UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended: June 30, 2018
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission file number 001-38053
ConvergeOne Holdings, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 81-4619427 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
3344 Highway 149, Eagan, MN 55121
(Address of principal executive offices) (Zip Code)
(888) 321-6227
(Registrants telephone number, including area code)
Forum Merger Corporation, c/o Forum Investors I, LLC, 135 East 57th Street, 8th Floor, New York, NY 10022
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☒ | Smaller reporting company | ☐ | |||
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Shares of the registrants common stock, $0.0001 par value, outstanding at August 3, 2018: 76,398,309 shares.
CONVERGEONE HOLDINGS, INC. AND ITS SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONVERGEONE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
As of | As of | |||||||
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Current Assets |
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Cash |
$ | 17,529 | $ | 13,475 | ||||
Trade accounts receivable, less allowances |
357,554 | 289,236 | ||||||
Inventories |
25,161 | 14,717 | ||||||
Prepaid expenses and other current assets |
14,864 | 9,294 | ||||||
Deferred customer support contract costs |
44,057 | 35,151 | ||||||
Income tax receivable |
20,509 | 10,576 | ||||||
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Total current assets |
479,674 | 372,449 | ||||||
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Other Assets |
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Goodwill |
331,377 | 331,456 | ||||||
Finite-life intangibles, net |
166,552 | 173,642 | ||||||
Property and equipment, net |
37,217 | 36,659 | ||||||
Deferred customer support contract costs, noncurrent |
3,420 | 3,915 | ||||||
Non-current income tax receivable |
579 | 2,620 | ||||||
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Total other assets |
539,145 | 548,292 | ||||||
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Total assets |
$ | 1,018,819 | $ | 920,741 | ||||
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Liabilities and Stockholders Equity (Deficit) | ||||||||
Current Liabilities |
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Current maturities of long-term debt |
$ | 6,700 | $ | 5,652 | ||||
Accounts payable |
189,770 | 157,778 | ||||||
Customer deposits |
20,580 | 22,498 | ||||||
Accrued compensation |
22,431 | 34,522 | ||||||
Accrued other |
38,267 | 27,362 | ||||||
Earnout consideration payable |
66,000 | | ||||||
Deferred revenue |
91,203 | 68,127 | ||||||
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Total current liabilities |
434,951 | 315,939 | ||||||
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Long-Term Liabilities |
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Long-term debt, net of debt issuance costs and current maturities |
693,075 | 566,424 | ||||||
Deferred income taxes |
4,838 | 18,056 | ||||||
Long-term income tax payable |
38 | 1,563 | ||||||
Deferred revenue and other long-term liabilities |
14,084 | 13,118 | ||||||
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Total long-term liabilities |
712,035 | 599,161 | ||||||
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Commitments and Contingencies |
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Stockholders Equity (Deficit) |
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Preferred stock, $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding |
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Common stock, $0.0001 par value; 1,000,000,000 shares authorized; 76,341,016 shares issued and outstanding as of June 30, 2018; 39,860,610 shares issued and outstanding as of December 31, 2017* |
8 | 4 | ||||||
Class B convertible common stock, $0.0001 par value; 16,000,000 nonvoting shares authorized; 6,585,546 nonvoting shares issued and outstanding as of December 31, 2017* |
| 1 | ||||||
Subscription receivable from related party |
| (1,805 | ) | |||||
Additional paid-in capital |
48,775 | 13,464 | ||||||
Accumulated deficit |
(176,950 | ) | (6,023 | ) | ||||
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Total stockholders equity (deficit) |
(128,167 | ) | 5,641 | |||||
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Total liabilities and stockholders equity (deficit) |
$ | 1,018,819 | $ | 920,741 | ||||
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* | Retroactively restated for the effect of the reverse recapitalization |
See accompanying notes to condensed consolidated financial statements.
1
CONVERGEONE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenue |
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Technology offerings |
$ | 197,162 | $ | 106,203 | $ | 338,616 | $ | 194,168 | ||||||||
Services |
193,849 | 85,119 | 358,736 | 180,120 | ||||||||||||
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Total revenue |
391,011 | 191,322 | 697,352 | 374,288 | ||||||||||||
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Cost of revenue |
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Technology offerings |
152,529 | 81,544 | 258,135 | 150,288 | ||||||||||||
Services |
124,154 | 51,991 | 236,504 | 112,920 | ||||||||||||
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Total cost of revenue |
276,683 | 133,535 | 494,639 | 263,208 | ||||||||||||
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Gross profit |
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Technology offerings |
44,633 | 24,659 | 80,481 | 43,880 | ||||||||||||
Services |
69,695 | 33,128 | 122,232 | 67,200 | ||||||||||||
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Total gross profit |
114,328 | 57,787 | 202,713 | 111,080 | ||||||||||||
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Operating expenses |
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Sales and marketing |
51,144 | 28,079 | 97,698 | 58,247 | ||||||||||||
General and administrative |
27,767 | 9,695 | 56,311 | 21,604 | ||||||||||||
Transaction costs |
6,204 | 922 | 12,051 | 2,035 | ||||||||||||
Depreciation and amortization |
12,018 | 6,959 | 23,357 | 13,985 | ||||||||||||
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Total operating expenses |
97,133 | 45,655 | 189,417 | 95,871 | ||||||||||||
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Operating income |
17,195 | 12,132 | 13,296 | 15,209 | ||||||||||||
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Other (income) expense |
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Interest income |
(17 | ) | (4 | ) | (65 | ) | (7 | ) | ||||||||
Interest expense |
26,507 | 22,785 | 37,735 | 31,781 | ||||||||||||
Preliminary bargain purchase gain |
5,085 | | (10,973 | ) | | |||||||||||
Other expense, net |
9 | 5 | 26 | 5 | ||||||||||||
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Total other expense, net |
31,584 | 22,786 | 26,723 | 31,779 | ||||||||||||
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Loss before income taxes |
(14,389 | ) | (10,654 | ) | (13,427 | ) | (16,570 | ) | ||||||||
Income tax (benefit) expense |
(6,928 | ) | 713 | (14,772 | ) | (2,082 | ) | |||||||||
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Net income (loss) |
(7,461 | ) | (11,367 | ) | 1,345 | (14,488 | ) | |||||||||
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Earnout consideration |
1,436 | | (124,005 | ) | | |||||||||||
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Net loss available to common shareholders |
$ | (6,025 | ) | $ | (11,367 | ) | $ | (122,660 | ) | $ | (14,488 | ) | ||||
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Net loss per common share: |
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Basic and diluted |
$ | (0.08 | ) | $ | (0.29 | ) | $ | (1.93 | ) | $ | (0.36 | ) | ||||
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Weighted average number of shares outstanding: |
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Basic and diluted |
75,222,455 | 39,860,619 | 63,487,614 | 39,870,980 | ||||||||||||
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Cash dividends declared per common share |
$ | 0.02 | $ | | $ | 0.02 | $ | | ||||||||
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See accompanying notes to condensed consolidated financial statements.
2
CONVERGEONE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
(in thousands, except share data)
(Unaudited)
Class B | Subscription Receivable |
Additional Paid-In Capital |
Accumulated Deficit |
Total | ||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Common Stock | ||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||
Balance at December 31, 2017, as previously reported |
| $ | | 89,766,294 | $ | 9 | 14,830,683 | $ | 1 | $ | (1,805 | ) | $ | 13,459 | $ | (6,023 | ) | $ | 5,641 | |||||||||||||||||||||
Retroactive conversion of shares |
| | (49,905,684 | ) | (5 | ) | (8,245,137 | ) | | | 5 | | | |||||||||||||||||||||||||||
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Balance at December 31, 2017, effect of reverse recapitalization (Note 2) |
| | 39,860,610 | 4 | 6,585,546 | 1 | (1,805 | ) | 13,464 | (6,023 | ) | 5,641 | ||||||||||||||||||||||||||||
Effect of reverse recapitalization |
| | 31,339,391 | 3 | (6,585,546 | ) | (1 | ) | | (18,305 | ) | (48,267 | ) | (66,570 | ) | |||||||||||||||||||||||||
Repayment of stock subscription receivable |
| | | | | | 1,805 | | | 1,805 | ||||||||||||||||||||||||||||||
Stock-based compensation expense |
| | | | | | | 4,904 | | 4,904 | ||||||||||||||||||||||||||||||
Earnout consideration |
| | 5,141,015 | 1 | | | | 59,337 | (124,005 | ) | (64,667 | ) | ||||||||||||||||||||||||||||
Repurchase of warrants |
| | | | | | | (9,098 | ) | | (9,098 | ) | ||||||||||||||||||||||||||||
Dividends paid |
| | | | | | | (1,527 | ) | | (1,527 | ) | ||||||||||||||||||||||||||||
Net income |
| | | | | | | | 1,345 | 1,345 | ||||||||||||||||||||||||||||||
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Balance at June 30, 2018 |
| $ | | 76,341,016 | $ | 8 | | $ | | $ | | $ | 48,775 | $ | (176,950 | ) | $ | (128,167 | ) | |||||||||||||||||||||
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See accompanying notes to condensed consolidated financial statements.
3
CONVERGEONE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six months ended | ||||||||
June 30, | ||||||||
2018 | 2017 | |||||||
Cash Flows from Operating Activities |
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Net income (loss) |
$ | 1,345 | $ | (14,488 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
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Preliminary bargain purchase gain |
(10,973 | ) | | |||||
Depreciation of property and equipment in operating expense |
5,258 | 2,805 | ||||||
Depreciation of property and equipment in cost of revenue |
2,792 | 690 | ||||||
Amortization of finite-life intangibles |
18,099 | 11,180 | ||||||
Change in fair value of acquisition-related contingent consideration |
(956 | ) | | |||||
Deferred income taxes |
(7,793 | ) | (2,492 | ) | ||||
Amortization of debt issuance costs |
799 | 1,755 | ||||||
Loss on extinguishment of debt |
14,732 | 13,638 | ||||||
Stock-based compensation expense |
6,431 | 330 | ||||||
Other |
(46 | ) | 5 | |||||
Changes in assets and liabilities, net of business acquisition in 2018: |
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Trade accounts receivable |
(3,892 | ) | 9,773 | |||||
Inventories |
(7,809 | ) | 1,101 | |||||
Prepaid expenses, deferred customer support contract costs and other |
(503 | ) | (193 | ) | ||||
Income tax receivable |
(7,893 | ) | | |||||
Accounts payable and accrued expenses |
(5,599 | ) | (20,904 | ) | ||||
Customer deposits |
(1,919 | ) | 1,240 | |||||
Income tax payable |
(1,525 | ) | (3,846 | ) | ||||
Deferred revenue and other long-term liabilities |
(1,910 | ) | (1,437 | ) | ||||
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Net cash used in operating activities |
(1,362 | ) | (843 | ) | ||||
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Cash Flows from Investing Activities |
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Purchases of property and equipment |
(7,595 | ) | (3,891 | ) | ||||
Acquisition of business, net of cash acquired |
(27,030 | ) | | |||||
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Net cash used in investing activities |
(34,625 | ) | (3,891 | ) | ||||
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Cash Flows from Financing Activities |
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Proceeds from revolving credit agreement |
139,000 | 18,000 | ||||||
Repayment of revolving credit agreement |
(119,000 | ) | (18,000 | ) | ||||
Proceeds from term notes, less discount |
670,000 | 435,700 | ||||||
Payment on long-term debt |
(562,325 | ) | (414,138 | ) | ||||
Payment of deferred financing costs |
(9,414 | ) | (5,330 | ) | ||||
Payment of extinguishment charges |
(5,684 | ) | (3,353 | ) | ||||
Dividends paid |
(1,527 | ) | | |||||
Repurchase of common stock |
| (385 | ) | |||||
Proceeds from subscription receivable |
1,805 | | ||||||
Proceeds from Forum cash |
147,335 | | ||||||
Payment of reverse recapitalization costs |
(28,204 | ) | | |||||
Payment to former C1 Securityholders |
(182,847 | ) | | |||||
Repurchase of warrants |
(9,098 | ) | | |||||
Deferred offering costs |
| (1,772 | ) | |||||
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Net cash provided by financing activities |
40,041 | 10,722 | ||||||
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Net increase in cash |
4,054 | 5,988 | ||||||
Cash - beginning of the period |
13,475 | 9,632 | ||||||
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Cash - end of the period |
$ | 17,529 | $ | 15,620 | ||||
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Supplemental disclosures of cash flow information |
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Interest paid |
$ | 25,315 | $ | 19,786 | ||||
Income taxes paid |
187 | 4,275 | ||||||
Supplemental disclosures of noncash investing and financing activities |
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Reverse recapitalization costs in accounts payable and accrued expenses, net of tax |
$ | 2,730 | $ | | ||||
Settlement of Earnout consideration payable |
58,005 | | ||||||
Earnout consideration payable |
66,000 | | ||||||
Deferred offering costs in accounts payable and accrued expenses |
| 565 | ||||||
Liabilities assumed from Forum |
317 | | ||||||
Deferred financing costs in accounts payable and accrued expenses |
392 | 465 | ||||||
Property and equipment purchases financed with accounts payable |
753 | 34 |
See accompanying notes to condensed consolidated financial statements.
4
1. Nature of Business and Summary of Significant Accounting Policies
Organization
ConvergeOne Holdings, Inc. and its subsidiaries (collectively, ConvergeOne, or the Company) is a leading IT services provider of collaboration and technology solutions for large and medium enterprises. The Company serves clients through its comprehensive engagement model which includes the full lifecycle of services from consultation through implementation, optimization, and ongoing support services. The Company provides innovative and sophisticated services, including professional and managed, cloud and maintenance services, and complex multi-vendor technology offerings to its clients. The Companys core technology markets are (1) collaboration and (2) enterprise networking, data center, cloud, and security.
On November 30, 2017, C1 Investment Corp. (C1) and Clearlake Capital Management III, L.P. (Clearlake or Seller Representative) signed an Agreement and Plan of Merger (Merger Agreement) with Forum Merger Corporation (Forum), whereby the parties agreed a subsidiary of Forum and C1 shall consummate a merger, pursuant to which the subsidiary shall be merged with and into C1, following which the separate corporate existence of the subsidiary shall cease and C1 shall continue as the surviving corporation (the Business Combination or Merger). All outstanding C1 stock options and all outstanding shares of C1s Class A common and Class B common stock held by C1 option holders and C1 stockholders (collectively, the C1 Securities and C1 Securityholders, respectively) were to be canceled and exchanged for a combination of cash and new shares of common stock as computed in accordance with the Merger Agreement.
On February 22, 2018, the transactions contemplated by the Merger (Transactions) were consummated and the name of the surviving corporation was changed to ConvergeOne Holdings, Inc. See Note 2Business Combination/Merger for further discussion.
References to the Company, we, us, our, and similar words refer to ConvergeOne Holdings, Inc. and all of the consolidated subsidiaries, unless specifically noted otherwise.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet as of December 31, 2017 included herein was derived from the C1 audited financial statements as of that date, but does not include all disclosures including notes required by U.S. GAAP. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or any other period. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Companys Registration Statement on Form S-1/A filed on April 24, 2018. There have been no changes to the Companys significant accounting policies described in the consolidated financial statements for the year ended December 31, 2017 that have had a material impact on the condensed consolidated financial statements and related notes for the three and six months ended June 30, 2018. Accounting policies that are new as a result of the Merger have been included below.
The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, Forum was treated as the acquired company for financial reporting purposes. This determination was primarily based on C1 shareholders having a majority of the voting power of the combined company, C1 comprising the ongoing operations of the combined entity, C1 comprising a majority of the governing body of the combined company, and C1s senior management comprising the senior management of the combined company. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of C1 issuing stock for the net assets of Forum, accompanied by a recapitalization (referred to as the Merger). The net assets of Forum were stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Merger are those of C1.
5
Earnout Consideration
As discussed in Note 2Business Combination/Merger, upon the completion of the Merger, the C1 Securityholders received a combination of cash and shares of ConvergeOne common stock in exchange for all of their C1 Securities. Subject to terms and conditions set forth in the Merger Agreement, the former C1 Securityholders have the contingent right to receive additional consideration for their former C1 Securities, in the form of cash and shares of ConvergeOne common stock (the Earnout Consideration, as defined in the Merger Agreement), based on specified Earnout Targets for 2018, 2019 and 2020 (Earnout Years) that may be accelerated. As of March 31, 2018, the Earnout Targets for 2018 and 2019 have been achieved. See Note 2 for the details of the Earnout Consideration.
The Earnout Consideration is contingent on the Company meeting the pre-established Earnings Targets and thus is recorded, if and when earned or probable to be earned. The portion of the Earnout Consideration pertaining to the former C1 option holders, who are current employees of the Company, is accounted for as compensation when the Earnings Targets have been met. The Earnout Consideration pertaining to the former C1 shareholders is accounted for as an equity transaction when the Earnings Targets have been met.
Common Stock Purchase Warrants
The Company accounts for the issuance of common stock purchase warrants based on the terms of the contract and whether there are any requirements for the Company to net cash settle the contract under any terms or conditions. Warrants for the purchase of 8.9 million shares of common stock were issued by Forum as part of the units sold in its initial public offering (IPO) in April 2017 (the Warrants). Each unit (a Unit), was comprised of one share of Class A common stock, a warrant to purchase one half of one share of Class A common stock and a right to receive one-tenth of a share of Class A common stock upon the consummation of a business combination by Forum. See Notes 2 and 7Business Combination/Merger and Stockholders Equity (Deficit). None of the terms of the Warrants have been modified as a result of the Merger.
The Warrants are freestanding financial instruments that are legally detachable from the shares that were issued at the same time. Most of the Warrants are redeemable at the Companys option in certain conditions. The Warrants require settlement to be in physical shares of common stock only. The terms of all of the outstanding Warrant contracts expressly state there are no requirements for the Company to net cash settle the Warrants under any circumstances. The Company has accounted for the Warrants as equity instruments.
Unit Purchase Option
Subsequent to the Merger, the Company has a unit purchase option (UPO) outstanding that was issued to Earlybird Capital LLC (EBC) and its designees in connection with Forums IPO. The UPO is accounted for as an equity instrument. The underwriters had performed all of their services in April 2017 and the fair value measurement was a one-time, nonrecurring measurement that is not subject to re-measurement over the life of the UPO (see Notes 2 and 7).
Net Income (Loss) Per Share
Prior to the Merger on February 22, 2018, net income (loss) per share was computed using the two-class method. The change in the Companys capital structure as a result of the Merger and reverse capitalization during 2018 has eliminated the need for a two-class method earnings per share calculation.
The historical number of outstanding shares of C1 common stock have been adjusted to retroactively reflect the effect of the Merger and the historical net income (loss) per share has been adjusted to give effect to this retroactive adjustment (see Note 2Business Combination/Merger and Note 8Net Income (Loss) per Share).
6
Post-Merger, basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders, which is computed by subtracting the Earnout Consideration from net income, by the weighted-average number of shares of common stock outstanding during the period, as adjusted for the Sponsor Earnout Shares that are not participating securities until vested, and the effect of shares that were contingently issuable for which the contingency has been resolved, whether or not those shares have been issued. The contingently issuable shares of common stock pertain to those shares to be issued when the Company meets the Earnings Targets established as part of the Merger Agreement as described in Note 2Business Combination/Merger.
Diluted net income (loss) per share is computed by dividing net income (loss) available to common shareholders, which is computed by subtracting the Earnout Consideration from net income, by the weighted-average number of shares of common stock outstanding during the period, as adjusted for the Sponsor Earnout Shares that are not participating securities until vested, the effect of shares that were contingently issuable for which the contingency has been resolved, whether or not those shares have been issued yet, and any dilutive equity instruments (warrants and options) that are in-the-money. The effect of the contingently issuable shares and dilutive equity instruments are included for the shorter of the date the underlying contracts were in existence to the end of the reporting period or the entire reporting period. However, diluted net loss per share excludes all dilutive potential shares if their effect is anti-dilutive.
Emerging Growth Company Status
The Company is an emerging growth company, as defined in Section 2(a) of the Securities Act of 1933, as amended, (the Securities Act), as modified by the Jumpstart Our Business Startups Act of 2012, (the JOBS Act). Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.
The Company would cease to be an emerging growth company upon the earliest to occur of: the last day of the fiscal year in which it has more than $1.07 billion in annual revenue; the date it qualifies as a large accelerated filer, with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by it of more than $1.0 billion in non-convertible debt securities; or December 31, 2022. The Company anticipates that it will cease to be an emerging growth company on December 31, 2018.
Recent Accounting Pronouncements
As long as the Company remains an Emerging Growth Company, the Company plans to adopt new accounting standards using the effective dates available for nonpublic entities.
Recently Adopted Accounting Pronouncements
On January 1, 2018, the Company adopted Accounting Standards Update (ASU) 2017-09, Compensation Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies that modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the changes in terms or conditions. The amendments in this standard should be applied prospectively to an award modified on or after the adoption date. The adoption of ASU 2017-09 did not have any impact on the consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single, comprehensive model for accounting for revenue from contracts
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with customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year, making it effective for annual reporting periods beginning after December 15, 2018 and interim periods within that fiscal year, with early adoption permitted.
The FASB has issued the following additional ASUs to amend the guidance in ASU 2014-09, all of which have effective dates concurrent with the effective date of ASU 2014-09:
(1) | In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations within the new revenue recognition standard. |
(2) | In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which enhances the guidance around identifying performance obligations in customer contracts within the new revenue recognition standard. |
(3) | In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-scope Improvements and Practical Expedients, which provides additional guidance around certain areas of the new revenue recognition standard. These areas include, but are not limited to, assessing the collectability criterion, presentation of sales taxes and accounting for noncash consideration. |
(4) | In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which provides additional guidance around narrow areas of the new revenue recognition standard. These areas include, but are not limited to, contract costs and modifications and remaining performance obligations. |
The Company does not intend to early adopt the new revenue recognition guidance. The Company is evaluating the effect of the revenue recognition ASUs. The evaluation includes selecting a transition method for these revenue recognition ASUs and determining the effect that the updated standards will have on the historical and future consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which changes the accounting for leases in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The standard has an effective date for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company does not currently intend to early adopt the new leasing guidance and, therefore, ASU 2016-02 will be effective for us for the year ending December 31, 2020. If the Company loses emerging growth company status in 2018, the standard will be effective for the Company for the year ending December 31, 2019. The Company has not yet begun to evaluate the effect of the new guidance on the consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments, to address diversity in practice regarding the presentation of eight specific cash flow situations. These situations include, but are not limited to, debt prepayment and debt extinguishment costs and contingent consideration payments made after a business combination. The standard has an effective date for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact that the standard will have on the consolidated financial statements.
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In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, to clarify the definition of a business and add guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard has an effective date for annual periods beginning after December 15, 2018, and interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the impact that the standard will have on the consolidated financial statements.
2. Business Combination/Merger
On February 22, 2018, C1 consummated its business combination/merger with Forum pursuant to the terms of the Merger Agreement. The following Transactions occurred shortly before the Merger:
| Holders of 16,940,909 shares of Forum common stock sold in its IPO in April 2017 exercised their rights to redeem those shares for cash at a price of $10.15 per share, for an aggregate of approximately $172 million (the Redemption). The per share conversion price of approximately $10.15 for holders of public shares electing Redemption was paid out of Forums trust account. |
| Subscription agreements entered into in connection with the Merger Agreement resulted in the issuance of 16,459,375 shares of common stock to private investors for an aggregate cash purchase price of $131,675,000 (the PIPE Investment). An additional subscription agreement had been entered into with one of the private investors for 1,500,000 shares for $12,000,000 (the Deferred PIPE) for which payment was due upon the Companys completion of an effective registration statement that registered all of the shares issued in the PIPE for resale. See below for discussion of issuance of the Deferred PIPE common shares for the Deferred PIPE and the corresponding additional payments to C1 Securityholders. |
The following Transactions occurred simultaneously with the Merger which took place on February 22, 2018 (the Closing):
| The remaining 309,091 Forum shares that were subject to Redemption, but not redeemed, and the 1,725,000 shares pertaining to the 17,250,000 Public Rights outstanding that had been issued as part of the Units sold in the IPO, were converted to ConvergeOne common shares on a one-for-one-basis. The 8,625,000 Public Warrants issued as part of the Units in the IPO continue in existence post-Merger and represent the right to purchase shares of ConvergeOne common stock (see Note 7Stockholders Equity (Deficit)). |
| All outstanding C1 Securities, which included 89,766,294 shares of Class A common stock, 14,830,683 shares of Class B common stock and 1,527,597 outstanding stock options, were immediately vested, canceled, and exchanged for a combination of new shares of ConvergeOne common stock and cash. The C1 Securities aggregated to 106,124,574 and were exchanged for 47,124,494 common shares of ConvergeOne (the Merger Exchange Ratio) and cash consideration (see below). Approximately 10,000 of the new shares were immediately forfeited by the C1 Securityholders for the payment of income taxes. |
| The C1 Securityholders are entitled to additional consideration in a combination of cash and shares of ConvergeOne common stock (collectively, Earnout Consideration), if the Earnout Targets, as defined in the Merger Agreement, are met. As of March 31, 2018, the Earnout Targets for 2018 and 2019 have been achieved. See Earnout Consideration Payments discussion below. |
| All of the remaining funds in Forums trust account, after taking into account the Redemption, Forums operating cash account, and the $131.7 million in proceeds from the PIPE Investment, all of which aggregated to approximately $135.3 million of cash, remained in escrow immediately prior to the Closing, which, together with approximately $35.3 million of cash of C1, was used to pay the cash component of the consideration of approximately $170.6 million paid to C1 Securityholders in connection with the Closing. |
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| Forums primary underwriter, EBC and its designees, collectively owned 172,500 shares of Forum common stock and a UPO to purchase up to a total of 1,125,000 Units exercisable at $10.00 per Unit. These outstanding shares were converted to ConvergeOne common stock on a one-for-one basis upon the Closing of the Merger. The UPO continues to exist post-Merger with the same terms and the underlying shares that would be issued upon exercise of the UPO and associated warrants pertain to ConvergeOne common stock (see Note 7). |
| The Forum founders (the Sponsor) had previously entered into a Sponsor Earnout Letter and Amendment to Escrow Agreement, which among other things, resulted in immediate forfeiture of 1,078,125 shares of Class F common stock and subjected 2,156,250 of their remaining Class F common shares to future forfeiture (Sponsor Earnout Shares) if the C1 Securityholder Earnout Targets are not met (see Note 7). The remaining 1,078,125 shares of Class F common stock, combined with the 622,500 shares of Class A common stock purchased by the Forum founders during the IPO (that were not subject to Redemption), along with the immediate conversion of the Sponsors Private Rights from the IPO to 62,250 common shares, resulted in a total of 3,919,125 common shares held by the Sponsor upon completion of the Merger transactions. All of the Sponsors shares were converted to ConvergeOne shares on a one-for-one basis. The 311,250 Private Warrants issued to the Sponsor as part of the Units it purchased in the IPO continue in existence post-Merger and represent the right to purchase shares of ConvergeOne common stock (see Note 7). |
| Immediately after giving effect to the Transactions described above (including the redemptions, forfeiture of some of the Forum common stock immediately prior to the Closing, the issuance of 47.1 million shares to the C1 Securityholders for the stock component of their consideration, and the issuance of 16.5 million shares of common stock to the PIPE investors), there were approximately 69.7 million shares of ConvergeOne common stock issued and outstanding, warrants to purchase approximately 8.9 million shares of common stock of ConvergeOne issued and outstanding, and a unit purchase option outstanding for the purchase of 1,125,000 Units of ConvergeOne common stock (that would result in the issuance of 1,237,500 total shares of ConvergeOne common stock, including the corresponding Rights, plus a warrant for the purchase of 562,500 additional shares of common stock at $11.50 per share) (see Note 7). |
| The registration rights agreement was amended (see Note 7). |
| Transaction expenses, net of tax, of $30,934,000 have been recorded as a cost of equity for the legal acquirers transaction costs, PIPE related costs, and our costs related to effectuating the reverse recapitalization which is an equity transaction. |
| Upon the Closing, the Rights and Units ceased trading, and ConvergeOnes common stock and warrants began trading on The Nasdaq Stock Market (Nasdaq) under the symbols CVON and CVONW, respectively. Additionally, the C1 Class A common stock and Class B common stock ceased to exist. |
| As of the Closing, entities affiliated with Clearlake beneficially owned approximately 54.7% of ConvergeOnes outstanding shares of common stock and the former Forum securityholders collectively beneficially owned approximately 8.8% of ConvergeOnes outstanding shares. As a result, ConvergeOne is a controlled company within the meaning of the Nasdaq listing rules. |
On April 25, 2018, the Company received a Notice of Effectiveness for the Registration Statement it filed to register all the shares issued in the PIPE for resale. Upon completion of an effective registration statement, the private investor immediately paid $12,000,000 to the Company for the Deferred PIPE and 1,500,000 shares of the Companys common stock were issued. On April 26, 2018, the Company distributed the $12,000,000 of proceeds to the former C1 Securityholders as additional consideration according to the terms of the Merger Agreement.
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The following is a summary of the reverse recapitalization, as recorded in the condensed consolidated statement of stockholders equity (deficit) (in thousands):
Cash | Noncash | Total | ||||||||||
Proceeds from Forum cash, including proceeds from PIPE |
$ | 147,335 | $ | | $ | 147,335 | ||||||
Payments made to C1 Security holders in exchange for all of their C1 Securities |
(182,654 | ) | | (182,654 | ) | |||||||
Reverse recapitalization expenses, net of tax |
(28,204 | ) | (2,730 | ) | (30,934 | ) | ||||||
Assumption of Forum liabilities |
| (317 | ) | (317 | ) | |||||||
|
|
|
|
|
|
|||||||
$ | (63,523 | ) | $ | (3,047 | ) | $ | (66,570 | ) | ||||
|
|
|
|
|
|
|||||||
C1 provided cash towards the payment to the C1 Securityholders |
$ | 35,240 | $ | | $ | 35,240 |
Earnout Consideration Payments
Subject to terms and conditions set forth in the Merger Agreement, the former C1 Securityholders have the contingent right to receive the Earnout Consideration (as defined in the Merger Agreement), based on specific Earnout Target measurements for 2018, 2019 and 2020 (Earnout Targets). The key terms pertaining to the Earnout Consideration are as follows:
(1) | The amounts that can be earned for each Earnout Target consist of $33 million of cash (Earnout Cash Payment) and 3,300,000 ConvergeOne common shares, less Sponsor Earnout Shares of 718,750 that vest each time an Earnout Target is met (see Note 7) which results in 2,581,250 common shares for each Earnout Target measurement met (Earnout Stock Payment), collectively a Regular Earnout Payment. |
(2) | Measurement Dates are the last calendar day of each fiscal quarter beginning with the first fiscal quarter ending after the Closing of the Merger. The Earnout Period is the period from the Closing of the Merger to December 31, 2020. |
(3) | The Earnout Targets to be met, which are calculated using a trailing twelve months methodology, are as follows: |
a. | Earnout EBITDA (as defined in, and calculated in accordance with, the Merger Agreement and measured at any applicable Measurement Date occurring within calendar year 2018) exceeds $144,000,000 (the 2018 Target); |
b. | Earnout EBITDA (as defined in, and calculated in accordance with, the Merger Agreement and measured at any applicable Measurement Date occurring within calendar year 2019) exceeds $155,000,000 (the 2019 Target); or |
c. | Earnout EBITDA (as defined in, and calculated in accordance with, the Merger Agreement and measured at any applicable Measurement Date occurring within calendar year 2020) exceeds $165,000,000 (the 2020 Target). |
See discussion below on the 2019 and 2020 Earnout Targets being accelerated under certain circumstances (that is, measured during earlier periods than the years ending December 31, 2019 and 2020).
(4) | In the event that at the time payment of an Earnout Cash Payment is due, such Earnout Cash Payment is an amount that would exceed either (i) the amount of cash available to the Company that is permitted to be distributed and paid without breaching the terms of any agreement related to indebtedness (Permitted Agreement Payment Amount) or (ii) the amount that could be paid without exceeding a permitted leverage measurement as set forth in the Merger Agreement (Permitted Leverage Payment Amount), the Permitted Cash Payment would be the lesser of the two amounts. |
Clearlake has the right to direct the Company to do either of the following with regard to the corresponding shortfall between the Permitted Cash Payment Amount and the Earnout Cash Payment that has been earned (Permitted Cash Payment Shortfall or Cash Shortfall): (i) pay the Cash Shortfall through the issuance of additional shares of common stock with an equivalent value equal to the Cash Shortfall, valued based on a twenty day trading period as defined in the Merger Agreement (Earnout Cash Payment Shortfall Parent Shares or Shortfall Shares) or (ii) provide notice to the Company that it elects to defer payment of the Cash Shortfall until the following Measurement Date. Clearlake shall have the option on each succeeding
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Measurement Date until the end of the Earnout Period to elect to be paid the applicable Shortfall Shares in full satisfaction of the Cash Shortfall or continue to defer payment. At the end of the Earnout Period, in the event that the Company has not paid a Cash Shortfall to the former C1 Securityholders, such Cash Shortfall shall automatically be converted into a right for the former C1 Securityholders to receive Shortfall Shares.
(5) | In the event that the Earnout EBITDA (as measured using the methodology set forth in the Merger Agreement) on any Measurement Date occurring within |
i. | The 2018 calendar year is in excess of the Earnout Target for a subsequent Earnout Year, then the Earnout Target for such subsequent Earnout Year shall also be deemed to have been achieved for such subsequent Earnout Year and the payment of the Regular Earnout Payment for such subsequent Earnout Year shall be accelerated and paid at the same time that the Regular Earnout Payment for the 2018 calendar year is paid or |
ii. | The 2019 calendar year is in excess of the 2020 Earnout Target, then the 2020 Earnout Target for the 2020 calendar year shall also be deemed to have been achieved for the 2020 calendar year and the payment of the Regular Earnout Payment for the 2020 calendar year shall be accelerated and paid at the same time that the Regular Earnout Payment for the 2019 calendar year is paid, provided that |
iii. | The accelerated Regular Earnout Payments (Accelerated Earnout Payment) shall be subject to the determination of the maximum amount of Permitted Cash Payment as described above. |
(6) | In the event that the applicable Earnout Target is not met for any Earnout Year, the former C1 Securityholders shall not be entitled to receive the Regular Earnout Payment for such Earnout Year; however, the C1 Securityholders will be entitled to receive a Catchup Earnout Payment (as defined in the Merger Agreement) and/or an Accelerated Earnout Payment (as defined in the Merger Agreement) upon satisfaction of certain terms and conditions. In the event that during the Earnout Period there is a Change of Control (as defined in the Merger Agreement), then any Regular Earnout Payments that have not previously been paid (whether or not previously earned) to the C1 Securityholders shall be deemed earned and due to the C1 Securityholders upon such Change of Control. |
(7) | The holders of C1 stock options that were accelerated as part of the Merger transactions are entitled to their respective pro rata share of the Earnout Consideration if they are an employee, director, or consultant to the Company at the time such installment is paid or issued. |
Each Earnout Payment otherwise payable to the former C1 Securityholders, under any circumstances, will be reduced by the amount of the Sponsor Earnout Shares that become vested in connection with an Earnout Payment by directly reducing each Earnout Stock Payment by the amount of the Sponsor Earnout Shares that have become vested.
The allocation of total merger consideration as between the cash consideration and common stock payable to the former C1 Securityholders shall be adjusted, by decreasing the cash consideration and correspondingly increasing the portion of total merger consideration paid in common stock, if and to the extent necessary to ensure that the former C1 Securityholders receive sufficient common stock such that, when aggregated with common stock previously paid as total merger consideration to the former C1 Securityholders, the amount of common stock is not less than the minimum amount of common stock necessary to satisfy the requirements for qualification as a reorganization under Section 368(a)(1)(A) of the Internal Revenue Code.
Earnout Consideration Measurement as of June 30, 2018
The thresholds for the Earnings Targets for 2018 and 2019 were met as of March 31, 2018, the first Measurement Date. Accordingly, based on the terms of the Merger Agreement, in connection with meeting two of the three Earnings Targets, the former C1 Securityholders were entitled to receive an aggregate of $66 million in cash and 5,162,500 newly issued shares of common stock, after deducting 1,437,500 Sponsor Earnout Shares which vested and immediately became participating securities. The Sponsor Earnout Shares remain subject to a lock-up agreement for 180 days from the closing date of the merger. The Company recorded the estimated value of the Earnout consideration as of March 31, 2018 and adjusted the amounts to actual during the three months ended June 30, 2018.
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The aggregate net Earnout Stock Payments of 5,162,500 shares were issued after the approval process was completed on May 22, 2018. Approximately 21,000 of the new shares were immediately forfeited by the C1 Securityholders for the payment of income taxes. As noted above, payment of the Earnout Cash Payments are subject to limitations and restrictions on cash distribution, as described in the Merger Agreement and set forth in the Companys debt facilities. After the approval process was completed, Clearlake elected to defer a decision on the Cash Shortfall until the next quarterly Measurement Date, which is June 30, 2018. The review and approval process for the June 30, 2018 Measurement Date will occur during August 2018, at which time Clearlake has the right to continue to defer any Cash Shortfall to the next Measurement Date, September 30, 2018, or direct the Company to issue equivalent shares of common stock to settle the Earnout Cash Payments. The liability for the 2018 and 2019 Earnout Cash Payments of $66,000,000 is recorded on the condensed consolidated balance sheet, and as of June 30, 2018 represents approximately 7.1 million of equivalent common shares, based on the measurement terms in the Merger Agreement.
The fair value of the 2018 and 2019 Earnout Stock Payments that were issued to the former C1 Securityholders in May 2018 and the fair value of the Sponsor Earnout Shares that vested in May 2018, when the Earnings Targets were officially approved, aggregated to $59,532,000, which has been recorded as an equity transaction during the six months ended June 30, 2018. The fair value had been estimated as $60,984,000 at March 31, 2018 and was subsequently adjusted when the shares were actually issued and vested.
A portion of the total Earnout Consideration is payable to the former C1 option holders, who must continue to be employed by the Company as of the payment date in order to receive their pro rata share of the Earnout Consideration. Management has recorded compensation expense related to the pro rata portion of the Earnout Stock Payments that were issued in May and the pro rata portion of the Earnout Cash Payments that has been accrued but not yet paid and is expected to be given to the former C1 option holders at a future date. The compensation was measured using the provisions set forth in the Merger Agreement which aggregated to approximately $1.5 million, all of which was recorded during the six months ended June 30, 2018.
The total Earnout Consideration that was recognized during the six months ended June 30, 2018 was $125,532,000, which includes the $1.5 million for the former C1 option holders. The net amount of $124,005,000 has been treated as a reduction to net income (loss) available to common shareholder for earnings per share purposes for the six months ended June 30, 2018. See Note 8. The total Earnout Consideration was estimated as $126,984,000 at March 31, 2018 and was subsequently adjusted when the Earnout Stock Payment shares were actually issued and the Sponsor Earnout Shares vested and final measurement occurred.
The shares issued in connection with the Earnout provisions represented contingently issuable shares as of March 31, 2018, which for earnings per share purposes are included in weighted average shares outstanding when it appears that there are no further contingences to be resolved. These shares have been factored into the earnings per share calculations for the three and six months ended June 30, 2018 as contingently issuable shares as of March 31, 2018.
3. Business Acquisitions
Acquisitions were accounted for as business combinations and the assets acquired and liabilities assumed were recognized based on the estimated fair values at the acquisition date as determined by the Companys management, using information currently available and current assumptions as to projections of future events and operating performance, and consideration of market conditions.
Arrow Systems Integration, Inc.
On March 1, 2018, the Company, through its subsidiary ConvergeOne, acquired Arrow Systems Integration, Inc. (ASI) for cash consideration of $28,376,000. During the six months ended June 30, 2018, the Company incurred transaction costs of $484,000 related to the acquisition and included the amount in transaction costs on the condensed consolidated statements of operations.
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The purchase price has been preliminarily allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date. The fair value of the net assets acquired was approximately $39,349,000. The excess of the aggregate fair value of the net assets acquired of $10,973,000 has been accounted for as a gain on bargain purchase in accordance with Accounting Standards Codification (ASC) 805 and included in preliminary bargain purchase gain on the consolidated statement of operations for the six months ended June 30, 2018. The bargain purchase gain is due to the seller divesting a non-core asset from its overall business. The Company acquired a significant income tax benefit pertaining to a goodwill write-off.
The acquisition fair value measurement is preliminary and subject to completion of the valuation of ASI and further management reviews and assessments of the preliminary fair value of the assets acquired and liabilities assumed. The adjustments arising from the completion of the outstanding matters may materially affect the preliminary purchase accounting. The purchase price allocation will be finalized as soon as practicable within the measurement period, but not later than one year following the acquisition date.
The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed (in thousands) of ASI acquired on March 1, 2018:
Assets Acquired: |
||||
Cash |
$ | 716 | ||
Trade accounts receivable |
64,426 | |||
Inventories |
2,635 | |||
Prepaid expenses |
1,752 | |||
Deferred customer support contract costs |
11,743 | |||
Property and equipment |
337 | |||
Customer relationships |
9,000 | |||
Deferred income taxes |
7,782 | |||
Noncompetition agreements |
300 | |||
|
|
|||
Total assets acquired |
98,691 | |||
|
|
|||
Liabilities Assumed: |
||||
Accounts payable and accrued expenses |
(33,390 | ) | ||
Deferred revenue and long-term liabilities |
(25,952 | ) | ||
|
|
|||
Total liabilities assumed |
(59,342 | ) | ||
|
|
|||
Net assets acquired |
$ | 39,349 | ||
|
|
|||
Purchase Price |
28,376 | |||
|
|
|||
Preliminary bargain purchase gain |
$ | 10,973 | ||
|
|
Adjustments to preliminary amounts made during the three months ended June 30, 2018, which were the result of information that existed as of the acquisition date, were recognized prospectively. The adjustments resulted in decreased preliminary bargain purchase gain by approximately $5,085,000 as a result of an increase in liabilities assumed of $9,962,000 offset by a decrease in purchase price of $2,266,000 and deferred income tax of $2,611,000.
Since the acquisition date of March 1, 2018, $77,356,000 of revenue and $12,867,000 of net income (inclusive of preliminary acquisition gain) are included in the accompanying condensed consolidated statement of operations for the six months ended June 30, 2018.
The fair value of accounts receivable was adjusted for approximately $3,263,000 for amounts not expected to be collected.
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Annese & Associates, Inc.
On July 14, 2017, the Company, through its subsidiary ConvergeOne, acquired Annese & Associates, Inc. (Annese) for cash consideration of $24,483,000 plus additional consideration of up to $4,000,000, contingent upon the achievement of certain gross profit targets for the twelve months ending June 30, 2018.
The Company estimated the fair value of the contingent consideration to be approximately $956,000 at December 31, 2017, based upon current assumptions as to projections of future events and operating performance, and consideration of market conditions. As of June 30, 2018, no additional contingent consideration is expected to be paid and the reduction in the fair value of the contingent consideration for the six months ended June 30, 2018 is included in the condensed consolidated statement of operations.
Unaudited Pro-Forma Information
Following are the supplemental consolidated results of the Company on an unaudited pro forma basis, as if the acquisition of ASI had been consummated on January 1, 2017. The pro forma results presented below show the impact of acquisition-related costs as well as the increase in interest expense related to acquisition-related debt (in thousands).
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(in thousands, except per share data) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenue |
$ | 391,011 | $ | 257,302 | $ | 730,193 | $ | 505,089 | ||||||||
Net income (loss) |
(7,461 | ) | (11,628 | ) | 538 | (15,290 | ) | |||||||||
Net income (loss) per share - basic and diluted |
(0.10 | ) | (0.29 | ) | 0.01 | (0.38 | ) |
These pro forma results were based on estimates and assumptions, which the Company believes are reasonable. Pro forma net income (loss) does not take into effect the impact of the earnout consideration for net income (loss) per share calculations. The weighted-average shares outstanding used to calculate pro forma net income (loss) per share were retroactively adjusted to reflect the Merger Exchange Ratio as described in Notes 2 and 7. These pro forma results are not the results that would have been realized had the Company been a combined company during the periods presented and are not necessarily indicative of consolidated results of operations in future periods.
4. Trade Accounts Receivable
The following is a roll forward of our allowance for doubtful accounts (in thousands):
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
Balance at beginning of period |
$ | 1,480 | $ | 1,024 | ||||
Amounts expensed (recovered) |
(120 | ) | 1,006 | |||||
Deductions(1) |
(34 | ) | (550 | ) | ||||
|
|
|
|
|||||
Balance at end of period |
$ | 1,326 | $ | 1,480 | ||||
|
|
|
|
(1) | Deductions include actual accounts written off, net of recoveries. |
15
5. Goodwill and Finite-Life Intangible Assets
Goodwill
The changes in the carrying amount of goodwill are as follows (in thousands):
Balance as of December 31, 2017 |
$ | 331,456 | ||
Measurement period adjustments |
(2,436 | ) | ||
Other |
2,357 | |||
|
|
|||
Balance as of June 30, 2018 |
$ | 331,377 | ||
|
|
During the six months ended June 30, 2018, goodwill increased by $2,357,000 associated primarily with an adjustment of deferred income taxes and decreased by $2,436,000 related to adjustments to the fair value of intangible assets acquired in 2017.
Finite-life Intangibles
In connection with business acquisitions the Company acquired certain customer relationships, trademarks, noncompetition agreements, and internally developed software. The Companys management determined, based upon information available at the time of acquisition and on certain assumptions as to future operations and market considerations, the values of the finite-life intangibles as follows: trademarks, using the relief from royalty method; and customer relationships, noncompetition agreements and internally developed software using, in part, a discounted cash flow method. The amortization periods were estimated by management, considering both the economic and legal lives, as well as the expected period of benefit.
