UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-K
______________
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
Commission File Number 001-36486
______________
CDK Global, Inc.
(Exact name of registrant as specified in its charter)
______________
Delaware
46-5743146
(State or other jurisdiction of incorporation or
organization)
(IRS Employer Identification No.)
1950 Hassell Road, Hoffman Estates
IL, 60169
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (847) 397-1700
______________
Securities registered pursuant to Section 12(b) of the Act:
Title of class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 Par Value
CDK
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
______________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes ☒ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company,” and "emerging growth
company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of common stock held by non-affiliates of the registrant, as of December 31, 2020, the last business day of the registrant's most
recently completed second fiscal quarter, was approximately $6.3 billion.
The number of shares outstanding of the registrant’s common stock as of August 16, 2021 was 120,831,922.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference to the registrant's definitive proxy statement, to be filed with the Securities and Exchange Commission within
120 days after the fiscal year end of June 30, 2021.
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Table of Contents
Page
Part I
Item 1.
Business
1
Item 1A.
Risk Factors
6
Item 1B.
Unresolved Staff Comments
20
Item 2.
Properties
20
Item 3.
Legal Proceedings
20
Item 4.
Mine Safety Disclosures
20
Part II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
21
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
22
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
43
Item 8.
Financial Statements and Supplementary Data
44
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
84
Item 9A.
Controls and Procedures
84
Item 9B.
Other Information
86
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
87
Item 11.
Executive Compensation
87
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
87
Item 13.
Certain Relationships and Related Transactions, and Director Independence
87
Item 14.
Principal Accounting Fees and Services
87
Part IV
Item 15.
Exhibits, Financial Statement Schedules
88
Signatures
91
Part I
Item 1. Business
This Annual Report on Form 10-K and the documents incorporated herein by reference contain "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, may be forward-looking statements. These
statements are based on management's expectations and assumptions as of the date of this filing and are subject to risks and uncertainties that may cause
actual results to differ materially from those expressed, or implied by, these forward-looking statements. Factors that could cause actual results to differ
materially from those contemplated by the forward-looking statements include, but are not limited to, those discussed in Part I, Item 1A of this Form 10-K
under the heading “Risk Factors,” which are incorporated herein by reference. We disclaim any obligation to update or revise forward-looking statements
that may be made to reflect new information or future events or circumstances that arise after the date made or to reflect the occurrence of unanticipated
events, other than as required by law. The following discussion should be read in conjunction with the consolidated financial statements and accompanying
notes included in Part II, Item 8 of this Form 10-K. As used herein, "CDK Global," "CDK," the "Company," "we," "our," and similar terms include CDK
Global, Inc. and its consolidated subsidiaries, unless the context indicates otherwise.
CDK Global, Inc. is the former Dealer Services division of Automatic Data Processing, Inc. ("ADP"). We were incorporated in Delaware as a wholly-
owned subsidiary of ADP on September 29, 2014 and began operating as an independent public company on September 30, 2014. Our principal corporate
offices are located in Hoffman Estates, Illinois. Our common stock is listed on the NASDAQ Global Select Market under the symbol “CDK.” We report
our annual results for our fiscal year, which ends June 30. As such, all references to 2021, 2020, and 2019 contained within this Annual Report on Form 10-
K relate to the applicable fiscal year, unless otherwise indicated.
On March 1, 2021, we completed the sale of the CDK International business ("International Business") to Francisco Partners. Financial results associated
with the International Business are presented as discontinued operations in the Consolidated Statements of Operations. Following the sale of the
International Business, we are organized as a single operating segment. On April 21, 2020, we completed the sale of the Digital Marketing Business to
Sincro LLC, a newly formed company owned by Ansira Partners, Inc., which is a subsidiary of Advent International. The Digital Marketing Business is
also presented as discontinued operations. For additional information refer to Item 8 of Part II, "Financial Statements and Supplementary Data", Note 1 -
Basis of Presentation and Note 4 - Discontinued Operations.
Overview
We are a leading provider of integrated data and technology solutions to the automotive, heavy truck, recreation and heavy equipment industries. Focused
on enabling end-to-end, omnichannel retail commerce through open, agnostic technology, we provide solutions to dealers and original equipment
manufacturers ("OEMs"), serving nearly 15,000 retail locations in North America. Our solutions connect people with technology by automating and
integrating all parts of the dealership and buying process, including the acquisition, sale, financing, insuring, parts supply, repair and maintenance of
vehicles.
We generate revenue primarily by providing a broad suite of subscription-based software and technology solutions for our core customer base of
automotive retailers as well as to retailers and manufacturers of heavy trucks, construction equipment, agricultural equipment, motorcycles, boats, and other
marine and recreational vehicles.
Our Strategy
To enable end-to-end automotive commerce, our strategy is to invest for the long-term in integrated software products and an open technology platform
that can deliver seamless, workflow-driven solutions for our customers. The automotive retail market is evolving and demand for new and integrated
technology solutions is growing: consumers increasingly expect a seamless omnichannel experience when purchasing or servicing vehicles; OEMs see
technology as a tool to ensure a consistent and positive customer experience across their retail networks; and retailers are seeking integrated workflow
technology solutions to help them improve both customer satisfaction and dealership cost structure. We believe that the best way to compete in a world
with numerous providers of unconnected software solutions for numerous automotive retailers, OEMs, consumers, and vehicles is to provide integrated
technology solutions and platform tools that can connect the disparate elements to create continuous retail workflows.
Our Business
We generate revenue primarily by providing a broad suite of subscription-based software and technology solutions for automotive retailers in North
America. We are focused on the use of software-as-a-service "SaaS" and mobile-centric solutions that are highly functional, flexible, and fast. Our flagship
Dealer Management System ("DMS") software solutions are hosted enterprise resource planning applications tailored to the unique requirements of the
retail automotive industry. Our DMS products facilitate the sale of
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new and used vehicles, consumer financing, repair and maintenance services, and vehicle and parts inventory management. We also provide a broad
portfolio of layered software applications and services, a robust and secure interface to the DMS through our Partner Program, data management and
business intelligence solutions, a variety of professional services, and a full range of customer support solutions. These solutions enable company-wide
accounting, financial reporting, cash flow management, and payroll services. Our DMSs are typically integrated with OEM data processing systems that
enable automotive retailers to order vehicles and parts, receive vehicle records, process warranties, and check recall campaigns and service bulletins while
helping them to fulfill their franchisee responsibilities to their OEM franchisers.
Complementary to our core DMS, we also provide a portfolio of layered software applications and services to address the unique needs of automotive retail
workflows. These solutions are often integrated to and targeted at users of our DMSs, but may, in some cases, be provided to customers that do not
otherwise use our DMS. Our principal layered applications are:
Solutions
Description
Vehicle Sales Solutions
Technology tools and services to streamline the entire vehicle inventory, sales, and finance and
insurance ("F&I") process
Fixed Operations Solutions
Solutions to manage the parts and service profit center of dealerships, including customer
targeting, appointment scheduling, on-site workflow, and billing
Customer Relationship Management Solutions
Software to manage interactions with current and prospective customers
Financial Management Solutions
Value-added capabilities for accounts payable, payments, and payroll
Document Management Solutions
Document creation and archiving solutions to address the complex automotive retail sales
process
Network Management Solutions
Wired and wireless network solutions to support dealer connectivity and security efforts
Integrated Telephony Management Solutions
Integrated telephony solutions that allow automotive retailers to connect and communicate via
presence, instant messaging, voice, and video
In recent years, we have strategically focused on delivering solutions that remove friction from the vehicle-buying experience. Specifically, we digitized
critical pieces of the sales process with products such as Connected Store, ELEAD1ONE ("ELEAD") customer relationship management ("CRM"), Digital
Contracting and eSign. On an as-needed basis, we have also implemented installation procedures for our DMS and layered application products on a fully
remote basis to meet the needs of our dealers. As a result of certain safety measures taken in response to the COVID-19 pandemic, we saw increased
demand for our digital solution that can facilitate remote delivery and touchless transaction products. Our June 2021 acquisition of Roadster, Inc. now gives
us capabilities to enable dealers to sell new and used vehicles completely online, while also giving consumers the option to begin and end the vehicle-
buying process anywhere they choose—online or in-store.
We further connect the automotive ecosystem by providing third party retail solution providers with robust and secure interfaces to the core DMS through
our Partner Program. For both automotive retailers and OEMs, we provide data management and business intelligence solutions through our open Neuron
intelligent data platform that extract, cleanse, normalize, enhance, and distribute billions of pieces of industry information and turn it into usable data that
provides actionable insights and products.
We offer automotive retailers and OEMs a variety of professional services, custom programming, consulting, implementation and training solutions, as well
as a full range of customer support solutions. We also provide solutions to retailers and manufacturers of heavy trucks, construction equipment, agricultural
equipment, motorcycles, boats, and other marine and recreational vehicles.
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Product Development and Innovation
Our ability to strengthen and extend our solutions portfolio is a key element of our business strategy. We execute on this strategy through a combination of
development and the selective pursuit of strategic acquisitions.
In addition to the ongoing investment to enhance existing solutions in our core business, we also invest in long- and medium-term product innovation
aligned with our strategy. For example, the Fortellis Automotive Commerce Exchange ("Fortellis") is the foundation of our open technology platform for
automotive commerce. In the automotive commerce market, Fortellis allows us and third parties to develop adaptive and interchangeable application
programming interfaces ("APIs") that can be used to connect existing technology solutions and build new solutions quickly and with high levels of
reliability. Similarly, we have developed our open Neuron intelligent data platform, which uses an analytics engine powered by artificial intelligence and
machine learning to create real-time and predictive insights that empower dealers and OEMs to sell and service more vehicles by creating personalized and
differentiated customer experiences. The Neuron platform is available through Fortellis via our open APIs where it can best accelerate the creation of new
products in the industry and enhance the user experience and value of existing products. We are developing these solutions using a methodical and
measured approach with respect to capital and resource allocation. We believe these investments align to our strategy and will position us to take advantage
of the evolving automotive retail market.
Competition
Our industry is highly competitive and fragmented. We compete with a broad and diverse range of information, technology, services, and consulting
companies, as well as with the in-house capabilities of OEMs and dealers. Our competitors range from local providers to regional and global competitors.
However, we believe that no competitor provides the same combination of customer focus and breadth of solutions that we do.
Each of our solutions faces competition from an array of solution providers. For our DMS solutions in North America, our principal competitors are
Reynolds and Reynolds, Dealertrack (Cox Automotive), Auto/Mate, AutoSoft, Tekion, PBS Systems, and various local and regional providers. The most
significant competitive factors that we face across our solutions are price, breadth of features and functionality, user experience, quality, brand, scalability,
and service capability.
Regulation
The automotive retail industry is highly regulated and automotive retailers and OEMs are subject to a broad array of complex regulations governing
virtually every aspect of their operations. Our customers must ensure their compliance with their regulatory requirements, and, in turn, we must ensure that
our solutions effectively address their regulatory compliance needs.
Because our business delivers solutions across a broad spectrum of automotive retailer operations, our activities are impacted by a wide variety of federal,
state, local, and international laws and regulations. Central to the value of our DMS application, for example, is that the forms we provide for our
customers meet the requirements of their applicable laws. Likewise, in our Vehicle Sales Solutions application, our electronic vehicle registration service is
dependent on our compliance with complex and detailed regulatory requirements. Across our portfolio of automotive retail solutions, we are focused on
ensuring that we meet our regulatory compliance obligations and that our solutions enable our customers to comply with the laws and regulations
applicable to them. See “Item 1A. Risk Factors - Risks Relating to Legal, Regulatory and Compliance Matters" for additional information regarding the
application and impact of laws and regulations on our operations.
Privacy and Data Protection Regulations
We are subject to a number of federal, state, and foreign laws and regulations regarding data governance and the privacy and protection of personal data.
For example, under the Gramm-Leach-Bliley Act ("GLB Act"), automotive retailers are generally deemed to be regulated financial institutions and
therefore are subject to the GLB Act and applicable regulations, including the Federal Trade Commission's ("FTC") Privacy Rule and Safeguards Rule. In
our capacity as a service provider to automotive retailers, we generally commit to our customers that we will handle non-public personal information
consistent with the GLB Act and the related regulations. Similarly, many United States ("U.S.") states and foreign jurisdictions have adopted regulations
that impose obligations on businesses that handle personal information, including notification requirements in the event of data breaches relating to
personal data, as well as minimum security standards with respect to the handling and transmission of personal data. For a discussion of privacy and data
protection regulation and the potential impacts on our business, see "Item 1A. Risk Factors - Risks Relating to Legal, Regulatory and Compliance Matters."
Seasonality
Though our business is not highly cyclical, a portion of it is seasonal. Our Transaction revenue experiences volatility around seasonal consumer vehicle
shopping activity, and our Other revenue has a seasonal increase in the third quarter of each fiscal year related to the services we provide to dealers in
support of their year-end reporting and tax filing obligations.
3
Concentrations
We maintain deposits in federally insured financial institutions in excess of federally insured limits. The Company maintains deposits in a diversified group
of financial institutions, has not experienced any losses to date, and monitors the credit ratings of the primary depository institutions where deposits reside.
For fiscal 2021, 2020, and 2019, no customer accounted for 10% or more of our consolidated revenue. As of June 30, 2021, and 2020, no customer
represented 10% or more of our accounts receivable.
Human Capital Resources
Our employees are our most valuable asset and are critical to our ability to deliver on our strategic plans. Our success in delivering high quality and
innovative products and solutions for our customers and driving operational excellence is only achievable through the talent, expertise, and dedication of
our team.
We recognize that attracting, developing and retaining skilled talent and promoting a diverse and inclusive culture are essential to our long-term success.
Our values – Be Open, Stay Curious, Own It and Create Possibilities represent who we are and how we show up for each other and our stakeholders. These
values inspire our employee experience and the connection our employees have with the resources and tools to learn, grow and perform. We continue to
make significant investments in talent development and recognize that the growth and development of our employees is crucial to deliver for our
customers.
The following are some of the investments we make in our employees, to align with our key priorities:
•
Diversity and Inclusion ("D&I"). Our D&I strategy embodies our continuous focus around increasing representation, embracing an inclusive
culture, and positively impacting our communities. We foster an inclusive culture that creates a sense of belonging for employees, no matter their
ethnicity, gender, race, physical abilities or preferences. This inclusive culture encourages employees to embrace different views which fuels
innovation, sparks growth, increases productivity and enables the delivery of best-in-class service to our customers. Our employee-led impact
teams support the activation of our D&I and Corporate Responsibility efforts across the organization to engage employees and deliver on our
commitments. During fiscal 2021, we launched a required Ignite Inclusion learning journey for all people leaders to continue cultivating this
inclusive culture that will help CDK and our customers win. To embed accountability for these efforts, our D&I efforts are reflected in a
component of our fiscal 2021 bonus plan for all eligible employees.
•
Thrive Continuous Performance Management ("THRIVE"). At CDK, we believe that everyone plays a distinct role in contributing to our
business objectives. We empower our people to achieve their highest performance and potential by building a culture of high-performing teams
and growth. We enable everyone to learn, grow, perform and accomplish tough goals. With THRIVE, employees own their performance and
career by aligning performance and development objectives with business priorities, and crowd sourcing feedback all throughout the year.
Employees and managers check in regularly to reflect on what’s gone well, what could go better and how they are tracking against their goals. At
year end, employees and managers collaborate to conduct a year-end performance assessment that encapsulates both performance achievements
and demonstration of behaviors in line with our values.
•
Pulse Real-Time Engagement ("PULSE"). Employee engagement is the connection that creates discretionary effort and commitment to the
organization, our colleagues and our customers. At CDK, employee engagement is a top priority for us. We strive to Be Open, and one way we
live this value is by providing employees with opportunities to share their feedback. The insights we gain through weekly PULSE feedback is how
we measure progress and share anonymous feedback with people leaders who are empowered to take action to strengthen engagement in their
teams. Through PULSE, we are consistently evaluating how our people feel about our organizational priorities including engagement, D&I, and
health and well-being drivers.
•
Learning and Development. We Stay Curious by enabling a culture of continuous learning and growth. CDK offers a variety of learning and
development programs and technologies that enhance our ability to connect employees with meaningful learning content. We offer a variety of
learning opportunities including technical learning paths, professional skill development, and leadership development programming. Our
partnership with EdAssist reimburses employees for tuition costs for career-enhancing education. We have also invested in LinkedIn Learning
licenses for all CDK employees, offering more than 16,000 learning items for employees to connect with throughout their unique journey.
•
Health and safety. We are committed to providing a healthy environment and safe workplace by operating in accordance with established health
and safety protocols across our facilities while maintaining an enhanced health and safety compliance program. In response to the COVID-19
pandemic, we have modified practices at our offices to adhere to guidance from the U.S. Centers for Disease Control and Prevention and local
health and governmental authorities in our global network. We have made investments to provide oversight, enhance coordination and ensure
robust safety protocols
4
are present across our operations. We believe that a healthy and safe workforce is an engaged workforce that is ready and able to contribute to our
success. In fiscal 2021, we added Health and Wellbeing questions to our PULSE survey to continuously assess the mental and social well being of
our employees in real-time.
As of June 30, 2021, we had a total of approximately 6,500 employees. We believe that relations with our employees are good. None of our employees in
the United States are represented by a collective bargaining agreement. We have statutory employee representation obligations with our Canadian
employees.
Available Information
Our company website is cdkglobal.com. The investor relations section of our website is investors.cdkglobal.com. We encourage investors to use our
website as a way of easily finding information about us. We promptly make available on the investor relations section of our website, free of charge, the
reports that we file or furnish with the Securities and Exchange Commission ("SEC"), corporate governance information (including our Code of Business
Conduct and Ethics), and select press releases. The information contained on the websites referenced in this Annual Report on Form 10-K is not
incorporated by reference into this filing. Further, our references to website URLs are intended to be inactive textual references only.
5
Item 1A. Risk Factors
The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this
Annual Report on Form 10-K. The following information should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes in Part II, Item 8, “Financial
Statements and Supplementary Data” of this Annual Report on Form 10-K.
The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown,
including but not limited to those described below, any one or more of which could, directly or indirectly, cause the Company’s actual financial condition
and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in
part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price.
Because of the following factors, as well as other factors affecting the Company’s financial condition and operating results, past financial performance
should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in
future periods.
Risks Relating to Our Business
The ongoing COVID-19 pandemic has materially affected how we and our customers are operating our businesses, and the duration and extent to
which this will impact our business, results of operations, and financial condition remains uncertain.
On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The COVID-19 pandemic has disrupted our market
and the global economy. As a result of the COVID-19 pandemic, many of our dealer customers experienced significant declines in new and used vehicle
unit sales and sales of their finance and insurance products, particularly during the first and second quarters of 2020. While our underlying business has
remained strong during the COVID-19 pandemic due to our subscription-based business model, the pace of improvements in the public health situation,
evolving global response measures and corresponding impacts on the automotive retail industry remain fluid and uncertain and may lead to sudden changes
in trajectory and outlook. Accordingly, we are currently unable to quantify the full and long-term impact of the pandemic on our results of operations and
financial position.
We are monitoring the global outbreak of COVID-19 and have taken steps to mitigate its risks by working with our customers and employees. To support
our customers during the pandemic, we offered financial and other assistance during the fourth quarter of fiscal 2020 and added product benefits to
facilitate remote delivery and touchless transactions. The direct financial impact of these concessions was a near-term decrease in cash receipts and a
reduction in revenue that will be recognized over fiscal 2021 and fiscal 2022. A discussion of the impact of these factors is provided in Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.
To support our employees, we temporarily closed offices globally and implemented certain travel restrictions. This work-from-home operating environment
has caused strain for, and may adversely impact the productivity of, certain employees, and these conditions may persist and harm our business, including
our future operating results. Additionally, our efforts to re-open our offices safely may not be successful, could expose our employees, customers, and
partners to health risks, and us to associated liability, and will involve additional financial burdens. The pandemic may have long-term effects on the nature
of the office environment and remote working, and this may present operational challenges that may adversely affect our business.
Furthermore, the pandemic has impacted and may further impact the broader economies of affected countries, including negatively impacting economic
growth, the proper functioning of financial and capital markets, foreign currency exchange rates and interest rates. Due to the unprecedented and sustained
social and economic consequences of the COVID-19 pandemic on the global economy generally, there is uncertainty around its duration and the timing of
recovery. The ultimate significance of the COVID-19 pandemic, including any measures to reduce its spread, on our business will depend on events that are
beyond our control and that we cannot predict and could have a material adverse effect on our consolidated results of operations, financial condition and
cash flows.
The impact of the COVID-19 pandemic may also exacerbate other risks discussed in the Risk Factors section of this Annual Report on Form 10-K, which
could in turn have a material adverse effect on us.
We face intense competition. If we do not continue to respond quickly to technological developments or customers’ shifting technological requirements
or to compete effectively against other providers of technology solutions to automotive retailers, OEMs, and other participants in the automotive retail
industry, it could have a material adverse effect on our business, results of operations, and financial condition.
6
Competition among automotive retail solutions providers is intense. The industry is highly fragmented and subject to rapidly evolving technology, shifting
customer needs, and frequent introductions of new solutions. We have a variety of competitors both for our integrated solutions and for each of our
individual solutions. For our DMS solutions, our principal competitors are Reynolds and Reynolds, Dealertrack (Cox Automotive), Auto/Mate, Tekion,
AutoSoft, PBS Systems and various local and regional providers.
Key elements of our business strategy are to strengthen and extend our solutions through intelligence and innovation and to develop and deliver our next
generation of solutions. However, our competitors may be able to respond more quickly or effectively to new or emerging technologies and changes in
customer demands or to devote greater resources to the development, promotion, and sale of their solutions than we can to ours. Moreover, we may not be
successful in responding to these forces and enhancing our products on a timely basis, and any enhancements we develop may not adequately address the
changing needs of our customers. We expect the industry to continue to attract new competitors and new technologies, possibly involving alternative
technologies that are more sophisticated and cost-effective than our solutions. These competitive pressures may require us to reduce our pricing. There can
be no assurance that we will be able to compete successfully against current or future competitors or that the competitive pressures we face will not have a
material adverse effect on our business, results of operations, and financial condition.
Market trends influencing the automotive retail industry could have a negative impact on our business, results of operations, and financial condition.
Market trends that negatively impact the automotive retail industry may affect our business by reducing the number and/or size of actual or potential
customers or the money that actual or potential customers are willing or able to spend on our solution portfolio. Such market factors include:
•
the adverse effect of long-term wage stagnation on the purchasing power of vehicle purchasers and the number of vehicle purchasers;
•
pricing and purchase incentives for vehicles;
•
disruption in the available inventory of vehicles;
•
disruption in the franchised automotive retailer dealership model, including potential disintermediation by emerging business models;
•
reductions in growth or decreases of automotive retailer spend on technology;
•
contractions in the number of franchised automotive retailers;
•
market supply of vehicles and fluctuations in used-vehicle pricing;
•
the expectation that consumers will be purchasing fewer vehicles overall during their lifetime as a result of better quality vehicles and longer
warranties and the development of shared-use mobility;
•
the cost of gasoline and other forms of energy;
•
the availability and cost of credit to finance the purchase of vehicles and excess negative equity in existing vehicle loans;
•
the effect of adverse macroeconomic conditions on consumer shopping activity;
•
increased federal and other taxation; and
•
reductions in business and consumer confidence.
Such market trends could have a material adverse effect on our business, results of operations, and financial condition.
Market acceptance of and influence over our products and services is concentrated in a limited number of automobile OEMs and consolidated retailer
groups, and we may not be able to maintain or grow these relationships.
Although the automotive retail industry is fragmented, a relatively small number of OEMs, consolidated retailer groups and retailer associations exert
significant influence over the market acceptance of automotive retail products and services due to their concentrated purchasing activity, their endorsement
or recommendation of specific products and services and/or their ability to define technical standards and certifications. For example, our DMSs are
certified to technical standards established by OEMs and certain of our products and services are provided pursuant to OEM-designated endorsement or
preferred vendor programs. While automotive retailers are generally free to purchase the solutions of their choosing, when an OEM has endorsed or
certified a provider of products or services to its associated franchised automotive retailers and if our solutions lack such certification or
7
endorsement, adoption or retention of our products and services among the franchised dealers of such OEM could be materially impaired.
We may be unable to develop and bring products and services in development to market or bring new products and services to market in a timely
manner or at all.
Our success depends in part upon our ability to bring to market new products and services, and enhancements thereto that address evolving customer
demands. The successful development of Fortellis, for example, is important to our strategy. The time, expense, and effort associated with developing and
offering Fortellis, and other new and enhanced products and services may be greater than anticipated. The length of the development cycle varies
depending on the nature and complexity of the product, the availability of development, product management, and other internal resources and the role, if
any, of strategic partners. If we are unable to develop and bring to market additional products and services, and enhancements thereto, in a timely manner,
or at all, we could lose market share to competitors who are able to offer these new products and services, which could have a material adverse effect on
our business, results of operations, and financial condition.
Our failure or inability to execute any element of our business strategy could negatively impact our business, results of operations, or financial
condition.
Our business, results of operations, and financial condition depend on our ability to execute our business strategy, which includes the following key
elements:
•
deepening relationships with our existing customer base;
•
continuing to expand our customer base;
•
delivering on our business process modernization initiatives;
•
strengthening and extending our solutions through intelligence and innovation;
•
developing and delivering our next generation of solutions;
•
selectively pursuing strategic acquisitions; and
•
building and maintaining a culture of performance and accountability.
We may not succeed in implementing a portion or all of our business strategy, and even if we do succeed, our strategy may not have the favorable impact
on our business, results of operations, or financial condition that we anticipate. We may not be able to effectively manage the expansion of our business or
achieve the rapid execution necessary to fully avail ourselves of the market opportunity for our solution portfolio. If we are unable to adequately implement
our business strategy, our business, results of operations, and financial condition could suffer a material adverse effect.
We are dependent on our key management, direct sales force, and technical personnel for continued success.
Our global senior management team is concentrated in a small number of key members, and our future success depends to a meaningful extent on the
services of our executive officers and other key team members, including members of our direct sales force and technology staff. Generally, our executive
officers and employees can terminate their employment relationship at any time. The loss of any key employees or our inability to attract or retain other
qualified personnel could materially harm our business and prospects.
Effective succession planning is important to our long-term success. Disruptions in future leadership transitions or reorganizations could have a material
adverse effect on our business, results of operations, and financial condition and could adversely affect our ability to attract and retain other key executives.
Competition for qualified leadership and technical personnel in the technology industry is intense, and we compete for leadership and technical personnel
with other technology companies that have greater financial and other resources than we do. Our future success will depend in large part on our ability to
attract, retain, and motivate highly qualified leadership and technical personnel, and there can be no assurance that we are able to do so. Any difficulty in
hiring or retaining needed personnel, or increased costs related thereto, could have a material adverse effect on our business, results of operations, and
financial condition.
8
Real or perceived errors or failures in our software and systems could negatively impact our results of operations and growth prospects.
We depend upon the sustained and uninterrupted performance of numerous proprietary and third-party technologies to deliver our solution portfolio. If one
or more of those technologies cannot scale to meet demand, or if there are human or technological errors in our execution of any feature or functionality
using any such technologies, then our business may be harmed. Because our software is often complex, undetected errors and failures may occur, especially
when new versions or updates are made. Despite testing by us, errors or bugs in our solutions may not be found until the software or service is in active use
by us or our customers. Moreover, our customers could incorrectly implement or inadvertently misuse our solutions, which could result in customer
dissatisfaction and adversely impact the perceived utility of our solutions as well as our brand. Any of these real or perceived errors, failures, or bugs could
result in negative publicity, reputational harm, loss of or delay in market acceptance of our solutions, loss of competitive position or claims by customers
for losses sustained by them, all of which, along with the costs of responding to such effects, may have a material adverse effect on our business, results of
operations, and financial condition.
Cyber-attacks and security vulnerabilities could lead to reduced revenue, increased costs, liability claims, or damage to our reputation.
We handle substantial amounts of confidential information, including personal information of our employees and of our customers' consumers and
employees. Our success depends on the confidence of OEMs, dealers, lenders, major credit reporting agencies and other data providers, and other users of
(or participants in) our solutions, in our ability to store, process, and transmit this confidential information securely (whether over the internet or
otherwise), and to operate our computer systems and operations without significant disruption or failure.
Our computer systems experience cyber-attacks and data security incidents of varying degrees on a regular basis. These events may lead to interruptions
and delays in our service and operations as well as loss, misuse, or theft of data that we store, process and transmit. Our security measures may also fail to
prevent unauthorized access to our systems and data may be exfiltrated and improperly disclosed or used due to employee error, malfeasance, system
errors, or vulnerabilities, including vulnerabilities of our vendors, suppliers, their products, or otherwise. While security measures are in place, if our
security measures fail to prevent unauthorized access to such data, our solutions may be perceived as not being secure and our customers may curtail or
stop using our solutions and/or vendors may curtail or stop providing their solutions to us. Any failure of, or lack of confidence, in the security of our
solutions could have a material adverse effect on our business, results of operations, and financial condition.
Despite our focus on data security, we may not be able to stop unauthorized attempts to gain access to data that we store and process, or to stop disruptions
in the transmission or provision of data and communications or other data by us. Advances in computer capabilities, new discoveries in the field of
cryptography, or other events or developments could result in a compromise or breach of the controls used by our solutions to protect data contained,
processed in and transferred to or from our, our customers’ and/or our vendors’ databases. While warranties and liabilities are usually limited in our
customer and vendor contracts, they or other third parties may seek to hold us liable for any losses suffered as a result of unauthorized access to their
confidential information or non-public personal information of consumers. In addition, while effort has been expanded to have insurance to cover these
losses, we may be required to expend significant capital and other resources to protect against or alleviate any problems caused by actual or threatened
cyber-attacks or other unauthorized access to such data. Our security measures may not be sufficient to prevent security breaches, and any failure to prevent
the improper use and disclosure of data and/or to adequately alleviate any problems caused by such improper use and disclosure could have a material
adverse effect on our business, results of operations, and financial condition.
Our customers, vendors and other partners are primarily responsible for the security of their information technology systems, and we rely on them to supply
clean data content and/or to utilize our products and services in a secure manner. While we provide guidance and specific requirements of data security in
some cases, we do not directly control any of such parties’ cyber security programs and operations. If our customers, vendors and other partners fail to
prevent any significant cyber security breaches, their businesses could be disrupted which may negatively impact our business, results of operations, and
financial condition.
Interruption or failure of our networks, systems, and infrastructure could hurt our ability to effectively provide our products and services, which could
damage our reputation and/or subject us to litigation or contractual penalties.
The availability of our products and services depends on the continuing operation of our network and systems. From time to time, we have experienced,
and may experience in the future, network or system slowdowns and interruptions. These network and system slowdowns and interruptions may interfere
with our ability to do business. While the appropriate upgrades to various systems, shoring up backup processes, and other measures to protect against data
loss and system failures have been implemented and tested, there is still risk that we may lose critical data or experience network failures.
Despite the resiliency plans we have in place, our ability to conduct business may be adversely impacted by a disruption in the
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infrastructure that supports our businesses. This may include a disruption involving electrical, satellite, undersea cable or other communications, internet,
cloud computing, transportation, or other services facilities used by us or third parties with which we conduct business. These disruptions may occur as a
result of events that affect only our buildings or systems or those of such third parties, or as a result of events with a broader impact globally, regionally or
in the cities where those buildings or systems are located, including, but not limited, to natural disasters, war, civil unrest, economic or political
developments, pandemics, and weather events. Such network, system or infrastructure failures or disruptions could result in lengthy interruptions in our
service and lost revenue opportunities for our customers, which could result in litigation against us and/or our customers may curtail or stop using our
solutions or vendors may curtail or stop providing their solutions to us. Additionally, we have service level agreements with certain of our customers that
may result in penalties or trigger cancellation rights in the event of a network or system slowdown or interruption. Any of these could have a material
adverse effect on our business, results of operations, and financial condition.
Our business operations may be harmed by events beyond our control.
Our business operations are vulnerable to damage or interruption from natural disasters, such as fires, floods, earthquakes, hurricanes, and pandemics or
outbreaks of disease or similar public health concerns, such as the COVID-19 pandemic (discussed further in the risk factor "The ongoing COVID-19
pandemic has materially affected how we and our customers are operating our businesses, and the duration and extent to which this will impact our
business, results of operations, and financial condition remains uncertain," above), or fears of such events, or from power outages, telecommunications
failures, terrorist attacks, computer network service outages and disruptions, “denial of service” attacks, computer malware and ransomware, break-ins,
sabotage, employee error or malfeasance, and other similar events beyond our control. The occurrence of any such event at any of our facilities or at any
third-party facility utilized by us or our third-party providers could cause interruptions or delays in our business, loss of data, or could render us unable to
provide our solution portfolio. In addition, any failure of a third-party to provide the data, products, services, or facilities required by us, as a result of
human error, bankruptcy, natural disaster, or other operational disruption, could cause interruptions to our computer systems and operations. The
occurrence of any of these events could have a material adverse effect on our business, results of operations, and financial condition.
We utilize certain key technologies, data, and services from, and integrate certain of our solutions with, third parties and may be unable to replace
those technologies, data, and services if they become obsolete, unavailable, or incompatible with our solutions.
We utilize certain key technologies and data from, and/or integrate certain of our solutions with, hardware, software, services, and data of third parties,
including Chrome Systems, TrueCar, Microsoft, Google, Yahoo, EMC, Cisco Systems, Kyocera, Experian, Equifax, TransUnion and others. Some of these
vendors are also our competitors in various respects. These third-party vendors could, in the future, seek to charge us cost-prohibitive fees for such use or
integration or may design or utilize their solutions in a manner that makes it more difficult for us to continue to utilize their solutions, or integrate their
technologies with our solutions, in the same manner or at all. Any significant interruption in the supply or maintenance of such third-party hardware,
software, services, or data could negatively impact our ability to offer our solutions unless and until we replace the functionality provided by this third-
party hardware, software, and/or data. In addition, we are dependent upon these third parties’ ability to enhance their current products, develop new
products on a timely and cost-effective basis, and respond to emerging industry standards and other technological changes. There can be no assurance that
we would be able to replace the functionality or data provided by third-party vendors in the event that such technologies or data becomes obsolete or
incompatible with future versions of our solutions or are otherwise not adequately maintained or updated. Any delay in or inability to replace any such
functionality could have a material adverse effect on our business, results of operations, and financial condition. Furthermore, delays in the release of new
and upgraded versions of third-party software applications could have a material adverse effect on our business, results of operations, and financial
condition.
We are currently, and expect to be in the future, involved in litigation that is expensive and time consuming and, if resolved adversely, that may
materially adversely affect us.
From time to time, we may become involved in various legal proceedings, including patent, copyright, commercial, product liability, employment, class
action, whistleblower, antitrust and other litigation and claims, in addition to governmental and other regulatory investigations and proceedings. Such
matters can be time-consuming, divert management’s attention and resources, cause us to incur significant expenses or liability and/or require us to change
our business practices. Because of the potential risks, expenses and uncertainties of litigation, we may, from time to time, settle disputes, even where we
have meritorious claims or defenses, by agreeing to settlement agreements. We are currently a defendant in several lawsuits that set forth allegations of
anti-competitive conduct and anti-competitive agreements between the Company and Reynolds and Reynolds relating to the manner in which the
defendants control access to, and allow integration with, their respective DMSs. Any negative outcome from any such lawsuits could result in payments of
substantial monetary damages or fines, or undesirable changes to our products or business practices, and accordingly our business, results of operations, or
financial condition could be materially and adversely affected. Although the results of such lawsuits and claims cannot be predicted with certainty, we do
not believe that the final outcome of these matters relating to the manner in which we control access to, and allow integration with, our DMS that we
currently face will
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have a material adverse effect on our business, results of operations, or financial condition. We believe these cases are without merit and intend to continue
to contest the claims in these cases vigorously.
Because litigation is inherently unpredictable, there can be no assurances that a favorable final outcome will be obtained in all our cases, and we cannot
assure that the results of any of these actions will not have a material adverse effect on our business, results of operations, financial condition and prospects.
For more information regarding the litigation in which we are currently involved, see the information set forth in Item 8 of Part II, "Notes to the
Consolidated Financial Statements", Note 18 - Commitments and Contingencies.
We may be unable to adequately protect, and we may incur significant costs in defending, our intellectual property and other proprietary rights.
Our success depends, in large part, on our ability to protect our intellectual property and other proprietary rights. We rely upon a combination of trademark,
trade secret, copyright, patent and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual
property and other proprietary rights. In addition, we attempt to protect our intellectual property and proprietary information by requiring certain of our
team members and consultants to enter confidentiality, non-competition and assignment of inventions agreements. To the extent that our intellectual
property and other proprietary rights are not adequately protected, third parties might gain access to our proprietary information, develop and market
products and services similar to ours or use trademarks similar to ours. Existing U.S. federal and state intellectual property laws offer only limited
protection. If we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or
other proprietary rights of others, the proceedings could be burdensome and expensive, and we may not prevail. The failure to adequately protect our
intellectual property and other proprietary rights, or manage costs associated with enforcing those rights, could have a material adverse effect on our
business, results of operations, and financial condition.
Claims that we or our technologies infringe upon the intellectual property or other proprietary rights of a third party may require us to incur
significant costs, enter into royalty or licensing agreements, or develop or license substitute technology.
We have in the past and may in the future be subject to claims that our technologies in our products and services infringe upon the intellectual property or
other proprietary rights of a third party. In addition, the vendors providing us with technology that we use in our own technology could become subject to
similar infringement claims. Although we believe that our products and services do not infringe any intellectual property or other proprietary rights, we
cannot assure that our products and services do not, or that they will not in the future, infringe intellectual property or other proprietary rights held by
others. Any claims of infringement could cause us to incur substantial costs defending against the claim, even if the claim is without merit, and could
distract our management from our business. Moreover, any settlement or adverse judgment resulting from the claim could require us to pay substantial
amounts, obtain a license to continue to use the products and services that are the subject of the claim, and/or otherwise restrict or prohibit our use of the
technology. There can be no assurance that we would be able to obtain a license on commercially reasonable terms, or at all, from the third party asserting
any particular claim, that we would be able to successfully develop alternative technology on a timely basis, if at all, or that we would be able to obtain a
license from another provider of suitable alternative technology to permit us to continue offering, and our customers to continue using, the products and
services. In addition, we generally provide in our customer agreements for certain products and services that we will indemnify our customers against third-
party infringement claims relating to technology that we provide to those customers, which could obligate us to pay damages if the products and services
were ever found to be infringing. Infringement claims asserted against us, our vendors, or our customers could have a material adverse effect on our
business, results of operations, and financial condition.
We have made strategic acquisitions and formed strategic alliances in the past and expect to do so in the future. If we are unable to find suitable
acquisitions or alliance partners that strengthen our value proposition to customers or to achieve the expected benefits from such acquisitions or
alliances, there could be a material adverse effect on our business, results of operations, and financial condition.
We have historically pursued growth through acquisitions, ranging from acquisitions of small start-up companies that provide a discrete application to a
handful of customers, to acquisitions of substantial companies with more mature solutions and a larger customer base, such as our acquisition of ELEAD in
2018, which supports our CRM business. As part of our ongoing business strategy to expand solutions offerings, acquire new technologies, and strengthen
our value proposition to customers, we frequently engage in discussions with third parties regarding, and enter into agreements relating to, possible
acquisitions, strategic alliances, and joint ventures. However, there may be significant competition for acquisition, alliance, and joint venture targets in our
industry, or we may not be able to identify suitable candidates, negotiate attractive terms, or obtain necessary regulatory approvals for such transactions in
the future. Acquisitions, strategic alliances, and joint ventures also involve numerous other risks, including potential exposure to assumed litigation and
unknown environmental and other liabilities, as well as undetected internal control, regulatory or other issues, or additional costs not anticipated at the time
the transaction was approved or completed.
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Even if we are able to complete acquisitions or enter into alliances and joint ventures that we believe will provide attractive growth opportunities, such
transactions are inherently risky. Significant risks from these transactions include risks relating to:
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integration and restructuring costs, both one-time and ongoing;
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developing and maintaining sufficient controls, policies, and procedures;
•
diversion of management’s attention from ongoing business operations;
•
establishing new informational, operational, and financial systems to meet the needs of our business;
•
losing key employees, customers, and vendors;
•
failing to achieve anticipated synergies, including with respect to complementary solutions; and
•
unanticipated or unknown liabilities.
If we are not successful in completing acquisitions in the future, we may be required to reevaluate our acquisition strategy. We also may incur substantial
expenses and devote significant management time and resources in seeking to complete acquisitions. In addition, we could use substantial portions of our
available cash to pay all or a portion of the purchase prices of future acquisitions. If we do not achieve the anticipated benefits of our acquisitions as rapidly
or to the extent anticipated by our management and financial or industry analysts, others may not perceive the same benefits of the acquisition as we do. If
these risks materialize, there could be a material adverse effect on our business, results of operations, and financial condition.
Our future acquisitions may involve the issuance of our equity securities as payment, in part or in full, for the business or assets acquired, which would
dilute our existing stockholders' ownership interests. Future acquisitions may also decrease our earnings and the benefits derived by us from an acquisition
might not outweigh or exceed the dilutive effect of the acquisition. We also may incur additional indebtedness, issue equity, have future impairment of
assets or suffer adverse tax and accounting consequences in connection with any future acquisitions.
We could be liable for contract or product liability claims, and disputes over such claims may disrupt our business, divert management’s attention, or
have a negative impact on our financial results.
We provide limited warranties to purchasers of our products and services. In addition, errors, defects or other performance problems in our products and
services, including with respect to data that we store, process and provide in connection with our products and services, could result in financial or other
damages to our customers or consumers. There can be no assurance that any limitations of liability set forth in our contracts would be enforceable or would
otherwise protect us from liability for damages. We maintain general liability insurance coverage, including coverage for errors and omissions in excess of
the applicable deductible amount; however, there can be no assurance that this coverage will continue to be available on acceptable terms, in sufficient
amounts to cover one or more large claims or at all, or that the insurer will not deny coverage for any future claim. The successful assertion of one or more
large claims against us that exceeds available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or
the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, results of operations, and financial
condition. Furthermore, any litigation, regardless of its outcome, could result in substantial cost to us and divert management’s attention from our
operations and could have a material adverse effect on our business, results of operations, and financial condition. In addition, some of our products and
services are business-critical for our customers, and a failure or inability to meet a customer’s expectations could seriously damage our reputation and
negatively impact our ability to retain existing business or attract new business.
If our customers fail to renew subscriptions in accordance with our expectations, our future revenue and operating results could suffer.
We generate revenue primarily by providing a broad suite of subscription-based software and technology solutions. A large portion of our success depends
on our ability to generate renewals of our subscription-based products and services and new sales of such products and services, both to new and existing
clients. Our customers have no obligation to renew their subscriptions for our services after the expiration of their initial subscription period, and customers
may not renew their subscriptions at the same or higher level of service or for the same duration of time, if at all. Therefore, we cannot provide assurance
that we will be able to accurately predict future customer renewal rates.
Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our services or the
services of third-parties working on our behalf, our ability to continue enhancing features and functionality, the reliability (including uptime) of our
subscription offerings, the prices of offerings and those offered by our competitors, the actual or perceived information security of our systems and
services, decreases in the size of our customer base, reductions in our customers’
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spending levels or declines in customer activity as a result of economic downturns or uncertainty in financial markets, including as a result of the COVID-
19 pandemic. If our customers do not renew their subscriptions or if they renew on terms less favorable to us, our revenue will be adversely affected.
Because we recognize a majority of our revenue from our subscription-based products and services over the term of the subscription, downturns or
upturns in new business may not be immediately reflected in our operating results.
We generally recognize a majority of our revenue from sales of our subscription-based products and services ratably over the term of the subscription
contract. As a result, the majority of our quarterly revenue is attributable to service contracts entered into during previous quarters. A decline in new or
renewed service agreements in any one quarter will not be fully reflected in our revenue in that quarter but will harm our revenue in future quarters.
Consequently, the effect of significant downturns in sales and market acceptance of our subscription services in a particular quarter may not be fully
reflected in our operating results until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through
additional sales in any period, because revenue from new subscription contracts, and from additional orders under existing subscription contracts, must be
recognized over the applicable subscription term. In addition, delays or failures in deployment of our subscription services may prevent us from
recognizing subscription revenue for indeterminate periods of time. Further, we may experience unanticipated increases in costs associated with providing
our subscription services to customers over the term of our subscription contracts as a result of inaccurate internal cost projections or other factors, which
may harm our operating results.
We have invested, and expect to continue to invest, in research and development efforts for new and existing products and technologies and technical
sales support. Such investments may affect our operating results, and, if the return on these investments is lower or develops more slowly than we
expect, our revenue and operating results may suffer.
We have invested and expect to continue to invest in research and development for new and existing products, technologies and services in response to our
customers’ increasing technological requirements. Such investments may be in related areas, such as technical sales support, and may include increases in
employee headcount. These investments may involve significant time, risks and uncertainties, including the risk that the expenses associated with these
investments may affect our margins and operating results and that such investments may not generate sufficient revenue to offset liabilities assumed and
expenses associated with these new investments. We believe that we must continue to invest a significant amount of time and resources in our research and
development efforts and technical sales support to maintain and improve our competitive position. If we do not achieve the benefits anticipated from these
investments, if the achievement of these benefits is delayed, or if customers reduce or slow the need to upgrade or enhance their computational software
products and design flows, our revenue and operating results may be adversely affected.
There can be no assurance that we will have access to the capital markets on terms acceptable to us or at all.
From time to time we may need to access the long-term and short-term capital markets to obtain financing. Although we believe that the sources of capital
currently in place will permit us to finance our operations for the foreseeable future on acceptable terms and conditions, our access to, and the availability
of, financing on acceptable terms and conditions in the future or at all will be impacted by many factors, including, but not limited to:
•
our financial performance;
•
our credit ratings;
•
the liquidity of the overall capital markets; and
•
the state of the economy.
There can be no assurance that we will have access to the capital markets on terms acceptable to us or at all.
Risks Relating to Legal, Regulatory and Compliance Matters
Our business is directly and indirectly subject to, and impacted by, extensive and complex laws and regulations in the U.S. and abroad, and new laws
and regulations and/or changes to existing laws and regulations, as well as any associated inquiries or investigations or any other government action,
may negatively impact our business, results of operations, and financial condition.
Our business is directly and indirectly subject to, and impacted by, numerous U.S. and foreign laws and regulations covering a wide variety of subject
matters. Compliance with complex foreign and U.S. laws and regulations that apply to our operations increases our costs and may impede our
competitiveness. In addition, failure to comply with such laws or regulations may result in the suspension or termination of our ability to do business in
applicable jurisdictions or the imposition of civil and criminal penalties,
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including fines or exposure to civil litigation. New regulations and/or changes to existing regulations could require us to modify our business practices,
including modify the manner in which we contract with or provide products and services to our customers; directly or indirectly limit how much we can
charge for our services; require us to invest additional time and resources to comply with such regulations; or limit our ability to update our existing
products and services, or require us to develop new ones.
In addition to the data privacy and security laws and regulations mentioned below, our business is also directly or indirectly governed by various laws and
regulations relating to issues such as information services, telecommunications, antitrust or competition, employment, motor vehicle and manufacturer
licensing or franchising, vehicle registration, advertising, taxation, consumer protection, and accessibility. We must also comply with anti-corruption laws
such as the U.S. Foreign Corrupt Practices Act. In addition, motor vehicle and manufacturer licensing, franchising and advertising is highly regulated at the
state level and is subject to changing legislative, regulatory, political, and other influences. Such state laws are complex and subject to frequent change. The
application of this framework of laws and regulations to our business is complex and, in many instances, is unclear or unsettled, which in turn increases our
cost of doing business, may interfere with our ability to offer our solutions competitively in one or more jurisdictions and may expose us and our
employees to potential fines, penalties, or other enforcement actions. In some cases, our customers may seek to impose additional requirements on our
business in efforts to comply with their interpretation of their own or our legal obligations. These requirements may differ significantly from our existing
solutions or processes and may require engineering and other costly resources to accommodate.
In addition, we are and expect to continue to be the subject of investigations, inquiries, data requests, actions, and audits from regulatory authorities,
particularly in the area of competition. On June 22, 2017, we received from the FTC a Civil Investigative Demand consisting of interrogatories and a
request to produce documents relating to any agreements between the Company and Reynolds and Reynolds. On April 22, 2019, we received a subsequent
request to schedule interviews with certain current and former Company employees. Parallel document requests have been received from certain states’
Attorneys General. We have responded to the requests and no proceedings have been instituted. At this time, we do not have sufficient information to
predict the outcome of, or the cost of resolving these investigations.
These laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with and may
delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and
attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices.
Our failure to comply, or to provide solutions that allow our customers to comply, or any new investments of additional time and resources necessary to
comply, or to provide solutions that allow our customers to comply, with any of the foregoing laws and regulations could have a material adverse effect on
our business, results of operations, and financial condition.
We are subject to new regulations that restrict the manner and extent to which we can control access to our DMS and other software applications and
limit what, if anything, we may charge for integration with those applications.
Revenue from the Partner Program is dependent on the business model of charging third party retail solution providers for integration to our DMS through
a program of robust and secure interfaces. Our ability to control the manner in which we provide this robust and secure access to information in our
systems, and our pricing model for this service, has been, and will likely continue to be, challenged, dictated and constrained in certain jurisdictions. For
example, during the fourth quarter of fiscal 2020, Arizona, Montana, North Carolina and Oregon passed legislation that requires us to provide access or
integrations to our software to read or write data in our systems. The legislation in some of these states purports to impose such requirements on us at our
cost and without markup, or even without compensation, to any third party designated by a dealer licensee of our software, regardless of whether the dealer
licensee has title to the data on our systems or the right under its software license to authorize non-licensee third parties access to our systems. In addition,
each statute imposes administrative and technical requirements that are inconsistent with our current solutions and capabilities. We believe that compliance
with such legislation will impair our ability to provide our customers with robust and secure technology solutions and will increase our risk of data security
and privacy breaches, system and data integrity problems, and associated adverse competitive, financial, operational, and reputational impacts. Similar
legislation has been proposed in other states and additional states may consider or pass similar legislation. We may incur significant legal and regulatory
expenses in connection with assessing or challenging the applicability of this legislation to our products and offerings and while we seek legal, regulatory,
or policy solutions to address concerns with respect to the validity of the legislation or our ability to comply with it. Ultimately, our failure to comply, or to
provide solutions that allow our customers to comply, or any new investments of additional time and resources necessary to comply, or to provide solutions
that allow our customers to comply, with this legislation will increase our operating costs and reduce our revenue, and could have a material adverse effect
on our business, results of operations, and financial condition.
Our business is directly or indirectly subject to, or impacted by, complex and rapidly evolving U.S. and foreign laws and regulation regarding privacy
and data protection. Many of these laws and regulations are subject to change and uncertain interpretation and could result in claims, adjustments to
our business practices, penalties, increased cost of operations, or declines in customer growth or engagement, or otherwise harm our business.
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Many U.S. and foreign jurisdictions have passed, or are currently contemplating, a variety of consumer protection, privacy, and data security laws and
regulations that may relate directly or indirectly to our business. For example, federal laws and regulations governing privacy and security of consumer
information generally apply to our customers and/or to us as a service provider. These include, but are not limited to, the federal Fair Credit Reporting Act,
the GLB Act and regulations implementing its information safeguarding requirements, the Junk Fax Prevention Act of 2005, the Controlling the Assault of
Non-Solicited Pornography and Marketing Act of 2003 (the "CAN-SPAM Act"), the Telephone Consumer Protection Act, the Do-Not-Call-Implementation
Act, applicable Federal Communications Commission (the "FCC") telemarketing rules (including the declaratory ruling affirming the blocking of unwanted
robocalls), the FTC Privacy Rule, Safeguards Rule, Consumer Report Information Disposal Rule, Telemarketing Sales Rule, Risk-Based Pricing Rule, Red
Flags Rule, and California Consumer Privacy Act of 2018. Laws of foreign jurisdictions, such as Canada's Anti-Spam Law and Personal Information
Protection and Electronic Documents Act, and European Union's General Data Protection Regulation (the "GDPR") similarly apply to our collection,
processing, storage, use, and transmission of protected data.
In the U.S., some state laws and regulations have imposed, and others have contemplated imposing, enhanced disclosure obligations and greater restrictions
or prohibitions on the use of data than are already contained in federal laws such as the GLB Act and its implementing regulations or the FTC rules
described above. For example, a new law in California, the California Consumer Privacy Act of 2018 ("CCPA"), went into effect on January 1, 2020.
CCPA provides California consumers with a greater level of transparency and broader rights and choices with respect to their personal information than
those contained in any existing state and federal laws in the U.S. The "personal information" regulated by CCPA is broadly defined to include any
information that identifies or is reasonably capable of being associated with or linked, directly or indirectly, with a California consumer or household,
including, for example, demographics, usage, transactions and inquiries, preferences, inferences drawn to create a profile about a consumer. Compliance
with CCPA requires the implementation of a series of operational measures such as preparing data maps, inventories, or other records of all personal
information pertaining to California residents, households and devices, as well as information sources, usage, storage, and sharing, maintaining and
updating detailed disclosures in privacy policies, establishing mechanisms to respond to consumers’ data access, deletion, portability, and opt-out requests,
etc. Violations of CCPA will result in civil penalties up to $7,500 per violation. CCPA further allows consumers to file lawsuits against a business if a data
breach has occurred as a result of the business' violation of the duty to implement and maintain reasonable security procedures and practices.
The enforcement of the CCPA commenced on July 1, 2020. In the meantime, significant uncertainties in the interpretation and application some key CCPA
provisions remain outstanding. On June 2, 2020, the California Attorney General submitted the draft of the implementation regulations to the CCPA
("CCPA Regulations") to the California Office of Administration Law for its final approval. Furthermore, the privacy group whose efforts led to the CCPA
in 2018 has proposed a new law, the California Privacy Rights Act ("CPRA"), which, if passed, would replace the CCPA and impose further compliance
burdens and risks on service providers such as us.
To comply with CCPA and assist many of our customers who are subject to CCPA to comply with CCPA, we have modified or adjusted the design,
development, and delivery of our products and services in a significant way. However, with further clarifications and interpretations of the CCPA, the
approval of the CCPA Regulations, and the passage of the CPRA and/or any new laws and regulations, additional modifications and adjustments may be
required, which may result in significant costs and expenses, and any delay or failure to make such changes may negatively affect our customers’
confidence in or perception of our product and services, result in their ceasing to use our products or services or even lawsuits and significant liabilities.
In addition, all 50 states have passed data breach notification laws that require notifications to affected consumers, attorneys general, consumer protection
agencies and/or other government authorities when there is a breach of personal data, and provide consumers with credit monitoring and other remedies.
Any data breaches and the related notifications and remedies may result in significant compliance costs in addition to potential liability and reputational
damage.
The costs and other burdens of compliance with privacy and data security laws and regulations could negatively impact the use and adoption of our
solutions and reduce overall demand for them. Additionally, evolving concerns regarding data privacy may cause our customers, or their customers and
potential customers, to resist providing the data necessary to allow us to deliver our solutions effectively. Even the perception that personal information is
not satisfactorily protected or does not meet regulatory requirements could inhibit sales of our solutions and any failure to comply with such laws and
regulations could lead to significant fines, penalties, or other liabilities. Any such decrease in demand or incurred fines, penalties, or other liabilities could
have a material adverse effect on our business, results of operations, and financial condition.
Changes in, or interpretations of, accounting principles may negatively impact our financial position and results of operations.
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States ("GAAP"). These
principles are subject to interpretation by the U.S. Securities and Exchange Commission ("SEC") and other organizations that develop and interpret
accounting principles. New accounting principles arise regularly, implementation of which can have a significant effect on and may increase the volatility
of our reported operating results and may even retroactively affect
15
previously reported operating results. In addition, the implementation of new accounting principles may require significant changes to our customer and
vendor contracts, business processes, accounting systems, and internal controls over financial reporting. The costs and effects of these changes could
adversely impact our operating results, and difficulties in implementing new accounting principles could cause us to fail to meet our financial reporting
obligations.
We may have exposure to unanticipated tax liabilities, which could harm our business, results of operations, and financial condition.
Our business operations subject us to income taxes and non-income based taxes, in both the U.S. and various foreign jurisdictions. The computation of the
provision for income taxes and other tax liabilities is complex, as it is based on the laws of numerous taxing jurisdictions and requires significant judgment
regarding the application of complicated rules governing accounting for tax provisions under GAAP. The provision for income taxes may require forecasts
of effective tax rates for the year, which include assumptions and forward looking financial projections, including the expectations of profit and loss by
jurisdiction. Various items cannot be accurately forecasted and future events may materially differ from our forecasts. Our provision for income tax could
be materially impacted by a number of factors, including changes in the geographical mix of our profits and losses, changes in our business, such as
internal restructuring and acquisitions, changes in tax laws and accounting guidance and other regulatory, legislative or judicial developments, tax audit
determinations, changes in our uncertain tax positions, changes in our intent and ability to indefinitely reinvest foreign earnings, changes in our ability to
utilize foreign tax credits, changes to our transfer pricing practices, tax deductions associated with stock-based compensation, and changes in our need for
deferred tax valuation allowances. Any changes in corporate income tax laws or any implementation of tax laws relating to corporate tax reform, could
significantly impact our overall tax liability. For these reasons, our actual tax liabilities in a future period may be materially different than our income tax
provision.
In addition, changes in tax laws or tax rulings may have a significant adverse impact on our effective tax rate. In the event that changes in tax laws
negatively impact our effective tax rates, our provision for taxes, or generate unanticipated tax liabilities, our business, results of operations, and financial
condition could suffer a material adverse effect.
Changes in tax laws or tax rulings could materially affect our results of operations and financial condition.
The income and non-income tax regimes we are subject to or operate under are unsettled and may be subject to significant change. Changes in tax laws or
tax rulings, or changes in interpretations of existing laws, could materially affect our results of operations and financial condition. For example, changes to
U.S. tax laws enacted in December 2017 had a significant impact on our tax obligations and effective tax rate for fiscal 2018 and beyond.
Risks Relating to Our Indebtedness
Our current level of indebtedness could negatively impact our ability to raise additional capital to fund our operations and limit our ability to react to
changes in the economy or our industry.
We have significant debt obligations. On May 24, 2021, we amended our existing $750.0 million revolving credit facility (which was undrawn as of June
30, 2021). In addition, we have $1.6 billion of existing senior notes outstanding. See Note 16 - Debt under Item 8 of Part II of this Annual Report on Form
10-K for details about the terms of our debt.
Our current indebtedness could have important consequences, including, but not limited to:
•
increasing our vulnerability to, and reducing our flexibility to plan for and respond to, general adverse economic and industry conditions and
changes in our business and the competitive environment;
•
an increasingly substantial portion of our cash flow from operations will be dedicated to making payments of principal of, and interest on, our
indebtedness, thereby reducing the availability of funds that would otherwise be available to fund working capital, capital expenditures,
acquisitions, dividends, share repurchases or other corporate purposes;
•
increasing our vulnerability to further downgrades of our credit rating, which could adversely affect our interest rates on existing indebtedness,
cost of additional indebtedness, liquidity and access to capital markets;
•
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
•
requiring us to secure our credit agreements and other indebtedness and provide subsidiary guarantees if certain conditions are met;
•
making it more difficult for us to repay, refinance or satisfy our obligations with respect to our debt;
16
•
limiting or eliminating our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions, or other
purposes; and
•
any failure to comply with the obligations of any of our debt instruments could result in an event of default under the agreements governing such
indebtedness, which in turn, if not cured or waived, could result in the acceleration of the applicable debt, and may result in the acceleration of any
other debt to which a cross-acceleration or cross-default provision applies.
Our ability to service our current and future levels of indebtedness will depend upon, among other things, our future financial and operating performance,
which will be affected by prevailing economic conditions, including the interest rate environment, and financial, business, regulatory and other factors,
some of which are beyond our control.
There is no assurance that we will generate cash flow from operations or that future debt or equity financings will be available to us to enable us to pay our
indebtedness or to fund other needs and we may be forced to take actions such as reducing or delaying business activities, acquisitions, investments or
capital expenditures, selling assets, restructuring or refinancing debt, reducing or discontinuing dividends we may pay in the future, or seeking additional
equity capital. These actions may not be effected on satisfactory terms, or at all. Any inability to generate sufficient cash flow or refinance our indebtedness
on favorable terms could have a material adverse effect on our business, results of operations, and financial condition.
High levels of indebtedness and debt service obligations will effectively reduce the amount of funds available for other business purposes and may
adversely affect us.
Interest costs related to our senior notes are substantial, and our higher level of indebtedness, including any future borrowings, could reduce funds available
for acquisitions, capital expenditures or other business purposes, impact our credit ratings, restrict our financial and operating flexibility or create
competitive disadvantages compared to other companies with lower debt levels.
Further, a higher level of indebtedness could make it more difficult for us to satisfy our obligations with respect to our debt, increase our vulnerability to
adverse economic or industry conditions and limit our ability to obtain additional financing.
Our ability to make payments of principal and interest on our indebtedness, including our senior notes, depends upon our future performance, which will be
subject to general economic conditions and financial, business and other factors affecting our consolidated operations, many of which are beyond our
control. If we are unable to generate sufficient cash flow from operations in the future to service our debt and meet our other cash requirements, we may be
required, among other things:
•
to seek additional financing in the debt or equity markets;
•
to refinance or restructure all or a portion of our indebtedness;
•
to sell selected assets or businesses; or
•
to reduce or delay planned capital or operating expenditures.
Such measures might not be sufficient to enable us to service our debt and meet our other cash requirements. In addition, any such financing, refinancing or
sale of assets might not be available on economically favorable terms or at all.
Our business, results of operations, and financial condition could be harmed by negative rating actions by credit rating agencies.
Nationally recognized credit rating organizations have issued credit ratings relating to the Company and our senior notes. In November 2016, our credit
ratings were downgraded to non-investment grade. If our ratings are downgraded further or if ratings agencies indicate that a downgrade may occur, it
could limit our access to new financing, reduce our flexibility with respect to working capital needs, adversely affect the market price of our senior notes,
result in an increase in financing costs, including interest expense under certain of our debt instruments, and result in less favorable covenants and financial
terms in our future financing arrangements. Any of these outcomes could also negatively impact our relationships with our customers or otherwise have a
material adverse effect on our business, results of operations, and financial condition. Additional details about the terms of our debt is contained in Item 8
of Part II, "Financial Statements and Supplementary Data", Note 16 - Debt.
Risks Relating to Our Common Stock
The market price of our shares may fluctuate widely.
The market price of our common stock may fluctuate widely, depending upon many factors, some of which may be beyond our control, including:
17
•
our business profile and market capitalization may not fit the investment objectives of our stockholders, and our common stock may not be
included in some indices, causing certain holders to sell their shares;
•
a shift in our investor base;
•
the actions of significant stockholders;
•
our quarterly or annual earnings, or those of other companies in our industry;
•
actual or anticipated fluctuations in our operating results;
•
announcements of acquisitions or dispositions and strategic moves, such as acquisitions or restructurings, by us or our competitors;
•
the failure of securities analysts to cover our common stock;
•
the operating and stock price performance of other comparable companies;
•
changes in expectations concerning our future financial performance and the future performance of our industry in general, including financial
estimates and recommendations by securities analysts;
•
differences between our actual financial and operating results and those expected by investors and analysts;
•
changes in the regulatory framework of our industry and regulatory action;
•
changes in general economic or market conditions, including the impact of COVID-19; and
•
the other factors described in these “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad
market fluctuations may adversely affect the trading price of our common stock.
Our revenue, operating results, and profitability vary from quarter to quarter, which may result in volatility in our stock price.
Our revenue, operating results, and profitability have varied in the past and are likely to continue to vary significantly from quarter to quarter, which may
lead to volatility in our stock price. These variations are due to several factors, including:
•
the timing, size, and nature of our customer revenue and any losses with respect thereto;
•
product and price competition regarding our products and services;
•
the timing of introduction and market acceptance of new products, services or product enhancements by us, or our competitors;
•
changes in our operating expenses;
•
foreign currency fluctuations;
•
the timing of acquisitions or divestitures of businesses, products, and services;
•
the seasonality of automobile sales;
•
the impact of COVID-19;
•
personnel changes; and
•
fluctuations in economic and financial market conditions.
There is substantial volatility in the stock markets that could negatively impact our stock regardless of our actual operating performance.
The stock market in general and the market for technology companies in particular have experienced extreme price and volume fluctuations. These
fluctuations have often been unrelated or disproportionate to operating performance.
These broad market and industry factors could materially and adversely affect the market price of our stock, regardless of our actual operating performance.
18
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that
company. Due to the potential volatility of our stock price, we may therefore be the target of securities litigation in the future. Securities litigation could
result in substantial costs and divert management’s attention and resources from our business.
Holders of our common stock may be adversely affected through the issuance of more senior securities or through dilution.
We may need to incur additional debt or issue equity in order to fund working capital, capital expenditures and product development requirements,
maintain debt capacity levels, or to make acquisitions and other investments. If we raise funds through the issuance of debt or equity, any debt securities or
preferred stock issued will have liquidation rights, preferences, and privileges senior to those of holders of our common stock. If we raise funds through the
issuance of common equity, the issuance will dilute the ownership interests of our stockholders. We cannot assure our investors or potential investors that
debt or equity financing will be available to us on acceptable terms, if at all. If we are not able to obtain sufficient financing, we may be unable to maintain
or grow our business.
Provisions in our certificate of incorporation and by-laws and of Delaware law may prevent or delay an acquisition of our Company.
Our certificate of incorporation and by-laws and Delaware law contain provisions that are intended to deter coercive takeover practices and inadequate
takeover bids by making them more burdensome to the bidder and to encourage prospective acquirers to negotiate with our Board of Directors rather than
to attempt a hostile takeover. These provisions include, among others:
•
the inability of our stockholders to act by written consent; and
•
the right of our Board of Directors to issue preferred stock without stockholder approval.
We have not opted out of the protections afforded by Section 203 of the Delaware General Corporation Law, which provides that a stockholder acquiring
more than 15% of our outstanding voting shares (an "Interested Stockholder") but less than 85% of such shares may not engage in certain business
combinations with us for a period of three years subsequent to the date on which the stockholder became an Interested Stockholder unless, prior to such
date, our Board of Directors approves either the business combination or the transaction which resulted in the stockholder becoming an Interested
Stockholder or the business combination is approved by our Board of Directors and by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the Interested Stockholder.
We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with
our Board of Directors and by providing our Board of Directors with more time to assess any acquisition proposal, and are not intended to make our
Company immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some stockholders and could delay or
prevent an acquisition that our Board of Directors determines is not in the best interests of our Company and our stockholders.
We cannot assure that we will continue to pay dividends or repurchase shares of our common stock at the times or in the amounts we currently
anticipate.
Our Board of Directors has declared, and we have paid, regular quarterly cash dividends on our common stock. The payment of such quarterly dividends
and any other future dividends will be at the discretion of our Board of Directors. There can be no assurance that we will continue to pay dividends, as to
what the amount of any future dividends will be, or that we will have sufficient surplus under Delaware law to be able to pay any future dividends. This
may result from extraordinary cash expenses, actual expenses exceeding contemplated costs, funding of capital expenditures, or increases in reserves. If we
do not pay future dividends, the price of our common stock must appreciate for stockholders to receive a gain on their investment in us. This appreciation
may not occur and our stock may in fact depreciate in value.
In January 2017, the Board of Directors authorized us to repurchase up to $2.0 billion of our common stock. As of June 30, 2021, we have spent a total of
approximately $1.5 billion to repurchase shares of our common stock under the authorization. There can be no assurance that we will be able to repurchase
shares of our common stock at the times or in the amounts we currently anticipate due to market conditions, our cash position, our ability to access new
financing, applicable laws and other factors, or that the results of the share repurchase program will be as beneficial as we currently anticipate.
The interests of significant stockholders may conflict with our interests or those of other stockholders, and their actions could disrupt our business and
affect the market price and volatility of our securities.
Since we began operating as an independent public company, three of our stockholders have, at various times, made filings on Schedule 13D with the SEC
indicating that they may take positions or make proposals with respect to, or with respect to potential changes in, among other things, our operations,
management, management and employee incentives, our certificate of incorporation
19
and bylaws, the composition of our Board of Directors, ownership, capital allocation policies, capital or corporate structure, dividend policy, potential
acquisitions involving us or certain of our businesses or assets, strategy, and plans. Any such positions or proposals may not in all cases be aligned with the
interests of our other stockholders. Significant stockholders may be proponents of pursuing acquisitions, divestitures, and other transactions that, in their
judgment, could enhance their investment, even though such transactions involve risks to our other stockholders.
Responding to actions by significant stockholders can be costly, time-consuming, and disrupting to our operations and can divert the attention of
management and our employees. Such activities could interfere with our ability to execute our business strategy, including plans relating to, growth
strategies, business process improvement, or the return of capital to our stockholders. In addition, a proxy contest for the election of directors at our annual
meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and our
Board of Directors. The perceived uncertainties as to our future direction also could affect the market price and volatility of our securities.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We own or lease approximately 0.9 million square feet of real estate, consisting of office and other commercial facilities principally in North America. We
own and maintain our global headquarters, totaling approximately 155,000 square feet, in Hoffman Estates, Illinois. We also own or lease 24 locations in
North America and 2 locations internationally.
We regularly add or reduce facilities as necessary to accommodate changes in our business operations. We believe that our facilities are adequate to meet
our immediate needs, and that, if and when needed, we will be able to secure adequate additional space to accommodate future expansion.
Item 3. Legal Proceedings
For a description of our legal proceedings, see Item 8 of Part II, "Financial Statements and Supplementary Data", Note 18 - Commitments and
Contingencies included in this Annual Report of Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
20
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Registrant's Common Equity
Our common stock began trading on the NASDAQ Global Select Market under the symbol "CDK" on October 1, 2014. As of August 16, 2021, there were
13,184 holders of record of our common stock.
Dividends
We expect to continue to pay dividends on our common stock. However, the declaration and payment of future dividends to holders of our common stock
will be at the discretion of our Board of Directors and will depend upon many factors, including our financial condition, earnings, capital requirements of
our businesses, legal requirements, regulatory constraints, industry practice and other factors that our Board of Directors deems relevant. There can be no
assurance that we will continue to pay dividends or guarantee of the amounts of such dividends.
Cumulative Total Shareholder Return
The following graph compares the cumulative total stockholder return on our common stock for the five years ended June 30, 2021 with the comparable
cumulative return of the: (i) Standard & Poor's (S&P) 500 Index, (ii) S&P MidCap 400 Index, and (iii) S&P 400 Information Technology Index.
The graph assumes $100 was invested in our common stock and in each of the indices as of the market close on June 30, 2016 and assumes that all cash
dividends are reinvested. The comparisons in the graph are required by the SEC and are not intended to forecast or be indicative of future performance of
our common stock. The graph and related information shall not be deemed "soliciting material" or to be "filed" with the SEC, nor shall such information be
incorporated by reference into any future filing
21
under the Securities Act of 1933 or the Securities Exchange Act of 1934 (the "Exchange Act"), each as amended, except to the extent that we specifically
incorporate it by reference into such filing.
Issuer Purchases of Equity Securities
The following table presents a summary of common stock repurchases made during the three months ended June 30, 2021.
Period
Total Number
of Shares
Purchased
Average Price
Paid per Share
Total Number
of Shares as
Part of Publicly
Announced
Programs
Maximum Number (or
Approximate Dollar
Value) that May Yet Be
Purchased Under the
Program
April 1 - 30, 2021
1,656
$
53.59
—
$
502,297,495
May 1 - 31, 2021
3,257
$
53.43
—
$
502,297,495
June 1 - 30, 2021
240,355
$
51.23
236,382
$
490,193,539
Total
245,268
236,382
(1) Pursuant to our 2014 Omnibus Award Plan, shares of our common stock may be withheld upon exercise of stock options or vesting of restricted stock to
satisfy tax withholdings. Shares withheld for such purposes have been included in the total number of shares purchased.
(2) In January 2017, the Board of Directors authorized us to repurchase up to $2.0 billion of our common stock under a return of capital program. This
authorization will expire when it is exhausted or at such time as it is revoked by the Board of Directors.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes thereto included elsewhere
herein. In this Annual Report on Form 10-K, all references to "we," "our," and "us" refer collectively to CDK and its consolidated subsidiaries.
Executive Overview. CDK enables end-to-end automotive commerce. For over 40 years, we have served automotive retailers and OEMs by providing
innovative solutions that allow them to better connect, manage, analyze, and grow their businesses. Our solutions automate and integrate all parts of the
buying process, including the acquisition, sale, financing, insuring, parts supply, repair, and maintenance of vehicles. We serve approximately 15,000 retail
locations in North America.
Sale of the International and Digital Marketing Businesses. On March 1, 2021, we completed the sale of the International Business to Francisco
Partners. Financial results associated with the International Business are presented as discontinued operations in the Consolidated Statements of
Operations. Following the sale of the International Business, we are organized as a single operating segment. On April 21, 2020, we completed our sale of
the Digital Marketing Business to Sincro LLC, a newly formed company owned by Ansira Partners, Inc., which is a subsidiary of Advent International.
The Digital Marketing Business is also presented as discontinued operations. For additional information refer to Item 8 of Part II, "Financial Statements
and Supplementary Data", Note 1 - Basis of Presentation and Note 4 - Discontinued Operations.
Acquisitions. On February 1, 2021, we acquired Square Root, Inc., an Austin-based developer of data curation software for OEMs.
On June 2, 2021, we acquired Roadster Inc., a Palo Alto, California-based digital sales platform that modernizes the way consumers buy vehicles and the
process in which dealers sell them.
Impacts of COVID-19. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The COVID-19 outbreak and
associated counter-acting measures implemented by governments around the world, as well as increased business uncertainty, caused a significant shift in
automotive retail activity, and the operations of our dealer customers in particular. To support our customers, we offered financial and other assistance
during the fourth quarter of fiscal 2020 and added product benefits to facilitate remote delivery and touchless transactions. We also took steps to monitor
our cash flow and liquidity and to migrate many employees to their current work-from-home status. While our underlying business has remained strong
during the COVID-19 pandemic, including an increase in our auto sites and improved customer sentiment, the impact of our customer support efforts as
well as the cumulative effect of delays of projects and installations due to COVID-19 travel restrictions had an adverse impact on our financial results
beginning late in the third quarter of fiscal 2020. These financial impacts were offset by lower travel expenses during the year. Activity in the automotive
market improved during fiscal 2021, and we expect that improvement trend to continue during the first half of fiscal 2022, though uncertainty remains.
Overall, we believe we are well positioned for further growth opportunities as the impact of the COVID-19 pandemic recedes in the markets we serve and
we remain committed to our
(1)
(2)
(2)
22
management philosophy, company goals and our business strategy.
Business Process Modernization Program. As of July 1, 2019, we initiated a three-year program designed to improve the way we do business for our
customers through best-in-class product offerings, processes, governance and systems. The business process modernization program includes a
comprehensive redesign in the way we go to market, including the quoting, contracting, fulfilling, and invoicing processes, and the systems and tools we
use. We incurred expenses related to this program of $14.1 million in fiscal 2021 and $16.1 million in fiscal 2020. We expect to incur expenses of
approximately $6.0 million during fiscal 2022. It is possible that the program will extend beyond the initial three-year time horizon.
Business Transformation Plan. During fiscal 2015, we initiated a three-year business transformation plan designed to increase operating efficiency and
improve the cost structure of our operations. The business transformation plan was completed at the end of fiscal 2019. It produced significant benefits in
our business performance. Additional information on the business transformation plan is contained in Item 8 of Part II, "Financial Statements and
Supplementary Data", Note 7 - Restructuring.
Sources of Revenue and Expenses
Revenue. We generally receive fee-based revenue by providing services to customers. We generate revenue from four categories: subscription, on-site
licenses and installation, transaction, and other.
Subscription: for software and technology solutions provided to automotive retailers and OEMs, which includes:
•
DMSs and layered applications, which may be installed on-site at the customer’s location, or hosted and provided on a SaaS basis,
including ongoing maintenance and support;
•
Interrelated services such as installation, initial training, and data updates; and
•
Prior to adoption of Accounting Standards Codification ("ASC") 842 "Leases" ("ASC 842"), subscription revenue included technology
solutions in which hardware was provided on a service basis. This revenue was previously classified as subscription revenue because
under lease accounting guidance in effect prior to ASC 842, substitution rights were considered substantive.
On-site licenses and installation: DMS applications where the software is installed on-site at the customer's location and interrelated services such
as installation.
Transaction: fees per transaction to process credit reports, vehicle registrations, and automotive equity mining.
Other: consulting and professional services, sales of hardware, and other miscellaneous revenue. After the adoption of ASC 842 in fiscal 2020,
Other revenue also includes leasing revenue from hardware provided to customers on a service basis, as hardware substitution rights are not
considered substantive.
Expenses. Expenses generally relate to the cost of providing services to customers. Significant expenses include employee payroll and other labor-related
costs, the cost of hosting customer systems, third-party costs for transaction-based solutions and licensed software utilized in our solution offerings,
telecommunications, transportation and distribution costs, computer hardware, software, and other general overhead items.
Trends and Uncertainties in our Marketplace. A number of material trends and/or uncertainties in our marketplace could have either a positive or
negative impact on our ability to conduct business, our results of operations, and/or our financial condition. The following is a summary of trends or
uncertainties that have the potential to affect our liquidity, capital resources, or results of operations:
•
Our revenue, operating earnings, and profitability have varied in the past as a result of these trends and uncertainties and are likely to continue to
vary from quarter to quarter, which may lead to volatility in our stock price. These trends or uncertainties could occur in a variety of different
areas of our business and the marketplace.
•
Changing market trends, including changes in the automotive marketplace could have a material impact on our business. From time to time,
factors such as the availability of automobile inventory and the economic trends of a region could have an impact on the volume of automobiles
sold at retail in one or more of the geographic markets in which we operate. We also expect to see the continued consolidation of dealers into
larger dealer groups that could further enhance our position as a strategic partner with larger dealer groups. To some extent, our business is
impacted by these trends, either directly through a shift in the number of transactions processed by customers of our transactional business, or
indirectly through changes in our customers’ spending habits based on their own changes in profitability.
23
•
Our ability to bring new solutions to market, research and develop, or acquire the data and technology that enables those solutions is important to
our continued success. In addition, our strategy includes the selective pursuit of acquisitions that support or complement our existing technology
and solution set. For example, dealers and OEMs are accelerating their adoption of a modern retailing experience for consumers that will allow the
option of completing transactions online or in store. Our acquisition of Roadster paired with ELEAD’s automotive CRM software and call center
solutions will enhance an end-to-end digital retail experience. An inability to invest in the continued development of new solutions for the
automotive marketplace, or an inability to acquire, or successfully integrate acquired, new technology or solutions due to a lack of liquidity or
resources, could impair our strategic position.
•
Our success depends on our ability to maintain the security of our data and intellectual property, as well as our customers’ data. Although we
maintain a clear focus on data and system security, and we incur significant costs securing our infrastructure annually in support of that focus, we
may experience interruptions of service or potential security issues that may be beyond our control.
Key Performance Measures. We regularly review the following key performance measures in evaluating our business results, identifying trends affecting
our business, and making operating and strategic decisions:
Dealer Management System Customer Sites (end of period). We track the number of retail customer sites that have an active DMS and sell vehicles in
automotive and adjacent markets as an indicator of our opportunity set for generating subscription revenue. We consider a DMS to be active if we have
billed a subscription fee for that solution during the last billing cycle in the most recently ended calendar month. Adjacent markets include heavy truck
dealerships that provide vehicles to the over-the-road trucking industry, recreation dealerships in the motorcycle, powersports, marine, and recreational
vehicle industries, and heavy equipment dealerships in the agriculture and construction equipment industries.
Average Revenue Per DMS Customer Site (monthly average for period). Average revenue per DMS customer site is an indicator of the scope of adoption of
our solutions by DMS customers. We monitor changes in this metric to measure the effectiveness of our strategy to deepen our relationships with our
current customer base through upgrading and expanding solutions. We calculate average revenue per DMS customer site by dividing subscription revenue
generated from our solutions in an applicable period by the monthly average number of DMS customer sites in the same period, divided by three. The
metric includes monthly billing directly associated with the reported DMS sites inclusive of DMS monthly fees, layered applications and data integration
fees and excludes (i) subscription revenue generated from customers not included in our DMS customer site count and (ii) subscription revenue related to
certain installation and training activities that is deferred then recognized as revenue over the life of the contract.
Non-GAAP Financial Measures
We disclose certain financial measures for our consolidated results on both a GAAP and a non-GAAP (adjusted) basis. The non-GAAP financial measures
disclosed should be viewed in addition to, and not as an alternative to, results prepared in accordance with GAAP. Our use of each of the following non-
GAAP financial measures may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not
define these non-GAAP financial measures, or reconcile them to the most directly comparable GAAP financial measures, in the same way.
Non-GAAP Financial Measure
Most Directly Comparable GAAP Financial Measure
Adjusted earnings before income taxes
Earnings before income taxes
Adjusted provision for income taxes
Provision for income taxes
Adjusted net earnings attributable to CDK
Net earnings attributable to CDK
Adjusted diluted earnings attributable to CDK per share
Diluted earnings attributable to CDK per share
Adjusted EBITDA
Net earnings attributable to CDK
Adjusted EBITDA margin
Net earnings attributable to CDK margin
We use adjusted earnings before income taxes, adjusted provision for income taxes, adjusted net earnings attributable to CDK, adjusted diluted earnings
attributable to CDK per share, adjusted EBITDA and adjusted EBITDA margin internally to evaluate our performance on a consistent basis. These
measures adjust for the impact of certain items that we believe are inconsistent in amount and frequency and do not directly reflect our underlying
operations. By adjusting for these items, we believe we have more precise inputs for use as factors in (i) our budgeting process, (ii) financial and
operational decisions, (iii) evaluations of ongoing operating performance on a consistent period-to-period basis and relative to our competitors, (iv) target
leverage calculations, (v) debt covenant calculations, and (vi) incentive-based compensation decisions.
We believe our non-GAAP financial measures are helpful to users of the financial statements because they (i) provide investors with meaningful
supplemental information regarding financial performance by excluding certain items, (ii) permit investors to view
24
performance using the same tools that management uses, and (iii) otherwise provide supplemental information that may be useful to investors in evaluating
our ongoing operating results on a consistent basis. We believe that the presentation of these non-GAAP financial measures, when considered in addition to
the corresponding GAAP financial measures and the reconciliations to those measures disclosed below, provides investors with a better understanding of
the factors and trends affecting our business than could be obtained absent these disclosures.
Results of Operations
(Tabular amounts in millions, except per share amounts)
Fiscal 2021 Compared to Fiscal 2020. The following is a discussion of the results of our consolidated results of operations for fiscal 2021 and 2020,
respectively.
The table below presents our Consolidated Statements of Operations for the periods indicated and the dollar change and percentage change between
periods.
Year Ended June 30,
Change
2021
2020
$
%
Revenue
$
1,673.2
$
1,639.0
$
34.2
2 %
Cost of revenue
875.0
800.6
74.4
9 %
Selling, general and administrative expenses
360.9
338.7
22.2
7 %
Litigation provision
12.0
—
12.0
— %
Total expenses
1,247.9
1,139.3
108.6
10 %
Operating earnings
425.3
499.7
(74.4)
(15)%
Interest expense
(124.6)
(144.1)
19.5
(14)%
Loss on extinguishment of debt
(25.6)
—
(25.6)
— %
Loss from equity method investment
(27.3)
(2.7)
(24.6)
n/m
Other income, net
36.9
21.1
15.8
75 %
Earnings before income taxes
284.7
374.0
(89.3)
(24)%
Margin %
17.0 %
22.8 %
Provision for income taxes
(94.5)
(108.8)
14.3
(13)%
Effective tax rate
33.2 %
29.1 %
Net earnings from continuing operations
190.2
265.2
(75.0)
(28)%
Net earnings (loss) from discontinued operations
852.8
(50.7)
903.5
n/m
Net earnings
1,043.0
214.5
828.5
n/m
Less: net earnings attributable to noncontrolling interest
8.7
7.0
1.7
24 %
Net earnings attributable to CDK
$
1,034.3
$
207.5
$
826.8
n/m
Revenue.
