with the roof in water tight condition.
(d)
Subject to the satisfaction of conditions (1), (2), and (3) set forth in Paragraph 2(c), and the delivery by Lessee
to Lessor of written evidence that Lessee’s commercial general liability insurance coverage required by Paragraph 11(a) is in effect, Lessee and
Lessee’s vendors and contractors shall have access to the Premises, on February 20, 2009 for the installation by Lessee at Lessee’s expense of
Lessee’s furniture, trade fixtures, and telecommunications equipment, provided that Lessee sand its vendors and suppliers shall not interfere
with the construction of Lessor’s Tenant Improvement Work.
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(e)
period, if exercised.
3.
As used in this Lease, “term” or “term of this Lease” shall include the initial term and the option extension
Option to Extend .
(a)
Lessor hereby grants to Lessee one (1) option to extend the term of this Lease for a period of twenty four (24)
calendar months immediately following the expiration of the initial term (the “option extension period”). Lessee may exercise the foregoing
option to extend by giving written notice of exercise to Lessor at least six (6) months, but not more than twelve (12) months, prior to the
expiration of the initial term of this Lease (the “option exercise period”), provided that if there currently exists an Event of Default by Lessee
(as defined in Paragraph 22) under this Lease that remains uncured after the expiration of notice and cure periods, if any, at the time of exercise
of the option or at the commencement date of the option extension period, such notice shall be void and of no force or effect. The option
extension period, if exercised, shall be upon the same terms and conditions as the initial term of this Lease, including the payment by Lessee of
Lessee’s Share of increases in the Operating Expenses and Taxes pursuant to Paragraph 5, except that (1) the Monthly Base Rent during the
option period, if exercised, shall be determined as set forth in Paragraph 3(c) hereof, (2) Lessor may adjust the hourly rate for after hours
HVAC services as of the commencement date of the option extension period pursuant to Paragraph 15(b), (3) there shall be no additional
option to extend, and (4) Lessee shall accept the Premises in their “as is” condition, subject to compliance with Laws as provided in Paragraph
2(c) and compliance with the Americans With Disabilities Act as provided in Paragraph 13(d) which shall also apply to the commencement of
the option extension period. If Lessee does not exercise the option in a timely manner, the option shall lapse, time being of the essence. Subject
to the foregoing, neither Lessor nor Lessee shall be required to perform any tenant improvement work with respect to the option extension
period.
(b)
The option to extend granted to Lessee by this Paragraph 3 is granted for the personal benefit of Rocket Fuel, Inc.
(“Rocket Fuel”) only, and shall be exercisable only by Rocket Fuel or by an assignee or sublessee referred to in Paragraph 17(g) as a
“Permitted Affiliate.” Said option may not be assigned or transferred by Rocket Fuel to, or exercised by, any assignee or sublessee, except as
provided in Paragraph 17(g).
(c)
The initial Monthly Base Rent for the Premises during the option extension period shall be determined pursuant
to the provisions of this subparagraph (c) and shall be equal to the then current fair market Monthly Base Rent of the Premises on the
commencement date of the option extension period as determined by agreement between the Lessor and Lessee reached prior to the expiration
of the option exercise period, if possible, or by the process of appraisal if the parties cannot reach agreement.
Upon the written request by Lessee to Lessor received by Lessor no earlier than twelve (12) months prior to the expiration of
the initial term, and no later than the eight (8) months prior to the expiration of the initial term, and prior to the exercise by Lessee of the option
to extend, Lessor shall give Lessee written notice of Lessor’s good faith opinion of the amount equal to the fair market Monthly Base Rent of
the Premises as of the commencement of the option extension period. Thereafter, upon the request of Lessee, Lessor and Lessee shall enter into
good faith negotiations for up to thirty (30) days in an effort to reach agreement on the fair market Monthly Base Rent for the Premises on the
commencement date of the option extension period.
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If Lessor and Lessee are unable to agree upon the amount equal to the initial fair market Monthly Base Rent for the Premises
on a full service basis, and thereafter, prior to the expiration of the option exercise period, Lessee exercises the option to extend, said amount of
the initial Monthly Base Rent shall be determined by appraisal. The appraisal shall be performed by one appraiser if the parties are able to
agree upon one appraiser. If the parties are unable to agree upon one appraiser, each party shall appoint an appraiser and the two appraisers
shall select a third appraiser. Each appraiser selected shall be a member of the American Institute of Real Estate Appraisers (AIREA) with at
least five (5) years of full-time commercial real estate appraisal experience in the Redwood City-Redwood Shores, California office rental
market.
If only one appraiser is selected, that appraiser shall notify the parties in simple letter form of its determination of the amount
equal to the fair market Monthly Base Rent for the Premises on the commencement date of the option extension period within fifteen (15) days
following its selection. Said appraisal shall be binding on the parties as the appraised current “fair market Monthly Base Rent” for the Premises
which shall be based upon what a willing new lessee would pay and a willing lessor would accept at arm’s length for premises comparable to
the Premises determined with reference to comparable premises in the vicinity of the Complex of similar age, size, quality of construction and
specifications (excluding the value of any improvements to the Premises made at Lessee’s cost) for a lease of similar duration to this Lease and
taking into consideration that there will be no free rent, improvement allowance, or other concessions. If multiple appraisers are selected, each
appraiser shall within ten (10) days of being selected make its determination of the amount equal to the initial fair market Monthly Base Rent
for the Premises on a full service basis in simple letter form. If two (2) or more of the appraisers agree on said amount, such agreement shall be
binding upon the parties. If multiple appraisers are selected and two (2) appraisers are unable to agree on said amount, the amount equal to the
initial fair market Monthly Base Rent for the Premises shall be determined by taking the mean average of the appraisals; provided, that any
high or low appraisal, differing from the middle appraisal by more than ten percent (10%) of the middle appraisal, shall be disregarded in
calculating the average. Said initial Monthly Base Rent shall be adjusted annually on the anniversary of the commencement of the option
extension period in the manner determined by the appraiser or appraisers to be consistent with the then prevailing market practice for
comparable space in the Redwood City, California office rental market.
If only one appraiser is selected, then each party shall pay one-half of the fees and expenses of that appraiser. If three
appraisers are selected, each party shall bear the fees and expenses of the appraiser it selects and one-half of the fees and expenses of the third
appraiser.
(d)
Thereafter, provided that Lessee has previously given timely notice to Lessor of the exercise by Lessee of the
option to extend the term, Lessor and Lessee shall execute an amendment to this Lease stating that the Monthly Base Rent for the Premises as
of the commencement of the option extension period shall be equal to fair market rent as agreed upon by Lessor and Lessee, or one hundred
percent (100%) of the fair market rental for the Premises as determined by the appraisal process referred to above.
(e)
Notwithstanding anything to the contrary contained in subparagraph (c) above, in no event shall the Monthly
Base Rent at the commencement of the option extension period be less than the Monthly Base Rent in effect immediately prior to the
commencement of the option extension period.
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4.
Monthly Base Rent .
(a)
Lessee shall pay to Lessor during the term of this Lease Base Rent on a full service basis as follows:
Period
Sq. Ft.
Months 1 – 3
Months 4 –12
Months 13 – 26
5,187
5,187
5,187
Monthly Base
Rent (Full Service)
Rate/sq. ft.
$
$
$
-0-/sq. ft.
2.65/sq. ft.
2.75/sq. ft.
$
$
$
-013,745.55 full service
14,264.25 full service
(b)
Upon the execution and delivery of this Lease by Lessor and Lessee, Lessee shall pay to Lessor the sum of Thirteen
Thousand Seven Hundred Forty-five and Fifty-five Hundredths Dollars ($13,745,55) representing the Monthly Base Rent for the fourth
calendar month of the initial term.
(c)
Monthly Base Rent is determined on a full service basis and includes the Base Operating Expenses and Base Taxes
referred to in Paragraph 5(b) hereof.
5.
Additional Rent: Increases in Operating Expenses and Taxes .
(a)
If Operating Expenses and/or Taxes as defined in Paragraphs 5(c) and 5(d), respectively, for any calendar year
during the term of this Lease after the calendar year 2009 exceeds Base Operating Expenses and/or Base Taxes as defined in Paragraph 5(b),
Lessee shall pay to Lessor, as “Additional Rent,” Lessee’s Share of such increase in Operating Expenses and Taxes in accordance with
Paragraph 5(f) hereof.
(b)
“Base Operating Expenses” and “Base Taxes” shall mean the actual Operating Expenses and Taxes of the Complex
for the calendar year 2009, adjusted to reflect a ninety-five percent (95%) occupancy rate of the Complex throughout such year.
(c)
“Operating Expenses,” as used herein, shall include all direct costs of management, operation, maintenance, and
repair of the Complex and providing services to tenants of the Building as determined by generally accepted accounting principles (unless
excluded by this Lease), including, but not limited to:
Personal property taxes related to the Complex; any parking taxes or parking levies imposed on the Complex in the future by
any governmental agency; a pro rata portion of the management fee charged for the management and operation of the Complex, in an amount
equal to four percent (4%) of the total gross income received by Lessor from the operation of the Complex (including Monthly Base Rent and
Additional Rent received from tenants), such amount to be capped at four percent (4%) during the term of the Lease; water and sewer charges;
waste disposal; insurance premiums for insurance coverages maintained by Lessor pursuant to Paragraph 11(b) hereof; license, permit, and
inspection fees; charges for electricity, heating, air conditioning, gas, and any other utilities (including, without limitation, any temporary or
permanent utility surcharge or other exaction); security; janitorial services and maintenance contracts; painting and repairing, interior and
exterior; maintenance and replacement of floor and window coverings; repair and maintenance of air-conditioning, heating, mechanical and
electrical systems, elevators, plumbing
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and sewage systems; compensation and related fringe benefits paid to a building engineer, if any, directly employed in the operation and
maintenance of the Complex; landscaping and gardening of Outside Areas; glazing; repair, maintenance, cleaning, sweeping, striping, and
resurfacing of the parking area; supplies, materials, equipment and tools in the maintenance of the Complex; costs for accounting services
incurred in the calculation of Operating Expenses and Taxes and Lessee’s Share thereof as defined herein; Lessee’s Share of the amortized cost
of the replacement of the HVAC system, elevators, replacement of the parking area, and any other improvements or replacements which would
properly be capitalized under standard accounting practices, including the cost of any capital expenditures for any improvements or changes to
the Complex which are required by laws, ordinances, or other governmental regulations adopted after the Commencement Date or for any
items which are intended to and have the effect of reducing Operating Expenses, provided, however, that the cost of said capital improvements
(together with interest on the unamortized balance at the rate equal to the effective rate of interest on Lessor’s bank line of credit at the time of
completion of said improvements, but in no event in excess of ten percent (10%) per annum) shall be amortized on a useful life basis in
accordance with standard accounting practices and treated as an Operating Expense, except that with respect to capital improvements made to
save Operating Expenses such amortization shall not be at a rate greater than the anticipated savings in Operating Expenses. Operating
Expenses shall also include any other expense or charge, whether or not described herein not specifically excluded by other provisions of this
Lease, which in accordance with generally accepted accounting and management practices would be considered an expense of managing,
operating, maintaining, and repairing the Complex.
(d)
Real property taxes and assessments upon the Complex, during each lease year or partial lease year during the
term of this Lease are referred to herein as “Taxes.”
As used herein, “Taxes” shall mean:
(1)
all real estate taxes, assessments and any other taxes levied or assessed against the Complex including
the Land, the Building, all improvements located thereon, and any increases in Taxes resulting from reassessments following any change in
ownership of the Complex or any interest therein, by any new construction or major repairs to the Complex (“major repairs” are defined for this
purpose as any repairs, work, alterations, or improvements to the Complex performed by Lessor or Lessee that cost in excess of Twenty
Thousand Dollars ($20,000.00)), or change in valuation now or hereafter imposed by any governmental or quasi-governmental authority or
special district having the direct or indirect power to tax or levy assessments; and
(2)
all other taxes which may be levied in lieu of real estate taxes, assessments, and other fees, charges,
and levies, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind and nature by any authority having the
direct or indirect power to tax, including without limitation any governmental authority or any improvement or other district or division thereof,
for public improvements, services, benefits, or environmental matters which are assessed, levied, confirmed, imposed, or become a lien
(a) upon the Complex; or (b) upon this transaction or any document to which Lessee is a party creating or transferring any interest in the
Premises; and (c) any tax or excise, however described, imposed in addition to, or in substitution partially or totally of, any tax previously
included within the definition of “Taxes” or any tax the nature of which was previously included in the definition “Taxes.”
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Not included within the definition of “Taxes” are any net income, profits, transfer, franchise, capital stock, estate or
inheritance taxes imposed by any governmental authority; late payment penalties or interest, provided that Lessee is not in default in the
payment of Monthly Base Rent or Additional Rent; or any increase in Taxes which are the result of leasehold improvements for any other
tenant of the Complex which are substantially in excess of building standard improvements.
With respect to any assessments which may be levied against or upon the Complex, or the underlying realty thereof,
which under the laws then in force may be evidenced by improvement or other bonds, or may be paid in annual installments, only the amount
of such annual installment (with appropriate proration of any partial year) and statutory interest shall be included within the computation of the
annual Taxes levied against the Complex, the Building and improvements thereon, and the underlying realty thereof.
(e)
The following costs (“Costs”) shall be excluded from the definition of Operating Expenses:
(1)
Costs occasioned by the act, omission or violation of law by Lessor, any other occupant of the
Complex, or their respective agents, employees or contractors;
(2)
Costs for which Lessor receives reimbursement from others, including reimbursement from
insurance;
(3)
The cost of any renovation, improvement, painting or redecorating of any portion of the Complex
which is not a common area or not made available for Lessee’s use in common with other tenants;
(4)
Fees, commissions, attorneys’ fees, costs or other disbursements incurred in connection with
negotiations or disputes with any other occupant of the Complex and costs arising from the violation by Lessor or any occupant of the Complex
(other than Lessee) of the terms and conditions of any lease or other agreement;
(5)
Interest, charges and fees incurred on debt or payments on any deed of trust on the Complex;
(6)
Advertising or promotional costs or other costs incurred in procuring tenants;
(7)
Costs incurred in repairing, maintaining or replacing any structural elements of the Building and
Complex for which Lessor are responsible pursuant to Paragraph 14(a) hereof;
(8)
Any wages, bonuses or other compensation of employees above the grade of the on site building
engineer who perform or supervise the performance of general building maintenance, and any executive salary of any officer or employee of
Lessor, including fringe benefits other than insurance plans and tax-qualified benefit plans, or any fee, profit or compensation retained by
Lessor or its affiliates for management and administration of the Complex in excess of the sum specified in Paragraph 5(c) above;
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(9)
General corporate overhead and general and administrative expenses of Lessor, except as
specifically provided in Paragraph 5(c); and
(10)
Leasing expenses and broker commissions payable by Lessor.
Lessor shall at all times use its best efforts to operate the Building and Complex in an economically reasonable manner at
costs not disproportionately higher than those experienced by other comparable buildings in the market area in which the Premises are located
(Redwood Shores).
(f)
As close as reasonably possible to the end of each calendar year commencing with the end of the calendar year
2009, Lessor shall notify Lessee of any increases in Operating Expenses and/or Taxes over the Base Operating Expenses and Base Taxes
reasonably estimated by Lessor for the following calendar year. Concurrent with such notice, Lessor shall provide a description of such
Operating Expenses and Taxes. Commencing on the first day of January of each calendar year after 2009 for which Lessor has estimated an
increase in Operating Expenses and/or Taxes, and on the first day of each calendar month thereafter, Lessee shall pay to Lessor, as Additional
Rent, one-twelfth (1/12th) of Lessee’s Share of the estimated increases in Operating Expenses and Taxes. If at any time during any such
calendar year, it appears to Lessor that the Operating Expenses or Taxes for such year will vary from Lessor’s estimate, Lessor may, by written
notice to Lessee, revise Lessor’s estimate for such year and the Additional Rent and Taxes payments by Lessee of Lessee’s Share of increases
for such year shall thereafter be based upon such revised estimate. Lessor shall furnish to Lessee with such revised estimate written verification
showing that the actual Operating Expenses or Taxes are greater than Lessor’s estimate. The increase in the monthly installments of Additional
Rent and Taxes resulting from Lessor’s revised estimate shall not be retroactive, but the amount of the increases in Additional Rent and Taxes
payable by Lessee for each calendar year shall be subject to adjustment between Lessor and Lessee after the close of the calendar year, as
provided below.
As soon as practical after the end of the calendar year 2009, and as soon as practical after the end of each calendar year of the
initial term thereafter, Lessor shall furnish Lessee a statement certified by a responsible employee or agent of Lessor (the “Operating
Statement”) with respect to such year, prepared by an employee or agent of Lessor, showing Operating Expenses and Taxes broken down by
component expenses, Base Taxes and Base Operating Expenses broken down by component expenses, Lessee’s Share of such increases in
Operating Expenses and Taxes, and the total payments made by Lessee on the basis of any previous estimate of such Operating Expenses and
Taxes, all in sufficient detail for verification by Lessee. Unless Lessee raises any objections to the Operating Statement within ninety (90) days
after receipt of the same, such statement shall conclusively be deemed correct and Lessee shall have no right thereafter to dispute such
statement or any item therein or the computation of Operating Expenses and/or Taxes. Lessee or its accountants shall have the right to inspect
and audit Lessor’s books and records with respect to this Lease once each Lease year to verify actual Operating Expenses and/or Taxes.
Lessor’s books and records shall be kept in accord with generally accepted accounting principles. If Lessee’s audit of Lessee’s Share of
increases in the Operating Expenses and/or Taxes for any year reveals a net overcharge of Lessee of more than five percent (5%), Lessor
promptly shall reimburse Lessee for the cost of the audit; otherwise, Lessee shall bear the cost of Lessee’s audit. If Lessee objects to Lessor’s
Operating Statement, Lessee shall continue to pay on a monthly basis Lessee’s Share of the increases in Operating Expenses and/or Taxes
based upon the prior year’s Operating Statement until the dispute is resolved.
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If Lessee’s Share of the increases in the Operating Expenses and Taxes for the year as finally determined exceeds the total
payments made by Lessee based on Lessor’s estimates, Lessee shall pay to Lessor the deficiency, within thirty (30) days after the receipt of
Lessor’s Operating Statement. If the total payments made by Lessee on account of Lessee’s Share of any such increases based on Lessor’s
estimate of the increases in Operating Expenses and/or Taxes exceed Lessee’s Share of the increases in Operating Expenses and/or Taxes as
finally determined, Lessee’s extra payment (but not more than Lessee’s Share of such increases), plus the cost of the audit if charged to Lessor,
shall be credited against payments of Lessee’s Share of increases in Additional Rent next due hereunder.
Notwithstanding the termination of this Lease, within thirty (30) days after Lessee’s receipt of Lessor’s Operating Statement
or the completion of Lessee’s audit regarding the Operating Expenses and/or Taxes for the calendar year in which this Lease terminates, Lessee
shall pay to Lessor or shall receive from Lessor, as the case may be, an amount equal to the difference between Lessee’s Share (prorated to the
expiration date or the termination date of this Lease) of the increases in Operating Expenses and/or Taxes for such year, as finally determined
(plus the cost of the audit if charged to Lessor), and the amount previously paid by Lessee on account thereof.
6.
Payment of Rent .
(a)
All rent shall be due and payable in lawful money of the United States of America at the address of Lessor set
forth in Paragraph 24, “Notices,” without deduction or offset and without prior demand or notice, unless otherwise specified herein. Monthly
Base Rent and Additional Rent payable by Lessee shall be payable monthly, in advance, on the first day of each calendar month. Lessee’s
obligation to pay rent for any partial month at the expiration or termination of the term shall be prorated on the basis of the actual number of
days in said calendar month.
(b)
If any installment of Monthly Base Rent, Additional Rent or any other sum due from Lessee is not received by
Lessor within five (5) days after Lessor’s notice to Lessee that such amount has not been received when due, Lessee shall pay to Lessor an
additional sum equal to five percent (5%) of the amount overdue as a late charge. The parties agree that this late charge represents a fair and
reasonable estimate of the costs that Lessor will incur by reason of the late payment by Lessee. Acceptance of any late charge shall not
constitute a waiver of Lessee’s default with respect to the overdue amount. Any amount not paid within ten (10) days after Lessee’s receipt of
written notice that such amount is due shall bear interest from the date due until paid at the rate of ten percent (10%) per annum, in addition to
the late payment charge.
Initials: Lessor
7.
Lessee
Security Deposit .
(a)
Lessee shall deposit with Lessor upon execution hereof the sum of Twenty-eight Thousand Five Hundred
Twenty-eight and Fifty Hundredths Dollars ($28,528.50) (the “Security Deposit”), as security for Lessee’s faithful performance of Lessee’s
obligations under this Lease. Lessor and Lessee agree that Lessor may apply the Security Deposit to the amounts reasonably necessary to
remedy defaults by Lessee beyond applicable notice and cure periods in the payment of rent, to repair damages to the Premises caused by
Lessee, and to clean the Premises upon the expiration or earlier termination of the term. If Lessor uses or applies all or any
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portion of the Security Deposit to remedy any such defaults by Lessee, Lessee shall within ten (10) days after written request therefor deposit
an amount with Lessor sufficient to restore the Security Deposit to the original amount required by this Lease. Lessor shall not be required to
keep all or any part of the Security Deposit separate from its general accounts.
(b)
Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the
Premises, but not later than thirty (30) days after the date Lessor receives possession of the Premises, return to Lessee (or, at Lessor’s option, to
the last assignee, if any, of Lessee’s interest herein), that portion of the Security Deposit not used or applied by Lessor to remedy any defaults
by Lessee referred to in Paragraph 7(a). No part of the Security Deposit shall be considered to be held in trust, to bear interest or other
increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease.
8.
Use . Lessee shall use and occupy the Premises only for general office uses, research and development, and for no
other use or purpose without Lessor’s prior written consent.
9.
Environmental Matters .
(a)
The term “Hazardous Materials” as used in this Lease shall mean any product, substance, or waste whose
presence, use, manufacture, disposal, transportation, or release, is regulated or monitored by any governmental authority pursuant to
Environmental Laws. Hazardous Materials shall include, but not be limited to hydrocarbons, petroleum, gasoline, and/or crude oil or any
products, by-products or fractions thereof.
(b)
“Environmental Laws” shall mean and include any Federal, State, or local statute, law, ordinance, code, rule,
regulation, order, or decree regulating, relating to, or imposing liability or standards of conduct concerning, any hazardous, toxic, or dangerous
waste, substance, element, compound, mixture or material, as now or at any time hereafter in effect including, without limitation, California
Health and Safety Code §§25100 et seq., §§25300 et seq., Sections 25281(f) and 25501 of the California Health and Safety Code,
Section 13050 of the Water Code, the Federal Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42
U.S.C. §§9601 et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act, 42 U.S.C. §§9601 et seq., the Federal Toxic
Substances Control Act, 15 U.S.C. §§2601 et seq., the Federal Resource Conservation and Recovery Act as amended, 42 U.S.C. §§6901 et
seq., the Federal Hazardous Material Transportation Act, 49 U.S.C. §§1801 et seq., the Federal Clean Air Act, 42 U.S.C. §7401 et seq., the
Federal Water Pollution Control Act, 33 U.S.C. §1251 et seq., the River and Harbors Act of 1899, 33 U.S.C. §§401 et seq., and all rules and
regulations of the EPA, the California Environmental Protection Agency, or any other state or federal department, board or any other agency or
governmental board or entity generally having jurisdiction over the environment, as any of the foregoing have been, or are hereafter amended.
(c)
Lessee shall not use, store, or transport to or from the Premises or the Complex, or dispose of any Hazardous
Materials without Lessor’s prior written consent, except (1) ordinary and customary office supplies and cleaning materials which are used in
the normal course of Lessee’s agreed use of the Premises, and (2) such other Hazardous Materials the generation, possession, storage, use,
transportation, or disposal of which in the quantities used by Lessee do not require a permit from any governmental authority. All such
Hazardous Materials (1) shall be used, stored, transported, and disposed of in strict compliance with Environmental Laws, and (2) shall be
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stored on the Premises only in limited quantity required for Lessee’s business at the Premises. Except as otherwise specifically permitted by
this Paragraph 9(c), Lessee shall not use, store, transport, or dispose of any Hazardous Materials in or about the Premises or the Complex.
Without limiting the generality of the foregoing, Lessee shall, at its sole cost, comply with all Environmental Laws relating to its use of
Hazardous Materials. If Hazardous Materials are discovered at or about the Premises or the Complex in violation of Environmental Laws and
such Hazardous Materials were used, stored, transported, or disposed of by Lessee, then Lessee shall, at Lessee’s sole expense, promptly take
all action necessary to cause the Complex to comply with all Environmental Laws with respect to such Hazardous Materials. Upon Lessor’s
request, Lessee shall deliver to Lessor (1) a copy of Lessee’s current Hazardous Materials Management Plan, if any, and any amendments or
supplements thereto, or replacements thereof, from time to time during the term of this Lease, and (2) a copy of all Hazardous Materials reports
or plans filed by Lessee with the City of Redwood City, if any, even though Lessee’s Hazardous Materials Management Plan and any such
reports or plans filed with the City show that Lessee is not currently using any reportable Hazardous Materials on the Premises.
(d)
If Lessee knows, or has reasonable cause to believe, that Hazardous Materials have come to be located in, on,
under or about the Premises, Lessee shall immediately give written notice of such fact to Lessor and provide Lessor with a copy of any report,
notice, claim or other documentation which Lessee has in its possession concerning the presence of such Hazardous Materials.
(e)
Lessee shall indemnify, defend with counsel reasonably acceptable to Lessor, and hold Lessor harmless from
any and all claims, damages, fines, judgments, penalties, costs, liabilities or losses (including, without limitation, any and all sums paid for
settlement of claims, attorneys’ fees, consultant and expert fees) (“Claims”) arising during or after the term (as such may be extended) from the
use, storage, transportation, release, disposal, discharge, or emission of Hazardous Materials at or about the Premises or the Complex by
Lessee, or Lessee’s employees, agents, contractors, invitees, or sublessees (collectively, “Lessee Parties”), in violation of Environmental Laws
or the terms of this Lease. Without limitation of the foregoing, this indemnification shall include any and all costs incurred due to any
investigation of the site or any cleanup, removal or restoration mandated by a federal, state or local agency or political subdivision and any
repairs to the Complex required in connection therewith. The foregoing indemnity shall survive the expiration or earlier termination of this
Lease.
(f)
Prior to the expiration of the term and the surrender of possession of the Premises by Lessee to Lessor, in the
event that Lessee or any sublessee during the term of this Lease has used Hazardous Materials on the Premises for which a permit is required,
Lessee shall obtain at Lessee’s expense an environmental closure report certified by the appropriate department of the City of Redwood City
(“Certified Closure Report”) and a copy of such Certified Closure Report shall be delivered to Lessor if such report is required by the City of
Redwood City or applicable law. Such closure shall include the removal and remediation at Lessee’s expense of any Hazardous Materials in,
on, under, or about the Premises released or discharged by Lessee, its Permitted Affiliates, sublessees, assignees, employees, agents,
contractors, or invitees (i) referred to in the environmental closure report prepared by the City of Redwood City, or (ii) as may be required by
the City as a condition to the issuance by the City of a Certified Closure Report that does not recommend or require further clean up or other
similar action.
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(g)
Lessee shall not be responsible under this Lease, and Lessor hereby releases Lessee from liability for any
Hazardous Materials present on the Complex that were not released by Lessee or its employees, agents, contractors, invitees, or sublessees.
(h)
The provisions of this Paragraph 9 shall survive the expiration or earlier termination of the term of this Lease.
10.
Taxes on Lessee’s Property . Lessee shall pay before delinquency any and all taxes, assessments, license fees, and
public charges levied, assessed, or imposed and which become payable during the initial term and any extension thereof upon Lessee’s
equipment, fixtures, furniture, and personal property installed or located in the Premises, and all of Lessor’s FF&E located on the Premises
which Lessee has the right to use without additional cost pursuant to Paragraph 1(c)
11.
Insurance .
(a)
Lessee shall, at Lessee’s sole cost and expense, provide and keep in force commencing with the date Lessee
has early access to the Premises pursuant to Paragraph 2(b) and continuing during the term of this Lease, a commercial general liability
insurance policy with a recognized casualty insurance company qualified to do business in California, insuring against any and all liability
occasioned by any occurrence in, on, about, or related to the Premises, or arising out of the condition, use, occupancy, alteration or
maintenance of the Premises, and covering the contractual liability referred to in Paragraph 12(a) of this Lease, having a combined single limit
for both bodily injury and property damage in an amount not less than Three Million Dollars ($3,000,000). All such insurance carried by
Lessee shall be in a form reasonably satisfactory to Lessor and its mortgage lender and shall be carried with companies that have a general
policyholder’s rating of not less than “A” and a financial rating of not less than Class “X” in the most current edition of Best’s Insurance
Reports; shall provide that such policies shall not be subject to material alteration or cancellation except after at least thirty (30) days’ prior
written notice to Lessor; and shall be primary and non-contributory. Prior to entering the Premises pursuant to the early access provision of
Paragraph 2(d) and upon renewal of such policies not less than fifteen (15) days prior to the expiration of the term of such coverage, Lessee
shall deliver to Lessor certificates of insurance confirming such coverage, together with evidence of the payment of the premium therefor,
naming Lessor and Lessor’s property manager as additional insureds. If Lessee fails to procure and maintain the insurance required hereunder,
Lessor may, but shall not be required to, order such insurance at Lessee’s expense and Lessee shall reimburse Lessor for all costs incurred by
Lessor with respect thereto. Lessee’s reimbursement to Lessor for such amounts shall be deemed Additional Rent, and shall include all sums
disbursed, incurred or deposited by Lessor, including Lessor’s costs, expenses and reasonable attorneys’ fees with interest thereon at the
interest rate referred to in Paragraph 6(a). Lessee shall also carry at Lessee’s expense property insurance coverage on the FF&E naming Lessor
as insured and with loss payable to Lessor.
(b)
Lessor shall obtain and carry in Lessor’s name, as insured, as an Operating Expense of the Premises as
provided in Paragraph 5(b), during this Lease term, “all risk” property insurance coverage (with rental loss insurance coverage for a period of
one year), flood insurance, commercial general liability insurance and property damage insurance, and insurance against such other risks or
casualties as Lessor shall determine, including, but not limited to, insurance coverages required of Lessor by the beneficiary of any deed of
trust which encumbers the Complex, including earthquake insurance coverage if required by Lessor’s institutional mortgage lender, provided
that
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such coverage is available at a commercially reasonable cost, insuring Lessor’s interest in the Complex (including any leasehold improvements
to the Premises constructed by Lessor or by Lessee with Lessor’s prior written approval) in an amount not less than the full replacement cost of
the Building and all other Improvements from time to time. The proceeds of any such insurance shall be payable solely to Lessor and Lessee
shall have no right or interest therein. Lessor shall have no obligation to insure against loss by Lessee to Lessee’s equipment, fixtures, furniture,
or other personal property of Lessee in or about the Premises, or to any FF&E of Lessor in or about the Premises that Lessee has the right to
use without charge, occurring from any cause whatsoever. Lessor’s commercial general liability insurance shall provide for contractual liability
referred to in Paragraph 12(b) of this Lease.
(c)
Notwithstanding anything to the contrary contained in this Lease, the parties release each other, and their
respective authorized representatives, employees, officers, directors, shareholders, managers, members, assignees, subtenants, and property
managers, from any claims for damage to any person or to the Premises and to the fixtures, personal property, leasehold improvements and
alterations of either Lessor or Lessee in or on the Premises that are caused by or result from (1) risks required by this Lease to be insured
against or (2) risks actually insured against by any property insurance policies carried by the parties and in force at the time of any such
damage, whichever is greater. This waiver applies whether or not the loss is due to the negligent acts or omissions of Lessor or Lessee or their
respective officers, directors, employees, agents, contractors, or invitees.
(d)
Each party shall cause each property insurance policy obtained by it to provide that the insurance company
waives all right of recovery by way of subrogation against either party in connection with the above waiver and any damage covered by any
policy; provided, however, that such provision or endorsement shall not be required if the applicable policy of insurance permits the named
insured to waive rights of subrogation on a blanket basis, in which case the blanket waiver shall be acceptable. Neither party shall be liable to
the other for any damage caused by fire or any of the risks insured against under any insurance policy required by this Lease.
12.
Indemnification .
(a)
Lessee waives all claims against Lessor for damages to Lessee’s furniture, fixtures, equipment, leasehold
improvements, or other property located in, upon, or about the Premises, and for injuries to persons in, upon, or about the Premises from any
cause arising at any time, except as may be caused by the negligence or willful misconduct of Lessor or its employees, agents or contractors, or
Lessor’s failure to perform any of its obligations under this Lease. Lessee shall indemnify, defend, and hold harmless Lessor from claims, suits,
actions, or liabilities for personal injury, death or for loss or damage to property that arise from (1) bodily injury or damage to property which
arises in or about the Building or the Outside Areas to the extent the personal injury, death, or damage to property results from the negligent
acts or omissions of Lessee, its employees, agents or contractors, or (2) any event of default by Lessee in the performance of any obligation on
Lessee’s part to be performed under this Lease.
(b)
Except to the extent of Lessee’s negligence or willful misconduct, Lessor shall indemnify, defend, and hold
harmless Lessee from claims, suits, actions, or liabilities for personal injury, death or for loss or damage to property that arise from (1) any
activity, work, or thing done, or permitted by Lessor in or about the Premises, (2) any occurrence in or about the Land, the Building, or the
Improvements to the extent the personal injury, death, or damage to
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property results from the gross negligence or willful acts or omissions of Lessor, its employees, agents or contractors, or (3) any breach or
default by Lessor in the performance of any obligation on Lessor’s part to be performed under this Lease.
(c)
In the absence of comparative or concurrent negligence on the part of Lessee or Lessor, their respective
agents, affiliates, and subsidiaries, or their respective officers, directors, members, employees or contractors, the foregoing indemnities by
Lessee and Lessor shall also include reasonable costs, expenses and attorneys’ fees incurred in connection with any indemnified claim or
incurred by the indemnitee in successfully establishing the right to indemnity. The indemnitor shall have the right to assume the defense of any
claim subject to the foregoing indemnities with counsel reasonably satisfactory to the indemnitee. The indemnitee agrees to cooperate fully
with the indemnitor and its counsel in any matter where the indemnitor elects to defend, provided the indemnitor shall promptly reimburse the
indemnitee for reasonable costs and expenses incurred in connection with its duty to cooperate.
The foregoing indemnities are conditioned upon the indemnitee providing prompt notice, upon the indemnitee’s discovery
thereof, to the indemnitor of any claim or occurrence that is likely to give rise to a claim, suit, action or liability that will fall within the scope
of the foregoing indemnities, along with sufficient details that will enable the indemnitor to make a reasonable investigation of the claim.
When the claim is caused by the joint negligence or willful misconduct of Lessee and Lessor or by the indemnitor party and a
third party unrelated to the indemnitor party (except indemnitor’s agents, officers, employees or invitees), the indemnitor’s duty to indemnify
and defend shall be proportionate to the indemnitor’s allocable share of joint negligence or willful misconduct.
(d)
Lessor shall not be liable to Lessee for (1) any injury or damage caused by the acts or negligence of any other
occupant of the Building, or (2) resulting from the overflow, breakage, or leakage of water, steam, gas, or electricity from pipes, wires, or
otherwise in the Premises or the Building however caused.
13.
Tenant Improvement Work .
(a)
Subject to the conditions contained in Paragraph 2(c) above, Lessor shall, at Lessor’s sole cost and expense
cause the following tenant improvement work (“Lessor’s Tenant Improvement Work”) in the Premises based on the floor plan of the Premises
attached hereto as Exhibit “B,” to be substantially completed prior to the Commencement Date:
(1)
Install all existing cubes/furniture located on the second floor into the Premises, per a mutually
(2)
Replace the carpeting and install tile in the Kitchen;
(3)
Paint walls as indicated by Lessee; and
(4)
Replace existing artwork located in the common areas of the second floor.
agreed upon cube plan;
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(b)
Lessor’s Tenant Improvement Work shall be performed by a general contractor selected by Lessor pursuant
to a construction contract between Lessor and the contractor describing Lessor’s Tenant Improvement Work and the scheduled completion
date.
(c)
Lessor shall cause Lessor’s Tenant Improvement Work to be performed in accordance with all applicable
Laws, in a good and workmanlike manner, free of defects and using new materials and equipment of good quality. Lessor shall cause Lessor’s
contractor to correct at the contractor’s expense any defects in any of the work noted by Lessee or by Lessor within one hundred twenty (120)
days after the Commencement Date. Any needed repairs to Lessor’s Tenant Improvement Work thereafter shall be performed by Lessor and
included in Operating Expenses pursuant to Paragraph 5 if the nature of such repairs is that it falls under Lessor’s maintenance and repair
obligations, otherwise such repairs shall be made by Lessee at Lessee’s expense.
(d)
Subject to Paragraph 2(c), Lessor shall cause the Premises to be in the condition required by Paragraph 2(c),
including in compliance with the Americans With Disabilities Act (ADA) on the Commencement Date. Lessee shall give written notice to
Lessor of any defect in any of the foregoing elements of the Building within one hundred twenty (120) days after the Commencement Date, and
Lessor shall cause any such defect specified by Lessee to be repaired, at Lessor’s expense, as soon as possible. Any needed repairs to any of the
foregoing elements of the Building of which Lessee gives Lessor written notice after such period shall be performed by Lessor and included in
Operating Expenses pursuant to Paragraph 5.
(e)
Subject to the completion of Lessor’s Tenant Improvement Work, and the performance by Lessor of
Lessor’s obligations under Paragraphs 2(c) and 2(d), Lessee waives all right to make repairs at the expense of Lessor, or to deduct the costs
thereof from the rent, and Lessee waives all rights under Section 1941 and 1942 of the Civil Code of the State of California. At the expiration
or sooner termination of this Lease, Lessee shall surrender the Premises and Lessor’s workstation furniture (cubes) in a clean and as good
condition as received, except for ordinary wear and tear and except for damage caused by casualty, the elements, acts of God, a taking by
eminent domain, maintenance that is Lessor’s responsibility hereunder, alterations or other improvements made by Lessee with Lessor’s prior
written consent which Lessee is not required to remove as a condition to Lessor’s approval of such alterations or improvements.
14.
Maintenance and Repairs; Alterations; Surrender and Restoration .
(a)
Lessor shall, at Lessor’s sole expense, keep in good order, condition, and repair and replace when necessary,
the structural elements of the roof (excluding the roof membrane) and the structural elements of the foundation and exterior walls (except the
interior faces thereof), of the Building, and other structural elements of the Building and the Complex as “structural elements” are defined in
building codes applicable to the Building, excluding any alterations structured, or otherwise, made by Lessee to the Premises or the Building
which are not approved in writing by Lessor prior to the construction or installation thereof by Lessee.
(b)
Lessor shall repair and maintain, as an Operating Expense pursuant to Paragraph 5 hereof, the exterior
entrances, all glass and window moldings, the roof membrane, and the common areas of the Building, and all partitions, doors, door jambs,
door closers, door hardware, fixtures, equipment, and appurtenances thereof, including all electrical, lighting, heating,
15
plumbing, and air conditioning systems serving the Premises, except for reasonable use and wear and except for any damage caused by the
negligence or willful misconduct of Lessee or its employees, agents, invitees, licensees, or contractors. In the event Lessee provides Lessor
with written notice of the need for any repairs, Lessor shall commence any such repairs promptly following receipt by Lessor of such notice
and Lessor shall diligently prosecute such repairs to completion. Lessor shall execute and maintain in force a service contract with an
authorized air conditioning service company and shall provide five-day a week janitorial service to the Premises. Lessor shall also repair and
maintain as an Operating Expense pursuant to Paragraph 5 hereof, the Outside Areas of the Complex, including the landscaping, walkways, and
parking area.
(c)
Subject to the foregoing and except as provided elsewhere in this Lease, Lessee shall at all times at Lessee’s
expense keep the Premises, and the existing office furniture listed on Exhibit “C,” in good and safe order, condition, and repair. Subject to the
release of claims and waiver of subrogation contained in Paragraphs 11(c) and 11(d), if Lessor are required to make any repairs by reason of
Lessee’s negligence or willful misconduct or omission to act, Lessor may add the cost of such repairs to the next installment of rent which shall
thereafter become due, and Lessee shall promptly pay the same upon receipt of an invoice therefor.
(d)
Lessee may, from time to time, at its own cost and expense and without the consent of Lessor make
nonstructural alterations to the interior of the Premises if the cost thereof in any one instance is Ten Thousand Dollars ($10,000) or less,
provided Lessee first notifies Lessor in writing of any such nonstructural alterations. Otherwise, Lessee shall not make any additional
alterations, improvements, or additions to the Premises without delivering to Lessor a complete set of plans and specifications for such work
and obtaining Lessor’s prior written consent thereto, which consent shall not be unreasonably withheld or delayed. Lessor may condition its
consent to Lessee agreeing to remove any such alterations upon expiration of the lease term and Lessee agreeing to restore the Premises to its
condition prior to such alterations at Lessee’s expense. Lessor shall advise Lessee in writing at the time consent is granted whether Lessor
reserves the right to require Lessee to remove any alterations from the Premises upon termination of this Lease.
All alterations, trade fixtures and personal property installed in the Premises solely at Lessee’s expense (“Lessee’s Property)
shall during the term of this Lease remain Lessee’s property and Lessee shall be entitled to all depreciation, amortization and other tax benefits
with respect thereto. Upon the expiration or sooner termination of this Lease all alterations, fixtures and improvements to the Premises, whether
made by Lessor or installed by Lessee at Lessee’s expense, shall be surrendered by Lessee with the Premises and shall become the property of
Lessor.
(e)
Lessee, at Lessee’s sole cost and expense, shall promptly and properly observe and comply with all present
and future orders, regulations, rules, laws, and ordinances of all governmental agencies or authorities, and the Board of Fire Underwriters,
except that Lessee shall not be required to make any structural changes or repairs or other repairs or changes of any nature which would be
considered a capital expenditure under generally accepted accounting principles to the Premises at Lessee’s expense unless such structural
repairs or changes are required by reason of the specific nature of the use of the Premises by Lessee.
(f)
Lessee shall surrender the Premises by the last day of the lease term or any earlier termination date, and
Lessor’s workstation furniture by the last day of the Lease term or any earlier termination date, in accordance with this Paragraph (f) with all of
the improvements to the Premises, parts, and surfaces thereof, clean and free of debris, and with the Premises and Lessor’s
16
workstation furniture returned in same condition as received, ordinary wear and tear or damage by casualty excepted and otherwise in the
condition described in Paragraph 13(e). “Ordinary wear and tear” shall not include any damage or deterioration that would have been prevented
by good maintenance practice or by Lessee performing all of its obligations under this Lease. The obligations of Lessee shall include the repair
of any damage occasioned by the installation, maintenance, or removal of Lessee’s trade fixtures, furnishings, equipment, and alterations, and
the restoration by Lessee of the Premises to its condition prior to any alterations, additions, or improvements if (1) Lessor’s consent thereto was
conditioned upon such removal and restoration upon expiration or sooner termination of the Lease term pursuant to Paragraph 14(d), or
(2) Lessee made any such alterations, additions, or improvements without obtaining Lessor’s prior written consent in breach of Paragraph
13(d). Such removal and restoration shall be performed by Lessee within a reasonable time after the expiration or sooner termination of the
Lease term if Lessor gives written notice to Lessee requiring Lessee to perform such removal and restoration.
