UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the Quarterly Period Ended: September 30, 2018

or

For the Transition Period from                      to                     

Commission file number 001-38053

ConvergeOne Holdings, Inc.

(Exact Name of Registrant as Specified in its Charter)

3344 Highway 149, Eagan, MN 55121

(Address of principal executive offices) (Zip Code)

(888) 321-6227

(Registrant’s telephone number, including area code)

Forum Merger Corporation, c/o Forum Investors I, LLC, 135 East 57^th Street, 8^th 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, every Interactive Data File required to be submitted 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 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.

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 registrant’s common stock, $0.0001 par value, outstanding at October 29, 2018: 76,398,309 shares.

CONVERGEONE HOLDINGS, INC. AND ITS SUBSIDIARIES

INDEX

2

PART I. – FINANCIAL INFORMATION

Item 1. – Financial Statements

CONVERGEONE HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

See accompanying notes to condensed consolidated financial statements.

3

CONVERGEONE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

4

CONVERGEONE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands, except share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

5

CONVERGEONE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

6

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 nine months ended September 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 nine months ended September 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.

7

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 September 30, 2018, all three Earnout Targets 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. All the Earnings Targets have been met as of September 30, 2018.

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.

The Nasdaq has delisted the Company’s warrants from The Nasdaq Capital Market, effective on July 30, 2018, following a determination by Nasdaq that the Company’s warrants no longer qualified for listing. See Note 7 —Stockholders’ Equity (Deficit).

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.

8

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.

Since revenues exceeded $1 billion for the nine months ended September 30, 2018, the Company will cease to be an “emerging growth company” on December 31, 2018.

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. The model requires an entity to recognize revenue when or as a customer obtains control of promised goods or services at an amount to which the entity expects to be entitled for the transfer of promised goods or services to customers. The new standard will replace most existing revenue recognition guidance in U.S. GAAP. 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 public entities for annual reporting periods beginning after December 15, 2017, and for nonpublic entities for annual periods beginning after December 15, 2018. Early adoption is permitted. The Company will cease to be an “emerging growth company” on December 31, 2018 and accordingly, the Company will be required to apply the new standard in its annual report as of December 31, 2018.

The standard allows either a “full retrospective adoption” in which the standard is applied to all of the periods presented or a “modified retrospective adoption” with the cumulative effect recognized in retained earnings as of the date of adoption. The Company will adopt the new standard using the modified retrospective method.

The Company continues to refine its processes, system changes and internal controls necessary to support the requirements of the new standard. The Company does not expect that the new standard will have a material impact on the recognition of revenue except for the presentation of revenue and cost of revenue related to certain third-party maintenance contracts. The exact impact of the new standard will be dependent on facts and circumstances at adoption and could vary from quarter to quarter.

9

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. The Company will cease to be an “emerging growth company” on December 31, 2018 and accordingly, the new standard will be effective for the Company for the year ending December 31, 2019. The Company is evaluating the effect of the leases standard ASUs. The evaluation includes selecting a transition method for these ASUs and determining the effect that the updated standards will have on the historical and future consolidated financial statements.

The FASB has issued the following additional ASUs to amend the guidance in ASU 2016-02, all of which have effective dates concurrent with the effective date of ASU 2016-02:

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.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement, to amend the disclosure requirements related to fair value measurements. These amendments include, but are not limited to, additional disclosures related to the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The standard has an effective date for annual periods beginning after December 15, 2019, 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.

Reclassifications

Certain reclassifications have been made to prior periods in the Consolidated Statements of Operations for presentation purposes. The reclassification had no effect on total operating expenses, net income (loss), or accumulated deficit.

10

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”):

11

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:

12

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.