Year Ended June 30,
Change
2021
2020
$
%
Subscription
$
1,313.9
$
1,306.0
$
7.9
1%
On-site licenses and installation
9.2
10.8
(1.6)
(15)%
Transaction
174.9
155.0
19.9
13%
Other
175.2
167.2
8.0
5%
Total Revenue
$
1,673.2
$
1,639.0
$
34.2
2%
Revenues for fiscal 2021 increased by $34.2 million as compared to fiscal 2020.
•
Subscription revenue increased by $7.9 million due to an increase in average sites and revenue per DMS customer site. DMS customer site count
increased from 14,719 sites as of June 30, 2020 to 15,025 sites as of June 30, 2021. This increase was largely offset by the impact of the re-
allocation of lessor revenue from subscription revenue to other revenue for our Hardware as a Service ("HaaS") arrangements due to our
prospective adoption of ASC 842 in fiscal 2020, and a decline in Partner Program revenue.
25
•
Transaction revenue increased by $19.9 million due to higher transaction volumes in fiscal 2021 as the downturn in automotive retail activity
caused by COVID-19 receded, as well as higher credit bureau charges initiated in the second half of fiscal 2021.
•
Other revenue increased by $8.0 million due to higher hardware revenue including lessor accounting under ASC 842 driven by strong installation
of our Cloud Connect product, partially offset by the COVID-related impacts in our consulting and call center businesses.
Cost of Revenue. Cost of revenue for fiscal 2021 increased by $74.4 million as compared to fiscal 2020. Cost of revenue increased due to higher
employee-related costs and professional services to support our strategic growth initiatives and other research and development activities as well as our
revenue growth. Cost of revenue was also impacted by a post-ASC 842 change in the timing of cost recognition for our HaaS arrangements, costs related to
a transition services agreement in connection with the sale of the Digital Marketing Business and the International Business, and higher incentive
compensation and employee benefit costs. The increase was partially offset by higher software capitalization and lower employee travel costs in fiscal
2021. Cost of revenue includes expenses to research, develop, and deploy new and enhanced solutions for our customers of $79.3 million and $49.6 million
for fiscal 2021 and 2020, respectively, representing 4.7% and 3.0% of revenue, respectively.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for fiscal 2021 increased by $22.2 million as compared to
fiscal 2020. Selling, general and administrative expenses increased primarily due to higher employee-related costs consistent with increased headcount, and
higher incentive compensation, partially offset by lower travel expenses as a result of the COVID-19 pandemic.
Litigation Provision. During fiscal 2021, our reassessment of the litigation liability resulted in an increase of $12.0 million. For additional information
refer to Item 8 of Part II, "Financial Statements and Supplementary Data", Note 18 - Commitments and Contingencies.
Interest Expense. Interest expense for fiscal 2021 decreased by $19.5 million as compared to fiscal 2020 largely due to lower average debt levels in fiscal
2021 compared to fiscal 2020 largely attributable to the payoff of $250.0 million of senior notes in the second quarter of fiscal 2020, the repayment of the
three-year term loan facility and five-year term loan facility ("term loans"), and the 5.875% unsecured senior notes with a $500.0 million aggregate
principal amount due in 2026 ("2026 notes") in the third and fourth quarter of fiscal 2021, respectively.
Loss on Extinguishment of Debt. Loss on extinguishment of debt is attributable to early terminations of debt. On March 1, 2021, we repaid the
indebtedness under the term loans. On April 23, 2021, we paid all indebtedness under the 2026 notes. As a result, we recorded expenses of $18.5 million
for a call premium related to the 2026 notes and $7.1 million for the write-off of unamortized debt financing costs during fiscal 2021.
Loss from Equity Method Investment. Refer to Note 15 - Investments for additional information on equity method investments.
Other Income, Net. Other income, net for fiscal 2021 increased by $15.8 million as compared to fiscal 2020 due largely to the recognition of income
related to a transition services agreement in connection with the sale of the Digital Marketing Business and the International Business.
Provision for Income Taxes. Income tax expense was $94.5 million and $108.8 million for fiscal 2021 and 2020, respectively. The effective tax rate,
expressed by calculating the income tax expense as a percentage of Earnings before income taxes, was 33.2% for fiscal 2021, and differed from the US
federal statutory rate of 21.0% primarily due to state and local income taxes, a valuation allowance on a deferred tax asset for the tax basis difference of an
equity method investment that is not expected to be realized, a valuation allowance on foreign tax credits not expected to be realized, tax shortfalls on
stock-based compensation and non-deductible officer’s compensation. The effective income tax rate for fiscal 2020 was 29.1%, and differed from the U.S.
federal statutory rate of 21.0% primarily due to state and local income taxes, a valuation allowance for capital loss carryforward credits triggered by a
change in estimate of the expected capital gain associated with the sale of the Digital Marketing Business, withholding taxes on foreign earnings that are no
longer indefinitely reinvested, offset by a benefit relating to a refund of prior year state taxes.
Net Earnings (Loss) from Discontinued Operations. Net earnings (loss) from discontinued operations reflect the results of the International Business and
the Digital Marketing Business. During fiscal 2021, net earnings for the International Business increased due to the recognition of the gain on sale of the
International Business, the benefits from restructuring efforts at the end of fiscal 2020, and lower travel costs due to the COVID-19 pandemic, partially
offset by professional fees associated with the sale of the International Business and unfavorable currency exchange rates. During fiscal 2020, we
completed the sale of the Digital Marketing Business and recorded a total loss on sale of $96.3 million. Refer to Note 4 - Discontinued Operations for
additional information.
26
Net Earnings Attributable to CDK. Net earnings attributable to CDK for fiscal 2021 increased $826.8 million as compared to fiscal 2020. The increase in
net earnings attributable to CDK was primarily due to the factors previously discussed.
Consolidated Non-GAAP Financial Results. The tables below present the reconciliation of the most directly comparable GAAP measures to adjusted
provision for income taxes, adjusted net earnings attributable to CDK, and adjusted diluted earnings attributable to CDK per share.
Year Ended June 30,
Change
2021
2020
$
%
Revenue
$
1,673.2
$
1,639.0
$
34.2
2 %
Earnings before income taxes
$
284.7
$
374.0
$
(89.3)
(24)%
Margin %
17.0 %
22.8 %
Stock-based compensation expense
43.0
19.2
23.8
Amortization of acquired intangible assets
17.6
15.3
2.3
Transaction and integration-related costs
5.1
9.5
(4.4)
Legal and other expenses related to regulatory and competition matters
16.3
19.4
(3.1)
Business process modernization program
14.1
16.1
(2.0)
Workplace optimization expenses
7.4
—
7.4
Officer transition expense
1.1
—
1.1
Net adjustments related to loss from equity method investment
24.3
2.2
22.1
Loss on extinguishment of debt
25.6
—
25.6
Adjusted earnings before income taxes
$
439.2
$
455.7
$
(16.5)
(4)%
Adjusted margin %
26.2 %
27.8 %
Year Ended June 30,
Change
2021
2020
$
%
Provision for income taxes
$
94.5
$
108.8
$
(14.3)
(13)%
Effective tax rate
33.2 %
29.1 %
Income tax effect of pre-tax adjustments
28.0
19.9
8.1
Income tax effect for foreign earnings previously deemed indefinitely
reinvested
—
(2.7)
2.7
Change in deferred tax valuation allowance
(7.7)
(14.8)
7.1
Impact of U.S. tax reform
—
0.3
(0.3)
Adjusted provision for income taxes
$
114.8
$
111.5
$
3.3
3 %
Adjusted effective tax rate
26.1 %
24.5 %
(1)
(1)
(1) (2)
(1) (3)
(1) (4)
(5)
(6)
(7)
(8)
(9)
(10)
(1)
(1)
(11)
(12)
(13)
(14)
(1)
27
Year Ended June 30,
Change
2021
2020
$
%
Net earnings
$
1,043.0
$
214.5
$
828.5
386 %
Less: net earnings attributable to noncontrolling interest
8.7
7.0
Net earnings attributable to CDK
1,034.3
207.5
826.8
398 %
Net (earnings) loss from discontinued operations
(852.8)
50.7
(903.5)
Stock-based compensation expense
43.0
19.2
23.8
Amortization of acquired intangible assets
17.2
14.9
2.3
Transaction and integration-related costs
5.1
9.5
(4.4)
Legal and other expenses related to regulatory and competition matters
16.3
19.3
(3.0)
Business process modernization program
14.1
16.1
(2.0)
Workplace optimization expenses
7.4
—
7.4
Officer transition expense
1.1
—
1.1
Net adjustments related to loss from equity method investment
24.3
2.2
22.1
Loss on extinguishment of debt
25.6
—
25.6
Income tax effect of pre-tax adjustments
(28.0)
(19.9)
(8.1)
Income tax effect for foreign earnings previously deemed indefinitely reinvested
—
2.7
(2.7)
Change in deferred tax valuation allowance
7.7
14.8
(7.1)
Impact of U.S. tax reform
—
(0.3)
0.3
Adjusted net earnings attributable to CDK
$
315.3
$
336.7
$
(21.4)
(6)%
Year Ended June 30,
Change
2021
2020
$
%
Diluted earnings attributable to CDK per share
$
8.44
$
1.70
$
6.74
396 %
Net (earnings) loss from discontinued operations
(6.96)
0.42
Stock-based compensation expense
0.35
0.16
Amortization of acquired intangible assets
0.14
0.12
Transaction and integration-related costs
0.04
0.08
Legal and other expenses related to regulatory and competition matters
0.13
0.15
Business process modernization program
0.12
0.13
Workplace optimization expenses
0.06
—
Officer transition expense
0.01
—
Net adjustments related to loss from equity method investment
0.20
0.02
Loss on extinguishment of debt
0.21
—
Income tax effect of pre-tax adjustments
(0.23)
(0.16)
Income tax effect for foreign earnings previously deemed indefinitely reinvested
—
0.02
Change in deferred tax valuation allowance
0.06
0.12
Impact of U.S. tax reform
—
—
Adjusted diluted earnings attributable to CDK per share
$
2.57
$
2.76
$
(0.19)
(7)%
Weighted average common shares outstanding:
Diluted
122.6
122.1
(15)
(1) (2)
(1) (3) (16)
(1) (4)
(5) (16)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(1)
(15)
(1) (2)
(1) (3)
(1) (4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(1)
28
The table below presents the reconciliation of net earnings attributable to CDK to adjusted EBITDA.
Year Ended June 30,
Change
2021
2020
$
%
Net earnings attributable to CDK
$
1,034.3
$
207.5
$
826.8
398 %
Margin %
61.8 %
12.7 %
Net earnings attributable to noncontrolling interest
8.7
7.0
1.7
Net (earnings) loss from discontinued operations
(852.8)
50.7
(903.5)
Provision for income taxes
94.5
108.8
(14.3)
Interest expense
124.6
144.1
(19.5)
Depreciation and amortization
98.7
91.7
7.0
Stock-based compensation expense
43.0
19.2
23.8
Transaction and integration-related costs
5.1
9.5
(4.4)
Legal and other expenses related to regulatory and competition matters
16.3
19.4
(3.1)
Business process modernization program
14.1
16.1
(2.0)
Workplace optimization expenses
7.4
—
7.4
Officer transition expense
1.1
—
1.1
Net adjustments related to loss from equity method investment
29.7
3.3
26.4
Loss on extinguishment of debt
25.6
—
25.6
Adjusted EBITDA
$
650.3
$
677.3
$
(27.0)
(4)%
Adjusted margin %
38.9 %
41.3 %
_________________________
(1) Excludes amounts attributable to discontinued operations.
(2) Stock-based compensation expense included in cost of revenue and selling, general and administrative expenses.
(3) Amortization of acquired intangible assets consists of non-cash amortization of intangible assets such as customer lists, purchased software, and trademarks acquired in
connection with business combinations. We exclude the impact of amortization of acquired intangible assets because these non-cash amounts are significantly impacted by
the timing and size of individual acquisitions and do not factor into our budgeting process, financial and operational decision making, target leverage calculations, and
determination of incentive-based pay.
(4) Transaction and integration-related costs include: (i) legal, accounting, outside service fees, and other costs incurred in connection with assessment and integration of
acquisitions and other strategic business opportunities; and (ii) post-close adjustments to acquisition-related contingent consideration, included in cost of revenue and
selling, general and administrative expenses.
(5) Legal and other expenses, related to regulatory and competition matters included in selling, general and administrative expenses and litigation provision.
(6) Business process modernization program designed to improve the way we do business for our customers through best-in-class product offerings, processes, governance
and systems. The business process modernization program includes a comprehensive redesign in the way we go to market, including the quoting, contracting, fulfilling, and
invoicing processes, and the systems and tools we use. The program is an investment to implement holistic business reform, including the design and implementation of a
new ERP system. The expense is included in cost of revenue and selling, general and administrative expenses.
(7) Workplace optimization expenses primarily include costs associated with the divestiture of non-strategic facilities as a result of assessing the post-COVID-19 pandemic
real estate requirements to support our business operations. During fiscal 2021, we recorded $4.5 million of operating lease and fixed asset impairment charges, and $2.9
million of employee-related termination costs. These expenses are included in cost of revenue and selling, general and administrative expenses in our Consolidated
Statements of Operations.
(8) Officer transition expense includes severance expense in connection with officer departures included in cost of revenue and selling, general and administrative expenses.
(9) Net adjustments related to loss from equity method investment includes certain portions of earnings attributable to an equity interest owned by CDK and in fiscal year
2021, a $14.5 million impairment of an equity method investment included in loss from equity method investment.
(10) Loss on extinguishment of debt related to a redemption premium and the write-off of unamortized debt financing costs as a result of the repayment of indebtedness.
(11) Income tax effect of pre-tax adjustments calculated at applicable statutory rates net of applicable permanent differences.
(17)
(15)
(1) (18)
(19)
(1) (20)
(1) (2)
(1) (4)
(5)
(6)
(7)
(8)
(9)
(10)
29
(12) True-up of income tax expense for cumulative withholding tax associated with historical foreign earnings that are no longer considered indefinitely reinvested as of
March 31, 2020. The change in assertion was made in response to the uncertainty related to the COVID-19 pandemic and its potential impact on CDK's liquidity needs.
(13) In fiscal 2021, a valuation allowance on a deferred tax asset for the tax basis difference of an equity method investment that is not expected to be realized. In fiscal
2020, a valuation allowance associated with a deferred tax asset for a capital loss carryforward which we do not expect to utilize.
(14) In fiscal 2020, a one-time tax benefit for an adjustment of an accrual for foreign withholding taxes related to undistributed earnings as a result of the Tax Reform Act.
(15) Net (earnings) loss from discontinued operations associated with our sale of the International Business that closed on March 1, 2021, and the divestiture of the Digital
Marketing Business that closed on April 21, 2020. We recorded a pre-tax gain of $965.6 million on the sale of the International Business.
(16) The portion of expense related to noncontrolling interest has been removed from amortization of acquired intangible assets for the years ended June 30, 2021 and 2020.
The portion of expense related to noncontrolling interest has been removed from legal and other expenses related to regulatory and competition matters for the year ended
June 30, 2020.
(17) Net earnings attributable to noncontrolling interest included in the financial statements.
(18) Provision for income taxes included in the financial statements.
(19) Interest expense included in the financial statements.
(20) Depreciation and amortization included in the financial statements.
Adjusted Earnings Before Income Taxes. Adjusted earnings before income taxes for fiscal 2021 decreased $16.5 million as compared to fiscal 2020.
Adjusted margin decreased from 27.8% to 26.2%. Adjusted earnings before income taxes were unfavorably impacted by the COVID-19 pandemic,
decrease in Partner Program revenue, higher investments in strategic growth initiatives, and an increase in amortization resulting from capitalized software,
partially offset by growth in the core business and lower interest expense.
Adjusted Provision for Income Taxes. Adjusted income tax expense was $114.8 million and $111.5 million for fiscal 2021 and 2020, respectively. The
adjusted effective tax rate, expressed by calculating the adjusted income tax expense as a percentage of Adjusted earnings before income taxes, was 26.1%
for fiscal 2021 and differed from the U.S. federal statutory rate of 21.0% primarily due to state and local income taxes, withholding taxes on foreign
earnings, and a valuation allowance set up on certain foreign tax credits. The adjusted effective tax rate for fiscal 2020 was 24.5%, and differed from the
U.S. federal statutory rate of 21.0% primarily due to state and local income taxes, offset by refunds of prior year state taxes.
Adjusted Net Earnings Attributable to CDK. Adjusted net earnings attributable to CDK for fiscal 2021 decreased $21.4 million as compared to fiscal
2020. The decrease in Adjusted net earnings attributable to CDK was primarily due to the items discussed above in Adjusted earnings before income taxes
and by the associated tax effect.
Adjusted EBITDA. Adjusted EBITDA for fiscal 2021 decreased $27.0 million as compared to fiscal 2020. Adjusted margin decreased from 41.3% to
38.9%. Adjusted EBITDA was unfavorably impacted by the COVID-19 pandemic, a decrease in Partner Program revenue and higher investments in
strategic growth initiatives, partially offset by growth in the core business.
30
Fiscal 2020 Compared to Fiscal 2019. The following is a discussion of the results of our consolidated results of operations for fiscal 2020 and 2019,
respectively.
The table below presents our Consolidated Statements of Operations for the periods indicated and the dollar change and percentage change between
periods.
Year Ended June 30,
Change
2020
2019
$
%
Revenue
$
1,639.0
$
1,593.0
$
46.0
3 %
Cost of revenue
800.6
734.4
66.2
9 %
Selling, general and administrative expenses
338.7
357.0
(18.3)
(5)%
Restructuring expenses
—
16.6
(16.6)
(100)%
Litigation provision
—
90.0
(90.0)
(100)%
Total expenses
1,139.3
1,198.0
(58.7)
(5)%
Operating earnings
499.7
395.0
104.7
27 %
Interest expense
(144.1)
(138.9)
(5.2)
4 %
Loss from equity method investment
(2.7)
(17.0)
14.3
(84)%
Other income, net
21.1
4.6
16.5
n/m
Earnings before income taxes
374.0
243.7
130.3
53 %
Margin %
22.8 %
15.3 %
Provision for income taxes
(108.8)
(48.6)
(60.2)
124 %
Effective tax rate
29.1 %
19.9 %
Net earnings from continuing operations
265.2
195.1
70.1
36 %
Net loss from discontinued operations
(50.7)
(63.2)
12.5
(20)%
Net earnings
214.5
131.9
82.6
63 %
Less: net earnings attributable to noncontrolling interest
7.0
7.9
(0.9)
(11)%
Net earnings attributable to CDK
$
207.5
$
124.0
$
83.5
67 %
Revenue.
Year Ended June 30,
Change
2020
2019
$
%
Subscription
$
1,306.0
$
1,283.3 $
22.7
2 %
On-site licenses and installation
10.8
7.9
2.9
37 %
Transaction
155.0
162.5
(7.5)
(5) %
Other
167.2
139.3
27.9
20 %
Total Revenue
$
1,639.0
$
1,593.0 $
46.0
3 %
Revenue for fiscal 2020 increased by $46.0 million as compared to fiscal 2019.
•
Subscription revenue grew due to the ELEAD acquisition, an increase in average revenue per DMS customer site primarily due to a combination
of higher layered application sales, and a net increase in DMS customer site count which increased from 14,681 sites as of June 30, 2019 to 14,719
sites as of June 30, 2020. These increases were partially offset by pricing concessions, including customer discounts and credits in response to the
COVID-19 pandemic.
•
Transaction revenue decreased primarily due to a reduction in vehicle registrations and credit report activity attributable to the COVID-19
pandemic.
•
Other revenue increased due to a post-ASC 842 change in the timing of revenue recognition for our HaaS arrangements.
Cost of Revenue. Cost of revenue for fiscal 2020 increased by $66.2 million as compared to fiscal 2019. Cost of revenue increased due to the ELEAD
acquisition, higher costs relating to investments in strategic growth initiatives, a post-ASC 842 change in the timing of cost recognition for our HaaS
arrangements, and an increase in amortization due to higher levels of capitalized software. These increases were partially offset by the cost containment
efforts in response to the COVID-19 pandemic, impairment charges recorded related to certain intangible assets during the second quarter of the prior year,
and lower employee related expenses. Cost
31
of revenue include expenses to research, develop, and deploy new and enhanced solutions for our customers of $49.6 million and $57.6 million for fiscal
2020 and 2019, respectively, representing 3.0% and 3.6% of revenue, respectively.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for fiscal 2020 decreased by $18.3 million as compared to
fiscal 2019. Selling, general and administrative expenses decreased due to lower stock-based compensation expense resulting from cumulative adjustments
related to the achievement of financial performance metrics associated with performance-based restricted stock units, certain expenses incurred in the prior
year related to the business transformation plan which was completed at the end of fiscal 2019, and lower travel expenses as a result of the COVID-19
pandemic, partially offset by costs related to the business process modernization program that began during fiscal 2020.
Restructuring Expenses. Restructuring expenses for fiscal 2019 relate to our business transformation plan which was completed at the end of fiscal 2019.
Litigation Provision. We recorded a $90.0 million litigation provision related to antitrust lawsuits during fiscal 2019. Additional information on the
litigation provision is contained in Item 8 of Part II, "Financial Statements and Supplementary Data", Note 18 - Commitments and Contingencies.
Interest Expense. Interest expense for fiscal 2020 increased by $5.2 million as compared to fiscal 2019 due to higher interest rates and higher average debt
levels in fiscal 2020 compared to fiscal 2019.
Loss from Equity Method Investment. During fiscal 2020, we recorded a $2.7 million loss related to an equity-method investment. In addition, during
fiscal 2019, we recorded a $17.0 million loss from an equity method investment related to the termination of a joint-venture contract. Refer to Note 15 -
Investments for additional information on equity method investments.
Other Income, Net. Other income, net for fiscal 2020 increased by $16.5 million as compared to fiscal 2019 due largely to the recognition of income
related to a transition services agreement in connection with the sale of the Digital Marketing Business.
Provision for Income Taxes. Income tax expense was $108.8 million and $48.6 million for fiscal 2020 and 2019, respectively. The effective tax rate,
expressed by calculating the income tax expense as a percentage of Earnings before income taxes, was 29.1% for fiscal 2020 and differed from the U.S.
federal statutory rate of 21.0% primarily due to state and local income taxes, a valuation allowance for capital loss carryforward credits triggered by a
change in estimate of the expected capital gain associated with the sale of the Digital Marketing Business, withholding taxes on foreign earnings that are no
longer indefinitely reinvested, offset by a benefit related to a refund of prior year state taxes. The effective tax rate for fiscal 2019 was 19.9% and differed
from the U.S. federal statutory rate of 21.0% primarily due to a decrease in a valuation allowance related to the estimated capital gain associated with the
sale of the Digital Marketing Business, an increase in a valuation allowance related to a new capital loss generated from termination of a joint venture, the
benefit of US tax credits, partially offset by the unfavorable impact of state and local taxes.
Net Loss from Discontinued Operations. Net loss from discontinued operations reflect the results of the International Business and the Digital Marketing
Business. During fiscal 2020, net earnings for the International Business decreased due to one-time employee termination benefits related to a restructuring
plan and customer pricing concessions in response to the COVID-19 pandemic. During fiscal 2019, the Digital Marketing Business was impacted by a
$168.7 million goodwill impairment charge. On April 21, 2020, we completed the sale of the Digital Marketing Business and recorded a total loss on sale
of $96.3 million. Refer to Note 4 - Discontinued Operations for additional information.
Net Earnings Attributable to CDK. Net earnings attributable to CDK for fiscal 2020 increased by $83.5 million as compared to fiscal 2019. The increase
in net earnings attributable to CDK was primarily due to the factors previously discussed.
32
Consolidated Non-GAAP Results. The tables below present the reconciliation of the most directly comparable GAAP measures to adjusted provision for
income taxes, adjusted net earnings attributable to CDK, and adjusted diluted earnings attributable to CDK per share.
Year Ended June 30,
Change
2020
2019
$
%
Revenue
$
1,639.0
$
1,593.0
$
46.0
3 %
Earnings before income taxes
$
374.0
$
243.7
$
130.3
53 %
Margin %
22.8 %
15.3 %
Stock-based compensation expense
19.2
29.0
(9.8)
Amortization of acquired intangible assets
15.3
14.6
0.7
Transaction and integration-related costs
9.5
13.2
(3.7)
Legal and other expenses related to regulatory and competition matters
19.4
111.2
(91.8)
Business process modernization program
16.1
—
16.1
Restructuring expenses
—
16.6
(16.6)
Other business transformation expenses
—
18.7
(18.7)
Impairment of intangible assets
—
14.9
(14.9)
Officer transition expense
—
6.4
(6.4)
Net adjustments related to loss from equity method investment
2.2
—
2.2
ELEAD joint venture termination
—
17.0
(17.0)
Adjusted earnings before income taxes
$
455.7
$
485.3
$
(29.6)
(6)%
Adjusted margin %
27.8 %
30.5 %
Year Ended June 30,
Change
2020
2019
$
%
Provision for income taxes
$
108.8
$
48.6
$
60.2
124 %
Effective tax rate
29.1 %
19.9 %
Income tax effect of pre-tax adjustments
19.9
48.5
(28.6)
Income tax effect for foreign earnings previously deemed indefinitely reinvested
(2.7)
—
(2.7)
Change in deferred tax valuation allowance
(14.8)
14.8
(29.6)
Impact of U.S. tax reform
0.3
0.6
(0.3)
Adjusted provision for income taxes
$
111.5
$
112.5
$
(1.0)
(1)%
Adjusted effective tax rate
24.5 %
23.2 %
(1)
(1)
(1) (2)
(1) (3)
(1) (4)
(5)
(6)
(1) (7)
(1) (7)
(8)
(9)
(10)
(11)
(1)
(1)
(12)
(13)
(14)
(15)
(1)
33
Year Ended June 30,
Change
2020
2019
$
%
Net earnings
$
214.5
$
131.9
$
82.6
63 %
Less: net earnings attributable to noncontrolling interest
7.0
7.9
Net earnings attributable to CDK
207.5
124.0
83.5
67 %
Net (earnings) loss from discontinued operations
50.7
63.2
(12.5)
Stock-based compensation expense
19.2
29.0
(9.8)
Amortization of acquired intangible assets
14.9
14.3
0.6
Transaction and integration-related costs
9.5
13.2
(3.7)
Legal and other expenses related to regulatory and competition matters
19.3
111.0
(91.7)
Business process modernization program
16.1
—
16.1
Restructuring expenses
—
16.5
(16.5)
Other business transformation expenses
—
18.7
(18.7)
Impairment of intangible assets
—
14.9
(14.9)
Officer transition expense
—
6.4
(6.4)
Net adjustments related to loss from equity method investment
2.2
—
2.2
ELEAD joint venture termination
—
17.0
(17.0)
Income tax effect of pre-tax adjustments
(19.9)
(48.5)
28.6
Income tax effect for foreign earnings previously deemed indefinitely reinvested
2.7
—
2.7
Change in deferred tax valuation allowance
14.8
(14.8)
29.6
Impact of U.S. tax reform
(0.3)
(0.6)
0.3
Adjusted net earnings attributable to CDK
$
336.7
$
364.3
$
(27.6)
(8)%
Year Ended June 30,
Change
2020
2019
$
%
Diluted earnings attributable to CDK per share
$
1.70
$
0.98
$
0.72
73 %
Net (earnings) loss from discontinued operations
0.42
0.50
Stock-based compensation expense
0.16
0.23
Amortization of acquired intangible assets
0.12
0.11
Transaction and integration-related costs
0.08
0.10
Legal and other expenses related to regulatory and competition matters
0.15
0.88
Business process modernization program
0.13
—
Restructuring expenses
—
0.13
Other business transformation expenses
—
0.15
Impairment of intangible assets
—
0.12
Officer transition expense
—
0.05
Net adjustments related to loss from equity method investment
0.02
—
ELEAD joint venture termination
—
0.13
Income tax effect of pre-tax adjustments
(0.16)
(0.38)
Income tax effect for foreign earnings previously deemed indefinitely reinvested
0.02
—
Change in deferred tax valuation allowance
0.12
(0.12)
Adjusted diluted earnings attributable to CDK per share
$
2.76
$
2.88
$
(0.12)
(4)%
Weighted average common shares outstanding:
Diluted
122.1
126.4
(16)
(1) (2)
(1) (3) (17)
(1) (4)
(5) (17)
(6)
(1) (7) (17)
(1) (7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(1)
(16)
(1) (2)
(1) (3) (17)
(1) (4)
(5) (17)
(6)
(1) (7) (17)
(1) (7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(1)
34
The table below presents the reconciliation of net earnings attributable to CDK to adjusted EBITDA.
Year Ended June 30,
Change
2020
2019
$
%
Net earnings attributable to CDK
$
207.5
$
124.0
$
83.5
67 %
Margin %
12.7 %
7.8 %
Net earnings attributable to noncontrolling interest
7.0
7.9
(0.9)
Net (earnings) loss from discontinued operations
50.7
63.2
(12.5)
Provision for income taxes
108.8
48.6
60.2
Interest expense
144.1
138.9
5.2
Depreciation and amortization
91.7
80.4
11.3
Stock-based compensation expense
19.2
29.0
(9.8)
Transaction and integration-related costs
9.5
13.2
(3.7)
Legal and other expenses related to regulatory and competition matters
19.4
111.2
(91.8)
Business process modernization program
16.1
—
16.1
Restructuring expenses
—
16.6
(16.6)
Other business transformation expenses
—
18.7
(18.7)
Impairment of intangible assets
—
14.9
(14.9)
Officer transition expense
—
6.4
(6.4)
Net adjustments related to loss from equity method investment
3.3
—
3.3
ELEAD joint venture termination
—
17.0
(17.0)
Adjusted EBITDA
$
677.3
$
690.0
$
(12.7)
(2)%
Adjusted margin %
41.3 %
43.3 %
_______________________
(1) Excludes amounts attributable to discontinued operations.
(2) Stock-based compensation expense included in cost of revenue and selling, general and administrative expenses.
(3) Amortization of acquired intangible assets consists of non-cash amortization of intangible assets such as customer lists, purchased software, and trademarks acquired in
connection with business combinations. We exclude the impact of amortization of acquired intangible assets because these non-cash amounts are significantly impacted by
the timing and size of individual acquisitions and do not factor into our budgeting process, financial and operational decision making, target leverage calculations, and
determination of incentive-based pay.
(4) Transaction and integration-related costs include: (i) legal, accounting, outside service fees, and other costs incurred in connection with assessment and integration of
acquisitions and other strategic business opportunities; and (ii) post-close adjustments to acquisition-related contingent consideration, included in cost of revenue and
selling, general and administrative expenses.
(5) Legal and other expenses, related to regulatory and competition matters included in selling, general and administrative expenses and litigation provision.
(6) Business process modernization program designed to improve the way we do business for our customers through best-in-class product offerings, processes, governance
and systems. The business process modernization program includes a comprehensive redesign in the way we go to market, including the quoting, contracting, fulfilling, and
invoicing processes, and the systems and tools we use. The program is an investment to implement holistic business reform, including the design and implementation of a
new ERP system. The expense is included in cost of revenue and selling, general and administrative expenses.
(7) Restructuring expense and other transformation expenses in fiscal 2019 relate to expenses incurred in connection with our business transformation plan. These charges
are included in cost of revenue and selling, general and administrative expenses.
(8) Impairment of intangible assets consists of the write-off of certain intangible assets and is reported in cost of revenue.
(9) Officer transition expense includes severance expense in connection with officer departures included in cost of revenue and selling, general and administrative expenses.
(10) Net adjustments related to loss from equity method investment includes certain portions of earnings attributable to an equity interest owned by CDK included in loss
from equity method investment.
(11) Loss related to ELEAD joint venture contract termination included in loss from equity method investment.
(12) Income tax effect of pre-tax adjustments calculated at applicable statutory rates net of applicable permanent differences.
(18)
(16)
(1) (19)
(20)
(1) (21)
(1) (2)
(1) (4)
(5)
(6)
(1) (7)
(1) (7)
(10)
(11)
(10)
(11)
35
(13) True-up of income tax expense for cumulative withholding tax associated with historical foreign earnings that are no longer considered indefinitely reinvested as of
March 31, 2020. The change in assertion was made in response to the uncertainty related to the COVID-19 pandemic and its potential impact on CDK’s liquidity needs.
(14) In fiscal 2019, decrease in valuation allowance associated with a deferred tax asset for a capital loss carryforward which the Company expected to utilize in connection
with the plan to divest the Digital Marketing Business. In fiscal 2020, based on new information about the plan for the sale, the valuation allowance was restored.
(15) In fiscal 2020, a one-time tax benefit for an adjustment of an accrual for foreign withholding taxes related to undistributed earnings as a result of the Tax Reform Act. In
fiscal 2019, a $0.6 million tax expense due to a true-up to the one-time transition tax pursuant to the Tax Reform Act.
(16) Net (earnings) loss from discontinued operations associated with our sale of the International Business that closed on March 1, 2021, and the divestiture of the Digital
Marketing Business that closed on April 21, 2020.
(17) The portion of expense related to noncontrolling interest has been removed from amortization of acquired intangible assets, and legal and other expenses related to
regulatory and competition matters for the years ended June 30, 2020 and 2019. The portion of expense related to noncontrolling interest has been removed from
restructuring expenses for the year ended June 30, 2019.
(18) Net earnings attributable to noncontrolling interest included in the financial statements.
(19) Provision for income taxes included in the financial statements.
(20) Interest expense included in the financial statements.
(21) Depreciation and amortization expense included in the financial statements.
Adjusted Earnings Before Income Taxes. Adjusted earnings before income taxes for fiscal 2020 decreased by $29.6 million as compared to fiscal 2019.
Adjusted margin decreased from 30.5% to 27.8%. Adjusted earnings before income taxes were unfavorably impacted by the COVID-19 pandemic, a
decrease in Partner Program revenue, higher investments in strategic growth initiatives, an increase in amortization resulting from capitalized software, and
higher interest expense, partially offset by growth in the core business.
Adjusted Provision for Income Taxes. Adjusted income tax expense was $111.5 million and $112.5 million for fiscal 2020 and 2019, respectively. The
adjusted effective tax rate, expressed by calculating the adjusted income tax expense as a percentage of Adjusted earnings before income taxes, was 24.5%
for fiscal 2020, and differed from the U.S. federal statutory rate of 21.0% primarily due to state and local income taxes. The adjusted effective tax rate for
fiscal 2019 was 23.2% and differed from the U.S. federal statutory rate of 21.0% primarily due to the impact of state and local taxes, partially offset by the
benefit of U.S. tax credits.
Adjusted Net Earnings Attributable to CDK. Adjusted net earnings attributable to CDK for fiscal 2020 decreased by $27.6 million as compared to fiscal
2019. The decrease in Adjusted net earnings attributable to CDK was primarily due to the items discussed above in adjusted earnings before income taxes
and by the associated tax effect.
Adjusted EBITDA. Adjusted EBITDA for fiscal 2020 decreased by $12.7 million as compared to fiscal 2019. Adjusted margin decreased from 43.3% to
41.3%. Adjusted EBITDA was unfavorably impacted by the COVID-19 pandemic, a decrease in Partner Program revenue and higher investments in
strategic growth initiatives, partially offset by growth in the core business.
36
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Refer to Impacts of COVID-19 in the Results of Operations section of Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for additional information about liquidity and capital resources.
Capital Structure Overview
Our principal source of liquidity is derived from cash generated through operations. At present, and in future periods, we expect cash generated by our
operations, together with cash and cash equivalents and borrowings from the capital markets, including our revolving credit facility, to be sufficient to
cover our cash needs for working capital, capital expenditures, strategic acquisitions, and anticipated quarterly dividends and stock repurchases.
As of June 30, 2021, cash and cash equivalents were $157.0 million, total CDK stockholders' equity was $480.8 million, and total debt was $1,593.6
million, which is net of unamortized financing costs of $17.3 million. Working capital as of June 30, 2021 was $201.1 million as compared to $179.5
million as of June 30, 2020. Working capital as used herein excludes current maturities of long-term debt and finance lease liabilities.
Our borrowings consist of 5.00% senior notes with a $500.0 million aggregate principal amount due in 2024, 4.875% senior notes with a $600.0 million
aggregate principal amount due in 2027, and 5.250% senior notes with a $500.0 million aggregate principal amount due in 2029. Additionally, we have a
$750.0 million revolving credit facility, of which none was drawn as of June 30, 2021.
On March 1, 2021, we repaid indebtedness of $566.0 million under the three-year and the five-year term loan facilities. As a result of this repayment, we
recorded expenses for the write-off of unamortized debt financing costs of $2.2 million in loss on extinguishment of debt in the Consolidated Statements of
Operations.
On April 23, 2021, we paid all indebtedness under the 2026 notes. The redemption was funded from cash on hand and lowered annual interest expense by
$29.4 million. As a result of this repayment, we recorded expenses of $18.5 million for the call premium and $4.8 million for the write-off of unamortized
debt financing costs in loss on extinguishment of debt in the Consolidated Statements of Operations.
On May 24, 2021, we entered into an amendment of our revolving credit facility, which includes an extension of its maturity from August 2023 to May
2026, and amendments to its financial covenants. The amended financial covenants provide that (i) the ratio of our total consolidated indebtedness to
consolidated EBITDA ("Leverage Ratio") may not exceed: 3.75 to 1.00. Upon the occurrence of certain acquisitions for each of the four consecutive fiscal
quarters immediately following such certain acquisitions (including the fiscal quarter in which such certain acquisition was consummated), the ratio set
forth above will be increased to 4.25 to 1.00, and (ii) the ratio of consolidated EBITDA to consolidated interest expense may not be less than 3.00 to 1.00.
Our long-term credit ratings and senior unsecured debt ratings are Ba1 (Stable Outlook) with Moody's, and BB+ (Negative Outlook) with S&P, which are
non-investment grades.
In the normal course of business, we also enter into contracts in which we make representations and warranties that relate to the performance of our
services and products. We do not expect any material losses related to such representations and warranties.
Return of Capital Plan. Our return of capital plan is a component of our broader capital allocation strategy. Our top priorities for capital allocation will
continue to be a thoughtful balance between: (i) organic investments that will continue to accelerate the growth and performance of the business; (ii)
inorganic opportunities that are synergistic with our portfolio and would meaningfully provide additional profitable revenue and increased long-term value;
and (iii) return of capital to shareholders through a mix of common stock repurchases and dividends, while targeting a leverage ratio, measured as financial
debt, net of cash, divided by adjusted EBITDA, at a range of 2.5x to 3.0x net debt to adjusted EBITDA over the long-term.
Stock Repurchase Program. In January 2017, the Board of Directors authorized us to repurchase up to $2.0 billion of our common stock as part of our
return of capital plan, whereby we have repurchased approximately $1.5 billion of common stock through June 30, 2021. Under the authorization, and
subject to the restrictions of our credit agreements, as amended, we may continue to purchase our common stock in the open market or in privately
negotiated transactions from time to time as permitted by federal securities laws and other legal requirements. The actual timing, number, and price of any
shares repurchased will be determined at management's discretion and will depend on a number of factors, which may include the market price of the
shares, general market and economic conditions, the availability and cost of additional indebtedness, and other potential uses for free cash flow including,
but not limited to, potential acquisitions. The refinancing of our revolving credit facility in the fourth quarter of fiscal 2021 removed restrictions on
repurchases of our common stock. In the third quarter of fiscal 2021, we announced that we expect to repurchase $200 million to $250 million of our
common stock over a period of 12 to 18 months. We made stock repurchases of $12.1 million during fiscal 2021 as part of this program.
37
Dividends to Common Stockholders. A summary of 2021 dividend activity for our common stock is as follows:
Dividend Per Share
Declaration Date
Record Date
Payment Date
$0.15
August 6, 2020
September 1, 2020
September 30, 2020
0.15
November 12, 2020
December 1, 2020
December 30, 2020
0.15
February 24, 2021
March 8, 2021
March 30, 2021
0.15
June 10, 2021
June 21, 2021
June 30, 2021
$0.60
The payment of any future dividends will be at the discretion of our Board of Directors and will depend upon our results of operations, financial condition,
business prospects, capital requirements, contractual restrictions, any potential indebtedness we may incur, restrictions imposed by applicable law, tax
considerations and other factors that our Board of Directors deems relevant. In addition, our ability to pay dividends on our common stock will be limited
by restrictions on our ability to pay dividends or make distributions to our stockholders and on the ability of our subsidiaries to pay dividends or make
distributions to us, in each case, under the terms of our current and any future agreements governing our indebtedness.
Cash Flows. Our cash flows from operating, investing, and financing activities, as reflected in the Consolidated Statements of Cash Flows for fiscal 2021
and 2020, are summarized as follows:
Year Ended June 30,
Change
($ in millions)
2021
2020
$
Cash provided by (used in):
Operating activities, continuing operations
$
341.5
$
327.6
$
13.9
Operating activities, discontinued operations
(124.8)
47.5
(172.3)
Investing activities, continuing operations
(459.9)
(94.1)
(365.8)
Investing activities, discontinued operations
1,380.9
(14.2)
1,395.1
Financing activities, continuing operations
(1,213.8)
(344.8)
(869.0)
Financing activities, discontinuing operations
—
(1.1)
1.1
Effect of exchange rate changes on cash and cash equivalents, and restricted cash, including cash
classified in current assets held for sale
21.1
(9.8)
30.9
Net change in cash and cash equivalents, and restricted cash, including cash classified in current assets
held for sale
$
(55.0)
$
(88.9)
$
33.9
Net cash flows provided by operating activities from continuing operations increased by $13.9 million due to the timing of payments made to our vendors
and tax authorities, and cash received from our customers in the normal course of business including those related to our transition services agreement in
connection with the sale of the Digital Marketing Business and the International Business, partially offset by lower net earnings adjusted for non-cash
charges.
Net cash flows used in operating activities from discontinued operations increased by $172.3 million primarily due to the tax paid on the gain on sale of the
International Business in fiscal 2021.
Net cash flows used in investing activities from continuing operations increased by $365.8 million largely due the acquisition of Roadster and Square Root,
as well as an increase in capitalized software and capital expenditures.
Net cash flows provided by investing activities from discontinued operations increased by $1,395.1 million primarily due to the receipt of $1.4 billion of
net proceeds from the sale of the International Business in the third quarter of fiscal 2021.
Net cash flows used in financing activities from continuing operations increased by $869.0 million primarily due to the repayment of our term loans and
2026 notes in fiscal 2021.
38
Off-Balance Sheet Arrangements. As of June 30, 2021, we did not have any off-balance sheet arrangements consisting of transactions, agreements, or
other contractual arrangements to which an entity not consolidated in our financial statements was a party. However, in the normal course of operations, we
may enter into contractual obligations consisting of purchase commitments. Such obligations have been presented in Item 8 of Part II, "Financial Statement
and Supplementary Data", Note 18 - Commitments and Contingencies of this Annual Report on Form 10-K.
Related Party Agreements. Refer to Item 8 of Part II, "Financial Statement and Supplementary Data", Note 15 - Investments of this Annual Report on
Form 10-K for financial information regarding related party transactions.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes have been prepared in accordance with GAAP. The preparation of these financial statements
requires management to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenue, and expenses. We
continually evaluate the accounting policies and estimates used to prepare the consolidated financial statements. Estimates are based on historical
experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from estimates made
by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial
condition are discussed below.
Revenue Recognition. We recognize revenue in accordance with ASC 606 "Revenue from Contracts with Customers" ("ASC 606").
We determine the amount of revenue to be recognized through the following steps:
•
Identification of the contract, or contracts, with a customer;
•
Identification of the performance obligations in the contract;
•
Determination of the transaction price;
•
Allocation of the transaction price to the performance obligations in the contract; and
•
Recognition of revenue when, or as, we satisfy the performance obligations.
The majority of our revenue is generated from contracts with multiple performance obligations. A performance obligation is a promise in a contract to
transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct
performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. We are required to estimate the total consideration
expected to be received from contracts with customers. In limited circumstances, the consideration expected to be received may be variable based on the
specific terms of the contract.
We rarely license or sell products or services on a standalone basis. As such, we are required to develop the best estimate of standalone selling price of each
distinct good or service as the basis for allocating the total transaction price. The primary method used to estimate standalone selling price is the adjusted
market assessment approach, with some product categories using the expected cost plus a margin approach. When establishing standalone selling price, we
consider various factors which may include geographic region, current market trends, customer class, its market share and position, its general pricing
practices for bundled products and services, and recent contract sales data.
We apply significant judgment in order to identify and determine the number of performance obligations, estimate the total transaction price, determine the
allocation of the transaction price to each identified performance obligation, and determine the appropriate method and timing of revenue recognition.
We generate revenue from the following four categories: subscription, on-site licenses and installation, transaction, and other. Taxes collected from
customers and remitted to governmental authorities are presented on a net basis; that is, such taxes are excluded from revenue.
Subscription. CDK provides software and technology solutions for automotive retailers and OEMs, which includes:
•
DMSs and layered applications, where the software is hosted and provided on a SaaS basis.
•
Interrelated services such as installation, initial training, and data updates; and
39
•
Prior to adoption of ASC 842, subscription revenue included technology solutions in which hardware was provided on a service basis. This
revenue was previously classified as subscription revenue because, under lease accounting guidance in effect prior to ASC 842, substitution rights
were considered substantive.
Revenue for SaaS and other hosted service arrangements, are recognized ratably over the duration of the contract. We have determined its obligation under
these arrangements is to stand ready to perform the underlying services as required by the customer. The customer receives the benefit of the services and
we have the right to payment as the services are performed. A time-elapsed output method is used to measure progress as we transfer control evenly over
the duration of the contract.
On-site licenses and installation. On-site software arrangements include a license of intellectual property as the customer has the contractual right to take
possession of the software and the customer can either run the software on its own hardware or contract with another party unrelated to us to host the
software. The customer receives the right to use the software license upon its installation for the term of the arrangement. As such, we have concluded that
the software license is a distinct performance obligation and recognizes the transaction price allocated to on-site software upon installation. We also provide
maintenance and support of the software applications. Such maintenance and support services may include server and desktop support, bug fixes, and
support resolving other issues a customer may encounter in utilizing the software. Revenue allocated to support and maintenance is generally recognized
ratably over the contract period as customers simultaneously consume and receive benefits, given the support and maintenance comprise distinct
performance obligations that are satisfied ratably over time. A time-elapsed output method is used to measure progress as we transfer control evenly over
the duration of the contract.
Transaction. We receive fees per transaction for providing auto retailers interfaces with third parties to process credit reports, vehicle registrations, and
automotive equity mining. Transaction revenue is variable based on the volume of transactions processed. We have a right to payment as the transactions
are performed in an amount that corresponds directly with the value to the customer. As such, we recognize transaction revenue as the services are rendered
and in the amount to which it has the right to invoice. Transaction revenue for credit report processing and automotive equity mining are recorded in
revenue gross of costs incurred when we are substantively and contractually responsible for providing the service, software, and/or connectivity to the
customer, and controls the specified good or service before it is transferred to the customer. We recognize vehicle registration revenue net of the state
registration fee since we are acting as an agent and do not control the related goods and services before they are transferred to the customer.
Other. We provide consulting and professional services, including marketing campaign solutions, and sells hardware such as laser printers, networking and
telephony equipment, and related items. Consulting and professional services are either billed on a time and materials basis or on a fixed monthly, quarterly
or semi-annual basis based on the amount of services contracted. After the adoption of ASC 842, Other revenue also includes leasing revenue from
hardware where the customer has a right of use during the contract term under ASC 842, as hardware substitution rights are not considered substantive.
Stock-Based Compensation. Certain of our employees (a) have been granted stock options to purchase shares of our common stock and/or (b) have been
granted restricted stock or restricted stock units under which shares of our common stock vest based on the passage of time or achievement of performance
and market conditions.
We recognize stock-based compensation expense in net earnings based on the fair value of the award on the date of the grant. We determine the fair value
of stock options issued using a binomial option-pricing model. The binomial option-pricing model considers a range of assumptions related to volatility,
dividend yield, risk-free interest rate, and employee exercise behavior. Expected volatility utilized in the binomial option pricing model are based on a
combination of implied market volatility and historical volatility of our stock and a peer group of companies due to the limited trading history associated
with our common stock. Inclusion of our stock volatility in the valuation of future stock option grants may impact stock-based compensation expense
recognized. Similarly, the dividend yield is based on historical experience and expected future dividend payments. The risk-free rate is derived from the
U.S. Treasury yield curve in effect at the time of grant. The binomial option pricing model also incorporates exercise and forfeiture assumptions based on
an analysis of historical data. The expected life of a stock option grant is derived from the output of the binomial model and represents the period of time
that options granted are expected to be outstanding.
The grant date fair value of restricted stock and restricted stock units that vest upon achievement of service conditions is based on the closing price of our
common stock on the date of grant. We also grant performance-based awards that vest over a performance period. Under these programs, we communicate
"target awards" at the beginning of the performance period with possible payouts at the end of the performance period ranging from 0% to 260% of the
target awards. The fair value of performance-based awards subject to a market condition is determined by using a Monte Carlo simulation model. The
principal variable assumptions utilized in determining the grant date fair value of performance-based awards subject to a market condition include the risk-
free rate, stock volatility, dividend yield, and correlations between our stock price and the stock prices of the peer group of companies. The probability
associated with the achievement of performance conditions affects the vesting of our performance-based awards.
40
Expense is only recognized for those shares expected to vest. We adjust stock-based compensation expense (increase or decrease) when it becomes
probable that actual performance will differ from our estimate.
Income Taxes. Income tax expense is recognized for the amount of taxes payable or refundable for the current year. Deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for
operating losses and tax credit carryforwards. Management must make assumptions, judgments, and estimates to determine the provision for income taxes,
taxes payable or refundable, and deferred tax assets and liabilities. Our assumptions, judgments, and estimates take into consideration the realization of
deferred tax assets and changes in tax laws or interpretations thereof. Our income tax returns are subject to examination by various tax authorities. A
change in the assessment of the outcomes of such matters could materially impact our consolidated financial statements.
We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. In determining the need for a
valuation allowance, we consider future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. In the
event we determine that it is more likely than not that an entity will be unable to realize all or a portion of its deferred tax assets in the future, we would
increase the valuation allowance and recognize a corresponding charge to earnings in the period in which such a determination is made. Likewise, if we
later determine that it is more likely than not that the deferred tax assets will be realized, we would reverse the applicable portion of the previously
recognized valuation allowance. In order to realize deferred tax assets, we must be able to generate sufficient taxable income of the appropriate character in
the jurisdictions in which the deferred tax assets are located.
We recognize tax benefits for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is
measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax
benefits claimed in our income tax returns that do not meet these recognition and measurement standards. Assumptions, judgments, and the use of
estimates are required in determining whether the "more likely than not" standard has been met when developing the provision for income taxes.
If certain pending tax matters settle within one year, the total amount of unrecognized tax benefits may increase or decrease for all open tax years and
jurisdictions. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. We continually assess the likelihood and amount of
potential adjustments and adjust the income tax provision, the current taxes payable and deferred taxes in the period in which the facts that give rise to a
revision become known.
We account for the global intangible low taxed income ("GILTI") tax as a period cost when incurred. The GILTI provision is effective beginning in fiscal
2019.
Beginning in fiscal 2019, our accounting policy is to allocate goodwill impairment first to any permanent portion of goodwill (when there is an excess of
book goodwill over tax goodwill) and to record a period expense when the impairment occurs.
Goodwill. We test goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value may not be recoverable.
We test goodwill for impairment at the reporting unit level. A reporting unit is an operating segment or a component of an operating segment. We have
three reporting units with discrete financial information for each that are regularly reviewed by the chief operating decision maker when allocating
resources and assessing performance.
We test impairment by first comparing the fair value of each reporting unit to its carrying amount. If the carrying value of the reporting unit exceeds its fair
value, the difference, up to the amount of goodwill recorded for the reporting unit, is recognized as an impairment.
We estimate the fair value of our reporting units by weighting the results from the income approach, which is the present value of expected cash flows
discounted at a risk-adjusted weighted average cost of capital, and the market approach, which uses market multiples of companies in similar lines of
business. These valuation approaches require significant judgment and consider a number of factors including assumptions about the future growth and
profitability of our reporting units, the determination of appropriate comparable publicly traded companies in our industry, discount rates, and terminal
growth rates. An adverse change to the fair value of reporting units could result in an impairment charge which could be material to consolidated earnings.
41
Long-Lived Assets. We review our long-lived assets for impairment annually and whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value of the asset to
its undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash
flow, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value. Given the significance of our long-lived
assets, an adverse change to the fair value of our long-lived assets could result in an impairment charge which could be material to our consolidated
earnings.
Assets Held for Sale. We consider assets to be held for sale when management, with appropriate authority, approves and commits to a formal plan to
actively market the assets for sale at a price reasonable in relation to their estimated fair value, the assets are available for immediate sale in their present
condition, an active program to locate a buyer has been initiated, the sale of the assets is probable and expected to be completed within one year, and it is
unlikely that significant changes will be made to the plan. Upon designation as held for sale, we record the assets at the lower of their carrying value or
their estimated fair value, reduced for the cost to dispose the assets. Depending on the net realized value from the sale, the potential charge could be
material to our consolidated earnings.
Legal and Other Contingencies. From time to time, we are subject to various claims and is involved in various legal, regulatory, and arbitration
proceedings concerning matters arising in connection with the conduct of its business activities, including those noted in Item 8 of Part II, "Financial
Statements and Supplementary Data", Note 18 - Commitments and Contingencies. We routinely assess the likelihood of any adverse judgments or
outcomes related to these matters, as well as ranges of probable losses, by consulting with internal personnel involved with such matters as well as with
outside legal counsel handling such matters. We accrue for estimated losses for those matters where we believe that the likelihood of a loss has occurred, is
probable and the amount of the loss is reasonably estimable. The determination of the amount of such reserves is made after careful analysis of each matter.
The amount of such reserves may change in the future due to new developments or changes in approach such as a change in settlement strategy in dealing
with these matters. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made
with respect to their resolution.
Business Combinations. We account for business combinations using the acquisition method of accounting, which allocates the fair value of the purchase
consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase
consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and
liabilities assumed, management makes significant estimates and assumptions including discount rates and long-term growth rates. We may utilize third-
party valuation specialists to assist us in the allocation. Initial purchase price allocations are subject to revision within the measurement period, not to
exceed one year from the date of acquisition. Acquisition-related transaction costs and other expenses associated with business combinations are expensed
as incurred.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Refer to Item 8 of Part II, "Financial Statements and Supplementary Data", Note 3 - New Accounting Pronouncements of this Annual Report on Form 10-K
for financial information regarding recently issued and adopted accounting pronouncements including the effects on our results of operations, financial
condition, and cash flows.
42
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. We are subject to interest rate risk related to our revolving credit facility as this arrangement contains interest rates that are not fixed.
As of June 30, 2021, none of our revolving credit facility was drawn.
Foreign Currency Risk. We operate and transact business in various foreign jurisdictions and are therefore exposed to market risk from changes in foreign
currency exchange rates that could impact our financial condition, results of operations, and cash flows. We have not been materially impacted by
fluctuations in foreign currency exchange rates as a significant portion of our business is transacted in U.S. dollars, and is expected to continue to be
transacted in U.S. dollars or U.S. dollar-based currencies. As of June 30, 2021, operations in foreign jurisdictions were principally transacted in Canadian
dollars. A hypothetical change in all foreign currency exchange rates of 10% would have resulted in an increase or decrease in consolidated operating
earnings of approximately $4.6 million for the year ended June 30, 2021.
We primarily manage our exposure to these market risks through our regular operating and financing activities.
43
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
45
Consolidated Statements of Operations
47
Consolidated Statements of Comprehensive Income
48
Consolidated Balance Sheets
49
Consolidated Statements of Cash Flows
50
Consolidated Statements of Stockholders' Equity (Deficit)
51
Notes to the Consolidated Financial Statements
52
Notes to Consolidated Financial Statements
1 Basis of Presentation
52
2 Summary of Significant Accounting Policies
52
3 New Accounting Pronouncements
59
4 Discontinued Operations
60
5 Acquisitions
61
6 Revenue
63
7 Restructuring
64
8 Stock-Based Compensation
64
9 Employee Benefit Plans
67
10 Earnings per Share
67
11 Allowance for Credit Losses
68
12 Property, Plant and Equipment, Net
69
13 Leases
69
14 Goodwill and Intangible Assets, Net
72
15 Investments
72
16 Debt
73
17 Income Taxes
75
18 Commitments and Contingencies
79
19 Share Repurchase Transactions
81
20 Quarterly Financial Results (Unaudited)
82
Financial Statement Schedule
Schedule II—Valuation and Qualifying Accounts
83
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of
CDK Global, Inc.
Hoffman Estates, Illinois
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CDK Global, Inc. and subsidiaries (the "Company") as of June 30, 2021 and 2020, the
related consolidated statements of operations, comprehensive income, stockholders' (deficit) equity, and cash flows, for each of the three years in the period
ended June 30, 2021, and the related notes and the schedule listed in the Index at Item 8 (collectively referred to as the "financial statements"). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and 2020, and the results
of its operations and its cash flows for each of the three years in the period ended June 30, 2021, in conformity with accounting principles generally
accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's
internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 17, 2021, expressed an unqualified opinion on the
Company's internal control over financial reporting.
Changes in Accounting Principle
As discussed in Note 2 to the financial statements, effective July 1, 2019, the Company adopted the Financial Accounting Standards Board Accounting
Standards Codification 842, Leases, using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical
audit matter or on the accounts or disclosures to which it relates.
Revenue — Refer to Notes 2 and 6 to the financial statements
Critical Audit Matter Description
The Company generates revenue from the following four categories: subscription, on-site licenses and installation, transaction, and other. The majority of
the Company’s revenue is generated from contracts with multiple performance obligations, and the Company’s products and services are rarely licensed or
sold on a standalone basis. Due to the multiple element nature of the Company’s contracts, appropriate revenue recognition requires the Company to
exercise significant judgment in the following areas:
•
Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus
together, such as software licenses and related services that are sold in hosted service arrangements.
•
Determination of stand-alone selling prices for products and services.
•
Estimation of contract transaction price and allocation of the transaction price to identified performance obligations.
•
The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.
45
In addition, the Company’s subscription and on-site license and installation revenue consists of a significant volume of transactions, sourced from multiple
systems, databases, and other tools across different business entities. The processing and recording of revenue involves a combination of manual-intensive
data input and automation, including migrating, formatting, and combining significant volumes of data across multiple systems and interfaces, partially
facilitated by custom-built algorithms.
Given the complexity of certain of the Company’s contracts and judgments necessary to evaluate the revenue recognition considerations as noted above, the
volume of contracts, and the complex manual and automated processes to record revenue, performing procedures to audit revenue required a high degree of
auditor judgment and extensive audit effort, including involvement of professionals with expertise in information technology (IT).
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s accounting for contracts with customers included the following, among others:
•
We tested the effectiveness of controls over the review of customer contracts, including, among others the identification of performance
obligations, determination of stand-alone selling prices, estimating transaction price, and determination of pattern of delivery of performance
obligations.
•
With the assistance of our IT specialists, we:
–
Identified the significant systems used to process revenue transactions and tested the general IT controls over each of these systems,
including testing of user access controls, change management controls, and IT operations controls.
–
Performed testing of system interface controls and automated controls within the relevant revenue streams, as well as the controls
designed to determine the accuracy and completeness of revenue.
•
We selected a sample of customer contracts and performed the following, among others:
–
Obtained contract documents for each selection, including master agreements, and other documents that were part of the agreement.
–
Analyzed the contract to determine if arrangement terms that may have an impact on revenue recognition were identified and properly
considered in the evaluation of the accounting for the contract.
–
Confirmed the contract terms with the counterparty and performed alternative procedures in the event of nonreplies.
–
Tested management’s identification of distinct performance obligations by evaluating whether the underlying goods, services, or both
were highly interdependent and interrelated.
–
Evaluated the total transaction price determined by management based on the terms of the contract, including any variable consideration,
and recalculated the allocation of the total transaction price to each distinct performance obligation based on respective standalone selling
prices.
–
Evaluated the appropriateness of the selected pattern of revenue recognition for each performance obligation and tested
delivery/installation of the goods and services.
–
For a sample of revenue transactions, we performed detail transaction testing by agreeing the amounts recognized to source documents
and testing the mathematical accuracy of the recorded revenue.
•
We analyzed trends in revenue at the customer and product/service levels to identify unusual trends, patterns, or anomalies.
•
We evaluated the reasonableness of the Company’s methodology for estimating standalone selling prices.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
August 17, 2021
We have served as the Company's auditor since 2014.
46
CDK Global, Inc.
Consolidated Statements of Operations
(In millions, except share and per share amounts)
Year Ended June 30,
2021
2020
2019
Revenue
$
1,673.2
$
1,639.0
$
1,593.0
Expenses:
Cost of revenue
875.0
800.6
734.4
Selling, general and administrative expenses
360.9
338.7
357.0
Restructuring expenses
—
—
16.6
Litigation provision
12.0
—
90.0
Total expenses
1,247.9
1,139.3
1,198.0
Operating earnings
425.3
499.7
395.0
Interest expense
(124.6)
(144.1)
(138.9)
Loss on extinguishment of debt
(25.6)
—
—
Loss from equity method investment
(27.3)
(2.7)
(17.0)
Other income, net
36.9
21.1
4.6
Earnings before income taxes
284.7
374.0
243.7
Provision for income taxes
(94.5)
(108.8)
(48.6)
Net earnings from continuing operations
190.2
265.2
195.1
Net earnings (loss) from discontinued operations
852.8
(50.7)
(63.2)
Net earnings
1,043.0
214.5
131.9
Less: net earnings attributable to noncontrolling interest
8.7
7.0
7.9
Net earnings attributable to CDK
$
1,034.3
$
207.5
$
124.0
Net earnings (loss) attributable to CDK per share - basic:
Continuing operations
$
1.48
$
2.13
$
1.49
Discontinued operations
$
7.00
$
(0.42)
$
(0.50)
Total net earnings attributable to CDK per share - basic
$
8.48
$
1.71
$
0.99
Net earnings (loss) attributable to CDK per share - diluted:
Continuing operations
$
1.48
$
2.12
$
1.48
Discontinued operations
$
6.96
$
(0.42)
$
(0.50)
Total net earnings attributable to CDK per share - diluted
$
8.44
$
1.70
$
0.98
Weighted average common shares outstanding:
Basic
121.9
121.6
125.5
Diluted
122.6
122.1
126.4
See notes to the consolidated financial statements.
47
CDK Global, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
Year Ended June 30,
2021
2020
2019
Net earnings
$
1,043.0
$
214.5
$
131.9
Other comprehensive income (loss):
Currency translation adjustments
60.7
(19.2)
(17.8)
Reclassification of foreign currency loss to net income
37.9
—
—
Total other comprehensive income (loss)
98.6
(19.2)
(17.8)
Comprehensive income
1,141.6
195.3
114.1
Less: comprehensive income attributable to noncontrolling interest
8.7
7.0
7.9
Comprehensive income attributable to CDK
$
1,132.9
$
188.3
$
106.2
See notes to the consolidated financial statements.
48
CDK Global, Inc.
Consolidated Balance Sheets
(In millions, except per share par value)
June 30,
2021
2020
Assets
Current assets:
Cash and cash equivalents
$
157.0
$
80.8
Accounts receivable, net
236.4
242.0
Other current assets
168.9
148.4
Assets held for sale
—
214.4
Total current assets
562.3
685.6
Property, plant and equipment, net
71.8
96.7
Other assets
448.7
418.3
Goodwill
1,297.1
999.5
Intangible assets, net
332.7
229.5
Long-term assets held for sale
—
424.5
Total assets
$
2,712.6
$
2,854.1
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term debt and finance lease liabilities
$
7.1
$
20.7
Accounts payable
29.0
34.3
Accrued expenses and other current liabilities
188.1
188.3
Litigation liabilities
34.0
57.0
Accrued payroll and payroll-related expenses
81.5
52.5
Deferred revenue
28.6
44.6
Liabilities held for sale
—
129.4
Total current liabilities
368.3
526.8
Long-term liabilities:
Debt and finance lease liabilities
1,586.5
2,655.1
Deferred income taxes
111.4
76.4
Deferred revenue
40.4
39.4
Liabilities held for sale
—
40.6
Other liabilities
111.1
96.5
Total liabilities
2,217.7
3,434.8
Stockholders' Equity (Deficit):
Preferred stock, $0.01 par value: 50.0 shares authorized; none issued and outstanding
—
—
Common stock, $0.01 par value: 650.0 shares authorized; 160.3 and 160.3 shares issued, respectively; 121.5 and
121.5 shares outstanding, respectively
1.6
1.6
Paid-in capital
715.1
687.9
Retained earnings
1,997.4
1,045.5
Treasury stock, at cost: 38.8 and 38.8 shares, respectively
(2,306.0)
(2,305.2)
Accumulated other comprehensive income (loss)
72.7
(25.9)
Total CDK stockholders' equity (deficit)
480.8
(596.1)
Noncontrolling interest
14.1
15.4
Total stockholder's equity (deficit)
494.9
(580.7)
Total liabilities and stockholders' equity (deficit)
$
2,712.6
$
2,854.1
See notes to the consolidated financial statements.
49
CDK Global, Inc.
Consolidated Statements of Cash Flows
(In millions)
Year Ended June 30,
2021
2020
2019
Cash Flows from Operating Activities:
Net earnings
$
1,043.0
$
214.5
$
131.9
Less: net earnings (loss) from discontinued operations
852.8
(50.7)
(63.2)
Net earnings from continuing operations
190.2
265.2
195.1
Adjustments to reconcile net earnings from continuing operations to cash flows provided by
operating activities, continuing operations:
Depreciation and amortization
98.7
91.7
80.4
Asset impairment
4.1
—
19.3
Loss on extinguishment of debt
25.6
—
—
Loss from equity method investment
27.3
2.7
17.0
Deferred income taxes
30.8
4.9
(5.3)
Stock-based compensation expense
43.0
19.2
29.0
Other
6.9
23.1
9.8
Changes in assets and liabilities, net of effect from acquisitions of businesses:
Accounts receivable
13.8
(27.0)
(9.8)
Other assets
(65.2)
(47.3)
(44.5)
Accounts payable
(6.3)
(3.9)
(2.9)
Accrued expenses and other liabilities
(27.4)
(1.0)
92.9
Net cash flows provided by operating activities, continuing operations
341.5
327.6
381.0
Net cash flows provided by (used in) operating activities, discontinued operations
(124.8)
47.5
102.1
Net cash flows provided by operating activities
216.7
375.1
483.1
Cash Flows from Investing Activities:
Capital expenditures
(20.6)
(17.1)
(49.2)
Capitalized software
(74.8)
(57.0)
(36.9)
Proceeds from sale of property, plant and equipment
—
—
6.7
Acquisitions of businesses, net of cash acquired
(359.5)
—
(513.0)
Investment in certificates of deposit
—
(12.0)
—
Proceeds from maturities of certificates of deposit
—
12.0
—
Purchases of investments
(5.0)
(20.0)
(17.0)
Proceeds from investments
—
—
0.4
Net cash flows used in investing activities, continuing operations
(459.9)
(94.1)
(609.0)
Net cash flows provided by (used in) investing activities, discontinued operations
1,380.9
(14.2)
(14.2)
Net cash flows provided by (used in) investing activities
921.0
(108.3)
(623.2)
Cash Flows from Financing Activities:
Net (repayments of ) proceeds from revolving credit facilities
(15.0)
15.0
1,100.0
Repayments of long-term debt and finance lease liabilities
(1,098.5)
(271.2)
(806.5)
Dividends paid to stockholders
(73.0)
(72.9)
(74.8)
Repurchases of common stock
(12.1)
—
(524.1)
Proceeds from exercise of stock options
2.5
6.2
5.0
Withholding tax payments for stock-based compensation awards
(5.0)
(6.2)
(15.8)
Dividend payments to noncontrolling owners
(10.0)
(6.7)
(10.3)
Payments of debt financing costs
(2.7)
(3.7)
(11.7)
Acquisition-related payments
—
(5.3)
(10.8)
Net cash flows used in financing activities, continuing operations
(1,213.8)
(344.8)
(349.0)
Net cash flows used in financing activities, discontinued operations
—
(1.1)
—
Net cash flows used in financing activities
(1,213.8)
(345.9)
(349.0)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash, including cash
classified in current assets held for sale
21.1
(9.8)
(6.9)
Net change in cash, cash equivalents, and restricted cash, including cash classified in current
assets held for sale
(55.0)
(88.9)
(496.0)
Net change in cash classified in current assets held for sale
134.9
42.1
34.2
Net change in cash, cash equivalents, and restricted cash
79.9
(46.8)
(461.8)
Cash, cash equivalents, and restricted cash, beginning of period
97.3
144.1
605.9
Cash, cash equivalents, and restricted cash end of period
$
177.2
$
97.3
$
144.1
Year Ended June 30,
2021
2020
2019
Reconciliation of cash, cash equivalents, and restricted cash to the Consolidated Balance
Sheets:
Cash and cash equivalents
$
157.0
$
80.8
$
134.4
Restricted cash in funds held for clients included in other current assets
20.2
16.5
9.7
Total cash, cash equivalents, and restricted cash
$
177.2
$
97.3
$
144.1
Year Ended June 30,
2021
2020
2019
Supplemental Disclosure:
Cash paid for:
Income taxes and foreign withholding taxes, net of refunds, continuing operations
$
74.9
$
51.6
$
105.9
Income taxes and foreign withholding taxes, net of refunds, discontinued operations
174.0
2.5
18.3
Interest
119.8
135.9
130.0
Non-cash investing and financing activities:
Capitalized property and equipment obtained under lease
11.9
14.4
15.9
Lease liabilities incurred
(11.9)
(14.4)
(15.9)
Capital expenditures and capitalized software, accrued not paid
0.3
3.2
11.1
Consideration received - equity method investment
—
39.9
—
Consideration received - note receivable
—
24.4
—
Cash consideration not yet transferred
16.8
—
—
See notes to the consolidated financial statements.
50
CDK Global, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
(In millions)
Common Stock
Paid-in
Capital
Retained
Earnings
Treasury Stock
Accumulated Other
Comprehensive
Income
Total CDK
Stockholders'
Equity (Deficit)
Non-
controlling
Interest
Total
Stockholders'
Equity (Deficit)
Shares
Issued
Amount
Balance as of June 30, 2018
160.3
$
1.6
$
679.8
$
753.0
$
(1,810.7)
$
11.5
$
(364.8)
$
17.5
$
(347.3)
Net earnings
—
—
—
124.0
—
—
124.0
7.9
131.9
Foreign currency translation adjustments
—
—
—
—
—
(17.8)
(17.8)
—
(17.8)
Stock-based compensation expense and
related dividend equivalents
—
—
29.7
(0.3)
—
—
29.4
—
29.4
Common stock issued for the exercise and
vesting of stock-based compensation
awards, net
—
—
(34.0)
—
23.2
—
(10.8)
—
(10.8)
Dividends paid to stockholders ($0.60 per
share)
—
—
—
(74.8)
—
—
(74.8)
—
(74.8)
Repurchases of common stock
—
—
13.0
—
(537.1)
—
(524.1)
—
(524.1)
Dividend payments to noncontrolling
owners
—
—
—
—
—
—
—
(10.3)
(10.3)
Impact of adoption of ASC 606
—
—
—
109.7
—
(0.4)
109.3
—
109.3
Balance as of June 30, 2019
160.3
1.6
688.5
911.6
(2,324.6)
(6.7)
(729.6)
15.1
(714.5)
Net earnings
—
—
—
207.5
—
—
207.5
7.0
214.5
Foreign currency translation adjustments
—
—
—
—
—
(19.2)
(19.2)
—
(19.2)
Stock-based compensation expense and
related dividend equivalents
—
—
18.8
(0.7)
—
—
18.1
—
18.1
Common stock issued for the exercise and
vesting of stock-based compensation
awards, net
—
—
(19.4)
—
19.4
—
—
—
—
Dividends paid to stockholders ($0.60 per
share)
—
—
—
(72.9)
—
—
(72.9)
—
(72.9)
Dividend payments to noncontrolling
owners
—
—
—
—
—
—
—
(6.7)
(6.7)
Balance as of June 30, 2020
160.3
1.6
687.9
1,045.5
(2,305.2)
(25.9)
(596.1)
15.4
(580.7)
Net earnings
—
—
—
1,034.3
—
—
1,034.3
8.7
1,043.0
Impact of Adoption of ASC 326 - current
expected credit losses, net of tax
—
—
—
(8.2)
—
—
(8.2)
—
(8.2)
Foreign currency translation adjustments
—
—
—
—
—
60.7
60.7
—
60.7
Reclassification of foreign currency loss to
net income
—
—
—
—
—
37.9
37.9
—
37.9
Stock-based compensation expense and
related dividend equivalents
—
—
41.0
(1.2)
—
—
39.8
—
39.8
Common stock issued for the exercise and
vesting of stock-based compensation
awards, net
—
—
(13.8)
—
11.3
—
(2.5)
—
(2.5)
Dividends paid to stockholders ($0.60 per
share)
—
—
—
(73.0)
—
—
(73.0)
—
(73.0)
Repurchases of common stock
—
—
—
—
(12.1)
—
(12.1)
—
(12.1)
Dividend payments to noncontrolling
owners
—
—
—
—
—
—
—
(10.0)
(10.0)
Balance as of June 30, 2021
160.3
$
1.6
$
715.1
$ 1,997.4
$
(2,306.0)
$
72.7
$
480.8
$
14.1
$
494.9
See notes to the consolidated financial statements
51
CDK Global, Inc.
Notes to the Consolidated Financial Statements
(Tabular amounts in millions, except share and per share amounts)
Note 1. Basis of Presentation
Description of Business. CDK Global, Inc. (the "Company" or "CDK") is a leading provider of integrated data and technology solutions to the automotive,
heavy truck, recreation and heavy equipment industries. Focused on enabling end-to-end, omnichannel retail commerce through open, agnostic technology,
the Company provides solutions to dealers and original equipment manufacturers ("OEMs"), serving approximately 15,000 retail locations in North
America. The Company's solutions connect people with technology by automating and integrating all parts of the dealership and buying process, including
the acquisition, sale, financing, insuring, parts supply, repair and maintenance of vehicles.
Basis of Preparation. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). The
preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect assets, liabilities,
revenue, and expenses that are reported in the accompanying financial statements and footnotes thereto. Actual results may differ from those estimates and
assumptions.
On March 1, 2021, the Company completed the sale of the CDK International business ("International Business") to Francisco Partners. Following the sale
of the International Business, the Company is organized as a single operating segment. The assets and liabilities of the International Business were
classified as held for sale on the Consolidated Balance Sheets as of June 30, 2020. The financial results of the International Business are presented in net
earnings (loss) from discontinued operations in the Consolidated Statements of Operations for all periods presented. Certain prior year amounts have been
reclassified to conform to the current year presentation. Unless otherwise noted, discussion in these Notes to the Consolidated Financial Statements refers
to continuing operations. For additional information, refer to Note 4 - Discontinued Operations.
Effective July 1, 2020, the Company adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-13,
"Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). The comparative
information has not been restated and continues to be reported under the accounting standards in effect for the periods presented. For additional
information, refer to Note 11 - Allowance for Credit Losses.
Note 2. Summary of Significant Accounting Policies
Consolidation. The financial statements include the accounts of the Company and its wholly owned subsidiaries. In addition, the financial statements
include the accounts of Computerized Vehicle Registration ("CVR") in which CDK holds a controlling financial interest. Intercompany transactions and
balances between consolidated CDK businesses have been eliminated.
Business Combinations. The Company accounts for business combinations using the acquisition method of accounting, which allocates the fair value of
the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the
purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets
acquired and liabilities assumed, management makes significant estimates and assumptions. The Company may utilize third-party valuation specialists to
assist the Company in the purchase price allocation. Initial purchase price allocations are subject to revision within the measurement period, not to exceed
one year from the date of acquisition. Acquisition-related transaction and other costs associated with business combinations are expensed as incurred.
Restructuring. Restructuring expenses include employee-related costs, including severance and other termination benefits calculated based on long-
standing benefit practices and local statutory requirements. Restructuring liabilities are recognized at fair value in the period the liability is incurred. In
some jurisdictions, the Company has ongoing benefit arrangements under which the Company records estimated severance and other termination benefits
when such costs are deemed probable and estimable, approved by the appropriate corporate management, and if actions required to complete the
termination plan indicate that it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. In jurisdictions where there is
not an ongoing benefit arrangement, the Company records estimated severance and other termination benefits when appropriate corporate management has
committed to the plan and the benefit arrangement is communicated to the affected employees. Restructuring expenses may also include contract
termination costs. A liability for costs to terminate a contract before the end of its term is recognized at fair value when the Company terminates the
contract in accordance with its terms. Estimates are evaluated periodically to determine whether an adjustment is required.
Revenue Recognition. The Company determines the amount of revenue to be recognized through the following steps:
•
Identification of the contract, or contracts, with a customer;
52
•
Identification of the performance obligations in the contract;
•
Determination of the transaction price;
•
Allocation of the transaction price to the performance obligations in the contract; and
•
Recognition of revenue when, or as, the Company satisfies the performance obligations.
The majority of the Company’s revenue is generated from contracts with multiple performance obligations. A performance obligation is a promise to
transfer a distinct good or service to the customer, and is the unit of account in Accounting Standards Codification ("ASC") 606. A contract’s transaction
price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company is
required to estimate the total consideration expected to be received from contracts with customers. In limited circumstances, the consideration expected to
be received may be variable based on the specific terms of the contract.
The Company rarely licenses or sells products or services on a standalone basis. As such, the Company is required to develop its best estimate of
standalone selling price of each distinct good or service as the basis for allocating the total transaction price. The primary method used to estimate
standalone selling price is the adjusted market assessment approach, with some product categories using the expected cost plus a margin approach. When
establishing standalone selling price, the Company considers various factors which may include geographic region, current market trends, customer class,
its market share and position, its general pricing practices for bundled products and services, and recent contract sales data.
The Company applies significant judgment in order to identify and determine the number of performance obligations, estimate the total transaction price,
determine the allocation of the transaction price to each identified performance obligation, and determine the appropriate method and timing of revenue
recognition.
Taxes collected from customers and remitted to governmental authorities are presented on a net basis; that is, such taxes are excluded from revenue.
The Company generates revenue from the following four categories: subscription, on-site licenses and installation, transaction, and other. The Company
does not evaluate a contract for a significant financing component if payment is expected within one year from the transfer of the promised items to the
customer.
Subscription. CDK provides software and technology solutions for automotive retailers and OEMs, which includes:
•
Dealer Management Systems ("DMSs") and layered applications, which may be installed on-site at the customer’s location, or hosted and
provided on a software-as-a-service ("SaaS") basis, including ongoing maintenance and support;
•
Interrelated services such as installation, initial training, and data updates;
•
Prior to adoption of ASC 842 "Leases" ("ASC 842"), subscription revenue included technology solutions in which hardware was provided on a
service basis. This revenue was previously classified as subscription revenue because, under lease accounting guidance in effect prior to ASC 842,
substitution rights were considered substantive.
SaaS and other hosted service arrangements, which allow the customer continuous access to the software over the contract period without taking control of
the software, are provided on a subscription basis. The Company has concluded that under its SaaS and hosted service arrangements, the customer obtains
access to the Company’s software which resides and is maintained on its managed servers. The customer does not obtain the right to take possession of the
software. As such, the Company has concluded that its SaaS and hosted services arrangements do not include a software license. Furthermore, the
Company has concluded that while the support and maintenance and hosting services are capable of being distinct performance obligations, the obligations
are not distinct within the context of the contract. In addition, as the support and maintenance and hosting services are provided over the same period and
have the same pattern of transfer of control, the support and maintenance and hosting services are combined and recognized as a single performance
obligation. The Company may provide new customers with interrelated setup activities such as installation, initial training and data updates that the
Company must undertake to fulfill the contract. These are considered fulfillment activities that do not transfer service to the customer. In addition to the
core DMS software application, the customer may also contract for layered applications, which are each considered a distinct performance obligation.
Revenue for SaaS and other hosted service arrangements, are recognized ratably over the duration of the contract. The Company has determined its
obligation under these arrangements is to stand ready to perform the underlying services as required by the customer. The customer receives the benefit of
the services, and the Company has the right to payment as the services are performed. A time-elapsed output method is used to measure progress as the
Company transfers control evenly over the duration of the contract.
53
On-site licenses and installation. On-site software arrangements include a license of intellectual property as the customer has the contractual right to take
possession of the software and the customer can either run the software on its own hardware or contract with another party unrelated to the Company to
host the software. The customer receives the right to use the software license upon its installation for the term of the arrangement. As such, the Company
has concluded that the software license is a distinct performance obligation and recognizes the transaction price allocated to on-site software upon
installation. The Company also provides maintenance and support of the software applications. Such maintenance and support services may include server
and desktop support, bug fixes, and support resolving other issues a customer may encounter in utilizing the software. Revenue allocated to maintenance
and support is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given the support and
maintenance comprise distinct performance obligations that are satisfied ratably over time. A time-elapsed output method is used to measure progress as
the Company transfers control evenly over the duration of the contract. Accordingly, maintenance and support revenue for on-site licenses is included in
subscription revenue.
Transaction. The Company receives fees per transaction for providing auto retailers interfaces with third parties to process credit reports, vehicle
registrations, and automotive equity mining. Transaction revenue varies based on the volume of transactions processed. For transaction revenue, the
Company has a right to payment as the transactions are performed in an amount that corresponds directly with the value to the customer. As such, the
Company recognizes transaction revenue as the services are rendered and in the amount to which it has the right to invoice. Transaction revenue for credit
report processing and automotive equity mining is recorded in revenue on a gross basis, incurred when the Company is substantively and contractually
responsible for providing the service, software, and/or connectivity to the customer, and controls the specified good or service before it is transferred to the
customer. The Company recognizes vehicle registration revenue net of the state registration fee since it is acting as an agent and does not control the related
goods and services before they are transferred to the customer.
Other. The Company provides consulting and professional services, including marketing campaign solutions, and sells hardware such as laser printers,
networking and telephony equipment, and related items. Consulting and professional services are either billed on a time and materials basis or on a fixed
monthly, quarterly or semi-annual basis based on the amount of services contracted. Revenue from these services is recorded when the Company’s
obligation is satisfied. Where the Company’s obligation is to provide continuous services throughout the contract period and the customer receives the
benefit of those services as they are performed, the Company recognizes services revenue over time using a time-elapsed output method as the Company
believes the passage of time faithfully depicts the transfer of services to its customers. Where the professional service represents a single performance
obligation, the customer receives the benefit of the services only upon their completion, and the Company does not have the right to payment as the
services are performed, such services revenue is recognized upon completion.
The Company often sells hardware bundled with maintenance services and has concluded that these bundles include two distinct performance obligations.
The first performance obligation is to transfer the hardware product and the second performance obligation is to provide maintenance on the hardware and
its embedded software. As such, the transaction price allocated to the sold hardware is recognized upon delivery at which point the customer is able to
direct the use of, and obtain substantially all of the remaining benefits of the hardware. Upon delivery of the hardware, the Company generally has the right
to payment, the customer has legal title, physical possession of, and control of the hardware. The transaction price allocated to the maintenance of hardware
and its embedded software is recognized ratably over the duration of the contract as the customer simultaneously consumes and receives the benefit of this
maintenance. The Company has determined its obligation under these arrangements is to stand ready to perform the underlying services as required by the
customer. A time-elapsed output method is used to measure progress as the Company transfers control evenly over the duration of the contract. Hardware
maintenance is included in subscription revenue.