Finite-life intangible assets consist of the following (in thousands):
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
Customer relationships |
$ | 219,576 | $ | 208,451 | ||||
Trademarks |
38,359 | 38,546 | ||||||
Noncompetition agreements |
6,312 | 6,241 | ||||||
Internally developed software |
541 | 541 | ||||||
|
|
|
|
|||||
264,788 | 253,779 | |||||||
Less accumulated amortization |
(98,236 | ) | (80, 137 | ) | ||||
|
|
|
|
|||||
Finite-life intangibles, net |
$ | 166,552 | $ | 173,642 | ||||
|
|
|
|
During the three months ended June 30, 2018 and 2017, aggregate amortization expense was $9,367,000 and $5,550,000, respectively. During the six months ended June 30, 2018 and 2017, aggregate amortization expense was $18,099,000 and $11,180,000, respectively. Based on the recorded intangible assets at June 30, 2018, estimated amortization expense is expected to be as follows (in thousands):
Years Ending December 31, |
||||
Remainder of 2018 |
$ | 18 ,560 | ||
2019 |
36,689 | |||
2020 |
33,378 | |||
2021 |
30,301 | |||
2022 |
25,856 | |||
2023 and thereafter |
21,768 | |||
|
|
|||
Total |
$ | 166,552 | ||
|
|
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6. Debt
Long-term debt consists of the following (in thousands):
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
Revolving line-of-credit |
$ | 40,000 | $ | 20,000 | ||||
Term loan facility |
670,000 | 562,325 | ||||||
|
|
|
|
|||||
Total long-term debt |
710,000 | 582,325 | ||||||
Less unamortized original issue discount |
(3,578 | ) | (5,623 | ) | ||||
Less unamortized deferred financing costs |
(6,647 | ) | (4,626 | ) | ||||
|
|
|
|
|||||
Total long-term debt, net of debt issuance costs |
699,775 | 572,076 | ||||||
Less current maturities |
(6,700 | ) | (5,652 | ) | ||||
|
|
|
|
|||||
Long-term debt, net |
$ | 693,075 | $ | 566,424 | ||||
|
|
|
|
April 2018 Credit Facilities
Senior Secured Term Loan
On April 10, 2018, certain of ConvergeOne Holdings, Inc.s subsidiaries, C1 Intermediate Corp. and C1 Holdings Corp. (f/k/a ConvergeOne Holdings Corp.) entered into a Term Loan Agreement with Credit Suisse AG, Cayman Islands Branch as the administrative agent and collateral agent (the Term Loan Agreement). The Term Loan Agreement provides for senior secured term loans in the aggregate principal amount of $670,000,000 (the Term Loans). A portion of the proceeds of the Term Loans was used to repay the existing credit facilities including the outstanding indebtedness under the Revolver Agreement of $90,000,000 and to pay debt issuance costs. The remaining proceeds will be used for working capital needs and general corporate purposes. The Company incurred financing transaction costs of approximately $5,931,000 and an original issue discount of $3,700,000 related to the Term Loan Agreement which will be amortized over the life of the credit agreement.
The principal installments in the amount of $1,675,000 are due on the last business day of each quarter commencing September 30, 2018, with the remaining outstanding principal amount to be paid on its maturity date of April 10, 2025.
The Term Loan Agreement contains a number of significant restrictive covenants. Such restrictive covenants, among other things, restrict, subject to certain exceptions, our and our restricted subsidiaries ability to incur additional indebtedness and make guarantees; create liens on assets; pay dividends and distributions or repurchase their capital stock; make investments, loans and advances, including acquisitions; engage in mergers, consolidations, dissolutions or similar transactions; sell or otherwise dispose of assets, including sale and leaseback transactions; engage in certain transactions with affiliates; enter into certain restrictive agreements; make changes in the nature of their business, fiscal year and organizational documents; make prepayments or amend the terms of certain junior debt; and enter into certain hedging arrangements.
The Term Loan Agreement also contains certain customary representations and warranties, affirmative covenants and events of default, including the occurrence of a Change of Control, as defined in the Term Loan Agreement. If an event of default occurs, the lenders under the Term Loan Agreement will be entitled to take various actions, including the acceleration of amounts due under the Term Loan Agreement and actions permitted to be taken by a secured creditor.
The Term Loan Agreement requires us to prepay outstanding Term Loans, subject to certain exceptions, in amounts equal to the following: commencing with the year ending December 31, 2018, 50% of excess cash flow (which percentage steps down to 25% and 0% when we obtain certain consolidated total net leverage ratios), provided that any mandatory excess cash flow prepayment shall be at least $10 million; 100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property (which percentage steps down to 50% when we obtain a certain consolidated total net leverage ratio); and 100% of the net cash proceeds of any incurrence of debt, other than debt permitted to be incurred or issued under the Term Loan Agreement.
17
We are permitted to voluntarily repay outstanding Term Loans at any time without premium or penalty unless such payment is made prior to October 10, 2018 in connection with a repricing transaction as described in the Term Loan Agreement, in which case we are required to pay a premium of 1% on the Term Loans so prepaid.
The Term Loans bear interest at 2.75% above the alternate base rate or 3.75% above the Eurodollar rate, as described in the Term Loan Agreement. Interest on the Eurodollar rate Term Loans is payable on the last day of the Interest Period, as defined in the Term Loan Agreement, and interest on alternate base rate Term Loans is payable on the last day of each quarter. Borrowings under the Term Loans had an interest rate of 5.84% at June 30, 2018.
June 2017 Credit Facilities
Senior Secured Term Loan
On June 20, 2017, ConvergeOne Holdings Corp. (Holdings) and the Companys subsidiary, and direct corporate parent of Holdings, C1 Intermediate Corp. (Intermediate) entered into a Term Loan Agreement (the 2017 Term Loan Agreement) with JPMorgan Chase Bank, N.A. as the administrative agent and collateral agent. The 2017 Term Loan Agreement provides for senior secured term loans in the aggregate principal amount of $430,000,000 (the Term Loans). A portion of the proceeds of the Term Loans were used to repay the existing credit facilities and to pay debt issuance costs. The remaining proceeds were used for working capital needs and general corporate purposes.
Principal installments in the amount of $1,413,000 were due on the last business day of each quarter, commencing September 30, 2017, with the remaining outstanding principal amount to be paid on its maturity date of June 20, 2024.
The Company was permitted to repay outstanding Term Loans at any time without premium or penalty, unless such payment is made prior to June 20, 2018 in connection with a repricing transaction as described in the 2017 Term Loan Agreement, in which case the Company is required to pay a premium of 1% of the Term Loans so prepaid.
The Term Loans bore interest at 3.75% above the alternate base rate or 4.75% above the Eurodollar rate as described in the agreement. Interest on the Eurodollar rate Term Loans was payable on the last day of the Interest Period, as defined in the Term Loan Agreement, and interest on alternate base rate Term Loans was payable on the last day of each quarter.
The Company incurred financing transaction costs of approximately $4,778,000 and an original issue discount of $4,300,000 related to the Term Loan Agreement which the Company amortized over the term of the credit agreement.
In July 2017, Holdings borrowed an additional $75,000,000 of term loans under an incremental amendment to the Term Loan Agreement, which loans are part of the same class of, and on the same terms as, the initial Term Loans. Proceeds from the incremental amendment were used for the acquisitions of Annese and SPS Holdco, LLC (SPS).
In October 2017, Holdings borrowed an additional $60,000,000 of term loans under an incremental amendment to the Term Loan Agreement, which loans are part of the same class of, and on the same terms as, the initial Term Loans. Proceeds from the incremental amendment were used to acquire AOS, Inc. (AOS).
The Company incurred financing transaction costs of approximately $2,208,000 and an original issue discount of $713,000 related to the incremental term loan joinder agreements. The Company expensed $1,793,000 of direct issuance costs incurred within interest expense on the consolidated statement of operations and amortized $1,128,000 over the remaining term of the credit agreement.
On April 10, 2018, concurrent with entering into the Term Loan Agreement, the Company terminated the 2017 Term Loan Agreement. The Company accounted for this termination as debt extinguishment and in accordance with the applicable accounting guidance for debt modification and extinguishments, and for interest costs accounting, the Company expensed $5,684,000 in extinguishment costs incurred including a 1% pre-payment penalty, the remaining unamortized deferred financing costs of $4,588,000, the remaining unamortized original issue discount of $4,443,000 and $17,000 of prepaid administrative fees relating to the 2017 Credit Facilities. The Company reported theses expenses within interest expense on the condensed consolidated statement of operations for the six months ended June 30, 2018.
18
Senior Secured Revolving Loan Facility
On June 20, 2017, Holdings and Intermediate entered into a Revolving Loan Credit Agreement (the Revolver Agreement) with Wells Fargo Commercial Distribution Finance, LLC (Wells Fargo) as the administrative agent and collateral agent and as Floorplan Funding Agent. The Revolver Agreement provides a senior secured revolving loan facility of $150,000,000 aggregate principal amount of revolving loans and amends and restates the existing floorplan agreement with Wells Fargo in order to extend credit in the form of a floorplan subfacility. The Revolver Agreement matures on June 20, 2022.
The obligations under the Revolver Agreement are unconditionally and irrevocably guaranteed by Intermediate and certain restricted subsidiaries of Holdings. The obligations under the Revolver Agreement are secured by a first priority lien on the receivable accounts, inventory, and deposit and securities accounts, and a second priority lien on substantially all of the other assets of Holdings and each guarantor. The aggregate principal amount of the revolving loans and floorplan advances is limited to a Borrowing Base as defined by the Revolver Agreement, reduced by outstanding letters of credit. Mandatory prepayments are required in the event that the sum of the outstanding principal amount of the revolving loans, letter of credit and floorplan advances exceeds the less of (i) the aggregate revolving commitments of $150,000,000 or (ii) the Borrowing Base, in an amount equal to the excess.
On February 13, 2018, the Company amended the Revolver Agreement to increase the aggregate revolving commitments from $150,000,000 to $200,000,000 and incurred financing transaction costs of $175,000 which the Company will amortize over the remaining term of the agreement.
The Revolver Agreement contains a number of covenants including, among other things, requirements to maintain certain financial ratios and restrictions on dividends. If the Revolving Exposure, as described in the Revolver Agreement, exceeds the lesser of the revolving loan commitments or the borrowing base, the Revolver Agreement requires the Company to prepay outstanding Revolving Loans in an aggregate amount equal to such excess. The Company is permitted to repay outstanding Revolving Loans at any time without premium or penalty.
Borrowings under the Revolver Agreement bear interest at rates ranging from 0.25% to 0.75% above the alternate base rate or from 1.25% to 1.75% above the Eurodollar rate as described in the Revolver Agreement, in each case based on availability under the Revolver Agreement as of such interest payment date. A commitment fee equal to 0.250% or 0.375% per annum (based on availability under the Revolver Agreement) times the average daily unused amount of the available revolving commitments is payable on the last day of each quarter.
On April 10, 2018, Intermediate, C1 Holdings Corp., certain of our subsidiaries and Wells Fargo entered into a Third Amendment to Revolving Loan Credit Agreement and revised certain definitions and restrictive covenants in such agreement to be consistent with the terms of the new Term Loan Agreement described above.
At June 30, 2018, the Borrowing Base was $200,000,000. There were no letters of credit outstanding, the outstanding balance on the revolver was $40,000,000 and the outstanding floorplan balance was $58,509,000; therefore, the maximum borrowing available was $101,491,000 at June 30, 2018.
Floor Planning Facilities
On June 20, 2017, concurrent with entering into the Revolver Agreement, the Company amended and restated its existing floor planning facilities with Wells Fargo to extend credit in the form of floorplan advances up to an aggregate principal amount of $150,000,000. If advances under the agreement are not paid within 60 days or by the end of the free flooring period (which ranges from 45-90 days), the floorplan advance automatically converts to a revolving loan subject to terms under the Revolver Agreement.
Concurrent with the amendment to the Revolver Agreement on February 13, 2018, the aggregate principal amount of floor plan advances credit limit increased from $150,000,000 to $200,000,000.
The outstanding balance of floorplan advances at June 30, 2018 was $58,509,000 and is included in accounts payable on the condensed consolidated balance sheet.
19
Debt Issuance Costs
The Company amortizes original issue discount and deferred financing costs (debt issuance cost) using the effective interest method over the life of the related instrument, and such amortization is included in interest expense in the consolidated statements of operations.
Debt issuance costs are as follows (in thousands):
Revolving Line of Credit |
Term Loan | Total | ||||||||||
Balance as of December 31, 2017 |
$ | 829 | $ | 9,420 | $ | 10,249 | ||||||
Additions |
175 | 9,631 | 9,806 | |||||||||
Extinguishment |
| (9,031 | ) | (9,031 | ) | |||||||
Amortization |
(109 | ) | (690 | ) | (799 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance as of June 30, 2018 |
$ | 895 | $ | 9,330 | $ | 10,225 | ||||||
|
|
|
|
|
|
Long-term Debt Maturities
The approximate future principal payments on long-term debt are as follows (in thousands):
Years Ending December 31, |
Debt | |||
Remainder of 2018 |
$ | 3,350 | ||
2019 |
6,700 | |||
2020 |
6,700 | |||
2021 |
6,700 | |||
2022 |
6,700 | |||
2023 and thereafter |
639,850 | |||
|
|
|||
Total |
670,000 | |||
Revolving line-of-credit |
40,000 | |||
Less unamortized debt issuance costs |
(10,225 | ) | ||
|
|
|||
Total debt |
$ | 699,775 | ||
|
|
7. Stockholders Equity (Deficit)
Prior to the Merger
C1
Prior to the Merger, C1 had two classes of common stock authorized, Class A and Class B which had differing rights. Class B common shares were subject to vesting.
As part of the Merger transactions, all of the outstanding shares of C1 Class A and Class B common stock were exchanged for new shares of ConvergeOne common stock using a Merger Exchange Ratio that was the same for both classes of common stock (see Note 2Business Combination/Merger).
At December 31, 2017, there were 89,766,294 and 14,830,683 shares of Class A and Class B common shares, respectively, issued and outstanding. In the Companys consolidated statement of stockholders equity (deficit), these amounts have been retroactively adjusted to 39,860,610 and 6,585,546, respectively, to reflect the Merger Exchange Ratio. All outstanding C1 Securities, including the C1 stock options, were immediately vested, canceled, and exchanged for a combination of new shares of ConvergeOne common stock and cash. The C1 Securities aggregated to 106,124,574 and were exchanged for 47,124,494 common shares of ConvergeOne and cash consideration of approximately $170,600,000. Approximately 10,000 of the newly issued shares were immediately forfeited by C1 Securityholders for the payment of income taxes.
Both classes of C1 common stock ceased to exist upon completion of the Merger.
20
Forum
Prior to the Merger, Forum had two classes of common stock authorized, Class A and Class F which had differing rights. As discussed below and in Note 2, all of the outstanding shares of Class A and Class F common stock remaining (after various Merger related transactions were consummated) were converted into shares of ConvergeOne common stock.
Both classes of Forum common stock ceased to exist upon completion of the Merger.
2014 Equity Incentive Plan
Prior to the Merger, C1 issued equity awards for compensation purposes to employees, directors and consultants under the Companys 2014 Equity Incentive Plan. Stock-based compensation expense was computed based on the grant date fair values of those awards and periodic re-measurement to current fair value was done each reporting period for one non-employee stock award. The fair value of the stock awards was amortized as compensation expense over the corresponding vesting periods until the awards were fully vested.
All outstanding stock awards were accelerated and vested in full just prior to the Closing of the Merger, which resulted in a modification to the vesting terms of the Companys stock awards. A portion of the modified stock awards were subject to re-measurement to current fair value, as a direct result of the modification, which resulted in an incremental $583,000 of fair value to be recorded as stock-based compensation expense over the life of the awards. All of the Companys stock awards were immediately fully vested, canceled and exchanged for cash and shares of common stock upon completion of the Merger. As a result, the full amount of previously unrecognized stock-based compensation expense of $4,842,000, including the incremental $583,000, was recognized in full during the six months ended June 30, 2018.
No further awards will be made pursuant to the 2014 Equity Incentive Plan.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock, $0.0001 par value per share. The Companys board of directors may, without further action by the stockholders, fix the rights, preferences, privileges and restrictions of up to an aggregate of 10,000,000 shares of preferred stock in one or more series and authorize their issuance. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of our common stock. The issuance of preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deterring or preventing a change of control or other corporate action. No shares of preferred stock are currently outstanding, and we have no present plan to issue any shares of preferred stock.
Common Stock
The Company is authorized to issue 1,000,000,000 shares of common stock, $0.0001 par value per share.
Voting Power
Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of common stock possess all voting power for the election of the Companys directors and all other matters requiring stockholder action. Holders of common stock are entitled to one vote per share on matters to be voted on by stockholders.
21
Dividends
Holders of common stock are entitled to receive such dividends, if any, as may be declared from time to time by the Companys board of directors in its discretion out of funds legally available therefore. In no event will any stock dividends or stock splits or combinations of stock be declared or made on common stock unless the shares of common stock at the time outstanding are treated equally and identically.
On May 8, 2018, the Board of Directors declared a regular quarterly cash dividend in the cumulative amount of approximately $1,527,000 payable to Common stockholders on June 15, 2018 to stockholders of record as of May 25, 2018. The Company had a retained deficit at the time of declaration and, as a result, the dividend was recorded as a reduction to paid-in-capital.
Liquidation, Dissolution and Winding Up
In the event of the Companys voluntary or involuntary liquidation, dissolution, distribution of assets or winding-up, the holders of the common stock will be entitled to receive an equal amount per share of all of the Companys assets of whatever kind available for distribution to stockholders, after the rights of the holders of the preferred stock have been satisfied.
Preemptive or Other Rights
There are no sinking fund provisions applicable to the common stock.
Sponsor Earnout Shares
Prior to the Merger
On December 28, 2016, Forum issued an aggregate of 3,593,750 of its Class F Common Stock to its Founders for an aggregate purchase price of $25,000 (the Founders Shares). On April 6, 2017, Forum effectuated a 1.2-for-1 stock dividend of its Class F Common Stock resulting in an aggregate of 4,312,500 Founders Shares outstanding. The Founders Shares automatically converted into shares of common stock upon the consummation of the Merger.
Simultaneously with the Forum IPO, the Sponsor purchased an aggregate of 555,000 Units in a private placement (the Placement Units) at a price of $10.00 per unit (or an aggregate purchase price of $5,550,000). In addition, on April 18, 2017, Forum consummated the sale of an additional 67,500 Placement Units at a price of $10.00 per unit, which were purchased by the Sponsor, generating gross proceeds of $675,000. Each Placement Unit consisted of one Placement Share, one Placement Right and one-half of one Placement Warrant (Private Warrant). The proceeds from the Placement Units were added to the proceeds from the Forum IPO held in the trust account of Forum.
The Placement Units were identical to the Units sold in the Forum IPO except that the Placement Warrants (i) are not redeemable by Forum and (ii) may be exercised for cash or on a cashless basis, so long as they are held by the initial purchaser or any of its permitted transferees.
Just prior to the Merger, the Founders owned 4,312,500 shares of Class F common stock, 622,500 shares of Class A common stock, Rights to 62,250 additional shares of Class A common stock, and warrants for the purchase of 311,250 shares of Class A common stock at $11.50 per share.
Merger
As part of the Merger Agreement, the Sponsor entered into a letter agreement on November 30, 2017 (the Sponsor Earnout Letter), with Forum, C1, and other parties whereby the Sponsor agreed that effective upon the Closing, with respect to the Founder Shares owned by the Sponsor, the Sponsor would (a) forfeit 1,078,125 of the Founder Shares and (b) subject 2,156,250 of the Founder Shares (the Sponsor Earnout Shares) to potential forfeiture in the event that the Earnout Payments are not achieved by Company Securityholders (see Note 2). Subject to certain limited exceptions, the Sponsor Earnout Shares will be subject to lock-up from the Closing until 180 days thereafter; provided that if the volume-weighted average price of Forum Common Shares for 15 trading days is at least $12.50 per share, then 25% of the Sponsor Earnout Shares will be released from escrow immediately (but still subject to the vesting requirements under the Sponsor Earnout Letter).
22
The Sponsor Earnout Shares will either (1) be forfeited if the C1 Earnings Targets are not met or (2) vest if the C1 Earnings Targets are met. The Earnout Targets are described in detail in Note 2. One-third of the Sponsor Earnout Shares, 718,750 shares, will become vested for each of the three Earnout Targets. The Sponsor Earnout Shares will convert to participating shares when vesting occurs. If the Earnings Targets are not met, the corresponding Sponsor Earnout Shares will be forfeited by the Sponsor.
All of the Sponsors shares, including the 62,250 shares issued as part of the Rights, were converted into shares of ConvergeOne common shares on a one-for-one basis. The 311,250 Private Warrants issued to the Sponsor as part of the Units it purchased in the IPO continue in existence post-Merger and represent the right to purchase shares of ConvergeOne common stock under the same terms and conditions as originally issued.
Post-Merger
Upon completion of the Merger, the Sponsor distributed 3,919,125 shares of ConvergeOne common stock to its members, including the 2,156,250 Sponsor Earnout Shares which are treated as issued and outstanding. The Sponsor Earnout Shares are not considered participating for dividend purposes and net income per share calculations until released from forfeiture restrictions upon achievement of the Earnout Targets (vested). The Sponsor is not providing any post-Merger services and once the shares are vested they are included in weighted-average shares outstanding for net income per share computations. Additionally, the Sponsor distributed to its members Private Warrants for the purchase of 311,250 shares of ConvergeOne common stock at $11.50 per share. As discussed in Note 2, the 2018 and 2019 Earnings Targets were met and thus 1,437,500 Sponsor Earnout Shares are vested and treated as participating shares. The remaining 718,750 Sponsor Earnout Shares have not yet vested as of June 30, 2018.
Warrants to Purchase Common Stock
Warrants for the purchase of 8.9 million shares of common stock were issued by Forum as part of the units sold in its IPO in April 2017. Each unit was comprised of one share of Class A common stock, a warrant to purchase one half of one share of Class A common stock and a right to receive one-tenth of a share of Class A common stock upon the consummation of a business combination by Forum. Upon completion of the Merger, these warrants pertain to the purchase of ConvergeOne common stock and the terms and conditions remain the same.
On February 26, 2018, the Company initiated a Public Offer to Purchase for cash up to 8,936,250 warrants at a price of $0.95 per Warrant, net to the seller without interest and subject to certain conditions, until March 23, 2018 (the Tender Offer). The Company increased the offer price to $1.20 per Warrant and extended the Tender Offer period to April 20, 2018.
The Tender Offer expired at 5:00 P.M., New York City time, on April 20, 2018, and a total of 7,581,439 warrants were validly tendered and not withdrawn pursuant to the Tender Offer as of such date. In accordance with the terms of the Tender Offer, the Company purchased all 7,581,439 validly tendered and not withdrawn warrants at a price of $1.20 per warrant for an aggregate purchase price of approximately $9,098,000, which was paid on April 23, 2018.
At June 30, 2018, there were a total of 1,354,810 warrants outstanding consisting of 1,091,060 Public Warrants originally sold as part of Units in the Forum IPO and 263,750 Placement Warrants.
The Company received a letter, dated June 19, 2018, from the Listing Qualifications Department of The Nasdaq Stock Market LLC (Nasdaq) indicating that Nasdaq intends to suspend and then delist the Companys warrants (NASDAQ: CVONW) from The Nasdaq Capital Market at the opening of business on June 28, 2018 for the failure to meet the requisite number of warrant holders requirement.
The Nasdaq has delisted the Companys warrants (NASDAQ: CVONW) from The Nasdaq Capital Market, effective at the opening of the trading session on July 30, 2018 following a determination by Nasdaq that the Companys warrants no longer qualified for listing pursuant to Listing Rule IM-5101-2.
Warrant Terms
Each whole warrant entitles the registered holder to purchase one share of common stock at a price of $11.50 per share, subject to adjustment as discussed below, at any time commencing on April 12, 2018. Pursuant to the warrant
23
agreement, a warrant holder may exercise such warrants only for a whole number of shares of common stock. This means that only a whole warrant may be exercised at any given time by a warrant holder. No warrants will be exercisable for cash unless there is an effective and current registration statement covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to such shares of common stock. Notwithstanding the foregoing, if a registration statement covering the shares of common stock issuable upon exercise of the Public Warrants is not effective within 90 days following the consummation of the Business Combination, warrant holders may, until such time as there is an effective registration statement and during any period when the Company shall have failed to maintain an effective registration statement, exercise warrants on a cashless basis pursuant to the exemption provided by Section 3(a)(9) of the Securities Act, provided that such exemption is available. If that exemption, or another exemption, is not available, holders will not be able to exercise their warrants on a cashless basis. In such event, each holder would pay the exercise price by surrendering the warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of common stock underlying warrants, multiplied by the difference between the exercise price of the warrants and the fair market value (defined below) by (y) the fair market value. The fair market value for this purpose will mean the average reported last sale price of the shares of common stock for the 5 trading days ending on the trading day prior to the date of exercise. The warrants will expire on February 22, 2023, the fifth anniversary of the completion of the Business Combination, at 5:00 p.m., New York City time, or earlier upon redemption or liquidation.
The warrants were originally issued in registered form under a warrant agreement between Continental, as warrant agent, and Forum. The warrant agreement provides that the terms of the warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval, by written consent or vote, of the holders of at least 50% of the then outstanding warrants in order to make any change that adversely affects the interests of the registered holders.
The exercise price and number of shares of common stock issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary dividend or our recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of shares of common stock at a price below their respective exercise prices.
The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank check payable to us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of shares of common stock and any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.
Under the terms of the warrant agreement, the Company agreed to use its best efforts to have declared effective a prospectus relating to the shares of common stock issuable upon exercise of the warrants and keep such prospectus current until the expiration of the warrants. However, the Company cannot assure that it will be able to do so and, if it does not maintain a current prospectus relating to the shares of common stock issuable upon exercise of the warrants, holders will be unable to exercise their warrants for cash and the Company will not be required to net cash settle or cash settle the warrant exercise.
Warrant holders may elect to be subject to a restriction on the exercise of their warrants such that an electing warrant holder would not be able to exercise their warrants to the extent that, after giving effect to such exercise, such holder would beneficially own in excess of 9.8% of the shares of common stock outstanding.
No fractional shares will be issued upon exercise of the warrants. If, by reason of any adjustment made pursuant to the warrant agreement, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, the Company will, upon exercise, round up to the nearest whole number the number of shares of common stock to be issued to the warrant holder.
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The Companys Redemption Right
The Company may call the Public Warrants for redemption, in whole and not in part, at a price of $0.01 per warrant:
| At any time during the exercise period, |
| Upon not less than 30 days prior written notice of redemption to each Public Warrant holder, |
| If, and only if, the reported last sale price of the shares of common stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations and recapitalizations), for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to Public Warrant holders; and |
| If, and only if, there is a current registration statement in effect with respect to the shares of common stock underlying the Public Warrants. |
The right to exercise will be forfeited unless the Public Warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a Public Warrant will have no further rights except to receive the redemption price for such holders Public Warrant upon surrender of such Public Warrant.
The redemption criteria for the Public Warrants have been established at a price which is intended to provide warrant holders a reasonable premium to the initial exercise price and provide a sufficient differential between the then-prevailing share price and the warrant exercise price so that if the share price declines as a result of a redemption call, the redemption will not cause the share price to drop below the exercise price of the Warrants.
If the Public Warrants are called for redemption as described above, the Company will have the option to require all holders that wish to exercise warrants to do so on a cashless basis. In such event, each holder would pay the exercise price by surrendering the warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the fair market value (defined below) by (y) the fair market value. The fair market value shall mean the average reported last sale price of the shares of common stock for the 5 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of Public Warrants.
Unit Purchase Option
As part of its IPO, in April 2017 Forum sold to its primary underwriter, EBC, and its designees, for $100, a UPO to purchase up to a total of 1,125,000 Units exercisable at $10.00 per Unit. The option represents the right to purchase up to 1,237,500 shares of common stock (which includes 112,500 shares which will be issued for the Rights included in the Units) and warrants to purchase 562,500 shares of common stock at $11.50 per share for an aggregate maximum amount of $6,468,750. Forum accounted for the UPO, inclusive of the receipt of $100 cash payment, as an expense of its IPO resulting in a charge directly to stockholders equity.
Upon completion of the Merger, the UPO pertains to the purchase of ConvergeOne common stock and the terms and conditions remain the same.
The UPO may be exercised for cash or on a cashless basis, at the holders option, at any time during the period commencing April 6, 2018 (the first anniversary of the effective date of the registration statement filed in connection with the Forum IPO) and will terminate on April 6, 2022 (the fifth anniversary of the effective date of the registration statement filed in connection with the Forum IPO).
The UPO grants to holders demand and piggy back registration rights for periods of five and seven years, respectively, from April 6, 2017 (the effective date of the registration statement filed in connection with the Forum IPO) with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the UPO. EBC and/or its designees may only make a demand registration (i) on one occasion and (ii) during the five year period beginning on April 6, 2017, the effective date of the registration statement filed with the SEC for the Forum IPO. The Company will bear all fees and expenses attendant to registering the securities, other than underwriting commissions, which will be paid for by the holders themselves.
The exercise price and number of Units issuable upon exercise of the UPO may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. However, the UPO will not be adjusted for issuances of common stock at a price below the Companys exercise price. The Company has no obligation to net cash settle the exercise of the UPO or the Rights or warrants underlying the UPO. The holder of the UPO will not be entitled to exercise the UPO or the Rights or warrants underlying the UPO unless a registration statement covering the securities underlying the UPO is effective or an exemption from registration is available. If the holder is unable to exercise the UPO or underlying Rights or warrants, the UPO, Rights or warrants, as applicable, will expire worthless.
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The underwriters had performed all of their services in April 2017 and thus the fair value measurement of the UPO at the date of issuance by Forum was a one-time, nonrecurring measurement that is not subject to re-measurement over the life of the UPO.
Registration Rights
In April 2017, the Sponsor entered into a registration rights agreement with Forum pursuant to which the Sponsor was granted certain rights relating to the registration of shares of common stock and warrants held by it and its transferees. In February 2018, upon the Closing of the Merger, the Company, certain C1 Securityholders, including the Companys executive officers and Clearlake, and the Sponsor entered into an amended and restated registration rights agreement, pursuant to which such parties hold registration rights with respect to shares of common stock issued as merger consideration under the Merger Agreement, including any Earnout Stock Payments, as well as shares of common stock held by the Sponsor and its transferees, or issuable upon the exercise of warrants by the Sponsor (collectively, the Registration Rights). Stockholders holding a majority-in-interest of such registrable securities are entitled to make a written demand for registration under the Securities Act of all or part of their registrable securities. Subject to certain exceptions, such stockholders also have certain piggy-back registration rights with respect to registration statements filed by the Company, as well additional rights to provide for registration of registrable securities on Form S-3 and any similar short-form registration statement that may be available at such time. The Company will bear the expenses incurred in connection with the filing of any such registration statements described above.
The Registration Rights do not meet the definition of a registration payment arrangement as there are no terms that require the Company to transfer consideration to the various securityholders if a registration statement is not declared effective or effectiveness is not maintained.
2018 Equity Incentive Plan
The 2018 Equity Incentive Plan (the Equity Incentive Plan) was approved by the Companys board of directors and stockholders in February 2018, and became effective upon the Closing of the Merger. The Equity Incentive Plan provides for the grant of incentive stock options, or ISOs, nonstatutory stock options, or NSOs, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards, and other forms of equity compensation, or collectively, stock awards, all of which may be granted to the Companys employees, including officers, non-employee directors and consultants. Additionally, the Equity Incentive Plan provides for the grant of performance cash awards. ISOs may be granted only to employees. All other awards may be granted to employees, including officers, and to non-employee directors and consultants.
The Company has not made any grants since the Closing of the Merger.
2018 Employee Stock Purchase Plan
The 2018 Employee Stock Purchase Plan (the ESPP) was approved by the Companys board of directors and stockholders in February 2018, and became effective upon the Closing of the Merger. The ESPP provides a means by which the Companys employees may be given an opportunity to purchase shares of the Companys common stock. The rights to purchase common stock granted under the ESPP are intended to qualify as options issued under an employee stock purchase plan as that term is defined in Section 423(b) of the Code.
The Board initially authorized an Offering beginning on May 1, 2018 and ending on June 30, 2018 (the Initial Offering). Following the end of the Initial Offering, a new Offering (Subsequent Offering) will automatically begin on the day that immediately follows the conclusion of the preceding Offering. Each Subsequent Offering will be approximately six months long, and will consist of one Purchase Period ending on June 30 and December 31 each year. The Board may change the terms and dates of Subsequent Offerings and Purchase Periods pursuant to the terms of the Purchase Plan.
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The Initial Offering consisted of one Purchase Period, ending on June 30, 2018. The Initial Offering resulted in 57,293 shares being issued in July, 2018. Stock-based compensation expense of approximately $62,000 was recognized in the three and six months ended June 30, 2018 related to the Initial Offering.
Expense
Stock-based compensation expense recognized for all equity awards for the three and six months ended June 30, 2018, was $45,000 and $6,431,000, respectively. Stock-based compensation expense recognized for all equity awards for the three and six months ended June 30, 2017 was $174,000 and $330,000, respectively.
The increase in expense for the six months ended June 30, 2018 was the result of recognizing the full amount of unrecognized C1 stock-based compensation expense of $4,842,000 upon the Closing of the Merger on February 22, 2018, including the expense related to the re-measurement of a portion of the C1 stock options just prior to the Closing, and $1,527,000 of compensation expense recorded for the portion of the Earnout Consideration payable to the former C1 option holders (see Note 2). Approximately $647,000 of the $1,527,000 of deemed compensation expense is recorded in the condensed consolidated statement of stockholders equity (deficit) and the remainder is recorded in the earnout consideration payable on the condensed consolidated balance sheet.
8. Net Income (Loss) per Share
Prior to the Merger
Prior to the Merger, C1 had two classes of common stock, Class A and Class B. The Company applied the two-class method of computing net income (loss) per share in which net income (loss) is allocated to the two classes of common stock in the same fashion as dividends are distributed. The holders of the Class A common stock were entitled to receive dividends in preference to the holders of the Class B common stock. After the payment of the Class A preferential dividends, the holders of the Class A and Class B common stock were entitled to share equally, on a per share basis, in all dividends declared by the Board of Directors. As a result of a cash dividend paid in October 2016, the holders of the Class A common stock were no longer entitled to receive any preferential dividends or preferential amounts in the event of any liquidation, dissolution, winding up or change of control transaction. Shares of Class B common stock were considered participating securities subsequent to the dividend payment in October 2016 for computation of net income (loss) per share. However, Class B common stockholders did not participate in a net loss.
In the Companys consolidated statement of operation for the three and six months ended June 30, 2017, the Class B common stockholders did not participate in the net loss. There were no Class A dilutive securities for the three and six months ended June 30, 2017. As a result, diluted net loss per common share is the same as basic net loss per common share for the three and six months ended June 30, 2017.
For the three and six months ended June 30, 2017, the Company has retroactively adjusted the weighted-average number of shares of common stock outstanding to reflect the Merger Exchange Ratio as described in Notes 2 and 7.
There were no Class A dilutive securities for the period from January 1, 2018 to the Merger date.
Post-Merger
Basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders, which is computed by subtracting the Earnout Consideration from net income, by the weighted-average number of shares of common stock outstanding during the period, as adjusted for the Sponsor Earnout Shares that are not participating securities until vested, and the effect of shares that were contingently issuable for which the contingency has been resolved, whether or not those shares have been issued. The contingently issuable shares of common stock pertain to those shares to be issued and vested when the Company meets the Earnings Targets established as part of the Merger Agreement as described in Note 2Business Combination/Merger.
Diluted net income (loss) per share is computed by dividing net income (loss) available to common shareholders, which is computed by subtracting the Earnout Consideration from net income, by the weighted-average number of
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shares of common stock outstanding during the period, as adjusted for the Sponsor Earnout Shares that are not participating securities until vested, the effect of shares that were contingently issuable for which the contingency has been resolved, whether or not those shares have been issued yet, and any dilutive equity instruments (warrants and options) that are in-the-money. The effect of the contingently issuable shares and dilutive equity instruments are included for the shorter of the date the underlying contracts were in existence to the end of the reporting period or the entire reporting period. However, diluted net loss per share excludes all dilutive potential shares if their effect is anti-dilutive.
For the three months and six ended June 30, 2018, the Company adjusted the weighted-average number of C1 Class A common shares outstanding from January 1, 2018 to the Merger date of February 22, 2018, to retroactively adjust those share amounts to reflect the Merger Exchange Ratio as described in Notes 2 and 7.
As of June 30, 2018, there were 13,717,054 equivalent shares of common that were evaluated for purposes of including in weighted-average shares outstanding. The actual amount of common share equivalents that were excluded from the calculation of diluted net loss per share for the three and six months ended June 30, 2018 was 7,117,054 and 6,421,547, respectively, as their effect was anti-dilutive.
Additionally, all of the Companys outstanding warrants to purchase common stock and the UPO were excluded from the computation of weighted-average shares outstanding for dilutive purposes during the three and six months ended June 30, 2018, due to the instruments having exercise prices in excess of the market value of the Companys common stock. These instruments could result in dilution in future periods.
| There were warrants outstanding for the purchase of 1,354,810 shares of common stock at $11.50 per share at June 30, 2018. |
| The UPO that is outstanding at June 30, 2018 represents the right to purchase 1,125,000 Units at $10.00 per share, which would result in the issuance of 1,237,500 shares of common stock and warrants for the purchase of 562,500 shares of common stock at $11.50 per share. |
The following is a summary of the information used to compute basic and diluted net loss per common share (in thousands, except per share amounts):
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Numerator: |
||||||||||||||||
Net income (loss) |
$ | (7,461 | ) | $ | (11,367 | ) | $ | 1,345 | $ | (14,488 | ) | |||||
Earnout consideration |
1,436 | | (124,005 | ) | | |||||||||||
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Net loss available to common shareholders |
$ | (6,025 | ) | $ | (11,367 | ) | $ | (122,660 | ) | $ | (14,488 | ) | ||||
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Denominator: |
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Weighted-average shares outstanding during the |
75,222,455 | 39,860,619 | 63,487,614 | 39,870,980 | ||||||||||||
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Net loss per common share: |
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Basic and diluted (1) |
$ | (0.08 | ) | $ | (0.29 | ) | $ | (1.93 | ) | $ | (0.36 | ) | ||||
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(1) | Share amounts were retroactively adjusted for the reverse recapitalization (see Note 2) |
9. Fair Value Measurements
For certain of the Companys financial instruments, including cash, trade accounts receivable, accounts payable, and accrued expenses, the carrying value approximates fair value due to the short-term maturities of these instruments.
The fair value of the Companys long-term debt as of June 30, 2018 and December 31, 2017 approximates the carrying value of $710,000,000 and $582,325,000, respectively. The Company uses significant other unobservable inputs to estimate fair value (Level 3 of the fair value hierarchy) of long-term debt based on the present value of future cash flows, interest rates, maturities and collateral requirements available for companies with similar credit ratings.
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For certain of the Companys nonfinancial assets, including goodwill, intangible assets and property and equipment, the Company may be required to assess the fair values of these assets, on a recurring or nonrecurring basis, and record an impairment if the carrying value exceeds the fair value. In determining the fair value of these assets, the Company may use a combination of valuation methods, which include Level 3 inputs. For the periods presented, there were no impairment charges. See Notes 1Nature of Business and Summary of Significant Accounting Policies and 5Goodwill and Finite-Life Intangible Assets for additional information regarding the Companys determination of fair value regarding goodwill and indefinite-lived intangible assets.
In conjunction with the acquisition of ASI discussed in Note 3Business Acquisitions, the Company used a combination of valuation methods which include Level 3 inputs in determining the fair values of the assets and liabilities acquired as well as the fair value of the consideration transferred.
10. Major Vendors and Economic Dependence
The Company has numerous technology partners whose communication products are purchased and resold. Although the Company purchases from a diverse vendor base, products manufactured by two of our vendors, Avaya Inc. (Avaya) and Cisco Systems, Inc. (Cisco), represented the majority of the Companys technology offerings revenue.
Avaya-related revenue represented 20% and 24% for the three months ended June 30, 2018 and 2017; and, 20% and 22% for the six months ended June 30, 2018 and 2017, respectively. Cisco-related revenue represented 43% and 33% for the three months ended June 30, 2018 and 2017; and, 39% and 34% for the six months ended June 30, 2018 and 2017, respectively.
The Company has one distributor that supplies a significant portion of its Avaya communication products.
At June 30, 2018 and December 31, 2017, the Company owed $19,871,000 and $28,146,000, respectively, to this distributor.
11. Operating Leases
The Company leases office and warehouse space and vehicles under operating lease agreements that expire on various dates through 2026.
Approximate future minimum annual rental commitments under these operating leases as of June 30, 2018 are as follows (in thousands):
Years Ending December 31, |
Amount | |||
Remainder of 2018 |
$ | 4,762 | ||
2019 |
6,981 | |||
2020 |
5,626 | |||
2021 |
4,697 | |||
2022 |
3,680 | |||
2023 and thereafter |
4,667 | |||
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Total |
$ | 30,413 | ||
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Rent expense was $2,914,000 and $5,401,000 for the three and six months ended June 30, 2018 and $1,044,000 and $2,162,000 for the three and six months ended June 30, 2017, respectively.
12. Employee Benefit Plans
The Company sponsors defined contribution plans for substantially all employees. Annual Company contributions under the
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plans are discretionary. Company contribution expense during the three and six months ended June 30, 2018 was $1,506,000 and $3,029,000, respectively. Company contribution expense during the three and six months ended June 30, 2017 was $634,000 and $1,950,000, respectively.
13. Income Taxes
On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a permanent reduction of the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018.
Various factors can create volatility in the Companys quarterly tax provision and quarterly effective income tax rate (after discrete items). Certain factors include permanent tax items, discrete items recognized in the period, as well as the actual amount of income or loss before income taxes.
The Companys estimated annual effective tax rate (excluding discrete items) for the six months ended June 30, 2018 and 2017 is 49.1% and 13.7%, respectively. The Companys annual effective tax rate differs from the federal statutory rate due to state taxes and non-deductible permanent items. The increase in the annual effective tax rate from the prior year is primarily driven by the impact of non-deductible permanent tax items offset by the decrease in the U.S. corporate income tax rate on income or loss before taxes.
The Companys effective income tax rate (after discrete items) for the six months ended June 30, 2018 and 2017 is 110.0% and 12.6%, respectively. The increase in the effective income tax rate from the prior period is driven by a combination of two factors. One factor is that the Company experienced significant or unusual discrete benefit items of $6.7 million in the current period and when combined with a net loss before income taxes, it causes the effective income tax rate to increase. These discrete items primarily include a bargain purchase gain that is not recognized for tax purposes and excess tax benefits associated with stock-based compensation payments. The other factor is that the impact of non-deductible permanent tax items result in an incremental increase to the effective income tax rate when combined with a net loss before taxes.
Certain of the Companys historical net operating losses are subject to Internal Revenue Code Section 382 limitations which have been considered in determining the amount of available net operating loss carryforwards. The Company has federal net operating loss carryforwards of $4.3 million that begin to expire in 2031 if not utilized. The Company also has $21.7 million of various state net operating loss carryforwards that begin to expire in 2020 if not utilized.
Uncertain Tax Positions
The Company recognizes the tax effects of an uncertain tax position only if it is more likely than not to be sustained based solely upon its technical merits at the reporting date. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. The unrecognized tax benefit is the difference between the tax benefit recognized and the tax benefit claimed on the Companys income tax return. The Company has reviewed its prior year returns and believes that all material tax positions in the current and prior years have been analyzed and properly accounted for and that the risk that additional material uncertain tax positions have not been identified is remote.
During the three months ended June 30, 2018, the previously recorded uncertain tax position was settled with the IRS unfavorably and reclassified to current income taxes. There was no overall impact to the effective tax rate as all liabilities were previously recorded.
The Companys federal income tax returns remain open to examination for 2014 through 2016 and certain of the Companys state income tax returns remain open to examination for 2013 through 2016.
14. Segment Reporting
Management has concluded that our chief operating decision maker (CODM) consists of both our chief executive officer and chief financial officer. The Companys CODMs collectively review the entire organizations consolidated results as a whole on a monthly basis to evaluate performance and make resource allocation decisions. Management views the Companys operations and manages its business as one operating segment.
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Geographic Areas
Sales to customers outside of the United States are not material for any of the periods presented. Additionally, the Company does not have long-lived assets outside of the United States.
Revenue by Technology Market
The following table presents total technology offerings revenue and services revenue by technology market, based on the Companys internal classification of revenue (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
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2018 | 2017 | 2018 | 2017 | |||||||||||||
Technology Offerings |
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Collaboration |
$ | 94,915 | $ | 52,524 | $ | 156,019 | $ | 96,199 | ||||||||
Enterprise Networking, Data Center, Cloud and Security |
102,247 | 53,679 | 182,597 | 97,969 | ||||||||||||
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$ | 197,162 | $ | 106,203 | $ | 338,616 | $ | 194,168 | |||||||||
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Services |
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Collaboration |
$ | 162,283 | $ | 68,039 | $ | 302,575 | $ | 146,615 | ||||||||
Enterprise Networking, Data Center, Cloud and Security |
31,566 | 17,080 | 56,161 | 33,505 | ||||||||||||
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$ | 193,849 | $ | 85,119 | $ | 358,736 | $ | 180,120 | |||||||||
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Total |
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Collaboration |
$ | 257,198 | $ | 120,563 | $ | 458,594 | $ | 242,814 | ||||||||
Enterprise Networking, Data Center, Cloud and Security |
133,813 | 70,759 | 238,758 | 131,474 | ||||||||||||
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Total |
$ | 391,011 | $ | 191,322 | $ | 697,352 | $ | 374,288 | ||||||||
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15. Related-Party Transactions
In June 2014, the Company entered into a Management and Monitoring Services Agreement with Clearlake, pursuant to which Clearlake provided the Company advisory services and received fees and reimbursements of related out-of-pocket expenses. For the three and six months ended June 30, 2018, the expense under the agreement was nil and $221,000 respectively. For the three and six months ended June 30, 2017, the expense under the agreement was $375,000 and $750,000, respectively, which $375,000 was included in accrued expenses at June 30, 2017. In connection with the Merger, this agreement was terminated.
