This prospectus
relates to the resale from time to time by certain selling stockholders of up to an aggregate of (i) 52,000 shares of our Series A Convertible Preferred Stock, par value $0.001 per share (the
Series A Preferred Stock
),
issued to the selling stockholders on May 2, 2016 pursuant to the Investment Agreement (as defined herein); and (ii) 13,408,969 shares of common stock, par value $0.001 per share (the
Common Stock
), consisting of shares
of Common Stock issuable upon conversion of the 52,000 shares of the originally purchased shares of Series A Preferred Stock based up on the conversion formula described in this prospectus. The selling stockholders may offer and sell shares of
Series A Preferred Stock or shares of Common Stock in public or private transactions, or both. These sales may occur at fixed prices, at market prices prevailing at the time of sale, at prices related to prevailing market prices, or at negotiated
prices.
The selling stockholders may sell all or a portion of the shares of Series A Preferred Stock or shares of Common Stock through
underwriters, broker dealers or agents, who may receive compensation in the form of discounts, concessions or commissions from the selling stockholders, the purchasers of the shares of Series A Preferred Stock or shares of Common Stock, or
both. See Plan of Distribution for a more complete description of the ways in which the shares of Series A Preferred Stock or shares of Common Stock may be sold. The names of any underwriters, dealers or agents, the specific terms of the
plan of distribution, any over-allotment option and any applicable underwriting discounts and commissions will be set forth in a supplement to this prospectus.
We are registering the offer and sale of the shares of Series A Preferred Stock and Common Stock offered by this prospectus in order to satisfy
certain registration rights we have granted the selling stockholders. We have agreed to bear the expenses (other than underwriting discounts, selling commissions and stock transfer taxes) in connection with the registration of the Series A Preferred
Stock and the Common Stock that the selling stockholders are offering under this prospectus, but we will not receive any of the proceeds from the selling stockholders sale of shares of Series A Preferred Stock or shares of Common Stock. The
registration of the shares of Series A Preferred Stock and Common Stock covered by this prospectus does not necessarily mean that any of the shares will be offered or sold by the selling stockholders. The timing and amount of any sale is within the
respective selling stockholders sole discretion, subject to certain restrictions. To the extent that any selling stockholder resells any shares covered by this prospectus, the selling stockholder may be required to provide you with this
prospectus and a prospectus supplement identifying and containing specific information about the selling stockholder and the terms of the shares being offered.
Our common stock is listed on the NASDAQ Global Market under the symbol CNXR. On September 14, 2016, the last reported sale
price of our common stock on the NASDAQ Global Market was $1.76. The Series A Preferred Stock is not listed on any exchange, and we do not intend to list the Series A Preferred Stock on any exchange.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This prospectus and the documents incorporated herein by reference contain certain forward-looking statements within the meaning of the U.S.
Private Securities Litigation Reform Act of 1995. These statements are based on our managements current beliefs, expectations and assumptions about future events, conditions and results and on information currently available to us. Discussions
containing these forward-looking statements may be found, among other places, in the sections entitled Business, Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of
Operations incorporated by reference from our most recent Annual Report on Form 10-K and in our Quarterly Reports on Form 10-Q, as well as any amendments thereto filed with the SEC.
All statements, other than statements of historical fact, included or incorporated herein regarding our strategy, future operations, financial
position, future revenue, projected costs, plans, prospects and objectives are forward-looking statements. Words such as expect, anticipate, intend, plan, believe, seek,
estimate, think, may, could, will, would, should, continue, potential, likely, opportunity and similar expressions or
variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements. Additionally, statements concerning matters such as our ability to develop, market and sell
solutions or software services based on our technology, our ability to achieve our business plans and objectives, information concerning our industry and the markets in which we operate, including our general expectations and market position, market
opportunity and market share, estimates regarding our revenue and cash expenditures and requirements and other statements regarding matters that are not historical are forward-looking statements. Such statements are based on currently available
operating, financial and competitive information and are subject to various risks, uncertainties and assumptions that could cause actual results to differ materially from those anticipated or implied in our forward-looking statements due to a number
of factors including, but not limited to, those set forth under the section entitled Risk Factors in our most recent Annual Report on Form 10-K and in our Quarterly Reports on Form 10-Q, as well as any amendments thereto filed with the
SEC. Given these risks, uncertainties and other factors, many of which are beyond our control, you should not place undue reliance on these forward-looking statements.
Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to revise any forward-looking
statements to reflect events or developments occurring after the date of this prospectus, even if new information becomes available in the future.
iii
SUMMARY
This summary highlights selected information from this prospectus and the documents incorporated herein by reference and does not contain
all of the information that you need to consider in making your investment decision. You should carefully read the entire prospectus, including the risks of investing in our securities discussed under Risk Factors on page 3 of this
prospectus, the information incorporated herein by reference, including our financial statements, and the exhibits to the registration statement of which this prospectus is a part. All references in this prospectus to we, us,
our, Connecture, the Company and similar designations refer to Connecture, Inc. and its consolidated subsidiaries, unless otherwise indicated or as the context otherwise requires.
CONNECTURE, INC.
Overview
We are a leading web-based consumer shopping, enrollment and retention platform for health insurance distribution. Our solutions support the
industry evolution towards a consumer-centric experience that is transforming how health insurance is purchased and distributed. We offer a personalized health insurance shopping experience that recommends the best fit insurance plan based on an
individuals preferences, health status, preferred providers, medications and expected out-of-pocket costs. Our customers are health insurance marketplace operators, such as health plans, brokers and exchange operators that must distribute
health and ancillary benefit insurance in a cost-effective manner to a growing number of insured consumers. Our solutions automate key functions in the health insurance distribution process, allowing our customers to price and present plan options
accurately to consumers and efficiently enroll, renew and manage plan members.
Preferred Stock Financing
On May 2, 2016, we completed a previously announced preferred stock financing (the
Financing
) pursuant to an Investment
Agreement (as amended, the
Investment Agreement
) with Francisco Partners IV, L.P., Francisco Partners IV-A, L.P. (collectively,
Francisco Partners
) and Chrysalis Ventures II, L.P. (
Chrysalis
and collectively with Francisco Partners, the
Investors
), pursuant to which we sold and issued to the Investors an aggregate of 52,000 shares of the Companys newly created Series A Preferred Stock, at a purchase price of
$1,000 per share, for an aggregate purchase price of $52,000,000. The shares were issued pursuant to a Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock of Connecture, Inc. that we filed with the Secretary
of State of the State of Delaware on April 29, 2016 (the
Certificate of Designation
).
In connection with the
closing of the transaction, we entered into an Investor Rights Agreement with the Investors (the
Investor Rights Agreement
) whereby we granted the Investors the right to require the Company to file with the Securities and Exchange
Commission a registration statement to register for resale the Investors shares of Series A Preferred Stock and the shares of the Companys Common Stock issuable upon conversion of the Series A Preferred Stock (such shares of Common
Stock, the
Conversion Shares
and the Series A Preferred Stock and Conversion Shares collectively, the
Registrable Securities
). The Investor Rights Agreement also provides the Investors the right to request
three underwritten offerings per year and unlimited piggy-back registration rights with respect to the Registrable Securities. The obligation to register the Registrable Securities continues until those securities have been
sold by the holders of the registration rights, may be sold without limitation under Rule 144 or, in the case of the Series A Preferred Stock, have been redeemed.
In addition, the Investor Rights Agreement provides that Francisco Partners: (i) can designate one member of the Companys board of
directors (the
Board
), which designee shall be entitled to serve on the compensation committee of the Board, and one Board observer for so long as Francisco Partners continues to hold at least 25%
1
of the equity interests purchased by it at the closing of the Financing and 5% of all outstanding Common Stock (on an as-converted basis) of the Company and (ii) can designate one Board
observer for so long as it holds at least 10% of the equity interests purchased by it at the closing of the Financing. If Francisco Partners is no longer entitled to designate a Board member, then any Board observer designated by Francisco Partners
can be excluded from any Board committee meeting or from receiving any committee materials if such exclusion would be in the best interests of the Company and its stockholders.
David A. Jones, Jr., the chairman of our board of directors, is a general partner of Chrysalis. Accordingly, the Financing constituted a
related party transaction and was reviewed and approved by the audit committee of our board of directors. In addition, Ezra Perlman, who is a Co-President of the managing companies of Francisco Partners, was appointed to our board of directors in
connection with the Financing pursuant to rights afforded to Francisco Partners pursuant to the Investor Rights Agreement.
The foregoing
description of the Investment Agreement and the Investor Rights Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of such agreements, which are filed herewith and incorporated herein by
reference. In addition, the terms and conditions of the Investment Agreement and the Investor Rights Agreement are more fully described in our Current Reports on Form 8-K filed with the SEC on March 14, 2016 and May 4, 2016, each of which
are incorporated by reference into this prospectus.
Corporate and Other Information
We were organized in 1999 under the name Healthplanet.com, Inc., which subsequently changed to SimplyHealth.com, Inc. later that year, and in
2002 changed our name to Connecture, Inc. We are headquartered in Brookfield, Wisconsin and our principal executive offices are located at 18500 West Corporate Drive, Suite 250, Brookfield, Wisconsin 53045. Our telephone number is
(262) 432-8282. Our corporate website address is www.connecture.com. The information contained in, or that can be accessed through, our website is not part of this prospectus.
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012. We will remain an emerging
growth company until the earlier of (1) the last day of the fiscal year (a) ending December 31, 2019, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we become a large accelerated
filer, which means that we have been public for at least 12 months, have filed at least one annual report and the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last day of our then most recently
completed second fiscal quarter, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We refer to the Jumpstart Our Business Startups Act of 2012 herein as the JOBS
Act, and references herein to emerging growth company shall have the meaning associated with such term in the JOBS Act.
The Offering
Securities offered by the selling stockholders
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52,000 shares of Series A Preferred Stock
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13,408,969 shares of Common Stock
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Use of Proceeds
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We will not receive any proceeds from the sale of Series A Preferred Stock or Common Stock by the selling stockholders.
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NASDAQ Global Market symbol of Common Stock
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CNXR
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2
RISK FACTORS
Investment in our securities involves risks. Prior to making a decision about investing in our securities, you should consider carefully the
risk factors, together with all of the other information contained or incorporated by reference in this prospectus and any prospectus supplement, including any additional specific risks described in the section entitled Risk Factors
contained in any supplements to this prospectus and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (our
Annual Report
) and our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2016 (our
Quarterly Report
) , as updated by annual, quarterly and other reports and documents we file with the SEC after the date of this prospectus and that are incorporated by reference herein or in the
applicable prospectus supplement. Each of these risk factors could have a material adverse affect on our business, results of operations, financial position or cash flows, which may result in the loss of all or part of your investment. In addition
to these risk factors, there may be additional risks and uncertainties of which management is not aware or focused on or that management deems immaterial. Any of these additional risk factors could have a material adverse effect on our business,
results of operations, financial position or cash flows, which may result in the loss of all or part of your investment.
Risks Related
to the Series A Preferred Stock
The Series A Preferred Stock ranks junior to all of Connectures and its subsidiaries liabilities in
the event of a bankruptcy, liquidation or winding-up.
In the event of bankruptcy, liquidation or winding-up, our assets will be
available to pay obligations on the Series A Preferred Stock only after all of our liabilities have been paid. In addition, the Series A Preferred Stock effectively ranks junior to all existing and future liabilities of our subsidiaries. The rights
of holders of the Series A Preferred Stock to participate in the assets of our subsidiaries upon any liquidation or reorganization of any subsidiary will rank junior to the prior claims of that subsidiarys creditors. In the event of
bankruptcy, liquidation or winding-up, there may not be sufficient assets remaining, after paying our liabilities and our subsidiaries liabilities, to pay amounts due on the Series A Preferred Stock.
An active trading market for the Series A Preferred Stock does not exist and may not develop.
The Series A Preferred Stock has no established trading market and is not listed on any securities exchange. Since the Series A Preferred Stock
has no stated maturity date, investors seeking liquidity will be limited to selling their shares in the secondary market. We cannot assure you that an active trading market in the Series A Preferred Stock will develop and, even if it develops, we
cannot assure you that it will last. In either case, the trading price of the Series A Preferred Stock could be adversely affected and holders ability to transfer shares of Series A Preferred Stock will be limited.
The market price of the Series A Preferred Stock will be directly affected by the market price of our Common Stock, which may be volatile.
To the extent that a secondary market for the Series A Preferred Stock develops, we believe that the market price of the Series A Preferred
Stock will be significantly affected by the market price of our Common Stock. The trading price of our Common Stock may be highly volatile and could be subject to wide fluctuations in response to various factors, including the risk factors described
in the section entitled Risk Factors contained in our Annual Report and our Quarterly Report and other factors which are beyond our control. These factors include:
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our operating performance and the operating performance of similar companies;
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the overall performance of the equity markets;
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announcements by us or our competitors of acquisitions, business plans, or commercial relationships;
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threatened or actual litigation;
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changes in laws or regulations relating to the sale of health insurance;
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any major change in our board of directors or management;
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publication of research reports or news stories about us, our competitors, or our industry, or positive or negative recommendations or withdrawal of research coverage by securities analysts;
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large volumes of sales of our shares of Common Stock by existing stockholders; and
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general political and economic conditions.
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In addition, the stock market in general, and the
market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Securities class action litigation has often
been instituted against companies following periods of volatility in the overall market and in the market price of a companys securities. This litigation, if instituted against us, could result in substantial costs, divert our
managements attention and resources, and harm our business, operating results, and financial condition.
We cannot predict how
shares of our Common Stock will trade in the future, but fluctuations that may adversely affect the market prices of our Common Stock, may, in turn, adversely affect the price of Series A Preferred Stock. This may result in greater volatility in the
market price of the Series A Preferred Stock than would be expected for nonconvertible preferred stock. In addition, we expect that the market price of the Series A Preferred Stock will be influenced by yield and interest rates in the capital
markets and our perceived creditworthiness.
There may be future sales or other dilution of our equity, which may adversely affect the market price
of our Common Stock or the Series A Preferred Stock and may negatively impact the holders investment.