After the adoption of ASC 842, Other revenue also includes leasing revenue from hardware where the customer has a right of use during the contract term
under ASC 842, as hardware substitution rights are not considered substantive.
Income Taxes. Income tax expense is recognized for the amount of taxes payable or refundable for the current year. Deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for
operating losses and tax credit carryforwards. Management must make assumptions, judgments, and estimates to determine the provision for income taxes,
taxes payable or refundable, and deferred tax assets and liabilities. The Company's assumptions, judgments, and estimates take into consideration the
realization of deferred tax assets and changes in tax laws or interpretations thereof. The Company's income tax returns are subject to examination by
various tax authorities. A change in the assessment of the outcomes of such matters could materially impact the Company's consolidated financial
statements.
The Company records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. In determining the need
for a valuation allowance, the Company considers future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning
strategies. In the event the Company determines that it is more likely than not that an entity will be unable to realize all or a portion of its deferred tax
assets in the future, the Company would increase the valuation allowance and recognize a corresponding charge to earnings in the period in which such a
determination is made. Likewise, if the
54
Company later determines that it is more likely than not that the deferred tax assets will be realized, the Company would reverse the applicable portion of
the previously recognized valuation allowance. In order to realize deferred tax assets, the Company must be able to generate sufficient taxable income of
the appropriate character in the jurisdictions in which the deferred tax assets are located.
The Company recognizes tax benefits for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount
recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax
benefits are tax benefits claimed in the Company's income tax returns that do not meet these recognition and measurement standards. Assumptions,
judgments, and the use of estimates are required in determining whether the "more likely than not" standard has been met when developing the provision
for income taxes.
If certain pending tax matters settle within one year, the total amount of unrecognized tax benefits may increase or decrease for all open tax years and
jurisdictions. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. The Company continually assesses the likelihood
and amount of potential adjustments and adjusts the income tax provision, the current taxes payable and deferred taxes in the period in which the facts that
give rise to a revision become known.
The Company accounts for the Global Intangible Low Taxed Income ("GILTI") tax as a period expense when incurred. The GILTI provision is effective
beginning in fiscal 2019.
Beginning in fiscal 2019, accounting policy of the Company is to allocate goodwill impairment first to any permanent portion of goodwill (when there is an
excess of book goodwill over tax goodwill) and to record a period cost when the impairment occurs.
Stock-Based Compensation. Certain of the Company's employees have been granted (a) stock options to purchase shares of the Company’s common stock
and/or (b) restricted stock or restricted stock units under which shares of the Company's common stock vest based on the passage of time or achievement of
performance and market conditions. The Company recognizes stock-based compensation expense in net earnings based on the fair value of the award on
the date of the grant. The Company records the impact of forfeitures on stock compensation expense in the period the forfeitures occur. The Company
determines the fair value of stock options issued using a binomial option-pricing model. The binomial option-pricing model considers a range of
assumptions related to volatility, dividend yield, risk-free interest rate, and employee exercise behavior. Expected volatility utilized in the binomial option
pricing model is based on a combination of implied market volatility and historical volatility of peer companies. Similarly, the dividend yield is based on
historical experience and expected future dividend payments. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant.
The binomial option pricing model also incorporates exercises based on an analysis of historical data. The expected life of a stock option grant is derived
from the output of the binomial model and represents the period of time that options granted are expected to be outstanding.
The grant date fair value of restricted stock and restricted stock units that vest upon achievement of service conditions is based on the closing price of the
Company's common stock on the date of grant. The Company also grants performance-based awards that vest over a performance period. Certain
performance-based awards are further subject to adjustment (increase or decrease) based on a market condition defined as total stockholder return of the
Company’s common stock compared to a peer group of companies. The fair value of performance-based awards subject to a market condition is
determined using a Monte Carlo simulation model. The principal variable assumptions utilized in determining the grant date fair value of performance-
based awards subject to a market condition include the risk-free rate, stock volatility, dividend yield, and correlations between the Company's stock price
and the stock prices of the peer group of companies. The probability associated with the achievement of performance conditions affects the vesting of the
Company's performance-based awards. Expense is only recognized for those shares expected to vest. The Company adjusts stock-based compensation
expense (increase or decrease) when it becomes probable that actual performance will differ from the estimate.
Cash and Cash Equivalents. Investment securities with an original maturity of three months or less at the time of purchase are considered cash
equivalents.
Accounts Receivable, Net. Accounts receivable, net is primarily comprised of trade receivables and lease receivables, net of allowances. Trade receivables
consist of amounts due to the Company in the normal course of business, which are not collateralized and do not bear interest. Lease receivables primarily
relate to sales-type leases arising from the sale of hardware elements in bundled DMS or other integrated solutions. Lease receivables represent the current
portion of the present value of the minimum lease payments at the beginning of the lease term. The long-term portion of the present value of the minimum
lease payments is included in other assets on the Consolidated Balance Sheets.
55
Allowance for Credit Losses. The Company is exposed to credit losses primarily through the sales of its products and services. The majority of the
Company’s receivables are trade receivables due in less than one year. The Company’s receivables also include the short and long-term portions of contract
assets, lease receivables and other accrued and unbilled receivables. Refer to Note 6 - Revenue for more information about contract assets.
After the adoption of ASU 2016-13, which requires the application of a current expected credit loss impairment model ("CECL"), the Company identified
the following risk characteristics of its customers and the related receivables and financial assets: geographic region, major line of business (e.g.
Automotive, OEM, etc.), size or a combination of these characteristics. Receivables with similar risk characteristics have been grouped into pools. For each
pool, the Company considers the historical credit loss experience, current economic conditions, adjusted for external data and macroeconomic factors such
as unemployment rates in certain operating regions or automobile sales. Due to the short-term nature of trade receivables, the estimated amount of accounts
receivable that may not be collected is based on the aging of the receivable balances, the financial condition of customers and the Company’s historical loss
rates. For certain other financial assets, the expected credit losses are also evaluated based on the credit rating of the counterparty, or reasonable and
supportable forecasts of future economic conditions. Additionally, specific reserves are established for certain financial assets on an individual basis when
they no longer meet the criteria to be classified in a particular pool. Should a particular asset’s risk characteristics change, the Company will assess whether
the asset should be moved to another pool. This analysis and the review of credit quality indicators are performed at each quarter-end, or more often as
deemed necessary based on specific facts and circumstances.
The Company also carries financial assets that are attributable to the sale of the Digital Marketing Business and the International Business. These assets
primarily consist of a 10-year note receivable, receivables related to transition services agreements in connection with the sale of the businesses, and the
fair value of contingent consideration. Specific reserves are established for these assets if it is determined that there is a higher probability of default, which
considers the aging of the receivable balances and the financial condition of the counterparties.
The Company’s monitoring activities include timely account reconciliation, reviews of credit and collection performance, consideration of customers'
financial conditions and macroeconomic conditions. For trade receivables and unbilled accounts receivable, credit quality indicators relate to collection
history and the delinquency status of amounts due, which is determined based on the aging of such receivables. For certain other financial assets including
contract assets, lease receivables, other accrued and unbilled receivables, and financial assets attributable to the sale of the Digital Marketing Business and
the International Business, credit quality indicators are generally based on rating agency data, publicly available information and information provided by
customers which may affect their ability to pay. Financial assets are written off when they are determined to be uncollectible.
Prior to the adoption of CECL, the accounts receivable allowances for both trade receivables and lease receivables were estimated based on historical
collection experience, an analysis of the age of outstanding accounts receivable, and credit issuance experience. Receivables were considered past due if
payment was not received by the date agreed upon with the customers. Write-offs were made when management believed it was probable a receivable
would not be recovered.
Funds Receivable and Funds Held for Clients and Client Fund Obligations. Funds receivable and funds held for clients represent amounts received or
expected to be received from clients in advance of performing titling and registration services on behalf of those clients. These funds are restricted and
classified in other current assets on the Consolidated Balance Sheets. The total amount due to remit for titling and registration obligations with the
Department of Motor Vehicles is recorded to client fund obligations which is classified as accrued expenses and other current liabilities on the Consolidated
Balance Sheets. Funds receivable was $42.7 million and $40.7 million, and funds held for clients was $20.2 million and $16.5 million as of June 30, 2021
and 2020, respectively. Client fund obligation was $62.9 million and $57.2 million as of June 30, 2021 and 2020, respectively.
Property, Plant and Equipment, Net. Property, plant and equipment, net is stated at cost and depreciated over the estimated useful lives of the assets
using the straight-line method. Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful lives of the
improvements. The estimated useful lives of assets are primarily as follows:
Buildings
20 to 40 years
Furniture and fixtures
4 to 7 years
Data processing equipment
2 to 5 years
Goodwill. The Company performs an evaluation of goodwill, utilizing either a qualitative or quantitative impairment test. A qualitative assessment is
performed at least annually to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. The
Company performs a quantitative impairment test for each reporting unit every three years, or more frequently if circumstances indicate a potential
impairment. The annual test for impairment is conducted as of April 1. A
56
reporting unit is an operating segment or a component of an operating segment. Goodwill is not amortized but is subject to periodic testing for impairment
at the reporting unit level.
Under a qualitative assessment, the most recent quantitative assessment is used to determine if it is more likely than not that the reporting unit's goodwill is
impaired. As part of this qualitative assessment, the Company assesses relevant events and circumstances including macroeconomic conditions, industry
and market conditions, cost factors, overall financial performance, changes in share price and entity-specific events to determine if there is an indication of
impairment.
Under a quantitative assessment, goodwill impairment is identified by comparing the fair value of a reporting unit to its carrying amount, including
goodwill. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered impaired and an impairment charge is recognized in an
amount equal to that excess, not to exceed the carrying amount of goodwill. The fair value of a reporting unit is generally determined by using a weighted
combination of an income approach and a market approach, as this combination is considered the most indicative of the Company's fair value in an orderly
transaction between market participants. The Company currently applies a 100% income approach weighting to one of its reporting units due to the limited
publicly available information for guideline companies.
Under the income approach, the Company determines fair value based on estimated future cash flows of a reporting unit, discounted by an estimated
weighted average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect
to earn. The estimated future cash flows of each reporting unit are based on internally generated forecasts for the remainder of the respective reporting
period and the next five to ten years.
Under the market approach, the Company utilizes valuation multiples derived from publicly available information for guideline companies to provide an
indication of how much a knowledgeable investor in the marketplace would be willing to pay for a company. The valuation multiples are applied to the
reporting units.
Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue
growth rates, operating margins, discount rates and future market conditions, among others. Any changes in the judgments, estimates or assumptions used
could produce significantly different results.
Impairment of Long-Lived Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value.
Internal Use Software and Computer Software to be Sold, Leased, or Otherwise Marketed. The Company’s policy provides for the capitalization of
external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, the Company’s policy
also provides for the capitalization of certain payroll and payroll-related costs for employees who are directly associated with internal use computer
software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs
associated with preliminary project stage activities, training, maintenance, and all other post-implementation stage activities are expensed as incurred. The
Company also expenses internal costs related to minor upgrades and enhancements, as it is impracticable to separate these costs from normal maintenance
activities. The Company typically amortizes internal use software over a 3 to 8 years life.
The Company’s policy provides for the capitalization of certain costs of computer software to be sold, leased, or otherwise marketed. The Company
capitalizes software production costs upon reaching technological feasibility for a specific product. Technological feasibility is attained when software
products have a completed working model whose consistency with the overall product design has been confirmed by testing. Costs incurred prior to the
establishment of technological feasibility are expensed as incurred. The establishment of technological feasibility requires judgment by management and in
many instances is only attained a short time prior to the general release of the software. Maintenance-related costs are expensed as incurred.
Pursuant to these policies, the Company incurred expenses to research, develop, and deploy new and enhanced solutions of $79.3 million, $49.6 million,
and $57.6 million for fiscal 2021, 2020, and 2019, respectively. These expenses were classified in cost of revenue on the Consolidated Statements of
Operations.
Assets Held for Sale. The Company considers assets to be held for sale when management, with appropriate authority, approves and commits to a formal
plan to actively market the assets for sale at a price reasonable in relation to their estimated fair value, the assets are available for immediate sale in their
present condition, an active program to locate a buyer has been initiated, the sale of the assets is probable and expected to be completed in one year and it is
unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records the assets at the lower of their carrying
value or their estimated fair value, reduced for the cost to dispose the assets, and ceases to record depreciation and amortization expenses on the assets.
57
Assets and liabilities of a discontinued operation are reclassified for all comparative periods presented on the Consolidated Balance Sheets. For assets and
liabilities that meet the held for sale criteria but do not meet the definition of a discontinued operation, the Company reclassifies the assets and liabilities in
the period in which the held for sale criteria are met, but does not reclassify prior period amounts. Refer to Note 4 - Discontinued Operations for further
information regarding Company's assets and liabilities held for sale.
Discontinued Operations. The Company reports financial results for discontinued operations separately from continuing operations to distinguish the
financial impact of disposal transactions from ongoing operations. Discontinued operations reporting occurs only when the disposal of a component or a
group of components of the Company (i) meets the held-for-sale classification criteria, is disposed of by sale, or other than by sale, and (ii) represents a
strategic shift that will have a major effect on the Company's operations and financial results. The results of operations and cash flows of a discontinued
operation are restated for all comparative periods presented. Unless otherwise noted, discussion in the Notes to Consolidated Financial Statements refers to
the Company's continuing operations. Refer to Note 4 - Discontinued Operations for further information.
Fair Value Measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value
hierarchy has been established based on three levels of inputs, of which the first two are considered observable and the last unobservable.
•
Level 1: Inputs that are based upon quoted prices in active markets for identical assets or liabilities.
•
Level 2: Inputs, other than quoted prices included in Level 1, which are observable for the asset or liability, either directly or indirectly.
•
Level 3: Unobservable inputs where there is little or no market activity for the asset or liability. These inputs reflect management's best estimate of
what market participants would use to price the assets or liabilities at the measurement date.
The Company determines the fair value of financial instruments in accordance with ASC 820, "Fair Value Measurements." This standard defines fair value
and establishes a framework for measuring fair value in accordance with GAAP. Cash and cash equivalents, accounts receivable, other current assets,
accounts payable, and other current liabilities are reflected on the Consolidated Balance Sheets at cost, which approximates fair value due to the short-term
nature of these instruments. The carrying value of the Company's term loan facilities (as described in Note 16 - Debt), including accrued interest,
approximated fair value based on the Company's current estimated incremental borrowing rate for similar types of arrangements.
The Company has derivatives not designated as hedges which consisted of foreign currency forward contracts to offset the risks associated with the effects
of certain foreign currency exposure on intercompany loans. The Company recognized changes in fair value of the derivative instruments in other income,
net in the Consolidated Statements of Operations.
Foreign Currency. For foreign subsidiaries where the local currency is the functional currency, net assets are translated into U.S. dollars based on
exchange rates in effect for each period, and revenue and expenses are translated at average exchange rates in the periods. Gains or losses from balance
sheet translation of such entities are included in accumulated other comprehensive income on the Consolidated Balance Sheets. Currency transaction gains
or losses relate to intercompany loans denominated in a currency other than that of the loan counterparty, which do not eliminate upon consolidation.
Currency transaction gains or losses are included in other income, net on the Consolidated Statements of Operations.
Leases. The Company has lease arrangements where the Company acts as either a lessee or a lessor. The Company applies judgment in order to determine
if an arrangement contains a lease, to assess which party retains a material amount of economic benefit from the underlying asset, and to determine which
party holds control over the direction and use of the asset. The Company also applies judgment to determine whether the Company will exercise renewal
options, to identify substantive substitution rights over the asset, to determine the incremental borrowing rate, and to estimate the fair value of the leased
asset.
CDK as a Lessee. The Company has obligations under lease arrangements mainly for facilities, equipment, data centers, and vehicles. These leases have
original lease periods expiring between fiscal 2022 and 2027. The Company classifies leases as finance leases when there is either a transfer of ownership
of the underlying asset by the end of the lease term, the lease contains an option to purchase the asset that the Company is reasonably certain will be
exercised, the lease term is for the major part of the remaining economic life of the asset, the present value of the lease payments and any residual value
guarantee equals or substantially exceeds all the fair value of the asset, or the asset is of such a specialized nature that it will have no alternative use to the
lessor at the end of the lease term. When none of these criteria are met, the Company classifies leases as operating leases.
Several of the Company's leases include one or more options to renew. The Company does not assume renewal periods in its determination of lease term
unless it is reasonably certain that the Company will exercise the renewal option. The Company
58
considers leases with an initial term of 12 months or less as short-term in nature and does not record such leases on the balance sheets. The Company
records all other leases on the balance sheets with right-of-use ("ROU") assets representing the right to use the underlying asset for the lease term and lease
liabilities representing the obligation to make lease payments arising from the lease.
The Company recognizes ROU assets and lease liabilities based on the present value of lease payments over the lease term. The ROU asset is adjusted for
prepaid or deferred rent, lease incentives and impairments. The Company uses the incremental borrowing rate at the lease commencement date to
determine the present value of the lease payments as the implicit rate in the leases is generally not readily determinable. The incremental borrowing rate is
generally determined using factors such as treasury yields, the Company's credit rating and lease term, and may differ for individual leases.
In addition to fixed lease payments, several lease arrangements contain provisions for variable lease payments relating to utilities and maintenance costs or
rental increases not scheduled in the lease. Variable lease payments are expensed in the period in which the obligation for those payments is incurred. The
Company has elected to combine lease and non-lease components, such as fixed maintenance costs, as a single lease component in calculating ROU assets
and lease liabilities.
CDK as a Lessor. The Company’s hardware-as-a-service arrangements, in which the Company provides customers continuous access to CDK owned
hardware, such as networking and telephony equipment and laser printers, are accounted for as sales-type leases under ASC 842, primarily because they do
not contain substantive substitution rights. Since the Company elected to not reassess prior conclusions related to arrangements containing leases, the lease
classification, and the initial direct costs, only hardware leases that commenced or are modified on or subsequent to July 1, 2019, are accounted for under
ASC 842. Historically, the Company has accounted for these arrangements as a distinct performance obligation under the revenue recognition guidance and
recognized revenue over the term of the arrangement. Sales-type lease arrangements follow the Company’s customary contracting practices and, generally,
include a fixed monthly fee for the lease and non-lease components for the duration of the contract term. The Company does not typically provide renewal,
termination or purchase options to its customers.
The Company recognizes net investment in sales-type leases based on the present value of the lease receivable when collectibility is probable. The
Company accounts for lease and non-lease components such as maintenance costs, separately. Consideration is allocated between lease and non-lease
components based on stand-alone selling price in accordance with ASC 606, Revenue from Contracts with Customers.
Note 3. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements. The Company adopted ASU 2016-13 on July 1, 2020. Refer to Note 11 - Allowance for Credit Losses,
for the required disclosures related to the adoption of this standard.
In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on
Financial Reporting" ("ASU 2020-04"). This ASU provides optional guidance for a limited period of time to ease the burden in accounting for (or
recognizing the effects of) reference rate reform on financial reporting. In January 2021, the FASB issued ASU No. 2021-01, "Reference Rate Reform
(Topic 848), Scope" ("ASU 2021-01"), which expands the scope of Topic 848 to include derivative instruments impacted by discounting transition. These
ASUs would apply to companies meeting certain criteria that have contracts, derivatives, hedging relationships and other transactions that reference LIBOR
or another reference rate expected to be discontinued because of the reference rate reform. These standards are effective upon issuance and may be applied
retrospectively as of any date from the beginning interim period that includes March 12, 2020 or prospectively. The Company adopted ASU 2020-04 and
ASU 2021-01 with no material impact on the consolidated financial statements.
Recently Issued Accounting Pronouncements. In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the
Accounting for Income Taxes," ("ASU 2019-12"), which simplifies the accounting for income taxes in various areas. ASU 2019-12 is effective for public
business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted,
including adoption in interim or annual periods for which financial statements have not yet been issued. The Company adopted ASU 2019-12 on July 1,
2021. The adoption of the new standard will not have a material impact on the Company’s consolidated financial statements.
In July 2021, the FASB issued ASU No. 2021-05 "Leases (Topic 842): Lessors — Certain Leases with Variable Lease Payments," ("ASU 2021-05"), which
modifies ASC 842 to require lessors to classify leases as operating leases if they have variable lease payments that do not depend on an index or rate and
would have selling losses if they were classified as sales-type or direct financing leases. The amendments in ASU 2021-05 are effective for fiscal years
beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of
adoption on its consolidated financial statements.
59
Note 4. Discontinued Operations
International Business. On March 1, 2021, the Company completed its sale of the International Business to Francisco Partners for $1.5 billion in cash.
The Company recorded a pre-tax gain on sale of $967.7 million in fiscal 2021. The gain on sale remains subject to post-closing adjustments. The pre-tax
gain on sale includes a $37.9 million reclassification of net currency losses from accumulated other comprehensive income. The pre-tax gain on sale
excludes transaction costs of $32.4 million, which were recorded as selling, general and administrative expenses in the table below. The assets and
liabilities of the International Business were classified as held for sale on the Consolidated Balance Sheets as of June 30, 2020. The financial results are
presented in net earnings (loss) from discontinued operations in the Consolidated Statements of Operations for all periods presented. The Company expects
to provide limited services to Francisco Partners to assist in the integration of the International Business through early fiscal 2022.
Year Ended June 30,
2021
2020
2019
Revenue
$
223.5
$
321.1
$
321.8
Cost of revenue
101.4
165.9
165.4
Selling, general and administrative expenses
83.2
91.2
87.7
Restructuring expenses
11.2
14.2
11.4
Operating earnings
27.7
49.8
57.3
Interest expense
(0.1)
(0.2)
(0.2)
Other income, net
2.5
0.6
3.1
Earnings before income taxes
30.1
50.2
60.2
Gain on sale
967.7
—
—
Provision for income taxes
(153.3)
(11.6)
(13.6)
Net earnings from discontinued operations - International Business
$
844.5
$
38.6
$
46.6
The total assets and liabilities held for sale related to discontinued operations for the International Business as of June 30, 2020 are stated separately on the
Consolidated Balance Sheets and comprised the following items:
June 30, 2020
Assets:
Current assets:
Cash and cash equivalents
$
134.9
Accounts receivable
58.0
Prepaid and other current assets
21.5
Total current assets
214.4
Property, plant and equipment, net
12.4
Goodwill
349.0
Intangible assets, net
5.7
Other assets
57.4
Total assets held for sale
$
638.9
Liabilities:
Current liabilities:
Accounts payable
$
5.1
Deferred revenue
63.3
Accrued expenses and other current liabilities
35.5
Accrued payroll and payroll-related expenses
25.5
Total current liabilities
129.4
Long-term deferred revenue
13.4
Deferred income taxes
2.0
Other liabilities
25.2
Total liabilities held for sale
$
170.0
60
Digital Marketing Business. On April 21, 2020, the Company completed its sale of the Digital Marketing Business to Sincro LLC, a newly formed
company owned by Ansira Partners, Inc., ("Ansira"), which is a subsidiary of Advent International. Total consideration for the transaction was $71.2
million, consisting of a $24.4 million 10-year note receivable, a 15% equity interest in Ansira, and the fair value of other contingent consideration. The
Company recorded a total loss on sale of $94.4 million, of which $96.3 million was recorded in fiscal 2020. Pursuant to the transaction, the Company
continued to provide limited services through the third quarter of fiscal 2021.
During fiscal 2019, as a result of the Company's decision to sell the Digital Marketing business, the Company evaluated the reporting unit's goodwill for
impairment, which indicated that the carrying value was higher than its fair value. The decline in fair value was driven by a decrease in estimated future
earnings and an unfavorable change in the discount rate representing management’s assessment of increased risk with respect to the business forecasts
primarily due to business uncertainty after the public announcement of the planned sale of business and management's shift in focus to customer retention
instead of growth. As a result, the Company recorded a goodwill impairment charge of $168.7 million which is included as a component of discontinued
operations for the year ended June 30, 2019.
The following table summarizes the comparative financial results of discontinued operations which are presented in net earnings (loss) from discontinued
operations in the Consolidated Statements of Operations:
Years Ended June 30,
2021
2020
2019
Revenue
$
(0.4)
$
235.0
$
418.1
Expenses:
Cost of revenue
0.6
209.1
307.4
Selling, general and administrative expenses
0.2
36.5
30.5
(Gain) loss on sale
(1.9)
96.3
—
Goodwill impairment
—
—
168.7
Restructuring expenses
—
—
1.5
Total expenses
$
(1.1)
$
341.9
$
508.1
Earnings (loss) before income taxes
0.7
(106.9)
(90.0)
Benefit from (provision for) income taxes
7.6
17.6
(19.8)
Net earnings (loss) from discontinued operations - Digital Marketing Business
$
8.3
$
(89.3)
$
(109.8)
Note 5. Acquisitions
Fiscal 2021 Acquisitions
Roadster. On June 2, 2021, the Company acquired Roadster, Inc., ("Roadster"), a Palo Alto, California-based digital sales platform. Roadster's customer
relationship management ("CRM") solution enables dealers and OEMs to sell vehicles completely online, and to enhance the consumer retail experience.
The Company acquired all of the outstanding equity of Roadster. The acquisition is being recorded using the acquisition method of accounting, which
requires, among other things, the assets acquired and liabilities assumed to be recognized at their respective fair values as of the acquisition date. Under the
acquisition method, total consideration was determined to be $364.4 million, subject to customary adjustments. Total consideration includes the fair value
of contingent payments up to $14.5 million, for which the amount payable will vary depending on the occurrence of certain events over an 18-month period
after the closing.
The following table summarizes the amounts recognized for assets acquired and liabilities assumed as of the acquisition date, subject to the finalized
purchase price allocation:
Cash and cash equivalents
$
8.5
Intangible assets
74.8
Other assets
8.2
Other liabilities
(10.3)
Total identifiable net assets
$
81.2
Goodwill
283.2
Total consideration
$
364.4
61
The intangible assets acquired primarily relate to customer relationships, software, and trademarks, which are being amortized over a useful life of 10, 8
and 4 years, respectively. The weighted average useful life of the acquired intangible assets is 8 years. The goodwill resulting from this acquisition reflects
expected synergies resulting from adding Roadster products and processes to the Company's products and processes. The acquired goodwill is not
deductible for tax purposes.
Square Root. On February 1, 2021, the Company acquired Square Root, Inc. ("Square Root"), an Austin-based developer of data curation software for
OEMs. The Company acquired all of the outstanding equity of Square Root for a purchase price of up to $25.0 million. The purchase price includes a
contingent purchase price payment of up to $5.0 million, which becomes payable if certain performance conditions are met by Square Root over a two-year
period after the closing. The fair value of the contingent payments was $2.3 million as of June 30, 2021.
The results of operations for Roadster and Square Root have been included in the Consolidated Statements of Operations from the date of acquisition. The
pro forma effects of this acquisition are not significant to the Company's reported results for any period presented. Accordingly, no pro forma financial
statements have been presented herein.
Fiscal 2019 Acquisition
ELEAD1ONE. On September 14, 2018, the Company acquired the equity interests of ELEAD1ONE ("ELEAD"). ELEAD’s automotive CRM software
and call center solutions enable interaction between sales, service and marketing operations to provide dealers with an integrated customer acquisition and
retention platform. The acquisition of ELEAD was accounted for using the acquisition method of accounting, which required, among other things, the
assets acquired and liabilities assumed be recognized at their respective fair values as of the acquisition date. The acquisition was made pursuant to an
equity purchase agreement, which contained customary representations, warranties, covenants, and indemnities by the sellers and the Company. The
Company acquired all of the outstanding equity of ELEAD for a purchase price of $513.0 million, net of cash acquired of $7.0 million.
The following table summarizes the amounts recognized for assets acquired and liabilities assumed as of the acquisition date:
Cash and cash equivalents
$
7.0
Intangible assets
132.0
Other assets
37.1
Other liabilities
(35.5)
Total identifiable net assets
140.6
Goodwill
379.4
Total consideration
$
520.0
The amounts in the table above are reflective of measurement period adjustments made during fiscal year 2019, which did not have a significant impact on
the Consolidated Statements of Operations, balance sheet or cash flows.
The intangible assets acquired primarily relate to customer lists, software, and trademarks, which are being amortized over a weighted average useful life of
12 years. The goodwill resulting from this acquisition reflects expected synergies resulting from adding ELEAD products and processes to the Company's
products and processes. The acquired goodwill is deductible for tax purposes.
In December 2018, the Company sold the airplane acquired as part of the ELEAD acquisition for cash less costs to sell of $6.7 million. Given the short
time between the ELEAD acquisition and the sale of the acquired airplane, the final purchase price allocated to the airplane was adjusted to equal the cash
less costs to sell in accordance with ASC 805, "Business Combinations" and ASC 360, "Property, Plant and Equipment." As such, there was no gain or loss
recognized on the sale of the airplane.
The results of operations for ELEAD have been included in the Consolidated Statements of Operations from the date of acquisition. The pro forma effects
of this acquisition are not significant to the Company's reported results for any period presented. Accordingly, no pro forma financial statements have been
presented herein.
In addition to the acquisition, the Company entered into a joint venture agreement with the sellers. Under the terms of the joint venture agreement, the
Company contributed $10.0 million to the venture at the ELEAD acquisition closing, committed to an additional $10.0 million in contributions over time,
and acquired 50% ownership in the joint venture. The Company's contributions were expected to fund the initial operations of the joint venture. Under ASC
810, "Consolidation," the joint venture was determined to be a variable interest entity; however, the Company was not considered the primary beneficiary.
As such, the joint venture was accounted for as an equity method investment and the initial $10.0 million contribution was recorded as an investment on the
Consolidated Balance Sheets. During the fourth quarter of fiscal 2019, the Company entered into a joint venture termination agreement with the former
owners of ELEAD in exchange for a termination payment of $7.0 million. The initial $10.0 million
62
contribution and the $7.0 million termination payment were recorded as a loss from equity method investment in the Consolidated Statements of
Operations.
Note 6. Revenue
Contract Balances
Accounts Receivable
A receivable is recorded when an unconditional right to invoice and receive payment exists, such that only the passage of time is required before payment
of consideration is due. The Company receives payments from customers based upon contractual billing schedules. Payment terms can vary by contract but
the period between invoicing and when payments are due is not significant. The timing of revenue recognition may differ from the timing of invoicing to
customers. Included in accounts receivable on the Consolidated Balance Sheets are unbilled receivable balances which have not yet been invoiced. As of
June 30, 2021, the balance of accounts receivable, net of allowances for doubtful accounts, was $236.4 million, inclusive of unbilled receivables of $1.8
million. As of June 30, 2020, the balance of accounts receivable, net of allowances for doubtful accounts, was $242.0 million, inclusive of unbilled
receivables of $1.3 million.
Contract Assets
A contract asset is recognized when a conditional right to consideration exists and transfer of control has occurred. Contract assets are typically related to
subscription contracts where the transaction price allocated to the satisfied performance obligation exceeds the value of billings to-date. Contract assets are
reported in a net position on a contract-by-contract basis and are included in other current assets for the current portion and other assets for the long-term
portion on the Consolidated Balance Sheets. The Company regularly reviews contract asset balances for impairment, considering factors such as historical
experience, credit-worthiness, age of the balance, and other economic or business factors. Refer to Note 11 – Allowance for Credit Losses for more
information about contract assets exposure to credit losses. Contract asset impairments were not significant in the twelve months ended June 30, 2021.
Contract assets were $64.3 million and $77.2 million as of June 30, 2021 and 2020, respectively.
Deferred Revenue
The Company's deferred revenue primarily consists of payments received from customers, or such consideration that is contractually due, in advance of
providing the product or performing services. Deferred revenue is reported in a net position on a contract-by-contract basis at the end of each reporting
period. As of June 30, 2021 and June 30, 2020, the deferred revenue balance was $69.0 million and $84.0 million, respectively. For the years ended June
30, 2021, 2020 and 2019, the Company recognized revenue of $76.5 million, $99.8 million, and $112.5 million, respectively, related to its deferred
revenue.
Remaining Performance Obligations. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when,
or as, the performance obligation is satisfied. The following information represents the total transaction price for the remaining performance obligations as
of June 30, 2021 related to non-cancelable contracts, including contracts less than one year in duration, that is expected to be recognized over future
periods. In each case the fiscal period represents the year ended June 30.
As of June 30, 2021, the Company had $2.6 billion of remaining performance obligations which represent contracted revenue that has not yet been
recognized, including contracted revenue where the contract's original expected duration is one year or less. The Company expects to recognize
approximately $950.0 million of the remaining performance obligations as revenue for fiscal 2022, $700.0 million for fiscal 2023, $490.0 million for fiscal
year 2024, $290.0 million for fiscal 2025, $150.0 million for fiscal 2026, and $20.0 million thereafter. The remaining performance obligations exclude
future transaction revenue where revenue is recognized as the services are rendered and in the amount to which the Company has the right to invoice.
Costs to Obtain and Fulfill a Contract. The Company capitalizes certain contract acquisition costs consisting primarily of commissions incurred when
contracts are signed. The Company does not capitalize commissions related to contracts with a duration of less than one year; such commissions are
expensed in selling, general and administrative expenses when incurred. Costs to fulfill contracts are capitalized when such costs are direct and related to
transition or installation activities for hosted software solutions. Capitalized costs to fulfill contracts primarily include travel and employee compensation
and benefit related costs for the Company's implementation and training teams. Capitalized costs to obtain a contract and most costs to fulfill a contract are
amortized over a period of five years which represents the expected period of benefit of these costs. In instances where the contract term is significantly
less than five years, costs to fulfill are amortized over the contract term which the Company believes best reflects the period of benefit of these costs.
As of June 30, 2021 and 2020, the Company capitalized contract acquisition and fulfillment costs of $195.7 million and $178.7 million, respectively. The
Company expects that incremental commission fees incurred as a result of obtaining contracts and
63
fulfillment costs are recoverable. During fiscal 2021, 2020, and 2019, the Company recognized cost amortization of $73.9 million, $72.4 million, and $71.7
million, respectively, and there were no significant impairment losses.
Revenue Disaggregation. The following table presents revenue by category for twelve months ended June 30, 2021, 2020 and 2019:
Year Ended June 30,
2021
2020
2019
Subscription
$
1,313.9
$
1,306.0
$
1,283.3
On-site licenses and installation
9.2
10.8
7.9
Transaction
174.9
155.0
162.5
Other
175.2
167.2
139.3
Total Revenue
$
1,673.2
$
1,639.0
$
1,593.0
Note 7. Restructuring
Business Transformation Plan. During fiscal year ended June 30, 2015, the Company initiated a three-year business transformation plan designed to
increase operating efficiency and improve the Company's cost structure in its operations. As the Company executed the business transformation plan, the
Company continually monitored, evaluated and refined its structure, including its design, goals, term and estimate and allocation of total restructuring
expenses. As part of this ongoing review process, during fiscal 2017, the Company extended the business transformation plan by one year through fiscal
2019. The Company incurred $156.6 million of accumulative other business transformation expense to execute the plan through its completion at the end
of fiscal 2019. In addition, the Company has recognized cumulative restructuring expenses of $59.5 million since the inception of the business
transformation plan in fiscal 2015 through its completion at the end of fiscal 2019.
Restructuring expenses associated with the business transformation plan included employee-related costs, which represent severance and other termination-
related benefits calculated based on long-standing benefit practices and local statutory requirements, and contract termination costs, which include costs to
terminate facility leases. The business transformation plan was completed at the end of fiscal year 2019.
There were no outstanding restructuring liabilities as of June 30, 2021 and 2020.
Note 8. Stock-Based Compensation
Incentive Equity Awards Granted by the Company. The Company's 2014 Omnibus Award Plan ("2014 Plan") provides for the granting of incentive
stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards, and performance
compensation awards to employees, directors, officers, consultants, advisors, and those of the Company's affiliates. The 2014 Plan provides for an
aggregate of 12.0 million shares of the Company's common stock to be reserved for issuance and is effective for a period of ten years. As of June 30, 2021,
there were 2.7 million shares available for issuance under the 2014 Plan. The Company reissues treasury stock to satisfy issuances of common stock upon
option exercise, equity vesting, or grants of restricted stock.
The Company recognizes stock-based compensation expense associated with employee equity awards in net earnings based on the fair value of the awards
on the date of grant. The Company accounts for forfeitures as they occur. Stock-based compensation primarily consisted of the following:
Time-Based Stock Options and Performance-Based Stock Options. Time-based stock options and performance-based stock options have a term of ten
years. Upon termination of employment, unvested stock options are evaluated for forfeiture or modification, subject to the terms of the awards and
Company policies.
Time-based stock options are granted to employees at an exercise price equal to the fair market value of the Company's common stock on the date of grant
and are generally issued under a three or four-year graded vesting schedule.
Performance-based stock options are granted to the CEO at an exercise price equal to the fair market value of the Company's stock on the date of grant.
These awards vest, subject to the Company's stock price performance and the CEO's continued employment with the Company, over a three-year
performance period.
64
Time-Based Restricted Stock and Time-Based Restricted Stock Units. Time-based restricted stock and restricted stock units generally vest over a two
to five-year period. Upon termination of employment, unvested time-based awards are evaluated for forfeiture or modification, subject to the terms of the
awards and Company policies.
Time-based restricted stock cannot be transferred during the vesting period. Compensation expense related to the issuance of time-based restricted stock is
measured based on the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period. Employees are eligible to
receive cash dividends on the CDK shares awarded under the time-based restricted stock program during the restricted period.
Time-based restricted stock units are primarily settled in cash for non-U.S. recipients and may be settled in stock or cash for U.S. recipients at the discretion
of the Company and cannot be transferred during the restriction period. Compensation expense related to the issuance of time-based restricted stock units is
recorded over the vesting period and is initially based on the fair value of the award on the grant date. Cash-settled, time-based restricted stock units are
subsequently remeasured at each reporting date during the vesting period to the current stock value. For grants made prior to September 6, 2018, no
dividend equivalents are paid on units awarded during the restricted period. For grants made on or subsequent to September 6, 2018, U.S. recipients are
credited with dividend equivalents on units awarded during the restricted period, and no dividend equivalents are paid or credited on units awarded to non-
U.S. recipients during the restricted period.
Performance-Based Restricted Stock Units. Performance-based restricted stock units generally vest over a three-year performance period. Under these
programs, the Company communicates "target awards" at the beginning of the performance period with possible payouts at the end of the performance
period ranging from 0% to 260% of the "target awards". Certain performance-based awards are further subject to adjustment based on a market condition,
defined as total stockholder return of the Company's common stock compared to a peer group of companies. The probability associated with the
achievement of performance conditions affects the vesting of the Company's performance-based awards. Expense is only recognized for those shares
expected to vest. Upon termination of employment, unvested awards are evaluated for forfeiture or modification, subject to the terms of the awards and
Company policies.
Performance-based restricted stock units are settled in either cash or stock for employees whose home country is the U.S. at the discretion of the Company,
and are settled in cash for all other employees and cannot be transferred during the vesting period. Compensation expense related to the issuance of
performance-based restricted stock units settled in cash is recorded over the vesting period, is initially based on the fair value of the award on the grant date
and is subsequently remeasured at each reporting date to the current stock value during the performance period, based upon the probability that the
performance target will be met. Compensation expense related to the issuance of performance-based restricted stock units settled in stock is recorded over
the vesting period based on the fair value of the award on the grant date. Prior to settlement, dividend equivalents are earned on "target awards" under the
performance-based restricted stock unit program.
The following table represents stock-based compensation expense and the related income tax benefits for fiscal 2021, 2020, and 2019, respectively:
Year Ended June 30,
2021
2020
2019
Cost of revenue
$
14.1
$
6.1
$
2.9
Selling, general and administrative expenses
28.9
13.1
26.1
Total stock-based compensation expense
$
43.0
$
19.2
$
29.0
Income tax benefit
6.2
3.1
5.9
Stock-based compensation expense, net of tax
$
36.8
$
16.1
$
23.1
(1) Represents stock-based compensation expense exclusive of non-deductible executive compensation at the statutory tax rates. Excess tax benefits or shortfalls associated
with stock awards are excluded from this disclosure and presented separately in Note 17 - Income Taxes.
Stock-based compensation expense for fiscal 2021 consisted of $40.8 million of expense related to equity-classified awards and $2.2 million of expense
related to liability-classified awards. Total stock-based compensation expense for fiscal 2021 includes $3.9 million of cumulative adjustments related to the
achievement of financial performance metrics based on the outcome of fiscal 2021 associated with performance-based restricted stock units.
Stock-based compensation expense for fiscal 2020 consisted of $18.4 million of expense related to equity-classified awards and $0.8 million of expense
related to liability-classified awards. Total stock-based compensation expense for fiscal 2020 includes $6.9 million of cumulative adjustments related to the
achievement of financial performance metrics based on the outcome of fiscal 2020 associated with performance-based restricted stock units.
(1)
65
Stock-based compensation expense for fiscal 2019 consisted of $28.1 million of expense related to equity-classified awards and $0.9 million of expense
related to liability-classified awards. Total stock-based compensation expense for fiscal 2019 includes $11.2 million of additional expense for a cumulative
adjustment in the fourth quarter related to the achievement of financial performance metrics for performance based restricted stock.
As of June 30, 2021, the total unrecognized compensation cost related to non-vested stock options and restricted stock units was $2.9 million and $73.5
million, respectively, which will be amortized over the weighted average remaining requisite service periods of 1.8 years and 2.0 years, respectively. There
was no unrecognized compensation cost related to non-vested restricted stock awards as of June 30, 2021.
The activity related to the Company's incentive equity awards for fiscal 2021, including amounts attributable to the Company's discontinued operations,
consisted of the following:
Time-Based Stock Options
Number
of Options
(in thousands)
Weighted Average
Exercise Price
(in dollars)
Weighted Average
Remaining
Contractual Life (in
years)
Aggregate Intrinsic
Value (in millions)
Options outstanding as of June 30, 2020
822
$
47.85
Options granted
319
43.45
Options exercised
(70)
35.12
Options canceled
(42)
59.40
Options outstanding as of June 30, 2021
1,029
$
46.88
7.4
$
4.1
Exercisable as of June 30, 2021
412
$
48.22
5.7
$
1.6
The Company received proceeds from the exercise of stock options of $2.5 million, $6.2 million, and $5.0 million during fiscal 2021, 2020, and 2019,
respectively. The aggregate intrinsic value of stock options exercised during fiscal 2021, 2020, and 2019 was approximately $1.0 million, $3.3 million, and
$5.0 million, respectively.
The Binomial model used to determine the grant date fair value of the time-based stock options granted in the first quarter of fiscal 2021 used an expected
volatility based on the average of implied volatility and historical stock price volatility for the Company, the average of which was 33.0%, a risk-free
interest rate of 0.4%, an expected dividend yield of 1.4%, and weighted average expected life of 6 years.
Performance-Based Stock Options. There were no grants of performance-based stock options during the fiscal 2021.
Number
of Options
(in thousands)
Weighted
Average
Exercise Price
(in dollars)
Options outstanding as of June 30, 2020
152
$
50.77
Options granted
—
—
Options outstanding as of June 30, 2021
152
$
50.77
66
The following table presents the assumptions used to determine the fair value of the stock options granted by the Company:
Fiscal 2021
Fiscal 2020
Fiscal 2019
Risk-free interest rate
0.4 %
1.7 %
3.1 %
Dividend yield
1.4 %
1.3 %
1.2 %
Weighted average volatility factor
33.0 %
25.9 %
23.2 %
Weighted average expected life (in years)
6.0
6.0
6.0
Weighted average fair value (in dollars)
$
11.73
$
11.24
$
12.72
Time-Based Restricted Stock and Time-Based Restricted Stock Units.
Restricted Stock
Restricted Stock Units
Number of
Shares
(in thousands)
Weighted
Average Grant
Date Fair Value
(in dollars)
Number of
Units
(in thousands)
Weighted
Average Grant
Date Fair Value
(in dollars)
Non-vested as of June 30, 2020
18
$
62.08
726
$
50.92
Granted
—
—
1,379
47.30
Vested
(18)
62.08
(315)
55.54
Forfeited
—
—
(265)
46.22
Non-vested as of June 30, 2021
—
$
—
1,525
$
47.60
Performance-Based Restricted Stock Units.
Restricted Stock Units
Number of
Units
(in thousands)
Weighted
Average Grant
Date Fair Value
(in dollars)
Non-vested as of June 30, 2020
663
$
50.71
Granted
449
44.11
Vested
(269)
53.53
Forfeited
(58)
50.45
Non-vested as of June 30, 2021
785
$
45.99
The Monte Carlo simulation model used to determine the grant date fair value of the total three-year performance-based restricted stock units granted
during fiscal 2021 used an expected volatility based on historical stock price volatility for the Company and the peer companies, the average of which was
31.7% and a risk-free interest rate of 0.2%. Because these awards earn dividend equivalents, the model did not assume an expected dividend yield.
Note 9. Employee Benefit Plans
The Company offers a defined contribution savings plan. This plan covers all eligible full-time domestic employees and provides company-matching
contributions on a portion of employee contributions. The costs recorded by the Company for this plan were $17.2 million, $16.5 million, and $15.4 million
for fiscal 2021, 2020, and 2019, respectively.
Note 10. Earnings per Share
The numerator for both basic and diluted earnings per share is net earnings attributable to CDK. The denominator for basic and diluted earnings per share is
based on the number of weighted average shares of the Company's common stock outstanding during the applicable reporting periods. Diluted earnings per
share also reflects the dilutive effect of unexercised in-the-money stock options and unvested restricted stock.
Holders of certain stock-based compensation awards are eligible to receive dividends as described in Note 8 - Stock-Based Compensation.
67
The following table summarizes the components of basic and diluted earnings per share.
June 30,
2021
2020
2019
Net earnings from continuing operations attributable to CDK
$
181.5
$
258.2
$
187.2
Net earnings (loss) from discontinued operations
852.8
(50.7)
(63.2)
Net earnings attributable to CDK
$
1,034.3
$
207.5
$
124.0
Weighted average shares outstanding:
Basic
121.9
121.6
125.5
Effect of dilutive securities
0.7
0.5
0.9
Diluted
122.6
122.1
126.4
Net earnings (loss) attributable to CDK per share - basic:
Continuing operations
$
1.48
$
2.13
$
1.49
Discontinued operations
7.00
(0.42)
(0.50)
Total net earnings attributable to CDK per share - basic
$
8.48
$
1.71
$
0.99
Net earnings (loss) attributable to CDK per share - diluted:
Continuing operations
$
1.48
$
2.12
$
1.48
Discontinued operations
6.96
(0.42)
(0.50)
Total net earnings attributable to CDK per share - diluted
$
8.44
$
1.70
$
0.98
The dilutive effect of outstanding stock options, restricted stock units, restricted stock, and performance share units is reflected in the diluted weighted average shares
outstanding using the treasury stock method.
The weighted average number of shares outstanding used in the calculation of diluted earnings per share does not include the effect of anti-dilutive
securities. The potential common shares excluded were 1.1 million, 1.0 million, and 0.5 million for fiscal 2021, 2020, and 2019, respectively.
Note 11. Allowance for Credit Losses
In June 2016, the FASB issued ASU 2016-13, which requires the application of a current expected credit loss impairment model ("CECL") to financial
assets measured at amortized cost (including trade accounts receivable), net investments in leases, and certain off-balance-sheet credit exposures. Under
CECL, lifetime expected credit losses on such financial assets are measured and recognized at each reporting date based on historical, current, and
forecasted information. Furthermore, CECL requires financial assets with similar risk characteristics to be analyzed on a collective basis.
On July 1, 2020, the Company adopted CECL using a modified retrospective approach. The noncash cumulative effect of adopting CECL resulted in a
decrease of $8.2 million, net of tax impacts, to retained earnings, with corresponding increases to the allowance for expected credit losses impacting
accounts receivable, net, other current assets and other assets on the Consolidated Balance Sheets. The cumulative-effect adjustment in retained earnings
includes amounts related to the International Business, which represented an impact upon adoption of $1.2 million, net of tax. At adoption, there was no
impact on the Company’s Consolidated Statements of Operations and Cash Flows. The impacts related to prior comparative periods have not been restated
and continue to be reported under the accounting standards in effect for the prior periods.
Credit loss expense is included in selling, general and administrative expenses in the Consolidated Statements of Operations. The following table provides
a rollforward of the allowance for credit losses that is deducted from the amortized cost basis to present the net amount expected to be collected as of June
30, 2021.
(1)
(1)
68
Accounts
receivable, net
Other current
assets
Other assets
Total
Balance as of June 30, 2020
$
10.6 $
— $
— $
10.6
Cumulative-effect adjustment upon adoption
0.7
0.5
8.2
9.4
Provision (release of provision) for expected credit losses
(2.3)
0.2
1.2
(0.9)
Write-offs
(3.0)
—
(0.2)
(3.2)
Other
0.3
—
—
0.3
Balance as of June 30, 2021
$
6.3 $
0.7 $
9.2 $
16.2
Note 12. Property, Plant and Equipment, Net
Depreciation expense for property, plant and equipment was $40.0 million, $49.0 million, and $49.2 million for fiscal 2021, 2020, and 2019, respectively.
Property, plant and equipment at cost and accumulated depreciation consisted of the following:
June 30,
2021
2020
Land and buildings
$
32.4
$
32.4
Data processing equipment
221.9
232.4
Furniture and fixtures, leasehold improvements and other
53.9
53.6
Total property, plant and equipment
308.2
318.4
Less: accumulated depreciation
236.4
221.7
Property, plant and equipment, net
$
71.8
$
96.7
Note 13. Leases
CDK as a Lessee. For fiscal 2021, the Company recorded leases expense of $26.7 million in cost of revenue, $3.1 million in selling, general and
administrative expenses, and $0.5 million in interest expense, in the Consolidated Statements of Operations. For fiscal 2020, the Company recorded lease
expense of $24.6 million in cost of revenue, $2.7 million in selling, general and administrative expenses, and $0.9 million in interest expense, in the
Consolidated Statements of Operations.
The following table summarizes the components of net lease expense for the year ended June 30, 2021 and 2020:
June 30,
2021
2020
Finance Leases:
Amortization expense of ROU assets
$
5.5
$
6.2
Interest expense on lease liabilities
0.5
0.9
Operating Leases:
Lease expense
14.3
9.7
Sublease income
(1.9)
(0.6)
Short-term lease expense
3.3
3.4
Variable lease expense
8.6
8.7
Total net lease expense
$
30.3
$
28.3
For fiscal 2019, operating leases expense under previous accounting guidance was $19.6 million. The following table presents supplemental information
related to leases:
69
June 30,
2021
2020
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows paid for operating leases
$
16.3
$
8.9
Operating cash flows paid for interest portion of finance leases
0.5
0.8
Finance cash flows paid for principal portion of finance leases
5.7
6.2
June 30,
2021
2020
Operating leases
Weighted average remaining lease term
4.2 years
5.4 years
Weighted average discount rate
3.9 %
4.2 %
Finance leases
Weighted average remaining lease term
1.8 years
2.6 years
Weighted average discount rate
4.4 %
4.6 %
The following table presents supplemental balance sheet information related to leases as of June 30, 2021 and 2020:
June 30,
2021
2020
Operating Leases:
ROU assets, net
$
31.4
$
35.3
Lease liabilities, current
13.4
2.1
Lease liabilities, non-current
31.1
38.5
Total lease liabilities
$
44.5
$
40.6
Finance Leases:
ROU assets, net
$
8.3
$
13.5
Lease liabilities, current
4.9
5.7
Lease liabilities, non-current
3.8
8.4
Total lease liabilities
$
8.7
$
14.1
Included in other assets for operating leases and property, plant and equipment, net for finance leases on the Consolidated Balance Sheets.
Included in accrued expenses and other current liabilities for operating leases and current maturities of long-term debt and finance lease liabilities for finance leases on the
Consolidated Balance Sheets.
Included in other liabilities for operating leases and long-term debt and finance lease liabilities for finance leases on the Consolidated Balance Sheets.
The following table presents maturity analysis of lease liabilities as of June 30, 2021:
(1)
(2)
(3)
(1)
(2)
(3)
(1)
(2)
(3)
70
Operating
Leases
Finance Leases
Twelve months ending June 30:
2022
$
14.8
$
5.2
2023
11.3
3.6
2024
7.0
0.2
2025
6.2
0.1
2026
5.2
—
Thereafter
4.0
—
Total lease payments
48.5
9.1
Less: interest
(4.0)
(0.4)
Present value of lease liabilities
$
44.5
$
8.7
The Company did not have any material minimum lease payments for executed leases that have not yet commenced as of June 30, 2021.
CDK as a Lessor. The following summarizes components of net lease income reported on the Consolidated Statements of Operations as of June 30, 2021
and 2020:
Year ended June 30,
2021
2020
Revenue
$
45.1
$
30.9
Cost of revenue
(37.6)
(30.1)
Interest income
2.4
0.7
Total lease income
$
9.9
$
1.5
Revenue from lease components are included in the Other category in revenue disaggregation table in Note 6 - Revenue.
As of June 30, 2021, the carrying value of the Company’s lease receivable reported in accounts receivable, net and other assets on the Consolidated
Balance Sheets was $19.5 million and $40.9 million, respectively. As of June 30, 2020, the carrying value of the Company’s lease receivable reported in
accounts receivable, net and other assets on the Consolidated Balance Sheets was $7.8 million and $18.7 million, respectively. The following table presents
maturity analysis of the lease payments the Company expects to receive as of June 30, 2021:
Amount
Twelve months ending June 30:
2022
$
21.1
2023
18.5
2024
14.2
2025
8.8
2026
3.4
Thereafter
0.1
Total cash flows to be received
66.1
Less: interest
5.7
Present value of lease receivable
$
60.4
(1)
(1)
71
Note 14. Goodwill and Intangible Assets, Net
Changes in goodwill were as follows:
Amount
Balance as of June 30, 2019
$
1,000.3
Currency translation
(0.8)
Balance as of June 30, 2020
999.5
Acquisitions
295.5
Currency translation
2.1
Balance as of June 30, 2021
$
1,297.1
Intangible assets, net from continuing operations consisted of:
June 30,
2021
2020
Useful lives (in
years)
Gross Carrying
Amount
Accumulated
Amortization
Intangible
Assets, net
Gross Carrying
Amount
Accumulated
Amortization
Intangible
Assets, net
Customer lists
5 - 15
$
187.9
$
(81.2)
$
106.7
$
156.6
$
(71.2)
$
85.4
Software
3 - 8
412.5
(192.3)
220.2
289.3
(148.9)
140.4
Trademarks
2 - 15
10.4
(4.6)
5.8
7.3
(3.6)
3.7
$
611.7
$
(279.0)
$
332.7
$
454.1
$
(224.6)
$
229.5
Other intangibles consist primarily of purchased rights, covenants, and patents (acquired directly or through acquisitions). All of the intangible assets have
finite lives and, as such, are subject to amortization. Amortization of intangible assets from continuing operations was $58.7 million, $42.7 million, and
$31.2 million for fiscal 2021, 2020, and 2019, respectively.
April 1, 2021, 2020 and 2019 Impairment Analysis. The Company completed its annual impairment analysis as of April 1, 2021 and 2020. For all
reporting units, the Company performed a quantitative analysis. Based on the results of the quantitative analysis, the Company determined that the fair
values of all reporting units exceeded their carrying values and no impairment existed.
During fiscal 2019, the Company recorded impairment charges of $13.2 million for software and $1.7 million for customer lists. Of the total $14.9 million
impairment charge, the Company recorded $12.0 million in cost of revenue and $2.9 million in selling, general and administrative expenses in the
Consolidated Statements of Operations.
Estimated future amortization expense related to existing intangible assets is as follows:
Amount
Year ending June 30,
2022
$
72.7
2023
71.2
2024
51.0
2025
34.5
2026
23.5
Thereafter
79.8
Total future amortization expense
$
332.7
Note 15. Investments
As of June 30, 2021, the Company's equity investments principally comprised a 15% ownership interest in Ansira and a 50% ownership interest in Open
Dealer Exchange ("ODE"). ODE processes certain credit bureau and other credit related transactions on behalf of the Company. The operations of ODE are
integral to the Company's business due to the access ODE has to credit bureaus, which provides an extension of the business over a critical functional area.
As a result, the Company records earnings related to the investment in costs of revenues in the Consolidated Statements of Operations. For the years ended
June 30, 2021, 2020, and 2019, the Company incurred expenses from ODE of $17.6 million, $13.7 million, and $12.3 million, respectively, in cost of
revenues in
72
the Consolidated Statements of Operations. During fiscal 2021, 2020 and 2019, the Company made payments to ODE of $14.9 million, $14.6 million, and
$13.4 million, respectively.
June 30,
2021
2020
Equity method investments
$
30.4
$
56.1
Other investments
20.0
20.0
Total
$
50.4
$
76.1
Opening balance
$
76.1
$
77.2
Losses recognized in loss from equity method investment
(27.3)
(2.7)
Amounts recognized in cost of revenue
13.3
11.0
Dividends received
(11.7)
(9.4)
Closing balance
$
50.4
$
76.1
(1) Fiscal 2021 includes a $14.5 million impairment charge with respect to one of the Company's equity investments.
In addition, the Company has a 10-year note receivable due 2030, with respect to one of its equity investments. As of June 30, 2021 and 2020, the note
receivable was $27.3 million and $24.4 million, respectively, recorded in other assets on the Consolidated Balance Sheets.
Other investments include entities where the Company does not have significant influence over the operating or financial policy and their fair values are
not readily determinable. Therefore, the Company has elected to measure these investments at cost with adjustments for observable changes in price or
impairment.
Note 16. Debt
Long-term debt and finance lease liabilities consisted of:
As of June 30, 2021
As of June 30, 2020
Maturity Date
Interest Rate
Amount
Interest Rate
Amount
Credit Facilities
Revolving credit facility
May 2026
$
—
2.875 % $
15.0
Total credit facilities
Term Loans Facilities
Unsecured three-year term loan facility
August 2021
—
2.750 %
300.0
Unsecured five-year term loan facility
August 2023
—
2.875 %
273.8
Total term loans
—
573.8
Unsecured Senior Notes
Senior notes, due 2024
October 2024
5.000 %
500.0
5.000 %
500.0
Senior notes, due 2026
June 2026
—
5.875 %
500.0
Senior notes, due 2027
May 2027
4.875 %
600.0
4.875 %
600.0
Senior notes, due 2029
May 2029
5.250 %
500.0
5.250 %
500.0
Total unsecured senior notes
1,600.0
2,100.0
Finance lease liabilities
8.7
14.1
Other
2.2
—
Unamortized debt financing costs
(17.3)
(27.1)
Total debt and finance lease liabilities
1,593.6
2,675.8
Less: current maturities of long-term debt
7.1
20.7
Total long-term debt and finance lease liabilities
$
1,586.5
$
2,655.1
(1)
73
Credit Facility. The Company has a variable rate senior unsecured revolving credit facility (the "revolving credit facility"). The revolving credit facility
provides up to $750.0 million of borrowing capacity and includes a sub-limit of up to $100.0 million for loans denominated in euro, pound sterling, and, if
approved by the revolving lenders, other currencies. The average outstanding balances of the revolving credit facility were $42.7 million and $122.7
million for the fiscal year ended June 30, 2021 and 2020, respectively.
The revolving credit facility contains various covenants and restrictive provisions that limit the Company's subsidiaries' ability to incur additional
indebtedness, the Company's ability to consolidate or merge with other entities, and the Company's subsidiaries' ability to incur liens, enter into sale and
leaseback transactions, and enter into agreements restricting the ability of the Company's subsidiaries to pay dividends. If the Company fails to perform the
obligations under these and other covenants, the revolving credit facility could be terminated and any outstanding borrowings, together with accrued
interest, could be declared immediately due and payable. In addition to customary events of default on the the revolving credit facility, an event of default
may also be triggered by the acceleration of the maturity of any other indebtedness the Company may have in an aggregate principal amount in excess of
$75.0 million.
On May 24, 2021, the Company entered into an amendment of its revolving credit facility which includes an extension of its maturity from August 2023 to
May 2026, and amendments to its financial covenants. The amended financial covenants provide that (i) the ratio of the Company's total consolidated
indebtedness to consolidated EBITDA (the "Leverage Ratio") may not exceed 3.75 to 1.00. Upon the occurrence of certain acquisitions for each of the four
consecutive fiscal quarters of the Company immediately following such certain acquisitions (including the fiscal quarter in which such certain acquisition
was consummated), the ratio set forth above will be increased to 4.25 to 1.00, and (ii) the ratio of the Company's consolidated EBITDA to consolidated
interest expense may not be less than 3.00 to 1.00. The related debt financing costs were not material to the consolidated financial statements.
Term Loan Facilities. On March 1, 2021, the Company repaid in full the three-year and five-year term loan facilities. As a result, the Company recorded a
loss on extinguishment of debt for the write-off of unamortized debt financing costs of $2.2 million in the Consolidated Statements of Operations.
Unsecured Senior Notes. The senior notes have fixed interest rates, for which interest is paid semi-annually. The notes are redeemable at certain dates in
whole or in part at the Company's option. The redemption price would be equal to, or in excess of, 100% of the aggregate principal amount thereof plus
accrued and unpaid interest, if any, plus the applicable "make-whole" premium.
On April 23, 2021, the Company repaid all indebtedness under the 2026 notes. As a result, the Company recorded expenses of $18.5 million for the call
premium and $4.8 million for the write-off of unamortized debt financing costs in the Consolidated Statements of Operations.
The senior notes are general unsecured obligations of the Company and are not guaranteed by any of the Company's subsidiaries. The senior notes rank
equally in right of payment with the Company's existing and future unsecured unsubordinated obligations, including the credit facilities. The senior notes
contain covenants restricting the Company's ability to incur additional indebtedness secured by liens, engage in sale/leaseback transactions, and merge,
consolidate, or transfer all or substantially all of the Company's assets. The senior notes are also subject to a change of control provision whereby each
holder of the senior notes has the right to require the Company to purchase all or a portion of such holder's senior notes at a purchase price equal to 101%
of the principal amount thereof plus accrued and unpaid interest upon the occurrence of both a change of control and a decline in the rating of the senior
notes.
74
Finance Lease Liabilities. The Company has lease agreements for equipment, which are classified as finance lease liabilities. Refer to Note 13 - Leases for
scheduled maturities and additional information relating to finance lease liabilities.
Fair Value. The fair values of the senior notes were estimated using quoted market prices for identical liabilities that are traded in over-the-counter
secondary markets that are not considered active. The carrying value of the term loans, including accrued interest, approximates fair value based on the
Company's current estimated incremental borrowing rate for similar types of arrangements. The senior notes and term loans are classified as Level 2 (direct
or indirect observable inputs other than quoted prices in active markets) in the fair value hierarchy. The carrying value of the revolving credit facility and
finance lease liabilities approximates fair value.
The approximate fair values and related carrying values of the Company's long-term debt, including current maturities and excluding unamortized debt
financing costs, are as follows:
June 30,
2021
2020
Fair value
$
1,746.8
$
2,790.5
Carrying value
1,610.9
2,702.9
The Company's aggregate scheduled maturities of the long-term debt as of June 30, 2021 were as follows:
Amount
Fiscal year ending 2022
$
—
Fiscal year ending 2023
—
Fiscal year ending 2024
—
Fiscal year ending 2025
500.0
Fiscal year ending 2026
—
Thereafter
1,100.0
Total debt
1,600.0
Unamortized deferred financing costs
(17.3)
Total debt, net of unamortized deferred financing costs
$
1,582.7
Note 17. Income Taxes
Provision for Income Taxes. Earnings before income taxes presented below is based on the geographic location to which such earnings were attributable.
June 30,
2021
2020
2019
Earnings before income taxes:
U.S.
$
260.7
$
346.8
$
205.7
Foreign
24.0
27.2
38.0
$
284.7
$
374.0
$
243.7
75
The provision for income taxes consisted of the following components:
June 30,
2021
2020
2019
Current:
Federal
$
42.6
$
83.0
$
25.0
State
12.7
18.3
10.5
Foreign
8.4
2.6
18.4
Total current
63.7
103.9
53.9
Deferred:
Federal
23.3
6.3
(1.3)
State
7.4
1.0
(2.0)
Foreign
0.1
(2.4)
(2.0)
Total deferred
30.8
4.9
(5.3)
Total provision for income taxes
$
94.5
$
108.8
$
48.6
A reconciliation between the Company’s effective tax rate from continuing operations and the U.S. federal statutory rate is as follows. Certain prior year
amounts have been reclassified to conform to current year presentation.
June 30,
2021
%
2020
%
2019
%
Provision for taxes at U.S. statutory rate
$
59.8
21.0 % $
78.5
21.0 % $
51.2
21.0 %
Increase (decrease) in provision from:
State income taxes, net of federal benefit
16.2
5.6 %
12.4
3.3 %
7.4
3.0 %
U.S. tax on foreign earnings
(0.2)
(0.1)%
1.8
0.5 %
2.0
0.8 %
Foreign tax rate differential
1.4
0.5 %
5.2
1.4 %
3.2
1.3 %
Foreign tax credits
(2.7)
(0.9)%
(7.7)
(2.1)%
(8.0)
(3.3)%
Foreign withholding taxes
1.9
0.7 %
1.6
0.4 %
—
— %
Valuation allowances
7.5
2.6 %
15.0
4.0 %
(10.6)
(4.3)%
Uncertain tax positions
(0.1)
— %
17.6
4.7 %
1.8
0.7 %
Mutual agreement procedure receivable
0.9
0.3 %
(16.2)
(4.3)%
—
— %
Tax shortfalls / (excess tax benefits) on stock-based
compensation
3.1
1.1 %
0.6
0.2 %
2.1
0.9 %
Nondeductible officer compensation
5.6
2.0 %
1.6
0.4 %
2.7
1.1 %
Noncontrolling interest
(1.5)
(0.5)%
(1.1)
(0.3)%
(1.9)
(0.8)%
Other
2.6
0.9 %
(0.5)
(0.1)%
(1.3)
(0.5)%
Provision for income taxes
$
94.5
33.2 % $
108.8
29.1 % $
48.6
19.9 %
The balance sheet classification and significant components of deferred income tax assets and liabilities are as follows:
76
June 30,
2021
2020
Classification:
Long term deferred tax assets (included in other non-current assets)
$
1.3
$
1.5
Long term deferred tax assets (included in long-term assets held for sale)
—
7.0
Long term deferred tax liabilities (included in deferred income taxes)
(111.4)
(76.4)
Long term deferred tax liabilities (included in long-term liabilities held for sale)
—
(2.0)
Net deferred tax liabilities
$
(110.1)
$
(69.9)
Components:
Deferred tax assets:
Accrued expenses
$
15.0
$
20.4
Compensation and benefits
17.6
17.7
Deferred revenue
1.7
11.1
Net operating losses
15.8
3.4
Capital losses
3.4
4.3
Lease liabilities
12.3
14.9
Tax credits
2.3
2.9
Other
10.1
5.5
78.2
80.2
Less: valuation allowances
(13.6)
(5.7)
Deferred tax assets
64.6
74.5
Deferred tax liabilities:
Deferred expenses
51.2
54.1
Property, plant and equipment and intangible assets
115.7
79.1
ROU assets
6.9
10.0
Prepaid expenses
0.9
1.2
Deferred tax liabilities
174.7
144.4
Net deferred tax liabilities
$
(110.1)
$
(69.9)
As discussed in Note 13 - Leases, CDK adopted ASC 842 on July 1, 2019. Therefore, in fiscal 2020 CDK recognized deferred tax assets for lease liabilities
and deferred tax liabilities for ROU assets as shown in the table above.
Deferred Taxes on Unremitted Foreign Earnings.
During the three months ended March 31, 2020, the Company began assessing the impact of the global emergence of COVID-19 on its business. In
response to the economic uncertainty engendered by the ongoing COVID-19 pandemic, the Company took steps to preserve cash and improve its liquidity
position. The Company reviewed its plans for foreign cash balances and, based on the increase in uncertainty and higher expected U.S. cash needs
associated with the pandemic, the Company removed its assertion that foreign earnings were indefinitely reinvested, making these earnings available for
repatriation as necessary. The Company has accrued $1.4 million and $3.0 million of withholding tax liabilities on unremitted foreign earnings on the
Consolidated Balance Sheets as of June 30, 2021 and 2020, respectively.
Carryforward Attributes. As of June 30, 2021, the Company had federal capital losses of $13.4 million which expire in 2024 and pre-apportioned state
capital losses of $13.4 million which expire in 2024 through 2034. The Company has $63.2 million of federal net operating losses, a portion of which begin
to expire in 2033, and $42.8 million of post-apportioned state net operating losses, a portion of which begin to expire in 2023, both the federal and state net
operating losses were derived from fiscal 2021 acquisitions. The Company had no foreign net operating loss carryforwards as of June 30, 2021.
The Company had U.S. federal foreign tax credits of $1.8 million which expire in 2031, U.S. federal research and development credits of $0.3 million
which begin to expire in 2037, and state tax credits of $0.2 million which expire in 2023.
Valuation Allowances. The Company has recorded valuation allowances of $13.6 million and $5.7 million as of June 30, 2021 and 2020, respectively,
because the Company has concluded it is more likely than not that it will be unable to utilize certain net
77
operating loss carryforwards, capital loss carryforwards and certain U.S. tax credits. As of each reporting date, the Company’s management considers new
evidence, both positive and negative, which could impact management’s determination with regard to future realization of deferred tax assets.
During fiscal 2021, the valuation allowance balance increased $7.9 million, primarily related to $7.7 million valuation allowance recorded on a deferred tax
asset for the tax basis difference of an equity method investment that is not expected to be realized.
During fiscal 2020, the valuation allowance balance decreased $4.6 million, which included a decrease of $18.4 million due to the expiration of a U.S.
capital loss carryforward on June 30, 2020 and an increase of $14.8 million related to a reversal of the fiscal year 2019 capital gain the Company previously
expected to recognize in conjunction with the sale of the assets of the Digital Marketing Business.
Unrecognized Income Tax Benefits. As of June 30, 2021, 2020, and 2019, the Company had unrecognized income tax benefits of $23.0 million, $24.8
million, and $8.2 million, respectively of which $3.9 million, $8.1 million, and $7.0 million, respectively, would impact the effective tax rate, if recognized.
The remainder, if recognized, would principally affect deferred taxes.
A roll-forward of unrecognized tax benefits is as follows:
June 30,
2021
2020
2019
Beginning balance
$
22.6
$
7.8
$
6.2
Increase related to current year tax positions
0.5
1.1
1.6
Increase related to prior year tax positions
0.9
15.8
0.8
Decrease related to prior year tax positions
(0.2)
(1.0)
—
Decrease related to settlements with tax authorities
(0.3)
—
(0.1)
Decrease related to lapse of the statute of limitations
(1.4)
(1.0)
(0.7)
Increase related to business combinations
0.2
—
—
Decrease related to divestiture
(1.9)
(0.1)
—
Ending balance
$
20.4
$
22.6
$
7.8
The Company's net unrecognized income tax benefits were impacted by a decrease of $2.2 million, an increase of $14.8 million, and an increase of $1.6
million during fiscal 2021, 2020, and 2019, respectively. Additionally, fiscal years 2021 and 2020 were impacted by the sale of International Business. For
all fiscal years, changes were based on information which indicated the extent to which certain tax positions were more likely than not to be sustained.
Penalties and interest expense associated with uncertain income tax positions have been recorded in the provision for income taxes on the Consolidated
Statements of Operations. Penalties and interest accrued during fiscal 2021 were $0.8 million primarily related to changes in methodology related to
transfer pricing. Penalties and interest incurred in fiscal 2020, and 2019 were not significant. As of June 30, 2021, June 30, 2020, June 30, 2019,
respectively, the Company had $2.6 million, $2.2 million, and $0.4 million of penalties and interest associated with uncertain tax positions, which was
included in other liabilities on the Consolidated Balance Sheets.
In addition, an offsetting long-term receivable of $17.7 million of tax and interest has been recorded as of June 30, 2021 as a result of the Company filing
to obtain mutual agreement procedure consideration under applicable U.S. and Canadian treaties for an update to transfer pricing policies. This long-term
receivable is offset by $18.2 million of tax and interest recorded as uncertain tax positions as of June 30, 2021.
The Company files income tax returns in the U.S. federal jurisdiction and various state, local, and foreign jurisdictions. In the normal course of business,
the Company is subject to examination by taxing authorities. The tax years currently under examination vary by jurisdiction. The Company regularly
considers the likelihood of assessments in each of the jurisdictions resulting from examinations. The Company has established a liability for unrecognized
income tax benefits, which it believes to be adequate in relation to the potential assessments. Once established, the liability for unrecognized tax benefits is
adjusted when there is more information available, when an event occurs necessitating a change, or the statute of limitations for the relevant taxing
authority to examine the tax position has expired.
Income tax-related examinations currently in progress in which the Company has significant business operations are as follows:
78
Tax Jurisdictions
Fiscal Years Ended
Illinois
6/30/2017 thru 6/30/2018
Massachusetts
6/30/2018 thru 6/30/2020
New York
6/30/2017 thru 6/30/2019
India
3/31/2015 thru 3/31/2018
Canada
6/30/2012 and 6/30/2014
Based on the possible outcomes of the Company's tax audits and expiration of the statute of limitations, it is reasonably possible that the liability for
uncertain tax positions will decrease in the next twelve months in the potential amount of $19.1 million.
Although the final resolution of the Company's tax disputes is uncertain, based on current information, the resolution of tax matters is not expected to have
a material effect on the Company's consolidated financial condition, liquidity, or results of operations. However, an unfavorable resolution could have a
material impact on the Company’s consolidated financial condition, liquidity, or results of operations in the periods in which the matters are ultimately
resolved.
Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act
(the "CARES Act") was enacted into law. The primary impact to the Company’s financial statements as a result of the CARES Act was the deferral of U.S.
corporate income tax payments from the fourth quarter of fiscal 2020 to the first quarter of fiscal 2021, as well as the deferral of employer-related payroll
tax payments from the fourth quarter of fiscal 2020, and first and second quarters of fiscal 2021, with 50% to be paid in the second quarter of fiscal 2022
and the remaining 50% to be paid in the second quarter of fiscal 2023.
Note 18. Commitments and Contingencies
Legal Proceedings. From time to time, the Company is subject to various claims and is involved in various legal, regulatory, and arbitration proceedings
concerning matters arising in connection with the conduct of its business activities, including those noted in this section. Although management at present
has no basis to conclude that the ultimate outcome of these proceedings, individually and in the aggregate, will materially harm the Company's financial
position, results of operations, cash flows, or overall trends, legal proceedings and related government investigations are subject to inherent uncertainties,
and unfavorable rulings or other events could occur. Unfavorable resolutions could include substantial monetary damages. In addition, in matters for which
injunctive relief or other conduct remedies are sought, unfavorable resolutions could include an injunction or other order prohibiting the Company from
selling one or more products at all or in particular ways, precluding particular business practices, or requiring other remedies. An unfavorable outcome may
result in a material adverse impact on the Company's business, results of operations, financial position, and overall trends. The Company might also
conclude that settling one or more such matters is in the best interests of its stockholders, employees, and customers, and any such settlement could include
substantial payments.
Competition Matters. The Company is currently involved in, or where indicated, has settled, the following antitrust lawsuits that set forth allegations of
anti-competitive agreements between the Company and The Reynolds and Reynolds Company ("Reynolds") relating to the manner in which the defendants
control access to, and allow integration with, their respective Dealer Management System ("DMS"), and that seek, among other things, treble damages and
injunctive relief. These lawsuits have been transferred to, or filed in, the U.S. District Court for the Northern District of Illinois for consolidated and
coordinated pretrial proceedings as part of a multi-district litigation proceeding ("MDL").
Active MDL Lawsuits
•
Teterboro Automall, Inc. d/b/a Teterboro Chrysler Dodge Jeep Ram ("Teterboro") brought a putative class action suit on behalf of itself and all
similarly situated automobile dealerships against CDK Global, LLC and Reynolds. Teterboro’s suit was originally filed on October 19, 2017, in
the U.S. District Court for the District of New Jersey. Since that time, several more putative class actions were filed in a number of federal district
courts, with substantively similar allegations; all of them have been consolidated with the MDL proceeding. On June 4, 2018, a consolidated class
action complaint was filed on behalf of a putative class made up of all dealerships in the United States that directly purchased DMS and/or
allegedly indirectly purchased DMS or data integration services from CDK Global, LLC or Reynolds ("Putative Dealership Class Plaintiffs").
CDK Global, LLC moved to dismiss the complaint, or in the alternative, compel arbitration of certain of the cases while staying the remainder
pending the outcome of those arbitration proceedings; its motion to dismiss was granted in part and denied in part, while its motion to compel
arbitration was denied. On February 22, 2019, CDK Global, LLC filed an answer to the remaining claims in Putative Dealership Class Plaintiffs'
complaint and asserted counterclaims against the Putative Dealership Class Plaintiffs. The Putative Dealership Class Plaintiffs filed a motion to
dismiss CDK Global, LLC’s counterclaims; that motion was granted in part and denied in part on September 3, 2019. On October 23, 2018, the
Putative Dealership Class Plaintiffs and Reynolds filed a motion for preliminary approval of settlement and for
79
conditional certification of the proposed settlement class. The court finally approved that settlement on January 22, 2019. The parties' cross-
motions for summary judgment and Daubert motions were fully briefed as of September 28, 2020 and remain pending.
•
Loop LLC d/b/a AutoLoop ("AutoLoop") brought suit against CDK Global, LLC on April 9, 2018, in the U.S. District Court for the Northern
District of Illinois, but reserved its rights with respect to remand to the U.S. District Court for the Western District of Wisconsin at the conclusion
of the MDL proceedings. On June 5, 2018, AutoLoop amended its complaint to sue on behalf of itself and a putative class of all other automotive
software vendors in the United States that purchased data integration services from CDK Global, LLC or Reynolds. CDK Global, LLC moved to
compel arbitration of AutoLoop’s claims, or in the alternative, to dismiss those claims; that motion was denied on January 25, 2019. CDK Global,
LLC filed an answer to AutoLoop’s complaint and asserted counterclaims against AutoLoop on February 15, 2019. AutoLoop filed an answer to
CDK Global, LLC’s counterclaims on March 8, 2019. The parties' cross-motions for summary judgment and Daubert motions were fully briefed
as of September 28, 2020 and remain pending.
Settled MDL Lawsuits
•
Authenticom, Inc. ("Authenticom") brought a suit against CDK Global, LLC and Reynolds. Authenticom’s suit was originally filed on May 1,
2017, in the U.S. District Court for the Western District of Wisconsin. On October 20, 2020, CDK Global, LLC and Authenticom entered into a
settlement agreement that resulted in a dismissal of all claims brought by Authenticom in the MDL, and CDK Global, LLC making a one-time
cash payment to Authenticom.
•
i3 Brands, Inc. and PartProtection LLC ("i3 Brands") brought suit against CDK Global, LLC and Reynolds. i3 Brands' suit was originally filed on
February 4, 2019, in the U.S. District Court for the Southern District of California; it was subsequently transferred to the U.S. District Court for
the Northern District of Illinois and consolidated as part of the MDL. On March 4, 2020, CDK Global, LLC and i3 Brands entered into a
settlement agreement that resulted in a dismissal of all claims brought by i3 Brands against CDK in the MDL, and CDK Global, LLC agreeing to a
release of i3 Brands and an agreement to abandon all claims against i3 Brands.
•
Motor Vehicle Software Corporation ("MVSC") brought a suit against CDK Global, LLC (after initially naming the Company), Reynolds, and
CVR, a majority owned joint venture of the Company. MVSC's suit was originally filed on February 3, 2017, in the U.S. District Court for the
Central District of California. On October 10, 2019, CDK Global, LLC and MVSC entered into a settlement agreement that resulted in a dismissal
of all claims brought by MVSC in the MDL as against CDK Global, LLC and CVR, and CDK Global, LLC making a one-time cash payment to
MVSC.
•
Cox Automotive, along with multiple subsidiaries ("Cox"), brought suit against CDK Global, LLC. Cox’s suit was originally filed on December
11, 2017, in the U.S. District Court for the Western District of Wisconsin. On July 10, 2019, CDK Global, LLC and Cox entered into a settlement
agreement that resulted in a dismissal of all claims brought by the affiliated parties in the MDL, and CDK Global, LLC making a one-time cash
payment to Cox.
The Company believes that the remaining unsettled cases are without merit and will continue to vigorously contest all asserted claims. Nonetheless, in light
of the Company's settlements with Authenticom, i3 Brands, MVSC, and Cox and its continued expenditure of legal costs to contest the remaining claims,
the Company has determined that a loss of some measure is probable and can be reasonably estimated. In the fourth quarter of fiscal 2019, the Company
initially recorded a litigation provision of $90.0 million and has continued to re-assess the liability in each subsequent quarter. In the first quarter of fiscal
2021, the Company's reassessment of its litigation liability resulted in an increase of $12.0 million. As of June 30, 2021, and 2020, the litigation liability for
the remaining unsettled cases was $34.0 million and $57.0 million, respectively. This estimated loss is based upon currently available information and
represents the Company's best estimate of such loss. Estimating the value of this estimated loss involved significant judgment given the uncertainty that
still exists with respect to the remaining unsettled cases due to a variety of factors typical of complex, large scale litigation, including, among others: (i)
formative issues, including: (a) the causes of action the plaintiffs can pursue; (b) the definition of the class(es) of plaintiffs; (c) the types of damages that
can be recovered; and (d) whether plaintiffs can establish loss causation as a matter of law, all of which have yet to be determined pending the outcome of
dispositive motions (e.g., motions for class certification and motions for summary judgment); (ii) significant factual issues remain to be resolved; (iii)
expert perspectives with respect to, among other things, alleged antitrust injury and damages is widely divergent and remains subject to dispositive
motions; (iv) the absence of productive settlement discussions to date with the remaining plaintiffs; and (v) the novel or uncertain nature of the legal issues
presented. For these same reasons, the Company cannot reasonably estimate a maximum potential loss exposure at this time. In addition, the Company's
estimate does not incorporate or reflect the potential value of the Company's counterclaims against certain of the plaintiffs in the ongoing cases. The legal
proceedings underlying the estimated litigation liability will change from time to time and actual results may vary significantly from the estimate. As noted
above, an adverse result in any of the remaining cases could have a material adverse effect on the Company's business, results of operations, financial
condition, or liquidity.
80
On June 22, 2017, the Company received from the Federal Trade Commission ("FTC") a Civil Investigative Demand consisting of specifications calling for
the production of documents relating to any agreements between the Company and Reynolds. Parallel document requests have been received from certain
states' Attorneys General. Since 2017, the Company has engaged in continuing communication with and received subsequent requests from the FTC related
to its investigation. The Company has responded to the requests and no proceedings have been instituted. The Company believes there has not been any
conduct by the Company or its current or former employees that would be actionable under the antitrust laws in connection with the agreements between
the Company and Reynolds or otherwise. At this time, the Company does not have sufficient information to predict the outcome of, or the cost of
responding to or resolving, these investigations.
Other Commitments and Contingencies. In the normal course of business, the Company may enter into contracts in which the Company makes
representations and warranties that relate to the performance of the Company’s services and products. The Company does not expect any material losses
related to such representations and warranties.
The Company has provided approximately $28.1 million of guarantees as of June 30, 2021 in the form of surety bonds issued to support certain licenses
and contracts which require a surety bond as a guarantee of performance of contractual obligations. In general, the Company would only be liable for the
amount of these guarantees in the event the Company defaulted in performing the obligations under each contract, of which, the probability is remote.
The Company has a total of $45.4 million of outstanding purchase commitments and contracts with expiration dates through 2025.
The Company had a total of $1.8 million in letters of credit outstanding as of June 30, 2021 primarily in connection with insurance programs.
Note 19. Share Repurchase Transactions
In January 2017, the Board of Directors authorized the Company to repurchase up to $2.0 billion of its common stock as part of a return of capital plan.
