Operating Activities

Our net loss and cash flows used in operating activities are significantly influenced by our investments in personnel, partnership expansion and transaction costs associated with the Business Combination.

For the year ended December 31, 2018, cash used in operations was approximately $575,000 resulting from a net loss of approximately $1,072,000 offset by approximately $309,000 from changes in operating assets and liabilities and by approximately $188,000 of net non-cash expenses. The $309,000 of cash flow provided from changes in operating assets and liabilities was primarily driven by a $250,000 increase in accounts payable, $228,000 increase in contract liabilities, a $130,000 decrease in prepaid expenses and other current assets offset by a $386,000 increase in accounts receivable. The $188,000 of cash flow provided by net non-cash expenses was primarily driven by approximately $181,000 in depreciation and amortization expense incurred primarily from the acquisition of CostTree.

For the year ended December 31, 2017, cash used in operations was approximately $309,000 resulting from a net loss of approximately $226,000 and approximately $372,000 net cash used from changes in operating assets and liabilities offset by approximately $290,000 of net non-cash expenses. The $372,000 of net cash used from changes in operating assets was primarily driven by an approximate $319,000 increase in prepaid expenses and other current assets, and an approximate $269,000 decrease in contract liabilities offset by a $158,000 decrease in accounts receivable. The 290,000 of cash flow provided by net non-cash expenses was primarily driven by a $163,000 loss from sales of marketable securities.

Investing Activities

Our investing activities consists primarily of investments and sales of marketable securities and capital expenditures.

For the years ended December 31, 2018 and 2017, cash provided by investing activities was approximately $663,000 and $1,285,000, respectively. We sold approximately $1,001,000 and $1,786,000 of marketable securities and purchased $336,000 and $469,000 during the years ended December 31, 2018 and 2017, respectively.

Financing Activities

Our financing activities consists primarily of repayments and proceeds from our line of credit and payments of contingent consideration associated with our acquisition of CostTree.

For the years ended December 31, 2018 and 2017, cash used in financing activities was $255,000 and 946,000, respectively. We made approximately $463,000 and $1,136,000 in repayments and borrowed $269,000 and $200,000 during the years ended December 31, 2018 and 2017, respectively. During the year ended December 31, 2018, we sold our marketable securities and used the proceeds to repay our line of credit in full. We made $50,000 in payments to CostTree LLC during the year ended December 31, 2018 pertaining to the contingent earn-out resulting from our acquisition of CostTree.

Contractual Obligations

Operating leases - We lease our office facilities under a non-cancelable operating lease, which expires in May 2022. Future minimum lease payments are as follows:

In 2017, we entered into an agreement to sublease a portion of the leased office space in Pasadena, CA to an unrelated party under a non-cancelable lease that expires in May 2022. Our lease expense will be offset by payments due under the sublease as follows:

Upon execution of the sublease, we recognized $75,755 in sublease liabilities which is amortized over the remaining life of the lease and recognized as sublease rental income.

Capital leases —We lease computer equipment under capital lease agreements. Outstanding principal payments under capital lease obligations were $7,782, payable in full in 2019.

Litigation —From time to time, we may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. We are not currently a party to any legal proceedings, nor is it aware of any pending or threatened litigation, that would have a material adverse effect on our business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.

Indemnification —In the ordinary course of business, we may provide indemnification of varying scope and terms to customers, vendors, investors, directors and officers with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. These indemnification provisions may survive termination of the underlying agreement and the maximum potential amount of future payments we could be required to make under these indemnification provisions may not be subject to maximum loss clauses. The maximum potential amount of future payments we could be required to make under these indemnification provisions is indeterminable. We have never paid a material claim, nor have it been sued in connection with these indemnification arrangements. As of December 31, 2018 and 2017, we have not accrued a liability for these indemnification arrangements because the likelihood of incurring a payment obligation, if any, in connection with these indemnification arrangements is not probable or reasonably estimable.

Off-balance sheet arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the SEC rules and regulations.

Open Counter’s Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used herein, the terms “Open Counter”, “we,” “our” and “us” refer to Open Counter Enterprises, Inc. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included elsewhere in this report.

Overview

Open Counter Enterprises, Inc., a Delaware corporation headquartered in San Francisco, California, is a developer and provider of software tools for cities to streamline permitting and licensing services for municipal governments. We provide customers with software through a hosted platform and also provide professional services related to software implementation. 

We had net losses of approximately $474,000 and $682,000 for the years ended December 31, 2018 and 2017, respectively, and had net cash used in operating activities of approximately $83,000 and $452,000 for the years ended December 31, 2018 and 2017, respectively. We believe that these matters, amongst others, raise doubt about our ability to continue as a going concern. 

As of December 31, 2018, we had cash of $103,000 and a working capital deficit of $1.4 million. As such, we anticipate that we will need to raise additional funds and/or generate revenue within twelve months. Additional funding will be needed to implement our business plan. Obtaining additional funding will be subject to a number of factors, including general market conditions, investor acceptance of our business plan and results from our business operations. These factors may impact the timing, amount, terms or conditions of additional financing available to us. If we are unable to raise sufficient funds, we may be forced to scale back our operations or cease operations.

Business Combination

On September 12, 2018, we entered into a definitive agreement relating to the Business Combination. On February 15, 2019, the Business Combination was approved by the shareholders of GTY Cayman. On February 19, 2019, the Business Combination was consummated.

Pursuant to the Business Combination, Open Counter received aggregate consideration of approximately $9.4 million in cash and 1,580,990 shares of Company common stock valued at $10.00 per share.

Components of Operating Results

Revenues

We provide subscription services by allowing customers to use our software without taking possession of the software. Subscription revenue is recognized ratably over the contract term as the customer simultaneously receives and consumes the benefits of the subscription service as the service is made available by us. We also provide professional services, including data collection, migration, normalization and configuration in which we enhance an asset that the customer controls. Professional services revenue is recognized over time using an output method based on milestones reached.

Cost of Revenues

Cost of revenues primarily consists of costs related to software hosting costs, salaries and benefits of client services personnel, third-party service costs, and licensing costs incurred pertaining to our services to customers .

Sales and Marketing

Sales and marketing expenses consist primarily of compensation and employee benefits, marketing events, advertising costs, travel, and trade shows and conferences.  

General and Administrative

General and administrative expenses consist primarily of personnel costs associated with our executive, finance, legal, human resources, compliance, and other administrative personnel, as well as accounting and legal professional services fees.

Critical Accounting Policies and Use of Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our accompanying financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, and which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These estimates are the basis for our judgments about the carrying values of assets and liabilities, which in turn may impact our reported revenue and expenses. Our actual results could differ significantly from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur periodically, could materially impact the financial statements.

Revenue Recognition

We adopted the Financial Accounting Standards Board (“FASB”) new revenue standard, Accounting Standards Codification 606,  Revenue from Contracts with Customers (“ASC 606”),  on January 1, 2017 using the full retrospective approach. The adoption of this standard did not have a material impact on prior revenue recognition or on opening equity, as the timing and measurement of revenue recognition for us is materially the same under ASC 606 as it was under the prior relevant guidance.

With the adoption of Topic 606, revenue is recognized upon transfer of control of promised products and services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. If the consideration promised in a contract includes a variable amount, we include an estimate of the amount it expects to receive for the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur.

We determine the amount of revenue to be recognized through application of the following steps:

We provide subscription services by allowing customers to use our software without taking possession of the software. Revenue is recognized ratably over the contract term as the customer simultaneously receives and consumes the benefits of the subscription service as the service is made available by us. For contracts where the period between when we transfer a promised service to the customer and when the customer pays is one year or less, we have elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component.