Except in certain
circumstances, we are not restricted from issuing additional shares of Common Stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, Common Stock or preferred stock
or any substantially similar securities. The market price of our Common Stock or Series A Preferred Stock could decline as a result of sales of a large number of shares of Common Stock or Series A Preferred Stock or similar securities in the market
or the perception that such sales could occur. For example, if we issue preferred stock in the future that has a preference over our Common Stock with respect to the payment of dividends or upon our liquidation, dissolution or winding-up, or if we
issue preferred stock with voting rights that dilute the voting power of our Common Stock, the rights of holders of our Common Stock or the market price of our Common Stock could be adversely affected.
In addition, each share of Series A Preferred Stock will initially be convertible at the option of the holder thereof into shares of our
Common Stock. The conversion of some or all of the Series A Preferred Stock will dilute the ownership interest of our existing common stockholders. Any sales in the public market of our Common Stock issuable upon such conversion could adversely
affect prevailing market prices of the outstanding shares of our Common Stock and Series A Preferred Stock. In addition, the existence of our Series A Preferred Stock may encourage short selling or arbitrage trading activity by market participants
because the conversion of our Series A Preferred Stock could depress the price of our equity securities. As noted above, a decline in the market price of the Common Stock may negatively impact the market price for the Series A Preferred Stock.
The Series A Preferred Stock is subject to conversion at our option in certain circumstances after May 2, 2018 based on the trading price of our
Common Stock.
At any time after May 2, 2018, if the weighted average price per share of Common Stock is greater than 175% of
the conversion price of the Series A Preferred Stock for at least forty-five consecutive trading days and the trading volume of our Common Stock is equal to or greater than 75,000 shares on at least forty of such forty-five trading days, we will be
entitled, but not required, to convert the Series A Preferred Stock into shares of
4
Common Stock, in whole but not in part, at a conversion price equal to the sum of the stated value of each share of Series A Preferred Stock and accrued and unpaid dividends with respect to each
share of Series A Preferred Stock as of the mandatory conversion date divided by the conversion price of such share in effect as of the mandatory conversion date. Following any such conversion, a holder of Series A Preferred Stock will no longer be
entitled to the dividend or other rights associated with the Series A Preferred Stock.
The Series A Preferred Stock has not been rated.
The Series A Preferred Stock has not been rated by any nationally recognized statistical rating organization. This may affect the
market price of the Series A Preferred Stock.
The Series A Preferred Stock may only be redeemed at the option of the holder in limited
circumstances.
The shares of Series A Preferred Stock, unlike indebtedness, will not give rise to a claim for payment of a
principal amount at a particular date. As a result, holders of the Series A Preferred Stock may be required to bear the financial risks of an investment in the Series A Preferred Stock for an extended period of time. Holders have a limited right to
require us to redeem the Series A Preferred Stock at certain dates after May 2, 2023, subject to our having sufficient funds legally available under the Delaware General Corporation Law (the
DGCL
).
See
Description of Series A Preferred Stock
Redemption
. In addition, holders have the option to require us to purchase any or all of their shares of Series A Preferred Stock upon the occurrence of a fundamental change in the
Company.
See Description of Series A Preferred StockRedemption.
Therefore, holders should be aware that they may be required to bear the financial risks of an investment in the Series A Preferred Stock for an
extended period of time.
We have the right, but not the obligation, to redeem shares of Series A Preferred Stock in limited circumstances.
We are entitled, but not required, to redeem the shares of Series A Preferred Stock upon the occurrence of a fundamental change in
the Company.
See Description of Series A Preferred StockRedemption.
Therefore, holders should not expect that they have a right to perpetual payment of dividends and should be aware that a proposed redemption of
the Series A Preferred Stock may make it difficult or impossible to sell shares of Series A Preferred Stock for a higher price, even if the market price for such shares had previously been higher.
Terms of our debt agreements and Delaware law may restrict us from making cash payments with respect to the Series A Preferred Stock.
Quarterly dividends and cash payments upon conversion, redemption or repurchase of the Series A Preferred Stock will be paid only if payment of
such amounts is not prohibited by debt agreements and assets are legally available under the DGCL to pay such amounts. Quarterly dividends will be paid only if such dividends are declared by our board of directors. Our board of directors is not
obligated or required to declare quarterly dividends even if we have funds available for such purposes.
Our existing lines of credit
limit our ability to pay cash dividends on our capital stock, including the Series A Preferred Stock, and our ability to make any cash payment upon conversion, redemption or repurchase of the Series A Preferred Stock. Any debt agreements that we
enter into in the future may limit our ability to pay cash dividends on our capital stock, including the Series A Preferred Stock, and our ability to make any cash payment upon conversion, redemption or repurchase of the Series A Preferred Stock.
Under applicable Delaware law, a Delaware corporation generally may not make a distribution if, after giving effect to the distribution,
the corporation would not be able to pay its liabilities as the liabilities become due in the usual course of business, or generally if the corporations total assets would be less than the sum of its total liabilities plus, unless the
corporations charter provides otherwise, the amount that would be needed if the corporation were dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the stockholders whose preferential rights are
superior to those receiving the distribution.
5
The conversion rate of the Series A Preferred Stock may not be adjusted for all dilutive events that may
adversely affect the market price of the Series A Preferred Stock or the Common Stock issuable upon conversion of the Series A Preferred Stock.
The number of shares of our Common Stock that holders are entitled to receive upon conversion of a share of Series A Preferred Stock is subject
to adjustment for certain events arising from increases in dividends or distributions in Common Stock, subdivisions, splits, and combinations of the Common Stock, certain issuances of stock purchase rights, options or warrants distributed in
connection with a stockholder rights plan, self-tender offers and exchange offers, cash dividends or distributions, and certain other actions by us that modify our capital structure.
See Description of Series A Preferred
StockAnti-Dilution Adjustments.
We will not adjust the conversion rate for other events, including the issuance of Common Stock pursuant to plans for reinvestment of dividends or interest, options or rights to purchase such
shares pursuant to benefit plans or employee agreements, any option, warrant, right, or exercisable, exchangeable or convertible security or for a change in the par value of the Common Stock. There can be no assurance that an event that adversely
affects the value of the Series A Preferred Stock, but does not result in an adjustment to the conversion rate, will not occur. Further, if any of these other events adversely affects the market price of our Common Stock, it may also adversely
affect the market price of the Series A Preferred Stock. In addition, we are not restricted from offering Common Stock in the future or engaging in other transactions that may dilute our Common Stock.
If our Common Stock is delisted, your ability to transfer or sell your shares of the Series A Preferred Stock, or Common Stock upon conversion, may be
limited and the market value of the Series A Preferred Stock will be materially adversely affected.
The terms of the Series A
Preferred Stock do not protect you if our Common Stock is delisted. Because the Series A Preferred Stock has no stated maturity date, holders may be forced to elect between converting their shares of the Series A Preferred Stock into illiquid shares
of our Common Stock or holding their shares of the Series A Preferred Stock and receiving stated dividends on the stock when, as and if authorized by the Board of Directors and declared by us with no assurance as to ever receiving the liquidation
preference. Accordingly, if the Common Stock is delisted, the holders ability to transfer or sell their shares of the Series A Preferred Stock, or Common Stock upon conversion, may be limited and the market value of the Series A Preferred
Stock will be materially adversely affected.
Holders may have to pay taxes if we adjust the conversion rate of the Series A Preferred Stock in
certain circumstances, even though holders would not receive any cash.
Upon certain adjustments to (or certain failures to make
adjustments to) the conversion rate of the Series A Preferred Stock, holders may be treated as having received a distribution from us, resulting in taxable income to them for U.S. federal income tax purposes, even though holders would not receive
any cash in connection with such adjustment to (or failure to adjust) the conversion rate. In addition, Non-U.S. Holders (as defined in
Material United States Federal Income Tax Considerations
) of the Series A Preferred Stock may,
in certain circumstances, be deemed to have received a distribution subject to U.S. federal withholding tax. Please consult your independent tax advisor and read
Material United States Federal Income Tax Considerations
regarding
the U.S. federal income tax consequences of an adjustment to the conversion rate of the Series A Preferred Stock.
6
USE OF PROCEEDS
We will not receive any proceeds from the sale by the selling stockholders of the shares of Series A Preferred Stock and Common Stock
registered under this prospectus.
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth our ratio of earnings to combined fixed charges and preferred stock dividends on a historical basis for each of
the periods presented. As we incurred net losses in all periods presented below, our earnings were insufficient to cover fixed charges in each of the periods presented. Because of these deficiencies, the ratio information is not applicable for such
periods.
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Year ended December 31
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Six
months
ended
June 30
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2015
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2014
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2013
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2012
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2016
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Ratio of earnings to combined fixed charges and preferred stock dividends
(1)(2)
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$
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$
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$
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$
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$
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(1)
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For the fiscal years ended December 31, 2015, 2014, 2013 and 2012 and the six months ended June 30, 2016, we had no earnings and are therefore unable to calculate the ratio of combined fixed charges and
preference dividends to earnings. Our earnings for those periods were insufficient to cover fixed charges by $7.3 million, $10.1 million, $27.3 million, $16.8 million and $17.2 million, respectively.
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(2)
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For purposes of computing the ratio of earnings to combined fixed charges and preferred stock dividends, earnings consist of net loss plus fixed charges. Combined fixed charges and preferred stock dividends consist of
interest expense and an estimate of interest within rent expense plus mandatory preferred stock dividends.
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7
SELLING STOCKHOLDERS
On May 2, 2016, we issued 52,000 shares of Series A Preferred Stock in a private offering to certain investors listed as selling
stockholders in this prospectus. Each share of Series A Preferred Stock is initially convertible, at the option of the holder, into a number of shares of common stock determined by dividing the sum of the Stated Value of such share of Series A
Preferred Stock on the conversion date and any accrued and unpaid dividends with respect to such share by a conversion price initially equal to $4.50 per share of Series A Preferred Stock. We are registering the securities offered by this prospectus
on behalf of the selling stockholders.
The selling stockholders may from time to time offer and sell pursuant to this prospectus any or
all of the shares of Series A Preferred Stock listed below that have been issued to them, and any or all of the shares of Common Stock issuable upon conversion of such shares of Series A Preferred Stock.
The table below sets forth the name of the selling stockholders, the number of shares of Series A Preferred Stock that are beneficially owned
by each such selling stockholder and the number of shares of Series A Preferred Stock that may be offered pursuant to this prospectus and the number of shares of our Common Stock that may be beneficially owned by such stockholders after May 2,
2018 (the date after which the Company may pay preferred dividends in cash) and the number of shares of Common Stock that may be offered pursuant to this prospectus. In the table below, the number of shares of Common Stock that may be offered
pursuant to this prospectus is calculated based on an assumed conversion as of May 3, 2018, a Stated Value per share of Series A Preferred Stock of $1,160.39, accrued and unpaid dividends per share of Series A Preferred Stock of $7.58 and a
conversion price of $4.50 per share of Series A Preferred Stock. The number of shares of Common Stock into which the Series A Preferred Stock is convertible is subject to adjustment under certain circumstances. Accordingly, the number of shares of
Common Stock issuable upon conversion of the Series A Preferred Stock and beneficially owned and offered by the selling stockholders pursuant to this prospectus may increase or decrease from that set forth in the below table. The percentage of
shares of Common Stock owned after the offering is based on 22,344,064 shares of Common Stock outstanding as of September 13, 2016 and the assumed conversion of all shares of Series A Preferred Stock into 13,408,969 shares of Common Stock.
Unless otherwise indicated in the footnotes to this table, we believe that each of the selling stockholders named in this table has sole voting and investment power with respect to the shares of Series A Preferred Stock and Common Stock indicated as
beneficially owned. The number of shares of Common Stock beneficially owned by the selling stockholders also includes shares of Common Stock currently held by such selling stockholders that was previously purchased from the Company or on the open
market. Such shares of Common Stock are not being registered pursuant to this prospectus and are not included in the number of shares that may be offered pursuant to this prospectus.
The information set forth below is based on information provided by or on behalf of the selling stockholders prior to the date hereof.
Information concerning the selling stockholders may change from time to time. The selling stockholders may from time to time offer and sell any or all of the securities under this prospectus. Because the selling stockholders are not obligated to
sell the offered securities, we cannot state with certainty the amount of our securities that the selling stockholders will hold upon consummation of any such sales. In addition, since the date on which the selling stockholders provided this
information to us, such selling stockholders may have sold, transferred or otherwise disposed of all or a portion of the offered securities. We are registering the shares to permit each selling stockholder to resell the shares when such stockholder
deems appropriate, subject to the restrictions on transfer set forth under Plan of Distribution.
8
Except as described above in
SummaryPreferred Stock Financing
, none of
the selling stockholders nor any of their respective affiliates, officers, directors or principal equity holders has had any material relationship with us or our affiliates within the past three years.
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|
|
|
|
|
Series A Preferred Stock
|
|
|
Common Stock
|
|
Name of selling
stockholder
|
|
Number of
shares
beneficially
owned and
offered
hereby
(1)
|
|
|
Number of
shares
owned
after
completion
of the
offering
(2)
|
|
|
Percent of
shares
beneficially
owned
after the
offering
|
|
|
Number of
shares
beneficially
owned
|
|
|
Number of
shares
offered
hereby
(1)
|
|
|
Number of
shares
owned
after
completion
of the
offering
(2)
|
|
|
Percent of
shares
beneficially
owned
after the
offering
(3)
|
|
Francisco Partners IV, L.P.
(4)
|
|
|
33,306
|
|
|
|
|
|
|
|
|
|
|
|
11,002,495
|
|
|
|
8,588,445
|
|
|
|
2,414,050
|
|
|
|
6.8
|
%
|
Francisco Partners IV-A, L.P.
(5)
|
|
|
16,694
|
|
|
|
|
|
|
|
|
|
|
|
5,514,767
|
|
|
|
4,304,795
|
|
|
|
1,209,972
|
|
|
|
3.4
|
|
Chrysalis Ventures II, L.P.