Under the authorization, the Company may purchase its common stock in the open market or in privately negotiated transactions from time to time as
permitted by federal securities laws and other legal requirements. The actual timing, number, and price of any shares to be repurchased is determined at
management's discretion and depends on a number of factors, including the market price of the shares, general market and economic conditions, and other
potential uses for free cash flow including, but not limited to, potential acquisitions.
In November 2018, the Company entered into an accelerated share repurchase agreement ("November 2018 ASR") to purchase $260.0 million of the
Company's common stock. Under the terms of the November 2018 ASR, the Company made a $260.0 million payment in November 2018 and received
initial delivery of approximately 4.1 million of the Company's common stock. In February 2019, the Company received an additional 1.1 million shares of
common stock in final settlement of the November 2018 ASR, for a total of 5.2 million shares. The value reflected in treasury stock upon completion of the
November 2018 ASR represents the value of the shares received based on the closing price of the Company's stock on the respective settlement dates,
which is higher than the $260.0 million cash paid by $13.0 million.
In 2019, the Company made open market repurchases of 4.4 million shares of the Company's common stock during fiscal 2019 for a total cost of $264.1
million.
Additionally, in June 2021, the Company made open market repurchases of 236 thousand shares of the Company's common stock for a total cost of
$12.1 million.
81
Note 20. Quarterly Financial Results (Unaudited)
Summarized quarterly results of operations for the fiscal 2021 and 2020 were as follows:
First Quarter
Second
Quarter
Third Quarter
Fourth
Quarter
Year ended June 30, 2021
Revenue
$
413.7
$
406.3
$
433.1
$
420.1
Gross profit
189.0
198.6
211.8
198.8
Earnings before income taxes
75.0
81.5
71.2
57.0
Net earnings from continuing operations
48.0
58.8
47.1
36.3
Net earnings from discontinued operations
10.0
11.3
815.8
15.7
Net earnings
58.0
70.1
862.9
52.0
Net earnings attributable to noncontrolling interest
2.3
1.8
2.0
2.6
Net earnings attributable to CDK
55.7
68.3
860.9
49.4
Net earnings attributable to CDK per share - basic:
Continuing operations
$
0.38
$
0.47
$
0.37
$
0.27
Discontinued operations
0.08
0.09
6.69
0.13
Total net earnings attributable to CDK per share - basic
$
0.46
$
0.56
$
7.06
$
0.40
Net earnings attributable to CDK per share - diluted:
Continuing operations
$
0.38
$
0.47
$
0.36
$
0.27
Discontinued operations
0.08
0.09
6.64
0.13
Total net earnings attributable to CDK per share - diluted
$
0.46
$
0.56
$
7.00
$
0.40
Year ended June 30, 2020
Revenue
$
417.7
$
418.2
$
426.4
$
376.7
Gross profit
210.7
225.1
227.6
175.0
Earnings before income taxes
88.3
100.5
109.1
76.1
Net earnings from continuing operations
64.9
60.1
77.4
62.8
Net earnings (loss) from discontinued operations
19.2
(36.0)
(17.9)
(16.0)
Net earnings
84.1
24.1
59.5
46.8
Net earnings attributable to noncontrolling interest
2.1
1.8
1.9
1.2
Net earnings attributable to CDK
82.0
22.3
57.6
45.6
Net earnings (loss) attributable to CDK per share - basic:
Continuing operations
$
0.52
$
0.48
$
0.62
$
0.51
Discontinued operations
0.16
(0.30)
(0.15)
(0.13)
Total net earnings attributable to CDK per share - basic
$
0.68
$
0.18
$
0.47
$
0.38
Net earnings (loss) attributable to CDK per share - diluted:
Continuing operations
$
0.51
$
0.47
$
0.62
$
0.50
Discontinued operations
0.16
(0.29)
(0.15)
(0.13)
Total net earnings attributable to CDK per share - diluted
$
0.67
$
0.18
$
0.47
$
0.37
(1) Amounts differ from previously reported in the Quarterly Reports on Form 10-Q as a result of the Digital Marketing Business and the International Business being
classified as discontinued operations. See Note 4 - Discontinued Operations for additional information.
(2) Gross profit is calculated as revenue less cost of revenue.
(2)
(1)
(1) (2)
(1)
82
CDK Global, Inc.
Schedule II - Valuation and Qualifying Accounts
(In millions)
Additions
Balance at
beginning of
period
Charged
(credited) to
costs and
expenses
Charged
(credited) to
other accounts
Deductions
Balance at
end of period
Year ended June 30, 2021
Accounts receivable allowances
$
14.6
$
(1.6)
$
0.7
$
(2.8)
$
10.9
Deferred tax valuation allowance
5.7
9.5
(0.7)
(0.9)
13.6
Year ended June 30, 2020
Accounts receivable allowances
$
7.0
$
18.4
$
—
$
(10.8)
$
14.6
Deferred tax valuation allowance
10.3
—
—
(4.6)
5.7
Year ended June 30, 2019
Accounts receivable allowances
$
3.1
$
6.6
$
—
$
(2.7)
$
7.0
Deferred tax valuation allowance
21.2
—
—
(10.9)
10.3
(1) Effective July 1, 2018, the Company adopted ASC 606 using the modified retrospective approach. The comparative information has not been restated and continues to
be reported under the accounting standards in effect for the period presented.
(2) Amount reflects the impact of the adoption of CECL on July 1, 2020.
(3) Doubtful accounts written off, less recoveries on accounts previously written off.
(4) Includes $7.7 million increase due to a valuation allowance recorded on deferred tax assets for the tax basis difference of an equity method investment that is not
expected to be realized, an increase of $1.8 million related to recording valuation allowance on U.S. foreign tax credits, a reduction of $0.9 million related to the utilization
of certain capital loss carryforwards, an increase of $0.7 million related to certain carryforward attributes from current year acquisitions recorded through purchase
accounting, and a decrease of $1.4 million related to held for sale assets.
(5) Includes $18.4 million reduction due to expiration of U.S. capital loss carryforwards, increase of $14.8 million related to a reversal of the fiscal year 2019 capital gain
previously expected to be used with sale of Digital Marketing Business, $0.7 million decrease due to certain non-U.S. tax loss carryforwards, and $0.3 million decrease due
to adjustment of state tax expense.
(6) Includes $14.8 million reduction related to the capital gain the Company expected to recognize in conjunction with the sale of the assets of the Digital Marketing
Business which were classified as held for sale in the fourth quarter of fiscal 2019, $4.3 million increase related to capital loss resulting from termination of a joint venture
contract, and a $0.4 million net decrease due to certain non-U.S. tax loss carryforwards.
(7) Fiscal years 2019 and 2020 numbers have been adjusted as a result of the Digital Marketing Business and the International Business being classified as discontinued
operations. See Note 4 - Discontinued Operations for additional information.
(2)
(3)
(4)
(4)
(4)
(7)
(3)
(5)
(1) (7)
(3)
(6)
83
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Management's Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
of the Exchange Act (the "evaluation"). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. Based on the evaluation, the Company's Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures were effective as of June 30, 2021 in ensuring that (i) information required to be
disclosed by the Company in reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure, and (ii) such information is
recorded, processed, summarized and reported in the time periods specified in the Securities and Exchange Commission's rules and forms.
Internal Control Over Financial Reporting
Management's Annual Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with
the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting as of June 30, 2021 based on the guidelines established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management has
concluded that our internal control over financial reporting was effective as of June 30, 2021.
Deloitte & Touche LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of
June 30, 2021. Their report is included in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting. In the fourth quarter of fiscal 2021, there were no significant changes to the Company's internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
84
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of
CDK Global, Inc.
Hoffman Estates, Illinois
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of CDK Global, Inc. and subsidiaries (the “Company”) as of June 30, 2021, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2021, based on
criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
financial statements as of and for the year ended June 30, 2021, of the Company and our report dated August 17, 2021, expressed an unqualified opinion on
those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
August 17, 2021
85
Item 9B. Other Information
None.
86
Part III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item will be set forth under the captions "Proposal 1: Election of Directors," "Section 16(a) Beneficial Ownership
Reporting Compliance," "Code of Business Conduct and Ethics," and "Board and Committee Governance" in the Proxy Statement to be filed with the SEC
no later than 120 days after the close of our fiscal year ended June 30, 2021. If the Proxy Statement is not filed with the SEC by such time, such
information will be included in an amendment to this Annual Report by such time.
Item 11. Executive Compensation
The information required by this item will be set forth under the captions "Compensation of Named Executive Officers" and "Compensation Discussion
and Analysis" in the Proxy Statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended June 30, 2021. If the Proxy
Statement is not filed with the SEC by such time, such information will be included in an amendment to this Annual Report by such time.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended June 30, 2021. If the Proxy Statement is not filed with the
SEC by such time, such information will be included in an amendment to this Annual Report by such time.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be set forth under the caption "Certain Relationships and Related Party Transactions" in the Proxy Statement to
be filed with the SEC no later than 120 days after the close of our fiscal year ended June 30, 2021. If the Proxy Statement is not filed with the SEC by such
time, such information will be included in an amendment to this Annual Report by such time.
Item 14. Principal Accounting Fees and Services
The information required by this item will be set forth under the caption "Fees of Independent Accounting Firm" in the Proxy Statement to be filed with the
SEC no later than 120 days after the close of our fiscal year ended June 30, 2021. If the Proxy Statement is not filed with the SEC by such time, such
information will be included in an amendment to this Annual Report by such time.
87
Part IV
Item 15. Exhibits, Financial Statement Schedules
The following documents are included in "Financial Statements and Supplementary Data" in Part II, Item 8 of this Annual Report on Form 10-K:
1.
Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the years ended June 30, 2021, 2020, and 2019
Consolidated Statements of Comprehensive Income for the years ended June 30, 2021, 2020, and 2019
Consolidated Balance Sheets as of June 30, 2021 and 2020
Consolidated Statements of Cash Flows for the years ended June 30, 2021, 2020, and 2019
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended June 30, 2021, 2020, and 2019
Notes to the Consolidated Financial Statements
2.
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts.
The following exhibits are filed with this Annual Report on Form 10-K or incorporated herein by reference to the document set forth next to the exhibit in
the list below:
Incorporated by Reference
Exhibit
Number
Exhibit Description
Form
File No.
Exhibit
Filing Date
Filed Herewith
3.1
Certificate of Incorporation of CDK Global, Inc.
8-K
1-36486
3.1
10/1/2014
3.2
Amended and Restated By-Laws of CDK Global, Inc., dated March 7,
2017
8-K
1-36486
3.1
3/9/2017
4.1
Description of Securities of the Registrant
X
4.2
Indenture, dated as of October 14, 2014, among CDK Global, Inc. and
U.S. Bank National Association, as trustee, pursuant to which the
4.50% Senior Notes due 2024 were issued
8-K
1-36486
4.2
10/17/2014
4.3
Indenture, dated as of May 15, 2017, between CDK Global, Inc. and
U.S. Bank National Association, as trustee, pursuant to which the
4.875% senior notes due 2027 were issued
8-K
1-36486
4.1
5/15/2017
4.4
Indenture, dated as of May 15, 2019, between CDK Global, Inc. and
U.S. Bank National Association, as trustee, pursuant to which the
5.25% senior notes due 2029 were issued
8-K
1-36486
4.1
5/15/2019
10.1
Form of Indemnification Agreement
8-K
1-36486
10.1
6/7/2018
10.2
Amended and Restated Corporate Officer Severance Plan
(Management Compensatory Plan)
8-K
1-36486
10.1
9/7/2017
10.3
Third Amended and Restated Change in Control Severance Plan for
Corporate Officers (Management Compensatory Plan)
10-K
1-36486
10.11
8/8/2017
10.4
CDK Global Inc., Amended and Restated Deferred Compensation
Plan, effective November 6, 2018
10-Q
1-36486
10.7
11/7/2018
10.5
CDK Global, Inc., Amended and Restated Retirement and Savings
Restoration Plan, effective November 6, 2018 (Management
Compensatory Plan)
10-Q
1-36486
10.8
11/7/2018
10.6
CDK Global, Inc. 2014 Omnibus Award Plan (Management
Compensatory Plan)
DEF 14A
1-36486
Appendix A
9/22/2015
10.7
First Amendment to the CDK Global, Inc. 2014 Omnibus Award Plan
(Management Compensatory Plan)
10-K
1-36486
10.6
8/8/2017
10.8
UK Tax Advantaged Sub-Plan (Management Compensatory Plan)
8-K
1-36486
10.1
1/26/2015
88
10.9
Form of Deferred Unit Award Agreement under the 2014 Omnibus
Award Plan (Form for Non-Employee Director) (Management
Compensatory Plan)
10-Q
1-36486
10.18
11/13/2014
10.10
Form of Restricted Stock Unit Award Agreement under the 2014
Omnibus Award Plan (Form for Non-Employee Director)
(Management Compensatory Plan)
10-Q
1-36486
10.7
11/3/2015
10.11
Form of Stock Option Grant Agreement under the 2014 Omnibus
Award Plan (Form for Non-Employee Director) (Management
Compensatory Plan)
10-Q
1-36486
10.8
11/3/2015
10.12
Form of Stock Option Grant Agreement under the 2014 Omnibus
Award Plan (Form for Corporate Officers) (Management
Compensatory Plan)
10-Q
1-36486
10.8
2/3/2016
10.13
Form of Stock Option Grant Agreement under the 2014 Omnibus
Award Plan (Form for Corporate Officers) (Management
Compensatory Plan)
10-K
1-36486
10.15
8/6/2020
10.14
Form of Performance Based Stock Option Award Agreement under the
2014 Omnibus Award Plan (Form for Corporate Officers)
(Management Compensatory Plan)
10-Q
1-36486
10.5
11/7/2018
10.15
Form of Performance Based Stock Option Award Agreement under the
2014 Omnibus Award Plan (Form for Corporate Officers)
(Management Compensatory Plan)
10-Q
1-36486
10.6
11/7/2018
10.16
UK Tax Advantaged Sub-Plan Form of Stock Option Grant Agreement
under the 2014 Omnibus Award Plan (Form for Corporate Officers)
(Management Compensatory Plan)
10-Q
1-36486
10.9
2/3/2016
10.17
Form of Restricted Stock Unit Award Agreement under the 2014
Omnibus Award Plan (Form for Corporate Officers) (Management
Compensatory Plan)
8-K
1-36486
10.1
9/6/2018
10.18
Form of Restricted Stock Unit Award Agreement under the 2014
Omnibus Award Plan (Form for Corporate Officers) (Management
Compensatory Plan)
8-K
1-36846
10.1
9/11/2019
10.19
Form of Restricted Stock Unit Award Agreement under the 2014
Omnibus Award Plan (Form for Corporate Officers) (Management
Compensatory Plan)
10-K
1-36846
10.22
8/6/2020
10.20
Form of Performance Stock Unit Award Agreement under the 2014
Omnibus Award Plan (Form for Corporate Officers) (Management
Compensatory Plan)
8-K
1-36486
10.2
9/6/2018
10.21
Form of Performance Stock Unit Award Agreement under the 2014
Omnibus Award Plan (Form for Corporate Officers) (Management
Compensatory Plan)
8-K
1-36846
10.2
9/11/2019
10.22
Form of Performance Stock Unit Award Agreement under the 2014
Omnibus Award Plan (Form for Corporate Officers) (Management
Compensatory Plan)
10-K
1-36846
10.27
8/6/2020
10.23
Employment Agreement, dated as of November 5, 2018, by and
between the Company and Brian Krzanich
8-K
1-36486
10.9
11/7/2018
10.24
Offer Letter, dated December 2, 2020, by and between CDK Global,
Inc. and Eric Guerin
8-K
1-36486
10.1
12/15/2020
10.25
Share Sale and Purchase Agreement, dated November 27,2020, by and
among CDK Global, Inc., and Concorde Bidco limited, with respect to
all of the issued share capital of CDK Global Holdings (UK) Limited
10-Q
1-36486
10.1
2/9/2021
10.26
Letter Agreement, dated March 1, 2021, between CDK Global, Inc.
and Concorde Bidco Limited
10-Q
1-36486
10.1
5/6/2021
10.27
Revolving Credit Agreement Dated as of May 24, 2021 among CDK
Global, Inc. and Bank of America, N.A.
8-K
1-36486
10.1
5/25/2021
10.28
Agreement and Plan of Merger, dated as of June 2, 2021, among CDK
Global, Inc., Spyder Merger Corp., Roadster, Inc., and Fortis Advisors
LLC, as the Stockholder Representative
X
21.1
Subsidiaries of the Registrant
X
23.1
Consent of Deloitte & Touche LLP, independent registered public
accounting firm
X
31.1
Certification by Brian Krzanich pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934
X
89
31.2
Certification by Eric J. Guerin pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934
X
32.1
Certification by Brian Krzanich pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
32.2
Certification by Eric J. Guerin pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
101.INS
XBRL Instance Document - the instance document does not appear in
the Interactive Data File because its XBRL tags are embedded within
the Inline XBRL document.
X
101.SCH
XBRL taxonomy extension schema document
X
101.CAL
XBRL taxonomy extension calculation linkbase document
X
101.LAB
XBRL taxonomy label linkbase document
X
101.PRE
XBRL taxonomy extension presentation linkbase document
X
101.DEF
XBRL taxonomy extension definition linkbase document
X
104
Cover Page Interactive Data File (formatted as Inline XBRL and
contained in Exhibit 101)
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CDK GLOBAL, INC.
By:
/s/ Eric J. Guerin
Eric J. Guerin
Executive Vice President, Chief Financial Officer
August 17, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Brian Krzanich
President, Chief Executive Officer and Director (principal executive officer)
August 17, 2021
Brian Krzanich
/s/ Eric J. Guerin
Executive Vice President, Chief Financial Officer (principal financial officer)
August 17, 2021
Eric J. Guerin
/s/ Neil Fairfield
Vice President, Corporate Controller and Chief Accounting Officer (principal
accounting officer)
August 17, 2021
Neil Fairfield
/s/ Leslie A. Brun
Director
August 17, 2021
Leslie A. Brun
/s/ Willie A. Deese
Director
August 17, 2021
Willie A. Deese
/s/ Amy J. Hillman
Director
August 17, 2021
Amy J. Hillman
/s/ Stephen A. Miles
Director
August 17, 2021
Stephen A. Miles
/s/ Robert E. Radway
Director
August 17, 2021
Robert E. Radway
/s/ Stephen F. Schuckenbrock
Director
August 17, 2021
Stephen F. Schuckenbrock
/s/ Frank S. Sowinski
Director
August 17, 2021
Frank S. Sowinski
/s/ Eileen J. Voynick
Director
August 17, 2021
Eileen J. Voynick
91
Exhibit 4.1
DESCRIPTION OF REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF
THE SECURITIES EXCHANGE ACT OF 1934
As of August 16, 2021, CDK Global, Inc. (the “Company,” “CDK,” “we,” “us,” and “our”) had one class of securities registered under Section 12
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”): our common stock, par value $0.01 per share.
DESCRIPTION OF CAPITAL STOCK
The following is a summary of information concerning our capital stock, including a summary of certain material terms and provisions of our
certificate of incorporation and our amended and restated by-laws. This summary does not purport to be complete and is qualified in its entirety by
reference to our certificate of incorporation, our amended and restated by-laws and the applicable provisions of the General Corporation Law of the State of
Delaware (“DGCL”).
Capital Stock
Shares Outstanding. We are authorized to issue up to 650,000,000 shares of common stock, par value $0.01 per share. As of August 16, 2021, we
had 120,831,922 shares of common stock issued and outstanding.
Dividends. Subject to prior dividend rights of the holders of any preferred shares, holders of shares of our common stock are entitled to receive
dividends when, as and if declared by our board of directors out of funds legally available for that purpose. Delaware law allows a corporation to pay
dividends only out of surplus, as determined under Delaware law.
Voting Rights. Each share of common stock is entitled to one vote on all matters submitted to a vote of stockholders. Holders of shares of our
common stock do not have cumulative voting rights. This means a holder of a single share of common stock cannot cast more than one vote for each
position to be filled on our board of directors. It also means the holders of a majority of the shares of common stock entitled to vote in the election of
directors can elect all directors standing for election and the holders of the remaining shares will not be able to elect any directors.
Other Rights. In the event of any liquidation, dissolution or winding up of our company, after the satisfaction in full of the liquidation preferences
of holders of any preferred shares, holders of shares of our common stock are entitled to ratable distribution of the remaining assets available for
distribution to stockholders. The shares of our common stock are not subject to redemption by operation of a sinking fund or otherwise. Holders of shares
of our common stock are not currently entitled to pre-emptive rights.
Fully Paid. The issued and outstanding shares of our common stock are fully paid and non-assessable. This means the full purchase price for the
outstanding shares of our common stock has been paid and the holders of such shares will not be assessed any additional amounts for such shares. Any
additional shares of common stock that we may issue in the future will also be fully paid and non-assessable.
Preferred Stock
We are authorized to issue up to 50,000,000 shares of preferred stock from time to time in one or more series and with such rights and preferences
as determined by our board of directors with respect to each series. As of the date of this filing, no shares of our preferred stock are issued and outstanding.
Limitation on Liability of Directors and Officers
We are a Delaware corporation. Our certificate of incorporation provides that no director is personally liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director, except as required by applicable law, as in effect from time to time. Currently, Delaware law
requires that liability be imposed only for the following:
•
any breach of the director’s duty of loyalty to our company or our stockholders;
•
any act or omission not in good faith or which involved intentional misconduct or a knowing violation of law;
•
unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL; and
•
any transaction from which the director derived an improper personal benefit.
As a result, neither we nor our stockholders have the right, including through stockholders’ derivative suits on our behalf, to recover monetary
damages against a director for breach of fiduciary duty as a director, including breaches resulting from grossly negligent behavior, except in the situations
described above.
Our certificate of incorporation provides that, to the fullest extent permitted by law, we will indemnify any officer or director of our company in
connection with any threatened, pending or completed action, suit or proceeding to which such person is, or is threated to be made, a party, whether civil or
criminal, administrative or investigative, arising out of the fact that the person is or was our director or officer, or served any other enterprise at our request
as a director or officer. We will reimburse the expenses, including attorneys’ fees, incurred by a person indemnified by this provision in connection with
any proceeding, including in advance of its final disposition, to the fullest extent permitted by law. Amending this provision will not reduce our
indemnification obligations relating to actions taken before an amendment.
We maintain insurance for our officers and directors against certain liabilities, including liabilities under the Securities Act, under insurance
policies, the premiums of which are paid by us. The effect of these is to indemnify any officer or director of the Company against expenses, judgments,
attorney’s fees and other amounts paid in settlements incurred by an officer or director arising from claims against such persons for conduct in their
capacities as officers or directors of the Company.
Anti-Takeover Effects of Our Certificate of Incorporation and By-laws and Delaware Law
Some provisions of our certificate of incorporation and by-laws and Delaware law could make the following more difficult:
•
acquisition of us by means of a tender offer;
•
acquisition of us by means of a proxy contest or otherwise; or
•
removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are
also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of increased
protection give us the potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us and outweigh the
disadvantages of discouraging those proposals because negotiation of them could result in an improvement of their terms.
2
Size of Board and Vacancies
Our by-laws provide that our board of directors have one or more members, which number is determined by resolution of our board of directors.
Directors are elected at each annual meeting of stockholders by the vote of a majority of the shares present. Any director may be removed at any time, with
or without cause, upon the affirmative vote of holders of a majority of the outstanding shares of our stock. Newly created directorships resulting from any
increase in our authorized number of directors or any vacancies in our board of directors resulting from death, resignation, retirement, removal from office
or other cause may be filled by the majority vote of our remaining directors in office, or by the sole remaining director, or by a majority vote of our
stockholders at a special meeting called for that purpose. If at such special meeting no person nominated to fill the vacancy receives a majority of such
votes, then such vacancy will be filled by the majority of remaining directors in office.
Elimination of Stockholder Action by Written Consent
Our certificate of incorporation eliminates the right of our stockholders to act by written consent. Stockholder action must take place at the annual
or a special meeting of our stockholders.
Stockholder Meetings
Under our by-laws, only our chairman, chief executive officer or our board of directors may call special meetings of our stockholders.
Requirements for Advance Notification of Stockholder Nominations and Proposals
Our by-laws establish advance notice procedures with respect to stockholder proposals and nomination of candidates for election as directors other
than nominations made by or at the direction of our board of directors or a committee of our board of directors.
Delaware Anti-Takeover Law
We are subject to Section 203 of the DGCL, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a business combination with an interested stockholder for a period of three years following the date such person became an interested
stockholder, unless the business combination or the transaction in which such person became an interested stockholder is approved in a prescribed manner.
Generally, a “business combination” includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder.
Generally, an “interested stockholder” is a person that, together with affiliates and associates, owns, or within three years prior to the determination of
interested stockholder status did own, 15% or more of a corporation’s voting stock. The existence of this provision may have an anti-takeover effect with
respect to transactions not approved in advance by our board of directors, including discouraging attempts that might result in a premium over the market
price for the shares of our common stock.
No Cumulative Voting
Neither our certificate of incorporation nor our by-laws provide for cumulative voting in the election of directors.
Undesignated Preferred Stock
The authorization of our undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other
rights or preferences that could impede the success of any attempt to change control of our company.
3
Forum for Adjudication of Disputes
Our certificate of incorporation provides that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the
State of Delaware is the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting breach of a fiduciary
duty owed by any of our directors, officers or other employees, any action asserting a claim arising pursuant to the DGCL or any action asserting a claim
governed by the internal affairs doctrine.
Despite the foregoing, it is possible that a court could rule that such provision is inapplicable or unenforceable. In addition, this provision would
not affect the ability of our stockholders to seek remedies under the federal securities laws.
Transfer Agent and Registrar
Our transfer agent and registrar is EQ Shareowner Services.
Listing
Our shares of common stock are listed on NASDAQ Global Select Market under the ticker symbol “CDK.”
4
Exhibit 10.28
AGREEMENT AND PLAN OF MERGER
AMONG
CDK GLOBAL, INC.,
SPYDER MERGER CORP.,
ROADSTER, INC.,
AND
FORTIS ADVISORS LLC, AS THE STOCKHOLDER REPRESENTATIVE
Dated as of June 2, 2021
TABLE OF CONTENTS
Page
ARTICLE 1. DEFINITIONS
1
Section 1.1 Definitions
1
Section 1.2 Other Definitional Provisions and Interpretation; Schedules
20
ARTICLE 2. THE MERGER; CLOSING
20
Section 2.1 The Merger
20
Section 2.2 Closing; Effective Time.
20
Section 2.3 Certificate of Incorporation and Bylaws
21
Section 2.4 Directors and Officers
21
Section 2.5 Conversion of Shares
21
Section 2.6 Dissenting Shares
22
Section 2.7 Treatment of Company Options and Company Warrants.
23
Section 2.8 Holdbacks.
23
Section 2.9 Payments by Purchaser
24
Section 2.10 Cancellation of Company Options and Company Warrants; Closing of Stock Transfer Books; Unclaimed
Funds.
25
Section 2.11 Deliveries by Purchaser and Merger Sub
26
Section 2.12 Deliveries by the Company
27
ARTICLE 3. MERGER CONSIDERATION; ADJUSTMENT
28
Section 3.1 Merger Consideration
28
Section 3.2 Estimated Merger Consideration; Allocation Statement.
29
Section 3.3 Determination of Final Merger Consideration.
30
Section 3.4 Withholding
33
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
34
Section 4.1 Organization and Authorization of the Company.
34
Section 4.2 Capitalization of the Company.
35
Section 4.3 Governmental Consents; No Conflicts.
37
Section 4.4 Financial Statements; No Undisclosed Liabilities.
38
Section 4.5 Absence of Certain Changes
39
Section 4.6 Assets.
39
Section 4.7 Real Property.
39
Section 4.8 Intellectual Property.
40
Section 4.9 Information Technology; Data Privacy and Security.
42
Section 4.10 Material Contracts
45
Section 4.11 Permits
47
Section 4.12 Benefit Plans.
47
Section 4.13 Employee and Labor Matters.
49
Section 4.14 Environmental Matters.
51
Section 4.15 Taxes.
51
-i-
TABLE OF CONTENTS
(continued)
Page
Section 4.16 Proceedings and Orders.
53
Section 4.17 Compliance with Laws
54
Section 4.18 Accounts Receivable
54
Section 4.19 Material Customers and Material Suppliers.
54
Section 4.20 Related Party Transactions.
55
Section 4.21 Bank Accounts
55
Section 4.22 Insurance
55
Section 4.23 Required Stockholder Approval
56
Section 4.24 Takeover Laws
56
Section 4.25 Disclosure
56
Section 4.26 CARES Act Compliance.
56
Section 4.27 Anti-Corruption Matters
57
Section 4.28 Drag-Along
58
Section 4.29 Brokers
58
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF PURCHASER AND MERGER SUB
58
Section 5.1 Organization and Authorization
58
Section 5.2 Governmental Consents; No Conflicts.
59
Section 5.3 Proceedings
59
Section 5.4 Availability of Funds
59
Section 5.5 Merger Sub
60
Section 5.6 Brokers
60
Section 5.7 No Additional Representations or Warranties
60
ARTICLE 6. PRE-CLOSING COVENANTS AND AGREEMENTS
61
Section 6.1 Access to Information
61
Section 6.2 Conduct of Business Pending the Closing
61
Section 6.3 Consents and Approvals.
63
Section 6.4 Notification of Certain Matters
65
Section 6.5 Exclusivity
65
Section 6.6 Required Stockholder Approval.
66
Section 6.7 Merger Sub Stockholder Approval
66
Section 6.8 Takeover Laws
66
Section 6.9 Termination of Related Party Contracts
66
Section 6.10 D&O Insurance
67
Section 6.11 Resignations
67
Section 6.12 Confidentiality
67
Section 6.13 R&W Insurance Policy
67
Section 6.14 PPP Loan
67
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TABLE OF CONTENTS
(continued)
Page
ARTICLE 7. ADDITIONAL COVENANTS AND AGREEMENTS
67
Section 7.1 Tax Matters.
67
Section 7.2 Employees and Employee Benefits.
70
Section 7.3 Books and Records.
71
Section 7.4 Release
71
ARTICLE 8. CONDITIONS TO CLOSING
72
Section 8.1 Conditions to Each Party’s Obligations
72
Section 8.2 Additional Conditions to Obligations of Purchaser and Merger Sub
73
Section 8.3 Additional Conditions to Obligations of the Company
74
Section 8.4 Frustration of Closing Conditions
75
ARTICLE 9. TERMINATION
75
Section 9.1 Termination
75
Section 9.2 Effect of Termination
76
ARTICLE 10. INDEMNIFICATION
76
Section 10.1 Survival
76
Section 10.2 Indemnification of Purchaser
76
Section 10.3 Indemnification of the Equityholders
78
Section 10.4 Certain Matters Relating to Indemnification.
78
Section 10.5 Claims.
80
Section 10.6 Notice of Third Party Claims; Assumption of Defense.
81
Section 10.7 Settlement or Compromise.
82
Section 10.8 Calculation of Losses
82
Section 10.9 Adjustment to Merger Consideration
82
Section 10.10 No Right of Contribution
83
Section 10.11 Remedies Exclusive
83
ARTICLE 11. Stockholder Representative
83
Section 11.1 Authority
83
Section 11.2 Reliance by Purchaser
84
Section 11.3 Stockholder Representative Amount
84
Section 11.4 Exculpation
85
ARTICLE 12. MISCELLANEOUS
86
Section 12.1 Expenses
86
Section 12.2 Amendments
86
Section 12.3 Notices
86
Section 12.4 United States Dollars
88
Section 12.5 Waivers
88
Section 12.6 Assignment
88
Section 12.7 No Third Party Beneficiaries
88
-iii-
TABLE OF CONTENTS
(continued)
Page
Section 12.8 Publicity
88
Section 12.9 Further Assurances
89
Section 12.10 Severability
89
Section 12.11 Entire Agreement
89
Section 12.12 No Strict Construction
89
Section 12.13 Governing Law
89
Section 12.14 Jurisdiction, Service, and Venue
89
Section 12.15 WAIVER OF TRIAL BY JURY
90
Section 12.16 Equitable Relief
90
Section 12.17 Privileged Communications
91
Section 12.18 No Waiver of Privilege; Protection from Disclosure or Use
91
Section 12.19 Counterparts
91
Section 12.20 Disclosure Schedules
92
Section 12.21 Complete Agreement
92
-iv-
EXHIBITS
Exhibit A [Reserved]
Exhibit B Certificate of Merger
Exhibit C Letter of Transmittal
Exhibit D Written Consent
Exhibit E Data Room Index
Exhibit F Paying Agent Agreement
Exhibit G Warrant Cancellation Agreement
Exhibit H PPP Escrow Agreement
SCHEDULES
Schedule 1.1A Net Working Capital Calculation
Schedule 1.1B Conduct of the Business
v
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER is made as of June 2, 2021, among CDK Global, Inc., a Delaware limited
liability company (“Purchaser”), Spyder Merger Corp., a Delaware corporation and a wholly-owned Subsidiary of Purchaser
(“Merger Sub”), Roadster, Inc., a Delaware corporation (the “Company”), and Fortis Advisors LLC, a Delaware limited liability
company, as representative of the stockholders of the Company for certain purposes described in this Agreement (the
“Stockholder Representative”). Purchaser, Merger Sub, the Company, and the Stockholder Representative are each sometimes
referred to in this Agreement as a “Party,” and collectively as the “Parties.” Certain capitalized terms used in this Agreement
have the meanings set forth in ARTICLE 1.
PRELIMINARY STATEMENTS
A. The Company is engaged in the business of providing online vehicle retailing solutions and other services related
thereto for retailers and manufacturers, including (a) a consumer-facing retailing and communication platform, (b) interactive
website and mobile applications, inventory and pricing tools, trade-in tools and services, service and protection plans, physical
accessory sales, credit application and financing services, electronic transaction processing and contracting services and (c)
support, training and consulting services with respect to online retailing and related workflows (the “Business”).
B. Purchaser desires to acquire the Company through a merger of Merger Sub with and into the Company.
C. The respective boards of directors of each of the Company, Purchaser, and Merger Sub have unanimously approved
this Agreement and the consummation of the Merger and the other transactions contemplated by this Agreement.
D. The respective boards of directors of each of the Company and Merger Sub have declared this Agreement to be
advisable and in the best interests of their respective stockholders and have directed that this Agreement be submitted to their
respective stockholders for approval.
E. Concurrently with the execution of this Agreement, certain Stockholders are entering into support agreements with
Purchaser, pursuant to which each such Stockholder has, among other things, irrevocably agreed to, among other things, execute
a written consent in favor of adopting this Agreement and exercising the drag-along provisions of Article 4 of the Voting
Agreement (the “Drag-Along”).
NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants, and agreements contained in
this Agreement, the Parties agree as follows:
ARTICLE 1.
DEFINITIONS
Section 1.1
Definitions. The following terms shall have the following meanings for purposes of this Agreement:
“Accounting Firm” has the meaning set forth in Section 3.3(c).
“Accounting Principles” has the meaning set forth in Section 3.2(a).
“Adjustment Holdback Amount” means Three Million Dollars ($3,000,000).
“Advisory Group” has the meaning set forth in Section 11.4.
“Affiliate” means, with respect to any specified Person, any other Person that, directly or indirectly, controls, is under
common control with, or is controlled by such specified Person. The term “control” (including its correlative meanings “under
common control with” and “controlled by”) as used in the preceding sentence means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of a Person, whether through ownership of securities or
partnership or other interests, by contract, or otherwise.
“Agreement” means this Agreement and Plan of Merger, including all Exhibits and Schedules.
“Aggregate Option Exercise Price” means $1,848,753.51.
“Aggregate Warrant Exercise Price” means $133,175.43.
“Anti-Corruption Laws” means all Laws relating to the prevention of corruption or bribery, including the U.S. Foreign
Corrupt Practices Act of 1977 and the UK Bribery Act 2010.
“Antitrust Law” means any federal, state, or foreign antitrust, competition, or trade regulation, statute, rule, regulation,
Order, decree, administrative and judicial doctrine, or other Law, that is designed or intended to prohibit, restrict, or regulate
actions having the purpose or effect of monopolization or restraint of trade or lessening of competition through merger or
acquisition, including the Clayton Act, 15 U.S.C. §§ 12-27, as amended, and the HSR Act.
“As-Converted Series A Preferred Stock” means, with respect to each share of Series A Preferred Stock, the number of
shares of Common Stock into which such share of Series A Preferred Stock is then convertible pursuant to Section B.4 of Article
IV of the Company Charter.
“As-Converted Series B Preferred Stock” means, with respect to each share of Series B Preferred Stock, the number of
shares of Common Stock into which such share of Series B Preferred Stock is then convertible pursuant to Section B.4 of Article
IV of the Company Charter.
2
“As-Converted Series B-1 Preferred Stock” means, with respect to each share of Series B-1 Preferred Stock, the number
of shares of Common Stock into which such share of Series B-1 Preferred Stock is then convertible pursuant to Section B.4 of
Article IV of the Company Charter.
“Authorized Action” has the meaning set forth in Section 11.1.
“Benefit Plan” means (a) an “employee benefit plan” within the meaning of Section 3(3) of ERISA, (b) a stock bonus,
stock purchase, stock option, restricted stock, stock appreciation right or similar equity or equity-based plan, or (c) any retirement
or deferred compensation plan, incentive compensation plan, commission plan or arrangement, retention plan or agreement,
unemployment compensation plan, vacation pay, change in control, severance pay, non-discretionary bonus or benefit
arrangement, insurance or hospitalization program, flexible benefit plan, cafeteria plan, dependent care plan or any fringe benefit
arrangements, whether pursuant to Contract, arrangement, custom or informal understanding, which does not constitute an
employee benefit plan within the meaning of Section 3(3) of ERISA.
“Business” has the meaning set forth in the preliminary statements to this Agreement.
“Business Day” means any day of the year other than (a) any Saturday or Sunday or (b) any other day on which banks
located in New York, New York or Chicago, Illinois are authorized or required to be closed for business.
“Cancelled Shares” has the meaning set forth in Section 2.5(b).
“Cap” has the meaning set forth in Section 10.3(b).
“Capital Lease” means any lease that would have been required to be classified as a capital lease in accordance with
GAAP prior to the adoption of ASC 842 (and excluding, for the avoidance of doubt, any lease that would have been classified as
an operating lease in accordance with GAAP prior to the adoption of ASC 842).
“CARES Act” has the meaning set forth in Section 4.15(o).
“Cash” means cash and cash equivalents, excluding (a) cash pledged or held as collateral under any letters of credit (but
only to the extent drawn upon), surety bonds, performance bonds, or other similar instruments, (b) cash that is not freely useable
because it is subject to legal or other restrictions on transfer and (c) credit card receivables arising in connection with sales to
customers who made such purchase using a credit card or debit card.
“CERCLA” means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980.
“CERCLIS” means the Comprehensive Environmental Response, Compensation and Liability Information System.
3
“Certificate of Merger” has the meaning set forth in Section 2.2(b).
“Claim Notice” has the meaning set forth in Section 10.4.
“Closing” has the meaning set forth in Section 2.2(a).
“Closing Date” has the meaning set forth in Section 2.2(a).
“Closing Date Cash” means the aggregate amount of Cash of the Company calculated as of the Determination Time in
accordance with the Accounting Principles. Closing Date Cash shall (a) be calculated net of issued but uncleared checks and
drafts written or issued by the Company as of the Determination Time and (b) include checks, drafts, wire transfers and other
deposits deposited or in transit for the account of the Company; provided, however, that Closing Date Cash shall not be (i)
reduced by issued but uncleared checks and drafts written or issued described in clause (i) above or (ii) increased by checks,
drafts, wire transfers and other deposits described in clause (ii) above, in either case to the extent such amounts are reflected as a
Current Liability or Current Asset, respectively, in the determination of Closing Date Net Working Capital.
“Closing Date Indebtedness” means (a) the aggregate amount of Indebtedness of the Company calculated as of the
Determination Time in accordance with the Accounting Principles plus (b) all Transfer Taxes plus (c) the Net Tax Amount plus
(d) Collected Deferred Revenue plus (e) Four Hundred Eighteen Thousand Dollars ($418,000) in respect of certain matters
identified by Purchaser during its due diligence with respect to the Company. Notwithstanding the foregoing, to avoid
duplication, “Closing Date Indebtedness” shall not include (i) any liability to the extent such liability is accrued as a Current
Liability for purposes of Closing Date Net Working Capital and (ii) the amount of the PPP Loan (which is the subject matter of
Section 2.9(b)).
“Closing Date Net Working Capital” means an amount equal to Current Assets minus Current Liabilities, in each case as
calculated in accordance with the Accounting Principles as illustrated in the calculation set forth on Schedule 1.1A.
“Closing Date Payoff Indebtedness” means all Closing Date Indebtedness, other than Closing Date Indebtedness
described in clause (c) of the definition of “Closing Date Indebtedness” and Transfer Taxes.
“Closing Equityholder Payment Amount” means an amount equal to the Estimated Merger Consideration less the
Adjustment Holdback Amount less the Indemnity Holdback Amount less the PPP Escrow Amount less the Stockholder
Representative Amount.
“Code” means the United States Internal Revenue Code of 1986, as amended.
“Collected Deferred Revenue” means the aggregate amount of deferred revenue of the Company calculated as of the
Determination Time in accordance with the Accounting Principles,
4
but only to the extent the applicable customer has funded such deferred revenue in Cash as of the Determination Time.
“Common Stock” means the Company’s common stock, $0.0001 par value per share.
“Common Stockholder” means a holder of Common Stock.
“Company” has the meaning set forth in the preamble to this Agreement.
“Company 401(k) Plan” means the Roadster Inc. Retirement Trust.
“Company Benefit Plan” means each Benefit Plan that is sponsored or maintained by the Company or any or its ERISA
Affiliates, to which the Company or any of its ERISA Affiliates is a party or in which the Company or any of its ERISA
Affiliates participates or with respect to which the Company has or could have any Liability.
“Company Charter” means the Amended and Restated Certificate of Incorporation of the Company, dated May 1, 2020.
“Company Copyrights” means the copyrights and works of authorship (and any applications for registration of the same)
owned by the Company.
“Company Data” means all data, meta-data, or information (a) transmitted to the Company by users or customers of any
Company’s products or Company website, or (b) contained in any Company IT Systems or other databases of the Company and
all other information, data and compilations thereof used by, or necessary to the Business of, the Company.
“Company Equity Plan” means the 2015 Stock Option and Grant Plan.
“Company Intellectual Property” means the Intellectual Property owned or purported to be owned by the Company.
“Company IT Systems” has the meaning set forth in Section 4.9(a).
“Company Options” means the issued and outstanding options to purchase shares of Common Stock under the Company
Equity Plan.
“Company Patents” means the patents and pending patent applications owned by the Company.
“Company Real Property” has the meaning set forth in Section 4.7(b).
“Company Records” means all customer lists, supplier lists, product price lists, sales records, product specifications,
advertising materials, engineering data, maintenance schedules,
5
and operating and production records relating to the Company or used in connection with the Business.
“Company Registered Intellectual Property” has the meaning set forth in Section 4.8(a).
“Company Software” has the meaning set forth in Section 4.8(h).
“Company Trademarks” means the trade names, trademarks, service names, service marks, and Internet domain names
(and applications for registration of the same) owned by the Company.
“Company Warrants” means any and all warrants or other rights, other than Preferred Stock or Company Options, to
purchase Company Stock or any other securities of the Company.
“Company’s Knowledge” means the actual knowledge of Andy Moss, Michael Lenz, Rudi Thun, Matthew Wolf,
Elizabeth Macnew, Trey Matteson, and, solely with respect to Section 4.8 and Section 4.9, Shui Wing Lo and Kevin Whitley, in
each case after reasonable inquiry, including consulting with such individual’s direct reports with operational responsibility for
the matters in question.
“Competing Transaction” has the meaning set forth in Section 6.5.
“Confidentiality Agreement” means the Non-Disclosure Agreement, dated as of June 30, 2020, between CDK Global, Inc.
and the Company, together with the Clean Team Amendment to Non-Disclosure Agreement executed by CDK Global, Inc. and
the Company on March 3, 2021.
“Consent” means a consent, authorization, or approval of, or a filing, notification, or registration with, a Person.
“Continuing Employee” has the meaning set forth in Section 7.2(a).
“Contract” means any contract, agreement, letter of intent, agreement in principle, lease, license, sales order, purchase
order, indenture, mortgage, note, bond, guaranty, or other legally binding arrangement or understanding, whether written or oral.
“Counsel” has the meaning set forth in Section 12.17.
“COVID-19” means the novel coronavirus, SARS-CoV-2 or COVID-19 (and all related strains, variants and sequences),
including any intensification, resurgence or any evolutions or mutations thereof, and/or related or associated epidemics,
pandemics, disease outbreaks or public health emergencies.
“Current Assets” means the aggregate amount of (a) accounts receivable (including credit card receivables arising in
connection with sales to customers who made such purchases using a credit card or debit card); provided that the accounts
receivable described in this clause (a) shall
6
exclude any accounts receivable that as of the Closing Date are aged more than ninety (90) days and (b) ordinary course prepaid
expenses, in each case calculated as of the Determination Time in accordance with the Accounting Principles; provided, that
Current Assets shall exclude, for the avoidance of doubt, Cash and any current or deferred Income Tax assets, in each case
calculated as of the Determination Time in accordance with the Accounting Principles.
“Current Liabilities” means the aggregate amount of current liabilities (excluding any portion included in Indebtedness or
Transaction Expenses) of the Company, calculated as of the Determination Time in accordance with the Accounting Principles,
including (a) accounts payable, (b) payroll liabilities, (c) accrued expenses, (d) all accrued and unpaid current Tax liabilities other
than any Income Tax liabilities or Taxes otherwise included in Closing Date Indebtedness or Transaction Expenses and (e) all
deferred revenue other than Collected Deferred Revenue, in each case calculated as of the Determination Time in accordance
with the Accounting Principles.
“Currently Conducted” means the Business as currently conducted by the Company, including the conduct of the
Business consistent with its existing plans therefor in the jurisdictions listed on Schedule 1.1B.
“Data Room” means (i) the virtual data room on Intralinks, having the name “Project Spyder,” and (b) the virtual data
room on Dropbox, having the name “Project Spyder,” in each case as established by the Company in connection with the
transactions contemplated by this Agreement, and the index of each of which is set forth in Exhibit E.
“Deductible” has the meaning set forth in Section 10.3(a).
“Determination Time” means 12:01 a.m. Central Time on the Closing Date.
“DGCL” has the meaning set forth in Section 2.1.
“Disclosure Schedules” has the meaning set forth in ARTICLE 4.
“Dissenting Shares” has the meaning set forth in Section 2.6.
“Dollars” or numbers preceded by the symbol “$” mean amounts in United States Dollars.
“Drag-Along” has the meaning set forth in the preliminary statements to this Agreement.
“Effective Time” has the meaning set forth in Section 2.2(b).
“Employee Option Holder Amount” means an aggregate amount equal to the sum of the Per Option Merger Consideration
payable to all Employee Option Holders.
7
“Employee Option Holders” means Option Holders who are current or former Employees and identified with an asterisk
on the Preliminary Payment Allocation Statement and the Final Allocation Statement.
“Employees” means, as of any time of determination, those individuals employed by the Company at such time.
“Enforceability Limitations” means limitations on enforcement and other remedies imposed by or arising under or in
connection with applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium, and other similar Laws
relating to or affecting creditors’ rights generally from time to time in effect or general principles of equity (including concepts of
materiality, reasonableness, good faith, and fair dealing with respect to those jurisdictions that recognize such concepts).
“Environmental Law” means any applicable Laws (including common law) concerning the protection of human health or
the environment (including ambient air, surface water, groundwater, sediment, land, surface or subsurface strata, and natural
resources), including Laws (a) imposing Liability in connection with cleanup, investigation or remediation relative to any Release
or threatened Release, (b) relating to exposure to Hazardous Substances and protection of worker health and safety, and (c)
otherwise relating to the environmental aspects of the manufacture, processing, distribution, use, treatment, storage, disposal,
emission, transport, or handling of Hazardous Substances.
“Environmental Permit” means any Permit required by or issued pursuant to any Environmental Law.
“Equity Interests” means (a) shares of capital stock, limited liability company membership interests, partnership interests,
or other equity interests of an entity, as applicable, and (b) any options, warrants, convertible notes or other securities exercisable
for or convertible into any of the securities described in clause (a).
“Equityholders” means the Stockholders, the Option Holders and the Warrant Holders, collectively.
“Equityholder Indemnified Party” has the meaning set forth in Section 10.3.
“ERISA” means the Employee Retirement Income Security Act of 1974.
“ERISA Affiliate” means, with respect to any Person, any corporation, trade, or business which, together with such
Person, is a member of a controlled group of corporations or a group of trades or businesses under common control within the
meaning of Sections 414 of the Code.
“Estimated Closing Statement” has the meaning set forth in Section 3.2(a).
“Estimated Merger Consideration” has the meaning set forth in Section 3.2(a).
8
“Final Payment Allocation Statement” has the meaning set forth in Section 3.3(d).
“Final Merger Consideration” means the Merger Consideration, as the same becomes final and binding pursuant to
Section 3.3. For the avoidance of doubt, the Final Merger Consideration shall not exceed the Maximum Merger Consideration.
“Financial Statements” means (a) the unaudited financial statements of the Company for the fiscal years ended December
31, 2019 and December 31, 2020 (including, in each case, balance sheets, statements of operations, statements of cash flows and
statement of stockholders’ equity) and (b) the unaudited financial statements of the Company, for the three (3) month interim
period ended March 31, 2021 (including, balance sheet, statement of operations, statement of cash flows and statement of
stockholders’ equity).
“Foreign Official” means (i) any officer or employee of a foreign Governmental Authority, or of a public international
organization, or any person acting in an official capacity for or on behalf of any such Governmental Authority or public
international organization or (ii) candidate for foreign public office, foreign political party, or foreign political campaign.
“Fully-Diluted Common Stock” means the aggregate number of shares of Common Stock issued and outstanding as of
immediately prior to the Effective Time, including (a) if the Series A Liquidation Preference Amount for each share of Series A
Preferred Stock is less than the Series A Participation Amount for such shares, the As-Converted Series A Preferred Stock, (b) if
the Series B Liquidation Preference Amount for each share of Series B Preferred Stock is less than the Series B Participation
Amount for such shares, the As-Converted Series B Preferred Stock, (c) if the Series B-1 Liquidation Preference Amount for
each share of Series B-1 Preferred Stock is less than the Series B-1 Participation Amount for such shares, the As-Converted
Series B-1 Preferred Stock, (d) the number of shares of Common Stock for which all In-the-Money Warrants are exercisable as of
immediately prior to the Effective Time and (e) the number of shares of Common Stock for which all In-the-Money Options are
exercisable as of immediately prior to the Effective Time.
“Fully-Diluted Common Stockholder Proceeds” means an amount equal to the Final Merger Consideration less the
Preferred Stock Liquidation Preference Amount (if any) less the Stockholder Representative Amount.
“Fundamental Representations” means the representations and warranties set forth in Section 4.1, Section 4.2, Section
4.20, Section 4.23, Section 4.28, Section 4.29, Section 5.1, and Section 5.6.
“GAAP” means generally accepted accounting principles in the United States.
“General Indemnity Holdback Amount” means One Million Eight Hundred Thousand Dollars ($1,800,000).
9
“Governmental Authority” means any federal, state, provincial, local, foreign, or supra-national government or other
political subdivision thereof or any entity, body, authority, agency, commission, court, tribunal, or judicial body exercising
executive, legislative, judicial, regulatory, arbitral, or administrative law functions, including quasi-governmental entities
established to perform such functions.
“Hazardous Substance” means petroleum or any material or substance in such concentration that it is regulated or
controlled as a hazardous substance, toxic substance, hazardous waste, or pollutant under any Environmental Law.
“Health Plan” means a group health plan as defined in Section 733(a)(1) of ERISA.
“Healthcare Reform Laws” means, collectively, the Patient Protection and Affordable Care Act, Pub. L. No. 111-148 and
the Health Care and Education Reconciliation Act of 2010 and regulations and guidance issued thereunder.
“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
“In-the-Money Options” means Company Options having an exercise price per share below the Per Share Common Stock
Merger Consideration.
“In-the-Money Warrants” means Company Warrants having an exercise price per share below the Per Share Common
Stock Merger Consideration.
“Inbound IP License” has the meaning set forth in Section 4.8(c).
“Income Taxes” means Taxes imposed on or measured by or determined with reference to gross or net income (however
denominated) (but not including, for the avoidance of doubt, any withholding, sales, use, real or personal property, transfer or
similar Taxes).
“Indebtedness” means, with respect to any Person, without duplication, the principal, accrued and unpaid interest and any
prepayment premiums, penalties, or other fees and expenses, and any expense reimbursement or other payment obligations, in
each case determined as of the Determination Time in accordance with the Accounting Principles, in respect of (a) all
indebtedness of such Person for borrowed money, loans, or advances, (b) all indebtedness for the deferred purchase price of
properties, assets, or services (including all earn-out obligations but excluding trade payables), (c) all obligations evidenced by
notes, bonds, debentures, or other similar instruments, (d) all indebtedness created or arising under any conditional sale or other
title retention agreement, (e) all obligations under Capital Leases, (f) all reimbursement, payment, or similar obligations,
contingent or otherwise, under any banker’s acceptance, letter of credit, or similar facility, in each case, solely to the extent drawn
upon, (g) all obligations under surety bonds and performance bonds, in each case, solely to the extent drawn upon, (h) all
obligations under any interest rate, currency, or other derivative, hedging, swap, or similar instrument and (i) all Liabilities of any
other Person described in clauses (a) through (h) above
10
that such Person has, directly or indirectly, guaranteed or assumed, or that is otherwise its legal obligation.
“Indemnity Holdback Amount” means the sum of (a) the General Indemnity Holdback Amount plus (b) the Special
Indemnity Holdback Amount.
“Indemnified Party” means any Person entitled to be indemnified pursuant to pursuant to ARTICLE 10.
“Information Security Reviews” has the meaning set forth in Section 4.9(c).
“Initial Closing Statement” has the meaning set forth in Section 3.3(a).
“Insurance Policies” has the meaning set forth in Section 4.23.
“Intellectual Property” means all intellectual property or other proprietary rights in and to: (a) patents and pending patent
applications, including provisionals, continuations, divisionals, continuations-in-part, reissues, or reexaminations thereof, (b)
trademarks, service marks, trade names, service names, trade dress, and Internet domain names, together with the goodwill
exclusively associated with any of the foregoing, and all applications, registrations and renewals thereof, (c) copyrights, database
rights, and works of authorship, (d) Know-How, and (e) Software.
“Interim Balance Sheet” has the meaning set forth in Section 4.4(b).
“Know-How” means trade secrets, inventions, discoveries, formulae, practices, processes, procedures, ideas,
specifications, engineering data, databases, and data collections.
“Law” means any law, statute, regulation, ordinance, rule, code, requirement, or rule of law (including common law)
enacted, promulgated, issued, released, or imposed by any Governmental Authority.
“Letter of Transmittal” has the meaning set forth in Section 2.10(a).
“Liability” means any debt, liability, commitment, or obligation of any nature, whether pecuniary or not, asserted or
unasserted, accrued or unaccrued, absolute or contingent, matured or unmatured, liquidated or unliquidated, determined or
determinable, incurred or consequential, known or unknown, and whether due or to become due, including those arising under
any Contract, Law or Order.
“Lien” means any lien, mortgage, pledge, security interest, imperfection of title, encroachment, lease, license, easement,
right-of-way, covenant, condition, restriction, adverse claim, or other encumbrance, other than any license of, option to license, or
covenant not to assert claims of infringement, misappropriation, or other violation with respect to Intellectual Property.
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“Lookback Date” means January 1, 2018.
“Losses” means any and all losses, claims, damages, costs, expenses (including reasonable attorneys’, consultants’,
experts’, and other professional advisors’ fees and expenses), penalties, judgment amounts, interest, amounts paid in settlement,
Taxes, Liabilities, and other charges, including costs of mitigation, damages for lost profits, damages based on a multiple of
earnings or a diminution in value, and special, indirect, and consequential damages, in each case, whether or not arising out of a
Third Party Claim, but excluding any punitive damages, except to the extent such punitive damages are paid to a third party in
connection with a Third Party Claim.
“Material Adverse Effect” means any event, change, or occurrence that, individually or in the aggregate with any other
events, changes, or occurrences, has or would reasonably be expected to have a material adverse effect on the business, assets,
Liabilities, condition (financial or otherwise), or results of operations of the Company (on a short-term or long-term basis), taken
as a whole, excluding any event, change, or occurrence resulting from: (a) effects generally affecting the industries or segments
thereof in which the Company operates; (b) general business, economic, or political conditions (or changes therein); (c) any
outbreak or escalation of hostilities or declared or undeclared acts of war, sabotage, terrorist attack, or any other act of terrorism;
(d) any failure by the Company to meet budgets, plans, projections, or forecasts (whether internal or otherwise) for any period (it
being understood that the underlying cause of the failure to meet such budgets, plans, projections, or forecasts shall be taken into
account in determining whether a Material Adverse Effect has occurred or could occur); (e) changes in Law or interpretation
thereof or GAAP or interpretation thereof; (f) changes in, or effects arising from or relating to, any earthquake, hurricane,
tsunami, tornado, flood, mudslide or other natural disaster, epidemic, pandemic or disease outbreak (including COVID19),
weather condition, explosion or fire, in each case, after the date hereof, (g) any sequester, stoppage, shutdown, default or similar
event or occurrence by or involving any Governmental Authority, and (h) changes, events, occurrences, developments, or effects
arising from or relating to (A) the taking of any required by this Agreement or taken at the express written request of Purchaser or
its Affiliates; provided, however, that any event, change, or occurrence resulting from the matters referred to in clauses (a), (b),
(c), (e), (f) and (g), above shall be excluded only to the extent such matters do not disproportionately impact the Company as
compared to other Persons operating in same industry.
“Material Contracts” has the meaning set forth in Section 4.10.
“Material Customer” has the meaning set forth in Section 4.19(a).
“Material Supplier” has the meaning set forth in Section 4.19(a).
“Maximum Merger Consideration” has the meaning set forth in Section 3.1.
“Merger” has the meaning set forth in Section 2.1.
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“Merger Consideration” has the meaning set forth in Section 3.1.
“Merger Sub” has the meaning set forth in the preamble to this Agreement.
“Multiemployer Plan” has the meaning set forth in Section 3(37) of ERISA.
“Negative Adjustment Amount” has the meaning set forth in Section 3.3(e)(ii).
“Net Tax Amount” means an amount (not less than $0) equal to the sum of (1) all unpaid Income Taxes of the Company
with respect to any Pre-Closing Tax Period and the portion of any Straddle Period ending on the Closing Date (“Pre-Closing
Income Taxes”) (calculated in accordance with the principles of Section 7.1(f)) with respect to any final Tax Return that is not yet
due (including extensions) and with respect to any final Tax Return that was filed on or before the Closing Date but for which the
unpaid cash Tax liabilities reflected thereon have not been paid (calculated for any Straddle Period in accordance with the
principles of Section 7.1(g)) and whether due and payable prior to, at, or following, the Closing Date, and (2) the amount of the
employer portion of any employment-related Taxes (including payroll Taxes) for which the due date is deferred, including
pursuant to Section 2302 of the CARES Act.
“Non-Employee Option Holders” means all Option Holders other than the Employee Option Holders.
“Notice of Acceptance” has the meaning set forth in Section 3.3(b)(i).
“Notice of Disagreement” has the meaning set forth in Section 3.3(b)(i).
“Option Holder” means a holder of a Company Option.
“Order” means any order, judgment, decree, injunction, stipulation, settlement, or consent order of or with any
Governmental Authority.
“Organizational Documents” means the certificate or articles of incorporation, certificate of formation, bylaws, limited
liability company agreement, shareholders agreement or voting agreement among equity owners, and other governing documents
of an entity, as applicable, in each case as amended.
“Out-of-Money Options” means Company Options having an exercise price per share above the Per Share Common
Stock Merger Consideration.
“Out-of-Money Warrants” means Company Warrants having an exercise price per share above the Per Share Common
Stock Merger Consideration.
“Outbound IP License” has the meaning set forth in Section 4.8(b).
“Outside Date” has the meaning set forth in Section 9.1(b).
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“Party” and “Parties” have the meanings set forth in the preamble to this Agreement. Following the Effective Time, the
Surviving Corporation shall be considered a Party.
“Paying Agent” means PNC Bank, National Association.
“Paying Agent Agreement” means the Paying Agent Agreement in the form attached as Exhibit F.
“Permit” means any material permit, license, approval, or other authorization required to be obtained by any
Governmental Authority.
“Permitted Liens” means (a) Liens for or in respect of Taxes or other governmental charges that are either (i) not yet due
and payable or (ii) that are being contested in good faith by appropriate proceedings and for which an appropriate reserve has
been established in accordance with GAAP; (b) workers’, mechanics’, materialmen’s, repairmen’s, suppliers’, carriers’, tenants’,
or similar Liens arising in the ordinary course of business or by operation of law with respect to obligations that are not yet due
and payable; (c) all covenants, conditions, restrictions (including any zoning, entitlement, conservation, restriction, and other land
use and environmental regulations by Governmental Authorities), easements, charges, rights-of-way, and other Liens that,
individually or in the aggregate, do not materially impair the use of the real property affected thereby; (d) all other Liens on
tangible personal property that, individually or in the aggregate, do not materially impair the value of the property subject to such
Liens or the use of such property in the Business; (e) solely with respect to the Equity Interests of the Company, restrictions on
transfer imposed under applicable securities Laws; and (f) non-exclusive licenses to Intellectual Property granted in the ordinary
course of business.
“Per Option Merger Consideration” means, with respect to each In-the-Money Option, (a) the Per Share Common Stock
Merger Consideration minus (b) the exercise price of such Company Option.
“Per Share Common Stock Merger Consideration” means, with respect to each share of Common Stock, the per share
cash amount equal to the quotient of (a) the sum of (i) the Fully-Diluted Common Stockholder Proceeds, plus (ii) the Aggregate
Option Exercise Price, plus (iii) the Aggregate Warrant Exercise Price, divided by (b) the Fully-Diluted Common Stock
immediately prior to the Effective Time.
“Person” means any individual, corporation, limited liability company, partnership, joint venture, trust, Governmental
Authority, or other legal entity.
“Personal Information” means (a) all information that identifies, relates to, describes, is capable of being associated with,
or could reasonably be linked, directly or indirectly, with a particular individual; and (b) any other information covered by
Privacy Laws (which may be defined therein as “personal data”, “personal information” or similar terms).
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“Per Warrant Merger Consideration” means, with respect to each In-the-Money Warrant, (a) the Per Share Common Stock
Merger Consideration minus (b) the exercise price of such Company Warrant.
“PPP Escrow Agent” means Silicon Valley Bank, or its successor under the PPP Escrow Agreement.
“PPP Escrow Agreement” means the PPP Escrow Agreement to be entered into by the Stockholder Representative and
the PPP Escrow Agent, substantially in the form of Exhibit H.
“PPP Escrow Amount” means $2,123,179.54.
“PPP Loan Forgiveness Application” means a loan forgiveness application for a PPP Loan, substantially in the form
promulgated by the U.S. Small Business Administration.
“PPP Loans” means any loans made to the Company the Paycheck Protection Program pursuant to the CARES Act,
which description, including the lender, and the principal amount thereof are set forth on Schedule 4.26(a), and all references to
the PPP Loans shall include all amounts owed to the lender related thereto, including principal, interest, costs, fees and expenses.
“Pre-Closing Tax Period” means any Tax period ending on or before the Closing Date and that portion of any Straddle
Period ending on and including the Closing Date.
“Preliminary Payment Allocation Statement” has the meaning set forth in Section 3.2(b).
“Preferred Stock” means the Company’s preferred stock, $0.0001 par value per share, consisting of the Series A Preferred
Stock, the Series B Preferred Stock and the Series B-1 Preferred Stock.
“Preferred Stock Liquidation Preference Amount” means an aggregate amount equal to the sum of (a) if payable pursuant
to Section 2.5(b), the Series A Liquidation Preference Amount, plus (b) if payable pursuant to Section 2.5(c), the Series B
Liquidation Preference Amount, plus (iv) if payable pursuant to Section 2.5(d), the Series B-1 Liquidation Preference Amount.
“Preferred Stockholder” means a holder of Preferred Stock.
“Privacy Agreements” has the meaning set forth in Section 4.9(f).
“Privacy Law” means any applicable Law that (a) relates to the confidentiality, Processing, privacy, security, protection,
transfer or trans-border data flow of Personal Information; (b) relates to the privacy or interception, recording or monitoring of
communications, (c) provides rights to an individual whose Personal Information is being processed; or (d) provides for a duty to
notify an individual whose Personal Information has been, or may have been, the subject of a Security Breach.
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“Privacy Policies” has the meaning set forth in Section 4.9(g).
“Privileged Communications” has the meaning set forth in Section 12.17.
“Proceeding” means an action, suit, arbitration, proceeding, audit, hearing, examination, investigation, or other litigation
(whether civil, criminal, administrative, investigative, or informal) by or before any Governmental Authority.
“Processing” means any operation or set of operations which is performed on Personal Information or sets of Personal
Information, whether or not by automated means, such as collection, recording, organization, structuring, storage, adaptation or
alteration, retrieval, consultation, use, disclosure by transmission, dissemination or otherwise making available, alignment or
combination, restriction, erasure or destruction.
“Proposed Adjustments” has the meaning set forth in Section 3.3(b)(ii).
“Pro-Rata Share” means, with respect to each Equityholder, an amount equal to the quotient of (a) the aggregate portion
of the Merger Consideration received by such Equityholder divided by (b) the Merger Consideration. The aggregate Pro Rata
Shares of all Equityholders shall equal 100%.
“Purchaser” has the meaning set forth in the preamble to this Agreement.
“Purchaser Indemnified Party” has the meaning set forth in Section 10.2.
“Purchaser Plans” has the meaning set forth in Section 7.2(b).
“R&W Insurance Policy” means that certain representation and warranty insurance policy to be issued for the benefit of
Purchaser based upon the binder previously delivered by Purchaser to the Company.
“Real Property Lease” has the meaning set forth in Section 4.7(b).
“Related Agreement” means any Contract that is to be entered into at the Closing or otherwise pursuant to this Agreement
on or prior to the Closing Date, including, but not limited to, the Paying Agent Agreement and the PPP Escrow Agreement. The
Related Agreements executed by a specified Person shall be referred to as “such Person’s Related Agreements,” “its Related
Agreements,” or other similar expression.
“Release” means any release, spill, emission, leaking, pumping, pouring, emptying, leaching, escaping, dumping,
injection, deposit or discharge of any Hazardous Substance in, onto or through the environment.
“Released Claims” has the meaning set forth in Section 7.4(a).
“Releasees” has the meaning set forth in Section 7.4(a).
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“Releasor” has the meaning set forth in Section 7.4(a).
“Remedial Action” means any action that is required under any Environmental Law to (a) investigate, clean up,
remediate, remove, respond to, treat or in any other way address a Release, or a threat of Release, into the environment, including
the performance of required studies, investigations, restoration or monitoring or (b) assess or restore the environment or natural
resources.
“Representatives” means with respect to any Person, such Person’s Affiliates and its and their respective directors,
officers, managers, employees, agents, representatives, insurance providers, and advisors.
“Required Stockholder Approval” has the meaning set forth in Section 4.24.
“Responsible Party” means (a) with respect to claims for indemnification pursuant to Section 10.2, the Stockholder
Representative on behalf of the Equityholders, and (b) with respect to claims for indemnification pursuant to Section 10.3,
Purchaser.
“Security Breach” means any actual, alleged or threatened misuse, compromise or unauthorized access, destruction, loss,
alteration, acquisition or disclosure of, or lock-up or making unavailable of any Company Data.
“Security Program” has the meaning set forth in Section 4.9(c).
“Series A Liquidation Preference Amount” means an aggregate amount per share of Series A Preferred Stock equal to the
sum of (a) $0.8711 plus (b) all declared but unpaid dividends on such share of Series A Preferred Stock.
“Series A Participation Amount” means, with respect to each share of Series A Preferred Stock, the product of (a) the
number of shares of As-Converted Series A Preferred Stock into which such share of Series A Preferred Stock is convertible as
of the Effective Time multiplied by (b) the Per Share Common Stock Merger Consideration.
“Series A Preferred Stock” means Preferred Stock designated as “Series A Preferred Stock” in accordance with the
Company Charter.
“Series B Liquidation Preference Amount” means an aggregate amount per share of Series B Preferred Stock equal to the
sum of (a) $1.1206 plus (b) all declared but unpaid dividends on such share of Series B Preferred Stock.
“Series B Participation Amount” means, with respect to each share of Series B Preferred Stock, the product of (a) the
number of shares of As-Converted Series B Preferred Stock into which such share of Series B Preferred Stock is convertible as of
the Effective Time multiplied by (b) the Per Share Common Stock Merger Consideration.
17
“Series B Preferred Stock” means Preferred Stock designated as “Series B Preferred Stock” in accordance with the
Company Charter.
“Series B-1 Liquidation Preference Amount” means an aggregate amount per share of Series B-1 Preferred Stock equal to
the sum of (a) $2.9231 plus (b) all declared but unpaid dividends on such share of Series B-1 Preferred Stock.
“Series B-1 Participation Amount” means, with respect to each share of Series B-1 Preferred Stock, the product of (a) the
number of shares of As-Converted Series B-1 Preferred Stock into which such share of Series B-1 Preferred Stock is convertible
multiplied by (b) the Per Share Common Stock Merger Consideration.
“Series B-1 Preferred Stock” means the Preferred Stock designated as “Series B-1 Preferred Stock” in accordance with
the Company Charter.
“Shares” means the Preferred Stock and the Common Stock, collectively.
“Special Indemnity Holdback Amount” means Ten Million Dollars ($10,000,000).
“Standard Inbound Licenses” means (i) non-disclosure agreements entered into the ordinary course of business, (ii)
incidental non-exclusive Trademark and feedback licenses entered into the ordinary course of business, (iii) licenses to Software
under a “open source,” “shareware,” or “freeware” license, (iv) licenses contained in an the Company’s standard form employee
or consulting agreement, and (v) licenses for generally commercially available software.
“Standard Outbound Licenses” means (i) non-disclosure agreements entered into the ordinary course of business, (ii)
incidental non-exclusive Trademark and feedback licenses entered into the ordinary course of business, (iii) non-exclusive
licenses granted to the Company’s service providers or vendors for the purpose of providing services to the Company, and (iv)
non-exclusive licenses to Company Intellectual Property granted to the Company’s customers in substantially similar to the
Company’s standard form customer agreement.
“Stockholder Notice” has the meaning set forth in Section 6.6(b).
“Stockholder Representative” has the meaning set forth in the preamble to this Agreement.
“Stockholder Representative Amount” means One Hundred Fifty Thousand Dollars ($150,000).
“Stockholder Representative Engagement Agreement” has the meaning set forth in Section 11.4.
“Stockholder Representative Expenses” has the meaning set forth in Section 11.3.
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“Stockholder Representative Group” has the meaning set forth in Section 11.4.
“Stockholders” means the Preferred Stockholders and the Common Stockholders.
“Straddle Period” means any Tax period beginning before or on the Closing Date and ending after the Closing Date.
“Software” means (a) computer programs, including software implementation of algorithms, models and methodologies,
whether in source-code, object-code, or human readable or other form, including firmware, operating systems, and specifications;
(b) database software that is accessed using computer programs; (c) descriptions, flow charts and other work products used to
design, plan, organize and develop any of the foregoing, screens, user interfaces, report formats, firmware, development tools,
templates, menus, buttons, and icons; and (d) documentation, including programmer notes, user manuals, and training materials,
relating to such computer programs.
“Subsidiary” of any Person means (a) any corporation, limited liability company, joint venture, trust, or other legal entity,
an amount of the voting Equity Interests of which sufficient to elect at least a majority of the board of directors, board of
managers, or other governing body of such corporation, limited liability company, joint venture, trust, or other legal entity is
owned or controlled, directly or indirectly, by such Person or one or more other Subsidiaries of such Person or a combination
thereof or (b) any partnership of which such Person or another Subsidiary of such Person is the general partner.
“Surviving Corporation” has the meaning set forth in Section 2.1.
“Takeover Laws” has the meaning set forth in Section 4.24.
“Target Net Working Capital” means Two Million Dollars ($2,000,000).
“Tax” or “Taxes” means all taxes and similar charges, fees, duties, levies, or other assessments (including income, gross
receipts, net proceeds, ad valorem, withholding, turnover, real or personal property (tangible and intangible), occupation,
customs, import and export, sales, use, franchise, excise, goods and services, digital services, value added, stamp, user, transfer,
registration, escheat or unclaimed property, recording, fuel, profit, excess profits, occupational, interest equalization, windfall
profits, severance, payroll, unemployment, and social security or other taxes or fees) that are imposed by any Governmental
Authority, in each case including any interest, penalties, or additions to tax attributable thereto (or attributable to the nonpayment
thereof).
“Tax Claim” has the meaning set forth in Section 7.1(d).
“Tax Return” means any report, return, or other information or filing required or permitted to be supplied to a
Governmental Authority in connection with any Taxes, including any schedules, amendments or attachments to such reports,
returns, declarations or other filings
19
that are filed with or submitted to, or that are required to be filed with or submitted to, any Governmental Authority.
“Third Party Claim” has the meaning set forth in Section 10.5.
“Transaction Engagement” has the meaning set forth in Section 12.17.
“Transaction Expenses” means, without duplication, (a) all fees and expenses incurred or payable by the Company in
connection with this Agreement and the transactions contemplated by this Agreement, including all fees and expenses of any
investment bankers, attorneys, accountants, consultants, experts, or other professionals engaged by or on behalf of the Company
in connection with this Agreement and the transactions contemplated by this Agreement, (b) all transaction bonuses, stay or
retention payments, change-of-control payments, and other similar payments or bonuses payable to any employee of the
Company solely as a result of the consummation of the transactions contemplated by this Agreement, and the employer’s share of
any employment, payroll or similar Taxes incurred with respect to such payments, excluding, however, any arrangement
(including the termination of any employee of the Company) entered into with or at the direction of Purchaser and/or its
Affiliates, (c) the cost of the directors’ and officers’ “tail” insurance policy obtained by the Company pursuant to Section 6.10,
(d) the employer’s share of any employment, payroll or similar Taxes incurred with respect to the payment by the Company to
Employee Option Holders of the Employee Option Holder Amount and (e) fifty percent (50%) of the fees and expenses (i) of the
Paying Agent pursuant to the Paying Agent Agreement and (ii) relating to the R&W Insurance Policy in accordance with Section
12.1, in the case of each of clause (a), clause (b), and clause (c), to the extent not paid prior to the Closing.
“Transaction Tax Deductions” means, without duplication, any deduction permitted for income Tax purposes that is
deductible at a “more likely than not” or higher level of comfort in a Pre-Closing Tax Period resulting from or attributable to (i)
Transaction Expenses, (ii) bonus or similar payments made to employees of the Company or its Subsidiaries or payments to any
of the Stockholders (including, in each case, the employer portion of any employment or payroll taxes related thereto) in
connection with the consummation of the Transactions, (iii) the exercise of, or any payment with respect to, any Option in
connection with the consummation of the Transaction, and (iv) the satisfaction of any portion of Indebtedness (including
deductions attributable to capitalized fees, interest and original issue discount). Notwithstanding the foregoing, for this purpose
seventy percent (70%) of any Transaction Tax Deductions that are success-based fees within the meaning of Treasury
Regulations Section 1.263(a)-5(f) shall be considered deductible consistent with Revenue Procedure 2011-29.
“Transfer Taxes” has the meaning set forth in Section 7.1(e).
“Unresolved Adjustments” has the meaning set forth in Section 3.3(c).
“Unresolved Balance” has the meaning set forth in Section 3.3(c).
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“Voting Agreement” means that certain Amended and Restated Voting Agreement, dated as of June 15, 2018, by and
among the Company and the Stockholders listed on the Schedules attached thereto.
“Warrant Cancellation Agreement” has the meaning set forth in Section 2.10(a).
“Warrant Holder” means a holder of a Company Warrant.
“Working Capital Adjustment” has the meaning set forth in Section 3.1(e).
“Written Consent” has the meaning set forth in Section 6.6(a).
Section 1.2
Other Definitional Provisions and Interpretation; Schedules. The headings preceding the text of Articles
and Sections included in this Agreement and the headings to Exhibits and Schedules attached to this Agreement are for
convenience only and shall not be deemed part of this Agreement or be given any effect in interpreting this Agreement. The use
of the masculine, feminine, or neuter gender or the singular or plural form of words in this Agreement shall not limit any
provision of this Agreement. The meaning assigned to each term defined in this Agreement shall be equally applicable to both the
singular and the plural forms of such term. The use of “including” or “include” will in all cases mean “including, without
limitation” or “include, without limitation,” respectively. The use of “or” is not intended to be exclusive unless expressly
indicated otherwise. Reference to any Person includes such Person’s successors and assigns to the extent such successors and
assigns are permitted by the terms of any applicable Contract, and reference to a Person in a particular capacity excludes such
Person in any other capacity or individually. Reference to any Contract (including this Agreement), document, or instrument shall
mean such Contract, document, or instrument as amended or modified and in effect from time to time in accordance with the
terms thereof and, if applicable, the terms of this Agreement. Reference to any statute means such statute as amended from time
to time and includes any successor legislation thereto and any regulations promulgated thereunder. Underlined references to
Articles, Sections, clauses, Exhibits or Schedules shall refer to those portions of this Agreement. The use of the terms
“hereunder,” “hereof,” “hereto,” and words of similar import shall refer to this Agreement as a whole and not to any particular
Article, Section, paragraph, or clause of, or Exhibit or Schedule to, this Agreement. All terms defined in this Agreement have the
defined meanings when used in any certificate or other document made or delivered pursuant to this Agreement, unless otherwise
defined in such certificate or other document. Any document, list, or other item shall be deemed to have been “provided” to
Purchaser for all purposes of this Agreement if a correct copy of such document, list, or other item was posted in the Data Room
at least two (2) Business Days prior to the date of this Agreement. Any information disclosed in any Schedule shall be deemed to
be disclosed for purposes of any other Schedule to which such disclosure is relevant, but only to the extent that it is readily
apparent from the face of such disclosure that such disclosure is relevant to such other Schedule.
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ARTICLE 2.
THE MERGER; CLOSING
Section 2.1
The Merger. On the terms and subject to the conditions contained in this Agreement and in accordance
with the applicable provisions of the General Corporation Law of the State of Delaware (the “DGCL”), at the Effective Time,
Merger Sub shall be merged with and into the Company (the “Merger”), the separate existence of Merger Sub shall cease, and the
Company shall continue as the surviving corporation (the “Surviving Corporation”). The Merger will have the effects set forth in
this Agreement and in the applicable provisions of the DGCL.
Section 2.2
Closing; Effective Time.
(a)
The consummation of the transactions contemplated by this Agreement (the “Closing”) shall take place at
the offices of Mayer Brown LLP, 71 South Wacker Drive, Chicago, Illinois 60606, at 12:00 p.m. (Central Time) on June 2, 2021,
or, if each of the conditions set forth in ARTICLE VIII has not been satisfied or, if permitted, waived by the Party entitled to the
benefits of such condition (other than any conditions that by their nature can only be satisfied on the Closing Date, but subject to
the satisfaction of such conditions on the Closing Date or waiver by the Party entitled to the benefits of such conditions) as of
such date, then the Business Day immediately following the date on which each of the conditions set forth in ARTICLE VIII has
been satisfied or, if permitted, waived by the Party entitled to the benefits of such condition (other than any conditions that by
their nature can only be satisfied on the Closing Date, but subject to the satisfaction of such conditions on the Closing Date or
waiver by the Party entitled to the benefits of such conditions); provided, however, that the Closing may occur remotely by
exchange of documents and signatures via email or other manner as may be mutually agreed upon by Purchaser and the
Company. The date on which the Closing occurs is referred to in this Agreement as the “Closing Date.”
(b)
Concurrently with the Closing, the Parties shall cause a certificate of merger, in the form attached as
Exhibit B (the “Certificate of Merger”), to be executed and filed with the Secretary of State of the State of Delaware in
accordance with the DGCL. The Merger shall become effective at the time the Certificate of Merger is filed with the Secretary of
State of the State of Delaware or at such later time as Purchaser and the Company may agree and specify in the Certificate of
Merger. The time when the Merger becomes effective is referred to in this Agreement as the “Effective Time.”
Section 2.3
Certificate of Incorporation and Bylaws. From and after the Effective Time, (a) the certificate of
incorporation of Merger Sub, as in effect immediately prior to the Effective Time, shall be the certificate of incorporation of the
Surviving Corporation until amended in accordance with the provisions thereof and applicable Law and (b) the bylaws of Merger
Sub, as in effect immediately prior to the Effective Time, shall be the bylaws of the Surviving Corporation until amended in
accordance with the provisions thereof and applicable Law, except in each case that the name of the Surviving Corporation set
forth therein shall be changed to the name of the Company.
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Section 2.4
Directors and Officers. From and after the Effective Time, (a) the directors of Merger Sub immediately
prior to the Effective Time shall be the directors of the Surviving Corporation until their respective successors have been duly
elected or appointed and qualified or until their earlier resignation, removal, or death and (b) the officers of the Merger Sub
immediately prior to the Effective Time shall be the officers of the Surviving Corporation until their respective successors have
been duly elected or appointed and qualified or until their earlier resignation, removal, or death.
Section 2.5
Conversion of Shares. At the Effective Time, by virtue of the Merger and without any action on the part of
any Party or any Stockholder:
(a)
each share of Common Stock issued and outstanding immediately prior to the Effective Time (other than
Cancelled Shares and any Dissenting Shares) shall be converted into the right to receive, upon delivery of a duly executed and
completed Letter of Transmittal and Surrendered Certificate(s), the Per Share Common Stock Merger Consideration, in cash,
without interest, when and as provided in this Agreement, and each such share of Common Stock after such conversion shall
automatically be cancelled and retired and shall cease to exist;
(b)
each share of Series A Preferred Stock issued and outstanding immediately prior to the Effective Time
(excluding any Cancelled Shares and any Dissenting Shares) shall be converted into the right to receive, upon delivery of a duly
executed and completed Letter of Transmittal and Surrendered Certificate(s), the greater of (i) the Series A Liquidation
Preference Amount applicable to such share as of the Effective Time and (ii) the Series A Participation Amount for such share as
of the Effective Time, in either case in cash, without interest, when and as provided in this Agreement, and such Series A
Preferred Stock after such conversion shall automatically be cancelled and retired and shall cease to exist;
(c)
each share of Series B Preferred Stock issued and outstanding immediately prior to the Effective Time
(excluding any Cancelled Shares and any Dissenting Shares) shall be converted into the right to receive, upon delivery of a duly
executed and completed Letter of Transmittal, the greater of (i) the Series B Liquidation Preference Amount applicable to such
share as of the Effective Time and (ii) the Series B Participation Amount for such share as of the Effective Time, in either case in
cash, without interest, when and as provided in this Agreement, and such Series B Preferred Stock after such conversion shall
automatically be cancelled and retired and shall cease to exist;
(d)
each share of Series B-1 Preferred Stock issued and outstanding immediately prior to the Effective Time
(excluding any Cancelled Shares and any Dissenting Shares) shall be converted into the right to receive, upon delivery of a duly
executed and completed Letter of Transmittal, the greater of (i) the Series B-1 Liquidation Preference Amount applicable to such
share as of the Effective Time and (ii) the Series B-1 Participation Amount for such share as of the Effective Time, in either case
in cash, without interest, when and as provided in this Agreement, and such Series B-1 Preferred Stock after such conversion
shall automatically be cancelled and retired and shall cease to exist;
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(e)
each Share issued and outstanding immediately prior to the Effective Time that is held in the treasury of
the Company or owned by the Company, Purchaser, or Merger Sub shall automatically be cancelled and retired and shall cease to
exist, and no cash or other consideration shall be delivered or deliverable in exchange for such Share (the Shares described in this
Section 2.5(e), “Cancelled Shares”); and
(f)
each share of common stock, $0.01 par value, of Merger Sub issued and outstanding immediately prior to
the Effective Time shall be converted into one (1) fully paid share of common stock, $0.01 par value, of the Surviving
Corporation.