15.
Utilities and Services .
(a)
Lessor shall, as an Operating Expense of the Building pursuant to Paragraph 5(b) hereof, provide reasonable
quantities of electricity, gas and water standard for a Class A office building. Heat and Air Conditioning service for the building is Monday
through Friday from 8:00 a.m. to 6:00 p.m., except recognized holidays. Lessor shall also provide five-day a week cleaning and maintenance
service and refuse pick-up service to the Premises. Lessee, at its option, may contract for its own janitorial service for Lessee’s Premises,
provided that such service is performed on a regular basis by a recognized professional janitorial service firm. In such event, Lessor shall no
longer bill Lessee for janitorial services to the Premises.
(b)
Lessee shall have access to the Premises twenty-four (24) hours per day, seven (7) days per week, by means
of a card key system. Lessor shall provide Lessee and the Premises with heating and air conditioning service, in addition to the hours set forth
in subparagraph (a) above, to the extent that such service is requested by Lessee. In the event of such a request by Lessee, the first twenty (20)
hours of after hours heating and air conditioning service per Lease year shall be at no charge to Lessee and, thereafter, Lessee shall pay to
Lessor on a monthly basis Lessor’s charge for such additional heating and air conditioning service. Lessor’s charge shall be Thirty-five Dollars
($35) per hour for after hours’ service. Lessor may make reasonable adjustments to said hourly rate as of the commencement date of each of
the option extension periods, if Lessee exercises its options to extend.
(c)
Lessor shall not be liable to Lessee for any interruption or failure of any utility services to the Building or the
Premises which is not caused by Lessor’s willful acts or negligence; provided however, that if service to the Premises is interrupted or provided
only intermittently for more than five (5) consecutive business days (Monday through Friday, except recognized holidays), Lessee’s Monthly
Base Rent shall be abated proportionately on a daily basis from the date of such interruption or commencement of only intermittent service
until normal service is restored. Lessor shall use its best efforts to promptly resume or restore the interrupted utilities or services. In the event
that utility services are not restored to the Building or the Premises within ninety (90) days after the date of the initial interruption, Lessee shall
have the right to terminate this Lease by giving written notice of termination to Lessor within ten (10) days after said period of ninety (90)
days, unless the utility services are restored prior to the receipt by Lessor of the notice of termination.
17
16.
Liens . Lessee agrees to keep the Premises and the Complex free from all liens arising out of any work performed,
materials furnished, or obligations incurred by Lessee. Lessee shall give Lessor at least ten (10) days prior written notice before commencing
any work of improvement on the Premises. Lessor shall have the right to post notices of non-responsibility with respect to any such work.
17.
Assignment and Subletting .
(a)
Except as otherwise provided in this Paragraph 17, Lessee shall not assign this Lease, or any interest therein,
voluntarily or involuntarily, and shall not sublet the Premises or any part thereof, or any right or privilege appurtenant thereto, without the prior
written consent of Lessor in each instance pursuant to the terms and conditions set forth below, which consent shall not be unreasonably
withheld, subject to the following provisions. Except as provided in Paragraph 17(g) and Paragraph 17(h), the following shall constitute an
assignment requiring Lessor’s prior written consent: the sale of all or substantially all of Lessee’s business operations conducted on the
Premises; or the sale by Lessee of all or substantially all of Lessee’s business assets located on the Premises; or a change in the control of
Lessee. Except as provided in Paragraph 17(h), the transfer, on a cumulative basis, of more than fifty percent (50%) of the voting control of
Lessee shall constitute a change in control for this purpose.
(b)
Prior to any assignment or sublease which Lessee desires to make, Lessee shall provide to Lessor the name
and address of the proposed assignee or sublessee, true and complete copies of all documents relating to Lessee’s prospective agreement to
assign or sublease, a copy of a current financial statement for such proposed assignee or sublessee, and Lessee shall specify all consideration to
be received by Lessee for such assignment or sublease in the form of lump sum payments, installments of rent, or otherwise. For purposes of
this Paragraph 17, the term “consideration” shall include all money or other consideration to be received by Lessee for such assignment or
sublease. Within fifteen (15) days after the receipt of such documentation and information, Lessor shall (1) notify Lessee in writing that Lessor
consents to the proposed assignment or sublease subject to the terms and conditions hereinafter set forth; or (2) notify Lessee in writing that
Lessor refuses such consent, specifying reasonable grounds for such refusal; or (3) subject to the provisions set forth below, notify Lessee that
Lessor elect to terminate this Lease and specifying the effective date of termination. If Lessor elects to terminate this Lease, then upon the
effective date of termination Lessor and Lessee shall each be released and discharged from any liability or obligation to the other under this
Lease accruing thereafter, and Lessee agrees that Lessor may enter into a direct lease with such proposed assignee or sublessee without any
obligation or liability to Lessee. Notwithstanding the foregoing, Lessor shall only have the right to terminate this Lease pursuant to the
foregoing clause (3) in the event of a proposed assignment or sublease by Lessee of more than fifty percent (50%) of the rentable square feet of
the Premises, provided that in no event shall Lessor have any right to terminate this Lease in connection with any permitted transfer under
Paragraph 17(g). In addition, if Lessor notifies Lessee pursuant to the foregoing clause (3) that Lessor elect to terminate this Lease, Lessee shall
have the right to rescind its proposed assignment or sublease by giving written notice thereof to Lessor, in which event this Lease shall remain
in full force and effect as if Lessee had never proposed such assignment or sublease.
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(c)
In deciding whether to consent to any proposed assignment or sublease, Lessor may take into account whether
or not reasonable conditions relating to the proposed assignment or subletting have been satisfied, including, but not limited to, the following:
(1)
In Lessor’s reasonable judgment, the proposed assignee or subtenant is engaged in such a business,
that the Premises, or the relevant part thereof, will be used in such a manner which complies with Paragraph 8 hereof entitled “Use”;
(2)
The proposed assignee or sublessee does not propose to conduct any manufacturing or development
processes on the Premises in which Hazardous Materials are regularly used;
(3)
The proposed assignee or subtenant is a reputable entity or individual with sufficient financial net
worth so as to reasonably indicate that it will be able to meet its obligations under this Lease or the sublease in a timely manner;
(4)
The proposed assignment or sublease is approved by Lessor’s mortgage lender (which shall not be
unreasonably withheld) if such lender has the right to approve or disapprove proposed assignments or subleases; and
(5)
Lessor’s consent to the assignment or sublease shall be in a separate instrument containing the
relevant provisions of this Paragraph 17 and otherwise in form reasonably acceptable to Lessor and its counsel.
(d)
As a condition to Lessor’s granting its consent to any assignment or sublease, (1) Lessor may require that
Lessee pay to Lessor, as and when received by Lessee, fifty percent (50%) of the amount of any excess of the consideration received by Lessee
in connection with said assignment or sublease over and above the rental amount fixed by this Lease and payable by Lessee to Lessor, after
deducting only reasonable leasing commissions, reasonable attorneys’ fees, and the cost of minor tenant improvements such as painting and
carpet cleaning, etc.) incurred by Lessee, and other reasonable costs and expenses incurred by Lessee in consummating such assignment or
sublease which are approved in writing by Lessor; (2) Lessee and the proposed assignee or sublessee shall demonstrate to Lessor’s reasonable
satisfaction that each of the criteria referred to in subparagraph (c) above is satisfied; and (3) Lessee shall reimburse Lessor upon demand for
the attorneys’ fees, not to exceed One Thousand Five Hundred Dollars ($1,500), and costs incurred by Lessor in negotiating, reviewing, and
approving the documentation relating to the assignment or sublease transaction.
(e)
Each assignment or sublease agreement to which Lessor has consented shall be an instrument in writing which
complies with the provisions of this Paragraph 17 and in form reasonably satisfactory to Lessor, and shall be executed by both Lessee and the
assignee or sublessee, as the case may be. Each such assignment or sublease agreement shall recite that it is and shall be subject and
subordinate to the provisions of this Lease, that the assignee or sublessee accepts such assignment or sublease, that Lessor’s consent thereto
shall not constitute a consent to any subsequent assignment or subletting by Lessee or the assignee or sublessee, and, except as otherwise set
forth in a sublease approved by Lessor, that the assignee or sublessee agrees to perform all of the obligations of Lessee hereunder (to the extent
such obligations relate to the portion of the Premises assigned or subleased), and that the termination of this Lease shall, at Lessor’s sole
election, constitute a termination of every such assignment or sublease.
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(f)
In the event Lessor shall consent to an assignment or sublease, Lessee shall, except as otherwise provided in
Paragraph 17(g), remain primarily liable for all obligations and liabilities of Lessee under this Lease, including, but not limited to, the payment
of rent.
(g)
Notwithstanding the foregoing, Lessee may, without Lessor’s prior written consent, without Lessor having the
right pursuant to Paragraph 17(b) above to terminate this Lease, and without any participation by Lessor in assignment and subletting proceeds,
assign this Lease or sublet all or any portion of the Premises to a subsidiary, affiliate, division or corporation controlled or under common
control with Lessee, or in connection with a merger, consolidation or reorganization, or to a purchaser of all or substantially all of Lessee’s
assets or substantially all of Lessee’s stock (collectively, “Permitted Affiliate”), provided, that except as specified hereafter, Rocket Fuel shall
remain primarily liable for all obligations and liabilities of Lessee under this Lease, including, but not limited to, the payment of rent. Lessee’s
foregoing rights to assign this Lease or to sublet the Premises shall be subject to the following conditions: (1) there shall be no uncured Event
of Default by Lessee under this Lease; (2) in the case of an assignment or subletting to a Permitted Affiliate, Rocket Fuel shall remain liable to
Lessor hereunder, unless as a result of a merger, consolidation, or reorganization Rocket Fuel is not a surviving entity, and in such event the
transferee or successor entity to Rocket Fuel has a net worth as shown on its current balance sheet certified by a third party certified public
accounting firm, or certified by the Chief Financial Officer of Lessee, equal to at least the net worth of Rocket Fuel of the date of the merger,
consolidation, or reorganization; and (3) the transferee or successor entity shall expressly assume in writing Lessee’s obligations hereunder
accruing from and after the effective date of such assignment or subletting.
(h)
Neither the sale nor transfer of Lessee’s capital stock in a public offering pursuant to an effective registration
statement filed by Lessee with the Securities and Exchange Commission, or the sale or transfer of Lessee’s securities at any time after Lessee’s
securities are publicly traded, shall be deemed an assignment, subletting, or other transfer of this Lease or the Premises, provided, that in the
event of the sale, transfer or issuance of Lessee’s securities in connection with a merger, consolidation, or reorganization, the conditions set
forth in Paragraph 17(g) shall apply.
(i)
Subject to the provisions of this Paragraph 17 any assignment or sublease without Lessor’s prior written
consent shall at Lessor’s election be void. The consent by Lessor to any assignment or sublease shall not constitute a waiver of the provisions
of this Paragraph 17, including the requirement of Lessor’s prior written consent, with respect to any subsequent assignment or sublease. If
Lessee purports to assign this Lease, or sublease all or any portion of the Premises, without Lessor’s prior written consent (if such consent is
required hereunder), Lessor may collect rent from the person or persons then or thereafter occupying the Premises and apply the net amount
collected to the rent reserved herein, but no such collection shall be deemed a waiver of Lessor’s rights and remedies under this Paragraph 17,
or the acceptance of any such purported assignee, sublessee, or occupant, or a release of Lessee from the further performance by Lessee of any
of the covenants by Lessee contained herein.
(j)
Lessee shall not hypothecate or encumber its interest under this Lease or any rights of Lessee hereunder, or
enter into any license or concession agreement respecting all or any portion of the Premises, without Lessor’s prior written consent which shall
not be unreasonably withheld, subject to all of the provisions of this Paragraph 17.
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(k)
In the event of any sale or exchange of the Complex by Lessor and assignment of this Lease by Lessor, Lessor
shall, upon providing Lessee with written confirmation that Lessor has transferred any security deposit held by Lessor, to Lessor’s successor in
interest and upon the assumption by the transferee of all of Lessor’s obligations hereunder accruing from and after the effective date of such
assignment, be and hereby is entirely relieved of all liability under any and all of Lessor’s covenants and obligations contained in or derived
from this Lease with respect to the period commencing with the consummation of the sale or exchange and assignment.
(l)
Lessee hereby stipulates that the foregoing terms and conditions of this Paragraph 17 are reasonable and that
Lessor has the remedy described in California Civil Code Section 1951.4 (Lessor may continue the Lease in effect after Lessee’s breach and
abandonment and recover rent as it becomes due, if Lessee has right to sublet or assign, subject only to reasonable limitations).
18.
Non-Waiver .
(a)
No waiver of any provision of this Lease shall be implied by any failure of Lessor to enforce any remedy for
the violation of that provision, even if that violation continues or is repeated. Any waiver by Lessor of any provision of this Lease must be in
writing.
(b)
No receipt of Lessor of a lesser payment than the rent required under this Lease shall be considered to be other
than on account of the earliest rent due, and no endorsement or statement on any check or letter accompanying a payment or check shall be
considered an accord and satisfaction. Lessor may accept checks or payments without prejudice to Lessor’s right to recover all amounts due
and pursue all other remedies provided for in this Lease.
Lessor’s receipt of monies from Lessee after giving notice to Lessee terminating this Lease shall in no way reinstate, continue, or
extend the Lease term or affect the termination notice given by Lessor before the receipt of those monies. After serving notice terminating this
Lease, filing an action, or obtaining final judgment for possession of the Premises, Lessor may receive and collect any rent, and the payment of
that rent shall not waive or affect such prior notice, action, or judgment.
19.
Holding Over . Lessee shall vacate the Premises and deliver the same to Lessor, together with Lessor’s workstation
furniture, upon the expiration or sooner termination of this Lease. In the event of holding over by Lessee after the expiration or termination of
this Lease, such holding over shall be on a month-to-month tenancy and all of the terms and provisions of this Lease shall be applicable during
such period, except that Lessee shall pay Lessor as Monthly Base Rent during such holdover an amount equal to the greater of (1) one hundred
fifty percent (150%) of the Monthly Base Rent in effect at the expiration of the term, or (2) the then market rent for comparable office space in
the Redwood City-Redwood Shores market area. If such holdover is without Lessor’s written consent, Lessee shall be liable to Lessor for all
costs, expenses, and consequential damages incurred by Lessor as a result of such holdover. The rental payable during such holdover period
shall be payable to Lessor on demand.
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20.
Damage or Destruction .
(a)
In the event of a total destruction of the Building and improvements during the initial term from any cause,
either party may elect to terminate this Lease by giving written notice of termination to the other party within thirty (30) days after the casualty
occurs. A total destruction shall be deemed to have occurred for this purpose if the Building or the Complex are destroyed to the extent of
seventy-five percent (75%) or more of the full replacement cost thereof. If the Lease is not terminated, Lessor shall repair and restore the
Premises in a diligent manner and this Lease shall continue in full force and effect, except that Monthly Base Rent and Additional Rent shall be
abated in accordance with Paragraph 20(d) below.
(b)
In the event of a partial destruction of the Building or the Complex to an extent not exceeding twenty-five
percent (25%) of the replacement cost thereof and if the damage thereto can be repaired, reconstructed, or restored within a period of one
hundred twenty (120) days from the date of such casualty, and if the casualty is from a cause which is required to be insured under Lessor’s
property insurance coverage, or is insured under any other coverage then carried by Lessor, and Lessor receives proceeds of insurance together
with the deductible sufficient to repair and restore the Building and improvements, Lessor shall forthwith repair the same, and this Lease shall
continue in full force and effect, except that Monthly Base Rent and Additional Rent shall be abated in accordance with Paragraph 20(d) below.
If any of the foregoing conditions is not met, Lessor shall have the option of either repairing and restoring the Building and improvements, or
terminating this Lease by giving written notice of termination to Lessee within thirty (30) days after the casualty, subject to the provisions of
Paragraph 20(c).
(c)
In the event of a partial destruction of the Building and improvements of the Complex to an extent equal to or
exceeding twenty-five percent (25%) but less than seventy-five percent (75%) of the replacement cost thereof, or if the damage thereto cannot
be repaired, reconstructed, or restored within a period of one hundred twenty (120) days from the date of such casualty, either Lessor or Lessee
may terminate this Lease by giving written notice of termination to the other within thirty (30) days after the casualty.
Furthermore, if such casualty is from a cause which is not required to be insured under Lessor’s property insurance coverage,
or is not insured under any other insurance carried by Lessor, or if the proceeds of insurance received by Lessor are not sufficient (or would not
have been sufficient if required insurance were carried) to repair and restore the Building and improvements, Lessor may elect to repair and
restore the Building and improvements (provided that Lessee has not elected to terminate this Lease pursuant to the first sentence of this
Paragraph 20(c)), or Lessor may terminate this Lease by giving written notice of termination to Lessee. Lessor’s election to repair and restore
the Building and improvements or to terminate this Lease, shall be made and written notice thereof shall be given to Lessee within thirty (30)
days after the casualty. Notwithstanding the foregoing, (1) if Lessor has not obtained all necessary governmental permits for the restoration and
commenced construction of the restoration within one hundred twenty (120) days after the casualty, Lessee may terminate this Lease by written
notice to Lessor given at any time prior to the actual commencement of construction of the restoration; or (2) if Lessor elect to repair and
restore the Building and improvements under subparagraph (b) or (c) above, but the repairs and restoration are not substantially completed
within one hundred eighty (180) days after the casualty, Lessee may terminate this Lease by written notice to Lessor given within thirty (30)
days after the expiration of said period of one hundred eighty (180) days after the casualty.
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If this Lease is not terminated by Lessor or Lessee pursuant to the foregoing provisions, Lessor shall complete the repairs in a
diligent manner and this Lease shall continue in full force and effect, except that Monthly Base Rent and Additional Rent shall be abated in
accordance with Paragraph 20(d) below.
(d)
In the event of repair, reconstruction, or restoration as provided herein, the Monthly Base Rent and Additional
Rent shall be abated proportionally in the ratio which the Lessee’s use of the Premises is impaired during the period of such repair,
reconstruction, or restoration, from the date of the casualty until such repair, reconstruction or restoration is completed.
(e)
With respect to any destruction of the Complex which Lessor are obligated to repair, or may elect to repair,
under the terms of this Paragraph 20, the provisions of Section 1932, Subdivision 2, and of Section 1933, Subdivision 4, of the Civil Code of
the State of California are waived by the parties. Lessor’s obligation to repair and restore the Complex shall be limited to the improvements
originally constructed by Lessor at Lessor’s expense. Lessee shall repair or replace, at Lessee’s expense, all leasehold improvements, fixtures,
and equipment installed by Lessee or paid for by Lessee, plus Lessor’s furniture listed on Exhibit “C.”
(f)
In the event of termination of this Lease pursuant to any of the provisions of this Paragraph 20, the monthly
rent shall be apportioned on a per diem basis and shall be paid to the date of the casualty. In no event shall Lessor be liable to Lessee for any
damages resulting to Lessee from the occurrence of such casualty, or from the repairing or restoration of the Building and improvements, or
from the termination of this Lease as provided herein, nor shall Lessee be relieved thereby from any of Lessee’s obligations hereunder, except
to the extent and upon the conditions expressly set forth in this Paragraph 20.
21.
Eminent Domain .
(a)
If the whole or any substantial part of the Building or appurtenant real property owned by Lessor shall be
taken or condemned by any competent public authority for any public use or purpose, the term of this Lease shall end upon the earlier to occur
of the date when the possession of the part so taken shall be required for such use or purpose or the vesting of title in such public authority.
Rent shall be apportioned as of the date of such termination. Lessee shall be entitled to receive any damages awarded by the court for
(1) leasehold improvements installed at Lessee’s expense or other property owned by Lessee, and (2) reasonable costs of moving by Lessee to
another location in San Mateo County, California. The entire balance of the award shall be the property of Lessor.
(b)
If there is a partial taking of the Premises by eminent domain which is not a substantial part of the Building
and the balance of the Premises remains reasonably suitable for continued use and occupancy by Lessee in Lessee’s reasonable judgment for
the purpose referred to in Paragraph 8, Lessor shall complete any necessary repairs in a diligent manner and this Lease shall remain in full force
and effect with a just and proportionate abatement of the Monthly Base Rent and Additional Rent, to reflect the number of square feet of the
Premises taken and the number of square feet remaining. If after a partial taking, the Premises and parking are not reasonably suitable for
Lessee’s continued use and occupancy for the use permitted herein, Lessee may terminate this Lease effective on the earlier of the date title
vests in the public authority or the date possession is
23
taken. Subject to the provisions of Paragraph 21(a), the entire award for such taking shall be the property of Lessor.
22.
Remedies . If Lessee fails to make any payment of rent or any other sum due under this Lease for five (5) days after
receipt by Lessee of written notice from Lessor; or if Lessee is in default in the performance of any other term of this Lease for thirty (30) days
or more after receipt by Lessee of written notice from Lessor (unless such default is incapable of cure within thirty (30) days and Lessee
commences cure within thirty (30) days and diligently prosecutes the cure to completion within a reasonable time); or if Lessee’s interest
herein, or any part thereof, is assigned or transferred, either voluntarily or by operation of law (except as expressly permitted by other
provisions of this Lease); or if Lessee makes a general assignment for the benefit of its creditors; or if this Lease is rejected (1) by a bankruptcy
trustee for Lessee, (2) by Lessee as debtor in possession, or (3) by failure of Lessee as a bankrupt debtor to act timely in assuming or rejecting
this Lease; then any of such events shall constitute an event of default by Lessee under this Lease and Lessor may, at its option, elect the
remedies specified in either subparagraph (a) or (b) below. Any such rejection of this Lease referred to above shall not cause an automatic
termination of this Lease. Whenever in this Lease reference is made to a default by Lessee, such reference shall refer to an event of default as
defined in this Paragraph 22.
(a)
Lessor may, in accordance with applicable Laws, repossess the Premises and remove all persons and property
therefrom. If Lessor repossesses the Premises because of a breach of this Lease, this Lease shall terminate and Lessor may recover from
Lessee:
(1)
the worth at the time of award of the unpaid rent which had been earned at the time of termination
including interest thereon at a rate equal to the Federal discount rate plus one percent (1%) per annum, or the maximum legal rate of interest,
whichever is less, from the time of termination until paid;
(2)
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 Lessee proves could have been reasonably avoided,
including interest thereon at a rate equal to the Federal discount rate plus one percent (1%) per annum, or the maximum legal rate of interest,
whichever is less, from the time of termination until paid;
(3)
the worth at the time of award of the amount by which the unpaid rent for the balance of the term
after the time of award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided; and
(4)
any other amount necessary to compensate Lessor for all the detriment proximately caused by
Lessee’s breach or by Lessee’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to
result therefrom.
(b)
If Lessor does not repossess the Premises, then this Lease shall continue in effect for so long as Lessor does
not terminate Lessee’s right to possession and Lessor may enforce all of its rights and remedies under this Lease, including the right to recover
the rent and other sums due from Lessee hereunder. For the purposes of this Paragraph 22, the following do not constitute a repossession of the
Premises by Lessor or a termination of the Lease by Lessor:
24
(1)
Acts of maintenance or preservation by Lessor or efforts by Lessor to relet the Premises; or
(2)
The appointment of a receiver by Lessor to protect Lessor’s interests under this Lease.
23.
Lessee’s Personal Property . If any personal property of Lessee remains on the Premises after (1) Lessor terminates this
Lease pursuant to Paragraph 22 above following an event of default by Lessee, or (2) after the expiration of the Initial term or after the
termination of this Lease pursuant to any other provisions hereof, Lessor shall give written notice thereof to Lessee pursuant to applicable law.
Lessor shall thereafter release, store, and dispose of any such personal property of Lessee in accordance with the provisions of applicable law.
24.
Notices . All notices, statements, demands, requests, or consents given hereunder by either party to the other shall be in
writing and shall be personally delivered or sent by United States mail, registered or certified, return receipt requested, postage prepaid, or by
recognized overnight courier service, and addressed to the parties as follows:
Lessor:
350 Marine Parkway LLC, Gillikin Trade LLC,
Lewis Trade LLC, Spiegl Trade LLC, and
Welsh Trade LLC
c/o Pollock Financial Group
150 Portola Road
Portola Valley, California 94028
Attention: Lincoln W. Westcott
Lessee:
Pre-Commencement:
Rocket Fuel, Inc.
1 Lagoon Drive, Suite 475
Redwood Shores, California 94065
Attention: George John, CEO
After Commencement:
Rocket Fuel, Inc.
350 Marine Parkway
Redwood City, California 94065
Attention: George John, CEO
or to such other address as either party may have furnished to the other as a place for the service of notice. Notices shall be deemed given upon
receipt or attempted delivery where delivery is not accepted. After the Commencement Date, Lessee’s address shall be the Premises.
25.
Estoppel Certificate . Lessee and Lessor shall within fifteen (15) days following request by the other party (the
“Requesting Party”), execute and deliver to the Requesting Party an estoppel certificate (1) certifying that this Lease has not been modified and
certifying that this Lease is in full force and effect, or, if modified, stating the nature of such modification and certifying that
25
this Lease, as so modified, is in full force and effect; (2) stating the date to which the rent and other charges are paid in advance, if at all;
(3) stating the amount of any security deposit held by Lessor; and (4) acknowledging that there are not, to the responding party’s knowledge,
any uncured defaults on the part of the Requesting Party hereunder, or if there are uncured defaults on the part of the Requesting Party, stating
the nature of such uncured defaults.
26.
Parking . Lessee shall have the right to use free of charge (subject to payment of Lessee’s Share of Operating Expenses
attributable thereto) in common with other tenants or occupants of the Complex on a non-reserved basis Lessee’s proportionate share of the
parking facilities of the Complex based upon the number of square feet occupied (3.3/1000), subject to such reasonable, written rules and
regulations for such parking facilities which may be established or altered by Lessor at any time or from time to time during the initial term,
provided that such rules and regulations shall not unreasonably interfere with Lessee’s parking rights. Vehicles of Lessee or its employees shall
not park in driveways or occupy parking spaces or other areas designated for any use such as handicap parking, visitors, deliveries, or loading.
27.
Signage; Roof Rights . Lessor shall provide Lessee with space for Lessee’s sign on the Complex monument sign for the
Building, as well as a listing on the lobby directory and signage at the entrance to Lessee’s Premises. Lessee shall also have the right to install a
directional sign off the elevator and staircase directing people to Lessee’s suite. The cost of the signs shall be paid by Lessee. The cost of
installation of the signs shall be paid by Lessee. Lessee shall have the nonexclusive right at Lessee’s expense to install a rooftop satellite dish or
other communications equipment on the roof of the Building for Lessee’s use only. Lessee shall, at Lessee’s expense, remove all such
equipment and shall repair any damage to the roof or the Building resulting from the installation or removal of such equipment. Lessor reserves
the right to lease, or to grant licenses to others, including persons or entities who are not tenants of the Building, to install, operate, and use
telecommunications antennae or microwave dishes on the roof of the Building, provided that such equipment does not interfere with the
operation of any rooftop satellite dish or other communications equipment installed on the roof of the Building by Lessee for Lessee’s use only.
28.
Real Estate Broker . Cornish & Carey Commercial Oncor International (“Cornish & Carey”) represents both Lessor and
Lessee in this transaction. Lessor shall pay a real estate commission to Cornish & Carey pursuant to a separate agreement between Lessor and
Cornish & Carey. Except for Cornish & Carey, each party represents to the other that it has not had any dealings with any other real estate
broker, agent, finder, or other person with respect to this Lease, and each party shall indemnify, defend, and hold harmless the other party from
all damages, expenses, and liabilities resulting from any claims that may be asserted against the other party by any broker, agent, finder, or
other person with whom the indemnifying party has or purportedly has dealt other than the aforementioned broker.
29.
Subordination; Attornment .
(a)
This Lease, without any further instrument, shall at all times be subject and subordinate to any and all
mortgages and deeds of trust which may now or hereafter affect Lessor’s interest in the real property of which the Premises form a part, and to
all advances made or hereafter to be made upon the security thereof, and to all renewals, modifications, consolidations, replacements and
extensions thereof. Lessor shall use reasonable efforts to cause the beneficiary of any deed of trust executed by Lessor as trustor after the date
hereof to execute a recognition and
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non-disturbance agreement in a form reasonably satisfactory to Lessor, Lessee and such beneficiary which (1) provides that this Lease shall not
be terminated so long as Lessee is not in default under this Lease, and (2) that upon acquiring title to the Premises by foreclosure or otherwise
such holder shall recognize all of Lessee’s rights hereunder which accrue thereafter.
(b)
In confirmation of such subordination, Lessee shall promptly execute any certificate or other instrument which
Lessor may deem proper to evidence such subordination, without expense to Lessor; provided, however, that if any person or persons
purchasing or otherwise acquiring the real property of which the Premises form a part by any sale, sales and/or other proceedings under such
mortgages and/or deeds of trust, shall elect to continue this Lease in full force and effect in the same manner and with like effect as if such
person or persons had been named as Lessor herein, then this Lease shall continue in full force and effect as aforesaid, and Lessee hereby
attorns and agrees to attorn to such person or persons.
(c)
If Lessee is notified in writing of Lessor’s default under any deed of trust affecting the Premises and if Lessee
is instructed in writing by the party giving notice to make Lessee’s rental payments to the beneficiary of said deed of trust Lessee shall comply
with such request without liability to Lessor until Lessee receives written confirmation that such default has been cured by Lessor and that the
deed of trust has been reinstated.
30.
Breach by Lessor .
(a)
Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an
obligation required to be performed by Lessor pursuant to this Lease. For purposes of this Paragraph 30, a reasonable time shall in no event be
less then thirty (30) days after receipt by Lessor, and by the holders of any mortgage or deed of trust covering the Premises whose name and
address have been furnished to Lessee in writing for such purposes, of written notice specifying wherein such obligation of Lessor has not been
performed; provided, however, that if the nature of Lessor’s obligation is such that more than thirty (30) days after such notice are reasonably
required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period
and thereafter diligently pursued to completion.
(b)
In the event of a breach of this Lease by Lessor, Lessee’s sole remedy shall be to institute an action against
Lessor for damages or for equitable relief, but Lessee shall not have the right to rent abatement, to offset against rent, or to terminate this Lease.
Lessee expressly waives the defense of constructive eviction.
31.
Lessor’s Entry . Lessor and Lessor’s agents, except in the case of an emergency, shall provide Lessee with twenty-four
(24) hours’ notice prior to entry of the Premises. Such entry by Lessor and Lessor’s agents shall not impair Lessee’s operations more than
reasonably necessary. Lessor and Lessor’s agents shall at all times be accompanied by Lessee during any such entry except in case of
emergency and except for janitorial work.
32.
Financial Statements . Lessee shall deliver to Lessor upon request (not more frequently than once during any six
(6) months period) a true, correct and complete copy of Lessee’s latest quarterly and annual income statements and balance sheets, certified by
Lessee’s independent certified public accountants, or if Lessee does not obtain audited financial statements, such financial statements shall be
certified by Lessee’s Chief Financial Officer or Chief Executive
27
Officer. Lessor shall preserve the confidentiality of such financial statements so long as Lessee is not a publicly reporting company, provided
that Lessor may disclose such financial statements to Lessor’s attorneys, accountants, or existing or prospective mortgage lenders, or to the
extent required to comply with applicable law.
33.
Attorneys’ Fees . If any action at law or in equity shall be brought to recover any rent under this Lease, or for or on
account of any breach of or to enforce or interpret any of the provisions of this Lease or for recovery of the possession of the Premises, the
prevailing party shall be entitled to recover from the other party costs of suit and reasonable attorneys’ fees, the amount of which shall be fixed
by the court and shall be made a part of any judgment rendered.
34.
Quiet Enjoyment . So long as no event of default by Lessee exists under this Lease, Lessee shall have quiet enjoyment
and possession of the Premises for the entire term hereof subject to all of the provisions of this Lease.
35.
Lessee’s Expansion Rights .
(a)
Lessor hereby grants to Lessee the right of first offer to lease the adjoining premises on the second floor of the
Building referred to as Suite 210, consisting of approximately four thousand eighty-three (4,083) rentable square feet (the “Expansion Space”),
upon the following terms and conditions: prior to entering into a lease of the Expansion Space with any other tenant, Lessor shall deliver to
Lessee a written offer (“First Offer”) to lease the Expansion Space, the Monthly Base Rent at which the Expansion Space is offered for lease,
and the approximate date that the Expansion Space will be available for occupancy. Lessor shall also specify the amount, if any, of any tenant
improvement allowance that Lessor is offering for the Expansion Space, and the portion of the Expansion Space, if any, that is offered for lease
“as is,” without any tenant improvement allowance. Lessee shall have ten (10) calendar days after receipt of the First Offer within which to
give written notice to Lessor of Lessee’s acceptance of Lessor’s First Offer with respect to any or all of the Expansion Space, time being of the
essence. Failure of Lessee to deliver such written acceptance within said period of ten (10) calendar days shall be deemed a rejection of the
First Offer with respect to all of the Expansion Space.
(b)
If Lessee accepts Lessor’s First Offer to lease the Expansion Space within the time specified, Lessor and
Lessee shall execute and deliver an amendment to this Lease stating that (1) the Expansion Space shall be added to the Premises leased by
Lessee, and Lessee shall pay the Monthly Base Rent for the Expansion Space specified by Lessor in the First Offer, with increases, if any,
specified in the First Offer; (2) Lessee’s Share of the Additional Rent (increases in Operating Expenses and Taxes), as defined in Paragraph
5(a) hereof, to be paid by Lessee with respect to the Expansion Space; (3) the Expansion Space shall be leased by Lessee for a term which is
co-terminus with the then remaining initial term of this Lease of the original Premises; (4) the Expansion Space shall be leased to Lessee
subject to all of the other terms and provisions of this Lease, except as otherwise specified in Lessor’s First Offer; and (5) if Lessee exercises
the option to extend contained in Paragraph 3 of this Lease, the premises leased by Lessee during the option period(s) referred to in this Lease
shall include the original Premises and the Expansion Space.
(c)
If Lessee rejects the First Offer, Lessor shall have the right, within one hundred eighty (180) days after the
expiration of said period of five (5) business days referred to in subparagraph (a) above, to lease all or any portion of the Expansion Space to a
third party
28
tenant, but not for a rent or on terms and conditions substantially more favorable to the tenant than those specified in the First Offer. If Lessor
leases the entire Expansion Space to a third party tenant during the period of one hundred eighty (180) days after the rejection of the First Offer
by Lessee, Lessee’s right of first offer with respect to the Expansion Space shall terminate and shall be of no further force or effect. If Lessor is
not successful in so leasing the Expansion Space during said period of one hundred eighty (180) days, Lessee’s right of first offer to lease the
Expansion Space shall again apply on the same terms and conditions as provided in this Paragraph 35.
36.
General Provisions .
(a)
Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any third person to
create the relationship of principal and agent or of partnership or of joint venture of any association between Lessor and Lessee, and neither the
method of computation of rent nor any other provisions contained in this Lease nor any acts of the parties hereto shall be deemed to create any
relationship between Lessor and Lessee other than the relationship of landlord and tenant.
(b)
Each and all of the provisions of this Lease shall be binding upon and inure to the benefit of the parties hereto,
and except as otherwise specifically provided elsewhere in this Lease, their respective heirs, executors, administrators, successors, and assigns,
subject at all times, nevertheless, to all agreements and restrictions contained elsewhere in this Lease with respect to the assignment, transfer,
encumbering, or subletting of all or any part of Lessee’s interest in this Lease.
(c)
The captions of the paragraphs of this Lease are for convenience only and shall not be considered or referred to
in resolving questions of interpretation or construction.
(d)
This Lease is and shall be considered to be the only agreement between the parties hereto and their
representatives and agents. All negotiations and oral agreements acceptable to both parties have been merged into and are included herein.
There are no other representations or warranties between the parties and all reliance with respect to representations is solely upon the
representations and agreements contained in this instrument.
(e)
The laws of the State of California shall govern the validity, performance, and enforcement of this Lease.
Notwithstanding which of the parties may be deemed to have prepared this Lease, this Lease shall not be interpreted either for or against Lessor
or Lessee, but this Lease shall be interpreted in accordance with the general tenor of the language in an effort to reach an equitable result.
(f)
Time is of the essence with respect to the performance of each of the covenants and agreements contained in
this Lease.
(g)
Lessee hereby expressly waives any and all rights of redemption granted by or under any present or future law
in the event of Lessee being evicted or dispossessed for any cause, or in the event of Lessor obtaining possession of the Premises by reason of
the breach by Lessee of any of the covenants and conditions of the Lease or otherwise. The rights given to Lessor herein are in addition to any
rights that may be given to Lessor by any statute or otherwise.
29
(h)
Recourse by Lessee for breach of this Lease by Lessor shall be expressly limited to Lessor’s interest in the
Complex and the rents, issues and profits therefrom, and in the event of any such breach or default by Lessor Lessee hereby waives the right to
proceed against any other assets of Lessor or against any other assets of any manager or member of Lessor.
(i)
Any provision or provisions of this Lease which shall be found to be invalid, void or illegal by a court of
competent jurisdiction, shall in no way affect, impair, or invalidate any other provisions hereof, and the remaining provisions hereof shall
nevertheless remain in full force and effect.
(j)
This Lease may be modified in writing only, signed by the parties in interest at the time of such
modification.
(k)
Each party represents to the other that the person signing this Lease on its behalf is properly authorized to do
so, and in the event this Lease is signed by an agent or other third party on behalf of either Lessor or Lessee, written authority to sign on behalf
of such party in favor of the agent or third party shall be provided to the other party hereto either prior to or simultaneously with the return to
such other party of a fully executed copy of this Lease.
(l)
No binding agreement between the parties with respect to the Premises shall arise or become effective until
this Lease has been duly executed by both Lessee and Lessor and a fully executed copy of this Lease has been delivered to both Lessee and
Lessor.
(m)
Lessor and Lessee acknowledge that the terms and conditions of this Lease constitute confidential information
of Lessor and Lessee. Neither party shall disseminate orally or in written form a copy of this Lease, lease proposals, lease drafts, or other
documentation containing the terms and conditions hereof to any third party, except to the attorneys, accountants, or other authorized business
representatives or agents of the parties, or unless required in connection with any financing by Lessee or in connection with a public offering of
securities by Lessee. Lessor shall make no public announcement of the consummation of this Lease transaction without Lessee’s prior
approval.
(n)
Except as provided in Paragraph 30, the rights and remedies that either party may have under this Lease or at
law or in equity, upon any breach, are distinct, separate and cumulative and shall not be deemed inconsistent with each other, and no one of
them shall be deemed to be exclusive of any other.
(o)
Except as provided in Paragraph 19, Holding Over, Lessor and Lessee waive any claim for consequential
damages which one may have against the other for breach of or failure to perform or observe the requirements and obligations created by this
Lease.
(p)
Lessor and Lessee each agree to and they hereby do waive trial by jury in any action, proceeding or
counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with
this Lease, the relationship of Lessor and Lessee, Lessee’s use or occupancy of the Premises and/or any claim of injury or damage, and any
statutory remedy.
(q)
This Lease shall not be recorded.
30
IN WITNESS WHEREOF, the Lessor and Lessee have duly executed this Lease as of the date first set forth herein.
“Lessor”
350 MARINE PARKWAY LLC,
a California limited liability company
By:
/s/ James M. Pollock
James M. Pollock
Its Manager
GILLIKIN TRADE LLC,
a California limited liability company
By:
Pollock Realty II LLC,
a California limited liability company
Its Manager
By:
/s/ James M. Pollock
James M. Pollock
Its Manager
LEWIS TRADE LLC,
a California limited liability company
By: Pollock Realty II LLC,
a California limited liability company
Its Manager
By:
/s/ James M. Pollock
James M. Pollock
Its Manager
SPIEGL TRADE LLC,
a California limited liability company
By: Pollock Realty II LLC,
a California limited liability company
Its Manager
By:
/s/ James M. Pollock
James M. Pollock
Its Manager
Signatures continue on following page
31
WELSH TRADE LLC
a California limited liability company
By:
Pollock Realty II LLC,
a California limited liability company
Its Manager
By:
/s/ James M. Pollock
James M. Pollock
Its Manager
“Lessee”
ROCKET FUEL, INC.,
a Delaware corporation
By:
/s/ George H. John
Name:
George H. John
Its:
CEO
By:
Name:
Its:
32
LEGAL DESCRIPTION
Real property in the City of Redwood City, County of San Mateo, State of California, described as follows:
PARCEL I:
LOT 1, AS SHOWN ON PARCEL MAP NO. 97-8, FILED APRIL 8, 1998, BOOK 70 OF PARCEL MAPS, PAGES 51 AND 52, SAN
MATEO COUNTY RECORDS.
PARCEL II:
A NON-EXCLUSIVE EASEMENT FOR INGRESS AND EGRESS, ACCESS, STORM DRAIN AND SANITARY SEWER PURPOSES
WITHIN LOT 1, AS SHOWN ON THAT CERTAIN MAP ENTITLED “MARINA PARK CENTER”, BEING A RESUBDIVISION OF
LOTS 3, 4, 5, 7 & 8 AND A PORTION OF LOT 1 OF THE MAP OF MARINA PARK NO. 2, RECORDED IN VOL. 97 OF MAPS PAGES
89 & 90, AND LANDS DESCRIBED IN DEED DOCUMENT 7770 O.R. 1845, OF SAN MATEO COUNTY RECORDS, REDWOOD
CITY, SAN MATEO COUNTY, CALIFORNIA,” FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN MATEO COUNTY,
STATE OF CALIFORNIA ON MARCH 22,1982 IN BOOK 106 OF MAPS AT PAGES 84 AND 85.
SAID EASEMENT IS FOR THE BENEFIT OF AND APPURTENANT TO PARCEL I HEREIN AND WAS CREATED BY THAT
CERTAIN GRANT OF EASEMENT RECORDED MARCH 22, 1982 UNDER DOCUMENT NO. 82022638, RECORDS OF SAN MATEO
COUNTY, CALIFORNIA.
PARCEL III:
EASEMENTS APPURTENANT TO PARCEL I ABOVE FOR INGRESS, EGRESS, USE, OCCUPANCY, ENJOYMENT AND FOR
CONSTRUCTION, MAINTENANCE AND OPERATION OF UTILITIES OVER THE COMMON AREA AS PROVIDED FOR IN
SECTIONS 4.2 AND 4.3 OF THE SHORE BUSINESS CENTER DECLARATION OF COVENANTS, CONDITIONS, RESTRICTIONS &
CHARGES FOR COMMERCIAL DEVELOPMENT RECORDED FEBRUARY 6, 1981, SERIES NUMBER 12350AS, SAN MATEO
COUNTY RECORDS.
PARCEL IV:
EASEMENTS APPURTENANT TO PARCEL I ABOVE FOR THE PURPOSES SET FORTH IN SECTION 3 OF THAT CERTAIN
AMENDED AND RESTATED RECIPROCAL EASEMENT AND MAINTENANCE AGREEMENT RECORDED OCTOBER 27, 1997,
SERIES NUMBER 97-138358, OFFICIAL RECORDS.
APN: 095-242-260-8
JPN: 106-084-000-03T and 106-084-000-04T
EXHIBIT “A”
EXHIBIT B
PLAN OF PREMISES
[FLOOR PLAN]
Exhibit B - Page 1
Exhibit “C”
FURNITURE INVENTORY
Manufacturer
Item/Description
Count
Knoll
Cubicle system — this system is configured
In groups of four; each grouping includes
Hardwired divider panels with power and data
Outlets at each station; adjustable desk units;
Assortment of desk accessories including some
Trays, pen holders, calendar trays and file holders.