(6)
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
4,522,891
|
|
|
|
515,729
|
|
|
|
4,007,162
|
|
|
|
11.2
|
|
(1)
|
Unless otherwise indicated, the selling stockholders may offer any or all of the Series A Preferred Stock they beneficially own and the Common Stock issuable upon conversion of the Series A Preferred Stock. Shares of
Common Stock held by such selling stockholder and not issued upon conversion of the Series A Preferred Stock may not be offered pursuant to this prospectus.
|
(2)
|
The selling stockholders have not informed us, and we do not know, when or in what amounts the selling stockholders may offer for sale the shares of common stock pursuant to this offering. The selling stockholders may
choose not to sell any of the shares offered by this prospectus. Because the selling stockholders may offer all, some or none of the shares of Series A Preferred Stock and Common Stock that they own pursuant to this offering, and because there are
currently no agreements, arrangements or undertakings with respect to the sale of any such shares, we cannot provide any information or estimates as to the number of shares of our Series A Preferred Stock or Common Stock that the selling
stockholders will hold after completion of this offering. For purposes of this table, we have assumed that the selling stockholders will have sold all of the securities covered by this prospectus upon the completion of this offering and will not
have sold any shares of Common Stock held by such selling stockholders not covered by this prospectus.
|
(3)
|
Calculated based on Rule 13d-3 under the Exchange Act, based on 22,344,064 shares outstanding as of September 13, 2016 and the assumed conversion of all shares of Series A Preferred Stock into 13,408,969 shares of
Common Stock.
|
(4)
|
Reflects 33,306 shares of Series A Preferred Stock held by Francisco Partners IV, L.P. (
FP IV
), 8,588,445 shares of Common Stock into which such shares of Series A Preferred Stock will be convertible
as of May 3, 2018 and 2,414,050 shares of Common Stock directly held by FP IV as of September 13, 2016 according to a Schedule 13D/A report filed by FP IV with the SEC on September 14, 2016. Francisco Partners GP IV, L.P. (
FP
GP IV
) is the general partner of FP IV, and as such may be deemed to have voting and dispositive power over the shares held by FP IV. Francisco Partners GP IV Management Limited (
FP GP Management
) is the general partner
of FP GP IV and provides management services to FP IV at the request of FP GP IV, and as such may be deemed to have voting and dispositive power over the shares held by FP IV. The Directors of FP GP Management are Mr. Dipanjan Deb and Mr.
Tom Ludwig (the FP Directors) and the Investment Committee of FP GP Management consists of Mr. Deb, Mr. David Golob, Mr. Ezra Perlman, and Mr. Keith Geeslin (the FP Investment Committee), and as such, each of the FP Directors
and each of the members of the FP Investment Committee may be deemed to have voting and dispositive power over the shares held by FP IV. The address of FP IV, FP GP IV, FP GP Management, each of the FP Directors and each member of the FP Investment
Committee is One Letterman Drive, Building CSuite 410, San Francisco, California 94129.
|
(5)
|
Reflects 16,694 shares of Series A Preferred Stock held by Francisco Partners IV-A, L.P. (
FP
IV-A
), 4,304,795 shares of Common Stock into which such shares of Series A Preferred Stock will be convertible as of May 3, 2018 and 1,209,972 shares of Common Stock directly held by FP IV-A as of September 13, 2016 according to
a Schedule 13D/A report filed by FP IV-A with the SEC on September 14, 2016. FP GP IV is the general partner of FP IV-A, and as such may be deemed to have voting and dispositive power over
|
9
|
the shares held by FP IV-A. FP GP Management is the general partner of FP GP IV and provides management services to FP IV-A at the request of FP GP IV, and as such may be deemed to have voting
and dispositive power over the shares held by FP IV-A. As a result of their positions with FP GP Management, each of the FP Directors and each of the members of the FP Investment Committee may also be deemed to have voting and dispositive power over
the shares held by FP IV-A. The address of FP IV-A, FP GP IV, FP GP Management, each of the FP Directors and each member of the FP Investment Committee is One Letterman Drive, Building CSuite 410, San Francisco, California 94129.
|
(6)
|
Reflects 2,000 shares of Series A Preferred Stock held by Chrysalis Ventures II, L.P. (
CV II LP
), 515,729 shares of Common Stock into which such shares of Series A Preferred Stock will be convertible
as of May 3, 2018 and 4,007,162 shares of Common Stock directly held by CV II LP. Chrysalis Partners II, LLC (
CP II LLC
) is the general partner of CV II LP, and as such may be deemed to have voting and dispositive power over
the shares held by CV II LP. Investment and voting decisions with respect to the shares held by CV II LP are made by an advisory committee of CP II LLC that consists of David A. Jones, Jr., who is a member of our board of directors, Koleman
Karleski, Wright Steenrod and Irv Bailey, each of whom is a member of CP II LLC. The address of CV II LP and CP II LLC is 101 South Fifth Street, Suite 1650, Louisville, KY 40202.
|
10
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock, together with any additional information we include in any applicable prospectus supplement or
any related free writing prospectus, summarizes the material terms and provisions of our Common Stock and our preferred stock, including the Series A Preferred Stock. For the complete terms of our common stock and preferred stock, please refer to
our amended and restated certificate of incorporation, the Certificate of Designations and our amended and restated bylaws that are incorporated by reference into the registration statement of which this prospectus is a part or may be incorporated
by reference in this prospectus or any applicable prospectus supplement. The terms of these securities may also be affected by Delaware General Corporation Law. The summary below and that contained in any applicable prospectus supplement or any
related free writing prospectus are qualified in their entirety by reference to our amended and restated certificate of incorporation, the Certificate of Designation and our amended and restated bylaws.
Common Stock
We are authorized to issue
75,000,000 shares of Common Stock, of which 22,344,064 shares were issued and outstanding as of August 26, 2016.
The holders of
common stock are entitled to one vote per share on all matters submitted to a vote of our stockholders generally 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. 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.
All of the outstanding shares of our common stock are fully paid and non-assessable. The shares of common stock offered by
this prospectus or upon the conversion of any preferred stock or debt securities or exercise of any warrants offered pursuant to this prospectus, when issued and paid for, will also be, fully paid and non-assessable.
Preferred Stock
We are authorized to
issue 5,000,000 shares of preferred stock, par value $0.001 per share, 52,000 of which were issued and outstanding as Series A Preferred Stock as of August 26, 2016.
Our preferred stock may be issued from time to time in one or more series pursuant to a resolution or resolutions providing for such issue
duly adopted by our board of directors (authority to do so being expressly vested in the board of directors). The board of directors is further authorized, subject to limitations prescribed by law, to fix by resolution or resolutions the
designations, powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of any wholly unissued series of preferred stock, including without limitation authority to fix by resolution or resolutions the dividend
rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, and liquidation preferences of any such series, and the number of shares constituting any such
series and the designation thereof, or any of the foregoing. The rights, preferences, privileges and restrictions of the preferred stock of each series will be fixed by the certificate of designation relating to each series. Our preferred stock is
available for issuance without further action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded.
11
The issuance of preferred stock may delay, deter or prevent a change in control or acquisition of
the Company.
The General Corporation Law of the State of Delaware, the state of our incorporation, provides that the holders of preferred
stock will have the right to vote separately as a class on any proposal involving fundamental changes in the rights of holders of that preferred stock. This right is in addition to any voting rights that may be provided for in the applicable
certificate of designation.
Registration Rights
We entered into an investors rights agreement on August 3, 2012 with certain stockholders (the
Existing Investors
Rights Agreement
). Subject to the terms of this agreement, as of August 26, 2016, holders of 4,007,162 shares of Common Stock had registration rights, which includes demand registration rights, piggyback registration rights and
short-form registration rights, pursuant to the Existing Investors Rights Agreement. The following description of the terms of the Existing Investors Rights Agreement is intended as a summary only and is qualified in its entirety by
reference to the Existing Investors Rights Agreement filed as an exhibit to the registration statement of which this prospectus forms a part.
The registration rights described below, granted pursuant to the Existing Investors Rights Agreement, will terminate, with respect to
any particular stockholder, upon the occurrence of the total shares of common stock held by and issuable to the particular stockholder constituting less than 1% of the shares of common stock then outstanding as shown on our most recent report or
statement filed with the SEC. The requisite holders of the registration rights granted under the Existing Investors Rights Agreement waived all piggyback or other registration rights with respect to the filing of this prospectus.
Demand Registration Rights
Subject to certain exceptions, the holders of 40% of then-outstanding registrable securities pursuant to the Existing Investors Rights
Agreement with demand registration rights may demand that we effect a registration under the Securities Act covering the public offering and sale of all or part of the registrable securities held by those stockholders. Upon any such demand and as
soon as practicable, we must effect the registration of the registrable securities that we have been requested to register, together with all other registrable securities that we may have been requested to register by other stockholders pursuant to
the piggyback registration rights described below. These registration rights are subject to specified conditions and limitations, including the right of the underwriters, if any, to limit the number of shares included in any such registration under
specified circumstances. In addition, we are not obligated to effect a demand registration if we have already effected two demand registrations or if the proposed aggregate offering price, net of underwriting discounts and commissions, of the shares
to be registered by the holders requesting registration is less than $5.0 million.
We have the ability to delay the filing of a
registration statement, subject to certain restrictions, if the board of directors determines in its judgment that it would be seriously detrimental to the Company and its stockholders for such registration to be effected at such time.
Piggyback Registration Rights
Pursuant to Existing Investors Rights Agreement, whenever we propose to file a registration statement under the Securities Act for
purposes of a public offering of securities of the Company, other than with respect to a registration related to any employee benefit plan, a registration relating to a corporate reorganization or other Rule 145 transaction or a registration in
which the only Common Stock being registered is stock issuable upon conversion of debt securities that are also being registered, the holders of then-outstanding registrable securities pursuant to the Existing Investors Rights Agreement are
entitled to notice of the registration and have the right to include their registrable securities in such registration, subject to limitation by the underwriter(s) of any
12
underwritten offering. As of August 26, 2016, the holders of approximately 4,007,162 shares of Common Stock had piggyback registration rights pursuant to the Existing Investors Rights
Agreement. The requisite holders under the Existing Investors Rights Agreement waived all piggyback registration rights with respect to the filing of this prospectus.
Short-Form Registration Rights
Any holder of registrable securities then outstanding that is party to the Existing Investors Rights Agreement may request in writing
that we effect a registration on Form S-3 under the Securities Act, so long as the proposed aggregate offering price of the shares to be registered by the holders requesting registration is at least $1.5 million, subject to certain exceptions.
We have the ability to delay the filing of a registration statement, subject to certain restrictions, if the board of directors determines in
its judgment that it would be seriously detrimental to the Company and its stockholders for such registration to be effected at such time.
Expenses of Registration
With specified exceptions, we are required to pay all expenses of registration, excluding underwriters discounts, commissions and stock
transfer taxes.
Anti-Takeover Provisions Under Our Charter and Bylaws and Delaware Law
Certain provisions of Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws contain provisions
that could have the effect of delaying, deferring or discouraging another party from acquiring control of us. These provisions, which are summarized below, may have the effect of discouraging coercive takeover practices and inadequate takeover bids.
These provisions are also designed, in part, to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with an
unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to acquire us because negotiation of these proposals could result in an improvement of their terms.
Amended and Restated Certificate of Incorporation
Undesignated Preferred Stock
. As discussed above, our board of directors has the ability to issue preferred stock with voting or other
rights or preferences that could impede the success of any attempt to change control of us. These and other provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of our company.
Limitations on the Ability of Stockholders to Act by Written Consent or Call a Special Meeting
. We have provided in our amended and
restated certificate of incorporation that our stockholders may not act by written consent. This limit on the ability of our stockholders to act by written consent may lengthen the amount of time required to take stockholder actions. As a result, a
holder controlling a majority of our capital stock would not be able to amend our amended and restated bylaws or remove directors without holding a meeting of our stockholders called in accordance with our amended and restated bylaws.
In addition, our amended and restated certificate of incorporation and amended and restated bylaws provide that special meetings of the
stockholders may be called only by the chairperson of our board of directors, the chief executive officer or a majority of the 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.
13
Requirements for Advance Notification of Stockholder Nominations and Proposals
. Our
amended and restated bylaws 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 the board of directors or a
committee of the board of directors. However, our amended and restated bylaws may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed. These provisions may also discourage or deter a
potential acquirer from conducting a solicitation of proxies to elect the acquirers own slate of directors or otherwise attempting to obtain control of our company.
Classified Board
. Our amended and restated certificate of incorporation and amended and restated bylaws provide that our board of
directors is divided into three classes with staggered three-year terms. As a result, one class (i.e., approximately one-third of our board of directors) will be elected at each annual meeting of stockholders, with the other classes continuing for
the remainder of their respective three-year terms. This provision may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us as it is more difficult and time-consuming for stockholders to replace
a majority of the directors on a classified board.
Board Vacancies Filled Only by Majority of Directors
. Vacancies and newly
created seats on our board may be filled only by a majority of the number of then-authorized members of our board of directors. Only our board of directors may determine the number of directors on our board. The inability of stockholders to
determine the number of directors or to fill vacancies or newly created seats on our board of directors makes it more difficult to change the composition of our board of directors, but these provisions promote a continuity of existing management.
No Cumulative Voting
. The Delaware General Corporation Law provides that stockholders are not entitled to the right to cumulate
votes in the election of directors unless our amended and restated certificate of incorporation provides otherwise. Our amended and restated certificate of incorporation provides that there shall be no cumulative voting and our amended and restated
bylaws do not expressly provide for cumulative voting.
Directors Removed Only for Cause.
Our amended and restated certificate
of incorporation provides for the removal of a director only with cause and by the affirmative vote of the holders of at least 66
2
⁄
3
% of the shares then
entitled to vote at an election of our directors.
Amendment of Charter Provisions
. The amendment of the provisions in our amended
and restated certificate of incorporation requires approval by holders of at least 66
2
⁄
3
% of our outstanding capital stock entitled to vote generally in the
election of directors (in addition to any rights of the holders of our outstanding capital stock to vote on such amendment under the Delaware General Corporation Law). The amendment of the provisions in our amended and restated bylaws requires
approval by either a majority of our board of directors or holders of at least 66
2
⁄
3
% of our outstanding capital stock entitled to vote generally in the
election of directors (in addition to any rights of the holders of our outstanding capital stock to vote on such amendment under the Delaware General Corporation Law).