Section 2.6
Dissenting Shares. Notwithstanding anything in this Agreement to the contrary, Shares (other than
Cancelled Shares) issued and outstanding immediately prior to the Effective Time and held by a Stockholder who is entitled to
demand and properly demands appraisal of such Shares pursuant to, and who otherwise complies in all respects with, Section 262
of the DGCL (“Dissenting Shares”), shall not be converted into or be exchangeable for the right to receive the consideration
specified in Section 2.5 but instead shall be converted into the right to receive such consideration as may be determined to be due
with respect to such Dissenting Shares pursuant to Section 262 of the DGCL. If, after the Effective Time, any such Stockholder
withdraws, fails to perfect, or otherwise loses such right to appraisal, the Dissenting Shares held by such Stockholder shall
thereupon be treated as if they had been converted as of the Effective Time into the right to receive the consideration specified in
Section 2.5. The Company shall give Purchaser (a) prompt notice of, together with copies of, any demands received by the
Company for appraisal of Shares pursuant to the DGCL and (b) the right to participate in all negotiations and proceedings with
respect to such demands. The Company shall not, except with the prior written Consent of Purchaser, (i) make any payment with
respect to, or settle or offer to settle, any such demand, (ii) waive any failure to properly make or effect any such demand or to
take any action required to perfect such appraisal rights, or (iii) agree to do any of the foregoing.
Section 2.7
Treatment of Company Options and Company Warrants.
(a)
At the Effective Time, each Company Option that is outstanding and that is unexercised and vested and
exercisable as of immediately prior to the Effective Time shall be, in accordance with the terms of the Company Equity Plan, by
virtue of the Merger and without any action on the part of Purchaser, Merger Sub, the Company, the Option Holder or any other
Person, cancelled and each holder of such Company Option shall cease to have any rights with respect thereto, other than the
right to receive, with respect to each In-the-Money Option, an amount in cash, without interest, and less any applicable Taxes,
when and as provided in this Agreement, equal to the Per Option Merger Consideration. After the Effective Time, each Option
Holder shall only be entitled to the payments described in this Section 2.7(a). For the avoidance of doubt, all Company Options
that are Out-of-Money Options and any Company Options that are not vested and exercisable as of immediately prior to the
Effective Time (including those that are In-the-Money Options) shall be cancelled and the holders thereof shall not have any right
to receive any consideration in respect thereof.
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(b)
At the Effective Time, each Company Warrant that is outstanding and unexercised as of immediately prior
to the Effective Time shall be, by virtue of the Merger and without any action on the part of Purchaser, Merger Sub, the
Company, the Warrant Holder or any other Person, deemed cancelled and each Warrant Holder shall cease to have any rights with
respect thereto, other than the right to receive, with respect to each Company Warrant that is an In-the-Money Warrant, an
amount in cash, without interest, and less any applicable Taxes, when and as provided in this Agreement, equal to the Per Warrant
Merger Consideration. After the Effective Time, each Warrant Holder shall only be entitled to the payments described in this
Section 2.7(b). For the avoidance of doubt, all Company Warrants that are Out-of-Money Warrants shall be cancelled and the
holders thereof shall not have any right to receive any consideration in respect thereof.
Section 2.8
Holdbacks.
(a)
At the Closing, Purchaser shall hold back and retain an aggregate amount equal to the sum of (i) the
Adjustment Holdback Amount, which shall serve as a source of recovery (but not the sole source of recovery) for amounts owed
to Purchaser pursuant to Section 3.3(e), plus (ii) the Indemnity Holdback Amount, which shall serve as a source of recovery (but
not the sole source of recovery) for all claims pursuant to Section 10.2(a).
(b)
The Adjustment Holdback Amount shall be retained by Purchaser or paid to the Paying Agent for
distribution to the Equityholders, as applicable, pursuant to Section 3.3(e).
(c)
Purchaser shall disburse to the Paying Agent no later than five (5) Business Days following the eighteen
(18) month anniversary of the Closing Date the then-remaining portion of the Indemnity Holdback Amount (if any), net of the
aggregate amount of any (x) payments made to Purchaser pursuant to Section 3.3(e)(ii), (y) claims for indemnification for which
the Purchaser Indemnified Parties have been reimbursed as of such date pursuant to Article X and (z) outstanding claims for
indemnification that have been validly noticed or filed pursuant to Article X, by wire transfer of immediately available funds in
accordance with the Paying Agent Agreement. Thereafter, the Paying Agent shall disburse the amount (if any) transferred to it
pursuant to this Section 2.8(c) to the Equityholders and the Company (with respect to the portion of any such payment payable to
Employee Optionholders) in accordance with this Agreement and the Company Charter.
(d)
The Parties agree for all Tax purposes that (i) the right of the Equityholders to the Adjustment Holdback
Amount and the Indemnity Holdback Amount is, in each case, intended to be treated as deferred contingent purchase price
eligible for installment sale treatment under Section 453 of the Code and (ii) Purchaser shall be treated as the owner of the
Adjustment Holdback Amount and the Indemnity Holdback Amount solely for Tax purposes, and all interest and earnings earned
thereon shall be allocable to Purchaser and (iii) if and to the extent any amounts are released from the Adjustment Holdback
Amount and the Indemnity Holdback Amount to the Equityholders, interest may be imputed on a portion of such amounts,
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as required by Sections 483 or 1274 of the Code. All Parties hereto shall file all Tax Returns consistently with the foregoing,
except as otherwise required by a Governmental Authority.
Section 2.9
Payments by Purchaser. At the Closing, Purchaser shall make the following payments:
(a)
to the Paying Agent to pay on behalf of the Company the Closing Equityholder Payment Amount, by wire
transfer of immediately available funds in accordance with the Paying Agent Agreement, which amount shall be disbursed by the
Paying Agent to the Equityholders and the Company pursuant to Section 2.10(b) and (c), respectively;
(b)
to the PPP Escrow Agent, the PPP Escrow Amount to be managed and paid out by the PPP Escrow Agent
pursuant to the terms of the PPP Escrow Agreement;
(c)
pay to the Stockholder Representative an amount equal to the Stockholder Representative Amount, by wire
transfer of immediately available funds to the account the Stockholder Representative designates in writing to Purchaser at least
three (3) Business Days prior to the Closing Date;
(d)
pay the applicable Persons identified in the pay-off letters delivered by the Company pursuant to Section
2.12(f) the respective amounts of the Closing Date Payoff Indebtedness set forth in such pay-off letters, by wire transfer of
immediately available funds to the account or accounts designated in each such pay-off letter; and
(e)
pay to the applicable Persons identified in the invoices delivered by the Company pursuant to Section
2.12(g), or as set forth in the Estimated Closing Statement, the respective amounts of the Transaction Expenses set forth in such
invoices or Estimated Closing Statement, by wire transfer of immediately available funds to the account or accounts designated
in each such invoice or the Estimated Closing Statement; provided that, with respect to expenses described in clause (d) of the
definition of “Transaction Expenses,” such amounts shall be retained by Purchaser.
Each of the foregoing payments (other than the PPP Escrow Amount and the Stockholder Representative Amount) will be
considered payments on behalf of the Company and in respect of obligations and liabilities of the Company.
Section 2.10
Cancellation of Company Options and Company Warrants; Closing of Stock Transfer Books; Unclaimed
Funds.
(a)
Promptly following the execution hereof (and in any event within five (5)Business Days), the Company
shall deliver to each (i) Stockholder, and Non-Employee Option Holder and Warrant Holder a letter of transmittal in the form
attached as Exhibit C (the “Letter of Transmittal”) in exchange for the applicable consideration specified in Section 2.5, Section
2.7(a) and Section 2.7(b) (subject to the delivery by such Warrant Holder of the Warrant Cancellation Agreement in addition to
such Letter of Transmittal), respectively, and (ii) Warrant
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Holder a warrant cancellation agreement in the form attached as Exhibit G (each, a “Warrant Cancellation Agreement”).
(b)
Upon the delivery to the Paying Agent by an Equityholder of (i) in the case such Equityholder is a
Stockholder or Non-Employee Option Holder, a properly completed and duly executed Letter of Transmittal with respect to such
Shares or Company Options, respectively, and (ii) in the case such Equityholder is a Warrant Holder, a properly completed and
duly executed Warrant Cancellation Agreement and Letter of Transmittal with respect to such Company Warrants, the Paying
Agent shall pay to such Equityholder the portion of the Closing Equityholder Payment Amount to which such Equityholder is
entitled, as set forth in the Preliminary Payment Allocation Statement. Until so delivered, as applicable, each such Share,
Company Option or Company Warrant, as applicable, shall represent solely the right to receive the applicable consideration
specified in Section 2.5 or Section 2.7, as applicable, in respect of each share represented by such Shares, such Company Option
or such Company Warrant, respectively.
(c)
Following the receipt by the Paying Agent of the Closing Equityholder Payment Amount, the Paying
Agent shall in accordance with the Paying Agent Agreement pay to the Company to the payroll account thereof specified in the
Final Payment Allocation Statement the portion thereof equal to the Employee Option Holder Amount. Following the receipt by
the Company of (i) the Employee Option Holder Amount, (ii) any portion of the Indemnity Holdback Amount payable to the
Employee Option Holders pursuant to Section 2.8(c), (iii) any portion of the Adjustment Holdback Amount payable to the
Employee Option Holders pursuant to Section 3.3(e) and (iv) the portion of any cash disbursements (if any) made from the
Stockholder Representative Amount pursuant to Section 11.3 payable to Employee Option Holders, Purchaser shall cause the
Company to pay to each Employee Option Holder through the Company’s payroll system on the first payroll date of the
Company following the date on which the Company receives the such amount (which payments shall be reduced, to the extent
applicable, by the amount of any Taxes that are required to be deducted and withheld with respect to such payment) the
applicable portion of such amount described in clause (i) through (iv) above payable thereto as set forth in the Final Payment
Allocation Statement.
(d)
If any payment under this Agreement is to be made to a Person other than the Person in whose name is
registered in the books and records of the Company, it shall be a condition to such payment that a proper form for transfer is
delivered to the Paying Agent and that the Person requesting such payment shall have paid any transfer and other Taxes required
by reason of such payment in a name other than that of the registered holder of the Shares or shall have established to the
reasonable satisfaction of the Paying Agent that such Taxes either have been paid or are not payable.
(e)
From and after the Effective Time, the stock transfer books of the Company shall be closed and there shall
be no further registration of transfers of any Shares on the books of the Company. If, after the Effective Time, any documentation
formerly representing Shares are presented to Purchaser or the Surviving Corporation, they shall be surrendered and canceled as
provided in this Section 2.10.
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(f)
Twelve (12) months following each of (i) the Effective Time, (ii) the final determination of the Final
Merger Consideration pursuant to Section 3.3, (iii) the release of the General Indemnity Holdback Amount, if any, pursuant to
Section 2.8(c)(i) and (iv) the release of the Special Indemnity Holdback Amount, if any, pursuant to Section 2.8(c)(ii), Purchaser
will be entitled to require the Paying Agent to deliver to Purchaser any funds delivered to the Paying Agent pursuant to Section
2.9(a), Section 3.3(e)(ii), Section 2.8(c)(i) and Section 2.8(c)(ii) that have not been disbursed to holders of Shares, Company
Options or Company Warrants and thereafter such holders shall be entitled only to look to Purchaser and the Surviving
Corporation (subject to abandoned property, escheat, or other similar Laws) for the consideration payable in exchange for such
Shares, Company Options or Company Warrants, as applicable.
Section 2.11
Deliveries by Purchaser and Merger Sub. At or prior to the Closing, Purchaser and Merger Sub shall
deliver, or cause to be delivered, to the Company each of the following:
(a)
each Related Agreement to which Purchaser is a party, executed by Purchaser;
(b)
the Paying Agent Agreement, executed by the Purchaser and the Paying Agent;
(c)
a copy of the certificate of incorporation of Merger Sub, certified as of a date not more than five (5)
Business Days prior to the Closing Date by the Secretary of State of the State of Delaware;
(d)
a certificate of good standing of Merger Sub, issued as of a date not more than five (5) Business Days prior
to the Closing Date by the Secretary of State of the State of Delaware;
(e)
a certificate, dated as of the Closing Date and executed by an officer of Purchaser, certifying as to the
satisfaction of the conditions set forth in Section 8.3(a) and Section 8.3(b);
(f)
a certificate, dated as of the Closing Date and executed by the secretary or an assistant secretary (or similar
officer) of Purchaser, certifying as to (i) the resolutions approved by the board of directors of Purchaser authorizing the
execution, delivery, and performance by Purchaser of this Agreement and its Related Agreements and the consummation by
Purchaser of the transactions contemplated by this Agreement and its Related Agreements and (ii) the names and signatures of
the officers of Purchaser authorized to execute this Agreement, its Related Agreements, and the other documents to be delivered
by Purchaser under this Agreement and its Related Agreements; and
(g)
a certificate, dated as of the Closing Date and executed by the secretary or an assistant secretary (or similar
officer) of Merger Sub, certifying as to (i) no amendments to the certificate of incorporation of Merger Sub since the date of
certification referenced in paragraph
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(c) above, (ii) the bylaws of Merger Sub, (iii) the resolutions approved by the board of directors of Merger Sub authorizing the
execution, delivery, and performance by Merger Sub of this Agreement and the consummation by Merger Sub of the transactions
contemplated by this Agreement, (iv) the resolutions approved by Purchaser, as the sole stockholder of Merger Sub, adopting this
Agreement, and (v) the names and signatures of the officers of Merger Sub authorized to execute this Agreement and the other
documents to be delivered by Merger Sub under this Agreement.
Section 2.12
Deliveries by the Company. At or prior to the Closing, the Company shall deliver, or cause to be delivered,
to Purchaser and Merger Sub each of the following:
(a)
the Paying Agent Agreement, executed by the Stockholder Representative;
(b)
a copy of the certificate of incorporation of the Company, certified as of a date not more than five (5)
Business Days prior to the Closing Date by the Secretary of State of the State of Delaware;
(c)
a certificate of good standing of the Company, issued as of a date not more than five (5) Business Days
prior to the Closing Date by the Secretary of State of the State of Delaware;
(d)
a certificate, dated as of the Closing Date and executed by the secretary or an assistant secretary of the
Company, certifying as to (i) no amendments to the certificate of incorporation of the Company since the date of certification
referenced in paragraph (c) above, (ii) the bylaws of the Company, (iii) the resolutions approved by the board of directors of the
Company authorizing the execution, delivery, and performance by the Company of this Agreement and the consummation by the
Company of the transactions contemplated by this Agreement, (iv) the Written Consent, and (v) the names and signatures of the
officers of the Company authorized to execute this Agreement and the other documents to be delivered by the Company under
this Agreement;
(e)
(i) a duly executed certification from the Company dated no more than thirty (30) days prior to the Closing
Date in accordance with the provisions of Treasury Regulations Sections 1.1445-2(c)(3) and 1.897-2(h) certifying that interests in
the Company do not constitute “United States real property interests” under Section 897(c) of the Code, and (ii) a duly executed
notice in accordance with the provisions of Treasury Regulations Section 1.897-2(h)(2) to be filed by Purchaser after the Closing
(on behalf of the Company) with the IRS within thirty (30) days of when the certification in Section 2.12(e)(i) was provided to
Purchaser;
(f)
letters of resignation from each individual requested by Purchaser pursuant to Section 6.11;
(g)
an executed pay-off letter and UCC-3 termination statements and other Lien terminations or releases
(including Intellectual Property security interest releases in form and substance necessary for recordation in the United States
Patent and Trademark Office,
29
United States Copyright Office, or any other similar Governmental Authority), in each case in form and substance reasonably
satisfactory to Purchaser, from each Person to whom any amount of the Closing Date Payoff Indebtedness is owed, evidencing
the satisfaction in full of all such Closing Date Payoff Indebtedness and the release or termination of all Liens relating to such
Closing Date Payoff Indebtedness;
(h)
an invoice from each Person (other than any Employee) to whom any amount of the Transaction Expenses
is owed, indicating the aggregate amount of Transaction Expenses owed to such Person;
(i)
a certificate, dated as of the Closing Date and executed by an officer of the Company, certifying as to the
satisfaction of the conditions set forth in Section 8.2(a), Section 8.2(b), Section 8.2(c), and Section 8.2(g);
(j)
the PPP Escrow Agreement, executed by the Stockholder Representative and the PPP Escrow Agent; and
(k)
such other documents, certificates, or instruments as Purchaser may reasonably request in order to effect
the transactions contemplated by this Agreement and the Related Agreements.
ARTICLE 3.
MERGER CONSIDERATION; ADJUSTMENT
Section 3.1
Merger Consideration. The aggregate merger consideration (the “Merger Consideration”) shall be an
amount equal to:
(a)
Three Hundred Sixty Million Dollars ($360,000,000);
(b)
plus the aggregate amount of Closing Date Cash;
(c)
minus the aggregate amount of Closing Date Indebtedness;
(d)
minus the aggregate amount of Transaction Expenses; and
(e)
(i) plus the amount by which Closing Date Net Working Capital exceeds Target Net Working Capital or (ii)
minus the amount by which Target Net Working Capital exceeds Closing Date Net Working Capital (such amount, the “Working
Capital Adjustment”); provided, however, that if the foregoing calculation would result in the Merger Consideration exceeding
Three Hundred Sixty Seven Million Dollars ($367,000,000), the Merger Consideration shall be Three Hundred Sixty Seven
Million Dollars ($367,000,000) (the “Maximum Merger Consideration”).
Notwithstanding anything to the contrary herein, the Adjustment Holdback Amount and the Indemnity Holdback Amount shall
not constitute Merger Consideration unless and until such amounts become payable pursuant to Section 2.8.
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Section 3.2
Estimated Merger Consideration; Allocation Statement.
(a)
Simultaneously with the execution and delivery of this Agreement, the Company shall deliver to Purchaser
a statement (the “Estimated Closing Statement”) setting forth the Company’s good faith estimate of (i) the Closing Date Cash, (ii)
the Closing Date Indebtedness, (iii) the Transaction Expenses and (iv) the Working Capital Adjustment, and based on the
foregoing, the Merger Consideration (such estimated amount, the “Estimated Merger Consideration”), together with reasonable
supporting materials and calculations. The Company shall prepare the Estimated Closing Statement in accordance with GAAP,
consistently applied with the accounting principles, policies and procedures used in the preparation of the Financial Statements to
the extent consistent with GAAP (collectively, the “Accounting Principles”). Prior to the Closing, Purchaser will be entitled to
review, comment on, and propose changes to the Estimated Closing Statement, including the calculation of the Estimated Merger
Consideration set forth therein, and the Company shall permit Purchaser and its Representatives reasonable access to the books
and records of the Company and to such historical financial information relating to the preparation of the Estimated Closing
Statement and the calculation of the Estimated Merger Consideration as Purchaser may request. The Company shall consider in
good faith any reasonable changes Purchaser proposes to the Estimated Closing Statement and revise the Estimated Closing
Statement if, based on its good faith assessment, such changes are warranted.
(b)
On the Business Day prior to the Closing Date, the Company shall deliver to Purchaser and the Paying
Agent a statement (the “Preliminary Payment Allocation Statement”), certified by the Chief Executive Officer of the Company,
which sets forth, as of the Closing Date, the following:
(i)
the names, addresses and email addresses (to the extent available) of (A) all Stockholders and the
number and class of Shares held by such Persons; (B) all Option Holders and the number of shares of Common
Stock subject to each vested In-the-Money Option held by each Option Holder, together with the exercise price per
share for each vested In-the-Money Option held by each Option Holder; and (C) all Warrant Holders, the number
of shares of Common Stock subject to each Company Warrant held by each Warrant Holder, together with the
exercise price per share for each Company Warrant held by each Warrant Holder; and
(ii)
the portion of the Closing Equityholder Payment Amount that is payable to each of the Persons
described in clause (i) above, as calculated pursuant to this Agreement and the Company Charter.
Section 3.3
Determination of Final Merger Consideration.
(a)
Within ninety (90) days after the Closing Date, Purchaser shall prepare and deliver to the Stockholder
Representative (i) an unaudited balance sheet of the Company as of the Closing Date and (ii) a statement (the “Initial Closing
Statement”) setting forth
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Purchaser’s good faith calculation of (i) the Closing Date Cash, (ii) the Closing Date Indebtedness, (iii) the Transaction Expenses
and (iv) the Working Capital Adjustment, and based on the foregoing, the Merger Consideration, together with reasonable
supporting materials and calculations. Purchaser shall prepare the Initial Closing Statement in accordance with this Agreement
and the Accounting Principles.
(b)
The Stockholder Representative will be entitled to review the Initial Closing Statement during the thirty
(30) day period beginning on the date the Stockholder Representative receives the Initial Closing Statement. During such thirty
(30) day period, the Stockholder Representative and its Representatives will have reasonable access (subject to any applicable
Laws or Orders arising out of or relating to, and any Purchaser or Company policies or procedures implemented in response to,
the COVID-19 pandemic, including restrictions on in-person gatherings) to the books and records of the Company, to work
papers prepared by Purchaser or Purchaser’s Representatives to the extent they relate to the Initial Closing Statement, and to such
historical financial information relating to the Initial Closing Statement as the Stockholder Representative may reasonably
request, and will be entitled to meet with Representatives of Purchaser on a mutually convenient basis in order to obtain and
discuss such information; provided, that such access does not unreasonably interrupt the normal course of business of Purchaser
and its Affiliates (including the Company). All access and information contemplated by this Section 3.3(b) shall be subject to the
terms and conditions of a non-disclosure agreement in form and substance satisfactory to Purchaser. At or prior to the end of such
thirty (30) day period, the Stockholder Representative shall either:
(i)
deliver a notice to Purchaser confirming that no adjustments are proposed by the Stockholder
Representative to Purchaser’s calculation of the Merger Consideration or any of its components, as set forth on the
Initial Closing Statement (in which case Purchaser’s calculation of the Merger Consideration as set forth in the
Initial Closing Statement shall constitute the Final Merger Consideration) (a “Notice of Acceptance”); or
(ii) deliver a notice to Purchaser to the effect that the Stockholder Representative disagrees with Purchaser’s
calculation of the Merger Consideration or any of its components, as set forth on the Initial Closing Statement (a
“Notice of Disagreement”), and specifying in reasonable detail the nature of such disagreement (which shall only
include disagreements based on mathematical errors or based on the Merger Consideration not being calculated in
accordance with this Agreement and the Accounting Principles) and the adjustments that, in the Stockholder
Representative’s view, should be made to the calculation of the Merger Consideration or any of its components, as
applicable, in order to comply with this Agreement and the Accounting Principles (collectively, the “Proposed
Adjustments”); provided, however, that if the Stockholder Representative fails to deliver a Notice of Acceptance
or a Notice of Disagreement within such thirty (30) day period, then the calculation of the Merger Consideration
as set forth in the Initial Closing Statement shall be final and binding on the Parties as the Final Merger
Consideration.
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(c)
If there are any Proposed Adjustments, Purchaser shall, no later than thirty (30) days after Purchaser’s
receipt of the Notice of Disagreement, notify the Stockholder Representative whether Purchaser accepts or rejects each such
Proposed Adjustment. Thereafter, the Stockholder Representative and Purchaser shall work in good faith to resolve any
differences that remain with respect to the Proposed Adjustments. If the Proposed Adjustments are so resolved in writing, such
agreement of the Stockholder Representative and Purchaser shall constitute the Final Merger Consideration. If, however, any of
the Proposed Adjustments are not so resolved (the “Unresolved Adjustments,” and the aggregate difference between the Parties’
respective calculations of the Merger Consideration resulting from the Unresolved Adjustments, the “Unresolved Balance”)
within thirty (30) days after Purchaser’s notice to the Stockholder Representative of its rejection of any Proposed Adjustments (or
such longer period as the Parties may mutually agree in writing), then, at the request of either the Stockholder Representative or
Purchaser, the Unresolved Adjustments will be submitted to Grant Thornton LLP or, if such firm is unable or unwilling to act, to
a nationally recognized firm with no material relationships with any Stockholder, the Stockholder Representative, Purchaser, or
any of their respective Affiliates and with accounting expertise and relevant experiences in resolving similar purchase price
adjustment disputes as mutually agreed by Purchaser and the Stockholder Representative (the “Accounting Firm”). Each Party
shall submit to the Accounting Firm its position with respect to the Unresolved Adjustments as set forth in the Initial Closing
Statement, in the case of Purchaser, and the Notice of Disagreement, in the case of the Stockholder Representative, and shall
make available to the Accounting Firm the books and records of the Company, work papers prepared by Purchaser, the
Stockholder Representative, or their respective Representatives to the extent they relate to the Initial Closing Statement or the
Notice of Disagreement, as the case may be, and other historical financial information relating to the Initial Closing Statement, in
each case as the Accounting Firm may request. The Accounting Firm shall act as an expert and not as an arbitrator with respect
the review contemplated by this Section 3.3(c) and the scope of the review by the Accounting Firm will be limited to: (i) a
disposition of the Unresolved Adjustments through a strict application of the Accounting Principles; (ii) based on its
determination of the matters described in clause (i) and all items and amounts that were previously accepted or agreed upon or
deemed agreed upon by the Parties in accordance with this Section 3.3, as applicable, a calculation of the Merger Consideration,
including each of its components; and (iii) an allocation of the fees and expenses of the Accounting Firm determined in
accordance with the formula specified below in this Section 3.3(c). The Accounting Firm may, at its discretion, conduct a
conference concerning the Unresolved Adjustments, at which conference Purchaser and the Stockholder Representative shall
have the right to present additional books and records, work papers, documents, materials, and other information and to have
their respective Representatives present, but in no event shall either Party or its Representatives have any ex parte
communications or meetings with the Accounting Firm without the prior written approval of the other Party. The Accounting
Firm is not entitled to, and the Parties shall not individually request the Accounting Firm to, (A) make any determination other
than as set forth above, (B) determine any Unresolved Adjustment to be a value higher than the highest value or lower than the
lowest value proposed by the Parties in their submissions to the Accounting Firm, or (C) undertake any independent investigation
of the facts relating to the Unresolved Adjustments. The Accounting Firm will be instructed to render its written decision
resolving the matters submitted to it as
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promptly as practicable and, if at all possible, within thirty (30) days after such submission of the Unresolved Adjustments. The
determination of the Merger Consideration by the Accounting Firm will, absent manifest error, be final and binding on the Parties
as the Final Merger Consideration, and judgment may be entered upon such determination in any court of competent jurisdiction.
The fees and expenses of the Accounting Firm incurred pursuant to this Section 3.3(c) shall be borne by Purchaser, on the one
hand, and the Stockholder Representative (on behalf of the Equityholders), on the other hand, as determined by the Accounting
Firm based on the inverse of the percentage that the Accounting Firm’s determination (before such allocation) bears to the total
value of each party’s respective position in relation to the total amount of the Unresolved Balance. For purposes of illustration
only, if the Unresolved Balance is $100, and the written determination of the Accounting Firm states that $80 of the Unresolved
Balance is resolved in Purchaser’s favor and $20 of the Unresolved Balance is resolved in the Stockholder Representative’s favor,
Purchaser would bear 20% of the Accounting Firm’s costs and expenses, on the one hand, and the Stockholder Representative
(on behalf of the Company Equityholders) would bear 80% of such costs and expenses, on the other hand. All other fees,
expenses, and costs incurred by a Party or its Representatives in connection with this Section 3.3 shall be borne by such Party
(and in the case of the Stockholder Representative, on behalf of the Equityholders).
(d)
Promptly (and in any event within two (2) Business Days) after the determination of the Final Merger
Consideration in accordance with this Section 3.3, the Stockholder Representative shall prepare and deliver to Purchaser and the
Paying Agent a statement (the “Final Payment Allocation Statement”) setting forth, as of the Closing Date, the following:
(i)
the names and addresses of (A) all Stockholders and the number and class of Shares held by such
Persons; (B) all Option Holders and the number of shares of Common Stock subject to each vested In-the-Money
Option held by each Option Holder, together with the exercise price per share for each vested In-the-Money
Option held by each Option Holder; and (C) all Warrant Holders, the number of shares of Common Stock subject
to each Company Warrant held by each Warrant Holder, together with the exercise price per share for each
Company Warrant held by each Warrant Holder;
(ii)
the portion of the Final Merger Consideration payable to each of the Persons described in clause (i)
above, as calculated pursuant to this Agreement and the Company Charter; and
(iii)
based on the foregoing and the Preliminary Payment Allocation Statement, the portion of the
Adjustment Holdback Amount, the Indemnity Holdback Amount and the PPP Escrow Amount, in each case, to
which each such Person is entitled.
(e)
Within five (5) Business Days after the date on which the Final Merger Consideration becomes final and
binding in accordance with this Section 3.3, if:
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(i)
the Final Merger Consideration is greater than, or equal to, the Estimated Merger Consideration,
then (A) Purchaser shall pay to the Paying Agent, for distribution to the Equityholders, by wire transfer of
immediately available funds in accordance with the Paying Agent Agreement, an aggregate amount in cash equal
to the sum of (A) such difference plus (B) the Adjustment Holdback Amount; or
(ii)
the Final Merger Consideration is less than the Estimated Merger Consideration, then (A)
Purchaser shall permanently retain from the Adjustment Holdback Amount an amount (the “Negative Adjustment
Amount”) in cash equal to such difference and (B) pay to the Paying Agent, for distribution to the Equityholders,
by wire transfer of immediately available funds in accordance with the Paying Agent Agreement, the remaining
portion of the Adjustment Holdback Amount, if any; provided that, if the Negative Adjustment Amount is greater
than the Adjustment Holdback Amount, Purchaser may also permanently retain from the Indemnity Holdback
Amount the difference between the Negative Adjustment Amount and the Adjustment Holdback Amount.
(f)
The Parties shall treat any payments made pursuant to this Section 3.3 as an adjustment to the aggregate
Merger Consideration for Tax purposes, unless otherwise required by Law.
Section 3.4
Withholding. Each of Purchaser, the Surviving Corporation, and the Paying Agent (each a “Withholding
Party”) shall be entitled to deduct and withhold from any amount payable under this Agreement such amounts as may be required
to be deducted and withheld from or with respect to such payment under the Code or other applicable Law relating to Taxes. To
the extent that amounts are so deducted and withheld, such amounts shall be treated for all purposes of this Agreement as having
been paid to the holder of the Shares in respect of which such deduction and withholding was made. In the event that
Withholding Party determines that withholding is required under applicable Law and permitted under this Agreement such
Withholding Party will make commercially reasonable efforts to notify the Stockholder Representative, on behalf of the recipient
of such payment, at least one (1) Business Day prior to the Closing Date or any subsequent date that the applicable payment is to
be made to provide such recipient with an opportunity to provide any form or documentation or take such other steps in order to
avoid such withholding and, if such deduction or withholding cannot be avoided, will timely remit any such amounts deducted or
withheld to the applicable Governmental Authority.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the corresponding subsection of the disclosure schedules delivered to Purchaser and Merger Sub
(the “Disclosure Schedules”), the Company represents and warrants to Purchaser and Merger Sub as of the date of this
Agreement and as of the Closing Date (as though made on the Closing Date) as follows:
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Section 4.1
Organization and Authorization of the Company.
(a)
The Company is validly existing and in good standing under the Laws of its jurisdiction of incorporation
and has all requisite corporate power and authority to own, lease, and operate its properties and assets and to conduct the
Business as Currently Conducted. The Company is validly licensed or qualified to do business and (where such concept is
applicable) is in good standing under the Laws of each jurisdiction in which the properties and assets leased or owned by it or the
conduct of the Business as Currently Conducted makes such licensing or qualification necessary except where the failure to be
licensed or qualified would not reasonably be expected to be material to the Company. A correct list of all of the foreign and U.S.
jurisdictions in which the Company is so licensed or qualified to do business is set forth on Schedule 4.1(a).
(b)
The Company has all requisite corporate power and authority to execute, deliver, and perform this
Agreement and its Related Agreements and, subject to obtaining the Required Stockholder Approval, to consummate the
transactions contemplated hereby and thereby. The execution, delivery, and performance by the Company of this Agreement and
its Related Agreements and the consummation by the Company of the transactions contemplated hereby and thereby have been
validly authorized by all necessary action by the board of directors of the Company, and, other than obtaining the Required
Stockholder Approval, no other corporate action by the Company or the Stockholders is necessary to authorize this Agreement or
its Related Agreements or to consummate the transactions contemplated hereby or thereby. The Company has validly executed
and delivered this Agreement, and, at the Closing will have validly executed and delivered its Related Agreements. This
Agreement and each of the Related Agreements to which the Company is a party constitute, or when executed and delivered by
the Company shall constitute, the legal, valid, and binding obligation of the Company, enforceable against the Company in
accordance with its respective terms, subject to the Enforceability Limitations.
(c)
The Company’s board of directors, at a meeting duly called and held at which all directors of the Company
were present or participated and voted, has unanimously adopted resolutions (i) determining that this Agreement, the Merger, and
the other transactions contemplated by this Agreement are advisable, fair to, and in the best interests of the Company and the
Stockholders, (ii) approving and declaring advisable this Agreement, the Merger, and the other transactions contemplated by this
Agreement, (iii) approving the Company’s Related Agreements and the transactions contemplated thereby, (iv) determining that
the Merger Consideration is fair to the Stockholders, (v) directing that the adoption of this Agreement be submitted to a vote of
the Stockholders, and (vi) recommending adoption of this Agreement by the Stockholders.
(d)
Complete and correct copies of the Company’s Organizational Documents in effect as of the date of this
Agreement, and stock transfer ledger have been provided to Purchaser. The Company is not in default under or in violation of its
Organizational Documents. At the Closing, the Company’s Organizational Documents, minute books, and stock transfer ledger
will be in the possession of the Company
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(e)
Schedule 4.1(e) sets forth a list of all of the current officers and directors of the Company (including, for
each such individual, the position held).
Section 4.2
Capitalization of the Company.
(a)
The authorized capital stock of the Company consists of 64,398,510 shares, consisting of (i) 37,952,892
shares of Common Stock and (ii) 26,445,618 shares of Preferred Stock, of which (A) 10,330,699 shares are designated as Series
A Preferred, (B) 6,697,046 shares are designated as Series B Preferred and (C) 9,417,873 shares are designated as Series B-1
Preferred. There are 6,550,934 shares of Common Stock issued and outstanding, 10,330,699 shares of Series A Preferred issued
and outstanding, 6,697,046 shares of Series B Preferred issued and outstanding and 8,184,720 shares of Series B-1 Preferred
issued and outstanding and none of the foregoing outstanding shares are shares of restricted stock granted pursuant to the
Company Equity Plan. All such issued and outstanding shares of capital stock of the Company (x) have been duly authorized, (y)
are validly issued, fully-paid, and non-assessable, and (z) were not issued in violation of any preemptive right, subscription right,
right of first refusal or other similar right, the Organizational Documents of the Company, any requirements set forth in
applicable Contracts or applicable Law. The Conversion Rate (as defined in the Company Charter) for the Series A Preferred
Stock is $0.8711, for the Series B Preferred Stock is $1.1206 and for the Series B-1 Preferred Stock is $2.9231. The Series A
Liquidation Preference Amount is $0.8711. The Series B Liquidation Preference Amount is $1.1206. The Series B-1 Liquidation
Preference Amount is $2.9231.
(b)
The Company has reserved an aggregate of 4,980,698 shares of Common Stock for issuance pursuant to
the Company Equity Plan (including shares subject to outstanding Company Options). As of the date hereof, a total of (i)
3,842,028 shares of Company Common Stock are subject to outstanding Company Options, of which 2,748,063 were vested and
exercisable, and (ii) 182,355 shares of Company Stock are subject to outstanding Company Warrants, in each case as of the date
hereof. None of the outstanding Company Options may be exercised prior to vesting. Complete and correct copies of the
Company Warrants, Company Equity Plan, the standard form of agreements under the Company Equity Plan and each agreement
for stock options or stock under the Company Equity Plan that does not conform to the standard form of agreement have been
made available to Purchaser, and the Company Equity Plan and such agreements have not been amended, modified or
supplemented since being made available to Purchaser, and there are no agreements, understandings or commitments to amend,
modify or supplement the Company Equity Plan or such agreements in any case from those made available to Purchaser.
Complete and correct copies of the Company Warrants have been made available to Purchaser. The terms of the Company Equity
Plan permit the treatment of Company Options as provided herein, without the consent or approval of any holders of Company
Options, the Stockholders or any other Person other than the board of directors of the Company, which board approval was
obtained prior to the execution and delivery hereof by the Company, a complete and correct copy of which has been provided by
the Company to Purchaser. All Company Options and shares of Common Stock issued upon exercise thereof have been issued
under the Company Equity Plan in compliance with Law and all requirements set forth in
37
applicable Contracts and each such grant was properly accounted for in accordance with GAAP in the financial statements
(including the related notes) of the Company. No Company Option has been granted with an exercise price less than the fair
market value of a share of Common Stock on the date on which the grant of such Company Option was by its terms to be
effective. All options with respect to shares of Common Stock that were ever issued by the Company ceased to vest on the date
on which the holder thereof ceased to be an employee, consultant or director of the Company. The exercise of the Company
Options and the payment of cash in respect thereof complied and will comply with the terms of the Company Equity Plan, all
Contracts applicable to such Company Options and all applicable Laws.
(c)
Schedule 4.2(c) sets forth each Employee and each other Person with an offer letter or other Contract that
contemplates or commits to making a grant of any option to purchase any Shares or any other Equity Interest of the Company, or
who has otherwise been promised any option to purchase any Shares or any other Equity Interest of the Company, which option
has not been granted, or other security has not been issued, as of the date hereof.
(d)
Except for this Agreement, the Company Options and the Company Warrants, there are no outstanding
options, warrants, rights, calls, convertible securities, or other Contracts obligating the Company to issue, transfer, sell,
repurchase, or redeem any of its Equity Interests. There are no outstanding or authorized stock appreciation, phantom, or similar
rights with respect to the Company. There are no voting trusts, stockholder agreements, proxies, or other Contracts or
understandings in effect to which the Company is a party with respect to the voting or transfer of any of the Company’s Equity
Interests. The Company has not created any “phantom stock,” stock appreciation rights or other similar rights, the value of which
is related to or based upon the price or value of any class or series of capital stock of the Company. The Company has no
outstanding debt or debt instruments providing for voting rights with respect to the Company to the holders thereof. No Person is
entitled to any preemptive or similar rights to subscribe for capital stock of the Company. The Company has not granted to any
Person the right to demand or request that the Company effect a registration under the Securities Act of 1933, as amended, of any
securities held by such Person or to include any securities of such Person in any such registration by the Company. There is no
Liability for dividends accrued and unpaid by the Company.
(e)
The Company does not directly or indirectly own, or have any interest in or right to acquire, any Equity
Interests of any other Person. The Company does not directly or indirectly control (as such term is defined in the definition of
“Affiliate”) any other Person.
(f)
As of the date hereof, there are no declared but unpaid dividends.
(g)
Schedule 4.2(g) sets forth the following information:
(i)
a true and complete list of each Stockholder, the number and series of Shares held by such
Stockholder, whether any of such Shares (and, if so, how many) were received upon the exercise of Company
Options, and confirmation of
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whether or not such Stockholder has executed and delivered the Voting Agreement;
(ii)
a true and complete list of each Option Holder, the number of Company Options held by such
Option Holder and the number of shares of Common Stock subject to such Company Option, together with (A) the
exercise price per share for each such Company Option, (B) the date of grant and vesting schedule (if applicable)
for each such Company Option, (C) the extent to which each such Company Option is vested as of the date hereof,
(D) whether each such Company Option is an incentive stock option or non-statutory stock option under the Code
and (E) whether the vesting of such Company Option shall be accelerated in any manner by any of the transactions
contemplated by this Agreement or upon any other event or condition and the extent of acceleration, if any; and
(iii)
a true and complete list of each Warrant Holder, the number of Company Warrants held by such
Warrant Holder and the number of shares of Common Stock subject to such Company Warrant, together with (A)
the exercise price per share for each such Company Warrant, and (B) whether such Company Warrant will be
deemed automatically exercised by any of the transactions contemplated by this Agreement or upon any other
event or condition.
No Equity Interests of the Company will be issued or outstanding as of the Closing Date that are not set forth on Schedule 4.2(g)
(h)
The (i) Aggregate Option Exercise Price represents a true and correct calculation of the aggregate exercise
price of all In-the-Money Options and (ii) Aggregate Warrant Exercise Price represents a true and correct calculation of the
aggregate exercise price of all In-the-Money Warrants.
Section 4.3
Governmental Consents; No Conflicts.
(a)
The execution, delivery, and performance by the Company of this Agreement or its Related Agreements,
and the consummation by the Company of the transactions contemplated hereby and thereby, do not and will not require any
Consent of or with any Governmental Authority, other than (i) any Consent that is required as a result of any facts or
circumstances relating solely to Purchaser or any of its Affiliates, (ii) the filing of the Certificate of Merger with the Secretary of
State of the State of Delaware, and (iii) the Consents set forth on Schedule 4.3(a).
(b)
Except as set forth on Schedule 4.3(b), the execution, delivery, and performance by the Company of this
Agreement and its Related Agreements, and the consummation by the Company of the transactions contemplated hereby and
thereby, do not and will not violate, conflict with, result in a breach, cancellation, or termination of, constitute a default under,
result in the creation of any Lien on any of the properties or assets of the Company
39
under, or result in a circumstance that, with or without notice or lapse of time or both, would constitute any of the foregoing
under, (i) any Law or Order applicable to or binding on the Company or any of its properties or assets, (ii) any Contract to which
the Company is a party or by which the Company or any of its properties or assets is bound, including any Material Contract,
Real Property Lease, Outbound IP License, or Inbound IP License, (iii) any Permit held by the Company, or (iv) any of the
Organizational Documents of the Company, except, in the case of each of clauses (ii) and (iii), where such violation, conflict,
breach, cancellation, termination, or default would not, individually or in the aggregate, be material to the Company.
Section 4.4
Financial Statements; No Undisclosed Liabilities.
(a)
Set forth in Schedule 4.4(a) are true and complete copies of the Financial Statements. The Financial
Statements (x) have been prepared from the books and records of the Company in accordance with GAAP in all material
respects, consistently applied, (y) are complete and correct in all material respects, and (z) present fairly, in all material respects,
the financial condition and results of operations, changes in cash flows, and changes in stockholders’ equity of the Company as of
the respective dates thereof and for the respective periods covered thereby, subject to, in the case of the Interim Balance Sheet,
normal recurring year-end adjustments (the effect of which will not, individually or in the aggregate, be material) and the absence
of footnotes. The books and records of the Company are correct, have been maintained in accordance with sound business
practices, and accurately reflect in all material respects all the transactions and actions therein described. At the Closing, all such
books and records will be in the possession of the Company. No financial statements of any Person other than the Company are
required by GAAP to be included in the Company’s financial statements.
(b)
The Company does not have any Liabilities, except: (i) Liabilities reflected on, or reserved against in, the
Financial Statements; (ii) Liabilities that have arisen since the date of the most recent balance sheet included in the Financial
Statements (the “Interim Balance Sheet”) in the ordinary course of business consistent with past practice, none of which is a
Liability resulting from or arising out of any breach of contract, breach of warranty, tort, infringement, misappropriation, or
violation of Law; (iii) Liabilities arising in connection with the transactions contemplated under this Agreement and the Related
Agreements; and (iv) Liabilities set forth on Schedule 4.4(b). There are no “off-balance sheet arrangements” (within the meaning
of Item 303 of Regulation S-K promulgated by the SEC) with respect to the Company.
(c)
Since the Lookback Date, the Company has maintained internal accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain
accountability for assets, (iii) access to assets is permitted only in accordance with management’s general or specific
authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences. Since the Lookback Date, there has not been (x) any significant
deficiency or material weakness in any system of internal accounting controls used by the
40
Company, (y) any fraud that involves any of the management or other Employees who have a role in the preparation of financial
statements or the internal accounting controls used by the Company, or (z) any claim or allegation regarding the foregoing clause
(y), in each case, that has resulted in or would reasonably be expected to result in material loss or liability to the Company.
(d)
Schedule 4.4(d) sets forth a correct list of all Indebtedness of the Company and identifies for each item of
Indebtedness the outstanding amount thereof as of the date of this Agreement, including, for each item of Indebtedness, the
Contract(s) governing such item of Indebtedness. All Indebtedness may be prepaid at the Closing without penalty under the terms
of the Contract(s) governing such Indebtedness.
Section 4.5
Absence of Certain Changes. Except as set forth on Schedule 4.5, since the date of the Interim Balance
Sheet, (a) the Company has conducted the Business in the ordinary course of business consistent with past practice and (b) there
has been no Material Adverse Effect. Without limiting the generality of the foregoing, since the date of the Interim Balance
Sheet, except as set forth on Schedule 4.5, the Company has not taken any action which, if taken after the date of this Agreement
and prior to the Closing, would require the Consent of Purchaser pursuant to Section 6.2.
Section 4.6
Assets.
(a)
Except for assets disposed of in the ordinary course of business since the date of the Interim Balance Sheet
or as set forth on Schedule 4.6(a), the Company has good and valid title to, a valid leasehold interest in, or a valid license to use
all of the properties and assets (tangible or intangible, real or personal) reflected on the Interim Balance Sheet or acquired, leased,
or licensed by the Company since the date of the Interim Balance Sheet, free and clear of any Lien (other than Permitted Liens).
(b)
The tangible properties and assets owned, leased, or licensed by the Company, including all buildings,
plants, structures, improvements, fixtures, machinery, equipment, vehicles, and other tangible assets, are free from material
defects, are in good operating condition (reasonable wear and tear excepted), and are reasonably suitable for the uses for which
intended.
(c)
Except as set forth on Schedule 4.6(c), after giving effect to the termination of related party Contracts,
services, support, and other arrangements pursuant to Section 6.8, the properties and assets owned, leased, or licensed by the
Company constitute all of the properties and assets used in or necessary to conduct the Business as Currently Conducted.
Section 4.7
Real Property.
(a)
The Company does not own, has never owned, and does not have any right to acquire any real property.
41
(b)
Schedule 4.7(b) sets forth a correct list of all Contracts pursuant to which the Company leases, subleases,
licenses, or otherwise occupies any real property as tenant, subtenant, or licensee (each, a “Real Property Lease”), together with
the address of the related property (collectively, the “Company Real Property”). The Company has provided to Purchaser a
complete and correct copy of each Real Property Lease, including all amendments, modifications, exhibits, and schedules. The
Company has a valid leasehold interest under each Real Property Lease, free and clear of any Lien (other than Permitted Liens).
Each such Real Property Lease is in full force and effect and constitutes a legal, valid, and binding obligation of the Company
and the other party or parties thereto, enforceable against the Company and such other party or parties in accordance with its
terms, subject to the Enforceability Limitations. The Company has performed and complied with all of its covenants and
obligations under each Real Property Lease, and neither the Company nor, to the Company’s Knowledge, any other party to a
Real Property Lease is in, or is alleged to be in, breach of or default under such Real Property Lease, nor has there occurred an
event or condition that with the passage of time or giving of notice (or both) would constitute such a breach or default. The
Company does not sublease, as sublessor, any portion of the Company Real Property to any other Person.
(c)
The Company Real Property constitutes all of the real property used in or necessary to conduct the
Business as Currently Conducted. There is no condemnation, expropriation, or other Proceeding in eminent domain pending or,
to the Company’s Knowledge, threatened affecting any portion of the Company Real Property.
Section 4.8
Intellectual Property.
(a)
Schedule 4.8(a)(i) (with respect to the Company Trademarks), Schedule 4.8(a)(ii) (with respect to the
Company Patents), and Schedule 4.8(a)(iii) (with respect to the Company Copyrights) set forth correct lists of all of the Company
Trademarks, Company Patents, and Company Copyrights, including the application and registration or grant number (if
applicable) and relevant jurisdiction, in each case, registered with a Governmental Authority (collectively, “Company Registered
Intellectual Property”). All of the Company Registered Intellectual Property is subsisting, and to the Company’s Knowledge,
valid (or, in the case of pending applications, validly applied for) and enforceable, and the Company has good and valid title to all
of the Company Intellectual Property, free and clear of any Lien (other than Permitted Liens). All registration, maintenance, and
renewal fees required as of the date of this Agreement to be paid in connection with the Company Intellectual Property have been
paid and all necessary documents and certificates in connection with the foregoing have been filed with the relevant
Governmental Authorities for the purposes of registering, perfecting, prosecuting, and maintaining the foregoing.
(b)
Schedule 4.8(b) sets forth a correct list of all Contracts pursuant to which the Company licenses, as
licensor, any Company Intellectual Property to any other Person, other than Standard Outbound Licenses (each, an “Outbound IP
License”). The Company has provided to Purchaser a true and complete copy of each Outbound IP License, including all
amendments, modifications, exhibits, and schedules. Each Outbound IP License is in full force and effect and constitutes a legal,
valid, and binding obligation of the Company and the other party or parties
42
thereto, enforceable against the Company and such other party or parties in accordance with its terms, subject to the
Enforceability Limitations. The Company has performed and complied with all of its covenants and obligations under each
Outbound IP License in all material respects, and neither the Company nor, to the Company’s Knowledge, any other party to any
Outbound IP License is in, or is alleged to be in, breach of or default under such Outbound IP License, nor has there occurred an
event or condition that with the passage of time or giving of notice (or both) would constitute such a breach or default.
(c)
Schedule 4.8(c) sets forth a correct list of all Contracts pursuant to which the Company licenses, as
licensee, Intellectual Property from any other Person (other than Standard Inbound Licenses) (each, an “Inbound IP License”).
The Company has provided to Purchaser a correct copy of each Inbound IP License, including all amendments, modifications,
exhibits, and schedules. Each Inbound IP License is in full force and effect and constitutes a legal, valid, and binding obligation
of the Company and the other party or parties thereto, enforceable against the Company and such other party or parties in
accordance with its terms, subject to the Enforceability Limitations. The Company has performed and complied with all of its
covenants and obligations under each Inbound IP License in all material respects, and neither the Company nor, to the
Company’s Knowledge, any other party to any Inbound IP License is in, or is alleged to be in, breach of or default under such
Inbound IP License, nor has there occurred an event or condition that with the passage of time or giving of notice (or both) would
constitute such a breach or default.
(d)
The Company Intellectual Property and the rights of the Company under the Inbound IP Licenses
constitute all of the rights to Intellectual Property used in or necessary to conduct the Business as Currently Conducted.
(e)
Except as set forth on Schedule 4.8(e), since the Lookback Date, no Proceeding has been filed against the
Company, and the Company has not received any written or, to the Company’s Knowledge, oral communication from any other
Person, (i) challenging the ownership, validity or enforceability of any Company Intellectual Property or (ii) alleging that the
conduct of the Business by the Company violates, infringes, or misappropriates the Intellectual Property rights of such Person.
The conduct of the Business as Currently Conducted does not violate, infringe, or misappropriate, and the conduct of the
Business since the Lookback Date has not violated, infringed, or misappropriated, the Intellectual Property of any other Person.
(f)
To the Company’s Knowledge, no Person has violated, infringed, or misappropriated any of the Company
Intellectual Property. Since Lookback Date, the Company has not filed any Proceeding or sent any written notice of a violation,
infringement, or misappropriation by another Person of the Company’s rights to the Company Intellectual Property. The
representations set forth in Section 4.8(e) and Section 4.8(f) are the sole representations made by the Company with respect to the
violation, infringement or misappropriation of any Intellectual Property.
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(g)
Each Person who has participated in the authorship, conception, creation, reduction to practice, or
development of any Intellectual Property rights for or under the direction or supervision of the Company (including any
Company Intellectual Property) has executed and delivered to the Company a valid and enforceable Contract providing for (i) the
non-disclosure by such Person of all trade secrets and Know-How of the Company; (ii) the assignment by such Person (by way of
a present grant of assignment) to the Company of all of such Person’s right, title, and interest in and to such Intellectual Property
rights created on behalf of the Company, and (iii) the waiver of any moral rights or similar rights in any jurisdiction. To the
Company’s Knowledge, no Person is in breach of or default under any such Contract, nor has there occurred an event or
condition that with the passage of time or giving of notice (or both) would constitute such a breach or default.
(h)
Schedule 4.8(h) contains a correct list of the most current embodiment of each item of Software included
in the Company Intellectual Property (the “Company Software”). The Company has a valid license or right to use all third party
Software that is required to operate or modify the Company Software as done by the Company as of the date of this Agreement.
The Company Software performs in all material respects in accordance with the technical documentation relating thereto. There
are no ownership rights of any other kind held by any other Person with respect to the Company Software and no ownership
rights in the Company Software have otherwise been transferred to any third party. In no instance has the eligibility of the
Company Software for protection under applicable patent or copyright law been forfeited or otherwise reverted to the public
domain by omission of any required notice or any other action, except as determined by the Company in its reasonable business
judgment. No Company Software, or any no portion thereof, is licensed pursuant to an “open source,” “shareware,” or “freeware”
license.
(i)
None of the source code or related materials for any Company Software has been licensed or provided to,
or used or accessed by, any Person other than employees, directors and independent contractors of the Company who have
entered into written confidentiality obligations with the Company with respect to such source code or related materials. The
Company is not a party to any source code escrow agreement or other agreement requiring the deposit of any source code or
related materials for any Company Software, or that will otherwise result in will result in, or entitle any Person to demand, the
disclosure, delivery or license of any source code for any Company Software to any Person. Neither this Agreement nor the
transactions contemplated by this Agreement will result in, or entitle any Person to demand, the disclosure, delivery or license of
any source code for any Company Software to any Person.
(j)
The Company Software consists solely of website-based applications reliant upon the incorporation thereof
into a third-party website for functionality and in all cases the functionality or components of such website provided by the
Company Software do not represent the entirety of the functionality or components provided on third-party websites. For the
avoidance of doubt, the Company does not provide standalone websites and any website into which the Company Software is
incorporated offers additional components or functionality aside from any components or functionality provided by the Company
Software.
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Section 4.9
Information Technology; Data Privacy and Security.
(a)
All information technology and computer systems, including Software, hardware, networks, interfaces, and
related systems, relating to the transmission, storage, maintenance, organization, presentation, generation, processing, or analysis
of data and information, whether or not in electronic format, used by the Company (collectively, the “Company IT Systems”)
have been properly maintained, in all material respects, by technically competent personnel, in accordance with standards set by
the manufacturers or otherwise in accordance with prudent industry standards, to ensure proper operation, monitoring, and use.
The Company IT Systems are in good working condition to effectively perform all information technology operations necessary
to conduct the Business as Currently Conducted. The Company has in place a commercially reasonable disaster recovery
program, including providing for the regular back-up and prompt recovery of the data and information, necessary to the conduct
of the Business (including such data and information that is stored on magnetic or optical media) without material disruption to,
or material interruption in, the conduct of the Business.
(b)
The Company has good and valid title to all of the data that constitutes Company Intellectual Property and
any other Company Data owned or purported to be owned by the Company, free and clear of any Lien (other than Permitted
Liens).
(c)
The Company has established, maintains, and is in compliance with a comprehensive written information
security program (“Security Program”) that (i) complies with all applicable Privacy Laws, industry standard practices, applicable
Privacy Policies (defined below), and applicable Privacy Agreements (defined below), (ii) includes and incorporates
administrative, technical, organizational, and physical security procedures and measures that are reasonable and appropriate to
preserve the security, confidentiality, and integrity of transactions and all Company Data in the Company’s possession or control
and are designed to protect against Security Breaches and (iii) is designed to protect against unauthorized use, access,
interruption, modification, or corruption of the Company IT Systems and the systems of any third party service providers that
have access to any Company Data or Company IT Systems. The Company has (A) regularly conducted and regularly conducts
vulnerability testing, risk assessments, and external audits of, and tracks Security Breaches and security incidents related to the
Company IT Systems and products (collectively, “Information Security Reviews”); (B) timely corrected any material exceptions
or vulnerabilities identified in such Information Security Reviews; (C) made available true and accurate copies of all Information
Security Reviews; and (D) timely installed (at a minimum within the timeframe recommended by the applicable software or
equipment suppliers) software security patches and other fixes to identified technical information security vulnerabilities.
(d)
The Company IT Systems are sufficient for current needs of the Business as Currently Conducted,
including as to capacity and ability to process current and anticipated peak volumes in a timely manner. Except as described in
Schedule 4.9, since the Lookback Date, there has been no (i) material disruption, interruption, outage, or continued substandard
performance affecting any Company IT System, (ii) unauthorized use, access, interruption, modification, or corruption of any
Company IT System, or (iii) written complaints from, notices
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from, or Proceedings conducted or claims asserted by any Person, including any Governmental Authority, against the Company
regarding any actual or alleged security breach or other unauthorized use, access, interruption, modification, or corruption of any
Company IT System.
(e)
The Company has had no actual Security Breaches. There is no pending, nor has there ever been any
complaint or Proceeding against the Company initiated by (i) any Person; or (ii) any other Governmental Authority, alleging that
there has been a Security Breach or alleging that any activity of the Company is in violation of any applicable Privacy Laws,
Privacy Agreements or Privacy Policies, and to the Company’s Knowledge, there is no reasonable basis for any such complaint
or Proceeding.
(f)
The Company is, and at all times has been, (1) in compliance in all respects with all applicable Privacy
Laws, including those applicable to Personal Information, the Company IT Systems, the Company’s services, and the Company’s
website, and (2) in compliance in all material respects with (i) all applicable contractual obligations concerning data privacy and
security relating to Personal Information in the possession or control of the Company or maintained by third parties having access
to such information under Contracts (or portions thereof) to which the Company is a party that are applicable to the Company, (ii)
all applicable data transfer agreements and data processing agreements to which the Company is a party and (iii) the requirements
of any privacy or security-related self-regulatory organizations or certifications to which the Company belongs (clauses (i), (ii)
and (iii), collectively, “Privacy Agreements”). The Company has not transferred any Personal Information (including, without
limitation, by remote access to such Personal Information) across any international borders except in compliance with applicable
Privacy Laws.
(g)
The Company is, and at all times has been, in compliance in all material respects with all applicable prior
internal and public-facing privacy policies of the Company regarding its privacy policies and practices (collectively, the “Privacy
Policies”), and the Privacy Policies have been maintained to be consistent with the actual practices of the Company. The Privacy
Policies permit the Company’s current uses of the Personal Information, and the Company has sought and obtained the
appropriate consent from the applicable Persons for such uses to the extent such consents are required by Privacy Laws. The
Privacy Policies have made all disclosures to Persons required by Privacy Laws, and none of such disclosures made or contained
in the Privacy Policies has been inaccurate, misleading or deceptive or in violation of any Privacy Laws in any material respect.
The Company has made available a true, correct, and complete copy of the Privacy Policy in effect since the Lookback Date. The
Company has not distributed and does not distribute marketing communications to any Person, except in accordance with Privacy
Laws and its Privacy Agreements, and opt-in consent has been obtained from all Persons located in jurisdictions where such opt-
in consent is required to marketing by electronic means in accordance with Privacy Laws. Without limiting the generality of the
forgoing, the Company is clearly identified as a service provider for its customers with respect to its customers’ Personal
Information in all Privacy Policies and Privacy Agreements, where applicable. The Company holds records evidencing all
consents referred to under this Section 4.9(g).
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(h)
The Company has all necessary and required rights to use, reproduce, modify, create derivative works of,
license, sublicense, distribute and otherwise exploit the data contained in the Company Data as currently done by the Company in
the operation of the Business of the Company, and the Company has the right to transfer such rights as needed to effectuate the
transactions contemplated by this Agreement.
(i)
With respect to the Personal Information the Company’s customers collect in connection with the
Company’s services, the Company contractually requires its customers to comply with applicable Privacy Policies and Privacy
Laws as a data controller of such Personal Information.
(j)
The Company contractually requires all third party vendors, affiliates, and other persons providing services
to the Company that have access to or receive Personal Information from or on behalf of the Company, to comply with all
applicable Privacy Laws, Privacy Agreements and Privacy Policies, and to take reasonable steps to ensure that all such Personal
Information in such third parties’ possession or control is protected in a manner consistent with the requirements of the Security
Program.
(k)
The execution, delivery, or performance by the Company of this Agreement and its Related Agreements
and the consummation of the transactions contemplated under this Agreement and the Related Agreements will not violate in any
material respects any applicable Privacy Laws or Privacy Policies or Privacy Agreements, in each case, binding on the Company
or result in or give rise to any right of termination or other right to impair or limit the Company’s rights to own or use any
Personal Information used in or necessary for the conduct of its Business.
(l)
The Company has, no greater than seven (7) days prior to the date hereof, (i) created an immutable backup
of all systems and data required to operate the Business, which backup cannot be edited, encrypted, or deleted in each case for a
period of no less than three hundred sixty-five (365) days from and after the date hereof, (ii) tested the backup to confirm it is
fully accessible and functional and (iii) confirmed the immutability of such backup, including by attempting to delete the backup
using an administrator account. As of the Closing, such immutable backup shall be in the possession of the Company, whether
contained on the Company IT Systems or otherwise.
Section 4.10
Material Contracts. Schedule 4.10 sets forth a correct list of all of the Contracts of the following types to
which the Company is a party or by which the Company or any of its properties or assets is bound, in each case, as of the date of
this Agreement:
(a)
any Contract with any supplier of goods or services that (i) has resulted in or that is reasonably expected to
result in expenditures by the Company of more than $100,000 in 2020 or 2021, (ii) requires the Company to purchase all of its
requirements for any good or service from such supplier, or (iii) contains any minimum or “take or pay” purchase or volume
requirements;
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(b)
any Contract with any customer that (i) has resulted in or that is reasonably expected to result in sales to
the Company of more than $100,000 in 2020 or 2021 or (ii) requires the Company to sell any product or service exclusively to
such customer, or (iii) obligates the Company to provide such customer with equal or preferred pricing terms as compared to the
pricing terms offered by the Company to any other customer, including any Contract with any “most favored nation” provision;
(c)
any Contract under which the Company is a lessee of or holds or operates any equipment, vehicle, or other
tangible personal property that is owned by another Person and that (i) has resulted in or that is reasonably expected to result in
expenditures by the Company of more than $50,000 in 2020 or 2021;
(d)
any Contract with a sales representative, manufacturer’s representative, distributor, dealer, broker, sales
agency, advertising agency, or other Person engaged in sales, distribution, or promotional activities for or on behalf of the
Business, in each case that (i) has resulted in or that is reasonably expected to result in expenditures by the Company of more
than $50,000 in 2020 or 2021, or (iii) grants such Person exclusive rights to sell, distribute, or promote in any geographical area
or any particular product;
(e)
any Contract that includes any right of first offer or refusal or other similar term favoring any other Person;
(f)
any Contract relating to the acquisition by the Company of any business, Equity Interests, or material
assets of any other Person (whether by merger, sale of Equity Interests, sale of assets, or otherwise);
(g)
any Contract relating to the sale or other disposition by the Company of any business, Equity Interests, or
material assets (whether by merger, sale of Equity Interests, sale of assets, or otherwise);
(h)
any Contract relating to the incurrence of Indebtedness of more than $100,000 or places a Lien (other than
a Permitted Lien) on any of the material assets of, the Company;
(i)
any Contract relating to any joint venture, partnership, strategic alliance, or similar relationship;
(j)
any Contract under which the Company has, directly or indirectly, made any advance, loan, or extension of
credit to, or capital contribution or other investment in, any other Person, in each case, of more than $50,000;
(k)
any collective bargaining agreement or other similar Contract with any labor organization, union, or
association;
(l)
any Contract, other than any Company Benefit Plan, with (i) any current or former officer or director of the
Company or (ii) any other current or former employee of,
48
independent contractor of, or consultant to the Company providing for, in the case of this clause (ii), aggregate future annualized
payments by the Company of more than $100,000;
(m)
any Contract that limits the freedom of the Company to compete with any Person or in any geographical
area or that otherwise restricts the development, manufacture, marketing, distribution, or sale of the Company’s products or
services;
(n)
any Contract restricting the ability of the Company to solicit or hire any other Person;
(o)
any power of attorney;
(p)
any Outbound IP License or Inbound IP License;
(q)
any Contract with any Governmental Authority;
(r)
any Contract with any Material Customer or Material Supplier;
(s)
any Contract relating to an interest rate cap, interest rate swaps, currency, commodity or other derivative or
hedging transaction or similar Contract; and
(t)
any other Contract that is material to the Business.
The Company has provided to Purchaser a true and complete copy (or, with respect to any oral Contract, a true and reasonably
complete written summary of the terms and conditions of such oral Contract) of each Contract set forth or required to be set forth
on Schedule 4.10 (including all amendments, modifications, exhibits, and schedules) (collectively with the Real Property Leases,
the “Material Contracts”). Except as set forth on Schedule 4.10, each Material Contract is in full force and effect and constitutes a
legal, valid, and binding obligation of the Company and the other party or parties thereto, enforceable against the Company and
such other party or parties in accordance with its terms, subject to the Enforceability Limitations. The Company has performed or
complied with all material covenants and obligations under each Material Contract, and neither the Company nor, to the
Company’s Knowledge, any other party to a Material Contract is in, or is alleged to be in, material breach of or default under
such Material Contract, nor has there occurred an event or condition that with the passage of time or giving of notice (or both)
would constitute such a material breach or default by the Company or, to the Company’s Knowledge, any other party to such
Material Contract. The Company has not received any written or, to the Company’s Knowledge, oral notice from any
counterparty to a Material Contract that such counterparty intends to terminate, not renew, or materially amend the terms of such
Material Contract, and the Company has not given any such written or oral notice to any counterparty to a Material Contract. The
Company has not waived any of its material rights under any Material Contract.
Section 4.11
Permits. The Company possesses or has applied for all Permits required by applicable Law to own, lease,
and operate its properties and assets and to conduct the Business as Currently Conducted. Schedule 4.11 sets forth a complete and
correct list of all such Permits.
49
All such Permits are valid and in full force and effect, and the Company has performed in all material respects its obligations
under and is, and since the Lookback Date has been in compliance, in all material respects, with all such Permits. The Company
has not received any written or, to the Company’s Knowledge, oral notice from any Governmental Authority (a) indicating or
alleging that the Company has violated, or does not possess, any Permit required to own, lease, and operate its properties and
assets or to conduct the Business as Currently Conducted or (b) threatening or seeking to withdraw, revoke, terminate, or suspend
any of the Company’s Permits. None of the Company’s Permits will be subject to withdrawal, revocation, termination, or
suspension as a result of the execution and delivery of this Agreement or the Related Agreements to which the Company is a
party or the consummation of the transactions contemplated hereby and thereby.
Section 4.12
Benefit Plans.
(a)
Schedule 4.12(a) sets forth a correct list of all Company Benefit Plans. A true and complete copy of each
of the Company Benefit Plans, and all Contracts relating thereto, or to the funding thereof, including all trust agreements,
insurance contracts, administration contracts, investment management agreements, subscription and participation agreements,
and recordkeeping agreements, have been provided to Purchaser. In the case of any Company Benefit Plan which is not in written
form, the Company has provided Purchaser with a true and reasonably complete written description of such Company Benefit
Plan. A true and complete copy of the most recent annual report, actuarial report, accountant’s opinion of the plan’s financial
statements, summary plan description, and IRS determination or opinion letter with respect to each Company Benefit Plan, to the
extent applicable has been provided to Purchaser, and there have been no material changes in the financial condition in the
respective Company Benefit Plans from that stated in the annual reports and actuarial reports supplied.
(b)
Each Company Benefit Plan has been maintained and administered in compliance in all material respects
with the applicable requirements of ERISA, the Code, and any other applicable Laws. Each Company Benefit Plan that is
intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue
Service or is the subject of a favorable opinion letter from the Internal Revenue Service on the form of such Company Benefit
Plan and to Company’s Knowledge, no event or omission has occurred that would cause any Company Benefit Plan to lose such
qualification or require corrective action to the IRS or Employee Plan Compliance Resolution System to maintain such
qualification.
(c)
Neither the Company nor any of its ERISA Affiliates has, or since the Lookback Date has had, any
Liability with respect to a Multiemployer Plan or a plan that is subject to Title IV of ERISA. None of the Company Benefit Plans
is a “multiple employer plan” (within the meaning of Section 413(c) of the Code) or a “multiple employer welfare arrangement”
(within the meaning of Section 3(40) of ERISA).
(d)
No Company Benefit Plan provides for post-employment or retiree welfare benefits, except as required by
applicable Laws.
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(e)
Neither the Company nor any other “disqualified person” or “party in interest” (as defined in Section
4975(e)(2) of the Code and Section 3(14) of ERISA, respectively) has engaged in any “prohibited transactions” (as defined in
section 406 of ERISA or section 4975 of the Code) in connection with any Company Benefit Plan.
(f)
There have been no acts or omissions by the Company or any of its ERISA Affiliates which have given
rise to or may give rise to interest, fines, penalties, taxes or related charges under section 502 of ERISA or Chapters 43, 47, 68 or
100 of the Code for which the Company or any of its ERISA Affiliates may be liable or under Section 409A of the Code for
which the Company, any of its ERISA Affiliates or any participant in any Employee Benefit Plan that is a nonqualified deferred
compensation plan (within the meaning of section 409A of the Code) may be liable. The Company, and each Company Benefit
Plan that is a Health Plan (i) is currently in compliance in all material respects with the Healthcare Reform Laws and (ii) has been
in compliance in all material respects with all applicable Healthcare Reform Laws since January 1, 2015. No event has occurred,
and no conditions or circumstance exists, that would reasonably be expected to subject the Company, any of its ERISA Affiliates,
or any Health Plan to material penalties or excise taxes under Sections 4980D, 4980H, or 4980I of the Code or any other
provision of the Healthcare Reform Laws.
(g)
Except as may be set forth in the terms of the Company Options, neither the execution and delivery by the
Company of this Agreement nor the consummation of the transactions contemplated by this Agreement would reasonably be
expected to accelerate the time of vesting or the time of payment, or increase the amount, of any compensation or benefits due to
any current or former director, officer, or employee of the Company. None of the payments contemplated by the Company
Benefit Plans in connection with this Agreement and the transactions contemplated by this Agreement (whether alone or together
with any other actions) would, in the aggregate, constitute excess parachute payments as defined in section 280G of the Code
(without regard to subsection (b)(4) thereof) and excluding the effect of any arrangement entered into by or at the direction of
Purchaser or its Affiliates. No Company Benefit Plan or any other Contract, agreement, plan, policy, or arrangement with any
employee, officer, director, consultant or independent contractor of the Company or any of its ERISA Affiliates provides for a
“gross-up” or similar payment from the Company or any of its affiliates in respect of any taxes that may become payable under
Sections 409A or 4999 of the Code.
(h)
There are no Proceedings (other than routine claims for benefits, none of which, individually or in the
aggregate, are material to the Company) pending or, to the Company’s Knowledge, threatened involving any Company Benefit
Plan or the assets of any Company Benefit Plan.
(i)
There is no action currently contemplated by the Company or any of its ERISA Affiliates, and no action
has been taken by the Company or any of its ERISA Affiliates, in respect of the Company or its Subsidiaries’ service providers or
such individuals’ employment, compensation or benefits, in each case, in response to the COVID-19 pandemic.
Section 4.13
Employee and Labor Matters.
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(a)
The Company has provided to Purchaser a list of each Employee and independent contractor providing
services to the Company as of the date of this Agreement, and in the case of each such Employee and independent contractor, the
following information, as applicable, as of the date hereof: (i) title or position; (ii) date of hire or commencement of services; (iii)
work location; (iv) whether full-time or part-time and whether exempt or non-exempt; (v) whether absent from active
employment and if so, the date such absence commenced, and the anticipated date of return to active employment; (vi) annual
salary or hourly rate; (vii); bonus target or other incentive compensation (if applicable); (viii) accrued but unused vacation or paid
time off (if applicable); and (ix) for independent contractors, their fee arrangement with the Company.
(b)
None of the Employees is represented by a union or other labor organization or group that was either
voluntarily recognized or certified by any labor relations board or other Governmental Authority, and no union organizational
campaign is pending or, to the Company’s Knowledge, threatened with respect to any of the Employees. There is no pending or,
to the Company’s Knowledge, threatened, strike, lockout, work stoppage, slowdown or other concerted action or labor dispute
with respect to or involving any Employees of the Company, and there have been no such actions since the Lookback Date.
(c)
The Company is, and since the Lookback Date has been, in compliance in all material respects with all
applicable Laws relating to employment and employment practices or terms and conditions of employment, including worker
classification, wages, hours of work, discrimination, harassment, retaliation, collective bargaining, immigration, workers’
compensation, unemployment compensation, withholding, and occupational safety and health. All independent contractors and
consultants providing personal services to the Company have been properly classified as independent contractors for purposes of
all Laws, including Laws with respect to employee benefits, and all employees of the Company have been properly classified
under the Fair Labor Standards Act and similar state laws. The Company (i) has withheld and reported all amounts required by
Law or by Contract to be withheld and reported with respect to wages, salaries, and other payments to current and former
employees, consultants, and independent contractors, (ii) is not liable for any arrearage of wages or Taxes or any interest, fine, or
penalty for failure to comply with any of the foregoing and (iii) is not liable for any payment to any trust or other fund governed
by or maintained by or on behalf of any Governmental Authority with respect to unemployment compensation benefits, social
security, or other benefits or obligations for current or former employees.
(d)
There is no pending or, to the Company’s Knowledge, threatened charge, claim, or Proceeding against the
Company by or before the Equal Employment Opportunity Commission or any state or local Governmental Authority concerning
employment practices and there have been no such charges, claims or Proceedings since the Lookback Date and, to the
Company’s Knowledge, there is such charge, claim or Proceeding threatened or reasonably anticipated against the Company.
(e)
The Company has not taken and currently has no plans to take any action with respect to the transactions
contemplated by this Agreement that could constitute a “mass
52
layoff” or “plant closing” within the meaning of the Worker Adjustment and Retraining Notification Act or could otherwise
trigger any notice requirement or Liability under any state or local plant closing notice Law.
(f)
No executive officer or other key employee of the Company is subject to any noncompete, nonsolicitation,
nondisclosure, confidentiality, employment, consulting or similar agreement that would adversely affect or conflict with the
present business activities of the Company and, to the Company’s Knowledge, no executive officer or other key employee of the
Company is planning to terminate his or her employment with the Company for any reason (or no reason), including the
consummation of the transactions contemplated by this Agreement.
(g)
The Company has investigated or reviewed all sexual harassment or other harassment, discrimination or
retaliation allegations (that were made in writing, orally to a member of management or human resources personnel) of which it
had Knowledge since the Lookback Date. With respect to each such allegation with potential merit, the Company has taken
corrective action that is reasonably calculated to prevent further improper action.
(h)
A Form I-9 has been completed and retained with respect to each current employee, and, where required
by law, former employees. The Company has not been the subject of any audit or other Proceeding, claim, demand, assessment or
judgments nor, to the Company’s knowledge, has the Company been the subject of an investigation, inquiry or other any audit or
other Proceeding, claim, demand, assessment or judgments from the U.S. Department of Homeland Security, including the
Immigration and Customs Enforcement, (or any predecessor thereto, including the U.S. Customs Service or the Immigration and
Naturalization Service) or any other immigration-related enforcement proceeding.
Section 4.14
Environmental Matters.
(a)
The Company is, and since the Lookback Date has been, in compliance with all Environmental Laws
applicable to the Business.
(b)
Since the Lookback Date, no written or, to the Company’s Knowledge, oral notice from any Governmental
Authority has been received by the Company claiming that (i) the operation of the Business is in violation of any Environmental
Law or Environmental Permit or (ii) the Company is responsible (or potentially responsible) for Remedial Action with respect to
the operation of the Business.
(c)
The Company has not released any Hazardous Substances on, into, or from any Company Real Property or
any other real property formerly leased or occupied by the Company, in each case, in violation of any Environmental Laws or
which has given rise to any Liabilities or investigatory, reporting, corrective, or remedial obligations pursuant to Environmental
Laws.
(d)
No Company Real Property or other real property formerly leased or occupied by the Company (i) has
been, pursuant to CERCLA or any similar Law, placed or, to
53
the Company’s Knowledge, is proposed to be placed on the National Priorities List, the CERCLIS, or any state or regional
equivalent list of known or suspected contaminated sites or (ii) is subject to a written claim, Order, or other written request or
written demand to effect removal or take Remedial Action.
(e)
The Company has not assumed by Contract or by operation of law, or agreed to indemnify any other
Person against, any Liabilities under Environmental Laws.
Section 4.15
Taxes.
(a)
All Tax Returns of the Company have been timely filed as required by applicable Law. Each such Tax
Return and filing is accurate and complete. All Taxes and estimated Taxes owed by the Company, whether or not shown on such
Tax Returns, have been fully and timely paid as required by applicable Law.
(b)
None of the Tax Returns of the Company has ever been audited or investigated by any Governmental
Authority. No Proceeding by any Governmental Authority is pending or, to the Company’s Knowledge, threatened with respect to
Taxes of the Company. No issues have been raised in any examination by any Governmental Authority of the Company which,
by application of similar principles, reasonably could be expected to result in a proposed adjustment to the liability for Taxes for
any other period not so examined.
(c)
The Company has complied with all applicable Laws relating to the reporting, payment, and withholding
of Taxes and all Taxes which the Company is required by Law to withhold or collect, including sales and use taxes, goods and
services taxes, and all amounts required to be withheld for Taxes of any employee, independent contractor, creditor, customer,
stockholder, or other Person have been duly withheld or collected and, to the extent required, have been paid over to the proper
Governmental Authorities. All Tax Returns in respect of such withheld amounts that are required to be filed by the Company
have been filed, and all statements required to be furnished to payees by the Company have been furnished to such payees, and
the information set forth on such information returns and statements is accurate and complete.
(d)
There are no Liens (other than Liens for current Taxes not yet due and payable) on any of the properties or
assets of the Company or the Shares.
(e)
The Company is not liable for the Taxes of any Person other than the Company as a result of filing unitary,
combined, or consolidated Tax Returns, as a transferee or successor or by Contract (other than Taxes imposed under provisions of
commercial contracts entered into in the ordinary course of business the primary purpose of which is other than Taxes).
(f)
The Company has not granted or been requested to grant any waiver of any statutes of limitations
applicable to any claim for Taxes, and the Company has not requested or been granted an extension of the time for filing any Tax
Return (other than automatic extensions for income Tax Returns).
54
(g)
The Company is not a “foreign person” as defined in section 1445(f)(3) of the Code.
(h)
The Company is not and has not been a United States real property holding corporation within the meaning
of Code §897(c)(2) at any time during the applicable period specified in Code §897(c)(1)(A)(ii).
(i)
The Company will not be required to include any item of income in, or exclude any item of deduction
from, taxable income for any taxable period ending after the Closing Date as a result of any: (i) change in (or improper use of)
any method of accounting for a taxable period ending on or prior to the Closing Date; (ii) closing agreement as described in
Section 7121 of the Code (or any corresponding or similar provision of U.S. state, local or non-U.S. income Tax Law) executed
on or prior to the Closing; (iii) intercompany transactions or any excess loss account described in Treasury Regulations under
Section 1502 of the Code (or any corresponding or similar provision of U.S. state, local or non-U.S. income Tax Law); (iv)
installment sale or open transaction disposition made on or prior to the Closing; (v) election under Section 108(i) of the Code (or
similar provision of U.S. state, local or non-U.S. Tax Law); (vi) prepaid amount received or deferred revenue accrued on or prior
to the Closing Date outside the ordinary course of business or (vii) any income under Section 965(a) of the Code, including as a
result of any election under Section 965(h) of the Code with respect thereto.
(j)
There is no limitation on the utilization by the Company of its net operating losses, built-in losses, Tax
credits or similar items under Sections 382, 383 or 384 of the Code, the separate return limitation year rules or comparable
provisions of foreign state or local Law (other than any such limitation arising as a result of the consummation of the transactions
contemplated by this Agreement)
(k)
The Company has never distributed stock of another Person, or had its stock distributed by another Person,
in a transaction that was purported or intended to be governed in whole or in part by section 355 or 361 of the Code.
(l)
The Company has not entered into a “reportable transaction” within the meaning of Treasury Regulation
§1.6011-4.
(m)
No written claim has been made by a Tax authority in a jurisdiction where Tax Returns with respect to the
Company are not filed asserting that the Company is or may be subject to Tax in that jurisdiction. The Company has no
permanent establishment or fixed place of business in any other country other than the United States.
(n)
The Company has not requested or received a ruling from any taxing authority or signed a closing or other
agreement with any taxing authority which would affect any taxable period after the Closing Date. The Company is not and has
never been the beneficiary of any Tax exemption or Tax holiday.
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(o)
The Company has not deferred any payroll Taxes or availed itself of any of the Tax deferral, credits or
benefits pursuant to the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (“CARES Act”) or otherwise taken
advantage of any change in applicable law in connection with COVID-19 that has the result of temporarily reducing (or
temporarily delaying the due date of) otherwise applicable payment obligations of the Company to any Governmental Authority.
The Company has not sought and does not intend to seek a covered loan under paragraph (36) of Section 7(a) of the Small
Business Act (15 U.S.C. 636(a)), as added by Section 1102 of the CARES Act.
(p)
No Person holds Equity Interests of the Company that are non-transferable or subject to a substantial risk
of forfeiture within the meaning of Section 83 of the Code with respect to which a valid election under Section 83(b) of the Code
has not been made.
Section 4.16
Proceedings and Orders.
(a)
Except as set forth on Schedule 4.16(a), there are, and since the Lookback Date have been, no Proceedings
pending or, to the Company’s Knowledge, threatened against the Company or any of its directors, officers, employees,
representatives, or agents in their capacities as such or relating to their employment, services or relationship with the Company,
nor, to the Company’s Knowledge, are there any facts or circumstances which may give rise to any such Proceeding. Except as
set forth on Schedule 4.16(a), there are, and since the Lookback Date have been, no Proceedings by the Company pending against
any other Person. None of the Proceedings set forth or required to be set forth on Schedule 4.16(a) would, if determined
adversely to the Company, materially and adversely affect the Company or the Business. Except as set forth on Schedule 4.16(a),
the operation of the Business is not, and since the Lookback Date has not been, subject to any Order. The Company is and has
been in compliance with all Orders set forth on Schedule 4.16(a). The Company is not a party to or bound by any Contract to
settle or compromise any Proceeding against it which has involved any obligation other than the payment of money or under
which the Company has any continuing Liability.
(b)
There are no Proceedings pending or, to the Company’s Knowledge, threatened by or against the Company
with respect to this Agreement, the Related Agreements to which the Company is a party or the transactions contemplated hereby
or thereby or that, if determined adversely to the Company, would prevent or delay the consummation by the Company of the
transactions contemplated by this Agreement or the Related Agreements.
Section 4.17
Compliance with Laws. The Company is, and except as set forth on Schedule 4.17 has at all times since the
Lookback Date been, in compliance in all material respects with all Laws applicable to its properties, its assets, its products and
the Business. Since the Lookback Date, the Company has not received any written or, to the Company’s Knowledge, oral notice
from a Governmental Authority alleging that the Company is not in compliance with any applicable Law.