24
Knoll
Knoll
Knoll
Two-drawer file roller with pad
Triangular roller tables
Rectangular conference tables
White Refrigerator
Server Room Racks
Miscellaneous office task chairs
24
16
6
1
3
13
Initials
Landlord
Tenant
65
COMMENCEMENT MEMORANDUM
Date:
Re:
, 2009
Lease dated February 17, 2009 between 350 MARINE PARKWAY LLC, a California limited liability company, GILLIKIN
TRADE LLC, California limited liability company, LEWIS TRADE LLC, California limited liability company, SPIEGL TRADE
LLC, California limited liability company, and WELSH TRADE LLC, California limited liability company, hereafter referred to as
“Lessor,” and ROCKET FUEL, INC., a Delaware corporation„ Lessee (the “Lease”), concerning the premises described in the Lease
located at 350 Marine Parkway, Redwood City, California 94065 (the “Premises”).
Ladies and Gentlemen:
In accordance with the Lease, we confirm and agree as follows:
1.
That the Premises have been accepted on this date by Lessee.
2.
That the Lessee has possession of the Premises and hereby acknowledges that under the provisions of the Lease, the
Commencement Date of the initial term of the Lease is
, 2009 and the expiration date of the initial term of the Lease is
2011.
3.
That in accordance with the provisions of the Lease, rent commences to accrue on
, 2009.
4.
Rent is due and payable in advance on the first day of each and every month during the term of said Lease. Your rent
checks should be made payable to 350 Marine Parkway LLC and mailed to 350 Marine Parkway LLC, c/o Pollock Financial Group, 150
Portola Road, Portola Valley, California 94028.
AGREED AND ACCEPTED
LESSEE :
LESSOR :
ROCKET FUEL, INC.,
a Delaware corporation
350 MARINE PARKWAY LLC,
a California limited liability company
By:
Name:
Its:
By:
/s/ James M. Pollock
James M. Pollock
Its Manager
Signatures continue on following page
EXHIBIT “D”
Page 1
,
GILLIKIN TRADE LLC,
a California limited liability company
By:
Pollock Realty II LLC,
a California limited liability company
Its Manager
By:
/s/ James M. Pollock
James M. Pollock
Its Manager
LEWIS TRADE LLC,
a California limited liability company
By:
Pollock Realty II LLC,
a California limited liability company
Its Manager
By:
/s/ James M. Pollock
James M. Pollock
Its Manager
SPIEGL TRADE LLC,
a California limited liability company
By:
Pollock Realty II LLC,
a California limited liability company
Its Manager
By:
/s/ James M. Pollock
James M. Pollock
Its Manager
WELSH TRADE LLC
a California limited liability company
By:
Pollock Realty II LLC,
a California limited liability company
Its Manager
By:
/s/ James M. Pollock
James M. Pollock
Its Manager
EXHIBIT “D”
Page 2
FIRST AMENDMENT TO LEASE
350 Marine Parkway
Redwood City, California 94065
THIS FIRST AMENDMENT TO LEASE (this “Amendment”), dated for reference purposes as of October 11, 2010, is made and
entered into by and between 350 MARINE PARKWAY LLC, a California limited liability company, hereafter referred to as “Lessor,” and
ROCKET FUEL INC., a Delaware corporation, hereafter referred to as “Lessee.”
RECITALS
A.
Lessor and Lessee entered into a lease dated as of February 17, 2009 (the “Lease”) of certain premises consisting of
approximately 5,187 rentable square feet referred to as Suite 220 (the “Existing Premises”) located on the second floor of the Building on the
real property owned by Lessor commonly referred to as 350 Marine Parkway, Redwood City, California 94065.
B.
The initial term of the Lease commenced on March 15, 2009. Lessor and Lessee wish to enter into this Amendment to
extend the initial term of the Lease of the Existing Premises, to expand the Existing Premises to include approximately 4,328 additional
rentable square feet in the Building referred to as Suite 210 (the “Expansion Premises”), and to amend the Lease in certain other respects, as set
forth herein.
AGREEMENT
NOW THEREFORE, in consideration of the mutual covenants contained herein, the parties agree as follows:
1.
Defined Terms . Except as otherwise provided herein, all capitalized terms and phrases used but not defined in this
Amendment shall have the meanings given to them in the Lease. References to “the Lease” hereafter shall mean the Lease referred to in Recital
A, as amended by this Amendment.
2.
Extension of the Lease Term of the Existing Premises . The initial term of the Lease of the Existing Premises commenced
on March 15, 2009 and expires on May 14, 2011. Lessor and Lessee agree that the initial term of the Lease of the Existing Premises is hereby
extended for a period of thirty-two and one-half (32.5) months commencing on May 15, 2011 and ending on January 31, 2014 (the “Existing
Premises Extension Term”). The Existing Premises Extension Term shall be upon all of the same terms and conditions of the Lease, except that
(1) the Monthly Base Rent payable by Lessee to Lessor during the Existing Premises Extension Term with respect to the Existing Premises
shall be as set forth in Paragraph 6 hereof; (2) the Premises shall be expanded to include the Expansion Premises pursuant to Paragraph 3
hereof; and (3) the Option to Extend set forth in Paragraph 3 of the Lease is amended as set forth in Paragraph 11 of this Amendment.
3.
Expansion of the Existing Premises to Include the Expansion Premises .
(a)
Effective as of February 1, 2011, Lessor and Lessee hereby agree that the Existing Premises shall be expanded to
include the Expansion Premises consisting of approximately 4,328 additional rentable square feet. The Expansion Premises are shown on the
floor plan of the second floor of the Building attached hereto as Amended Exhibit “B” and made a part hereof.
(b)
The initial term of the lease of the Expansion Premises shall be thirty-six (36) months, commencing on February 1,
2011 (the “Expansion Premises Commencement Date”), and shall expire on January 31, 2014, unless sooner terminated pursuant to the Lease;
provided, however, that the Expansion Premises Commencement Date, and Lessee’s obligation to pay Rent for the Expansion Premises, shall
be delayed for each day Lessor delays in delivering possession of the Expansion Premises to Lessee (i) during the early access period described
in Paragraph 5 hereof, and (ii) with the Tenant Improvements described in Paragraph 10 hereof substantially completed.
(c)
Attached hereto as Exhibit “C-1” and incorporated by reference herein is a list of Lessor’s existing workstation
furniture located in the Expansion Premises (“Furniture”) which shall remain in place and which Lessee shall have the right to use during the
term of the Lease of the Expansion Premises without additional cost. Upon receipt by Lessor of a written request from Lessee, provided that
Lessee delivers such written request to Lessor prior to April 1, 2011, Lessor shall remove any Furniture designated by Lessee at Lessor’s
expense. Lessee shall return any remaining Furniture listed on Exhibit “C-1” to Lessor in the same condition and repair as when received,
reasonable wear and tear excepted, upon such removal thereof at Lessee’s request as provided above, if applicable, and the balance (or all, if
applicable) of the Furniture at the expiration or sooner termination of the Lease of the Expansion Premises.
(d)
The Expansion Premises Commencement Date shall be confirmed in writing by Lessor and Lessee by the
execution and delivery of the Expansion Premises Commencement Memorandum in the form attached hereto as “Exhibit “D-1” and made a
part hereof.
4.
as follows:
Lessee’s Share . Paragraph 1(b) of the Lease is hereby amended as of the Expansion Premises Commencement Date to read
“(b) “Lessee’s Share” as used in this Lease shall mean the percentage calculated by dividing the sum of the total number of
rentable square feet of the Existing Premises (5,187) and the Expansion Premises (4,328), which equals 9,515, by the total number of
rentable square feet in the Complex (34,452 rentable square feet). The parties agree that Lessee’s Share shall be 27.62% based upon the
Existing Premises and the Expansion Premises consisting of a total of approximately nine thousand five hundred fifteen (9,515)
rentable square feet (9,515/34,452).”
5.
Early Access to the Expansion Premises . Subject to (1) the prior execution and delivery of this Amendment by Lessor and
Lessee; (2) the payment by Lessee to Lessor concurrently with the execution and delivery of this Amendment of the sum of Twelve Thousand
One Hundred Sixty-seven and Sixty-seven Hundredths Dollars ($12,167.67) representing the
2
increase in the Security Deposit referred to in Paragraph 9 of this Amendment; and (3) the delivery by Lessee to Lessor of written evidence that
Lessee’s commercial general liability insurance coverage required by Paragraph 11(a) of the Lease is in effect and has been amended to
expressly refer to both the Existing Premises and the Expansion Premises, Lessee and Lessee’s vendors and contractors shall have access to the
Expansion Premises, free of charge, from January 1, 2011 to January 31, 2011 for office set up and for the construction of Tenant
Improvements by Lessee, provided that (a) Lessor has approved in writing prior to the commencement of any proposed Tenant Improvements
by Lessee in the Expansion Premises any Tenant Improvements to be constructed by or for Lessee in the Expansion Premises, (b) Lessee shall
pay the entire cost of any such Tenant Improvements, and (c) Paragraph 16, Liens, of the Lease shall apply to any such Tenant Improvements
to be constructed by or for Lessee in the Expansion Premises.
6.
Existing Premises Monthly Base Rent . Paragraph 4(a) of the Lease is hereby amended to read as follows:
“4.
Existing Premises Monthly Base Rent . Lessee shall pay to Lessor Monthly Base Rent determined on a full service
basis that includes the Base Operating Expenses and Base Taxes referred to in Paragraph 5(b) hereof, with respect to the Existing
Premises during the Existing Premises Extension Term pursuant to Paragraph 2 of this Amendment, as follows:
Existing Premises :
Period — 32.5 Months
May 15, 2011— August 15, 2011
August 16, 2011 — May 31, 2012
June 1, 2012 — May 31, 2013
June 1, 2013 —January 31, 2014
7.
Rent/SF/Mo.
$
$
$
$
Amount/Mo.
Full Service
Sq. Ft.
0
2.65
2.73
2.81
5,187
5,187
5,187
5,187
$
$
$
$
0
13,745.55
14,157.92
14,582.66 ”
The Expansion Premises Monthly Base Rent .
(a)
Lessee shall pay to Lessor Monthly Base Rent on a full service basis with respect to the Expansion Premises during
the initial term of the Lease of the Expansion Premises, as follows:
Expansion Premises :
Period — 36 Months
February 1, 2011— April 30, 2011
May 1, 2011 — January 31, 2012
February 1, 2012 — January 31, 2013
February 1, 2013 — January 31, 2014
Rent/SF/Mo.
$
$
$
$
3
0
2.65
2.7295
2.8114
Amount/Mo.
Full Service
Sq. Ft.
4,328
4,328
4,328
4,328
$
$
$
$
0
11,469.20
11,813.28
12,167.67
(b)
Monthly Base Rent for the Expansion Premises is determined on a full service basis and includes the Base
Operating Expenses and Base Taxes referred to in Paragraph 8 hereof.
8.
Additional Rent; Increases in Operating Expenses and Taxes .
(a)
If Operating Expenses and/or Taxes with respect to the Existing Premises and the Expansion Premises as defined
in Paragraphs 8(c) and 8(d), respectively, of this Amendment, for any calendar year during the extension of the term of the Lease of the
Existing Premises or during the term of the Expansion Premises after the calendar year 2011 exceeds Base Operating Expenses and/or Base
Taxes as defined in Paragraph 8(b) hereof, Lessee shall pay to Lessor, as “Additional Rent,” Lessee’s Share (as defined in Paragraph 4 hereof)
of such increase in Operating Expenses and Taxes in accordance with Paragraph 5(f) of the Lease, as amended by Paragraph 8(e) hereof.
(b)
“Base Operating Expenses” and “Base Taxes” shall mean the actual Operating Expenses and Taxes of the
Complex for the calendar year 2011, adjusted to reflect a ninety-five percent (95%) occupancy rate of the Complex throughout such year.
(c)
“Operating Expenses,” as used in this Amendment are defined in Paragraph 5(c) of the Lease, which is hereby
incorporated herein by reference (subject to the Costs that are excluded from the definition of Operating Expenses by Paragraph 5(e) of the
Lease).
(d)
herein by reference.
“Taxes” as used in this Amendment are defined in Paragraph 5(d) of the Lease which is hereby incorporated
(e)
Effective as of the Expansion Premises Commencement Date, Paragraph 5(f) of the Lease is hereby amended by
substituting “2011” in place of “2009.”
9.
Additional Security Deposit . Concurrently with the execution and delivery of this Amendment by Lessor and Lessee,
Lessee shall pay to Lessor the sum of Twelve Thousand One Hundred Sixty-seven and Sixty-seven Hundredths Dollars ($12,167.67) as an
additional Security Deposit reflecting the expansion of the Premises to include the Expansion Premises. Said additional sum shall increase the
Security Deposit held by Lessor pursuant to Paragraph 7 of the Lease from Twenty-eight Thousand Five Hundred Twenty-eight and Fifty
Hundredths Dollars ($28,528.50) to a total of Forty Thousand Six Hundred Ninety-six and Seventeen Hundredths Dollars ($40,696.17).
10.
Expansion Premises Tenant Improvement Work . Lessor shall cause to be performed prior to January 1, 2011, at Lessor’s
sole cost and expense, the following Tenant Improvements in the Expansion Premises: remove the dividing wall between the Existing Premises
and the Expansion Premises. Lessor agrees to cause such work to be performed after 5:00 p.m., Monday through Friday, or on weekends.
11.
Option to Extend . Paragraph 3(a) Option to Extend, of the Lease is hereby amended: (a) to provide that the Premises
subject to the option to extend are the entire 9,515 rentable square feet consisting of the Existing Premises and the Expansion Premises, and
(b) references in Paragraph 3 to “the expiration of the initial term” shall mean January 31, 2014.
4
12.
Real Estate Broker . Cornish & Carey Commercial (“Cornish & Carey”) represents both Lessor and Lessee in this
transaction. Lessor shall pay a real estate commission to Cornish & Carey pursuant to a separate agreement between Lessor and Cornish &
Carey. Except for Cornish & Carey, each party represents to the other that it has not had any dealings with any other real estate broker, agent,
finder, or other person with respect to this Lease, and each party shall indemnify, defend, and hold harmless the other party from all damages,
expenses, and liabilities resulting from any claims that may be asserted against the other party by any broker, agent, finder, or other person with
whom the indemnifying party has or purportedly has dealt other than the aforementioned broker.
13.
Parking . Paragraph 26, Parking, of the Lease is amended as of February 1, 2011 to increase the number of parking spaces
that Lessee shall have the right to use on a non-reserved basis pursuant to Paragraph 26 of the Lease. Lessee’s share of parking spaces shall be
increased to equal Lessee’s proportionate share of the parking facilities of the Complex based upon the total 9,515 rentable square feet of the
Existing Premises and the Expansion Premises. Paragraph 26 of the Lease shall remain in effect subject to the foregoing increase.
14.
Right of First Offer to Lease .
(a)
Subject to the expiration on December 31, 2010 of the existing Lease between Lessor and Gabriel Investment
Services, LLC (“Gabriel Ventures”) of Suite 200, and subject to Gabriel Ventures vacating Suite 200, Lessor hereby grants to Lessee the right
of first offer to lease the premises on the second floor of the Building referred to as Suite 200, consisting of approximately five thousand six
hundred sixty (5,660) rentable square feet (the “First Offer Space”), upon the following terms and conditions: prior to entering into a lease of
the First Offer Space with any other tenant, Lessor shall deliver to Lessee a written offer (“First Offer”) to lease the entire First Offer Space, the
Monthly Base Rent at which the First Offer Space is offered for lease (which shall be Lessor’s good faith determination of the fair market value
of the First Offer Space), the term of the lease of the First Offer Space in accordance with Paragraph 14(b), and the approximate date that the
First Offer Space will be available for occupancy. Lessor shall also specify the amount, if any, of any tenant improvement allowance that
Lessor is offering for the First Offer Space, or if the First Offer Space is offered for lease “as is,” without any tenant improvement allowance.
Lessee shall have ten (10) calendar days after receipt of the First Offer within which to give written notice to Lessor of Lessee’s acceptance of
Lessor’s First Offer to lease the First Offer Space, time being of the essence. Failure of Lessee to deliver such written acceptance within said
period of ten (10) calendar days shall be deemed a rejection of the First Offer with respect to the First Offer Space.
(b)
If Lessee accepts Lessor’s First Offer to lease the First Offer Space within the time specified, Lessor and Lessee
shall execute and deliver an amendment to this Lease stating that (1) the First Offer Space shall be added to the premises leased by Lessee, and
Lessee shall pay the Monthly Base Rent for the First Offer Space specified by Lessor in the First Offer, with increases, if any, specified in the
First Offer; (2) Lessee’s Share of the Additional Rent (increases in Operating Expenses and Taxes), as defined in Paragraph 8 of this
Amendment, to be paid by Lessee with respect to the First Offer Space; (3) the First Offer Space shall be leased by Lessee for a term which is
co-terminus with the then remaining term of this Lease of the Existing Premises and the Expansion Premises; provided, however, if Lessor’s
First Offer is made on or after February 1, 2012 and Lessee has not further extended the Term as of such date,
5
Lessor shall have the right to specify in the First Offer that the term for the First Offer Space shall extend beyond the Term of this Lease for a
period not to exceed thirty-six (36) months; (4) the First Offer Space shall be leased to Lessee subject to all of the other terms and provisions of
the Lease as amended hereby, (A) except that Lessee’s termination right in Paragraph 16 shall be of no further force or effect, and (B) except as
otherwise specified in Lessor’s First Offer; and (5) if Lessee exercises the option to extend referred to in Paragraph 11 of this Amendment, the
premises leased by Lessee during the option period referred to in Paragraph 11 of this Amendment shall include the Existing Premises, the
Expansion Premises, and the First Offer Space.
(c)
If Lessee rejects the First Offer, Lessor shall have the right, within one hundred eighty (180) days after the
expiration of said period of ten (10) calendar days referred to in subparagraph (a) above, to lease all or any portion of the First Offer Space to a
third party tenant, but not for a rent or on terms and conditions substantially more favorable to the tenant than those specified in the First Offer.
If Lessor leases the entire First Offer Space to a third party tenant during the period of one hundred eighty (180) days after the rejection of the
First Offer by Lessee, Lessee’s right of First Offer with respect to the First Offer Space shall terminate and shall be of no further force or effect.
If Lessor is not successful in so leasing the First Offer Space during said period of one hundred eighty (180) days, Lessee’s right of First Offer
to lease the First Offer Space shall again apply on the same terms and conditions as provided in this Paragraph 14.
(d)
Lessee’s expansion rights in Paragraph 35 of the Lease shall remain in effect subject to said Paragraph 35.
15.
Right of First Notification . During the term of the Lease as amended hereby, Lessor shall give Lessee at least fifteen (15)
days written notice of the availability for lease, on a direct basis by Lessor, of the space on the ground floor of the Building and the lease terms
for such space before such ground floor space is offered to the market for lease by Lessor.
16.
Termination Right . If Lessee gives written notice to Lessor between June 1, 2012 and July 31, 2012 (the exact date is
referred to hereafter as the “notice date”) of Lessee’s bona fide need for additional space in the Building, specifying the number of rentable
square feet that Lessee needs and if Lessor is not able to agree to accommodate Lessee’s additional space needs in the Building prior to
January 31, 2013 because such additional space in the Building is not available for lease, provided Lessee is not in default beyond applicable
notice and cure periods as of the notice date, or on the effective date of termination specified hereafter, subject to Paragraph 14(b)(4)(A),
Lessee shall have the one time right to terminate the Lease effective January 31, 2013, (1) by giving written notice of termination to Lessor
between June 1, 2012 and July 31, 2012, time being of the essence, and (2) concurrently with giving such notice of termination, Lessee shall
pay to Lessor by bank cashier’s check a termination fee equal to the total of three (3) months of Monthly Base Rent for the Existing Premises
and the Expansion Premises at the rates in effect on the effective date of termination, plus Lessee’s Share of Additional Rent (Operating
Expenses and Taxes) due, if any, prorated as of the effective date of termination. If Lessee timely exercises its termination right as set forth
herein and Lessee pays to Lessor the amounts at the time specified, the Lease shall terminate as of January 31, 2013 in the same manner as if
the Lease had terminated in accordance with its terms, except for Lessee’s obligations to pay to Lessor the termination fee and the prorated
Additional Rent. Lessor shall
6
respond to Lessee’s request to lease additional space in writing within ten (10) calendar days after Lessor’s receipt of Lessee’s notice. Lessor
shall advise Lessee in Lessor’s written response whether or not Lessor is able to accommodate Lessee’s additional space needs.
17.
Continuing Effect . The parties acknowledge that the Lease remains in full force and effect as amended hereby, and with the
term extended with respect to the Existing Premises and with the Existing Premises expanded to include the Expansion Premises subject to all
of the terms and conditions of the Lease, as amended by this Amendment.
18.
Counterparts . This Amendment may be executed in one or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument. Signature pages may be detached from counterparts and attached to a
single copy of this Amendment to form one (1) document.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date set forth above.
“Lessor”
350 MARINE PARKWAY LLC,
a California limited liability company
By:
/s/ James M. Pollock
James M. Pollock, Manager
By:
/s/ Jeffrey O. Pollock
Jeffrey Ord Pollock, Manager
“Lessee”
ROCKET FUEL INC.,
a Delaware corporation
By:
Name:
Its:
By:
Name:
Its:
7
/s/ George H. John
George H. John
CEO
EXPANSION PREMISES FLOOR PLAN
[FLOOR PLAN]
AMENDED EXHIBIT “B”
LESSOR’S FURNITURE
Item/Description
Count
Herman Miller cubes
16
Overhead cabinets
15
File cabinets
14
Blue tack boards
15
U shaped desks with overhead cabinet and file cabinet.
2
L shaped desk with overhead cabinet and file cabinet
1
EXHIBIT “C-1”
SECOND AMENDMENT TO LEASE
350 Marine Parkway
Redwood City, California 94065
THIS SECOND AMENDMENT TO LEASE (this “Amendment”), dated for reference purposes as of February 25, 2011, is made and
entered into by and between 350 MARINE PARKWAY LLC, a California limited liability company, hereafter referred to as “Lessor,” and
ROCKET FUEL, INC., a Delaware corporation, hereafter referred to as “Lessee.”
RECITALS
A.
Lessor and Lessee entered into a lease dated as of February 17, 2009 (the “Original Lease”) of certain premises consisting
of approximately 5,187 rentable square feet referred to as Suite 220 (the “Existing Premises”) located on the second floor of the Building on the
real property owned by Lessor commonly referred to as 350 Marine Parkway, Redwood City, California 94065.
B.
Lessor and Lessee entered into a First Amendment to Lease dated as of October 11, 2010 (the “First Amendment”)
amending the Original Lease by, among other things, extending the term of the lease of the Existing Premises, expanding the Existing Premises
to include approximately 4,328 additional rentable square feet (the “Expansion Premises”), in the Building, and to amend the lease in certain
other respects as set forth therein. The Original Lease as amended by the First Amendment, and as further amended by this Amendment, is
hereafter referred to as the “Lease.”
C.
Lessor and Lessee wish to enter into this Amendment to expand the Existing Premises to include approximately 90
additional rentable square feet in the Building, and to amend the Lease in certain other respects, as set forth herein.
AGREEMENT
NOW THEREFORE, in consideration of the mutual covenants contained herein, the parties agree as follows:
1.
Defined Terms . Except as otherwise provided herein, all capitalized terms and phrases used but not defined in this
Amendment shall have the meanings given to them in the Lease.
2.
Expansion of the Existing Premises.
(a)
Effective as of March 15, 2011, Lessor and Lessee hereby agree that the Existing Premises shall be expanded
by approximately 90 rentable square feet, from approximately 5,187 rentable square feet to approximately 5,277 rentable square feet (the
“Expanded Existing Premises”). The amended floor plan of the second floor of the Building is attached hereto as Amended Exhibit “B” and
made a part hereof.
(b)
Subject to the expansion of the Existing Premises as of March 15, 2011 pursuant to Paragraph 2(a) above, the
initial term of the lease of the Expanded Existing Premises shall remain as set forth in Paragraph 2 of the First Amendment.
3.
Lessee’s Share . Paragraph 1(b) of the Lease and Paragraph 4 of the First Amendment are hereby amended as of March 15,
2011 to read as follows:
“(b) “Lessee’s Share” as used in this Lease shall mean the percentage calculated by dividing the sum of the total number of
rentable square feet of the Expanded Existing Premises (5,277) and the Expansion Premises (4,328), which equals 9,605 rentable
square feet, by the total number of rentable square feet in the Complex (34,452 rentable square feet). The parties agree that as of
March 15, 2011 Lessee’s Share shall be 27.88% based upon the Expanded Existing Premises and the Expansion Premises consisting
of a total of approximately nine thousand six hundred five (9,605) rentable square feet (9,605/34,452).”
4.
Expanded Existing Premises Monthly Base Rent . Paragraph 6 of the First Amendment is hereby amended to read as
follows:
“6.
Existing Premises Monthly Base Rent. Paragraph 4(a) of the Lease is hereby amended to read as follows:
‘4.
Expanded Existing Premises Monthly Base Rent . Commencing as of March 15, 2011 and ending on January 31,
2014, Lessee shall pay to Lessor Monthly Base Rent determined on a full service basis that includes the Base Operating Expenses
and Base Taxes referred to in Paragraph 8(b) of the First Amendment with respect to the Expanded Existing Premises, as follows:
Expanded Existing Premises :
Period
Rent/SF/Mo.
Amount/Mo.
Full Service
Sq. Ft.
March 15, 2011 – May 14, 2011
$
2.75
5,277
$
14,511.75
May 15, 2011 – August 15, 2011
$
0
5,277
$
0
August 16, 2011 – May 31, 2012
$
2.65
5,277
$
13,984.05
June 1, 2012 – May 31, 2013
$
2.73
5,277
$
14,406.21
June 1, 2013 – January 31, 2014
$
2.81
5,277
$
14,828.37
5.
Additional Rent . Whenever reference is made to the “Existing Premises” in Paragraph 8, “Additional Rent, Increases in
Operating Expenses and Taxes” of the First Amendment such term shall mean the Existing Premises as expanded by the additional
approximately 90 rentable square feet referred to in this Amendment.
6.
Expanded Existing Premises Tenant Improvement Work . Lessor shall cause to be performed at Lessor’s sole cost and
expense the Tenant Improvement Work in the Expanded Existing Premises described in the Proposal dated 1/21/2011 by JM Lehman
Construction, Inc.
2
attached hereto as Exhibit “E” and made a part hereof. Any additional work in the Expanded Existing Premises or elsewhere in the Existing
Premises shall be performed at Lessee’s expense, subject to Lessor’s approval of said additional work.
7.
The Expansion Premises Monthly Base Rent. The Expansion Premises Monthly Base Rent shall be payable by Lessee to
Lessor in accordance with Paragraph 7 of the First Amendment.
8.
Option to Extend . Paragraph 3(a), Option to Extend, of the Lease is hereby amended to provide that the Premises subject
to the option to extend are the entire 9,605 rentable square feet consisting of the Expanded Existing Premises and the Expansion Premises.
9.
Real Estate Broker . Cornish & Carey Commercial (“Cornish & Carey”) represents both Lessor and Lessee with respect to
this Second Amendment. Lessor shall pay a real estate commission to Cornish & Carey for its services in connection with this Second
Amendment pursuant to a separate agreement between Lessor and Cornish & Carey. Except for Cornish & Carey, each party represents to the
other that it has not had any dealings with any other real estate broker, agent, finder, or other person with respect to this Amendment, and each
party shall indemnify, defend, and hold harmless the other party from all damages, expenses, and liabilities resulting from any claims that may
be asserted against the other party by any broker, agent, finder, or other person with whom the indemnifying party has or purportedly has dealt
other than the aforementioned broker.
10.
Continuing Effect . The parties acknowledge that the Lease remains in full force and effect as amended hereby, with the
Existing Premises expanded by approximately 90 rentable square feet, as provided in this Amendment.
11.
Counterparts . This Amendment may be executed in one or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument. Signature pages may be detached from counterparts and attached to a
single copy of this Amendment to form one (1) document.
3
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date set forth above.
“Lessor”
350 MARINE PARKWAY LLC,
a California limited liability company
By:
/s/ James M. Pollock
James M. Pollock, Manager company
By:
/s/ Jeffrey O. Pollock
Jeffrey Ora Pollock, Manager
“Lessee”
ROCKET FUEL, INC.,
a Delaware corporation
By:
/s/ George H. John
Name: George H. John
Its:
CEO
By:
/s/ Illegible
Name: Illegible
Its:
4
CFO
AMENDED EXPANSION PREMISES FLOOR PLAN
ATTACHED
AMENDED EXHIBIT “B”
EXHIBIT B
[FLOOR PLAN]
JM LEHMAN CONSTRUCTION, INC.
PROPOSAL
1932 EUCALYPTUS AVE.
SAN CARLOS, CA 94070
Date
1/21/2011
Proposal #
2009M327
TEL: (650) 593-6211
FAX: (650) 637-1040
CA LICENSE #627936
Name / Address
Project
Pollack Financial
150 Portola Rd.
Portola Valley, CA
Rocketfuel Inc.
350 Marine Parkway, Suite 220
Redwood Shores, CA 94065
Description
Total
SCOPE OF WORK:
5,200.00
Lobby Area
- Demo existing Entry Door
- Demo Corridor wall and leave header (T-bar ceilings do not match)
- Wrap header with sheetrock, install square cornerbead, tape & finish smooth
- Frame new full height Entry wall, sheetrock, tape & finish smooth
- Demo T-bar ceiling for full height entry wall, install new wall angle, put T-bar back together
- Install Entry Door in new location
- Furnish and install 18” x 9’ hollow metal 20 min. rated borrowed lite on side of Entry Door
- Furnish and install clear aluminum borrowed lite to match existing
- Demo approx. 22’ x 14’ of glue down carpet
- Furnish and install new glue down carpet & base (allowance $1,500.00)
- Electrical (Demo switches & two (2) duplex outlets, wire for & install new switches)
- Paint
- Clean-up
Thank you for the opportunity to provide pricing for this project.
Total
APPROVED:
DATE:
Exhibit “E”
1
JM LEHMAN CONSTRUCTION, INC.
PROPOSAL
1932 EUCALYPTUS AVE.
SAN CARLOS, CA 94070
Date
1/21/2011
Proposal #
2009M327
TEL: (650) 593-6211
FAX: (650) 637-1040
CA LICENSE #627936
Name / Address
Project
Pollack Financial
150 Portola Rd.
Portola Valley, CA
Rocketfuel Inc.
350 Marine Parkway, Suite 220
Redwood Shores, CA 94065
Description
Total
* All work to be done during normal business hours
Payment is to be made as follows: Full payment upon Job Completion
All material is guaranteed to be as specified. All work is to be completed in a manner according to standard practices. Any
alternation or deviation from the specifications made involving extra costs will be executed only upon written orders and
will become an extra charge over and above the proposal.
THIS PROPOSAL MAY BE WITHDRAWN BY US IF NOT ACCEPTED WITHIN THIRTY (30) DAYS.
AUTHORIZED SIGNATURE
DATE:
ACCEPTANCE OF PROPOSAL — The above prices, specifications, and conditions are satisfactory and are hereby
accepted. You are authorized to do the work as specified. Payment will be made as outlined above.
ACCEPTANCE SIGNATURE
DATE:
Thank you for the opportunity to provide pricing for this project.
Total
APPROVED:
$
5,200.00
DATE:
Exhibit “E”
2
THIRD AMENDMENT TO LEASE
350 Marine Parkway
Redwood City, California 94065
THIS THIRD AMENDMENT TO LEASE (this “Third Amendment”), dated for reference purposes as of March 22, 2012, is made
and entered into by and between 350 MARINE PARKWAY LLC, a California limited liability company, hereafter referred to as “Lessor,” and
ROCKET FUEL, INC., a Delaware corporation, hereafter referred to as “Lessee.”
RECITALS
A.
Lessor and Lessee entered into a lease dated as of February 17, 2009 (the “Original Lease”) of certain premises consisting
of approximately 5,187 rentable square feet referred to as Suite 220 located on the second floor of the Building on the real property owned by
Lessor commonly referred to as 350 Marine Parkway, Redwood City, California 94065.
B.
Lessor and Lessee entered into a First Amendment to Lease dated as of October 11, 2010 (the “First Amendment”)
amending the Original Lease by, among other things, extending the term of the Original Lease, expanding the second floor premises by
approximately 4,328 rentable square feet, from approximately 5,187 rentable square feet to a total of approximately 9,515 rentable square feet
and amending the Original Lease in certain other respects as set forth in the First Amendment.
C.
Lessor and Lessee entered into a Second Amendment to Lease dated as of February 25, 2011 (the “Second Amendment”)
amending the Original Lease, as amended by the First Amendment, by expanding the Existing Premises on the second floor of the Building by
approximately 90 rentable square feet from approximately 9,515 rentable square feet to approximately 9,605 rentable square feet (referred to in
this Third Amendment as the “Existing Premises”). The Original Lease, as amended by the First Amendment and the Second Amendment, is
hereafter referred to as the “Lease.”
D.
Lessor and Lessee now wish to enter into this Third Amendment to expand the Existing Premises to include Suite 100, the
entire first floor of the Building consisting of approximately 14,572 rentable square feet (referred to in this Third Amendment as the
“Expansion Premises”), and to amend the Lease in certain other respects, as set forth herein.
AGREEMENT
NOW THEREFORE, in consideration of the mutual covenants contained herein, the parties agree as follows:
1.
Defined Terms .
(a)
Except as otherwise provided herein, all capitalized terms and phrases used but not defined in this Third
Amendment shall have the meanings given to them in the Lease.
(b)
As used in this Third Amendment (1) the “Existing Premises” refers to Suite 220 consisting of approximately 9,605
rentable square feet on the second floor of the Building (5,187 + 4,328 + 90 = 9,605); (2) the “Expansion Premises” refers to Suite 100,
consisting of approximately 14,572 rentable square feet on the first floor of the Building; and (3) the “Total Premises” refers to the sum of the
Existing Premises and the Expansion Premises for a total of approximately 24,177 rentable square feet. Effective as of the Expansion Premises
Commencement Date, the term “Premises” as used in the Lease shall mean the Total Premises, except as otherwise provided in this Third
Amendment.
2.
Term .
(a)
The commencement date of the term of the Original Lease of approximately 5,187 rentable square feet of the
premises located on the second floor of the Building was on or about March 15, 2009; the commencement date of the expansion of the
premises on the second floor of the Building of approximately 4,328 additional rentable square feet was on or about February 1, 2011 pursuant
to the First Amendment; and the commencement date of the expansion of the premises on the second floor of the Building by approximately 90
rentable square feet was on or about March 15, 2011.
(b)
Except as otherwise provided in this Third Amendment, the Commencement Date of the term of the Lease as to the
Expansion Premises (the “Expansion Premises Commencement Date”), shall be the later of August 1, 2012 or the date that Lessor delivers
legal possession of the Expansion Premises to Lessee free of any claims by the Superior Lessors (as defined in Paragraph 15 below), and the
Expiration Date of the Lease of the Expansion Premises shall be July 31, 2017, unless sooner terminated in accordance with the Lease, making
the Total Premises in the Building leased by Lessee approximately 24,177 rentable square feet. An amended floor plan of the Total Premises is
attached hereto as Exhibit A. Effective as of the
2
Expansion Premises Commencement Date, Lessor hereby leases the Expansion Premises to Lessee, subject to all of the terms and conditions of
the Lease, as amended by this Third Amendment. Notwithstanding anything to the contrary in the Lease, Lessor agrees that Lessee may
surrender possession of the Total Premises at the expiration or earlier termination of the Lease in the condition existing as of the Expansion
Premises Commencement Date, as modified by the Tenant Improvement Work.
(c)
Effective as of the Expansion Premises Commencement Date, the Expiration Date of the Lease as to the Existing
Premises is hereby extended from January 31, 2014 to July 31, 2017 in order to be co-terminus with the Expiration Date of the term of the
Lease as to the Expansion Premises.
3.
Lessee’s Share . Paragraph 3(b) of the Lease is hereby amended to read as follows:
“(b)
Through July 31, 2012 “Lessee’s Share” as used in this Lease shall be 27.88%, the percentage calculated by
dividing the number of rentable square feet of the Existing Premises (approximately 9,605 rentable square feet) by 34,452
(9,605/34,452). Effective as of the Expansion Premises Commencement Date, “Lessee’s Share” as used in this Lease shall be 70.18%
the percentage calculated by dividing the number of rentable square feet of the Total Premises (24,177 rentable square feet), by the
total number of rentable square feet in the Complex (34,452 rentable square feet). The parties agree that as of the Expansion Premises
Commencement Date, Lessee’s Share shall be 70.18% based upon the Total Premises containing approximately twenty-four thousand
one hundred seventy-seven (24,177) rentable square feet (24,177/34,452).”
4.
Existing Premises Monthly Base Rent . Effective as of the Expansion Premises Commencement Date, Paragraph 4(a) of the
Lease is deleted in its entirety and replaced by the following:
“(a)
Commencing as of February 1, 2012 and ending on July 31, 2017, Lessee shall pay to Lessor Monthly
Base Rent for the Existing Premises determined on a full service basis that includes Lessee’s Share of the Base Operating Expenses
and Base Taxes attributable to the Existing Premises as follows:
3
Period
Rent/SF/Mo.
February 1, 2012 – May 31, 2012
June 1, 2012 – May 31, 2013
June 1, 2013 – January 31, 2014
February 1, 2014 – July 31, 2014
August 1, 2014 – July 31, 2015
August 1, 2015 – July 31, 2016
August 1, 2016 – July 31, 2017
$
$
$
$
$
$
$
2.65
2.73
2.81
3.5535
3.6601
3.7699
3.8830
Amount/Mo.
Full Service
Sq. Ft.
9,605
9,605
9,605
9,605
9,605
9,605
9,605
$
$
$
$
$
$
$
25,453.25
26,221.65
26,990.05
34,131.37
35,155.26
36,209.89
37,296.22
“Base Operating Expenses” and “Base Taxes” payable by Lessee with respect to the Existing Premises shall mean
Lessee’s Share of the actual Operating Expenses and Taxes of the Complex for the calendar year 2011 and continuing through July 31,
2017, adjusted to reflect a ninety-five percent (95%) occupancy rate of the Complex throughout such year, pursuant to Paragraph 3
above.”
5.
Expansion Premises Monthly Base Rent.
(a)
Commencing as of the Expansion Premises Commencement Date and ending on July 31, 2017, Lessee
shall pay to Lessor Monthly Base Rent for the Expansion Premises determined on a full service basis that includes Lessee’s Share of
the Base Operating Expenses and Base Taxes (referred to in Paragraph 3 above) as follows:
Period
Rent/SF/Mo.
Expansion Premises Commencement Date - October 31, 2012
November 1, 2012 - July 31, 2013
August 1, 2013 - July 31, 2014
August 1, 2014 - July 31, 2015
August 1, 2015 - July 31, 2016
August 1, 2016 - July 31, 2017
$
$
$
$
$
$
0
3.45
3.5535
3.6601
3.7699
3.8830
Amount/Mo.
Full Service
Sq. Ft
14,572
14,572
14,572
14,572
14,572
14,572
$
$
$
$
$
$
0
50,273.40
51,781.60
53,355.05
54,935.10
56,583.15
(b)
Commencing on the Expansion Premises Commencement Date, and continuing through July 31, 2017,
“Base Operating Expenses” and “Base Taxes” payable by Lessee with respect to the Expansion Premises shall mean Lessee’s Share of
the actual
4
Operating Expenses and Taxes of the Complex for the calendar year 2012 adjusted to reflect a ninety-five percent (95%) occupancy
rate of the Complex throughout such year.
6.
Expansion Premises Tenant Improvement Work .
(a)
Subject to Paragraph 6(b) Lessor shall cause to be performed general fix up work in the approximately 14,572
rentable square feet of the Expansion Premises, including, but not limited to, replacement of carpet, new paint, installation of glass to recently
added offices, the addition of a unisex restroom, and the demolition of a few walls specified by Lessee, as reflected by a space plan approved in
writing by Lessor and Lessee is attached hereto as Exhibit B (the “Expansion Premises Tenant Improvement Work”). The Expansion Premises
Tenant Improvement Work shall be performed by a general contractor selected by Lessor (the “General Contractor”) pursuant to a construction
contract between Lessor and the General Contractor (the “Construction Contract”) containing a guaranteed maximum price of the work in an
amount not exceeding the construction budget for the Expansion Premises Tenant Improvement Work attached hereto as Exhibit B (the
“Approved Budget”) and a one (1) year warranty against defects in the Expansion Premises Tenant Improvement Work. The Construction
Contract shall specify a substantial completion date of the Expansion Premises Tenant Improvement Work which date shall be on or about
August 1, 2012.
(b)
Lessor shall contribute the sum of up to One Hundred Sixty Thousand Two Hundred Ninety-two Dollars
($160,292.00) ($11.00 per square foot of the Expansion Premises) (“Lessor’s Tenant Improvement Allowance”). Lessee shall be required to
pay (collectively, the “Lessee’s Contribution”): (i) the excess, if any, of the Approved Budget over the Lessor’s Tenant Improvement
Allowance; and (ii) any increase in the cost of the Expansion Premises Tenant Improvement Work in excess of Lessor’s Tenant Improvement
Allowance that is due to any additions to the work described in Paragraph 6(a) requested by Lessee before the commencement of the work, that
are approved in writing by Lessor, or any additions to the work requested by Lessee after the commencement of the work that are the subject of
change orders requested by Lessee that are approved by Lessor and Lessee in writing (“Approved Change Orders”). Lessor shall pay any
increase in the guaranteed maximum price of the work specified in the Construction Contract claimed by the contractor due to Building
conditions not apparent to the contractor at the time the guaranteed maximum price Construction Contract is signed by the contractor.
(c)
Upon receipt by Lessor of any progress billings from the General Contractor that exceed Lessor’s Tenant
Improvement Allowance, Lessor shall submit
5
an invoice to Lessee for Lessee’s Contribution (together with copies of the General Contractor’s total billings to date), and Lessor shall submit
an invoice to Lessee for each billing by the General Contractor thereafter for all additional amounts payable by Lessee as Lessee’s Contribution
(with a copy of such billing). Lessee shall pay to Lessor for payment by Lessor to the General Contractor the amount of each such invoice for
Lessee’s Contribution within ten (10) business days after receipt by Lessee of such invoice.
(d)
Notwithstanding anything to the contrary in the Lease or this Third Amendment, Lessor shall pay for (and the
Tenant Improvement Allowance shall be deemed to be increased by the amount of) any of the following costs: (i) costs incurred due to the
presence of Hazardous Materials in the Expansion Premises or the surrounding areas unless due to the use of Hazardous Material by Lessee,
(ii) costs to bring the Expansion Premises, the Building or any exterior areas into compliance with applicable laws and restrictions, including,
without limitation, the Americans with Disabilities Act and environmental laws, even if such compliance is triggered as a result of the
Expansion Premises Tenant Improvement Work, and (iii) any construction management, supervision, alteration, or similar fees of Lessor or its
property manager in connection with the Expansion Premises Tenant Improvement Work.
(e)
Any unused amount of Lessor’s Tenant Improvement Allowance shall be retained by Lessor upon completion of
the Expansion Premises Tenant Improvement Work and shall not be credited against rent payable by Lessee to Lessor.