Delaware Anti-Takeover Statute
. We are subject to Section 203 of the Delaware General Corporation Law which regulates corporate
acquisitions of publicly held companies. This law provides that a specified person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the outstanding voting stock of a publicly held Delaware
corporation, or an interested stockholder, may not engage in business combinations with the corporation for a period of three years after the date on which the person became an interested stockholder, unless the business combination or the
transaction in which the person became an interested stockholder is approved in advance in a manner prescribed by Delaware law. The law does not include interested stockholders prior to the time our common stock was listed on The NASDAQ Global
Market. The law defines the term business combination to include mergers, asset sales and other transactions in which the interested stockholder receives or could receive a financial benefit on other than a pro rata basis with other
stockholders. This provision has an anti-takeover effect with respect to transactions not approved in advance by
14
our board of directors, including discouraging takeover attempts that might result in a premium over the market price for the shares of our common stock. With approval of our stockholders, we
could amend our amended and restated certificate of incorporation in the future to avoid the restrictions imposed by this anti-takeover law.
The provisions of Delaware law and our amended and restated certificate of incorporation could have the effect of discouraging others from
attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of
preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.
Transfer Agent and Registrar
Our
transfer agent and registrar for our capital stock is American Stock Transfer & Trust Company, LLC. The transfer agents address is 6201 15th Avenue, Brooklyn, New York 11219, and its telephone number is (718) 921-8200.
Listing
Our common stock is listed on
The NASDAQ Global Market under the symbol CNXR.
15
DESCRIPTION OF SERIES A PREFERRED STOCK
The following is a summary of the material terms of the Series A Preferred Stock. For a more complete description you should refer to the
actual terms of the Series A Preferred Stock and the Certificate of Designations. For purposes of this section titled
Description of Series A Preferred Stock
, unless otherwise defined, terms shall have the meaning as ascribed
below in
Definitions
.
General
On April 29, 2016, we filed with the Secretary of State of the State of Delaware a Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock of Connecture, Inc. (the
Certificate of Designation
) classifying the Series A Convertible Preferred Stock and establishing the voting powers, designations, preferences and other special rights,
and the qualifications, limitations and restrictions of the shares of the Series A Convertible Preferred Stock. The Certificate of Designation became effective upon filing.
Classification and Number of Shares
In
the Certificate of Designation, 52,000 shares of preferred stock were designated as Series A Convertible Preferred Stock.
Dividends
Holders of Series A Preferred Stock (the
Holders
) are entitled to receive the following dividends (such dividends,
the
Dividends
).
Preferred Dividends
From and after May 2, 2016, each Holder, in preference and priority to the holders of all other classes or series of stock, is entitled to
receive, with respect to each share, or fraction of a share, of Series A Preferred Stock then outstanding and held by such Holder, dividends accruing on a daily basis, commencing from the date of issuance of such share of Series A Preferred Stock,
at the rate of seven and one half percent (7.5%) per annum of the Stated Value per whole share (or proportion thereof with respect to fractional shares) of Series A Preferred Stock (the
Preferred Dividends
). The Preferred
Dividends are cumulative, whether or not earned or declared, and are paid quarterly in arrears on the last day of March, June, September and December in each year, commencing June 30, 2016. The Preferred Dividends will be accreted to, and
increase, the outstanding Stated Value; provided, however, that following May 2, 2018, the Preferred Dividends may, at the Companys option, be paid in cash and, if not so paid in cash, will automatically be accreted to, and increase, the
outstanding Stated Value.
Additional Dividends
Upon the occurrence and during the continuance of a Dividend Increase Event (the date of a Dividend Increase Event being referred to as an
Additional Dividend Accrual Date
), each holder of then-outstanding shares of Series A Preferred Stock will thereafter be entitled to receive cash dividends accruing on a daily basis from the Additional Dividend Accrual Date,
through and including the date on which such dividends are paid, at the annual rate of four percent (4%) per annum of the Stated Value per share of Series A Preferred Stock. These cash dividends are hereinafter referred to as
Additional Dividends
. The Additional Dividends are in addition to, and not a substitute for or payment in lieu of, the Preferred Dividends. The Additional Dividends will increase by one percent (1%) upon each sixth-month
anniversary of the Dividend Increase Event, provided, however, that in no event may the Preferred Dividends and Additional Dividends collectively exceed sixteen percent (16%) per annum. The Additional Dividends are cumulative, whether or not
earned or declared, and are paid quarterly in arrears on the dividend payment dates for Preferred Dividends, if not paid prior. Any unpaid Additional Dividends will compound quarterly.
16
Registration Default Dividends
Registration Default Dividends will accrue on the Series A Preferred Stock to the extent provided in the Investor Rights Agreement. In
the event that the Company is required to pay Registration Default Dividends pursuant to the Investor Rights Agreement, the Company will provide written notice (
Registration Default Notice
) to the Holders of its obligation to pay
Registration Default Dividends no later than fifteen (15) days prior to the proposed payment date for the Registration Default Dividends, and the Registration Default Notice will set forth the amount of Registration Default Dividends to be paid
by the Company on such payment date. In no event, may Registration Default Dividends accrue at a rate in excess of 0.50% per annum of the Stated Value, regardless of the number of events or circumstances giving rise to requirements to pay such
Registration Default Dividends. Unless the context requires otherwise, all references to Preferred Dividends will include any Registration Default Dividends. Such Registration Default Dividends that are payable shall be payable in cash in arrears on
each dividend payment date following accrual set forth above in
DividendsPreferred Dividends
at the same time and in the same manner (except in cash only) as the Preferred Dividends.
Priority of Dividends
If the Company at any time pays a dividend on or makes a distribution in respect of the Common Stock (whether in cash, in kind or in other
property) or any other class or series of capital stock of the Company, the Company will, at the same time and on the same terms, pay or distribute to each Holder a dividend (or distribution) equal to the dividend that would have been payable to
such Holder if the shares, or fraction of a share, of Series A Preferred Stock held by such Holder had been converted into Common Stock on the date of determination of holders of Common Stock entitled to receive such dividend or distribution.
If at any time the Company pays less than the total amount of dividends then accumulated with respect to the Series A Preferred Stock, such
payment will be distributed pro rata among the Holders based upon the Stated Value on all shares of Series A Preferred Stock held by each such Holder.
Liquidation Rights
Upon any liquidation,
dissolution or winding-up of the Company, whether voluntary or involuntary (a
Liquidation
), after the satisfaction in full of the debts of the Company, the Holders will receive from the net assets of the Company the Liquidation
Preference multiplied by the number of shares of Series A Preferred Stock held by such Holders, before any distribution or payment will be made to the holders of any Junior Securities, and if the assets of the Company are insufficient to pay in full
such amounts, then the entire assets to be distributed to the Holders will be ratably distributed among the Holders in accordance with the respective amounts that would be payable on such shares if all amounts payable were paid in full. The Company
will mail written notice of any such Liquidation at least 45 days prior to the payment date stated in the notice to each Holder.
Right of the Holders
to Convert
At any time from and after May 2, 2016, each Holder has the right, at such Holders option, subject to the
conversion procedures set forth in the Certificate of Designation to convert each share of such Holders Series A Preferred Stock at any time into that number of shares of Common Stock determined by dividing (i) the sum of (x) the
Stated Value of such share of Series A Preferred Stock and (y) any accrued and unpaid dividends (including, for the avoidance of doubt, any Preferred Dividends, Additional Dividends and Registration Default Dividends) in respect of the Series A
Preferred Stock up to but not including the Conversion Date (as defined below) by (ii) the Conversion Price. The right of conversion may be exercised as to all or any portion of such Holders Series A Preferred Stock from time to time;
provided that, in each case, no right of conversion may be exercised by a Holder in respect of fewer than 1,000 shares of Series A Preferred Stock (unless such conversion relates to all shares of Series A Preferred Stock held by such Holder). Any
shares of Common Stock issued upon conversion of Series A Preferred Stock will be duly authorized, validly issued, fully paid and nonassessable.
17
Mandatory Conversion by the Company
At any time after May 2, 2018, if (i) the shares of Common Stock underlying the Series A Preferred Stock are registered for resale
under the Securities Act of 1933, as amended, (ii) the Weighted Average Price per share of Common Stock was greater than the Mandatory Conversion Price for at least forty-five (45) consecutive Trading Days, of which forty (40) of the
forty-five (45) consecutive Trading Days are each Qualified Trading Days, and (iii) no Dividend Increase Event under clause (ii) or (iii) of the definition of that term has occurred and is continuing, the Company may elect to
convert (a
Mandatory Conversion
) all, but not less than all, of the outstanding shares of Series A Preferred Stock into shares of Common Stock (the date selected by the Company for any Mandatory Conversion, the
Mandatory
Conversion Date
). In the case of a Mandatory Conversion, each share of Series A Preferred Stock then outstanding will be converted into that number of shares of Common Stock determined by dividing (i) the sum of (x) the Stated
Value of such share of Series A Preferred Stock and (y) any accrued and unpaid dividends (including, for the avoidance of doubt, any Preferred Dividends, Additional Dividends and Registration Default Dividends) in respect of the Series A
Preferred Stock up to but not including the Mandatory Conversion Date by (ii) the Conversion Price. Any shares of Common Stock issued upon conversion of Series A Preferred Stock will be duly authorized, validly issued, fully paid and
nonassessable.
Effect of Conversion
Effect of Conversion
Effective immediately prior to the close of business on the Conversion Date applicable to any shares of Series A Preferred Stock, Preferred
Dividends, Additional Dividends and Registration Default Dividends will no longer accrue or be declared on any such shares of Series A Preferred Stock, and on conversion, such shares of Series A Preferred Stock will cease to be outstanding.
The
Conversion Date
means (A) with respect to conversion of any shares of Series A Preferred Stock at the option of
any Holder, the date on which such Holder complies with the relevant procedures in the Certificate of Designation and (B) with respect to a Mandatory Conversion, the Mandatory Conversion Date.
Record Holder of Underlying Securities as of Conversion Date
The Person or Persons entitled to receive the Common Stock issuable upon conversion of Series A Preferred Stock on a Conversion Date will be
treated for all purposes as the record holder(s) of such shares of Common Stock as of the close of business on such Conversion Date. As promptly as practicable on or after the Conversion Date and compliance by the applicable Holder with the relevant
procedures set forth in the Certificate of Designation (and in any event no later than three (3) Trading Days thereafter), the Company will issue the number of whole shares of Common Stock issuable upon conversion. Such delivery of shares of
Common Stock will be made, at the option of the Company, in certificated form or by book-entry. Any such certificate or certificates will be delivered by the Company to the appropriate Holder on a book-entry basis or by mailing certificates
evidencing the shares to the Holders. In the event that a Holder will not by written notice designate the name in which shares of Common Stock to be delivered upon conversion of shares of Series A Preferred Stock should be registered, or the manner
in which such shares should be delivered, the Company will be entitled to register and deliver such shares in the name of the Holder and in the manner shown on the records of the Company.
Failure to Convert
If the Company fails for any reason or no reason to issue to a Holder of Series A Preferred Stock a certificate representing the Conversion
Shares within three (3) Business Days after the Conversion Date or Mandatory Conversion Date, as applicable, and register such shares of Common Stock on the Companys share register or to credit the Holders balance account with the
Depository Trust Company for such number of shares of Common Stock to which the Holder is entitled upon such conversion, and if on or after the Conversion Date
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the Holder purchases, or another Person purchases on the Holders behalf or for the Holders account (in an open market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by the Holder of shares of Common Stock issuable upon such conversion that the Holder anticipated receiving from the Company (a
Buy-In
), then the Company will pay in cash to the Holder (for costs incurred
either directly by such Holder or on behalf of a third party) the amount by which the total purchase price paid for Common Stock as a result of the Buy-In (including brokerage commissions, if any) exceeds the proceeds received by such Holder as a
result of the sale to which such Buy-In relates.
Fractional Shares
No fractional shares of Common Stock may be issued upon conversion of the Series A Preferred Stock into Common Stock. In the event a fractional
share of Common Stock would be issued on conversion, the number of shares of Common Stock to be issued will be rounded down to the nearest whole share.
Adjustments to Conversion Price
Dilutive Issuances
The Conversion Price and the number of Conversion Shares will be adjusted from time to time as follows:
If and whenever on or after the May 2, 2016, the Company issues or sells, or is deemed to have issued or sold, any shares of Common Stock
(including the issuance or sale of shares of Common Stock owned or held by or for the account of the Company, but excluding shares of Common Stock deemed to have been issued by the Company in connection with any Excluded Securities (the
Additional Shares
) for a consideration per share (the
New Issuance Price
) less than a price (the
Applicable Price
) equal to the Conversion Price in effect immediately prior to such issue or
sale or deemed issuance or sale (the foregoing a
Dilutive Issuance
), then immediately after such Dilutive Issuance, the Conversion Price then in effect shall be reduced to a price determined as follows:
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Adjusted Conversion Price
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where
A equals the number of shares of Common Stock outstanding, including the Additional Shares deemed to be issued
hereunder, immediately preceding the Dilutive Issuance;
B equals the Conversion Price in effect immediately
preceding such Dilutive Issuance;
C equals the number of Additional Shares issued or deemed issued hereunder
as a result of the Dilutive Issuance; and
D equals the aggregate consideration, if any, received or deemed to
be received by the Company upon such Dilutive Issuance.
For purposes of determining the adjusted Conversion Price, the following shall be
applicable:
(i)
Issuance of Options
. If the Company in any manner grants any Options and the lowest price per share
for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exercise or exchange of any Convertible Securities issuable upon exercise of any such Option is less than the Applicable Price, then such share
of Common Stock will be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share. For purposes of this provision, the lowest price per share for which
one share of Common Stock is issuable upon exercise of such Options or upon conversion, exercise or exchange of such Convertible Securities issuable upon exercise of any such Option is equal to the sum of the lowest amounts of
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consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the granting or sale of the Option, upon exercise of the Option and upon
conversion, exercise or exchange of any Convertible Security issuable upon exercise of such Option less any consideration paid or payable by the Company with respect to such one share of Common Stock upon the granting or sale of such Option, upon
exercise of such Option and upon conversion exercise or exchange of any Convertible Security issuable upon exercise of such Option. No further adjustment of the Conversion Price or number of Conversion Shares will be made upon the actual issuance of
such shares of Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such shares of Common Stock upon conversion, exercise or exchange of such Convertible Securities.