On August 17, 2017, the Company granted 530,772 options to purchase the Companys Class B Common Stock to a newly appointed board member. On September 25, 2017, the board member early exercised the options for a total exercise price of $1,805,000 with payment in the form of a Recourse Promissory Note. The note bore interest at 2.6% and was paid in full upon the Closing of the Merger.
16. Subsequent Events
On August 8, 2018, the Board of Directors of the Company declared a regular quarterly cash dividend of $0.02 per common share to be paid on September 14, 2018 to all stockholders of record as of the close of business on August 24, 2018. Future dividends will be subject to Board of Directors approval.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the safe harbor created by those sections. Forward-looking statements are based on our managements beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as may, will, should, could, goal, would, expect, plan, anticipate, believe, estimate, project, predict, potential and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading Risk Factors. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
The following discussion and analysis provides information management believes to be relevant in understanding the financial condition and results of operations of ConvergeOne Holdings, Inc. and its subsidiaries (ConvergeOne, the Company, we, us, or our). The discussion should be read in conjunction with both our condensed consolidated financial statements and related notes included in Part I, Item 1 - Financial Statements, and Managements Discussion and Analysis of Financial Condition and Results of Operations in our Registration Statement on Form S-1/A filed on April 24, 2018.
Prior to February 22, 2018, we were known as Forum Merger Corporation. On February 22, 2018, we completed the Business Combination, with C1 Investment Corp., a private company. For accounting purposes, Forum Merger Corporation was deemed to be the acquired entity in the Merger.
Overview
We are a leading IT services provider of collaboration and technology solutions for large and medium enterprises. We serve clients through our comprehensive engagement model which includes the full lifecycle of services from consultation and design through implementation, optimization, and ongoing support. Our deep technical expertise enables us to deliver complex, multi-vendor solutions across a number of delivery models, including on-premise and in private, hybrid, C1 Cloud, and public cloud environments. We served over 7,200 clients in 2017, which includes clients served by companies we acquired in 2017. From 2015 to 2017, we served 57% of the Fortune 100, 43% of the Fortune 500, and 36% of the Fortune 1000, which includes clients served in the same period by companies we acquired in 2017 and 2015.
Our technical expertise and client-centric culture have led to long-standing and expanding client relationships. With approximately 1,700 highly skilled engineers and consulting professionals and approximately 360 sales professionals, we are able to deliver customized services and technology offerings to address the specific needs of our clients. Additionally, among our top 100 clients based on 2017 revenue, we have an average tenure of more than nine years. We generated 93% of our total revenue in 2017 from clients we served in a prior year, excluding the impact of our 2017 acquisitions.
We design thousands of solutions each year across our core technology markets: (i) collaboration and (ii) enterprise networking, data center, cloud, and security. Collaboration is primarily comprised of software-centric unified communications technology, which enables communication anywhere on any device, and our customer engagement applications which deliver a personalized and omni-channel experience for our clients end customers. Our other core technology markets, enterprise networking, data center, cloud, and security, focus on the critical software and hardware IT infrastructure to enable our clients to securely process and store the applications and information they need to conduct their business. Our solutions are a combination of our professional services and technology offerings and are complemented by our industry-leading managed, cloud, and maintenance services.
For the six months ended June 30, 2018 and 2017, 51% and 48% of our total revenue, respectively, was derived from professional and managed, cloud, and maintenance services and 49% and 52% was derived from technology offerings. For the six months ended June 30, 2018 and 2017, 66% and 65% of our total revenue, respectively, was derived from our services and technology offerings in the collaboration market. The remaining 34% and 35% of our total revenue, respectively, was derived from our enterprise networking, data center, cloud, and security services and technology offerings. In 2018, we acquired Arrow Systems Integration, Inc. (ASI), and in 2017, we acquired Annese & Associates, Inc. (Annese ), SPS Holdco, LLC (SPS ), Rockefeller Group Technology Solutions, Inc. (RGTS ) and AOS, Inc. (AOS ), which significantly affect comparability of our 2018 and 2017 results of operations and metrics. Please see the section below titled Recent Acquisitions for further information regarding these acquisitions.
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Services
During the six months ended June 30, 2018 and 2017, 32% and 35% of our services revenue, respectively, came from professional services and 68% and 65%, respectively, was derived from managed, cloud, and maintenance services. For the six months ended June 30, 2018 and 2017, services in the collaboration market comprised 84% and 81%, respectively, of our services revenue.
Technology Offerings
For the six months ended June 30, 2018 and 2017, 46% and 50% of our technology offerings revenue, respectively, was generated by technology offerings in the collaboration market.
Our Corporate History
Since our founding in 1993, our client-centric culture has defined how we operate. We have worked, since the beginning, to deliver innovative multi-vendor services and solutions to solve our clients IT challenges and to help them grow. Our business model has driven our internal organic growth while at the same time allowing us to add capabilities and vendor relationships through both internal investments and acquisitions.
See further discussion in our Registration Statement on Form S-1/A filed on April 24, 2018.
Recent Acquisitions
In March 2018, we acquired ASI for cash consideration of $28.4 million. The acquisition increases our collaboration business.
In December 2017, we acquired AOS for cash consideration of $65.2 million. The acquisition increases our presence in the Midwest and broadens our portfolio of collaboration services and solutions capabilities.
In September 2017, we acquired RGTS for cash consideration of $20.9 million. The acquisition increases our presence in the New York City market and brings additional capabilities in collaboration and cloud.
In August 2017, we acquired SPS for cash consideration of $51.1 million. The acquisition brought additional solutions and services capabilities in collaboration and video.
In July 2017, we acquired Annese for cash consideration of $24.5 million. The Annese acquisition brought additional solutions and service capabilities in enterprise networking, security, collaboration, and cloud, backed by four decades of experience and expertise.
Factors Affecting our Operating Performance
We believe the following trends and factors may have an impact on our operating performance:
Evolution of cloud-based collaboration solutions. Within the broader unified communications and customer engagement market, cloud and hosted solutions are expected to grow faster than on-premise solutions as organizations increasingly look for scalable, agile, and mobile-enabled solutions while simultaneously seeking to reduce capital costs. As a result, enterprises are shifting from on-premise, hardware infrastructure to software-centric hosted and cloud solutions. Given our ability to deliver collaboration and other technology offerings over private, hybrid, C1 Cloud, and public cloud environments, we believe we are well positioned to benefit from these trends and expect these trends to drive growth in our managed, cloud, and maintenance services business, which typically have multi-year contractual terms and high renewal rates. We calculate renewal rate as the annual contract value (ACV ) of contracts renewed as a percentage of the total ACV up for renewal in an applicable period. This can result in a renewal rate greater than 100% in the event that a contract renews at a higher value than the expiring contract value. Additionally, we exclude customer bankruptcies, site closures, short-term contracts and other adjustments in the calculation of the renewal rate.
Growing complexity of technology solutions and expansion of our services business mix. Due to increased technology and vendor complexity, we are seeing an increased demand for multi-vendor IT solutions. As a result, enterprises are increasingly seeking the assistance of IT service providers who have the expertise to consult, design, integrate, and manage their technology solutions and platforms. Given our technical expertise, leading managed, cloud, and maintenance services, and customized services approach, we expect that our services offerings will comprise a higher percentage of our revenue in the future, which would have a favorable impact on our gross margins.
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Our ability to increase penetration of our existing, long-standing clients. Our future growth will depend in part on our ability to expand sales of our services and solutions to our existing clients. For 2017, 93% of our total revenue was derived from clients we served in a prior year, excluding the impact of our 2017 acquisitions. We believe we are well positioned to identify new opportunities to expand or sell new services and solutions to our existing clients. For 2017, 66.3% of our total revenue came from collaboration solutions, and we believe there are additional opportunities to sell our other technology offerings, including enterprise networking, data center, cloud, and security into our existing client base. In addition, we believe there is opportunity to further penetrate our existing client base with our managed, cloud, and maintenance services.
Customer adoption of our expanding technology offerings and services. We plan to continue to invest in the development of our innovative and client-centric services and solutions. As technology becomes increasingly complex and clients look to reduce their capital cost, we believe our clients will transition from maintenance to managed services, and ultimately to cloud services. Most recently, we added advanced monitoring capabilities for our managed services platform, developed our own cloud hosted capabilities, and, through acquisitions, significantly bolstered our security technical expertise, offering end-to-end network and data security services and solutions to our clients. We believe that customer adoption of our cloud and security technology offerings and managed and hosted services can drive growth in our business over time.
Continue to maintain relationships with key technology partners. Through our leading professional services capabilities, we design thousands of solutions a year for our clients across our core technology markets: (i) collaboration and (ii) enterprise networking, data center, cloud, and security. We are vendor agnostic, as we enjoy strong relationships with more than 300 leading and next-generation technology partners. In order to retain access to the best-of-breed solutions and offer the latest technology solutions, we need to continue to maintain our relationships with existing key technology partners and develop new relationships.
Impact of Avaya Restructuring. Avaya, which was one of our largest vendors as a percentage of our technology offerings revenue in 2018 and 2017, filed for reorganization under Chapter 11 in January 2017, filed its preliminary plan of reorganization in April 2017, and had its Chapter 11 plan of reorganization approved by the Bankruptcy Court in November 2017. As a result of Avayas restructuring, new or existing clients have, in some cases, elected to delay purchasing decisions with respect to Avaya technology offerings or have chosen to replace existing Avaya technology offerings with the technology offerings of other vendors. Delays in customer purchasing decisions, or an election by our clients to purchase alternative technology offerings from us or from other providers, has resulted in decreased technology offerings revenue in 2017, and could result in lower revenues and gross profits or margins or otherwise have an adverse effect on our business in the future. Management continues to evaluate the impact that Avayas reorganization has had on our results of operations and financial condition.
Components of Results of Operations
There are a number of factors that impact the revenue and margin profile of the services and technology offerings we provide, including, but not limited to, solution and technology complexity, technical expertise requiring the combination of products and types of services provided, as well as other elements that may be specific to a particular client solution.
Revenue
Our revenue consists of the sale of our technology offerings and services. We separately present technology offerings and services revenue, along with the associated cost of revenue, in our consolidated statements of operations.
Technology Offerings Revenue
Technology offerings revenue includes revenue from the sale of hardware and software products and is generally recognized on a gross basis with the selling price to the client recorded as revenue because we act as the primary obligor under these contracts. Revenue is generally recognized when the title and risk of loss are passed to the customer, there is persuasive evidence of an arrangement for sale, the sales price is fixed and determinable, and collectability is reasonably assured. Hardware and software items can be delivered to our clients in a variety of ways including shipping from our facilities, via drop-shipment by the vendor or distributor, or via electronic delivery for software licenses.
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Services Revenue
Services revenue includes:
Revenue for Professional Services. Revenue for professional services is generally recognized when professional services are performed and all obligations have been substantially met. The majority of professional services revenue is fixed price.
Revenue for Managed, Cloud, and Maintenance Services. Revenue for managed and cloud services is generally recognized on a straight-line basis over the contractual term of the arrangements, which is consistent with the timing of services rendered. Revenue from the sale of third-party retail maintenance contracts is recognized net of the related cost of revenue. In third-party retail maintenance contracts, all services are provided by third-party providers and, as a result, we are acting as an agent and not considered the primary obligor. As we are under no obligation to perform additional services, revenue is recognized at the time of sale. Revenue from the sale of third-party wholesale maintenance contracts is recognized on a gross basis at the time of sale with the selling price to the client recorded as revenue and the acquisition cost recorded as cost of revenue. Based upon the evaluation of indicators for gross and net reporting, we have concluded that we are acting as a principal in these contracts.
Cost of Revenue, Gross Profit, and Gross Margin
Technology Offerings Gross Profit
Technology offerings gross profit is equal to technology offerings revenue less the acquisition cost of the product, recorded as cost of revenue, net of technology partners and distributor rebates. Technology offerings gross profit is impacted by the complexity of hardware and software sold in our solutions, as well as the mix of product type with generally higher gross profits coming from the sale of collaboration products.
Services Gross Profit
Services gross profit is equal to services revenue less cost of revenue associated with services.
Professional Services Gross Profit. Cost of revenue associated with professional services includes the compensation, benefits, and other costs associated with our delivery and project management engineering team, as well as costs charged by third-party contractors. Costs associated with our delivery and project management engineering team are generally recognized as incurred. Costs charged by third-party contractors are initially deferred as prepaid expense and generally recorded as cost of revenue when the professional service project is complete or when contractual milestones have been achieved. As a result, our services gross profit may fluctuate from period to period.
Managed, Cloud, and Maintenance Services Gross Profit. Compensation, benefits, and other costs associated with our managed and in-house maintenance services engineering team, costs charged by subcontractors, and costs of running our three Network Operations Centers, or NOCs, are recorded as cost of revenue as incurred. These costs include depreciation of certain equipment and software utilized in our NOCs in support of our managed, cloud, and maintenance services contracts. We incur external costs associated with professional and managed services, primarily related to purchasing maintenance support contracts with third-party manufacturers and software licenses, which are generally prepaid. These costs, associated with maintenance contracts where we have an obligation to perform services, are incurred specifically to assist us in rendering services to our customers and are recorded as deferred customer support contract costs at the time the costs are incurred. The costs are amortized to expense as a cost of revenueservices on a straight-line basis over the period during which we fulfill our performance obligation. Third-party wholesale maintenance services cost of revenue is the acquisition cost from technology partners. In addition, our managed, cloud, and maintenance services gross profit is impacted by the mix of wholesale versus retail third-party maintenance revenue and the average contractual length of the third-party maintenance agreements.
Services gross profit is generally impacted by our ability to negotiate longer term managed and cloud contracts with our clients, maintaining a high contract renewal rate, effectively managing our service level agreements, or SLAs, resolving a large percentage of the incidents in-house, increasing utilization rates of our NOC engineers, and timing of revenue recognition. Our services gross profit is also impacted by our ability to deliver on fixed-price professional services engagements within scope, and our ability to keep our delivery engineers utilized.
Gross margin measures our gross profit as a percentage of revenue. Gross margin is generally impacted by changes in the mix of product type sold as well as the mix of services versus technology offerings revenue, with generally higher gross margins coming from the sale of collaboration products and services revenue.
Operating Expenses
Our operating expenses include sales and marketing expenses, general and administrative expenses, transaction costs, and depreciation and amortization.
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Sales and Marketing Expense. Sales and marketing expense is comprised of compensation, commission expense, variable incentive pay, and benefits related to our sales personnel, along with travel expenses, other employee related costs including stock-based compensation, and expenses related to marketing programs and events. Commission expenses are largely driven by gross margin performance and are generally paid to the sales personnel when the solutions revenue has been collected from the client.
General and Administrative Expense. General and administrative expense is comprised of compensation and benefits of administrative personnel, including variable incentive pay and stock-based compensation, and other administrative costs such as facilities expenses, professional fees, and travel expenses.
Transaction Costs. We present transaction costs as a separate line item within operating expenses based on it being a material cost that varies period to period. Transaction costs include acquisition-related expenses, including integration costs, employee retention bonuses, severance charges, advisory and due diligence fees, and transaction-related legal and accounting due diligence costs.
Depreciation and Amortization Expense. Depreciation expense relates to our fixed assets except for assets used in cost of revenue. Amortization expense relates to intangible assets we acquired in our business acquisitions.
Other (Income) Expense, Net
Other (income) expense, net includes the preliminary bargain purchase gain related to the acquisition of ASI. It also includes interest expense associated with our outstanding debt and costs associated with the refinancing of our debt. We also may seek to finance strategic acquisitions in the future with the proceeds from additional debt incurrences, which may have an impact on our interest expense.
Income Tax Expense (Benefit)
We are subject to U.S. federal income taxes, state income taxes net of federal income tax effect, and nondeductible expenses. Our effective tax rate will vary depending on permanent nondeductible expenses and other factors.
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Results of Operations
The following tables set forth our consolidated financial data in dollar amounts and as a percentage of total revenue.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Revenue |
||||||||||||||||
Technology offerings |
$ | 197,162 | $ | 106,203 | $ | 338,616 | $ | 194,168 | ||||||||
Services |
193,849 | 85,119 | 358,736 | 180,120 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
391,011 | 191,322 | 697,352 | 374,288 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Cost of revenue |
||||||||||||||||
Technology offerings |
152,529 | 81,544 | 258,135 | 150,288 | ||||||||||||
Services |
124,154 | 51,991 | 236,504 | 112,920 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total cost of revenue |
276,683 | 133,535 | 494,639 | 263,208 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
||||||||||||||||
Technology offerings |
44,633 | 24,659 | 80,481 | 43,880 | ||||||||||||
Services |
69,695 | 33,128 | 122,232 | 67,200 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total gross profit |
114,328 | 57,787 | 202,713 | 111,080 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating expenses |
||||||||||||||||
Sales and marketing |
51,144 | 28,079 | 97,698 | 58,247 | ||||||||||||
General and administrative |
27,767 | 9,695 | 56,311 | 21,604 | ||||||||||||
Transaction costs |
6,204 | 922 | 12,051 | 2,035 | ||||||||||||
Depreciation and amortization |
12,018 | 6,959 | 23,357 | 13,985 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
97,133 | 45,655 | 189,417 | 95,871 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
17,195 | 12,132 | 13,296 | 15,209 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other (income) expense |
||||||||||||||||
Interest income |
(17 | ) | (4 | ) | (65 | ) | (7 | ) | ||||||||
Interest expense |
26,507 | 22,785 | 37,735 | 31,781 | ||||||||||||
Preliminary bargain purchase gain |
5,085 | | (10,973 | ) | | |||||||||||
Other expense, net |
9 | 5 | 26 | 5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other expense, net |
31,584 | 22,786 | 26,723 | 31,779 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss before income taxes |
(14,389 | ) | (10,654 | ) | (13,427 | ) | (16,570 | ) | ||||||||
Income tax (benefit) expense |
(6,928 | ) | 713 | (14,772 | ) | (2,082 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
(7,461 | ) | (11,367 | ) | 1,345 | (14,488 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnout consideration |
1,436 | | (124,005 | ) | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss to common shareholders |
$ | (6,025 | ) | $ | (11,367 | ) | $ | (122,660 | ) | $ | (14,488 | ) | ||||
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|
|
|
|
|
|
|
Three Months Ended June 30, 2018 Compared to the Three Months Ended June 30, 2017
Revenue
Three Months Ended June 30, | Change | |||||||||||||||
2018 | 2017 | Amount | % | |||||||||||||
(in thousands) | ||||||||||||||||
Technology offerings |
$ | 197,162 | $ | 106,203 | $ | 90,959 | 85.6 | % | ||||||||
Services |
193,849 | 85,119 | 108,730 | 127.7 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total revenue |
$ | 391,011 | $ | 191,322 | $ | 199,689 | 104.4 | % | ||||||||
|
|
|
|
|
|
|||||||||||
Technology offerings as a percentage of total revenue |
50.4 | % | 55.5 | % | ||||||||||||
Services revenue as a percentage of total revenue |
49.6 | % | 44.5 | % |
Total revenue increased $199.7 million, or 104.4%, to $391.0 million in the second quarter of 2018 from $191.3 million in the second quarter of 2017. The revenue increase was driven by the $108.7 million growth in our services and by a $91.0 million growth in technology offerings.
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The technology offerings revenue increase is primarily attributable to recent acquisitions with revenue from the Annese, RGTS, AOS & ASI acquisitions of $75.0 million in the second quarter of 2018.
The services revenue growth was primarily driven by acquisitions and revenue growth for managed, cloud, and maintenance services due to new contracts. Services revenue from the Annese, RGTS, AOS and ASI acquisitions accounted for $62.5 million in the second quarter of 2018.
Revenue by Core Technology Market
Three Months Ended June 30, | Change | |||||||||||||||
2018 | 2017 | Amount | % | |||||||||||||
(in thousands) | ||||||||||||||||
Collaboration revenue: |
||||||||||||||||
Technology offerings |
$ | 94,915 | $ | 52,524 | $ | 42,390 | 80.7 | % | ||||||||
Services |
162,283 | 68,039 | 94,245 | 138.5 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total collaboration revenue |
$ | 257,198 | $ | 120,563 | $ | 136,635 | 113.3 | % | ||||||||
|
|
|
|
|
|
|||||||||||
Enterprise networking, data center, cloud, and security revenue |
||||||||||||||||
Technology offerings |
$ | 102,247 | $ | 53,679 | $ | 48,568 | 90.5 | % | ||||||||
Services |
31,566 | 17,080 | 14,486 | 84.8 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total enterprise networking, data center, cloud, and security revenue |
$ | 133,813 | $ | 70,759 | $ | 63,054 | 89.1 | % | ||||||||
|
|
|
|
|
|
|||||||||||
Total revenue |
$ | 391,011 | $ | 191,322 | $ | 199,689 | 104.4 | % | ||||||||
|
|
|
|
|
|
Collaboration
The increase in collaboration services revenue of $94.2 million is primarily related to services revenue increases from the SPS, ASI and RGTS acquisitions. The increase in collaboration technology revenue of $42.4 million was primarily related to the SPS, ASI and RGTS acquisitions.
Enterprise, Networking, Data Center, Cloud, and Security
Enterprise, networking, data center, cloud, and security revenue increased $63.1 million, or 89.1%, to $133.8 million for the second quarter of 2018 from $70.7 million for the second quarter of 2017. The increase is primarily related to revenues from the Annese and AOS acquisitions.
Cost of Revenue, Gross Profit, and Gross Margin
Three Months Ended June 30, | Change | |||||||||||||||
2018 | 2017 | Amount | % | |||||||||||||
(in thousands) | ||||||||||||||||
Cost of revenue |
||||||||||||||||
Technology offerings |
$ | 152,529 | $ | 81,544 | $ | 70,985 | 87.1 | % | ||||||||
Services |
124,154 | 51,991 | 72,163 | 138.8 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total cost of revenue |
$ | 276,683 | $ | 133,535 | $ | 143,148 | 107.2 | % | ||||||||
|
|
|
|
|
|
|||||||||||
Gross profit |
||||||||||||||||
Technology offerings |
$ | 44,633 | $ | 24,659 | $ | 19,974 | 81.0 | % | ||||||||
Services |
69,695 | 33,128 | 36,567 | 110.4 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total gross profit |
$ | 114,328 | $ | 57,787 | $ | 56,541 | 97.8 | % | ||||||||
|
|
|
|
|
|
|||||||||||
Gross Margin |
||||||||||||||||
Technology offerings |
22.6 | % | 23.2 | % | ||||||||||||
Services |
36.0 | % | 38.9 | % | ||||||||||||
Total gross margin |
29.2 | % | 30.2 | % |
The increase in total gross profit is primarily attributed to the acquisitions made in 2017 and 2018.
Technology offerings gross margins as a percentage of revenue decreased primarily due to a shift in product mix from the collaboration market to the enterprise, networking, data center, cloud, and security market, which generally has lower gross margins.
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Services gross margin decreased primarily due to impact of recent acquisitions which typically had lower gross margins as a percent of revenues.
Operating Expenses
Three Months Ended June 30, | Change | |||||||||||||||
2018 | 2017 | Amount | % | |||||||||||||
(in thousands) | ||||||||||||||||
Sales and marketing |
$ | 51,144 | $ | 28,079 | $ | 23,065 | 82.1 | % | ||||||||
General and administrative |
27,767 | 9,695 | 18,072 | 186.4 | % | |||||||||||
Transaction costs |
6,204 | 922 | 5,282 | 572.9 | % | |||||||||||
Depreciation and amortization |
12,018 | 6,959 | 5,059 | 72.7 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
$ | 97,133 | $ | 45,655 | $ | 51,478 | 112.8 | % | |||||||||
|
|
|
|
|
|
Sales and Marketing Expense
The increase in sales and marketing expense was primarily driven by $15.0 million of additional expenses for operations of acquired businesses in the third and fourth quarters of 2017 and first quarter of 2018 and by increased salaries and benefits of $5.1 million, increased commissions and bonuses of $1.4 million, increased meetings and travel of $1.0 million and $0.6 million increase in office expenses, professional fees and other expenses.
General and Administrative Expense
The increase was primarily driven by $12.6 million of additional expenses for operations of acquired businesses in the third and fourth quarters of 2017 and first quarter of 2018, $2.2 million increase in salaries and benefits and $2.4 million of professional fees, other expenses and office expenses and by $0.9 million increase in bonus and commissions.
Transaction Costs
The increase in transaction costs was due to $1.4 million of additional transaction-related professional fees and expenses, including legal, accounting, tax, and advisory fees, $2.8 million of additional acquisition-related integration costs and $1.0 million of additional severance charges and employee retention bonuses.
Depreciation and Amortization
The increase in depreciation and amortization was primarily due to an increase in amortization due to recent acquisitions and purchases of property and equipment.
Other Expense, Net
Three Months Ended June 30, | Change | |||||||||||||||
2018 | 2017 | Amount | % | |||||||||||||
(in thousands) | ||||||||||||||||
Other expense, net |
$ | 31,584 | $ | 22,786 | $ | 8,798 | 38.6 | % |
Other expense change was primarily the result of a reduction in the preliminary bargain purchase gain by $5.1 million related to ASI and higher interest expense of $3.7 million associated with the losses on extinguishment of debt that occurred in the second quarter of 2018 over the second quarter of 2017 as well as increased debt balances as a result of borrowings used to partially pay for our recent acquisitions and closing of the merger.
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Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017
Revenue
Six Months Ended June 30, | Change | |||||||||||||||
2018 | 2017 | Amount | % | |||||||||||||
(in thousands) | ||||||||||||||||
Technology offerings |
$ | 338,616 | $ | 194,168 | $ | 144,448 | 74.4 | % | ||||||||
Services |
358,736 | 180,120 | 178,616 | 99.2 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total revenue |
$ | 697,352 | $ | 374,288 | $ | 323,064 | 86.3 | % | ||||||||
|
|
|
|
|
|
|||||||||||
Technology offerings as a percentage of total revenue |
48.6 | % | 51.9 | % | ||||||||||||
Services revenue as a percentage of total revenue |
51.4 | % | 48.1 | % |
Total revenue increased $323.1 million, or 86.3%, to $697.4 million in the first six months of 2018 from $374.3 million in the first six months of 2017. The revenue increase was driven by the $178.6 million growth in our services and by a $144.4 million growth in technology offerings.
The technology offerings revenue increase was primarily driven by acquisition activity from the Annese, RGTS, AOS & ASI acquisitions which accounted for $123.6 million of the increase in the first six months of 2018.
The services revenue growth was primarily driven by acquisitions and revenue growth for managed, cloud, and maintenance services due to new contracts. Services revenue from the Annese, RGTS, AOS and ASI acquisitions accounted for $100.2 million in the first six months of 2018.
Revenue by Core Technology Market
Six Months Ended June 30, | Change | |||||||||||||||
2018 | 2017 | Amount | % | |||||||||||||
(in thousands) | ||||||||||||||||
Collaboration revenue: |
||||||||||||||||
Technology offerings |
$ | 156,019 | $ | 96,199 | $ | 59,820 | 62.2 | % | ||||||||
Services |
302,575 | 146,615 | 155,960 | 106.4 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total collaboration revenue |
$ | 458,594 | $ | 242,814 | $ | 215,780 | 88.9 | % | ||||||||
|
|
|
|
|
|
|||||||||||
Enterprise networking, data center, cloud, and security revenue |
||||||||||||||||
Technology offerings |
$ | 182,597 | $ | 97,969 | $ | 84,628 | 86.4 | % | ||||||||
Services |
56,161 | 33,505 | 22,656 | 67.6 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total enterprise networking, data center, cloud, and security revenue |
$ | 238,758 | $ | 131,474 | $ | 107,284 | 81.6 | % | ||||||||
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Total revenue |
$ | 697,352 | $ | 374,288 | $ | 323,064 | 86.3 | % | ||||||||
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Collaboration
The increase in collaboration services revenue of $155.9 million is primarily related to services revenue increases from the SPS, ASI and RGTS acquisitions. The increase in collaboration technology revenue of $59.8 million was primarily related to the SPS, ASI and RGTS acquisitions.
Enterprise, Networking, Data Center, Cloud, and Security
Enterprise, networking, data center, cloud, and security revenue increased $107.3 million, or 81.6%, to $238.8 million for the first six months of 2018 from $131.5 million for the first six months of 2017. The increase is primarily related to revenues from the Annese and AOS acquisitions.
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Cost of Revenue, Gross Profit, and Gross Margin
Six Months Ended June 30, | Change | |||||||||||||||
2018 | 2017 | Amount | % | |||||||||||||
(in thousands) | ||||||||||||||||
Cost of revenue |
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Technology offerings |
$ | 258,135 | $ | 150,288 | $ | 107,847 | 71.8 | % | ||||||||
Services |
236,504 | 112,920 | 123,584 | 109.4 | % | |||||||||||
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Total cost of revenue |
$ | 494,639 | $ | 263,208 | $ | 231,431 | 87.9 | % | ||||||||
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Gross profit |
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Technology offerings |
$ | 80,481 | $ | 43,880 | $ | 36,601 | 83.4 | % | ||||||||
Services |
122,232 | 67,200 | 55,032 | 81.9 | % | |||||||||||
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Total gross profit |
$ | 202,713 | $ | 111,080 | $ | 91,633 | 82.5 | % | ||||||||
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Gross Margin |
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Technology offerings |
23.8 | % | 22.6 | % | ||||||||||||
Services |
34.1 | % | 37.3 | % | ||||||||||||
Total gross margin |
29.1 | % | 29.7 | % |
The increase in total gross profit is primarily attributed to the acquisitions made in the third and fourth quarters of 2017 and first quarter of 2018.
Technology offerings gross margins as a percent of revenue increased slightly with a slight increase in mix of enterprise networking, data center, cloud and security technology offering revenues.
Services gross margin decreased primarily due to the impact of recent acquisitions which historically had lower gross margins.
Operating Expenses
Six Months Ended June 30, | Change | |||||||||||||||
2018 | 2017 | Amount | % | |||||||||||||
(in thousands) | ||||||||||||||||
Sales and marketing |
$ | 97,698 | $ | 58,247 | $ | 39,451 | 67.7 | % | ||||||||
General and administrative |
56,311 | 21,604 | 34,707 | 160.7 | % | |||||||||||
Transaction costs |
12,051 | 2,035 | 10,016 | 492.2 | % | |||||||||||
Depreciation and amortization |
23,357 | 13,985 | 9,372 | 67.0 | % | |||||||||||
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$ | 189,417 | $ | 95,871 | $ | 93,546 | 97.6 | % | |||||||||
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Sales and Marketing Expense
The increase in sales and marketing expense was primarily driven by $24.4 million of additional expenses for operations of the Annese, AOS, ASI and RGTS businesses in 2018 and by increased salaries and benefits of $10.3 million, increased commissions and bonuses of $1.2 million, increased meetings and travel of $1.8 million, $0.8 million lower marketing development funds received, $0.4 million increase in office expenses and $0.5 million of marketing expense .
General and Administrative Expense
The increase in general and administrative expense was primarily driven by $22.3 million of additional expenses for operations of Annese, AOS, ASI and RGTS businesses in 2018 and $10.6 million increase in salaries and benefits and $2.1 million of professional fees, office expenses and other expenses partially offset by $0.3 million lower meetings and travel expense.
Transaction Costs
The increase in transaction costs was due to $3.9 million of additional transaction-related professional fees and expenses, including legal, accounting, tax, and advisory fees, $4.1 million of additional acquisition-related integration costs and $2.0 million of additional severance charges and employee retention bonuses.
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Depreciation and Amortization
The increase in depreciation and amortization expense was primarily due to an increase in amortization due to recent acquisitions and purchases of property and equipment.
Other Expense, Net
Six Months Ended June 30, | Change | |||||||||||||||
2018 | 2017 | Amount | % | |||||||||||||
(in thousands) | ||||||||||||||||
Other expense, net |
$ | 26,723 | $ | 31,779 | $ | (5,056 | ) | -15.9 | % |
The net change in other expense was primarily the result of a preliminary bargain purchase gain of $11.0 million related to the ASI acquisition offset by higher interest expense associated with the losses on extinguishment of debt that occurred in the second quarter of 2018 over the second quarter of 2017 and increased debt balances as a result of additional borrowings used to partially pay for our recent acquisitions and closing of the merger.
Income Tax Benefit
Six Months Ended June 30, | Change | |||||||||||||||
2018 | 2017 | Amount | % | |||||||||||||
(in thousands) | ||||||||||||||||
Income tax benefit |
$ | (14,772 | ) | $ | (2,082 | ) | $ | (12,690 | ) | 609.5 | % |
Our estimated annual effective tax rate (excluding discrete items) for the six months ended June 30, 2018 and 2017 is 49.1% and 13.7%, respectively. The increase in the annual effective tax rate from the prior year is primarily driven by the impact of non-deductible permanent tax items offset by the decrease in the U.S. corporate income tax rate on income or loss before taxes.
Our effective income tax rate (after discrete items) for the six months ended June 30, 2018 and 2017 is 110.0% and 12.6%, respectively. The increase in the effective income tax rate from the prior period is driven by a combination of two factors. One factor is that we experienced significant or unusual discrete benefit items of $6.7 million in the current period and when combined with a net loss before income taxes, it causes the effective income tax rate to increase. These discrete items primarily include a bargain purchase gain that is not recognized for tax purposes and excess tax benefits associated with stock-based compensation payments. The other factor is that the impact of non-deductible permanent tax items result in an incremental increase to the effective income tax rate when combined with a net loss before taxes.
Key Business Metrics - Non-GAAP Financial Measures
Our management regularly monitors certain financial measures to track the progress of our business against internal goals and targets. We believe that the most important of these measures include Adjusted Revenue, Gross Margin, Adjusted EBITDA, Adjusted Net Income, and Services Revenue as a Percentage of Total Revenue.
Three Months | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Total Revenue |
$ | 391,011 | $ | 191,322 | $ | 697,352 | $ | 374,288 | ||||||||
Adjusted Revenue |
395,111 | 191,342 | 703,016 | 374,331 | ||||||||||||
Services mix: |
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Professional services revenue as a percentage of total revenue |
17 | % | 17 | % | 16 | % | 17 | % | ||||||||
Managed, cloud, and maintenance services revenue as a percentage of total revenue |
33 | 27 | 35 | 31 | ||||||||||||
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Services revenue as a percentage of total revenue |
50 | % | 44 | % | 51 | % | 48 | % | ||||||||
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Gross Margin |
29 | % | 30 | % | 29 | % | 30 | % | ||||||||
Net income (loss) |
$ | (7,461 | ) | $ | (11,367 | ) | $ | 1,345 | $ | (14,488 | ) | |||||
Adjusted Net Income |
22,750 | 2,584 | 33,823 | 6,119 | ||||||||||||
Adjusted EBITDA |
38,554 | 21,307 | 61,585 | 34,388 |
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Adjusted Revenue
Adjusted Revenue is a non-GAAP financial measure. We believe that Adjusted Revenue provides supplemental information with respect to our revenue activity associated with our ongoing operations. We define Adjusted Revenue as total revenue adjusted to exclude non-cash acquisition accounting adjustments to revenue as a result of our acquisitions.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure. We believe Adjusted EBITDA provides helpful information with respect to our operating performance as viewed by management, including a view of our business that is not dependent on (i) the impact of its capitalization structure and (ii) items that are not part of our day-to-day operations. Management uses Adjusted EBITDA (1) to compare our operating performance on a consistent basis, (2) to calculate incentive compensation for our employees, (3) for planning purposes including the preparation of our internal annual operating budget, (4) to evaluate the performance and effectiveness of our operational strategies, and (5) to assess compliance with various metrics associated with the agreements governing our indebtedness. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating performance in the same manner as management.
We define Adjusted EBITDA as net income (loss) plus (a) total depreciation and amortization, (b) interest expense and other, net, and (c) income tax expense, as further adjusted to eliminate non-cash stock-based compensation expense, acquisition accounting adjustments, transaction costs, and other one-time nonrecurring costs. We do not believe these adjustments are indicative of our ongoing performance.
Services Revenue as a Percentage of Total Revenue
Our professional services involve the consultation, design, integration and implementation, application development, and program management of customized solutions for core technology markets. We view professional services as a percentage of revenue as a key measure in the successful execution of our operating strategies of leading client engagements with professional services and the profitability of our business.
We provide comprehensive managed, cloud, and maintenance services to our clients across our core technology markets. Given these services typically have multi-year contractual terms, with high renewal rates, we view managed, cloud, and maintenance services as a percentage of revenue as a key measure of our revenue visibility and profitability of our business.
Adjusted Net Income
Adjusted Net Income is a non-GAAP financial measure which management uses in our evaluation of past performance, trends, and prospects for the future. Management uses Adjusted Net Income (1) to compare our operating performance on a consistent basis, (2) for planning purposes, including the preparation of our internal annual operating budget, and (3) to evaluate the performance and effectiveness of our operational strategies. Accordingly, we believe that Adjusted Net Income provides useful information to investors and others in understanding and evaluating our operating performance in the same manner as management. We believe that Adjusted Net Income is utilized by investors and other interested parties as a measure of our comparative operating performance period-over-period that considers the impact of certain items that do not directly correlate to our ongoing operating performance and that vary significantly from period to period, such as the interest expense associated with our outstanding debt, as well as the impact of depreciation on our fixed assets and income taxes. We define Adjusted Net Income as net income (loss) adjusted to exclude (a) amortization of acquisition-related intangible assets, (b) amortization of debt issuance costs, (c) non-cash stock-based compensation expense, (d) costs related to debt refinancing, (e) acquisition accounting adjustments, (f) transaction costs, (g) other costs, and (h) the income tax impact associated with the foregoing items. We do not believe these adjustments are indicative of our ongoing performance.
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Other Financial Data: |
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Adjusted Revenue (1) |
$ | 395,111 | $ | 191,342 | $ | 703,016 | $ | 374,331 | ||||||||
Adjusted EBITDA (2) |
$ | 38,554 | $ | 21,307 | $ | 61,585 | $ | 34,388 | ||||||||
Adjusted Net Income (3) |
$ | 22,750 | $ | 2,584 | $ | 33,823 | $ | 6,119 |
(1) | The reconciliation of revenue, the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted Revenue for each of the periods presented is as follows. See Use of Non-GAAP Financial Measures below for additional information. |
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Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Revenue |
$ | 391,011 | $ | 191,322 | $ | 697,352 | $ | 374,288 | ||||||||
Acquisition accounting adjustments |
4,100 | 20 | 5,664 | 43 | ||||||||||||
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Adjusted Revenue |
$ | 395,111 | $ | 191,342 | $ | 703,016 | $ | 374,331 | ||||||||
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(2) | The reconciliation of net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA for each of the periods presented is as follows. See Use of Non-GAAP Financial Measures below for additional information. |
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Net income (loss) |
$ | (7,461 | ) | $ | (11,367 | ) | $ | 1,345 | $ | (14,488 | ) | |||||
Depreciation and amortization (a) |
13,351 | 7,317 | 26,149 | 14,675 | ||||||||||||
Preliminary bargain purchase gain |
5,085 | | (10,973 | ) | | |||||||||||
Other expense, net |
26,499 | 22,786 | 37,696 | 31,779 | ||||||||||||
Income tax (benefit) expense |
(6,928 | ) | 713 | (14,772 | ) | (2,082 | ) | |||||||||
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EBITDA |
30,546 | 19,449 | 39,445 | 29,884 | ||||||||||||
Stock-based compensation expense |
45 | 174 | 6,431 | 330 | ||||||||||||
Acquisition accounting adjustments (b) |
1,700 | 9 | 3,264 | 3 | ||||||||||||
Transaction costs (c) |
6,204 | 922 | 12,051 | 2,035 | ||||||||||||
Other costs (d) |
59 | 753 | 394 | 2,136 | ||||||||||||
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Adjusted EBITDA |
$ | 38,554 | $ | 21,307 | $ | 61,585 | $ | 34,388 | ||||||||
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a) | Depreciation and amortization equals the sum of (1) depreciation and amortization included in total operating expenses and (2) depreciation and amortization included in total cost of revenue within our consolidated financial statements. |
b) | Acquisition accounting adjustments include charges associated with non-cash acquisition accounting fair value adjustments to deferred revenue and deferred customer support costs. |
c) | Transaction costs of (1) $6.2 million for the three months ended June 30, 2018 include $1.8 million related to transaction-related professional fees, including legal, accounting, tax, and advisory fees, $3.3 million of acquisition-related integration costs, and acquisition-related expenses of $1.1 million related to severance charges and employee retention bonuses, and (2) $0.9 million for the three months ended June 30, 2017 include acquisition-related expenses of $0.4 million related to transaction-related professional fees and expenses, and $0.5 million of acquisition-related integration costs. Transaction costs of (3) $12.0 million for the six months ended June 30, 2018 include $4.9 million related to transaction-related professional fees, including legal, accounting, tax, and advisory fees, $5.0 million of acquisition-related integration costs, and acquisition-related expenses of $2.1 million related to severance charges and employee retention bonuses, and (4) $2.0 million for the six months ended June 30, 2017 include acquisition-related expenses of $1.0 million related to transaction-related professional fees and expenses, $0.9 million of acquisition-related integration costs and acquisition-related expenses of $0.1 million related to severance charges and employee retention bonuses. |
d) | Other costs of (1) $0.4 million for the six months ended June 30, 2018 represent payments to Clearlake for advisory and consulting services pursuant to its management and monitoring services agreement which was terminated in connection with the Business Combination and one-time recruiting expenses, (2) $2.2 million for the six months ended June 30, 2017 include expenses of $1.3 million related to severance and related legal expenses and $0.9 million related to payments to Clearlake for advisory and consulting services pursuant to its management and monitoring services agreement, and (3)$0.8 million for the three months ended June 30, 2017 include expenses of $0.3 million related to severance and related legal expenses and $0.5 million related to payments to Clearlake for advisory and consulting services pursuant to its management and monitoring services agreement. |
(3) | The reconciliation of net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted Net Income for each of the periods presented is as follows. See Use of Non-GAAP Financial Measures below for additional information. |
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Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Net income (loss) |
$ | (7,461 | ) | $ | (11,367 | ) | $ | 1,345 | $ | (14,488 | ) | |||||
Amortization of intangible assets |
9,367 | 5,551 | 18,099 | 11,180 | ||||||||||||
Amortization of debt issuance costs |
358 | 849 | 799 | 1,755 | ||||||||||||
Preliminary bargain purchase gain |
5,085 | | (10,973 | ) | | |||||||||||
Stock-based compensation expense |
45 | 174 | 6,431 | 330 | ||||||||||||
Costs related to debt financing (a) |
14,732 | 13,638 | 14,732 | 14,194 | ||||||||||||
Acquisition accounting adjustments (b) |
1,700 | 9 | 3,264 | 3 | ||||||||||||
Transaction costs (c) |
6,204 | 922 | 12,051 | 2,035 | ||||||||||||
Other costs (d) |
59 | 753 | 394 | 2,136 | ||||||||||||
Income tax impact of adjustments (e) |
(7,339 | ) | (7,945 | ) | (12,319 | ) | (11,026 | ) | ||||||||
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Adjusted net income |
$ | 22,750 | $ | 2,584 | $ | 33,823 | $ | 6,119 | ||||||||
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a) | Costs related to debt refinancing in the three and six months ended June 30, 2018 of $14.7 million consists of $5.7 million in extinguishment costs incurred including a 1% pre-payment penalty and $9.0 million write-off of unamortized debt financing transaction costs. Costs related to debt refinancing in the three months ended June 30, 2017 of $13.6 million consists of $3.4 million in extinguishment costs incurred including a 1% pre-payment penalty and $10.2 million write-off of unamortized debt financing transaction costs. Costs related to debt refinancing in the six months ended June 30, 2017 of $14.2 million consists of $3.4 million in extinguishment costs incurred including a 1% pre-payment penalty, $0.6 financing transaction costs and $10.2 million write-off of unamortized debt financing transaction costs. |
b) | Acquisition accounting adjustments include charges associated with non-cash acquisition accounting fair value adjustments to deferred revenue and deferred customer support costs. |
c) | Transaction costs of (1) $6.2 million for the three months ended June 30, 2018 include $1.8 million related to transaction-related professional fees, including legal, accounting, tax, and advisory fees, $3.3 million of acquisition-related integration costs, and acquisition-related expenses of $1.1 million related to severance charges and employee retention bonuses, and (2) $0.9 million for the three months ended June 30, 2017 include acquisition-related expenses of $0.4 million related to transaction-related professional fees and expenses, and $0.5 million of acquisition-related integration costs. Transaction costs of (3) $12.0 million for the six months ended June 30, 2018 include $4.9 million related to transaction-related professional fees, including legal, accounting, tax, and advisory fees, $5.0 million of acquisition-related integration costs, and acquisition-related expenses of $2.1 million related to severance charges and employee retention bonuses, and (4) $2.0 million for the six months ended June 30, 2017 include acquisition-related expenses of $1.0 million related to transaction-related professional fees and expenses, $0.9 million of acquisition-related integration costs and acquisition-related expenses of $0.1 million related to severance charges and employee retention bonuses. |
d) | Other costs of (1) $0.4 million for the six months ended June 30, 2018 represent payments to Clearlake for advisory and consulting services pursuant to its management and monitoring services agreement which was terminated in connection with the Business Combination and one-time recruiting expenses, (2) $2.2 million for the six months ended June 30, 2017 include expenses of $1.3 million related to severance and related legal expenses and $0.9 million related to payments to Clearlake for advisory and consulting services pursuant to its management and monitoring services agreement, and (3)$0.8 million for the three months ended June 30, 2017 include expenses of $0.3 million related to severance and related legal expenses and $0.5 million related to payments to Clearlake for advisory and consulting services pursuant to its management and monitoring services agreement. |
e) | Income tax impact of adjustments includes an estimated tax impact of the adjustments to net income (loss) at our average statutory tax rate of 26.0% and 40.0% for the three and six months ended June 30, 2018 and 2017, respectively, except for the impact of tax-deductible goodwill and intangible assets resulting from certain historical acquisitions. |
Use of Non-GAAP Financial Measures
Adjusted Revenue, Adjusted EBITDA, and Adjusted Net Income should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. They are not measurements of our financial performance under GAAP and should not be considered as alternatives to revenue or net income (loss), as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. Adjusted Revenue, Adjusted EBITDA, and Adjusted Net Income have limitations as analytical tools and you should not consider them in isolation or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations include:
| non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating ongoing operating performance for a particular period; |
45
| Adjusted EBITDA and Adjusted Net Income do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of ongoing operations; and |
| other companies in our industry may calculate Adjusted Revenue, Adjusted EBITDA, and Adjusted Net Income, differently than we do, limiting their usefulness as comparative measures. |
We compensate for these limitations to Adjusted Revenue, Adjusted EBITDA, and Adjusted Net Income by relying primarily on GAAP results and using Adjusted Revenue, Adjusted EBITDA, and Adjusted Net Income only for supplemental purposes. Adjusted EBITDA and Adjusted Net Income include adjustments for items that may occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business, and complicate comparisons of internal operating results and operating results of other peer companies over time. For example, it is useful to exclude non-cash, stock-based compensation expenses because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and these expenses can vary significantly across periods due to timing of new stock-based awards. We also exclude certain discrete, unusual, one-time, or non-cash costs, including transaction costs, and the income tax impact of adjustments in order to facilitate a more useful period-over-period comparison of its financial performance. Each of the normal recurring adjustments and other adjustments described in this paragraph help management with a measure of our operating performance over time by removing items that are not related to day-to-day operations or are non-cash expenses.