(f)
The Expansion Premises Tenant Improvement Work shall comply with all applicable laws and building codes,
including the Americans with Disabilities Act, and shall be constructed in a good and workmanlike manner, free of defects, using new
materials and equipment of good quality. Upon substantial completion of the Expansion Premises Tenant Improvement Work, Lessee shall
have the right to submit a written “punch list” to Lessor, setting forth any defective items of construction. Lessor shall cause any such items to
be corrected promptly by the General Contractor or the responsible subcontractor. Neither the acceptance by Lessee of the Expansion Premises
nor the submission of a “punch list” shall be deemed a waiver by Lessee of Lessee’s right to have any defects in the Expansion Premises
Tenant Improvement Work repaired at no cost to Lessee, provided that Lessee gives written notice to Lessor of any defects in the Expansion
Premises Tenant Improvement Work within the one (1) year contractor’s warranty in the Construction Agreement with the General Contractor
against defects in workmanship or materials. The cost of any repairs necessary to correct any defects in the Expansion Premises
6
Tenant Improvement Work thereafter shall be treated as an Operating Expense pursuant to Paragraph 5 of the Original Lease.
(g)
The Expansion Premises shall be delivered to Lessee in good working condition, including, but not limited to, the
roof of the Building, HVAC, electrical, plumbing, and lighting systems in the Building and the Expansion Premises, and, Lessor shall, at its
sole cost and expense, repair any defect in the foregoing delivery condition promptly after receipt of notice from Lessee; provided, that, Lessee
provides such notice within ninety (90) days following (l) the Expansion Premises Commencement Date or (2) the substantial completion of
the Expansion Premises Tenant Improvement work, whichever occurs first. Subject to the foregoing and the completion of the Expansion
Premises Tenant Improvement Work, Lessee waives all right to make repairs at the expense of Lessor, or to deduct the costs thereof from the
rent, and Lessee waives all rights under Section 1941 and 1942 of the Civil Code of the State of California.
(h)
Lessor acknowledges that Lessee occupies or will occupy the Expansion Premises under a Temporary License
Agreement (as defined in Paragraph 15 of this Third Amendment). Lessor agrees that, at Lessee’s option, the Expansion Premises Tenant
Improvement Work may be performed in the Expansion Premises prior to the Expansion Premises Commencement Date, provided that
(1) Lessor has previously approved in writing the plans and specifications for the Expansion Premises Tenant Improvement Work and the
guaranteed maximum price specified in the Construction Contract between Lessor and the General Contractor who is to perform the Expansion
Premises Tenant Improvement Work; (2) Lessee shall deliver to Lessor concurrently with execution and delivery by the parties of this Third
Amendment a certificate of insurance confirming that Lessee’s Commercial General Liability Insurance coverage is in effect with respect to the
Expansion Premises and that Lessor is named as an additional insured thereon pursuant to the terms and conditions of Paragraph 11(a) of the
Original Lease; and (3) Lessee has delivered to Lessor prior to or concurrently with the execution and delivery by the parties of this Third
Amendment the additional Security Deposit amount referred to in Paragraph 7 hereof.
(i)
During the Lease term, as extended, Lessee shall have the right to use any cubicles owned by Lessor and located in
the Expansion Premises (the “Lessor-Owned Cubicles”). An inventory of the Lessor-Owned Cubicles is attached hereto as Exhibit C. Lessor
shall remove certain furniture in the Expansion Premises specified by Lessee within thirty (30) days after (1) the Expansion Premises
Commencement Date, or (2) the substantial completion of the Expansion Premises Tenant Improvement Work, whichever occurs first. If after
such thirty (30) days
7
Lessee wants to have furniture removed from the Premises, Lessee shall give written notice to Lessor requesting such removal. Lessor shall
remove such furniture and submit an invoice to Lessee for the actual, reasonable cost of such removal, and Lessee shall promptly reimburse
Lessor for such cost. Upon such removal the parties shall update the inventory attached hereto as Exhibit C. Lessor shall ensure that all existing
wiring in the Expansion Premises is not cut during the removal of any furniture.
(j)
Lessee agrees to observe the following rules and regulations of the Building during the term of this Lease:
(1) There shall be no loud music or musical instruments played in the Building; (2) Lessee shall use its good faith diligent efforts to keep the
Building restrooms in a neat and orderly condition; and (3) any common area parties or other events sponsored by Lessee shall be subject to
Lessor’s prior written approval, which approval Lessor may withhold in Lessor’s sole, but reasonable, judgment if Lessor believes that any
such event could disturb other tenants of the Building. If Lessee breaches any of the foregoing Building rules and regulations Lessor shall give
Lessee prompt written notice thereof and for one (1) year thereafter Lessor may, in Lessor’s sole judgment, withhold Lessor’s approval of any
common area parties or other events.
7.
Security Deposit . Lessor currently holds a Security Deposit from Lessee of Forty Thousand Dollars ($40,000.00).
Concurrently with the execution and delivery of this Third Amendment by Lessor and Lessee, Lessee shall pay to Lessor an additional cash
Security Deposit in the amount of Three Hundred Sixty Thousand Dollars ($360,000.00), increasing the Security Deposit to Four Hundred
Thousand Dollars ($400,000.00). Upon Lessee delivering to Lessor bank statements confirming that Lessee has raised a minimum of Twenty
Million Dollars ($20,000,000.00) debt or equity funding during the calendar year 2012, and provided that no event of default by Lessee under
this Lease has occurred and is continuing as of the date of receipt of such confirmation (as “event of default” is defined in Paragraph 22 of the
Original Lease), Lessor shall promptly release and return to Lessee One Hundred Thousand Dollars ($100,000.00) of the Security Deposit,
reducing the Security Deposit to Three Hundred Thousand Dollars ($300,000.00). Thereafter, provided that (1) Lessee delivers written
evidence acceptable to Lessor that Lessee has a cash balance of at least Five Million Dollars ($5,000,000.00) in Lessee’s corporate bank
accounts; and (2) no event of default by Lessee under this Lease has occurred and is continuing as of the applicable Reduction Date, as of
March 1, 2013 and thereafter on each anniversary of said date during the term of the Lease (each, a “Reduction Date”), Lessor shall credit on
each Reduction Date the total sum of Seventy-five Thousand Dollars ($75,000.00) of the Security Deposit to the next monthly payments of the
Existing Premises Monthly Base Rent and the Expansion Premises Monthly Base Rent,
8
prorata, based on said two Monthly Base Rent amounts following such Reduction Date; provided, however, that such reductions of the Security
Deposit shall cease when the Security Deposit has been reduced to One Hundred Fifty Thousand Dollars ($150,000.00), which amount shall be
retained by Lessor as a Security Deposit until the expiration of the term of the Lease of the Existing Premises and the Expansion Premises and
the term of any Option to Extend exercised by Lessee.
8.
Option to Extend . Paragraph 3(a), Option to Extend, of the Lease and Paragraph 8 of the Second Amendment, are hereby
amended as follows:
(a)
The option extension period is extended from twenty-four (24) calendar months to sixty (60) calendar
months;
(b)
Lessee may exercise the Option to Extend with respect to the Existing Premises; or the Expansion
Premises; or the Total Premises; and
(c)
Subject to the amendments referred to in subparagraphs (a) and (b) above of this Paragraph 8, Paragraph
3, Option to Extend, of the Lease and Paragraph 8 of the Second Amendment shall continue to apply such that Lessee has one (1) Option to
Extend the term of the Lease as to the Existing Premises, the Expansion Premises, or both, for one (1) additional term of sixty (60) calendar
months.
9.
Right of First Offer .
(a)
Subject to the prior rights granted by Lessor to Gabriel Investments (Suite 200) and Woodside Fund (Suite 300), in
their existing leases as set forth on Exhibit D attached hereto, Lessor hereby grants to Lessee the right of first offer (“Right of First Offer”) to
lease Suite 200 and/or Suite 300 if either or both said suites becomes available for lease pursuant to a direct lease from Lessor (not a sublease)
at any time during the initial term of this Lease. Lessee’s Right of First Offer is personal to Rocket Fuel, Inc. and any Permitted Affiliate of
Lessee. Lessee’s Right of First Offer to lease Suite 200 and/or Suite 300 shall be upon the following terms and conditions: provided that no
event of default by Lessee (as defined in Paragraph 22 of the Original Lease) has occurred and remains uncured, and provided that Lessee has
not assigned its interest in this Lease to any third party, (other than a Permitted Affiliate), and subject to the prior rights of Gabriel Investments
and Woodside Fund referred to above, when either of Suite 200 or Suite 300 becomes available for lease Lessor shall deliver to Lessee written
notice offering to lease such space to Lessee, specifying the number of rentable square feet of the space available
9
for lease, the Monthly Base Rent for such space, the date the space will be available for occupancy, and the term of the Lease for such space
(“First Offer”). The space shall be offered to Lessee for lease “as is” in its then condition. Lessor shall have no obligation to construct any
Tenant Improvements to such space. Lessee shall have five (5) business days after receipt of the First Offer within which to give written notice
to Lessor of interest by Lessee’s management in leasing the offered space pursuant to Lessor’s First Offer. Failure of Lessee to deliver such
written notice of interest within said period of five (5) business days following receipt of Lessor’s notice of the First Offer, or Lessee’s failure
to deliver Lessee’s final written acceptance of Lessor’s First Offer within ten (10) business days following receipt of Lessor’s notice of the
First Offer, shall be deemed a rejection of the First Offer, time being of the essence. If Lessee rejects the First Offer, Lessor shall have the right
to lease all or any part of the space to a third party lessee for a term, at such rental, and upon such other terms and conditions as Lessor shall
determine in Lessor’s sole judgment, provided that if Lessee rejects the First Offer and thereafter Lessor decides to offer to lease the space at a
lower Monthly Base Rent or on materially more favorable terms than the terms contained in Lessor’s First Offer to Lease, Lessor shall re-offer
the space to Lessee in writing at the lower Monthly Base Rent or on such more favorable terms before offering the space to a third party at such
lower Monthly Base Rent or on such more favorable terms (a “Reoffer”), and Lessee shall have three (3) business days after receipt of the
Reoffer to accept the revised First Offer in writing, time being of the essence. If Lessee notifies Lessor in writing of Lessee’s final acceptance
of Lessor’s First Offer or Reoffer within the time periods referred to above, then Lessee and Lessor shall execute and deliver an amendment to
this Lease to include the space which shall become a part of the Total Premises for purposes of this Lease. The space shall be leased by Lessee
at the then applicable Monthly Base Rent in Lessor’s First Offer (or such lower rent as is offered to Lessee in the Reoffer), and subject to all of
the other terms and provisions of this Lease (as the same may be amended by the terms of the First Offer or Reoffer), excluding Paragraph 6
hereof (Expansion Premises Tenant Improvement Work) if no tenant improvement allowance is provided in the First Offer or Reoffer.
(b)
The rights of Lessee under this Paragraph 9 shall be continuous through the term of the Lease, as extended.
Lessee’s rejection of any particular offer shall not relieve Lessor of its obligation to again offer Suite 200 and Suite 300 to Lessee at any time
that such space subsequently becomes available.
10.
Assignment and Subletting . The word “Premises” when used in Paragraph 17, Assignment and Subletting, of the Lease
shall mean both the Existing Premises and the Expansion Premises. Subject to Paragraph 8(b) above, Paragraph 17 of the Lease, Assignment
and Subletting, shall apply to the Total Premises.
10
11.
Parking . The provision “Lessee’s proportionate share of the parking facilities of the Complex” as used in Paragraph 26 of
the Original Lease shall mean 70% of the parking facilities of the Complex (24,177/34,452) such that from and after the Expansion Premises
Commencement Date Lessee shall have the right to use on a non-reserved basis pursuant to Paragraph 26 of the Lease Lessee’s proportionate
share of the parking facilities of the Complex based upon the total 24,177 rentable square feet of the Existing Premises and the Expansion
Premises. Paragraph 26 of the Lease shall remain in effect subject to the foregoing increase.
12.
Signage . Lessee’s signage rights granted by Lessor in Paragraph 27 of the Original Lease (Building directory, suite signage,
and monument signage) shall be expanded to reflect the total rentable square feet of the Total Premises (24,177 square feet). Lessee shall also
have the right at Lessee’s expense to install Building top signage, subject to (1) the prior written approval by Lessor of the size, design, and
location of all such signage, including the Building top signage, (2) compliance by Lessee with all rules, regulations and ordinances of the City
of Redwood City, and the Redwood Shores Association applicable to all of Lessee’s signage, including the Building top signage, and (3) the
prior written approval by the City of Redwood City and the Redwood Shores Association of Lessee’s signage, including the Building top
signage. Lessee shall repair and maintain at Lessee’s expense all such signage, and Lessee shall remove at Lessee’s expense upon the
expiration or sooner termination of this Lease all of Lessee’s signage installed in, on, or about the Building, including the Building top signage,
and Lessee shall promptly repair at Lessee’s expense any damage to the Building or common areas of the Property caused by such removal
upon the expiration or sooner termination of this Lease. The foregoing obligations of Lessee shall survive the expiration or sooner termination
of this Lease.
13.
Real Estate Broker . Cornish & Carey Commercial Newmark Knight Frank (“Cornish & Carey”) represents both Lessor and
Lessee with respect to this Third Amendment. Lessor shall pay a real estate commission to Cornish & Carey for its services in connection with
this Third Amendment pursuant to a separate agreement between Lessor and Cornish & Carey. Except for Cornish & Carey, each party
represents to the other that it has not had any dealings with any other real estate broker, agent, finder, or other person with respect to this Third
Amendment, and each party shall indemnify, defend, and hold harmless the other party from all damages, expenses, and liabilities resulting
from any claims that may be asserted against the other party by any broker, agent, finder, or other person with whom the indemnifying party
has or purportedly has dealt other than Cornish & Carey.
11
14.
Continuing Effect . The parties acknowledge that except to the extent the Lease is amended by this Third Amendment the
Lease shall remain unmodified and in full force and effect and is hereby ratified and confirmed.
15.
Existing Sublease . The parties acknowledge that the Expansion Premises were originally leased by 350 Marine Parkway
LLC, Gillikin Trade LLC, Lewis Trade LLC, Spiegl Trade LLC, and Welsh Trade LLC (collectively “Building Owner”) to Hudson
Entertainment, Inc. (the “Sublessor”) under that certain Standard Office Master Lease dated July 11, 2006 (the “Master Lease”), and subleased
by Sublessor to Activision Publishing, Inc. (the “Sub-Sublessor”) under that certain Sublease dated November 7, 2008 (the “Sublease”), and
sub-subleased by Sub-Sublessor to Obopay, Inc. (the “Sub-Sublessee,” and, collectively with Building Owner, Sublessor and Sub-Sublessor,
the “Superior Lessors”) pursuant to that certain Sub-Sublease dated May 17, 2010 (the “Sub-Sublease,” and, collectively with the Master Lease
and Sublease, the “Superior Leases”). Sub-Sublessee subsequently licensed a portion of the Expansion Space and has the right to license and
occupy the entire Expansion Space pursuant to that certain License dated February 1, 2012 (the “Temporary License Agreement”), which
Temporary License Agreement expires July 31, 2012. Accordingly, Lessor further agrees as follows:
(a)
Lessor acknowledges and consents to the Temporary License Agreement and agrees that Lessor shall not terminate
the Master Lease or take any action under the Master Lease or the other Superior Leases to declare any Superior Lessor to be in default of any
Superior Lease due to the Temporary License Agreement or Lessee’s occupancy of the Expansion Space thereunder.
(b)
Lessor agrees that, in the event of any termination of the Master Lease prior to the Expansion Premises
Commencement Date, the Lease and this Third Amendment shall be automatically amended such that the Expansion Premises Commencement
Date shall be deemed to have occurred as of the date of such termination of the Master Lease; provided, however, that if such termination of
the Master Lease arises out of the occurrence of a casualty or condemnation event, then Paragraph 20, Damage and Destruction, and Paragraph
21, Eminent Domain, respectively, of the Lease shall apply.
(c)
Notwithstanding anything to the contrary in this Lease or any of the Superior Leases, Lessor hereby releases all
Superior Lessors from any surrender obligations with respect to the Expansion Premises, and, acknowledges that possession of the Expansion
Premises will not be surrendered at the expiration of the Superior Leases (due to the continued occupancy by Lessee of the Expansion Premises
pursuant to this Third Amendment). Each Superior Lessor shall be a third
12
party beneficiary of the foregoing release, and, Lessor will execute a separate release in favor of any such Superior Lessor, if requested by such
Superior Lessor.
(d)
Lessor agrees to provide copies to Lessee of any notices or other correspondence with any Superior Lessor in
connection with the Expansion Premises and/or the Superior Leases.
16.
SNDA . Lessor shall use its good faith diligent efforts to obtain within thirty (30) days after the execution and delivery by
the parties of this Third Amendment a commercially reasonable subordination and non-disturbance agreement (“SNDA”) from any lender with
a deed of trust lien on the Complex providing that Lessee’s leasehold interest in the Complex shall not be disturbed in the event of a foreclosure
of the lender’s deed of trust or a transfer of the Complex by a deed in lieu of foreclosure, so long as no event of default by Lessee under the
Lease remains uncured. The SNDA shall provide that in the event of foreclosure or conveyance of the Complex by deed in lieu of foreclosure
the lender shall not be bound by any previous defaults of Lessor then existing under the Lease, including, but not limited to, Lessor’s obligation
to fund the Lessor’s Tenant Improvement Allowance specified in subparagraph 6(b) of this Third Amendment.
17.
Counterparts . This Third Amendment may be executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same instrument. Signature pages may be detached from counterparts and
attached to a single copy of this Third Amendment to form one document.
(Signatures appear on the following page.)
13
IN WITNESS WHEREOF, the parties have executed this Third Amendment as of the date set forth above.
“Lessor”
350 MARINE PARKWAY LLC,
a California limited liability company
By:
/s/ James M. Pollock
James M. Pollock, Manager
By:
/s/ Lincoln Westcott
Lincoln Westcott, Manager
“Lessee”
ROCKET FUEL, INC.,
a Delaware corporation
By:
/s/ J. Peter Bardwick
Name:
J. Peter Bardwick
Its:
CFO
By:
Name:
Its:
14
Exhibit A
Total Premises Floor Plan
[ See attached ]
EXISTING PREMISES
[FLOOR PLAN]
EXPANSION PREMISES
[FLOOR PLAN]
Exhibit B
Space Plan for Expansion Premises Tenant Improvement Work
[ See attached ]
JM LEHMAN CONSTRUCTION, INC.
PROPOSAL
1932 EUCALYPTUS AVE.
SAN CARLOS, CA 94070
Date
4/3/2012
Proposal #
20110179
TEL: (650) 593-6211
FAX: (650) 637-1040
CA LICENSE #627936
Name / Address
Project
Pollack Financial
150 Portola Rd.
Portola Valley, CA
Revised
Rocketfuel Inc.
350 Marine Parkway
1st Floor
Redwood Shores, CA 94065
Description
Total
SCOPE OF WORK (per job walk and sketch):
- Demo (2 corner offices (Ping Pang Room), full height wall, T-bar, doors/frames & Office behind stairwell with full
height walls)
8,135.00
- Demo fire sprinkler drops from Office demo, relocate upward
2,300.00
- New T-bar Ceiling
2,375,00
Computer Room 131
- Frame undergrid wall, sheetrock, tape & finish to match existing
- Install door/frame (provided by landlord)
- Paint
- Redistribute electrical to stay in new Server Room
3,100.00
Wall in Front of Restrooms
- Frame wall (6’ high) column to column, sheetrock both sides, tape & finish to match existing walls
1,550.00
*Alternate: Furnish and install two (2) clear aluminum borrowed lites approx. 10’ wide x 6’ high with one (1) vertical
mullion in each with 1/4” clear tempered glass
Thank you for the opportunity to provide pricing for this project.
Total
APPROVED:
DATE:
1
3,465.00
JM LEHMAN CONSTRUCTION, INC.
PROPOSAL
1932 EUCALYPTUS AVE.
SAN CARLOS, CA 94070
Date
4/3/2012
Proposal #
20110179
TEL: (650) 593-6211
FAX: (650) 637-1040
CA LICENSE #627936
Name / Address
Project
Pollack Financial
150 Portola Rd.
Portola Valley, CA
Revised
Rocketfuel Inc.
350 Marine Parkway
1st Floor
Redwood Shores, CA 94065
Description
Total
Womens Restroom
- Furr wall & fill-in existing sidelite
- Plumbing (one (1) toilet & one (1) sink)
- Saw cut & Fill-in
- Floor & Wainscot Tile
- Exhaust Fan
- Electrical
- Stone countertops with 4” stone backsplash
- Accessories
27,400,00
Mens Restroom/Shower
- Frame ceiling
- Frame & hang Densarmor Plus (wing wall for Shower)
- Plumbing (one (1) toilet, one (1) sink, two (2) urinals, & one (1) shower)
- Saw cut & Fill-in
- Floor & Wainscot Tile
- Waterproofing & Shower Tile
- Exhaust Fan
- Electrical
- Stone countertops with 4” stone backsplash
- Toilet/Urinal Partitions
- Accessories
38,200.00
- Move switches in six (6) offices
- Furnish and install six (6) clear aluminum borrowed lites to match door height (7’)
7,260.00
- Carpet (demo & install Designweave Carpet Tiles)
59,733.00
- Paint
16,250.00
Thank you for the opportunity to provide pricing for this project.
Total
APPROVED:
DATE:
2
JM LEHMAN CONSTRUCTION, INC.
PROPOSAL
1932 EUCALYPTUS AVE.
SAN CARLOS, CA 94070
Date
4/3/2012
Proposal #
20110179
TEL: (650) 593-6211
FAX: (650) 637-1040
CA LICENSE #627936
Name / Address
Project
Pollack Financial
150 Portola Rd.
Portola Valley, CA
Revised
Rocketfuel Inc.
350 Marine Parkway
1st Floor
Redwood Shores, CA 94065
Description
Total
- General Conditions, Supervision & Overhead
25,223.00
- 10% Contingency $19,338.00
* All work to be done during normal business hours
Exclusions:
- Drawings
- Permit Fees
- Fire Sprinklers (except Corner Offices)
- HVAC
- Life Safety
Payment is to be made as follows: Progress Payments
All material is guaranteed to be as specified. All work is to be completed in a manner according to standard practices.
Any alteration or deviation from the specifications made involving extra costs will become an extra charge over and
above the proposal.
THIS PROPOSAL MAY BE WITHDRAWN BY US IF NOT ACCEPTED WITHIN THIRTY (30) DAYS.
AUTHORIZED SIGNATURE
DATE:
ACCEPTANCE OF PROPOSAL — The above prices, specifications, and conditions are satisfactory and are hereby
accepted. You are authorized to do the work as specified. Payment will be made as outlined above.
ACCEPTANCE SIGNATURE
/s/ lllegible
DATE:
4-3-12
Thank you for the opportunity to provide pricing for this project.
Total
APPROVED:
DATE:
3
$
194,991.00
Exhibit C
Inventory of Lessor-Owned Cubicles
[ See attached ]
All Lessor owned Cubicles will be moved out of the Premises prior to teh Commencement Date by Lessee.
There shall be no Lessor Cubicles left in the Premises as of the Commencement Date.
Exhibit D
Suite 200 & Suite 300 Existing Extension Rights
Gabriel Investments (Suite 200)

Existing lease expires on December 31, 2012. Tenant has one (1) option to extend the term of the Lease for a period of five
(5) years, which must be exercised, if at all, between April 1, 2012 and June 30, 2012.
Woodside Fund (Suite 300)

Existing lease expires on April 30, 2014. Tenant has one (1) option to extend for a period of five (5) years, which option must be
exercised, if at all, between May 1, 2013 and July 31, 2013.
FOURTH AMENDMENT TO LEASE
350 Marine Parkway
Redwood City, California 94065
THIS FOURTH AMENDMENT TO LEASE (this “Fourth Amendment”), dated for reference purposes as of May 1, 2013, is made
and entered into by and between 350 MARINE PARKWAY LLC, a California limited liability company, hereafter referred to as “Lessor,” and
ROCKET FUEL, INC., a Delaware corporation, hereafter referred to as “Lessee.”
RECITALS
A.
Lessor and Lessee entered into a lease dated as of February 17, 2009 (the “Original Lease”) of certain premises consisting
of approximately 5,187 rentable square feet referred to as Suite 220 located on the second floor of the Building on the real property owned by
Lessor commonly referred to as 350 Marine Parkway, Redwood City, California 94065.
B.
Lessor and Lessee entered into a First Amendment to Lease dated as of October 11, 2010 (the “First Amendment”)
amending the Original Lease by, among other things, extending the term of the Original Lease, expanding the second floor premises leased by
Lessee by approximately 4,328 rentable square feet from approximately 5,187 rentable square feet to a total of approximately 9,515 rentable
square feet, and amending the Original Lease in certain other respects as set forth in the First Amendment.
C.
Lessor and Lessee entered into a Second Amendment to Lease dated as of February 25, 2011 (the “Second Amendment”)
amending the Original Lease, as amended by the First Amendment, by expanding the Existing Premises on the second floor of the Building by
approximately 90 rentable square feet from approximately 9,515 rentable square feet to approximately 9,605 rentable square feet.
D.
Lessor and Lessee entered into a Third Amendment to Lease dated as of March 22, 2012 (the “Third Amendment”)
amending the Original Lease, as amended by the First Amendment, and the Second Amendment, to expand the Existing Premises to include
Suite 100, the entire first floor of the Building consisting of approximately 14,572 rentable square feet, increasing the Premises to
approximately 24,177 rentable square feet, to further extend the term of the Original Lease, and to amend the Lease in certain other respects, as
set forth therein. The Original Lease as amended by the First Amendment, the Second Amendment, and the Third Amendment, is hereafter
referred to as the “Lease.”
AGREEMENT
NOW THEREFORE, in consideration of the mutual covenants contained herein, the parties agree as follows:
1.
Defined Terms.
(a)
Except as otherwise provided herein, all capitalized terms and phrases used but not defined in this Fourth
Amendment shall have the meanings given to them in the Lease.
(b)
As used in this Fourth Amendment the “Existing Premises” refers to (1) Suite 220 consisting of approximately
9,605 rentable square feet on the second floor of the Building (5,187 + 4,328 + 90 = 9,605); and (2) Suite 100 consisting of approximately
14,572 rentable square feet on the first floor of the Building, for a total of approximately 24,177 rentable square feet in the Existing Premises.
Lessor and Lessee now wish to enter into this Fourth Amendment to Lease to expand the Existing Premises to include Suite 200, located on the
second floor of the Building consisting of approximately 5,660 rentable square feet (referred to in this Fourth Amendment as the “Expansion
Premises”). The “Total Premises” refers to the sum of the Existing Premises and the Expansion Premises for a total of approximately 29,837
rentable square feet.
2.
Term.
(a)
Effective as of the Expansion Premises Commencement Date, Lessor hereby leases the Expansion Premises to
Lessee and Lessee hereby leases the Expansion Premises from Lessor, subject to the terms and conditions of the Lease, as amended by this
Fourth Amendment. The Commencement Date of the term of the Lease of the Expansion Premises (the “Expansion Premises
Commencement Date”) shall be May 1, 2013 and the Expiration Date of the Lease of the Expansion Premises shall be October 31, 2014,
unless sooner terminated in accordance with the provisions of the Lease. As of the Expansion Premises Commencement Date the Total
Premises in the Building leased by Lessee consists of approximately 29,837 rentable square feet. An amended floor plan of the Total Premises
is attached hereto as Exhibit A.
(b)
Lessor shall grant to Lessee early access to the Expansion Premises free of charge from the date of the execution
and delivery of this Fourth Amendment by the parties through the Expansion Premises Commencement Date for Lessee’s office set up and
Lessee’s painting and carpeting, provided that before Lessee shall have early access to the Expansion Premises, Lessee shall deliver to Lessor
evidence that Lessee’s commercial general liability insurance coverage
2
required by the Original Lease is in full force and effect. Except as set forth below, Lessee shall accept the Expansion Premises on the
Expansion Premises Commencement Date in its “as is” condition. Except as otherwise provided in this Fourth Amendment, any Tenant
Improvements to the Expansion Premises shall be made at Lessee’s expense provided that before any Tenant Improvement Work is
commenced in the Expansion Premises Lessee shall obtain Lessor’s written approval of Lessee’s proposed Tenant Improvement Work. Lessor
shall deliver possession of the Expansion Premises to Lessee in good, vacant broom clean condition, with all building systems in good working
order and in compliance with all laws. Lessee’s acceptance of the Expansion Premises shall not be deemed a waiver of Lessee’s rights to have
defects in the Expansion Premises repaired at no cost to Lessee. Lessee shall give notice to Lessor whenever any such defect becomes
reasonably apparent, and Lessor shall repair such defect as soon as possible.
3.
Expansion. Premises Monthly Base Rent . Subject to the terms of Paragraph 2(a) above, commencing as of May 1, 2013,
the Expansion Premises Commencement Date, and ending on October 31, 2014, the Expansion Premises Expiration Date, Lessee shall pay to
Lessor Monthly Base Rent for the Expansion Premises determined on a full service basis, as follows:
Period
May 1, 2013 — April 30, 2014
May 1, 2014 — October 31, 2014
Rent/SF/Mo.
$
$
4.15
4.2745
Amount/Mo.
Full Service
Sq. Ft.
5,660
5,660
$
$
23,489.00
24,193.67
4.
Lessee’s Share . With respect to the Expansion Premises, commencing January 1, 2014 through October 31, 2014, Lessee
shall pay to Lessor Lessee’s Share (as defined below) of any increases in Operating expenses and Taxes over the 2013 base year. “Lessee’s
Share” as used in this Fourth Amendment shall be the percentage calculated by dividing the number of rentable square feet of the Expansion
Premises (5,660) by the total number of rentable square feet in the Complex (34,452 rentable square feet). The parties agree that Lessee’s Share
of the Operating Expenses and Taxes payable by Lessee with respect to the Expansion Premises shall be 16.43% (5,660/34,452) based on the
Expansion Premises consisting of approximately five thousand six hundred sixty (5,660) rentable square feet.
5.
Security Deposit . Lessor currently holds a Security Deposit from Lessee of Three Hundred Sixty Thousand Dollars
($360,000.00). Concurrently with the execution and delivery of this Fourth Amendment by Lessor and Lessee, Lessee shall pay to Lessor an
additional Security Deposit in cash in the amount of Twenty-four Thousand One Hundred Ninety-three and Sixty-seven Hundredths Dollars
3
($24,193.67) (one month of Monthly Base Rent for the Expansion Premises), increasing the Security Deposit to Three Hundred Eighty-four
Thousand One Hundred Ninety-three and Sixty-seven Hundredths Dollars ($384,193.67).
6.
Option to Extend . If the Option to Extend in Paragraph 3(a) of the Original Lease, or in Paragraph 8 of the Second
Amendment, is exercised the Expansion Premises shall be included in the Premises that the Option to Extend applies to.
7.
Right of First Offer .
(a)
Subject to the prior right granted by Lessor to Woodside Fund (Suite 300), in its existing lease, as set forth on
Exhibit B attached hereto Lessor hereby grants to Lessee the right of first offer (“Right of First Offer”) to lease Suite 300 if said premises
becomes available for lease pursuant to a direct lease from Lessor (not a sublease) at any time during the term of the Lease of the Expansion
Premises. Lessee’s Right of First Offer is personal to Rocket Fuel, Inc. and any Permitted Affiliate of Lessee. Lessee’s Right of First Offer to
lease Suite 300 shall be upon the following terms and conditions: provided that no event of default by Lessee (as defined in Paragraph 22 of the
Original Lease) has occurred beyond any applicable notice and cure periods, and provided that Lessee has not assigned its interest in this Lease
to any other party, (other than a Permitted Affiliate), and subject to the prior rights of Woodside Fund referred to above, when Suite 300
becomes available for lease Lessor shall deliver to Lessee written notice offering to lease such space to Lessee, specifying the number of
rentable square feet of the space available for lease, and the terms upon which Lessor is willing to lease such space, including the Monthly Base
Rent for such space, the date the space will be available for occupancy, and the term of the Lease for such space (“First Offer”). The space
shall be offered to Lessee for lease “as is” in its then condition. Lessor shall have no obligation to construct any Tenant Improvements to such
space. Lessee shall have five (5) business days after receipt of the First Offer within which to give written notice to Lessor of interest by
Lessee’s management in leasing the offered space pursuant to Lessor’s First Offer. Failure of Lessee to deliver such written notice of interest
within said period of five (5) business days following receipt of Lessor’s notice of the First Offer, or Lessee’s failure to deliver Lessee’s final
written acceptance of Lessor’s First Offer within ten (10) business days following receipt of Lessor’s notice of the First Offer, shall be
deemed a rejection of the First Offer, time being of the essence. If Lessee rejects the First Offer, Lessor shall have the right to lease all or any
part of the space to another lessee party for a term, upon the same terms and conditions as set forth in the First Offer, provided that if Lessee
rejects the First Offer and thereafter Lessor decides to offer to lease the space at a lower Monthly Base Rent or on materially more favorable
terms than the terms contained in Lessor’s First Offer to Lease, Lessor shall re-offer
4
the space to Lessee in writing at the lower Monthly Base Rent or on such more favorable terms before offering the space to a third party at such
lower Monthly Base Rent or on such more favorable terms (a “Reoffer” ), and Lessee shall have three (3) business days after receipt of the
Reoffer to accept the revised First Offer in writing, time being of the essence. If Lessee notifies Lessor in writing of Lessee’s final acceptance
of Lessor’s First Offer or Reoffer within the time periods referred to above, then Lessee and Lessor shall execute and deliver an amendment to
this Lease to include the space which shall become a part of the Total Premises for purposes of the Lease. The space shall be leased by Lessee
at the then applicable Monthly Base Rent in Lessor’s First Offer (or such lower rent as is offered to Lessee in the Reoffer), and subject to all of
the other terms and provisions of the Lease (as the same may be amended by the terms of the First Offer or Reoffer), excluding Paragraph 13 of
the Original Lease, Tenant Improvement Work (Expansion Premises Tenant Improvement Work) if no tenant improvement allowance is
provided in the First Offer or Reoffer.
(b)
The rights of Lessee under this Paragraph 7 shall be continuous through the term of the Lease of the Expansion
Premises, as extended. Lessee’s rejection of any particular offer shall not relieve Lessor of its obligation to again offer Suite 300 to Lessee at
any time that such space subsequently becomes available.
8.
Parking . The term “Lessee’s proportionate share of the parking facilities of the Complex” as used in Paragraph 26 of
the Original Lease shall mean the parking facilities of the Complex such that from and after the Expansion Premises Commencement Date
Lessee shall have the right to use on a non-reserved basis pursuant to Paragraph 26 of the Original Lease Lessee’s proportionate share of the
parking facilities of the Complex based upon the total of 29,837 rentable square feet of the Existing Premises and the Expansion Premises
(29,837/34,452 = 86.6%). Paragraph 26 of the Original Lease shall remain in effect subject to the foregoing increase.
9.
Real Estate Broker . Cornish & Carey Commercial Newmark Knight Frank (“Cornish & Carey”) represents both Lessor
and Lessee with respect to this Fourth Amendment. Lessor shall pay a real estate commission to Cornish & Carey for its services in connection
with this Fourth Amendment pursuant to a separate agreement between Lessor and Cornish & Carey. Except for Cornish & Carey, each party
represents to the other that it has not had any dealings with any other real estate broker, agent, finder, or other person with respect to this Fourth
Amendment, and each party shall indemnify, defend, and hold harmless the other party from all damages, expenses, and liabilities resulting
from any claims that may be asserted against the other party by any broker, agent, finder, or other person with whom the indemnifying party
has or purportedly has dealt other than Cornish & Carey.
5
10.
Continuing Effect. The parties acknowledge that except to the extent the Lease is amended by this Fourth Amendment the
Original Lease as amended by the First Amendment, Second Amendment, the Third Amendment and this Fourth Amendment shall remain
unmodified and in full force and effect and is hereby ratified and confirmed.
11.
Counterparts. This Fourth Amendment may be executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same instrument. Signature pages may be detached from counterparts and
attached to a single copy of this Fourth Amendment to form one document.
IN WITNESS WHEREOF, the parties have executed this Fourth Amendment as of the date set forth above.
“Lessor”
350 MARINE PARKWAY LLC,
a California limited liability company
By:
/s/ James M. Pollock
James M. Pollock, Manager
By:
/s/ Lincoln Westcott
Lincoln Westcott, Manager
“Lessee”
ROCKET FUEL, INC.,
a Delaware corporation
By:
Name:
Its:
/s/ JoAnn Covington
JoAnn Covington
VP, General Counsel
By:
Name:
Its:
/s/ J. Peter Bardwick
J. Peter Bardwick
CFO
6
Exhibit A
Total Premises Floor Plan
[ See attached ]
EXHIBIT A
Premises
[FLOOR PLAN]
Exhibit A - Page 1
[FLOOR PLAN]
[FLOOR PLAN]
Exhibit B
Suite 300 Existing Extension Rights
Woodside Fund (Suite 300): Existing lease expires on April 30, 2014. Tenant has one (1) option to extend for a period of five (5) years, which
option must be exercised, if at all, between May 1, 2013 and July 31, 2013.
Exhibit 10.5
OFFICE LEASE
This Office Lease (this “ Lease ”), dated as of the date set forth in Section 1.1 , is made by and between VII Pac Shores Investors,
L.L.C., a Delaware limited liability company (“ Landlord” ), and ROCKET FUEL INC., a Delaware corporation (“Tenant”). The
following exhibits are incorporated herein and made a part hereof: Exhibits A-1 , A-2 and A-3 (Outlines of Suites 100, 300 and 400);
Exhibit B (Work Letter); Exhibit B-1 (Proposed Initial Alterations); Exhibit C (Form of Confirmation Letter); Exhibit D (Rules and
Regulations); Exhibit E (Judicial Reference); Exhibit F (Additional Provisions); Exhibit F-1 (Form of Letter of Credit); Exhibit F-2 (Outline
of Potential Offering Space); Exhibits G , G-1 and G-2 (Notice to Tenants and Transferees of Current or Future Uses of Adjacent Port
Property); Exhibit H (Notice to Pacific Shores Tenants, Lessees, Successors, Assigns And Transferees Regarding Current or Future Uses of
Adjacent RMC Lonestar and Port of Redwood City Property); and Exhibit I (Certain HVAC Repairs).
1
BASIC LEASE INFORMATION
1.1
Date:
1.2
Premises.
1.3
August 7 , 2013
1.2.1
“Building” :
1900 Seaport Boulevard, Redwood City, CA 94063, commonly known as Pacific
Shores Center — Building Number 3.
1.2.2
“Premises” :
Subject to Section 2.1.1 . 105,775 rentable square feet of space consisting of
(i) 34,966 rentable square feet of space located on the 1 st floor of the Building and
commonly known as Suite 100, the outline and location of which is set forth in
Exhibit A-1 ; (ii) 35,405 rentable square feet of space located on the 3 rd floor of
the Building and commonly known as Suite 300, the outline and location of which is
set forth in Exhibit A-2 ; and (iii) the 35,405 rentable square feet of space located on
the 4 th floor of the Building and commonly known as Suite 400, the outline and
location of which is set forth in Exhibit A-3 . If the Premises include any floor in its
entirety, all corridors and restroom facilities located on such floor shall be
considered part of the Premises. In addition, if the Premises comprise 100% of the
rentable square footage of the Building, then the portion of the Building located on
the first (1 st ) floor of the Building and designated on Exhibit A-1 as “Common
Area” shall be considered part of the Premises.
1.2.3
“Property” :
The Building, the parcel(s) of land upon which it is located, and, at Landlord’s
discretion, any parking facilities and other improvements serving the Building and
the parcel(s) of land upon which such parking facilities and other improvements are
located.
1.2.4
“Project” :
The Property or, at Landlord’s discretion, any project containing the Property and
any other land, buildings or other improvements (including, without limitation, that
land, those buildings and those improvements located at 1100, 1200, 1300, 1400,
1500, 1600, l700, 1800, 1900, 2000 and 2100 Seaport Boulevard, Redwood City, CA
94063).
Term:
The term of this Lease (the “ Term ”) shall commence on the Commencement Date
and end on the Expiration Date (or any earlier date on which this Lease is terminated
as provided herein).
Term
1.3.1
1
1.4
1.3.2
“Commencement
Date” :
1.3.3
“Expiration Date” : The last day of the 72 nd full calendar month commencing on or after the
Commencement Date.
The earlier of (i) the first date on which Tenant conducts business in the Premises, or
(ii) the Outside Date (defined below). As used herein, “ Outside Date ” means
January 1, 2014; provided, however, that (a) if Landlord fails to cause the Delivery
Date (defined below) to occur by the Required Delivery Date (defined below), then,
as Tenant’s sole remedy for such failure, the Outside Date shall be postponed by one
(1) day for each day by which the Delivery Date follows the Required Delivery Date,
and (b) the Outside Date shall be subject to Section 2.5 of Exhibit B . As used
herein, “ Delivery Date ” means the date on which Landlord tenders possession of
the Premises to Tenant free from occupancy by any party. As used herein, “
Required Delivery Date ” means the date occurring one (1) business day after the
mutual execution and delivery hereof. During the period beginning on the Delivery
Date and ending on the date immediately preceding the Commencement Date, all
provisions of this Lease shall apply (and, without limiting the foregoing, Tenant
shall have access to the Premises and the right to perform Alterations (defined in
Section 7.2 ) in accordance with the terms hereof) as if the Commencement Date had
occurred; provided, however, that (a) during such period Tenant shall not be required
to pay Monthly Rent (defined in Section 3 ); and (b) during the period beginning on
the Delivery Date and ending on the earlier of (i) the date immediately preceding the
Commencement Date, or (ii) August 31, 2013. Tenant shall not be required to pay
for electricity consumed in the Premises.
“Base Rent” :
Monthly Base
Rent Per
Rentable Square
Foot (rounded to
the nearest 100 th
of a dollar)
Period During
Term
Monthly
Installment
of Base Rent
Commencement Date through last day of 12 th full calendar
month of Term
$
3.25
$
343,769.69
13 th through 24 th full calendar months of Term
$
3.35
$
354,082.78
25 th through 36 th full calendar months of Term
$
3.45
$
364,705.26
37 th through 48 th full calendar months of Term
$
3.55
$
375,646.42
49 th through 60 th full calendar months of Term
$
3.66
$
386,915.81
61 st full calendar month of Term through Expiration Date
$
3.77
$
598,523.29
Notwithstanding the foregoing, Tenant shall be entitled to an abatement of Base Rent, in the amount of $343,769.69 per month, for the first
10 full calendar months of the Term.
2
1.5
“Additional Fees” :
Collectively, the Management Fee (defined below) and the Athletic Facility Fee
(defined below). The term “ Management Fee ” shall mean a monthly fee equal to
3% of the monthly installment of Base Rent payable hereunder for such month (as
determined without taking into consideration any abatement of Base Rent for such
month). The term “ Athletic Facility Fee ” shall mean a monthly fee equal to Tenant’s
Share (defined below) of the product of (A) a fraction (the numerator of which is the
Building Rentable Square Footage (defined below) and the denominator of which is
1,672,073 rentable square feet) multiplied by (B) the product of (i) the monthly Base
Rent per rentable square foot payable hereunder for such month (as determined
without taking into consideration any abatement of Base Rent for such month)
multiplied by (ii) 38,000 rentable square feet.
1.6
“Tenant’s Share” :
74.9223 % (representing the percentage obtained by dividing the rentable square
footage of the Premises by 141,180 rentable square feet (i.e., the total rentable square
footage of the Building (the “ Building Rentable Square Footage ”)).