Section 4.18
Accounts Receivable. All accounts receivable of the Company have arisen from bona fide transactions by
the Company in the ordinary course of business. All accounts
56
receivable reflected in the Interim Balance Sheet are, to the Company’s Knowledge, good and collectible in the ordinary course
of business at the aggregate recorded amounts thereof, net of any applicable allowance for doubtful accounts reflected in the
Interim Balance Sheet, which allowance was calculated in accordance with GAAP, and all accounts receivable to be reflected in
the calculation of Closing Date Net Working Capital will be, to the Company’s Knowledge, good and collectible in the ordinary
course of business at the aggregate recorded amounts thereof, net of any applicable allowance for doubtful accounts, which
allowance will be determined in accordance with GAAP. Schedule 4.18 sets forth such amounts of accounts receivable as of the
date hereof that are subject to asserted claims by, and any other disputes with, customers and reasonably detailed information
regarding asserted claims made since the Lookback Date, including the type and amounts of such claims.
Section 4.19
Material Customers and Material Suppliers.
(a)
Schedule 4.19(a) sets forth a correct list of (i) the top twenty-five (25) customers of the Company,
excluding reseller, distributor and vehicle manufacturer customers (based on the total amount of sales to such customer) for the
year ended December 31, 2020, and for the two-month period ended February 28, 2021, (ii) all resellers and distributors whereby
the Company has appointed a third party as a “reseller” of one or more of its products to the end users thereof and (iii) all vehicle
manufacturer customers whereby the Company provides products or services directly to vehicle manufacturer customers pursuant
to a contract between the Company and such vehicle manufacturers (each, a “Material Customer”), including in each case the
total amount of sales to each such Material Customer during the applicable period and the percentage of the total sales of the
Company represented by such sales, and (iii) the top twenty (20) suppliers and vendors to the Company (based on total amount
purchased from such supplier or vendor) for the year ended December 31, 2020, and for the two-month period ended February
28, 2021 (each, a “Material Supplier”), showing the total amount of purchases by the Company from each such Material Supplier
during the applicable period and the percentage of the total amount of purchases by the Company represented by such purchases.
(b)
Except as set forth in Schedule 4.19(b), since the Lookback Date, there has been (i) no adverse change in
the business relationship, or any material dispute, between the Company and any Material Customer or Material Supplier, (ii) no
adverse change in any material term or condition of any Contract between the Company and any Material Customer or Material
Supplier, and (iii) no written, or, to the Company’s Knowledge, oral, indication received by the Company that any Material
Customer or Material Supplier intends to reduce its purchases from or sales to, as applicable, the Company or that any Material
Customer or Material Supplier intends to terminate, not renew, or materially amend the terms and conditions of any Contract with
the Company.
(c)
Since the Lookback Date, no Material Customer or Material Supplier has made any breach of contract,
indemnification, or similar claim against the Company. All Material Customers are current in their payment of invoices and the
Company does not have, and since January 1, 2020 has not had, any material disputes with any Company Customer that arose
and remained unresolved. The Company is current in its payments to all Material Suppliers and
57
the Company does not have, and since January 1, 2020 has not had, any material dispute concerning Contracts with or products
and/or services provided by any Material Supplier that arose or remained unresolved. There are no warranty claims made or
refunds requested by any Material Customer with respect to any Company product or service except for normal warranty claims
and refunds in the ordinary course of business consistent with past practice and that would not result in a reversal of any material
amount of revenue received by the Company. Neither the Company nor any of its Representatives have made any oral
commitments or promises with respect to the Company product or service, including pricing, future features, or the like, to any
former, current or prospective customer.
Section 4.20
Related Party Transactions.
(a)
Except as set forth on Schedule 4.20(a), no officer, director, or Employee of the Company, or any
individual in any such officer’s, director’s, or Employee’s immediate family, (i) is a party to any Contract with the Company, (ii)
has an interest in any property (real or personal, tangible or intangible) owned, leased, or licensed by the Company or otherwise
used in the conduct of the Business, (iii) provides any goods or services to the Company (other than in such person’s capacity as
an officer, director, or Employee of the Company), or (iv) to the Company’s Knowledge, has an interest in any Person that is a
customer of, or supplier or vendor to, the Company.
(b)
The Company has not made, and does not have outstanding, any loans to any of its officers, directors,
Employees, Equityholders or, to the Knowledge of the Company, any of their respective relatives or Affiliates.
Section 4.21
Bank Accounts. Schedule 4.21 sets forth a correct list of all bank accounts, safe deposit boxes, and lock
boxes maintained by or on behalf of the Company and the persons authorized to sign or otherwise act with respect thereto.
Section 4.22
Insurance. Schedule 4.22 sets forth a correct list of all policies of insurance owned or held by the Company
(collectively, the “Insurance Policies”), which includes the name of the insurer under each such Insurance Policy, the type of
policy, policy number and the term and amount of coverage thereunder. The Company has provided to Purchaser correct copies
of all of the Insurance Policies. All of the Insurance Policies are valid, in full force and effect, and enforceable, all premiums
thereunder have been paid in full, and no written notice of cancellation, termination or premium increase has been received by the
Company with respect to any of the Insurance Policies. The Company is and has been in compliance in all material respects with
all such Insurance Policies. Schedule 4.22 also sets forth a correct list of all claims which have been made by or on behalf of the
Company since the Lookback Date under any of the Insurance Policies, including any claims that are currently pending under the
Insurance Policies. There is no claim pending under any Insurance Policy as to which coverage has been questioned, denied or
disputed by the underwriters of such Insurance Policy or for which its total value (inclusive of defense expenses) would
reasonably be expected to exceed the applicable policy limits.
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Section 4.23
Required Stockholder Approval. The only vote or consent of the Equityholders required to adopt this
Agreement and approve the Merger, the Company’s Related Agreements, the other transactions contemplated hereby and thereby,
and the other matters set forth in the Written Consent, is the affirmative vote of the holders of at least (i) a majority of the
outstanding Shares and (ii) holders of at least sixty-two percent (62%) of the outstanding Preferred Stock (the “Required
Stockholder Approval”). No other vote of the Stockholders is required by Law, the Organizational Documents of the Company,
or any Contract to which the Company is a party.
Section 4.24
Takeover Laws. The board of directors of the Company has taken all action necessary in order to exempt
this Agreement, the Company’s Related Agreements, the Merger, and the other transactions contemplated by this Agreement and
the Company’s Related Agreements from, and this Agreement, the Company’s Related Agreements, the Merger, and the other
transactions contemplated by this Agreement and the Company’s Related Agreements are exempt from, the restrictions on
business combinations set forth in Section 203 of the DGCL and any other similar applicable Law. No other “business
combination,” “control share acquisition,” “fair price,” “moratorium,” or other similar anti-takeover Law (collectively, “Takeover
Laws”) is applicable to this Agreement, the Company’s Related Agreements, the Merger, and the other transactions contemplated
by this Agreement and the Company’s Related Agreements.
Section 4.25
Disclosure. None of the representations or warranties of the Company contained in this Agreement, none
of the information contained in the Schedules, and none of the other information or documents provided or made available to
Purchaser or any of its Representatives by the Company, any Stockholder, or any of their respective Representatives in
connection with this Agreement or the transactions contemplated by this Agreement contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances
under which they were made, not misleading.
Section 4.26
CARES Act Compliance.
(a)
Schedule 4.26(a) sets forth the PPP Loan that the Company has received and the Company has no
outstanding applications for any other PPP Loan. The Company was eligible for its PPP Loan at the time of application and
truthfully and accurately completed the application for its PPP Loan.
(b)
The Company has made available to Purchaser complete and correct copies of all documentation related to
the PPP Loan, including the original loan application, the loan documents from the lender, documentation of eligibility and
economic need, the PPP Loan Forgiveness Application submitted by the Company to the lender, and all other documentation as
specified in such PPP Loan Forgiveness Application.
(c)
To the extent that the consummation of the transactions contemplated by this Agreement will result in an
event of default under the PPP Loan documents, the Company has obtained all necessary waivers, approvals and consents.
59
(d)
The Company used the proceeds of the PPP Loan solely in accordance with all Laws governing such
receipt and use, as the same have been modified from time to time prior to the Closing Date by the applicable Governmental
Authority or further legislation, as applicable. In the event of a modification of the regulation that provided clarity and an
opportunity to cure, the Company has taken all such opportunities to cure any defect in its compliance.
(e)
The Company has used all of the proceeds of the PPP Loan in compliance with Section 1102 of the
CARES Act and U.S. Small Business Administration regulations published in the Federal Register before the date of this
Agreement.
(f)
Schedule 4.26(f) sets forth all funds other than the PPP Loan received by the Company pursuant to the
CARES Act, including any COVID-19 relief funds, loans or grants issued by a Governmental Authority. The Company (i) has
met the qualifications to receive such funds that were in effect at the time of such receipt; (ii) has truthfully and accurately in all
material respects submitted any attestations or applications required for receipt of such funds that were in effect at the time of
such receipt; (iii) was in compliance with all terms and conditions required in order to receive such funds at the time such funds
were received; (iv) otherwise met all requirements and qualifications in order to (A) receive such funds at the time such funds
were received and (B) retain and use such funds from and after the date such funds were received; and (v) have made available to
Purchaser complete and correct copies of all material documentation related to such funds.
Section 4.27
Anti-Corruption Matters.
(a)
Neither the Company nor any director, officer, agent, representative, employee, or other Person acting on
behalf of the Company has (i) violated any provision of the Anti-Corruption Laws, (ii) made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment to any Foreign Official to obtain or retain business, (iii) used or attempted to use
any corporate funds for any unlawful contribution, gift, entertainment, travel expense, or other unlawful expenses relating to
political activity or a charitable donation, or (iv) made any offer, promise to pay, or direct or indirect unlawful payment to or for
the use or benefit of any Foreign Official. Neither the Company nor any director, officer, agent, representative, employee, or
other Person acting on behalf of the Company has made any such unlawful offer to or for the use and benefit of any other Person
where there was a belief or awareness that there was a high probability that the recipient would use such offer for any purpose as
described in this Section 4.27. The Company has instituted and maintains and enforces policies and procedures designed to
promote compliance with the Anti-Corruption Laws.
(b)
No Representative of the Company is a Foreign Official.
(c)
There are no, and there have not been any, Proceedings pending or, to the Company’s Knowledge,
threatened against the Company or any director, office, agent, representative, employee, or other Person acting on behalf of the
Company involving a violation or alleged violation of any Anti-Corruption Law.
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Section 4.28
Drag-Along.
(a)
The Company and the applicable Stockholders have taken all steps necessary to validly exercise the Drag
Along set forth in Section 4.1 of the Voting Agreement with respect to the transactions contemplated hereby.
(b)
This Agreement and the Related Agreements and the transactions contemplated hereby and thereby do not
give rise to any fact or circumstance that would restrict the valid exercise of the Drag-Along pursuant to Section 4.2 of the Voting
Agreement.
Section 4.29
Brokers. No broker, finder, or investment bank is entitled to any brokerage, finder’s, or similar fee or
commission in connection with the transactions contemplated by this Agreement or any Related Agreement based upon
arrangements made by or on behalf of the Company, other than Code Advisors, LLC, the fees and expenses of which shall
constitute Transaction Expenses.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF PURCHASER AND MERGER SUB
Except as set forth in the corresponding subsection of the schedules delivered to the Company, the Purchaser and Merger
Sub represent and warrant to the Company as of the date hereof and as of the Closing Date (as though made on the Closing Date)
as follows:
Section 5.1
Organization and Authorization. Each of Purchaser and Merger Sub is validly existing and in good
standing under the Laws of its jurisdiction of incorporation. Each of Purchaser and Merger Sub has all requisite corporate power
and authority to execute, deliver, and perform this Agreement and its Related Agreements and, subject to the adoption of this
Agreement by Purchaser, in its capacity as the sole stockholder of Merger Sub, to consummate the transactions contemplated by
this Agreement and its Related Agreements. The execution, delivery, and performance by each of Purchaser and Merger Sub of
this Agreement and its Related Agreements and the consummation by each of Purchaser and Merger Sub of the transactions
contemplated by this Agreement and its Related Agreements have been validly authorized by all necessary action by the board of
directors of each of Purchaser and Merger Sub, and, other than the adoption of this Agreement by Purchaser, in its capacity as the
sole stockholder of Merger Sub, no other corporate action by Purchaser or Merger Sub is necessary to authorize this Agreement
or to consummate the transactions contemplated by this Agreement. Each of Purchaser and Merger Sub has validly executed and
delivered this Agreement and, at or prior to the Closing, each of Purchaser and Merger Sub will have validly executed and
delivered each of its Related Agreements. This Agreement constitutes, and each Related Agreement of Purchaser or Merger Sub
will after the Closing constitute, legal, valid, and binding obligations of Purchaser or Merger Sub, as applicable, enforceable
against Purchaser or Merger Sub in accordance with their respective terms, subject to the Enforceability Limitations.
Section 5.2
Governmental Consents; No Conflicts.
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(a)
The execution, delivery, and performance by each of Purchaser and Merger Sub of this Agreement and its
Related Agreements, and the consummation by each of Purchaser and Merger Sub of the transactions contemplated by this
Agreement and its Related Agreements, do not and will not require any Consent of or with any Governmental Authority, other
than (i) any Consent the failure of which to be obtained would not be material to Purchaser or Merger Sub or prevent or
materially delay the consummation by Purchaser and Merger Sub of the transactions contemplated by this Agreement or any of
its Related Agreements, (ii) any Consent that is required as a result of any facts or circumstances relating solely to the Company,
any Stockholder, or any of their respective Affiliates, and (iii) the filing of the Certificate of Merger with the Secretary of State of
the State of Delaware.
(b)
The execution, delivery, and performance by each of Purchaser and Merger Sub of this Agreement and its
Related Agreements, and the consummation by each of Purchaser and Merger Sub of the transactions contemplated by this
Agreement and its Related Agreements, do not and will not violate, conflict with, result in a breach, cancellation, or termination
of, constitute a default under, result in the creation of any Lien on any of the properties or assets of Purchaser or Merger Sub
under, or result in a circumstance that, with or without notice or lapse of time or both, would constitute any of the foregoing
under (i) any Law or Order applicable to or binding on Purchaser, Merger Sub, or any of their respective properties or assets, (ii)
any material Contract to which Purchaser or Merger Sub is a party or by which Purchaser, Merger Sub, or any of their respective
properties or assets is bound, (iii) any Permit held by Purchaser or Merger Sub, or (iv) any of the Organizational Documents of
Purchaser or Merger Sub except, in the case of each of clauses (i), (ii), and (iii), where such violation, conflict, breach,
cancellation, termination, or default would not prevent or delay the consummation by Purchaser or Merger Sub of the
transactions contemplated by this Agreement or any of its Related Agreements.
Section 5.3
Proceedings. There are no Proceedings pending or, to Purchaser’s knowledge, threatened by or against
Purchaser, Merger Sub, or any of their respective Affiliates with respect to this Agreement or the transactions contemplated by
this Agreement or Purchaser’s Related Agreements or that, if determined adversely to Purchaser or Merger Sub, would prevent or
delay the consummation by Purchaser or Merger Sub of the transactions contemplated by this Agreement or any of its Related
Agreements.
Section 5.4
Availability of Funds. Purchaser has sufficient cash, available lines of credit, or other sources of
immediately available funds to enable it to pay when due the Estimated Merger Consideration and all other amounts required to
be paid by it under this Agreement and its Related Agreements.
Section 5.5
Merger Sub. All of the issued and outstanding shares of capital stock of Merger Sub are owned by
Purchaser. Merger Sub was formed solely for the purpose of engaging in the Merger, and since the date of its incorporation has
engaged in no other business, conducted any operations, or incurred any Liabilities, other than in connection with the execution
of this Agreement, the performance of its obligations under this Agreement, and matters ancillary thereto.
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Section 5.6
Brokers. No broker, finder, or investment bank is entitled to any brokerage, finder’s, or other fee or
commission in connection with the transactions contemplated by this Agreement or any Related Agreement based upon
arrangements made by or on behalf of Purchaser.
Section 5.7
No Additional Representations or Warranties.
(a)
Each of Purchaser and Merger Sub acknowledges that none of the Company or its Subsidiaries, nor any
other Person, has made any representation or warranty, express or implied, as to the accuracy or completeness of any information
regarding the Company, any of its Subsidiaries, the Business or other matters that is not specifically included in this Agreement
or the Disclosure Schedules. Without limiting the generality of the foregoing, none of the Company or its Subsidiaries nor any
other Person has made a representation or warranty to Purchaser or Merger Sub with respect to (i) any projections, estimates or
budgets for the Company or any of its Subsidiaries or the Business, or (ii) any materials, documents or information relating to the
Company and any of its Subsidiaries or the Business made available to Purchaser or Merger Sub or their counsel, accountants or
advisors in Company’s data room or otherwise, in each case, except as expressly covered by a representation or warranty set forth
in ARTICLE 4 of this Agreement or the Related Agreements. In connection with each of Purchaser’s and Merger Sub’s
investigation of the Business, the Company has delivered, or made available to Purchaser, Merger Sub and their respective
Affiliates, agents and Representatives, certain projections and other forecasts, including but not limited to, projected financial
statements, cash flow items and other data of Company and its Subsidiaries and certain business plan information of the
Business. Each of Purchaser and Merger Sub acknowledges that there are uncertainties inherent in attempting to make such
projections and other forecasts and plans and accordingly is not relying on them, that each of Purchaser and Merger Sub is
familiar with such uncertainties, that each of Purchaser and Merger Sub is taking full responsibility for making its own evaluation
of the adequacy and accuracy of all projections and other forecasts and plans so furnished to it, and that Purchaser, Merger Sub
and their Affiliates, agents and Representatives shall have no claim against any Person with respect thereto. Accordingly, each of
Purchaser and Merger Sub acknowledges that, without limiting the generality of this Section 5.7, neither the Company, nor any of
its Representatives, agents or Affiliates, has made any representation or warranty with respect to such projections and other
forecasts and plans.
(b)
In furtherance of the foregoing, each of Purchaser and Merger Sub acknowledges that it is not relying on
any representation or warranty of Company, other than those representations and warranties specifically set forth in ARTICLE 4
of this Agreement and the Related Agreements. Each of Purchaser and Merger Sub acknowledges that it has conducted to its
satisfaction an independent investigation of the financial condition, liabilities, results of operations and projected operations of
the Business and the nature and condition of its properties, assets and businesses and, in making the determination to proceed
with the transactions contemplated hereby, has relied solely on the results of its own independent investigation and the
representations and warranties set forth in ARTICLE 4 and the Related Agreements.
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ARTICLE 6.
PRE-CLOSING COVENANTS AND AGREEMENTS
Section 6.1
Access to Information. From the date of this Agreement until the Closing Date, the Company shall give
Purchaser and its Representatives full access, upon reasonable advance notice and during normal business hours, to the offices,
facilities, books, and records of the Company, shall make the officers and employees of the Company available to Purchaser and
its Representatives as they may from time to time request, and shall provide Purchaser and its Representatives with any and all
additional information concerning the Company or the Business as they may from time to time request. The Company shall have
the right to have a Representative present during any inspections, interviews, and examinations conducted at the offices or
facilities owned or leased by the Company.
Section 6.2
Conduct of Business Pending the Closing. From the date of this Agreement until the Closing Date, the
Company shall operate the Business in the ordinary course of business consistent with past practice. Consistent with the
foregoing, the Company shall keep and maintain its assets in good operating condition and repair and use its reasonable best
efforts consistent with good business practice to maintain the business organization of the Company intact and to preserve the
goodwill of the suppliers, contractors, licensors, employees, customers, distributors, and others having business relations with the
Company. The Company shall not take any action that would, or that would reasonably be expected to, result in any of the
conditions to Closing set forth in ARTICLE 8 not being satisfied. Without limiting the generality of the foregoing, except as set
forth on Schedule 6.2 or to the extent Purchaser otherwise Consents in writing (which consent shall not be unreasonably
withheld, delayed or conditioned), prior to the Closing, the Company shall not:
(a)
amend its Organizational Documents;
(b)
(i) issue or sell any of its Equity Interests, (ii) grant any options, warrants, calls, or other rights to purchase
or otherwise acquire any of its Equity Interests, or (iii) split, combine, reclassify, cancel, redeem, or repurchase any of its Equity
Interests;
(c)
sell, lease, transfer, or otherwise dispose of, or incur any Lien (other than a Permitted Lien) on, any of its
properties or assets material to the Business;
(d)
make any capital expenditures in an aggregate amount of more than $50,000;
(e)
create, incur, guarantee, or assume any Indebtedness in an aggregate amount of more than $50,000;
(f)
enter into any transaction between the Company, on the one hand, and any Equityholder or any Affiliate of
any Equityholder, on the other hand, that (i) is not on an arm’s-length basis or (ii) would be binding on the Company after the
Closing;
64
(g)
make any loans, advances, or capital contributions to, or investments in, any other Person (including any
Affiliate) of more than $50,000;
(h)
acquire any business, Equity Interests, or assets of any other Person (whether by merger, sale of Equity
Interests, sale of assets, or otherwise);
(i)
create any Subsidiary;
(j)
enter into any new line of business;
(k)
grant any increase in the base salary or wages, bonus opportunity, or other compensation or benefits
payable to any Employee, in each case except (i) as required by Law or (ii) as required by the terms of any existing Contract,
Company Benefit Plan, or collective bargaining agreement set forth on Schedule 4.12(a);
(l)
adopt, establish, enter into, terminate, amend or modify in any material respect any Company Benefit Plan
(or any arrangement that would be a Company Benefit Plan if it were in existence on the date hereof) or take any action to
accelerate the time of payment or vesting of any rights, compensation, benefits or funding obligations under any Benefit Plan,
except (i) as required by Law or (ii) as required by the express terms of any existing Company Benefit Plan or an existing
Contract;
(m)
(i) amend or modify in any material respect any Material Contract, (ii) terminate, not renew, or extend any
Material Contract, or (iii) enter into a Contract that, if entered into prior to the date hereof, would have been a Material Contract;
(n)
make any change in any accounting method, principle, policy, or procedure used by it (other than regarding
Taxes, which shall be governed by clause (o) below), other than, in each case, changes required by GAAP or applicable Law;
(o)
unless required by applicable Law, make or change any Tax election, change any annual Tax accounting
period, file any amended Tax Return, enter into any closing agreement, settle any Tax claim or assessment, consent to any
extension or waiver of the limitation period applicable to any Tax claim or assessment, or adopt or change any accounting
principle, accounting policy, or accounting procedure used by it regarding Taxes;
(p)
accelerate or delay collection of any notes or accounts receivable in advance of or beyond their regular due
dates or the dates when the same would have been collected in the ordinary course of business consistent with past practice;
(q)
delay or accelerate payment of any account payable or other Liability beyond or in advance of its due date
or the date when such Liability would have been paid in the ordinary course of business consistent with past practice;
(r)
offer any rebates, discounts, commissions, incentives, or inducements for the purchase of products or
services that are materially different from those rebates, discounts,
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commissions, incentives or inducements offered by it in the ordinary course of business consistent with prior practice, or engage
in any form of “channel stuffing” or other activity that could reasonably be expected to result in a reduction, temporary or
otherwise, in the demand for its products and services following the Closing;
(s)
make any material change in its general pricing practices or policies or any change in its credit or
allowance practices or policies;
(t)
declare, set aside, or pay any dividend or any other distribution with respect to its Equity Interests;
(u)
(i) settle or commence any material Proceeding or (ii) cancel any other debts owed to or claims held by it
other than, in the case of this clause (ii), in the ordinary course of business consistent with past practice;
(v)
waive, abandon, or otherwise dispose of any rights in or to any Company Intellectual Property;
(w)
adopt a complete or partial plan of liquidation, dissolution, restructuring, recapitalization, bankruptcy,
suspension of payments, or other reorganization; or
(x)
agree to do, approve, or authorize any of the foregoing.
Section 6.3
Consents and Approvals.
(a)
On the terms and subject to the conditions of this Agreement, each Party shall use its reasonable best
efforts to cause the Closing to occur as promptly as practicable after the date of this Agreement, including taking all reasonable
actions necessary (i) to comply promptly with all legal requirements that may be imposed on it or any of its Affiliates with
respect to the Closing, (ii) to obtain all Consents from third parties necessary or appropriate to permit the consummation of the
transactions contemplated by this Agreement, and (iii) to obtain or make each Consent of or with a Governmental Authority that,
if not obtained or made, would adversely affect the ability of the Parties to consummate the transactions contemplated by this
Agreement; provided, however, that no Party shall have any obligation to offer or pay any material consideration (or incur any
obligation) in order to obtain any such Consents; and provided, further, that the Company shall not make any agreement or
understanding affecting the Shares, the Company, or the Business as a condition for obtaining any such Consents except with the
prior written Consent of Purchaser.
(b)
Notwithstanding anything in this Agreement to the contrary, Purchaser and its Affiliates shall, on behalf of
the Parties, control, lead, and be responsible for all communications and strategy for dealing with any Governmental Authority,
including any communications and strategy relating to the negotiation of any settlement of a Proceeding relating to the
Agreement or Related Agreements, whether under Antitrust Law or otherwise, and the Company shall take all reasonable actions
to support the Purchaser and its Affiliates in
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connection therewith, provided that, Purchaser and its Affiliates shall consult with the Company and consider in good faith the
views of the Company with respect to dealing with any Governmental Authority. Without limiting the generality of the foregoing,
if Purchaser determines that it is necessary or advisable to do so (or to the extent otherwise required by applicable Governmental
Authority or Law), the Parties shall respond promptly to inquiries from any Governmental Authority in connection with any
Proceeding or request for information or other communication concerning this Agreement or the Related Agreements or the
transactions contemplated hereby or thereby, in any case that may be initiated by any Governmental Authority pursuant to any
Antitrust Law relating to this Agreement or the Related Agreements, and supply as promptly as practicable such information or
documentation as may be requested pursuant to any applicable Antitrust Law by any Governmental Authority. The Company
shall not, and shall cause its Representatives to not, participate in any meeting or discussion relating to the transactions
contemplated by this Agreement and Related Agreements, either in person or by telephone, with any Governmental Authority in
connection with the proposed transactions unless it gives Purchaser the opportunity to attend and observe, unless otherwise
prohibited by such Governmental Authority.
(c)
In furtherance and not in limitation of the covenants of the Parties contained in this Section 6.3, subject to
applicable legal limitations including redaction where necessary, each Party agrees to (i) furnish to the other Parties such
information and assistance as the other Parties may reasonably request in connection with its preparation of any notifications,
filings, communications, or other submissions to any Governmental Authority relating to the HSR Act or any other applicable
Antitrust Law (subject in all cases to Purchaser’s right to control, lead and be responsible for all communications and strategy for
dealing with such Governmental Authority), (ii) keep the other Parties apprised of the status of matters relating to the completion
of the transactions contemplated by this Agreement, including promptly furnishing the other Parties with copies of notices or
other communications received by such Party from, or given by such Party to, any third party or any Governmental Authority
with respect to such transactions, and (iii) use its reasonable best efforts to share information protected from disclosure under the
attorney-client privilege, work product doctrine, joint defense privilege or any other privilege pursuant to this Section 6.3(a) in a
manner so as to preserve any applicable privilege.
(d)
Except as otherwise permitted in this Agreement, Purchaser and its Affiliates shall not acquire or agree to
acquire, by merging with or into, consolidating with, by purchasing all or a portion of the assets of or all or a portion of the equity
in, any entity owning or having any rights in any business of the type and character of, or that competes with, all or any part of,
the Business, including entering into, or agreeing to enter into, any license (other than customary licenses in connection with
commercial agreements entered into in the ordinary course of business) or joint venture, which could reasonably be expected to,
in each case, or in the aggregate, (i) impose any delay in the obtaining of, or increase the risk of not obtaining the expiration,
termination or waiver of any applicable waiting period or any Consent, approval, permit, ruling, authorization or clearance
pursuant to the Antitrust Laws necessary to consummate the transactions contemplated hereby or by the Related Agreements, (ii)
increase
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the risk of any Governmental Authority initiating a Proceeding relating to the Agreement or Related Agreements or entering an
injunction or order prohibiting the consummation of the transactions contemplated by the Agreement or by the Related
Agreements, (iii) increase the risk of not being able to remove any such order on injunction on appeal or otherwise, or (iv) delay
or prevent the consummation of the transactions contemplated by the Agreement or Related Agreements. The Company shall not
consent to any voluntary extension of any statutory deadline or waiting period or to any voluntary delay of the consummation of
the transactions contemplated by this Agreement or by the Related Agreements unless Purchaser has given its prior written
Consent to such extension or delay.
(e)
Notwithstanding the foregoing or anything else in this Agreement to the contrary, Purchaser and its
Affiliates shall not be required to (i) propose, offer, commit, agree, or consent to (A) sell, divest, lease, license, transfer, hold
separate, or otherwise dispose of any assets, businesses, products or product lines of Purchaser, any of its Affiliates, or the
Company, (B) terminate, amend, or modify any existing relationships, ventures, contractual rights or Liabilities of Purchaser, any
of its Affiliates, or the Company, or (C) take or agree to take any action that after the Closing would limit the freedom of
Purchaser, any of its Affiliates, or the Company with respect to, or its ability to retain, one or more of its or its Affiliates’
(including the Company’s) businesses, product lines, or assets, (ii) contest, defend, or resist any Proceeding brought or threatened
to be brought investigating, challenging or seeking to enjoin, restrain, prohibit, or otherwise make illegal any of the transactions
contemplated by this Agreement or the Related Agreements, or (iii) appeal or seek to have vacated, lifted, reversed, or overturned
any Order, whether temporary, preliminary, or permanent, that enjoins, restrains, prohibits, or otherwise makes illegal any of the
transactions contemplated by this Agreement or the Related Agreements.
Section 6.4
Notification of Certain Matters. From the date of this Agreement until the Closing Date, each of the
Company and Purchaser shall give the other prompt written notice of: (a) any event, change, or occurrence that (i) causes, or
would reasonably be expected to cause, any representation or warranty of such Party set forth in this Agreement to be untrue or
inaccurate in any material respect or (ii) causes, or would reasonably be expected to cause, such Party to fail to perform or
comply with in any material respect any covenant or agreement of such party in this Agreement; and (b) any Proceeding
commenced or, to the Company’s Knowledge or Purchaser’s knowledge, as applicable, threatened against or otherwise affecting
such Party with respect to the transactions contemplated by this Agreement. No such notification will limit any of the
representations, warranties, covenants, agreements, rights, or remedies of the Parties contained in this Agreement.
Section 6.5
Exclusivity. From the date of this Agreement until the Effective Time, the Company shall not, directly or
indirectly, (a) solicit, initiate, or encourage the submission of any proposal or offer from any other Person relating to a potential
business combination with or acquisition of the Company or the Business (whether by way of merger, purchase of Equity
Interests, purchase of assets, or otherwise) or any portion of the Equity Interests or assets of the Company (a “Competing
Transaction”), (b) participate in or continue any activities, discussions,
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or negotiations regarding a Competing Transaction, or (c) provide information regarding the Company or the Business to, or
enter into or agree to enter into any Contract with, any Person, other than Purchaser and its Representatives, in connection with a
possible Competing Transaction with such Person. The Company shall, and shall cause its Representatives to, cease any existing
activities, discussions, and negotiations with any other Person with respect to any of the foregoing. The Company shall advise
Purchaser orally and in writing of the receipt by the Company or any of its Representatives of any oral or written communication,
proposal, offer, or inquiry from any other Person regarding a Competing Transaction, including the identity of the Person making
the same and the material terms and conditions of any proposal or offer.
Section 6.6
Required Stockholder Approval.
(a)
The Company shall use its reasonable best efforts to obtain, within one (1) day following the execution and
delivery of this Agreement, the Required Stockholder Approval pursuant to written consents of the Stockholders in the form
attached as Exhibit D (collectively, the “Written Consent”). Promptly following receipt of the Written Consent, the Company
shall deliver a correct copy, certified by the secretary or an assistant secretary of the Company, of the Written Consent to
Purchaser.
(b)
Promptly following, but in no event more than three (3) Business Days after, receipt of the Written
Consent, the Company shall prepare and deliver (or cause to be delivered) a notice (the “Stockholder Notice”) to every
Stockholder that did not execute the Written Consent. The Stockholder Notice shall (i) be a statement to the effect that the
Company’s board of directors has unanimously adopted resolutions determining that this Agreement, the Merger, and the other
transactions contemplated by this Agreement are in the best interests of the Company and the Stockholders, approving and
declaring advisable this Agreement, the Merger, and the other transactions contemplated by this Agreement, and determining that
the Merger Consideration is fair to the Stockholders, (ii) in accordance with Section 228(e) of the DGCL, provide the
Stockholders to whom it is sent with notice of the actions taken in the Written Consent, and (iii) notify such Stockholders of their
dissent and appraisal rights pursuant to Section 262 of the DGCL. The Stockholder Notice shall include a copy of Section 262 of
the DGCL and shall be sufficient in form and substance to start the twenty (20) day period during which a Stockholder must
demand appraisal of such Stockholder’s Shares as contemplated by Section 262(d)(2) of the DGCL. Purchaser shall have the
right to review and approve, in advance, the Stockholder Notice and all documents and other materials submitted to the
Stockholders in accordance with this Section 6.6(b), such approval not to be unreasonably withheld, conditioned, or delayed.
Section 6.7
Merger Sub Stockholder Approval. Promptly following the execution and delivery of this Agreement,
Purchaser shall adopt this Agreement in its capacity as sole stockholder of Merger Sub and deliver to the Company evidence of
its vote or action by written consent relating thereto in accordance with the DGCL and the Organizational Documents of Merger
Sub.
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Section 6.8
Takeover Laws. If any Takeover Law shall become applicable to this Agreement, the Merger, or any of the
other transactions contemplated by this Agreement, the Company and its board of directors shall take such actions as are
necessary so that the Merger and the other transactions contemplated by this Agreement may be consummated as promptly as
practicable on the terms contemplated by this Agreement, and otherwise take such actions as are necessary to minimize the
effects of any such Takeover Law on the Merger and the other transactions contemplated by this Agreement.
Section 6.9
Termination of Related Party Contracts. Prior to the Closing, the Company shall take such actions as are
necessary to terminate, effective as of the Closing, all Contracts, services, and other arrangements, whether written or oral (except
for the Contracts set forth on Schedule 6.9), between the Company, on the one hand, and any Stockholder, Option Holder or
Warrant Holder or any of their respective Affiliates, on the other hand, and, from and after the Closing, no further rights or
Liabilities of any party shall continue under such terminated Contracts, services, or arrangements.
Section 6.10
D&O Insurance. At or prior to the Closing, the Company shall obtain and fully pay for an irrevocable
directors’ and officers’ “tail” insurance policy that provides coverage, for a period of six (6) years after the Closing Date, for
current and former officers, directors, managers, and employees of the Company with respect to matters existing or occurring at
or prior to the Closing Date (i) from an insurance carrier with the same or better credit rating as the Company’s current insurance
carrier with respect to directors’ and officers’ liability insurance and (ii) in an amount and scope at least as favorable as the
existing insurance.
Section 6.11
Resignations. On or prior to the Closing Date, the Company shall cause each officer and director of the
Company requested by Purchaser to tender his or her resignation from such position effective as of the Closing.
Section 6.12
Confidentiality. Purchaser acknowledges that the information being provided to it in connection with the
transactions contemplated by this Agreement is subject to the Confidentiality Agreement. Effective upon the Closing, and
without further action by any Party, the Confidentiality Agreement shall terminate.
Section 6.13
R&W Insurance Policy. Purchaser shall use commercially reasonable efforts to cause the R&W Insurance
Policy to be issued and bound on or prior to the date hereof (in accordance with the terms of the binder therefor) and remain in
full force and effect thereafter. All costs and expenses related to the R&W Insurance Policy, including, without limitation, the
total premium, underwriting costs, brokerage commission, due diligence fees, Taxes related to such policy and other fees and
expenses associated with such policy will be paid one-half by Purchaser, on the one hand, and one-half by the Company, on the
other hand.
Section 6.14
PPP Loan. Purchaser, the Company and the Stockholder Representative agree to reasonably cooperate and
provide all reasonably requested information and execute and deliver such further instruments and documents as may be
reasonably requested with respect to the PPP Loan, the PPP Loan Forgiveness Application and any forgiveness or audit,
investigation,
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or inquiry in connection therewith. The Stockholder Representative (on behalf of the Equityholders) shall be responsible for all
costs and expenses related to the submission of the PPP Loan Forgiveness Application and any forgiveness or audit,
investigation, or inquiry in connection therewith after the Closing.
ARTICLE 7.
ADDITIONAL COVENANTS AND AGREEMENTS
Section 7.1
Tax Matters.
(a)
Tax Returns. The Company shall prepare and timely file, or shall cause to be prepared and timely filed, all
Tax Returns in respect of the Company that are required to be filed (taking into account any extension) on or before the Closing
Date, and the Company shall pay, or cause to be paid, all Taxes of the Company due on or before the Closing Date. Such Tax
Returns shall be prepared by treating items on such Tax Returns in a manner consistent with the past practices of the Company
with respect to such items, except as required by Law. At least thirty (30) days prior to the due date of any such Tax Return, the
Company shall submit a copy of any such Tax Return that is an Income Tax Return to Purchaser for Purchaser’s review and
approval, which approval shall not be unreasonably withheld. Purchaser shall prepare and file, or cause to be prepared and filed,
all Tax Returns required to be filed by the Company following the Closing Date. Purchaser shall permit the Stockholder
Representative, at the Equityholders’ expense, to review and approve (such approval not to be unreasonably withheld,
conditioned or delayed) each such Tax Return with respect to a taxable period ending on or before the Closing Date or any
Straddle Period at least thirty (30) days prior to the due date with respect to any income Tax Return or such shorter time period as
is reasonable given the circumstances with respect to any non-income Tax Return. If Purchaser does not receive comments from
the Stockholder Representative at least five (5) days prior to the due date of such Tax Returns, the Stockholder Representative
shall be deemed to have no comments to such Tax Returns. To the extent permitted by applicable law, (i) all Transaction Tax
Deductions shall be deducted on Tax Returns for the taxable period that ends (or is deemed to end) as of the end of the day on the
Closing Date and (ii) any net operating losses of the Company arising in taxable periods ending (or deemed to end) on or prior to
the Closing Date shall be applied against income arising in Pre-Closing Tax Periods (including, if permitted by applicable law,
pursuant to a carryback).
(b)
Straddle Period. In the case of a Straddle Period, the amount of any Tax based on or measured by income
or receipts or imposed in connection with any transaction that is allocable to the portion of a Straddle Period ending on the
Closing Date shall be determined based on an interim closing of the books as of the close of business on the Closing Date (and
for such purpose, the Tax period of any partnership or other pass-through entity in which the Company holds a beneficial interest
shall be deemed to terminate at such time), and the amount of any other Tax of the Company that is allocable to the portion of a
Straddle Period ending on the Closing Date shall be deemed to be the amount of such Tax for the entire Straddle Period
multiplied by a fraction, the numerator of which is the number of days in the portion of the Straddle Period ending on and
including the Closing Date, and the denominator of which is the total number of days in the entire Straddle Period.
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(c)
Cooperation. Purchaser and the Stockholder Representative agree to furnish or cause to be furnished to the
other, upon request, as promptly as practicable, such information and assistance relating to Taxes, including access to books and
records, as is reasonably necessary for the filing of all Tax Returns by Purchaser and the Stockholder Representative or otherwise
with respect to the Company, the making of any election relating to Taxes, the preparation for any audit by any Tax authority and
the prosecution or defense of any claim, suit or proceeding relating to any Tax. Each of Purchaser, the Company and the
Stockholder Representative shall retain all books and records in their possession with respect to Taxes for a period of at least
seven years following the Closing Date. Notwithstanding the foregoing or any other provision herein to the contrary, in no event
shall the Stockholder Representative be entitled to review or otherwise have access to any income Tax Return, or information
related thereto, of Purchaser or its Affiliates (other than Tax Returns of the Company for Pre-Closing Tax Periods). Subject to
Section 7.1(e), the Stockholder Representative shall have no obligation to prepare or file any Tax Returns.
(d)
Tax Audits. Purchaser shall have the right to control the conduct of any action or threatened action with
respect to Taxes of the Company (a “Tax Claim”). Purchaser shall give the Stockholder Representative prompt notice upon
receipt of any written notice of a Tax Claim attributable to a Pre-Closing Tax Period or any other Tax Claim for which the
Equityholders may have an indemnification obligation pursuant to Article 10. To the extent a Tax Claim relates to a Tax Claim
for which the Equityholders may have an indemnification obligation pursuant to Article 10, Purchaser shall (i) keep the
Stockholder Representative reasonably informed of all material developments on a timely basis, (ii) provide to the Stockholder
Representative copies of any and all material correspondence from any Governmental Authority related to such Tax Claim, (iii)
provide the Stockholder Representative with the opportunity to attend conferences with the relevant Governmental Authority (if
reasonably practical) and (iv) not settle, adjust or otherwise resolve such Tax Claim without the prior written consent of the
Stockholder Representative, such consent not to be unreasonably withheld, conditioned or delayed. Notwithstanding the
provisions of Article X, this Section 7.1(d) shall exclusively govern the notice, conduct and procedural requirements of any Tax
Claim.
(e)
Transfer Taxes. Any transfer, stamp, documentary, sales, use, registration, value added Tax and other
similar Taxes (including all applicable real estate transfer Taxes) incurred in connection with this Agreement and the transactions
contemplated hereby (“Transfer Taxes”) will be borne by the Equityholders as Closing Date Indebtedness. The Stockholder
Representative and the Stockholders agree to file or cause to be filed in a timely manner all necessary documents (including all
Tax Returns) with respect to all such amounts for which the Stockholders are so liable. The Stockholder Representative shall
provide Purchaser with evidence satisfactory to Purchaser that such Transfer Taxes have been paid by the Stockholders.
(f)
Pre-Closing Income Taxes. The determination of “Pre-Closing Income Taxes” included in Indebtedness
and any indemnification for Pre-Closing Taxes pursuant to Section 10.2(i) or for any breach of a representation or warranty
contained in Section 4.15 shall,
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in each case, be calculated in accordance with the following assumptions: (i) no election under Section 338 or Section 336 of the
Code (or any comparable applicable provision of state, local or non-U.S. Tax Law) is made with respect to the transactions
contemplated by this Agreement; (ii) the taxable year of the Company ends as of the end of the day on the Closing Date; (iii) no
Taxes are incurred by the Company on the Closing Date after the Closing outside the ordinary course of business; (iv) the
Company makes a timely election under Revenue Procedure 2011-29, 2011-18 I.R.B. 746, to apply the seventy percent (70%)
safe-harbor to any Transaction Tax Deductions that are “success based fees” as defined in Treasury Regulation Section
1.263(a)-5(f); (v) to the extent deductible under applicable Tax law at a “more likely than not” or higher level of confidence, all
Transaction Tax Deductions are deducted on income Tax Returns for the taxable period that ends (or is deemed to end) as of the
end of the day on the Closing Date; (vi) to the extent permitted by applicable law, any net operating losses of the Company
arising in the applicable taxable periods ending (or deemed to end) on or prior to the Closing Date are applied against Income
Taxes arising in Pre-Closing Tax Period(s) for which such net operating losses may be applied in accordance with applicable
Law; and (vii) such Taxes shall be computed (including reporting positions, elections and accounting methods) of the Company
in preparing its applicable Tax Returns, unless otherwise required under applicable Law.
(g)
Prohibited Tax Actions. To the extent that any such action could (1) reasonably be expected to give rise to
a Tax Claim for which the Equityholders may have an indemnification obligation pursuant to Article X or (2) otherwise reduce
the amount of Merger Consideration payable pursuant to this Agreement, Purchaser, the Company and their respective Affiliates
will not: (i) amend any Tax Returns of or with respect to the Company with respect to any Pre-Closing Tax Period, (ii) make or
change any Tax election or change any method of accounting that has effect on any Tax Return for a Pre-Closing Tax Period, (iii)
agree to extend or waive the statute of limitations with respect to Taxes of the Company for a Pre-Closing Tax Period, (iv) initiate
discussions or examinations with any Governmental Authority (including any voluntary disclosures) regarding Taxes for any Pre-
Closing Tax Period, or (v) engage in any transaction on the Closing Date after the Closing outside the ordinary course of business
of the Company, in each such case, except with the prior written consent of the Stockholder Representative, such consent not to
be unreasonably withheld, conditioned or delayed. Notwithstanding anything in this Agreement to the contrary, Purchaser and its
Affiliates shall not make any election pursuant to Code Sections 336 or 338 (or any similar or corresponding provision of state,
local or non-U.S. tax law) with respect to the transactions pursuant to this Agreement.
Section 7.2
Employees and Employee Benefits.
(a)
During the twelve (12) month period commencing at the Closing Date, Purchaser shall provide, or shall
cause the Surviving Corporation to provide the Employees who were employed by the Company immediately prior to the Closing
(the “Continuing Employees”) with base compensation, bonus, incentive opportunities, and employee benefits that are
substantially comparable in the aggregate to the base compensation, bonus, incentive compensation opportunities, and employee
benefits that such Continuing Employees were
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entitled to receive immediately prior to Closing. For purposes of the foregoing, equity or equity-based compensation shall not be
taken into account for determining compensation or benefits before after the Closing.
(b)
To the extent applicable, with respect to employee benefit plans, programs and arrangements that are
established or maintained by Purchaser (“Purchaser Plans”) and in which Continuing Employees become eligible to participate
after the Closing, Continuing Employees (and their eligible dependents) shall be given credit for their service with the Company
(i) for purposes of eligibility to participate and vesting (but not benefit accrual) to the extent such service was taken into account
under a corresponding Company Benefit Plan, and (ii) for purposes of satisfying any waiting periods, evidence of insurability
requirements, or the application of any pre-existing condition limitations and shall be given credit for amounts paid under a
corresponding Company Plan during the same period for purposes of applying deductibles, copayments and out-of-pocket
maximums as though such amounts had been paid in accordance with the terms and conditions of the applicable Purchaser Plan.
Notwithstanding the foregoing provisions of this Section 7.2(b), service and other amounts shall not be credited to Continuing
Employees (or their eligible dependents) to the extent the crediting of such service or other amounts would result in duplication
of benefits.
(c)
Effective as of no later than the day immediately preceding the Closing Date (but conditioned on the
Closing), the Company shall take all actions that are necessary or appropriate to terminate the Company 401(k) Plan and to
provide that, that, notwithstanding any other provision of the Company 401(k) Plan to the contrary, no person shall become a
participant in the Plan after the termination date, no contributions shall be made to the Company 401(k) Plan by or on behalf of
any person for periods after the termination date, and as of the termination date, each participant in the Company 401(k) Plan
shall have a fully vested and nonforfeitable interest in all of his account balances under the Company 401(k) Plan.
(d)
Notwithstanding the preceding provisions of this Section 7.2, this Section 7.2 is not intended to and shall
not (i) create any third party rights, (ii) amend any Company Benefit Plan, (iii) require the Company, Purchaser or any of their
Affiliates continue any Benefit Plan beyond the time when it otherwise lawfully could be terminated or modified or (iv) provide
any Continuing Employee with any rights to continued employment, specific benefits or any severance pay or similar benefits
following any termination of employment.
Section 7.3
Books and Records.
(a)
For a period of seven (7) years after the Closing Date, Purchaser shall retain, or cause the Company to
retain, all Company Records and other accounting, legal, auditing, Tax, and other books and records of the Business relating to (i)
the conduct of the Business or (ii) the ownership of the Company, in each case prior to the Closing Date. Notwithstanding the
foregoing, Purchaser may dispose of any such Company Records or other books and records during such seven (7) year period if
the same are first are offered in writing to the Stockholder Representative and not accepted by the Stockholder Representative
within thirty (30) days of such offer.
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(b)
After the Closing Date, Purchaser shall permit the Stockholder Representative and its Representatives to
have reasonable access to (subject to any applicable Laws or Orders arising out of or relating to, and any Purchaser or Company
policies or procedures implemented in response to, the COVID-19 pandemic, including restrictions on in-person gatherings), and
to inspect and copy, at the Equityholders’ expense, any Company Records and other books and records referred to in Section
7.3(a) that any Stockholder requires for financial reporting, Tax, or accounting purposes; provided that the Stockholder
Representative and such Stockholder agrees in writing with Purchaser to keep confidential all such Company Records and other
books and records; provided, however, that in no event shall Purchaser be required to provide any Equityholder with access to
such records (or copies) in connection with any Proceeding in which the interest of such records (or copies) in connection with
any Proceeding in which the interest of such Equityholder, as applicable, are adverse to those of Purchaser other than in
accordance with discovery rules of any applicable Governmental Authority in connection with a Proceeding.
Section 7.4
Release. As an inducement to Purchaser and Merger Sub to consummate the transactions contemplated by
this Agreement, including the payment to the Equityholders of that portion of the Merger Consideration to which they are entitled
hereunder, each Equityholder acknowledges and agrees as follows:
(a)
As of the Closing, by the approval of this Agreement pursuant to the Organizational Documents of the
Company, each Equityholder acknowledges and agrees that as of the Closing, to the fullest extent permitted by applicable Law,
such Equityholder acknowledges and agrees, on behalf of itself, its Affiliates and each of their respective Representatives,
successors and assigns (collectively, “Releasor”) that Releasor hereby irrevocably and unconditionally releases and forever
discharges the Company, Purchaser, Merger Sub, and their respective Representatives (including, without limitation, attorneys,
accountants, consultants, bankers and financial advisors), successors or assigns (collectively, the “Releasees”) from any and all
Proceedings, allegations, assertions, complaints, controversies, charges, duties, grievances, Liabilities, promises, commitments,
agreements, guarantees, endorsements, duties and Losses (including attorneys’ fees and costs incurred) of any nature whatsoever
(whether direct or indirect, known or unknown, disclosed or undisclosed, matured or unmatured, accrued or unaccrued, asserted
or unasserted, absolute or contingent, determined or conditional, express or implied, fixed or variable and whether vicarious,
derivative, joint, several or secondary) arising contemporaneously with or having occurred at any time prior to the Closing or on
account of, arising out of, or based in whole or in part on any act, omission, matter, cause, event, or circumstance whatsoever
occurring contemporaneously with or having occurred at any time prior to the Closing (collectively, “Released Claims”).
Notwithstanding the foregoing, the Released Claims shall not include, and the foregoing release shall not (i) affect or in any way
limit Purchaser’s obligation to deliver the Merger Consideration to such Equityholder pursuant to the terms of this Agreement or
(ii) release any rights of Releasor or any obligations of the Releasees pursuant to this Agreement or any Related Agreement.
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(b)
By the approval of this Agreement pursuant to the Organizational Documents of the Company, Releasor
acknowledges that (i) Purchaser and Merger Sub are relying on, among other things, the provisions of this Section 7.4, in
consummating the transactions contemplated hereby, (ii) Purchaser and Merger Sub would not be consummating such
transactions in the absence of the release contemplated in this Section 7.4 and (iii) Releasor will derive a material and substantial
benefit, directly or indirectly, from the transactions contemplated hereby.
ARTICLE 8.
CONDITIONS TO CLOSING
Section 8.1
Conditions to Each Party’s Obligations. The obligations of Purchaser, Merger Sub, and the Company to
consummate the transactions contemplated by this Agreement are subject to the satisfaction (or waiver by each of Purchaser and
the Company) of the following conditions as of the Closing Date:
(a)
The applicable waiting period under the HSR Act shall have expired or been terminated.
(b)
No Governmental Authority shall have entered or issued any Order preventing, enjoining, or making
illegal the consummation of any of the transactions contemplated by this Agreement or the Related Agreements and no Law shall
have been enacted or shall be deemed applicable to any of the transactions contemplated by this Agreement or the Related
Agreements which makes the consummation of any of such transactions illegal.
(c)
The Required Stockholder Approval shall have been obtained and Purchaser shall have adopted this
Agreement in its capacity as the sole stockholder of Merger Sub.
Section 8.2
Additional Conditions to Obligations of Purchaser and Merger Sub. The obligations of Purchaser and
Merger Sub to consummate the transactions contemplated by this Agreement are subject to the satisfaction (or waiver by
Purchaser) of the following additional conditions as of the Closing Date:
(a)
Each of the Fundamental Representations of the Company shall be true and correct as of the date of this
Agreement and as of the Closing Date as though made on the Closing Date (except to the extent any such Fundamental
Representation speaks as of the date of this Agreement or any other specific date, in which case such Fundamental
Representation shall be true and correct as of such date). Each of the other representations and warranties of the Company set
forth in ARTICLE 4 (disregarding all qualifications as to materiality or Material Adverse Effect set forth therein) shall be true
and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made on the Closing
Date (except to the extent any such representation or warranty speaks as of the date of this Agreement or any other specific date,
in which case such representation or warranty shall be true and correct in all material respects as of such date).
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(b)
The Company shall have performed or complied with in all material respects all covenants and agreements
required to be performed or complied with by the Company under this Agreement on or prior to the Closing Date.
(c)
No Proceeding shall be pending by or before any Governmental Authority seeking to, or wherein an
unfavorable Order would, (i) prevent the consummation of any of the transactions contemplated by this Agreement or the Related
Agreements, (ii) make illegal any of the transactions contemplated by this Agreement or the Related Agreements, (iii) cause any
of the transactions contemplated by this Agreement or the Related Agreements to be rescinded following the Closing, or (iv)
impose any conditions, restrictions, undertakings, or limitations that, individually or in the aggregate, in the reasonable judgment
of Purchaser, would impair, or could reasonably be expected to impair, the ability of Purchaser to consummate any of the
transactions contemplated by this Agreement or the Related Agreements or would adversely affect, or could reasonably be
expected to adversely affect, the expected economic benefits to Purchaser arising from the consummation of the transactions
contemplated by this Agreement and the Related Agreements.
(d)
No Governmental Authority shall have an open, existing, or pending Proceeding pursuant to any applicable
Antitrust Law investigating, challenging, or seeking to enjoin the transactions contemplated by this Agreement or the Related
Agreements, or have made a request for information from, or otherwise initiated any communication with, any of the Parties
concerning the transactions contemplated by this Agreement which could reasonably be expected to result in any such
Proceeding.
(e)
Since the date of this Agreement, there shall have been no Material Adverse Effect.
(f)
Holders of not more than one percent (1%) of the outstanding Shares shall have delivered to the Company
a notice of appraisal with respect the Shares held by such holders pursuant to Section 262 of the DGCL.
(g)
Any and all Liens (other than Permitted Liens) on the properties and assets of the Company shall have
been terminated and released pursuant to documentation in form and substance satisfactory to Purchaser.
(h)
Purchaser shall have received from the Company each delivery required pursuant to Section 2.12.
No waiver by Purchaser of any condition based on the accuracy of any representation or warranty of the Company, or on the
Company’s performance of or compliance with any covenant or agreement, will affect any right to indemnification or other
remedy of Purchaser or any other Purchaser Indemnified Party provided for in this Agreement based on such representation,
warranty, covenant, or agreement.
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Section 8.3
Additional Conditions to Obligations of the Company. The obligations of the Company to consummate the
transactions contemplated by this Agreement are subject to the satisfaction (or waiver by the Company) of the following
additional conditions as of the Closing Date:
(a)
Each of the Fundamental Representations of Purchaser and Merger Sub shall be true and correct as of the
date of this Agreement and as of the Closing Date as though made on the Closing Date (except to the extent any such
Fundamental Representation speaks as of the date of this Agreement or any other specific date, in which case such Fundamental
Representation shall be true and correct as of such date). Each of the other representations and warranties of Purchaser and
Merger Sub set forth in ARTICLE V (disregarding all qualifications as to materiality set forth therein) shall be true and correct in
all material respects as of the date of this Agreement and as of the Closing Date as though made on the Closing Date (except to
the extent any such representation or warranty speaks as of the date of this Agreement or any other specific date, in which case
such representation or warranty shall be true and correct as of such date).
(b)
Purchaser and Merger Sub shall have performed or complied with in all material respects all covenants and
agreements required to be performed or complied with by Purchaser and Merger Sub under this Agreement on or prior to the
Closing Date.
(c)
The Company shall have received from Purchaser and Merger Sub each delivery required pursuant to
Section 2.11.
No waiver by the Company of any condition based on the accuracy of any representation or warranty of Purchaser and Merger
Sub, or on Purchaser’s or Merger Sub’s performance of or compliance with any covenant or agreement, will affect any right to
any remedy of any Stockholder provided for in this Agreement based on such representation, warranty, covenant, or agreement.
Section 8.4
Frustration of Closing Conditions. No Party may rely, whether as a basis for not consummating the
transactions contemplated by this Agreement or terminating this Agreement or otherwise, on the failure of any condition set forth
in this ARTICLE VIII to be satisfied if such failure was caused by such Party’s breach of this Agreement.
ARTICLE 9.
TERMINATION
Section 9.1
Termination. This Agreement may be terminated, and the transactions contemplated by this Agreement
may be abandoned, by written notice delivered by Purchaser or the Company to the other Party (other than in the case of Section
9.1(a)) at any time prior to the Closing:
(a)
by the mutual written agreement of the Company and Purchaser;
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(b)
by either the Company or Purchaser, if the Closing does not occur on or prior to July 30, 2021 (the
“Outside Date”); provided, however, that the right to terminate this Agreement under this Section 9.1(b) shall not be available to
a Party whose breach of or failure to perform any of its representations, warranties, covenants, or agreements contained in this
Agreement has been the cause of or has resulted in the failure of the Closing to occur on or prior to the Outside Date;
(c)
by Purchaser, if:
(i)
the Company breaches or fails to perform in any material respect any of its representations,
warranties, covenants, or agreements contained in this Agreement, which breach or failure to perform (A) would
result in a failure of a condition set forth in Section 8.1 or Section 8.2 and (B) (1) if capable of being cured, has
not been cured by the Company by the earlier of the Outside Date and the date that is twenty (20) days after the
Company’s receipt of written notice from Purchaser stating Purchaser’s intention to terminate this Agreement
pursuant to this Section 9.1(c) or (2) is incapable of being cured;
(ii)
any of the conditions set forth in Section 8.1 or Section 8.2 has become incapable of being satisfied
on or prior to the Outside Date
(iii)
any Governmental Authority initiates a Proceeding pursuant to any applicable Antitrust Law
seeking to investigate, challenge, or enjoin, restrain, prohibit, or otherwise make illegal any of the transactions
contemplated by this Agreement or the Related Agreements, or makes a request for information from, or otherwise
initiates any communication with, any of the Parties concerning the transactions contemplated by this Agreement
which could reasonably be expected to result in any such Proceeding; or
(iv)
the Company has not delivered to Purchaser a certified copy of the Written Consent by 5:00 p.m.
(Central Time) on or prior to June 2, 2021; or
(d)
by the Company, if Purchaser or Merger Sub breaches or fails to perform in any material respect any of its
representations, warranties, covenants, or agreements contained in this Agreement, which breach or failure to perform (A) would
result in a failure of a condition set forth in Section 8.1 or Section 8.3 and (B) (1) if capable of being cured, has not been cured by
Purchaser by the earlier of the Outside Date and the date that is twenty (20) days after Purchaser’s receipt of written notice from
the Company stating the Company’s intention to terminate this Agreement pursuant to this Section 9.1(d) or (2) is incapable of
being cured; or (ii) any of the conditions set forth in Section 8.1 or Section 8.3 has become incapable of being satisfied on or
prior to the Outside Date.
Section 9.2
Effect of Termination. If this Agreement is terminated pursuant to Section 9.1, this Agreement will
immediately become void and have no further force or effect, and no Party will have any Liability to any other Party; provided,
however, that (a) the first sentence of
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Section 6.12, this Section 9.2, and ARTICLE 12 will survive such termination and (b) no such termination will relieve any Party
from Liability for any fraud, intentional misrepresentation, or intentional or willful breach of this Agreement by such Party prior
to such termination.
ARTICLE 10.
INDEMNIFICATION
Section 10.1
Survival. The representations and warranties contained herein and in any certificate delivered pursuant to
this Agreement shall survive the Closing for a period of eighteen (18) months after the Closing except that (a) the Fundamental
Representations, (b) the representations and warranties under Section 4.15, and (c) the portion of any certificate delivered
pursuant to this Agreement relating to the representations and warranties described in clauses (a) and (b), in each case shall
survive the Closing until thirty (30) days after the expiration of the applicable statute of limitations for the applicable underlying
claim. The covenants contained in this Agreement shall remain in full force and effect in accordance with their terms (or, if no
survival period is specified, indefinitely). Notwithstanding the foregoing, (i) any indemnification claims asserted in good faith
and in writing by notice from an Indemnified Party to a Responsible Party prior to the expiration date of the applicable survival
period will not thereafter be barred by the expiration of such survival period and such claims will survive until finally resolved
and (ii) if, during the applicable survival period, an Indemnified Party becomes aware of facts or circumstances that could
reasonably be expected to lead to a Third Party Claim, the indemnification obligations pursuant to this ARTICLE 10 shall not
terminate with respect to such potential Third Party Claim if the Indemnified Party notifies the Responsible Party of the general
nature of such potential Third Party Claim in accordance with Section 10.6 prior to the end of the applicable survival period,
whether or not a Third Party Claim is actually made or threatened against the Indemnified Party prior to the end of the applicable
survival period.
Section 10.2
Indemnification of Purchaser. From and after the Closing, each Equityholder shall severally (based on each
such Equityholder’s Pro Rata Share), and not jointly, indemnify and hold harmless each of Purchaser, its Affiliates (including the
Surviving Corporation), and each of their respective Representatives, successors, and assigns (each, a “Purchaser Indemnified
Party”) from any and all Losses suffered or incurred by such Purchaser Indemnified Party as a result of, arising out of, or relating
to:
(a)
any breach of or inaccuracy in any representation or warranty made by the Company in ARTICLE 4 or in
any certificate delivered by the Company pursuant to this Agreement;
(b)
any breach of or failure by the Company to perform any covenant or agreement of the Company contained
in this Agreement that was to be performed at or prior to the Closing;
(c)
any Indebtedness of the Company outstanding as of the Closing and not taken into account in calculating
Closing Date Indebtedness;
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(d)
any Transaction Expenses not taken into account in calculating the Final Merger Consideration;
(e)
the exercise by any Person of appraisal rights in connection with the Merger, including any Proceeding in
respect of Dissenting Shares and any payments to any Person that was a holder of Shares, Company Options or Company
Warrants, as applicable, immediately prior to Effective Time in respect of such Person’s Dissenting Shares, to the extent such
payments exceed the portion of the Merger Consideration to which such Person would have been entitled pursuant to this
Agreement in respect of such Dissenting Shares if such Person had not exercised appraisal rights in respect thereof;
(f)
any claim made by any Person relating to the portion of the Final Merger Consideration, if any, to which
such Person is entitled pursuant to this Agreement, including any claim that the Preliminary Payment Allocation Statement or the
Final Payment Allocation Statement is incorrect;
(g)
any claim by any current or former officer, director, manager, or employee of the Company that such
Person is entitled to indemnification or advancement of expenses under the Organizational Documents of the Company, any
Contract with the Company, or applicable Law with respect to any threatened, pending, or completed claim, inquiry, or
Proceeding, whether criminal, civil, administrative, or investigative, based on or arising out of or relating to the fact that such
Person is or was an officer, director, manager, or employee of the Company prior to the Closing;
(h)
any claim by any current or former holder or alleged current or former holder of any Shares or other Equity
Interests of the Company relating to or arising out of this Agreement, the Related Agreements, the Merger, or the other
transactions contemplated by this Agreement and the Related Agreements, whether for breach of fiduciary duty or otherwise;
(i)
any noncompliance by the Company with respect to, or alleged or actual repayment pursuant to, the
applicable provisions of the CARES Act or any loan or other Contract entered into by such Persons pursuant thereto (including
any ineligibility, breach, improper use of funds or proceeds, or repayment obligation pursuant to a PPP Loan), or any Proceeding
resulting from a statement, certification, act or omission by the Company in connection with its participation in the Payroll
Protection Program pursuant to the CARES Act;
(j)
the matters described on Schedule 10.2(j); and
(k)
the fraud, intentional misrepresentation, or intentional or willful breach on the part of (i) any current,
former or alleged securityholder of the Company, (ii) the Company or (iii) any current or former Representative of the Company
(whether or not such Company Representative was acting on behalf of the Company in committing such fraud, intentional
misrepresentation or willful breach).
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Other than in connection with a claim relating to a breach of the representations and warranties contained in Section 4.15(e), (i),
(k) or (o), the Purchaser Indemnified Parties’ sole remedy for Losses with respect to Taxes for any breach of a representation or
warranty contained in Section 4.15 shall be limited to Taxes for to Pre-Closing Tax Periods. The Equityholders shall have no
indemnification obligation for any Taxes of the Company resulting from any action taken by Purchaser or its Affiliates after the
Closing on the Closing Date outside the ordinary course of business.
Section 10.3
Indemnification of the Equityholders. From and after the Closing, Purchaser shall indemnify and hold
harmless each Equityholder and each of their respective Affiliates, Representatives, successors, and assigns (each, an
“Equityholder Indemnified Party”) from any and all Losses suffered or incurred by such Equityholder Indemnified Party as a
result of, arising out of, or relating to:
(a)
any breach of or inaccuracy in any representation or warranty made by Purchaser or Merger Sub in
ARTICLE 5 or in any certificate delivered by Purchaser or Merger Sub pursuant to this Agreement;
(b)
any breach of or failure by Purchaser or Merger Sub to perform any covenant or agreement of Purchaser or
Merger Sub contained in this Agreement that was to be performed at or prior to the Closing; and
(c)
the fraud, intentional misrepresentation, or intentional or willful breach on the part of Purchaser or Merger
Sub in connection with the transactions contemplated hereby.
Section 10.4
Certain Matters Relating to Indemnification.
(a)
An Indemnified Party shall not be entitled to indemnification under Section 10.2(a) or Section 10.3(a)
unless the aggregate amount of Losses that would eligible for indemnification exceeds One Million Eight Hundred Thousand
Dollars ($1,800,000) (the “Deductible”), in which case the Indemnified Party shall be indemnified for all such Losses in excess
of the Deductible; provided, however, that the Deductible will not apply to any Losses resulting from, arising out of, or relating
to any breach of or inaccuracy in any of the Fundamental Representations or any of the Company’s representations or warranties
set forth in Section 4.15.
(b)
An Indemnified Party shall not be entitled to indemnification under 10.2(a) or Section 10.3(a) for any
Losses in excess of One Million Eight Hundred Thousand Dollars ($1,800,000) (the “Cap”); provided, however, that the Cap will
not apply to any Losses arising out of or relating to any breach of or inaccuracy in any of the Fundamental Representations.
(c)
With respect to claims for Losses under Section 10.2(a) (except with respect to the Fundamental
Representations) or any of the certifications made with respect
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thereto pursuant to Section 2.11(e) for which a Purchaser Indemnified Party is entitled to indemnification in accordance with this
Article 10, such claims shall be satisfied:
(i)
first, from the General Indemnity Holdback Amount until the Cap is met; and
(ii)
second, from the R&W Insurance Policy to the extent available (other than for indemnification
arising or resulting from the committing, participation in or actual knowledge of the Equityholders of fraud,
intentional misrepresentation or willful breach of this Agreement).
(d)
With respect to claims for Losses (x) for a breach of a Fundamental Representation under Section 10.2(a)
or any of the certifications made with respect thereto pursuant to Section 2.11(e) and (y) pursuant to clauses (b) through (k) of
Section 10.2, in each case for which a Purchaser Indemnified Party is entitled to indemnification in accordance with this Article
10, such claims shall be satisfied:
(i)
first, from the R&W Insurance Policy to the extent available (other than for indemnification arising
or resulting from the committing, participation in or actual knowledge of the Equityholders of fraud, intentional
misrepresentation or willful breach of this Agreement);
(ii)
second, by the permanent retention by Purchaser of a portion of the Special Indemnity Holdback
Amount with a value equal to such Losses (or, if such Losses exceed the then-remaining Special Indemnity
Holdback Amount, the entire remaining Special Indemnity Holdback Amount);
(iii)
third, if the then-remaining Special Indemnity Holdback Amount is insufficient to cover the full
amount of such Losses or if the entire Special Indemnity Holdback Amount has been previously permanently
retained by Purchaser, then by the permanent retention by Purchaser of a portion of the General Indemnity
Holdback Amount with a value equal to such Losses (or, if such Losses exceed the then-remaining General
Indemnity Holdback Amount, the entire remaining General Indemnity Holdback Amount); and
(iv)
fourth, if the then-remaining General Indemnity Holdback Amount is insufficient to cover the full
amount of such Losses or if the entire General Indemnity Holdback Amount has been previously permanently
retained by Purchaser or released pursuant to Section 2.8, subject to the limitations contained in this Section 10.3,
each Equityholder shall, within ten (10) Business Days following the date the amount of such Losses is
determined, agreed or deemed agreed to be owed, pay in cash such Equityholder’s Pro Rata Share of the amount
owed to such Purchaser Indemnified Party; provided, that this clause (iv) shall not apply with respect to claims
under Section 10.2(a) or any of the certifications made with respect thereto pursuant to Section 2.11(e) for Losses
for a breach of
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the representations set forth in Section 4.20. The Stockholder Representative hereby agrees to give notice to each
Equityholder of such payment obligation within three (3) Business Days of such determination, agreement or
deemed agreement;
provided that the aggregate liability for each Equityholder for all such claims shall not exceed its Pro Rata Share of the Merger
Consideration paid or payable to the Equityholders pursuant to Section 2.5 and Section 2.7, as applicable.
(e)
Nothing in this Agreement shall be deemed to limit the liability of any Party or Equityholder for actual
fraud.
(f)
Notwithstanding anything in this Agreement to the contrary, if any representation or warranty contained in
this Agreement or in any certificate delivered pursuant to this Agreement is qualified by materiality, “Material Adverse Effect,”
or any other similar qualification, such qualification will be ignored and deemed not included in such representation or warranty
for purposes of (i) determining whether there has been a breach of or inaccuracy in such representation or warranty and (ii)
calculating the amount of Losses resulting from, arising out of, or relating to such breach or inaccuracy.
Section 10.5
Claims.
(a)
As promptly as is reasonably practicable after becoming aware of a claim for indemnification under this
Agreement not involving a Third Party Claim, the Indemnified Party shall give written notice of such claim (a “Claim Notice”) to
the Responsible Party; provided, however, that the failure of the Indemnified Party to promptly give such notice shall not affect
the right of the Indemnified Party to indemnification except to the extent (if any) that the defense of such claim by the
Responsible Party is materially prejudiced thereby. The Claim Notice shall set forth in reasonable detail the facts and
circumstances giving rise to such claim for indemnification (to the extent known by the Indemnified Party) and the amount of
Losses suffered or incurred or that Indemnified Party reasonably believes it will or may suffer or incur.
(b)
If the Responsible Party does not object in writing to such claim within ten (10) Business Days after
receiving such Claim Notice, it shall be conclusively established for purposes of this Agreement that such claim is within the
scope of and subject to indemnification pursuant to this ARTICLE X and, subject to Section 10.4, the Indemnified Party shall be
entitled to seek indemnification therefor and no subsequent objection by the Responsible Party shall be permitted. If within such
ten (10) Business Day period the Responsible Party agrees that the Indemnified Party may be entitled to indemnification but
objects to the amount thereof, the Indemnified Party shall nevertheless be entitled to seek indemnification for such lesser amount
without prejudice to the Indemnified Party’s claim for the difference. If within such ten (10) Business Day period the Responsible
Party objects in writing to such claim or the amount thereof, then the total amount of indemnification to which the Indemnified
Party shall be entitled shall be determined by (x) the written agreement of Indemnified Party and the Responsible Party or (y) a
final Order of any court of competent jurisdiction. The Order of a court shall be deemed
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final when the time for appeal, if any, shall have expired and no appeal shall have been taken or when all appeals taken shall have
been finally determined.
Section 10.6
Notice of Third Party Claims; Assumption of Defense.
(a)
As promptly as is reasonably practicable after receiving notice of the assertion of any claim or demand, or
the commencement of any Proceeding, by any Person who is not an Indemnified Party in respect of which indemnification may
be sought under this Agreement (a “Third Party Claim”), the Indemnified Party shall give a Claim Notice (in the form
contemplated by Section 10.5(a)) to the Responsible Party in respect of such Third Party Claim; provided, however, that the
failure of the Indemnified Party to promptly give such notice shall not relieve the Responsible Party of its obligations under this
Agreement except to the extent (if any) that the Responsible Party is materially prejudiced thereby.
(b)
The Responsible Party may, at its own expense, (i) participate in the defense of any such Third Party Claim
and (ii) upon written notice delivered to the Indemnified Party within ten (10) Business Days of the receipt of the Claim Notice
(subject to the conditions and limitations set forth below), assume and control the defense of such Third Party Claim with counsel
reasonably acceptable to the Indemnified Party; provided, however, that as a condition precedent to the Responsible Party’s right
to assume control of such defense, it must first: (A) enter into an agreement with the Indemnified Party (in form and substance
reasonably satisfactory to the Indemnified Party) pursuant to which the Responsible Party agrees to be fully responsible for, and
to provide full indemnification to the Indemnified Party for, all Losses relating to such Third Party Claim; and (B) furnish the
Indemnified Party with evidence reasonably satisfactory to the Indemnified Party that the Responsible Party is and will be able to
fully satisfy such Liability; and provided further, however, that the Responsible Party will not have the right to assume control of
the defense of such Third Party Claim, and shall pay the fees and expenses of counsel retained by the Indemnified Party, if (1)
such Third Party Claim seeks non-monetary relief (in whole or in part) or relates to or arises in connection with any criminal
Proceeding, (2) the Indemnified Party reasonably believes an adverse determination with respect to such Third Party Claim
would be detrimental to or injure the reputation or future business prospects of the Indemnified Party or any of its Affiliates, (3)
the named parties in any such action (including any impleaded parties) include both the Indemnified Party and the Responsible
Party (or their respective Affiliates) and the representation of both parties by the same counsel would be inappropriate due to
actual or potential differing or conflicts of interests between them, (4) such Third Party Claim seeks money damages in excess of
the Indemnity Holdback Amount, (5) the Responsible Party fails to actively and diligently conduct the defense of such Third
Party Claim, or (6) the Indemnified Party reasonably believes the defense of such Third Party Claim would adversely affect the
Indemnified Party’s relationship with any of its customers, suppliers, or other business relationships.
(c)
If the Responsible Party is permitted to assume and control the defense of any Third Party Claim and elects
to do so, the Indemnified Party shall have the right to employ counsel separate from the counsel employed by the Responsible
Party in such Third Party Claim and to participate in the defense thereof, but the fees and expenses of such counsel employed by
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the Indemnified Party shall be at the expense of the Indemnified Party unless (i) the employment thereof has been specifically
authorized by the Responsible Party in writing or (ii) the Indemnified Party has been advised by legal counsel that a reasonable
likelihood exists of a conflict of interest between the Responsible Party and the Indemnified Party.
(d)
Regardless of which Party controls the defense of any Third Party Claim, the Parties shall, and shall cause
their respective Affiliates to, cooperate in the defense or prosecution of such Third Party Claim, including by providing or
making available to the controlling Party all witnesses, pertinent records, materials, and information relating thereto in such
Party’s possession or under such Party’s control (or in the possession or control of any of its Representatives) as is reasonably
requested by the controlling Party or its counsel.
Section 10.7
Settlement or Compromise.
(a)
If the Indemnified Party is controlling the defense of any Third Party Claim, the Indemnified Party shall
obtain the prior written Consent of the Responsible Party (such Consent not to be unreasonably withheld, conditioned, or
delayed) before entering into any settlement or compromise of such Third Party Claim. Notwithstanding the foregoing, the
Indemnified Party will have the right to settle or compromise any such Third Party Claim without such Consent, provided that in
such event the Indemnified Party shall waive any right to indemnification with respect to such Third Party Claim unless such
Consent is unreasonably withheld, conditioned, or delayed.
(b)
If the Responsible Party is controlling the defense of such Third Party Claim, the Responsible Party shall
obtain the prior written Consent of the Indemnified Party before entering into any settlement or compromise of such Third Party
Claim unless (i) such settlement or compromise involves only payment of money damages, (ii) all such money damages will be
the responsibility of, and paid in full by, the Responsible Party, (iii) such settlement or compromise does not impose an injunction
or other equitable relief on, and contains no admission of wrongdoing by, the Indemnified Party, and (iv) such settlement or
compromise includes a complete and unconditional release of the Indemnified Party.
(c)
Any settlement or compromise made or caused to be made by the Indemnified Party or the Responsible
Party, as the case may be, of any Third Party Claim in accordance with this Section 10.7 shall also be binding upon the
Responsible Party or the Indemnified Party, as the case may be, in the same manner as if a final Order had been entered by a
court of competent jurisdiction in the amount of such settlement or compromise.
Section 10.8
Calculation of Losses. Notwithstanding anything to the contrary in this Agreement, the amount of any
Losses suffered or incurred by any Indemnified Party shall be calculated after giving effect to (A) any insurance proceeds
actually received by the Indemnified Party with respect to such Losses from third party insurers, including the R&W Insurance
Policy, net of (i) all out-of-pocket costs and expenses relating to collection of such amounts from such insurers, (ii) any
deductible associated therewith and (iii) any increase in premiums resulting therefrom and (B) the amount of any cash Tax
benefits actually realized (whether by actual
86
receipt of cash Tax refund or an actual reduction of cash Taxes due and owning) by the Purchaser Indemnified Party in respect of
such Losses.
Section 10.9
Adjustment to Merger Consideration. To the extent permitted by Law, any amounts payable under Section
10.2 shall be treated by the Parties as an adjustment to the Final Merger Consideration.
Section 10.10 No Right of Contribution. No Equityholder shall have any right of contribution, subrogation, or
indemnification against the Company with respect to any claim for indemnification by the Purchaser Indemnified Parties.
Section 10.11 Remedies Exclusive. From and after the Closing, and except in the case of fraud or willful misconduct
(which shall be subject to the limitations set forth in this Agreement), and subject to the rights of the Purchaser Indemnified
Parties under the R&W Insurance Policy, (i) the rights of the Indemnified Parties to indemnification hereunder relating to this
Agreement and the transactions contemplated hereby shall be limited to recovery as set forth in this ARTICLE 10, and such
indemnification rights shall be the sole and exclusive remedies of the Indemnified Parties hereunder subsequent to the Closing
Date with respect to any breach of any representations and warranties of the Company set forth in this Agreement or arising in
connection herewith, and (ii) to the maximum extent permitted by applicable Law, the Indemnified Parties hereby waive all other
entitlements, rights, remedies, claims and causes of action hereunder with respect to any matter in any way relating thereto,
whether in contract, tort, under any laws at common law or otherwise. Notwithstanding the foregoing or anything to the contrary
in this Agreement, (a) any and all disputes relating to the Initial Closing Statement or the determination of the Final Merger
Consideration shall be exclusively resolved in accordance with the provisions of Section 3.3 and not pursuant to this ARTICLE
10 and (b) nothing contained in this Section 10.11 or elsewhere in this Agreement shall limit or be construed to limit the rights of
any Indemnified Party to make or with respect to, or otherwise waive or release, any claims for specific performance, Losses or
other remedies in respect of any covenant and agreement requiring performance at or after the Closing.
For purposes of this ARTICLE 10, (i) if the Equityholders comprise the Indemnifying Party, any references to the Indemnifying
Party (except provisions relating to an obligation to make or a right to receive any payments) will be deemed to refer to the
Stockholder Representative and (ii) if the Equityholders comprise the Indemnified Party, any references to the Indemnified Party
(except provisions relating to an obligation to make or a right to receive any payments) will be deemed to refer to the Stockholder
Representative.
ARTICLE 11.
STOCKHOLDER REPRESENTATIVE
Section 11.1
Authority. By virtue of the approval of the Merger and this Agreement by the Equityholders and without
any further action of any of the Equityholders or the Company, Fortis Advisors LLC, a Delaware limited liability company, is
hereby appointed as the Stockholder Representative and as the true and lawful attorney-in-fact and exclusive agent under
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this Agreement and the PPP Escrow Agreement. The Stockholder Representative shall have such powers and authority as are
necessary or appropriate to carry out the functions assigned to it under this Agreement, the Stockholder Representative
Engagement Agreement and the Related Agreements, including the full power and authority on behalf of the Equityholders to: (i)
consummate the transactions contemplated by this Agreement; (ii) execute the Related Agreements and make all decisions
required or allowed to be made by the Stockholder Representative pursuant to the Related Agreements; (iii) review the Initial
Closing Statement delivered by Purchaser pursuant to Section 3.3(a), negotiate with Purchaser regarding any Proposed
Adjustments, and otherwise take all other actions contemplated to be taken by the Stockholder Representative under Section 3.3;
(iv) defend, control, settle, compromise, or take any other action on behalf of the Equityholders with respect to any matter for
which any Purchaser Indemnified Party seeks indemnification under ARTICLE 10; (v) execute and deliver any amendment or
waiver to this Agreement or any Related Agreement; (vi) deliver all notices required to be delivered by the Equityholders under
this Agreement; (vii) take all other actions to be taken by or on behalf of the Equityholders that the Stockholder Representative
may deem necessary or desirable in connection with this Agreement, the Stockholder Representative Engagement Agreement and
the Related Agreements; and (ix) do each and every act and exercise any and all rights which the Equityholders are permitted or
required to do or exercise under this Agreement. Notwithstanding the foregoing, the Stockholder Representative shall have no
obligation to act on behalf of the Equityholders, except as expressly provided herein, in the PPP Escrow Agreement and in the
Stockholder Representative Engagement Agreement, and for purposes of clarity, there are no obligations of the Stockholder
Representative in any ancillary agreement, schedule, exhibit or the Disclosure Schedules. Such exclusive agency and proxy, and
the powers, immunities and rights to indemnification granted to the Stockholder Representative Group hereunder: (i) are coupled
with an interest, are therefore irrevocable without the consent of the Stockholder Representative and shall survive the death,
incapacity, bankruptcy, dissolution, or liquidation of any Equityholder, and (ii) shall survive the delivery of an assignment by any
Seller of the whole or any fraction of his, her or its interest in the Indemnity Holdback Amount or the PPP Escrow Amount. The
Stockholder Representative shall be entitled to: (i) rely upon the Preliminary Payment Allocation Statement, (ii) rely upon any
signature believed by it to be genuine, and (iii) reasonably assume that a signatory has proper authorization to sign on behalf of
the applicable Equityholder or other party. All decisions and actions by the Stockholder Representative (to the extent authorized
by this Agreement, the Stockholder Representative Engagement Agreement or any Related Agreement) will be binding upon all
of the Equityholders and their successors as if expressly confirmed and ratified in writing by the Equityholders, and no
Equityholder will have the right to object, dissent, protest, or otherwise contest the same. The Stockholder Representative may
resign at any time and may be removed or replaced by a majority vote of the Advisory Group. The immunities and rights to
indemnification shall survive the resignation or removal of the Stockholder Representative or any member of the Advisory Group
and the Closing and/or any termination of this Agreement and the PPP Escrow Agreement.
Section 11.2
Reliance by Purchaser. Pursuant to such designation, each Equityholder shall have further agreed that
Purchaser will be entitled to rely on any action taken by the
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Stockholder Representative on behalf of such Equityholder pursuant to Section 11.1 (each, an “Authorized Action”), and that
each Authorized Action shall be binding on such Equityholder as fully as if such Equityholder had taken such Authorized Action.