We have made a policy election to exclude from the measurement of the transaction price all taxes assessed by a government authority that are both imposed on and concurrent with a specific revenue producing transaction and collected by us from a customer. Such taxes may include but are not limited to sales, use, value added and certain excise taxes. 

Contract Liabilities

Contract liabilities primarily consist of amounts that have been billed to or received from customers in advance of revenue recognition and prepayments received from customers in advance for implementation and other services, as well as initial subscription fees. Open Counter recognizes contract liabilities as revenues when the services are performed and the corresponding revenue recognition criteria are met. Customer prepayments are generally applied against invoices issued to customers when services are performed and billed.

Accounts Receivable

Accounts receivable primarily consists of amounts due from our customers, which are located throughout the United States. Accounts receivable are recorded at the invoiced amount, do not require collateral, and do not bear interest. We estimate an allowance for doubtful accounts by evaluating specific accounts where information indicates the customers may have an inability to meet financial obligations, such as bankruptcy and significantly aged receivables outstanding. Uncollectible receivables are written-off in the period management believes it has exhausted every opportunity to collect payment from the customer. Bad debt expense is recorded when events or circumstances indicate an additional allowance is required based on our specific identification approach.

Stock-Based Compensation

Stock options and restricted stock awarded to employees, directors and consultants are measured at fair value on the grant date. We recognize compensation expense ratably over the requisite service period of the option or restricted stock. As of January 1, 2017, we no longer use a forfeiture rate to recognize compensation expense as a result of the adoption of ASU No. 2016-09, “ Improvements to Employee Share-Based Payment Accounting .”

We value stock options using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, including the risk-free interest rate, expected life, expected stock price volatility and dividend yield. The risk-free interest rate assumption is based upon observed interest rates for constant maturity U.S. Treasury securities consistent with the expected term of employee stock options. The expected life represents the period of time the stock options are expected to be outstanding and is based on the simplified method. Under the simplified method, the expected life of an option is presumed to be the mid-point between the vesting date and end of the contractual term. We used the simplified method due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock options. Expected volatility is based on historical volatilities for publicly traded stock of comparable companies over the estimated expected life of the stock options. We have assumed no dividend yield because we do not expect to pay dividends in the near future, which is consistent with our history of not paying dividends.

We value restricted stock at the closing market price on the date of grant, and recognize compensation expense ratably over the requisite service period of the restricted stock.

Recent accounting pronouncements

See Note 3 to our financial statements for a description of recent accounting pronouncements applicable to our financial statements.

Revenues

Revenues incurred during the year ended December 31, 2018 were approximately $1.7 million compared to $1.5 million in the prior period.

Subscription services revenues incurred during the year ended December 31, 2018 were approximately $1.4 million compared to $1.1 million in the prior period. Through December 31, 2018, we have added five new customers and have also upgraded services to five additional customers, providing access to our new Residential Portal.

Professional services revenues incurred during the year ended December 31, 2018 were approximately $287,000 compared to $463,000 in the prior period. Revenue decreases in this category are largely due to the completion of a custom implementation for the City of Boston, which moved into a maintenance agreement in November of 2017.

Cost of revenues

Cost of revenues incurred during the year ended December 31, 2018 were approximately $498,000 compared to $434,000 in the prior period.

Operating expenses

Operating expenses incurred during the year ended December 31, 2018 were approximately $1.6 million compared to $1.7 million in the prior period. The changes resulted from:

Other income (expense)

Other expenses incurred during the year ended December 31, 2018 were approximately $110,000 compared to $65,000 in the prior period. The increase in interest expense of approximately $54,000 is due primarily to interest incurred on additional borrowings under the Lighter Capital promissory note, which occurred on December 17, 2017. The increase in other income of $10,000 resulted from an award received from the U.S. Conference of Mayors.

Operating Activities

Net cash used in operating activities of approximately $83,000 for the year ended December 31, 2018 was primarily a result of our net loss of approximately $474,000, and changes of approximately $378,000 in operating assets and liabilities, partially offset by approximately $7,000 of depreciation and amortization of property and equipment, and approximately $5,000 in stock-based compensation expenses.

Net cash used in operating activities of approximately $452,000 for the year ended December 31, 2017 was primarily a result of our net loss of approximately $682,000, and changes of approximately $180,000 in operating assets and liabilities, partially offset by approximately $7,000 of depreciation and amortization of property and equipment and approximately $43,000 in stock-based compensation expenses.

Investing Activities

Net cash provided by investing activities of approximately $1,000 for the year ended December 31, 2018 resulted from proceeds from the disposition of property and equipment.

Net cash used in investing activities of approximately $7,000 for the year ended December 31, 2017 resulted from our purchase of computer equipment and a security deposit.

Financing Activities

Net cash used in financing activities of approximately $5,000 for the year ended December 31, 2018 resulted from principal payments of approximately $56,000 on notes payable to Lighter Capital and net borrowings of approximately $50,000 on line of credit.

Net cash provided by financing activities of approximately $191,000 for the year ended December 31, 2017 mainly resulted from principal payments of approximately $66,000 and a borrowing of approximately $256,000 on notes payable to Lighter Capital.

Contractual Obligations

Legal Proceedings

From time to time, we may become involved in legal proceedings arising in the ordinary course of its business. We are not presently a party to any legal proceedings that, if determined adversely to us, would have a material adverse effect on us.

Indemnification

In the ordinary course of business, we may provide indemnification of varying scope and terms to customers, vendors, investors, directors and officers with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. These indemnification provisions may survive termination of the underlying agreement and the maximum potential amount of future payments we could be required to make under these indemnification provisions may not be subject to maximum loss clauses. The maximum potential amount of future payments we could be required to make under these indemnification provisions is indeterminable. We have never paid a material claim, nor have it been sued in connection with these indemnification arrangements. As of December 31, 2018, the we have not accrued a liability for these indemnification arrangements because the likelihood of incurring a payment obligation, if any, in connection with these indemnification arrangements is not probable or reasonably estimable.

Off-balance sheet arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the SEC rules and regulations.

Questica’s Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included elsewhere in this report.

As used herein, the terms “Questica”, “we,” “our” and “us” refer to Questica, Inc., Questica USCDN Inc. and its consolidated subsidiary as a combined entity.

Unless otherwise specified, financial amounts included herein are expressed in Canadian Dollars, Questica’s functional currency.

Company Overview

Questica, Inc., Questica USCDN Inc. and its wholly owned subsidiary Questica Ltd., design and develop capital and operating budgeting software. The Questica suite of products are part of a comprehensive web-based budgeting preparation, performance, management and data visualization solution that enables public sector and non-profit organizations to improve and shorten their budgeting cycles.

Questica Inc. was organized in 1998 as an Ontario corporation. Questica Inc. maintains two offices located in Burlington, Ontario, Canada and serves the Healthcare, K-12, Higher Education and Local Government verticals in North America.

Questica USCDN was organized in 2017 as an Ontario corporation and Questica Ltd. was incorporated in 2017, in the United States (U.S.) as a Delaware corporation. Questica Ltd. is located in Huntington Beach, California, primarily serving the non-profit market and services a limited number of customers in the public and private sector. The majority of the Questica Ltd.’s customers are located in the U.S. and Canada, and as well as some international customers, primarily located in the United Kingdom and Africa.

The combined financial statements include the accounts of Questica, Inc. and Questica, USCDN Inc., which constitute entities under common control. All intercompany balances and transactions have been eliminated.