1.7
“Permitted Use” :
General office use or any other use that: (a) is limited to research and development;
(b) is legally permitted; (c) is not a retail use; (d) does not generate (i) foot traffic
exceeding that normally associated with general office use, (ii) any noise or odor
detectable outside the Premises that is not normally associated with general office use,
(iii) any burden on any Building system exceeding that normally associated with
general office use, or (iv) any risk to the Building or to the safety or health of its
occupants that is not normally associated with general office use; (e) does not
adversely affect Landlord’s or Tenant’s insurance coverage; (f) does not include a wet
lab; (g) does not involve the introduction, use, Storage or disposal of any type or
quantity of hazardous material not customarily associated with general office use; and
(h) in all other respects is consistent with a first-class office/R&D building.
1.8.
“Security Deposit” :
$0.00.
Prepaid Base Rent:
$343,769.69, as more particularly described in Section 3 .
Prepaid Additional Rent:
$142,796.64, as more particularly described in Section 3 .
Parking:
The Applicable Number (defined below) of unreserved parking spaces, at the rate of
$0.00 per space per month. As used in this Section 1.9, “ Applicable Number ”
means, at any time, the lowest whole number that equals or exceeds the number
obtained by multiplying (a) the quotient obtained by dividing (i) three (3) by (ii) 1,000
rentable square feet, by (b) the rentable square footage of the Premises.
1.9
Zero (0) reserved parking space(s), at the rate of $N/A per space per month.
1.10
Address of Tenant:
Before the Commencement Date :
Rocket Fuel Inc.
350 Marine Parkway
Redwood City, CA 94065
From and after the Commencement Date : the Premises.
3
1.11
Address of Landlord:
Equity Office
2655 Campus Drive, Suite 100
San Mateo, California 94403
Attn: Building manager
with copies to :
Equity Office
2655 Campus Drive, Suite 100
San Mateo, California 94403
Attn: Managing Counsel
and
Equity Office
Two North Riverside Plaza
Suite 2100 Chicago, IL 60606
Attn: Lease Administration
Cornish & Carey Commercial, a California corporation (“ Tenant’s Broker ”),
representing Tenant, and Cassidy Turley Northern California, Inc., a California
corporation (“ Landlord’s Broker ”), representing Landlord.
1.12
Broker(s):
1.13
Building HVAC Hours and Holidays: “ Building HVAC Hours ” means 7:00 a.m. to 6:00 p.m., Monday through Friday,
excluding the day of observation of New Year’s Day, Presidents Day, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day, and, at
Landlord’s discretion, any other locally or nationally recognized holiday that is
observed by other buildings comparable to and in the vicinity of the Building
(collectively, “ Holidays ”).
1.14
“ Transfer Radius ”:
None.
1.15
“ Initial Alterations ”:
Defined in Exhibit B .
1.16
“ Guarantor ”:
None.
1.17
Letter of Credit:
Concurrently with its execution and delivery of this Lease, Tenant shall deliver to
Landlord a letter of credit in the amount of One Million Six Hundred Thousand
Dollars ($1,600,000.00) as more particularly described in Section 3 of Exhibit F .
2
PREMISES AND COMMON AREAS.
2.1
The Premises.
2.1.1
Subject to the terms hereof, Landlord hereby leases the Premises in Tenant and Tenant hereby leases the
Premises from Landlord. Landlord and Tenant acknowledge that the rentable square footage of the Premises is as set forth in Section 1.2.2 and
the rentable square footage of the Building is as set forth in Section 1.6 . At any time Landlord may deliver to Tenant a notice substantially in
the form of Exhibit C , as a confirmation of the information set forth therein. Tenant shall execute and return (or, by notice to Landlord,
reasonably object to) such notice within 10 days after receiving it, and if Tenant fails to do so, Tenant shall be deemed to have executed and
returned it without exception.
2.1.2
Except as expressly provided herein (including Sections 6.3 and 7 ), the Premises are accepted by Tenant in
their configuration and condition existing on the date hereof, without any obligation of Landlord to perform or pay for any alterations to the
Premises, and without any representation or warranty regarding the configuration or condition of the Premises, the Building or the Project or
their suitability for Tenant’s business. Landlord shall deliver the Premises to Tenant with the floors cleared of trash and swept and free from
occupancy by any party.
2.2
Common Areas . Tenant may use, in common with Landlord and third parties and subject to the Rules and Regulations
(defined in Exhibit D ), the access roads, driveways and parking areas that are located on the Property and serve the Premises on the date
hereof, together with any other portions of the
4
Property that are designated from time to time by Landlord for such use (the “ Common Areas ”). During any period in which the Premises
comprise 100% of the rentable square footage of the Building, Landlord shall not designate any portion of the Building for common use by
Tenant and third parties.
3
RENT . Tenant shall pay all Base Rent and Additional Rent (defined below) (collectively, “ Rent ”) to Landlord or Landlord’s agent,
without prior notice or demand or any setoff or deduction, at the place Landlord may designate from time to time, in money of the United
States of America that, at the time of payment, is legal tender for the payment of all obligations. As used herein, “ Additional Rent ” means all
amounts, other than Base Rent, that Tenant is required to pay Landlord hereunder. Monthly payments of Base Rent and monthly payments of
Additional Rent for Expenses (defined in Section 4.2.2 ). Taxes (defined in Section 4.2.3 ) and Additional Fees (collectively, “ Monthly Rent
”) shall be paid in advance on or before the first day of each calendar month during the Term; provided, however, that the installment of Base
Rent for the first full calendar month for which such Base Rent is payable hereunder and the installment of Additional Rent for Expenses and
Taxes and Additional Fees for the first full calendar month for which such Additional Rent is payable hereunder shall be paid upon Tenant’s
execution and delivery hereof, Except as otherwise provided herein, all other items of Additional Rent shall be paid within 30 days after
Landlord’s request for payment. Rent for any partial calendar month shall be prorated based on the actual number of days in such month.
Without limiting Landlord’s other rights or remedies, (a) if any installment of Rent is not received by Landlord or its designee within five
(5) business days after its due date. Tenant shall pay Landlord a late charge equal to 5% of the overdue amount (provided, however, that such
late charge shall not apply to any such delinquency unless either (i) such delinquency is not cured within five (5) business days after notice
from Landlord, or (ii) Tenant previously received notice from Landlord of a delinquency that occurred earlier in the same calendar year); and
(b) any Rent that is not paid within 10 days after its due date shall hear interest, from its due date until paid, at the lesser of 12% per annum or
the highest rate permitted by Law (defined in Section 5 ). Tenant’s covenant to pay Rent is independent of every other covenant herein.
4
EXPENSES AND TAXES.
4.1
General Terms . In addition to Base Rent, Tenant shall pay, in accordance with Section 4.4 , for each Expense Year
(defined in Section 4.2.1 ), an amount equal to the sum of (a) Tenant’s Share of Expenses for such Expense Year, plus (b) Tenant’s Share of
Taxes for such Expense Year. Tenant’s Share of Expenses and Tenant’s Share of Taxes for any partial Expanse Year shall be prorated based on
the number of days in such Expense Year.
4.2
Definitions . As used herein, the following terms have the following meaning:
4.2.1
“ Expense Year ” means each calendar year in which any portion of the Term occurs.
4.2.2
“ Expenses ” means fill expenses, costs and amounts that Landlord pays or incurs during any Expense Year
because of or in connection with the ownership, management, maintenance, security, repair, replacement, restoration or operation of the
Property. Landlord shall act in a reasonable manner in incurring Expenses. Expenses shall include (i) the cost of supplying all utilities, the cost
of operating, repairing, maintaining and renovating 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, the cost of
contesting any Laws that may affect Expenses, and the costs of complying with any transportation-management program required under any
Law; (iii) the cost of all commercially reasonable insurance premiums and deductibles; (iv) the cost of landscaping and relamping; (v) the cost
of parking-area operation, repair, restoration, and maintenance; (vi) fees and costs, including consulting fees, legal fees and accounting fees, of
all contractors and consultants in connection with the management, operation, maintenance and repair of the Property; (vii) payments under any
equipment-rental agreements and the fair rental value of any management office space; (viii) wages, salaries and other compensation, expenses
and benefits, including taxes levied thereon, of all persons to the extent engaged in the operation, maintenance and security of the Property, and
costs of training, uniforms, and employee enrichment for such persons; (ix) the costs of operation, repair, maintenance and replacement of all
systems and equipment (and components thereof) of the Property; (x) the cost of janitorial, alarm, security and other services, replacement of
wall and floor coverings, ceiling files and fixtures in Common Areas, maintenance and replacement of curbs and walkways, repair to roofs and
re-roofing; (xi) rental or acquisition costs of supplies, tools, equipment, materials and personal property used in the maintenance, operation and
repair of the Property; (xii) the cost of capital improvements or any other items that are (A) intended to effect economics in the operation or
maintenance of the Property, reduce current or future Expenses, enhance the safety or security of the Property or its occupants, or enhance the
environmental sustainability of the Property’s operations, (B) replacements or modifications of the nonstructural portions of the Base Building
(defined in Section 7 ) or Common Areas that are required to keep the Base Building or Common Areas in good condition, or (C) required
under any Law; (xiii) the cost of tenant-relation programs reasonably established by Landlord; and (xiv) payments or costs under any existing
or future reciprocal easement agreement, transportation management agreement, landscape maintenance agreement, cost-sharing agreement or
other covenant, condition, restriction or similar instrument affecting the Property (including
5
any such agreement relating to the Athletic Facility).
Notwithstanding the foregoing, Expenses shall not include;
(a) capital expenditures not described in clauses (xi) or (xii) above (in addition, any capital expenditure shall be amortized (including
actual or imputed interest on the amortized cost) over the useful life of the item purchased through such capital expenditure, as reasonably
determined by Landlord in accordance with generally accepted accounting principles, consistently applied);
(b) depreciation;
(c) payments of mortgage or other non-operating debts of Landlord;
(d) costs of repairs to the extent Landlord is reimbursed by insurance or condemnation proceeds;
(e) except as provided in clause (xiii) above, costs of leasing space in the Project, including brokerage commissions, lease
concessions, rental abatements and construction allowances granted to specific tenants, and costs of constructing (as distinguished from
repairing) tenant improvements for specific tenants;
(f) costs of selling, financing or refinancing the Building;
(g) fines, penalties or interest resulting from late payment of Taxes or Expenses;
(h) organizational expenses of creating or operating the entity that constitutes Landlord;
(i) damages paid to Tenant hereunder or to other tenants of the Building under their respective leases;
(j) that portion of any management fee paid to a manager of the Building which is based upon a percentage of the revenues or income
generated from the Building (as distinguished from any expenses of such manager which are reimbursed by Landlord);
(k) reserves;
(l) costs of cleaning up Hazardous Materials (defined below), except for routine cleanup performed as part of the ordinary operation
and maintenance of the Property, and costs resulting from the presence of Hazardous Materials at the Property in amounts or conditions that
violate applicable Laws (as used herein. “Hazardous Materials” means any material now or hereafter defined or regulated by any Law or
governmental authority as radioactive, toxic, hazardous, or waste, or a chemical known to the state of California to cause cancer or
reproductive toxicity, including (1) petroleum and any of its constituents or byproducts, (2) radioactive materials, (3) asbestos in any form or
condition, and (4) materials regulated by any of the following, as amended from time to time, and any rules promulgated thereunder: the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. §§9601 et seq.; the Resource Conservation and
Recovery Act, 42 U.S.C. §§6901, et seq.; the Toxic Substances Control Act, 15 U.S.C. §§2601, et seq.; the Clean Water Act, 33 U.S.C. §§1251
et seq.; the Clean Air Act, 42 U.S.C. §§7401 et seq.; The California Health and Safety Code; The California Water Code; The California Labor
Code; The California Public Resources Code; and The California Fish and Game Code.);
(m) insurance deductibles other than (a) earthquake insurance deductibles up to the amount (the “Annual Limit” ) of 0.5% of the total
insurable value of the Property per occurrence (provided, however, that, notwithstanding any contrary provision hereof, if, for any occurrence,
the earthquake insurance deductible exceeds the Annual Limit, then, after such deductible is included (up to the Annual Limit) in Expenses for
the applicable Expense Year, such excess may be included (up to the Annual Limit) in Expenses for the immediately succeeding Expense Year,
and any portion of such excess that is not so included in Expenses for such immediately succeeding Expense Year may be included (up to the
Annual Limit) in Expenses for the next succeeding Expense Year, and so on with respect to each succeeding Expense Year; provided further,
however, that in no event shall the portions of such deductible that are included in Expenses for any one or more Expense Years exceed, in the
aggregate, 5.0% of the total insurable value of the Property), and (b) any other insurance deductibles up to $50,000.00 per occurrence;
(n) any cost of repairing damage resulting from a Casualty (defined in Section 11 ), other than (i) any insurance deductible (subject to
clause (m) above), and (ii) if such damage is not covered by Landlord’s insurance (as determined without regard to any deductible), any portion
of such cost that does not exceed the maximum amount of the insurance deductible for such damage that would not have been excluded from
Expenses under clause (m) above if such damage had been covered by earthquake or terrorism insurance or any other type of insurance
generally maintained by owners of Comparable
6
Buildings;
(o) costs of services of benefits made available to other tenants of the Building but not to Tenant;
(p) any cost of repairing damage resulting from a Taking (defined in Section 13 );
(q) co-insurance payments;
(r) fines or penalties resulting from any violations of Law, negligence or willful misconduct of Landlord or its employees, agents or
contractors.
(s) amounts (other than management fees) paid to Landlord’s affiliates for services, but only to the extent such amounts exceed the
prices charged for such services by unaffiliated third parties having similar skill and experience;
(t) any expense for which Landlord has received actual reimbursement (other than from a tenant of the Building pursuant to its lease);
(u) costs of curing defects in design or original construction of the property;
(v) any management fee exceeding the Management Fee (it being agreed that, as used herein, “management fee” does not include any
costs — such as salaries, hourly labor costs, and telephone bills — that would customarily be reimbursed to the manager under a third-party
management agreement); or
(w) costs of complying with any transportation-management program not existing on the date of mutual execution and delivery hereof,
except to the extent such program is required by Law (but excluding any Law imposed as a result of any new construction, change in use, or
similar voluntary act by Landlord or any tenant of Landlord at the Project occurring after the date of mutual execution and delivery hereof).
If, during any portion of any Expense Year, the Building is not 100% occupied (or a service provided by Landlord to Tenant is not
provided by Landlord to a tenant that provides such service itself, or any tenant of the Building is entitled to free rent, rent abatement or this
like), Expenses for such Expense Year shall be determined as if the Building had been 100% occupied (and all services provided by Landlord
to Tenant had been provided by Landlord to all tenants, and no tenant of the Building had been entitled to free rent, rent abatement or the like)
during such portion of such Expense Year.
4.2.3
“ Taxes ” means all federal, state, county or local governmental or municipal taxes, fees, charges, assessments,
levies, licenses or other impositions, whether general, special, ordinary or extraordinary, that are 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 or operation of the Property, including, without limitation, those imposed by any improvement district or any community facilities
district (including with respect to a district established for purposes of constructing the Seaport Boulevard improvements and other
improvements as required in the development agreement related to the Project or by the City of Redwood City). Taxes shall include (a) real
estate taxes; (b) general and special assessments; (c) transit taxes; (d) leasehold taxes; (e) personal property taxes imposed upon the fixtures,
machinery, equipment, apparatus, systems, appurtenances, furniture and other personal property used in connection with the Property; (f) any
tax on the rent, right to rent or other income from any portion of the Property or as against the business of leasing any portion of the Property;
and (g) any assessment, tax, fee, levy or charge imposed by any governmental agency, or by any non-governmental entity pursuant to any
private cost-sharing agreement, in order to fund the provision or enhancement of any fire-protection, street-, sidewalk- or road-maintenance,
refuse-removal or other service that is (or, before the enactment of Proposition 13, was) normally provided by governmental agencies to
property owners or occupants without charge (other than through real property taxes). Any costs and expenses (including reasonable attorneys’
and consultants’ fees) incurred in attempting to protest, reduce or minimize Taxes shall be included in Taxes for the year in which they are
incurred. Notwithstanding any contrary provision hereof, Taxes shall be determined without regard to any “green building” credit and shall
exclude (i) all excess profits taxes, franchise taxes, gift taxes, transfer taxes, capital stock taxes, inheritance and succession taxes, estate taxes,
federal and state income taxes, and other taxes to the extent (x) applicable to Landlord’s general or net income (as opposed to rents, receipts or
income attributable to operations at the property), or (y) measured solely by the square footage, rent, fees, services, tenant allowances or similar
amounts, rights or obligations described or provided in or under any particular lease, license or similar agreement or transaction at the Building;
(ii) any Expenses, and (iii) any items required to be paid or reimbursed by Tenant under Section 4.5 . Notwithstanding the foregoing, if
Landlord receives a “green building” credit against Taxes for any Expense Year as a result, in whole or in part, of Landlord’s incurrence of any
amount(s) included in Expenses for any Expense Year(s) (collectively, the “ Tenant-Paid Cost” ), then, to the extent such credit is fairly
attributable to the Tenant-Paid Cost, Taxes for such Expense Year shall be reduced by the lesser of (x) the amount of such credit, or (y) the
Tenant-Paid Cost. If any assessment included in Taxes can be
7
paid by Landlord in installments, such assessment shall not be included in Taxes in any calendar year in an amount exceeding that which would
be included in Taxes in such calendar year if such assessment were paid in the maximum number of installments permitted by Law.
4.3
Allocation . Landlord, in its reasonable discretion, may equitably allocate Expenses among office, retail or other portions or
occupants of the Property. If Landlord incurs Expenses or Taxes for the Property together with another property, Landlord, in its reasonable
discretion, shall equitably allocate such shared amounts between the Property and such other property.
4.4
Calculation and Payment of Expenses and Taxes .
4.4.1
Statement of Actual Expenses and Taxes; Payment by Tenant . Landlord shall give to Tenant, after the end of
each Expense Year, a statement (the “ Statement ”) setting forth the actual Expenses and Taxes for such Expense Year. If the amount paid by
Tenant for such Expense Year pursuant to Section 4.4.2 is less or more than the sum of Tenant’s Share of the actual Expenses plus Tenant’s
Share of the actual Taxes (as such amounts are set forth in such Statement), Tenant shall pay Landlord the amount of such underpayment, or
receive a credit in the amount of such overpayment, with or against the Rent then or next due hereunder, provided, however, that if this Lease
has expired or terminated and Tenant has vacated the Premises, Tenant shall pay Landlord the amount of such underpayment, or Landlord
shall pay Tenant the amount of such overpayment (less any Rent due), within 30 days after delivery of such Statement. Landlord shall use
reasonable efforts to deliver the Statement on or before June 30 of the calendar year immediately following the Expense Year to which it
applies. Any failure of Landlord to timely deliver the Statement for any Expense Year shall not diminish either party’s rights under this
Section 4 . Notwithstanding the foregoing, if (a) Landlord fails to furnish a Statement on or before October 31 of the calendar year following
the Expense Year to which such Statement applies, (b) Tenant, after October 31 of such calendar year, provides Landlord with notice of such
failure (which notice shall expressly include the text of this sentence), and (c) Landlord fails to furnish such Statement by the later of
(i) December 31 of such calendar year, or (ii) the date occurring 30 days after Landlord’s receipt of such notice from Tenant, then Tenant shall
not be required to pay Landlord any underpayment for such Expense Year, except as provided in Section 4.4.3 . Except as provided in
Section 4.4.3 and 4.6 , the Statement shall be deemed to be final and binding upon both Landlord and Tenant.
4.4.2
Statement of Estimated Expenses and Taxes . Landlord shall give to Tenant, for each Expense year, a statement
(the “ Estimate Statement ”) setting forth Landlord’s reasonable estimates of the Expenses (the “ Estimated Expenses ”) and Taxes (the “
Estimated Taxes ”) for such Expense Year. Upon receiving an Estimate Statement, Tenant shall pay, with its next installment of Base Rent
coming due at least 30 days after such receipt, an amount equal to the excess of (a) the amount obtained by multiplying (i) the sum of Tenant’s
Share of the Estimated Expenses plus Tenant’s Share of the Estimated Taxes (as such amounts are set forth in such Estimate Statement), by
(ii) a fraction, the numerator of which is the number of months that have elapsed in the applicable Expense Year (including the month of such
payment) and the denominator of which is 12, over (b) any amount previously paid by Tenant for such Expense Year pursuant to this
Section 4.4.2 . Until Landlord delivers a new Estimate Statement (which Landlord may do at any time), Tenant shall pay monthly, with the
monthly Base Rent installments, an amount equal to one-twelfth (1/12) of the sum of Tenant’s Share of the Estimated Expenses plus Tenant’s
Share of the Estimated Taxes, as such amounts are set forth in the previous Estimate Statement. Any failure of Landlord to timely deliver any
Estimate Statement shall not diminish Landlord’s rights to receive payments and revise any previous Estimate Statement under this Section 4 .
4.4.3
Retroactive Adjustment of Taxes . Notwithstanding any contrary provision hereof, if, after Landlord’s delivery of
any Statement, an increase or decrease in Taxes occurs for the applicable Expense Year (whether by reason of reassessment, error, or
otherwise), Taxes for such Expense Year shall be retroactively adjusted. If, as a result of such adjustment, it is determined that Tenant has
under-or overpaid Tenant’s Share of such Taxes, Tenant shall pay Landlord the amount of such underpayment, or receive a credit in the amount
of such overpayment, with or against the Rent then or next due hereunder; provided, however, that if this Lease has expired or terminated and
Tenant has vacated the Premises, Tenant shall pay Landlord the amount of such underpayment, or Landlord shall pay Tenant the amount of
such overpayment (less any Rent due), within 30 days after such adjustment is made.
4.5
Charges for Which Tenant Is Directly Responsible . Tenant shall pay, 10 days before delinquency, any taxes levied against
Tenant’s equipment, furniture, fixtures and other personal property located in or about the Premises. If any such taxes are levied against
Landlord or its property (or if the assessed value of Landlord’s property is increased by the inclusion therein of a value placed upon such
equipment, furniture, fixtures or other personal property of Tenant), Landlord may pay such taxes (or such increased assessment) regardless of
their (or its) validity, in which event Tenant, upon demand, shall repay to Landlord the amount so paid. If, during any period in which the
Premises comprise less than 100% of the rentable square footage of the Building, the Leasehold Improvements (defined in Section 7.1 ) are
assessed for real property tax purposes at a valuation higher than the valuation at which tenant improvements conforming to Landlord’s
“building standard” in other space in the Building are
8
assessed, the Taxes levied against Landlord or the Property by reason of such excess assessed valuation shall be deemed taxes levied against
Tenant’s personal property for purposes of this Section 4.5 . For purposes of the preceding sentence. Landlord acknowledges that the Proposed
Initial Alterations (defined in Section 2.2.2 of Exhibit B ) conform to Landlord’s “building standard.” Notwithstanding any contrary provision
hereof, Tenant shall pay 10 days before delinquency (or reimburse to Landlord upon demand, if the same is required by Law to be paid by
Landlord); (i) any rent tax, sales tax, service tax, transfer tax, value added tax, use tax, business tax, gross income tax, gross receipts tax, or
other tax, assessment, fee, levy or charge measured solely by the square footage, Rent, services, tenant allowances or similar amounts, rights or
obligations described or provided in or under this Lease, and (ii)any taxes assessed upon the possession, leasing, operation, management,
maintenance, alteration, repair, use or occupancy by Tenant of any portion of the Property.
4.6
Books and Records . Within 60 days after receiving any Statement (the “ Review Notice Period ”), Tenant may give
Landlord notice (“ Review Notice ”) stating that Tenant elects to review Landlord’s calculation of the Expenses and/or Taxes for the Expense
Year to which such Statement applies and identifying with reasonable specificity the records of Landlord reasonably relating to such matters
that Tenant desires to review. Within a reasonable time after receiving a timely Review Notice (and, at Landlord’s option, an executed
confidentiality agreement as described below), Landlord shall deliver to Tenant, or make available for inspection at a location reasonably
designated by Landlord, copies of such records. Within 60 days after such records are made available to Tenant (the “ Objection Period ”),
Tenant may deliver to Landlord notice (an “ Objection Notice ”) stating with reasonable specificity any objections to the Statement, in which
event Landlord and Tenant shall work together in good faith to resolve Tenant’s objections. Tenant may not deliver more than one Review
Notice or more than one Objection Notice with respect to any Expense Year. If Tenant fails to give Landlord a Review Notice before the
expiration of the Review Notice Period or fails to give Landlord an Objection Notice before the expiration of the Objection Period, Tenant shall
be deemed to have approved the Statement. If Tenant retains an agent to review Landlord’s records, the agent must be with a CPA firm
licensed to do business in the State of California and its fees shall not be contingent, in whole or in part, upon the outcome of the review.
Tenant shall be responsible for all costs of such review. The records and any related information obtained from Landlord shall be treated as
confidential, and as applicable only to the Premises, by Tenant, its auditors, consultants, and any other parties reviewing the same on behalf of
Tenant (collectively, “ Tenant’s Auditors ”). Before making any records available for review, Landlord may require Tenant and Tenant’s
Auditors to execute a reasonable confidentiality agreement, in which event Tenant shall cause the same to be executed and delivered to
Landlord within 30 days after receiving it from Landlord, and if Tenant fails to do so, the Objection Period shall be reduced by one day for
each day by which such execution and delivery follows the expiration of such 30-day period. Notwithstanding any contrary provision hereof,
Tenant may not examine Landlord’s records or dispute any Statement if any Rent remains unpaid past its due date. If, for any Expense Year,
Landlord and Tenant determine that the sum of Tenant’s Share of the actual Expenses plus Tenant’s Share of the actual Taxes is less or more
than the amount reported, Tenant shall receive a credit in the amount of its overpayment against Rent then or next due hereunder; provided,
however, that if this Lease has expired or terminated and Tenant has vacated the Premises, Landlord shall pay Tenant the amount of its
overpayment (less any Rent due), or Tenant shall pay Landlord the amount of its underpayment, within 30 days after such determination.
5
USE; COMPLIANCE WITH LAWS.
5.1
Tenant’s Obligations . Tenant shall not (a) use the Premises for any purpose other than the Premises Use, or (b) do anything
in or about the Premises that violates any of the Rules and Regulations, damages the reputation of the Project, interferes with, injures or
unreasonably annoys other occupants of the Project, or constitutes a nuisance. Tenant, at its expense (expect as provided in Exhibit B ), shall
comply with all Laws relating to (i) the operation of its business at the Project, (ii) the use, condition, configuration or occupancy of the
Premises, (iii) any Supplemental Systems (defined below) exclusively serving the Premises, or (iv) the portions of Base Building Systems
(defined below) located in the Premises; provided, however, that nothing in this sentence shall be deemed to require Tenant to make (A) any
change to any Common Area, the Building structure, or any Building system other than (1) any Supplemental System exclusively serving the
Premises, and (2) the portions of Base Building Systems located in the Premises, or (B) any change to any portion of a Base Building System
located in the Premises that is required by Law on the date of mutual execution and delivery hereof unless, in the case of this clause (iv)(B),
such requirement is enforced as a result of a Tenant-Insured Improvement (defined in Section 10.2.2 ), the installation of a trade fixture, or a
particular use (as distinguished from general office/R&D use) of the Premises. If, in order to comply with any such Law, Tenant must obtain or
deliver any permit, certificate or other document evidencing such compliance. Tenant shall provide a copy of such document of Landlord
promptly after obtaining or delivering it. Except as provided in Exhibit B , if a change to any Common Area, the Building structure, or any
Building system (other than a Supplemental system exclusively serving the Premises or a portion of a Base Building System located in the
Premises) becomes required under Law (or if any such requirement is enforced) as a result of any Tenant-Insured Improvement, the installation
of any trade fixture, or any particular use of the Premises (as distinguished from general office/R&D use), then Tenant, upon demand, shall
(x) at Landlord’s
9
option, either make such change at Tenant’s cost or pay Landlord the cost of making such change, and (y) pay Landlord a coordination fee
equal to 3% of the cost of such change. As used herein, “ Law ” means any existing or future law, ordinance, regulation or requirement of any
governmental authority having jurisdiction over the Project or the parties. As used herein, “ Supplemental System ” means each of the
following, in each case wherever located (whether inside or outside of the Premises or the Building) and whenever and by whomever installed:
(i) any system that serves only a particular use (as distinguished from general office/R&D use) within the Building (such as the operation of a
computer-server room, “clean room” or laboratory space), including any Unit (defined in Section 25.5 ) and any supplemental fire-suppression
system, and (ii) any other Building system that would not customarily be considered part of the base building of a first-class multi-tenant
office/R&D building, such as a kitchen (including any hot water heater, dishwasher, garbage disposal, insta-hot dispenser, or plumbing) or any
similar facility. As used herein, “ Base Building System ” means any mechanical (including HVAC), electrical, plumbing or fire/life-safety
system serving the Building, other than a Supplemental System.
5.2
Landlord’s Obligations . Landlord, at its expense (subject to section 4 ), shall cause the Base Building (except for portions
of Base Building Systems located in the Premises, other than any change described in clause (iv)(B) of the second sentence of Section 5.1 ,
which change shall not be excluded from Landlord’s obligations under this sentence) and the Common Areas to comply with all Laws
(including the Americans with Disabilities Act, as amended (the “ ADA ”)) to the extent that (a) such compliance is necessary for Tenant to use
the Premises for general office/R&D use in a normal and customary manner and for Tenant’s employees and visitors to have reasonably safe
access to and from the Premises, or (b) Landlord’s failure to cause such compliance would impose liability upon Tenant under Law; provided,
however, that Landlord shall not be required to perform or pay for such compliance to the extent that (x) Tenant is required to perform or pay
for such compliance under Section 5.1 or 7.3 or any other provision hereof, or (y) such compliance is required under any provision of the ADA
other than Title III thereof. Notwithstanding the foregoing, Landlord may contest any alleged violation in good faith, including by applying for
and obtaining a waiver or deferment of compliance, asserting any defense allowed by Law, and appealing any order or deferment of
compliance, asserting any defense allowed by Law, and appealing any order or judgment to the extent permitted by Law; provided, however,
that after exhausting any rights to contest or appeal, Landlord shall perform any work necessary to comply with any final order or judgment.
5.3
Landlord’s Representation . Landlord represents and warrants to Tenant that, as of the date hereof, Landlord has not
received written notice from any governmental agency, and Landlord does not otherwise have actual knowledge (without inquiry), that the
existing configuration or condition of the Premises, the Building or the Property (including any Building system) violates the ADA or any other
applicable Law.
6
SERVICES.
6.1
Standard Services . Landlord shall provide the following services on all days (unless otherwise stated below); (a) subject to
limitations imposed by Law, customary heating, ventilation and air conditioning (“ HVAC ”) in season during Building HVAC Hours;
(b) electricity supplied by the applicable public utility, stubbed to the Premises; (c) water supplied by the applicable public utility (i) for use in
lavatories and any drinking facilities located in Common Areas within the Building, and (ii) stubbed to the Building core for use in any
plumbing fixtures located in the Premises; (d) janitorial services to the Building (other than the Premises), except on weekends and Holidays;
(e) elevator service (subject to scheduling by Landlord, and payment of Landlord’s standard usage fee, for any freight service); and (f) access to
the Building for Tenant and its employees, 24 hours per day/7 days per week, subject to the terms hereof and such security or monitoring
systems as Landlord may reasonably impose, including sign-in procedures and/or presentation of identification cards.
6.2
Electricity Costs and Above-Standard Use . Electricity used by Tenant in the Premises shall, at Landlord’s option, be paid
for by Tenant either: (a) through inclusion in Expenses (except as provided for excess usage, and unless the Premises comprise 100% of the
rentable square footage of the Building, in which event this clause (a) shall not apply); (b) by a separate charge payable by Tenant to Landlord;
or (c) by separate charge billed by the applicable utility company and payable directly by Tenant. If electricity used by Tenant in the Premises
is paid for pursuant to clause (b) or (c) of the preceding sentence. Landlord shall be solely responsible for any costs of installing, operating and
maintaining any equipment that is installed in order to measure such electricity. If (i) electricity used by Tenant in the Premises is paid for
pursuant to clause (a) of the first sentence of this Section 6.2 . (ii) the Premises comprise less than 100% of the rentable square footage of the
Building; and (iii) Tenant’s consumption of electricity exceeds the rate Landlord reasonably deems to be standard for the Building, then Tenant
shall pay Landlord, upon billing, the cost of such excess consumption, including any costs of installing (to the extant not already installed),
operating and maintaining any equipment that is installed in order to supply or measure such excess electricity. The connected electrical load of
Tenant’s incidental-use equipment shall not exceed the Building-standard electrical design load, and Tenant’s electrical usage shall not exceed
the capacity of the feeders to the Project or the risers or wiring installation. If, during any period in which the Premises comprise less than
100% of the rentable square footage of the Building, Tenant’s consumption of water exceeds the rate Landlord reasonably deems to be standard
for the
10
Building, Tenant shall pay Landlord, upon billing, the cost of such excess consumption, including any costs of installing (to the extent not
already installed), operating and maintaining any equipment that is installed in order to supply or measure such excess water. Landlord shall
provide HVAC service outside Building HVAC Hours if Tenant gives Landlord such prior notice and pays Landlord such hourly cost as
Landlord may require, provided, however, that (a) the minimum period of time for which Tenant may request HVAC service outside Building
HVAC Hours is three (3) hours, and (b) Tenant shall not be required to pay any such hourly cost for HVAC service outside Building HVAC
Hours if the Premises comprise 100% of the rentable square footage of the Building. The parties acknowledge that, as of the date hereof,
Landlord’s charge for HVAC service outside Building HVAC Hours is $35.00 per hour, subject to change from time to time. Tenant shall not,
without Landlord’s prior consent, use equipment that may affect the temperature maintained by the air conditioning system or consume
above-Building-standard amounts of any water furnished for the Premises by Landlord pursuant to Section 6.1 .
6.3
Interruption . Subject to Section 11, any failure to furnish, delay in furnishing, or diminution in the quality or quantity of any
Landlord service resulting from any application of Law, failure of equipment, performance of maintenance, repairs, improvements or
alterations, utility interruption or event of Force Majeure (each, a “ Service Interruption ”) shall not render Landlord liable to Tenant,
constitute a constructive eviction, or excuse Tenant from any obligation hereunder. Notwithstanding the foregoing, if all or a material portion
of the Premises is made untenantable or inaccessible for more than the Applicable Number (defined below) of consecutive business days after
notice from Tenant to Landlord by a Service Interruption that does not result from a Casualty, a Taking, or an Act of Tenant (defined in
Section 10.1 ), then, as Tenant’s sole remedy (except as provided below in this Section 6.3 ). Monthly Rent shall abate for the period beginning
on the day immediately following such Applicable Number of consecutive business days and ending on the day such Service Interruption ends
(or, if later, for the period of equal length beginning on the first day on which Monthly Rent first becomes payable hereunder), but only in
proportion to the percentage of the rentable square footage of the Premises made untenantable or inaccessible. As used in this Section 6.3 . “
Application Number ” means (a) three (3) (unless the Service Interruption occurs on the Delivery Date, in which event the Applicable
Number shall be zero (o)), if the Service Interruption results from any negligence, willful misconduct or breach of Section 7.1 of or by any
Landlord Party (defined in Section 10.1 ), or (b) 45, if the Service Interruption does not result from any negligence, willful misconduct, or
breach of Section 7.1 of or by any Landlord Party. Notwithstanding the foregoing, if (a) all or a material portion of the Premises is made
untenantable or inaccessible for 30 consecutive days after notice from Tenant to Landlord by a Service Interruption that (i) does not result from
a Casualty, a Taking, or an Act of Tenant, and (ii) can be corrected through Landlord’s reasonable efforts, and (b) Landlord is not diligently
pursuing the correction of such Service Interruption, them nothing in this Section 6.3 shall diminish any remedy of constructive eviction Tenant
may have based on such Service Interruption.
6.4
Janitorial Service to Premises . Tenant at its expense, shall provide to the Premises all trash-disposal, janitorial, and
customary cleaning service (other than exterior window washing), on a daily basis (except on weekends and Holidays) and in a manner
customarily provided by owners of Comparable Buildings (defined in Section 25.10 ), together with all necessary interior pest control service,
so that the Premises are kept in a reasonably neat, clean and pest-free condition. Without limiting the foregoing, trash, garbage and other waster
shall be kept only in sanitary containers, and all containers and equipment for the storage or disposal of such material shall be kept in a clean
and sanitary condition.
7
REPAIRS AND ALTERATIONS.
7.1
Repairs .
7.1.1
Tenant’s Obligations . Subject to Sections 11 and 13 . Tenant, at its expense, shall perform all maintenance and
repairs (including replacements) to the Premises, and keep Premises in as good condition and repair as existed when Tenant took possession
and as thereafter improved by Landlord and/or Tenant, except for reasonable wear and tear and repairs that are Landlord’s express
responsibility hereunder. Tenant’s maintenance and repair obligations shall include (a) all leasehold improvements in the Premises, whenever
and by whomever installed or paid for, including any Alterations (defined in Section 7.2 ), and any leasehold improvements installed pursuant
to any prior lease, but excluding the Base Building (the “ Leasehold Improvements ”); (b) all Supplemental Systems exclusively serving the
Premises; and (c) all Lines (defined in Section 23 ) and trade fixtures. In addition, during any period in which the Premises comprise 100% of
the rentable square footage of the Building; (w) Tenant’s maintenance and repair obligations shall include all Base Building Systems; provided,
however, that, as applied to Base Building Systems, the first sentence of this Section 7.1.1 shall be deemed to be amended by replacing the
words “when Tenant took possession” with the words “when the Premises first comprised 100% of the rentable square footage of the
Building”; (x) without limiting the foregoing, in the case of any Base Building System that is an elevator, a heating, ventilation and
air-conditioning system, or a portion thereof (each, a “ Designated System ”). Tenant, subject to Section 11 and 13 , and at its expense, shall
(i) keep such Designated System in as good working order and condition as existed upon its installation (or, if later, on the date on which the
Premises first comprised 100% of the reniable square footage of the Building), subject to normal wear and tear and repairs that are Landlord’s
11
express responsibility hereunder (other than under Section 7.1.2.A ); (ii) maintain in effect, with a contractor reasonably approved by Landlord,
a contract for the maintenance and repair of such Designated System (which contract shall require the contractor, at least once every three
(3) months, to (A) inspect such Designated System and provide to Tenant a report of any defective conditions, together with any
recommendations for maintenance, repair or parts-replacement, all in accordance with the manufacturer’s recommendations, and (B) replace
fillers, oil and lubricate machinery, replace parts, adjust drive belts, change oil and perform other preventive maintenance, including, as
applicable, annual maintenance of duct work and interior unit drains, and annual caulking of sheet metal and re-caulking of jacks and vents);
(iii) follow all reasonable recommendation of such contractor, and (iv) promptly provide to Landlord a copy of such contract and each report
issued thereunder, (y) Tenant shall have the benefit of any warranties available to Landlord regarding the Base Building Systems to the extent
such warranties cover maintenance and repairs for which Tenant is responsible hereunder, and (z) if access to the roof of the Building is
required in order to perform any of Tenant’s obligations under this sentence, such access shall be subject to such reasonable rules and
procedures as Landlord may impose, and Tenant shall maintain the affected portion of the roof in a clean and orderly condition and shall not
interfere with use of the roof by Landlord. Notwithstanding the foregoing. if Tenant fails to perform such maintenance and repairs as required
hereunder, Landlord may, in its option, after notifying Tenant (except in an emergency), perform such work on Tenant’s behalf, in which case
Tenant shall pay Landlord, upon demand, the cost of such work plus a coordination fee equal to 5% of such cost.
7.1.2
Landlord’s Obligations .
A.
Generally . Landlord shall perform all maintenance and repairs to, and keep in good condition and repair, (i) the
roof and exterior walls and windows of the Building, (ii) the Base Building (subject to Section 7.1.1 during any period in which the Premises
comprise 100% of the rentable square footage of the Building), and (iii) the Common Areas. As used herein, “ Base Building ” means the
structural portions of the Building, together with all Base Building Systems.
B.
Landlord’s Limited Warranty of Building Systems . If, at any time during the period beginning on the
Delivery Date and ending 120 days after the Commencement Date, any Building System existing on the Delivery Date fails to operate as
designed and such failure does not result from any Casualty. Act of Tenant, or Alteration, the Landlord, at its expense (which expense,
notwithstanding any contrary provision hereof, shall not be included in Expenses), promptly after notice from Tenant, shall commence and
diligently prosecute to completion such maintenance, repair and/or replacement as shall be sufficient (in the absence of any Casualty, Act of
Tenant, or Alteration) to cause such Building system to operate as designed for at least 30 days.
C.
Certain Landlord Repairs . Not later than January 1,2014, Landlord, at its expense (which shall not be included
in Expenses), shall perform, one time only, the repairs to the Building’s HVAC system described in Exhibit I .
D.
Certain Capital Items . Notwithstanding Section 7.1.1 , during any period in which the Premises comprise
100% of the rentable square footage of the Premises, Landlord shall perform any necessary repair or replacement of any Base Building System
if such repair of replacement (i) is capital in nature (as reasonably determined by Landlord in accordance with GAAP), and (ii) is not made
necessary by any Casualty, Act of Tenant, or Alteration. Notwithstanding any contrary provision hereof (but subject to Section 7.1.2.B ), the
cost of any such repair or replacement shall be included in Expenses, subject to amortization in accordance with clause (a) of the second
paragraph of Section 4.2.2 .
7.2
Alterations . Tenant may not make any improvement, alteration, addition or change to the Premises or to any mechanical,
plumbing or HVAC facility or other system serving the Premises (an “ Alteration ”) without Landlord’s prior consent, which consent shall be
requested by Tenant not less than 15 business days before commencement of work and shall not be unreasonably withheld by Landlord.
Notwithstanding the foregoing, Landlord’s prior consent shall not be required for any Alteration (a “ Cosmetic Alteration ”) that does not
adversely or otherwise materially any system or structural component of the Building, is not visible from outside the Premises, and costs less
than $25,000.00. For any Alteration. Tenant shall deliver to Landlord completion affidavits, full and final lien waivers, all governmental
approvals, and “as built” drawings (in CAD format, if requested by Landlord), provided, however, that for a Cosmetic Alteration, Tenant may
deliver marked-up plans rather than “as built” drawings. For any Alteration other than a Cosmetic Alteration, (a) Tenant, before commencing
work, shall deliver to Landlord, and obtain Landlord’s approval (which shall not be unreasonably withheld) of, any applicable plans and
specifications, and (b) Tenant shall pay Landlord upon demand Landlord’s reasonable out-of-pocket expenses actually incurred in reviewing
the work; provided, however, that this clause (b) shall not apply to any Initial Alterations.
7.3
Tenant Work . Before commencing any repair or Alteration or any work affecting Lines (“ Tenant Work ”), other than any
Tenant Work consisting of a repair that does not affect vertical Lines and is reasonably estimated to cost less than $50,000.00 . Tenant shall
deliver to Landlord, and obtain Landlord’s approval (which shall not be unreasonably withheld) of, (a)names of contractors,
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subcontractors, mechanics, laborers and materialmen; (b) evidence of contractors’ and subcontractors’ insurance; and (c) any required
governmental permits. Tenant shall perform all Tenant work (i) in a good and workmanlike manner using materials of a quality reasonably
approved by Landlord; (ii) in compliance with any approved plans and specifications, all Laws, the National Electric Code, and Landlord’s
construction rules and regulations; and (iii) in a manner that does not impair the Base Building. If, as a result of any Tenant Work, Landlord
becomes required under Law to perform any inspection, give ay notice, or cause such Tenant Work to be performed in any particular manner.
