| 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 three months ended March 31,
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. An exception to this pertains to the
Sponsor Earnout Shares, which do not participate in dividend rights
until vested.
Liquidation, Dissolution and Winding Up
In the event of the Company’s voluntary or involuntary
liquidation, dissolution, distribution of assets
or winding-up,
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
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
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
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
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
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 of March 31, 2018, the Sponsor did not hold any
shares of ConvergeOne common stock or Private Warrants.
Warrants to Purchase Common Stock
At March 31, 2018, there were a total of 8,936,250 warrants
outstanding consisting of 8,624,999 Public Warrants originally sold
as part of Units in the Forum IPO and 311,250 Placement Warrants
sold as part of the private placement consummated simultaneously
with the Forum IPO. Upon completion of the Merger, these warrants
pertain to the purchase of ConvergeOne common stock and the terms
and conditions remain the same. At March 31, 2018, the
warrants were being listed on the Nasdaq Capital Market.
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
warrantholder 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 warrantholder. 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:
• 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 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.
Tender Offer to Purchase Warrants for Cash
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”). On March 23, 2018, the Company increased the
offer price to $1.20 per Warrant and extended the Tender Offer
period to April 13, 2018. On April 13, 2018, the Tender
Offer period was extended 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.
Immediately following the closing of the Tender Offer, there are
1,354,810 warrants outstanding consisting of 1,091,060 Public
Warrants and 263,750 Placement 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, re-measurement
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
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
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 non-employee
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.
No rights have been granted since the closing of the Merger.
Expense
Stock-based compensation expense recognized for equity awards for
the three months ended March 31, 2018 and 2017, was $6,386,000
and $233,000, respectively.
The increase in expense for the three months ended March 31,
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 $1,543,000 of deemed compensation
expense accrued for the portion of the Earnout Consideration
payable to the former C1 option holders (see Note 2). Approximately
$850,000 of the $1,543,000 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. |