Acquisition of PowerPlan Corporation

On June 20, 2017, pursuant to the terms of an asset purchase agreement, we acquired all of the assets and operations of PowerPlan Corporation (“PowerPlan”), which provides business performance management solutions, including budgeting software products and the associated or related services including support services.

The total consideration transferred was measured at its acquisition-date fair value of approximately $3.5 million.

Business Combination

On September 12, 2018, we entered into a definitive agreement relating to the Business Combination. On February 15, 2019, the Business Combination was approved by the shareholders of GTY Cayman. On February 19, 2019, the Business Combination was consummated. Upon the Closing on February 19, 2019, the Company indirectly acquired Questica for aggregate consideration of approximately $44.4 million in cash and an aggregate of 2,600,000 Class A exchangeable shares in the capital stock of Questica Exchangeco and 1,000,000 Class B exchangeable shares in the capital stock of Questica Exchangeco, each of which is exchangeable into shares of Company common stock, that were issued to the holders of Questica capital stock (the “Questica Holders”). In accordance with the Questica Shareholder Agreement, dated as of February 12, 2019, by and among the Company and certain Questica Holders (the “Questica Shareholder Agreement”), 500,000 Class C exchangeable shares in the capital stock of Questica Exchangeco may be redeemable at the sole discretion of the Company at any time for $5.0 million plus all accrued and unpaid dividends, and may be exchanged for shares of Company common stock beginning on the sixty-first day following the Closing for a number of shares of Company common stock equal to $5.0 million plus accrued and unpaid dividends divided by the lesser of (i) $10.00 or (ii) the 5-day volume weighted average price (“VWAP”) at the time of exchange. For so long as the Class C exchangeable shares remain outstanding, they accumulate a dividend of 5.0% per annum for the first sixty days following the Closing and 10.0% per annum thereafter. The Class A exchangeable shares in the capital stock of Questica Exchangeco are subject to transfer restrictions for one year, which such transfer restrictions may be lifted earlier if, subsequent to the Closing, (i) the last sale price of the Company’s common stock equals or exceeds $12.00 per share (as adjusted for share splits, share dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after Closing, or (ii) the Company consummates a subsequent liquidation, merger, share exchange or other similar transaction which results in all of its shareholders having the right to exchange their shares of Company common stock for cash, securities or other property. In addition, approximately $0.1 million in cash and 800,000 exchangeable shares were deposited into escrow for a period of one year to cover certain indemnification obligations of the Questica Holders.

Revenue

All revenue-generating activities are directly related to the sale, implementation and support of our solutions within a single operating segment. We derive the substantial majority of our revenues from subscription fees for the use of its solutions hosted in our data centers as well as revenues for implementation and customer support services related to our solutions. A small portion of our customers host our solutions in their own data centers under term license and maintenance agreements, and we recognize the corresponding revenues ratably over the term of those customer agreements.

Software License Revenues

We provide customers with the right to use software as it exists when made available. Customers purchase these licenses upfront. Revenues from distinct licenses are recognized upfront when the software is made available to the customer, as this is when the customer has the risks and rewards of the right to use software.

Hosting Revenue

We also provide hosting services for which revenue is recognized over time as the services are provided, which is ratably over the contract term.

Professional Services Revenues

Our professional services contracts generate revenue on a time and materials basis. Revenues are recognized as the services are rendered for time and materials contracts as the customer simultaneously receives and consumes the benefits of the professional service on a continuous basis.

Cost of Revenues

Cost of revenues is comprised primarily of salaries and other personnel-related costs, including employee benefits, bonuses and stock-based compensation, for employees providing services to our customers. Costs associated with these services include the costs of our implementation, customer support, data center and customer training personnel, as well as costs related to research and development personnel who perform implementation and customer support services. Cost of revenues also includes the direct costs of bill-pay and other third-party intellectual property included in our solutions, the amortization of deferred solution and services costs, co-location facility costs and depreciation of our data center assets, an allocation of general overhead costs and referral fees. Direct costs of third-party intellectual property include amounts paid for third-party licenses and related maintenance that are incorporated into our software and the amortization of acquired technology from our recent acquisitions, with the costs amortized to cost of revenues over the useful lives of the purchased assets.

Critical Accounting Policies and Use of Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our accompanying combined financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, and which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These estimates are the basis for our judgments about the carrying values of assets and liabilities, which in turn may impact our reported revenue and expenses. Our actual results could differ significantly from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur periodically, could materially impact the combined financial statements.

Revenue Recognition

We adopted the Financial Accounting Standards Board (“FASB”) new revenue recognition framework, ASC 606,  Revenue from Contracts with Customers (“ASC 606”), on January 1, 2017 using the full retrospective approach. The adoption of this standard did not have a material impact on prior revenue recognition or on opening equity, as the timing and measurement of revenue recognition for Questica is materially the same under ASC 606 as it was under the prior relevant guidance.

With the adoption of Topic 606, revenue is recognized upon transfer of control of promised products and services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. If the consideration promised in a contract includes a variable amount, we include an estimate of the amount it expects to receive for the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur.

We determine the amount of revenue to be recognized through application of the following steps:

We do not have any material obligations for returns or refunds in its contracts with customers.

We enter into contracts with our customers that may include promises to transfer multiple deliverables, including software licenses, hosting services, software maintenance and professional services. A performance obligation is a promise in a contract with a customer to transfer products or services that are distinct. Determining whether products and services are distinct performance obligations that should be accounted for separately or combined as one unit of accounting may require significant judgment.

Hosting services and software licenses are distinct as such services are often sold separately. In determining whether professional services are distinct, we consider the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, and the contractual dependence of the service on the other deliverables in the arrangement.

We allocate the transaction price to each performance obligation on a relative standalone selling price (“SSP”) basis. The SSP is the price at which we would sell a promised product or service separately to a customer. Judgment is required to determine the SSP for each distinct performance obligation. We use an adjusted market assessment approach to estimate the stand-alone selling price for software licenses, hosting services, and software maintenance, and a cost plus a margin approach for professional services.

Deferred Revenues

Deferred revenues primarily consist of amounts that have been billed to or received from customers in advance of revenue recognition and prepayments received from customers in advance for implementation, maintenance and other services, as well as initial subscription fees. We recognize deferred revenues as revenues when the services are performed and the corresponding revenue recognition criteria are met. Customer prepayments are generally applied against invoices issued to customers when services are performed and billed. Deferred revenues that are expected to be recognized as revenues during the succeeding twelve-month period are recorded in current liabilities as deferred revenues, current portion, and the remaining portion is recorded in long-term liabilities as deferred revenues, net of current portion.

Accounts receivable

Accounts receivable are recorded at the invoiced amount, do not require collateral, and do not bear interest. We estimate our allowance for doubtful accounts by evaluating specific accounts where information indicates our customers may have an inability to meet financial obligations, such as bankruptcy and significantly aged receivables outstanding.

Impairment of Long-lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Impairment losses on long-lived assets, such as real estate and equipment, are recognized when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than their carrying value and, accordingly, all or a portion of such carrying value may not be recoverable. Impairment losses are then measured by comparing the fair value of assets to their carrying amounts.

Goodwill and Intangible Assets

Goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired. Intangible assets with indefinite useful lives are measured at their respective fair values as of the acquisition date. We do not amortize goodwill and intangible assets with indefinite useful lives. We review goodwill and indefinite-lived intangible assets at least annually for possible impairment. Goodwill and indefinite-lived intangible assets are reviewed for possible impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit or the indefinite-lived intangible assets below their carrying values.

Recent accounting pronouncements

See Note 3 to our combined financial statements for a description of recent accounting pronouncements applicable to our financial statements.

