Martello to Acquire GSX as Part of Strategic Investment in Digital Experience Monitoring

Transaction adds to monthly recurring revenue with opportunity to scale the GSX addressable market by moving it to a true cloud SaaS platform.

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OTTAWA, April 28, 2020 /CNW/ – Martello Technologies Group Inc., (“Martello” or the “Company”) (TSXV: MTLO), a provider of digital experience monitoring (DEM) solutions deployed in more than 5,000 enterprise networks around the world, today announced two initiatives as part of a strategic investment to strengthen its DEM capabilities.

The Company has entered into a share purchase agreement (the “Share Purchase Agreement“) dated April 28, 2020 to acquire 100% of the shares of GSX Participations SA (“GSX“), a provider of end-user experience monitoring for Microsoft Office 365 headquartered in Geneva, Switzerland with more than 400 enterprise customers globally. The consideration for the acquisition is 22,000,000 common shares and CDN$13,860,000 cash for an aggregate purchase price of $18,700,000, subject to adjustment (the “Purchase Price“),

Martello intends to close debt financing concurrently with the closing of the Transaction. Financing provided by Vistara Capital Partners will fund the acquisition of GSX, while a secured revolving credit facility from National Bank of Canada will be made available to Martello to draw upon from time to time to finance its day to day operations. The transaction is subject to the completion of standard conditions of closing for this type of transaction, including the completion of the financings as well as conditions regarding minimum cash and available cash at closing. Additional information about the transaction and the debt financings above are detailed in this press release. Closing is expected by May 28, 2020.

Martello also announced today that, as part of an enhanced focus on its software as a service (SaaS) -based DEM strategy, the Company has completed a strategic review of all operations and is taking steps to achieve efficiencies across the organization. As a result, Martello has reduced its workforce with a specific focus on the former Elfiq division, and is in discussions with a third-party regarding a divestment of this division. These decisions have been taken in the context of rapidly expanding global remote work requirements and the resulting opportunity created in the SaaS-based DEM market, and by the Company’s priority to achieve positive adjusted EBITDA in the near term. Additional details are provided in this press release.

GSX Transaction Highlights and Commentary:

• Based on unaudited financial statements prepared by GSX for the year ended December 31, 2019:
  • GSX generated €4.4M of revenues in FY2019, which is approximately CDN$6.6M.
  • Pro forma consolidated Martello revenues on a trailing twelve-month basis are approximately $19.7M.
  • Approximately 89% of total GSX revenue for its software during FY2019 was recurring, with Monthly Recurring Revenue (MRR) of approximately €0.3M, or CDN$0.45M.
  • GSX billings from sales of Microsoft Office 365 digital experience monitoring increased by 34% in FY2019.
  • GSX’s gross margins are approximately 90%.
  • GSX EBITDA in FY2019 was (€1.1M)

• Complimentary to the earlier acquisition of Savision, the acquisition of GSX further extends Martello’s digital experience monitoring capabilities into Microsoft Office 365, which is the dominant business application platform used by Martello’s enterprise and SMB markets.
• While this acquisition has been in negotiation and diligence for more than six months, recent events show the opportunity with Microsoft Office 365. The service has 200 million monthly active users, typically growing at a pace of 3 million users per month¹. With remote work increasing, Microsoft noted on March 19, 2020² an unprecedented spike in Teams usage, with daily users growing by 12 million in just seven days.
• Once synergies are realized from integration, Martello believes that GSX should deliver positive adjusted EBITDA contribution, and with MRR and Office 365 monitoring growth trajectories, should help to deliver EBITDA margins typically associated with SaaS vendors.
• GSX is a Microsoft Gold Partner in both Messaging and Cloud Productivity.
• Near-term growth opportunities as a result of this transaction include:
  • Integrating the GSX software into Martello’s multi-tenant cloud SaaS environment to provide a simplified deployment model for GSX’s existing target market (large enterprise and MSPs) while also expanding its addressable market to small and medium sized businesses.
  • Offering Office 365 user experience monitoring to existing Martello customers and partners, many of whom use or sell Office 365.

“There are few services whose performance is as critical to CIOs as Microsoft Office 365”, said John Proctor, President and CEO of Martello. “By acquiring GSX, the Company extends its existing monitoring, analytics and network optimization capabilities deeply into Office 365 and increases monthly recurring revenue from this mission critical space. As we take steps to exit the SD-WAN business, Martello will be focused on strengthening its SaaS-based DEM market opportunity going forward, to increase MRR and move towards positive adjusted EBITDA. We’re pleased to welcome GSX into the Martello family, and appreciate the confidence that National Bank and Vistara Capital Partners have placed in us – in today’s uncertain market conditions, our lenders recognize Martello’s market opportunity together with GSX”.