Liquidity and Capital Resources
As of June 30, 2018, we had $17.5 million of cash. We believe our cash, cash flows from operations and availability of borrowings will be sufficient to support our planned operations for at least the next 12 months. We finance our operations and capital expenditures through a combination of internally generated cash from operations and from borrowings under our revolver. Our long-term needs primarily include meeting debt service requirements, working capital requirements, and capital expenditures. We may also pursue strategic acquisition opportunities that may impact our future cash requirements. There are a number of factors that may negatively impact our available sources of funds in the future including the ability to generate cash from operations and borrow on our debt facilities. The amount of cash generated from operations is dependent upon factors such as the successful execution of our business strategies and general economic conditions. The amount of cash available for borrowings under our various debt facilities is dependent on our ability to maintain sufficient collateral and general financial conditions in the marketplace.
We may opportunistically raise debt capital, subject to market and other conditions, to refinance our existing capital structure at a lower cost of capital. Additionally, as part of our growth strategies, we may also raise debt capital for strategic alternatives and general corporate purposes. If additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition may be adversely affected.
Merger and Earnout Consideration
The following cash transactions resulted from the consummation of the merger with Forum which took place on February 22, 2018 (the Closing):
| All of the remaining funds in Forums trust account, after taking into account the Redemption, Forums operating cash account, and the $131.7 million in proceeds from the PIPE Investment, all of which aggregated to approximately $135.3 million of cash, remained in escrow immediately prior to the Closing, which, together with approximately $35.3 million of cash of C1, was used to pay the cash component of the consideration of approximately $170.6 million paid to C1 Securityholders in connection with the Closing. |
| All outstanding C1 Securities were immediately vested, canceled, and exchanged for a combination of new shares of ConvergeOne common stock and cash of $170,654,000. |
| An additional subscription agreement had been entered into with one of the private investors for 1,500,000 shares for $12,000,000 (the Deferred PIPE) for which payment was made to the Company on April 26, 2018. The Company distributed the $12,000,000 of proceeds to the former C1 Securityholders as additional consideration on April 26, 2018. |
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| Proceeds of $1,805,000 for the repayment of related party stock subscription receivable were received. |
| Transaction expenses, net of tax of $30,934,000 were incurred including the legal acquirers transaction costs, PIPE Investment related costs, and our costs related to effectuating the reverse recapitalization. |
The C1 Securityholders are entitled to additional consideration in a combination of cash and shares of ConvergeOne common stock (collectively, Earnout Consideration), if the Earnout Target measurements for 2018, 2019 and 2020 (Earnout Targets), as defined in the Merger Agreement, are met.
(1) | The amounts that can be earned for each Earnout Target consist of $33 million of cash (Earnout Cash Payment) and 3,300,000 ConvergeOne common shares, less Sponsor Earnout Shares of 718,750 that vest each time an Earnout Target is met which results in 2,581,250 common shares for each Earnout Target measurement met (Earnout Stock Payment), collectively a Regular Earnout Payment. |
(2) | In the event that at the time payment of an Earnout Cash Payment is due, such Earnout Cash Payment is an amount that would exceed either (i) the amount of cash available to the Company that is permitted to be distributed and paid without breaching the terms of any agreement related to indebtedness (Permitted Agreement Payment Amount) or (ii) the amount that could be paid without exceeding a permitted leverage measurement as set forth in the Merger Agreement (Permitted Leverage Payment Amount), the Permitted Cash Payment would be the lesser of the two amounts. |
Clearlake will have the right to direct the Company to do either of the following with regard to the corresponding shortfall between the Permitted Cash Payment Amount and the Earnout Cash Payment that has been earned (Permitted Cash Payment Shortfall or Cash Shortfall): (i) pay the Cash Shortfall through the issuance of additional shares of common stock with an equivalent value equal to the Cash Shortfall, valued based on a twenty day trading period as defined in the Merger Agreement (Earnout Cash Payment Shortfall Parent Shares or Shortfall Shares) or (ii) provide notice to the Company that it elects to defer payment of the Cash Shortfall until the following Measurement Date. Clearlake shall have the option on each succeeding Measurement Date until the end of the Earnout Period to elect to be paid the applicable Shortfall Shares in full satisfaction of the Cash Shortfall or continue to defer payment. At the end of the Earnout Period, in the event that the Company has not paid a Cash Shortfall to the former C1 Securityholders, such Cash Shortfall shall automatically be converted into a right for the former C1 Securityholders to receive Shortfall Shares.
i. | Earnout Cash Payments may be accelerated in the event that the Earnout Targets occurring within an Earnout Year are in excess of the Earnout Target for a subsequent Earnout Year. Payment of the Regular Earnout Payment for such subsequent Earnout Year shall be accelerated and paid at the same time that the Regular Earnout Payment is paid. |
ii. | The accelerated Regular Earnout Payments (Accelerated Earnout Payment) shall be subject to the determination of the maximum amount of Permitted Cash Payment as described above. |
See Financial Statement Note 2Business Combination/Merger for further discussion of Earnout Consideration and the initial Measurement Date results.
Indebtedness
In June 2017, we entered into a $430 million term loan agreement with a maturity date in June 2024. In July 2017, we borrowed an additional $75 million as an incremental term loan to partially fund our acquisitions, which also matured in June 2024. In October 2017, we borrowed an additional $60 million as an incremental term loan, which also matured in June 2024. In addition, in June 2017, we entered into a revolving loan agreement that provides a loan facility of $150 million and amended and restated the existing floorplan arrangement to extend credit in the form of floorplan advances, up to $150 million.
In February 2018, the revolver agreement was amended to increase the revolving loan facility amount to $200 million. The revolver agreement matures in June 2022.
On April 10, 2018, we paid off the existing term loan agreement in its entirety and entered into a new financing arrangement. We entered into a $670 million term loan agreement with a maturity date in April 2025. A portion of the proceeds of the term loan was used to repay the existing credit facilities including the outstanding indebtedness under the Revolver Agreement of $90 million and to pay debt issuance and debt extinguishment costs. The remaining proceeds will be used for working capital needs and general corporate purposes.
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The principal installments in the amount of $1,675,000 are due on the last business day of each quarter commencing September 30, 2018, with the remaining outstanding principal amount to be paid on its maturity date of April 10, 2025.
The outstanding borrowing on the revolver as of June 30, 2018 was $40 million which was used for normal working capital purposes.
Liquidity
We generally fund our short- and long-term liquidity needs through a combination of cash on hand, cash flows generated from operations, and available borrowings under our revolving credit facility. Our management regularly monitors certain liquidity measures to monitor performance. We believe that the most important of those measures include net debt and available liquidity.
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Net debt |
$ | 692,471 | $ | 568,850 | ||||
Available liquidity |
119,020 | 91,153 |
Net Debt
We define net debt as total debt less cash. The following table presents our calculation of net debt as of the dates indicated:
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Long-term debt, net of debt issuance costs and current maturities |
$ | 693,075 | $ | 566,424 | ||||
Plus unamortized debt issuance costs |
10,225 | 10,249 | ||||||
Plus current maturities of long-term debt |
6,700 | 5,652 | ||||||
|
|
|
|
|||||
Total debt |
710,000 | 582,325 | ||||||
Less cash |
17,529 | 13,475 | ||||||
|
|
|
|
|||||
Net debt |
$ | 692,471 | $ | 568,850 | ||||
|
|
|
|
Available Liquidity
We calculate our available liquidity as the sum of cash from our consolidated balance sheet plus the amount available and unutilized on our revolving credit facilities.
The following table presents our calculation of available liquidity as of the dates indicated:
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Cash |
$ | 17,529 | $ | 13,475 | ||||
Unutilized revolver |
101,491 | 77,678 | ||||||
|
|
|
|
|||||
Available liquidity |
$ | 119,020 | $ | 91,153 | ||||
|
|
|
|
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Cash Flows
The following table shows our cash flows for the six months ended June 30, 2018 and 2017:
Six Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Operating activities |
$ | (1,362 | ) | $ | (843 | ) | ||
Investing activities |
(34,625 | ) | (3,891 | ) | ||||
Financing activities |
40,041 | 10,722 |
Operating Activities
Net cash used in operating activities consists of net income (loss) adjusted for noncash items, such as: depreciation and amortization of property and equipment and intangible assets, deferred income taxes, stock-based compensation, amortization of debt issuance costs, losses on extinguishments of debt or disposals of property and equipment, and for changes in net working capital assets and liabilities. Generally, the most significant factor relates to nondeductible book amortization expense associated with intangible assets. The timing between the conversion of our receivables into cash from our customers and disbursements to our vendors is the primary driver of changes in our working capital.
Net cash used in operating activities for the first six months of 2018 was $1.4 million. This was primarily attributable to net income before preliminary bargain purchase gain, depreciation and amortization, loss on extinguishment of debt and other of $29.7 million offset by working capital component changes that aggregate to a net $31.1 million provision of cash for operating activities. The most significant working capital component changes relate to: (1) a $5.6 million decrease in accounts payable and accrued expenses due to a decrease in the days outstanding as well as changes in the timing of payments (2) a $7.8 million increase in inventory due to timing of purchases and additional inventory from acquisitions and (3) a $7.9 million increase in income tax receivable.
Net cash used by operating activities for the first six months of 2017 was $0.8 million. This was primarily attributable to net income before preliminary bargain purchase gain, depreciation and amortization, loss on extinguishment of debt and other of $13.4 million offset by working capital component changes that aggregate to a net $14.3 million provision of cash for operating activities. The most significant working capital component changes relate to: (1) a $20.9 million decrease in accounts payable and accrued expenses due to a decrease in the days outstanding as well as changes in the timing of purchases offset by (2) a $9.8 million increase in accounts receivable driven by increased revenue in the first six months of 2017.
Investing Activities
Net cash used in investing activities for the first six months of 2018 was $34.6 million, primarily due to the ASI business acquisition net of cash acquired of $27.0 million and $7.6 million of capital expenditures.
Net cash used in investing activities for the first six months of 2017 was $3.9 million due to the purchase of equipment.
Financing Activities
Net cash provided by financing activities for the first six months of 2018 was $40.0 million and was primarily related to net additional borrowings on term debt including the revolving credit agreements of $127.6 million, plus proceeds from subscription receivable of $1.8 million, from Forum cash accounts of $147.3 million offset by payment of debt extinguishment costs and debt issuance costs of $15.1 million, payment to former C1 securityholders of $182.8 million, payment of reverse recapitalization costs of $28.2 million, the repurchase of warrants of $9.1 million and $1.5 million payment of dividends.
Net cash provided by financing activities for the first six months of 2017 was $10.7 million and was primarily related to net additional borrowings on term debt of $21.6 million offset by payment of debt extinguishment costs and debt issuance costs of $8.7 million, payment of deferred offering costs of $1.8 million and repurchase of common stock of $0.4 million.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet transactions or interests.
Seasonality
Our results are affected by the budget cycles of our client base which generally result in stronger sales in the second half of the year. We believe this variability is largely due to our clients and technology partners fiscal year ends, as well as budgetary and spending patterns of our clients. As a result of our historically higher portion of sales in the second half of each year, our cost of revenue and commission expense increase during such periods relative to any increase in revenue. The increased cost of revenue and commission expense, and other impacts of seasonality, may affect profitability in a given quarter.
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Critical Accounting Policies and Estimates
There were no changes to critical accounting policies and estimates from those disclosed in Critical Accounting Policies and Estimates within Convergeones Managements Discussion and Analysis of Financial Condition and Results of Operations in our Registration Statement on Form S-1/A filed on April 24, 2018..
Emerging Growth Company Status
We are an emerging growth company, as defined in Section 2(a) of the Securities Act of 1933, as amended, (the Securities Act), as modified by the Jumpstart Our Business Startups Act of 2012, (the JOBS Act). Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our consolidated financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
We would cease to be an emerging growth company upon the earliest to occur of: the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; the date it qualifies as a large accelerated filer, with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by it of more than $1.0 billion in non-convertible debt securities; or December 31, 2022. We anticipate that we will cease to be an emerging growth company on December 31, 2018.
Recent Accounting Pronouncements
See Note 1 to our Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk
Interest rates are highly sensitive to many factors, including U.S. fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. Interest rate risk is the exposure to loss resulting from changes in the level of interest rates and the spread between different interest rates. We are exposed to market risk from changes in interest rates on debt, which bears interest at variable rates. Our debt has floating interest rates. We are exposed to changes in the level of interest rates and to changes in the relationship or spread between interest rates for our floating rate debt. Our floating rate debt requires payments based on variable interest rates such as the federal funds rate, prime rate, eurocurrency rate, and LIBOR. Therefore, increases in interest rates may reduce our net income or increase our net loss by increasing the cost of debt. As of June 30, 2018, we had $692.5 million of total debt subject to variable interest rates. Based on the amount outstanding as of June 30, 2018, if the interest rate on our borrowings were to increase or decrease by 100 basis points over a twelve month period, our annual interest cost on borrowings subject to variable interest rates would increase or decrease by $6.9 million.
Item 4. Controls and Procedures
On February 22, 2018, C1 Investment Corp., or C1, and a subsidiary of Forum Merger Corporation, or Forum, consummated a merger, following which the separate corporate existence of the subsidiary ceased and C1 continued as the surviving corporation (the Merger). Upon the closing of the Merger on February 22, 2018, the sole business conducted by us is the business conducted by C1. Also, as a result of the Merger, the internal control over financial reporting utilized by C1 prior to the Merger became the internal control over financial reporting of the Company.
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Managements Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2018. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2018, our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, reported and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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From time to time we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are not currently a party to any legal proceedings that we believe would have a material adverse effect on our financial position, results of operations, or cash flows and are not aware of any material legal proceedings contemplated by governmental authorities.
Investing in our securities involves a high degree of risk. You should consider carefully the risks and uncertainties described below before deciding whether to purchase any of our securities. If any of these risks actually occur, it could harm our business, financial condition, results of operations and cash flows and our prospects. In that event, the price of our securities could decline and you could lose part or all of your investment.
Risks Related to Our Business and Industry
Our results of operations and ability to grow could be negatively affected if we cannot adapt and expand our technology offerings and services in response to ongoing market changes.
The collaboration and technology solutions business and markets are characterized by rapid technological change, evolving industry standards, changing client preferences, and new product and service introductions. Our success depends on our ability to continue to develop and implement technology offerings and services that anticipate or timely respond to rapid and continuing changes in technology and industry developments and offerings by new technology providers to serve the evolving needs of our clients. Examples of areas of significant change in the industry include cloud, software-defined infrastructure, virtualization, security, mobility, data analytics, and Internet of Things, or IoT, the continued shift from maintenance to managed services and ultimately to cloud-based services, as-a-service solutions, security, and information technology automation. In addition, enterprises are continuing to shift from on-premise, hardware infrastructure to software-centric hosted solutions. Technological developments such as these may materially affect the cost and use of technology and services by our clients and could affect the nature of how our revenue is generated. These technologies, and others that may emerge, could reduce and, over time, replace some of our current business. In addition, clients may delay spending under existing contracts and engagements and may delay entering into new contracts while they evaluate new technologies. If we do not sufficiently invest in new technology, industry developments, and our personnel, or evolve and expand our business at sufficient speed and scale, or if we do not make the right strategic investments to respond to these developments and successfully drive innovation, our technology offerings and services, our results of operations, and our ability to develop and maintain a competitive advantage and to continue to grow could be negatively affected.
In addition, if we are unable to keep up with changes in technology and new hardware, software, and services offerings, for example, by providing the appropriate training to our account managers, sales technology specialists, engineers, and consultants to enable them to effectively sell and deliver such new offerings to clients, our business, results of operations, or financial condition could be adversely affected.
Our business depends on our technology partner relationships and the availability of their products.
We have relationships with over 100 technology partners, including Avaya, Cisco, Dell, IBM, Interactive Intelligence, and Microsoft. Our business depends on the sale and installation of a variety of hardware and software that we purchase for resale from technology partners, which include original equipment manufacturers, or OEMs, software publishers, and wholesale distributors. We are authorized by our technology partners to sell all or some of their technology offerings via direct marketing activities. Our authorization with each technology partner is subject to specific terms and conditions regarding but not limited to, sales channel restrictions, product return privileges, price protection policies, purchase discounts, and technology partner programs and funding, including purchase rebates, sales volume rebates, purchasing incentives, and cooperative advertising reimbursements. However, we do not have long-term contracts with many of our technology partners and many of these arrangements are terminable upon notice by either party. Material changes to the agreements with our technology partners, including changes to purchase discounts and rebate programs, or our failure to timely react to such changes, could have an adverse effect on our business, results of operations, or financial condition.
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The priorities and objectives of our partners may differ from ours. As most of our relationships are non-exclusive, our partners are not prohibited from competing with us or forming closer or preferred arrangements with our competitors. From time to time, technology partners may terminate or limit our right to sell some or all of their technology offerings or change the terms and conditions or reduce or discontinue the incentives that they offer us. For example, there is no assurance that, as our technology partners continue to sell directly to customers and through resellers, they will not limit or curtail the availability of their products to solutions providers like us. Any such termination or limitation or the implementation of such changes could have a negative impact on our business, results of operations, or financial condition.
In addition, our success is dependent on our ability to develop relationships with and sell hardware, software, and services from new emerging vendors, including vendors that we have not historically represented in the marketplace. To the extent that a vendors offering that is highly in demand is not available to us to provide in one or more client channels, and there is not a competitive offering from another vendor that we are authorized to sell in such client channels, or we are unable to develop relationships with new technology providers or companies that we have not historically represented, our business, results of operations, or financial condition could be adversely impacted.
In addition, the termination of key technology partner relationships as a result of the sale, spin-off, combination, bankruptcy, or other similar circumstances of any of our technology partners and/or certain of their business units, including any such sale to or combination with a vendor with whom we do not currently have a commercial relationship or whose products we do not sell, could have an adverse impact on our business, results of operations, or financial condition.
We rely on a small number of key vendors for a significant portion of our technology offerings revenue.
Although we purchase from a diverse vendor base, in 2017, products manufactured by Avaya and Cisco represented 21% and 39%, respectively, of our technology offerings revenue. The loss of, or change in business relationship with, either of these or any other key technology partners, the diminished availability or quality of their products, or backlogs for their products leading to manufacturer allocation, could reduce the supply and increase the cost of products we sell and negatively impact our competitive position. In addition, we rely on one distributor that supplies a significant portion of our Avaya products and the termination of this distributor relationship could negatively impact our business.
Avaya, which was our largest vendor as a percentage of our technology offerings revenue in 2015 and 2016, filed for reorganization under Chapter 11 in January 2017, filed its preliminary plan of reorganization in April 2017 and had its Chapter 11 plan of reorganization approved by the Bankruptcy Court in November 2017. As a result of Avayas restructuring, new or existing clients may elect to delay purchasing decisions with respect to Avaya technology offerings or may choose to replace existing Avaya technology offerings with the technology offerings of other vendors. Although we have partner relationships with a diverse vendor base, new or existing clients may elect to purchase such alternative technology offerings from a provider other than us or such alternative technology offerings may have lower margins. Delays in customer purchasing decisions, or an election by our clients to purchase alternative technology offerings from us or from other providers, could result in lower revenues and gross profits or margins or otherwise have an adverse effect on our business, although we cannot estimate the impact at this time.
If we are unable to expand or renew sales to existing clients, or attract new clients, our growth could be slower than we expect and our business may be harmed.
Our future growth depends upon expanding sales and renewals of our technology offerings and services with existing clients. Our clients may not purchase our technology offerings and services, or our clients may reduce their purchasing volumes, if we do not demonstrate the value proposition for their investment, and we may not be able to replace existing clients with new clients. In addition, our clients may not renew their contracts with us on the same terms, or at all, because of dissatisfaction with our service. If our clients do not renew their contracts, our revenue may grow more slowly than expected, may not grow at all, or may decline. Additionally, increasing incremental sales to our current client base may require increasingly sophisticated and costly sales efforts that are targeted at senior management. We plan to continue expanding our sales efforts but we may be unable to hire qualified sales personnel, may be unable to successfully train those sales personnel that we are able to hire, and sales personnel may not become fully productive on the timelines that we have projected, or at all. Additionally, although we dedicate significant resources to sales and marketing programs, these sales and marketing programs may not have the desired effect and may not expand sales. We cannot assure you that our efforts will increase sales to existing clients or additional revenue. If our efforts to upsell to our clients are not successful, our future growth may be limited.
Our ability to achieve significant growth in revenue in the future will also depend upon our ability to attract new clients. This may be particularly challenging where an organization has already invested substantial personnel and financial resources to integrate competing technology offerings and services into its business, as such organization may be reluctant or unwilling to invest in new technology offerings and services. If we fail to attract new clients and maintain and expand those client relationships, our revenue may grow more slowly than expected and our business may be harmed.
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Demand for our technology offerings and services could be adversely affected by volatile, negative, or uncertain economic conditions and the effects of these conditions on our clients businesses.
Our revenue and profitability depend on the demand for our technology offerings and services, which could be negatively affected by numerous factors, many of which are beyond our control. Volatile, negative, or uncertain economic conditions affect our clients businesses and the markets we serve. Such economic conditions in our markets have undermined, and could in the future undermine, business confidence in our markets and cause our clients to reduce or defer their spending on new technology offerings and services, or may result in clients reducing, delaying or eliminating spending under existing contracts with us, which would negatively affect our business. Growth in the markets we serve could be at a slow rate, or could stagnate or contract, in each case for an extended period of time. Ongoing economic volatility and uncertainty and changing demand patterns affect our business in a number of other ways, including making it more difficult to accurately forecast client demand and effectively build our revenue and resource plans.
Economic volatility and uncertainty is particularly challenging because it may take some time for the effects and changes in demand patterns resulting from these and other factors to manifest themselves in our business and results of operations. Changing demand patterns from economic volatility and uncertainty could have a significant negative impact on our business, results of operations, or financial condition.
Substantial competition could reduce our market share and significantly harm our financial performance.
Our current competition includes:
| in-house IT departments; |
| global service providers and integrators; |
| local and regional providers; |
| resellers; and |
| equipment manufacturers. |
We expect the competitive landscape in which we compete to continue to change as new technologies are developed. While innovation can help our business as it creates new offerings for us to sell and provide complementary services, it can also disrupt our business model and create new and stronger competitors. For instance, while cloud-based solutions present an opportunity for us, cloud-based solutions and technologies that deliver technology solutions as a service could increase the amount of sales directly to clients rather than through solutions providers like us, or could reduce the amount of hardware we sell, leading to a reduction in our technology offerings revenue and/or profitability. In addition, some of our hardware and software technology partners sell, and could intensify their efforts to sell, their products directly to our clients. Moreover, traditional OEMs have increased their services capabilities through mergers and acquisitions with service providers, which could potentially increase competition in the market to provide comprehensive technology solutions to clients. If any of these trends becomes more prevalent, it could adversely affect our business, results of operations, or financial condition.
We focus on offering a high level of service to gain new clients and retain existing clients. To the extent we face increased competition to gain and retain clients, we may be required to reduce prices, increase advertising expenditures, or take other actions that could adversely affect our business, results of operations, or financial condition. Additionally, some of our competitors may reduce their prices in an attempt to stimulate sales, which may require us to reduce prices. This would require us to sell a greater number of products and services to achieve the same level of revenue and gross profit. If such a reduction in prices occurs and we are unable to attract new clients and sell increased quantities of products and services, our sales growth and profitability could be adversely affected.
Our future results will depend on our ability to continue to focus our resources and manage costs effectively.
We are continually implementing productivity measures and focusing on measures intended to further improve cost efficiency. We may be unable to realize all expected cost savings in connection with these efforts within the expected time frame, or at all, and we may incur additional and/or unexpected costs to realize them. Further, we may not be able to sustain any achieved savings in the future. Future results will depend on the success of these efforts.
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If we are unable to control costs, we may incur losses, which could decrease our operating margins and significantly reduce or eliminate our profits. Our future profitability will depend on our ability to manage costs or increase productivity. An inability to effectively manage costs could adversely impact our business, results of operations, or financial condition.
Our profitability could suffer if we are not able to manage large and complex projects and complete fixed-price, fixed-timeframe contracts on budget and on time.
Our profitability and operating results are dependent on the scale of our projects and the prices we are able to charge for our technology offerings and services. We perform a significant portion of our work through fixed-price contracts, in which we assume full control of the project team and manage all facets of execution. As a significant portion of our projects are on a fixed-price model, we may be unable to accurately estimate the appropriate project price and successfully manage such projects. Although we use specified technical processes and our past experience to reduce the risks associated with estimating, planning, and performing fixed-price and fixed-timeframe projects, we face the risk of cost overruns, completion delays, and wage inflation in connection with these projects. If we fail to accurately estimate the resources or time required for a project or future rates of wage inflation, or if we fail to perform contractual obligations within the contractual timeframe, our profitability could suffer.
The challenges of managing larger and more complex projects include:
| maintaining high-quality control and process execution standards; |
| maintaining planned resource utilization rates on a consistent basis; |
| maintaining productivity levels and implementing necessary process improvements; |
| controlling project costs; |
| maintaining close client contact and high levels of client satisfaction; |
| recruiting and retaining sufficient numbers of skilled IT professionals; and |
| maintaining effective client relationships. |
In addition, large and complex projects may involve multiple engagements or stages, and there is a risk that a client may choose not to retain us for additional stages or may cancel or delay additional planned engagements. Such cancellations or delays may make it difficult to plan our project resource requirements, and may result in lower profitability levels than we anticipated upon commencing engagements.
Our investments in new services and technologies may not be successful.
We continue to invest in new services and technologies, including cloud, software-defined infrastructure, virtualization, security, mobility, data analytics, and IoT. The complexity of these solutions, our learning curve in developing and supporting them, and significant competition in the markets for these solutions could make it difficult for us to market and implement these solutions successfully. Additionally, there is a risk that our clients may not adopt these solutions widely, which would prevent us from realizing expected returns on these investments. Even if these solutions are successful in the market, they still rely on third-party hardware and software and our ability to meet stringent service levels. If we are unable to deploy these solutions successfully or profitably, it could adversely impact our business, results of operations, or financial condition.
If we lose any of our key personnel, or are unable to attract and retain the talent required for our business, our business could be disrupted and our financial performance could suffer.
Our success is heavily dependent upon our ability to attract, develop, engage, and retain key personnel to manage and grow our business, including our key executive, management, sales, services, and technical personnel.
Our future success will depend to a significant extent on the efforts of our executive officers: John A. McKenna, Jr., our President, Chief Executive Officer and Chairman of the Board; John F. Lyons, our President, Field Organization; Paul K. Maier, our President, Services Organization; and Jeffrey E. Nachbor, our Chief Financial Officer, as well as the continued service and support of other key employees. Our future success also will depend on our ability to attract and retain highly skilled technology specialists, engineers, and consultants, for whom the market is extremely competitive. All of our officers and key employees are at-will employees, meaning that they can terminate their employment with us at any time. Further, we do not maintain key man life insurance policies for any of our officers or key employees.
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Our inability to attract, develop, and retain key personnel could have an adverse effect on our relationships with our technology partners and clients and adversely affect our ability to expand our offerings of technology offerings and services. Moreover, our inability to train our sales, services, and technical personnel effectively to meet the rapidly changing technology needs of our clients could cause a decrease in the overall quality and efficiency of such personnel. Such consequences could adversely affect our business, results of operations, or financial condition.
Our ability to attract and retain business and personnel may depend on our reputation in the marketplace.
We believe our brand name and our reputation in the marketplace are important corporate assets that help distinguish our technology offerings and services from those of competitors and also contribute to our ability to recruit and retain talented personnel, in particular our engineers and consulting professionals. However, our corporate reputation is potentially susceptible to material damage by events such as disputes with clients, cybersecurity breaches, service outages, internal control deficiencies, delivery failures, or compliance violations. Similarly, our reputation could be damaged by actions or statements of current or former clients, directors, employees, competitors, vendors, partners, our joint ventures or joint venture partners, adversaries in legal proceedings, legislators, or government regulators, as well as members of the investment community or the media. There is a risk that negative information about us, even if based on rumor or misunderstanding, could adversely affect our business. Damage to our reputation could be difficult, expensive and time-consuming to repair, could make potential or existing clients reluctant to select us for new engagements, resulting in a loss of business, and could adversely affect our recruitment and retention efforts. Damage to our reputation could also reduce the value and effectiveness of our brand name and could reduce investor confidence in us, adversely affecting our share price.
We have experienced rapid internal growth as well as growth through acquisitions in recent periods. If we fail to manage our growth effectively, or our business does not grow as expected, our operating results may suffer.
Our headcount and operations have grown substantially. We had approximately 2,185 employees as of December 31, 2017, as compared with approximately 1,349 employees as of December 31, 2015. This growth has placed, and will continue to place, a significant strain on our operational, financial, and management infrastructure. We anticipate further increases in headcount will be required to support increases in our technology offerings and continued expansion. To manage this growth effectively, we must continue to improve our operational, financial, and management systems and controls by, among other things:
| effectively attracting, training, and integrating a large number of new employees, particularly technical personnel and members of our management and sales teams; |
| further improving our key business systems, processes, and information technology infrastructure to support our business needs; |
| enhancing our information and communication systems to ensure that our employees are well-coordinated and can effectively communicate with each other and our clients; and |
| improving our internal control over financial reporting and disclosure controls and procedures to ensure timely and accurate reporting of our operational and financial results. |
If we fail to manage our expansion or implement our new systems, or if we fail to implement improvements or maintain effective internal controls and procedures, our costs and expenses may increase more than expected and we may not expand our client base, increase renewal rates, enhance our existing applications, develop new applications, satisfy our clients, respond to competitive pressures, or otherwise execute our business plan. If we are unable to manage our growth, our operating results likely will be harmed.
Future acquisitions could disrupt our business and may divert managements attention, and if unsuccessful, harm our business.
We may choose to expand by making additional acquisitions that could be material to our business. We have in the past made several acquisitions of complementary businesses, including Arrow Systems Integration, Inc., in 2018, RGTS, Strategic Products and Services, Annese & Associates, Inc. and AOS in 2017 and SIGMAnet, MSN Communications, and Sunturn in 2015. Acquisitions involve many risks, including the following:
| an acquisition may negatively affect our results of operations and financial condition because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition; |
| we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel, or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us; |
| an acquisition may disrupt our ongoing business, divert resources, increase our expenses, or distract our management; |
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| an acquisition may result in a delay or reduction of client purchases for both us and the company we acquired due to client uncertainty about continuity and effectiveness of service from either company; |
| we may encounter difficulties in, or may be unable to, successfully sell any acquired technology offerings or services; |
| an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors have stronger market positions; |
| the challenges inherent in effectively managing an increased number of employees in diverse locations; |
| the potential strain on our financial and managerial controls and reporting systems and procedures; |
| the potential known and unknown liabilities associated with an acquired company; |
| our use of cash to pay for acquisitions would limit other potential uses for our cash; |
| if we incur additional debt to fund such acquisitions, such debt may subject us to additional material restrictions on our ability to conduct our business as well as additional financial maintenance covenants; |
| the risk of impairment charges related to potential write-downs of acquired assets or goodwill in future acquisitions; |
| to the extent that we issue a significant amount of equity or equity-linked securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease; and |
| managing the varying intellectual property protection strategies and other activities of an acquired company. |
We may not succeed in addressing these or other risks or any other problems encountered in connection with the integration of any acquired business. The inability to integrate successfully the business, technologies, products, personnel, or operations of any acquired business, or any significant delay in achieving integration, could harm our business, results of operations, or financial condition.
We may not be able to recognize revenue in the period in which our services are performed, which may cause our margins to fluctuate.
Our services are performed under both time-and-material and fixed-price contract arrangements. All revenue is recognized pursuant to applicable accounting standards. We recognize revenue from professional services, which includes the design, configuration, installation, and integration of business communication and data systems, as the services are performed and all obligations have been substantially met. Our failure to meet all the obligations, or otherwise meet a clients expectations, may result in our having to record the cost related to the performance of services in the period that services were rendered, but delay the timing of revenue recognition to a future period in which all obligations have been met.
We may experience quarterly fluctuations in our operating results due to a number of factors, which makes our future results difficult to predict and could cause our operating results to fall below expectations.
Our quarterly operating results have fluctuated in the past and we expect them to fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, our past results may not be indicative of our future performance, and comparing our operating results on a period-to-period basis may not be meaningful. In addition to the other risks described herein, factors that may affect our quarterly operating results include:
| changes in spending on collaboration and technology offerings and services by our current or prospective clients; |
| pricing our technology offerings and services effectively so that we are able to attract and retain clients without compromising our operating results; |
| attracting new clients and increasing our existing clients use of our technology offerings and services; |
| the mix between wholesale and retail maintenance new contracts and renewals; |
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| client renewal rates and the amounts for which agreements are renewed; |
| seasonality and its effect on client demand; |
| awareness of our brand; |
| changes in the competitive dynamics of our market, including consolidation among competitors or clients and the introduction of new technologies and technology enhancements; |
| changes to the commission plans, quotas, and other compensation-related metrics for our sales representatives; |
| the amount and timing of payment for operating expenses, particularly sales and marketing expense; |
| our ability to manage our existing business and future growth, domestically and internationally; |
| unforeseen costs and expenses related to the expansion of our business, operations, and infrastructure, including disruptions in our hosting network infrastructure and privacy and data security; and |
| general economic and political conditions in our domestic and international markets. |
We may not be able to accurately forecast the amount and mix of future technology offerings and services, size or duration of contracts, revenue, and expenses and, as a result, our operating results may fall below our estimates.
We could be held liable for damages or our reputation could suffer from security breaches or disclosure of confidential information or personal data.
We are dependent on IT networks and systems to process, transmit, and securely store electronic information and to communicate among our locations and with our clients. Through our cloud technology offerings, we process, transmit, and store electronic information of our clients. Security breaches of this infrastructure could lead to shutdowns or disruptions of our systems and potential loss or unauthorized disclosure of confidential information or data, including personal data. In addition, many of our engagements involve projects that are critical to the operations of our clients businesses. The theft and/or unauthorized use or publication of our, or our clients, confidential information or other proprietary business information as a result of such an incident could adversely affect our competitive position and reduce marketplace acceptance of our services. Any failure in the networks or computer systems used by us or our clients could result in a claim for substantial damages against us and significant reputational harm, regardless of our responsibility for the failure.
In addition, we often have access to or are required to manage, utilize, collect, and store sensitive or confidential client or employee data, including personal data. As a result, we are subject to numerous U.S. and non-U.S. laws and regulations designed to protect this information, such as the European Union Directive on Data Protection and various U.S. federal and state laws governing the protection of personal data. If any person, including any of our employees, negligently disregards or intentionally breaches controls or procedures with which we are responsible for complying with respect to such data, or otherwise mismanages or misappropriates that data, or if unauthorized access to or disclosure of data in our possession or control occurs, we could be subject to liability and penalties in connection with any violation of applicable privacy laws and/or criminal prosecution, as well as significant liability to our clients or our clients customers for breaching contractual confidentiality and security provisions or privacy laws. These risks will increase as we continue to grow our cloud-based offerings and services and store and process increasingly large amounts of our clients confidential information and data and host or manage parts of our clients businesses, especially in industries involving particularly sensitive data such as the financial services industry and the healthcare industry. The loss or unauthorized disclosure of sensitive or confidential client or employee data, including personal data, whether through breach of computer systems, systems failure, employee negligence, fraud or misappropriation, or otherwise, could damage our reputation and cause us to lose clients. Similarly, unauthorized access to or through our information systems and networks or those we develop or manage for our clients, whether by our employees or third parties, could result in negative publicity, legal liability, and damage to our reputation, which could in turn harm our business, results of operations, or financial condition.
If we cause disruptions in our clients businesses or provide inadequate service, our clients may have claims for substantial damages against us, which could cause us to lose clients, have a negative effect on our corporate reputation, and adversely affect our results of operations.
If we make errors in the course of delivering services to our clients or fail to consistently meet our service level obligations or other service requirements of our clients, these errors or failures could disrupt our clients business, which could result in a reduction in our revenue or a claim for substantial damages against us. In addition, a failure or inability by us to meet a contractual requirement could subject us to penalties, cause us to lose clients or damage our brand or corporate reputation, and limit our ability to attract new business.
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The services we provide are often critical to our clients businesses. Certain of our client contracts require us to comply with security obligations including maintaining network security and backup data, ensuring our network is virus-free, maintaining business continuity planning procedures, and verifying the integrity of employees that work with our clients by conducting background checks. Any failure in a clients system, failure of our data center, cloud or other offerings, or breach of security relating to the services we provide to the client could damage our reputation or result in a claim for substantial damages against us. Any significant failure of our equipment or systems, or any major disruption to basic infrastructure in the locations in which we operate, such as power and telecommunications, could impede our ability to provide services to our clients, have a negative impact on our reputation, cause us to lose clients, and adversely affect our results of operations.
Under our client contracts, our liability for breach of our obligations is in some cases limited pursuant to the terms of the contract. Such limitations may be unenforceable or otherwise may not protect us from liability for damages. In addition, certain liabilities, such as claims of third parties for which we may be required to indemnify our clients, are generally not limited under our contracts. The successful assertion of one or more large claims against us in amounts greater than those covered by our current insurance policies could harm our business, results of operations, or financial condition. Even if such assertions against us are unsuccessful, we may incur reputational harm and substantial legal fees.
The length and unpredictability of the sales cycle for our technology offerings and services could delay new sales and cause our revenue and cash flows for any given quarter to fail to meet our projections or market expectations.
The sales cycle between our initial contact with a potential client and the signing of a contract to provide technology offerings and services varies. As a result of the variability and length of the sales cycle, we have a limited ability to forecast the timing of sales. A delay in or failure to complete transactions could harm our business and financial results, and could cause our financial results to vary significantly from quarter to quarter. Our sales cycle varies widely, reflecting differences in our potential clients decision-making processes, procurement requirements, and budget cycles, and is subject to significant risks over which we have little or no control, including:
| our clients budgetary constraints and priorities; |
| the timing of our clients budget cycles; and |
| the length and timing of clients approval processes. |
Reliance on shipments at the end of the quarter could cause our revenue for the applicable period to fall below expected levels. Our profitability depends, in part, on the volume of technology offerings and services sold, and we may be unable to achieve increases in our profit margins in the future.
As a result of client purchasing patterns and the efforts of our client engagement team to meet or exceed their performance objectives, we have historically generated a substantial portion of revenue during the last few weeks of each quarter. If expected revenue at the end of any quarter is delayed for any reason, including the failure of anticipated purchase orders to materialize, our inability to ship and demonstrate clients receipt of products prior to quarter-end to fulfill purchase orders received near the end of the quarter, our failure to manage inventory to meet demand, our inability to release new products on schedule, or any failure of our systems related to order review and processing, our revenue for that quarter could fall below our expectations, which could adversely impact our business, results of operations, or financial condition.
Seasonality may cause fluctuations in our revenue and profitability.
We believe there are significant seasonal factors that cause us to record higher revenue in some quarters compared to others. We believe this variability is largely due to our clients and technology partners fiscal year ends, as well as budgetary and spending patterns of our clients. For example, we have historically generated a higher portion of our sales in the second half of each year, at which point our cost of revenue and commission expense increases relative to any increase in revenue. The increased cost of revenue and commission expense, and other impacts of seasonality, may affect profitability in a given quarter. Our growth rate may have made seasonal fluctuations more difficult to detect. If our growth rate slows over time, seasonal or cyclical variations in our operations may become more pronounced, and our business, results of operations, or financial position may be adversely affected.
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Our work with government clients exposes us to additional risks inherent in the government contracting environment.
We provide IT services to various government agencies, including federal, state, and local government entities. For 2016 and 2017, approximately 7% and 10%, respectively, of our total revenue was derived from sales to federal, state, and local governments. While our sales to public sector clients are diversified across various agencies and departments, changes in law, regulation, or the political climate, or an across-the-board change in government spending policies, including budget cuts at the federal level, could result in our public sector clients reducing their purchases and terminating their service contracts, which could adversely impact our business, results of operations, or financial condition.
Furthermore, we derive a substantial portion of our government contracts revenue from contracts awarded through competitive procurement processes, which can impose substantial costs upon us to prepare for and participate in competitions. Moreover, there is no assurance that our proposal will be selected for any future opportunity and even where we are awarded a contract, the award may be subject to protest by competitors, which may require the contracting agency or department to suspend our performance pending the outcome of the protest.
In addition, government contracts often contain additional audit rights, termination for convenience provisions, compliance, and disclosure obligations, and are subject to heightened reputational and contractual risks compared to contracts with commercial clients, including the risk of False Claims Act prosecutions and/or suspensions or debarment proceedings. The additional obligations and risks could affect not only our business with the particular government entities involved, but also our business with other entities of the same or other governmental bodies or with certain commercial clients, and could adversely impact our business, results of operations, or financial condition.
Our technology offerings and services could infringe upon the intellectual property rights of others or we might lose our ability to utilize the intellectual property of others.
We cannot be sure that our brand, technology offerings, and services, including, for example, the software solutions of others that we offer to our clients, do not infringe on the intellectual property rights of third parties, and these third parties could claim that we or our clients are infringing upon their intellectual property rights. These claims could harm our reputation, cause us to incur substantial costs or prevent us from offering some services or solutions in the future, or require us to rebrand. Any related proceedings could require us to expend significant resources over an extended period of time. In most of our contracts, we agree to indemnify our clients for expenses and liabilities resulting from claimed infringements of the intellectual property rights of third parties. In some instances, the amount of these indemnities could be greater than the revenue we receive from the client. Any claims or litigation in this area, regardless of merit, could be time-consuming and costly, damage our reputation, and/or require us to incur additional costs to obtain the right to continue to offer a service or solution to our clients. If we cannot secure this right at all or on reasonable terms, or, alternatively, substitute a non-infringing technology, our business, results of operations, or financial condition could be harmed. Similarly, if we are unsuccessful in defending a trademark claim, we could be forced to re-brand, which could harm our business, results of operations, or financial condition. Additionally, in recent years, individuals and firms have purchased intellectual property assets where their sole or primary purpose is to assert claims of infringement against technology providers and clients that use such technology. Any such action naming us or our clients could be costly to defend or lead to an expensive settlement or judgment against us. Moreover, such an action could result in an injunction being ordered against our client or our own services or operations, causing further damages.
If we are unable to protect our intellectual property rights from unauthorized use or infringement by third parties, our business could be adversely affected.
Our success depends, in part, upon our ability to protect our proprietary methodologies and other intellectual property. Existing laws offer only limited protection of our intellectual property rights, and the protection in some countries in which we operate or may operate in the future may be very limited. We rely upon a combination of confidentiality policies, nondisclosure and other contractual arrangements, and trade secret, copyright, and trademark laws to protect our intellectual property rights. These laws are subject to change at any time and could further limit our ability to protect our intellectual property. There is uncertainty concerning the scope of available intellectual property protection for software and business methods, which are fields in which we rely on intellectual property laws to protect our rights. The validity and enforceability of any intellectual property right we obtain may be challenged by others and, to the extent we have enforceable intellectual property rights, those intellectual property rights may not prevent competitors from reverse engineering our proprietary information or independently developing technology offerings and services similar to or duplicative of ours. Further, the steps we take in this regard might not be adequate to prevent or deter infringement or other misappropriation of our intellectual property by competitors, former employees or other third parties, and we might not be able to detect unauthorized use of, or take appropriate and timely steps to enforce, our intellectual property rights. Enforcing our rights might also require considerable time, money, and oversight, and we may not be successful in enforcing our rights.
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If we are unable to collect our receivables from, or bill our unbilled services to, our clients, our business, results of operations, or financial condition could be adversely affected.
Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for technology offerings sold or services performed. We typically evaluate the financial condition of our clients and usually bill and collect on relatively short cycles. We maintain allowances against receivables and unbilled services. Actual losses on client balances could differ from those that we currently anticipate and, as a result, we might need to adjust our allowances. There is no guarantee that we will accurately assess the creditworthiness of our clients. Macroeconomic conditions could also result in financial difficulties for our clients, including limited access to the credit markets, insolvency, or bankruptcy, and, as a result, could cause clients to delay payments to us, request modifications to their payment arrangements that could increase our receivables balance, or default on their payment obligations to us. Timely collection of client balances also depends on our ability to complete our contractual commitments and bill and collect our contracted revenue. If we are unable to meet our contractual requirements, we might experience delays in collection of and/or be unable to collect our client balances, and if this occurs, our business, results of operations, or financial condition could be adversely affected. In addition, if we experience an increase in the time to bill and collect for our services, our cash flows could be adversely affected.
Increased costs of labor and employee health and welfare benefits may adversely impact our results of operations.
Given our large number of employees, labor-related costs represent a significant portion of our expenses. Salaries, wages, benefits, commissions, and other labor compensation costs excluding bonus and payroll tax for our full-time employees amounted to $133 million in 2017, which represented approximately 62% of our selling, general and administrative expenses and approximately 10% of our cost of revenue. An increase in labor costs, for example, as a result of increased competition for skilled labor, or employee benefit costs, such as health care costs or otherwise, could adversely impact our business, results of operations, or financial condition.
We rely on third-party companies to perform certain of our obligations to clients, which could impact our business if not performed.
We deliver and manage mission-critical software, systems and network solutions for our clients. We also offer certain services, such as implementation, installation, and deployment services, to our clients through various third-party providers who are engaged to perform these services on our behalf. We are also required, as a component of some of our contracts with our OEM partners, to utilize their engineers as part of our solutions. In addition, we support approximately 150 multinational clients through our Aura and Unified Comms alliances, offering access to more than 50 IT service providers in approximately 60 countries and enabling us to offer our managed services internationally. If we or our third-party services providers, including our alliance service providers, fail to provide high-quality services to our clients, or if such services result in a disruption of our clients businesses, we could be subject to legal claims, proceedings, and liability.
The interruption of the flow of products from suppliers could disrupt our supply chain.
A significant portion of the products we sell are manufactured or purchased by our technology partners outside of the United States, primarily in Asia. Political, social, or economic instability in Asia, or in other regions in which our technology partners purchase or manufacture the products we sell, could cause disruptions in trade, including exports to the United States. Other events that could also cause disruptions to our supply chain include:
| the imposition of additional trade law provisions or regulations or changes to existing trade laws provisions or regulations; |
| the imposition of additional duties, tariffs, and other charges on imports and exports; |
| foreign currency fluctuations; |
| natural disasters or other adverse occurrences at, or affecting, any of our suppliers facilities; |
| restrictions on the transfer of funds; |
| the financial instability or bankruptcy of manufacturers; and |
| significant labor disputes, such as strikes. |
We cannot predict whether the countries in which the products we sell are purchased or manufactured, or may be purchased or manufactured in the future, will be subject to new or additional trade restrictions or sanctions imposed by the U.S. or foreign governments, including the likelihood, type or effect of any such restrictions. Trade restrictions, including new or increased tariffs or quotas, embargoes, sanctions, safeguards, and customs restrictions against the products we sell, as well as foreign labor strikes and work stoppages or boycotts, could increase the cost or reduce the supply of product available to us and adversely affect our business, results of operations, or financial condition. In addition, our exports are subject to regulations and noncompliance with these requirements could have a negative effect on our business, results of operations, or financial condition.
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Our global operations are subject to complex risks, some of which might be beyond our control.
Our clients have operations across South America, Europe, Australia, and Asia. Although international revenue currently represents a small portion of our business, our revenue from clients outside of the United States may expand in the future as we expand our international presence. As a result, we may be subject to risks inherently associated with international operations, including risks associated with foreign currency exchange rate fluctuations, difficulties in enforcing intellectual property and/or contractual rights, the burdens of complying with a wide variety of foreign laws and regulations, potentially adverse tax consequences, tariffs, quotas, and other barriers, potential difficulties in collecting accounts receivable, international hostilities, terrorism, and natural disasters. Expansion of international operations also increases the likelihood of potential or actual violations of domestic and international anticorruption laws, such as the Foreign Corrupt Practices Act, or of U.S. and international export control and sanctions regulations. We may also face difficulties integrating any new facilities in different countries into our existing operations, as well as integrating employees that we hire in different countries into our existing corporate culture. If we are unable to manage the risks of our global operations, our business, results of operations, or financial condition could be adversely affected.
Changes in accounting rules could adversely affect our future financial results.
We prepare our financial statements in conformity with generally accepted accounting principles, or U.S. GAAP. These accounting principles are subject to interpretation by the Financial Accounting Standards Board, the SEC, the American Institute of Certified Public Accountants, and various other bodies formed to interpret and create appropriate accounting policies. Technology offerings and services, and the manner in which they are bundled, are technologically complex and the characterization of these technology offerings and services requires judgment to apply revenue recognition policies. Any mischaracterization of these technology offerings and services could result in misapplication of revenue recognition policies. Future periodic assessments required by current or new accounting standards, including through the implementation of ASU 2014-09 as described in the notes to our condensed consolidated financial statements found elsewhere in this report, may result in non-cash changes and/or changes in presentation or disclosure. In addition, any change in accounting standards may influence our clients decision to purchase from us or to finance transactions with us, which could adversely impact our business, results of operations, or financial condition.
Risks Related to Our Indebtedness
We face risks related to our substantial indebtedness.
As of June 30, 2018, we had total outstanding debt of $710 million. Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk associated with our variable rate debt, and prevent us from meeting our obligations under our credit facilities. Substantially all of our assets are secured by our credit facilities. Our substantial indebtedness could have important consequences to us, including:
| making it more difficult for us to satisfy our obligations with respect to our debt, and any failure to comply with the obligations under our debt instruments, including restrictive covenants, could result in an event of default under the agreements governing our indebtedness, increasing our vulnerability to general economic and industry conditions; |
| reducing the benefits we expect to receive from our recent and any future acquisition transactions; |
| requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our debt, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, selling and marketing efforts, product development, future business opportunities, and other purposes; |
| exposing us to the risk of increased interest rates as substantially all of our borrowings are at variable rates; |
| restricting us from making strategic acquisitions and from pursuing certain business opportunities; |
| limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; and |
| limiting our flexibility and ability to plan for, or adjust to, changing market conditions and placing us at a competitive disadvantage compared to our competitors who may be less highly leveraged. |
The occurrence of any one of these events could have an adverse effect on our business, results of operations, financial condition, and ability to satisfy our obligations under our indebtedness.
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Despite our high indebtedness level, we and our subsidiaries may still be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the agreements governing our indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions and, under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial.
Our debt agreements impose significant operating and financial restrictions on us and our subsidiaries that may prevent us from pursuing certain business opportunities and restrict our ability to operate our business.
The credit agreements governing our credit facilities contain covenants that restrict us and our subsidiaries ability to take various actions, such as:
| incur additional indebtedness and make guarantees; |
| create liens on assets; |
| engage in mergers or consolidations; |
| sell assets, including sale and leaseback transactions; |
| make fundamental changes; |
| pay dividends and distributions or repurchase our capital stock; |
| make investments, loans and advances, including acquisitions; |
| engage in certain transactions with affiliates; |
| make changes in the nature of our business and organizational documents; and |
| make prepayments of junior debt. |
The restrictions in the credit agreements governing our credit facilities also limit our ability to plan for or react to market conditions, meet capital needs, or otherwise restrict our activities or business plans and adversely affect our ability to finance our operations, enter into acquisitions or to engage in other business activities that could be in our interest.
To service our indebtedness and other cash needs, we require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.
Our ability to satisfy our debt obligations and to fund any planned capital expenditures, dividends, and other cash needs will depend in part upon the future financial and operating performance of our subsidiaries and upon our ability to renew or refinance borrowings. We cannot assure you that our business will generate cash flow from operations, or that we will be able to draw under our revolving credit facilities or otherwise, in an amount sufficient to fund our liquidity needs, including the payment of principal and interest on our indebtedness. Prevailing economic conditions and financial, business, competitive, legislative, regulatory, and other factors, many of which are beyond our control, will affect our ability to make these payments.
If we are unable to make payments, refinance our debt or obtain new financing under these circumstances, we may consider other options, including:
| sales of assets; |
| sales of equity; |
| reduction or delay of capital expenditures, strategic acquisitions, investments, and alliances; or |
| negotiations with our lenders to restructure the applicable debt. |
These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which
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could further restrict our business operations. In addition, the terms of the credit agreements governing the credit facilities may restrict us from adopting some of these alternatives. In the absence of sufficient cash flow from operating results and other resources, we could face substantial liquidity problems and could be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions for fair market value, or at all. Furthermore, any proceeds that we could realize from any such dispositions may not be adequate to meet our debt service obligations then due. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, could adversely impact our business, results of operation, and financial condition.
Any decline in the ratings of our corporate credit could adversely affect our ability to access capital.
Any decline in the ratings of our corporate credit or any indications from the rating agencies that their ratings on our corporate credit are under surveillance or review with possible negative implications could adversely impact our ability to access capital.
We are subject to fluctuations in interest rates.
Borrowings under our credit facilities are subject to variable rates of interest and expose us to interest rate risk. For example, assuming the revolving portion of our credit facilities is fully drawn along with the outstanding term loan balance as of June 30, 2018, on a pro forma basis, each 0.5% change in assumed blended interest rates would result in an approximately $4.4 million change in annual interest expense on indebtedness. At present, we do not have any existing interest rate swap agreements, which involve the exchange of floating for fixed rate interest payments to reduce interest rate volatility. However, we may decide to enter into such swaps in the future. If we do, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness and any swaps we enter into may not fully mitigate our interest rate risk, may prove disadvantageous, or may create additional risks.
Our only significant asset is ownership of our subsidiaries and such ownership may not be sufficient to pay dividends or make distributions or loans to enable us to pay any dividends on our Common Stock.
We have no direct operations and no significant assets other than the ownership of our subsidiaries. We will depend on our subsidiaries for distributions, loans and other payments to generate the funds necessary to meet our financial obligations, including our expenses as a publicly traded company, and to pay any dividends with respect to our common stock. In addition, there are legal and contractual restrictions in agreements governing current and future indebtedness of our subsidiaries, as well as the financial condition and operating requirements of our subsidiaries. The earnings from, or other available assets of, our subsidiaries, may not be sufficient to pay dividends or make distributions or loans to enable us to pay any dividends on our common stock or satisfy our other financial obligations.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our securities adversely, the price and trading volume of our securities could decline.
The trading market for our securities will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. Securities and industry analysts do not currently, and may never, publish research on us. If no securities or industry analysts commence coverage of us, our stock price and trading volume would likely be negatively impacted. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, the price of our securities would likely decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports on it, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
Exercise of warrants for common stock would increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders.
As of June 30, 2018, we had warrants to purchase 1,354,810 shares of common stock outstanding. Each whole warrant is exercisable to purchase one share of common stock at $11.50 per share. To the extent such warrants are exercised, additional shares of common stock will be issued, which will result in dilution to the then-existing holders of common stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our common stock.
We may redeem the unexpired warrants prior to their exercise at a time that is disadvantageous to warrant holders, thereby making such warrants worthless.
We have the ability to redeem outstanding warrants at any time prior to their expiration, at a price of $0.01 per warrant, provided that the last reported sales price of the common stock equals or exceeds $18.00 per share for any 20 trading days within a
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30 trading-day period ending on the third trading day prior to the date we send the notice of redemption to the warrant holders. If and when the warrants become redeemable, we may exercise our redemption right even if we are unable to register or qualify the underlying securities for sale under all applicable state securities laws. Redemption of the outstanding warrants could force (i) to exercise your warrants and pay the exercise price therefor at a time when it may be disadvantageous for you to do so, (ii) to sell your warrants at the then-current market price when you might otherwise wish to hold your warrants or (iii) to accept the nominal redemption price which, at the time the outstanding warrants are called for redemption, is likely to be substantially less than the market value of your warrants. None of the Placement Warrants and warrants underlying the units issuable upon conversion of working capital loan will be redeemable by us so long as they are held by their initial purchasers or their permitted transferees.
Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our certificate of incorporation contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. These provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.
Risks Related to our Corporate Governance
We are a controlled company within the meaning of the applicable Nasdaq rules and, as a result, qualify for exemptions from certain corporate governance requirements. If we rely on these exemptions, our stockholders will not have the same protections afforded to stockholders of companies that are subject to such requirements.
Clearlake controls a majority of the voting power of our outstanding common stock. Under Nasdaq rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company is a controlled company and may elect not to comply with certain corporate governance requirements, including the requirement:
| that a majority of the board of directors consist of independent directors; |
| for an annual performance evaluation of the nominating and corporate governance and compensation committees; |
| that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committees purpose and responsibilities; and |
| that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committees purpose and responsibility. |
We may use these exemptions now or in the future. As a result, our stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq corporate governance requirements.
Clearlake has a significant degree of control of us and their interests may conflict with ours or yours in the future.
Investment funds associated with or designated by Clearlake have a significant degree of control over the election of the members of our board of directors and thereby may control our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payment of dividends, if any, on our common stock, the incurrence or modification of debt by us, amendments to our Charter and Bylaws, and the entering into of extraordinary transactions, and their interests may not in all cases be aligned with your interests. In addition, Clearlake may have an interest in pursuing acquisitions, divestitures, and other transactions that, in our judgment, could enhance our profitability, even though such transactions might involve risks to you. For example, Clearlake could cause us to make acquisitions that increase our indebtedness. Clearlake may direct us to make significant changes to our business operations and strategy, including with respect to, among other things, sales of assets, employee headcount levels, and initiatives to reduce costs and expenses.
As of June 30, 2018, Clearlake holds 55.4% of our common stock. So long as Clearlake continues to own a significant amount of the outstanding shares of our common stock, even if such amount is less than 50%, Clearlake will continue to be able to strongly influence or effectively control our decisions. In addition, so long as Clearlake continues to maintain this ownership, it will be able effectively to determine the outcome of all matters requiring stockholder approval and will be able to cause or prevent a change of control or a change in the composition of our board of directors and could preclude any unsolicited acquisition of us. The concentration of ownership could deprive our stockholders of an opportunity to receive a premium for our shares of common stock as part of a sale.
In the event of a conflict between our interests and the interests of Clearlake we have adopted policies and procedures, specifically a Code of Business Conduct and Ethics and a Related Person Transactions Policy, to identify, review, consider and
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approve such conflicts of interest. In general, if an affiliate of a director, executive officer or significant stockholder, including Clearlake, intends to engage in a transaction involving us, such director, executive officer or significant stockholder must report such transaction for consideration and approval by our audit committee. We cannot provide assurances that our efforts and policies to eliminate the potential impacts of conflicts of interest will be effective.
Our certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for:
| any derivative action or proceeding brought on our behalf; |
| any action asserting a breach of fiduciary duty; |
| any action asserting a claim against us arising under the Delaware General Corporation Law, our certificate of incorporation or our bylaws; and |
| any action asserting a claim against us that is governed by the internal-affairs doctrine. |
Our certificate of incorporation provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.
These exclusive forum provisions may limit a stockholders ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If a court were to find either exclusive forum provision in our certificate of incorporation to be inapplicable or unenforceable in an action, it may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm our business.
Risks Related to Our Securities
Our stock price may be volatile and may decline regardless of our operating performance.
Our stock price is likely to be volatile. The trading prices of the securities of companies in our industry have been highly volatile. As a result of this volatility, investors may not be able to sell their common stock at or above their purchase price. The market price of our common stock and warrants may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
| actual or anticipated fluctuations in our revenue and other operating results, including as a result of the addition or loss of any number of clients; |
| announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments; |
| the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; |
| failure of securities analysts to initiate or maintain coverage of us, changes in ratings and financial estimates and the publication of other news by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors; |
| changes in operating performance and stock market valuations of our competitors or companies in similar industries; |
| the size of our public float; |
| price and volume fluctuations in the trading of our common stock and warrants and in the overall stock market, including as a result of trends in the economy as a whole; |
| new laws or regulations or new interpretations of existing laws or regulations applicable to our business or industry, including data privacy and data security; |
| lawsuits threatened or filed against us for claims relating to intellectual property, employment issues, or otherwise; |
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| changes in our board of directors or management; |
| short sales, hedging, and other derivative transactions involving our common stock; |
| sales of large blocks of our common stock including sales by our executive officers, directors, and significant stockholders; and |
| other events or factors, including changes in general economic, industry and market conditions, and trends, as well as any natural disasters that may affect our operations. |
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies in our industry. Stock prices of such companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies.
In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management, and harm our business.
Future sales of shares by existing stockholders could cause our stock price to decline.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. In addition, certain holders of our common stock and warrants have piggy-back registration rights with respect to registration statements we file. The presence of these additional shares of common stock trading in the public market may have an adverse effect on the market price of our securities.
If securities or industry analysts do not publish research or reports about our business, or if they downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. In addition, if our operating results fail to meet the forecast of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our stock price and trading volume to decline.
We are an emerging growth company and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.
We are an emerging growth company, as defined in the Jumpstart Our Businesses Startups Act of 2012 (the JOBS Act ), and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced financial disclosure obligations, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. As an emerging growth company under the JOBS Act, we have elected to delay the adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies.
We may take advantage of these provisions until we are no longer an emerging growth company. We would cease to be an emerging growth company upon the earliest to occur of: the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; the date we qualify as a large accelerated filer, with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; or December 31, 2022. We anticipate that we will cease to be an emerging growth company on December 31, 2018. The information that we provide our security holders may be different than you might get from other public companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
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We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, particularly after we are no longer an emerging growth company, which could adversely affect our business, results of operations, or financial condition.
After we cease to be an emerging growth company, we will incur greater legal, accounting, and other expenses than we previously incurred. We are subject to the reporting requirements of the Securities Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the rules and regulations of The Nasdaq Stock Market LLC. These requirements have increased and will continue to increase our legal, accounting, and financial compliance costs and have made and will continue to make some activities more time consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to maintain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers. After we are no longer an emerging growth company, or sooner if we choose not to take advantage of certain exemptions set forth in the JOBS Act, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. In that regard, we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge.
Effective as of July 30, 2018, our warrants were delisted from the Nasdaq Capital Market, and as a result, investors ability to transact in our warrants is limited.
Our warrants were previously traded and listed on The Nasdaq Capital Market under the symbol CVONW. Following the completion of the Business Combination, we were required to submit to Nasdaq data regarding round lot holders of our common stock and warrants. On July 30, 2018, our warrants were delisted from The Nasdaq Capital Market following a determination by Nasdaq that the warrants do not meet the minimum 400 round lot holder requirement for listing as set forth in Nasdaq Listing Rule 5515(a)(4). As a result, investors face limited availability for market quotations for our warrants and reduced liquidity with respect to our warrants.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Effective as of June 20, 2018, the Company and Cisco Systems, Inc. entered into Amendment No. 2 (the Cisco Amendment) to the Systems Integrator Agreement originally dated June 20, 2016. Among other things, the Cisco Amendment updated certain annual volume purchase requirements and certification/specialization requirements to maintain eligibility under the Systems Integrator Agreement and extended the term of the Systems Integrator Agreement through June 20, 2020.
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* | The annexes, schedules, and certain exhibits to the Agreement and Plan of Merger have been omitted pursuant to Item 601(b)(2) of Regulation S-K. ConvergeOne hereby agrees to furnish supplementally a copy of any omitted annex, schedule or exhibit to the Commission upon request. |
** | Filed herewith. |
| Indicates a management contract or compensatory plan, contract or arrangement. |
+ | Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 promulgated under the Exchange Act and have been separately filed with the Securities and Exchange Commission. |
# | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Managements Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ConvergeOne Holdings, Inc. | ||||||
Date: August 9, 2018 | By: | /s/ John A. McKenna, Jr. | ||||
John A. McKenna, Jr. | ||||||
President and Chief Executive Officer and Chairman of the Board | ||||||
Date: August 9, 2018 | By: | /s/ Jeffrey Nachbor | ||||
Jeffrey Nachbor | ||||||
Chief Financial Officer |
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Exhibit 10.1
CONVERGEONE HOLDINGS, INC.
(FORMERLY FORUM MERGER CORPORATION)
2018 EMPLOYEE STOCK PURCHASE PLAN
ADOPTED BY THE BOARD OF DIRECTORS: FEBRUARY 1, 2018
APPROVED BY THE STOCKHOLDERS: FEBRUARY 20, 2018
AMENDED AND RESTATED AS OF JULY 1, 2018
1. | GENERAL; PURPOSE. |
(a) The Plan provides a means by which Eligible Employees of the Company and certain designated Related Corporations may be given an opportunity to purchase shares of Common Stock. The Plan permits the Company to grant a series of Purchase Rights to Eligible Employees under an Employee Stock Purchase Plan.
(b) The Company, by means of the Plan, seeks to retain the services of such Employees, to secure and retain the services of new Employees and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Related Corporations.
2. | ADMINISTRATION. |
(a) The Board will administer the Plan. The Board may delegate administration of the Plan to a Committee or Committees, as provided in Section 2(c).
(b) The Board will have the power, subject to, and within the limitations of, the express provisions of the Plan:
(i) To determine when and how Purchase Rights will be granted and the provisions of each Offering (which need not be identical).
(ii) To designate from time to time which Related Corporations will be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and Purchase Rights, and to establish, amend and revoke rules and regulations for the administration of the Plan. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it deems necessary or expedient to make the Plan fully effective.
(iv) To settle all controversies regarding the Plan and Purchase Rights.
(v) To amend the Plan at any time as provided in Section 12.
(vi) To suspend or terminate the Plan at any time as provided in Section 12.
(vii) Generally, to exercise such powers and to perform such acts as it deems necessary or expedient to promote the best interests of the Company and its Related Corporations and to carry out the intent that the Plan be treated as an Employee Stock Purchase Plan.
(viii) To adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the Plan by Employees who are foreign nationals or employed outside the United States.
(c) The Board may delegate some or all of the administration of the Plan to a Committee or Committees. If administration is delegated to a Committee, the Committee will have, in connection with the administration of the Plan, the powers theretofore possessed by the Board that have been delegated to the Committee, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references to the Board in this Plan and in any applicable Offering Document will thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may retain the authority to concurrently administer the Plan with the Committee and may, at any time, revest in the Board some or all of the powers previously delegated. Whether or not the Board has delegated administration of the Plan to a Committee, the Board will have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan.
(d) All determinations, interpretations and constructions made by the Board in good faith will not be subject to review by any person and will be final, binding and conclusive on all persons.
3. | SHARES OF COMMON STOCK SUBJECT TO THE PLAN. |
(a) Subject to Section 11(a) relating to Capitalization Adjustments, the aggregate number of shares of Common Stock that may be issued under the Plan will not exceed 1,500,000 shares of Common Stock, plus the number of shares of Common Stock that are automatically added on January 1st of each year for a period of up to ten years, commencing on the first January 1st following the Effective Date and ending on (and including) January 1, 2027, in an amount equal to the lesser of (i) 1.0% of the total number of shares of Capital Stock outstanding on December 31st of the preceding calendar year, and (ii) 1,500,000 shares of Common Stock. Notwithstanding the foregoing, the Board may act prior to the first day of any calendar year to provide that there will be no January 1st increase in the share reserve for such calendar year or that the increase in the share reserve for such calendar year will be a lesser number of shares of Common Stock than would otherwise occur pursuant to the preceding sentence.
(b) If any Purchase Right terminates without having been exercised in full, the shares of Common Stock not purchased under such Purchase Right will again become available for issuance under the Plan.
(c) The stock issuable under the Plan will be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Company on the open market.
4. | GRANT OF PURCHASE RIGHTS; OFFERING. |
(a) The Board may from time to time grant or provide for the grant of Purchase Rights to Eligible Employees under an Offering (consisting of one or more Purchase Periods) on an Offering Date or Offering Dates selected by the Board. Each Offering will be in such form and will contain such terms and conditions as the Board will deem appropriate and will comply
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with the requirement of Section 423(b)(5) of the Code that all Employees granted Purchase Rights will have the same rights and privileges. The terms and conditions of an Offering will be incorporated by reference into the Plan and treated as part of the Plan. The provisions of separate Offerings need not be identical, but each Offering will include (through incorporation of the provisions of this Plan by reference in the document comprising the Offering or otherwise) the period during which the Offering will be effective, which period will not exceed twenty-seven (27) months beginning with the Offering Date, and the substance of the provisions contained in Sections 5 through 8, inclusive.
(b) If a Participant has more than one Purchase Right outstanding under the Plan, unless he or she otherwise indicates in forms delivered to the Company: (i) each form will apply to all of his or her Purchase Rights under the Plan, and (ii) a Purchase Right with a lower exercise price (or an earlier-granted Purchase Right, if different Purchase Rights have identical exercise prices) will be exercised to the fullest possible extent before a Purchase Right with a higher exercise price (or a later-granted Purchase Right if different Purchase Rights have identical exercise prices) will be exercised.
(c) The Board will have the discretion to structure an Offering so that if the Fair Market Value of a share of Common Stock on any Purchase Date during an Offering is less than or equal to the Fair Market Value of a share of Common Stock on the Offering Date for that Offering, then (i) that Offering will terminate immediately following the purchase of shares of Common Stock on such Purchase Date, and (ii) the Participants in such terminated Offering will be automatically enrolled in a new Offering that begins immediately after such Purchase Date.
5. | ELIGIBILITY. |
(a) Purchase Rights may be granted only to Employees of the Company or, as the Board may designate in accordance with Section 2(b), to Employees of a Related Corporation. Except as provided in Section 5(b), an Employee will not be eligible to be granted Purchase Rights unless, on the Offering Date, the Employee has been in the employ of the Company or the Related Corporation, as the case may be, for such continuous period preceding such Offering Date as the Board may require, but in no event will the required period of continuous employment be equal to or greater than two (2) years. In addition, the Board may provide that no Employee will be eligible to be granted Purchase Rights unless, on the Offering Date, such Employees customary employment with the Company or the Related Corporation is more than twenty (20) hours per week and more than five (5) months per calendar year or such other criteria as the Board may determine consistent with Section 423 of the Code.
(b) The Board may provide that each person who, during the course of an Offering, first becomes an Eligible Employee will, on a date or dates specified in the Offering which coincides with the day on which such person becomes an Eligible Employee or which occurs thereafter, receive a Purchase Right under that Offering, which Purchase Right will thereafter be deemed to be a part of that Offering. Such Purchase Right will have the same characteristics as any Purchase Rights originally granted under that Offering, as described herein, except that:
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(i) the date on which such Purchase Right is granted will be the Offering Date of such Purchase Right for all purposes, including determination of the exercise price of such Purchase Right;
(ii) the period of the Offering with respect to such Purchase Right will begin on its Offering Date and end coincident with the end of such Offering; and
(iii) the Board may provide that if such person first becomes an Eligible Employee within a specified period of time before the end of the Offering, he or she will not receive any Purchase Right under that Offering.
(c) No Employee will be eligible for the grant of any Purchase Rights if, immediately after any such Purchase Rights are granted, such Employee owns stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Related Corporation. For purposes of this Section 5(c), the rules of Section 424(d) of the Code will apply in determining the stock ownership of any Employee, and stock which such Employee may purchase under all outstanding Purchase Rights and options will be treated as stock owned by such Employee.
(d) As specified by Section 423(b)(8) of the Code, an Eligible Employee may be granted Purchase Rights only if such Purchase Rights, together with any other rights granted under all Employee Stock Purchase Plans of the Company and any Related Corporations, do not permit such Eligible Employees rights to purchase stock of the Company or any Related Corporation to accrue at a rate which exceeds twenty-five thousand dollars ($25,000) of Fair Market Value of such stock (determined at the time such rights are granted, and which, with respect to the Plan, will be determined as of their respective Offering Dates) for each calendar year in which such rights are outstanding at any time.
(e) Officers of the Company and any designated Related Corporation, if they are otherwise Eligible Employees, will be eligible to participate in Offerings under the Plan. Notwithstanding the foregoing, the Board may provide in an Offering that Employees who are highly compensated Employees within the meaning of Section 423(b)(4)(D) of the Code will not be eligible to participate.
6. | PURCHASE RIGHTS; PURCHASE PRICE. |
(a) On each Offering Date, each Eligible Employee, pursuant to an Offering made under the Plan, will be granted a Purchase Right to purchase up to that number of shares of Common Stock purchasable either with a percentage or with a maximum dollar amount, as designated by the Board, but in either case not exceeding fifteen percent (15%) of such Employees earnings (as defined by the Board in each Offering) during the period that begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date will be no later than the end of the Offering.
(b) The Board will establish one (1) or more Purchase Dates during an Offering on which Purchase Rights granted pursuant to that Offering will be exercised and shares of Common Stock will be purchased in accordance with such Offering.
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(c) In connection with each Offering made under the Plan, the Board may specify (i) a maximum number of shares of Common Stock that may be purchased by any Participant pursuant to such Offering, (ii) a maximum number of shares of Common Stock that may be purchased by any Participant on any Purchase Date pursuant to such Offering, (iii) a maximum aggregate number of shares of Common Stock that may be purchased by all Participants pursuant to such Offering, and/or (iv) a maximum aggregate number of shares of Common Stock that may be purchased by all Participants on any Purchase Date pursuant to such Offering. If the aggregate purchase of shares of Common Stock issuable upon exercise of Purchase Rights granted under such Offering would exceed any such maximum aggregate number, then, in the absence of any Board action otherwise, a pro rata (based on each Participants accumulated Contributions) allocation of the shares of Common Stock available will be made in as nearly a uniform manner as will be practicable and equitable.
(d) The purchase price of shares of Common Stock acquired pursuant to Purchase Rights shall be an amount equal to ninety-five percent (95%) of the Fair Market Value of a share of Common Stock on the applicable Purchase Date of the Offering; provided, however, that the Board may determine a different per share purchase price, so long as such per share purchase price is communicated to Participants prior to the beginning of the Offering; and provided, further, that in no event shall such per share purchase price be less than the lesser of (i) 85% of the Fair Market Value of a share of Common Stock on the applicable Offering Date or (ii) 85% of the Fair Market Value of a share of Common Stock on the applicable Purchase Date.
7. | PARTICIPATION; WITHDRAWAL; TERMINATION. |
(a) An Eligible Employee may elect to authorize payroll deductions as the means of making Contributions by completing and delivering to the Company, within the time specified in the Offering, an enrollment form provided by the Company. The enrollment form will specify the amount of Contributions not to exceed the maximum amount specified by the Board. Each Participants Contributions will be credited to a bookkeeping account for such Participant under the Plan and will be deposited with the general funds of the Company except where applicable law requires that Contributions be deposited with a third party. To the extent provided in the Offering, a Participant may begin such Contributions on or after the Offering Date. To the extent provided in the Offering, a Participant may thereafter decrease (including to zero) or increase his or her Contributions. To the extent specifically provided in the Offering, in addition to or instead of making Contributions by payroll deductions, a Participant may make Contributions through payment by cash or check prior to a Purchase Date.
(b) During an Offering, a Participant may cease making Contributions and withdraw from the Offering by delivering to the Company a withdrawal form provided by the Company. The Company may impose a deadline before a Purchase Date for withdrawing. Upon such withdrawal, such Participants Purchase Right in that Offering will immediately terminate and the Company will distribute to such Participant all of his or her accumulated but unused Contributions without interest. A Participants withdrawal from an Offering will have no effect upon his or her eligibility to participate in any other Offerings under the Plan, but such Participant will be required to deliver a new enrollment form to participate in subsequent Offerings.
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(c) Purchase Rights granted pursuant to any Offering under the Plan will terminate immediately if the Participant either (i) is no longer an Employee for any reason or for no reason (subject to any post-employment participation period required by law) or (ii) is otherwise no longer eligible to participate. The Company will distribute to such individual all of his or her accumulated but unused Contributions without interest.
(d) Neither payroll deductions credited to a Participants account nor any rights with regard to the exercise of a Purchase Right or to receive shares of Common Stock under this Plan may be assigned, transferred, pledged, or otherwise disposed of in any way (other than as set forth in Section 10 with respect to the delivery of cash and shares of Common Stock) by the Participant. Any such attempt at assignment, transfer, pledge, or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw from an Offering. Purchase Rights may be exercised only by a Participant.
(e) Unless otherwise specified in an Offering, the Company will have no obligation to pay interest on Contributions.
8. | EXERCISE OF PURCHASE RIGHTS. |
(a) On each Purchase Date, each Participants accumulated Contributions will be applied to the purchase of shares of Common Stock, up to the maximum number of shares of Common Stock permitted by the Plan and the applicable Offering, at the purchase price specified in the Offering. No fractional shares will be issued upon the exercise of Purchase Rights unless specifically provided for in the Offering.
(b) Unless otherwise provided in the Offering, if any amount of accumulated Contributions remains in a Participants account after the purchase of shares of Common Stock and such remaining amount is less than the amount required to purchase one share of Common Stock on the final Purchase Date of an Offering, then such remaining amount will be held in such Participants account for the purchase of shares of Common Stock under the next Offering under the Plan, unless such Participant withdraws from or is not eligible to participate in such Offering, in which case such amount will be distributed to such Participant after the final Purchase Date, without interest. If the amount of Contributions remaining in a Participants account after the purchase of shares of Common Stock is at least equal to the amount required to purchase one whole share of Common Stock on the final Purchase Date of an Offering, then such remaining amount will not roll over to the next Offering and will instead be distributed in full to such Participant after the final Purchase Date of such Offering without interest.
(c) No Purchase Rights may be exercised to any extent unless the shares of Common Stock to be issued upon such exercise under the Plan are covered by an effective registration statement pursuant to the Securities Act and the Plan is in material compliance with all applicable federal, state, foreign and other securities and other laws applicable to the Plan. If, on a Purchase Date, the shares of Common Stock are not so registered or the Plan is not in such compliance, no Purchase Rights will be exercised on such Purchase Date, and the Purchase Date will be delayed until the shares of Common Stock are subject to such an effective registration statement and the Plan is in such compliance, except that the Purchase Date will not be delayed more than twelve (12) months and the Purchase Date will in no event be more than twenty-seven (27) months from the Offering Date. If, on the Purchase Date, as delayed to the maximum extent permissible, the shares of Common Stock are not so registered or the Plan is not in such compliance, no Purchase Rights will be exercised and all accumulated but unused Contributions will be distributed to the Participants without interest.
9. | COVENANTS OF THE COMPANY. |
The Company will seek to obtain from each federal, state, foreign or other regulatory commission or agency having jurisdiction over the Plan such authority as may be required to
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grant Purchase Rights and issue and sell shares of Common Stock thereunder. If, after commercially reasonable efforts, the Company is unable to obtain the authority that counsel for the Company deems necessary for the grant of Purchase Rights or the lawful issuance and sale of Common Stock under the Plan, and at a commercially reasonable cost, the Company will be relieved from any liability for failure to grant Purchase Rights and/or to issue and sell Common Stock upon exercise of such Purchase Rights.
10. | DESIGNATION OF BENEFICIARY. |
(a) The Company may, but is not obligated to, permit a Participant to submit a form designating a beneficiary who will receive any shares of Common Stock and/or Contributions from the Participants account under the Plan if the Participant dies before such shares and/or Contributions are delivered to the Participant. The Company may, but is not obligated to, permit the Participant to change such designation of beneficiary. Any such designation and/or change must be on a form approved by the Company.
(b) If a Participant dies, and in the absence of a valid beneficiary designation, the Company will deliver any shares of Common Stock and/or Contributions to the executor or administrator of the estate of the Participant. If no executor or administrator has been appointed (to the knowledge of the Company), the Company, in its sole discretion, may deliver such shares of Common Stock and/or Contributions to the Participants spouse, dependents or relatives, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.
11. | ADJUSTMENTS UPON CHANGES IN COMMON STOCK; CORPORATE TRANSACTIONS. |
(a) In the event of a Capitalization Adjustment, the Board will appropriately and proportionately adjust: (i) the class(es) and maximum number of securities subject to the Plan pursuant to Section 3(a); (ii) the class(es) and maximum number of securities by which the share reserve is to increase automatically each year pursuant to Section 3(a); (iii) the class(es) and number of securities subject to, and the purchase price applicable to, outstanding Offerings and Purchase Rights; and (iv) the class(es) and number of securities that are the subject of the purchase limits under each ongoing Offering. The Board will make these adjustments, and its determination will be final, binding and conclusive.
(b) In the event of a Corporate Transaction, (i) any surviving or acquiring corporation (or its parent company) may assume or continue outstanding Purchase Rights or may substitute similar rights (including a right to acquire the same consideration paid to the stockholders in the Corporate Transaction) for outstanding Purchase Rights, or (ii) if any surviving or acquiring corporation (or its parent company) does not assume or continue outstanding Purchase Rights or does not substitute similar rights for outstanding Purchase Rights, then the Participants accumulated Contributions will be used to purchase shares of Common Stock within ten (10) business days prior to the Corporate Transaction under such Purchase Rights, and such Purchase Rights will terminate immediately after such purchase.
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12. | AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN. |
(a) The Board may amend the Plan at any time in any respect the Board deems necessary or advisable. However, except as provided in Section 11(a) relating to Capitalization Adjustments, stockholder approval will be required for any amendment of the Plan for which stockholder approval is required by applicable law or listing requirements.
(b) The Board may suspend or terminate the Plan at any time. No Purchase Rights may be granted under the Plan while the Plan is suspended or after it is terminated.
(c) Any benefits, privileges, entitlements and obligations under any outstanding Purchase Rights granted before an amendment, suspension or termination of the Plan will not be materially impaired by any such amendment, suspension or termination except (i) with the consent of the person to whom such Purchase Rights were granted, (ii) as necessary to comply with any laws, listing requirements, or governmental regulations (including, without limitation, the provisions of Section 423 of the Code and the regulations and other interpretive guidance issued thereunder relating to Employee Stock Purchase Plans) including, without limitation, any such regulations or other guidance that may be issued or amended after the Adoption Date, or (iii) as necessary to obtain or maintain favorable tax, listing, or regulatory treatment. To be clear, the Board may amend outstanding Purchase Rights without a Participants consent if such amendment is necessary to ensure that the Purchase Right and/or the Plan complies with the requirements of Section 423 of the Code.
Notwithstanding anything in the Plan or any Offering Document to the contrary, the Board will be entitled to: (i) establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars; (ii) permit Contributions in excess of the amount designated by a Participant in order to adjust for mistakes in the Companys processing of properly completed Contribution elections; (iii) establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each Participant properly correspond with amounts withheld from the Participants Contributions; (iv) amend any outstanding Purchase Rights or clarify any ambiguities regarding the terms of any Offering to enable the Purchase Rights to qualify under and/or comply with Section 423 of the Code; and (v) establish other limitations or procedures as the Board determines in its sole discretion advisable that are consistent with the Plan. The actions of the Board pursuant to this paragraph will not be considered to alter or impair any Purchase Rights granted under an Offering as they are part of the initial terms of each Offering and the Purchase Rights granted under each Offering.
13. | EFFECTIVE DATE OF PLAN. |
The Plan will become effective on the Effective Date. No Purchase Rights will be exercised unless and until the Plan has been approved by the stockholders of the Company, which approval must be within 12 months before or after the Adoption Date (or if required under Section 12(a), the date of any material amendment of the Plan).
8
14. | MISCELLANEOUS PROVISIONS. |
(a) Proceeds from the sale of shares of Common Stock pursuant to Purchase Rights will constitute general funds of the Company.
(b) A Participant will not be deemed to be the holder of, or to have any of the rights of a holder with respect to, shares of Common Stock subject to Purchase Rights unless and until the Participants shares of Common Stock acquired upon exercise of Purchase Rights are recorded in the books of the Company (or its transfer agent).
(c) The Plan and Offering do not constitute an employment contract. Nothing in the Plan or in the Offering will in any way alter the at will nature of a Participants employment or be deemed to create in any way whatsoever any obligation on the part of any Participant to continue in the employ of the Company or a Related Corporation, or on the part of the Company or a Related Corporation to continue the employment of a Participant.
(d) The provisions of the Plan will be governed by the laws of the State of Delaware without resort to that states conflicts of laws rules.
15. | DEFINITIONS. |
As used in the Plan, the following definitions will apply to the capitalized terms indicated below:
(a) Adoption Date means February 1, 2018, which is the date the Plan was adopted by the Board.
(b) Board means the Board of Directors of the Company.
(c) Capitalization Adjustment means any change that is made in, or other events that occur with respect to, the Common Stock subject to the Plan or subject to any Purchase Right after the Adoption Date without the receipt of consideration by the Company through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, large nonrecurring cash dividend, stock split, reverse stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other similar equity restructuring transaction, as that term is used in Statement of Financial Accounting Standards Board Accounting Standards Codification Topic 718 (or any successor thereto). Notwithstanding the foregoing, the conversion of any convertible securities of the Company will not be treated as a Capitalization Adjustment.
(d) Capital Stock means each and every class of common stock of the Company, regardless of the number of votes per share.
(e) Code means the Internal Revenue Code of 1986, as amended, including any applicable regulations and guidance thereunder.
(f) Committee means a committee of one (1) or more members of the Board to whom authority has been delegated by the Board in accordance with Section 2(c).
9
(g) Common Stock means the Class A common stock of the Company.
(h) Company means Forum Merger Corporation, a Delaware corporation.
(i) Contributions means the payroll deductions and other additional payments specifically provided for in the Offering that a Participant contributes to fund the exercise of a Purchase Right. A Participant may make additional payments into his or her account if specifically provided for in the Offering, and then only if the Participant has not already had the maximum permitted amount withheld during the Offering through payroll deductions.
(j) Corporate Transaction means the consummation, in a single transaction or in a series of related transactions, of any one or more of the following events:
(i) a sale or other disposition of all or substantially all, as determined by the Board in its sole discretion, of the consolidated assets of the Company and its Subsidiaries;
(ii) a sale or other disposition of at least fifty percent (50%) of the outstanding securities of the Company;
(iii) a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or
(iv) a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise.
(k) Director means a member of the Board.
(l) Effective Date means the effective date of this Plan, which is the date of the closing of the transactions contemplated by the Agreement and Plan of Merger among the Company, FMC Merger Subsidiary Corp., FMC Merger Subsidiary LLC, Clearlake Capital Management III, L.P., and C1 Investment Corp., dated as of November 30, 2017, provided that this Plan is approved by the Companys stockholders on or prior to such date.
(m) Eligible Employee means an Employee who meets the requirements set forth in the document(s) governing the Offering for eligibility to participate in the Offering, provided that such Employee also meets the requirements for eligibility to participate set forth in the Plan.
(n) Employee means any person, including an Officer or Director, who is employed for purposes of Section 423(b)(4) of the Code by the Company or a Related Corporation. However, service solely as a Director, or payment of a fee for such services, will not cause a Director to be considered an Employee for purposes of the Plan.
(o) Employee Stock Purchase Plan means a plan that grants Purchase Rights intended to be options issued under an employee stock purchase plan, as that term is defined in Section 423(b) of the Code.
10
(p) Exchange Act means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
(q) Fair Market Value means, as of any date, the value of the Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange or traded on any established market, the Fair Market Value of a share of Common Stock will be, unless otherwise determined by the Board, the closing sales price for such stock as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the date of determination, as reported in a source the Board deems reliable.
(ii) Unless otherwise provided by the Board, if there is no closing sales price for the Common Stock on the date of determination, the Fair Market Value of a share of Common Stock will be the closing sales price for such stock on the last preceding date for which such quotation exists.
(iii) In the absence of such markets for the Common Stock, the Fair Market Value of a share of Common Stock will be determined by the Board in good faith in compliance with applicable laws and in a manner that complies with Section 409A of the Code.
(r) Offering means the grant to Eligible Employees of Purchase Rights, with the exercise of those Purchase Rights automatically occurring at the end of one or more Purchase Periods. The terms and conditions of an Offering will generally be set forth in the Offering Document approved by the Board for that Offering.
(s) Offering Date means a date selected by the Board for an Offering to commence.
(t) Officer means a person who is an officer of the Company or a Related Corporation within the meaning of Section 16 of the Exchange Act.
(u) Participant means an Eligible Employee who holds an outstanding Purchase Right.
(v) Plan means this Forum Merger Corporation 2018 Employee Stock Purchase Plan.
(w) Purchase Date means one or more dates during an Offering selected by the Board on which Purchase Rights will be exercised and on which purchases of shares of Common Stock will be carried out in accordance with such Offering.
(x) Purchase Period means a period of time specified within an Offering, generally beginning on the Offering Date or on the first Trading Day following a Purchase Date and ending on a Purchase Date. An Offering may consist of one or more Purchase Periods.
(y) Purchase Right means an option to purchase shares of Common Stock granted pursuant to the Plan.
11
(z) Related Corporation means any parent corporation or subsidiary corporation of the Company whether now or subsequently established, as those terms are defined in Sections 424(e) and (f), respectively, of the Code.
(aa) Securities Act means the Securities Act of 1933, as amended.
(bb) Subsidiary means, with respect to the Company, (i) any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation will have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company, and (ii) any partnership, limited liability company or other entity in which the Company has a direct or indirect interest (whether in the form of voting or participation in profits or capital contribution) of more than fifty percent (50%). For purposes of the foregoing clause (i), the Company will be deemed to Own or have Owned such securities if the Company, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to such securities.
(cc) Trading Day means any day on which the exchange(s) or market(s) on which shares of Common Stock are listed (including, but not limited to, the NYSE, the Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market or any successors thereto) is open for trading.
12
[***] = Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment requested under 17 C.F.R. Section 240.24b-2.