Revenues

Revenues were approximately $13.1 million for the year ended December 31, 2018, compared to approximately $11.0 million for the year ended December 31, 2017. The increase of approximately $2.0 million was attributable to the recognition of software license and the result of the PowerPlan acquisition.

Cost of Revenue

Cost of revenue was approximately $1.3 million for the year ended December 31, 2018, compared to approximately $815,000 for the year ended December 31, 2017. The increase of approximately $471,000 was primarily related to the acquisition of PowerPlan starting in June 2017 and increases in new name sales.

Selling, General and Administrative

Selling, general and administrative (“SG&A”), expenses increased from approximately $8.0 million for the year ended December 31, 2017 to approximately $10.3 million for the year ended December 31, 2018. The increase of approximately $2.5 million was primarily attributable to increased costs for employee compensation and payroll taxes due to an increase in headcount and the result of the PowerPlan acquisition.

Other Income (Expense)

Other income (expense) increased from approximately $15,000 of income for the year ended December 31, 2017 to approximately $1.9 million of income for the year ended December 31, 2018. The increase is primarily attributable to the gain on sale recorded for our Engineer to Order asset of approximately $1.1 million and a $0.8 million gain related to our foreign currency translation adjustments during the year ended December 31, 2018.

Liquidity

As of December 31, 2018, we had cash and cash equivalents of approximately $4.5 million, and a working capital of approximately $1.9 million.  

Our liquidity to date has been satisfied mainly through profits earned in operating activities and gain from marketable securities. Based on the foregoing, management believes that we will have sufficient working capital and borrowing capacity to meet our needs through one year from this filing.

Operating Activities

For the year ended December 31, 2018, net cash provided by operating activities was approximately $4.6 million, which primarily consisted of our net income of approximately $2.4 million, plus non-cash expenses of approximately $641,000 and net cash provided by operating assets and liabilities of approximately $1.6 million. The non-cash expenses consisted of approximately $188,000 in depreciation and amortization, approximately $221,000 in intangible amortization, approximately $371,000 in change in fair value of contingent consideration, and approximately $118,000 of unrealized loss on marketable securities, partially offset by approximately $258,000 in foreign currency translation adjustment.

For the year ended December 31, 2017, net cash provided by operating activities was approximately $1.6 million, which primarily consisted of our net income of approximately $1.6 million and non-cash expenses of approximately $294,000, offset by net cash used in operating assets and liabilities of approximately $310,000. The non-cash expenses consisted of approximately $143,000 in depreciation and amortization, approximately $113,000 in intangible amortization, approximately $128,000 in change in fair value of contingent consideration, partially offset by approximately $124,000 in unrealized gains on marketable securities.

Investing Activities

For the year ended December 31, 2018, net cash used in investing activities of approximately $414,000 primarily consisted of purchases of marketable securities of approximately $565,000 and purchase of equipment of approximately $47,000, partially offset by proceeds from sales of marketable securities of approximately $197,000.

For the year ended December 31, 2017, net cash provided by investing activities of approximately $2.2 million primarily consisted of proceeds from sales of marketable securities of approximately $4.0 million, partially offset by the purchase of marketable securities of approximately $888,000, the acquisition of Power Plan of approximately $663,000 and the purchase of equipment of approximately $196,000.

Financing Activities

For the year ended December 31, 2018, net cash used in financing activities totaled approximately $1.9 million with approximately $1.2 million for the payment of dividends and approximately $711,000 for the payment of contingent consideration related to the Power Plan acquisition.

For the year ended December 31, 2017, net cash used in financing activities totaled approximately $3.5 million resulting primarily from the payment of dividends.

Related Party Transactions

Parties are considered related to us if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with us. Related parties also include principal owners of our companies, our management, members of the immediate families of principal owners of our companies and our management and other parties with which we may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. Our related party transactions are as follow:

Off-balance sheet arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the SEC rules and regulations.

Sherpa’s Management’s Discussion and Analysis of Financial Condition and Results of Operations

References to “we”, “us”, “our” or the “Company” are to Sherpa Government Solutions, LLC, except where the context requires otherwise. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto of Sherpa Government Solutions, LLC included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included elsewhere in this report.

Overview

We are a Colorado limited liability company headquartered in Denver, Colorado, established in 2004. We are a leading provider of public sector budgeting software and consulting services that help state and local governments create and manage budgets and performance. Customers purchase our software and engage our consulting services to configure the software and train clients on how to manage the software going forward. Following implementation, customers continue to use the software in perpetuity while paying maintenance or subscription fees.

Our customers benefit from a system that greatly simplifies the budgeting process, encourages collaboration, and provides detailed projections on substantial portions of their budget. Increased access to data including instant aggregation of the budget requests means customers can spend more time analyzing data and less time collecting it and formatting outputs. Our business consulting provides access to lessons learned from over 100 public sector budgeting implementations and consultants who average 20 years of experience targeted in budgeting and performance management.

Our contracts are comprised of two durations, a short-term implementation, which may take from 3 to 12 months, and the on-going maintenance, which is from 1-5 years and renewable. Due to the investment made in implementing software and the quality of the solution, retention rates are very high.

The key elements of our offerings are:

Highly Configurable Software

Our software was designed to be configured by functional staff with no changes to the underlying code. Implementation teams are comprised of functional experts, not technical experts, who are able to understand business requirements and demonstrate configured software immediately after requirements meetings. This means customers see their future solution throughout the process and can make refinements without having to wait for an entire build phase to complete.

Consulting

Our consulting team has an average of over 20 years of targeted public sector budgeting experience and have implemented over 100 public sector budgeting projects. This experience is invaluable to customers for several reasons. Customers can quickly explain their processes and our team will understand without multiple iterations, meaning clients dedicate a significantly lower amount of their time to engagements. When customers seek advice, we can refer them to dozens of relevant examples where other similar clients have faced similar challenges. We have many innovative customers whose collective thought leadership is channeled through our implementation team. Our team has seen what has worked and what has not, so we can offer counsel on business processes redesign including recommended timing relative to the software project.

Support

Our support model is designed to enable customers to use our software for the long term, traversing changes in leadership, policy, and staff. As part of our basic maintenance model, customers can reach out to their consulting team at any time to get assistance, answers to questions, or support with activities that are rarely done, such as annual rollover. This results in customers getting answers to questions immediately, without the struggles of reporting issues through a chain of support staff who are not familiar with the client processes and configuration.

Revenues

Professional services revenue

Our professional services contracts generate revenue on a time and materials, fixed fee or subscription basis. Revenues are recognized as the services are rendered for time and materials contracts. Revenues are recognized when the milestones are achieved and accepted by the customer or on a proportional performance basis for fixed fee contracts. Revenues are recognized ratably over the contract term for subscription contracts. The milestone method for revenue recognition is used when there is substantive uncertainty at the date the contract is entered into whether the milestone will be achieved. Training revenues are recognized as the services are performed.

Software license revenue

We provide customers with the right to use software as it exists when made available. Customers purchase these licenses upfront. Revenues from distinct licenses are recognized upfront when the software is made available to the customer as this is when the customer has the risks and rewards of the right to use software. We also act an agent in reselling third- party software as we are not primarily responsible for the third-party software.

Hosting revenue

We also provide hosting services and support for which revenue is recognized over time as the services are provided, which is generally ratably over the contract term.

General and Administrative

General and administrative expenses consist primarily of personnel costs associated with our executive, finance, legal, human resources, and other administrative personnel, as well as accounting and legal professional services fees.