13

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 September 30, 2018

The thresholds for the Earnings Targets for 2018 and 2019 were met as of March 31, 2018, the first Measurement Date. Management believes the Company’s calculations of Earnout EBITDA, made in accordance with the terms of the Merger Agreement, indicate that the threshold for the Earnings Target for 2020 has been met as of September 30, 2018. Although a final determination will not be made until a formal review and approval process has been completed with the parties to the Merger Agreement, for accounting purposes it is considered probable that the calculations will be approved and the 2020 Earnings Target construed to be officially met. Accordingly, based on the terms of the Merger Agreement, in connection with meeting all three of the Earnings Targets, the former C1 Securityholders were entitled to receive an aggregate of $99 million in cash and 7,743,750 newly issued shares of common stock, after deducting 2,156,250 Sponsor Earnout Shares which vested and immediately became participating securities. The Company recorded the estimated value of the Earnout consideration for the Earnings Targets for 2018 and 2019 as of March 31, 2018 and for the Earnings Target for 2020 as of September 30, 2018.

The aggregate net Earnout Stock Payments for the 2018 and 2019 Earnouts of 5,162,500 shares were issued on May 22, 2018. Approximately 21,000 of the new shares were immediately forfeited by the C1 Securityholders for the payment of income taxes. It is expected that the aggregate Stock Earnout Payments for the 2020 Earnout of 2,581,250 shares would be issued shortly after the approval process under the Merger Agreement is completed.

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. In the event of a Cash Shortfall, Clearlake would need to determine whether the Company would pay the Cash Shortfall through the issuance of additional shares of common stock with an equivalent value or defer a decision on the Cash Shortfall until the next quarterly Measurement Date. As of the March 31, 2018 and June 30, 2018 Measurement Dates, there was a Cash Shortfall for the 2018 and 2019 Earnout Cash Payment, and Clearlake elected to defer a decision on the Cash Shortfall until the next quarterly Measurement Date. Management believes that as of the September 30, 2018 Measurement Date, that there may be a Cash Shortfall for the entire $99 million Earnout Cash Payment. The liability for the Earnout Cash Payments of $99,000,000 is recorded on the condensed consolidated balance sheet, and as of September 30, 2018 represents approximately 10.6 million of equivalent common shares, based on the measurement terms in the Merger Agreement.

The fair value of the Earnout Stock Payments that were made and to be made to the former C1 Securityholders and the fair value of the Sponsor Earnout Shares that vested or to be vested, aggregated to $90,255,000, which has been recorded as an equity transaction during the nine months ended September 30, 2018.

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 $681,000 and $2,208,000 during the three and nine months ended September 30, 2018, respectively.

14

The total Earnout Consideration that was recognized during the three and nine months ended September 30, 2018 was $63,723,000 and $189,255,000, respectively, which includes compensation expense for the former C1 option holders. The net amount of $63,041,000 and $187,047,000 has been treated as a reduction to net income (loss) available to common shareholders for earnings per share purposes for the three and nine months ended September 30, 2018, respectively. See Note 8.

The shares issued in connection with the Earnout provisions represented contingently issuable shares as of the date they were construed to be officially met, which for the 2018 & 2019 Earnouts is March 31, 2018 and for the 2020 Earnout is September 30, 2018. For earnings per share purposes, contingently issuable shares 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 nine months ended September 30, 2018 as contingently issuable shares as of March 31, 2018 for the 2018 & 2019 Earnouts and as of September 30, 2018 for the 2020 Earnout.

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.

2018 Acquisitions

Advantel Networks

On September 28, 2018, the Company, through its subsidiary ConvergeOne, Inc., acquired Advantel, Inc. (“Advantel”) for cash consideration of $16,736,000. The Company incurred transaction costs of $535,000 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. Based on the preliminary fair value measurement of the assets acquired and liabilities assumed, the Company paid a premium over the fair value of the net tangible and identified intangible assets acquired, resulting in preliminary goodwill of approximately $11,561,000. The premium paid is attributed to Advantel’s presence in the business communications industry and its growth potential.

The acquisition fair value measurement is preliminary and subject to completion of the valuation of Advantel 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.

No revenue or net income for Advantel is included in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2018.