Exhibit 10.2
AMENDMENT NO. 2 TO THE SYSTEMS INTEGRATOR AGREEMENT (RENEWAL)
This Amendment No. 2 (the Amendment) to the Systems Integrator Agreement (the Agreement) by and between Cisco Systems, Inc., a California corporation, having its principal place of business at 170 West Tasman Drive, San Jose, California, 95134 (Cisco) and ConvergeOne Inc., a corporation formed under the laws of Minnesota (the Integrator) having its principal place of business at 3344 Highway 149, Egan, Minnesota, 55121, United States, is entered into as of the date of last signature below (the Amendment Effective Date).
WHEREAS, as of June 20, 2016, Cisco and Integrator entered into the Agreement, as amended (if applicable);
WHEREAS, any future extension, renewal, or amendment to the Agreement may be in electronic format and accepted on-line by means of an electronic contract management system, (including these terms the On-line Amendment) as described herein; and
WHEREAS, in order to implement an On-line Amendment, Cisco will deliver an e-mail to an authorized officer or representative of Integrator, which e-mail will contain a link to the On-line Amendment. By clicking on the link, Integrator will be presented with an On-line Amendment, which will set forth the terms of the extension, renewal or amendment to the Agreement and will contain a means for acceptance.
NOW THEREFORE, the parties agree to amend the Agreement as follows:
1. The Agreement may be extended, renewed or amended by electronic means by accepting terms and conditions on-line and the provisions of such extension, renewal or amendment shall for all purposes be legally enforceable and binding on the parties as if the Agreement were extended, renewed or amended in writing and signed by both parties. The On-line Amendment shall be deemed signed and thus the terms hereof agreed to, if Integrator clicks on the Renew button therein and thereby accepts the On-line Amendment. All references to writing or written amendments in the Agreement shall be deemed to include any On-line Amendment, and all references to signature shall include on-line acceptance. Integrator waives any challenge to the validity or enforceability of any renewals, extensions or amendments to the Agreement or the terms of any of the forgoing on the grounds that the terms of any renewal, extension or amendment were presented on-line or electronically or acceptance of such renewal, extension or amendment was electronically transmitted or accepted.
2. The term of the Agreement shall be renewed for a period of two (2) year(s) commencing on the following date: (i) if the Agreement has not expired (i.e. the Amendment Effective Date is on or before the expiry of the then-current term of the Agreement), then the end of the then-current term of the Agreement; or (ii) if the Agreement has expired (i.e. the Amendment Effective Date is after the expiry of the then-current term of the Agreement), then the Amendment Effective Date.
3. If the Agreement contains a subsection titled Integrators Volume Requirement under the Integrator Obligations section, then that subsection is hereby deleted in its entirety and replaced with the following subsection:
Integrator must meet certain annual volume purchase requirements to maintain its eligibility for this Agreement. Such requirements vary by country and are listed at the following link:
http://www.cisco.com/web/partners/partner_with_cisco/channel_partner_program/dpp.html
1.
4. If the Agreement does not contain such a subsection, then the following language is added to the Integrator Obligations section and any language in the Agreement regarding annual volume purchase requirements is hereby deleted:
Integrator must meet certain annual volume purchase requirements to maintain its eligibility for this Agreement. Such requirements vary by country and are listed at the following link:
http://www.cisco.com/web/partners/partner_with_cisco/channel_partner_program/dpp.html
5. The Integrators Certification Requirement (generally located in Exhibit A to the Agreement) is hereby deleted in its entirety and replaced with the following:
Integrator must meet certain certification/specialization requirements to maintain its eligibility for this Agreement. Such requirements are listed at the following link:
http://www.cisco.com/web/partners/partner_with_cisco/channel_partner_program/dpp.html.
6. If the Agreement does not contain the Integrators Certification Requirement, then the following language is added to Exhibit A to the Agreement and any language in the Agreement regarding certification requirements is hereby deleted:
Integrator must meet certain certification/specialization requirements to maintain its eligibility for this Agreement. Such requirements are listed at the following link:
http://www.cisco.com/web/partners/partner_with_cisco/channel_partner_program/dpp.html.
7. If the Agreement contains a subsection as part of the Integrators Obligations titled No Stocking of Product, then that subsection is hereby deleted in its entirety and replaced with the following subsection:
No Stocking of Product. Integrator may not stock Products nor order Products without a valid End User purchase order. This subsection does not apply to Integrators based in Japan.
8. If the Agreement does not contain such a subsection, then the following language is added to the Integrator Obligations section and any language in the Agreement regarding no stocking of Product is hereby deleted:
No Stocking of Product. Integrator may not stock Products nor order Products without a valid End User purchase order. This subsection does not apply to Integrators based in Japan.
9. The following subsection is added to the Integrator Obligations section of the Agreement:
Due Diligence. Integrator must complete any due diligence or other questionnaire provided by Cisco and must comply with such other due diligence or other compliance requirements requested by Cisco in writing.
10. If the Agreement contains an Added Value definition (the Initial Added Value Definition) which differs from the following definition, the Initial Added Value Definition is hereby deleted and replaced with the following definition. If the Agreement does not contain an Added Value definition, then the following definition is hereby added:
Added Value is the non-Cisco component or portion of the total solution which Integrator provides to End Users. Examples of Added Value are pre- and post-sales network design, configuration, trouble-shooting, managed services, cloud services, and support and the sale of complementary products and services that comprise a significant portion of the total revenues
2.
[***] = Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment requested under 17 C.F.R. Section 240.24b-2.
received by Integrator from an End User of Cisco Products. Integrator acknowledges that providing financing options and/or network services (unless such network services comprise managed and/or cloud services) to End Users does not constitute Added Value.
11. The section in the Agreement regarding Shipping and Delivery and any associated Shipping Terms Exhibit that may be attached thereto are hereby deleted in their entirety and replaced with the following clause:
SHIPPING AND DELIVERY
(a) | Scheduled shipping dates will be assigned by Cisco as close as practicable to Integrators requested date based on Ciscos then-current lead times for the Products. Cisco will communicate scheduled shipping dates in the order acknowledgement or on Cisco.com. Unless given written instruction by Integrator, Cisco shall select the carrier. |
(b) | Shipping options available as well as applicable shipment terms (per Incoterms 2010) are set forth in the Shipping Terms Exhibit at the following URL:https://www.cisco.com/web/fw/tools/commerce/ngorder/doc/Standard_Shipping_Exhibit.pdf at Cisco.com (the Shipping Terms Exhibit). The selected shipping option shall be indicated on the Purchase Order. Where applicable, Integrator shall pay the shipping and handling charges in addition to the purchase price for the Products, which will be included in remittance and/or commercial invoices issued by Cisco. Title and risk of loss shall transfer from Cisco to Integrator and delivery shall be deemed to occur in accordance with the Shipping Terms Exhibit. Integrator shall be responsible for all freight, handling and insurance charges subsequent to delivery. |
(c) | Where Integrator places orders on any Cisco Affiliate other than Cisco, Integrator shall pay any invoices issued by such entity with respect to such orders and the delivery terms agreed with such entity shall apply. Different shipping terms may apply to such Purchase Orders as set forth in the Shipping Terms Exhibit or otherwise as set out on Cisco.com. |
(d) | Integrator shall assume responsibility for compliance with applicable export laws and regulations, including the preparation and filing of shipping documentation necessary for export clearance. This also applies in cases where Integrator requests in its Purchase Order delivery of Products to Integrators forwarding agent or another representative in the country of shipment. Integrator agrees not to use any export licenses owned by Cisco or any of its Affiliates. |
For shipments under FCA as per the Shipping Terms Exhibit, Integrator specifically agrees to provide Cisco with the complete name and address of each End User either (a) in the Purchase Order issued, or (b) in writing within five days of receiving a request by Cisco, and other information required under this Agreement or requested by Cisco. Export clearance will ensure utilizing Ciscos general global export licenses or in the case a general global license does not include the listed End User destination, then individual export licenses must be obtained prior to export. Integrator accepts any additional delays caused by the export licensing process as well as delays to comply with conditions of the individual export license.
(e) | Cisco shall not be liable for any loss, damage, or penalty for delay in delivery or for failure to give notice of any delay. Except in accordance with the applicable shipping terms set forth in this Agreement, Cisco shall not have any liability in connection with shipment, nor shall the carrier be deemed to be an agent of Cisco. |
3.
[***] = Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment requested under 17 C.F.R. Section 240.24b-2.
(f) | All sales are final. Except as provided in Ciscos warranty statements, Cisco does not accept returns unless (i) Cisco shipped a product other than as specified in the Purchase Order, (ii) such Product is unopened, and (iii) the Product is returned in accordance with Ciscos then current RMA policy and procedures. |
12. Exhibit B, Discount Schedule shall now be known as Exhibit B, Discount Terms and Conditions; the existing Discount Schedule shall be hereby deleted and replaced in its entirety with the Discount Terms and Conditions attached herein as Appendix A.
13. To the extent the following language is not present in the Agreement, it is hereby added to the Term and Termination section of the Agreement:
In the event that, following termination or expiration of this Agreement, Integrator places Purchase Orders and Cisco accepts such Purchase Orders, then any such Purchase Orders shall be governed by the terms and conditions of this Agreement notwithstanding the earlier expiration or termination of this Agreement; provided, however, that acceptance by Cisco of any such Purchase Order will not be considered to be an extension of the term of the Agreement nor a renewal thereof.
14. To the extent there is a clause or exhibit in the Agreement regarding Compliance with Laws, including Anti-Corruption Laws, such clause or exhibit is hereby deleted in its entirety and replaced with the following clause:
Compliance with Laws, including Anti-Corruption Laws
Cisco Systems expects and requires that all of its suppliers, subcontractors, channel partners, consultants, agents and other parties with whom Cisco does business (Cisco Partners), act at all times in a professional and ethical manner in carrying out their services and contractual obligations to Cisco, or on Ciscos behalf to a Cisco customer or other third party. To that end, all Cisco Partners shall:
1. | Comply with all country, federal, state and local laws, ordinances, codes, regulations, rules, policies and procedures, including, but not limited to, anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, U.K. Bribery Act, (Applicable Laws). Cisco Partners can find more information about the FCPA at the following URL: http://www.usdoj.gov/criminal/fraud/fcpa/, or by contacting publicsectorcompliance@cisco.com. |
2. | Upon request, Ciscos Partners may be required to have their own subcontractors, consultants, agents or representatives execute a similar written anti-corruption compliance statement, and to confirm to Cisco that such action has been taken. |
3. | Ciscos Partners shall immediately report to Cisco any concerns it may have regarding any business practices by any Cisco employee or Cisco Partner by emailing ethics@cisco.com, or by calling Ciscos Helpline toll free number in North America 1-877-571-1700 or worldwide number (reverse calling charges to Cisco) 001-770-776-5611. |
15. The section in the Agreement titled No Resale Outside the Territory is hereby deleted in its entirety and replaced with the following:
No Resale Outside the Territory. Integrator shall not solicit Product or Service orders, engage salespersons, Resell, or establish warehouses or other distribution centers outside of the Territory.
4.
[***] = Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment requested under 17 C.F.R. Section 240.24b-2.
For purposes of clarification, Cisco considers the following to be soliciting Product or Service orders outside of the Territory in violation of the Agreement, except as expressly authorized by Cisco in writing in advance: where Integrator solicits for Resale or Resells Cisco Product or Services to an End User which is located outside the Territory and otherwise has no meaningful operations in the Territory, even if delivery of the Cisco Product or Service occurs in the Territory.
16. In the section in the Agreement titled Term and Termination, Cisco may additionally terminate the Agreement where Integrator fails to complete any due diligence questionnaire or other questionnaire provided by Cisco and/or fails to comply with such other due diligence or other compliance requirements requested by Cisco in writing and/or fails to meet Ciscos general due diligence requirements.
17. To the extent that there is conflict between the Agreement and this Amendment, the terms of this Amendment shall take precedence over the terms and conditions of the Agreement with regards to the subject matter described herein.
18. All other terms and conditions of the Agreement remain unchanged and in full force and effect.
The parties have caused this Amendment to be duly executed. Each party represents that its respective signatories whose signatures appear below have been and are on the date of signature duly authorized to execute this Amendment.
ConvergeOne Inc. |
Cisco Systems, Inc. | |||
(Integrator) | (Cisco) | |||
/s/ John Lyons Authorized Signature |
/s/ Jean Pate Authorized Signature | |||
John F. Lyons |
Jean Pate | |||
Print Name | Print Name | |||
President, ConvergeOne Field Organization |
Authorized Signatory | |||
Title | Title | |||
March 26, 2018 Date |
March 26, 2018 Date |
5.
[***] = Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment requested under 17 C.F.R. Section 240.24b-2.
Appendix A
Discount Terms and Conditions
1.0 | Certification Incentive |
Cisco Certified Partner Programs are designed to recognize and reward Partners who achieve the highest expertise in selling, designing, supporting, and servicing Cisco solutions. Certified Partners have completed comprehensive training that ensures a consistently high level of Product knowledge, technical expertise and service capabilities. Integrators discount will be set based on the certification level Integrator has been awarded at the time it submits a particular purchase order for Products. The requirements for each certification level are provided in the URLs identified in the following table:
Program |
URL |
Gold |
http://www.cisco.com/web/partners/partner_with_cisco/channel_partner_program/resale/specializations/gold.html |
Premier |
http://www.cisco.com/web/partners/partner_with_cisco/channel_partner_program/resale/specializations/premier.html |
Select |
http://www.cisco.com/web/partners/partner_with_cisco/channel_partner_program/resale/specializations/select.html |
Partner must comply with the requirements of a particular Program as outlined in the information provided at the associated URL in order to achieve and retain all program benefits, including any associated increase in discount.
Integrators participation in a particular certification Program may be subject to additional requirements, including compliance with Program audit requirements. Certification requires the submission of an electronic application. The application and program transition guidelines are available at: www.cisco.com/go/pma.
Certifications are granted by country, and discount points attributable to certification will be provided based on the country specified in point of sale information provided by Integrator at time of order. Cisco may designate larger geographical areas in which certifications are effective. Such multi- national areas will be identified by Cisco to Integrator at: https://www.cisco.com/c/en/us/partners/partner-with-cisco/channel-partner-program/certifications/multinational-and-global.html.
6.
[***] = Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment requested under 17 C.F.R. Section 240.24b-2.
2.0 | Discount Matrices |
Upon execution of the Agreement, Integrator will be provided access to a restricted web page describing the resale discount to which Integrator is entitled depending on Integrators certification level. The web page is available at
http://www.cisco.com/web/partners/partner_with_cisco/channel_partner_program/certification_discount.html.
Note: Cisco reserves the right to introduce future Product families at different discounts. Cisco will notify Integrator in writing (including by posting on CCO) at least thirty (30) days prior to the introduction of such a new family of Products.
3.0 | Internet Commerce/Point of Sale Reporting |
Integrator shall submit electronically complete Point of Sale information with each of its Resales of Products under this Agreement.
POS information is submitted electronically when Integrator uses IC or EDI (Electronic Data Interchange) technology in a format agreed in advance with Cisco to submit orders electronically.
POS information shall include the following:
A. | Integrators Purchase Order number. |
B. | Ciscos Product name and number. |
C. | The following information: |
(1) | Ship-To Name |
Address (street, city, state, zip)
(2) | Bill-To Name |
Address (street, city, state, zip)
(3) | Install Site Name |
Address (street, city, state, zip)
Contact person (name, email, phone number)
(4) | End User Name |
Address (street, city, state, zip)
Contact person (name, email, phone number)
NOTE: A Post Office Box is not a valid value for address information and will be rejected.
Cisco will have the right to verify all POS information provided. Integrator shall provide Cisco with reasonable proof (shippers documentation, invoices, etc.) confirming the information on Ciscos written request.
In the event Integrator does not provide POS information at the time of order entry, Integrator shall prepare such information in an electronic format as specified by Cisco and forward such POS information to Cisco within seven (7) days following the submission of an Order. Integrator shall include all information that is set forth above under IC/POS. Cisco will have the right to verify the information in such reports and may request, and Integrator shall provide, reasonable proof (shippers documentation, invoices, etc.) confirming the information.
7.
[***] = Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment requested under 17 C.F.R. Section 240.24b-2.
Such reports shall be sent to the following e-mail address: us1_tier_pos@cisco.com or such other address as Cisco may specify.
4.0 | Internal Use Discount |
The discount level at which Integrator is entitled to purchase Products for Internal Use will be made available to Integrator at:
http://www.cisco.com/web/partners/partner_with_cisco/channel_partner_program/certification_discount.html.
5.0 | Demonstration/Evaluation/Lab Product Discount |
To assist Integrator in its sales and marketing efforts, Integrator will be entitled to a discount for its purchases of demonstration, evaluation, and lab equipment (collectively the Lab Discount). Upon execution of the Agreement, the Lab Discount to which Integrator is entitled shall be provided at:
http://www.cisco.com/web/partners/partner_with_cisco/channel_partner_program/certification_disco unt.html.
This discount may be applied to a maximum total value of Cisco Products as follows (the Lab Discount Limitations):
Integrators Certification Level |
Maximum total value of Cisco Products*/ Integrator may purchase using the Lab Discount | |
Gold | $[***] in any [***] period. | |
Premier | $[***] in any [***] period. |
*/ | Based on the Price List of Products purchased by Integrator from Cisco. |
If Integrator is authorized by Cisco to Resell Products and Services in more than one country or country grouping, then the Lab Discount Limitations will apply on a per country or country grouping, provided that Integrator may not use the Lab Discount to purchase more than US$500,000 (based on then-current Price List) in Products in any Cisco sales theater (North America, Asia/Pacific, Europe, Emerging Markets, Japan) in any 12-month period.
If Integrator and its Affiliates collectively have multiple Systems Integrator Agreements with Cisco in a particular country or country grouping, then the Lab Discount Limitations will apply as if all Affiliates were purchasing under a single Systems Integrator Agreement.
Integrator may only use Products purchased with its Lab Discount for demonstration, evaluation, or lab purposes. Except to the extent permitted by Applicable Law, any Software received with or for such Products may not be distributed further, and, notwithstanding any other provision of this Agreement, all Software for such Products is licensed to Integrator solely for its use for demonstration, evaluation or lab purposes.
8.
[***] = Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment requested under 17 C.F.R. Section 240.24b-2.
In the event that a particular Cisco certification, specialization, or Advanced Technology Provider program in which Integrator participates requires the purchase of additional demonstration, evaluation, or lab Products, then, notwithstanding the dollar caps referenced in the matrix above, Integrator may apply its Lab Discount to the purchase of such required Products.
6.0 | Price Deviations |
With respect to additional discounts granted to Integrator for Integrators Resale to one or more specific End Users in accordance with Section 3 of the Agreement (Prices), Integrator will receive a valid deal identification number (Deal ID) from a Cisco Sales Representative. The Integrator must place the Deal ID in the appropriate field in Ciscos Ordering Tool, Ariba and/or ICS-XML interface. For an Integrator with no specific Deal ID field in their XML interface or Ariba Solution, a Deal ID must be provided to Cisco either by electronic submission at the time of order. A valid Purchase Order must be placed within five (5) business days of the granting of the additional discount, or the Purchase Order will be subject to cancellation.
Integrator may submit the Deal ID in the notes fields on Purchase Orders when using ICS-XML as an order submission method.
7.0 | Non-Value Added Discount |
In the event that Cisco determines in its sole discretion that Integrator is selling Products without significant Added Value, the total discount for any such no-value added opportunity will be reduced. Upon execution of the Agreement, the Non-Value Added Discount to which Integrator is entitled depending on Integrators certification level shall be made available at:
http://www.cisco.com/web/partners/partner_with_cisco/channel_partner_program/certification_discount.html.
This remedy is without prejudice to, and is in addition to, all other rights and remedies available to Cisco. Purchases and Resales of Products Integrator makes within the Territory to other resellers of Products that are purchasing for purposes of Resale will be presumed to be sales made without significant Added Value, and will be subject to the special Non-Value Added Discount provided for in this Section 7.0 unless Cisco provides written consent in advance.
9.
[***] = Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment requested under 17 C.F.R. Section 240.24b-2.
Exhibit 31.1
CERTIFICATION
I, John A. McKenna, Jr., certify that:
1) | I have reviewed this Quarterly Report on Form 10-Q of ConvergeOne Holdings, Inc.; |
2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4) | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | [reserved]; |
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5) | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 9, 2018 | By: | /s/ JOHN A. MCKENNA, JR. | ||||
John A. McKenna, Jr. | ||||||
President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Jeffrey Nachbor, certify that:
1) | I have reviewed this Quarterly Report on Form 10-Q of ConvergeOne Holdings, Inc.; |
2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4) | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | [reserved]; |
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5) | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 9, 2018 | By: | /s/ JEFFREY NACHBOR | ||||
Jeffrey Nachbor | ||||||
Chief Financial Officer |
Exhibit 32.1
CERTIFICATION
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. § 1350), John A. McKenna, Jr., the President and Chief Executive Officer of ConvergeOne Holdings, Inc. (the Company), hereby certifies that, to his knowledge:
1. The Companys Quarterly Report on Form 10-Q for the period ended June 30, 2018, to which this Certification is attached as Exhibit 32.1 (the Periodic Report), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and
2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Periodic Report and results of operations of the Company for the period covered by the Periodic Report.
Date: August 9, 2018 | By: | /s/ JOHN A. MCKENNA, JR. | ||||
John A. McKenna, Jr. | ||||||
President and Chief Executive Officer |
A signed original of this written statement required by Section 906 of 18 U.S.C. § 1350 has been provided to ConvergeOne Holdings, Inc. and will be retained by ConvergeOne Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.
Exhibit 32.2
CERTIFICATION
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. § 1350), Jeffrey Nachbor, the Chief Financial Officer of ConvergeOne Holdings, Inc. (the Company), hereby certifies that, to his knowledge:
1. The Companys Quarterly Report on Form 10-Q for the period ended June 30, 2018, to which this Certification is attached as Exhibit 32.1 (the Periodic Report), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and
2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Periodic Report and results of operations of the Company for the period covered by the Periodic Report.
Date: August 9, 2018 | By: | /s/ JEFFREY NACHBOR | ||||
Jeffrey Nachbor | ||||||
Chief Financial Officer |
A signed original of this written statement required by Section 906 of 18 U.S.C. § 1350 has been provided to ConvergeOne Holdings, Inc. and will be retained by ConvergeOne Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.
Document and Entity Information - shares |
6 Months Ended | |
---|---|---|
Jun. 30, 2018 |
Aug. 03, 2018 |
|
Document And Entity Information [Abstract] | ||
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | Jun. 30, 2018 | |
Document Fiscal Year Focus | 2018 | |
Document Fiscal Period Focus | Q2 | |
Trading Symbol | CVON | |
Entity Registrant Name | ConvergeOne Holdings, Inc. | |
Entity Central Index Key | 0001697152 | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Non-accelerated Filer | |
Entity Common Stock, Shares Outstanding | 76,398,309 |
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares |
Jun. 30, 2018 |
Dec. 31, 2017 |
||||
---|---|---|---|---|---|---|
Preferred stock, par value | $ 0.0001 | $ 0.0001 | ||||
Preferred Stock, Shares Authorized | 10,000,000 | 10,000,000 | ||||
Preferred stock, shares issued | 0 | 0 | ||||
Preferred stock, shares outstanding | 0 | 0 | ||||
Common stock, par value | $ 0.0001 | $ 0.0001 | ||||
Common stock, shares authorized | 1,000,000,000 | 1,000,000,000 | ||||
Common stock, shares issued | 76,341,016 | 39,860,610 | [1] | |||
Common stock, shares outstanding | 76,341,016 | 39,860,610 | [1] | |||
Class B convertible common stock | ||||||
Common stock, par value | $ 0.0001 | |||||
Common stock, shares authorized | [1] | 16,000,000 | ||||
Common stock, shares issued | [1] | 6,585,546 | ||||
Common stock, shares outstanding | [1] | 6,585,546 | ||||
|
Condensed Consolidated Statements of Operations - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | |||||
---|---|---|---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
||||
Revenue | |||||||
Revenue | $ 391,011 | $ 191,322 | $ 697,352 | $ 374,288 | |||
Cost of revenue | |||||||
Total cost of revenue | 276,683 | 133,535 | 494,639 | 263,208 | |||
Gross profit | |||||||
Gross profit | 114,328 | 57,787 | 202,713 | 111,080 | |||
Operating expenses | |||||||
Sales and marketing | 51,144 | 28,079 | 97,698 | 58,247 | |||
General and administrative | 27,767 | 9,695 | 56,311 | 21,604 | |||
Transaction costs | 6,204 | 922 | 12,051 | 2,035 | |||
Depreciation and amortization | 12,018 | 6,959 | 23,357 | 13,985 | |||
Total operating expenses | 97,133 | 45,655 | 189,417 | 95,871 | |||
Operating income | 17,195 | 12,132 | 13,296 | 15,209 | |||
Other (income) expense | |||||||
Interest income | (17) | (4) | (65) | (7) | |||
Interest expense | 26,507 | 22,785 | 37,735 | 31,781 | |||
Preliminary bargain purchase gain | 5,085 | (10,973) | |||||
Other expense, net | 9 | 5 | 26 | 5 | |||
Total other expense, net | 31,584 | 22,786 | 26,723 | 31,779 | |||
Loss before income taxes | (14,389) | (10,654) | (13,427) | (16,570) | |||
Income tax (benefit) expense | (6,928) | 713 | (14,772) | (2,082) | |||
Net income (loss) | (7,461) | (11,367) | 1,345 | (14,488) | |||
Earnout consideration | 1,436 | (124,005) | |||||
Net loss available to common shareholders | $ (6,025) | $ (11,367) | $ (122,660) | $ (14,488) | |||
Net loss per common share: | |||||||
Basic and diluted | [1] | $ (0.08) | $ (0.29) | $ (1.93) | $ (0.36) | ||
Weighted average number of shares outstanding: | |||||||
Basic and diluted | [1] | 75,222,455 | 39,860,619 | 63,487,614 | 39,870,980 | ||
Cash dividends declared per common share | $ 0.02 | $ 0.02 | |||||
Technology Offerings [Member] | |||||||
Revenue | |||||||
Revenue | $ 197,162 | $ 106,203 | $ 338,616 | $ 194,168 | |||
Cost of revenue | |||||||
Cost of revenue | 152,529 | 81,544 | 258,135 | 150,288 | |||
Gross profit | |||||||
Gross profit | 44,633 | 24,659 | 80,481 | 43,880 | |||
Service [Member] | |||||||
Revenue | |||||||
Revenue | 193,849 | 85,119 | 358,736 | 180,120 | |||
Cost of revenue | |||||||
Cost of revenue | 124,154 | 51,991 | 236,504 | 112,920 | |||
Gross profit | |||||||
Gross profit | $ 69,695 | $ 33,128 | $ 122,232 | $ 67,200 | |||
|
Condensed Consolidated Statements of Stockholders' Equity (Deficit) - 6 months ended Jun. 30, 2018 - USD ($) $ in Thousands |
Total |
'Scenario, Previously Reported [Member] |
Common Stock [Member] |
Common Stock [Member]
'Scenario, Previously Reported [Member]
|
Common Stock [Member]
Retroactive conversion of shares [Member]
|
Common Stock [Member]
Class B convertible common stock
|
Common Stock [Member]
Class B convertible common stock
'Scenario, Previously Reported [Member]
|
Common Stock [Member]
Class B convertible common stock
Retroactive conversion of shares [Member]
|
Subscription Receivable |
Subscription Receivable
'Scenario, Previously Reported [Member]
|
Additional Paid-in Capital |
Additional Paid-in Capital
'Scenario, Previously Reported [Member]
|
Additional Paid-in Capital
Retroactive conversion of shares [Member]
|
Retained Earnings (Accumulated Deficit) |
Retained Earnings (Accumulated Deficit)
'Scenario, Previously Reported [Member]
|
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance (in shares) at Dec. 31, 2017 | 39,860,610 | 89,766,294 | (49,905,684) | 6,585,546 | 14,830,683 | (8,245,137) | |||||||||
Balance at Dec. 31, 2017 | $ 5,641 | $ 5,641 | $ 4 | $ 9 | $ (5) | $ 1 | $ 1 | $ (1,805) | $ (1,805) | $ 13,464 | $ 13,459 | $ 5 | $ (6,023) | $ (6,023) | |
Effect of reverse recapitalization, value | (66,570) | $ 3 | $ (1) | (18,305) | (48,267) | ||||||||||
Effect of reverse recapitalization, shares | 31,339,391 | (6,585,546) | |||||||||||||
Repayment of stock subscription receivable | 1,805 | $ 1,805 | |||||||||||||
Stock-based compensation expense | 4,904 | 4,904 | |||||||||||||
Earnout consideration, value | (64,667) | $ 1 | 59,337 | (124,005) | |||||||||||
Earnout consideration, shares | 5,141,015 | ||||||||||||||
Repurchase of warrants | (9,098) | (9,098) | |||||||||||||
Dividends paid | (1,527) | (1,527) | |||||||||||||
Net income | 1,345 | 1,345 | |||||||||||||
Balance (in shares) at Jun. 30, 2018 | 76,341,016 | ||||||||||||||
Balance at Jun. 30, 2018 | $ (128,167) | $ 8 | $ 48,775 | $ (176,950) |
Nature of Business and Summary of Significant Accounting Policies |
6 Months Ended | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2018 | |||||||||||||
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |||||||||||||
Nature of Business and Summary of Significant Accounting Policies | 1. Nature of Business and Summary of Significant Accounting Policies Organization ConvergeOne Holdings, Inc. and its subsidiaries (collectively, “ConvergeOne”, or the “Company”) is a leading IT services provider of collaboration and technology solutions for large and medium enterprises. The Company serves clients through its comprehensive engagement model which includes the full lifecycle of services from consultation through implementation, optimization, and ongoing support services. The Company provides innovative and sophisticated services, including professional and managed, cloud and maintenance services, and complex multi-vendor technology offerings to its clients. The Company’s core technology markets are (1) collaboration and (2) enterprise networking, data center, cloud, and security. On November 30, 2017, C1 Investment Corp. (“C1”) and Clearlake Capital Management III, L.P. (“Clearlake” or “Seller Representative”) signed an Agreement and Plan of Merger (“Merger Agreement”) with Forum Merger Corporation (“Forum”), whereby the parties agreed a subsidiary of Forum and C1 shall consummate a merger, pursuant to which the subsidiary shall be merged with and into C1, following which the separate corporate existence of the subsidiary shall cease and C1 shall continue as the surviving corporation (the “Business Combination” or “Merger”). All outstanding C1 stock options and all outstanding shares of C1’s Class A common and Class B common stock held by C1 option holders and C1 stockholders (collectively, the “C1 Securities” and “C1 Securityholders”, respectively) were to be canceled and exchanged for a combination of cash and new shares of common stock as computed in accordance with the Merger Agreement. On February 22, 2018, the transactions contemplated by the Merger (“Transactions”) were consummated and the name of the surviving corporation was changed to ConvergeOne Holdings, Inc. See Note 2—Business Combination/Merger for further discussion. References to “the Company,” “we,” “us,” “our,” and similar words refer to ConvergeOne Holdings, Inc. and all of the consolidated subsidiaries, unless specifically noted otherwise. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet as of December 31, 2017 included herein was derived from the C1 audited financial statements as of that date, but does not include all disclosures including notes required by U.S. GAAP. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or any other period. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Registration Statement on Form S-1/A filed on April 24, 2018. There have been no changes to the Company’s significant accounting policies described in the consolidated financial statements for the year ended December 31, 2017 that have had a material impact on the condensed consolidated financial statements and related notes for the three and six months ended June 30, 2018. Accounting policies that are new as a result of the Merger have been included below. The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, Forum was treated as the “acquired” company for financial reporting purposes. This determination was primarily based on C1 shareholders having a majority of the voting power of the combined company, C1 comprising the ongoing operations of the combined entity, C1 comprising a majority of the governing body of the combined company, and C1’s senior management comprising the senior management of the combined company. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of C1 issuing stock for the net assets of Forum, accompanied by a recapitalization (referred to as “the Merger”). The net assets of Forum were stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Merger are those of C1. Earnout Consideration As discussed in Note 2—Business Combination/Merger, upon the completion of the Merger, the C1 Securityholders received a combination of cash and shares of ConvergeOne common stock in exchange for all of their C1 Securities. Subject to terms and conditions set forth in the Merger Agreement, the former C1 Securityholders have the contingent right to receive additional consideration for their former C1 Securities, in the form of cash and shares of ConvergeOne common stock (the “Earnout Consideration”, as defined in the Merger Agreement), based on specified Earnout Targets for 2018, 2019 and 2020 (“Earnout Years”) that may be accelerated. As of March 31, 2018, the Earnout Targets for 2018 and 2019 have been achieved. See Note 2 for the details of the Earnout Consideration. The Earnout Consideration is contingent on the Company meeting the pre-established Earnings Targets and thus is recorded, if and when earned or probable to be earned. The portion of the Earnout Consideration pertaining to the former C1 option holders, who are current employees of the Company, is accounted for as compensation when the Earnings Targets have been met. The Earnout Consideration pertaining to the former C1 shareholders is accounted for as an equity transaction when the Earnings Targets have been met. Common Stock Purchase Warrants The Company accounts for the issuance of common stock purchase warrants based on the terms of the contract and whether there are any requirements for the Company to net cash settle the contract under any terms or conditions. Warrants for the purchase of 8.9 million shares of common stock were issued by Forum as part of the units sold in its initial public offering (“IPO”) in April 2017 (the “Warrants”). Each unit (a “Unit”), was comprised of one share of Class A common stock, a warrant to purchase one half of one share of Class A common stock and a right to receive one-tenth of a share of Class A common stock upon the consummation of a business combination by Forum. See Notes 2 and 7—Business Combination/Merger and Stockholders’ Equity (Deficit). None of the terms of the Warrants have been modified as a result of the Merger. The Warrants are freestanding financial instruments that are legally detachable from the shares that were issued at the same time. Most of the Warrants are redeemable at the Company’s option in certain conditions. The Warrants require settlement to be in physical shares of common stock only. The terms of all of the outstanding Warrant contracts expressly state there are no requirements for the Company to net cash settle the Warrants under any circumstances. The Company has accounted for the Warrants as equity instruments. Unit Purchase Option Subsequent to the Merger, the Company has a unit purchase option (“UPO”) outstanding that was issued to Earlybird Capital LLC (“EBC”) and its designees in connection with Forum’s IPO. The UPO is accounted for as an equity instrument. The underwriters had performed all of their services in April 2017 and the fair value measurement was a one-time, nonrecurring measurement that is not subject to re-measurement over the life of the UPO (see Notes 2 and 7). Net Income (Loss) Per Share Prior to the Merger on February 22, 2018, net income (loss) per share was computed using the two-class method. The change in the Company’s capital structure as a result of the Merger and reverse capitalization during 2018 has eliminated the need for a two-class method earnings per share calculation. The historical number of outstanding shares of C1 common stock have been adjusted to retroactively reflect the effect of the Merger and the historical net income (loss) per share has been adjusted to give effect to this retroactive adjustment (see Note 2—Business Combination/Merger and Note 8—Net Income (Loss) per Share).
Post-Merger, basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders, which is computed by subtracting the Earnout Consideration from net income, by the weighted-average number of shares of common stock outstanding during the period, as adjusted for the Sponsor Earnout Shares that are not participating securities until vested, and the effect of shares that were contingently issuable for which the contingency has been resolved, whether or not those shares have been issued. The contingently issuable shares of common stock pertain to those shares to be issued when the Company meets the Earnings Targets established as part of the Merger Agreement as described in Note 2—Business Combination/Merger. Diluted net income (loss) per share is computed by dividing net income (loss) available to common shareholders, which is computed by subtracting the Earnout Consideration from net income, by the weighted-average number of shares of common stock outstanding during the period, as adjusted for the Sponsor Earnout Shares that are not participating securities until vested, the effect of shares that were contingently issuable for which the contingency has been resolved, whether or not those shares have been issued yet, and any dilutive equity instruments (warrants and options) that are “in-the-money”. The effect of the contingently issuable shares and dilutive equity instruments are included for the shorter of the date the underlying contracts were in existence to the end of the reporting period or the entire reporting period. However, diluted net loss per share excludes all dilutive potential shares if their effect is anti-dilutive. Emerging Growth Company Status The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012, (the “JOBS Act”). Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. The Company would cease to be an “emerging growth company” upon the earliest to occur of: the last day of the fiscal year in which it has more than $1.07 billion in annual revenue; the date it qualifies as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by it of more than $1.0 billion in non-convertible debt securities; or December 31, 2022. The Company anticipates that it will cease to be an “emerging growth company” on December 31, 2018. Recent Accounting Pronouncements As long as the Company remains an Emerging Growth Company, the Company plans to adopt new accounting standards using the effective dates available for nonpublic entities. Recently Adopted Accounting Pronouncements On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2017-09,Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies that modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the changes in terms or conditions. The amendments in this standard should be applied prospectively to an award modified on or after the adoption date. The adoption of ASU 2017-09 did not have any impact on the consolidated financial statements. Recently Issued Accounting Pronouncements Not Yet Adopted In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single, comprehensive model for accounting for revenue from contracts with customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year, making it effective for annual reporting periods beginning after December 15, 2018 and interim periods within that fiscal year, with early adoption permitted. The FASB has issued the following additional ASUs to amend the guidance in ASU 2014-09, all of which have effective dates concurrent with the effective date of ASU 2014-09:
The Company does not intend to early adopt the new revenue recognition guidance. The Company is evaluating the effect of the revenue recognition ASUs. The evaluation includes selecting a transition method for these revenue recognition ASUs and determining the effect that the updated standards will have on the historical and future consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which changes the accounting for leases in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The standard has an effective date for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company does not currently intend to early adopt the new leasing guidance and, therefore, ASU 2016-02 will be effective for us for the year ending December 31, 2020. If the Company loses emerging growth company status in 2018, the standard will be effective for the Company for the year ending December 31, 2019. The Company has not yet begun to evaluate the effect of the new guidance on the consolidated financial statements. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments, to address diversity in practice regarding the presentation of eight specific cash flow situations. These situations include, but are not limited to, debt prepayment and debt extinguishment costs and contingent consideration payments made after a business combination. The standard has an effective date for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact that the standard will have on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, to clarify the definition of a business and add guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard has an effective date for annual periods beginning after December 15, 2018, and interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the impact that the standard will have on the consolidated financial statements. |
Business Combination/Merger |
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Business Combinations [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Business Combination/Merger | 2. Business Combination/Merger On February 22, 2018, C1 consummated its business combination/merger with Forum pursuant to the terms of the Merger Agreement. The following Transactions occurred shortly before the Merger:
The following Transactions occurred simultaneously with the Merger which took place on February 22, 2018 (the “Closing”):
On April 25, 2018, the Company received a Notice of Effectiveness for the Registration Statement it filed to register all the shares issued in the PIPE for resale. Upon completion of an effective registration statement, the private investor immediately paid $12,000,000 to the Company for the Deferred PIPE and 1,500,000 shares of the Company’s common stock were issued. On April 26, 2018, the Company distributed the $12,000,000 of proceeds to the former C1 Securityholders as additional consideration according to the terms of the Merger Agreement.
The following is a summary of the reverse recapitalization, as recorded in the condensed consolidated statement of stockholders’ equity (deficit) (in thousands):
Earnout Consideration Payments Subject to terms and conditions set forth in the Merger Agreement, the former C1 Securityholders have the contingent right to receive the Earnout Consideration (as defined in the Merger Agreement), based on specific Earnout Target measurements for 2018, 2019 and 2020 (“Earnout Targets”). The key terms pertaining to the Earnout Consideration are as follows:
See discussion below on the 2019 and 2020 Earnout Targets being accelerated under certain circumstances (that is, measured during earlier periods than the years ending December 31, 2019 and 2020).
Clearlake has the right to direct the Company to do either of the following with regard to the corresponding shortfall between the Permitted Cash Payment Amount and the Earnout Cash Payment that has been earned (“Permitted Cash Payment Shortfall” or “Cash Shortfall”): (i) pay the Cash Shortfall through the issuance of additional shares of common stock with an equivalent value equal to the Cash Shortfall, valued based on a twenty day trading period as defined in the Merger Agreement (“Earnout Cash Payment Shortfall Parent Shares” or “Shortfall Shares”) or (ii) provide notice to the Company that it elects to defer payment of the Cash Shortfall until the following Measurement Date. Clearlake shall have the option on each succeeding Measurement Date until the end of the Earnout Period to elect to be paid the applicable Shortfall Shares in full satisfaction of the Cash Shortfall or continue to defer payment. At the end of the Earnout Period, in the event that the Company has not paid a Cash Shortfall to the former C1 Securityholders, such Cash Shortfall shall automatically be converted into a right for the former C1 Securityholders to receive Shortfall Shares.
Each Earnout Payment otherwise payable to the former C1 Securityholders, under any circumstances, will be reduced by the amount of the Sponsor Earnout Shares that become vested in connection with an Earnout Payment by directly reducing each Earnout Stock Payment by the amount of the Sponsor Earnout Shares that have become vested. The allocation of total merger consideration as between the cash consideration and common stock payable to the former C1 Securityholders shall be adjusted, by decreasing the cash consideration and correspondingly increasing the portion of total merger consideration paid in common stock, if and to the extent necessary to ensure that the former C1 Securityholders receive sufficient common stock such that, when aggregated with common stock previously paid as total merger consideration to the former C1 Securityholders, the amount of common stock is not less than the minimum amount of common stock necessary to satisfy the requirements for qualification as a reorganization under Section 368(a)(1)(A) of the Internal Revenue Code. Earnout Consideration Measurement as of June 30, 2018 The thresholds for the Earnings Targets for 2018 and 2019 were met as of March 31, 2018, the first Measurement Date. Accordingly, based on the terms of the Merger Agreement, in connection with meeting two of the three Earnings Targets, the former C1 Securityholders were entitled to receive an aggregate of $66 million in cash and 5,162,500 newly issued shares of common stock, after deducting 1,437,500 Sponsor Earnout Shares which vested and immediately became participating securities. The Sponsor Earnout Shares remain subject to a lock-up agreement for 180 days from the closing date of the merger. The Company recorded the estimated value of the Earnout consideration as of March 31, 2018 and adjusted the amounts to actual during the three months ended June 30, 2018.
The aggregate net Earnout Stock Payments of 5,162,500 shares were issued after the approval process was completed on May 22, 2018. Approximately 21,000 of the new shares were immediately forfeited by the C1 Securityholders for the payment of income taxes. As noted above, payment of the Earnout Cash Payments are subject to limitations and restrictions on cash distribution, as described in the Merger Agreement and set forth in the Company’s debt facilities. After the approval process was completed, Clearlake elected to defer a decision on the Cash Shortfall until the next quarterly Measurement Date, which is June 30, 2018. The review and approval process for the June 30, 2018 Measurement Date will occur during August 2018, at which time Clearlake has the right to continue to defer any Cash Shortfall to the next Measurement Date, September 30, 2018, or direct the Company to issue equivalent shares of common stock to settle the Earnout Cash Payments. The liability for the 2018 and 2019 Earnout Cash Payments of $66,000,000 is recorded on the condensed consolidated balance sheet, and as of June 30, 2018 represents approximately 7.1 million of equivalent common shares, based on the measurement terms in the Merger Agreement. The fair value of the 2018 and 2019 Earnout Stock Payments that were issued to the former C1 Securityholders in May 2018 and the fair value of the Sponsor Earnout Shares that vested in May 2018, when the Earnings Targets were officially approved, aggregated to $59,532,000, which has been recorded as an equity transaction during the six months ended June 30, 2018. The fair value had been estimated as $60,984,000 at March 31, 2018 and was subsequently adjusted when the shares were actually issued and vested. A portion of the total Earnout Consideration is payable to the former C1 option holders, who must continue to be employed by the Company as of the payment date in order to receive their pro rata share of the Earnout Consideration. Management has recorded compensation expense related to the pro rata portion of the Earnout Stock Payments that were issued in May and the pro rata portion of the Earnout Cash Payments that has been accrued but not yet paid and is expected to be given to the former C1 option holders at a future date. The compensation was measured using the provisions set forth in the Merger Agreement which aggregated to approximately $1.5 million, all of which was recorded during the six months ended June 30, 2018. The total Earnout Consideration that was recognized during the six months ended June 30, 2018 was $125,532,000, which includes the $1.5 million for the former C1 option holders. The net amount of $124,005,000 has been treated as a reduction to net income (loss) available to common shareholder for earnings per share purposes for the six months ended June 30, 2018. See Note 8. The total Earnout Consideration was estimated as $126,984,000 at March 31, 2018 and was subsequently adjusted when the Earnout Stock Payment shares were actually issued and the Sponsor Earnout Shares vested and final measurement occurred. The shares issued in connection with the Earnout provisions represented contingently issuable shares as of March 31, 2018, which for earnings per share purposes are included in weighted average shares outstanding when it appears that there are no further contingences to be resolved. These shares have been factored into the earnings per share calculations for the three and six months ended June 30, 2018 as contingently issuable shares as of March 31, 2018. |
Business Acquisitions |
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Business Combinations [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Business Acquisitions | 3. Business Acquisitions Acquisitions were accounted for as business combinations and the assets acquired and liabilities assumed were recognized based on the estimated fair values at the acquisition date as determined by the Company’s management, using information currently available and current assumptions as to projections of future events and operating performance, and consideration of market conditions. Arrow Systems Integration, Inc. On March 1, 2018, the Company, through its subsidiary ConvergeOne, acquired Arrow Systems Integration, Inc. (“ASI”) for cash consideration of $28,376,000. During the six months ended June 30, 2018, the Company incurred transaction costs of $484,000 related to the acquisition and included the amount in transaction costs on the condensed consolidated statements of operations.