Critical accounting policies and significant judgments and estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our accompanying financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, and which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These estimates are the basis for our judgments about the carrying values of assets and liabilities, which in turn may impact our reported revenue and expenses. Our actual results could differ significantly from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.

Revenue Recognition

We adopted the Financial Accounting Standards Board (“FASB”) new revenue framework, Accounting Standards Codification 606,  Revenue from Contracts with Customers (“ASC 606”),  on January 1, 2017 using the full retrospective approach. The adoption of this standard did not have a material impact on prior revenue recognition or on opening equity, as the timing and measurement of revenue recognition for the Company is materially the same under ASC 606 as it was under the prior relevant guidance.

Significant judgments – contracts with multiple performance obligations

We enter into contracts with customers that include promises to transfer multiple performance obligations, including software licenses, hosting, and professional services. Determining whether products and services are distinct performance obligations that should be accounted for separately or combined as one unit of accounting may require significant judgment.

In determining whether professional services are distinct, we consider the following factors: availability of the services from other vendors, the nature of the services, and whether the services are interdependent and interrelated. To date, we have concluded that all software licenses, hosting services, software support, and professional services included in contracts, with multiple performance obligations, are distinct.

We allocate the transaction price to each performance obligation on a relative standalone selling price (“SSP”) basis. The SSP is the price at which we would sell a promised product or service separately to a customer. Judgment is required to determine the SSP for each distinct performance obligation. We use an adjusted market assessment approach to estimate the stand-alone selling price for software licenses, hosting services, and a cost plus a margin approach for professional services.

For contracts where the period between when we transfer a promised service to the customer and when the customer pays in one year or less, we have elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component.

We have made a policy election to exclude from the measurement of the transaction price all taxes assessed by a government authority that are both imposed on and concurrent with a specific revenue producing transaction and collected by us from a customer. Such taxes may include but are not limited to sales, use, value added and certain excise taxes. 

Contract Liabilities

Contract liabilities primarily consist of amounts that have been billed to or received from customers in advance of revenue recognition and prepayments received from customers in advance for implementation, hosting and other services. We recognize contract liabilities as revenues when the services are performed and the corresponding revenue recognition criteria are met. Customer prepayments are generally applied against invoices issued to customers when services are performed and billed. Contract liabilities that are expected to be recognized as revenues during the succeeding twelve-month period are recorded in current liabilities as contract liabilities, current portion, and the remaining portion is recorded in long-term liabilities as contract liabilities, net of current portion.

Accounts Receivable

Accounts receivable consists of amounts due from customers. Accounts receivable are recorded at the invoiced amount, do not require collateral, and do not bear interest. We estimate an allowance for doubtful accounts by evaluating specific accounts where information indicates that the customer may have an inability to meet financial obligations, such as bankruptcy and significantly aged receivables outstanding. We had no allowance for doubtful accounts as of December 31, 2018.

Recent accounting pronouncements

See Note 3 to our financial statements for a description of recent accounting pronouncements applicable to our financial statements.

Revenues

The increase in revenues for the year ended December 31, 2018, compared to the year ended December 31, 2017, was primarily due to a $712,000 increase in professional services revenues, $380,000 increase in licenses revenues and $73,000 increase in hosting revenues. The increase in the professional and licenses revenues was driven primarily by the acquisition of five new software clients. Our hosting revenues increased by $73,000 or 64% due to the acquisition of new clients who purchased hosting services for sold software.

Cost of revenues

The increase in cost of revenues of $368,000 for the year ended December 31, 2018, compared to the year ended December 31, 2017, was primarily due to third party reporting software utilized by five new software clients.

General and administrative

The increase in general and administrative of $489,000 for the year ended December 31, 2018, compared to the year ended December 31, 2017, was primarily due to a $580,000 increase in guaranteed payments to employees, offset by a decrease of $49,000 in contract labor services expenses.

Other Income

The increase in other income for the year ended December 31, 2018 compared to the year ended December 31, 2017, was primarily due to $2,700 in interest income.

Liquidity

Sherpa is financed by revenues. In the event of insufficient liquidity, partner contributions are used to close any gaps.

Operating Activities

For the year ended December 31, 2018, cash generated by operations was approximately $984,000, resulting from net income of approximately $994,000, offset by aggregate non-cash expenses of approximately of approximately $2,000 and changes in operating assets and liabilities of approximately $13,000.

For the year ended December 31, 2017, cash generated by operations was approximately $437,000, resulting from net income of approximately $683,000, offset by aggregate non-cash expenses of approximately $15,000 and changes in operating assets and liabilities of approximately $262,000.

Financing Activities

For the years ended December 31, 2018 and 2017, cash used in financing activities was $758,000 and $260,000, respectively, resulting primarily from distributions to members in each period.

Contractual Obligations

From time to time, we may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. We are not currently a party to any legal proceedings, nor is it aware of any pending or threatened litigation, that would have a material adverse effect on our business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.

Off-balance sheet arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the SEC rules and regulations.

Quantitative and Qualitative Disclosure about Market Risk

Not Applicable.

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information known to the Company regarding the beneficial ownership of Company common stock as of March 14, 2019 by:

Beneficial ownership is determined according to the rules of the SEC, which generally provide that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power over that security, including options and warrants that are currently exercisable or exercisable within 60 days. Company stock issuable upon exercise of options and warrants currently exercisable within 60 days are deemed outstanding solely for purposes of calculating the percentage of total voting power of the beneficial owner thereof.

The beneficial ownership of Company common stock is based on 48,520,495 shares of Company common stock issued and outstanding as of March 14, 2019.

Unless otherwise indicated, the Company believes that each person named in the table below has sole voting and investment power with respect to all shares of Company common stock beneficially owned by them.

* Less than 1%.

(1) Unless otherwise noted, the business address of each of the shareholders listed is 1180 North Town Center Drive, Suite 100, Las Vegas, Nevada 89144.

(2) William D. Green, Joseph M. Tucci and Harry L. You, the co-founders of GTY Cayman, are members and the managers of GTY Investors, LLC, the Sponsor, and share voting and dispositive power over the founder shares held by the Sponsor. Stephen Rohleder is also a member of the Sponsor. Pursuant to the terms and conditions of the Sponsor’s limited liability company agreement, Mr. Rohleder may have been entitled to a distribution of up to 1,200,000 Class B Ordinary Shares from the Sponsor based on his investment in the Sponsor and the share price of GTY Cayman’s Class A Ordinary Shares at the time of distribution.

(3) Excludes 148,898 shares of Company common stock held in escrow, registered in the name of the escrow agent, pursuant to an agreement between Mr. Bechtolsheim and the Company, pursuant to which Mr. Bechtolsheim expressly disclaimed and relinquished any right to exercise voting power or investment power with respect to any shares of Company common stock owned by him to the extent (but only to the extent) that ownership of such shares would cause him to beneficially own in excess of 9.9% of the Company’s voting common stock. Mr. Bechtolsheim does not have voting power or investment power with respect to such excluded shares. The included and excluded shares were initially issued to Mr. Bechtolsheim as Class A Ordinary Shares of GTY Cayman pursuant to a Subscription Agreement, which such shares were cancelled and exchanged on a one-for-one basis for shares of Company common stock at the Closing. The address for Mr. Bechtolsheim is 5453 Great America Parkway, Santa Clara, CA 94025.