(ii)
Issuance of Convertible Securities
. If the Company in any manner issues or sells any Convertible Securities and the
lowest price per share for which one share of Common Stock is issuable upon the conversion, exercise or exchange thereof is less than the Applicable Price, then such share of Common Stock will be deemed to be outstanding and to have been issued and
sold by the Company at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this provision, the lowest price per share for which one share of Common Stock is issuable upon the
conversion, exercise or exchange thereof is equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to one share of Common Stock upon the issuance or sale of the Convertible Security
and upon conversion, exercise or exchange of such Convertible Security less any consideration paid or payable by the Company with respect to such one share of Common Stock upon the issuance or sale of such Convertible Security and upon conversion,
exercise or exchange of such Convertible Security. No further adjustment of the Conversion Price or number of Conversion Shares will be made upon the actual issuance of such shares of Common Stock upon conversion, exercise or exchange of such
Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Series A Preferred Stock has been or is to be made pursuant to other provisions described in this
section, no further adjustment of the Conversion Price or number of Conversion Shares shall be made by reason of such issue or sale.
(iii)
Change in Option Price or Rate of Conversion
. If the purchase price provided for in any Options, the additional
consideration, if any, payable upon the issue, conversion, exercise or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exercisable or exchangeable for shares of Common Stock increases
or decreases at any time, the Conversion Price and the number of Conversion Shares in effect at the time of such increase or decrease will be adjusted to the Conversion Price and the number of Conversion Shares which would have been in effect at
such time had such Options or Convertible Securities provided for such increased or decreased purchase price, additional consideration or increased or decreased conversion rate, as the case may be, at the time initially granted, issued or sold. For
purposes of this provision, if the terms of any Option or Convertible Security that was outstanding as of the May 2, 2016 are increased or decreased in the manner described in the immediately preceding sentence, then such Option or Convertible
Security and the shares of Common Stock deemed issuable upon exercise, conversion or exchange will be deemed to have been issued as of the date of such increase or decrease. No adjustment described in this section will be made if such adjustment
would result in an increase of the Conversion Price then in effect or a decrease in the number of Conversion Shares.
(iv)
Calculation of Consideration Received
. In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction, (A) the Options will be deemed to have been
issued for the Option Value of such Options and (B) the other securities issued or sold in such integrated transaction will be deemed to have been issued for the difference of (x) the aggregate consideration received by the Company less
any consideration paid or payable by the Company pursuant to the terms of such other securities of the Company, less (y) the Option Value. If any shares of Common Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received will be deemed to be the net amount received by the Company. If any shares of Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount
of such consideration received by the Company will be the fair value of such consideration, except
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where such consideration consists of securities, in which case the amount of consideration received by the Company will be the Closing Price of such security on the date of receipt. If any shares
of Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity, the amount of consideration will be deemed to be the fair value of
such portion of the net assets and business of the non-surviving entity as is attributable to such shares of Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or securities will
be determined jointly by the Company and the Required Holders. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the
Valuation Event
), the fair value of
such consideration will be determined within five (5) Trading Days after the tenth (10th) day following the Valuation Event by an independent, reputable appraiser jointly selected by the Company and the Required Holders. The determination
of such appraiser shall be final and binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne by the Company.
(v)
Record Date
. If the Company takes a record of the holders of shares of Common Stock for the purpose of entitling
them (A) to receive a dividend or other distribution payable in shares of Common Stock, Options or in Convertible Securities or (B) to subscribe for or purchase shares of Common Stock, Options or Convertible Securities, then such record
date will be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
Subdivisions of Common Stock
If the Company at any time on or after May 2, 2016 subdivides (by any stock split, stock dividend, recapitalization, reorganization,
scheme, arrangement or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced and the number of
Conversion Shares will be proportionately increased. If the Company at any time on or after May 2, 2016 combines (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination will be proportionately increased and the number of Conversion Shares will be proportionately decreased. Any
such adjustment will become effective at the close of business on the date the subdivision or combination becomes effective.
Other
Events
If any event occurs of the type contemplated by the provisions of the Certificate of Designation, but not expressly
provided for by such provisions (including, without limitation, the granting of stock appreciation rights or phantom stock rights), then the Board will make an appropriate adjustment in the Conversion Price and the number of Conversion Shares so as
to protect the rights of the Holder.
Reorganization Events
If there occurs any reorganization, recapitalization, consolidation or merger involving the Company in which the Common Stock is converted into
or exchanged for securities, cash or other property (excluding a merger solely for the purpose of changing the Companys jurisdiction of incorporation), then, following any such reorganization, recapitalization, consolidation or merger, in each
case pursuant to which shares of Common Stock would be converted into or exchanged for, or would constitute solely the right to receive, cash, securities or other property, each share of Series A Preferred Stock will be convertible into the kind and
amount of securities, cash or other property which a holder of the number of shares of Common Stock of the Company issuable upon conversion of one share of Series A Preferred Stock immediately prior to such reorganization, recapitalization,
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consolidation or merger would have been entitled to receive pursuant to such transaction; and, in such case, appropriate adjustment (as determined in good faith by the Board) will be made in the
application of the provisions described above in
Adjustments to Conversion Price
with respect to the rights and interest thereafter of the Holders, to the end that the provisions set forth in that section (including
provisions with respect to changes in and other adjustments of the Conversion Price) will thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of
the Series A Preferred Stock. In the event holders of Common Stock have the opportunity to elect the form of consideration to be received in the transaction, the Company will make adequate provision whereby the Holders will have a reasonable
opportunity to determine the form of consideration into which all of the Series A Preferred Stock, treated as a single class, will be convertible from and after the effective date of such transaction. The determination: (i) will be made by
Holders representing a plurality of shares of Series A Preferred Stock participating in such determination, (ii) will be subject to any limitations to which all of the holders of Common Stock are subject, including, but not limited to, pro rata
reductions applicable to any portion of the consideration payable in such transaction and (iii) will be conducted in such a manner as to be completed by the date which is the earlier of: (1) the deadline for elections to be made by holders
of Common Stock, and (2) two Trading Days prior to the anticipated effective date of such transaction.
Successive Adjustments
After an adjustment to the Conversion Price, any subsequent event requiring an adjustment will cause an adjustment to each such
Conversion Price as so adjusted.
Purchase Rights
If at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of Common Stock (the
Purchase Rights
), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which
the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of the Holders Series A Preferred Stock (without regard to any limitations on the conversion thereof) immediately
before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale
of such Purchase Rights.
Reserved Stock
The Company will at all times reserve and keep available out of its authorized but unissued Common Stock solely for the purpose of issuance
upon the conversion of the Series A Preferred Stock, such number of shares of Common Stock as will then be issuable upon the conversion of all outstanding shares or fractions of shares of Series A Preferred Stock. All shares of Common Stock which
will be so issued will be duly and validly issued and fully paid and nonassessable and free from all liens, duties and charges arising out of or by reason of the issue thereof (including, without limitation, in respect of taxes) and will be approved
for listing on the NASDAQ Global Market if shares of Common Stock generally are so listed (or any other national securities exchange on which the Common Stock is listed). The Company will from time to time take all such action as may be requisite to
assure that the par value per share of the Common Stock is at all times equal to or less than the effective Conversion Price. The Company will take all such action within its control as may be necessary on its part to assure that all such shares of
Common Stock may be so issued without violation of any applicable law or regulation, or of any requirements of any national securities exchange upon which the Common Stock of the Company may be listed. The Company will not take any action which
results in any adjustment of the Conversion Price if after such action the total number of shares of Common Stock issued and outstanding and thereafter issuable upon exercise of all Options and conversion of Convertible Securities, including upon
conversion of the Series A Preferred Stock, would exceed the total number of shares of such class of Common Stock then authorized by the Companys Certificate of Incorporation.
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Status of Reacquired Shares
Shares of Series A Preferred Stock that have been issued and reacquired in any manner, whether by redemption, repurchase or otherwise or upon
any conversion of shares of Series A Preferred Stock to Common Stock, will be retired and have the status of authorized and unissued shares of preferred stock of the Company undesignated as to series, and may be redesignated as any series of
preferred stock of the Company and reissued.
Voting Rights
General
In
addition to any class voting rights provided by law and the Certificate of Designation, the Holders of Series A Preferred Stock have the right to vote together with the holders of Common Stock as a single class on any matter on which the holders of
Common Stock are entitled to vote (including the election of directors). With respect to the voting rights of the Holders of the Series A Preferred Stock, each Holder of Series A Preferred Stock is entitled to cast one vote for each share of Common
Stock that would be issuable to such Holder upon the conversion of all the shares of Series A Preferred Stock held by such Holder on the record date for the determination of stockholders entitled to vote at a conversion rate the numerator of which
is the Stated Value (as adjusted for any subdivision by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise, as described above in
Adjustments to Conversion Price
, occurring
prior to such record date) and the denominator of which is the Conversion Price (which Conversion Price, solely for purposes of determining this conversion rate, cannot be less than $2.86 (the Closing Price of the Common Stock on March 11,
2016)).
Protective Provisions
In addition to any other vote of the Holders required by law or by the Certificate of Incorporation, without the prior consent of the Required
Holders, given in person or by proxy, either in writing or at a special meeting called for that purpose, at which meeting the holders of the shares of such Series A Preferred Stock shall vote together as a class, the Company will not:
(a) (x) authorize, create, designate, establish or issue (whether by merger or otherwise) (i) an increased number of shares of Series A
Preferred Stock, or (ii) any other class or series of capital stock ranking senior to or on parity with the Series A Preferred Stock as to dividends or upon liquidation or (y) reclassify any shares of Common Stock into shares having any
preference or priority as to dividends or upon liquidation superior to or on parity with any such preference or priority of Series A Preferred Stock;
(b) amend, restate, alter or repeal the Certificate of Incorporation in a manner which would adversely affect a Holders ability to
(i) transfer its shares of Series A Preferred Stock or Common Stock to any person or (ii) convert its shares of Series A Preferred Stock into Common Stock;
(c) directly or indirectly, declare or pay any dividend or distribution on, or directly or indirectly purchase, redeem, repurchase or
otherwise acquire or permit any subsidiary of the Company to redeem, repurchase or acquire, any Junior Securities if (i) after giving effect to such action, the Company would not have sufficient funds legally available to redeem all outstanding
shares of Series A Preferred Stock for an amount equal to the aggregate Liquidation Preference of such shares or (ii) there are any accrued and unpaid Preferred Dividends, Additional Dividends or Registration Default Dividends; or
(d) agree to do any of the foregoing.
Redemption
From and after May 2,
2023, each Holder has the right, at the Holders option, to require the Company to redeem all or any portion of such Holders shares of Series A Preferred Stock at a per share price equal to the
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Liquidation Preference in effect on the Redemption Date (the
Redemption Price
) by delivery of written notice to the Company (the
Redemption Request
) at least
thirty (30) days prior to the proposed date of redemption (the
Redemption Date
) set forth in the Redemption Request.
Promptly following receipt of a Redemption Request and no later than twenty (20) days prior to a Redemption Date, the Company will mail a
notice of optional redemption by first-class mail, postage prepaid to each Holder (other than the Holder(s) who submitted the applicable Redemption Request), which notice must state (i) the applicable Redemption Date and the applicable
Redemption Price and (ii) the date upon which the redemption right terminates, which cannot be earlier than seven (7) Business Days prior to the applicable Redemption Date. Any Holder may then, in its sole discretion, exercise its
redemption right (without waiver of any other redemption rights herein) with respect to all or any portion of the shares of Series A Preferred Stock (the
Redemption Securities
) beneficially owned by such Holder by delivery to the
Company of a written notice no less than seven (7) Business Days prior to the applicable Redemption Date stating (x) that such Holder is exercising the right of redemption described herein and (y) the number of shares of the
Redemption Securities with respect to which such Holder is exercising its redemption right.
In the event of a Fundamental Change, unless
waived by the Required Holders, each Holder has the right, at the Holders option, to require the Company to redeem all or any portion of such Holders shares of Series A Preferred Stock at a price equal to the Redemption Price by delivery
of a Redemption Request at least thirty (30) days prior to the Redemption Date set forth in the Redemption Request.
In the event of
a Fundamental Change other than an Exempt Transaction, the Company has the right, at the Companys option, to redeem all or any portion of the outstanding shares of Series A Preferred Stock at a price equal to the Redemption Price by delivery
of written notice to the Holders (the
Redemption Notice
) at least thirty (30) days prior to the Redemption Date set forth in such Redemption Notice. Such Redemption Notice shall set forth the number of shares of Series A
Preferred Stock being redeemed, the Redemption Price and the Redemption Date.
The Company will pay the applicable Redemption Price in
cash on the later of (i) the Redemption Date and (ii) upon the receipt of surrender of the certificates, if any, representing the shares of Series A Preferred Stock to be redeemed (properly endorsed or assigned for transfer, if the Company
reasonably requires, and letters of transmittal and instructions therefor on reasonable terms as are included in the notice sent by the Company); provided, that if such certificates are lost, stolen or destroyed, the Company may require the
applicable Holder to execute an agreement reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith, prior to paying such Redemption Price.
Shares of Series A Preferred Stock to be redeemed on the Redemption Date, as the case may be, will from and after the Redemption Date, no
longer be deemed to be outstanding; and all powers, designations, preferences and other rights of the holder thereof as a holder of shares of Series A Preferred Stock (except the right to receive from the Company the applicable Redemption Price)
will cease and terminate with respect to such shares; provided, that in the event that a share of Series A Preferred Stock is not redeemed due to a default in payment by the Company or because the Company is otherwise unable to pay the applicable
Redemption Price in cash in full, such share of Series A Preferred Stock will remain outstanding and will be entitled to all of the powers, designations, preferences and other rights as provided in the Certificate of Designation.
Any redemption of shares of Series A Preferred Stock (such redemption, the
Redemption
) will be payable out of any
cash legally available. At the time of the Redemption, the Company will take all actions required or permitted under Delaware law to permit the Redemption and to make funds legally available for such Redemption. To the extent that the Company has
insufficient funds to redeem all of the shares of Series A Preferred Stock upon the Redemption, the Company will use available funds to redeem a pro rata portion of such shares of Series A Preferred Stock, to the extent permissible under Delaware
law.
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Preemptive Rights
The Holders do not have any preemptive right to subscribe to any issue of the same or other capital stock of the Company.