Section 11.3
Stockholder Representative Amount. The Stockholder Representative Amount shall be withheld from the
Equityholders at Closing and paid directly to an account designated by the Stockholder Representative to be used: (i) as a fund
for the fees and Stockholder Representative Expenses (including any legal fees and expenses) of, and other amounts payable by,
the Stockholder Representative in connection with this Agreement, the Stockholder Representative Engagement Agreement and
the Related Agreements, or (ii) as otherwise determined by the Advisory Group. The Stockholder Representative is not providing
any investment supervision, recommendations or advice and shall have no responsibility or liability for any loss of principal of
the Stockholder Representative Amount other than as a result of its gross negligence or willful misconduct. The Stockholder
Representative is not acting as a withholding agent or in any similar capacity in connection with the Stockholder Representative
Amount and has no tax reporting or income distribution obligations. The Equityholders will not receive any interest on the
Stockholder Representative Amount and assign to the Stockholder Representative any such interest. Subject to Advisory Group
approval, the Stockholder Representative may contribute funds to the Stockholder Representative Amount from any
consideration otherwise distributable to the Equityholders. Any balance of the Stockholder Representative Amount not utilized
for such purposes shall be paid (via the Paying Agent), when deemed appropriate by the Stockholder Representative in its sole
discretion, to the Equityholders in accordance with the Final Payment Allocation Statement. If the Stockholder Representative
Amount is insufficient to satisfy the fees and Stockholder Representative Expenses of, and other amounts payable by, the
Stockholder Representative, then immediately prior to the final distribution of the Indemnity Holdback Amount or PPP Escrow
Amount to the Equityholders, the Stockholder Representative will be entitled to recover any such Stockholder Representative
Expenses from such amounts prior to the distribution of such amounts to the Equityholders. The Stockholder Representative shall
also be entitled to recover any remaining fees, Stockholder Representative Expenses, or other amounts directly from the
Equityholders, and, for the avoidance of doubt, the Stockholder Representative shall not have any obligation to personally
advance funds in connection with the performance of any of its duties under this Agreement, the Stockholder Representative
Engagement Agreement or the Related Agreements, or otherwise incur any financial liability in the exercise or performance of
any of its powers, rights, duties or privileges or pursuant to this Agreement, the Stockholder Representative Engagement
Agreement, the Related Agreements or the transactions contemplated hereby or thereby. The Stockholder Representative Group
shall be indemnified, defended and held harmless by each Equityholder, severally and not jointly (in accordance with the Final
Payment Allocation Statement), against all fees, losses, claims, damages, liabilities, costs, judgments, fines, amounts paid in
settlement and expenses (including legal fees and expenses, costs of other skilled professionals and in connection with seeking
recovery from insurers) and other amounts payable or incurred by the Stockholder Representative in connection with the
performance of any of its duties under this Agreement, the Stockholder Representative Engagement Agreement or the Related
Agreements, including any such fees, expenses, or other amounts that may be incurred
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by the Stockholder Representative in connection with any Proceeding to which the Stockholder Representative is made a party by
reason of the fact it is or was acting as the Stockholder Representative pursuant to the terms of this Agreement, the Stockholder
Representative Engagement Agreement or the Related Agreements (collectively, the “Stockholder Representative Expenses”), to
the extent the Stockholder Representative Amount and any remaining portion of the Indemnity Holdback Amount and PPP
Escrow Amount are insufficient to pay such Stockholder Representative Expenses.
Section 11.4
Exculpation. The Stockholder Representative will not, by reason of this Agreement or any Related
Agreement, have a fiduciary relationship in respect of any Equityholder. Certain Equityholders have entered into an engagement
agreement (the “Stockholder Representative Engagement Agreement”) with the Stockholder Representative to provide direction
to the Representative in connection with its services under this Agreement, the PPP Escrow Agreement and the Stockholder
Representative Engagement Agreement (such Equityholders, including their individual representatives, collectively hereinafter
referred to as the “Advisory Group”). Neither the Stockholder Representative nor its members, managers, directors, officers,
contractors, agents and employees nor any member of the Advisory Group (collectively, the “Stockholder Representative
Group”), will be liable to any Equityholder for any action taken or omitted by it or any agent employed by it under this
Agreement, any Related Agreement, or any other document entered into in connection with this Agreement, the Stockholder
Representative Engagement Agreement or any Related Agreement, except that the Stockholder Representative will not be
relieved of any Liability imposed by Law for willful misconduct. The Stockholder Representative will not be liable to any
Equityholder for any apportionment or authorization of distribution of payments made by the Stockholder Representative in good
faith, and if any such apportionment or authorization of distribution is subsequently determined to have been made in error the
sole recourse of any Equityholder to whom payment was due, but not made, will be to recover from other Equityholders any
payment in excess of the amount to which such other Equityholders are determined to have been entitled. The Stockholder
Representative Group will not be required to make any inquiry concerning either the performance or observance of any of the
terms, provisions, or conditions of this Agreement or any Related Agreement. Neither the Stockholder Representative nor any
Representative engaged by it will be liable to any Equityholder by virtue of the failure or refusal of the Stockholder
Representative for any reason to consummate the transactions contemplated by this Agreement or relating to the performance of
its other duties under this Agreement, except that the Stockholder Representative will not be relieved of any Liability imposed by
Law for fraud or willful misconduct.
ARTICLE 12.
MISCELLANEOUS
Section 12.1
Expenses. Except as provided in Section 3.3(c), Section 7.3(b), Section 10.6(b), and Section 10.6(c), each
Party shall bear its own fees and expenses with respect to this Agreement and the transactions contemplated by this Agreement;
provided, however, that all fees and costs relating to the R&W Insurance Policy, including all premiums and the
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underwriting fees incurred or to be incurred in connection with procuring the R&W Insurance Policy, shall be apportioned one-
half to Purchaser, on the one hand, and one-half to the Company, on the other hand.
Section 12.2
Amendments. The Parties may amend, modify, or supplement this Agreement only by a written agreement
signed by Purchaser, the Company, and the Stockholder Representative.
Section 12.3
Notices. Any notice, request, instruction, or other communication to be given under this Agreement by a
Party shall be in writing and shall be deemed to have been given to the other Party (a) when delivered, if delivered in person or
by overnight delivery service (charges prepaid), (b) when sent, if sent via email, provided that no undeliverable message is
received by the sender, or (c) when received, if sent by registered or certified mail, return receipt requested, in each case to the
address, facsimile number, or email address of such Party set forth below and marked to the attention of the designated
individual, provided that with respect to notices deliverable to the Stockholder Representative, such notices shall be delivered
solely via email or facsimile:
If to Purchaser or Merger Sub, to:
CDK Global, LLC
950 Hassell Road
Hoffman Estates, IL 60169
Attention: Chief Executive Officer
Email: BK@CDK.com
with a copy (which will not constitute notice) to:
CDK Global, LLC
1950 Hassell Road
Hoffman Estates, Illinois 60169
Attention: General Counsel
Email: Lee.Brunz@cdk.com
and
Mayer Brown LLP
71 S. Wacker Dr.
Chicago, IL 60606
Attention: Jodi Simala; Jason Wagenmaker
Email: jsimala@mayerbrown.com;
jwagenmaker@mayerbrown.com
(ii) If to the Stockholder Representative or, prior to the Closing, the Company, to:
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Fortis Advisors LLC
Attention: Notices Department (Project Spyder)
Facsimile No.: (858) 408-1843
Email: notices@fortisrep.com
Roadster, Inc.
300 De Haro Street, Suite 334
San Francisco, CA 94103
Attention: Andrew Moss
Email: andy@roadster.com
with a copy (which will not constitute notice) to:
Goodwin Procter LLP
601 Marshall Street
Redwood City, CA 94063
Attention: David Johanson
Email: djohanson@goodwinlaw.com
or to such other individual or address or email address as a Party may designate for itself by notice given in accordance with this
Section 12.3.
Section 12.4
United States Dollars. All payments pursuant to this Agreement shall be made by wire transfer in Dollars
in immediately available funds to the account or accounts designated in writing by the payee to the payor.
Section 12.5
Waivers. No failure or delay by a Party in enforcing any of such Party’s rights under this Agreement will
be deemed to be a waiver of such rights. No single or partial exercise of a Party’s rights will be deemed to preclude any other or
further exercise of such Party’s rights under this Agreement. No waiver of any of a Party’s rights under this Agreement will be
effective unless it is in writing and signed by such Party.
Section 12.6
Assignment. This Agreement will be binding on and inure to the benefit of the Parties and their respective
successors and permitted assigns. No Party may, by operation of law or otherwise, assign this Agreement or any of such Party’s
rights or obligations under this Agreement without the written Consent of the other Parties, except that each of Purchaser and
Merger Sub may, without the Consent of the Company or the Stockholder Representative, assign any of its rights under this
Agreement to any Affiliate of Purchaser, but no such assignment will relieve Purchaser of any of its obligations under this
Agreement.
Section 12.7
No Third Party Beneficiaries. Except as provided in ARTICLE 10 (with respect to Purchaser Indemnified
Parties), this Agreement is solely for the benefit of the Parties and their respective successors and permitted assigns, and nothing
in this Agreement, express or
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implied, is intended to or will confer on any other Person any legal or equitable right, benefit, or remedy of any nature
whatsoever under or by reason of this Agreement.
Section 12.8
Publicity. From and after the date of this Agreement, Purchaser and the Company or any of their respective
Representatives may make a press release or other public disclosure regarding the existence of this Agreement and the Related
Agreements and the transactions contemplated by this Agreement and the Related Agreements without the written Consent of the
other Parties; provided, however, that (a) prior to the issuance of such press release or public disclosure, the Party proposing to
make such press release or disclosure shall provide to the other Party no less than three (3) Business Days prior to the issuance of
such press release or disclosure a copy or a summary of such press release or disclosure and consider in good faith any changes
such Party proposes to such press release or disclosure and (b) the Party proposing to issue such press release or disclosure shall
not be obligated to make any changes based on such comments; provided further, that no such press release or disclosure shall
disclose any material economic terms or provisions of this Agreement and the Related Agreements. Subject to this Section 12.8,
Each Party shall hold confidential the terms and provisions of this Agreement and the Related Agreements and the terms of the
transactions contemplated by this Agreement and the Related Agreements. Notwithstanding the foregoing, nothing in this Section
12.8 will prevent any Party or its Representatives from making any press release or other disclosure required by Law or the rules
of any stock exchange, in which case the Party required to make such press release or other disclosure shall use commercially
reasonable efforts to allow the other Parties reasonable time to review and comment on such release or disclosure in advance of
its issuance.
Section 12.9
Further Assurances. On and after the Closing Date, upon the request of any Party, the other Parties shall
execute and deliver such assignments and other instruments as may be reasonably requested by the requesting Party in order to
evidence and effectuate the transactions contemplated by this Agreement.
Section 12.10 Severability. If any provision of this Agreement is declared invalid, illegal, or unenforceable, (a) all other
provisions of this Agreement will remain in full force and effect and (b) the Parties shall negotiate in good faith to amend or
modify this Agreement to replace such invalid, illegal, or unenforceable provision with a valid, legal, and enforceable provision
giving effect to the Parties’ intent to the maximum extent permitted by Law.
Section 12.11 Entire Agreement. This Agreement (including the Disclosure Schedules), the Related Agreements, and the
Confidentiality Agreement contain the entire agreement among the Parties and supersede all prior agreements, arrangements, and
understandings, written or oral, among the Parties relating to the subject matter of this Agreement, the Related Agreements, and
the Confidentiality Agreement.
Section 12.12 No Strict Construction. The Parties have each participated in the negotiation and drafting of the terms of
this Agreement. The Parties agree that any rule of legal interpretation to the effect that any ambiguity is to be resolved against the
drafting party will not apply in interpreting this Agreement. The headings of the sections and paragraphs of this
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Agreement have been inserted for convenience of reference only and will in no way restrict or otherwise modify any of the terms
or provisions hereof.
Section 12.13 Governing Law. This Agreement, and all claims or causes of action that are based on, arise out of, or relate
to this Agreement, will be governed by and construed in accordance with the Laws of the State of Delaware without regard to its
conflicts of law rules and any other Law that would cause the application of the Laws (including the statute of limitations) of any
jurisdiction other than the State of Delaware.
Section 12.14 Jurisdiction, Service, and Venue. Except with respect to the resolution of Unresolved Adjustments in
accordance with Section 3.3, each Party agrees: (a) to submit to the exclusive jurisdiction of the Delaware Court of Chancery in
and for New Castle County, or in the event (and only in the event) that such Delaware Court of Chancery does not have subject
matter jurisdiction over such dispute, any Delaware State court sitting in New Castle County, unless the federal courts have
exclusive jurisdiction, in which case the federal courts located in New Castle County in the State of Delaware (such courts,
including appellate courts therefrom, the “Specified Courts”) for any Proceeding arising out of or relating to this Agreement or
the transactions contemplated by this Agreement; (b) to commence any Proceeding arising out of or relating to this Agreement or
the transactions contemplated by this Agreement only in the Specified Courts; (c) that service of any process, summons, notice,
or document by U.S. registered mail to the address of such Party set forth in Section 12.3 will be effective service of process for
any Proceeding brought against such Party in any of the Specified Courts; (d) to waive any objection to the laying of venue of
any Proceeding arising out of or relating to this Agreement or the transactions contemplated by this Agreement in the Specified
Courts; and (e) to waive and not to plead or claim that any such Proceeding brought in any of the Specified Courts has been
brought in an inconvenient forum.
Section 12.15 WAIVER OF TRIAL BY JURY. EACH PARTY WAIVES ANY RIGHT TO A TRIAL BY JURY IN
ANY PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (A) NO
REPRESENTATIVE OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER
PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (B) SUCH
PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) SUCH PARTY MAKES
THIS WAIVER VOLUNTARILY, AND (D) SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT
BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS Section 12.15.
Section 12.16 Equitable Relief. The parties hereto agree that irreparable damage, for which monetary relief, even if
available, would not be an adequate remedy, would occur in the event that any provision of this Agreement is not performed in
accordance with its specific terms or is otherwise breached, including if the parties hereto fail to take any action required of them
hereunder to consummate the transactions contemplated hereby. It is accordingly agreed that (a) the parties hereto will be entitled
to an injunction or injunctions, specific performance or other
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equitable relief to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof without proof
of damages or otherwise, this being in addition to any other remedy to which they are entitled under this Agreement and (b) the
right of specific performance and other equitable relief is an integral part of the transactions contemplated by this Agreement and
without that right, neither the Company nor Purchaser would have entered into this Agreement. The parties hereto agree not to
assert that a remedy of specific performance or other equitable relief is unenforceable, invalid, contrary to law or inequitable for
any reason, and not to assert that a remedy of monetary damages would provide an adequate remedy or that the parties otherwise
have an adequate remedy at law. The parties hereto acknowledge and agree that any party pursuing an injunction or injunctions to
prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in accordance with
this Section 12.16 will not be required to provide any bond or other security in connection with any such order. The remedies
available to the parties pursuant to this Section 12.16 will be in addition to any other remedy to which they were entitled at law or
in equity, and the election to pursue an injunction or specific performance will not restrict, impair or otherwise limit any party
from seeking the payment of any liabilities, losses, damages, costs or expenses related to any breach of this Agreement, in each
case, subject to the terms of Section 9.2. If, before the Outside Date, any party hereto brings any action, in each case in
accordance with Section 12.16, to enforce specifically the performance of the terms and provisions hereof by any other party,
Outside End Date will automatically be extended (y) for the period during which such action is pending, plus ten (10) Business
Days or (z) by such other time period established by the court presiding over such action, as the case may be.
Section 12.17 Privileged Communications. Goodwin Procter LLP and the Company’s in-house legal department
(collectively, “Counsel”) have acted as counsel for the Company in connection with this Agreement and the Related Agreements
and the consummation of the transactions contemplated by this Agreement and the Related Agreements (the “Transaction
Engagement”). The Parties acknowledge that (a) all communications in any form or format whatsoever between or among
Counsel, on the one hand, and the Company or any of its directors, officers, employees, agents, or advisors, on the other hand,
that relate in any way to the Transaction Engagement (collectively, the “Privileged Communications”) will be deemed to be
attorney-client privileged communications that belong to the Company, (b) from and after the Closing, the Privileged
Communications and the expectation of client confidence relating thereto shall belong solely to the Surviving Corporation and
may be controlled by the Surviving Corporation and shall not be claimed by any Equityholder or any of its Affiliates, and (c)
Counsel shall have no duty whatsoever to reveal or disclose any such Privileged Communications, or any of its files relating to
the Transaction Engagement, to any Equityholder, any of their respective Affiliates, or any of their respective Representatives by
reason of any attorney-client relationship between Counsel and any Equityholder or otherwise. No Equityholder or any of its
Affiliates will have access to any such Privileged Communications, or to the files of Counsel relating to the Transaction
Engagement.
Section 12.18 No Waiver of Privilege; Protection from Disclosure or Use. Nothing in this Agreement will be deemed to
be a waiver of any attorney-client privilege, work product
95
protection, or other protection from disclosure or use. The Parties have undertaken reasonable efforts to prevent the disclosure of
any information that may be confidential, subject to a claim of privilege, or otherwise protected from disclosure or use but,
notwithstanding such efforts, the consummation of the transactions contemplated by this Agreement could result in the
inadvertent disclosure of such information. The Parties agree that any such inadvertent disclosure of information that may be
confidential, subject to a claim of privilege, or otherwise protected from disclosure or use will not constitute a waiver of or
otherwise prejudice any claim of confidentiality, privilege, or protection from disclosure, and further agree to use reasonable best
efforts to return any inadvertently disclosed information to the disclosing Party promptly upon becoming aware of its existence.
Promptly following the return of any inadvertently disclosed information, the Party returning such information shall destroy any
and all copies, summaries, descriptions, or notes of such inadvertently disclosed information, including electronic versions
thereof, and all portions of larger documents or communications that contain such copies, summaries, descriptions, or notes.
Section 12.19 Counterparts. This Agreement may be executed in counterparts (including using any electronic signature
covered by the United States ESIGN Act of 2000, Uniform Electronic Transactions Act, the Electronic Signatures and Records
Act or other applicable law, e.g., www.docusign.com), and such counterparts may be delivered in electronic format, including by
facsimile, email or other transmission method. Such delivery of counterparts shall be conclusive evidence of the intent to be
bound hereby and each such counterpart, including those delivered in electronic format, and copies produced therefrom shall
have the same effect as an originally signed counterpart. To the extent applicable, the foregoing constitutes the election of the
Parties to invoke any law authorizing electronic signatures. Minor variations in the form of the signature page, including footers
from earlier versions of this Agreement, shall be disregarded in determining a Party’s intent or the effectiveness of such signature.
No Party shall raise the use the delivery of signatures to this Agreement in electronic format as a defense to the formation of a
contract and each such Party forever waives any such defense.
Section 12.20 Disclosure Schedules. The Disclosure Schedules have been arranged for purposes of convenience in
separately numbered sections corresponding to the sections of this Agreement; provided, however, each section of the Disclosure
Schedules will be deemed to incorporate by reference all information disclosed in any other section of the Disclosure Schedules
to the extent the relevance of such information to such other section of the Disclosure Schedules is reasonably apparent on the
face of such disclosure. Capitalized terms used in the Disclosure Schedules and not otherwise defined therein have the meanings
given to them in this Agreement. The specification of any dollar amount or the inclusion of any item in the representations and
warranties contained in this Agreement, the Disclosure Schedules or the attached exhibits is not intended to imply that the
amounts, or higher or lower amounts, or the items so included, or other items, are or are not required to be disclosed (including
whether such amounts or items are required to be disclosed as material or threatened) or are within or outside of the ordinary
course of business, and no Party will use the fact of the setting of the amounts or the fact of the inclusion of any item in this
Agreement, the Disclosure Schedules or exhibits in any dispute or controversy between the Parties as to whether any obligation,
item or matter not
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set forth or included in this Agreement, the Disclosure Schedules or exhibits is or is not required to be disclosed (including
whether the amount or items are required to be disclosed as material or threatened) or are within or outside of the ordinary course
of business. Any description of any agreement, document, instrument, plan, arrangement or other item set forth on any Disclosure
Schedule is a summary only and is qualified in its entirety by the terms of such agreement, document, instrument, plan,
arrangement or item. The information contained in this Agreement, in the Disclosure Schedules and exhibits hereto is disclosed
solely for purposes of this Agreement, and no information contained herein or therein will be deemed to be an admission by any
Party hereto to any Person of any matter whatsoever, including any violation of Law or breach of contract.
Section 12.21 Complete Agreement. This Agreement, together with the Related Agreements, the Confidentiality
Agreement and the Letters of Transmittal, contain the entire agreement of the Parties regarding the subject matter of this
Agreement and the transactions contemplated hereby and supersedes all prior agreements among the Parties respecting the sale
and purchase of the Company.
[Remainder of page intentionally left blank; signature page follows.]
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed and delivered as of the date first
written above.
CDK GLOBAL, INC.
By: /s/ Lee J. Brunz
Name: Lee J. Brunz
Title: Executive Vice President, General Counsel and Secretary
SPYDER MERGER CORP.
By: /s/ Lee J. Brunz
Name: Lee J. Brunz
Title: President and Secretary
ROADSTER, INC.
By: /s/ Andrew Moss
Name: Andrew Moss
Title: Chief Executive Officer
STOCKHOLDER REPRESENTATIVE:
FORTIS ADVISORS LLC
By: /s/ Ryan Simkin
Name: Ryan Simkin
Title: Managing Director
[Signature Page to Agreement and Plan of Merger]
Exhibit A
[RESERVED]
Exhibit B
CERTIFICATE OF MERGER
MERGING
SPYDER MERGER CORP.
(a Delaware corporation)
WITH AND INTO
ROADSTER, INC.
(a Delaware corporation)
_________________________
Pursuant to Title 8, Section 251(c) of the Delaware General Corporation Law, as amended
__________________________
June __, 2021
Pursuant to the terms and provisions of Title 8, Section 251(c) of the General Corporation Law of the State of Delaware,
as amended (the “DGCL”), Roadster, Inc., a Delaware corporation (“Roadster”), hereby certifies in connection with the merger
(the “Merger”) of Spyder Merger Corp., a Delaware corporation (“Merger Sub”), with and into Roadster, as follows:
FIRST: The name and state of incorporation of each of the constituent corporations (the “Constituent Corporations”) to the
Merger are:
Name State of Incorporation
Spyder Merger Corp. Delaware
Roadster, Inc. Delaware
SECOND: An Agreement and Plan of Merger (the “Merger Agreement”), dated as of June 2, 2021, by and among CDK
Global, Inc., a Delaware corporation (the “Purchaser”), Merger Sub, Roadster and Fortis Advisors LLC, a Delaware limited
liability company, as representative of the stockholders of Roadster for certain purposes described in the Merger Agreement, has
been approved, adopted, certified, executed and acknowledged by each of the Constituent Corporations in accordance with the
requirements of Section 251 of the DGCL.
THIRD: Pursuant to the terms and provisions of the Merger Agreement, Merger Sub will merge with and into Roadster. The
name of the surviving corporation (the “Surviving Corporation”) in the Merger is: “Roadster, Inc.” Upon the effectiveness of the
Merger, the
separate corporate existence of Merger Sub shall cease, and Roadster shall continue as the Surviving Corporation and as a
wholly-owned subsidiary of the Purchaser.
FOURTH: At the effective time of the Merger, the Amended and Restated Certificate of Incorporation, as amended, of the
Surviving Corporation shall be amended and restated so as to read in its entirety as set forth in Annex A attached hereto
incorporated herein by reference and made a part hereof.
FIFTH: The executed Merger Agreement is on file at the office of the Surviving Corporation. The address of the office of the
Surviving Corporation at which the executed Merger Agreement is on file is 1950 Hassell Road, Hoffman Estates, Illinois 60169.
SIXTH: A copy of the Merger Agreement will be furnished by the Surviving Corporation, on request and without cost, to any
stockholder of either of the Constituent Corporations.
SEVENTH: This Certificate of Merger, and the Merger provided for herein, shall be effective upon the filing of this
Certificate of Merger with the Secretary of State of the State of Delaware.
[ SIGNATURE PAGE FOLLOWS ]
IN WITNESS WHEREOF, the undersigned authorized officer has duly executed this Certificate of Merger as of the date first
above written.
ROADSTER, INC.
By: __________________________
Name:
Title:
ANNEX A
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ROADSTER, INC.
_______________________________________________________________________
1.
The name of the corporation (the “Corporation”) is:
Roadster, Inc.
2.
The address of its registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of
New Castle 19801. The name of its registered agent at such address is The Corporation Trust Company.
3.
The nature of the business or purpose to be conducted or promoted is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of Delaware (the “DGCL”).
4.
The total number of shares of stock which the Corporation shall have authority to issue is one thousand (1,000) shares of
common stock, $0.01 par value per share.
5.
The Corporation is to have perpetual existence.
6.
The management of the business and the conduct of the affairs of the Corporation shall be vested in its board of directors.
In furtherance and not in limitation of the powers conferred by statute, the board of directors is expressly authorized to make,
adopt, alter, amend or repeal the By-laws (the “By-laws”) of the Corporation.
7.
Meetings of the stockholders may be held within or without the State of Delaware, as the By-laws may provide. The
books of the Corporation may be kept (subject to any provision contained in the DGCL) outside the State of Delaware at such
place or places as may be designated from time to time by the board of directors of the Corporation or in the By-laws of the
Corporation. Elections of directors of the Corporation need not be by written ballot unless the By-laws of the Corporation shall so
provide.
8.
The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by the DGCL, and all rights conferred upon stockholders herein are
granted subject to this reservation. No repeal, alteration or amendment of this Certificate of Incorporation shall be made unless
the same is approved by the board of directors of the Corporation pursuant to a resolution adopted by the directors then in office
in accordance with the By-laws and applicable law and thereafter approved by the stockholders.
9.
(A) Directors of the Corporation shall have no personal liability to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except to the extent now or hereafter required by law.
(B) The Corporation shall indemnify, to the fullest extent permitted from time to time by the DGCL or any other
applicable laws as presently or hereafter in effect, any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, including,
without limitation, an action by or in the right of the Corporation, by reason of the fact that he is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise (and the Corporation, in the discretion of the board of directors, may so indemnify a person by
reason of the fact that he is or was an employee or agent of the Corporation or is or was serving at the request of the Corporation
in any other capacity for or on behalf of the Corporation or was serving at the request of the Corporation as an employee or agent
of another corporation, partnership, joint venture, trust or other enterprise), against any liability or expense actually and
reasonably incurred by such person in respect thereof; provided, however, the Corporation shall be required to indemnify a
director or officer of the Corporation in connection with an action, suit or proceeding initiated by such person only if such action,
suit or proceeding was authorized by the board of directors of the Corporation. Such indemnification is not exclusive of any other
right to indemnification provided by law or otherwise. The right to indemnification conferred by this paragraph shall be deemed
to be a contract between the Corporation and each person referred to herein.
(C) No amendment to or repeal of the provisions of this Article 9 shall apply to or have any effect on the liability or
alleged liability of any person for or with respect to any acts or omissions of such person occurring prior to such amendments.
Exhibit C
LETTER OF TRANSMITTAL
FOR THE SURRENDER OF CAPITAL STOCK, COMPANY WARRANTS AND COMPANY OPTIONS OF ROADSTER, INC.
Surrendered Pursuant to the Merger
of
Spyder Merger Corp.
with and into
Roadster, Inc.
DELIVERY INSTRUCTIONS
By Courier or Overnight Delivery:
PNC Bank, National Association
Attn: M&A Team
80 S. 8th Street, Suite 3715
Minneapolis, MN 55402
For information, please email pncpaidsupport@pnc.com or call 833-762-3855
Delivery of this Letter of Transmittal to an address other than as set forth above will not constitute a valid delivery.
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS
How to Receive Your Proceeds.
To validly tender your shares or surrender your options or warrants in order to receive your proceeds, you will need to
complete the following steps. The steps below are offered through PNC PAID; however, if you wish to complete the Letter
of Transmittal in hard copy, please complete the following steps:
1. Provide Registered Holder information (Section 1).
2. List the Securities being surrendered for Proceeds (Section 2).
3. Select your payment method (Section 3).
4. Sign this Letter of Transmittal (Section 4).
5. Complete Medallion Guarantee (Section 5) ONLY IF the Proceeds for Securities being surrendered for payment are to be
made to any payee other than the Registered Holder.
6. Complete the applicable tax form (Exhibit B)
If the Medallion Guarantee is required as a condition of payment, please send to the following address:
PNC Bank, N.A.
Attn: M&A Team
80 S. 8th Street, Suite 3715
Minneapolis, MN 55402
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY
BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
IF SHARES ARE REGISTERED IN DIFFERENT NAMES, A SEPARATE LETTER OF TRANSMITTAL MUST BE
SUBMITTED FOR EACH DIFFERENT REGISTERED HOLDER. SEE INSTRUCTION 1.
THE METHOD OF DELIVERY FOR SHARES OF CAPITAL STOCK IS AT THE OPTION AND RISK OF THE OWNER
OR GRANTEE, AS THE CASE MAY BE, THEREOF.
Section 1. Registered Holder Information.
Name(s) of Registered Holder(s)
exactly as name(s)
appear(s) on record of Shares
Address
City
State/Province
Postal/Zip Code
Country
Email Address of Registered
Holder
Contact number of registered
Shareholder
By providing your email address, you hereby agree and understand that you are providing your consent to the electronic delivery of any and all disclosures, information or documents about the
service and related matters in connection with this LOT (“Account”). Electronic Communications covered by your consent may include, but are not limited to: PNC Privacy Policy, IRS Tax
Forms, letters, notices or alerts regarding your Account, any disclosure required by federal, state or local law, and other information, documents, data records and other legal notices that may
relate to your Account. Your consent will continue to apply and you will continue to receive electronically the applicable or requested information pertaining to your Account above until you are
no longer an accountholder, or until you withdraw your consent. You may withdraw your consent to receiving Account documents and communications electronically at any time, by contacting
us in writing at PNC Financial Services Group, Attn: Payment Administration, 80 S. 8th Street, Suite 3715, Minneapolis, MN 55402. If you do, you will receive certain Account documents
issued after the date on which you withdraw such consent in paper form. Any withdrawal of your consent to Electronic Communications will be effective only after we have a reasonable period
of time to process your withdrawal request. To access and retain Electronic Communications, you must have: (i) ssl enabled web browsers, (ii) an email address and a personal computer or
equivalent device capable of connecting, and actually connected, to the Internet, (iii) Acrobat Reader software version 6.0 or higher to view documents in Portable Document Format (PDF). This
viewer is available for download, free of charge, from www.adobe.com and (iv) sufficient electronic storage capability on your hard drive or other data storage facility or a means to print or store
notices and information through your browser software.
Section 2. Description of Roadster, Inc. Capital Stock, Options or Warrants.
Security Type
Security Number
Quantity of Security
Section 3. Method of Payment.
Please SELECT ONLY ONE of the following methods of payment to receive your proceeds, and complete the corresponding “Payment
Information” in Section 3(a), 3(b) or (3c).
Wire Transfer
If selected, please complete the “Wire
Transfer” Section 3(a) below.
$65 wire fee deducted from the proceeds
of the payment
Automated Clearing House
If selected, please complete the “ACH”
Section 3(b) below.
$25 ACH fee deducted from the proceeds
of the payment
Check
If selected, please complete the “Check”
Section 3(c) below.
No Fee
Check this box ONLY if you want payment issued to a name OTHER THAN the Registered Holder. If checked, you will be
required to obtain and deliver a Medallion Guarantee (See Section 5) and complete the following information before payment will
be issued.
Section 3(a). Payment Information. Wire Transfer.
Bank Name
Fedwire ABA Number/SWIFT
Name on Bank Account
Account Number/IBAN
FFC Account Name (if applicable)
FFC Account Number (if applicable)
Bank Contact/Telephone Number
**You agree that any error in payment (i.e. overpayment, duplicate payment, fraudulent payment, or otherwise) will be reversed
through a debit to such account.
Section 3(b). Payment Information. Automated Clearing House (ACH).
Bank Name
ABA Number
Name on Bank Account
Account Number
Account Type:
Checking
Savings
**You agree that any error in payment (i.e. overpayment, duplicate payment, fraudulent payment, or otherwise) will be reversed through a debit to such
account.
Section 3(c). Payment Information. Check.
CHECK ISSUANCE
Name: ______________________________________________________________________________________
Address:
City:
State/Province:
Postal/Zip Code:
Country:
Section 4. Signature Page to Letter of Transmittal
Registered Holder Name:
By:
(Signatory Entity)
Its:
(Capacity)
By:
(Signatory Entity)
Its:
(Capacity)
Signature:
(Signature(s) of Registered Holder(s))
Name:
(Please Print)
Title:
Date:
ADDITIONAL SIGNERS (IF APPLICABLE)
Sign Here:
(Signature(s) of Registered Holder(s))
Name:
(Please Print)
Title:
Date:
Section 5. Medallion Guarantee
MEDALLION GUARANTEE: If payment is to be made to anyone other than the Registered Holder, your signature above must be
medallion guaranteed. A Medallion Signature Guarantee stamp may be obtained from a domestic bank or trust company, broker-dealer, clearing agency, savings
association, or other financial institution which participates in a Medallion program of the Securities Transfer Association Medallion Program (STAMP), Stock
Exchanges Medallion Program (SEMP) or the NYSE Medallion Signature Program, as long as the amount of the transaction does not exceed the relevant surety
coverage of the medallion. Signature guarantees from financial institutions which do not participate in a Medallion program will not be accepted. A notary public
cannot provide a Medallion Signature Guarantee stamp.
LETTER OF TRANSMITTAL
Ladies and Gentlemen:
In connection with the merger (the "Merger") of Roadster, Inc. (the "Company") with Spyder Merger Corp. ("Merger Sub"), a
wholly-owed subsidiary of CDK Global, Inc. ("Purchaser"), pursuant to an Agreement and Plan of Merger, dated as of June 2, 2021 (the
"Merger Agreement"), by and among Purchaser, Merger Sub, the Company, and Fortis Advisors LLC, as representative of the Company's
stockholders (the “Stockholders’ Representative”), the undersigned herewith surrenders the above listed shares of Company capital stock (the
"Shares"), Company Warrants and/or all Company Options held by the undersigned immediately prior to the Effective Time of the Merger
and the book-entry entitlements, including book entries recorded in the Company’s books and records, which immediately prior to the
Effective Time of the Merger represented the Shares, in each case to be exchanged for cash, minus any required tax deductions or
withholdings and certain other deductions set forth in the Merger Agreement, as adjusted and payable pursuant to the Merger Agreement.
You should read the Merger Agreement and the other attachments and exhibits thereto in their entirety for a complete description of the
consideration you may be entitled to receive in respect of your Shares, Company Warrants and/or Company Options. Capitalized terms used
herein but not defined shall have the respective meaning set forth in the Merger Agreement. To the extent the undersigned is a
Stockholder, by delivery of this Letter of Transmittal to PNC Bank, National Association, as Purchaser’s paying agent (the “Paying
Agent”), the undersigned hereby (i) forever waives all dissenters' and appraisal rights, including, without limitation, under
applicable Delaware law and (ii) withdraws all written objections to the Merger and/or demands for appraisal, if any, with respect to
any Shares owned by the undersigned.
The undersigned understands that Purchaser and the Surviving Corporation may rely upon the representations, warranties,
agreements and release contained in this Letter of Transmittal as if each such
person was a party to this Letter of Transmittal and each shall have the rights, remedies and benefits under this Letter of Transmittal as if
such person was a party hereto and thereto.
Pursuant to this Letter of Transmittal, the undersigned agrees to be bound by all provisions of the Merger Agreement applicable to it.
The undersigned understands that Purchaser will hold back and retain cash representing the Adjustment Holdback Amount and the Indemnity
Holdback Amount pursuant to Section 2.8 of the Merger Agreement to secure certain obligations under the Merger Agreement, and the
undersigned hereby appoints Fortis Advisors LLC, as Stockholders' Representative on his, her or its behalf pursuant to and in accordance
with the provisions of the Merger Agreement. All such amounts shall be held by Purchaser, subject to the terms and conditions of the Merger
Agreement. The undersigned acknowledges and agrees that he, she or it may be entitled to receive a portion of the Adjustment Holdback
Amount and/or the Indemnity Holdback Amount at the times and in the amounts set forth in the Merger Agreement subject to and in
accordance with the terms of the Merger Agreement. The undersigned acknowledges that claims for Losses and other matters made on the
Adjustment Holdback Amount and/or the Indemnity Holdback Amount may delay or preclude the release of any portion of the Adjustment
Holdback Amount and/or the Indemnity Holdback Amount to the undersigned.
The undersigned represents and warrants to the Company, Purchaser and Merger Sub that (i) the undersigned owns, beneficially and
of record, and has full authority to surrender, the Shares specified in this Letter of Transmittal, free and clear of all Liens, and/or all Company
Warrants and/or Company Options held by the undersigned, (ii) other than the Shares listed in Section 2 of this Letter of Transmittal labeled
"Description of Roadster, Inc. Capital Stock", and, if indicated above, the Company Warrants and/or Company Options held by the
undersigned, the undersigned owns no shares of, or options, warrants, convertible securities or other instruments convertible for, the
Company's capital stock or equity securities, directly or beneficially, (iii) the undersigned has full power and authority to submit, sell, assign
and transfer the Shares specified in this Letter of Transmittal and surrender the Company Warrants and/or Company Options held thereby and
to otherwise enter into and perform his, her or its obligations under this Letter of Transmittal and the Merger Agreement, and such sale,
assignment, transfer or performance will not conflict or violate any law, regulation or order of any governmental authority applicable to the
undersigned or any contract to which the undersigned is a party or by which the undersigned's assets or properties are bound, (iv) the
undersigned does not have any claim or dispute with the Company, Purchaser or Merger Sub as of the date hereof, and (v) the delivery of the
Shares pursuant to the provisions of the Merger Agreement will transfer valid title thereto, free and clear of any and all Liens.
Further, and without limiting the foregoing, if the undersigned is an entity, the undersigned represents and warrants to the Company,
Purchaser and Merger Sub that (i) the undersigned has full corporate or other applicable power and authority to execute and deliver this
Letter of Transmittal, to perform its obligations hereunder and to consummate the transactions provided for or contemplated hereby and (ii)
this Letter of Transmittal has been duly and validly executed and delivered by the undersigned and constitutes a legal, valid and binding
obligation of the undersigned enforceable against the undersigned in accordance with its respective terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting creditors' rights generally, and subject, as to enforceability, to general
principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity).
The undersigned will, upon request, execute and deliver any additional documents reasonably deemed appropriate or necessary by
the Paying Agent and/or Purchaser in connection with the surrender of the Shares, Company Warrants and/or Company Options held thereby.
All authority conferred or agreed to be conferred in this Letter of Transmittal shall be binding upon the successors, assigns, heirs, executors,
administrators and legal representatives of the undersigned and shall not be affected by, and
shall survive, the death or incapacity of the undersigned. The surrender of Shares, Company Warrants and/or Company Options hereby is
irrevocable.
The undersigned acknowledges, agrees and confirms that:
(a) The undersigned has reviewed this Letter of Transmittal, the Merger Agreement and related materials provided with this
Letter of Transmittal, and has agreed to be bound and abide by the provisions thereof.
(b) The undersigned has had an opportunity to ask questions and receive answers from the Company as deemed necessary to
evaluate the transactions proposed herein.
(c) The undersigned understands the meaning and legal consequences of the representations, warranties and covenants in this
Letter of Transmittal, and that Purchaser and the Company have relied upon such representations, warranties and covenants. The
undersigned agrees to indemnify and hold harmless Purchaser, Merger Sub and the Company and any of their officers, directors,
attorneys, agents and employees from and against losses, damages, liabilities or expenses incurred as a result of any breach of such
representations, warranties or covenants by the undersigned.
(d) Generally, each Equityholder, including the undersigned shall indemnify Purchaser, Merger Sub and certain of their
respective affiliated parties with respect to any Losses relating to a breach of the representations and warranties of the Company set
forth in the Merger Agreement, the breach or nonperformance by the Company of the covenants of the Company set forth in the
Merger Agreement, and certain other matters specified in the Merger Agreement, in each case as set forth in the Merger Agreement,
as well as in connection with the Letter of Transmittal. By executing this Letter of Transmittal, the undersigned understands, agrees
and acknowledges that the undersigned is hereby subject to the obligations of an "Equityholder" under the Merger Agreement,
including but not limited to the obligation to indemnify Purchaser, Stockholders’ Representative and certain affiliated parties
pursuant to the terms set forth in the Merger Agreement.
(e) By executing this Letter of Transmittal, the undersigned understands, agrees and acknowledges that the undersigned
is subject to the obligations of an "Equityholder" under the Merger Agreement and shall be bound by such terms of the Merger
Agreement, including but not limited to the obligation to indemnify Purchaser and certain affiliated parties pursuant to the terms set
forth in the Merger Agreement and the appointment of Fortis Advisors LLC as the Stockholders' Representative under and
pursuant to the terms contained therein. Each Equityholder (as defined in the Merger Agreement), including the undersigned, shall,
as set forth in Section 11.3 of the Merger Agreement, indemnify the Stockholders’ Representative for any fees and expenses
(including legal fees and expenses) and other amounts payable or incurred by the Stockholders’ Representative in connection with
the performance of any of its duties under the Merger Agreement in excess of the Stockholder Representative Amount (as defined in
the Merger Agreement).
(f) By the execution and delivery of this Letter of Transmittal, the undersigned consents to the Merger and acknowledges the
validity and enforceability of the Merger Agreement, and WAIVES AND AGREES NOT TO ASSERT ITS RIGHTS, IF ANY, TO DISSENT
OR SEEK STATUTORY APPRAISAL IN RESPECT OF THE UNDERSIGNED’S SHARES IN THE COMPANY PURSUANT TO
APPLICABLE LAW (INCLUDING SECTION 262 OF THE DELAWARE GENERAL
CORPORATION LAW). THE UNDERSIGNED HEREBY ACKNOWLEDGES AND AGREES THAT COMPLETION AND DELIVERY
OF THIS LETTER OF TRANSMITTAL CONSTITUTES THE WAIVER BY THE UNDERSIGNED OF ALL APPRAISAL AND
DISSENTER’S RIGHTS, INCLUDING, WITHOUT LIMITATION, APPRAISAL RIGHTS UNDER SECTION 262 OF THE DELAWARE
GENERAL CORPORATION LAW, WITH RESPECT TO ANY COMPANY CAPITAL STOCK HELD BY THE UNDERSIGNED AS OF
IMMEDIATELY PRIOR TO THE EFFECTIVE TIME, WHETHER OR NOT THE UNDERSIGNED HAS PREVIOUSLY MADE A
WRITTEN DEMAND UPON THE COMPANY OR OTHERWISE COMPLIED WITH THE APPRAISAL RIGHTS PROVISIONS OF
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW.
(g) From and after the Effective Time, for good and valuable consideration, the undersigned finally and forever releases
Purchaser and the Surviving Corporation, and their respective successors, assigns, officers, directors, agents, servants, employees and all
affiliates and subsidiaries, past and present, of Purchaser and the Surviving Corporation (the "Releasees") from each and every agreement,
commitment, indebtedness, obligation and claim of every nature and kind whatsoever, known or unknown, suspected or unsuspected (each, a
"Claim" and collectively, the "Claims") that (i) the undersigned may have had in the past, may have as of the date hereof or, to the extent
arising from or in connection with any act, omission or state of facts taken or existing on or prior to the date hereof, may have after the date
hereof against any of the Releasees and (ii) have arisen or arises directly out of, or relates directly to, the undersigned's interest as an
equityholder of the Company, except such Claims as are contemplated by the Merger Agreement (such Claims being the "Released Claims").
The undersigned acknowledges his, her or its understanding that the facts in respect of which this release is given may hereafter be
determined to be other than or different from the facts now known or believed by the undersigned, and the undersigned hereby accepts and
assumes the risks of the facts being different and agrees that this release shall be and remain, in all respects, effective and not subject to
termination or rescission by reason of any such difference in facts.
The parties hereto intend that the provisions regarding the Released Claims be construed as broadly as possible, and incorporate
herein similar federal, state or other laws, all of which, with respect to the Released Claims, are similarly waived by the undersigned. The
undersigned has had full opportunity to review the Letter of Transmittal with any attorney or consultant of his, her or its choosing, and is not
acting under any coercion or duress and is of sound mental and physical health, and of clear mind. The undersigned has fully reviewed the
Letter of Transmittal and understands the terms and provisions hereof, and has had any terms unclear to him, her or it explained to him, her
or it to his, her or its satisfaction by persons of his, her or its choosing. The undersigned hereby acknowledges that, as of the Effective Time,
the undersigned has no ongoing interest in the Company, financial or otherwise, by reason of ownership of the capital stock of the Company,
options to purchase capital stock of the Company or otherwise.
Further, the undersigned hereby irrevocably covenants to refrain from, directly or indirectly, asserting any Released Claim, or
commencing, instituting or causing to be commenced, any proceeding of any kind against any Releasee based upon any Released Claim. The
undersigned represents to the Releasees that the undersigned has not assigned or transferred or purported to assign or transfer to any Person
all or any part of, or any interest in, any Released Claim. The undersigned further agrees that he, she or it shall keep all confidential and
proprietary information of the Company confidential and shall not use such confidential information other than for the benefit of the
Company.
NO HOLDER OF SHARES WHO INTENDS TO EXERCISE STATUTORY DISSENTERS' OR APPRAISAL RIGHTS,
INCLUDING, WITHOUT LIMITATION, UNDER DELAWARE LAW SHOULD SUBMIT FOR EXCHANGE HIS, HER OR ITS
SHARES.
THE UNDERSIGNED UNDERSTANDS THAT SUBMISSION OF THIS LETTER OF TRANSMITTAL TO THE PAYING AGENT
WILL CONSTITUTE A WAIVER OF HIS, HER OR ITS RIGHTS TO DEMAND DETERMINATION OF THE FAIR VALUE OF
HIS, HER OR ITS SHARES PURSUANT TO THE PROVISIONS OF DELAWARE LAW OR OTHER APPLICABLE LAW. THE
UNDERSIGNED FURTHER UNDERSTANDS THAT IF HE, SHE OR IT HAS FILED A COMPLAINT WITH RESPECT TO THE
SHARES SUBMITTED AND SURRENDERED HEREWITH, THE UNDERSIGNED BY SUBMISSION TO THE PAYING AGENT
OF THIS LETTER OF TRANSMITTAL HEREBY WITHDRAWS SUCH COMPLAINT AND AGREES THAT THE FAIR VALUE
OF SUCH SHARES IS NOT MORE THAN THE CONSIDERATION PAYABLE PURSUANT TO THE MERGER AND THE
COMPANY HEREBY ACCEPTS SUCH WITHDRAWAL.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
The undersigned understands that surrender is not made in acceptable form until the receipt by Purchaser or its designees (including
the Paying Agent) of this Letter of Transmittal, duly completed and signed, together with all accompanying evidences of authority in form
reasonably satisfactory to Purchaser (which may delegate power in whole or in part to the Paying Agent) as may be required by the
Instructions. All questions as to validity, form and eligibility of any surrender of Shares, Company Options and/or Company Warrants hereby
will be determined by Purchaser (which may delegate power in whole or in part to the Paying Agent) and such determination shall be final
and binding.
The undersigned understands that payment for surrendered Shares, Company Options and/or Company Warrants will be made as
promptly as reasonably practicable after the surrender of the Shares, Company Options and/or Company Warrants is made in acceptable
form.
INSTRUCTIONS
1.
Delivery of Letter of Transmittal.
This Letter of Transmittal, filled in and signed, must be used in connection with the delivery and surrender of the Shares, Company Warrants
and/or Company Options. A Letter of Transmittal should be received by [●], 2021 in reasonably satisfactory form.
Terms of Conversion of the Shares into the Right to Receive Cash as set forth in the Merger Agreement. Each Share (as shown in Section 2 of
this Letter of Transmittal labeled "Description of Roadster, Inc. Capital Stock") will be converted as of the effective time of the Merger into
the right to receive cash, without interest, and subject to applicable withholding and adjustment, as set forth in the Merger Agreement.
Conversion of Company Options into the Right to Receive Cash as set forth in the Merger Agreement. Each Company Option (as defined in
the Merger Agreement) will, contingent on the consummation of the Merger, be cancelled and converted as of the effective time of the
Merger into the right to receive cash, without interest, and subject to applicable withholding and adjustment and less the exercise price of
such Company Options, as set forth in the Merger Agreement.
Conversion of Company Warrants into the Right to Receive Cash as set forth in the Merger Agreement. Each Company Warrant (as defined in
the Merger Agreement) will, contingent on the consummation of the Merger, be cancelled and converted as of the effective time of the
Merger into the right to receive cash, without interest, and subject to applicable withholding and adjustment and less the exercise price of
such Company Warrants, as set forth in the Merger Agreement. Receipt of proceeds by holders of Company Warrants is contingent upon the
execution of the Warrant Cancellation Agreement.
Guarantee of Signature. Stock powers and signature guarantees are unnecessary unless (a) the Shares, Company Warrants or Company
Options are registered in a name other than that of the person submitting the Letter of Transmittal or (b) such registered holder completes the
Special Payment Instructions or Special Delivery Instructions. In the case of (a) above, the party must provide a properly executed stock
power with the signature on the stock power and on the Letter of Transmittal guaranteed by a participant in the Security Transfer Agents
Medallion Program, the New York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange Medallion Program
(each, an "Eligible Institution"). In the case of (b) above, only the signature on the Letter of Transmittal should be similarly guaranteed.
Signatures on Letter of Transmittal and Endorsements. If this Letter of Transmittal is signed by the registered holder(s) of the Shares,
Company Warrants or Company Options surrendered hereby, the signature(s) must correspond exactly with the name(s) as written on the
book records of the Company or as provided in the applicable Company Option and/or Company Warrant without alteration, enlargement or
any change whatsoever.
If any of the Shares surrendered hereby are held of record by two or more joint owners, all such owners must sign this Letter of Transmittal.
If any of the Shares surrendered hereby are registered in different names on the Company’s books and records, it will be necessary to
complete, sign and submit as many separate Letters of Transmittal as there are different registrations.
If this Letter of Transmittal or stock power is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation
or other person acting in a fiduciary or representative capacity, such person should so indicate when signing, and proper evidence satisfactory
to the Company of the authority of such person so to act must be submitted.
If this Letter of Transmittal is signed by the registered holder(s) of the Shares listed and surrendered hereby, no endorsements or separate
stock powers are required.
2.
Stock Transfer Taxes.
Equityholders will bear 100% liability (as Closing Date Indebtedness) for any transfer, stamp, documentary, sales, use, registration, value
added Tax and other similar Taxes applicable to the delivery of payment for surrendered Shares; provided, however, that if any such payment
is to be issued to any person(s) other than the registered holder(s) of the surrendered Shares, it shall be a condition of the issuance and
delivery of such payment that the amount of any stock transfer taxes (whether imposed on the registered holder(s) or such person(s)) payable
on account of the transfer (or transfers) of the surrendered Shares shall be delivered to Purchaser or its designee (including the Paying Agent)
or satisfactory evidence of the payment of such taxes or nonapplicability thereof shall be submitted to Purchaser or its designee (including the
Paying Agent) before such check will be issued.
3.
Validity of Surrender, Irregularities.
All questions as to validity, form and eligibility of any surrender of Shares, Company Warrants and/or Company Options hereby will be
determined by Purchaser (which may delegate power in whole or in part to the Paying Agent), and such determination shall be final and
binding. Purchaser reserves the right to waive any irregularities or defects in the surrender of any Shares, Company Warrants and/or
Company Options, and its interpretations of the terms and conditions of the Merger Agreement and of this Letter of Transmittal (including
these instructions) with respect to such irregularities or defects shall be final and binding. A surrender will not be deemed to have been made
until all irregularities have been cured or waived.
4.
Payment to a Name other than the Registered Holder.
Indicate the name and address to which payment for the Shares, Company Warrants and/or Company Options is to be sent if different from
the name and/or address of the person(s) signing this Letter of Transmittal.
5. Requests for Information or Additional Copies.
Information and additional copies of this Letter of Transmittal and the Merger Agreement (including the schedules and exhibits thereto) may
be obtained from the Paying Agent by writing to the address on the front of this Letter of Transmittal, by email at pncpaidsupport@pnc.com
or by phone at 833-762-3855.
6. Inadequate Space.
If the space provided on this Letter of Transmittal is inadequate, the Share certificate numbers (if applicable) and number of Shares and/or the
descriptions of Company Warrants and/or Company Options should be listed on a separate signed schedule affixed hereto.
7. Letter of Transmittal Required.
You will not receive any cash for your Shares (other than upon exercise of dissenters' or appraisal rights), the Company Warrants and/or
Company Options unless and until you deliver this Letter of Transmittal, duly completed and signed, to the Paying Agent, together with any
required accompanying evidences of authority in form reasonably satisfactory to Purchaser as may be required pursuant to these Instructions.
No interest will be paid on amounts due for the Shares, Company Warrants and/or Company Options.
8. Form W-9. Each stockholder surrendering Shares, Company Warrants and/or Company Options for payment is required to provide the
Paying Agent with a correct Taxpayer Identification Number ("TIN") and certain other information on a Form W-9, or an appropriate IRS
Form W-8, as described below.
IMPORTANT TAX INFORMATION
United States federal income tax law generally requires that if your shares, Company Warrants and/or Company Options are accepted for
payment, you or your assignee (in either case, the "Payee"), must provide the Paying Agent (the "Payor") with the Payee's correct TIN,
which, in the case of a Payee who is an individual, is the Payee's social security number. If the Payor is not provided with the correct TIN or
an adequate basis for an exemption, the Payee may be subject to a $50 penalty imposed by the Internal Revenue Service ("IRS") and backup
withholding in an amount equal to 28% of the gross proceeds received pursuant to the Merger. Backup withholding is not an additional tax.
Rather, the tax liability of a person subject to backup withholding will be reduced by the amount withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
To prevent backup withholding, each Payee must provide such Payee's correct TIN by completing the " Form W-9" set forth herein,
certifying that (i) the TIN provided is correct, (ii) (A) the Payee is exempt from backup withholding, (B) the Payee has not been notified by
the Internal Revenue Service that such Payee is subject to backup withholding as a result of a failure to report all interest or dividends, or (C)
the IRS has notified the payee that such Payee is no longer subject to backup withholding, and (iii) the Payee is a U.S. Person (including a
U.S. resident alien).
If the Payee does not have a TIN, such Payee should consult the enclosed Guidelines for Certification of Taxpayer Identification Number
on Form W-9 (the "W-9 Specific Instructions") for instructions on applying for a TIN and apply for and receive a TIN prior to submitting the
Form W-9. If the Payee does not provide such Payee's TIN to the Payor by the time of payment, backup withholding will apply.
If the Shares are held in more than one name or is not in the name of the actual owner, consult the W-9 Specific Instructions for
information on which TIN to report.
Certain Payees (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and
reporting requirements. To prevent possible erroneous backup withholding, an exempt Payee should write "EXEMPT" on the Form W-9. See
the W-9 Specific Instructions for additional instructions. In order for a nonresident alien or foreign entity to qualify as exempt, such person
must submit an appropriate and properly completed Form W-8BEN, W-8ECI, W-8EXP or W-8IMY, as the case may be, signed under
penalties of perjury attesting to such exempt status. Such forms may be obtained from the Paying Agent or the IRS at its Internet website:
www.irs.gov.
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON FORM W-9
Guidelines for Determining the Proper Identification Number to Give the Payer – Social Security numbers have nine digits
separated by two hyphens: i.e. 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e., 00-
0000000. The table below will help determine the number to give the payer.
For this type of account:
GIVE THE
SOCIAL SECURITY
NUMBER OF-
For this type of account:
GIVE THE
SOCIAL SECURITY
NUMBER OF-
1. Individual
The individual
9. A valid trust, estate or
pension trust
The legal entity (do not
furnish the identifying
number of the personal
representative or trustee
unless the legal entity itself
is not designated in the
account title.).
2. Two or more individuals
(joint account)
The actual owner of the
account or, if combined
funds, the first individual
on the account
10. Corporate account or account
of LLC electing corporate
status on Form 8832
The corporation
3. Husband and wife
(joint account)
The actual owner of the
account or, if combined
funds, the first individual
on the account
11. Religious, charitable or
educational tax-exempt
organization
The organization
4. Custodian account of a
minor (Uniform Gift to
Minors Act)
The minor
12. Partnership account held in
the name of the business or
account of multi-member
LLC (other than an LLC
described in item 10)
The partnership
5. Adult and minor
(joint account)
The adult or, if the minor is
the only contributor, the
minor
13. Association, club or other
tax- exempt organization
The organization
6. Account in the name of
guardian or committee for a
designated ward, minor or
incompetent person
The ward, minor or
incompetent person
14. A broker or registered
nominee
The broker or nominee
7. a. The usual revocable
savings trust account
(grantor is also trustee)
b. So-called trust account
that is not a legal or
valid trust under state
law
The grantor-trustee
The actual owner
15. Account with the Department
of Agriculture in the name of
a public entity (such as a state
or local government, school
district or prison) that receives
agricultural program
payments
The public entity
8. Sole proprietorship account
or account of single member
LLC
The owner
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON FORM W-9, Cont.
Obtaining a Number
If you don't have a TIN or you don't know your number, obtain Form SS-5, Application for a Social Security Number Card, or Form SS-4,
Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service and
apply for a number. Section references in these guidelines refer to sections under the Internal Revenue Code of 1986, as amended.
Payees Exempt From Backup Withholding
Even if the payee does not provide a TIN in the manner required, you are not required to backup withhold on any payments you make if the
payee is:
1.
An organization exempt from tax under section 501(a), any individual retirement account (IRA), or a custodial account under section
403(b)(7) if the account satisfies the requirements of section 401(f)(2).
2.
The United States or any of its agencies or instrumentalities.
3.
A state, the District of Columbia, a possession of the United States, or any of their political subdivisions or instrumentalities.
4.
A foreign government or any of its political subdivisions, agencies, or instrumentalities.
5.
An international organization or any of its agencies or instrumentalities.
Other payees that may be exempt from backup withholding include:
6.
A corporation.
7.
A foreign central bank of issue.
8.
A dealer in securities or commodities required to register in the United States, the District of Columbia, or a possession of the United
States.
9.
A futures commission merchant registered with the Commodity Futures Trading Commission.
10. A real estate investment trust.
11. An entity registered at all times during the tax year under the Investment Company Act of 1940.
12. A common trust fund operated by a bank under section 584(a).
13. A financial institution.
14. A middleman known in the investment community as a nominee or custodian.
15. A trust exempt from tax under section 664 or described in section 4947.
Payments Exempt From Backup Withholding
Dividends and patronage dividends that generally are exempt from backup withholding include:
•
Payments to nonresident aliens subject to withholding under section 1441.
•
Payments to partnerships not engaged in a trade or business in the United States and that have at least one nonresident alien partner.
•
Payments of patronage dividends not paid in money.
•
Payments made by certain foreign organizations.
•
Section 404(k) distributions made by an ESOP.
Interest payments that generally are exempt from backup withholding include:
•
Payments of interest on obligations issued by individuals. However, if you pay $600 or more of interest in the course of your trade or
business to a payee, you must report the payment. Backup withholding applies to the reportable payment if the payee has not provided a
TIN or has provided an incorrect TIN.
•
Payments of tax-exempt interest (including exempt-interest dividends under section 852).
•
Payments described in section 6049(b)(5) to nonresident aliens.
•
Payments on tax-free covenant bonds under section 1451.
•
Payments made by certain foreign organizations.
•
Mortgage or student loan interest paid to you.
Other types of payments that generally are exempt from backup withholding include:
•
Wages.
•
Distributions from a pension, annuity, profit-sharing or stock bonus plan, any IRA, or an owner-employee plan.
•
Certain surrenders of life insurance contracts.
•
Gambling winnings if withholding is required under section 3402(q). However, if withholding is not required under section 3402(q),
backup withholding applies if the payee fails to furnish a TIN.
•
Real estate transactions reportable under section 6045(e).
•
Cancelled debts reportable under section 6050P.
•
Distributions from a medical savings account and longterm care benefits.
•
Fish purchases for cash reportable under section 6050R.
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON FORM W-9, Cont.
Exempt payees described above should file Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE
PAYER, FURNISH YOUR TIN, WRITE "EXEMPT" ON THE FACE OF THE FORM AND RETURN IT TO THE PAYER. IF THE
PAYMENTS ARE INTEREST, DIVIDENDS OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM.
Certain payments other than interest, dividends and patronage dividends not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under Internal Revenue Code sections 6041, 6041A, 6042, 6044, 6045, 6049, 6050A and 6050N.
Privacy Act Notice. – Section 6109 of the Internal Revenue Code requires you to give your correct TIN to persons who must file
information returns with the IRS to report, among other things, interest, dividends, and certain other income paid to you. The IRS uses the
numbers for identification purposes and to help verify the accuracy of your tax return. The IRS may also provide this information to the
Department of Justice for civil and criminal litigation, and to cities, states and the District of Columbia to carry out their tax laws. You must
provide your TIN whether or not you are required to file a tax return. Payers must generally withhold 28% of taxable interest, dividend and
certain other payments to a payee who does not give a TIN to a payer. Certain penalties may also apply.
Penalties
(1) Penalty for Failure to Furnish TIN. If you fail to furnish your correct TIN to a requester, you are subject to a penalty of $50 for each
such failure unless your failure is due to reasonable cause and not to willful neglect.
(2) Civil Penalty for False Information With Respect to Withholding. — If you make a false statement with no reasonable basis that
results in no imposition of backup withholding, you are subject to a penalty of $500.
(3) Civil and Criminal Penalties for False Information. — Willfully falsifying certifications or affirmations may subject you to criminal
penalties including fines and/or imprisonment.
(4) Misuse of Taxpayer Identification Numbers. — If the requester discloses or uses TINs in violation of federal law, the requester may be
subject to civil and criminal penalties.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE.
Exhibit B
[IRS Form W-9 to be attached]
Exhibit D
WRITTEN CONSENT
ROADSTER, INC.
WRITTEN CONSENT OF THE STOCKHOLDERS IN LIEU OF
SPECIAL MEETING OF THE STOCKHOLDERS
The undersigned stockholders of Roadster, Inc., a Delaware corporation (the “Company”), who hold (i) a majority of the Company’s
outstanding capital stock, (ii) at least seventy percent (70%) of the shares of the Company’s Preferred Stock voting together as a separate
class on an as-converted to Common Stock basis and (iii) the holders of a majority of the outstanding shares of the Company’s Common
Stock not issued or issuable upon conversion of Preferred Stock voting together as a separate class (the “Requisite Holders”), pursuant to
Sections 228(a) and 251 of the Delaware General Corporation Law (the “DGCL”), hereby take the following actions and adopt the following
resolutions by written consent in lieu of a duly called meeting, with the same force and effect as if duly adopted at a special meeting of the
stockholders of the Company held for the purpose, effective as of the date set forth below when the requisite number of votes to approve such
actions have been obtained. All capitalized terms not otherwise defined herein shall have the definitions set forth in the Merger Agreement
(as defined below).
Approval of Merger
WHEREAS, each of the undersigned stockholders of the Company has reviewed the Agreement and Plan of Merger, dated as of
June 2, 2021, by and among the Company, CDK Global, Inc., a Delaware limited liability company (“Purchaser”), Spyder Merger Corp., a
Delaware corporation (“Merger Sub”), and the Stockholder Representative (as defined in the Merger Agreement) attached hereto as
Exhibit A (the “Merger Agreement”), pursuant to which Merger Sub will be merged with and into the Company, with the Company surviving
the merger and continuing as a wholly-owned subsidiary of Purchaser (the “Merger”).
WHEREAS, the Board of Directors of the Company (the “Board”) has determined that the Company’s entry into the Merger
Agreement, the Merger and the other transactions contemplated by the Merger Agreement are advisable and in the best interests of the
Company and its stockholders, has approved and adopted the Merger Agreement, the Merger and the other transactions contemplated by the
Merger Agreement, and has declared all of them advisable; and has recommended the approval and adoption by each of the Company’s
stockholders of the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement.
WHEREAS, each of the undersigned stockholders of the Company desires to adopt and approve the Merger Agreement, the Merger
and the other transactions contemplated by the Merger Agreement.
NOW, THEREFORE, BE IT:
RESOLVED: The undersigned stockholders of the Company hereby adopt and approve the Merger Agreement, the Merger and the other
transactions contemplated by the Merger Agreement, including the filing of the Certificate of Merger with the Delaware
Secretary of State and all other transactions contemplated thereby.
RESOLVED: That the undersigned stockholders of the Company hereby waive any notice requirement set forth in the Certificate of
Incorporation of the Company, the DGCL, the Bylaws of the Company or any other agreement among the Company and
any or all of the Company’s stockholders, each as so amended and currently in effect, with respect to the Merger
Agreement, the Merger, the transactions contemplated by the Merger Agreement and other matters contained herein.
Termination of Stockholder Agreements
WHEREAS, the undersigned stockholders of the Company, constituting more than 70% in equity interest of the stockholders of the
Company, desire to terminate certain stockholders’ agreements, including the Investors’ Rights Agreement, dated July 31, 2017, as amended,
the First Refusal and Co-Sale Agreement dated July 31, 2017, as amended, and the Voting Agreement dated July 31, 2017, as amended, by
and among the Company and certain stockholders named therein (collectively the “Stockholders’ Agreements”), contingent upon the
execution and delivery of the Merger Agreement and the consummation of the Merger, and effective at the Effective Time (as defined in the
Merger Agreement).
NOW, THEREFORE, BE IT:
RESOLVED: The undersigned stockholders of the Company hereby terminate the Stockholders’ Agreements contingent upon the
execution and delivery of the Merger Agreement and the consummation of the Merger, and effective at the Effective Time
(as defined in the Merger Agreement).
Stockholder Representative
RESOLVED: The Company is hereby authorized to enter into that certain Engagement Letter with the Stockholder Representative, in
substantially the form attached hereto as Exhibit B (the “Fortis Engagement Letter”), solely with respect to the provisions
therein regarding the payment of the engagement fee.
RESOLVED: The undersigned hereby approves the appointment of Fortis Advisors LLC to act as the Stockholder Representative for the
purpose of performing the obligations of the Stockholder Representative pursuant to the terms of the Merger Agreement,
including, without limitation, to act as the exclusive agent and attorney-in-fact for and on behalf of the stockholders in
connection with and to facilitate the consummation of the transactions contemplated by the Merger Agreement.
Exercise of “Drag Along”
WHEREAS: The undersigned hereby deems it advisable to and in the best interests of the Company and its Stockholders that the
Company exercise its “drag along” rights under Section 4 of the Voting Agreement dated July 31, 2017, as amended, by
and among the Company and certain stockholders named therein (the “Drag Along Exercise”).
NOW, THEREFORE, BE IT:
RESOLVED: That each undersigned stockholder, with respect only to himself, herself or itself, hereby approves the Drag Along Exercise.
Waiver of Appraisal Rights
WHEREAS: Any stockholder who does not vote in favor of the Merger (a “Dissenting Stockholder”) may, under certain circumstances by
following procedures prescribed by Section 262 of the DGCL, a copy of which is attached hereto as Exhibit C, exercise
appraisal rights under the DGCL to receive cash in an amount equal to the “fair value” of such stockholder’s shares as to
which such stockholder has exercised such dissenters’ or appraisal rights.
NOW, THEREFORE, BE IT:
RESOLVED: That each undersigned stockholder, with respect only to himself, herself or itself, (a) hereby acknowledges that (i) such
stockholder has received and read a copy of Section 262 of the DGCL, a copy of which is attached hereto as Exhibit C, and
(ii) such stockholder is aware of such stockholder’s rights to dissent to the Merger and request an appraisal of the “fair
value” of Shares held by such Stockholder pursuant to Section 262 of the DGCL, and (b) that by signing this Written
Consent, such Stockholder adopts the Merger Agreement and hereby approves the Merger and the other Related
Transactions (as defined in the Merger Agreement), and hereby irrevocably and unconditionally waives, and agrees not to
exercise, any dissenters’ or other similar rights (including, without limitation, any rights under Section 262 of the DGCL)
for such shares in accordance with the DGCL, any other applicable laws or otherwise with respect to the Merger
Agreement, the Merger and the Related Transactions.
General
RESOLVED: That all acts and deeds heretofore done by any director or officer of the Company intended to carry out the intent of the
foregoing resolutions are hereby ratified and approved in all respects.
RESOLVED: That this Written Consent of Stockholders be filed with the records of meetings of the stockholders.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the undersigned has executed this written consent as of the date set forth below.
If Stockholder is an Entity:
Print Name of Entity: _______________________________
Signature: _______________________________
Name of Authorized Signatory: _______________________________
Title of Authorized Signatory: _______________________________
Address: _______________________________
_______________________________
Date: _______________________________
If Stockholder is an Individual:
Signature: _______________________________
Print Name: _______________________________
Address: _______________________________
_______________________________
Date: _______________________________
EXHIBIT A
Merger Agreement
See attached.
EXHIBIT B
Fortis Engagement Letter
See attached.
EXHIBIT C
Delaware General Corporate Law § 262
§ 262. Appraisal rights [For application of this section, see § 17; 82 Del. Laws, c. 45, § 23; and 82 Del. Laws, c. 256, § 24].
(a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to §228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder’s shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word “stockholder” means a holder of record of stock in a corporation; the words “stock”
and “share” mean and include what is ordinarily meant by those words; and the words “depository receipt” mean a receipt or other instrument issued by a
depository representing an interest in 1 or more shares, or fractions thereof, solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected
pursuant to § 251 (other than a merger effected pursuant to § 251(g) of this title), § 252, § 254, § 255, § 256, § 257, § 258, § 263 or § 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be available for the shares of any class or series of stock, which stock, or depository
receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of the meeting of stockholders to act upon the
agreement of merger or consolidation (or, in the case of a merger pursuant to § 251(h), as of immediately prior to the execution of the agreement of
merger), were either: (i) listed on a national securities exchange or (ii) held of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of
the stockholders of the surviving corporation as provided in § 251(f) of this title.
(2) Notwithstanding paragraph (b)(1) of this section, appraisal rights under this section shall be available for the shares of any class or series of stock of a
constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to §§251, 252, 254, 255, 256,
257, 258, 263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock (or depository receipts in respect thereof) or
depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts described in the foregoing paragraphs (b)(2)a. and b. of this section; or
d. Any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the
foregoing paragraphs (b)(2)a., b. and c. of this section.
(3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under § 253 or § 267 of this title is not owned by the parent
immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation.
(4) [Repealed.]
(c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or
series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the
corporation. If the certificate of incorporation contains such a provision, the provisions of this section, including those set forth in subsections (d),(e), and
(g) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for notice of
such meeting (or such members who received notice in accordance with §255(c) of this title) with respect to shares for which appraisal rights are available
pursuant to subsection (b) or (c) of this section that appraisal rights are available for any or all of the shares of the constituent corporations, and shall
include in such notice a copy of this section and, if 1 of the constituent corporations is a nonstock corporation, a copy of §114 of this title. Each stockholder
electing to demand the appraisal of such stockholder’s shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of such stockholder’s shares; provided that a demand may be delivered to the corporation by electronic transmission if
directed to an information processing system (if any) expressly designated for that purpose in such notice. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such stockholder’s shares. A
proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to § 228, § 251(h), § 253, or § 267 of this title, then either a constituent corporation before the
effective date of the merger or consolidation or the surviving or resulting corporation within 10 days thereafter shall notify each of the holders of any class
or series of stock of such constituent corporation who are entitled to appraisal rights of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of such constituent corporation, and shall include in such notice a copy of this section and,
if 1 of the constituent corporations is a nonstock corporation, a copy of § 114 of this title. Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the effective date of the merger or consolidation. Any stockholder entitled to appraisal rights
may, within 20 days after the date of giving such notice or, in the case of a merger approved pursuant to § 251(h) of this title, within the later of the
consummation of the offer contemplated by § 251(h) of this title and 20 days after the date of giving such notice, demand in writing from the surviving or
resulting corporation the appraisal of such holder’s shares; provided that a demand may be delivered to the corporation by electronic transmission if
directed to an information processing system (if any) expressly designated for that purpose in such notice. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such holder’s shares. If such
notice did not notify stockholders of the effective date of the merger or consolidation, either (i) each such constituent corporation shall send a second notice
before the effective date of the merger or consolidation notifying each of the holders of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or consolidation or (ii) the surviving or resulting corporation shall send such a second notice
to all such holders on or within 10 days after such effective date; provided, however, that if such second notice is sent more than 20 days following the
sending of the first notice or, in the case of a merger approved pursuant to § 251(h) of this title, later than the later of the consummation of the offer
contemplated by § 251(h) of this title and 20 days following the sending of the first notice, such second notice need only be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal of such holder’s shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is required to give either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For purposes of determining the stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than 10 days prior to the date the notice is given, provided, that if the notice is given
on or after the effective date of the merger or consolidation, the record date shall be such effective date. If no record date is fixed and the notice is given
prior to
the effective date, the record date shall be the close of business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) of this section hereof and who is otherwise entitled to appraisal rights, may commence an appraisal proceeding by filing a petition in
the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60
days after the effective date of the merger or consolidation, any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a
named party shall have the right to withdraw such stockholder’s demand for appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (d)
of this section hereof, upon request given in writing (or by electronic transmission directed to an information processing system (if any) expressly
designated for that purpose in the notice of appraisal), shall be entitled to receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger or consolidation (or, in the case of a merger
approved pursuant to § 251(h) of this title, the aggregate number of shares (other than any excluded stock (as defined in § 251(h)(6)d. of this title)) that
were the subject of, and were not tendered into, and accepted for purchase or exchange in, the offer referred to in § 251(h)(2)), and, in either case, with
respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such statement shall be given to the
stockholder within 10 days after such stockholder’s request for such a statement is received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under subsection (d) of this section hereof, whichever is later. Notwithstanding subsection (a)
of this section, a person who is the beneficial owner of shares of such stock held either in a voting trust or by a nominee on behalf of such person may, in
such person’s own name, file a petition or request from the corporation the statement described in this subsection.
(f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached
by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the
Court, and the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails
to comply with such direction, the Court may dismiss the proceedings as to such stockholder. If immediately before the merger or consolidation the shares
of the class or series of stock of the constituent corporation as to which appraisal rights are available were listed on a national securities exchange, the
Court shall dismiss the proceedings as to all holders of such shares who are otherwise entitled to appraisal rights unless (1) the total number of shares
entitled to appraisal exceeds 1% of the outstanding shares of the class or series eligible for appraisal, (2) the value of the consideration provided in the
merger or consolidation for such total number of shares exceeds $1 million, or (3) the merger was approved pursuant to § 253 or § 267 of this title.
(h) After the Court determines the stockholders entitled to an appraisal, the appraisal proceeding shall be conducted in accordance with the rules of the
Court of Chancery, including any rules specifically governing appraisal proceedings. Through such proceeding the Court shall determine the fair value of
the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with interest, if any, to
be paid upon the amount determined to be the fair value. In determining such fair value, the Court
shall take into account all relevant factors. Unless the Court in its discretion determines otherwise for good cause shown, and except as provided in this
subsection, interest from the effective date of the merger through the date of payment of the judgment shall be compounded quarterly and shall accrue at
5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective date of the
merger and the date of payment of the judgment. At any time before the entry of judgment in the proceedings, the surviving corporation may pay to each
stockholder entitled to appraisal an amount in cash, in which case interest shall accrue thereafter as provided herein only upon the sum of (1) the difference,
if any, between the amount so paid and the fair value of the shares as determined by the Court, and (2) interest theretofore accrued, unless paid at that time.
Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its
discretion, proceed to trial upon the appraisal prior to the final determination of the stockholders entitled to an appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has submitted such stockholder’s
certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that such
stockholder is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court’s decree may be
enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorney’s fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares
entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no stockholder who has demanded appraisal rights as provided in subsection (d) of this
section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other
distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however, that if no
petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or
resulting corporation a written withdrawal of such stockholder’s demand for an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just;
provided, however that this provision shall not affect the right of any stockholder who has not commenced an appraisal proceeding or joined that
proceeding as a named party to withdraw such stockholder’s demand for appraisal and to accept the terms offered upon the merger or consolidation within
60 days after the effective date of the merger or consolidation, as set forth in subsection (e) of this section.
(l) The shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation.
8 Del. C. 1953, § 262; 56 Del. Laws, c. 50; 56 Del. Laws, c. 186, § 24; 57 Del. Laws, c. 148, §§ 27-29; 59 Del. Laws, c. 106, § 12; 60 Del. Laws, c. 371,
§§ 3-12; 63 Del. Laws, c. 25, § 14; 63 Del. Laws, c. 152, §§ 1, 2; 64 Del. Laws, c. 112, §§ 46-54; 66 Del. Laws, c. 136, §§ 30-32; 66 Del. Laws, c. 352,
§ 9; 67 Del. Laws, c. 376, §§ 19, 20; 68 Del. Laws, c. 337, §§ 3, 4; 69 Del. Laws, c. 61, § 10; 69 Del. Laws, c. 262, §§ 1-9; 70 Del. Laws, c. 79, §
16; 70 Del. Laws, c. 186, § 1; 70 Del. Laws, c. 299, §§ 2, 3; 70 Del. Laws, c. 349, § 22; 71 Del. Laws, c. 120, § 15; 71 Del. Laws, c. 339, §§ 49-52; 73
Del. Laws, c. 82, § 21; 76 Del. Laws, c. 145, §§ 11-16; 77 Del. Laws, c. 14, §§ 12, 13; 77 Del. Laws, c. 253, §§ 47-50; 77 Del. Laws, c. 290, §§ 16,
17; 79 Del. Laws, c. 72, §§ 10, 11; 79
Del. Laws, c. 122, §§ 6, 7; 80 Del. Laws, c. 265, §§ 8-11; 81 Del. Laws, c. 354, §§ 9, 10, 17; 82 Del. Laws, c. 45, § 15; 82 Del. Laws, c. 256, § 15;
Exhibit E
DATA ROOM INDEX
See attached.
Exhibit F
PAYING AGENT AGREEMENT
PNC Bank, National Association
PAYING AGENT AGREEMENT
This Paying Agent Agreement (this “Agreement”) dated as of June 2, 2021 (the “Agreement Date”) is entered into by and among
CDK Global, Inc., a Delaware corporation (“Purchaser”), Fortis Advisors LLC, a Delaware limited liability company, solely in its
capacity as the representative of the stockholders of the Company (the “Stockholder Representative”) and PNC Bank, National
Association, as paying agent (the “Paying Agent”).
WHEREAS, the Purchaser, Spyder Merger Corp., a Delaware corporation and a wholly-owned Subsidiary of Purchaser,
Roadster, Inc., a Delaware corporation (the “Company”), and the Stockholder Representative, amongst others, have entered
into that certain Agreement and Plan of Merger, dated June 2, 2021 (the “Merger Agreement”);
WHEREAS, the Purchaser and the Stockholder Representative desire that Paying Agent facilitate certain payments due to
Company securityholders (“Company Securityholders”) as contemplated by the Merger Agreement, which may be subject to
reduction or withholding under the Internal Revenue Code of 1986, as amended (the “Code”) and any other applicable law
(“Withholding Amounts”), as applicable.
NOW THEREFORE, in consideration of the mutual covenants herein contained and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1)
Appointment and Acceptance. The Purchaser and the Stockholder Representative hereby appoint PNC Bank, National
Association to act as the Paying Agent, and PNC Bank, National Association accepts such appointment to act as Paying
Agent pursuant to the terms of this Agreement.
2)
Account: Payment Fund. On the date hereof (the “Payment Date”) (defined below), Purchaser shall deposit with Paying
Agent, pursuant to the wire instructions on Exhibit A, immediately available funds into the payment fund (the “Payment
Fund”), sufficient to pay:
a)
amounts due to Company Securityholders on the date of payment thereto; and
b)
fees due to the Paying Agent at the Closing as set forth on Exhibit B.
The Paying Agent shall receive the initial deposit and any additional deposits and agrees to hold the Payment Fund in a
separate and distinct account (the “Account”) which is hereby established and which will be held and disbursed by the
Paying Agent only in accordance with the express terms and conditions of this Agreement.
After the Payment Date, from time to time, the following additional deposits may be delivered to the Paying Agent for
distribution to the Company Securityholders (the “Additional Amounts”): (i) any portion of the Indemnity Holdback Amount
(as defined in the Merger Agreement) payable to the Company Securityholders (if any) pursuant to Section 2.8(c) of the
Merger Agreement, (ii) any portion of the Adjustment Holdback Amount (as defined in the Merger Agreement) payable to
the Company Securityholders (if any) pursuant to Section 3.3(e) of the Merger Agreement and (ii) any
cash disbursements (if any) made from the Stockholder Representative Amount (as defined in the Merger Agreement)
pursuant to Section 11.3 of the Merger Agreement.
3)
Spreadsheets and Payments.
a)
The Stockholder Representative has caused to be delivered to Paying Agent on the date hereof a Microsoft Excel
spreadsheet (the “Closing Spreadsheet”) containing a list of the Company Securityholders and the following
information for each Company Securityholder:
i)
name, address, email address and Tax Identification Number (if available);
ii)
for each Company Securityholder who holds Company stock (a “Stockholder”), on a row-by-row basis per
security, list the class of stock (e.g. common, preferred), for preferred stock, the series thereof (e.g., Series
A, Series B, Series B-1), the number of shares of each (e.g., 4,650 shares), certificate number(s), and the
payment amount (expressed in United States (U.S.) dollar amounts, rounded to the second decimal place)
for such Stockholder;
iii)
for each Company Securityholder who holds Company warrants (a “Warrantholder”), on a row-by-row basis
per security, list the class and series of company stock subject thereto, the number of shares of each, the
warrant certificate number, issuance date, and the payment amount (expressed in United States (U.S.) dollar
amounts, rounded to the second decimal place) for such Warrantholder;
iv)
for each Company Securityholder who holds Company options (an “Optionholder”), on a row-by-row basis
per option grant, list the number of options granted and the grant date and the payment amount (expressed
in United States (U.S.) dollar amounts, rounded to the second decimal place) for such Optionholder; and
v)
any other information that a Company Securityholder must verify during completion of the Solicitation
Documents (defined below) before such Company Securityholder can receive payment.
To the extent Purchaser and the Stockholder Representative desire Paying Agent to facilitate the payment of Merger
Agreement related transaction expenses to non-securityholders (e.g., legal fees, investment banker fees, etc.)
(“Transaction Expenses”), the Stockholder Representative shall cause the following information to be included in the
Closing Spreadsheet and/or Payment Spreadsheets: payee name, address and wiring instructions.
Unless otherwise directed by Purchaser or the Stockholder Representative, any de minimis amounts attributable to
rounding discrepancies may be added to or deducted from payments made to the largest Holder.
b)
If the Purchaser or the Stockholder Representative desire Paying Agent to make additional payments beyond those
contemplated by Section 2(a), Purchaser or the Stockholder Representative shall provide or cause to be provided to
Paying Agent, at least two (2) Business Days prior to date on which such payments shall be made, with an
Additional Spreadsheet in the same format as Schedule A (an “Additional Spreadsheet” and, together
with the “Closing Spreadsheet,” the “Payment Spreadsheet(s)”). Solely to the extent applicable, each Payment
Spreadsheet shall identify any additional tax reporting direction to the extent it differs from Section 6 of this
Agreement.
c)
If sufficient funds to cover the dollar amounts allocated on the Payment Spreadsheet(s) are received by Paying
Agent in the Payment Fund prior to 10:00 a.m. Eastern Standard Time on the Payment Date or applicable date
thereafter, Paying Agent shall make commercially reasonable best efforts to process payments to Eligible Payees
(defined below) no later than two (2) Business Days after the such date in accordance with the Payment
Spreadsheet(s), this Agreement, and each Company Securityholder’s payment instructions provided within the
Company Securityholder’s completed Solicitation Documents. On or after the Payment Date, Paying Agent shall pay
any Eligible Payees for whom Paying Agent has received all information necessary for such payment to be made. All
payments shall be made in United States (U.S.) dollars and shall be made by ACH, check or wire transfer (in each
case as requested by each Eligible Payee). The Paying Agent may deduct fees from an Eligible Payees payment if
the Eligible Payee elects to receive payment by wire or ACH. The Paying Agent will not deduct fees for payments
made by check.
d)
On the Payment Date, the Purchaser shall pay or cause to be paid to the Paying Agent fees for the Paying Agent’s
services hereunder as set forth in Exhibit B attached hereto. Paying Agent’s agreement to the terms and conditions
of this Agreement and the fee schedule attached assumes that the Payment Spreadsheets, records of the Company
or its transfer agent are accurate, received in a timely fashion and in good order so that conversion of the records
may be completed efficiently and additional balancing and/or correcting of the records shall not be not required. If
the records are received late, or are inaccurate, incomplete and/or otherwise not in good order, the solicitation
process, mailing of materials and payments to Company Securityholders may need to be delayed and additional
fees may apply as appropriate for time spent correcting and/or balancing the records. The Stockholder
Representative or its counsel shall work with Paying Agent to ensure the accuracy of the Payment Spreadsheet(s)
and to correct any inaccuracies or inconsistencies (if any) within the Payment Spreadsheet(s).
e)
From time to time after the Payment Date, the Stockholder Representative may provide Additional Spreadsheets
regarding the payments of Additional Amounts together with written instructions directing the Paying Agent to make
such payments. Once sufficient funds to cover the dollar amounts allocated on the Additional Spreadsheets are
received by Paying Agent, Paying Agent shall make commercially reasonable best efforts to process payments to
Eligible Payees on the date on which such funds are received (and in no event later than the second Business Day
following the date on which such funds are received) in accordance with the applicable Additional Spreadsheets, this
Agreement, and each Company Securityholder’s payment instructions provided within the Company
Securityholder’s completed Solicitation Documents. Paying Agent shall pay any Eligible Payees for whom Paying
Agent has received all information necessary for such payment to be made. All payments shall be made in United
States (U.S.) dollars and shall be made by ACH, check or wire transfer (in each case as requested by, and at the
expense of, each Eligible Payee).