(4) According to a Schedule 13G/A filed with the SEC on March 11, 2019, Miller Value Partners, LLC (“Miller Value Partners”) and the William H. Miller III Living Trust share voting and dispositive power over 2,471,499 shares of the Company’s common stock, consisting of 1,853,625 shares of common stock and 617, 874 shares of common stock underlying warrants. Various accounts managed by Miller Value Partners have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, such securities. The business address of Miller Value Partners is One South Street, Suite 2550, Baltimore, MD 21202

Directors and Executive Officers

Biographical information with respect to the Company’s directors and executive officers immediately after the Closing set forth in Item 10 “Directors, Executive Officers and Corporate Governance” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 is hereby incorporated by reference into this Item 2.01 and is included in Exhibit 99.8 to this Current Report on Form 8-K.

Director Independence

Information with respect to the independence of the Company’s directors immediately after the Closing set forth in Item 10 “Directors, Executive Officers and Corporate Governance” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 is hereby incorporated by reference into this Item 2.01 and is included in Exhibit 99.8 to this Current Report on Form 8-K.

Committees of the Board of Directors

Information with respect to the composition of the committees of the board of directors of the Company immediately after the Closing set forth in Item 10 “Directors, Executive Officers and Corporate Governance” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 is hereby incorporated by reference into this Item 2.01 and is included in Exhibit 99.8 to this Current Report on Form 8-K.

Executive Compensation

A description of the compensation of the executive officers and directors of GTY Cayman and each of the Targets before the consummation of the Business Combination is set forth in the Company’s final prospectus, originally filed with the SEC pursuant to Rule 424(b) under the Securities Act on January 31, 2019, in connection with the Company’s Registration Statement on Form S-4 (File No. 333-229189), as supplemented (the “proxy statement/prospectus”), in the section entitled “Executive Compensation,” which is incorporated herein by reference into this Item 2.01 and is included in Exhibit 99.9 to this Current Report on Form 8-K..

A description of the Company’s executive compensation following the Closing is set forth in the proxy statement/prospectus in the section entitled “Management of New GTY Following the Business Combination – Post-Combination Company Executive Compensation,” which is incorporated herein by reference into this Item 2.01 and is included in Exhibit 99.9 to this Current Report on Form 8-K..

At the Extraordinary General Meeting, the stockholders of the Company approved the GTY Technology Holdings Inc. 2019 Omnibus Incentive Plan (the “Incentive Plan”). The description of the Incentive Plan is set forth in the proxy statement/prospectus section entitled “The Incentive Plan Proposal” is incorporated herein by reference into this Item 2.01 and is included in Exhibit 99.9 to this Current Report on Form 8-K.. A copy of the full text of the Incentive Plan is filed as Exhibit 10.7 to this Current Report on Form 8-K and is incorporated herein by reference. Following the consummation of the Business Combination, the Company expects that the Board or the Compensation Committee will make grants of awards under the Incentive Plan to eligible participants.

Certain Relationships and Related Transactions

The description of certain relationships and related transactions is included in the proxy statement/prospectus in the section entitled “Certain Relationships and Related Party Transactions,” which is incorporated herein by reference into this Item 2.01 and is included in Exhibit 99.9 to this Current Report on Form 8-K..

The information regarding the Subscription Agreements set forth in Item 2.01 of this Current Report on Form 8-K is incorporated herein by reference.

Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters

The Company’s common stock and warrants are listed on Nasdaq under the symbols “GTYH” and “GTYHW,” respectively. In connection with the Closing, GTY Cayman’s units, Class A Ordinary Shares and warrants were delisted from Nasdaq. As of the Closing Date, there were 42 holders of record of Company common stock.

Recent Sales of Unregistered Securities

The disclosure set forth in Item 2.01 of the Original Form 8-K with respect to the issuance of the Company common stock in the Business Combination pursuant to the Transaction Documents and Subscription Agreements is incorporated herein by reference.

The Company common stock issued in the Business Combination pursuant to the Transaction Documents was not registered under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder. 6,073,181 shares of Company common stock issued pursuant to the Subscription Agreements were not registered under the Securities Act in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder.

Description of Securities

The following description of the Company’s capital stock is a summary and is not complete. We urge you to read in their entirety the Company’s Charter, which is filed as an exhibit to Current Report on Form 8-K.

Authorized and Outstanding Stock

The Charter authorizes the issuance of 425,000,000 shares of capital stock, consisting of (x) 400,000,000 shares of common stock, $0.0001 par value per share, and (y) 25,000,000 shares of preferred stock, par value $0.0001 per share. As of the Closing, there were 48,511,028 shares of the Company’s common stock issued and outstanding, held of record by 42 holders, and there were no shares of preferred stock outstanding, and 27,093,334 warrants outstanding held of record by 4 holders. Such numbers do not include DTC participants or beneficial owners holding shares through nominee names.

Common Stock

Voting Power

Except as otherwise required by law or as otherwise provided in any amendment or restatement of the Charter establishing for any series of preferred stock, the holders of the Company’s common stock possess all voting power for the election of directors and all other matters requiring stockholder action and will at all times vote together as one class on all matters submitted to a vote of the Company’s stockholders. Each share of common stock is entitled to one vote on matters to be voted on by stockholders.

Dividends

Holders of the Company’s common stock are entitled to receive such dividends and other distributions, if any, as may be declared from time to time by Company’s board of directors in its discretion out of funds legally available therefor and shall share equally on a per share basis in such dividends and distributions.

Liquidation, Dissolution and Winding Up

In the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding-up of the Company, the holders Company’s common stock will be entitled to receive an equal amount per share of all of Company’s assets of whatever kind available for distribution to stockholders, after Company has satisfied or made provision for the satisfaction of its debts and obligations and shall have paid or made provision for satisfaction of the rights of the holders of the preferred stock, if any.

Preemptive or Other Rights

There are no preemptive or other subscription rights and no sinking fund or redemption provisions applicable to holders of Company’s common stock.

Election of Directors

The Charter does not provide for cumulative voting with respect to the election of directors. The board of directors of the Company is divided into three classes with staggered three-year terms. Only one class of directors will be subject to election at each annual meeting of stockholders, with the directors in the other classes continuing for the remainder of their respective three-year terms. The Company’s bylaws contemplate, among other things, that (i) at a meeting of shareholders in which the number of nominees for election to the board of directors is equal to or less than the number of directors to be elected, a nominee for director shall be elected to the board of directors only if the votes cast “for” such nominee’s election exceed the votes cast “against” such nominee’s election, with “abstentions,” “broker non-votes” and “withheld votes” not counted as a vote “for” or “against” such nominee’s election and (ii) at a meeting of shareholders in which the number of nominees for election to the board of directors exceeds the number of directors to be elected, directors shall be elected by a plurality of the votes cast at such meeting.

Preferred Stock

The Charter provides that shares of preferred stock may be issued from time to time in one or more series. The board of directors is authorized to fix the voting rights, if any, designations, powers, preferences, the relative, participating, optional or other special rights and any qualifications, limitations and restrictions thereof, applicable to the shares of each series. The board of directors will be able, without stockholder approval, to issue preferred stock with voting and other rights that could adversely affect the voting power and other rights of the holders of the common stock and could have anti-takeover effects. The ability of the board of directors to issue preferred stock without stockholder approval could have the effect of delaying, deferring or preventing a change of control of the Company or the removal of existing management. The Company had no preferred stock outstanding at the date hereof. Although the Company does not currently intend to issue any shares of preferred stock, it cannot assure you that it will not do so in the future.

Warrants

Public Warrants

Upon the Closing, the Company had 18,400,000 public warrants outstanding. Each public warrant will entitle the registered holder to purchase one share of the Company’s common stock at a price of $11.50 per whole share, subject to adjustment as discussed below, at any time commencing on March 21, 2019. A warrant holder may exercise its warrants only for a whole number of shares. The warrants will expire on February 19, 2024, which is five years after the date of the Closing, at 5:00 p.m., New York City time, or earlier upon redemption or liquidation.