Amendment to Terms
Any term of the
Series A Preferred Stock may be amended or waived upon the written consent of the Company and the Holders of at least 66% of the Series A Preferred Stock then outstanding.
Fractional Shares
Series A Preferred
Stock may be issued in fractions of a share that entitles each Holder, in proportion to such Holders fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of
holders of Series A Preferred Stock.
Definitions
As used in this Description of Series A Convertible Series A Preferred Stock, the following terms have the respective meanings set
forth below:
Affiliate
, as applied to any Person, means any other Person directly or indirectly controlling or controlled by, or under
direct or indirect common control with, such Person; provided that the following Persons shall not be deemed to be Affiliates of a Holder or any of its Affiliates: (a) the Company and its subsidiaries and (b) any portfolio company in which
such Holder or any of its Affiliates has an investment (whether debt or equity) or any of such portfolio companies controlled Affiliates, so long as, in the case of this clause (b), such Person shall not have been acting on behalf of or at the
direction of such Holder or any of its Affiliates or received any confidential information about the Company or its subsidiaries from or on behalf of such Holder (it being acknowledged and agreed that an employee of such Holder or its Affiliates
that is a director or officer of such portfolio company or its controlled Affiliates shall not be deemed to have received such confidential information solely by reason of such individual serving on the board or similar governing body of such
portfolio company). For the purposes of this definition, control, when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise; and the terms controlling and controlled have meanings correlative to the foregoing.
Approved Stock Plan
means any employee benefit plan, equity incentive plan or other issuance, employment agreement or option grant or
similar agreement which has been approved by the Board, pursuant to which the Companys securities may be issued to any employee, consultant, officer or director for services provided to the Company. For the avoidance of doubt, Approved Stock
Plan shall include all shares reserved for issuance pursuant to such Approved Stock Plan, and any increases to such share reserve that occur automatically or by shareholder approval on or after the Closing Date.
Bloomberg
means Bloomberg Financial Markets and its successors.
Board
means the board of directors of the Company.
Business Day
means any day except a Saturday, a Sunday or other day on which the U.S. Securities and Exchange Commission or banking
institutions in New York, New York are authorized or required by law, regulation or executive order to be closed.
Closing Date
means
May 2, 2016.
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Closing Price
of the Common Stock on any date of determination means the closing sale price
or, if no closing sale price is reported, the last reported sale price, of shares of Common Stock on the NASDAQ Global Market on such date. If the Common Stock is not traded on the NASDAQ Global Market on any date of determination, the Closing Price
of the Common Stock on such date of determination means the closing sale price as reported in the composite transactions for the principal United States securities exchange or automated quotation system on which the Common Stock is so listed or
quoted, or, if no closing sale price is reported, the last reported sale price on the principal United States securities exchange or automated quotation system on which the Common Stock is so listed or quoted, or if the Common Stock is not so listed
or quoted on a United States securities exchange or automated quotation system, the last quoted bid price for the Common Stock in the over-the-counter market as reported by OTC Market Group, Inc. or any similar organization, or, if that bid price is
not available, the market price of the Common Stock on that date as determined by an Independent Financial Advisor retained by the Company for such purpose.
Common Stock
means the common stock, par value $0.001 per share, of the Company, including the stock into which the Series A Preferred
Stock is convertible, and any securities into which the Common Stock may be reclassified.
Common Stock Equivalents
means any
securities of the Company or its subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time
convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.
Conversion
Price
means $4.50, subject to adjustment as provided herein.
Conversion Rate
means, as of any date, the rate determined by
dividing the Stated Value by the Conversion Price in effect on such date.
Conversion Shares
means the shares of Common Stock into which the Series A Preferred Stock is convertible.
Convertible Securities
means any stock or securities (other than Options) directly or indirectly convertible into or exercisable or
exchangeable for shares of Common Stock.
Dividend Increase Event
means any failure by the Company to (i) pay the Preferred
Dividends when due, (ii) redeem a Holders Series A Preferred Stock when required, (iii) effect conversion of a Holders Series A Preferred Stock when required, (iv) notify Holders in the event of a Fundamental Change,
(v) comply with the anti-dilution provisions of the Certificate of Designation, (vi) comply with the notices provision of the Certificate of Designation or (vii) comply with the protective provisions set forth in the Certificate of
Designation.
Exchange Act
means the Securities Exchange Act of 1934, as amended, or any successor statute, and the rules and
regulations promulgated thereunder.
Excluded Securities
means: (i) capital stock, Options or Convertible Securities issued to
directors, officers, employees or consultants of the Company in connection with their service as directors of the Company, their employment by the Company or their retention as consultants by the Company pursuant to an Approved Stock Plan in
existence on the date immediately preceding the Closing Date, (ii) shares of Common Stock issued upon the conversion or exercise of Options or Convertible Securities that were issued and outstanding on the date immediately preceding the Closing
Date, provided such securities are not amended after the Closing Date to increase the number of shares of Common Stock issuable thereunder or to lower the exercise or conversion price thereof, (iii) securities issued pursuant to the Investment
Agreement and securities issued upon the exercise or conversion of those securities or in respect of any dividends on such securities and (iv) shares of Common Stock issued or issuable by reason of a dividend, stock split or other distribution
on shares of Common Stock (but only to the extent that such a dividend, split or distribution results in an adjustment in the Conversion Price pursuant to the other provisions of this Certificate of Designations).
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Exempt Transaction
means (x) a transaction described in item (ii) of the definition
of Fundamental Change in which less than ten percent (10%) of the consideration payable to the Companys stockholders is cash or (y) a transaction described in items (iv) or (v) of the definition of Fundamental Change.
Fundamental Change
means the occurrence of any of the following events: (i) a person or group within the
meaning of Section 13(d) of the Exchange Act, other than the Company, files a Schedule TO or any schedule, form or report under the Exchange Act disclosing that such person or group has become the direct or indirect beneficial
owner, as defined in Rule 13d-3 under the Exchange Act, of Common Stock representing more than 50% of the voting securities of the Company or the Company otherwise becomes aware of such ownership; (ii) the consummation of (a) any
recapitalization, reclassification or change of the Common Stock (other than a change only in par value, from par value to no par value or from no par value to par value, or changes resulting from a subdivision or combination of Common Stock) as a
result of which the Common Stock would be converted into, or exchanged for, or represent solely the right to receive, cash, stock, other securities, other property or assets or (b) any share exchange, consolidation or merger of the Company
pursuant to which the Common Stock will be converted into, or exchanged for, or represent solely the right to receive, cash, stock, other securities, other property or assets; (iii) the Company sells all or substantially all of its assets;
(iv) the stockholders of the Company approve or the Company otherwise adopts any plan or proposal for the liquidation, dissolution or winding-up of the Company; or (v) the Common Stock ceases to be listed on any of the New York Stock
Exchange, the NASDAQ Global Select Market or the NASDAQ Global Market (or any of their respective successors) or another U.S. national securities exchange; provided, however, that a transaction or transactions described in clause (ii) above
will not constitute a Fundamental Change if the holders of all classes of Common Stock immediately prior to such transaction own, directly or indirectly, more than 50% of all classes of Common Stock of the continuing or surviving corporation.
Independent Financial Advisor
means an accounting, appraisal, investment banking firm or consultant of nationally recognized standing;
provided, however, that such firm or consultant is not an Affiliate of the Company and is reasonably acceptable to the Required Holders.
Investment Agreement
means that certain investment agreement, dated on or about March 11, 2016, as amended, by and among the Company
and each of the investors party thereto.
Investor Rights Agreement
means that certain investor rights agreement, dated on or about
May 2, 2016, by and among the Company and each of the investors party thereto.
Junior Securities
means the Common Stock and all
other Common Stock Equivalents of the Company other than those securities which are explicitly senior or pari passu to the Series A Preferred Stock in dividend rights or liquidation preference.
Liquidation Preference
means an amount per share equal to (i) the greater of (A) the Stated Value and (B) such amount as
would have been payable had all shares of Series A Preferred Stock been converted into Common Stock immediately prior to a Liquidation plus (ii) any accrued but unpaid Preferred Dividends, Additional Dividends and Registration Default Dividends
thereon.
Mandatory Conversion Price
means 175% of the Conversion Price.
Options
means any rights, warrants or options to subscribe for or purchase shares of Common Stock or Convertible Securities.
Option Value
means the value of an Option based on the Black and Scholes Option Pricing model obtained from the OV function on
Bloomberg determined as of the day prior to the public announcement of the applicable Option for pricing purposes and reflecting (i) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the remaining term of
the applicable Option as of the applicable date of
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determination, (ii) an expected volatility equal to the greater of (a) 100% and (b) the 100 day volatility obtained from the HVT function on Bloomberg as of the day
immediately following the public announcement of the issuance of the applicable Option, (iii) the underlying price per share used in such calculation shall be the highest Weighted Average Price of the Common Stock on any Trading Day during the
period beginning on the day prior to the execution of definitive documentation relating to the issuance of the applicable Option and ending on the day of the public announcement of such issuance and (iv) a 360 day annualization factor.
Person
means an individual, a limited liability company, a partnership, a joint venture, a corporation, an association, joint stock
company, an estate, a trust, an unincorporated organization, any other entity and a government or any department or agency thereof.
Principal
Market
means The NASDAQ Global Market.
Qualified Trading Day
means any Trading Day on which the volume of shares of Common
Stock traded is equal to or greater than 75,000 shares (as adjusted for stock splits, reverse stock splits and similar transactions).
Registration Default Dividends
means all amounts, if any, payable pursuant to Section 3.12 of the Investor Rights Agreement.
Required Holders
means, as of any date, the holders of at least a majority of the Series A Preferred Stock outstanding as of such date.
Stated Value means $1,000.00 per share, subject to increase as set forth in DividendsPreferred Dividends.
Trading
Day
means any day on which the Common Stock are traded on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market on which
the Common Stock are then traded; provided that Trading Day shall not include any day on which the Common Stock are scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock are suspended from
trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York time).
Weighted Average Price
means, for any security as of any date, the dollar volume-weighted average price for such security on the
Principal Market during the period beginning at 9:30:01 a.m., New York time (or such other time as the Principal Market publicly announces is the official open of trading), and ending at 4:00:00 p.m., New York time (or such other time as the
Principal Market publicly announces is the official close of trading), as reported by Bloomberg through its Volume at Price function or, if the foregoing does not apply, the dollar volume-weighted average price of such security in the
over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30:01 a.m., New York time (or such other time as the Principal Market publicly announces is the official open of trading), and ending at
4:00:00 p.m., New York time (or such other time as the Principal Market publicly announces is the official close of trading), as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for
such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the pink sheets by OTC Markets LLC. If the Weighted Average Price cannot be calculated
for a security on a particular date on any of the foregoing bases, the Weighted Average Price of such security on such date shall be the fair market value as mutually determined by the Company and the applicable Holder. If the Company and the
applicable Holder are unable to agree upon the fair market value of such security, then the Weighted Average Price will be determined by an Independent Financial Advisor retained by the Company for such purpose. All such determinations shall be
appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during the applicable calculation period.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
General
The following discussion is a
summary of the material U.S. federal income tax consequences relevant to the ownership and disposition of shares of the Common Stock and the Series A Preferred Stock. It does not purport to be a complete analysis of all potential tax effects. The
discussion is based upon the Internal Revenue Code of 1986, as amended (the Code), U.S. Treasury Regulations (Treasury Regulations) issued thereunder, Internal Revenue Service (IRS) rulings and pronouncements and
judicial decisions now in effect, all of which are subject to change at any time. Any such change may be applied retroactively in a manner that could adversely affect a holder of the Common Stock or the Series A Preferred Stock. This discussion does
not address all of the U.S. federal income tax consequences that may be relevant to a holder in light of such holders particular circumstances or to holders subject to special rules, such as banks, financial institutions, U.S. expatriates,
insurance companies, regulated investment companies, real estate investment trusts, controlled foreign corporations, passive foreign investment companies, dealers in securities or currencies, traders in securities,
partnerships or other pass-through entities or investors in such entities, U.S. Holders (as defined below) whose functional currency is not the U.S. dollar, tax-exempt organizations and persons holding the Common Stock or the Series A Preferred
Stock as part of a straddle, hedge, conversion transaction or other integrated transaction. Tax consequences may vary depending upon the particular circumstances of an investor. Moreover, the effect of any
applicable state, local or foreign tax laws or of U.S. federal estate or gift tax laws is not discussed. This discussion is limited to taxpayers who will hold the Series A Preferred Stock and the Common Stock received in respect thereof as
capital assets within the meaning of Section 1221 of the Code (generally, property held for investment).
As used herein,
U.S. Holder means a beneficial owner of the Common Stock or the Series A Preferred Stock who or that is or is treated for U.S. federal income tax purposes as:
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an individual that is a citizen or resident of the U.S.;
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a corporation or other entity taxable as a corporation created or organized in or under the laws of the U.S., any state thereof, or the District of Columbia;
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an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
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a trust, if (i) a U.S. court can exercise primary supervision over the administration of the trust and one or more U.S. persons can control all substantial trust decisions, or (ii) the trust was in existence
on August 20, 1996, was treated as a U.S. person prior to such date, and has validly elected to continue to be treated as a U.S. person.
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As used herein, a Non-U.S. Holder is any holder other than a U.S. Holder.
No rulings from the IRS have been or are expected to be sought with respect to the matters discussed below. There can be no assurance that the
IRS will not take a different position concerning the tax consequences of the purchase, ownership or disposition of the Common Stock or the Series A Preferred Stock or that any such position would not be sustained. If a partnership or other entity
taxable as a partnership holds the Common Stock or the Series A Preferred Stock, the tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Such partner should consult its tax advisor as
to the tax consequences.
We urge you to consult your own tax advisor regarding the U.S. federal income tax consequences of owning and
disposing of the Common Stock or the Series A Preferred Stock, including your status as a U.S. Holder or a Non-U.S. Holder, as well as any tax consequences that may arise under the laws of any state, municipal, foreign or other non-U.S. taxing
jurisdiction and the possible effects of changes in U.S. federal or other tax laws.