As a result of the acquisition, a portion of the consideration, $1,260,000, was placed in an escrow account. The total escrow is included in cash consideration paid in the table below. The funds in the escrow account are to secure the sellers’ and the Company’s indemnification obligations in the purchase agreement and for any post-closing purchase price adjustments. The funds held in escrow after settlement of indemnification claims of the buyer will be paid to the sellers at a future date.

Arrow Systems Integration, Inc.

On March 1, 2018, the Company, through its subsidiary ConvergeOne, Inc., acquired Arrow Systems Integration, Inc. (“ASI”) for cash consideration of $28,376,000. During the nine months ended September 30, 2018, the Company incurred transaction costs of $487,000 related to the acquisition and included the amount in transaction costs on the condensed consolidated statements of operations.

15

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 $40,561,000. The excess of the aggregate fair value of the net assets acquired of $12,185,000 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 nine months ended September 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.

Adjustments to preliminary amounts made during the three and nine months ended September 30, 2018, which were the result of information that existed as of the acquisition date, were recognized prospectively. The adjustments during the three months ended September 30, 2018 resulted in increased preliminary bargain purchase gain by approximately $1,212,000 as a result of an increase in assets acquired of $917,000 and a decrease in liabilities assumed of $725,000 offset by a decreased in deferred income tax asset of $430,000. The adjustments during the nine months ended September 30, 2018 resulted in a decrease to preliminary bargain purchase gain by approximately $3,873,000 as a result of an increase in liabilities assumed of $9,237,000 offset by a an increase in assets acquired of $917,000, an increase in deferred income tax asset of $2,181,000 and decrease in purchase price of $2,266,000.

Since the acquisition date of March 1, 2018, $148,042,000 of revenue and $18,670,000 of net income (inclusive of preliminary acquisition gain) are included in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2018.

The fair value of accounts receivable was adjusted for approximately $3,048,000 for amounts not expected to be collected.

The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed (in thousands) for acquisitions completed in the nine months ended September 30, 2018:

16

Unaudited Pro-Forma Information

Following are the supplemental consolidated results of the Company on an unaudited pro forma basis, as if the acquisition of Advantel and 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.

2017 Acquisition

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 September 30, 2018, no additional contingent consideration is expected to be paid and the reduction in the fair value of the contingent consideration for the nine months ended September 30, 2018 is included in the condensed consolidated statement of operations.

4. Trade Accounts Receivable

The following is a roll forward of our allowance for doubtful accounts (in thousands):

17

5. Goodwill and Finite-Life Intangible Assets

Goodwill

The changes in the carrying amount of goodwill are as follows (in thousands):

During the nine months ended September 30, 2018, goodwill increased $11,561,000 for the acquisition of Advantel in 2018, decreased by $2,616,000 related primarily to adjustments to the fair value of intangible assets acquired in 2017 and increased by $2,357,000 associated with an adjustment of deferred income taxes.

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 September 30, 2018 and 2017, aggregate amortization expense was $9,318,000 and $6,711,000, respectively. During the nine months ended September 30, 2018 and 2017, aggregate amortization expense was $27,417,000 and $17,891,000, respectively. Based on the recorded intangible assets at September 30, 2018, estimated amortization expense is expected to be as follows (in thousands):

18

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 5.99% at September 30, 2018.

19

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 nine months ended September 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.

20

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 September 30, 2018, the Borrowing Base was $200,000,000. There were no letters of credit outstanding, the outstanding balance on the revolver was $50,000,000 and the outstanding floorplan balance was $71,780,000; therefore, the maximum borrowing available was $78,220,000 at September 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 September 30, 2018 was $71,780,000 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.

21

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):

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.

22

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.

The Company paid a regular quarterly cash dividend of $0.02 per share during each of the second and third quarters of 2018. Dividends paid in the three and nine months ended September 30, 2018 were approximately $1,528,000 and $3,055,000, respectively. The Company had an accumulated deficit at the time of declaration and, as a result, the dividends were 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.