The Company will not be obligated to deliver any shares of common stock pursuant to the exercise of a warrant and will have no obligation to settle such warrant exercise unless a registration statement under the Securities Act with respect to the shares of common stock underlying the warrants is then effective and a prospectus relating thereto is current, subject to its satisfying its obligations described below with respect to registration. No warrant will be exercisable and the Company will not be obligated to issue a share of common stock upon exercise of a warrant unless the share issuable upon such warrant exercise has been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the registered holder of the warrants. In the event that the conditions in the two immediately preceding sentences are not satisfied with respect to a warrant, the holder of such warrant will not be entitled to exercise such warrant and such warrant may have no value and expire worthless. In no event will the Company be required to net cash settle any warrant.

The Company is obligated to file with the SEC as soon as practicable, but in no event later than March 12, 2019, a registration statement for the registration, under the Securities Act, of the shares of common stock issuable upon exercise of the warrants, and to cause the same to become effective and to maintain the effectiveness of such registration statement, and a current prospectus relating thereto, until the expiration of the warrants in accordance with the provisions of the warrant agreement. If a registration statement covering the shares of common stock issuable upon exercise of the warrants is not effective by the 60 ^th day after the Closing, warrant holders may, until such time as there is an effective registration statement and during any period when the Company will have failed to maintain an effective registration statement, exercise warrants on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act or another exemption.

Once the warrants become exercisable, the Company may call the warrants for redemption:

If and when the warrants become redeemable, the Company may exercise its redemption right even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws.

The Company established the last of the redemption criterion discussed above to prevent a redemption call unless there is at the time of the call a significant premium to the warrant exercise price. If the foregoing conditions are satisfied and the Company issues a notice of redemption of the warrants, each warrant holder will be entitled to exercise his, her or its warrant prior to the scheduled redemption date. However, the price of the common stock may fall below the $18.00 redemption trigger price (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) as well as the $11.50 warrant exercise price (for whole shares) after the redemption notice is issued.

If the Company calls the warrants for redemption as described above, it will have the option to require any holder that wishes to exercise his, her or its warrant to do so on a “cashless basis.” In determining whether to require all holders to exercise their warrants on a “cashless basis,” the Company will consider, among other factors, its cash position, the number of warrants that are outstanding and the dilutive effect on its shareholders of issuing the maximum number of shares issuable upon the exercise of the warrants. If the Company takes advantage of this option, all holders of warrants would pay the exercise price by surrendering their 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” means the average reported last sale price of the common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. If the Company takes advantage of this option, the notice of redemption will contain the information necessary to calculate the number of shares of common stock to be received upon exercise of the warrants, including the “fair market value” in such case. Requiring a cashless exercise in this manner will reduce the number of shares to be issued and thereby lessen the dilutive effect of a warrant redemption. If the Company calls the warrants for redemption and does not take advantage of this option, the holders of the private placement warrants and their permitted transferees would still be entitled to exercise their private placement warrants for cash or on a cashless basis using the same formula described above that other warrant holders would have been required to use had all warrant holders been required to exercise their warrants on a cashless basis, as described in more detail below.

A holder of a warrant may notify the Company in writing in the event it elects to be subject to a requirement that such holder will not have the right to exercise such warrant, to the extent that after giving effect to such exercise, such person (together with such person’s affiliates), to the warrant agent’s actual knowledge, would beneficially own in excess of 4.9% or 9.8% (as specified by the holder) of the Company’s common stock outstanding immediately after giving effect to such exercise.

If the number of outstanding shares of common stock is increased by a share dividend payable in common stock, or by a split-up of common stock or other similar event, then, on the effective date of such share dividend, split-up or similar event, the number of shares of common stock issuable on exercise of each warrant will be increased in proportion to such increase in the outstanding shares of common stock. A rights offering to holders of common stock entitling holders to purchase shares of common stock at a price less than the fair market value will be deemed a share dividend of a number of shares of common stock equal to the product of (i) the number of shares of common stock actually sold in such rights offering (or issuable under any other equity securities sold in such rights offering that are convertible into or exercisable for shares of common stock) multiplied by (ii) one (1) minus the quotient of (x) the price per share of common stock paid in such rights offering divided by (y) the fair market value. For these purposes (i) if the rights offering is for securities convertible into or exercisable for shares of common stock, in determining the price payable for shares of common stock, there will be taken into account any consideration received for such rights, as well as any additional amount payable upon exercise or conversion and (ii) fair market value means the volume weighted average price of shares of common stock as reported during the 10 trading day period ending on the trading day prior to the first date on which the shares of common stock trade on the applicable exchange or in the applicable market, regular way, without the right to receive such rights.

In addition, if at any time while the warrants are outstanding and unexpired, the Company pays a dividend or makes a distribution in cash, securities or other assets to the holders of common stock on account of such common stock (or other securities into which the warrants are convertible), other than (a) as described above, (b) certain ordinary cash dividends, or (c) to satisfy the redemption rights of the holders of shares of common stock in connection with the business combination, then the warrant exercise price will be decreased, effective immediately after the effective date of such event, by the amount of cash and/or the fair market value of any securities or other assets paid on each share of common stock in respect of such event.

If the number of outstanding shares of common stock is decreased by a consolidation, combination, reverse share split or reclassification of the shares of common stock or other similar event, then, on the effective date of such consolidation, combination, reverse share split, reclassification or similar event, the number of shares of common stock issuable on exercise of each warrant will be decreased in proportion to such decrease in outstanding shares of common stock.

Whenever the number of shares of common stock purchasable upon the exercise of the warrants is adjusted, as described above, the warrant exercise price will be adjusted by multiplying the warrant exercise price immediately prior to such adjustment by a fraction (x) the numerator of which will be the number of shares of common stock purchasable upon the exercise of the warrants immediately prior to such adjustment, and (y) the denominator of which will be the number of shares of common stock so purchasable immediately thereafter.

In case of any reclassification or reorganization of the outstanding shares of common stock (other than those described above or that solely affects the par value of such shares), or in the case of any merger or consolidation of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and that does not result in any reclassification or reorganization of the Company’s outstanding shares of common stock), or in the case of any sale or conveyance to another corporation or entity of the assets or other property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the holders of the warrants will thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in the warrants and in lieu of the shares of common stock immediately theretofore purchasable and receivable upon the exercise of the rights represented thereby, the kind and amount of shares of common stock or other securities or property (including cash) receivable upon such reclassification, reorganization, merger or consolidation, or upon a dissolution following any such sale or transfer, that the holder of the warrants would have received if such holder had exercised their warrants immediately prior to such event. If less than 70% of the consideration receivable by the holders of common stock in such a transaction is payable in the form of shares of common stock in the successor entity that is listed for trading on a national securities exchange or is quoted in an established over-the-counter market, or is to be so listed for trading or quoted immediately following such event, and if the registered holder of the warrant properly exercises the warrant within thirty days following public disclosure of such transaction, the warrant exercise price will be reduced as specified in the warrant agreement based on the Black-Scholes value (as defined in the warrant agreement) of the warrant. The purpose of such exercise price reduction is to provide additional value to holders of the warrants when an extraordinary transaction occurs during the exercise period of the warrants pursuant to which the holders of the warrants otherwise do not receive the full potential value of the warrants.