Tenant shall comply with such requirement and promptly provide Landlord with reasonable documentation of such compliance. Landlord’s
approval of Tenant’s plans and specifications shall not relieve Tenant from any obligation under this Section 7.3 . In performing any Tenant
Work, Tenant shall not use contractors, services, labor, materials or equipment that, in Landlord’s reasonable judgment, would disturb labor
harmony with any workforce or trades engaged in performing other work or services at the Project.
8
LANDLORD’S PROPERTY . All Leasehold improvements (excluding Tenant’s Property (defined below)) shall become
Landlord’s property upon installation and without compensation to Tenant. Notwithstanding the foregoing. If any Tenant-Insured
Improvements are Specialty Improvements (defined below), then except as otherwise notified by Landlord, Tenant, at its expense and before
the expiration or earlier termination hereof, shall remove such Tenant-Insured Improvements (other than (i) any supplemental HVAC unit,
which shall be governed by Section 25.5 . and (ii) any Proposed Initial Alterations), repair any resulting damage to the Premises or Building,
and restore the affected portion of the Premises to its configuration and condition existing before the installation of such Tenant-Insured
Improvements. If Tenant fails to timely perform any work required under the preceding sentence. Landlord may perform it at Tenant’s expense.
When Landlord approves any Tenant-Insured Improvements (or, in the case of any Alterations that do not require Landlord’s approval
hereunder, if Tenant specifically requests that Landlord do so, then, within 10 business days after such request), Landlord shall identify any
such Tenant-Insured improvements that will be required to be removed pursuant to this section 8, and any such Tenant-Insured improvements
that are not so identified by Landlord shall not be required to be removed pursuant to this Section 8 . As used herein, “Specialty
Improvements” means any Tenant-Insured Improvements that , in Landlord’s reasonable judgment, are not customary multi-tenant
office/R&D installations, including equipment racks; classrooms; bathrooms (other than the base Building bathrooms); file rooms, libraries or
other rooms with reinforced flooring; workout/fitness rooms; shower rooms; locker rooms; kitchen facilities (other than coffee bar
kitchenettes); server rooms; safes; laboratories; vaults, and areas without drop ceilings. Nothing herein shall be deemed to (a) transfer to
Landlord ownership of any of Tenant’s trade fixtures, furniture, equipment or other personal property installed in the Premises (“Tenant’s
Property”) , (b) create any contractual lien or “landlord’s lien” in any of Tenant’s Property, or (c) prohibit Tenant from removing Tenant’s
Property from the Premises, provided that Tenant repairs all damage caused by its installation or removal.
9
LIENS . Tenant shall keep the Project free form any lien arising out of any work performed, material furnished or obligation
incurred by or on behalf of Tenant. Tenant shall remove any such lien within 10 business days after notice from Landlord, and if Tenant fails to
do so, Landlord, without limiting its remedies, may pay the amount necessary to cause such removal, whether or not such lien is valid. The
amount so paid, together with reasonable attorneys’ fees and expenses, shall be reimbursed by Tenant upon demand.
10
INDEMNIFICATION; INSURANCE .
10.1
Waiver and Indemnification . Tenant waives all claims against Landlord, its Security Holders (defined in Section 17 ),
Landlord’s managing agent(s), their (direct or indirect) owners, and the beneficiaries, trustees, officers, directors, employees and agents of each
of the foregoing (including Landlord, the “ Landlord Parties ”) for (i) any damage to person or property (or resulting from the loss of use
thereof), except to the extent such damage is caused by any negligence, willful misconduct or breach of this Lease of or by any Landlord party,
or (ii) any failure to prevent or control any criminal or otherwise wrongful conduct by any third party or to apprehend any third party who has
engaged in such conduct. Tenant shall indemnify, defend, protect, and hold the Landlord Parties harmless from any obligation, loss, claim,
action, liability, penalty, damage, cost or expense (including reasonable attorneys’ and consultants’ fees and expenses) (each, a “ Claim” ) that
is imposed or asserted by any third party and arises from any negligence, willful misconduct or breach of this Lease of or by, Tenant, any party
claiming by, through or under Tenant, their (direct or indirect) owners, licensees or invitees (an “ Act of Tenant” ), except to the extent such
Claim arises from any negligence, willful misconduct or breach of this Lease of or by any Landlord Party. Landlord shall indemnify, defend,
protect, and hold Tenant, its (direct or indirect) owners, and their respective beneficiaries, trustees, officers, directors, employees and agents
(including Tenant, the “ Tenant Parties ”) harmless from any Claim that is imposed or asserted by any third party and arises from any arises
from any negligence, willful misconduct or breach of this Lease of or by any Landlord Party, except to the extent such Claim arises from an
Act of Tenant.
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10.2
Tenant’s Insurance . Tenant shall maintain the following coverages in the following amounts:
10.2.1
Commercial General Liability Insurance covering claims of bodily injury, personal injury and property damage
arising out of Tenant’s operations and contractual liabilities, including coverage formerly known as broad from, on an occurrence basis, with
combined primary and excess/umbrella limits of $3,000,000 each occurrence and $4,000,000 annual aggregate.
10.2.2
Property Insurance covering (i) all office furniture, trade fixtures, office equipment, free-standing cabinet work,
movable partitions, merchandise and all other items of Tenant’s property in the Premises installed by, for, or at the expense of Tenant, and
(ii) any Leasehold Improvements installed by or for the benefit of Tenant pursuant to this Lease ( “Tenant-Insured Improvements” ). Such
insurance shall be written on a special cause of loss form for physical loss or damage, 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
polices of insurance, and shall include coverage for damage or other loss caused by fire or other peril, including 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 year.
10.2.3
Workers’ Compensation statutory limits and Employers’ Liability limits of $1,000,000.
10.3
Form of Policies . The minimum limits of insurance required to be carried by Tenant shall not limit Tenant’s liability. Such
insurance shall be issued by an insurance company that has an A.M Best rating of not less than A-VIII and shall be in form and content
reasonably acceptable to Landlord. Tenant’s Commercial General Liability Insurance shall (a) name the Landlord Parties and any other party
designated by Landlord (“ Additional Insured Parties ”) as additional insureds; and (b) be primary insurance as to all claims thereunder and
provide that any insurance carried by Landlord is excess and non-contributing with Tenant’s insurance. Landlord shall be designated as a loss
payee with respect to Tenant’s Property Insurance on any Tenant-Insured Improvements. Tenant shall deliver to Landlord, on or before the
Commencement Date and at least 15 days before the expiration dates thereof, certificates from Tenant’s insurance company on the forms
currently designated “ACORD 25” (Certificate of Liability Insurance) and “ACORD 28” (Evidence of Commercial Property Insurance) or the
equivalent, Attached to the ACORD 25 (or equivalent) there shall be an endorsement naming the Additional Insured Parties as additional
insureds, and attached to the ACORD 28 (or equivalent) there shall be an endorsement designating Landlord as a loss payee with respect to
Tenant’s Property Insurance on any Tenant-Insured Improvements, and each such endorsement shall be binding on Tenant’s insurance
company. Upon Landlord’s request. Tenant shall deliver to Landlord, in lieu of such certificates, copies of the policies of insurance required to
be carried under Section 10.2 showing that the Additional Insured Parties are named as additional insureds and that Landlord is designated as a
loss payee with respect to Tenant’s Property Insurance on any Tenant-Insured Improvements.
10.4
Subrogation . Notwithstanding any contrary provision hereof (but subject to Section 11 ), each party waives, and shall cause
its insurance carrier to waive, any right of recovery against the other party, any of its (direct or indirect) owners, or any of their respective
beneficiaries, trustees, officers, directors, employees or agents for any loss of or damage to property which loss or damage is (or, if the
insurance required hereunder had been carried, would have been) covered by the waiving party’s property insurance, without regard to any
negligence of any party so released. For purposes of this Section 10.4 only, (a) any deductible with respect to a party’s insurance shall be
deemed covered by, and recoverable by such party under, valid and collectable policies of insurance, and (b) any contractor retained by
Landlord to install, maintain or monitor a fire or security alarm for the Building shall be deemed an agent of Landlord.
10.5
Additional Insurance Obligations . Tenant shall maintain such increased amounts of the insurance required to be carried by
Tenant under this Section 10 , and such other types and amounts of insurance covering the Premises and Tenant’s operations therein, as may be
reasonably requested by Landlord, but not in excess of the amounts and types of insurance then being required by landlords of buildings
comparable to and in the vicinity of the Building.
10.6
Landlord’s Insurance . Landlord shall maintain the following insurance, together with such other insurance coverage as
Landlord, in its reasonable judgment, may elect to maintain, the premiums of which shall be included in Expenses. (a) Commercial General
Liability insurance applicable to the Property, Building and Common Areas providing, on an occurrence basis, a minimum combined single
limit of at least $3,000,000,00; (b) Special Cause of Loss Insurance on the Building at replacement cost value as reasonably estimated by
Landlord; (c) Worker’s Compensation insurance to the extent required by Law; and (d) Employers Liability Coverage to the extent required by
Law. Nothing in this Section 10.6 shall be deemed to require Landlord to maintain earthquake insurance.
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11
CASUALTY DAMAGE .
11.1
With reasonable promptness after discovering any damage to the promises (other than trade Fixtures), or to any Common Area
or Building System necessary for access to or tenantability of the Promises, resulting from any fire or other casualty (a “ Casualty ” , Landlord
shall notify Tenant of Landlord’s reasonable estimate of the time required to substantially complete repair of such damage (the “ Landlord
Repairs ”). If, according to such estimate, the Landlord Repairs cannot substantially Completed within 270 days after the date of the Casualty,
either party may terminate this Lease upon 60 days’ notice to the other party delivered within 10 days after Landlord’s delivery of such
estimate. Within 90 days after discovering any damage to the Property resulting from any Casualty, Landlord may terminate this Lease by
notifying Tenant if (i) the cost of the Landlord Repairs exceeds (any such excess, a “ Shortfall ” ) the sum of (a) the proceeds of Landlord’s
insurance (other than with respect to any Tenant-Insured Improvements), less any portion thereof that is lawfully required by any Security
Holder to be used to pay any mortgage debt; plus (b) if any insurance required under Section 10.6 is not carried by Landlord, then any proceeds
of such insurance (other than with respect to any Tenant-Insured Improvements) that would have been available to Landlord (any could not
have lawfully required by any Security Holder to be used to pay any mortgage debt) if Landlord had carried such insurance (subject to
maximum commercially reasonable deductibles), plus (c) any applicable deductibles (other than with respect to earthquake damage), plus
(d) any insurance proceeds or other amounts paid to Landlord pursuant to Section 11.2, plus (e) 5% of the replacement cost of the Building, as
reasonably determined by Landlord: or (ii) Landlord is not legally permitted to rebuild the Building and Common Areas in substantially the
same configuration structurally and architecturally; or (iii) the damage occurs during the last 12 months of the Term and Landlord estimates
that the Landlord Repairs cannot be substantially completed within the period beginning on the date of the Causalty and having a duration
equal to 20% of the balance of the Term remaining on such date. Notwithstanding the foregoing, any notice of termination of this Lease
pursuant to clause (l) of the preceding sentence (a “ Shortfall Termination Notice ”) shall be ineffective if (x) Tenant, within 10 business days
after receiving such Shortfall Termination Notice, notifies Landlord that Tenant agrees to pay, and provides Landlord with evidence reasonably
satisfactory to Landlord of Tenant’s ability to pay, the Shortfall; and (y) the Shortfall does not exceed 5% of the replacement cost of the
Building, as reasonably determined by Landlord. If any shortfall Termination Notice becomes ineffective by operation of the preceding
sentence and this Lease is not otherwise terminated pursuant to this Section 11.1 , then (i) Tenant, within three (3) business days after
Landlord’s request (which shall not be made more frequently than once per calendar month), shall deliver to Landlord, as Additional Rent, in
addition to any amounts required to be paid to Landlord under Section 11.2 , cash in an amount equal to (a) the Shortfall multiplied by a
fraction, the numerator of which is the total cost of the Landlord Repairs incurred by Landlord to date, and the denominator of which is
Landlord’s reasonable estimate of the total cost of the Landlord Repairs, less (b) the total amount of the payments previously made by Tenant
to Landlord pursuant to this sentence; (ii) if Landlord’s reasonable estimate of the total cost of the Landlord Repairs changed to reflect the total
actual cost of the Landlord Repairs, then the Shortfall and the amounts payable pursuant to this sentence shall be adjusted equitably; and
(iii) Tenant shall not, by reason of Tenant’s delivery of such amounts, acquire any ownership, equitable mortgage or similar interest in any part
of the Property or otherwise become entitled to reimbursement from Landlord, it being hereby acknowledged and agreed by Tenant that
Landlord’s agreement to perform the Landlord Repairs as required under this Section 11 , together with the other terms and conditions hereof,
shall be deemed adequate consideration for such delivery.
11.2
If this Lease is not terminated pursuant to Section 11.1 . Landlord shall promptly and diligently perform the Landlord Repairs,
subject to reasonably delays for insurance adjustment and other events of Force Majeure. The Landlord Repairs shall restore the Premises
(other than trade fixtures) and any Common Area or Building system necessary for access to or tenantability of the Premises to substantially the
same condition that existed when the Casualty occurred, except for (a) any modifications required by Law or any Security Holder, and (b) any
modifications to the Common Areas that are deemed desirable by Landlord, are consistent with the character of the Project, and do not
materially impair access to or tenantability of the Premises. Notwithstanding Section 10.4 , if this Lease is not terminated pursuant to
Section 11.1 , Tenant shall assign to Landlord (or its designee) all insurance proceeds payable to Tenant under Tenant’s insurance required
under Section 10.2 with respect to any Tenant-Insured Improvements, and if the estimated or actual cost of restoring any Tenant-Insured
Improvements, exceeds the insurance proceeds received by Landlord from Tenant’s insurance carrier. Tenant shall pay such excess to Landlord
within 15 days after Landlord’s demand. No Casualty and no restoration performed as required hereunder shall render Landlord liable to
Tenant, constitute a constructive eviction, or excuse Tenant from any obligation hereunder, provided, however, that if the Premises (other than
trade fixtures) or any Common Area or Building system necessary for access to or tenantability of the Premises is damaged by a Casualty, then,
during any time that, as a result of such damage, any portion of the Premises is inaccessible or untenantable and is not occupied by Tenant,
Monthly Rent shall be abated in proportion to the rentable square footage of such portion of the Premises. If Landlord does not substantially
complete the Landlord Repairs on or before the Outside Restoration Date (defined below), then, provided that the Casualty was not caused by
the willful misconduct of Tenant or any party claiming by, through or under Tenant, Tenant may terminate this Lease by notifying Landlord
within 15 days after the Outside Restoration Date. As used herein, “Outside Restoration Date” means the date occurring
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two (2) months after the later of (a) the expiration of the time set forth in Landlord’s estimate described in the first sentence of Section 11.1 , or
(b) the date occurring 270 days after the date of the Casualty: provided, however, that the Outside Restoration Date shall be extended to the
extent of (i) any delay (not to exceed 60 days) caused by the insurance adjustment process, (ii) any other delay (not to exceed 60 days) caused
by events of Force Majeure, and (iii) any delay caused by Tenant or any party claiming by, through or under Tenant. Notwithstanding the
foregoing, if Landlord determines in good faith that it will be unable to substantially complete the Landlord Repairs on or before the Outside
Restoration Date, Landlord may cease its performance of the Landlord Repairs and provide Tenant with notice (the “ Restoration Date
Extension Notice ”) stating such inability and identifying the date on which Landlord reasonably believes such substantial completion will
occur, in which event Tenant may terminate this Lease by notifying Landlord within five (5) business days after receiving the Restoration Date
Extension Notice. If Tenant does not terminate this Lease within such 5-business day period, the Outside Restoration Date shall be
automatically amended to be the date identified in the Restoration Date Extension Notice.
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NONWAIVER . No provision hereof shall be deemed waived by either party unless it is waived by such party expressly and in
writing, and no waiver of any breach of any provision hereof shall be deemed a waiver of any subsequent breach of such provision or any other
provision hereof. Landlord’s acceptance of Rent shall not be deemed a waiver of any preceding breach of any provision hereof, other than
Tenant’s failure to pay the particular Rent so accepted, regardless of Landlord’s knowledge of such preceding breach at the time of such
acceptance. No acceptance of payment of an amount less than the Rent due hereunder shall be deemed a waiver of Landlord’s right to receive
the full amount of Rent due, whether or not any endorsement or statement accompanying such payment purports to effect an accord and
satisfaction. No receipt of monies by Landlord from Tenant after the giving of any notice, the commencement of any suit, the issuance of any
final judgment, or the termination hereof shall affect such notice, suit or judgment, or reinstate or extend the Term or Tenant’s right of
possession hereunder.
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CONDEMNATION . If any part of the Premises, Building or Property is taken for any public of quasi-public use by power of
eminent domain or by private purchase in lieu thereof (a “ Taking ”) for more than 180 consecutive days, Landlord may terminate this Lease.
If more than 15% of the rentable square footage of the Premises is Taken, or access to or parking for the Premises is substantially impaired as a
result of a Taking, for more than 180 consecutive days. Tenant may terminate this Lease. Any such termination shall be effective as of the date
possession must be surrendered to the authority, and the terminating party shall provide termination notice to the other party within 45 days
after receiving written notice of such surrender date. Except as provided above in this Section 13 , neither party may terminate this Lease as a
result of a Taking. Tenant shall not assert any claim for compensation because of any Taking; provided, however, that Tenant may file a
separate claim for (a) any Taking of Tenant’s personal property of any fixtures that Tenant is entitled to remove upon the expiration hereof,
(b) moving and relocation expenses, and (c) the unamortized portion of the lesser of (i) any amount paid by Tenant, without reimbursement by
Landlord, for the construction of any then-existing Tenant-Insured Improvements that were installed pursuant hereto and taken in such Taking,
or (ii) the amount obtained by multiplying (A) the amount described in the preceding clause (c)(i), by (B) a fraction, the numerator of which is
the value of such Tenant-Insured Improvements, as determined in accordance with applicable Law, and the denominator of which is the total
amount paid by Tenant and Landlord for such Tenant-Insured Improvements, so long as such claim does not diminish the award available to
Landlord or any Security Holder (except to the extent of the amount described in the preceding clause (c)) and is payable separately to Tenant.
For purposes of the preceding sentence, the amortization of any amount paid for Tenant-Insured Improvements shall be computed over the
period commencing upon the substantial completion of such Tenant-Insured Improvements and expiring at the end of the initial Term (or, if
such Tenant-Insured Improvements are installed during an extension Term, at the end of such extension Term). If this Lease is terminated
pursuant to this Section 13, all Rent shall be apportioned as of the date of such termination. If a Taking occurs and this Lease is not so
terminated, Monthly Rent shall be abated for the period of such Taking in proportion to the percentage of the rentable square footage of the
Premises, if any, that is subject to, or rendered inaccessible by, such Taking.
14
ASSIGNMENT AND SUBLETTING .
14.1
Transfers . Tenant shall not, without Landlord’s prior consent, assign, mortgage, pledge, hypothecate, encumber, cause any
lien to attach to, or otherwise transfer this Lease or any interest hereunder, permit any assignment or other transfer hereof or any interest
hereunder by operation of law, enter into any sublease or license agreement, otherwise permit the occupancy or use of any part of the Premises
by any persons other than Tenant and its employees and contractors, or permit a Change of Control (defined in Section 14.6 ) to occur (each, a
“ Transfer ”). If Tenant desires Landlord’s consent to any Transfer, Tenant shall provide Landlord with (i) notice of the terms of the proposed
Transfer, including its proposed effective date (the “ Contemplated Effective Date ”), a description of the portion of the Premises to be
transferred (the “ Contemplated Transfer Space ”), a calculation of the Transfer Premium (defined in Section 14.3 ), and a copy of all
existing executed and/or proposed documentation pertaining to the proposed Transfer, and (ii) current financial statements of the proposed
transferee (or, in the case of a Change of Control, of the proposed new controlling party(ies)) certified by an officer or
16
owner thereof and any other information reasonably required by Landlord in order to evaluate the proposed Transfer (collectively, the “
Transfer Notice ”). Within 15 business days after receiving the Transfer Notice, Landlord shall notify Tenant of (a) its consent to the proposed
Transfer, or (b) its refusal to consent to the proposed Transfer. Any Transfer made without Landlord’s prior consent shall, at Landlord’s option,
be void. Tenant shall pay Landlord a fee of $1,500.00 for Landlord’s review of any proposed Transfer, whether or not Landlord consents to it.
14.2
Landlord’s Consent . Subject to Section 14.4 . Landlord shall not unreasonably withhold its consent to any proposed Transfer.
Without limiting other reasonable grounds for withholding consent, it shall be deemed reasonable for Landlord to withhold its consent to a
proposed Transfer if:
14.2.1
The proposed transferee is not a party of reasonable financial strength in light of the responsibilities to be undertaken
in connection with the Transfer on the date the Transfer Notice is received; or
14.2.2
The proposed transferee has a character or reputation or is engaged in a business that is not consistent with the quality
of the Building or the Project; or
14.2.3
The proposed transferee is a governmental entity or a nonprofit organization; or
14.2.4
[Intentionally Omitted]; or
14.2.5
The proposed transferee or any of its Affiliates, on the date the Transfer Notice is received, leases or occupies (or, at
any time during the 3-month period ending on the date the Transfer Notice is received, has provided Landlord with a written proposal or
request for proposal to lease) space in the Project and Landlord has (or believes in good faith, based on the scheduled expiration dates of
existing leases and/or its rights to relocate existing tenants, that it will have) space available that, in its good faith judgment, will meet the
proposed transferee’s leasing needs.
Notwithstanding any contrary provision hereof, (a) if Landlord consents to any Transfer pursuant to this Section 14.2 but Tenant does
not enter into such Transfer within six (6) months thereafter, such consent shall no longer apply and such Transfer shall not be permitted unless
Tenant again obtains Landlord’s consent thereto pursuant and subject to the terms of this Section 14 ; and (b) if Landlord unreasonably
withholds its consent under this Section 14.2 , Tenant’s sole remedies shall be contract damages (subject to Section 20 ) or specific
performance, and Tenant waives all other remedies, including any right to terminate this Lease.
14.3
Transfer Premium . If Landlord consents to a Transfer (other than a Permitted Transfer (defined in Section 14.8 ) or a Change
of Control), Tenant shall pay Landlord an amount equal to 50% of any Transfer Premium (defined below). As used herein, “ Transfer
Premium ” means (a) in the case of an assignment, any consideration (including payment for Leasehold Improvements, but excluding any fair
market value payment for personal property) paid by the assignee for such assignment, less any reasonable and customary expenses directly
incurred by Tenant on account of such assignment, including brokerage fees, legal fees, and Landlord’s review fee; and (b) in the case of a
sublease, license or other occupancy agreement, for each month of the term of such agreement, the amount by which all rent and other
consideration paid by the transferee to Tenant pursuant to such agreement (less all reasonable and customary expenses directly incurred by
Tenant on account of such agreement, including brokerage fees, legal fees, construction costs and Landlord’s review fee) exceeds the Monthly
Rent payable by Tenant hereunder with respect to the Contemplated Transfer Space. Payment of Landlord’s share of the Transfer Premium
shall be made (x) in the case of an assignment, within 10 days after Tenant receives the consideration described above, and (y) in the case of a
sublease, license or other occupancy agreement, for each month of the term of such agreement. within five (5) business days after Tenant
receives the rent and other consideration described above.
14.4
[Intentionally Omitted.]
14.5
Effect of Consent . If Landlord consents to a Transfer, (i) such consent shall not be deemed a consent to any further Transfer,
(ii) Tenant shall deliver to Landlord, promptly after execution, an executed copy of all documentation pertaining to the Transfer in form
reasonably acceptable to Landlord, and (iii) Tenant shall deliver to Landlord, upon Landlord’s request, a complete statement, certified by an
independent CPA or Tenant’s chief financial officer, setting forth in detail the computation of any Transfer Premium. In the case of an
assignment, the assignee shall assume in writing, for Landlord’s benefit, all of Tenant’s obligations hereunder. No Transfer, with or without
Landlord’s consent, shall relieve Tenant or any guarantor hereof from any liability hereunder. Notwithstanding any contrary provision hereof,
Tenant, with or without Landlord’s consent, shall not enter into, or permit any party claiming by, through or under Tenant to enter into, any
sublease, license or other occupancy agreement that provides for payment based in whole or in part on the net income or profit of the subtenant,
licensee or other occupant thereunder.
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14.6
Change of Control . As used herein, “ Change of control ” means (a) if Tenant is a closely held professional service firm, the
withdrawal or change (Whether voluntary, involuntary or by operation of law) of more than 50% of its equity owners within a 12-month
period; and (b) in all other cases, any transaction(s) resulting in the acquisition of a Controlling Interest (defined below) by one or more parties
that did not own a Controlling Interest immediately before such transaction(s). As used herein, “ Controlling Interest ” means any direct or
indirect equity or beneficial ownership interest in Tenant that confers upon its holder(s) the direct or indirect power to direct the ordinary
management and policies of Tenant, whether through the ownership of voting securities, by contract or otherwise (but not through the
ownership of voting securities listed on a recognized securities exchange). (Landlord acknowledges that, by operation of the definitions of
“Transfer,” “Change of Control” and “Controlling Interest,” no stock of Tenant listed on a recognized securities exchange shall be deemed a
Controlling Interest, and, therefore, no issuance of Tenant’s stock in an offering or sale on a recognized securities exchange shall be deemed a
Change of Control or a Transfer.)
14.7
Effect of Default . If Tenant is in Default (defined in Section 19.1 ), Landlord is irrevocably authorized, as Tenant’s agent and
attorney-in-fact, to direct any transferee under any sublease, license or other occupancy agreement to make all payments under such agreement
directly to Landlord (which Landlord shall apply towards Tenant’s obligations hereunder) until such Default is cured. Such transferee shall rely
upon any representation by Landlord that Tenant is in Default, whether or not confirmed by Tenant.
14.8
Permitted Transfers . Notwithstanding any contrary provision hereof, if Tenant is not in Default, Tenant may, without
Landlord’s consent pursuant to Section 14.1 , (i) sublease any portion of the Premises to an Affiliate of Tenant, (ii) assign this Lease to (a) an
Affiliate of Tenant (other than pursuant to a merger or consolidation), (b) a successor to Tenant by merger or consolidation, or (c) a successor
to Tenant by purchase of all or substantially all of Tenant’s assets, or (iii) permit a Change of Control to occur (a “ Permitted Transfer ”),
provided that (i) at least 10 business days before the Transfer, Tenant notifies Landlord of such Transfer and delivers to Landlord any
documents or information reasonably requested by Landlord relating thereto, including reasonable documentation that the Transfer satisfies the
requirements of this Section 14.8 ; (ii) in the case of a sublease, the subtenant executes and delivers to Landlord, at least 10 business days
before taking occupancy, an agreement reasonably acceptable to Landlord which (A) requires the subtenant to assume all of Tenant’s release,
waiver, indemnity and insurance obligations hereunder with respect to the Contemplated Transfer Space and to be bound by each provision
hereof that limits the liability of any Landlord Party, and (B) provides that if either a Landlord Party or the subtenant institutes a suit against the
other for violation of or to enforce agreement, or in connection with any matter relating to the sublease or the subtenant’s occupancy of the
Contemplated Transfer Space, the prevailing party shall be entitled to all of its costs and expenses, including reasonable attorneys’ fees; (iii) in
the case of an assignment pursuant to clause (ii)(a) or (ii)(c) above, the assignee executes and delivers to Landlord, at least 10 business days
before the assignment, a commercially reasonable instrument pursuant to which the assignee assumes, for Landlord’s benefit, all of Tenant’s
obligations hereunder; (iv) in the case of an assignment pursuant to clause (ii)(b) above, (A) the successor entity has a net worth (as determined
in accordance with GAAP, but excluding intellectual property and any other intangible assets (“ Net Worth ”)) immediately after the Transfer
that is not less than the Net Worth of Tenant immediately before the Transfer, and (B) if Tenant is a closely held professional service firm, at
least 50% of its equity owners existing 12 months before the Transfer are also equity owners of the successor entity; (v) except in the case of a
Change of Control, the transferee is qualified to conduct business in the State of California; (vi) in the case of a Change of Control, (A) Tenant
is not a closely held professional service firm, and (B) Tenant’s Net Worth immediately after the Change of Control is not less than its Net
Worth immediately before the Change of Control; and (vii) the Transfer is made for a good faith operating business purpose and not in order to
evade the requirements of this Section 14 . As used herein “ Affiliate ” means, with respect to any party, a person or entity that controls, is
under common control with, or is controlled by such party.
15
SURRENDER . Upon the expiration or earlier termination hereof, and subject to Sections 8 and 11 and this Section 15 , Tenant
shall surrender possession of the Premises to Landlord in as good condition and repair as existed when Tenant took possession and as thereafter
improved by Landlord and/or Tenant, except for reasonable wear and tear and repairs that are Landlord’s express responsibility hereunder.
Before such expiration or termination, Tenant, without expense to Landlord, shall (a) remove from the Premises all debris and rubbish and all
furniture, equipment, trade fixtures, Lines, free-standing cabinet work, movable partitions and other articles of personal property that are owned
or placed in the Premises by Tenant or any party claiming by, through or under Tenant (except for any Lines not required to be removed under
Section 23 ), and (b) repair all damage to the Premises and Building resulting from such removal. If Tenant fails to timely perform such
removal and repair, Landlord may do so at Tenant’s expense (including storage costs). If Tenant fails to remove such property from the
Premises, or from storage, within 30 days after notice from Landlord, any part of such property shall be deemed, at Landlord’s option, either
(x) conveyed to Landlord without compensation, or (y) abandoned.
16
HOLDOVER . If Tenant fails to surrender the Premises upon the expiration or earlier termination hereof, Tenant’s tenancy shall
be subject to the terms and conditions hereof; provided, however,
18
that such tenancy shall be a tenancy at sufferance only, for entire Premises, and Tenant shall pay Monthly Rent (prorated on a per-diem basis
for any partial month) at a rate equal to the Applicable Percentage (defined below) of the Monthly Rent applicable during the last calendar
month of the Term. As used herein, “ Applicable Percentage ” means, for any holdover, (a) 125% during the first 30 days of such holdover,
and (b) 150% during the balance of such holdover. Nothing in this, Section 16 shall limit Landlord’s rights or remedies or be deemed a consent
to any holdover. If Landlord is unable to deliver possession of the Premises to a new tenant or to perform improvements for a new tenant as a
result of Tenant’s holdover. Tenant shall be liable for all resulting damages, including lost profits, incurred by Landlord.
17
SUBORDINATION: ESTOPPEL CERTIFICATES .
17.1
This Lease shall be subject and subordinate to all existing and future ground or underlying leases, mortgages, trust deeds and
other encumbrances against the Building or Project, all renewals, extensions, modifications, consolidations and replacements thereof (each, a “
Security Agreement ”), and all advances made upon the security of such mortgages or trust deeds, unless in each case the holder of such
Security Agreement (each, a “ Security Holder ”) requires in writing that this Lease be superior thereto, Upon any termination or foreclosure
(or any delivery of a deed in lien of foreclosure) of any Security Agreement. Tenant, upon request, shall attorn, without deduction or set-off, to
the Security Holder or purchaser or any successor thereto and shall recognize such party as the lessor hereunder and agree to continue this
Lease as a direct lease between Tenant, as tenant, and such party, as landlord, provided that such party agrees to recognize Tenant’s rights as
tenant hereunder and continue this lease as a direct lease between such party, as landlord, and Tenant as tenant (provided, however, that such
party shall not be (i) bound by any payment of Rent for more than one (1) month in advance; (ii) liable for (A) the return of any security
deposit, letter of credit or other collateral, except to the extent it was received by such party, or (B) any act, omission, representation, warranty
of default of any prior landlord (including Landlord); or (iii) subject to any offset or defense that Tenant might have against any prior landlord
(including Landlord); provided further, however, that nothing in the preceding clauses (ii)(B) or (iii) shall limit the liability of such party for
any default by such prior landlord to the extent it continues following the acquisition of such prior landlord’s interest hereunder by such party,
unless such default consists of (x) a breach of an obligation relating to the design, construction, or repair of any defect in any Leasehold
Improvements or other improvements to the Building, or (y) a failure to disburse, pay or reimburse any funds to Tenant). Within 10 days after
request by Landlord. Tenant shall execute such further instruments as Landlord may reasonably deem necessary to evidence the subordination
or superiority of this Lease to any Security Agreement. Tenant waives any right it may have under Law to terminate or otherwise adversely
affect this Lease or Tenant’s obligations hereunder upon a foreclosure. Within 10 business days after Landlord’s request. Tenant shall execute
and deliver to Landlord a commercially reasonable estoppel certificate in favor of such parties as Landlord may reasonably designate, including
current and prospective Security Holders and prospective purchasers.
17.2
Notwithstanding Section 17.1 . Tenant’s agreement to subordinate this Lease to a future Security Agreement shall not be
effective unless Landlord has provided Tenant with a commercially reasonable non-disturbance agreement from the Security Holder. For
purposes of the preceding sentence, a non-disturbance agreement shall not be deemed commercially reasonable unless it provides that: (a) so
long as no Default exists, this Lease and Tenant’s right to possession hereunder shall remain in full force and effect; (b) the Security Holder
shall have additional time (not to exceed 90 days after written notice from Tenant) to cure any default of Landlord; and (c) neither the Security
Holder nor any successor in interest shall be (i) bound by (A) any payment of Rent for more than one (1) month in advance, or (B) any
amendment of this Lease made without the written consent of the Security Holder or such successor in interest; (ii) liable for (A) the return of
any security deposit, letter of credit or other collateral, except to the extent it was received by the Security Holder, or (B) any act, omission,
representation, warranty or default of any prior landlord (including Landlord); or (iii) subject to any offset or defense that Tenant might have
against any prior landlord (including Landlord); provided, however, that nothing in the preceding clauses (c)(ii)(B) or (c)(iii) shall limit the
liability of the Security Holder or such successor in interest for any default by such prior landlord to the extent it continues following the
acquisition of such prior landlord’s interest hereunder by the Security Holder or such successor in interest, unless such default consists of (x) a
breach of an obligation relating to the design, construction, or repair of any defect in any Leasehold Improvements or other improvements to
the Building, or (y) a failure to disburse, pay or reimburse any funds to Tenant.
17.3
The parties acknowledge that before entering into this Lease Landlord has provided to Tenant the standard form of SNDA used
by Landlord’s existing Security Holder (“ Existing Security Holder ”), Promptly upon receiving Tenant’s written comments to such form of
SNDA. Landlord shall forward the same to Existing Security Holder, request Existing Security to execute the SNDA, and provide Tenant with
the contact information for Existing Security Holder’s attorney. Tenant shall promptly reimburse Landlord for (or, upon Landlord’s request,
promptly pay directly to Existing Security Holder or its attorney, as the case may be) all expenses and costs, including attorney’s fees, that
Landlord becomes required to pay to Existing Security Holder in connection with any negotiation, preparation execution or
19
delivery of such SNDA.
18
ENTRY BY LANDLORD . At all reasonable times and upon reasonable notice to Tenant, or in an emergency, Landlord may
enter the Premises to (i) inspect the Premises; (ii) show the Premises to prospective purchasers, current or prospective Security Holders or
insurers, or, during the last 12 months of the Term for while an uncured Default exists), prospective tenants; (iii) post notices of
non-responsibility; or (iv) perform maintenance, repairs or alterations. Upon reasonable prior notice to Tenant (which notice, notwithstanding
Section 25.1 , may be delivered by e-mail, fax, telephone or orally and in person), Landlord may enter the Premises to perform any required
services. If reasonably necessary, Landlord may temporarily close any portion of the Premises to perform maintenance, repairs or (to the extent
required by Law or reasonably required for the construction of tenant improvements for another tenant of the Building) alterations. In an
emergency, Landlord may use any means it deems proper to open doors to and in the Premises. Except in an emergency, Landlord shall use
reasonable efforts to minimize interference with Tenant’s use of the Premises. Except in an emergency, Landlord shall comply with any
reasonable security procedures of Tenant (which shall be limited to procedures requiring identification of the person(s) entering the Premises,
accompaniment by a Tenant employee, and/or the wearing of a badge). No entry into or closure of any portion of the Premises pursuant to this
Section 18 shall render Landlord liable to Tenant, constitute a constructive eviction, or excuse Tenant from any obligation hereunder.
19
DEFAULTS; REMEDIES .
19.1
Events of Default . The occurrence of any of the following shall constitute a “ Default ”:
19.1.1
Any failure by Tenant to pay any Rent when due unless such failure is cured within five (5) business days after notice
from Landlord of such failure; or
19.1.2
Except where a specific time period is otherwise set forth for Tenant’s cure herein (in which event Tenant’s failure to
cure within such time period shall be a Default), and except as otherwise provided in this Section 19.1 , any breach by Tenant of any other
provision hereof where such breach continues for 30 days after notice from Landlord; provided that if such breach cannot reasonably be cured
within such 30-day period, Tenant shall not be in Default as a result of such breach if Tenant diligently commences such cure within such
period, thereafter diligently pursues such cure, and completes such cure within 60 days after Landlord’s notice; or
19.1.3
Abandonment of the Premises by Tenant; or
19.1.4
Any breach by Tenant of Sections 5 , 14 , 17 , 18 or 25.3 where such breach continues for more than five (5) business
days after notice from Landlord.
If (a) Tenant breaches a particular provision hereof (other than a provision requiring payment of Rent), and Landlord notifies Tenant
of such breach, on three (3) separate occasions during any 12-month period; (b) such breaches harm any tenants, prospective tenants, occupants
of adjacent property, or other third parties; and (c) such breaches are collectively material, then Tenant’s subsequent breach of such provision
shall be, at Landlord’s option, an incurable Default. To the extent the notice periods provided herein satisfy any notice periods provided by
Law, Landlord shall not be required to give any additional notice in order to be entitled to commence an unlawful detainer proceeding.
19.2
Remedies Upon Default . Upon any Default, Landlord shall have, in addition to any other remedies available to Landlord at
law or in equity (which shall be cumulative and nonexclusive), the option to pursue any one or more of the following remedies (which shall be
cumulative and nonexclusive) without any notice or demand.
19.2.1
Landlord may 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 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:
(a)
The worth at the time of award of the unpaid Rent which has been earned at the time of such termination;
plus
(b)
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
(c)
The worth at the time of award of the amount by which the unpaid Rent for the balance of the Term after the
time of award exceeds the amount of such Rent loss that Tenant proves
20
could have been reasonably avoided; plus
(d)
Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant’s
failure to perform its obligations hereunder or which in the ordinary course of things would be likely to result therefrom, including (but only to
the extent reasonably attributable to the remaining Term) brokerage commissions, advertising expenses, expenses of remodeling any portion of
the Premises for a new tenant (whether for the same or a different use), and any special concessions made to obtain a new tenant; plus
(e)
At Landlord’s option, such other amounts in addition to or in lieu of the foregoing as may be permitted from
time to time by Law.
As used in Sections 19.2.1(a) and (b) , the “ worth at the time of award ” shall be computed by allowing interest 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 G.13(415), published on
the first Tuesday of each calendar month (or such other comparable index as Landlord shall reasonably designate if such rate ceases to be
published) plus two (2) percentage points, or (ii) the highest rate permitted by Law. As used in Section 19.2.1(c) , 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 1%.
19.2.2
Landlord shall have the remedy described in California Civil Code § 1951.4 (lessor may continue lease in effect after
lessee’s 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 hereunder, 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 , or any Law or other provision hereof), without prior
demand or notice except as required by 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.
19.3
Efforts to Relet . Unless Landlord provides Tenant with express notice to the contrary, no re-entry, repossession, repair,
maintenance, change, alteration, addition, reletting, appointment of a receiver or other action or omission by Landlord shall (a) be construed as
an election by Landlord to terminate this Lease or Tenant’s right to possession, or to accept a surrender of the Premises, or (b) operate to
release Tenant from any of its obligations hereunder. Tenant waives, for Tenant and for all those claiming by, through or under Tenant,
California Civil Code § 3275 and California Code of Civil procedure §§ 1174(c) and 1179 and any existing or future rights to redeem or
reinstate, by order or judgment of any court or by any legal process or writ, this Lease or Tenant’s right of occupancy of the Premises after any
termination hereof.
19.4
Landlord Default .
19.4.1
Landlord shall not be in default hereunder unless it breaches any provision hereof where such breach continues for 30
days after notice from Tenant; provided that if such breach cannot reasonably be cured within such 30-day period, Landlord shall not be in
default hereunder as a result of such breach if Landlord diligently commences such cure within such period, thereafter diligently pursues such
cure, and completes such cure within 90 days after Tenant’s notice.
19.4.2
If Landlord becomes in default hereunder (as provided in Section 19.4.1 ) as a result of any breach by Landlord of its
obligations under Section 7.1.2.A to keep in good condition and repair the roof of the Building, the exterior walls and windows of the Building,
or any system of the Building for which Landlord is responsible under Section 7.1.2.A , and if such default materially and adversely affects the
conduct of Tenant’s business in the Premises, then Tenant may thereafter provide Landlord with a notice (in addition to those required under
Section 19.4.1 in order for Landlord to become in default) stating that if Landlord does not perform such obligation then Tenant will exercise
its right to do so under this Section 19.4.2 , and if Landlord does not commence performance of such obligation within 10 business days after
such notice and thereafter diligently pursue such performance until completion, Tenant may perform such obligation. If Tenant performs any
such obligation of Landlord, then (a) Tenant shall do so (i) in a first-class manner using materials of the same (or better) quality as those being
repaired or replaced, (ii) using, where commercially reasonable, Landlord’s approved contractors, (iii) in compliance with all Laws, and (iv) in
a manner that does not impair the Base Building; (b) if, as a result of such work, Landlord becomes required under Law to perform any
inspection, give any notice, or cause such Tenant Work to be performed in any particular manner, Tenant shall comply with such requirement
and promptly provide Landlord with reasonable documentation of such compliance; (c) Tenant shall promptly provide Landlord with copies of
any governmental permits required to perform the work; and (d) to the extent Landlord is responsible hereunder for the maintenance or repair
of any
21
item repaired or installed by Tenant. Tenant shall promptly make available to Landlord the benefit of any warranties received in connection
therewith, If Tenant performs any such obligation of Landlord in accordance with this Section 19.4.2 , then (x) Landlord shall reimburse
Tenant, within 10 business days after receiving demand therefor and reasonable documentation thereof, the reasonable out-of-pocket costs
incurred by Tenant in so performing such obligation; and (y) if Landlord fails to provide such reimbursement within such 10-business-day
period. Tenant, after 30 days’ notice to Landlord, may withhold the amount Landlord failed to reimburse as required hereunder from the next
due installment(s) of Rent until Tenant is fully reimbursed.
19.4.3
Notwithstanding any contrary provision hereof, before exercising any remedies for a default by Landlord, Tenant
shall give notice and a reasonable time to cure to any Security Holder of which Tenant has been notified.