23

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”). As discussed in Note 2, all three Earnings Targets were met as of September 30, 2018 and thus 2,156,250 Sponsor Earnout Shares are vested and treated as participating shares and 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.

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.

24

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 September 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 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.

25

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).

26

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.

Common Stock Repurchase Program

On August 22, 2018, the Company’s Board of Directors approved a common stock repurchase program whereby the Company is authorized to purchase up to a maximum of $25 million of its common stock, subject to compliance with applicable law and the limitations in the Company’s credit facilities on stock repurchases.

The authorization allows repurchases from time to time in the open market or in privately negotiated transactions. The amount and timing of repurchases made under the repurchase program will depend on a variety of factors, including available liquidity, cash flow and market conditions. Shares can be purchased through the repurchase program through August 2020, unless extended or shortened by the Company’s Board of Directors. The program does not obligate the Company to acquire any particular amount of common stock and the program may be modified or suspended at any time at the Company’s discretion. The repurchases would be funded from available working capital and are subject to compliance with the terms and limitations of the Company’s credit facilities.

Pursuant to its common stock repurchase program, during the three and nine months ended September 30, 2018, the Company repurchased in the open market 1,066,946 shares of its common stock at a total cost of approximately $10,044,000 (an average price of $9.41 per share). As of September 30, 2018, the maximum dollar value of shares that may be purchased under the Repurchase Program is approximately $14,956,000. All shares delivered from these repurchases have been placed into treasury stock.

27

8. Stock-based Compensation

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, which provided for the issuance of incentive stock options, nonqualified stock options, stock appreciation rights, restricted shares, and other awards. 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 nine months ended September 30, 2018.

No further awards will be made pursuant to the 2014 Equity Incentive Plan.

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 granted 5,039,000 options during the three and nine months ended September 30, 2018 with an average exercise price of $11.49 per share.

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.

Options

The Company’s option awards under the 2018 Equity Incentive Plan vest and become exercisable over a five-year period; 20% vest on the first annual anniversary of issuance and the balance vest ratably monthly over the remaining four-year period, subject to the optionholders continuous service as of each such vesting date.

28

Equity awards were valued at their estimated fair value at the time of issuance and are being amortized as compensation expense on a straight-line basis over the period in which they are earned by the individuals. The grant-date fair value of our option grants was calculated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

A summary of the stock option activity for the 2014 Equity Incentive Plan is presented below:

A summary of the stock option activity for the 2018 Equity Incentive Plan is presented below:

29

Expense

Stock-based compensation expense recognized for all equity awards for the three and nine months ended September 30 is as follows (in thousands):

Approximately $918,000 of the $2,208,000 of deemed compensation expense from the earnout for the nine months ended September 30, 2018 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.

9. 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 operations for the three and nine months ended September 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 nine months ended September 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 nine months ended September 30, 2017.

For the three and nine months ended September 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,

30

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 nine ended September 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 September 30, 2018, there were 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 nine months ended September 30, 2018, as their effect was anti-dilutive:

Additionally, all of the Company’s outstanding options and 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 nine months ended September 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.

31

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):

10. 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 September 30, 2018 and December 31, 2017 approximates the carrying value of $718,325,000 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 acquisitions of ASI and Advantel 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.

11. 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 25% and 16% for the three months ended September 30, 2018 and 2017; and, 22% and 20% for the nine months ended September 30, 2018 and 2017, respectively. Cisco-related revenue represented 44% and 43% for the three months ended September 30, 2018 and 2017; and, 39% and 37% for the nine months ended September 30, 2018 and 2017, respectively.

The Company has one distributor that supplies a significant portion of its Avaya communication products.

At September 30, 2018 and December 31, 2017, the Company owed $25,799,000 and $28,146,000, respectively, to this distributor.

12. Operating Leases

The Company leases office and warehouse space and vehicles under operating lease agreements that expire on various dates through 2026.

32

Approximate future minimum annual rental commitments under these operating leases as of September 30, 2018 are as follows (in thousands):