The warrants are issued in registered form under a warrant agreement with Continental Stock Transfer & Trust Company, as warrant agent. You should review a copy of the warrant agreement, which is filed as an exhibit to this Current Report on Form 8-K, for a complete description of the terms and conditions applicable to the warrants.

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 the holders of at least 50% of the then outstanding public warrants to make any change that adversely affects the interests of the registered holders of public warrants.

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 (or on a cashless basis, if applicable), by certified or official bank check payable to the Company, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders 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 shareholders.

No fractional shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, the Company will, upon exercise, round down to the nearest whole number the number of shares of common stock to be issued to the warrant holder.

Private Placement Warrants

The private placement warrants (including the shares of common stock issuable upon exercise of the private placement warrants) will not be transferable, assignable or salable until March 21, 2019, subject to certain exceptions, and they will not be redeemable by the Company so long as they are held by the Sponsor or its permitted transferees. The Sponsor, or its permitted transferees, has the option to exercise the private placement warrants on a cashless basis. Except as described below, the private placement warrants have terms and provisions that are identical to those of the public warrants. If the private placement warrants are held by holders other than the Sponsor or its permitted transferees, the private placement warrants will be redeemable by the Company and exercisable by the holders on the same basis as the public warrants.

If holders of the private placement warrants elect to exercise them on a cashless basis, they would pay the exercise price by surrendering his, her or its 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” means the average reported last sale price of the common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of warrant exercise is sent to the warrant agent.

Dividends

The payment of cash dividends in the future will be dependent upon the Company’s revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of the business combination. The payment of any cash dividends subsequent to the business combination is within the discretion of the board of directors at such time. Further, if the Company incurs any indebtedness, its ability to declare dividends may be limited by restrictive covenants the Company may agree to in connection therewith.

Transfer Agent and Warrant Agent

The transfer agent for the Company’s common stock and warrant agent for its warrants is Continental Stock Transfer & Trust Company.

Registration Rights

The holders of the founder shares and private placement warrants are entitled to registration rights pursuant to the registration rights agreement entered into in connection with the IPO, requiring the Company to register such securities for resale. The holders of the majority of these securities are entitled to make up to three demands, excluding short form demands, that the Company register such securities. In addition, the holders have certain “piggy-back’’ registration rights with respect to registration statements filed subsequent to the Company’s completion of the business combination and rights to require the Company to register for resale such securities pursuant to Rule 415 under the Securities Act. However, the registration rights agreement provides that the Company will not permit any registration statement filed under the Securities Act to become effective until termination of the applicable lock-up period, which occurs in the case of the founder shares, on the earlier of (A) one year after the completion of the business combination or (B) subsequent to the business combination, (i) if the last sale price of the Company’s common stock equals or exceeds $12.00 per share (as adjusted for share splits, share capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the business combination or (ii) the date on which the Company complete a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all shareholders having the right to exchange their ordinary shares for cash, securities or other property, subject to certain exceptions.

In addition, holders of the Company’s common stock who received their shares (i) pursuant to the Transaction Agreements as consideration in connection with the acquisition of the Targets and (ii) pursuant to certain Subscription Agreements entered in connection with the business combination, are entitled to registration rights pursuant to which the Company is obligated to register the resale of such shares.

Certain Anti-Takeover Provisions of Massachusetts Law and the Charter

The Company, as a corporation incorporated under the laws of the Commonwealth of Massachusetts, is subject to the provisions of the Massachusetts General Laws.

Chapter 110F of the Massachusetts General Laws generally provides that, if a person acquires 5% or more of the stock of a Massachusetts corporation without the approval of the board of directors of that corporation, such person may not engage in certain transactions with the corporation for a period of three years following the time that person becomes a 5% shareholder, with certain exceptions. A Massachusetts corporation may elect in its articles of organization or bylaws not be governed by Chapter 110F.

Under the Massachusetts control share acquisitions statute (Chapter 110D of the Massachusetts General Laws), a person who acquires beneficial ownership of shares of stock of a corporation in a threshold amount equal to one-fifth or more but less than one-third, one-third or more but less than a majority, or a majority or more of the voting stock of the corporation, referred to as a control share acquisition, must obtain the approval of a majority of shares entitled to vote generally in the election of directors (excluding (1) any shares owned by any person acquiring or proposing to acquire beneficial ownership of shares in a control share acquisition, (2) any shares owned by any officer of the corporation and (3) any shares owned by any employee of the corporation who is also a director of the corporation) for the purpose of acquiring voting rights for the shares that such person acquires in crossing the foregoing thresholds.

The Massachusetts control share acquisitions statute permits the corporation, to the extent authorized by its articles of organization or bylaws, to redeem all shares acquired by an acquiring person in a control share acquisition for fair value (which is to be determined in accordance with procedures adopted by the corporation) if (1) no control share acquisition statement is delivered by the acquiring person or (2) a control share acquisition statement has been delivered and voting rights were not authorized for such shares by the shareholders in accordance with the applicable provision of the control share acquisitions statute.

If the voting rights for shares acquired in a control share acquisition are authorized by a majority of shareholders, the acquirer has acquired beneficial ownership of a majority or more of all voting power in the election of directors, then each stockholder of record, other than the acquirer, who has not voted in favor of authorizing voting rights for the control may demand payment for his or her stock and an appraisal in accordance with M.G.L. chapter 156D.

The Massachusetts control share acquisition statute permits a Massachusetts corporation to elect not to be governed by the statute’s provisions by including a provision in the corporation’s articles of organization or bylaws pursuant to which the corporation opts out of the statute.

Massachusetts law provides that the board of directors of a public corporation be staggered into three groups having terms of three years. This could make it difficult to replace a majority of the board in any one year. A corporation may elect not to be governed by this provision by a vote of the board of directors, or by two-thirds of each class of stock outstanding at a meeting duly called for the purpose of voting on an exemption.

Chapter 110C of the Massachusetts General Laws (1) subjects an offeror to certain disclosure and filing requirements before such offeror can proceed with a takeover bid, defined to include any acquisition of or offer to acquire stock by which, after acquisition, the offeror would own more than 10% of the issued and outstanding equity securities of a target company and (2) provides that, if a person (together with its associates and affiliates) beneficially owns more than 5% of the stock of a Massachusetts corporation, such person may not make a takeover bid if during the preceding year such person acquired any of the subject stock with the undisclosed intent of gaining control of the corporation. The statute contains certain exceptions to these prohibitions, including if the board of directors approves the takeover bid, recommends it to the corporation’s shareholders and the terms of the takeover are furnished to shareholders. The validity of Chapter 110C has been called into questioned by a 1982 US Supreme Court decision that invalidated a similar law in the state of Illinois.

Indemnification of Directors and Officers

The Charter provides that the Company’s officers and directors will be indemnified by the Company to the fullest extent permitted by the Massachusetts Business Corporation Act (“MBCA”), as it presently exists, or may in the future be amended. In addition, the Charter provides that the Company’s directors will not be personally liable for monetary damages to the Company for breaches of their fiduciary duty as directors, unless they violated their duty of loyalty to the Company or its stockholders, acted not in good faith or with intentional misconduct, knowingly or intentionally violated the law, or derived an improper personal benefit from their actions as directors. The Company intends to enter into agreements with its officers and directors to provide contractual indemnification in addition to the indemnification provided for in the Charter. The Charter also permits the Company to secure insurance on behalf of any officer, director or employee for any liability to the fullest extent permitted by the MBCA. The Company has purchased a policy of directors’ and officers’ liability insurance that insures its officers and directors against the cost of defense, settlement or payment of a judgment in some circumstances and insures the Company against its obligations to indemnify its officers and directors.