The purchase price has been preliminarily allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date. The fair value of the net assets acquired was approximately $39,349,000. The excess of the aggregate fair value of the net assets acquired of $10,973,000 has been accounted for as a gain on bargain purchase in accordance with Accounting Standards Codification (“ASC”) 805 and included in preliminary bargain purchase gain on the consolidated statement of operations for the six months ended June 30, 2018. The bargain purchase gain is due to the seller divesting a non-core asset from its overall business. The Company acquired a significant income tax benefit pertaining to a goodwill write-off. The acquisition fair value measurement is preliminary and subject to completion of the valuation of ASI and further management reviews and assessments of the preliminary fair value of the assets acquired and liabilities assumed. The adjustments arising from the completion of the outstanding matters may materially affect the preliminary purchase accounting. The purchase price allocation will be finalized as soon as practicable within the measurement period, but not later than one year following the acquisition date. The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed (in thousands) of ASI acquired on March 1, 2018:
Adjustments to preliminary amounts made during the three months ended June 30, 2018, which were the result of information that existed as of the acquisition date, were recognized prospectively. The adjustments resulted in decreased preliminary bargain purchase gain by approximately $5,085,000 as a result of an increase in liabilities assumed of $9,962,000 offset by a decrease in purchase price of $2,266,000 and deferred income tax of $2,611,000. Since the acquisition date of March 1, 2018, $77,356,000 of revenue and $12,867,000 of net income (inclusive of preliminary acquisition gain) are included in the accompanying condensed consolidated statement of operations for the six months ended June 30, 2018. The fair value of accounts receivable was adjusted for approximately $3,263,000 for amounts not expected to be collected.
Annese & Associates, Inc. On July 14, 2017, the Company, through its subsidiary ConvergeOne, acquired Annese & Associates, Inc. (“Annese”) for cash consideration of $24,483,000 plus additional consideration of up to $4,000,000, contingent upon the achievement of certain gross profit targets for the twelve months ending June 30, 2018. The Company estimated the fair value of the contingent consideration to be approximately $956,000 at December 31, 2017, based upon current assumptions as to projections of future events and operating performance, and consideration of market conditions. As of June 30, 2018, no additional contingent consideration is expected to be paid and the reduction in the fair value of the contingent consideration for the six months ended June 30, 2018 is included in the condensed consolidated statement of operations. Unaudited Pro-Forma Information Following are the supplemental consolidated results of the Company on an unaudited pro forma basis, as if the acquisition of ASI had been consummated on January 1, 2017. The pro forma results presented below show the impact of acquisition-related costs as well as the increase in interest expense related to acquisition-related debt (in thousands).
These pro forma results were based on estimates and assumptions, which the Company believes are reasonable. Pro forma net income (loss) does not take into effect the impact of the earnout consideration for net income (loss) per share calculations. The weighted-average shares outstanding used to calculate pro forma net income (loss) per share were retroactively adjusted to reflect the Merger Exchange Ratio as described in Notes 2 and 7. These pro forma results are not the results that would have been realized had the Company been a combined company during the periods presented and are not necessarily indicative of consolidated results of operations in future periods. |
Trade Accounts Receivable |
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Trade Accounts Receivable | 4. Trade Accounts Receivable The following is a roll forward of our allowance for doubtful accounts (in thousands):
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Goodwill and Finite-Life Intangible Assets |
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Goodwill and Finite-Life Intangible Assets | 5. Goodwill and Finite-Life Intangible Assets Goodwill The changes in the carrying amount of goodwill are as follows (in thousands):
During the six months ended June 30, 2018, goodwill increased by $2,357,000 associated primarily with an adjustment of deferred income taxes and decreased by $2,436,000 related to adjustments to the fair value of intangible assets acquired in 2017. Finite-life Intangibles In connection with business acquisitions the Company acquired certain customer relationships, trademarks, noncompetition agreements, and internally developed software. The Company’s management determined, based upon information available at the time of acquisition and on certain assumptions as to future operations and market considerations, the values of the finite-life intangibles as follows: trademarks, using the relief from royalty method; and customer relationships, noncompetition agreements and internally developed software using, in part, a discounted cash flow method. The amortization periods were estimated by management, considering both the economic and legal lives, as well as the expected period of benefit. Finite-life intangible assets consist of the following (in thousands):
During the three months ended June 30, 2018 and 2017, aggregate amortization expense was $9,367,000 and $5,550,000, respectively. During the six months ended June 30, 2018 and 2017, aggregate amortization expense was $18,099,000 and $11,180,000, respectively. Based on the recorded intangible assets at June 30, 2018, estimated amortization expense is expected to be as follows (in thousands):
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Debt |
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Debt | 6. Debt Long-term debt consists of the following (in thousands):
April 2018 Credit Facilities Senior Secured Term Loan On April 10, 2018, certain of ConvergeOne Holdings, Inc.’s subsidiaries, C1 Intermediate Corp. and C1 Holdings Corp. (f/k/a ConvergeOne Holdings Corp.) entered into a Term Loan Agreement with Credit Suisse AG, Cayman Islands Branch as the administrative agent and collateral agent (the “Term Loan Agreement”). The Term Loan Agreement provides for senior secured term loans in the aggregate principal amount of $670,000,000 (the “Term Loans”). A portion of the proceeds of the Term Loans was used to repay the existing credit facilities including the outstanding indebtedness under the Revolver Agreement of $90,000,000 and to pay debt issuance costs. The remaining proceeds will be used for working capital needs and general corporate purposes. The Company incurred financing transaction costs of approximately $5,931,000 and an original issue discount of $3,700,000 related to the Term Loan Agreement which will be amortized over the life of the credit agreement. The principal installments in the amount of $1,675,000 are due on the last business day of each quarter commencing September 30, 2018, with the remaining outstanding principal amount to be paid on its maturity date of April 10, 2025. The Term Loan Agreement contains a number of significant restrictive covenants. Such restrictive covenants, among other things, restrict, subject to certain exceptions, our and our restricted subsidiaries’ ability to incur additional indebtedness and make guarantees; create liens on assets; pay dividends and distributions or repurchase their capital stock; make investments, loans and advances, including acquisitions; engage in mergers, consolidations, dissolutions or similar transactions; sell or otherwise dispose of assets, including sale and leaseback transactions; engage in certain transactions with affiliates; enter into certain restrictive agreements; make changes in the nature of their business, fiscal year and organizational documents; make prepayments or amend the terms of certain junior debt; and enter into certain hedging arrangements. The Term Loan Agreement also contains certain customary representations and warranties, affirmative covenants and events of default, including the occurrence of a Change of Control, as defined in the Term Loan Agreement. If an event of default occurs, the lenders under the Term Loan Agreement will be entitled to take various actions, including the acceleration of amounts due under the Term Loan Agreement and actions permitted to be taken by a secured creditor. The Term Loan Agreement requires us to prepay outstanding Term Loans, subject to certain exceptions, in amounts equal to the following: commencing with the year ending December 31, 2018, 50% of “excess cash flow” (which percentage steps down to 25% and 0% when we obtain certain consolidated total net leverage ratios), provided that any mandatory “excess cash flow” prepayment shall be at least $10 million; 100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property (which percentage steps down to 50% when we obtain a certain consolidated total net leverage ratio); and 100% of the net cash proceeds of any incurrence of debt, other than debt permitted to be incurred or issued under the Term Loan Agreement.
We are permitted to voluntarily repay outstanding Term Loans at any time without premium or penalty unless such payment is made prior to October 10, 2018 in connection with a repricing transaction as described in the Term Loan Agreement, in which case we are required to pay a premium of 1% on the Term Loans so prepaid. The Term Loans bear interest at 2.75% above the alternate base rate or 3.75% above the Eurodollar rate, as described in the Term Loan Agreement. Interest on the Eurodollar rate Term Loans is payable on the last day of the Interest Period, as defined in the Term Loan Agreement, and interest on alternate base rate Term Loans is payable on the last day of each quarter. Borrowings under the Term Loans had an interest rate of 5.84% at June 30, 2018. June 2017 Credit Facilities Senior Secured Term Loan On June 20, 2017, ConvergeOne Holdings Corp. (“Holdings”) and the Company’s subsidiary, and direct corporate parent of Holdings, C1 Intermediate Corp. (“Intermediate”) entered into a Term Loan Agreement (the “2017 Term Loan Agreement”) with JPMorgan Chase Bank, N.A. as the administrative agent and collateral agent. The 2017 Term Loan Agreement provides for senior secured term loans in the aggregate principal amount of $430,000,000 (the “Term Loans”). A portion of the proceeds of the Term Loans were used to repay the existing credit facilities and to pay debt issuance costs. The remaining proceeds were used for working capital needs and general corporate purposes. Principal installments in the amount of $1,413,000 were due on the last business day of each quarter, commencing September 30, 2017, with the remaining outstanding principal amount to be paid on its maturity date of June 20, 2024. The Company was permitted to repay outstanding Term Loans at any time without premium or penalty, unless such payment is made prior to June 20, 2018 in connection with a repricing transaction as described in the 2017 Term Loan Agreement, in which case the Company is required to pay a premium of 1% of the Term Loans so prepaid. The Term Loans bore interest at 3.75% above the alternate base rate or 4.75% above the Eurodollar rate as described in the agreement. Interest on the Eurodollar rate Term Loans was payable on the last day of the Interest Period, as defined in the Term Loan Agreement, and interest on alternate base rate Term Loans was payable on the last day of each quarter. The Company incurred financing transaction costs of approximately $4,778,000 and an original issue discount of $4,300,000 related to the Term Loan Agreement which the Company amortized over the term of the credit agreement. In July 2017, Holdings borrowed an additional $75,000,000 of term loans under an incremental amendment to the Term Loan Agreement, which loans are part of the same class of, and on the same terms as, the initial Term Loans. Proceeds from the incremental amendment were used for the acquisitions of Annese and SPS Holdco, LLC (“SPS”). In October 2017, Holdings borrowed an additional $60,000,000 of term loans under an incremental amendment to the Term Loan Agreement, which loans are part of the same class of, and on the same terms as, the initial Term Loans. Proceeds from the incremental amendment were used to acquire AOS, Inc. (“AOS”). The Company incurred financing transaction costs of approximately $2,208,000 and an original issue discount of $713,000 related to the incremental term loan joinder agreements. The Company expensed $1,793,000 of direct issuance costs incurred within interest expense on the consolidated statement of operations and amortized $1,128,000 over the remaining term of the credit agreement. On April 10, 2018, concurrent with entering into the Term Loan Agreement, the Company terminated the 2017 Term Loan Agreement. The Company accounted for this termination as debt extinguishment and in accordance with the applicable accounting guidance for debt modification and extinguishments, and for interest costs accounting, the Company expensed $5,684,000 in extinguishment costs incurred including a 1% pre-payment penalty, the remaining unamortized deferred financing costs of $4,588,000, the remaining unamortized original issue discount of $4,443,000 and $17,000 of prepaid administrative fees relating to the 2017 Credit Facilities. The Company reported theses expenses within interest expense on the condensed consolidated statement of operations for the six months ended June 30, 2018.
Senior Secured Revolving Loan Facility On June 20, 2017, Holdings and Intermediate entered into a Revolving Loan Credit Agreement (the “Revolver Agreement”) with Wells Fargo Commercial Distribution Finance, LLC (“Wells Fargo”) as the administrative agent and collateral agent and as Floorplan Funding Agent. The Revolver Agreement provides a senior secured revolving loan facility of $150,000,000 aggregate principal amount of revolving loans and amends and restates the existing floorplan agreement with Wells Fargo in order to extend credit in the form of a floorplan subfacility. The Revolver Agreement matures on June 20, 2022. The obligations under the Revolver Agreement are unconditionally and irrevocably guaranteed by Intermediate and certain restricted subsidiaries of Holdings. The obligations under the Revolver Agreement are secured by a first priority lien on the receivable accounts, inventory, and deposit and securities accounts, and a second priority lien on substantially all of the other assets of Holdings and each guarantor. The aggregate principal amount of the revolving loans and floorplan advances is limited to a Borrowing Base as defined by the Revolver Agreement, reduced by outstanding letters of credit. Mandatory prepayments are required in the event that the sum of the outstanding principal amount of the revolving loans, letter of credit and floorplan advances exceeds the less of (i) the aggregate revolving commitments of $150,000,000 or (ii) the Borrowing Base, in an amount equal to the excess. On February 13, 2018, the Company amended the Revolver Agreement to increase the aggregate revolving commitments from $150,000,000 to $200,000,000 and incurred financing transaction costs of $175,000 which the Company will amortize over the remaining term of the agreement. The Revolver Agreement contains a number of covenants including, among other things, requirements to maintain certain financial ratios and restrictions on dividends. If the Revolving Exposure, as described in the Revolver Agreement, exceeds the lesser of the revolving loan commitments or the borrowing base, the Revolver Agreement requires the Company to prepay outstanding Revolving Loans in an aggregate amount equal to such excess. The Company is permitted to repay outstanding Revolving Loans at any time without premium or penalty. Borrowings under the Revolver Agreement bear interest at rates ranging from 0.25% to 0.75% above the alternate base rate or from 1.25% to 1.75% above the Eurodollar rate as described in the Revolver Agreement, in each case based on availability under the Revolver Agreement as of such interest payment date. A commitment fee equal to 0.250% or 0.375% per annum (based on availability under the Revolver Agreement) times the average daily unused amount of the available revolving commitments is payable on the last day of each quarter. On April 10, 2018, Intermediate, C1 Holdings Corp., certain of our subsidiaries and Wells Fargo entered into a Third Amendment to Revolving Loan Credit Agreement and revised certain definitions and restrictive covenants in such agreement to be consistent with the terms of the new Term Loan Agreement described above. At June 30, 2018, the Borrowing Base was $200,000,000. There were no letters of credit outstanding, the outstanding balance on the revolver was $40,000,000 and the outstanding floorplan balance was $58,509,000; therefore, the maximum borrowing available was $101,491,000 at June 30, 2018. Floor Planning Facilities On June 20, 2017, concurrent with entering into the Revolver Agreement, the Company amended and restated its existing floor planning facilities with Wells Fargo to extend credit in the form of floorplan advances up to an aggregate principal amount of $150,000,000. If advances under the agreement are not paid within 60 days or by the end of the free flooring period (which ranges from 45-90 days), the floorplan advance automatically converts to a revolving loan subject to terms under the Revolver Agreement. Concurrent with the amendment to the Revolver Agreement on February 13, 2018, the aggregate principal amount of floor plan advances credit limit increased from $150,000,000 to $200,000,000. The outstanding balance of floorplan advances at June 30, 2018 was $58,509,000 and is included in accounts payable on the condensed consolidated balance sheet. Debt Issuance Costs The Company amortizes original issue discount and deferred financing costs (debt issuance cost) using the effective interest method over the life of the related instrument, and such amortization is included in interest expense in the consolidated statements of operations. Debt issuance costs are as follows (in thousands):
Long-term Debt Maturities The approximate future principal payments on long-term debt are as follows (in thousands):
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Stockholders' Equity (Deficit) | 7. Stockholders’ Equity (Deficit) Prior to the Merger C1 Prior to the Merger, C1 had two classes of common stock authorized, Class A and Class B which had differing rights. Class B common shares were subject to vesting. As part of the Merger transactions, all of the outstanding shares of C1 Class A and Class B common stock were exchanged for new shares of ConvergeOne common stock using a Merger Exchange Ratio that was the same for both classes of common stock (see Note 2—Business Combination/Merger). At December 31, 2017, there were 89,766,294 and 14,830,683 shares of Class A and Class B common shares, respectively, issued and outstanding. In the Company’s consolidated statement of stockholders’ equity (deficit), these amounts have been retroactively adjusted to 39,860,610 and 6,585,546, respectively, to reflect the Merger Exchange Ratio. All outstanding C1 Securities, including the C1 stock options, were immediately vested, canceled, and exchanged for a combination of new shares of ConvergeOne common stock and cash. The C1 Securities aggregated to 106,124,574 and were exchanged for 47,124,494 common shares of ConvergeOne and cash consideration of approximately $170,600,000. Approximately 10,000 of the newly issued shares were immediately forfeited by C1 Securityholders for the payment of income taxes. Both classes of C1 common stock ceased to exist upon completion of the Merger.
Forum Prior to the Merger, Forum had two classes of common stock authorized, Class A and Class F which had differing rights. As discussed below and in Note 2, all of the outstanding shares of Class A and Class F common stock remaining (after various Merger related transactions were consummated) were converted into shares of ConvergeOne common stock. Both classes of Forum common stock ceased to exist upon completion of the Merger. 2014 Equity Incentive Plan Prior to the Merger, C1 issued equity awards for compensation purposes to employees, directors and consultants under the Company’s 2014 Equity Incentive Plan. Stock-based compensation expense was computed based on the grant date fair values of those awards and periodic re-measurement to current fair value was done each reporting period for one non-employee stock award. The fair value of the stock awards was amortized as compensation expense over the corresponding vesting periods until the awards were fully vested. All outstanding stock awards were accelerated and vested in full just prior to the Closing of the Merger, which resulted in a modification to the vesting terms of the Company’s stock awards. A portion of the modified stock awards were subject to re-measurement to current fair value, as a direct result of the modification, which resulted in an incremental $583,000 of fair value to be recorded as stock-based compensation expense over the life of the awards. All of the Company’s stock awards were immediately fully vested, canceled and exchanged for cash and shares of common stock upon completion of the Merger. As a result, the full amount of previously unrecognized stock-based compensation expense of $4,842,000, including the incremental $583,000, was recognized in full during the six months ended June 30, 2018. No further awards will be made pursuant to the 2014 Equity Incentive Plan. Preferred Stock The Company is authorized to issue 10,000,000 shares of preferred stock, $0.0001 par value per share. The Company’s board of directors may, without further action by the stockholders, fix the rights, preferences, privileges and restrictions of up to an aggregate of 10,000,000 shares of preferred stock in one or more series and authorize their issuance. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of our common stock. The issuance of preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deterring or preventing a change of control or other corporate action. No shares of preferred stock are currently outstanding, and we have no present plan to issue any shares of preferred stock. Common Stock The Company is authorized to issue 1,000,000,000 shares of common stock, $0.0001 par value per share. Voting Power Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of common stock possess all voting power for the election of the Company’s directors and all other matters requiring stockholder action. Holders of common stock are entitled to one vote per share on matters to be voted on by stockholders.
Dividends Holders of common stock are entitled to receive such dividends, if any, as may be declared from time to time by the Company’s board of directors in its discretion out of funds legally available therefore. In no event will any stock dividends or stock splits or combinations of stock be declared or made on common stock unless the shares of common stock at the time outstanding are treated equally and identically. On May 8, 2018, the Board of Directors declared a regular quarterly cash dividend in the cumulative amount of approximately $1,527,000 payable to Common stockholders on June 15, 2018 to stockholders of record as of May 25, 2018. The Company had a retained deficit at the time of declaration and, as a result, the dividend was recorded as a reduction to paid-in-capital. Liquidation, Dissolution and Winding Up In the event of the Company’s voluntary or involuntary liquidation, dissolution, distribution of assets or winding-up, the holders of the common stock will be entitled to receive an equal amount per share of all of the Company’s assets of whatever kind available for distribution to stockholders, after the rights of the holders of the preferred stock have been satisfied. Preemptive or Other Rights There are no sinking fund provisions applicable to the common stock. Sponsor Earnout Shares Prior to the Merger On December 28, 2016, Forum issued an aggregate of 3,593,750 of its Class F Common Stock to its Founders for an aggregate purchase price of $25,000 (the “Founders Shares”). On April 6, 2017, Forum effectuated a 1.2-for-1 stock dividend of its Class F Common Stock resulting in an aggregate of 4,312,500 Founders Shares outstanding. The Founders Shares automatically converted into shares of common stock upon the consummation of the Merger. Simultaneously with the Forum IPO, the Sponsor purchased an aggregate of 555,000 Units in a private placement (the “Placement Units”) at a price of $10.00 per unit (or an aggregate purchase price of $5,550,000). In addition, on April 18, 2017, Forum consummated the sale of an additional 67,500 Placement Units at a price of $10.00 per unit, which were purchased by the Sponsor, generating gross proceeds of $675,000. Each Placement Unit consisted of one Placement Share, one Placement Right and one-half of one Placement Warrant (“Private Warrant”). The proceeds from the Placement Units were added to the proceeds from the Forum IPO held in the trust account of Forum. The Placement Units were identical to the Units sold in the Forum IPO except that the Placement Warrants (i) are not redeemable by Forum and (ii) may be exercised for cash or on a cashless basis, so long as they are held by the initial purchaser or any of its permitted transferees. Just prior to the Merger, the Founders owned 4,312,500 shares of Class F common stock, 622,500 shares of Class A common stock, Rights to 62,250 additional shares of Class A common stock, and warrants for the purchase of 311,250 shares of Class A common stock at $11.50 per share. Merger As part of the Merger Agreement, the Sponsor entered into a letter agreement on November 30, 2017 (the “Sponsor Earnout Letter”), with Forum, C1, and other parties whereby the Sponsor agreed that effective upon the Closing, with respect to the Founder Shares owned by the Sponsor, the Sponsor would (a) forfeit 1,078,125 of the Founder Shares and (b) subject 2,156,250 of the Founder Shares (the “Sponsor Earnout Shares”) to potential forfeiture in the event that the Earnout Payments are not achieved by Company Securityholders (see Note 2). Subject to certain limited exceptions, the Sponsor Earnout Shares will be subject to lock-up from the Closing until 180 days thereafter; provided that if the volume-weighted average price of Forum Common Shares for 15 trading days is at least $12.50 per share, then 25% of the Sponsor Earnout Shares will be released from escrow immediately (but still subject to the vesting requirements under the Sponsor Earnout Letter).
The Sponsor Earnout Shares will either (1) be forfeited if the C1 Earnings Targets are not met or (2) vest if the C1 Earnings Targets are met. The Earnout Targets are described in detail in Note 2. One-third of the Sponsor Earnout Shares, 718,750 shares, will become vested for each of the three Earnout Targets. The Sponsor Earnout Shares will convert to participating shares when vesting occurs. If the Earnings Targets are not met, the corresponding Sponsor Earnout Shares will be forfeited by the Sponsor. All of the Sponsor’s shares, including the 62,250 shares issued as part of the Rights, were converted into shares of ConvergeOne common shares on a one-for-one basis. The 311,250 Private Warrants issued to the Sponsor as part of the Units it purchased in the IPO continue in existence post-Merger and represent the right to purchase shares of ConvergeOne common stock under the same terms and conditions as originally issued. Post-Merger Upon completion of the Merger, the Sponsor distributed 3,919,125 shares of ConvergeOne common stock to its members, including the 2,156,250 Sponsor Earnout Shares which are treated as issued and outstanding. The Sponsor Earnout Shares are not considered participating for dividend purposes and net income per share calculations until released from forfeiture restrictions upon achievement of the Earnout Targets (“vested”). The Sponsor is not providing any post-Merger services and once the shares are vested they are included in weighted-average shares outstanding for net income per share computations. Additionally, the Sponsor distributed to its members Private Warrants for the purchase of 311,250 shares of ConvergeOne common stock at $11.50 per share. As discussed in Note 2, the 2018 and 2019 Earnings Targets were met and thus 1,437,500 Sponsor Earnout Shares are vested and treated as participating shares. The remaining 718,750 Sponsor Earnout Shares have not yet vested as of June 30, 2018. Warrants to Purchase Common Stock Warrants for the purchase of 8.9 million shares of common stock were issued by Forum as part of the units sold in its IPO in April 2017. Each unit was comprised of one share of Class A common stock, a warrant to purchase one half of one share of Class A common stock and a right to receive one-tenth of a share of Class A common stock upon the consummation of a business combination by Forum. Upon completion of the Merger, these warrants pertain to the purchase of ConvergeOne common stock and the terms and conditions remain the same. On February 26, 2018, the Company initiated a Public Offer to Purchase for cash up to 8,936,250 warrants at a price of $0.95 per Warrant, net to the seller without interest and subject to certain conditions, until March 23, 2018 (the “Tender Offer”). The Company increased the offer price to $1.20 per Warrant and extended the Tender Offer period to April 20, 2018. The Tender Offer expired at 5:00 P.M., New York City time, on April 20, 2018, and a total of 7,581,439 warrants were validly tendered and not withdrawn pursuant to the Tender Offer as of such date. In accordance with the terms of the Tender Offer, the Company purchased all 7,581,439 validly tendered and not withdrawn warrants at a price of $1.20 per warrant for an aggregate purchase price of approximately $9,098,000, which was paid on April 23, 2018. At June 30, 2018, there were a total of 1,354,810 warrants outstanding consisting of 1,091,060 Public Warrants originally sold as part of Units in the Forum IPO and 263,750 Placement Warrants. The Company received a letter, dated June 19, 2018, from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that Nasdaq intends to suspend and then delist the Company’s warrants (NASDAQ: CVONW) from The Nasdaq Capital Market at the opening of business on June 28, 2018 for the failure to meet the requisite number of warrant holders requirement. The Nasdaq has delisted the Company’s warrants (NASDAQ: CVONW) from The Nasdaq Capital Market, effective at the opening of the trading session on July 30, 2018 following a determination by Nasdaq that the Company’s warrants no longer qualified for listing pursuant to Listing Rule IM-5101-2. Warrant Terms Each whole warrant entitles the registered holder to purchase one share of common stock at a price of $11.50 per share, subject to adjustment as discussed below, at any time commencing on April 12, 2018. Pursuant to the warrant agreement, a warrant holder may exercise such warrants only for a whole number of shares of common stock. This means that only a whole warrant may be exercised at any given time by a warrant holder. No warrants will be exercisable for cash unless there is an effective and current registration statement covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to such shares of common stock. Notwithstanding the foregoing, if a registration statement covering the shares of common stock issuable upon exercise of the Public Warrants is not effective within 90 days following the consummation of the Business Combination, warrant holders may, until such time as there is an effective registration statement and during any period when the Company shall have failed to maintain an effective registration statement, exercise warrants on a cashless basis pursuant to the exemption provided by Section 3(a)(9) of the Securities Act, provided that such exemption is available. If that exemption, or another exemption, is not available, holders will not be able to exercise their warrants on a cashless basis. In such event, each holder would pay the exercise price by surrendering the warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of common stock underlying warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” for this purpose will mean the average reported last sale price of the shares of common stock for the 5 trading days ending on the trading day prior to the date of exercise. The warrants will expire on February 22, 2023, the fifth anniversary of the completion of the Business Combination, at 5:00 p.m., New York City time, or earlier upon redemption or liquidation. The warrants were originally issued in registered form under a warrant agreement between Continental, as warrant agent, and Forum. The warrant agreement provides that the terms of the warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval, by written consent or vote, of the holders of at least 50% of the then outstanding warrants in order to make any change that adversely affects the interests of the registered holders. The exercise price and number of shares of common stock issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary dividend or our recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of shares of common stock at a price below their respective exercise prices. The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank check payable to us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of shares of common stock and any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders. Under the terms of the warrant agreement, the Company agreed to use its best efforts to have declared effective a prospectus relating to the shares of common stock issuable upon exercise of the warrants and keep such prospectus current until the expiration of the warrants. However, the Company cannot assure that it will be able to do so and, if it does not maintain a current prospectus relating to the shares of common stock issuable upon exercise of the warrants, holders will be unable to exercise their warrants for cash and the Company will not be required to net cash settle or cash settle the warrant exercise. Warrant holders may elect to be subject to a restriction on the exercise of their warrants such that an electing warrant holder would not be able to exercise their warrants to the extent that, after giving effect to such exercise, such holder would beneficially own in excess of 9.8% of the shares of common stock outstanding. No fractional shares will be issued upon exercise of the warrants. If, by reason of any adjustment made pursuant to the warrant agreement, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, the Company will, upon exercise, round up to the nearest whole number the number of shares of common stock to be issued to the warrant holder.
The Company’s Redemption Right The Company may call the Public Warrants for redemption, in whole and not in part, at a price of $0.01 per warrant:
The right to exercise will be forfeited unless the Public Warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a Public Warrant will have no further rights except to receive the redemption price for such holder’s Public Warrant upon surrender of such Public Warrant. The redemption criteria for the Public Warrants have been established at a price which is intended to provide warrant holders a reasonable premium to the initial exercise price and provide a sufficient differential between the then-prevailing share price and the warrant exercise price so that if the share price declines as a result of a redemption call, the redemption will not cause the share price to drop below the exercise price of the Warrants. If the Public Warrants are called for redemption as described above, the Company will have the option to require all holders that wish to exercise warrants to do so on a “cashless basis.” In such event, each holder would pay the exercise price by surrendering the warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” shall mean the average reported last sale price of the shares of common stock for the 5 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of Public Warrants. Unit Purchase Option As part of its IPO, in April 2017 Forum sold to its primary underwriter, EBC, and its designees, for $100, a UPO to purchase up to a total of 1,125,000 Units exercisable at $10.00 per Unit. The option represents the right to purchase up to 1,237,500 shares of common stock (which includes 112,500 shares which will be issued for the Rights included in the Units) and warrants to purchase 562,500 shares of common stock at $11.50 per share for an aggregate maximum amount of $6,468,750. Forum accounted for the UPO, inclusive of the receipt of $100 cash payment, as an expense of its IPO resulting in a charge directly to stockholders’ equity. Upon completion of the Merger, the UPO pertains to the purchase of ConvergeOne common stock and the terms and conditions remain the same. The UPO may be exercised for cash or on a cashless basis, at the holder’s option, at any time during the period commencing April 6, 2018 (the first anniversary of the effective date of the registration statement filed in connection with the Forum IPO) and will terminate on April 6, 2022 (the fifth anniversary of the effective date of the registration statement filed in connection with the Forum IPO). The UPO grants to holders demand and “piggy back” registration rights for periods of five and seven years, respectively, from April 6, 2017 (the effective date of the registration statement filed in connection with the Forum IPO) with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the UPO. EBC and/or its designees may only make a demand registration (i) on one occasion and (ii) during the five year period beginning on April 6, 2017, the effective date of the registration statement filed with the SEC for the Forum IPO. The Company will bear all fees and expenses attendant to registering the securities, other than underwriting commissions, which will be paid for by the holders themselves. The exercise price and number of Units issuable upon exercise of the UPO may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. However, the UPO will not be adjusted for issuances of common stock at a price below the Company’s exercise price. The Company has no obligation to net cash settle the exercise of the UPO or the Rights or warrants underlying the UPO. The holder of the UPO will not be entitled to exercise the UPO or the Rights or warrants underlying the UPO unless a registration statement covering the securities underlying the UPO is effective or an exemption from registration is available. If the holder is unable to exercise the UPO or underlying Rights or warrants, the UPO, Rights or warrants, as applicable, will expire worthless.
The underwriters had performed all of their services in April 2017 and thus the fair value measurement of the UPO at the date of issuance by Forum was a one-time, nonrecurring measurement that is not subject to re-measurement over the life of the UPO. Registration Rights In April 2017, the Sponsor entered into a registration rights agreement with Forum pursuant to which the Sponsor was granted certain rights relating to the registration of shares of common stock and warrants held by it and its transferees. In February 2018, upon the Closing of the Merger, the Company, certain C1 Securityholders, including the Company’s executive officers and Clearlake, and the Sponsor entered into an amended and restated registration rights agreement, pursuant to which such parties hold registration rights with respect to shares of common stock issued as merger consideration under the Merger Agreement, including any Earnout Stock Payments, as well as shares of common stock held by the Sponsor and its transferees, or issuable upon the exercise of warrants by the Sponsor (collectively, the “Registration Rights”). Stockholders holding a majority-in-interest of such registrable securities are entitled to make a written demand for registration under the Securities Act of all or part of their registrable securities. Subject to certain exceptions, such stockholders also have certain “piggy-back” registration rights with respect to registration statements filed by the Company, as well additional rights to provide for registration of registrable securities on Form S-3 and any similar short-form registration statement that may be available at such time. The Company will bear the expenses incurred in connection with the filing of any such registration statements described above. The Registration Rights do not meet the definition of a registration payment arrangement as there are no terms that require the Company to transfer consideration to the various securityholders if a registration statement is not declared effective or effectiveness is not maintained. 2018 Equity Incentive Plan The 2018 Equity Incentive Plan (the “Equity Incentive Plan”) was approved by the Company’s board of directors and stockholders in February 2018, and became effective upon the Closing of the Merger. The Equity Incentive Plan provides for the grant of incentive stock options, or ISOs, nonstatutory stock options, or NSOs, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards, and other forms of equity compensation, or collectively, stock awards, all of which may be granted to the Company’s employees, including officers, non-employee directors and consultants. Additionally, the Equity Incentive Plan provides for the grant of performance cash awards. ISOs may be granted only to employees. All other awards may be granted to employees, including officers, and to non-employee directors and consultants. The Company has not made any grants since the Closing of the Merger. 2018 Employee Stock Purchase Plan The 2018 Employee Stock Purchase Plan (the “ESPP”) was approved by the Company’s board of directors and stockholders in February 2018, and became effective upon the Closing of the Merger. The ESPP provides a means by which the Company’s employees may be given an opportunity to purchase shares of the Company’s common stock. The rights to purchase common stock granted under the ESPP are intended to qualify as options issued under an “employee stock purchase plan” as that term is defined in Section 423(b) of the Code. The Board initially authorized an Offering beginning on May 1, 2018 and ending on June 30, 2018 (the “Initial Offering”). Following the end of the Initial Offering, a new Offering (“Subsequent Offering”) will automatically begin on the day that immediately follows the conclusion of the preceding Offering. Each Subsequent Offering will be approximately six months long, and will consist of one Purchase Period ending on June 30 and December 31 each year. The Board may change the terms and dates of Subsequent Offerings and Purchase Periods pursuant to the terms of the Purchase Plan.
The Initial Offering consisted of one Purchase Period, ending on June 30, 2018. The Initial Offering resulted in 57,293 shares being issued in July, 2018. Stock-based compensation expense of approximately $62,000 was recognized in the three and six months ended June 30, 2018 related to the Initial Offering. Expense Stock-based compensation expense recognized for all equity awards for the three and six months ended June 30, 2018, was $45,000 and $6,431,000, respectively. Stock-based compensation expense recognized for all equity awards for the three and six months ended June 30, 2017 was $174,000 and $330,000, respectively. The increase in expense for the six months ended June 30, 2018 was the result of recognizing the full amount of unrecognized C1 stock-based compensation expense of $4,842,000 upon the Closing of the Merger on February 22, 2018, including the expense related to the re-measurement of a portion of the C1 stock options just prior to the Closing, and $1,527,000 of compensation expense recorded for the portion of the Earnout Consideration payable to the former C1 option holders (see Note 2). Approximately $647,000 of the $1,527,000 of deemed compensation expense is recorded in the condensed consolidated statement of stockholders’ equity (deficit) and the remainder is recorded in the earnout consideration payable on the condensed consolidated balance sheet. |
Net Income (Loss) per Share |
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Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Income (Loss) per Share | 8. Net Income (Loss) per Share Prior to the Merger Prior to the Merger, C1 had two classes of common stock, Class A and Class B. The Company applied the two-class method of computing net income (loss) per share in which net income (loss) is allocated to the two classes of common stock in the same fashion as dividends are distributed. The holders of the Class A common stock were entitled to receive dividends in preference to the holders of the Class B common stock. After the payment of the Class A preferential dividends, the holders of the Class A and Class B common stock were entitled to share equally, on a per share basis, in all dividends declared by the Board of Directors. As a result of a cash dividend paid in October 2016, the holders of the Class A common stock were no longer entitled to receive any preferential dividends or preferential amounts in the event of any liquidation, dissolution, winding up or change of control transaction. Shares of Class B common stock were considered participating securities subsequent to the dividend payment in October 2016 for computation of net income (loss) per share. However, Class B common stockholders did not participate in a net loss. In the Company’s consolidated statement of operation for the three and six months ended June 30, 2017, the Class B common stockholders did not participate in the net loss. There were no Class A dilutive securities for the three and six months ended June 30, 2017. As a result, diluted net loss per common share is the same as basic net loss per common share for the three and six months ended June 30, 2017. For the three and six months ended June 30, 2017, the Company has retroactively adjusted the weighted-average number of shares of common stock outstanding to reflect the Merger Exchange Ratio as described in Notes 2 and 7. There were no Class A dilutive securities for the period from January 1, 2018 to the Merger date. Post-Merger Basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders, which is computed by subtracting the Earnout Consideration from net income, by the weighted-average number of shares of common stock outstanding during the period, as adjusted for the Sponsor Earnout Shares that are not participating securities until vested, and the effect of shares that were contingently issuable for which the contingency has been resolved, whether or not those shares have been issued. The contingently issuable shares of common stock pertain to those shares to be issued and vested when the Company meets the Earnings Targets established as part of the Merger Agreement as described in Note 2—Business Combination/Merger. Diluted net income (loss) per share is computed by dividing net income (loss) available to common shareholders, which is computed by subtracting the Earnout Consideration from net income, by the weighted-average number of shares of common stock outstanding during the period, as adjusted for the Sponsor Earnout Shares that are not participating securities until vested, the effect of shares that were contingently issuable for which the contingency has been resolved, whether or not those shares have been issued yet, and any dilutive equity instruments (warrants and options) that are “in-the-money”. The effect of the contingently issuable shares and dilutive equity instruments are included for the shorter of the date the underlying contracts were in existence to the end of the reporting period or the entire reporting period. However, diluted net loss per share excludes all dilutive potential shares if their effect is anti-dilutive. For the three months and six ended June 30, 2018, the Company adjusted the weighted-average number of C1 Class A common shares outstanding from January 1, 2018 to the Merger date of February 22, 2018, to retroactively adjust those share amounts to reflect the Merger Exchange Ratio as described in Notes 2 and 7. As of June 30, 2018, there were 13,717,054 equivalent shares of common that were evaluated for purposes of including in weighted-average shares outstanding. The actual amount of common share equivalents that were excluded from the calculation of diluted net loss per share for the three and six months ended June 30, 2018 was 7,117,054 and 6,421,547, respectively, as their effect was anti-dilutive. Additionally, all of the Company’s outstanding warrants to purchase common stock and the UPO were excluded from the computation of weighted-average shares outstanding for dilutive purposes during the three and six months ended June 30, 2018, due to the instruments having exercise prices in excess of the market value of the Company’s common stock. These instruments could result in dilution in future periods.
The following is a summary of the information used to compute basic and diluted net loss per common share (in thousands, except per share amounts):
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Fair Value Measurements |
6 Months Ended |
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Jun. 30, 2018 | |
Fair Value Disclosures [Abstract] | |
Fair Value Measurements | 9. Fair Value Measurements For certain of the Company’s financial instruments, including cash, trade accounts receivable, accounts payable, and accrued expenses, the carrying value approximates fair value due to the short-term maturities of these instruments. The fair value of the Company’s long-term debt as of June 30, 2018 and December 31, 2017 approximates the carrying value of $710,000,000 and $582,325,000, respectively. The Company uses significant other unobservable inputs to estimate fair value (Level 3 of the fair value hierarchy) of long-term debt based on the present value of future cash flows, interest rates, maturities and collateral requirements available for companies with similar credit ratings. For certain of the Company’s nonfinancial assets, including goodwill, intangible assets and property and equipment, the Company may be required to assess the fair values of these assets, on a recurring or nonrecurring basis, and record an impairment if the carrying value exceeds the fair value. In determining the fair value of these assets, the Company may use a combination of valuation methods, which include Level 3 inputs. For the periods presented, there were no impairment charges. See Notes 1—Nature of Business and Summary of Significant Accounting Policies and 5—Goodwill and Finite-Life Intangible Assets for additional information regarding the Company’s determination of fair value regarding goodwill and indefinite-lived intangible assets. In conjunction with the acquisition of ASI discussed in Note 3—Business Acquisitions, the Company used a combination of valuation methods which include Level 3 inputs in determining the fair values of the assets and liabilities acquired as well as the fair value of the consideration transferred. |
Major Vendors and Economic Dependence |
6 Months Ended |
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Jun. 30, 2018 | |
Risks and Uncertainties [Abstract] | |
Major Vendors and Economic Dependence | 10. Major Vendors and Economic Dependence The Company has numerous technology partners whose communication products are purchased and resold. Although the Company purchases from a diverse vendor base, products manufactured by two of our vendors, Avaya Inc. (“Avaya”) and Cisco Systems, Inc. (“Cisco”), represented the majority of the Company’s technology offerings revenue. Avaya-related revenue represented 20% and 24% for the three months ended June 30, 2018 and 2017; and, 20% and 22% for the six months ended June 30, 2018 and 2017, respectively. Cisco-related revenue represented 43% and 33% for the three months ended June 30, 2018 and 2017; and, 39% and 34% for the six months ended June 30, 2018 and 2017, respectively. The Company has one distributor that supplies a significant portion of its Avaya communication products. At June 30, 2018 and December 31, 2017, the Company owed $19,871,000 and $28,146,000, respectively, to this distributor. |
Operating Leases |
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Leases [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating Leases | 11. Operating Leases The Company leases office and warehouse space and vehicles under operating lease agreements that expire on various dates through 2026. Approximate future minimum annual rental commitments under these operating leases as of June 30, 2018 are as follows (in thousands):
Rent expense was $2,914,000 and $5,401,000 for the three and six months ended June 30, 2018 and $1,044,000 and $2,162,000 for the three and six months ended June 30, 2017, respectively. |
Employee Benefit Plans |
6 Months Ended |
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Jun. 30, 2018 | |
Postemployment Benefits [Abstract] | |
Employee Benefit Plans | 12. Employee Benefit Plans The Company sponsors defined contribution plans for substantially all employees. Annual Company contributions under the plans are discretionary. Company contribution expense during the three and six months ended June 30, 2018 was $1,506,000 and $3,029,000, respectively. Company contribution expense during the three and six months ended June 30, 2017 was $634,000 and $1,950,000, respectively. |
Income Taxes |
6 Months Ended |
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Jun. 30, 2018 | |
Income Tax Disclosure [Abstract] | |
Income Taxes | 13. Income Taxes On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a permanent reduction of the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Various factors can create volatility in the Company’s quarterly tax provision and quarterly effective income tax rate (after discrete items). Certain factors include permanent tax items, discrete items recognized in the period, as well as the actual amount of income or loss before income taxes. The Company’s estimated annual effective tax rate (excluding discrete items) for the six months ended June 30, 2018 and 2017 is 49.1% and 13.7%, respectively. The Company’s annual effective tax rate differs from the federal statutory rate due to state taxes and non-deductible permanent items. The increase in the annual effective tax rate from the prior year is primarily driven by the impact of non-deductible permanent tax items offset by the decrease in the U.S. corporate income tax rate on income or loss before taxes. The Company’s effective income tax rate (after discrete items) for the six months ended June 30, 2018 and 2017 is 110.0% and 12.6%, respectively. The increase in the effective income tax rate from the prior period is driven by a combination of two factors. One factor is that the Company experienced significant or unusual discrete benefit items of $6.7 million in the current period and when combined with a net loss before income taxes, it causes the effective income tax rate to increase. These discrete items primarily include a bargain purchase gain that is not recognized for tax purposes and excess tax benefits associated with stock-based compensation payments. The other factor is that the impact of non-deductible permanent tax items result in an incremental increase to the effective income tax rate when combined with a net loss before taxes. Certain of the Company’s historical net operating losses are subject to Internal Revenue Code Section 382 limitations which have been considered in determining the amount of available net operating loss carryforwards. The Company has federal net operating loss carryforwards of $4.3 million that begin to expire in 2031 if not utilized. The Company also has $21.7 million of various state net operating loss carryforwards that begin to expire in 2020 if not utilized. Uncertain Tax Positions The Company recognizes the tax effects of an uncertain tax position only if it is more likely than not to be sustained based solely upon its technical merits at the reporting date. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. The unrecognized tax benefit is the difference between the tax benefit recognized and the tax benefit claimed on the Company’s income tax return. The Company has reviewed its prior year returns and believes that all material tax positions in the current and prior years have been analyzed and properly accounted for and that the risk that additional material uncertain tax positions have not been identified is remote. During the three months ended June 30, 2018, the previously recorded uncertain tax position was settled with the IRS unfavorably and reclassified to current income taxes. There was no overall impact to the effective tax rate as all liabilities were previously recorded. The Company’s federal income tax returns remain open to examination for 2014 through 2016 and certain of the Company’s state income tax returns remain open to examination for 2013 through 2016. |
Segment Reporting |
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Segment Reporting | 14. Segment Reporting Management has concluded that our chief operating decision maker (CODM) consists of both our chief executive officer and chief financial officer. The Company’s CODMs collectively review the entire organization’s consolidated results as a whole on a monthly basis to evaluate performance and make resource allocation decisions. Management views the Company’s operations and manages its business as one operating segment.
