Form 8-K ConvergeOne Holdings, For: Aug 09

(State or other jurisdiction

of incorporation)

(Commission

File Number)

(IRS Employer

Identification No.)

3344 Highway 149

Eagan, MN

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Results of Operations and Financial Condition.

Financial Statements and Exhibits.

Exhibit

Description

/s/ JEFFREY NACHBOR

Total revenue of $391.0 million, an increase of 104.4% year-over-year.

Services revenue of $193.8 million, accounting for 49.6% of total revenue.

Collaboration revenue of $257.2 million, accounting for 65.8% of total revenue.

GAAP net loss of $7.5 million. GAAP net loss to common shareholders of $6.0 million, including the presentation effect of $(1.4) million of earnout consideration related to compensation expense. ⁽¹⁾

Adjusted EBITDA per credit agreement of $45.1 million, an increase of 98.3% year-over-year.

Adjusted net income of $22.8 million, Adjusted earnings per diluted share (“Adjusted EPS”) of $0.28.

Total revenue for the quarter ended June 30, 2018 was $391.0 million compared to $191.3 million in the second quarter of 2017.

Services revenue for the second quarter of 2018 was $193.8 million, an increase of 127.7% compared to $85.1 million in the second quarter of 2017. Services revenue accounted for 49.6% of total revenue compared to 44.5% in the second quarter of 2017.

Technology Offerings revenue for the second quarter of 2018 was $197.2 million, an increase of 85.6% compared to $106.2 million in the second quarter of 2017.

Gross Profit for the quarter ended June 30, 2018 was $114.3 million compared to $57.8 million in the second quarter of 2017. Gross margin for the second quarter of 2018 was 29.2% compared to 30.2% for the second quarter of 2017.

Services gross profit was $69.7 million for the second quarter of 2018, compared to $33.1 million in the second quarter of 2017.

Technology Offerings gross profit was $44.6 million for the second quarter of 2018, compared to $24.7 million in the second quarter of 2017.

GAAP net loss was $7.5 million for the quarter ended June 30, 2018, compared to a GAAP net loss of $11.4 million in the second quarter of 2017. GAAP net loss to common shareholders, including the presentation effect of $(1.4) million of earnout consideration related to compensation expense for earnings per share purposes, was $6.0 million for the quarter ended June 30, 2018, compared to a GAAP net loss of $11.4 million in the second quarter of 2017. ⁽¹⁾ Second quarter 2018 GAAP net loss to common shareholders includes $14.7 million of costs related to the refinancing of the Company’s 2017 Term Loan Agreement, $6.2 million of transaction costs primarily associated with the integration of recent acquisitions and a $5.1 million non-recurring adjustment to the Company’s previously recorded bargain purchase gain on the acquisition of Arrow Electronics’ Systems Integration Business.

Adjusted EBITDA per credit agreement for the quarter ended June 30, 2018 was $45.1 million, an increase of 98.3% compared to Adjusted EBITDA per credit agreement of $22.7 million in the second quarter of 2017.

Adjusted net income for the quarter ended June 30, 2018 was $22.8 million, or $0.28 per diluted share based on 82.3 million weighted-average diluted common shares outstanding, compared to $2.6 million in the second quarter of 2017.

Net cash used in operating activities for the six months ended June 30, 2018 was $1.4 million, and capital expenditures totaled $7.6 million, compared with cash used in operating activities of $0.8 million and capital expenditures of $3.9 million for the prior year’s period.

At June 30, 2018, ConvergeOne had $17.5 million in cash, compared to $13.5 million at the end of 2017. Net of debt issuance costs, total debt outstanding at June 30, 2018 was $699.8 million, compared to $572.1 million at the end of 2017.

On August 8, 2018, ConvergeOne’s Board of Directors declared a regular quarterly cash dividend of $0.02 per share to be paid on September 14, 2018 to stockholders of record as of August 24, 2018. ConvergeOne’s Board of Directors anticipates declaring this dividend in future quarters on a regular basis; however, future declarations are subject to Board of Directors’ approval and may be adjusted as business needs or market conditions change.

Revenue is expected to be in the range of $1,450 to $1,550 million.

Gross profit margin is expected to be in the range of 29.5% to 30.5%.

Adjusted EBITDA per credit agreement is expected in the range of $155 to $165 million.

Adjusted Net Income is expected to be in the range of $70 to $78 million.

Adjusted EPS is expected to be in the range of $0.91 to $1.01 based on 77 million weighted average shares outstanding on a diluted basis.

In the first quarter of 2018, the Company recorded total estimated earnout consideration of $126.9 million related to the merger of Forum Merger Corporation and ConvergeOne, as the March 31, 2018 last twelve months pro forma EBITDA, as calculated in accordance with the merger agreement, was in excess of $155.0 million, and therefore, the first two tranches of the earnout have been deemed to be achieved. The total earnout consideration was subsequently adjusted to $125.5 million when the Earnout shares were actually issued in May 2018. The earnout consideration was recorded as an equity transaction of $124.0 million and compensation expense of $1.4 million. For accounting presentation purposes, the equity portion of the earnout consideration is reflected as a reduction of the net income available to common shareholders.