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LANDLORD EXCULPATION . Notwithstanding any contrary provision hereof, (a) the liability of the Landlord Parties to
Tenant shall be limited to an amount equal to the lesser of (i) the value of Landlord’s interest in the Building, or (ii) the value of the equity
interest Landlord would have in the Building if the Building were encumbered by third-party debt in an amount equal to 80% of the value of
the Building (as such value is determined by Landlord); (b) Tenant shall look solely to Landlord’s interest in the Building for the recovery of
any judgment of award against any Landlord Party; (c) no Landlord Party shall have any personal liability for any judgment or deficiency, and
Tenant waives and releases such personal liability on behalf of itself and all parties claiming by, through or under Tenant; and (d) no Landlord
Parry shall be liable for any injury or damage to, or interference with, Tenant’s business, including loss of profits, loss of rents or other
revenues, loss of business opportunity, loss of goodwill or loss of use, or for any form of special or consequential damage. For purposes of this
Section 20 . “ Landlord’s interest in the Building ” shall include rents paid by tenants, insurance proceeds, condemnation proceeds, and
proceeds from the sale of the Building (collectively, “ Owner Proceeds ”); provided, however, that Tenant shall not be entitled to recover
Owner Proceeds from any Landlord Party (other than Landlord) or any other third party after they have been distributed or paid to such party;
provided further, however, that nothing in this sentence shall diminish any right Tenant may have under Law, as a creditor of Landlord, to
initiate or participate in an action to recover Owner Proceeds from a third party on the grounds that such third party obtained such Owner
Proceeds when Landlord was, or could reasonably be expected to become, insolvent or in a transfer that was preferential or fraudulent as to
Landlord’s creditors.
21
[Intentionally Omitted.]
22
[Intentionally Omitted.]
23
COMMUNICATIONS AND COMPUTER LINES. All Lines shall be (a) installed in accordance with Section 7 ; and (b) clearly
marked with adhesive plastic labels (or plastic tags attached to such Lines with wire) to show Tenant’s name, suite number, and the purpose of
such Lines (i) every six (6) feet outside the Premises (including the electrical room risers and any Common Areas), and (ii) at their termination
points. Landlord may designate specific contractors for work relating to vertical Lines. Sufficient space for additional cables shall be
maintained for other occupants, as reasonably determined by Landlord. Unless otherwise notified by Landlord. Tenant, at its expense and
before the expiration or earlier termination hereof, shall remove all Lines and repair any resulting damage. As used herein. “ Lines ” means all
communications or computer wires and cables serving the Premises and installed by or for the benefit of Tenant.
24
PARKING. Tenant may park in the Building’s parking facilities (the “ Parking Facility ”), in common with other parties, upon
the following terms and conditions. Tenant shall not use more than the number of unreserved and/or reserved parking spaces set forth in
Section 1.9 . Tenant shall not be required to pay any additional rental for such use of such parking spaces. Landlord shall not be liable to
Tenant, not shall this Lease be affected, if any parking is impaired by (or any parking charges are imposed as a result of) any Law. Tenant shall
comply with all reasonable rules and regulations established by Landlord from time to time for the orderly operation and use of the Parking
Facility, including any reasonable sticker or other identification system and the prohibition of vehicle repair and maintenance activities in the
Parking Facility. Landlord may, in its reasonable discretion, allocate and assign parking passes among Tenant and the other tenants in the
Building provided that such allocation and assignment does not materially increase Tenant’s obligations or materially reduce Tenant’s rights
hereunder. Tenant’s use of the Parking Facility shall be at Tenant’s sole risk, and Landlord shall have no duty to prevent any third party from
causing any damage to or theft of any vehicles or other property occurring in the Parking Facility or otherwise in connection with any use of
the Parking Facility by Tenant or its employees or invitees. Landlord may alter the size, configuration, design, layout or any other aspect of the
Parking Facility without abatement of Rent or liability to Tenant provided that such alteration does not materially impair Tenant’s rights under
this Section 24 . In addition, for purposes of facilitating any such alteration, Landlord may temporarily deny or restrict access to the Parking
Facility, without abatement of Rent or liability to Tenant, provided that Landlord uses commercially reasonable efforts to make reasonable
substitute parking available to Tenant. Landlord may delegate its
22
responsibilities hereunder to a parking operator, in which case (i) such parking operator shall have all the right, of control reserved herein by
Landlord, (ii) Tenant shall enter into a commercially reasonable parking agreement with such parking operator on substantially the same terms
and conditions as those set forth herein with respect to the parking spaces, (iii) Tenant shall pay such parking operator, rather than Landlord,
any amounts required to be paid hereunder with respect to the parking spaces, and (iv) Landlord shall have no liability for claims arising
through acts or omissions of such parking operator except to the extent caused by Landlord’s negligence or willful misconduct. Tenant’s
parking rights under this Section 24 are solely for the benefit of Tenant’s employees and invitees and such rights may not be transferred
without Landlord’s prior consent, except pursuant to a Transfer permitted under Section 14 .
25
MISCELLANEOUS.
25.1
Notices . Except as provided in Section 18, no notice, demand, statement, designation, request, consent, approval, election
or other communication given hereunder (“ Notice ”) shall he binding upon either party unless (a) it is in writing; (b) it is (i) sent by certified or
registered mail, postage prepaid, return receipt requested, (ii) delivered by a nationally recognized courier service, or (iii) delivered personally;
and (c) it is sent or delivered to the address set forth in Section 1.10 or 1.11 , as applicable, or to such other place (other than a P.O. box) as the
recipient may from time to time designate in a Notice to the other party. Any Notice shall be deemed received on the earlier of the date of
actual delivery or the date on which delivery is refused, or, if Tenant is the recipient and has vacated its notice address without providing a new
notice address, three (3) business days after the date the Notice is deposited in the U.S. mail or with a courier service as described above. No
provision of this Lease expressly requiring a particular Notice to be in writing shall limit the generality of clause (a) of the first sentence of this
Section 25.1 .
25.2
Force Majeure. If either party is prevented from performing any obligation hereunder by any strike, act of God, war,
terrorist act, shortage of labor or materials, governmental action, civil commotion or other similar cause beyond such party’s reasonable control
(“ Force Majeure ”), such obligation shall be excused during (and any time period for the performance of such obligation shall be extended
by) the period of such prevention; provided, however, that this Section 25.2 shall not (a) permit Tenant to hold over in the Premises after the
expiration or earlier termination hereof, (b) excuse any of Tenant’s obligations under Sections 3 , 4 , 5 , 21 or 25.3 or any of Tenant’s
obligations whose nonperformance would interfere with another occupant’s use occupancy or enjoyment of its premises or the Project, or
(c) except as may be expressly provided herein, extend any period of time whose expiration results, under the express terms hereof, in an
abatement of Rent or a right to terminate this Lease.
25.3
Representations and Covenants . Tenant represents, warrants and covenants that (a) Tenant is, and at all times during the
Term will remain, duly organized, validly existing and in good standing under the Laws of the state of its formation and qualified to do
business in the state of California; (b) neither Tenant’s execution of not its performance under this Lease will cause Tenant to be in violation of
any agreement or Law; (c) Tenant (and any guarantor hereof) has not, and at no time during the Term will have, (i) made a general assignment
for the benefit of creditors, (ii) filed a voluntary petition in bankruptcy; (iii) suffered the filing by creditors of an involuntary petition in
bankruptcy which is not dismissed within 30 days; (iv) suffered the appointment of a receiver to take possession of all or substantially all of its
assets, (v) suffered the attachment or other judicial seizure of all or substantially all of its assets, (vi) admitted in writing its inability to pay its
debts as they come due, or (vii) made an offer of settlement, extension or composition to its creditors generally; and (d) no 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 Tenant, any guarantor hereof or any subtenant of Tenant is, or any time during the Term will be, (i) in violation of any 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, with the result that it becomes unlawful for Landlord to do business with Tenant.
25.4
Signs . Landlord shall include Tenant’s name in any tenant directory located in the lobby on the first floor of the Building. If
any part of the Premises is located on a multi-tenant floor, Landlord, at Tenant’s cost, shall provide identifying suite signage for Tenant
comparable to that provided by Landlord on similar floors in the Building Tenant may not install (a) any signs outside the Premises, or
(b) without Landlord’s prior consent in its sole and absolute discretion, any signs, window coverings, blinds or similar items that are visible
from outside the Premises (provided, however, that Landlord shall not unreasonably withhold its consent to the placement of a sign showing
the Tenant Name (defined in Section 5.1 of Exhibit F ) in the portion of the Premises on the first (1 st ) floor of the Building that serves as
Tenant’s reception area). Landlord shall not install (or permit any other party to install) in any Common Area located on the ground floor of the
Building any sign other than a directory or directional sign.
23
25.5
Supplemental HVAC . If any supplemental HVAC unit (a “ Unit ”) serves the Premises, then (a) Tenant shall pay the costs
of all electricity consumed in the Unit’s operation, together with the cost of installing a meter to measure such consumption; (b) Tenant, at its
expense, shall (i) operate and maintain the Unit in compliance with all applicable Laws and such reasonable rules and procedures as Landlord
may impose; (ii) keep the Unit in as good working order and condition as exists upon its installation (or, if later, on the date Tenant takes
possession of the Premises), subject to normal wear and tear and damage resulting from Casualty; (iii) maintain in effect, with a contractor
reasonably approved by Landlord, a contract for the maintenance and repair of the Unit, which contract shall require the contractor, at least
once every three (3) months, to inspect the Unit and provide to Tenant a report of any defective conditions, together with any recommendations
for maintenance, repair or parts-replacement; (iv) follow all reasonable recommendation of such contractor, and (v) promptly provide to
Landlord a copy of such contract and each report issued thereunder (provided, however, that Tenant shall not be required to perform any repair
or replacement of any Unit if such repair or replacement is capital in nature (as reasonably determined by Landlord in accordance with GAAP)
and is not made necessary by any Alteration or Act of Tenant, except to the extent. If any, that such repair or replacement is necessary in order
to put such Unit into a configuration or condition that complies with Law and does not pose an unreasonable hazard to person or property);
(c) the Unit shall become Landlord’s property upon installation and without compensation to Tenant, provided, however, that if the Unit does
not exist on the date hereof, then at the expiration or earlier termination hereof, Tenant, at its expense, shall remove the Unit and repair any
resulting damage; (d) the Unit shall be deemed (i) a Leasehold Improvement (except for purposes of Section 8 ), and (ii) for purposes of
Section 11 , part of the Premises; (e) if the Unit exists on the date of mutual execution and delivery hereof, Tenant accepts the Unit in its “as is”
condition, without representation or warranty as to quality, condition, fitness for use or any other matter; (f) [Intentionally Omitted]; and (g) if
any portion of the Unit is located on the roof, then (i) Tenant’s access to the roof shall be subject to such reasonable rules and procedures as
Landlord may impose; (ii) Tenant shall maintain the affected portion of the roof in a clean and orderly condition and shall not interfere with use
of the roof by Landlord or any other tenants or licensees; and (iii) Landlord may relocate the Unit and/or temporarily interrupt its operation,
without liability to Tenant, as reasonably necessary to maintain and repair the roof or otherwise operate the Building.
25.6
Attorneys’ Fees . In any action or proceeding between the parties, including any appellate or alternative dispute resolution
proceeding, the prevailing party may recover from the other party all of its costs and expenses in connection therewith, including reasonable
attorneys’ fees and costs. Tenant shall pay all reasonable attorneys’ fees and other fees and costs that Landlord incurs in enforcing this Lease
(a) where Tenant has failed to pay Rent when due, or (b) in any bankruptcy case, assignment for the benefit of creditors, or other insolvency,
liquidation or reorganization proceeding involving Tenant or this Lease.
25.7
Brokers . Tenant represents to Landlord that it has dealt only with Tenant’s Broker as its broker in connection with this
Lease. Tenant shall indemnify, defend, and hold Landlord harmless from all claims of any brokers, other than Tenant’s Broker, claiming to
have represented Tenant in connection with this Lease. Landlord shall indemnify, defend and hold Tenant harmless from all claims of any
brokers, including Landlord’s Broker, claiming to have represented Landlord in connection with this Lease. Tenant acknowledges that any
Affiliate of Landlord that is involved in the negotiation of this Lease is representing only Landlord, and that any assistance rendered by any
agent or employee of such Affiliate in connection with this Lease or any subsequent amendment or other document related hereto has been or
will be rendered as an accommodation to Tenant solely in furtherance of consummating the transaction on behalf of Landlord, and not as agent
for Tenant.
25.8
Governing Law; WAIVER OF TRIAL BY JURY . This Lease shall be construed and enforced in accordance with the
Laws of the State of California. THE PARTIES WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW. THE RIGHT TO TRIAL BY
JURY IN ANY LITIGATION ARISING OUT OF OR RELATING TO THIS LEASE. THE RELATIONSHIP OF LANDLORD AND
TENANT, TENANT’S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM FOR INJURY OR DAMAGE OR ANY
EMERGENCY OR STATUTORY REMEDY.
25.9
Waiver of Statutory Provisions . Each party waives California Civil Code §§ 1932(2) and 1933(4). Tenant waives (a) any
rights under (i) California Civil Code §§ 1932(1), 1941, 1942, 1950.7 or any similar Law, or (ii) California Code of Civil Procedure §
1265.130; and (b) any right to terminate this Lease under California Civil Code § 1995.310.
25.10
Interpretation . As used herein, the capitalized term “Section” refers to a section hereof unless otherwise specifically
provided herein. As used in this Lease the terms “herein,” “hereof,” “hereto” and “hereunder” refer to this Lease and the term “include” and its
derivatives are not limiting. Any reference herein to “any part” or “any portion” of the Premises, the Property or any other property shall be
construed to refer to all or any part of such property. Wherever this Lease requires Tenant to comply with any Law, rule, regulation, procedure
or other requirement or prohibits Tenant from engaging in any particular conduct this Lease shall be deemed also to require Tenant to cause
each of its employees, licensees, invitees and subtenants, and any other party claiming by, through or under
24
Tenant, to comply with such requirement or refrain from engaging in such conduct, as the case may be. Wherever this Lease requires Landlord
to provide a customary service or to act in a reasonable manner (whether in incurring an expense, establishing a rule or regulation, providing an
approval or consent, or performing any other act), this Lease shall be deemed also to provide that whether such service is customary or such
conduct is reasonable shall be determined by reference to the practices of owners of buildings that (i) are comparable to the Building in size,
age, class, quality and location, and (ii) at Landlord’s option, have been, or are being prepared to be, certified under the U.S. Green Building
Council’s Leadership in Energy and Environmental Design (LEED) rating system or a similar rating system (“ Comparable Buildings ”)
Tenant waives the benefit of any rule that a written agreement shall be construed against the drafting party. Whenever this Lease requires all
approval, consent, selection or judgment by either Landlord or Tenant, unless another standard (such as “good faith”) is expressly set forth,
such approval, consent, selection or judgment shall not be unreasonably withheld or delayed. For purposes hereof, (a) a matter (such as the
application or violation of a Law) shall be deemed to result from a particular use (as distinguished from general office/R&D use) of the
Premises if and only if such matter results from such use and a different office/R&D use could be made of the Premises without resulting in
such matter; and (b) a matter (such as compliance with a Law) shall be deemed to be required for a particular use (as distinguished from
general office/R&D use) of the Premises if and only if such matter is required for such use and a different office/R&D use could be made of the
Premises without requiring such matter. For purposes hereof, a portion of the Premises shall be deemed to be untenantable during any period in
which it cannot be used for any office/R&D use and is not used by Tenant other than to store Tenant’s property.
25.11
Entire Agreement . This Lease sets forth the entire agreement between the parties relating to the subject matter hereof and
supersedes any previous agreements (none of which shall be used to interpret this Lease). Tenant acknowledges that in entering into this Lease
it has not relied upon any representation, warranty or statement, whether oral or written, not expressly set forth herein. This Lease can be
modified only by a written agreement signed by both parties.
25.12
Other . Landlord, at its option, may cure any Default, without waiving any right or remedy or releasing Tenant from any
obligation, in which event Tenant shall pay Landlord, upon demand, the cost of such cure. If any provision hereof is void or unenforceable, no
other provision shall be affected. Submission of this instrument for examination or signature by Tenant does not constitute an option or offer to
lease, and this instrument is not binding until it has been executed and delivered by both parties. If Tenant is comprised of two or more parties,
their obligations shall be joint and several. Time is of the essence with respect to the performance of every provision hereof in which time of
performance is a factor. So long as Tenant performs its obligations hereunder, Tenant shall have peaceful and quiet possession of the Premises
against any party claiming by, through or under Landlord, subject to the terms hereof. Landlord may transfer its interest herein, in which event
Landlord shall be released from, and Tenant shall look solely to the transferee for the performance of, all of Landlord’s obligations arising
hereunder after the date of such transfer (including the return of any Security Deposit), but only to the extent the transferee has assumed such
obligations (whether by agreement or by operation of Law), and Tenant shall attorn to the transferee. If Tenant (or any party claiming by,
through or under Tenant) pays directly to the provider for any energy consumed at the Property, Tenant, promptly upon request, shall deliver to
Landlord (or, at Landlord’s option, execute and deliver to Landlord an instrument enabling Landlord to obtain from such provider) any data
about such consumption that Landlord, in its reasonable judgment, is required to disclose to a prospective buyer, tenant or Security Holder
under California Public Resources Code § 25402.10 or any similar Law. Landlord reserves all rights not expressly granted to Tenant hereunder,
including the right to make alterations to the Project. No rights to any view of to light or air over any property are granted to Tenant hereunder.
Landlord reserves to itself the right, from time to time, to grant such easements, rights and dedications that Landlord deems necessary or
desirable, and to cause the recordation of Parcel Maps and conditions, covenants and restrictions, so long as such easements, rights,
dedications. Parcel Maps and conditions, covenants and restrictions do not (a) unreasonably interfere with Tenant’s use of the Premises, the
Common Area or the Parking Facility, including access thereto, or (b) materially increase Tenant’s obligations or materially reduce Tenant’s
rights hereunder. Upon 10 days prior written request, Tenant shall sign any such documents, and take such other actions, which are reasonably
necessary or appropriate to accomplish such granting, recordation and subordination of this Lease to same. The expiration or termination hereof
shall not relieve either party of any obligation that accrued before, or continues to accrue after, such expiration or termination.
25.13
Athletic Facility. Subject to the provisions of this Section 25.13, Landlord shall provide Tenant with the Applicable Number
(defined below) of memberships to the athletic facility located at 1100 Seaport Boulevard, Redwood City, California (the “ Athletic Facility
“). Such memberships shall be for the non-exclusive use of the Athletic Facility by Tenant’s employees during the Term. Such memberships
shall be provided at no additional periodic charge beyond that required under Sections 1.5 and 3 , provided, however that subject to the terms of
such memberships, additional charges for particular services or privileges may apply. Any Tenant employee electing to use one of the
memberships and the Athletic Facility first shall execute and deliver to Landlord (or the owner or operator of such Athletic Facility) Landlord’s
(or such owner’s or operator’s) then-standard form of license or other agreement
25
governing such use. The use of the Athletic Facility shall be subject to the reasonable rules and regulations (including rules regarding hours of
use) established from time to time by Landlord (or the owner or operator of such Athletic Facility). Tenant shall indemnify, defend, protect, and
hold the Landlord Parties harmless from any Claim that is imposed or asserted by any third party and arises from (a) any negligence or willful
misconduct of Tenant’s employee(s) in connection with the use of the Athletic Facility, or (b) any breach by Tenant’s employee(s) of any
representation, covenant or other term contained in the license or other agreement governing such employee’s use of the Athletic Facility. The
costs of operating, maintaining and repairing the Athletic Facility shall be included as part of Expenses, subject to the terms and conditions of
Section 4 . For purposes of this Section 25.13 , “ Applicable Number ” means the largest whole number not exceeding the number obtained by
multiplying Tenant’s Project Share (defined below) by 6,400. As used herein, “ Tenant’s Project Share ” means the percentage obtained by
dividing the rentable square footage of the Premises by the rentable square footage of the Project, as determined by Landlord from time to time.
The parties acknowledge that, as of the date hereof, (a) the rentable square footage of the Project is 1,672,073 rentable square feet; and
(b) Tenant’s Project Share is 6.3361%.
25.14
Project Declaration. The parties acknowledge that (a) all provisions of this Lease are subject and subordinate to the
terms of the Project Declaration (defined below), and (b) under the Project Declaration, the Declarant (as defined in the Project Declaration) or
the Association (as defined in the Project Declaration) is responsible, by itself or through the Manager (as defined in the Project Declaration),
for maintaining, repairing, replacing, restoring, operating and maintaining (“ Operating ”) the Project Common Areas (defined below) on the
terms and conditions of, and subject to the allocation and assessment of costs incurred as provided in, the Project Declaration. Accordingly, the
parties agree that, notwithstanding any contrary provision in this Lease, (i) Tenant’s rights hereunder are subject and subordinate to the terms of
the Project Declaration; (ii) to the extent Landlord is no longer the Declarant nor the Manager (or to the extent the Project Common Areas are
owned or Operated by the Association), Landlord’s obligations hereunder to provide Tenant (or Tenant’s employees) with rights to use the
Project Common Areas shall be limited to the obligation to use commercially reasonable efforts to enforce the obligations of such parties under
the Project Declaration to provide Tenant (or Tenant’s employees) with such rights; (iii) to the extent Landlord is no longer the Declarant nor
the Manager (or to the extent the Project Common Areas are owned or Operated by the Association), Landlord’s obligations hereunder to
Operate the Project Common Areas as described herein shall be limited to the obligations to (A) use commercially reasonable efforts to enforce
the obligations of such parties under the Project Declaration to so Operate the Project Common Areas, and (B) perform any obligations to so
Operate the Project Common Areas that Landlord may have under the Project Declaration; and (iv) all “Assessments” (as defined in the Project
Declaration) attributable to the Property shall be included in Expenses, subject to the terms and conditions of Section 4 . Landlord shall have no
liability for claims arising from acts or omissions of the Association nor, to the extent Landlord is no longer the Declarant nor the Manager, for
the acts or omissions of any such parties. Without limiting the foregoing, Landlord shall not be liable to Tenant, and Tenant shall not be entitled
to any abatement of Rent, as a result of a person or entity exercising its rights under the Project Declaration. Tenant shall not breach, nor cause
Landlord to be in breach of, the terms of the Project Declaration. Without limitation, Tenant, at its sole cost and expense, shall comply with the
following terms of the Project Declaration to the extent applicable to the Tenant’s use and occupancy of the Premises and/or Tenant’s use of
the Building or Project Common Areas: Sections 6.2, 6.3, 6.4, 7.1, 7.3, 7.4, 7.6, 7.10, 7.11, 7.12, 7.13, 7.14, 7.15, 7.16, 7.17, 7.18 and 7.19;
provided, however, that Tenant shall not submit any plans for approval by the Committee (as defined in the Project Declaration) without the
prior written consent of Landlord. As used herein, “ Project Common Areas ” means the areas defined in the Project Declaration as “Common
Areas.” As used herein, “ Project Declaration ” means that certain Declaration of Covenants, Conditions, Restrictions, Easements and
Charges for Commercial Planned Development dated June 9, 2000 and recorded July 21, 2000 as Instrument No. 2000-089122 in the Official
Records of the County of San Mateo, California, as amended by (1) that certain First Amendment to Declaration of Covenants, Conditions,
Restrictions, Easements and Charges for Commercial Planned Development dated as of December 6, 2006 and recorded December 7, 2006 as
Instrument No. 2006-185322 in the Official Records of the County of San Mateo, California and (2) that certain Second Amendment to
Declaration of Covenants, Conditions, Restrictions, Easements and Charges for Commercial Planned Development dated as of April , 2007
and recorded April 11, 2007 as Instrument No. 2007-055324 in the Official Records of the County of San Mateo, California.
25.15
Underlying Documents. Tenant agrees that (i) Tenant’s rights under this Lease are subject and subordinate to the
Underlying Documents (defined below), (ii) Tenant shall not cause Landlord to be in breach of the Underlying Documents, and (iii) to the
extent applicable to Tenant’s use and occupancy of the Premises and/or Tenant’s use of the Building and the Common Areas, Tenant shall
comply with the terms of the Underlying Documents at its sole cost and expense. As used herein, “ Underlying Documents ” means any
covenants, conditions restrictions and other documents of record applicable to the Project (except for the Project Declaration and any Security
Agreement, which documents are addressed elsewhere in this Lease).
26
[SIGNATURES ARE ON THE FOLLOWING PAGE]
27
IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be executed the day and date first above written.
LANDLORD :
VII PAC SHORES INVESTORS, L.L.C., a
Delaware limited liability company
By:
Name:
Title:
/s/ Kenneth Young
Kenneth Young
Vice President
TENANT :
ROCKET FUEL INC. a Delaware corporation
By:
Name:
Title:
N/A
N/A
[chairman] [president] [vice-president]
By:
Name:
Title:
28
/s/ J. Peter Bardwick
J. Peter Bardwick
CFO
[secretary][assistant secretary] [chief
financial officer] [assistant treasurer]
8/5/2013
EXHIBIT A-1
PACIFIC SHORES CENTER – BUILDING NUMBER 3
OUTLINE OF SUITE 100
[FLOOR PLAN]
1
EXHIBIT A-2
PACIFIC SHORES CENTER – BUILDING NUMBER 3
OUTLINE OF SUITE 300
[FLOOR PLAN]
1
EXHIBIT A-3
PACIFIC SHORES CENTER – BUILDING NUMBER 3
OUTLINE OF SUITE 400
[FLOOR PLAN]
1
EXHIBIT B
PACIFIC SHORES CENTER – BUILDING NUMBER 3
WORK LETTER
As used in the Exhibit B (this “ Work Letter ”), the following terms shall have the following meanings. “ Initial Alterations ” means
all Alterations to be constructed in the Premises pursuant to this Work Letter, “ Initial Alteration Work ” means the construction of the Initial
Alterations, together with any related work (including demolition) that is necessary to construct the Initial Alterations.
1
ALLOWANCE.
1.1
Allowance . Tenant shall be entitled to a one-time tenant improvement allowance (the “ Allowance ”) in the amount of
$3,702,135.11 (i.e., $35.00 per rentable square foot of the Premises) to be applied toward (a) the TI Allowance Items (defined in Section 1.2.1
below), as more fully provided in Section 1.2.1 below, and (b) the Other Allowance Items (defined in Section 1.3 below), as more fully
provided in Section 1.3 below. Tenant shall be responsible for all costs associated with the Initial Alteration Work, including the costs of the TI
Allowance Items, to the extent such costs exceed the lesser of (a) the sum of the Allowance and the Space Planning Allowance (defined in
Section 1.4 below), or (b) the aggregate amount that Landlord is required to disburse for such purpose pursuant to this Work Letter. Tenant
shall be responsible for all costs associated with the Other Allowance Items to the extent such costs exceed the aggregate amount that Landlord
is required to disburse for such purpose pursuant to this Work Letter. Notwithstanding any contrary provision of this Lease, if Tenant fails to
use the entire Allowance by June 30, 2015, the unused amount shall revert to Landlord and Tenant shall have no further rights with respect
thereto.
1.2
Disbursement of Allowance .
1.2.1
TI Allowance Items. Except as otherwise provided in this Work Letter, the Allowance shall be disbursed by
Landlord only for the following items (the “ TI Allowance Items ”) (a) the cost of planning, design and engineering of the Initial Alterations,
including the fees of Tenant’s architect and engineers, if any, and any Review Fees (defined in Section 2.3 below); (b) plan-check, permit and
license fees relating to performance of the Initial Alteration Work; (c) the cost of performing the Initial Alteration Work, including permitting,
construction and installation costs, after hours charges, testing and inspection costs, freight elevator usage, hoisting and trash removal costs,
contractors’ fees and general conditions, and project management fees; (d) the cost of any change to the base, shell or core of the Premises or
Building required by Tenant’s plans and specifications (the “ Plans ”) ( including if such change is due to the fact that such work is prepared on
an unoccupied basis), including all direct architectural and/or engineering fees and expenses incurred in connection therewith; (e) the cost of
any change to the Plans or Initial Alteration Work required by Law; (f) the Coordination Fee (defined in Section 2.3 below); and (g) sales and
use taxes.
1.2.2
Disbursement. Subject to the terms hereof, Landlord shall make monthly disbursements of the Allowance for TI
Allowance Items as follows.
1.2.2.1
Monthly Disbursements . Not more frequently than once per calendar month. Tenant may deliver to
Landlord: (i) a request for payment of Tenant’s contractor, approved by Tenant, in AIA G-702/G-703 format or another format reasonably
requested by Landlord, showing the schedule of values, by trade, of percentage of completion of the Initial Alteration Work, detailing the
portion of the work completed and the portion not completed (which approved request shall be deemed Tenant’s approval and acceptance of
the work and materials described therein); (ii) copies of all third-party contracts (including change orders) pursuant to which the Initial
Alteration Work has been performed. including paid invoices from all parties providing labor or materials to the Premises (collectively, the “
Construction Contracts ”); (iii) executed conditional mechanic’s lien releases from all parties providing labor or materials to the Premises
(along with unconditional mechanic’s lien releases for any prior payments made pursuant to the paragraph) satisfying California Civil Code §§
8132 and/or 8134, as applicable; and (iv) all other information reasonably requested by Landlord. Within 30 days after receiving such
materials, Landlord shall deliver a check to Tenant, payable jointly to Tenant and its contractor, in the amount of the lesser of (a) Landlord’s
Share (defined below) of the amount requested by Tenant pursuant to the preceding sentence, less a 10% retention (the aggregate amount of
such retentions shall be referred to in this Work Letter as the “ Final Retention ”), or (b) the amount of any remaining portion of the
Allowance (not including the Final Retention). Landlord’s payment of such amounts shall not be deemed Landlord’s approval or acceptance of
the work or materials described in Tenant’s payment request. As used in this Section 1.2.2.1 . “ Landlord’s Share ” means the lesser of
(i) 100%, or (ii) the percentage obtained by dividing the Allowance by the estimated sum of all TI Allowance Items, as determined based on the
Construction Contracts.
1
1.2.2.2
Final Retention . Subject to the terms hereof, Landlord shall deliver to Tenant a check for the Final
Retention, together with any other undisbursed portion of the Allowance required to pay for the TI Allowance Items, within 30 days after the
latest of (a) the completion of the Initial Alteration Work in accordance with the approved plans and specifications; (b) Landlord’s receipt of
(i) copies of all Construction Contracts; (ii) executed unconditional mechanic’s lien releases satisfying California Civil Code § 8138; (iii) a
certificate from Tenant’s architect, in a form reasonably acceptable to Landlord, certifying that the Initial Alteration Work has been
substantially completed; (iv) evidence that all governmental approvals required for Tenant to legally occupy the Premises have been obtained,
and (v) any other information reasonably requested by Landlord; (c) Tenant’s delivery to Landlord of “as built” drawings (in CAD format, if
requested by Landlord); or (d) Tenant’s compliance with Landlord’s standard “close-out” requirements regarding city approvals, closeout tasks,
Tenant’s contractor, financial close-out matters, and Tenant’s vendors. Landlord’s payment of the Final Retention shall not be deemed
Landlord’s approval of acceptance of the work or materials described in Tenant’s payment requests.
1.3
Disbursement for Other Allowance Items . If any portion of the Allowance remains after the TI Allowance Items have been
fully paid for, then, subject to the last sentence of Section 1.1 above, Landlord, upon Tenant’s request, shall disburse such portion of the
Allowance, not to exceed $211,550.58 (i.e., $2.00 per rentable square foot of the Premises), to Tenant, to be applied toward the reasonable
costs of purchasing and installing in the Premises Tenant’s Lines, furniture, equipment, fixtures and/or other personal property (collectively “
Other Allowance Items ”), within 30 days after receiving paid invoices from Tenant with respect to such costs.
1.4
Space Planning Allowance . In addition to providing the Allowance, Landlord shall reimburse Tenant an amount not to
exceed $10,000.00 ( the “ Space Planning Allowance ”) toward the cost of Tenant’s preparation of test-fits for the Premises. The Space
Planning Allowance shall be paid to Tenant within 30 days following Landlord’s receipt of paid invoices for the test-fit costs incurred and a
copy of full and final waivers of lien from the space planner and/or consultants retained by Tenant. If Tenant does not submit a request for
payment of the entire Space Planning Allowance by June 30, 2015, any unused amount shall accrue to the sole benefit of Landlord, it being
understood that Tenant shall not be entitled to any credit, abatement or other concession in connection therewith.
1.5
Landlord Costs . If the reasonable cost of the Initial Alteration Work is increased by reason of any Landlord Condition
(defined below) and not by reason of any Act of Tenant, then the Allowance shall be increased by an amount equal to such cost increase. As
used herein, “ Landlord Condition ” means (a) the existence in the Premises on the Delivery Date of (i) asbestos-containing materials, or
(ii) Hazardous Materials in amounts or conditions that violate applicable Laws, or (b) any failure, on the Delivery Date, of the configuration or
condition of the Base Building or the Common Areas of the Building or the Project to comply with the ADA or any other applicable Law, other
than any such failure resulting from any particular use of the Premises (as distinguished from general office/R&D use).
1.6
Failure to Disburse . If Landlord fails to disburse any portion of the Allowance when due hereunder and such failure
continues for 30 days after Tenant’s demand therefor (which demand shall reference, and quote verbatim in its entirety, this Section 1.6) .
Tenant may deduct such portion of the Allowance from the next due installment of Rent and each subsequent installment of Rent until Tenant
is fully reimbursed for such portion of the Allowance.
2
MISCELLANEOUS.
2.1
Applicable Lease Provisions . Without limitation, the Initial Alteration Work shall be subject to Sections 7.2 , 7.3 and 8 of
this Lease. For purposes of Section 7.3 of this Lease, Landlord hereby approves Quezada Architecture as Tenant’s architect for the Initial
Alteration Work.
2.2
Plans and Specifications .
2.2.1
Generally. Landlord shall provide Tenant with notice approving or disapproving any proposed plans and
specifications for the Initial Alteration Work within 10 business days after the later of Landlord’s receipt thereof from Tenant of the mutual
execution and delivery of this Lease. Any such notice of disapproval shall describe with reasonable specificity the basis of disapproval and the
changes that would be necessary to resolve Landlord’s objections.
2.2.2.
Proposed Initial Alterations. Landlord shall not withhold its consent, pursuant to Section 7.2 of this Lease, to any
Initial Alterations described with reasonable specificity in the preliminary Fit Plan dated July 18, 2013 prepared by Quezada Architects, a copy
of which is attached as Exhibit B-1 (“ Proposed Initial Alterations ”); provided, however, that Landlord may impose reasonable conditions
upon such consent, including the condition that Tenant, at its expense and pursuant to Section 8 of this Lease, remove such Proposed Initial
Alterations before the expiration or earlier termination of this Lease.
2
2.3
Review Fees; Coordination Fee . Tenant shall reimburse Landlord, upon demand, for any fees reasonably incurred by
Landlord for review of the Plans by Landlord’s third party consultants (“ Review Fees ”). In consideration of Landlord’s coordination of the
Initial Alteration Work, Tenant shall pay Landlord a fee (the “ Coordination Fee ”) in an amount equal to 1.25% of the amount of the
Allowance (excluding any increases in the Allowance pursuant to Section 1.5 above). Other than the Review Fees and the Coordination Fee.
Tenant shall not be required to pay any construction management, profit or overhead charges or review fees of Landlord in connection with the
Initial Alteration Work.
2.4
Tenant Default . Notwithstanding any contrary provision of this Lease, if Tenant defaults under this Lease before the Initial
Alteration Work is completed, then (a) Landlord’s obligations under this Work Letter shall be excused, and Landlord may cause Tenant’s
contractor to cease performance of the Initial Alteration Work, until such default is cured, and (b) Tenant shall be responsible for any resulting
delay in the completion of the Initial Alteration Work.
2.5
Landlord Delay . If, as a result of (a) any negligence, willful misconduct or breach of this Lease of or by Landlord, or (b) any
Landlord Condition, and not in either case because of any failure of Tenant to use reasonable efforts to mitigate the effects thereof or because
of any Act of Tenant. Tenant’s substantial completion of the Initial Alteration Work is delayed beyond the Outside Date (a “ Landlord Delay
”), then, as Tenant’s sole remedy for such Landlord Delay, the Outside Date shall be postponed by one (1) day for each day of such Landlord
Delay.
2.6
No Obligation to Perform Initial Alteration Work . Nothing in this Work Letter shall be deemed to require Tenant to
design or perform any Initial Alteration Work.
2.7
Other . This Work Letter shall not apply to any space other than the Premises.
3
EXHIBIT B-1
PACIFIC SHORES CENTER – BUILDING NUMBER 3
PROPOSED INITIAL ALTERATIONS
See Attached
1
EXHIBIT C
PACIFIC SHORES CENTER – BUILDING NUMBER 3
CONFIRMATION LETTER
, 20
To:
Re: Office Lease (the “ Lease ”) dated
, 20
, between
,a
(“
Landlord ”), and
,a
(“ Tenant ”), concerning Suite
on the
floor of the
building located at 1900 Seaport Boulevard, Redwood City, CA 94063, commonly known as Pacific Shores Center - Building Number 3.
Lease ID:
Business Unit Number:
Dear
:
In accordance with the Lease, Tenant accepts possession of the Premises and confirms that the Commencement Date is
the Expiration Date is
.
and
Please acknowledge the foregoing by signing all three (3) counterparts of this letter in the space provided below and returning two
(2) fully executed counterparts to my attention. Please note that, pursuant to Section 2.1.1 of the Lease, if Tenant fails to execute and return (or,
by notice to Landlord, reasonably object to) this letter within 10 days after receiving it, Tenant shall be deemed to have executed and returned it
without exception.
“ Landlord”:
,
a
By:
Name:
Title:
Agreed and Accepted as of
, 20 .
“Tenant”:
,
a
By:
Name:
Title:
1
EXHIBIT D
PACIFIC SHORES CENTER — BUILDING NUMBER 3
RULES AND REGULATIONS
Tenant shall comply with the following rules and regulations (as modified or supplemented from time to time, the “ Rules and
Regulations ”). Landlord shall not be responsible to Tenant for the nonperformance of any of the Rules and Regulations by any other tenants
or occupants of the Project. In the event of any conflict between the Rules and Regulations and the other provisions of this Lease, the latter
shall control. Notwithstanding any contrary provision of this Exhibit D . Sections 2 , 3 and 5 below shall not apply during any period in which
the Premises comprise 100% of the rentable square footage of the Building.
1.
Tenant shall not alter any lock or install any new or additional locks or bolts on any doors or windows of the Premises
without obtaining Landlord’s prior consent. Tenant shall bear the cost of any lock changes or repairs required by Tenant. Two (2) keys will be
furnished by Landlord for the Premises, and any additional keys required by Tenant must be obtained from Landlord at a reasonable cost to be
established by Landlord. Upon the termination of this Lease, Tenant shall restore to Landlord all keys of stores, offices and toilet rooms
furnished to or otherwise procured by Tenant, and if any such keys are lost, Tenant shall pay Landlord the cost of replacing them or of
changing the applicable locks if Landlord deems such changes necessary.
2.
Premises.
All doors opening to public corridors shall be kept closed at all times except for normal ingress and egress to the
3.
Landlord may close and keep locked all entrance and exit doors of the Building during such hours as are customary for
comparable buildings in the vicinity of the Building. Tenant shall cause its employees, agents, contractors, invitees and licensees who use
Building doors during such hours to securely close and lock them after such use. Any person entering or leaving the Building during such
hours, or when the Building doors are otherwise locked, may be required to sign the Building register, and access to the Building may be
refused unless such person has proper identification or has a previously arranged access pass. Landlord will furnish passes to persons for whom
Tenant requests them. Tenant shall be responsible for all persons for whom Tenant requests passes and shall be liable to Landlord for all acts of
such persons. Landlord and its agents shall not be liable for damages for any error with regard to the admission or exclusion of any person to or
from the Building. In case of invasion, mob, riot, public excitement or other commotion, Landlord may prevent access to the Building or the
Project during the continuance thereof by any means it deems appropriate for the safety and protection of life and property.
4.
Landlord may prescribe the weight, size and position of all safes and other heavy property brought into the Building
and also the times and manner of moving the same in and out of the Building. Safes and other heavy objects shall, if considered necessary by
Landlord, stand on supports of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or
damage to any such safe or property. Any damage to the Building, its contents, occupants or invitees resulting from Tenant’s moving or
maintaining any such safe or other heavy property shall be the sole responsibility and expense of Tenant (notwithstanding Sections 7 and 10.4
of this Lease).
5.
No furniture, freight or equipment shall be brought into the Building without prior notice to Landlord. All moving
activity into or out of the Building shall be scheduled with Landlord and done only at such time and in such manner as Landlord designates. No
furniture, packages, supplies, equipment or merchandise will be received in the Building or carried up or down in the elevators, except between
such hours, in such specific elevator and by such personnel as shall be designated by Landlord.
6.
Employees of Landlord shall not perform any work or do anything outside their regular duties unless under special
instructions from Landlord.
7.
No sign, advertisement, notice or handbill shall be exhibited, distributed, painted or affixed by Tenant on any part of
the Premises or the Building without Landlord’s prior consent. Tenant shall not disturb, solicit, peddle or canvass any occupant of the Project.
8.
The toilet rooms, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which
they were constructed, and no foreign substance shall be thrown therein Notwithstanding Sections 7 and 10.4 of this Lease, Tenant shall bear
the expense of any breakage, stoppage or damage resulting from any violation of this rule by Tenant or any of its employees, agents,
contractors, invitees or licensees.
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9.
Tenant shall not overload the floor of the Premises, or mark, drive nails or screws or drill into the partitions, woodwork
or (other than by reasonable methods in order to hang customary lightweight office decorations such as pictures and whiteboards) drywall of
the Premises, or otherwise deface the Premises, without Landlord’s prior consent. Tenant shall not purchase bottled water, ice, towel, linen,
maintenance or other like services from any person not on Landlord’s list of approved providers of such services or otherwise reasonably
approved by Landlord.
10.
Except for vending machines intended for the sole use of Tenant’s employees and invitees, no vending machine or
machines other than fractional horsepower office machines shall be installed, maintained of operated in the Premises without Landlord’s prior
consent.
11.
Tenant shall not, without Landlord’s prior consent, use, store, install, disturb, spill, remove, release or dispose of, within
or about the Premises or any other portion of the Project, any asbestos-containing materials, any solid, liquid of gaseous material now or
subsequently considered toxic or hazardous under the provisions of 42 U.S.C. Section 9601 et seq. or any other applicable environmental Law,
or any inflammable, explosive or dangerous fluid or substance provided, however, that Tenant may use, store and dispose of such substances in
such amounts as are typically found in similar premises used for general office purposes provided that such use, storage and disposal does not
damage any part of the Premises, Building or Project and is performed in a safe manner and in accordance with all Laws. Tenant shall comply
with all Laws pertaining to and governing the use of such materials by Tenant and shall remain solely liable for the costs of abatement and
removal. No burning candle or other open flame shall be ignited or kept by Tenant in or about the Premises, Building or Project.
12.
Tenant shall not, without Landlord’s prior consent, use any method of healing of air conditioning other than that
supplied by Landlord.
13.
Tenant shall not use or keep any foul or noxious gas or substance in or on the Premises, or occupy or use the Premises
in a manner offensive or objectionable to Landlord or other occupants of the Project by reason of noise, odors or vibrations, or interfere with
other occupants or those having business therein, whether by the use of any musical instrument, radio, CD player or otherwise. Tenant shall not
throw anything out of doors, windows or skylights or down passageways.
14.
Tenant shall not bring into or keep within the Project, the Building or the Premises any animals (other than service
animals), birds, aquariums, or, except in areas designated by Landlord, bicycles or other vehicles.
15.
No cooking shall be done in the Premises, nor shall the Premises be used for lodging, for living quarters or sleeping
apartments, or for any improper, objectionable or immoral purposes. Notwithstanding the foregoing, Underwriters’ laboratory-approved
equipment and microwave ovens may be used in the Premises for heating food and brewing coffee, tea, hot chocolate and similar beverages for
employees and invitees, provided that such use complies with all Laws.