Geographic Areas Sales to customers outside of the United States are not material for any of the periods presented. Additionally, the Company does not have long-lived assets outside of the United States. Revenue by Technology Market The following table presents total technology offerings revenue and services revenue by technology market, based on the Company’s internal classification of revenue (in thousands):
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Related-Party Transactions |
6 Months Ended |
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Jun. 30, 2018 | |
Related Party Transactions [Abstract] | |
Related-Party Transactions | 15. Related-Party Transactions In June 2014, the Company entered into a Management and Monitoring Services Agreement with Clearlake, pursuant to which Clearlake provided the Company advisory services and received fees and reimbursements of related out-of-pocket expenses. For the three and six months ended June 30, 2018, the expense under the agreement was nil and $221,000 respectively. For the three and six months ended June 30, 2017, the expense under the agreement was $375,000 and $750,000, respectively, which $375,000 was included in accrued expenses at June 30, 2017. In connection with the Merger, this agreement was terminated. On August 17, 2017, the Company granted 530,772 options to purchase the Company’s Class B Common Stock to a newly appointed board member. On September 25, 2017, the board member early exercised the options for a total exercise price of $1,805,000 with payment in the form of a Recourse Promissory Note. The note bore interest at 2.6% and was paid in full upon the Closing of the Merger. |
Subsequent Events |
6 Months Ended |
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Jun. 30, 2018 | |
Subsequent Events [Abstract] | |
Subsequent Events | 16. Subsequent Events On August 8, 2018, the Board of Directors of the Company declared a regular quarterly cash dividend of $0.02 per common share to be paid on September 14, 2018 to all stockholders of record as of the close of business on August 24, 2018. Future dividends will be subject to Board of Directors approval. |
Nature of Business and Summary of Significant Accounting Policies (Policies) |
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Organization, Consolidation and Presentation of Financial Statements [Abstract] | |||||||||||||
Basis of Presentation | Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet as of December 31, 2017 included herein was derived from the C1 audited financial statements as of that date, but does not include all disclosures including notes required by U.S. GAAP. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or any other period. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Registration Statement on Form S-1/A filed on April 24, 2018. There have been no changes to the Company’s significant accounting policies described in the consolidated financial statements for the year ended December 31, 2017 that have had a material impact on the condensed consolidated financial statements and related notes for the three and six months ended June 30, 2018. Accounting policies that are new as a result of the Merger have been included below. The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, Forum was treated as the “acquired” company for financial reporting purposes. This determination was primarily based on C1 shareholders having a majority of the voting power of the combined company, C1 comprising the ongoing operations of the combined entity, C1 comprising a majority of the governing body of the combined company, and C1’s senior management comprising the senior management of the combined company. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of C1 issuing stock for the net assets of Forum, accompanied by a recapitalization (referred to as “the Merger”). The net assets of Forum were stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Merger are those of C1. |
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Earnout Consideration | Earnout Consideration As discussed in Note 2—Business Combination/Merger, upon the completion of the Merger, the C1 Securityholders received a combination of cash and shares of ConvergeOne common stock in exchange for all of their C1 Securities. Subject to terms and conditions set forth in the Merger Agreement, the former C1 Securityholders have the contingent right to receive additional consideration for their former C1 Securities, in the form of cash and shares of ConvergeOne common stock (the “Earnout Consideration”, as defined in the Merger Agreement), based on specified Earnout Targets for 2018, 2019 and 2020 (“Earnout Years”) that may be accelerated. As of March 31, 2018, the Earnout Targets for 2018 and 2019 have been achieved. See Note 2 for the details of the Earnout Consideration. The Earnout Consideration is contingent on the Company meeting the pre-established Earnings Targets and thus is recorded, if and when earned or probable to be earned. The portion of the Earnout Consideration pertaining to the former C1 option holders, who are current employees of the Company, is accounted for as compensation when the Earnings Targets have been met. The Earnout Consideration pertaining to the former C1 shareholders is accounted for as an equity transaction when the Earnings Targets have been met. |
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Common Stock Purchase Warrants | Common Stock Purchase Warrants The Company accounts for the issuance of common stock purchase warrants based on the terms of the contract and whether there are any requirements for the Company to net cash settle the contract under any terms or conditions. Warrants for the purchase of 8.9 million shares of common stock were issued by Forum as part of the units sold in its initial public offering (“IPO”) in April 2017 (the “Warrants”). Each unit (a “Unit”), was comprised of one share of Class A common stock, a warrant to purchase one half of one share of Class A common stock and a right to receive one-tenth of a share of Class A common stock upon the consummation of a business combination by Forum. See Notes 2 and 7—Business Combination/Merger and Stockholders’ Equity (Deficit). None of the terms of the Warrants have been modified as a result of the Merger. The Warrants are freestanding financial instruments that are legally detachable from the shares that were issued at the same time. Most of the Warrants are redeemable at the Company’s option in certain conditions. The Warrants require settlement to be in physical shares of common stock only. The terms of all of the outstanding Warrant contracts expressly state there are no requirements for the Company to net cash settle the Warrants under any circumstances. The Company has accounted for the Warrants as equity instruments. |
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Unit Purchase Option | Unit Purchase Option Subsequent to the Merger, the Company has a unit purchase option (“UPO”) outstanding that was issued to Earlybird Capital LLC (“EBC”) and its designees in connection with Forum’s IPO. The UPO is accounted for as an equity instrument. The underwriters had performed all of their services in April 2017 and the fair value measurement was a one-time, nonrecurring measurement that is not subject to re-measurement over the life of the UPO (see Notes 2 and 7). |
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Net Income (Loss) Per Share | Net Income (Loss) Per Share Prior to the Merger on February 22, 2018, net income (loss) per share was computed using the two-class method. The change in the Company’s capital structure as a result of the Merger and reverse capitalization during 2018 has eliminated the need for a two-class method earnings per share calculation. The historical number of outstanding shares of C1 common stock have been adjusted to retroactively reflect the effect of the Merger and the historical net income (loss) per share has been adjusted to give effect to this retroactive adjustment (see Note 2—Business Combination/Merger and Note 8—Net Income (Loss) per Share).
Post-Merger, basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders, which is computed by subtracting the Earnout Consideration from net income, by the weighted-average number of shares of common stock outstanding during the period, as adjusted for the Sponsor Earnout Shares that are not participating securities until vested, and the effect of shares that were contingently issuable for which the contingency has been resolved, whether or not those shares have been issued. The contingently issuable shares of common stock pertain to those shares to be issued when the Company meets the Earnings Targets established as part of the Merger Agreement as described in Note 2—Business Combination/Merger. Diluted net income (loss) per share is computed by dividing net income (loss) available to common shareholders, which is computed by subtracting the Earnout Consideration from net income, by the weighted-average number of shares of common stock outstanding during the period, as adjusted for the Sponsor Earnout Shares that are not participating securities until vested, the effect of shares that were contingently issuable for which the contingency has been resolved, whether or not those shares have been issued yet, and any dilutive equity instruments (warrants and options) that are “in-the-money”. The effect of the contingently issuable shares and dilutive equity instruments are included for the shorter of the date the underlying contracts were in existence to the end of the reporting period or the entire reporting period. However, diluted net loss per share excludes all dilutive potential shares if their effect is anti-dilutive. |
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Emerging Growth Company Status | Emerging Growth Company Status The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012, (the “JOBS Act”). Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. The Company would cease to be an “emerging growth company” upon the earliest to occur of: the last day of the fiscal year in which it has more than $1.07 billion in annual revenue; the date it qualifies as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by it of more than $1.0 billion in non-convertible debt securities; or December 31, 2022. The Company anticipates that it will cease to be an “emerging growth company” on December 31, 2018. |
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Recent Accounting Pronouncements | Recent Accounting Pronouncements As long as the Company remains an Emerging Growth Company, the Company plans to adopt new accounting standards using the effective dates available for nonpublic entities. Recently Adopted Accounting Pronouncements On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2017-09,Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies that modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the changes in terms or conditions. The amendments in this standard should be applied prospectively to an award modified on or after the adoption date. The adoption of ASU 2017-09 did not have any impact on the consolidated financial statements. Recently Issued Accounting Pronouncements Not Yet Adopted In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single, comprehensive model for accounting for revenue from contracts with customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year, making it effective for annual reporting periods beginning after December 15, 2018 and interim periods within that fiscal year, with early adoption permitted. The FASB has issued the following additional ASUs to amend the guidance in ASU 2014-09, all of which have effective dates concurrent with the effective date of ASU 2014-09:
The Company does not intend to early adopt the new revenue recognition guidance. The Company is evaluating the effect of the revenue recognition ASUs. The evaluation includes selecting a transition method for these revenue recognition ASUs and determining the effect that the updated standards will have on the historical and future consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which changes the accounting for leases in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The standard has an effective date for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company does not currently intend to early adopt the new leasing guidance and, therefore, ASU 2016-02 will be effective for us for the year ending December 31, 2020. If the Company loses emerging growth company status in 2018, the standard will be effective for the Company for the year ending December 31, 2019. The Company has not yet begun to evaluate the effect of the new guidance on the consolidated financial statements. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments, to address diversity in practice regarding the presentation of eight specific cash flow situations. These situations include, but are not limited to, debt prepayment and debt extinguishment costs and contingent consideration payments made after a business combination. The standard has an effective date for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact that the standard will have on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, to clarify the definition of a business and add guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard has an effective date for annual periods beginning after December 15, 2018, and interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the impact that the standard will have on the consolidated financial statements. |
Business Combination/Merger (Tables) |
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Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Reverse Recapitalization | The following is a summary of the reverse recapitalization, as recorded in the condensed consolidated statement of stockholders’ equity (deficit) (in thousands):
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Business Acquisitions (Tables) |
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Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
fair Value of Assets Acquired and Liabilities Assumed | The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed (in thousands) of ASI acquired on March 1, 2018:
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Acquisitions | Following are the supplemental consolidated results of the Company on an unaudited pro forma basis, as if the acquisition of ASI had been consummated on January 1, 2017. The pro forma results presented below show the impact of acquisition-related costs as well as the increase in interest expense related to acquisition-related debt (in thousands).
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Trade Accounts Receivable (Tables) |
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Receivables [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for Doubtful Accounts | The following is a roll forward of our allowance for doubtful accounts (in thousands):
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Goodwill and Finite-Life Intangible Assets (Tables) |
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Goodwill and Intangible Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in Carrying Amount of Goodwill | The changes in the carrying amount of goodwill are as follows (in thousands):
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Finite-Life Intangible Assets | Finite-life intangible assets consist of the following (in thousands):
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Estimated Amortization Expense | Based on the recorded intangible assets at June 30, 2018, estimated amortization expense is expected to be as follows (in thousands):
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Debt (Tables) |
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Long-term debt | Long-term debt consists of the following (in thousands):
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Debt Issuance Costs | Debt issuance costs are as follows (in thousands):
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Future Principal Payments on Long-Term Debt | The approximate future principal payments on long-term debt are as follows (in thousands):
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Net Income (Loss) per Share (Tables) |
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Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of compute basic and diluted net loss per common share | The following is a summary of the information used to compute basic and diluted net loss per common share (in thousands, except per share amounts):
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Operating Leases (Tables) |
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Leases [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
future Minimum Annual Rental Commitments | Approximate future minimum annual rental commitments under these operating leases as of June 30, 2018 are as follows (in thousands):
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Segment Reporting (Tables) |
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Segment Reporting [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Revenue by Type of Internal Classification | The following table presents total technology offerings revenue and services revenue by technology market, based on the Company’s internal classification of revenue (in thousands):
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Nature of Business and Summary of Significant Accounting Policies - Additional Information (Detail) shares in Millions |
Apr. 30, 2017
shares
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IPO [Member] | |
Nature Of Operations And Basis Of Accounting Presentation [Line Items] | |
Warrants issued | 8.9 |
Summary of Reverse Recapitalization, as Recorded in Condensed Consolidated Statement of Equity (deficit): (Detail) $ in Thousands |
6 Months Ended |
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Jun. 30, 2018
USD ($)
| |
Proceeds from Forum cash, including proceeds from PIPE | $ 147,335 |
Payments made to C1 Security holders in exchange for all of their C1 Securities | (182,847) |
Reverse recapitalization expenses, net of tax | (30,934) |
Assumption of Forum liabilities | (317) |
Effect of reverse recapitalization | (66,570) |
C1 provided cash towards the payment to the C1 Securityholders | 35,240 |
Scenario, Adjustment [Member] | |
Payments made to C1 Security holders in exchange for all of their C1 Securities | (182,654) |
Lump Sum Cash Payment [Member] | |
Proceeds from Forum cash, including proceeds from PIPE | 147,335 |
Payments made to C1 Security holders in exchange for all of their C1 Securities | (182,654) |
Reverse recapitalization expenses, net of tax | (28,204) |
Effect of reverse recapitalization | (63,523) |
C1 provided cash towards the payment to the C1 Securityholders | 35,240 |
Non Cash [Member] | |
Reverse recapitalization expenses, net of tax | (2,730) |
Assumption of Forum liabilities | (317) |
Effect of reverse recapitalization | $ (3,047) |
Business Acquisitions - Additional Information (Detail) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | |||
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Mar. 01, 2018 |
Jul. 14, 2017 |
Jun. 30, 2018 |
Jun. 30, 2018 |
Mar. 31, 2018 |
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Gain on bargain acquisition | $ 10,973 | ||||
Business acquisition, contingent consideration liability | $ 125,532 | 125,532 | $ 126,984 | ||
Scenario, Adjustment [Member] | |||||
Cash consideration | 2,266 | ||||
Gain on bargain acquisition | 5,085 | ||||
Total liabilities assumed | (9,962) | (9,962) | |||
Deferred income taxes | 2,611 | 2,611 | |||
SPS | |||||
Fair value of accounts receivable | $ 3,263 | ||||
Arrow Systems Integration, Inc. ('ASI') [Member] | |||||
Cash consideration | 28,376 | ||||
Transaction costs related to the acquisition | 484 | ||||
Fair value of the contingent consideration | 39,349 | ||||
Gain on bargain acquisition | 10,973 | 10,973 | |||
Total liabilities assumed | (59,342) | ||||
Deferred income taxes | $ 7,782 | ||||
Revenue, since the acquisition | 77,356 | ||||
Net income, since the acquisition | 12,867 | ||||
Annese | |||||
Aggregate consideration paid in cash | $ 24,483 | ||||
Change in the fair value of the contingent consideration | 956 | ||||
Annese | Accrued other [Member] | |||||
Business acquisition, contingent consideration liability | $ 4,000 | $ 0 | $ 0 |
Fair Value of Assets acquired and Liabilities assumed (Detail) - USD ($) $ in Thousands |
6 Months Ended | |
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Mar. 01, 2018 |
Jun. 30, 2018 |
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Business Acquisition [Line Items] | ||
Preliminary bargain purchase gain | $ 10,973 | |
Arrow Systems Integration, Inc. ('ASI') [Member] | ||
Business Acquisition [Line Items] | ||
Cash | $ 716 | |
Trade accounts receivable | 64,426 | |
Inventories | 2,635 | |
Prepaid expenses | 1,752 | |
Deferred customer support contract costs | 11,743 | |
Property and equipment | 337 | |
Deferred income taxes | 7,782 | |
Total assets acquired | 98,691 | |
Accounts payable and accrued expenses | (33,390) | |
Deferred revenue and long-term liabilities | (25,952) | |
Total liabilities assumed | (59,342) | |
Net assets acquired | 39,349 | |
Purchase Price | 28,376 | |
Preliminary bargain purchase gain | 10,973 | $ 10,973 |
Arrow Systems Integration, Inc. ('ASI') [Member] | Customer Relationships | ||
Business Acquisition [Line Items] | ||
Intangible assets | 9,000 | |
Arrow Systems Integration, Inc. ('ASI') [Member] | Noncompetition Agreements | ||
Business Acquisition [Line Items] | ||
Intangible assets | $ 300 |
Unaudited Pro-forma Information (Detail) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Business Combinations [Abstract] | ||||
Revenue | $ 391,011 | $ 257,302 | $ 730,193 | $ 505,089 |
Net income (loss) | $ (7,461) | $ (11,628) | $ 538 | $ (15,290) |
Net income (loss) per share - basic and diluted | $ (0.10) | $ (0.29) | $ 0.01 | $ (0.38) |
Trade Accounts Receivable (Detail) - USD ($) $ in Thousands |
6 Months Ended | 12 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Dec. 31, 2017 |
|||
Allowance for Doubtful Accounts Receivable [Roll Forward] | ||||
Balance at beginning of period | $ 1,480 | $ 1,024 | ||
Amounts expensed (recovered) | (120) | 1,006 | ||
Deductions | [1] | (34) | (550) | |
Balance at end of period | $ 1,326 | $ 1,480 | ||
|
Schedule of Changes in the Carrying Amount of Goodwill (Detail) $ in Thousands |
6 Months Ended |
---|---|
Jun. 30, 2018
USD ($)
| |
Goodwill and Intangible Assets Disclosure [Abstract] | |
Balance as of December 31, 2017 | $ 331,456 |
Measurement period adjustments | (2,436) |
Goodwill increase associated with adjustment of deferred income taxes | 2,357 |
Balance as of June 30, 2018 | $ 331,377 |
Goodwill and Finite-Life Intangible Assets - Additional Information (Detail) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Goodwill and Intangible Assets Disclosure [Abstract] | ||||
Goodwill increase associated with adjustment of deferred income taxes | $ (2,357) | |||
Goodwill decrease associated with measurement period adjustments | (2,436) | |||
Aggregate amortization Expense | $ 9,367 | $ 5,550 | $ 18,099 | $ 11,180 |
Finite Life Intangible Assets (Detail) - USD ($) $ in Thousands |
Jun. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Finite-lived intangible assets, gross | $ 264,788 | $ 253,779 |
Less accumulated amortization | (98,236) | (80,137) |
Finite-life intangibles, net | 166,552 | 173,642 |
Customer Relationships | ||
Finite-lived intangible assets, gross | 219,576 | 208,451 |
Trademarks | ||
Finite-lived intangible assets, gross | 38,359 | 38,546 |
Noncompete Agreements | ||
Finite-lived intangible assets, gross | 6,312 | 6,241 |
Internally developed software | ||
Finite-lived intangible assets, gross | $ 541 | $ 541 |
Schedule of Aggregate Amortization Expense (Detail) - USD ($) $ in Thousands |
Jun. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Goodwill and Intangible Assets Disclosure [Abstract] | ||
Remainder of 2018 | $ 18,560 | |
2019 | 36,689 | |
2020 | 33,378 | |
2021 | 30,301 | |
2022 | 25,856 | |
2023 and thereafter | 21,768 | |
Finite-life intangibles, net | $ 166,552 | $ 173,642 |
Debt - Component of long-term debt (Detail) - USD ($) $ in Thousands |
Jun. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Debt Instrument [Line Items] | ||
Total long-term debt | $ 710,000 | $ 582,325 |
Less unamortized original issue discount | (3,578) | (5,623) |
Less unamortized deferred financing costs | (6,647) | (4,626) |
Total debt | 699,775 | 572,076 |
Less current maturities | (6,700) | (5,652) |
Long-term debt, net | 693,075 | 566,424 |
Total long-term debt, net of debt issuance costs | 699,775 | 572,076 |
Term Loan facility [Member] | ||
Debt Instrument [Line Items] | ||
Total long-term debt | 670,000 | 562,325 |
Senior secured revolving loan facility [Member] | ||
Debt Instrument [Line Items] | ||
Total long-term debt | $ 40,000 | $ 20,000 |
Debt - April 2018 Credit Facilities - Additional Information (Detail) - USD ($) $ in Thousands |
6 Months Ended | ||
---|---|---|---|
Apr. 10, 2018 |
Jun. 30, 2018 |
Dec. 31, 2017 |
|
Debt Instrument [Line Items] | |||
Debt aggregate principal amount | $ 710,000 | $ 582,325 | |
Original debt issue discount | 3,578 | 5,623 | |
Senior secured revolving loan facility [Member] | |||
Debt Instrument [Line Items] | |||
Debt aggregate principal amount | $ 40,000 | $ 20,000 | |
Repayment of credit facilities | $ 90,000 | ||
Senior Secured Revolving Loan Facility [Member] | |||
Debt Instrument [Line Items] | |||
Debt aggregate principal amount | 670,000 | ||
Debt financing transaction costs | 5,931 | ||
Original debt issue discount | 3,700 | ||
Debt principal installments | $ 1,675 | ||
Debt payment term | The principal installments in the amount of $1,675,000 are due on the last business day of each quarter commencing September 30, 2018, with the remaining outstanding principal amount to be paid on its maturity date of April 10, 2025. | ||
Debt maturity date | Apr. 10, 2025 | ||
Debt agreement requirement | The Term Loan Agreement requires the Company to prepay outstanding Term Loans, subject to certain exceptions, in amounts equal to the following: commencing with the year ending December 31, 2018, 50% of “excess cash flow” (which percentage steps down to 25% and 0% when we obtain certain consolidated total net leverage ratios), provided that any mandatory “excess cash flow” prepayment shall be at least $10 million; 100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property (which percentage steps down to 50% when we obtain a certain consolidated total net leverage ratio); and 100% of the net cash proceeds of any incurrence of debt, other than debt permitted to be incurred or issued under the Term Loan Agreement. | ||
Debt instrument prepayment percentage | 1.00% | ||
Debt, stated interest rate | 5.84% | ||
Senior Secured Revolving Loan Facility [Member] | Base Rate [Member] | |||
Debt Instrument [Line Items] | |||
Debt interest rate | 2.75% | ||
Senior Secured Revolving Loan Facility [Member] | Eurodollar [Member] | |||
Debt Instrument [Line Items] | |||
Debt interest rate | 3.75% |
Debt - June 2017 Credit Facilities - Additional Information (Detail) - USD ($) |
1 Months Ended | 6 Months Ended | ||||
---|---|---|---|---|---|---|
Feb. 13, 2018 |
Oct. 31, 2017 |
Jul. 31, 2017 |
Jun. 30, 2018 |
Dec. 31, 2017 |
Jun. 20, 2017 |
|
Debt Instrument [Line Items] | ||||||
Financing Cost Transactions | $ 6,647,000 | $ 4,626,000 | ||||
Original Issue Discount | 3,578,000 | $ 5,623,000 | ||||
Extinguishment costs incurred | $ 9,031,000 | |||||
Senior Secured Revolving Loan Facility [Member] | ||||||
Debt Instrument [Line Items] | ||||||
Debt instrument, principal amount | $ 430,000,000 | |||||
Issuance date | Jun. 20, 2017 | |||||
Principal Installments | $ 1,413,000 | |||||
Maturity Date commencing | Sep. 30, 2017 | |||||
Maturity Date ending | Jun. 20, 2024 | |||||
Installment payment description | Last business day of each quarter | |||||
Premium or penalty in connection with a repricing transaction | 1.00% | |||||
Financing Cost Transactions | $ 4,778,000 | |||||
Original Issue Discount | 4,300,000 | |||||
Senior Secured Revolving Loan Facility [Member] | Incremental Amendment Agreement [Member] | ||||||
Debt Instrument [Line Items] | ||||||
Financing Cost Transactions | 2,208,000 | |||||
Original Issue Discount | 713,000 | |||||
Proceeds from borrowing | $ 60,000,000 | $ 75,000,000 | ||||
Unamortized deferred cost | 1,128,000 | |||||
Senior Secured Revolving Loan Facility [Member] | Incremental Amendment Agreement [Member] | Interest Expense [Member] | ||||||
Debt Instrument [Line Items] | ||||||
Direct issuance costs incurred within interest expense | $ 1,793,000 | |||||
Senior Secured Revolving Loan Facility [Member] | ||||||
Debt Instrument [Line Items] | ||||||
Borrowing Base | $ 200,000,000 | $ 150,000,000 | ||||
Line of credit, maturity date | Jun. 20, 2022 | |||||
Line of credit, issuance date | Jun. 20, 2017 | |||||
Financing transaction costs | $ 175,000 | |||||
Senior Secured Revolving Loan Facility [Member] | Minimum | ||||||
Debt Instrument [Line Items] | ||||||
Commitment Fee, percentage | 0.25% | |||||
Senior Secured Revolving Loan Facility [Member] | Maximum | ||||||
Debt Instrument [Line Items] | ||||||
Commitment Fee, percentage | 0.375% | |||||
Senior secured revolving loan facility [Member] | Senior Secured Revolving Loan Facility [Member] | ||||||
Debt Instrument [Line Items] | ||||||
Extinguishment costs incurred | $ 5,684,000 | |||||
Pre payment penalty | 1.00% | |||||
Unamortized deferred financing costs | $ 4,588,000 | |||||
Unamortized original issue discount | 4,443,000 | |||||
prepaid administrative fees | $ 17,000 | |||||
Base Rate [Member] | Senior Secured Revolving Loan Facility [Member] | ||||||
Debt Instrument [Line Items] | ||||||
Interest rate spread | 3.75% | |||||
Base Rate [Member] | Senior Secured Revolving Loan Facility [Member] | Minimum | ||||||
Debt Instrument [Line Items] | ||||||
Interest rate spread | 0.25% | |||||
Base Rate [Member] | Senior Secured Revolving Loan Facility [Member] | Maximum | ||||||
Debt Instrument [Line Items] | ||||||
Interest rate spread | 0.75% | |||||
Eurodollar [Member] | Senior Secured Revolving Loan Facility [Member] | ||||||
Debt Instrument [Line Items] | ||||||
Interest rate spread | 4.75% | |||||
Eurodollar [Member] | Senior Secured Revolving Loan Facility [Member] | Minimum | ||||||
Debt Instrument [Line Items] | ||||||
Interest rate spread | 1.25% | |||||
Eurodollar [Member] | Senior Secured Revolving Loan Facility [Member] | Maximum | ||||||
Debt Instrument [Line Items] | ||||||
Interest rate spread | 1.75% | |||||
Senior Secured Revolving Loan Facility [Member] | ||||||
Debt Instrument [Line Items] | ||||||
Borrowing Base | $ 200,000,000 | |||||
Letters of Credit Outstanding | 40,000,000 | |||||
Line of credit, remaining borrowing capacity | 101,491,000 | |||||
Senior Secured Revolving Loan Facility [Member] | Senior secured revolving loan facility [Member] | ||||||
Debt Instrument [Line Items] | ||||||
Line of credit | 40,000,000 | |||||
Senior Secured Revolving Loan Facility [Member] | Floorplan [Member] | ||||||
Debt Instrument [Line Items] | ||||||
Line of credit | $ 58,509,000 |
Debt - Floor Planning Facilities - Additional Information (Detail) - Senior secured revolving loan facility [Member] - USD ($) $ in Thousands |
Jun. 30, 2018 |
Feb. 13, 2018 |
Jun. 20, 2017 |
---|---|---|---|
GE Commercial Distribution Finance Corporation [Member] | |||
Debt Instrument [Line Items] | |||
Credit Facility | $ 150,000 | ||
Wells Fargo Capital Finance Senior Secured Credit Facility [Member] | |||
Debt Instrument [Line Items] | |||
Credit Facility | $ 200,000 | ||
Wells Fargo Capital Finance Senior Secured Credit Facility [Member] | Accounts Payable | |||
Debt Instrument [Line Items] | |||
Line of Credit Facility, Outstanding Amount | $ 58,509,000 |
Debt - Schedule of debt issuance costs (Detail) - USD ($) $ in Thousands |
6 Months Ended | |
---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Schedule of Capitalization, Long-term Debt [Line Items] | ||
Balance as of December 31, 2017 | $ 10,249 | |
Additions | 9,806 | |
Extinguishment | (9,031) | |
Amortization | (799) | $ (1,755) |
Balance as of June 30, 2018 | 10,225 | |
Term Loan facility [Member] | ||
Schedule of Capitalization, Long-term Debt [Line Items] | ||
Balance as of December 31, 2017 | 9,420 | |
Additions | 9,631 | |
Extinguishment | (9,031) | |
Amortization | (690) | |
Balance as of June 30, 2018 | 9,330 | |
Senior secured revolving loan facility [Member] | ||
Schedule of Capitalization, Long-term Debt [Line Items] | ||
Balance as of December 31, 2017 | 829 | |
Additions | 175 | |
Amortization | (109) | |
Balance as of June 30, 2018 | $ 895 |
Debt - Future principal payments on long term debt (Detail) - USD ($) $ in Thousands |
Jun. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Debt Disclosure [Abstract] | ||
Remainder of 2018 | $ 3,350 | |
2019 | 6,700 | |
2020 | 6,700 | |
2021 | 6,700 | |
2022 | 6,700 | |
2023 and thereafter | 639,850 | |
Total | 670,000 | |
Revolving line-of-credit | 40,000 | |
Less unamortized debt issuance costs | (10,225) | $ (10,249) |
Total debt | $ 699,775 | $ 572,076 |
Stockholders' Equity (Deficit) - Additional Information (Detail) |
1 Months Ended | 3 Months Ended | 6 Months Ended | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Aug. 08, 2018 |
Jun. 19, 2018 |
May 08, 2018
USD ($)
|
Apr. 30, 2018
shares
|
Apr. 26, 2018
USD ($)
|
Apr. 20, 2018
USD ($)
$ / shares
shares
|
Feb. 26, 2018
$ / Warrants
shares
|
Feb. 22, 2018
USD ($)
$ / shares
shares
|
Nov. 30, 2017
shares
|
Apr. 18, 2017
USD ($)
$ / shares
shares
|
Apr. 06, 2017
USD ($)
$ / shares
shares
|
Dec. 28, 2016
USD ($)
shares
|
Jul. 31, 2018
USD ($)
|
Jun. 30, 2018
USD ($)
$ / shares
shares
|
Mar. 31, 2018 |
Jun. 30, 2017
USD ($)
|
Jun. 30, 2018
USD ($)
$ / shares
shares
|
Jun. 30, 2017
USD ($)
|
Feb. 21, 2018
$ / shares
shares
|
Dec. 31, 2017
$ / shares
shares
|
Apr. 30, 2017
USD ($)
$ / shares
shares
|
|||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Common stock, shares issued | 69,700,000 | 76,341,016 | 76,341,016 | 39,860,610 | [1] | ||||||||||||||||||||||
Common shares held | 69,700,000 | 76,341,016 | 76,341,016 | 39,860,610 | [1] | ||||||||||||||||||||||
Common shares issued in exchange | 47,124,494 | ||||||||||||||||||||||||||
Preferred Stock, Shares Authorized | 10,000,000 | 10,000,000 | 10,000,000 | ||||||||||||||||||||||||
Preferred stock, par value | $ / shares | $ 0.0001 | $ 0.0001 | $ 0.0001 | ||||||||||||||||||||||||
Common stock, shares authorized | 1,000,000,000 | 1,000,000,000 | 1,000,000,000 | ||||||||||||||||||||||||
Common stock, par value | $ / shares | $ 0.0001 | $ 0.0001 | $ 0.0001 | ||||||||||||||||||||||||
Voting right | One vote per share | ||||||||||||||||||||||||||
Class of warrant outstanding | 8,900,000 | 1,354,810 | 1,354,810 | ||||||||||||||||||||||||
Option per share | $ / shares | $ 11.50 | $ 11.50 | $ 11.50 | ||||||||||||||||||||||||
Warrants or rights outstanding | $ / Warrants | 0.95 | ||||||||||||||||||||||||||
DelistingFromNasdaq | Jul. 30, 2018 | ||||||||||||||||||||||||||
Compensation expense recognized for equity awards | $ | $ 45,000 | $ 174,000 | $ 6,431,000 | $ 330,000 | |||||||||||||||||||||||
Stock-based compensation expense | $ | 4,904,000 | ||||||||||||||||||||||||||
C1 Investment Corp [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Securities exchanged | 106,124,574 | ||||||||||||||||||||||||||
Cash consideration related to merger | $ | $ 12,000,000 | $ 170,600,000 | |||||||||||||||||||||||||
Number of shares forfeited for payment of income taxes | 10,000 | ||||||||||||||||||||||||||
Subsequent Event [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Dividends payable, date to be paid | Sep. 14, 2018 | ||||||||||||||||||||||||||
Tender Offers [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Option per share | $ / shares | $ 1.20 | ||||||||||||||||||||||||||
Number of warrants purchased for cash through tender offer | 7,581,439 | ||||||||||||||||||||||||||
Aggregate purchase price of warrant | $ | $ 9,098,000 | ||||||||||||||||||||||||||
IPO [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Option to purchase shares | 8,900,000 | ||||||||||||||||||||||||||
Exercisable price per Unit | $ / shares | $ 10.00 | ||||||||||||||||||||||||||
Option per share | $ / shares | $ 11.50 | ||||||||||||||||||||||||||
Unit price | $ | $ 100 | ||||||||||||||||||||||||||
Aggregate maximum amount of option to purchase share | $ | $ 6,468,750 | ||||||||||||||||||||||||||
Stock-based compensation expense | $ | $ 62,000 | $ 62,000 | |||||||||||||||||||||||||
IPO [Member] | Maximum | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Option to purchase shares | 1,237,500 | ||||||||||||||||||||||||||
Total units available for purchase | 1,125,000 | ||||||||||||||||||||||||||
IPO [Member] | Common Stock [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Option to purchase shares | 562,500 | ||||||||||||||||||||||||||
IPO [Member] | Capital Units [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Option to purchase shares | 112,500 | ||||||||||||||||||||||||||
IPO [Member] | Subsequent Event [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Initial offering Share Issue | $ | $ 57,293 | ||||||||||||||||||||||||||
Public Warrants [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Class of warrant outstanding | 8,936,250 | 8,625,000 | 1,091,060 | 1,091,060 | |||||||||||||||||||||||
Warrant redemption price | $ / shares | $ 0.01 | $ 0.01 | |||||||||||||||||||||||||
Warrant or right, redemption circumstance, weighted average price of common stock | $ / shares | $ 18.00 | ||||||||||||||||||||||||||
Forum [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Purchase of Common Stock | 8,900,000 | ||||||||||||||||||||||||||
Sale of Common Stock | 8,900,000 | ||||||||||||||||||||||||||
Stock Based Commensation | Each unit was comprised of one share of Class A common stock, a warrant to purchase one half of one share of Class A common stock and a right to receive one-tenth of a share of Class A common stock upon the consummation of a business combination by Forum. | ||||||||||||||||||||||||||
Placement Warrants [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Class of warrant outstanding | 263,750 | 263,750 | |||||||||||||||||||||||||
Dividend Declared [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Dividends payable | $ | $ 1,527,000 | ||||||||||||||||||||||||||
Dividends payable, date to be paid | Jun. 15, 2018 | ||||||||||||||||||||||||||
Dividends payable, date of record | May 25, 2018 | ||||||||||||||||||||||||||
Class F Common Stock [Member] | Founders [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Common shares held | 4,312,500 | 4,312,500 | |||||||||||||||||||||||||
Stock issued, shares | 3,593,750 | ||||||||||||||||||||||||||
Initial offering Share Issue | $ | $ 25,000 | ||||||||||||||||||||||||||
Stock split ratio | 1.2 | ||||||||||||||||||||||||||
Class A common stock | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Common stock, shares issued | [2] | 39,860,610 | |||||||||||||||||||||||||
Common shares held | [1] | 39,860,610 | |||||||||||||||||||||||||
Class A common stock | Founders [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Common shares held | 622,500 | ||||||||||||||||||||||||||
Class of warrant outstanding | 62,250 | ||||||||||||||||||||||||||
Option to purchase shares | 311,250 | ||||||||||||||||||||||||||
Exercisable price per Unit | $ / shares | $ 11.50 | ||||||||||||||||||||||||||
Class A common stock | 'Scenario, Previously Reported [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Common stock, shares issued | 89,766,294 | ||||||||||||||||||||||||||
Common shares held | 89,766,294 | ||||||||||||||||||||||||||
Class B convertible common stock | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Common stock, shares issued | [1] | 6,585,546 | |||||||||||||||||||||||||
Common shares held | [1] | 6,585,546 | |||||||||||||||||||||||||
Common stock, shares authorized | [1] | 16,000,000 | |||||||||||||||||||||||||
Common stock, par value | $ / shares | $ 0.0001 | ||||||||||||||||||||||||||
Class B convertible common stock | 'Scenario, Previously Reported [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Common stock, shares issued | 14,830,683 | ||||||||||||||||||||||||||
Common shares held | 14,830,683 | ||||||||||||||||||||||||||
The Forum founders ("the Sponsor") [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Common shares held | 3,919,125 | ||||||||||||||||||||||||||
Sponsor Earnout share Vested | 1,437,500 | ||||||||||||||||||||||||||
Sponsor Earnout share unvested | 718,750 | 718,750 | |||||||||||||||||||||||||
The Forum founders ("the Sponsor") [Member] | Common Stock [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Shares issued upon conversion of private rights from the IPO to common shares | 62,250 | ||||||||||||||||||||||||||
The Forum founders ("the Sponsor") [Member] | Private Placement [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Stock issued, shares | 555,000 | 67,500 | |||||||||||||||||||||||||
Initial offering Share Issue | $ | $ 5,550,000 | $ 675,000 | |||||||||||||||||||||||||
Stock issued, shares price per share | $ / shares | $ 10.00 | $ 10.00 | |||||||||||||||||||||||||
Stock issued description | Each Placement Unit consisted of one Placement Share, one Placement Right and one-half of one Placement Warrant ("Private Warrant") | ||||||||||||||||||||||||||
The Forum founders ("the Sponsor") [Member] | Private Warrant [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Class of warrant outstanding | 311,250 | 311,250 | 311,250 | ||||||||||||||||||||||||
Option per share | $ / shares | $ 11.5 | $ 11.5 | |||||||||||||||||||||||||
The Forum founders ("the Sponsor") [Member] | Class F Common Stock [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Common shares held | 2,156,250 | ||||||||||||||||||||||||||
Number of shares forfeited | 1,078,125 | 1,078,125 | |||||||||||||||||||||||||
Common stock subject to future forfeiture | 2,156,250 | 2,156,250 | |||||||||||||||||||||||||
Sponsor Earnout description | The Sponsor would (a) forfeit 1,078,125 of the Founder Shares and (b) subject 2,156,250 of the Founder Shares (the “Sponsor Earnout Shares”) to potential forfeiture in the event that the Earnout Payments are not achieved by Company Securityholders (see Note 2). Subject to certain limited exceptions, the Sponsor Earnout Shares will be subject to lock-up from the Closing until 180 days thereafter; provided that if the volume-weighted average price of Forum Common Shares for 15 trading days is at least $12.50 per share, then 25% of the Sponsor Earnout Shares will be released from escrow immediately (but still subject to the vesting requirements under the Sponsor Earnout Letter). | ||||||||||||||||||||||||||
The Forum founders ("the Sponsor") [Member] | Class F Common Stock [Member] | IPO [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Stock issued, shares | 1,078,125 | ||||||||||||||||||||||||||
The Forum founders ("the Sponsor") [Member] | Class A common stock | IPO [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Stock issued, shares | 622,500 | ||||||||||||||||||||||||||
Former C1 Security holders [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Sponsor Earnout Shares used to calculate Earnout stock payment | 718,750 | ||||||||||||||||||||||||||
Former C1 option holders [Member] | |||||||||||||||||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||
Stock-based compensation expense incremental cost as a result of modification | $ | $ 583,000 | ||||||||||||||||||||||||||
Compensation expense recognized for equity awards | $ | 4,842,000 | ||||||||||||||||||||||||||
Compensation expense related to the pro rata portion of the Earnout Consideration | $ | 1,527,000 | ||||||||||||||||||||||||||
Stock-based compensation expense | $ | $ 647,000 | ||||||||||||||||||||||||||
|
Net Income (Loss) Per Share - Additional Information (Detail) - $ / shares |
2 Months Ended | 3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|---|
Feb. 22, 2018 |
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Equivalent Shares Outstanding evaluated for purposes of including in weighted-average shares outstanding | 13,717,054 | ||||
Weighted Average Number of Shares Outstanding, excluded from earing per share | 7,117,054 | 6,421,547 | |||
Number of share Warrants Outstanding for Purchase of Common Stock | 8,900,000 | 1,354,810 | 1,354,810 | ||
Warrant Price Per share | $ 11.50 | $ 11.50 | $ 11.50 | ||
Unit purchase option outstanding | 1,125,000 | ||||
Unit purchase option owned, exercise price | $ 10.00 | ||||
Common Stock [Member] | |||||
Issuance of commons stock and warrant that would result from unit purchase option | 1,237,500 | ||||
Warrant [Member] | |||||
Issuance of commons stock and warrant that would result from unit purchase option | 562,500 | ||||
Class A common stock | |||||
Dilutive securities | 0 | 0 | 0 |
Summary of Information Used to Compute Basic and Diluted Net Loss Per Common Share (Detail) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | 6 Months Ended | |||||
---|---|---|---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
||||
Numerator: | |||||||
Net income (loss) | $ (7,461) | $ (11,367) | $ 1,345 | $ (14,488) | |||
Earnout consideration | 1,436 | (124,005) | |||||
Net loss available to common shareholders | $ (6,025) | $ (11,367) | $ (122,660) | $ (14,488) | |||
Denominator: | |||||||
Weighted-average shares outstanding during the period - basic and diluted | [1] | 75,222,455 | 39,860,619 | 63,487,614 | 39,870,980 | ||
Net loss per common share: | |||||||
Basic and diluted | [1] | $ (0.08) | $ (0.29) | $ (1.93) | $ (0.36) | ||
|
Fair Value Measurement - Additional Information (Detail) - USD ($) |
12 Months Ended | |
---|---|---|
Dec. 31, 2017 |
Jun. 30, 2018 |
|
Fair Value Measurements [Line Items] | ||
Asset impairment charges | $ 0 | |
Fair Value, Inputs, Level 3 | ||
Fair Value Measurements [Line Items] | ||
Long term debt, fair value | $ 582,325,000 | $ 710,000,000 |
Major Vendor and Economic Dependence - Additional Information (Detail) - Cost of Goods, Product Line $ in Thousands |
3 Months Ended | 6 Months Ended | 12 Months Ended | ||
---|---|---|---|---|---|
Jun. 30, 2018
USD ($)
|
Jun. 30, 2017 |
Jun. 30, 2018
USD ($)
Distributor
|
Jun. 30, 2017 |
Dec. 31, 2017
USD ($)
Distributor
|
|
Vendors | Avaya Inc | |||||
Concentration Risk [Line Items] | |||||
Concentration Risk, Percentage | 20.00% | 24.00% | 20.00% | 22.00% | |
Vendors | Cisco Systems Inc | |||||
Concentration Risk [Line Items] | |||||
Concentration Risk, Percentage | 43.00% | 33.00% | 39.00% | 34.00% | |
Supplier Concentration Risk [Member] | Avaya communication products [Member] | |||||
Concentration Risk [Line Items] | |||||
Accounts Payable | $ | $ 19,871 | $ 19,871 | $ 28,146 | ||
Number of distributors | Distributor | 1 | 1 |
Operating Lease - Future minimum Annual Rental Commitment (Detail) $ in Thousands |
Jun. 30, 2018
USD ($)
|
---|---|
Leases, Operating [Abstract] | |
Remainder of 2018 | $ 4,762 |
2019 | 6,981 |
2020 | 5,626 |
2021 | 4,697 |
2022 | 3,680 |
2023 and thereafter | 4,667 |
Total | $ 30,413 |
Operating Leases - Additional Information (Detail) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Leases [Abstract] | ||||
Operating leases, rent expense | $ 2,914 | $ 1,044 | $ 5,401 | $ 2,162 |
Employee benefit plan - Additional Information (Detail) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Defined Contribution Plan [Abstract] | ||||
Defined Contribution Plan, employer contribution | $ 1,506 | $ 634 | $ 3,029 | $ 1,950 |
Income Taxes - Additional Information (Detail) - USD ($) $ in Millions |
6 Months Ended | 12 Months Ended | |
---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Dec. 31, 2017 |
|
Income Tax Contingency [Line Items] | |||
U.S. federal income tax rate | 21.00% | 35.00% | |
Effective income tax rate (before discrete items) | 49.10% | 13.70% | |
Effective income tax rate (after discrete items) | 110.00% | 12.60% | |
Income tax expense (benefit) from discrete items | $ 6.7 | ||
Domestic Tax Authority | |||
Income Tax Contingency [Line Items] | |||
Operating Loss Carryforwards | $ 4.3 | ||
Operating Loss Carryforwards, Expiration Year | 2031 | ||
State and Local Jurisdiction | |||
Income Tax Contingency [Line Items] | |||
Operating Loss Carryforwards | $ 21.7 | ||
Operating Loss Carryforwards, Expiration Year | 2020 |
Segment Information - Additional Information (Detail) |
6 Months Ended |
---|---|
Jun. 30, 2018
Segment
| |
Segment Reporting [Abstract] | |
Number of operating segments | 1 |
Segment Reporting - Schedule of Revenue by Type of Internal Classification (Detail) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Segment Information [Line Items] | ||||
Revenues | $ 391,011 | $ 191,322 | $ 697,352 | $ 374,288 |
Collaboration | ||||
Segment Information [Line Items] | ||||
Revenues | 257,198 | 120,563 | 458,594 | 242,814 |
Enterprise Networks | ||||
Segment Information [Line Items] | ||||
Revenues | 133,813 | 70,759 | 238,758 | 131,474 |
Technology Offerings [Member] | ||||
Segment Information [Line Items] | ||||
Revenues | 197,162 | 106,203 | 338,616 | 194,168 |
Technology Offerings [Member] | Collaboration | ||||
Segment Information [Line Items] | ||||
Revenues | 94,915 | 52,524 | 156,019 | 96,199 |
Technology Offerings [Member] | Enterprise Networks | ||||
Segment Information [Line Items] | ||||
Revenues | 102,247 | 53,679 | 182,597 | 97,969 |
Service [Member] | ||||
Segment Information [Line Items] | ||||
Revenues | 193,849 | 85,119 | 358,736 | 180,120 |
Service [Member] | Collaboration | ||||
Segment Information [Line Items] | ||||
Revenues | 162,283 | 68,039 | 302,575 | 146,615 |
Service [Member] | Enterprise Networks | ||||
Segment Information [Line Items] | ||||
Revenues | $ 31,566 | $ 17,080 | $ 56,161 | $ 33,505 |
Related Party Transaction - Additional Information (Detail) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||||
---|---|---|---|---|---|---|
Sep. 25, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
Aug. 17, 2017 |
|
New Board Member [Member] | Class A common stock | ||||||
Related Party Transaction [Line Items] | ||||||
Options to purchase common stock | 530,772 | |||||
Common shares issued upon exercise of options | $ 1,805 | |||||
Related party, promissory note interest rate | 2.60% | |||||
Clearlake [Member] | ||||||
Related Party Transaction [Line Items] | ||||||
Related Party Transaction, Expense | $ 0 | $ 375 | $ 221 | $ 750 | ||
Clearlake [Member] | Accrued Liabilities [Member] | ||||||
Related Party Transaction [Line Items] | ||||||
Related Party Transaction, accrued expense | $ 375 | $ 375 |
Subsequent Events - Additional Information (Detail) - Subsequent Event [Member] |
Aug. 08, 2018
$ / shares
|
---|---|
Subsequent Event [Line Items] | |
Dividend payable | $ 0.02 |
Dividend payable, Date declared | Aug. 08, 2018 |
Dividend payable, Date to be paid | Sep. 14, 2018 |
Dividend payable, Date of record | Aug. 24, 2018 |
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