4)
Document Solicitation. Approval.
a)
The Paying Agent shall deliver no later than one (1) Business Day after its receipt of the Closing Spreadsheet (the
“Solicitation Date”) to each Company Securityholder (using the email address provided in the Closing Spreadsheet)
the applicable documents described on Exhibit C (the “Solicitation Documents”) required for completion by each
Company Securityholder. Such delivery of Solicitation Documents shall be conducted electronically through Paying
Agent’s online portal (“PNC PAID”) or by mail or email if (i) there is no email address for the Company Securityholder
or (ii) the Company Securityholder prefers to present the Solicitation Documents offline. Such Delivery of Solicitation
Documents was conducted electronically through PNC PAID or by mail if (i) there is no email address for the
Company Securityholder or (ii) the Company Securityholder requested the Solicitation Documents offline. Prior to
and as a condition of payment, the Company Securityholder will have delivered (online or otherwise) to the Paying
Agent Solicitation Documents properly completed in accordance with the instructions therein no later than two (2)
Business Days prior to the disbursement of payment thereto by the Paying Agent (such Company Securityholder
referred to herein as an “Eligible Payee”). The Paying Agent may reasonably rely on the payment instructions
provided by the Eligible Payee within the completed Solicitation Documents without any further authentication or
validation of the payment instructions provided for the registered holder. In the event the Stockholder Representative
directs Paying Agent to mail the Solicitation Documents, the Paying Agent shall send such Solicitation Documents
via mail to the addresses set forth on the Payment Spreadsheet. Purchaser and the Stockholder Representative
acknowledge such process may not be as timely as using PNC PAID, and additional fees will apply (as set forth on
Exhibit B). Paying Agent shall send a second solicitation via PNC PAID (or, to the extent directed by the Stockholder
Representative, a second mailing of Solicitation Documents) to all Company Securityholders that have failed to
deliver properly completed Solicitation Documents by the date that is seven (7) months following the Solicitation
Date. If requested by Paying Agent, Stockholder Representative or its counsel shall provide instruction concerning
any issues related to the completion of any Solicitation Document.
b)
The Paying Agent will examine the Solicitation Documents delivered or mailed to the Paying Agent by Company
Securityholders to ascertain that (i) the Solicitation Documents are properly completed and duly executed in
accordance with the instructions set forth therein, and (ii) any other documents contemplated by a Solicitation
Document are properly completed and duly executed in accordance with the applicable Solicitation Document. In
cases where any Solicitation Document has been improperly completed or executed or where the shares presented
are not in proper form for transfer, or if some other irregularity exists in connection with the surrender of Company
stock, Company options or Company warrants, as applicable, the Paying Agent may consult with the Purchaser and
the Stockholder Representative on taking such actions as are necessary to cause such irregularity to be corrected.
In this regard, the Paying Agent is authorized to waive an irregularity in connection with the surrender of shares,
options or warrants after review of the irregularity with the Purchaser and the Stockholder Representative and after
approval in writing of the Authorized Representatives, provided that the Paying Agent agrees that waiving such
irregularity shall not cause the Paying Agent to be subjected to any potential liability related thereto and shall be
indemnified in accordance with the terms of Section 7 of this Agreement. In the absence of such approval, the
Paying Agent is not authorized to waive any irregularity. In the event the irregularity cannot be remedied with
consultation of the Purchaser, the Stockholder Representative or by the Company Securityholders within 30 days of
receipt by the Paying Agent, the Paying Agent shall return the Solicitation
Documents (if provided by mail) and certificates including any related materials to the applicable Company
Securityholder indicating the irregularity which prevents the Paying Agent from performing its duties pursuant to this
Agreement.
c)
The Paying Agent will respond as soon as reasonably practicable to any telephone, electronic mail, or mail requests
for information relating to the book-entry shares and the payment of cash with respect thereof. The Stockholder
Representative acknowledges that the Paying Agent, in its discretion, may request direction from the Stockholder
Representative pursuant to Company Securityholders’ requests, and the Stockholder Representative warrants that
each Authorized Representative of the Stockholder Representative is authorized to provide such direction.
d)
Purchaser and the Stockholder Representative hereby instruct the Paying Agent that the surrender of physical stock
certificates to the Paying Agent is not expressly or strictly required under the Merger Agreement. Accordingly,
surrender or delivery by Company Securityholders to the Paying Agent of original unit certificates will not be required
in connection with the services contemplated by this Agreement.
e)
For payments to anyone other than the Company Securityholder listed on the Payment Spreadsheet(s) (a
“Transferee”), Paying Agent will not process such payment until it receives from the Transferee satisfactory written
instructions/documentation supporting such request including a signature medallion guarantee by an eligible
guarantor with the appropriate surety backing covering the dollar amount of the payment or direction from Purchaser
or its counsel. A Transferee will be deemed to be an Eligible Payee and will receive all subsequent proceeds under
the Merger (as defined in the Merger Agreement). The Paying Agent is authorized to consult with the Stockholder
Representative or its counsel to resolve any inconsistencies or inaccuracies presented during this payment process.
f)
Paying Agent shall require each Eligible Payee to complete and submit an Internal Revenue Service (“IRS”) Form
W-9 or the applicable version of Form W-8, as applicable, and other forms and documents related to tax certification
the Paying Agent may reasonably request. If Paying Agent does not receive such documentation, a portion of any
payment may be withheld and remitted to the appropriate tax authorities, as required by the Code, or by state and
local laws.
g)
The individuals (“Authorized Representatives”) set forth on Exhibit D-1 and Exhibit D-2 are authorized to take action,
give direction or execute documents on behalf of the Purchaser and Stockholder Representative, respectively, or to
take any such other actions on behalf of the Purchaser or the Stockholder Representative, respectively, as may be
set forth herein. For any funds transfer instructions directed by the Purchaser or the Stockholder Representative
outside of the Payment Spreadsheet or completed Solicitation Documents, the Paying Agent is authorized to seek
confirmation of such funds transfer instructions by a single telephone call-back to one of the applicable Authorized
Representatives. Paying Agent, acting reasonably, may rely upon the confirmation of anyone purporting to be that
Authorized Representative. The persons and telephone numbers designated for call-backs may be changed only in
writing executed by an Authorized Representative and received by Paying Agent. No funds will be disbursed until an
Authorized Representative is able to confirm such instructions by telephone call-back. The Stockholder
Representative
acknowledges this security procedure set forth herein to be commercially reasonable. The Paying Agent and the
beneficiary’s bank in any funds transfer may rely solely upon any account numbers or similar identifying numbers
provided by the Company Securityholders or confirmed by an Authorized Representative. The Stockholder
Representative acknowledges that there are certain security, corruption, transmission error and access availability
risks associated with using open networks such as the internet and the Stockholder Representative assumes such
risks.
h)
The Purchaser and the Stockholder Representative may instruct Paying Agent to grant certain authorized
individuals, (each an “Authorized Individual”), as set forth on Exhibit E-1 and E-2, respectively, access to information
regarding the Payment Fund via PNC PAID. Each Authorized Individual must agree to comply with the PNC PAID
Terms and Conditions and any other provisions required by Paying Agent to access PNC PAID. The Purchaser must
provide written notice to Paying Agent to change or remove any access previously authorized and granted. The
Purchaser and the Stockholder Representative each understands that revocation of the authorization will not affect
any action taken by Paying Agent, or any information that Paying Agent has already released based upon the
Purchaser or the Stockholder Representative’s previously granted authorization, prior to Paying Agent’s actual
receipt and processing of any request to change or remove the Authorized Individual.
i)
The Authorized Individual may disclose any Confidential Information to its affiliates and its and their respective
directors, officers, employees, auditors and/or agents (collectively, “Authorized Individual Representatives”) who
need to know such information, provided that such Authorized Individual Representatives have agreed in writing to
maintain the confidentiality of the Confidential Information in a manner no less protective than as set forth herein.
5)
Tax Certifications and Reporting.
a)
Subject to Section 4(c), Paying Agent, Stockholder Representative and the Purchaser agree to the following tax
reporting for U.S. Tax purposes:
i)
Payments to Stockholders and/or Warrantholders who are U.S. Persons. Unless otherwise identified by the
Stockholder Representative on the Payment Spreadsheet as dividends, interest or other reportable income
(collectively, “Other Income”) not reportable on IRS Form 1099-B, for each Stockholder and/or Warrantholder
who is a US person, Paying Agent will prepare and file IRS Form 1099-B and any other applicable U.S. tax
forms and report such payments as gross proceeds. Notwithstanding the foregoing, if the Stockholder
Representative set forth on the Payment Spreadsheet that payments made by the Paying Agent to a
Stockholder and/or Warrantholder who is a U.S. person are Other Income, Stockholder Representative will
cause to be provided the applicable Withholding Amounts on the Payment Spreadsheet for any such
payments and Paying Agent will prepare and file the applicable U.S. tax forms as instructed by the
Stockholder Representative.
ii)
Payments to Stockholders and/or Warrantholder who are Foreign Payees. Unless otherwise identified by the
Stockholder Representative on the Payment
Spreadsheet as Other Income, for each Stockholder and/or Warrantholder who is a Non-Resident Alien
“NRA” individual or foreign entity (referred to herein as a “Foreign Payee”), Paying Agent will not report or
withhold from gross proceed payments. Notwithstanding the foregoing, if the Stockholder Representative
sets forth on the Payment Spreadsheet that payments made by the Paying Agent to Foreign Payees are
Other Income, the Stockholder Representative will cause to be provided the applicable Withholding Amounts
on the Payment Spreadsheet for any such payments and Paying Agent will make the appropriate withholding
and prepare and file IRS Form 1042-S (or any other appropriate tax form).
iii)
Payments to Non-Employee Option Holders who are U.S. Persons. Paying Agent will prepare and file IRS
Form 1099-NEC (or any other appropriate tax form) for any payments made by the Paying Agent to Non-
Employee Optionholders who are U.S. persons (actual or presumed).
iv)
Payments to Non-Employee Option Holders who are Non-Resident Aliens. Paying Agent will not report nor
withhold any amounts for a Foreign Payee Non-Employee Optionholder. Notwithstanding the foregoing, if the
Stockholder Representativesets forth on the Payment Spreadsheet that payments made by the Paying Agent
to Non-Employee Optionholders are for options in lieu of wages for work performed within the United States
(including any territories thereof), the Stockholder Representative shall cause to be provided the applicable
Withholding Amounts on the Payment Spreadsheet for any such payments and Paying Agent shall make the
appropriate withholding and prepare and file IRS Form 1042-S (or any other appropriate tax form).
v)
The securities being sold pursuant to the Merger Agreement shall not be classified as “covered securities”
for purposes of the reporting requirements of the Treasury Regulations promulgated under Section 6045A of
the IRC unless represented on the Closing Spreadsheet to the Paying Agent that the securities are “covered
securities” for such purposes. If the securities are represented as “covered securities”, each Company
Securityholder’s date of acquisition and cost basis for the applicable security shall be included on the Closing
Spreadsheet, along with such other information as is reasonably requested by the Paying Agent for sending
accurate and complete IRS Form 1099-B information to the Company Securityholders.
b)
The Paying Agent will not report nor withhold from any amounts set forth on the Payment Spreadsheet as
Transaction Expenses. The Paying Agent will have no obligation to collect any tax forms and the Paying Agent will
not be deemed payor, nor withholding agent for any amounts set forth as Transaction Expenses.
c)
The Stockholder Representative agrees the Paying Agent may seek tax counsel or advice from tax experts with
respect to reporting and withholding as required by this Agreement or applicable tax law. Except as otherwise
agreed herein, the Stockholder Representative acknowledges the Paying Agent has full, complete and final authority
regarding all determinations concerning withholding requirements and responsibilities in accordance with applicable
federal and state tax certification and reporting regulations.
6)
Duties of Paying Agent.
a)
The Paying Agent shall have no duties or obligations other than those specifically set forth herein or as may be
subsequently agreed in writing by Purchaser and Paying Agent which shall be deemed purely ministerial in nature
and no other duties, including but not limited to any fiduciary duty and no implied duties or obligations shall be read
into this Agreement.
b)
The Paying Agent shall be protected in relying and acting, or refusing to act, without further investigation upon any
certificate or certification, instruction, direction, statement, request, consent, agreement, records, or other instrument
(collectively “Certificates and Instructions”) whatsoever furnished to the Paying Agent by an Authorized
Representative, not only as to its due execution and validity and the effectiveness of its provisions, but also as to the
truth and accuracy of any information therein contained, which the Paying Agent shall in good faith believe to be
genuine or to have been signed or presented by a proper person or persons. The Paying Agent shall have no
responsibility or liability for the accuracy or inaccuracy of such Certificates and Instructions.
c)
The Paying Agent shall not be required to take any action hereunder which might, in Paying Agent’s sole judgment,
require Paying Agent to expend or risk its own funds or otherwise incur any financial liability or to take any legal
action or commence any proceeding in connection with this Agreement.
d)
The Paying Agent may consult counsel satisfactory to Paying Agent and the advice or opinion of such counsel shall
be full and complete authorization and protection in respect of any action taken or omitted by Paying Agent in good
faith and in accordance with such advice or opinion of counsel and such advice of counsel.
e)
The Paying Agent shall have no obligation to make any payment pursuant to this Agreement unless Purchaser has
deposited sufficient amounts to fund such payments.
f)
Purchaser and the Stockholder Representative acknowledge and agree that the Paying Agent is not a party to, is
wholly unfamiliar with, is not bound by, and has no duties or obligations under the Merger Agreement and that all
references in this Agreement to the Merger Agreement are for convenience, and that the Paying Agent shall have no
implied duties beyond the express duties set forth in this Agreement. Any inconsistency between this Agreement on
the one hand and the Merger Agreement and the Solicitation Documents on the other shall be resolved in favor of
the Merger Agreement and the Solicitation Documents, with the qualification that (i) the Paying Agent is not a party
to the Merger Agreement and as such is not subject to its terms, as noted above, and (ii) the rights and obligations
of the Paying Agent shall be governed solely by the provisions of this Agreement. The Paying Agent shall not be
liable or responsible for any failure of any party to the Merger Agreement or any Company Securityholder to comply
with any of such party’s obligations relating to the Merger, including without limitation, obligations under applicable
securities laws.
g)
The Paying Agent may perform any of its duties hereunder either directly or, with Purchaser’s prior written consent,
through agents or attorneys.
h)
The Paying Agent is authorized to comply with a legal garnishment, attachment, levy, restraining notice or court
order that is validly served with respect to any of the Payment Fund, or the delivery thereof shall be stayed or
enjoined by an order of a court of
competent jurisdiction, Paying Agent is hereby expressly authorized, in its sole discretion, to obey and comply with
all such orders so entered or issued, whether with or without jurisdiction, and in the event that Paying Agent obeys
or complies with any such order it shall not be liable to the Purchaser or to any other person by reason of such
compliance notwithstanding such order be subsequently reversed, modified, annulled, set aside or vacated.
i)
The Account shall be maintained in accordance with applicable laws, rules and regulations and policies and
procedures of general applicability to accounts established by the Paying Agent.
j)
Purchaser and the Stockholder Representative understand and acknowledge that The PNC Financial Services
Group, Inc., a Pennsylvania corporation (“PNC”) offers a diversified set of financial products and services, and may
currently, or in the future, have relationships with parties whose interests may conflict with the interests of Purchaser
and the Stockholder Representative. For the avoidance of doubt, although Stockholder Representative is a wholly-
owned subsidiary of Paying Agent, Paying Agent shall act in all respects in accordance with the terms and
conditions set forth in this Agreement.
7)
Indemnification; Exculpation.
a)
Purchaser and the Stockholder Representative (solely on behalf of the Company Securityholders and in its capacity
as the Stockholder Representative, not in its individual capacity) jointly and severally agree to indemnify, defend,
protect and hold harmless the Paying Agent and its officers, directors, employees, affiliates, agents and controlling
persons from and against any and all losses, liabilities, claims, costs, damages or expenses, including, without
limitation, reasonable attorneys’ fees and expenses, incurred or made, arising out of or in connection with this
Agreement or the performance of the Paying Agent’s obligations under the provisions of this Agreement or any
related transaction or any claim, litigation, investigation or proceeding related to any of the foregoing (including with
respect to the successful defense, in whole or in part, of a claim that the Paying Agent engaged in willful misconduct,
or acted with gross negligence, whether or not any such indemnified parties is a party thereto, including but not
limited to, withholding or employment taxes or related amounts payable in respect of a payment made hereunder,
acting, or refusing to act, in reliance upon any signature, endorsement, assignment, certificate, order, request,
notice, report, instructions, record, including but not limited to records concerning tax certification and cost basis
information provided to it, or other instrument or document believed by the Paying Agent in good faith to be valid,
genuine and sufficient; provided, however, such indemnification shall not apply to any such act or omission finally
adjudicated to have been directly caused by the fraud, bad faith, willful misconduct or gross negligence of the
Paying Agent. As between Purchaser and the Stockholder Representative, any indemnity paid to any indemnitee
hereunder shall be borne by the party determined by a court of competent jurisdiction to be responsible for causing
the indemnitee losses against which the Paying Agent is entitled to indemnification or, if no such determination is
made, then 50% by Purchaser and 50% by the Stockholder Representative (provided that any amounts paid by the
Stockholder Representative shall be solely on behalf of the Company Securityholders).
b)
The indemnities provided in Section 7 shall survive the resignation or discharge of the Paying Agent or the
termination or assignment of this Agreement. Anything in this Agreement to the contrary notwithstanding: in no event
shall the Paying Agent be liable under or in connection with the Agreement for indirect, special, incidental, punitive
or consequential losses or damages of any kind whatsoever, including but not limited to lost profits, whether or not
foreseeable, even if the Paying Agent has been advised of the possibility thereof and regardless of the form of
action in which such damages are sought’ and Paying Agent shall be liable to Parent only for actual, direct damages
that are solely attributable to the Paying Agent’s fraud, bad faith, gross negligence or willful misconduct in
performing duties as outlined in this Paying Agent Agreement.
c)
The Paying Agent shall give written notice as promptly as practicable to Purchaser and the Stockholder
Representative of any suit, claim, proceeding, demand or liability of which the Paying Agent has received written
notice (collectively, "Claim") arising out of or in connection with the performance of the Paying Agent's obligations
under the provisions of this Agreement and will reasonably cooperate with the Stockholder Representative, at the
Stockholder Representative’s expense, in the defense or settlement thereof. Failure to provide prompt notice shall
not affect the indemnification provided hereunder except to the extent that the Stockholder Representative has
actually and materially been prejudiced as a result of such failure. The Stockholder Representative shall have sole
control over the defense of any Claim and of all negotiations for its settlement or compromise, including the retention
of counsel reasonably satisfactory to the Paying Agent; provided that the Paying Agent shall have the right to be
represented in any such action or proceeding by independent counsel of the Paying Agent's own choice, which
independent counsel's fees shall be paid solely by the Paying Agent unless (1) the Stockholder Representative has
failed to assume the defense thereof, (2) the Stockholder Representative and the Paying Agent have mutually
agreed to the retention of such counsel or (3) the Stockholder Representative or Paying Agent determines in its
reasonable judgment that with respect to the defense of such Claim (A) there may be legal defenses available to the
Paying Agent that are not available to the Stockholder Representative or (B) a conflict of interest exists between the
Stockholder Representative and the Payment Agent, in which case such fees shall be paid by the Stockholder
Representative. The Stockholder Representative may not, without the prior written consent of the Paying Agent,
enter into any settlement or compromise of any Claim unless such settlement or compromise includes (1) an
unconditional release of the Paying Agent from all liabilities and obligations with respect to such Claim, (2) does not
imposes injunctive or other equitable relief against the Paying Agent and (3) does not include a statement or
admission of fault or culpability by or on behalf of the Paying Agent.
8)
Term. This Agreement shall terminate upon (i) the completion of the exchange of all securities and other payments subject
to this Agreement or (ii) the completion of all unclaimed property reporting and escheatment obligations arising in
connection with the duties of the Paying Agent pursuant to this Agreement. Upon termination of this Agreement, the Paying
Agent shall promptly deliver to the Purchaser any certificates, funds or other property then held by the Paying Agent relating
to the Purchaser or the Company. After such time, any party entitled to such certificates, funds or property shall look solely
to Purchaser, and not the Paying Agent therefor, and all liability of the Paying Agent with respect thereto shall cease. If after
seven years from the date hereof any shares, warrants or options remain unexchanged or other payments remain unpaid
and moneys and/or securities on deposit hereunder are not escheatable in accordance with unclaimed property laws
and regulations, then Paying Agent may terminate this Agreement and any remaining property may be delivered to
Purchaser. Thereafter, Purchaser shall be responsible for compliance with unclaimed property obligations.
9)
Unclaimed Property Administration.
a)
Subject to applicable unclaimed property laws, the Paying Agent will initiate unclaimed property reporting services
for unclaimed shares and related cash distributions, which may be deemed abandoned or otherwise subject to
applicable unclaimed property law or regulation. Such services may include preparation of unclaimed property
reports, delivery of abandoned property to various states, completion of required due diligence notifications,
responses to inquiries from owners, and such other services as may reasonably be necessary to comply with
applicable unclaimed property laws or regulations. In connection with the foregoing, the Stockholder Representative
shall assist the Paying Agent and provide such cooperation as may reasonably be necessary in the performance of
the services hereunder. Paying Agent or its duly appointed agent shall remit unclaimed funds to the appropriate
state or jurisdiction, as provided for under applicable unclaimed property law or regulation.
b)
To the extent required by Securities and Exchange Commission (“SEC”) Rule 17Ad-17 (17 CFR § 240.17Ad-17),
Paying Agent will provide one (1) written notification to each Company Securityholder who becomes an
“unresponsive payee” (as defined in Rule 17Ad-17(c)(3)) that such Company Securityholder has been sent a check
that has not yet been negotiated, no later than 210 days (seven (7) months) after the sending of the not yet
negotiated check to such Company Securityholder.
10) Notices. Any notice, request for consent, report, or any other communication required or permitted in this Agreement shall
be in writing and shall be deemed to have been given when delivered by electronic mail to the e-mail address given below,
provided that written confirmation of receipt is obtained promptly from the recipient after completion of the electronic mail
transmission, provided that notices will be deemed to have been given to the Paying Agent on the actual date received,
provided further, that with respect to notices delivered to the Stockholder Representative, such notices shall be delivered
solely via email:
If notice to Purchaser:
CDK Global, LLC
950 Hassell Road
Hoffman Estates, IL 60169
Attention: Chief Executive Officer
Email: BK@CDK.com
With a copy (which shall not constitute notice) to
CDK Global, LLC
1950 Hassell Road
Hoffman Estates, Illinois 60169
Attention: General Counsel
Email: Lee.Brunz@cdk.com
and
Mayer Brown LLP
71 S. Wacker Dr.
Chicago, IL 60606
Attention: Jodi Simala; Jason Wagenmaker
Email: jsimala@mayerbrown.com;
jwagenmaker@mayerbrown.com
If notice to the Paying Agent:
PNC Bank, National Association
Attn: Lisa Sounthonevichith Kremers
IDS Building
80 South Eighth Street, Suite 3715
Minneapolis Minnesota 55402
E-mail: pncpaidadmin@pnc.com; lisa.kremers@pnc.com
With a copy (which shall not constitute notice) to
PNC Bank, National Association
Legal Department
1600 Market Street, 8 Floor
Philadelphia, PA 19103
ATTN: Treasury Management Counsel
If notice to the Stockholder Representative:
Fortis Advisors LLC
th
Attention: Notices Department (Project Spyder)
E-mail: notices@fortisrep.com
Any party may unilaterally designate a different address by giving notice of each change in the manner specified above to
each other party. In all cases, the Paying Agent shall be entitled to rely on a copy or electronic transmission of any
document with the same legal effect as if it were the original of such document. “Business Day” shall mean any day other
than a Saturday, Sunday or any other day on which banking institutions located in Pennsylvania are authorized or obligated
by law or executive order to close.
11) Governing Law. This Agreement shall be governed by and construed according to the laws of the State of Delaware
without regard to principles of conflicts of law. The parties hereto consent to the exclusive jurisdiction of the state and
federal courts sitting in the state of Delaware and consent to personal jurisdiction of and venue in such courts with respect
to any and all matters or disputes arising out of this Agreement.
12) Waiver of Jury Trial. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW THAT CANNOT BE WAIVED, EACH
PARTY HEREBY WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT
OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND,
ACTION OR CAUSE OF ACTION ARISING IN WHOLE OR IN PART UNDER, RELATED TO, BASED ON OR IN
CONNECTION WITH THIS AGREEMENT OR THE SUBJECT MATTER HEREOF, WHETHER NOW EXISTING OR
HEREAFTER ARISING AND WHETHER SOUNDING IN TORT OR CONTRACT OR OTHERWISE. ANY PARTY HERETO
MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 12 WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF EACH SUCH PARTY TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY.
13) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original
and all of which together shall constitute one and the same instrument. Delivery of an executed signature page to this
Agreement and agreements, certificates, instruments and documents entered into in connection herewith by facsimile or
other electronic transmission (including Adobe PDF format) will be effective as delivery of a manually executed counterpart
to this Agreement or such agreements, certificates, instruments and documents.
14) Amendment and Waiver. The terms of this Agreement may be altered, amended, modified or revoked only by an
instrument in writing signed by all the parties hereto. No course of conduct shall constitute a waiver of any terms or
conditions of this Agreement, unless such waiver is specified in writing, and then only to the extent so specified. A waiver of
any of the terms and conditions of this Agreement on one occasion shall not constitute a waiver of the other terms of this
Agreement, or of such terms and conditions on any other occasion.
15) Assignment; Binding Effect. Neither this Agreement nor any rights or obligations hereunder may be assigned by any
party hereto without the express written consent of each of the other parties hereto. This Agreement shall inure to and be
binding upon the parties hereto and their respective successors, heirs and permitted assigns. Notwithstanding the
foregoing, any entity into which the Paying Agent may be merged or converted or with which it may be consolidated, or any
entity to which all or substantially all the paying agent business of the Paying Agent may be transferred, shall
be the successor Paying Agent under this Agreement and shall have and succeed to the rights, powers, duties, immunities
and privileges as its predecessor, in each case without the execution or filing of any instrument or paper or the performance
of any further act (other than due notice to Purchaser and the Stockholder Representative).
16) Patriot Act. The parties hereto acknowledge that in accordance with Section 326 of the USA Patriot Act, Paying Agent is
required to obtain, verify and record information that identifies each person or legal entity that establishes a relationship or
opens an account with the Paying Agent. The parties to this Agreement agree to provide all such information as Paying
Agent may reasonably request in order to satisfy the requirements of the USA Patriot Act or any other regulatory
requirements, and any policy or procedure implemented by the Paying Agent to comply therewith.
17) Compliance with Laws. Each of Purchaser and the Stockholder Representative hereby represents that (i) it is not a
person that is the target of any sanctions program administered by the U.S. Department of the Treasury Office of Foreign
Assets Control (“Sanctioned Person”); (ii) it is not directly or indirectly controlled by, or acting hereunder for or on behalf of,
any Sanctioned Person; and (iii) none of the funds used to make any payments contemplated under this agreement are
derived from any illegal activity.
18) Severability. If any provision of this Agreement shall be held or deemed to be or shall in fact, be illegal, inoperative or
unenforceable the same shall not affect any other provision or provisions herein contained or render the same invalid,
inoperative or unenforceable to any extent whatsoever.
19) Further Assurances. If at any time any of the Purchaser, the Stockholder Representative or the Paying Agent shall
determine or be advised that any further agreements, assurances or other documents are reasonably necessary or
desirable to carry out the provisions of this Agreement and the transactions contemplated by this Agreement, the parties
shall execute and deliver any and all such agreements or other documents and do all things reasonably necessary or
appropriate to carry out fully the provisions of this Agreement.
20) No Third-Party Beneficiaries. This Agreement is for the sole benefit of the parties hereto, and their respective successors
and permitted assigns, and nothing herein, express or implied, is intended to or shall confer upon any other person or entity
any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.
21) Force Majeure. No party to this Agreement shall be liable to any other party hereto for losses due to, or if it is unable to
perform its obligations under the terms of this Agreement because of, acts of God, fire, war, terrorism, floods, strikes,
electrical outages, equipment or transmission failure, interruption or malfunctions of communications or power supplies,
labor difficulties, actions of public authorities or other similar causes reasonably beyond its control, it being understood that
the Paying Agent shall use commercially reasonable efforts which are consistent with accepted practices in the banking
industry to resume performance as soon as reasonably practicable under the circumstances.
22) Titles and Headings. All titles and headings in this Agreement are intended solely for convenience of reference and shall
in no way limit or otherwise affect the interpretation of any of the provisions hereof.
23) Entire Agreement. This Agreement constitutes the entire agreement between the Paying Agent, the Stockholder
Representative and the Purchaser in connection with the subject matter of this Agreement, and no other agreement entered
into between the Purchaser and the Stockholders, or any of them, including, without limitation, the Agreement and the
Merger Agreement shall be considered as adopted or binding, in whole or in part, upon the Paying Agent notwithstanding
that any such other agreement may be deposited with the Paying Agent or the Paying Agent may have knowledge thereof.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, Purchaser and the Paying Agent have caused their names to be signed hereto by their duly
authorized officers, all as of the date first written above.
CDK GLOBAL, INC.
By:
Name:
Title:
PNC BANK, NATIONAL ASSOCIATION, as Paying Agent
By:
Name:
Title:
FORTIS ADVISORS LLC
By:
Name: Ryan Simkin
Title: Managing Director
Schedule A
Closing Spreadsheet
Exhibit A
Paying Agent Wire instructions
Exhibit B
Fee Schedule
Contracted Services
Description
Fees (USD)
Payments Administration Fee
Transaction setup, agreement negotiation and
ongoing payments administration for the life of
the deal; setup of the online portal
$7,500
Closing Payments
~213 holders
$75 per payment/per holder
Tax reporting included
Post-closing Payment Fees
Post-closing releases
(escrow releases)
$60 per payment/per holder
Tax reporting included
LOT Distribution, Review
and Acceptance
Web-based 0nline solicitation
(LOT, payment and tax forms)
Included in the above for online
delivery.
1099 Reporting
Standard 1099-B Tax Reporting
(Alternative tax reporting
Available at additional cost)
Electronic Delivery Included
Document solicitation
(if requested)
Solicitation, review of documents, shareholder
follow up and reporting
(i.e. consents, joinders, 280Gs, etc.)
Available upon request
($50 per document per holder)
Escrow Administration Fee
Agreement Negotiation, Accounts
Set-Up and Administration
N/A (with a different provider)
Administration fee includes the electronic solicitation of required documents, review & approval, addressing deficiencies, payment and tax reporting
for the payees, set up of the account(s), agreement negotiation, and associated 1099B reporting.
Out-of-pocket expenses (when applicable) will be billed at cost at the sole discretion of PNC. Fees for services not specifically covered in this
schedule will be billed in accordance with our prevailing rates. These costs may include, but are not limited to, review of IRS Form W-8IMY for
foreign holders, stockholder presentment status updates, stockholder record adjustments, electronic copies of stockholder presentments and non-
standard stockholder records.
Assumptions:
•
Fee schedule is based on Paying agent appointment only; escrows with another provider
•
PNC is Paying Agent for merger consideration and post-closing payments (three escrow releases)
Disclosures:
•
Paying agent fees are payable upon closing
•
Change in deal details might trigger changes to the fee schedule
Contracted Services
Description
Fees (USD)
Payments Administration Fee
Transaction setup, agreement negotiation and
ongoing payments administration for the life of
the deal; setup of the online portal
$7,500
Closing Payments
~213 holders
$75 per payment/per holder
Tax reporting included
Post-closing Payment Fees
Post-closing releases
(escrow releases)
$60 per payment/per holder
Tax reporting included
LOT Distribution, Review
and Acceptance
Web-based 0nline solicitation
(LOT, payment and tax forms)
Included in the above for online
delivery.
1099 Reporting
Standard 1099-B Tax Reporting
(Alternative tax reporting
Available at additional cost)
Electronic Delivery Included
Document solicitation
(if requested)
Solicitation, review of documents, shareholder
follow up and reporting
(i.e. consents, joinders, 280Gs, etc.)
Available upon request
($50 per document per holder)
Escrow Administration Fee
Agreement Negotiation, Accounts
Set-Up and Administration
N/A (with a different provider)
Administration fee includes the electronic solicitation of required documents, review & approval, addressing deficiencies, payment and tax reporting
for the payees, set up of the account(s), agreement negotiation, and associated 1099B reporting.
Out-of-pocket expenses (when applicable) will be billed at cost at the sole discretion of PNC. Fees for services not specifically covered in this
schedule will be billed in accordance with our prevailing rates. These costs may include, but are not limited to, review of IRS Form W-8IMY for
foreign holders, stockholder presentment status updates, stockholder record adjustments, electronic copies of stockholder presentments and non-
standard stockholder records.
Assumptions:
•
Fee schedule is based on Paying agent appointment only; escrows with another provider
•
PNC is Paying Agent for merger consideration and post-closing payments (three escrow releases)
Disclosures:
•
Paying agent fees are payable upon closing
•
Change in deal details might trigger changes to the fee schedule
Exhibit C
Solicitation Documents
Type of Company
Securityholder
Solicitation Document Title
Exhibit
Required for Payment
Stockholders
Letter of Transmittal & Tax
Form
C-1
Yes
Warrantholders
Letter of Transmittal, Warrant
Cancellation Agreement & Tax
Form
C-1
Yes
Non-Employee Optionholder
Letter of Transmittal & Tax
Form
C-1
Yes
Exhibit C-1
Letter of Transmittal for Stockholders, Warrantholders, Non-Employee Optionholders
Exhibit D-1
List of Authorized Representatives of Purchaser
Name
Email Address
Signature
Contact Number
Exhibit D-2
List of Authorized Representatives of Stockholder Representative
(See attached Certificate of Authorized Representatives)
Exhibit E-1
List of Authorized Individuals of Purchaser
Name
Title
E-mail Address
Contact Number
Access Level - Full access will
be provided unless otherwise
noted below.
Paying Agent may rely upon the information provided for anyone herein listed as an Authorized Individuals. The persons and
information designated on this Exhibit E-1 may be changed only in writing executed by the Purchaser and received and
processed by Paying Agent.
Exhibit E-2
List of Authorized Individuals of Stockholder Representative
Name
Title
E-mail Address
Contact Number
Access Level - Full access will
be provided unless otherwise
noted below.
Adam Lezack
Managing Director alezack@fortisrep.com
858-200-8692
Ryan Simkin
Managing Director rsimkin@fortisrep.com
858-200-8691
Rick Fink
Managing Director rfink@fortisrep.com
858-922-8950
Jacqueline Shawhan
Director, M&A
Operations
jshawhan@fortisrep.com
858-200-8697
Tori Geft
SVP, M&A
tgeft@fortisrep.com
858-200-8698
Finance Team
finance@fortisrep.com
858-200-8688, x
310
Support Team
support@fortisrep.com
858-200-8688, Opt
2
Paying Agent may rely upon the information provided for anyone herein listed as an Authorized Individuals. The persons and
information designated on this Exhibit E-2 may be changed only in writing executed by the Stockholder Representative and
received and processed by Paying Agent.
Approved Riders:
Vesting Schedule: To be used only with serial acquirers to assist in the management and tracking of a vesting schedule whereby
certain securities were subject to a vesting schedule and upon change of control, such securities became the right to receive
cash – cash still subject to vesting schedule.
Language to be inserted in 2(f):
f) If Purchaser desires Paying Agent to make payments with respect to Company Securityholders of former restricted
stock subject to a vesting schedule (a “Restricted Stockholder”), Purchaser shall deliver or cause to be delivered a
Microsoft Excel spreadsheet containing a list (a “Vesting Schedule”) of the Restricted Stockholders and the following
information for each Restricted Stockholder:
i)
name, address or email address and Tax Identification Number (if available);
ii)
an IRS Form W-9 or IRS Form W-8BEN, as applicable;
iii) the date of each vesting event, the underlying security associated with each vesting event, and the
corresponding dollar amount for each vesting event (in each case, all on a row-by-row basis per security);
and
iv) the payment instructions for each Restricted Stockholder, the tax reporting for each payment, and whether
any Withholding Amounts are applicable with respect to any payment.
On the first Business Day of each calendar month, Paying Agent shall provide Purchaser with a spreadsheet
including the name of the Restricted Stockholder, the date of the vesting event and the payment amount for any
vesting events occurring the month prior (e.g. April 1st report will contain vesting events achieved in March).
Purchaser shall advise the Paying Agent whether or not each Restricted Stockholder was employed by Purchaser
as of the vesting event date and is eligible for payment. If the Restricted Stockholder was not employed through the
vesting event date and eligible for payment, Purchaser shall provide direction on the disposition of any remaining
amounts originally allocated on the Vesting Schedule to the Restricted Stockholder.
Exhibit G
WARRANT CANCELLATION AGREEMENT
THIS WARRANT CANCELLATION AGREEMENT (the “Cancellation Agreement”), dated [__], 2021, is entered into
by and among Roadster, Inc., a Delaware corporation (the “Company”), CDK Global, Inc., a Delaware corporation (the
“Purchaser”), and the Person listed as the warrantholder on the signature page hereto (“Holder”). Capitalized terms used but not
defined herein have the meanings ascribed to them in the Merger Agreement (as defined below).
RECITALS
WHEREAS, the Company has previously granted to Holder a warrant to purchase shares of the Common Stock as set
forth on Exhibit A (the “Shares”) of the Company pursuant to that certain warrant described on Exhibit A (the “Warrant”);
WHEREAS, the Company has entered into an Agreement and Plan of Merger (as may be amended, modified or restated,
the “Merger Agreement”), dated June 2, 2021, by and among the Company, the Purchaser, Spyder Merger Corp., a Delaware
corporation (the “Merger Sub”) and the Stockholder Representative (as defined in the Merger Agreement), pursuant to which,
Merger Sub will be merged with and into the Company, with the Company continuing as the surviving corporation and thereby
becoming a wholly-owned subsidiary of Purchaser (collectively, the “Transaction”);
WHEREAS, the terms of the Merger Agreement do not require Purchaser to assume the obligations of the Warrant;
WHEREAS, in lieu of exercising its rights to purchase the Shares, Holder and the Company desire to cancel the Warrant
immediately prior to the Closing in exchange for consideration from the Company as described herein;
WHEREAS, pursuant to the terms of the Merger Agreement, at Closing, Purchaser will deliver or cause to be delivered an
amount equal to the Stockholder Representative Amount to the Stockholder Representative to hold as a reserve fund to pay
certain amounts that may become payable by the Equityholders and the Stockholder Representative after the Closing;
WHEREAS, pursuant to the terms of the Merger Agreement and the PPP Escrow Agreement, upon Closing, Purchaser
will deliver an amount equal to the Estimated Merger Consideration less the Adjustment Holdback Amount, less the Indemnity
Holdback Amount (the Adjustment Holdback Amount and the Indemnity Holdback Amount together, the “Holdback Amount”),
less the Stockholder Representative Amount and less the PPP Escrow Amount to PNC Bank, National Association, to be
distributed to the Equityholders pursuant to the terms of the under the Merger Agreement; and
WHEREAS, the Stockholder Representative Amount, the PPP Escrow Amount and the Holdback Amount will be funded
in part by a portion of the consideration that would otherwise be payable to Holder hereunder.
NOW, THEREFORE, in consideration of the mutual promises and agreements hereinafter contained and for other good
and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company, Purchaser and Holder
hereby agree as follows:
1.
Cancellation of Warrant.
(a)
Cancellation. Holder hereby irrevocably and unconditionally cancels, surrenders and waives all of Holder’s
rights under the Warrant, whether vested or unvested, effective as of the Closing; provided that the foregoing shall not be
effective unless the Closing actually occurs.
(b)
Cancellation Payment. In consideration for the surrender and cancellation of the Warrant and all rights
related to the Warrant, upon surrender of the document evidencing the Warrant and presentment of this duly executed
Cancellation Agreement (collectively, the “Warrant Cancellation Deliveries”), Purchaser and the Company shall cause
the Paying Agent to deliver a cash payment to Holder as set forth on Exhibit A (the “Cash Cancellation Payment”). The
Cash Cancellation Payment shall be in an amount equal to the pro rata portion of the aggregate consideration Holder
would have received in consideration for the Shares issued upon exercise of the Warrant in connection with the
Transaction had Holder exercised the Warrant immediately prior to the Closing, less (without duplication) the sum of (i)
the exercise price therefor as set forth in the Warrant; (ii) Holder’s pro rata share of the Holdback Amount, which amount
is set forth on Exhibit A; (iii) Holder’s pro rata share of the Stockholder Representative Amount, which amount is set
forth on Exhibit A; and (iv) Holder’s pro rata share of the PPP Escrow Amount, which amounts are set forth on Exhibit A.
Holder understands that following the execution and effectiveness of this Cancellation Agreement, Holder shall have no
further rights with respect to the Warrant or any shares of stock, or rights to acquire the shares of stock, underlying the
Warrant.
(c)
Waiver of Notice Rights and Requirements. Holder hereby waives (i) any requirement under the Warrant to
provide Holder with any notice regarding the Transaction, (ii) any requirement under the Warrant to provide Holder with
any time period to exercise or exchange the Warrant prior to, or after, the Transaction, and (iii) any provisions of the
Warrant regarding the termination or assumption of the Warrant and any other provision of the Warrant inconsistent with
this Cancellation Agreement.
(d)
Consent to Holdback Amount. Holder hereby acknowledges and agrees that a portion of consideration
otherwise payable to Holder at Closing and designated as the Holdback Amount as set forth on Exhibit A, will be held
back and retained by the Purchaser and disbursed in accordance with Sections, 2.8, 3.3 and 10.2 of the Merger
Agreement. In the event any portion of the Holdback Amount is distributed to the
Equityholders, Holder shall receive an amount proportionate to the amount Holder’s pro rata share of the Holdback
Amount bears to the total Holdback Amount.
(e)
Consent to PPP Escrow Amount. Holder hereby acknowledges and agrees that a portion of consideration
otherwise payable to Holder at Closing and designated as the PPP Escrow Amount, as set forth on Exhibit A, will be
deposited into bank accounts and held in escrow by Silicon Valley Bank, and disbursed in accordance with the terms of
the PPP Escrow Agreement. In the event any portion of any PPP Escrow Amount is distributed to the Equityholders,
Holder shall receive an amount proportionate to the amount Holder’s pro rata share of the Escrow Amount bears to the
total Escrow Amount.
(f)
Appointment of Stockholder Representative. In connection with the Transaction, Holder acknowledges that
Fortis Advisors LLC will be appointed under the Merger Agreement to act on behalf of the Equityholders thereunder as
the Stockholder Representative. Holder hereby irrevocably constitutes and appoints Fortis Advisors LLC to serve as the
Stockholder Representative on behalf of Holder, as the true and lawful agent and attorney-in-fact of Holder with full
powers of substitution to act in the name, place and stead of Holder with respect to the transactions contemplated by this
Cancellation Agreement, the Merger Agreement and the PPP Escrow Agreement, as each may be amended, including,
without limitation, to act as agent for the Stockholder Representative Amount, and to do or refrain from doing all such
further acts and things, and to execute all such documents on behalf of Holder as Stockholder Representative shall deem
necessary or appropriate in connection with any of the transactions contemplated by this Cancellation Agreement, the
Merger Agreement, the Escrow Agreement and the PPP Escrow Agreement, as each may be amended, including, without
limitation, the Reserve Amount and the Escrow Amount. Purchaser shall be entitled to rely on any and all action taken by
the Stockholder Representative without any liability to, or obligation to inquire of, Holder.
(g)
Holder Representations. Holder represents and warrants that Holder does not currently own any warrants
other than the Warrant described herein and has not exercised in whole or in part its purchase rights represented by the
Warrant. Holder further represents and warrants that it has full power and authority to enter into this Cancellation
Agreement and to perform its obligations hereunder, including to surrender for cancellation the Warrant. Holder
represents and warrants that this Cancellation Agreement constitutes the valid and binding obligation of Holder,
enforceable against Holder in accordance with its terms. Holder further represents and warrants that the execution and
delivery by Holder of this Cancellation Agreement and compliance with the terms hereof by Holder, do not and shall not
(i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a default under, (iii) result in
a violation of, or (iv) require any authorization, consent, approval, exemption or other action by or notice to any court or
administrative or governmental body pursuant to, any material law, statute, rule or regulation to which Holder is subject,
or any material agreement, organizational document, instrument, order, judgment or decree to which Holder is a party or
by which it is bound. Holder represents and warrants that, other than
any pledge or assignment of Holder’s interests in the Warrant to or any other obligation of Holder to the Small Business
Administration or its designee or otherwise in relation to any requirement under the Small Business Investment Act of
1958, as amended and in effect from time to time, and the regulations promulgated thereunder (in each case which will be
fully released contemporaneously with the execution of this Cancellation Agreement), Holder is the record and beneficial
owner of the Warrant free and clear of all security interests, liens, restrictions, charges, encumbrances or other obligations
relating to the surrender, sale or transfer thereof (other than pursuant to the Warrant) and the Warrant will not be subject to
any adverse claims. Upon request, Holder will execute and deliver any additional documents or take such additional
reasonable actions as deemed by the Company to be necessary or desirable to complete the surrender and cancellation of
the Warrant pursuant to this Cancellation Agreement.
2.
Confidentiality. Holder agrees to at all times keep confidential and not divulge, furnish or make accessible any
information regarding or relating to the Merger Agreement, this Agreement or the Merger or any of the other transactions
contemplated hereby or thereby, or any claim or dispute arising therefrom or relating thereto, to anyone (other than to directors,
officers, managers, attorneys, accountants, or financial advisors of Holder, in each case who have a need to know such
information in order to fulfill their obligations to the Holder, are made aware of the confidential nature of the information, are
directed by Holder to keep such information confidential and are either bound by confidentiality restrictions with respect to the
information shared that are at least as restrictive as this Section 2 or are bound by legally enforceable codes of professional
responsibility that require maintenance of confidentiality of such information, provided that any such Persons to whom such
information is disclosed are made aware of the confidential nature of the information, are directed by Holder to keep such
information confidential and are bound by confidentiality restrictions with respect to the information shared that are at least as
restrictive as this Section 2; provided further that Holder shall be liable to Purchaser for any Losses resulting from any failure to
maintain such confidentiality by any Person to whom disclosures were made by Holder pursuant to the foregoing clauses (a) or
(b) except, in each case, to the extent that (i) such information has otherwise been made public (other than as a result of
disclosure by Holder in violation of the terms of this Cancellation Agreement, any Person to whom any Holder disclosed such
information who violated the terms of any confidentiality obligation to such Holder or by the Company or the Stockholder
Representative in violation of the confidentiality provisions in the Merger Agreement); (ii) such Holder is required by applicable
Law to divulge or disclose such information, in which case Holder shall use his, her or its commercially reasonable efforts to
cooperate with Purchaser to limit such disclosure to the greatest extent permitted under applicable Law; or (iii) Holder is required
by an applicable process, subpoena or order, provided that Holder gives Purchaser notice, to the extent permitted by applicable
Law, that is reasonable in the circumstances and uses his, her or its commercially efforts to cooperate with Purchaser to obtain a
protective order to take such other legal steps to protect its interest in such information.
3.
Release. Effective on payment of the Cash Cancellation Payment to Holder:
(a)
To the fullest extent permitted by applicable Law, Holder acknowledges and agrees, on behalf of himself,
herself or itself and each of his, her or its Affiliates and each of their respective directors, officers, managers, employees,
agents, representatives, insurance providers, advisors, successors and assigns (collectively, “Releasor”) that Releasor
hereby irrevocably and unconditionally releases and forever discharges the Company, Purchaser, Merger Sub, and their
respective directors, officers, managers, employees, agents, representatives, insurance providers, and advisors (including,
without limitation, attorneys, accountants, consultants, bankers and financial advisors), successors or assigns (collectively,
the “Releasees”) from any and all Proceedings, allegations, assertions, complaints, controversies, charges, duties,
grievances, Liabilities, promises, commitments, agreements, guarantees, endorsements, duties and Losses (including
attorneys’ fees and costs incurred) of any nature whatsoever (whether direct or indirect, known or unknown, disclosed or
undisclosed, matured or unmatured, accrued or unaccrued, asserted or unasserted, absolute or contingent, determined or
conditional, express or implied, fixed or variable and whether vicarious, derivative, joint, several or secondary) arising
contemporaneously with or having occurred at any time prior to the Closing or on account of, arising out of, or based in
whole or in part on any act, omission, matter, cause, event, or circumstance whatsoever occurring contemporaneously
with or having occurred at any time prior to the Closing (collectively, “Released Claims”). Notwithstanding the
foregoing, the Released Claims shall not include, and the foregoing release shall not (i) affect or in any way limit
Purchaser’s obligation to deliver the Merger Consideration to Holder pursuant to the terms of the Merger Agreement or
(ii) release any rights of Releasor or any obligations of the Releasees pursuant to the Merger Agreement or any Related
Agreement.
(b)
Releasor acknowledges that (i) Purchaser and Merger Sub are relying on, among other things, the
provisions of this Section 3, in consummating the transactions contemplated by the Merger Agreement, (ii) Purchaser and
Merger Sub would not be consummating such transactions in the absence of the release contemplated in this Section 3 and
(iii) Releasor will derive a material and substantial benefit, directly or indirectly, from the transactions contemplated
thereby.
4.
Successors and Assigns. This Cancellation Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective executors, administrators, next-of-kin, successors and assigns.
5.
Governing Law. This Cancellation Agreement shall be construed and enforced according to the laws of the State
of Delaware, without regard to the conflict of laws provisions of such state.
6.
Counterparts. This Cancellation Agreement may be executed in multiple counterparts (including by means of
facsimile or other electronic transmission), each of which shall be deemed an original and all of which together shall constitute
one agreement.
7.
Severability. To the fullest extent possible, each provision of this Cancellation Agreement shall be interpreted in
such manner as to be effective and valid under applicable law,
but if any provision of this Cancellation Agreement is held by a court of competent jurisdiction to be prohibited by or invalid
under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating
the remainder of such provision or the remaining provisions of this Cancellation Agreement.
8.
Counterparts. This Agreement may be executed in counterparts (including using any electronic signature covered
by the United States ESIGN Act of 2000, Uniform Electronic Transactions Act, the Electronic Signatures and Records Act or
other applicable law, e.g., www.docusign.com), and such counterparts may be delivered in electronic format, including by
facsimile, email or other transmission method. Such delivery of counterparts shall be conclusive evidence of the intent to be
bound hereby and each such counterpart, including those delivered in electronic format, and copies produced therefrom shall
have the same effect as an originally signed counterpart. To the extent applicable, the foregoing constitutes the election of the
parties to invoke any law authorizing electronic signatures. Minor variations in the form of the signature page, including footers
from earlier versions of this Agreement, shall be disregarded in determining a party’s intent or the effectiveness of such signature.
No party shall raise the use the delivery of signatures to this Agreement in electronic format as a defense to the formation of a
contract and each such party forever waives any such defense.
9.
Complete Agreement. This Cancellation Agreement and the documents referred to herein contain the complete
agreement between the parties hereto and supersede any prior understandings, agreements or representations by or between the
parties, written or oral, which may have related to the subject matter hereof in any way.
10.
Waiver of Jury Trial. Each party to this Cancellation Agreement hereby waives, to the fullest extent permitted by
law, any right to trial by jury of any claim, demand, action or cause of action arising under this Cancellation Agreement or in any
way connected with or related or incidental to the dealings of the parties hereto in respect of this Cancellation Agreement or any
of the transactions related hereto, in each case whether now existing or hereafter arising, and whether in contract, tort, equity or
otherwise. Each party to this Cancellation Agreement hereby agrees and consents that any such claim, demand, action or cause of
action shall be decided by court trial without a jury and that the parties to this Cancellation Agreement may file an original
counterpart of a copy of this Cancellation Agreement with any court as written evidence of the consent of the parties hereto to the
waiver of their right to trial by jury.
11.
Amendment and Waiver. Any provision of this Cancellation Agreement may be amended or waived only in
writing signed by the Company, Purchaser and Holder. No waiver of any provision hereunder or any breach or default thereof
shall extend to or affect in any way any other provision or prior or subsequent breach or default.
12.
Third Party Beneficiary. Each of the Stockholder Representative, the Equityholders, Merger Sub and each other
Released Party shall be an intended third-party beneficiary of this Cancellation Agreement, with the right to enforce the terms of
this Cancellation Agreement against Holder as if named as a party hereto.
[Signature page follows]
IN WITNESS WHEREOF, this Cancellation Agreement has been executed on behalf of the Company, Purchaser and
Holder effective as of the day and year first above written.
COMPANY:
ROADSTER, INC.
By:
Name:
Title:
IN WITNESS WHEREOF, this Cancellation Agreement has been executed on behalf of the Company, Purchaser and
Holder effective as of the day and year first above written.
PURCHASER:
CDK GLOBAL, INC.
By:
Name:
Title:
IN WITNESS WHEREOF, this Cancellation Agreement has been executed on behalf of the Company, Purchaser and
Holder effective as of the day and year first above written.
HOLDER:
By:
Name:
Title:
(if entity, trustee or other authorized party)
Date:_____________________________________
EXHIBIT A
HOLDER:__________________________________________________
WARRANT
Issue Date
Number and Class of
Shares
Class of Shares
Exercise Price Per
Share
Aggregate Exercise
Price
[_______]
[____]
[____]
$[____]
$[____]
CANCELLATION AND ESCROW PAYMENTS
Cash Cancellation Payment
Reserve Amount
Adjustment Escrow Amount
PPP Escrow Amount
$[____]
$[____]
$[____]
$[____]
Exhibit H
PPP ESCROW AGREEMENT
SUMMARY OF TERMS
The following Summary of Terms (“Summary”) together with the Escrow Agreement Terms and Conditions (“Terms and Conditions”) and any exhibits or
schedules attached hereto sets forth terms on which Silicon Valley Bank (the “Escrow Agent”) will facilitate and regularize the receipt of monies due, and
disbursement of those monies in connection with the Transaction (as described below). The Escrow Agent will receive funds due and disburse the funds per
instructions described in this Escrow Agreement (referred herein as this “Agreement”). This Agreement is entered among the Escrow Agent, Depositor and
Beneficiary, collectively referred to herein as “Parties.” Reference is hereby made the Deposit Agreement and Disclosure Statement – Business Accounts
(“Deposit Agreement”), and this Agreement shall be deemed a related agreement to the Deposit Agreement. The details listed below set forth a summary of
the terms of the Account which are explained in further detail in the Terms and Conditions. If there is a conflict between the terms of this Summary and those
of the Terms and Conditions, the terms of the Summary will control. If any provision of this Summary is opposite a box that is not checked or otherwise
marked to indicate that it is applicable, such provision shall not apply to this Agreement and shall be null, void and of no force or effect. Capitalized terms
used but not defined herein shall have the definitions ascribed to such terms in the Terms and Conditions.
Effective Date: This Agreement shall become effective on the day and year of the last signature received below.
Escrow Agent: Silicon Valley Bank, its principal place of business at 3003 Tasman Drive, Santa Clara, CA 95054.
Depositor:
Roadster, Inc.
Beneficiary:
Silicon Valley Bank, as lender
(individually and collectively, “Depositor”)
(individually and collectively, “Beneficiary”)
Address:
300 De Haro St., #334,
Address:
3003 Tasman Drive
San Francisco, CA, 94103
Santa Clara, CA 95054
Escrow Account #: _____________________________
(Assigned upon receipt of signed escrow agreement)
Interest Rate: [ 0.01 ]% per annum (the “Interest Rate”).
Transaction:
This Agreement is being entered into among the Depositor, the Beneficiary and the Escrow Agent in connection with the U.S. Small Business Administration
(“SBA”) Paycheck Protection Program Note executed by the Depositor on [4/30/2020] for [8168057205] SBA Loan No. [8168057205 ] (the “PPP Loan”).
Escrow Amount: $ [$2,123,179.54 ].
The Escrow Amount will accrue interest at the Interest Rate from the date funded until the date the Escrow Amount is disbursed
in accordance with this Agreement.
Disbursement Eligible Date.
The “Disbursement Eligible Date” will be the earliest of the occurrence of the following events:
(1) [8/30/2021 ];
(2) the date upon which SVB receives notice from the SBA of the denial with prejudice of the forgiveness of the Depositor’s PPP Loan;
(3) the date upon which SVB receives funds from the SBA in partial forgiveness of the Depositor’s PPP Loan; and
(4) the date upon which SVB receives funds from the SBA in full forgiveness of the Depositor’s PPP Loan (the “Full Repayment Date”).
Parties agree that no disbursements from the Escrow Account will occur prior to the Disbursement Eligible Date.
On or within ten (10) business days after a Disbursement Eligible Date other than a Full Repayment Date, Depositor and Beneficiary agree that in
accordance with the Escrow Account Disbursement Instruction Letters, attached hereto as Exhibits C-1 and C-2, funds in the Escrow Account will be
released:
(1) first, to the Beneficiary in the amount (not exceed the outstanding obligations under the PPP Loan) set forth in the written notice delivered by
the Beneficiary to the Escrow Agent and the Depositor, which funds will be applied to repay the PPP Loan in full; and
(2) second, to the Depositor (or as directed by the Depositor), all funds remaining in the Escrow Account, less any fees payable in connection with
this Agreement.
On or within ten (10) business days after a Disbursement Eligible Date that is a Full Repayment Date, as evidenced by a written notice provided by the
Beneficiary to the Escrow Agent and the Depositor, all funds in the Escrow Account, less any fees payable in connection with this Agreement, will be
released to the Depositor (or as directed by the Depositor) in accordance with the Escrow Account Disbursement Instruction Letter. All amounts released to
the Depositor pursuant to this Section shall include the interest or other income earned on such amounts at the Interest Rate.
Escrow Account Disbursement Instructions.
Upon the execution of this Agreement, the Beneficiary and the Depositor shall deliver to the Escrow Agent written instructions, substantially in the form of
Exhibit C hereto, regarding the accounts into which disbursements shall be made. Upon receipt of written notice from the Beneficiary regarding the
forgiveness status of the PPP Loan, as outlined above, the Escrow Agent shall release the amount(s) requested, less any fees payable in connection with
this Agreement.
Fees.
Fees in connection with this Agreement are outlined in Exhibit A. It is the responsibility of the Depositor to pay required fees to the Escrow Agent. Any fees
not paid will be deducted from the Escrow Amount prior to disbursement of the funds.
Miscellaneous.
The Depositor and Beneficiary each state that they have read the Agreement, including those terms found in the Terms and Conditions pages which follow
this signature page, understand and agree to it, and acknowledge receipt of a copy of the same. The Depositor and the Beneficiary further acknowledge that
this Agreement shall not be effective until signed by the Escrow Agent.
By signing this Agreement in the space indicated below, each party signifies its intent to accept the terms of the Agreement and be legally bound as of the
Effective Date. All parties may execute this form by electronic means and each party recognizes and accepts the use of electronic signatures and records by
any other party in connection with the storage and execution of this form and its items as provided for in the federal Electronic Signatures in Global and
National Commerce Act and any applicable state law governing electronic transactions.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year of the last signature below.
Depositor:
Beneficiary:
By:
By:
Name/Title:
Name/Title:
Date:
Date:
Phone:
Phone:
Email:
Email:
Escrow Agent:
Silicon Valley Bank
By:
Name/Title:
Date:
Address for Notices:
Attn: Deposit Escrow Services
Silicon Valley Bank
3003 Tasman Drive, HF-151
Santa Clara, CA 95054
Fax: (408) 728-9746
Email: escrowservices@svb.com
ESCROW AGREEMENT
TERMS AND CONDITIONS
The Summary is attached hereto and made a part of these Terms and Conditions, and together the Summary, these Terms of Conditions and any exhibits or
schedules attached hereto form the Escrow Agreement (the “Agreement”) between Escrow Agent, Depositor, and Beneficiary, dated as of the Effective Date.
To the extent any provision of the Summary conflicts with these Terms and Conditions, the terms of the Summary shall control. Terms not otherwise defined
herein shall have the meanings ascribed to them in the Summary. The parties hereby agree as follows:
SECTION 1. APPOINTMENT OF THE ESCROW AGENT.
Depositor and Beneficiary do hereby appoint, constitute and designate Silicon Valley Bank as their Escrow Agent for the purposes set forth herein, and the
Escrow Agent accepts the agency created under this Agreement and agrees to the obligations stated herein.
SECTION 2. CONFLICT WITH OTHER AGREEMENTS.
Depositor and Beneficiary agree that this Agreement supersedes any conflicting terms contained in any other agreement or understanding pertaining to the
monies.
SECTION 3. DELIVERIES TO ESCROW AGENT.
The Depositor shall deliver to the Escrow Agent via wire transfer or book transfer the sum identified in the Summary as the Escrow Amount as an initial
deposit or any subsequent deposits. Escrow Agent agrees to hold and disburse said amount in accordance with the terms and conditions of this Agreement
and for the uses and purposes stated herein. Such amount shall be delivered into escrow in accordance with the instructions in Exhibit B.
SECTION 4. INVESTMENT OF FUNDS.
All such funds will be deposited to the Escrow Account. Parties hereby agree that the Escrow Agent does not provide, nor shall any communication from
Escrow Agent be construed as, investment advice or an offer of investment advice. Parties specifically disclaim any right or claim against Escrow Agent for
information or communications presented to any Party and misconstrued as investment advice. If the Escrow Account is interest bearing, interest will be
allocated as identified in the Summary and reported as earned, even if not distributed. Escrow Agent may withhold taxes as required.
SECTION 5. RESPONSIBILITIES OF ESCROW AGENT.
The duties and responsibilities of the Escrow Agent shall be those expressly set forth in this Agreement. No implied duties of the Escrow Agent shall be read
into this Agreement and the Escrow Agent shall not be subject to, or obligated to recognize any other agreement between or direction or instruction of, any
or all of the parties hereto. The Escrow Agent shall also not be responsible for the duties of Depositor and Beneficiary to each other. Notwithstanding any
provision to the contrary contained in any other agreement between any of the parties hereto, the Escrow Agent shall have no interest in the Escrow Amount
except as provided in this Agreement.
SECTION 6. DISBURSEMENTS.
Section 6.1. Parties agree that any disbursements shall be made into an account held by the Depositor or Beneficiary in accordance with the wire transfer
instructions contained therein. Notwithstanding this requirement, even if Parties mutually agree to disbursement to a third party, Escrow Agent is not
obligated to make such disbursement to an account controlled by an entity other than Depositor or Beneficiary if doing so violates Escrow Agent policy or
may create regulatory risk or obligation on Escrow Agent.
Section 6.2. Parties agree that any disbursements made are final. Escrow Agent shall have no obligation to attempt a return of funds absent a showing of
gross negligence or willful misconduct by Escrow Agent.
SECTION 7. INSTRUCTIONS AND DIRECTIONS TO AGENT.
Instructions to Escrow Agent shall be provided by the Parties via email to the following email address: grouescrowservices@svb.com
If Escrow Agent receives an instruction after (12 PM Pacific Time), such instruction shall be considered received on the next Business Day. A “Business
Day” means any day that Escrow Agent is open, which is all days except Saturdays, Sundays, federal holidays, or when closures or emergency conditions
occur due to unforeseen circumstances outside of Escrow Agent’s control.
Escrow Agent provides certain procedures, features and functionality (“Security Procedures”) to help secure and protect account data from misuse, fraud,
and theft and to verify the authenticity of directions received. These Security Procedures include but are not limited to process controls, technological
controls and third-party applications, described in this Agreement or an applicable Related Agreement. Escrow Agent is authorized to rely on the authenticity
of an instruction which purports to be from Depositor and Beneficiary. The Escrow Agent is authorized, in its sole discretion, to disregard any and all notices
or instructions given by any person or entity, except notices or instructions as provided for in this Agreement by the undersigned or an Authorized Signer (as
such phrase is used in the Deposit Agreement), if designated, and orders or process of any court entered or issued with or without jurisdiction. If any
property subject hereto is at any time attached, garnished, or levied upon under any court order, or in case the payment, assignment, transfer, conveyance
or delivery of any such property shall be stayed or enjoined by any court order, or in case any order, judgment, or decree shall be made or entered by any
court affecting such property or any party hereto, then in any such events, the Escrow Agent is authorized, in its sole discretion, to rely upon and comply with
any such order, writ, judgment or decree with which it is advised by legal counsel of its own choosing, and if it complies with any such order, writ, judgment or
decree it shall not be liable to any other party hereto or to any other person, firm or corporation by reason of such compliance even though such order, writ,
judgment or decree may be subsequently reversed, modified, annulled, set aside, or vacated.
SECTION 8. Agent’s Right to Rely on Genuineness of Instrument.
The Escrow Agent may rely, and shall be protected in acting or refraining from acting, upon any instrument furnished to it hereunder and believed by it to be
genuine and believed by it to have been signed or presented by the appropriate party or parties described in this Agreement. The Escrow Agent shall not be
responsible nor liable in any respect on account of the lack of authority, or lack of right of any such person executing, or delivering or purporting to execute,
deposit or deliver any such document, funds or endorsement of this Agreement or on account of or by reason of forgeries, or false representations.
SECTION 9. Indemnity and Hold Harmless of Bank.
Depositor and Beneficiary hereby agree to indemnify and hold harmless Escrow Agent, its affiliates and their respective directors, officers, agents and
employees (“Indemnified Persons”) against any and all claims, causes of action, liabilities, lawsuits, demands and damages (each, a “Claim”) arising from
this Agreement, including without limitation, any and all court costs and reasonable attorneys’ fees, in any way related to or arising out of or in connection
with this Agreement or any action taken or not taken pursuant hereto, including, but not limited to, any Claims arising as a result of Escrow Agent’s
adherence to instructions from Depositor and Beneficiary; provided that no Indemnified Person shall be entitled to be indemnified to the extent that such
Claims result from an Indemnified Person’s gross negligence or willful misconduct. Depositor and Beneficiary grant Escrow Agent a security interest in any
Escrow Account, including all current or future deposits or renewals and the interest proceeds thereof, for amounts owing to Escrow Agent now or later
under this Agreement or any related agreement. This provision shall survive the termination of this Agreement.
SECTION 10. Disagreements.
In the event of any disagreement between the parties and/or any other person, resulting in an adverse claim or demand being made in connection with this
Agreement, Escrow Agent shall not become liable to the parties for damages or interest for Escrow Agent’s failure or refusal to comply with conflicting or
adverse demands, and Escrow Agent may continue to refuse to act until the disagreement is resolved by the parties or by the court in which the Escrow
Agent files a request for interpleader.
SECTION 11. JURY TRIAL WAIVER; JUDICIAL REFERENCE
TO THE EXTENT ALLOWED BY LAW, IF A DISPUTE ARISES BETWEEN ANY PARTY REGARDING THE AGREEMENT OR ANY SERVICE, ALL
PARTIES WAIVE ANY RIGHT THAT IT MAY HAVE TO REQUEST A JURY TRIAL. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY, if and to the
extent the above waiver of the right to a trial by jury is not enforceable, the parties hereto agree that any and all disputes or controversies of any nature
between them arising at any time shall be decided by a reference to a referee who shall be a retired state or federal judge with judicial experience in civil
matters, mutually selected by the parties (or, if they cannot agree, by the Presiding Judge of the Santa Clara County, California Superior Court) appointed in
accordance with California Code of Civil Procedure Section 638 (or pursuant to comparable provisions of federal law if the dispute falls within the exclusive
jurisdiction of the federal courts), sitting without a jury, in Santa Clara County, California; and the parties hereby submit to the jurisdiction of such court. The
referenced proceedings shall be conducted pursuant to and in accordance with the provisions of California Code of Civil Procedure Sections 638 through
645.2, inclusive. The referee shall have the power, among others, to grant provisional relief, including without limitation, entering temporary restraining
orders, issuing preliminary and permanent injunctions and appointing receivers. All such proceedings shall be closed to the public and confidential, and all
records relating thereto shall be permanently sealed. If during the course of any dispute, a party desires to seek provisional relief, but a referee has not been
appointed at that point pursuant to the judicial reference procedures, then such party may apply to the appropriate court in the Northern District of the State
of California for such relief. The proceeding before the referee shall be conducted in the same manner as it would be before a court under the rules of
evidence applicable to judicial proceedings. The parties shall be entitled to discovery, which shall be conducted in the same manner as it would be before a
court under the rules of discovery applicable to judicial proceedings. The referee shall oversee discovery and may enforce all discovery rules and orders
applicable to judicial proceedings in the same manner as a trial court judge. The parties agree that the selected or appointed referee shall have the power to
decide all issues in the action or proceeding, whether of fact or of law, and shall report a statement of decision thereon pursuant to California Code of Civil
Procedure Section 644(a). The referee shall also determine all issues relating to the applicability, interpretation and enforceability of this paragraph. The
following matters shall not be subject to reference to a referee as set forth in this paragraph: (i) non-judicial foreclosure of any collateral (real or personal
property), (ii) exercise of self-help remedies (including set off or recoupment), (iii) appointment of a receiver and (iv) temporary, provisional or ancillary
remedies (including writs of attachment, writs of possession, temporary restraining orders or preliminary injunctions).
SECTION 12. WAIVER.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT OR ANYWHERE ELSE, DEPOSITOR AND BENEFICIARY
EACH WAIVE, AND THEY AGREE THAT THEY SHALL NOT SEEK FROM ESCROW AGENT UNDER ANY THEORY OF LIABILITY (INCLUDING
WITHOUT LIMITATION ANY THEORY IN TORT), ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES ARISING IN CONNECTION
WITH THIS AGREEMENT.
SECTION 13. RESIGNATION OF THE AGENT.
The Agent reserves the right to resign as Escrow Agent at any time by giving thirty (30) days advance written notice to Depositor and Beneficiary. Within
thirty days after receipt of notice of resignation, Depositor and Beneficiary shall inform the Escrow Agent of a successor escrow agent to which the Escrow
Agent shall distribute the property then held hereunder, less its fees, costs and expenses (including counsel fees and expenses). If Depositor and
Beneficiary are unable to appoint a successor escrow agent within thirty days and there is property held under this Agreement, then Depositor and
Beneficiary shall cause the property to be disbursed.
If, upon resignation and termination of Escrow Agent, funds are not able to be disbursed, and neither Depositor nor Beneficiary are able to provide mutually
agreed upon instructions for disposition of funds, Parties acknowledge and agree that Escrow Agent may interplead any or all Escrow Account funds to a
court of competent jurisdiction for interpleading purposes. In addition, Escrow Agent retains authority to follow its own escheatment processes if required.
SECTION 14. GENERAL PROVISIONS
Section 14.1. Choice of Law. This Agreement will be governed by the laws of the State of California without regard to its conflicts of law provisions. All
Parties each submit to the exclusive jurisdiction of the State and Federal courts in Santa Clara County, California.
Section 14.2. Call Monitoring and Recording. Depositor and Beneficiary authorizes Escrow Agent to monitor, and to record, telephone conversations and
other electronic communications Depositor and Beneficiary has with Escrow Agent and with Escrow Agent’s representatives for reasonable business
purposes, including security and quality assurance. Escrow Agent will not remind Depositor and Beneficiary or Grantor that Escrow Agent may be monitoring
or recording a call at the outset of the call unless required by law to do so.
Section 14.3. Successors and Assigns. This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Depositor and
Beneficiary may not assign this Agreement or any rights or obligations hereunder without Escrow Agent’s prior written consent which may be granted or
withheld in Escrow Agent’s sole discretion. Escrow Agent has the right, without the consent of or notice to Depositor and Beneficiary, to sell, transfer, assign,
negotiate, or grant participation in all or any part of, or any interest in, Escrow Agent’s obligations, rights, and benefits under this Agreement and any other
agreed documents.
Section 14.4. Notices. Any notice or other communication related to this Agreement, other than transaction instructions as identified above, shall be in writing
and shall be sent by United States mail, overnight courier, facsimile or electronic mail to the noted addresses set forth below the parties’ signatures. For all
purposes hereof any notice so mailed shall be as effectual as though served upon the person of the party to whom it was mailed at the time of the deposit in
the United States mail, faxed or electronic mail.
Section 14.5. Severability of Provisions. Each provision of this Agreement is severable from every other provision in determining enforceability of any
provision.
Section 14.6. Counterparts. For convenience, this Agreement may be executed in any number of counterparts with the same effect as if each party had
executed the same document. This shall include any electronic signatures or electronic execution methods.
Section 14.7. Integration; Amendments. This Agreement, any Exhibits herein, as well as any related documents contain the entire understanding of the
parties on this subject. No purported amendment or modification of any document, or waiver, discharge or termination of any obligation shall be enforceable
or admissible unless, and only to the extent, expressly set forth in a writing signed by the party against which enforcement or admission is sought. Without
limiting the generality of the foregoing, no oral promise or statement, nor any action, inaction, delay, failure to require performance or course of conduct shall
operate as, or evidence, an amendment, supplement or waiver or have any other effect on the Agreement.
Section 14.8. Term and Survival. Unless terminated earlier, this Agreement shall remain in effect until all amounts received by the Escrow Agent have been
disbursed as provided herein above. In no case will the termination of this Agreement relieve the parties of their responsibility to pay any fees due to the
Escrow Agent and payable under this Agreement. All covenants, representations and warranties made in this Agreement continue in full force until this
Agreement has terminated pursuant to its terms (other any other obligations which, by their terms, are to survive the termination of this Agreement).
Section 14.9. Attorneys’ Fees, Costs and Expenses. In any action or proceeding between Depositor and Beneficiary and Escrow Agent arising out of or
relating to the documents, the prevailing party shall be entitled to recover its reasonable attorneys’ fees and other costs and expenses incurred, in addition to
any other relief to which it may be entitled.
Section 14.10. Electronic Execution of Documents. The words “execution,” “signed,” “signature” and words of like import in any documents shall be deemed
to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity and enforceability as a
manually executed signature or the use of a paper-based recordkeeping systems, as the case may be, to the extent and as provided for in any applicable
law, including, without limitation, any state law based on the Uniform Electronic Transactions Act.
Section 14.11. Headings. The headings used in this Agreement are for convenience only and shall not affect interpretation.
Section 14.12. Construction of Agreement. In cases of uncertainty this Agreement shall be construed without regard to which of the parties caused the
uncertainty to exist.
Section 14.13. Relationship. The relationship of the parties to this Agreement is determined solely by the provisions of this Agreement. The parties do not
intend to create any agency, partnership, joint venture, trust, fiduciary or other relationship not contemplated or agreed to in this Agreement with duties or
incidents different from those of parties to an arm’s-length contract.
Section 14.14. Third Parties. Nothing in this Agreement, whether express or implied, is intended to: (a) confer any benefits, rights or remedies under or by
reason of this Agreement on any persons other than the express parties to it and their respective permitted successors and assigns; (b) relieve or discharge
the obligation or liability of any person not an express party to this Agreement; or, (c) give any person not an express party to this Agreement any right of
subrogation or action against any party to this Agreement.
Section 14.15. Legal Process. Escrow Agent reserves all rights, and Depositor and Beneficiary explicitly acknowledge and agree to such reservation, related
to Escrow Agents obligations under any legal process served unto it in any way related to the Depositor and Beneficiary. In any action or proceeding
between Escrow Agent and any other party to this Agreement, the prevailing party will be entitled to recover its reasonable attorneys’ fees and other
reasonable costs and expenses incurred, in addition to any other relief to which it may be entitled.
Section 14.16. Acknowledgment and Amendments. All Parties understand and agree to the terms and conditions in this Agreement. Parties agree that all
terms under this Agreement, including any obligations on Escrow Agent, are subject to applicable laws. Either Depositor or Beneficiary may be subject to
other agreements with Escrow Agent. By signing this Agreement, the Parties acknowledge that they have read this Agreement, and Depositor and/or
Beneficiary have discussed this Agreement with a lawyer of their choosing, if desired, or that Depositor and Beneficiary have been afforded such opportunity
and that Depositor and Beneficiary are signing this Agreement without duress of any kind. The provisions of this Agreement may only be altered, modified or
amended by instrument in writing duly executed by all of the Parties hereto.
Section 14.17. Interpretation. This Agreement is the most reliable evidence of the Agreement between Parties. If any Party goes to court for any reason, that
Party can use a copy, filmed or electronic, of any periodic statement, this Agreement, or any other document to prove that Parties obligations or that a
transaction has taken place. The copy, microfilm, microfiche, or optical image will have the same validity as the original. Unless otherwise specified herein,
all “days” referred to in this Agreement shall be business days. Whenever under the terms hereof the time giving a notice or performing an act falls upon a
Saturday, Sunday or federal holiday, such time shall be extended to the next following business day.
Section 14.18. Errors and Omissions. Typos on documents which are not material to the terms of the Agreement, such as accidental misspellings or clerical
errors, shall not affect the validity of this Agreement.
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device are trademarks of SVB Financial Group, used under license. Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. Silicon
Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB).
Exhibit A
Fee Schedule
In accordance with this Agreement, the following fees are due to the Escrow Agent and shall be assessed against the Funds held in escrow unless
specifically identified otherwise:
Type of Fee:
Amount
Due:
Escrow Fee*:
$0
Payable at the time the escrow account is
established
Renewal Fee: (if
applicable)
$0
Payable on the first and subsequent
anniversaries of the escrow account
* An additional fee may be charged if revisions to the agreement are requested (you will be notified if the additional fee applies at the time of the request).
Exhibit B
Delivery Instructions
In accordance with this Agreement, all funds to be deposited to the Escrow Account should be delivered as follows:
Remittance Via Wire Transfer:
Account Name: _________________ Escrow Account
Bank:
Silicon Valley Bank
Account #:
ABA #:
121140399
SWIFT:
SVBKUS6S
Address:
Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
Exhibit C – 1
Escrow Account Disbursement Instruction Letter
(PPP - Depositor)
Silicon Valley Bank
Deposit Escrow Services
3003 Tasman Drive, HF-151
Santa Clara, CA 95054
Fax: (408) 728-9746
Escrow Agreement dated:
Depositor:
Roadster, Inc.
Beneficiary:
Silicon Valley Bank, as lender
This letter is delivered pursuant to the Escrow Agreement identified above, by and among the Depositor, Beneficiary and Silicon Valley Bank as Escrow
Agent.
The Transaction relating to this Agreement:
☐Is Ongoing
☒Is Final
A Disbursement Eligible Date has occurred and the Depositor hereby instructs Escrow Agent to release funds from the Escrow Account into the account as
identified below, in accordance with the Escrow Agreement. This funds transfer will occur after the Beneficiary has confirmed that all amounts outstanding on
the PPP Loan, after forgiveness if applicable, have been repaid in full.
$_________________________
Name on Account:
Address as listed on the account:
Bank Name:
Account Number:
Bank ABA/Routing Number:
Reference:
The undersigned has caused its duly authorized representative to execute this letter as of the date hereof.
DEPOSITOR
By:
Name/Title:
Date:
Exhibit C – 2
Escrow Account Disbursement Instruction Letter
(PPP - Beneficiary)
Silicon Valley Bank
Deposit Escrow Services
3003 Tasman Drive, HF-151
Santa Clara, CA 95054
Fax: (408) 728-9746
Escrow Agreement dated:
Depositor:
Roadster, Inc.
Beneficiary:
Silicon Valley Bank, as lender
This letter is delivered pursuant to the Escrow Agreement identified above, by and among the Depositor, Beneficiary and Silicon Valley Bank as Escrow
Agent.
The Transaction relating to this Agreement:
☐Is Ongoing
☒Is Final
A Disbursement Eligible Date has occurred and the Beneficiary hereby instructs Escrow Agent to release funds from the Escrow Account into the account in
the name of Beneficiary as identified below, in accordance with the Escrow Agreement. These funds will be used by the Beneficiary to repay all amounts
outstanding on the PPP Loan, after forgiveness if applicable.
$_________________________
Name on Account:
Silicon Valley Bank
Bank Name:
Account Number:
Bank ABA/Routing Number:
Reference:
The execution and delivery of this Instruction by the individual named below have been duly authorized by all necessary action on the part of the Beneficiary.
SILICON VALLEY BANK, as Beneficiary
By:
Name/Title:
Date:
Exhibit 21.1
Name of Subsidiary
Jurisdiction of
Incorporation
CDK Global Holdings, LLC
Delaware
CDK Global Holdings II, LLC
Delaware
CDK Global, LLC
Delaware
CDK Global International Holdings, Inc.
Delaware
CDK Global (UK) LP
United Kingdom
CDK Global (Canada) Limited
Canada
CDK Data Services, Inc.
Texas
CDK Vehicle Registration, Inc.
California
Computerized Vehicle Registration
California
Roadster, Inc.
Delaware
CDKI Holdings (UK) 2 Limited
United Kingdom
In accordance with Item 601(b)(21) of Regulation S-K, the Company has omitted the names of particular subsidiaries because the unnamed subsidiaries
would not have constituted a significant subsidiary as of June 30, 2021.
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-199078 on Form S-8 and Registration Statement No. 333-224580 on Form
S-3 of our reports dated August 17, 2021, relating to the financial statements of CDK Global, Inc. and the effectiveness of CDK Global, Inc.'s internal
control over financial reporting appearing in this Annual Report on Form 10-K for the year ended June 30, 2021.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
August 17, 2021
EXHIBIT 31.1
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
I, Brian Krzanich, certify that:
1.
I have reviewed this Annual Report on Form 10-K of CDK Global, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date:
August 17, 2021
/s/ Brian Krzanich
Brian Krzanich
President, Chief Executive Officer
(principal executive officer)
EXHIBIT 31.2
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
I, Eric J. Guerin, certify that:
1.
I have reviewed this Annual Report on Form 10-K of CDK Global, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date:
August 17, 2021
/s/ Eric J. Guerin
Eric J. Guerin
Executive Vice President, Chief Financial Officer
(principal financial officer)
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of CDK Global, Inc. (the "Company") on Form 10-K for the fiscal year ended June 30, 2021 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Brian Krzanich, President, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
August 17, 2021
/s/ Brian Krzanich
Brian Krzanich
President, Chief Executive Officer
(principal executive officer)
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of CDK Global, Inc. (the "Company") on Form 10-K for the fiscal year ended June 30, 2021 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Eric J. Guerin, Executive Vice President, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
August 17, 2021
/s/ Eric J. Guerin
Eric J. Guerin
Executive Vice President, Chief Financial Officer
(principal financial officer)