16.
The Premises shall not be used for manufacturing or for the storage of merchandise except to the extent such storage
may be incidental to the Permitted Use. Tenant shall not occupy the Premises as an office for a messenger-type operation or dispatch office,
public stenographer or typist, or for the manufacture or sale of liquor, narcotics or tobacco, or as a medical office, a barber or manicure shop, or
an employment bureau, without Landlord’s prior consent. Tenant shall not engage or pay any employees in the Premises except those actually
working for Tenant in the Premises, nor advertise for laborers giving an address at the Premises.
17.
Landlord may exclude from the Project any person who, in Landlord’s judgment, is intoxicated or under the influence
of liquor or drugs, or who violates any of these Rules and Regulations.
18.
Tenant shall not loiter in or on the entrances, corridors, sidewalks, lobbies, courts, halls, stairways, elevators, vestibules
or any Common Areas for the purpose of smoking tobacco products or for any other purpose, nor in any way obstruct such areas, and shall use
them only as a means of ingress and egress for the Premises.
19.
[Intentionally Omitted.]
20.
Tenant shall store all its trash and garbage inside the Premises. No material shall be placed in the trash or garbage
receptacles if, under Law, it may not be disposed of in the ordinary and customary manner of disposing of trash and garbage in the vicinity of
the Building. All trash, garbage and refuse disposal shall be made only through entryways and elevators provided for such purposes at such
times as Landlord shall designate. Tenant shall comply with Landlord’s recycling program, if any.
21.
Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord
or any governmental agency.
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22.
Any persons employed by Tenant to do janitorial work (a) shall be subject to Landlord’s prior consent, and (b) shall not,
in Landlord’s reasonable judgment, disturb labor harmony with any workforce or trades engaged to performing other work or services at the
Project, and Tenant shall be responsible for all acts of such person.
23.
No awning or other projection shall be attached to the outside walls of the Building without Landlord’s prior consent.
Other than Landlord’s Building-standard window coverings, no curtains, blinds, shades or screens shall be attached to or hung in, or used in
connection with, any window or door of the Premises. All electrical ceiling fixtures hung in the Premises or spaces along the perimeter of the
Building must be fluorescent and/or of a quality, type, design and a warm white bulb color approved in advance by Landlord. Neither the
interior nor exterior of any windows shall be coated or otherwise sunscreened without Landlord’s prior consent. Tenant shall abide by
Landlord’s regulations concerning the opening and closing of window coverings.
24.
Tenant shall not obstruct any sashes, sash doors, skylights, windows or doors that reflect or admit light or air into the
halls, passageways or other public places in the Building, nor shall Tenant place any bottles, parcels or other articles on the windowsills.
25.
the Landlord.
Tenant must comply with requests by Landlord concerning the informing of their employees of items of importance to
26.
Tenant must comply with the State of California “No-Smoking” law set forth in California Labor Code Section 6404.5
and with any local “No-Smoking” ordinance that is not superseded by such law.
27.
Tenant shall cooperate in any reasonable safety or security program developed by Landlord or required by Law.
28.
All office equipment of an electrical or mechanical nature shall be placed by Tenant in the Premises in settings
approved by Landlord, to absorb or prevent any vibration, noise or annoyance.
29.
Tenant shall not use my hand trucks except those equipped with rubber tires and rubber side guards.
30.
No auction, liquidation, fire sale, going-out-of-business or bankruptcy sale shall be conducted in the Premises without
Landlord’s prior consent.
31.
Without Landlord’s prior consent, 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.
Landlord may from time to time modify or supplement these Rules and Regulations in a manner that, in Landlord’s reasonable
judgment, is appropriate for the management, safety, care and cleanliness of the Premises, the Building, the Common Areas and the Project, for
the preservation of good order therein, and for the convenience of other occupants and tenants thereof, provided that no such modification of
supplement shall materially reduce Tenant’s rights or materially increase Tenant’s obligations hereunder. Landlord may waive any of these
Rules and Regulations for the benefit of any tenant, but no such waiver shall be construed as a waiver of such Rule and Regulation in favor of
any other tenant nor prevent Landlord from thereafter enforcing such Rule and Regulation against any tenant.
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EXHIBIT E
PACIFIC SHORES CENTER—BULDING NUMBER 3
JUDICIAL REFERENCE
IF THE JURY-WAIVER PROVISIONS OF SECTION 25.8 OF THIS LEASE ARE NOT ENFORCEABLE UNDER CALIFORNIA
LAW, THE PROVISIONS SET FORTH BELOW SHALL APPLY.
It is the desire and intention of the parties to agree upon a mechanism and procedure under which controversies and disputes arising
out of this Lease or related to the Premises will be resolved in a prompt and expeditious manner. Accordingly, except with respect to actions for
unlawful or forcible detainer or with respect to the prejudgment remedy of attachment, any action, proceeding or counterclaim brought by
either party hereto against the other (and/or against its officers, directors, employees, agents or subsidiaries or affiliated entities) on any matters
arising out of or in any way connected with this Lease, Tenant’s use or occupancy of the Premises and/or any claim of injury or damage,
whether sounding in contract, fort, or otherwise, shall be heard and resolved by a referee under the provisions of the California Code of Civil
Procedure, Sections 638 — 645.1, inclusive (as same may be amended, or any successor statute(s) thereto) (the “Referee Sections” ). Any fee
to initiate the judicial reference proceedings and all fees charged and costs incurred by the referee shall be paid by the party initiating such
procedure (except that if a reporter is requested by either party, then a reporter shall be present at all proceedings where requested and the fees
of such reporter — except for copies ordered by the other parties — shall be borne by the party requesting the reporter); provided however, that
allocation of the costs and fees, including any initiation fee, of such proceeding shall be ultimately determined in accordance with Section 25.6
of this Lease. The venue of the proceedings shall be in the county in which the Premises are located. Within 10 days of receipt by any party of a
request to resolve any dispute or controversy pursuant to this Exhibit E , the parties shall agree upon a single referee who shall try all issues,
whether of fact or law, and report a finding and judgment on such issues as required by the Referee Sections. If the parties are unable to agree
upon a referee within such 10-day period, then any party may thereafter file a lawsuit in the county in which the Premises are located for the
purpose of appointment of a referee under the Referee Sections. If the referee is appointed by the court, the referee shall be a neutral and
impartial retired judge with substantial experience in the relevant matters to be determined, from Jams/Endispute, Inc., ADR Services, Inc. or a
similar mediation/arbitration entity approved by each party in its sole and absolute discretion. The proposed referee may be challenged by any
party for any of the grounds listed in the Referee Sections. The referee shall have the power to decide all issues of fact and law and report his or
her decision on such issues, and to issue all recognized remedies available at law or in equity for any cause of action that is before the referee,
including an award of attorneys’ fees and costs in accordance with this Lease. The referee shall not, however, have the power to award punitive
damages, nor any other damages that are not permitted by the express provisions of this Lease, and the parties waive any right to recover any
such damages. The parties may conduct all discovery as provided in the California Code of Civil Procedure, and the referee shall oversee
discovery and may enforce all discovery orders in the same manner as any trial court judge, with rights to regulate discovery and to issue and
enforce subpoenas, protective orders and other limitations on discovery available under California Law. The reference proceeding shall be
conducted in accordance with California Law (including the rules of evidence), and in all regards, the referee shall follow California Law
applicable at the time of the reference proceeding. The parties shall promptly and diligently cooperate with one another and the referee, and
shall perform such acts as may be necessary to obtain a prompt and expeditious resolution of the dispute or controversy in accordance with the
terms of this Exhibit E . In this regard, the parties agree that the parties and the referee shall use best efforts to ensure that (a) discovery be
conducted for a period no longer than six (6) months from the date the referee is appointed, excluding motions regarding discovery, and (b) a
trial date be set within 9 months of the date the referee is appointed. In accordance with Section 644 of the California Code of Civil Procedure,
the decision of the referee upon the whole issue must stand as the decision of the court, and upon the filing of the statement of decision with the
clerk of the court, or with the judge if there is no clerk, judgment may be entered thereon in the same manner as if the action had been tried by
the court. Any decision of the referee and/or judgment or other order entered thereon shall be appealable to the same extent and in the same
manner that such decision, judgment, or order would be appealable if rendered by a judge of the superior court in which venue is proper
hereunder. The referee shall in his/her statement of decision set forth his/her findings of fact and conclusions of law. The parties intend this
general reference agreement to be specifically enforceable in accordance with the Code of Civil Procedure. Nothing in this Exhibit E shall
prejudice the right of any party to obtain provisional relief or other equitable remedies from a court of competent jurisdiction as shall otherwise
be available under the Code of Civil Procedure and/or applicable court rules.
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EXHIBIT F
PACIFIC SHORES CENTER — BUILDING NUMBER 3
ADDITIONAL PROVISIONS
1.
Environmental Disclosure, Representation, and Indemnities .
1.1.
Pursuant to Section 25359.7 of the California Health and Safety Code, Landlord hereby discloses to Tenant the
condition of the Property described to that certain Phase I Environmental Site Assessment dated February, 2012, prepared by
Enviro-Sciences (of Delaware), Inc. (the “ Phase I Report ”). Tenant acknowledges that Landlord has made a copy of such
report available to Tenant (without warranty as to its accuracy or completeness), and the Tenant has fully reviewed such
report.
1.2.
Landlord represents and warrants to Tenant that, to Landlord’s actual knowledge (without inquiry other than review of
the Phase I Report) as of the date hereof, and except as otherwise disclosed in the Phase I Report, the Property does not
contain (a) any Hazardous Materials in amounts or conditions that violate applicable environmental Laws, (b) any
asbestos-containing materials, or (c) any volatile organic compounds in the ground water of the Property that can reasonably
be expected to cause material vapor intrusion into the Premises.
1.3.
Without limiting its obligations under Section 10.1 of this Lease. Landlord shall indemnify, defend and hold harmless
the Tenant Parties from and against (a) any fine or reasonable direct remedial cost or expense (including reasonable legal
expenses and consultants’ fees) (collectively, “ Costs ”) that any Tenant Party may incur as a result of a cleanup, abatement,
removal, or other remedial response (each, a “ Remedial Response ”) required of any Tenant Party by a governmental
authority resulting from the introduction, production, use, generation, storage, treatment, disposal, discharge, release or other
handling or disposition of any Hazardous Material on or about the Premises and/or the Property, and (b) any action or claim
(a “ Cost Claim ”) asserted against any Tenant Party seeking to require such Tenant Party to pay any such Cost or perform
any such Remedial Response. However, the foregoing indemnity obligation shall not apply to any Cost or Cost Claim to the
extent arising from (i) any negligence or willful misconduct of any Tenant Party or any contractor of Tenant, (ii) any
Hazardous Material introduced to or produced, stored or generated at the Premises and/or the Property by any Tenant Party or
any contractor of Tenant, or (iii) any Known Hazardous Material (defined below) disturbed, distributed of exacerbated by any
Tenant Party or any contractor of Tenant. As used herein, “ Known Hazardous Material ” means any Hazardous Material
of whose existence at the Premises and/or the Property Tenant knows, has received notice, or should reasonably have known.
In addition, the foregoing indemnity obligation shall not bind any party that acquires Landlord’s interest in the Property by
foreclosure or deed in lieu of foreclosure, except to the extent of any Costs incurred as a result of any Remedial Response that
such party was required under applicable Law to perform, but failed to perform, after such acquisition.
1.4.
Without limiting its obligations under Section 10.1 of this Lease. Tenant shall indemnity, defend and hold harmless the
Landlord Parties from and against (a) any Cost that any Landlord Party may incur as a result of a Remedial Response
required of any Landlord Party by a governmental authority to the extent resulting from (i) the introduction, production, use,
generation, storage, treatment, disposal, discharge, release, or other handling or disposition of any Hazardous Material on or
about the Premises and/or the Property by any Tenant Party or any contractor of Tenant, or (ii) the disturbance, distribution or
exacerbation of any Known Hazardous Material by any Tenant Party or any contractor of Tenant, and (b) any Cost Claim
asserted against any Landlord Party seeking to require such Landlord Party to pay any such Cost or perform any such
Remedial Response. However, the foregoing indemnity obligation shall not apply to any Cost or Cost Claim to the extent
arising from any negligence or willful misconduct of any Landlord Party or any contractor of Landlord, or caused by the
handling of any Hazardous Material on or about the Premises, the Building and/or the Property by any Landlord Party or any
contractor of Landlord.
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2.
Acknowledgment of Notices. Landlord has provided and Tenant hereby acknowledges receipt of the notices attached as
Exhibit G and Exhibit H hereto, concerning the presence of certain uses and operations of neighboring parcels of land.
3.
L etter of Credit .
3.1.
General Provisions . Concurrently with Tenant’s execution of this Lease, Tenant shall deliver to Landlord, as
collateral for the full performance by Tenant of all of its obligations under this Lease and for damages Landlord may suffer
as a result of Tenant’s breach of one or more provisions of this Lease, including any damages arising under California Civil
Code § 1951.2 following termination of this Lease, a standby, unconditional, irrevocable, transferable letter of credit (the
“Letter of Credit” ) in the form of Exhibit F-1 and containing the terms required herein, in the face amount of One Million
Six Hundred Thousand Dollars ($1,600,000.00) (as such amount may be reduced pursuant to Section 3.6 below, the “Letter
of Credit Amount” ), naming Landlord as beneficiary, issued (or confirmed) by Comerica Bank or another financial
institution acceptable to Landlord in Landlord’s reasonable discretion, permitting multiple and partial draws thereon, and
otherwise in form acceptable to Landlord in its reasonable discretion. Tenant shall cause the Letter of Credit to be
continuously maintained in effect (whether through replacement, renewal or extension) in the Letter of Credit Amount
through the date (the “Final LC Expiration Date” ) that is 60 days after the scheduled expiration date of the Term, as it
may be extended from time to time. If the Letter of Credit held by Landlord expires before the Final LC Expiration Date
(whether by reason of a stated expiration date or a notice of termination or non-renewal given by the issuing bank), Tenant
shall deliver a new Letter of Credit or certificate of renewal or extension to Landlord not later than 45 days before the
expiration date of the Letter of Credit then held by Landlord. In addition, if, at any time before the Final LC Expiration Date,
the financial institution that issued (or confirmed) the Letter of Credit held by Landlord fails to meet the Minimum Financial
Requirement (defined below), Tenant, within 10 business days after Landlord’s demand, shall deliver to Landlord, in
replacement of such Letter of Credit, a new Letter of Credit issued (or confirmed) by a financial institution that meets the
Minimum Financial Requirement and is otherwise acceptable to Landlord in Landlord’s sole discretion, whereupon Landlord
shall return to Tenant the Letter of Credit that is being replaced. For purposes hereof, a financial institution shall be deemed
to meet the “Minimum Financial Requirement” on a particular date if and only if, as of such date, such financial
institution (i) has not been placed into receivership by the FDIC; and (ii) has a financial strength that, in Landlord’s good
faith judgment, is not less than that which is then generally required by Landlord and its affiliates as a condition to accepting
letters of credit in support of new leases. Any new Letter of Credit or certificate of renewal or extension (a “Renewal or
Replacement LC” ) shall comply with all of the provisions of this Section 3 , shall be irrevocable, transferable and shall
remain in effect for be automatically renewable) through the Final LC Expiration Date upon the same terms as the Letter of
Credit that is expiring or being replaced.
3.2.
Drawings under Letter of Credit . If Tenant breaches any provision of this Lease, then (i) Landlord, without limiting
its remedies, may draw upon the Letter of Credit in an amount necessary to satisfy any damages suffered by Landlord
(including any damages arising under section California Civil Code § 1951.2 following termination of this Lease) as a result
of such breach; and (ii) without limiting the preceding clause (i), if less than 45 days remain before the Final LC Expiration
Date, then Landlord, without limiting its remedies, may draw upon the Letter of Credit in its entirety. In addition, if Tenant
fails to furnish a Renewal or Replacement LC complying with all of the provisions of this Section 3 when required under this
Section 3 . Landlord, without limiting its remedies, may draw upon the Letter of Credit in us entirety: provided, however,
that Landlord shall pay to Tenant any unapplied proceeds from such draw upon Tenant’s provision to Landlord of a Renewal
or Replacement LC complying with all of the provisions of this Section 3 . Proceeds of the Letter of Credit obtained through
a draw permitted under this Section 3.2 may be held by Landlord, without segregation, in accordance with the terms of this
Section 3 (the “LC Proceeds Account” ) until applied to Landlord’s damages or paid to Tenant pursuant to this Section 3 .
3.3.
Use of Proceeds by Landlord . The proceeds of the Letter of Credit shall constitute Landlord’s sole and separate
property (and not Tenant’s property or the property of Tenant’s bankruptcy estate) and Landlord may, immediately upon any
draw (and without notice to Tenant), apply or offset the proceeds of the Letter of Credit against (a) any Rent payable by
Tenant under this Lease that is not paid when due; (b) all losses and damages
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that Landlord has suffered or that Landlord reasonably estimates that it may suffer as a result of Tenant’s failure to comply
with one or more provisions of this Lease, including any damages arising under section California Civil Code § 1951.2
following termination of this Lease; (c) any costs incurred by Landlord in connection with this Lease (including attorneys’
fees); and (d) any other amount that Landlord may spend or become obligated to spend by reason of Tenant’s failure to
comply with this Lease. Provided that Tenant has performed all of its obligations under this Lease, Landlord shall pay to
Tenant, within 45 days after the Final LC Expiration Date, the amount of any proceeds of the Letter of Credit received by
Landlord and not applied as provided above; provided, however, that if, before the expiration of such 45-day period, a
voluntary petition is filed by Tenant or any Guarantor, or an involuntary petition is filed against Tenant or any Guarantor by
any of Tenant’s or Guarantor’s creditors, under the Federal Bankruptcy Code, then such payment shall not be required until
either all preference issues relating to payments under this Lease have been resolved in such bankruptcy or reorganization
case or such bankruptcy or reorganization case has been dismissed, in each case pursuant to a final court order not subject to
appeal or any stay pending appeal.
3.4.
Additional Covenants of Tenant . If, for any reason, the amount of the Letter of Credit becomes less than the Letter of
Credit Amount, Tenant shall, within 10 business days thereafter, provide Landlord with additional letter(s) of credit in an
amount equal to the deficiency (or a replacement letter of credit in the total Letter of Credit Amount), and any such
additional (or replacement) letter of credit shall comply with all of the provisions of this Section 3 , and if Tenant fails to
comply with the foregoing, notwithstanding any contrary provision of this Lease, such failure shall constitute an incurable
Default by Tenant. Tenant further covenants and warrants that it will neither assign nor encumber the Letter of Credit or any
part thereof and that neither Landlord nor its successors or assigns will be bound by any such assignment, encumbrance,
attempted assignment or attempted encumbrance.
3.5.
Nature of Letter of Credit . Landlord and Tenant (a) acknowledge and agree that in no event shall the Letter of Credit
or any renewal thereof, any substitute therefor or any proceeds thereof (including the LC Proceeds Account) be deemed to be
or treated as a “security deposit” under California Civil Code § 1950.7, as it may be amended or succeeded, or any other Law
applicable to security deposits in the commercial context ( “Security Deposit Laws” ); (b) acknowledge and agree that the
Letter of Credit (including any renewal thereof, any substitute therefor or any proceeds thereof) is not intended to serve as a
security deposit and shall not be subject to the Security Deposit Laws; and (c) waive any and all lights, duties and obligations
either party may now or, in the future, will have relating to or arising from the Security Deposit Laws. Tenant hereby waives
the provisions of California Civil Code § 1950.7 and all other provisions of Law, now or hereafter in effect, which
(i) establish the time frame by which Landlord must refund a security deposit under a lease, and/or (ii) provide that Landlord
may claim from the security deposit only those sums reasonably necessary to remedy defaults in the payment of rent, to
repair damage caused by Tenant or to clean the Premises, it being agreed that Landlord may, in addition, claim those sums
specified above in this Section 3 and/or those sums reasonably necessary to compensate Landlord for any loss or damage
caused by Tenant’s breach of this Lease or the acts or omission of Tenant or any other Tenant Related Parties, including any
damages Landlord suffers following termination of this Lease.
3.6.
Reduction in Letter of Credit Amount . Subject to the terms of this Section 3.6 , and provided that Tenant has
completed an initial public offering ( “IPO” ). Tenant may reduce the Letter of Credit Amount so that the reduced Letter of
Credit Amounts will be as follows: (a) One Million Five Hundred Thousand Dollars ($1,500,000.00) effective as of the first
business day occurring after such IPO, unless clause (b) or (c) below applies; (b) One Million Dollars ($1,000,000.00)
effective as of the third (3 rd ) anniversary of the Commencement Date, unless clause (c)(ii) below applies; and (c) Five
Hundred Thousand Dollars ($500,000.00) effective as of the earlier of (i) the fourth (4 th ) anniversary of the Commencement
Date, or (ii) the first business day occurring after Tenant provides Landlord with reasonable documentation that Tenant’s
market capitalization has exceeded One Billion Dollars at the end of each of eight (8) consecutive calendar quarters
occurring since such IPO. Notwithstanding any contrary provision hereof, if a monetary Default exceeding $10,000.00 or a
material non-monetary Default occurs. Tenant shall have no further right to reduce the Letter of Credit Amount. Any
reduction in the Letter of Credit Amount shall the accomplished by
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Tenant’s delivery to Landlord of a substitute letter of credit in the reduced amount or an amendment to the existing Letter of
Credit reflecting the reduced amount.
4.
Extension Option .
4.1.
Grant of Option; Conditions . Subject to the terms of this Section 4 . Tenant shall have the right (the “ First Extension
Option ”) to extend the Term for one (1) additional period of five (5) years commencing on the day following the Expiration
Date and ending on the fifth (5 th ) anniversary of the Expiration Date (the “ First Extension Term ”). In addition, if Tenant
exercises the First Extension Option and the Term is extended pursuant to such exercise, then, subject to the terms of this
Section 4 . Tenant shall have the right (the “ Second Extension Option .” and together with the First Extension Option, each,
an “ Extension Option ”) to extend the term of this Lease for an additional period of five (5) years commencing on the date
immediately following the last day of the First Extension Term and ending on the 5 th anniversary of the last day of the First
Extension Term (the “ Second Extension Term ”, and together with the First Extension Term, each an “ Extension Term ”).
Tenant my exercise an Extension Option only if:
(A)
(B)
Tenant delivers written notice to Landlord (the “ Extension Notice ”) (i) electing to exercise the Extension
Option and (ii) stating Tenant’s estimate of the Prevailing Market (defined in Section 4.5 below) rate for the
Extension Term not less than 12 and not more than 15 full calendar months before the expiration of the previous
term;
no Default exists when Tenant delivers the Extension Notice;
(C)
not more than 35,475 rentable square feet of the Premises is sublet (other than pursuant to a Permitted
Transfer) when Tenant delivers the Extension Notice;
(D)
this Lease has not been assigned (other than pursuant to a Permitted Transfer) before Tenant delivers the
Extension Notice; and
(E)
in the case of the Second Extension Option. Tenant has exercised the First Extension Option and the term of
this Lease has been extended pursuant to such exercise.
4.2.
Terms Applicable to Extension Term.
A.
During the Extension Term, (a) the Base Rent rate per rentable square foot shall be equal to the Prevailing
Market rate per rentable square foot; (b) Base Rent shall increase, it at all, in accordance with the increases assumed
in the determination of Prevailing Market rate; and (c) Base Rent shall be payable in monthly installments in
accordance with the terms and conditions of this Lease.
B.
During the Extension Term Tenant shall pay Tenant’s Share of Expenses and Taxes for the Premises in
accordance with this Lease.
4.3.
Procedure for Determining Prevailing Market.
A.
Initial Procedure . Within 30 days after receiving the Extension Notice, Landlord shall give Tenant either
(i) written notice (“ Landlord ’s Binding Notice ”) accepting Tenant’s estimate of the Prevailing Market rate for the
Extension Term stared in the Extension Notice, or (ii) written notice (“ Landlord’s Rejection Notice ”) rejecting
such estimate and stating Landlord’s estimate of the Prevailing Market rate for the Extension Term. If Landlord
gives Tenant a Landlord’s Rejection Notice, Tenant, within 15 days thereafter, shall give Landlord either (i) written
notice (“ Tenant ’ s Binding Notice ”) accepting Landlord’s estimate of the Prevailing Market rate for the
Extension Term stated in such Landlord’s Rejection Notice, or (ii) written notice (“ Tenant ’ s Rejection Notice ”)
rejecting such estimate. If Tenant gives Landlord a Tenant’s Rejection Notice, Landlord and Tenant shall work
together in good faith to agree in writing upon the Prevailing Market rate for the Extension Term. If, within 30 days
after delivery of a Tenant’s Rejection Notice, the parties fail to agree in writing upon the Prevailing Market rate, the
provisions of Section 4.3.B below shall apply.
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B.
C.
Dispute Resolution Procedure .
1.
If, within 30 days after delivery of a Tenant’s Rejection Notice, the parties fail to agree in writing
upon the Prevailing Market rate, Landlord and Tenant, within five (5) days thereafter, shall each
simultaneously submit to the other, in a sealed envelope, its good faith estimate of the Prevailing Market
rate for the Extension Term (collectively, the “ Estimates ”). Within seven (7) days after the exchange of
Estimates, Landlord and Tenant shall each select an appraiser to determine which of the two Estimates
most closely reflects the Prevailing Market rate for the Extension Term. Each appraiser so selected shall be
certified as an MAI appraiser or as an ASA appraiser and shall have had at least five (5) years experience
within the previous 10 years as a real estate appraiser working in Redwood City, California, with working
knowledge of current rental rates and leasing practices relating to buildings similar to the Building. For
purposes hereof, an “ MAI ” appraiser means an individual who holds an MAI designation conferred by,
and is an independent member of, the American Institute of Real Estate Appraisers (or its successor
organization, or in the event there is no successor organization, the organization and designation most
similar), and an “ ASA ” appraiser means an individual who holds the Senior Member designation
conferred by, and is an independent member of, the American Society of Appraisers (or its successor
organization, or, in the event there is no successor organization, the organization and designation most
similar).
2.
If each party selects an appraiser in accordance with Section 4.3.B.1 above, the parties shall cause
their respective appraisers to work together in good faith to agree upon which of the two Estimates most
closely reflects the Prevailing Market rate for the Extension Term. The Estimate, if any, so agreed upon by
such appraisers shall be final and binding on both parties as the Prevailing Market rate for the Extension
Term and may be entered in a court of competent jurisdiction. If the appraisers fail to reach such agreement
within 20 days after their selection, then, within 10 days after the expiration of such 20-day period, the
parties shall instruct the appraisers to select a third appraiser meeting the above criteria (and if the
appraisers fail to agree upon such third appraiser within 10 days after being so instructed, either party may
cause a court of competent jurisdiction to select such third appraiser). Promptly upon selection of such third
appraiser, the parties shall instruct such appraiser (or, if only one of the parties has selected an appraiser
within the 7-day period described above, then promptly after the expiration of such 7-day period the parties
shall instruct such appraiser) to determine, as soon as practicable but in any case within 14 days after his
selection, which of the two Estimates most closely reflects the Prevailing Market rate. Such determination
by such appraiser (the “ Final Appraiser ”) shall be final and binding on both parties as the Prevailing
Market rate for the Extension Term and may be entered in a court of competent jurisdiction. If the Final
Appraiser believes that expert advice would materially assist him, be may retain one or more qualified
persons to provide such expert advice. The parties shall share equally in the costs of the Final Appraiser
and of any experts retained by the Final Appraiser. Any fees of any other appraiser, counsel or expert
engaged by Landlord or Tenant shall be borne by the party retaining such appraiser, counsel or expert.
Adjustment . If the Prevailing Market rate has not been determined by the commencement date of the
Extension Term. Tenant shall pay Base Rent for the Extension Term upon the terms and conditions in effect during
the last month ending on or before the expiration date of this Lease until such time as the Prevailing Market rate has
been determined. Upon such determination, the Base Rent for the Extension Term shall be retroactively adjusted. If
such adjustment results in an under- or overpayment of Base Rent by Tenant. Tenant shall pay Landlord the amount
of such underpayment, or receive a credit in the amount of such overpayment, with or against the next Base Rent
due under this Lease.
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4.4.
Extension Amendment. If Tenant is entitled to and properly exercises its Extension Option, and if the Prevailing
Market rate for the Extension Term is determined in accordance with Section 4.3 above, Landlord, within a reasonable time
thereafter, shall prepare and deliver to Tenant an amendment (the “ Extension Amendment ”) reflecting changes in the Base
Rent, the Term, the expiration date of this Lease, and other appropriate terms, and Tenant shall execute and return the
Extension Amendment to Landlord within 15 days after receiving it. Notwithstanding the foregoing, upon determination of
the Prevailing Market rate for the Extension Term in accordance with Section 4.3 above, an otherwise valid exercise of the
Extension Option shall be fully effective whether or not the Extension Amendment is executed.
4.5.
Definition of Prevailing Market. For purposes of this Extension Option, “ Prevailing Market ” shall mean the
arms-length, fair-market, annual rental rate per rentable square foot under extension and renewal leases and amendments
entered into on or about the date on which the Prevailing Market is being determined hereunder for space comparable to the
Premises in the Building and office buildings comparable to the Building in the Project. The determination of Prevailing
Market shall take into account (i) any material economic differences between the terms of this Lease and any comparison
lease or amendment, such as rent abatements, construction costs and other concessions, and the manner, if any, in which the
landlord under any such lease is reimbursed for operating expenses and taxes; (ii) any material differences in configuration or
condition between the Premises and any comparison space, including any cost that would have to be incurred in order to
make the configuration or condition of the comparison space similar to that of the Premises; and (iii) any reasonably
anticipated changes in the Prevailing Market rate from the time such Prevailing Market rate is being determined and the time
such Prevailing Market rate will become effective under this Lease.
5.
Monument Signage .
5.1.
Tenant’s Right to Monument Signage. Subject to the terms of this Section 5 , from and after the Commencement
Date, Tenant shall have the exclusive right to have signage (“ Tenant’s Monument Signage ”) bearing Tenant’s Name
(defined below) installed on the Building’s monument sign (the “ Monument Sign ”) As used herein, “ Tenant Name ”
means, at any time, at Tenant’s discretion, (i) the name of Tenant set forth in the first paragraph of this Lease (“ Tenant’s
Existing Name ”), or (ii) if Tenant’s name is not then Tenant’s Existing Name, then Tenant’s name, provided that such name
is compatible with a first-class office building, as determined by Landlord in its reasonable discretion, and/or (iii) Tenant’s
logo, provided that such logo is then being used by Tenant on a substantially nationwide basis and is compatible with a
first-class office building, as determined by Landlord in its reasonable discretion.
5.2.
Landlord’s Approval. Any proposed Tenant’s Monument Signage shall comply with all applicable Laws and shall be
subject to Landlord’s prior written consent. Without limitation, Landlord may withhold consent to any Tenant’s Monument
Signage that, in Landlord’s sole judgment, is not harmonious with the design standards of the Building and Monument Sign,
and Landlord may require that Tenant’s Monument Signage be of the same size and style as the other signage on the
Monument Sign. To obtain Landlord’s consent, Tenant shall submit design drawings to Landlord showing the type and sizes
of all lettering; the colors, finishes and types of materials used in Tenant’s Monument Signage; and (if applicable and
Landlord consents thereto) any arrangements for illumination.
5.3.
Fabrication; Installation; Maintenance; Removal; Costs. Landlord shall (a) fabricate (substantially in accordance
with Tenant’s design approved by Landlord), install and, at the expiration or earlier termination of Tenant’s rights under this
Section 5 , remove Tenant’s Monument Signage; and (b) maintain, repair, and (if applicable) illuminate the Monument Sign.
Tenant shall reimburse Landlord, promptly upon demand, for (x) all costs incurred by Landlord in fabricating, installing or
removing Tenant’s Monument Signage, and (y) Tenant’s pro rata share (as determined taking into account any other parties
using the Monument Sign) of all costs incurred by Landlord in maintaining, repairing and (if applicable) illuminating the
Monument Sign.
6.
Building Signage .
6.1.
Tenant’s Right to Building Signage. Subject to the terms of this Section 6 , from and after the Commencement Date,
Tenant shall have the exclusive right to install, maintain, repair, replace and operate the Building Signage (defined below).
As used herein, “ Building
6
Signage ” means a sign that bears the Tenant Name and is located at the top of any one or more exterior sides of the Building
selected by Tenant.
6.2.
Landlord’s Approval. The size, color, materials and all other aspects of the Building Signage, including the manner in
which it is attached to the Building and any provisions for illumination, shall be subject to Landlord’s approval, which may
be withheld in Landlord’s reasonable discretion; provided, however, that Landlord’s approval as to aesthetic matters may be
withheld in Landlord’s sole and absolute (but good faith) discretion.
6.3.
General Provisions. Tenant, at its expense, shall design, fabricate, locate, install, maintain, repair, replace, operate and
remove the Building Signage, in each case in a first class manner consistent with a first-class office building and in
compliance with all applicable Laws. Without limiting the foregoing, Tenant shall not install or modify the Building Signage
until after obtaining and providing copies to Landlord of all permits and approvals necessary therefor. Tenant shall be solely
responsible, at its expense, for obtaining such permits and approvals; provided, however, that Landlord shall reasonably
cooperate with Tenant, at no material cost or liability to Landlord, in executing permit applications and performing any other
ministerial acts reasonably necessary to enable Tenant to obtain such permits and approvals. Tenant hereby acknowledges
that, notwithstanding Landlord’s approval of the Building Signage, Landlord has made no representation or warranty to
Tenant that Tenant will be able to obtain such permits or approvals. Within 30 days after the expiration or earlier termination
of this Lease, Tenant, at its expense, shall remove the Building Signage and restore all damage to the Building caused by its
installation, operation or removal, Notwithstanding any contrary provision of this Lease. Tenant, not Landlord, shall, at its
expense. (i) cause its property insurance policy to cover the Building Signage, and (ii) promptly repair the Building Signage
if it is damaged by fire or any other casualty. Except as may be expressly provided in this Section 6 , the installation,
maintenance, repair, replacement, removal and any other work performed by Tenant affecting the Building Signage shall be
governed by the provisions of Sections 7.2 and 7.3 of this Lease as if such work were an Alteration. If an emergency results
from Tenant’s failure to maintain, repair, replace, operate or remove the Building Signage as required under this Section 6 ,
then, without limiting Landlord’s remedies, Landlord, at its option, with notice to Tenant (by telephone, e-mail, fax or any
other reasonable method, notwithstanding Section 25.1 of this Lease), may perform such maintenance, repair, replacement,
operation or removal, in which event Tenant shall reimburse Landlord for the reasonable cost thereof upon Landlord’s
demand. The costs of any utilities consumed in operation of the Building Signage shall be paid by Tenant upon Landlord’s
demand in accordance with Section 3 of this Lease.
7.
Right of First offer .
7.1.
Grant of Option; Conditions.
A.
Subject to the terms of this Section 7 , Tenant shall have a right of first offer (“ Right of First Offer ”) with
respect to the following suite (and with respect to each portion of such suite) (such suit or portion thereof, a “
Potential Offering Space ”); the 35,405 rentable square feet known as Suite 200 on the 2 nd floor of the Building
shown on the demising plan attached to this Lease as Exhibit F-2 . Tenant’s Right of First Offer shall be exercised
as follows: At any time after Landlord has determined that a Potential Offering Space has become Available
(defined below), but before leasing such Potential Offering Space a third party, Landlord, subject to the terms of this
Section 7 , shall provide Tenant with a written notice (for purposes of this Section 7 , an “ Advice ”) advising
Tenant of the material terms on which Landlord is prepared to lease such Potential Offering Space (sometimes
referred to herein as an “ Offering Space ”) to Tenant, which terms shall be consistent with Section 7.2 below. For
purposes hereof, a Potential Offering Space shall be deemed to become “ Available ” as follows: (i) if such Potential
Offering Space is not leased to a third party as of the date of mutual execution and delivery of this Lease, such
Potential Offering Space shall be deemed to become Available when Landlord has received from a prospective
tenant a written proposal to lease such Potential Offering Space; (ii) if such Potential Offering Space is leased to a
third party as of, or at any time after, the date of mutual execution and delivery of this Lease, such Potential Offering
Space shall be deemed to become Available when Landlord has determined that such third-party tenant, and any
occupant of such Potential Offering Space claiming under such third-party tenant, will not extend or renew the term
of its lease, or enter into a new lease, for such Potential Offering Space; and (iii) if,
7
after such Potential Offering Space becomes Available, Landlord becomes entitled to lease such Potential Offering
Space to a third party pursuant to Section 7.1.B or 7.1.C below but fails to do so within 180 days, then such Potential
Offering Space shall be deemed to become Available again at the expiration of such 180-day period. If the term for
the Offering Space, as set forth in the Advice, extends beyond the expiration date for the balance of the Premises,
Landlord, at its option, may state in the Advice that if Tenant exercises its Right of First Offer based on the Advice,
the term for the balance of the Premises shall be extended to be coterminous with the term for the Offering Space, as
provided in Section 7.2.E below). Upon receiving an Advice, Tenant may lease the Offering Space, in its entirety
only, under the terms set forth in the Advice, by delivering to Landlord a written notice of exercise satisfying any
applicable requirements of Section 7.2.E below (for purposes of this Section 7 , a “ Notice of Exercise ”) within 10
days after receiving the Advice.
B.
If Tenant receives art Advice but does not deliver a Notice of Exercise within the period of time required under
Section 7.1.A above. Landlord may lease the Offering Space to any party on any terms determined by Landlord in its
sole and absolute discretion.
C.
Notwithstanding any contrary provision hereof, (i) Landlord shall not be required to provide Tenant with an
Advice if any of the following conditions exists when Landlord would otherwise deliver the Advice; and (ii) if
Tenant receives an Advice from Landlord. Tenant shall not be entitled to lease the Offering Space based on such
Advice if any of the following conditions exists:
(1)
(2)
a Default exists:
more then 35,475 rentable square feet of the Premises is sublet (other than pursuant to a Permitted
Transfer);
(3)
this Lease has been assigned (other than pursuant to a Permitted Transfer): or
(4)
Tenant is not occupying the Premises.
If by operation of the preceding sentence, Landlord is not required to provide Tenant with an Advice, or Tenant, after
receiving an Advice, is not entitled to lease the Offering Space based on such Advice, then Landlord may lease the
Offering Space to any party on any terms determined by Landlord in its sole and absolute discretion.
7.2.
Terms for Offering Space.
A.
The term for the Offering Space shall be such period as Landlord, in its sole and absolute discretion, may set
forth in the Advice: provided, however, that such term shall be not less than coterminous with the term for the balance
of the Premises and not more than 60 months. Except as provided in Section 7.2.E below, Section 4 above shall not
apply to the Offering Space unless the term for the Offering Space is coterminous with the term for the balance of the
Premises.
B.
The term for the Offering Space shall commence on the commencement date stated in the Advice and thereupon
the Offering Space shall be considered a part of the Premises subject to the provisions of this Lease: provided,
however, that the provisions of the Advice (including the provision of the Advice establishing the expiration date for
the Offering Space) shall prevail to the extent they conflict with the provisions of this Lease.
C.
Tenant shall pay Monthly Rent for the Offering Space in accordance with the provisions of the Advice. The
Advice shall reflect the Prevailing Market (defined in Section 7.4 below) rate for the Offering Space as determined in
Landlord’s reasonable judgment and shall include a market tenant improvement allowance and market free rent, as
reasonably determined by Landlord.
D.
Except as may be otherwise provided in the Advice, (i) the Offering Space (including improvements and
personally, if any) shall be accepted by Tenant in
8
its configuration and condition existing on the earlier of the date Tenant takes possession of the Offering Space or the
commencement date for the Offering Space; and (ii) if Landlord is delayed in delivering possession of the Offering
Space by any holdover or unlawful possession of the Offering Space by any party, Landlord shall use reasonable
efforts to obtain possession of the Offering Space and any obligation of Landlord to tender possession of, permit entry
to, or perform alterations to the Offering Space shall be deferred until after Landlord has obtained possession of the
Offering Space.
E.
7.3.
If the term for the Offering Space extends beyond the expiration date for the balance of the Premises, then (i) at
Landlord’s option (which Landlord may exercise by so stating in the Advice), the term for the balance of the Premises
shall be extended to be coterminous with the term for the Offering Space (the period of such extension shall be
referred to hereinafter as the “ Offering Extension Term ”); and (ii) if Landlord exercises such option, then Tenant
shall include in the Notice of Exercise a statement of Tenant’s estimate of the Prevailing Market (defined in
Section 4.5 above) rate for the Offering Extension Term, and (b) the terms of such extension shall be governed by
Sections 4.2, 4.3 and 4.5 above, as if the Offering Extension Term were an “Extension Term” within the meaning of
Section 4.1 above; provided, however, that as applied to such extension, (1) all references in such Sections to the
“Extension Term” shall be deemed to refer to the Offering Extension Term; (2) all references in such Sections to the
“Extension Notice” shall be deemed to refer to the Notice of Exercise; and (3) all references in such Sections to the
“Extension Option” shall be deemed to refer to the Right of First Offer.
Ongoing Right.
A.
B.
[Intentionally Omitted.]
If (i) Landlord lease a Potential Offering Space to a third party as permitted under Section 7.1 above and
subsequently determines that such Potential Offering Space has again become Available, or (ii) a Potential Offering
Space becomes Available again because Landlord fails to lease it to a third party within 180 days after becoming
entitled to do so under Section 7.1.B or 7.1.C above, then, subject to Section 7.1.3.A above, the provisions of this
Section 7 shall apply again to such Potential Offering Space.
7.4.
Offering Amendment. If Tenant validly exercises its Right of First Offer, Landlord, within a reasonable period of time
thereafter; shall prepare and deliver to Tenant an amendment (the “ Offering Amendment ”) adding the Offering Space to
the Premises on the terms set forth in the Advice and reflecting the changes in the Base Rent, the rentable square footage of
the Premises, Tenant’s Share, the term for the balance of the Premises (if applicable), and other appropriate terms in
accordance with this Section 7 . Tenant shall execute and return the Offering Amendment to Landlord within 15 days after
receiving it, but an otherwise valid exercise of the Right of First Offer shall be fully effective whether or not the Offering
Amendment is executed.
7.5.
Definition of Prevailing Market. For purposes of this Section 7, “ Prevailing Market ” means the arms-length,
fair-market, annual rental rate per rentable square foot, under renewal and expansion leases and amendments entered into on
or about the date on which the Prevailing Market is being determined hereunder, for space comparable to the Offering Space
in the Building and office buildings comparable to the Building in the Project. The determination of Prevailing Market shall
take into account (i) any material economic differences between the terms of this Lease and any comparison lease or
amendment, such as rent abatements, construction costs and other concessions, and the manner, if any, in which the landlord
under any such lease is reimbursed for operating expenses and taxes; and (ii) any material differences in configuration or
condition between the Offering Space and any comparison space, including any cost that would have to be incurred in order
to make the configuration or condition of the comparison space similar to that of the Offering Space.
7.6.
Subordination. If Landlord, as permitted under Section 7.1.B or 7.1.C above, leases any Potential Offering Space to a
third party on terms including a right of first offer, right of first refusal, expansion option or other expansion right with
respect to any other Potential Offering Space (and if, in the case of any such lease permitted under Section 7.1.B above,
9
such expansion right was disclosed in the Advice received by Tenant), then Tenant’s Right of First Offer with respect to such
other Potential Offering Space shall be subject and subordina