Current Assets

Cash

Trade accounts receivable, less allowances

Inventories

Prepaid expenses and other current assets

Deferred customer support contract costs

Income tax receivable

Total current assets

Other Assets

Goodwill

Finite-life intangibles, net

Property and equipment, net

Deferred customer support contract costs, noncurrent

Non-current income tax receivable

Total other assets

Total assets

Current Liabilities

Current maturities of long-term debt

Accounts payable

Customer deposits

Accrued compensation

Accrued other

Earnout consideration payable

Deferred revenue

Total current liabilities

Long-Term Liabilities

Long-term debt, net of debt issuance costs and current maturities

Deferred income taxes

Long-term income tax payable

Deferred revenue and other long-term liabilities

Total long-term liabilities

Commitments and Contingencies

Stockholders’ Equity (Deficit)

Preferred stock, $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding

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*

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*

Subscription receivable from related party

Additional paid-in capital

Accumulated deficit

Total stockholders’ equity (deficit)

Total liabilities and stockholders’ equity (deficit)

Retroactively restated for the effect of the reverse recapitalization

Revenue

Technology offerings

Services

Total revenue

Cost of revenue

Technology offerings

Services

Total cost of revenue

Gross profit

Technology offerings

Services

Total gross profit

Operating expenses

Sales and marketing

General and administrative

Transaction costs

Depreciation and amortization

Total operating expenses

Operating income

Other (income) expense

Interest income

Interest expense

Preliminary bargain purchase gain

Other expense, net

Total other expense, net

Loss before income taxes

Income tax (benefit) expense

Net income (loss)

Earnout consideration

Net loss available to common shareholders

Net loss per common share:

Basic and diluted

Weighted average number of shares outstanding:

Basic and diluted

Cash dividends declared per common share

Cash Flows from Operating Activities

Net income (loss)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Preliminary bargain purchase gain

Depreciation of property and equipment in operating expense

Depreciation of property and equipment in cost of revenue

Amortization of finite-life intangibles

Change in fair value of acquisition-related contingent consideration

Deferred income taxes

Amortization of debt issuance costs

Loss on extinguishment of debt

Stock-based compensation expense

Other

Changes in assets and liabilities, net of business acquisition in 2018:

Trade accounts receivable

Inventories

Prepaid expenses, deferred customer support contract costs and other

Income tax receivable

Accounts payable and accrued expenses

Customer deposits

Income tax payable

Deferred revenue and other long-term liabilities

Net cash used in operating activities

Cash Flows from Investing Activities

Purchases of property and equipment

Acquisition of business, net of cash acquired

Net cash used in investing activities

Cash Flows from Financing Activities

Proceeds from revolving credit agreement

Repayment of revolving credit agreement

Proceeds from term notes, less discount

Payment on long-term debt

Payment of deferred financing costs

Payment of extinguishment charges

Dividends paid

Repurchase of common stock

Proceeds from subscription receivable

Proceeds from Forum cash

Payment of reverse recapitalization costs

Payment to former C1 Securityholders

Repurchase of warrants

Deferred offering costs

Net cash provided by financing activities

Net increase in cash

Cash—beginning of the period

Cash—end of the period

Adjusted EBITDA reconciliation:

Net income (loss)

Depreciation and amortization (a)

Preliminary bargain purchase gain

Other expense, net

Income tax (benefit) expense

EBITDA

Stock-based compensation expense

Acquisition accounting adjustments (b)

Transaction costs (c)

Other costs (d)

Adjusted EBITDA

Additional Adjustments:

Board of Directors related expense

One time and non-recurring process and efficiency improvements (e)

Pro Forma synergies (f)

EBITDA per acquisition (g)

Adjusted EBITDA per Credit Agreement

Depreciation and amortization equals the sum of depreciation and amortization included in total operating expenses and depreciation and amortization included in total cost of revenue.

Acquisition accounting adjustments include charges associated with non-cash acquisition accounting fair value adjustments to deferred revenue and deferred customer support costs.

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.

Other costs of (1) $0.1 million for the three months ended June 30, 2018 represent one-time recruiting expenses, and (2) $.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.

One time and non-recurring process and efficiency improvements of $2.2 million in the three months ended June 30, 2018 primarily related to Cloud product development activities related to the launch of our Cloud platforms and costs associated with the process of going public. One time and non-recurring process and efficiency improvements costs for the three months ended June 30, 2017 include $1.1 million of Cloud product development activities related to the launch of our Cloud platforms, and $0.5 million related to rating agency fees.

Pro Forma synergies represent unrealized cost synergies of acquired companies post-close.

EBITDA per acquisition is the acquired companies EBITDA prior to the Company’s ownership.

Adjusted net income reconciliation:

Net income (loss)

Amortization of intangible assets

Amortization of debt issuance costs

Preliminary bargain purchase gain

Stock-based compensation expense

Costs related to debt financing

Acquisition accounting adjustments

Transaction costs

Other costs

Income tax impact of adjustments

Adjusted net income

Adjusted Net Income per share

Adjusted EPS—Basic

Adjusted EPS—Diluted

Weighted average number of shares outstanding (a)

Basic shares

Diluted Shares

The weighted average diluted shares includes the effect of the common share equivalents for the quarter. The amount differs from diluted shares in the financial statements, as common share equivalents were excluded for financial reporting purposes, due to the anti-dilutive effect since there was a net loss to common shareholders. Diluted shares for Adjusted EPS include approximately 7.1 million of equivalent common shares representing the liability for the 2018 and 2019 Earnout Cash Payments of $66,000,000. If Clearlake elects to pay the Earnout in cash, these additional common share equivalents would not be included in the calculation of Adjusted EPS – Diluted.