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U.S. Holders
Distributions on the Common Stock or the Series A Preferred Stock
In general, distributions with respect to the Common Stock or the Series A Preferred Stock, as applicable (other than distributions on the
Series A Preferred Stock in the form of increases to the Stated Value, described below in
U.S. HoldersAccruing Dividends on the Series A Preferred Stock
), will be taxable as dividends to the extent paid out of the
Companys current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such income will be includible in the gross income of a U.S. Holder as ordinary income on the day actually or constructively received
by such holder. For purposes of determining the portion of distributions on separate classes of shares of our stock that will be treated as dividends for U.S. federal income tax purposes, current and accumulated earnings and profits will be
allocated to distributions resulting from priority rights of Series A Preferred Stock before being allocated to other distributions. Any portion of a distribution that exceeds such earnings and profits will first be applied to reduce a U.S.
Holders tax basis in the Common Stock or Series A Preferred Stock on a share-by-share basis, and the excess will be treated as gain from the disposition of the Common Stock or Series A Preferred Stock, the tax treatment of which is discussed
below under
U.S. HoldersDisposition, Including Redemptions
.
Under current law, dividends received by individual
holders of Common Stock or the Series A Preferred Stock will be subject to a reduced maximum tax rate of 20% if such dividends are treated as qualified dividend income for U.S. federal income tax purposes. The rate reduction does not
apply to dividends received to the extent that the individual shareholder elects to treat the dividends as investment income, which may be offset against investment expenses. Furthermore, the rate reduction does not apply to dividends
that are paid to individual shareholders with respect to Common Stock or Series A Preferred Stock that is held for 60 days or less during the 121 day period beginning on the date which is 60 days before the date on which the Common Stock or Series A
Preferred Stock becomes ex-dividend (or where the dividend is attributable to a period or periods in excess of 366 days, Common Stock or Series A Preferred Stock that is held for 90 days or less during the 181 day period beginning on the date which
is 90 days before the date on which the Common Stock or Series A Preferred Stock becomes ex-dividend). Also, if a dividend received by an individual shareholder that qualifies for the rate reduction is an extraordinary dividend within
the meaning of Section 1059 of the Code, any loss recognized by such individual shareholder on a subsequent disposition of the stock will be treated as long-term capital loss to the extent of such extraordinary dividend,
irrespective of such shareholders holding period for the stock. In addition, dividends recognized by U.S. Holders that are individuals could be subject to the 3.8% tax on net investment income. Individual shareholders should consult their own
tax advisors regarding the implications of these rules in light of their particular circumstances.
Dividends received by corporate
shareholders generally will be eligible for the dividends-received deduction. Generally, this deduction is allowed if the underlying stock is held for at least 46 days during the 91 day period beginning on the date 45 days before the ex-dividend
date of the stock, and for cumulative preferred stock with an arrearage of dividends attributable to a period in excess of 366 days, the holding period is at least 91 days during the 181 day period beginning on the date 90 days before the
ex-dividend date of the stock. If a corporate shareholder receives a dividend on the Common Stock or Series A Preferred Stock that is an extraordinary dividend within the meaning of Section 1059 of the Code, the shareholder in
certain instances must reduce its basis in the Common Stock or Series A Preferred Stock by the amount of the nontaxed portion of such extraordinary dividend that results from the application of the dividends-received
deduction. If the nontaxed portion of such extraordinary dividend exceeds such corporate shareholders basis, any excess will be taxed as gain as if such shareholder had disposed of its shares in the year the
extraordinary dividend is paid. Each domestic corporate holder of the Common Stock or Series A Preferred Stock is urged to consult with its tax advisors with respect to the eligibility for and the amount of any dividends received
deduction and the application of Code Section 1059 to any dividends it may receive on the Series A Preferred Stock.
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Accruing Dividends on the Series A Preferred Stock
If a dividend on the Series A Preferred Stock accrues, the tax treatment to a U.S. Holder of such accrual will depend on whether (a) the
Series A Preferred Stock is treated as participating in corporate growth to any significant extent as determined under applicable Treasury Regulations and (b) cash distributions are also made on the Common Stock. The Company believes that the
Series A Preferred Stock will be treated as participating in corporate growth to a significant extent because (i) with respect to dividends, if the Company at any time pays a dividend on or makes a distribution in respect of the Common Stock or
any other class or series of capital stock, the Company must also make a distribution on each share of Series A Preferred Stock equal to the dividend that would have been payable to had the Series A Preferred Stock been converted into Common Stock
immediately before such dividend or distribution and (ii) on liquidation, each share of Series A Preferred Stock will be entitled to the greater of the Stated Value or such amount as would have been payable had all shares of Series A Preferred
Stock been converted into Common Stock immediately prior to a liquidation. In general, a U.S. Holder is bound by our determination, unless the U.S. Holder explicitly discloses that it is taking a contrary position in a statement attached to its
timely filed tax return for the taxable year in which it acquires the stock. The remainder of this summary assumes that the Series A Preferred Stock will be treated as participating preferred. This view, however, is not free from doubt. There can be
no assurance that the IRS will not take the position that the Series A Preferred Stock should not be treated as participating in corporate growth to any significant extent as determined under the Treasury Regulations.
If cash distributions are not made on the Common Stock, an accrued dividend on the Series A Preferred Stock will be tax-free to a U.S. Holder.
A U.S. Holders tax basis and holding period for such Series A Preferred Stock generally will remain the same as it was prior to the distribution. If, however, cash distributions are made on the Common Stock, the tax treatment of an accrual on
the Series A Preferred Stock is not entirely clear. Such a distribution may be a taxable distribution to the U.S. Holder, as described above in
U.S. HoldersDistributions on the Common Stock or the Series A Preferred Stock
.
Generally, where more than 36 months have elapsed between a distribution of cash or property on the Common Stock and an accrual on the Series A Preferred Stock, the later will be presumed not to result in a deemed distribution to the holders of
Series A Preferred Stock unless both distributions are made pursuant to a plan. Alternatively, such a distribution may be a tax-free distribution, as described in the previous paragraph. U.S. Holders should consult their own tax advisors regarding
the U.S. federal income tax consequences of such a distribution if cash distributions are also made on the Common Stock.
Adjustment
of Conversion Rate
The conversion rate of the Series A Preferred Stock is subject to adjustment under certain circumstances. The
Treasury Regulations treat a holder of Series A Preferred Stock as having received a constructive distribution includible in such holders U.S. income in the manner described under
U.S. HoldersDistributions on the Common Stock or
the Series A Preferred Stock
above, if and to the extent that certain adjustments (or failures to make adjustments) in the conversion rate increase the holders proportionate interest in our earnings and profits. Adjustments to the
conversion rate made pursuant to a bona fide reasonable adjustment formula that has the effect of preventing dilution in the interests of the holders of the Series A Preferred Stock generally will not be considered to result in a constructive
distribution. However, certain of the possible conversion rate adjustments provided in the Series A Preferred Stock will generally give rise to a deemed distribution to the holders of the Series A Preferred Stock to the extent of our current and
accumulated earnings and profits. Thus, under certain circumstances in the event of a deemed distribution, you may recognize taxable income even though you may not receive any cash or property.
Conversion of Series A Preferred Stock into Common Stock
A U.S. Holder generally will not recognize gain or loss upon the conversion of the Series A Preferred Stock into shares of Common Stock.
However, if the conversion takes place when there is a dividend arrearage on the
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Series A Preferred Stock and the fair market value of the Common Stock exceeds the issue price of the Series A Preferred Stock, the Common Stock received in respect of such dividend arrearage may
be treated as a dividend distribution as described above under
Distributions on the Common Stock or the Series A Preferred Stock
. In addition, if the conversion is pursuant to a plan to periodically increase your
proportionate interest in our assets or earnings and profits, a portion of the Common Stock received may be treated as a dividend distribution as described above under
Distributions on the Common Stock or the Series A Preferred
Stock
. Assuming the conversion is not pursuant to any such plan and no dividend arrearage exists, except as discussed in the next sentence, a U.S. Holders basis in shares of Common Stock received upon conversion of the Series A
Preferred Stock (and any fractional shares of our Common Stock treated as received and then exchanged for cash) will equal the basis of the converted shares of Series A Preferred Stock and the holding period of such shares of Common Stock will
include the holding period of the converted shares of Series A Preferred Stock. Common Stock received in payment of dividends in arrears and taxed as a dividend upon receipt, if any, will have a basis equal to their fair market value on the date of
conversion, and a new holding period which will commence on the day after the conversion.
Cash received in lieu of a fractional share of
Common Stock upon conversion will be treated as a payment in a taxable exchange for such fractional share, and gain or loss will be recognized on the receipt of cash in an amount equal to the difference between the amount of cash received and the
amount of adjusted tax basis allocable to the fractional share.
Dispositions, Including Redemptions
Upon any sale, exchange, redemption (except as discussed below) or other disposition of the Common Stock or Series A Preferred Stock, a U.S.
Holder will recognize capital gain or loss equal to the difference between the amount realized by the U.S. Holder and the U.S. Holders adjusted tax basis in the Common Stock or Series A Preferred Stock. Such capital gain or loss will be
long-term capital gain or loss if the U.S. Holders holding period for the Common Stock or Series A Preferred Stock is longer than one year. A U.S. Holder should consult its own tax advisors with respect to applicable tax rates and netting
rules for capital gains and losses. Certain limitations exist on the deduction of capital losses by both corporate and non-corporate taxpayers. In addition, gains recognized by U.S. Holders that are individuals, trusts and estates could be subject
to the 3.8% tax on net investment income.
A redemption of shares of the Common Stock or Series A Preferred Stock generally will be a
taxable event. If the redemption is treated as a sale or exchange, instead of a dividend, a U.S. Holder will recognize capital gain or loss (which will be long-term capital gain or loss, if the U.S. Holders holding period for such Common Stock
or Series A Preferred Stock exceeds one year) equal to the difference between the amount realized by the U.S. Holder and the U.S. Holders adjusted tax basis in the Common Stock or Series A Preferred Stock redeemed, except to the extent that
any cash received is attributable to any accrued but unpaid dividends on the Common Stock or Series A Preferred Stock, which will be subject to the rules discussed above in
Distributions on the Common Stock or Series A Preferred
Stock
. A payment made in redemption of the Common Stock or Series A Preferred Stock may be treated as a dividend, rather than as payment in exchange for the Common Stock or Series A Preferred Stock, unless the redemption meets any one of a
number of tests under Section 302(b) of the Code. In determining whether any of these tests has been met, a U.S. Holder must take into account not only shares of the Common Stock or Series A Preferred Stock that the U.S. Holder actually owns,
but also shares of stock that the U.S. Holder is deemed to own under certain constructive ownership rules.
Information reporting
and backup withholding
In general, information reporting requirements will apply to payments of dividends on, and the proceeds of
the sale of, the Common Stock or the Series A Preferred Stock. Backup withholding may apply to such payments if a U.S. Holder fails to comply with certain identification requirements. Backup withholding is currently imposed at a rate of 28%. Backup
withholding is not an additional tax. Any amounts withheld under the backup
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withholding rules from a payment to a U.S. Holder will be allowed as a credit against such holders U.S. federal income tax and may entitle the holder to a refund, provided that the required
information is furnished to the IRS in a timely manner. We are required to determine the date and amount of any constructive distributions. Recently proposed Treasury Regulations, on which we may rely prior to the issuance of final Treasury
Regulations, specify how the date and amount of constructive distributions are determined, and provide that our determination of those items will generally control the timing and amount of any constructive distributions (or portions thereof) you
would be required to include your taxable income.
Non-U.S. Holders
Distributions on the Common Stock or the Series A Preferred Stock
If distributions are made with respect to the Common Stock or Series A Preferred Stock, such distributions will be treated as dividends to the
extent of our current and accumulated earnings and profits as determined under the Code and may be subject to withholding as discussed below. Any portion of a distribution that exceeds our current and accumulated earnings and profits will first be
applied to reduce the Non-U.S. Holders basis in the Common Stock or Series A Preferred Stock and, to the extent such portion exceeds the Non-U.S. Holders basis, the excess will be treated as gain from the disposition of the Common Stock
or Series A Preferred Stock, the tax treatment of which is discussed below under
Dispositions, Including Redemptions
.
Dividends paid to a Non-U.S. Holder of the Common Stock or Series A Preferred Stock will be subject to withholding of U.S. federal income tax
at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. However, dividends that are effectively connected with the conduct of a trade or business by the Non-U.S. Holder within the United States (and, where a tax
treaty applies, are attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States) are not subject to the withholding tax, provided that certain certification and disclosure requirements are satisfied including
completing Internal Revenue Service Form W-8ECI (or other applicable form). Instead, such dividends are subject to U.S. federal income tax on a net income basis in the same manner as if the Non-U.S. Holder were a United States person as defined
under the Code, unless an applicable income tax treaty provides otherwise. Any such effectively connected dividends received by a foreign corporation may be subject to an additional branch profits tax at a 30% rate or such lower rate as
may be specified by an applicable income tax treaty. A Non-U.S. Holder of the Common Stock or Series A Preferred Stock who wishes to claim the benefit of an applicable treaty rate and avoid backup withholding, as discussed below, for dividends will
be required to (i) complete Internal Revenue Service Form W-8BEN or Form W-8BEN-E (or other applicable form) and certify under penalty of perjury that such holder is not a United States person as defined under the Code and is eligible for
treaty benefits, or (ii) if the Common Stock or Series A Preferred Stock is held through certain foreign intermediaries, satisfy the relevant certification requirements of applicable Treasury regulations. A Non-U.S. Holder of the Common Stock
or Series A Preferred 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 timely filing an appropriate claim for refund with the Internal Revenue Service.
Accruing Dividends on the Series A Preferred Stock
To the extent an accrual of a dividend taxable as described above under the heading
U.S. HoldersAccruing Dividends on the Series
A Preferred Stock
such accrual will be taxable in the manner set forth in the paragraph above,
Non-U.S. HoldersDistributions on the Common Stock or the Series A Preferred Stock
.
Adjustment of conversion rate
As described above under
U.S. HoldersAdjustment of Conversion Rate
, adjustments to the conversion rate (or
failure to make adjustments) that have the effect of increasing a Non-U.S. Holders proportionate interest in our assets or earnings may, in some circumstances, result in a deemed distribution to the Non-U.S. Holder that
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are taxed as described above under
Non-U.S. HoldersDistributions on the Common Stock or the Series A Preferred Stock
. Any constructive dividend deemed paid to a
Non-U.S. Holder will be subject to U.S. federal withholding tax at the rate of 30%, unless reduced or eliminated by treaty. However, any constructive dividends that are effectively connected with the conduct of a trade or business by a Non-U.S.
Holder within the United States will be taxed as described above under
Non-U.S. HoldersDistributions on the Common Stock or the Series A Preferred Stock
. Any withholding tax that we are required to pay on behalf of a
Non-U.S. Holder will reduce future amounts otherwise payable to such stockholder. Under recently issued proposed regulations, constructive distributions, if any, generally would be deemed to occur on the date adjustments to the conversion price are
made in accordance with the terms of the relevant series or class of stock.
Conversion of Series A Preferred Stock into Common
Stock
A Non-U.S. Holder generally will not recognize gain or loss in respect of the receipt of Common Stock upon the conversion of
the Series A Preferred Stock, except that the Common Stock received that is attributable to undeclared, accumulated and unpaid dividends or dividends in arrears, if any, will be treated in the manner described above under
Non-U.S.
HoldersDistributions on the Common Stock or the Series A Preferred Stock
.
Dispositions, Including Redemptions
Any gain realized by a Non-U.S. Holder on the disposition of the Common Stock or Series A Preferred Stock (other than a conversion
of Series A Preferred Stock into Common Stock) generally will not be subject to U.S. federal income tax unless:
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the gain is effectively connected with a trade or business of the Non-U.S. Holder in the United States (and, if required by an applicable income tax treaty, is attributable to a U.S. permanent establishment of the
Non-U.S. Holder);
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the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of that disposition, and certain other conditions are met; or
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we are or have been a United States real property holding corporation as described under Section 897 of the Code for U.S. federal income tax purposes during the shorter of the five-year period preceding
the date of the disposition or the non-United States holders holding period.
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An individual Non-U.S. Holder described
in the first bullet point immediately above will be subject to tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates. An individual Non-U.S. Holder described in the second bullet point immediately above will
be subject to a flat 30% tax on the gain derived from the sale, which may be offset by U.S. source capital losses, even though the individual is not considered a resident of the United States. If a Non-U.S. Holder that is a foreign corporation falls
under the first bullet point immediately above, it will be subject to tax on its net gain in the same manner as if it were a United States person as defined under the Code and, in addition, may be subject to the branch profits tax equal to 30% of
its effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax treaty. With regard to the third bullet point, we do not believe that we are, have been, or will be a United States real property
holding corporation for United States federal income tax purposes.
If a Non-U.S. Holder is subject to U.S. federal income tax on any
disposition of the Common Stock or Series A Preferred Stock, a redemption of shares of the Common Stock or Series A Preferred Stock will be a taxable event. If the redemption is treated as a sale or exchange, instead of a dividend, a Non-U.S. Holder
generally will recognize long-term capital gain or loss, if the Non-U.S. Holders holding period for such Common Stock or Series A Preferred Stock exceeds one year, equal to the difference between the amount of cash received and fair market
value of property received and the Non-U.S. Holders adjusted tax basis in the Common Stock or Series A Preferred Stock redeemed, except that to the extent that any cash received is attributable to any
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accrued but unpaid dividends, which generally will be subject to the rules discussed above in
Non-U.S. HoldersDistributions on the Common Stock or the Series A Preferred
Stock
. A payment made in redemption of the Common Stock or Series A Preferred Stock may be treated as a dividend, rather than as payment in exchange for the Common Stock or Series A Preferred Stock, in the same circumstances discussed
above under
U.S. HoldersDispositions, Including Redemptions
. Each Non-U.S. Holder of the Common Stock or Series A Preferred Stock should consult its own tax advisors to determine whether a payment made in redemption of the
Common Stock or Series A Preferred Stock will be treated as a dividend or as payment in exchange for the Common Stock or Series A Preferred Stock.
Information reporting and backup withholding
We must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to such holder and the tax withheld with respect to
such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the Non-U.S. Holder resides under
the provisions of an applicable income tax treaty.
A Non-U.S. Holder will be subject to backup withholding for dividends paid to such
holder unless such holder certifies under penalty of perjury that it is a Non-U.S. Holder (and the payor does not have actual knowledge or reason to know that such holder is a U.S. person as defined under the Code), or such holder otherwise
establishes an exemption.
Information reporting and, depending on the circumstances, backup withholding will apply to the proceeds of a
sale of our stock within the United States or conducted through certain U.S.-related financial intermediaries, unless the beneficial owner certifies under penalty of perjury that it is a Non-U.S. Holder (and the payor does not have actual knowledge
or reason to know that the beneficial owner is a U.S. person as defined under the Code), or such owner otherwise establishes an exemption.
We are required to determine the date and amount of any constructive distributions. Recently proposed Treasury Regulations, on which we may
rely prior to the issuance of final Treasury Regulations, specify how the date and amount of constructive distributions are determined, and provide that our determination of those items will generally control the timing and amount of any
constructive distributions (or portions thereof) a Non-U.S. Holder would be required to include in such Non-U.S. Holders taxable income.
Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a Non-U.S. Holders U.S. federal
income tax liability provided the required information is furnished to the IRS.
FATCA
Sections 1471 through 1474 of the Code (provisions which are commonly referred to as FATCA), generally impose a 30% United States
withholding tax on dividends paid on the Common Stock or the Series A Preferred Stock or on the gross proceeds from a disposition of Common Stock or Series A Preferred Stock paid to certain non-U.S. entities (whether or not such non-U.S. entity is a
beneficial owner or an intermediary), including certain foreign financial institutions, unless such non-U.S. entity provides sufficient documentation evidencing either (i) an exemption from FATCA, or (ii) its compliance with certain
reporting and disclosure obligations (or deemed compliance pursuant to an intergovernmental agreement with the United States). The withholding tax applies to payments of dividends on the Common Stock or the Series A Preferred Stock but only to
payments of gross proceeds upon a disposition after December 31, 2018. You should consult your own tax advisor regarding the possible implications of FATCA on your ownership of the Common Stock or the Series A Preferred Stock.
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PLAN OF DISTRIBUTION
The offered securities are being registered to permit the holders of the offered securities the ability to offer and sell the offered
securities from time to time after the date of this prospectus. We will not receive any of the proceeds from the offering by the selling stockholders of the Series A Preferred Stock and the Common Stock. We will bear the fees and expenses incurred
by us in connection with our obligation to register the offered securities. If the securities are sold through underwriters or broker-dealers, the selling stockholders will be responsible for underwriting discounts, selling commissions or stock
transfer taxes.
The securities offered hereby may be sold from time to time in one or more transactions at fixed prices, at prevailing
market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale or at negotiated prices. These prices will be determined by the selling stockholders or by agreement between such
holders and underwriters or dealers who may receive fees or commissions in connection with such sale. Such sales may be effected by a variety of methods, including the following:
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in market transactions, including transactions on a national securities exchange or quotations service or over-the-counter market;
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in privately negotiated transactions;
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through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
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in a block trade in which a broker-dealer will attempt to sell a block of securities as agent but may position and resell a portion of the block as principal to facilitate the transaction;
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through the settlement of short sales, in each case subject to compliance with the Securities Act and other applicable securities laws;
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through one or more underwriters on a firm commitment or best-efforts basis;
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an exchange distribution in accordance with the rules of the applicable exchange, if any;
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ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
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purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
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broker-dealers may agree with the selling stockholders to sell a specified number of such securities at a stipulated price per security;
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directly to one or more purchasers;
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in any combination of the above or by any other legally available means.
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The selling
stockholders may enter into derivative transactions with third parties or sell securities not covered by this prospectus to third parties in privately negotiated transactions.
The selling stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the offered
securities, short and deliver the securities to close out such short positions, or loan or pledge the securities that in turn may sell such securities. The selling stockholders also may transfer, donate and pledge offered securities, in which case
the transferees, donees, pledgees or other successors in interest may be deemed selling stockholders for purposes of this transaction.
To
our knowledge, there are currently no plans, arrangements or understandings between the selling stockholders and any underwriter, broker-dealer or agent regarding the sale by the selling stockholders of the offered securities. The selling
stockholders may decide to sell all or a portion of the securities offered by it
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pursuant to this prospectus or may decide not to sell any securities under this prospectus. In addition, the selling stockholders may transfer sell, transfer or devise the securities by other
means not described in this prospectus. Any securities covered by this prospectus that qualify for sale pursuant to Rule 144 under the Securities Act (
Rule 144
) may be sold pursuant to Rule 144 rather than pursuant to this
prospectus.
Underwriters, broker-dealers (including selling stockholders who are registered broker-dealers) or agents participating in
the distribution of the offered securities are deemed to be underwriters within the meaning of the Securities Act. Selling stockholders, including those who are affiliates of registered broker-dealers, may be deemed to be underwriters
within the meaning of the Securities Act. Profits on the sale of securities by selling stockholders, and any commission received by any other underwriter, broker-dealer or agent, may be deemed to be underwriting commissions under the Securities Act.
Selling stockholders that are deemed to be underwriters are subject to statutory liabilities, including, but not limited to, those of Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the Exchange Act.
The selling stockholders and any other person participating in the distribution will be subject to the applicable provisions of the Exchange
Act and the rules and regulations under the Exchange Act, including, without limitation, Regulation M, which may limit the timing of purchases and sales by the selling stockholders and any other relevant person of any of the securities. Furthermore,
Regulation M may restrict the ability of any person engaged in the distribution of securities to engage in market-making activities with respect to the securities being distributed. All of the above may affect the marketability of the securities and
the ability of any person or entity to engage in market-making activities with respect to the securities.
To the extent required, the
securities to be sold, the names of the selling stockholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will
be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus.
In order to comply with the securities laws of some states, if applicable, the securities must be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in some states the securities may not be sold unless it has been registered or qualified for sale in the applicable state or an exemption from registration or qualification requirements is
available and is complied with.
Pursuant to the Investor Rights Agreement, we have agreed to indemnify in certain circumstances the
selling stockholders against certain liabilities under the Securities Act. The selling stockholders have agreed to indemnify us in certain circumstances against certain liabilities, including certain liabilities under the Securities Act. The selling
stockholders may indemnify any underwriter that participates in transactions involving the sale of shares of Common Stock or Series A Preferred Stock against certain liabilities, including liabilities arising under the Securities Act.
The Series A Preferred Stock is not listed on an exchange and we do not intend to list the Series A Preferred Stock on any exchange. Our
Common Stock is listed on the NASDAQ Global Market under the symbol CNXR. On September 14, 2016, the closing price of our Common Stock as reported on the NASDAQ Global Market was $1.76 per share.
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LEGAL MATTERS
DLA Piper LLP (US), Austin, Texas will pass for us upon the validity of the securities being offered by this prospectus and applicable
prospectus supplement, and counsel named in the applicable prospectus supplement will pass upon legal matters for any underwriters, dealers or agents.
EXPERTS
The consolidated financial statements, and the related financial statement schedule, incorporated in this Prospectus by reference from our
Annual Report on Form 10-K have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which is incorporated herein by reference. Such consolidated financial statements and
financial statement schedule have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file annual, quarterly and current reports, proxy statements and other information electronically with the SEC. You may read and copy these
reports, proxy statements and other information at the SECs public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the public reference room. You
can request copies of these documents by writing to the SEC and paying a fee for the copying costs. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC, including us. The SECs Internet site can be found at http://www.sec.gov. In addition, we make available on or through our Internet site copies of these reports as soon as reasonably practicable after we
electronically file or furnish them to the SEC. Our Internet site can be found at http://www.investor.connecture.com. Information contained in or accessible through our website does not constitute a part of this prospectus.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows us to incorporate by reference information that we file with it into this prospectus, which means that we can
disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus. Information in this prospectus supersedes information incorporated by reference that we
filed with the SEC prior to the date of this prospectus, while information that we file later with the SEC will automatically update and supersede the information in this prospectus. We incorporate by reference into the registration statement of
which this prospectus forms a part the following documents, and any future filings we will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of the initial registration statement but prior to effectiveness
of the registration statement and after the date of this prospectus but prior to the termination of the offering of the securities covered by this prospectus (other than current reports or portions thereof furnished under Item 2.02 or
Item 7.01 of Form 8-K):
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our annual report on Form 10-K for the year ended December 31, 2015, originally filed with the SEC on March 15, 2016 (File No. 001-36778);
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our quarterly reports on Form 10-Q for the quarters ended March 31, 2016, and June 30, 2016 filed with the SEC on May 10, 2016 (File No. 001-36778) and August 9, 2016 (File
No. 001-36778), respectively;
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our current reports on Form 8-K filed with the SEC on January 7, 2016, March 14, 2016, April 29, 2016, May 4, 2016, May 9, 2016, June 9, 2016 and July 15, 2016
(File Nos. 001-36778);
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our definitive proxy statement filed on Schedule 14A in connection with our 2016 Annual Meeting of Stockholders filed with the SEC on April 4, 2016 (File No. 001-36778); and
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the description of our common stock contained in our registration statement on Form 8-A filed with the SEC on December 9, 2014 (File No. 001-36778).
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We will provide each person, including any beneficial owner, to whom a prospectus supplement and the accompanying prospectus is delivered, a
copy of any or all of the information that has been incorporated by reference into this prospectus but not delivered with this prospectus upon written or oral request at no cost to the requester. Requests should be directed to: Connecture, Inc.,
18500 W. Corporate Drive, Suite 250, Brookfield, Wisconsin, 53045, Attn: Investor Relations, telephone: (262) 432-8282.
Neither we
nor the selling stockholders have authorized anyone to provide you with information different from that contained or incorporated by reference in this prospectus, any prospectus supplement or any free writing prospectus prepared by us or on our
behalf. Neither we nor the selling stockholders take any responsibility for, or can provide any assurance as to the reliability of, any information other than the information contained or incorporated by reference in this prospectus, any prospectus
supplement or any free writing prospectus prepared by us or on our behalf. The selling stockholders are not offering to sell, nor seeking offers to buy, shares of Series A Preferred Stock or shares of Common Stock in any jurisdiction where an offer
or sale is not permitted.
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52,000 Shares of Series A Convertible Preferred Stock
13,408,969 Shares of Common Stock
PROSPECTUS
September 26, 2016