“Businesses in every industry are deploying cloud services such as Microsoft Office 365, unified communications and video conferencing”, said Antoine Leboyer, President and CEO of GSX. “Martello has built an impressive family of solutions which combines monitoring and analytics capabilities to ensure an optimum user experience for these key business services. We are excited that GSX’s advanced synthetic Digital Experience Monitoring capabilities will enhance Martello’s portfolio of solutions, while adding more value to our clients and partners”

“As the world has shifted to remote work and usage of cloud-based communication and collaboration tools such as Microsoft Teams has grown rapidly, Martello’s opportunity has become even more attractive”, said Noah Shipman, Partner in Vistara Capital Partners. “We are impressed by Martello’s management team, technology and market opportunity, and believe that the acquisition of GSX will help accelerate its growth with a solution for the expanding Microsoft Office 365 market. Vistara invests in ambitious technology companies with resilient business models across North America and are specifically proud to support another emerging Canadian technology leader in Martello”.

“National Bank is pleased to partner with Martello, a leading provider of monitoring and analytics solutions for real-time cloud services. We’re proud to support the growth of this renowned Ottawa-based company and to have assisted them with financing this strategic investment. This collaboration is in line with our firm commitment to promoting innovation, even in uncertain economic times, and supporting Canadian businesses,” said David Looi, Senior Director, Technology and Innovation Banking Group at National Bank.

Transaction and Financing Details

Through its wholly owned subsidiary, Martello Technologies Corporation (“MTC“), Martello will purchase all the issued and outstanding securities of GSX. The Purchase Price is payable as follows: (i) a cash payment of CDN$13,860,000 and (ii) the issuance of 22,000,000 common shares of the Company (the “Common Shares“) to the shareholders of GSX (the “Vendors“). Upon completion of the transaction, it is expected that the Vendors will own 9.5% of the issued and outstanding shares of Martello on an undiluted basis. While no new insiders will be created upon closing, the Martello Shares issued to GSX’s largest Vendor will be subject to a 4-month plus 1 day hold period. Sampford Advisors acted as exclusive M&A adviser to Martello on this transaction. The transaction does not constitute a Fundamental acquisition as per TSXV Policy 5.3.

As part of the transaction described above, MTC will complete debt financing with Vistara Capital Partners (“Vistara“). Vistara will provide a subordinated secured term loan of US$8M (the “Term Loan“.  The Vistara credit agreement (the “Vistara Credit Agreement“) is dated April 27, 2020. The Term Loan is repayable within 36 months of closing and carries interest of the greater of (i) 12.50% per annum; and (ii) the U.S. prime rate plus 8.75% per annum calculated monthly in arrears on the outstanding principal amount. Vistara will take subordinated security interest in all the present and after acquired property of MTC, the Company, and the Canadian, US, Swiss, and Dutch subsidiaries of the Borrower (the “Corporate Guarantors“). Repayment of the Term Loan will be guaranteed by the Company and each of the Corporate Guarantors.

As consideration for providing the Term Loan, Vistara will receive upon closing 12,777,273 bonus warrants to purchase Common Shares (“Bonus Warrants“) subject to the TSXV Policy 5.1 – Loans, Loan Bonuses, Finder’s Fees and Commissions (“TSXV Policy“). Each Bonus Warrant will be exercisable into one Common Share (a “Bonus Share“) at an exercise price of CDN $0.22 per Bonus Share for up to 36 months from closing (the “Expiry Time“), unless the Term Loan is repaid earlier, then the Expiry Time shall be reduced in accordance with TSXV Policy. Subject to TSXV approval, the Bonus Warrants may be exercised on a “cashless basis”. Furthermore, if at any time, after four months and a day after the Issue Date, the volume weighted average price (VWAP) of the Common Shares for any twenty (20) consecutive Trading Days on the TSXV, during which the total volume of common shares traded in such period exceeds 5,000,000, is equal to or exceeds CDN $0.44 being 100% premium on exercise price then all of the Bonus Warrants shall be deemed to be automatically exercised by Vistara on a cashless basis. The Bonus Shares will be subject to an initial four month plus one day hold period from the date of issuance of the Bonus Warrants. Issuance of the Bonus Warrants is subject to approval by the TSXV. Existing term debt to Royal Bank of Canada will be repaid on or prior to closing.

Additional Financing

In addition, National Bank of Canada (“National Bank” or the “Senior Lender“) has offered to provide a senior secured revolving credit facility of up to CDN $7.5M (the “Revolving Facility“) which MTC can draw upon from time to time to finance its day to day operations.  The National Bank credit agreement (the “National Bank Credit Agreement“) is dated April 27, 2020. It is comprised of a demand revolving line of credit and other ancillary facilities. The credit facility carries interest of Canadian Prime Rate plus 2.85% per annum. This facility will be undrawn at the close of the transaction.

The facilities provided by National Bank will be guaranteed by the Company and its subsidiaries in Canada, US, Netherlands, and GSX (the “Corporate Guarantors“) and will be secured against the property of MTC and of certain of the Corporate Guarantors. Repayment of the National Bank revolving facility is expected to also be guaranteed in part by Export Development Canada.

Strategic Review Results

Martello has taken steps to achieve efficiencies in sales, general and administrative and development operations. As part of this initiative, the former Elfiq network technology division workforce has been reduced by approximately 70% through temporary layoffs, to focus on the SaaS-based components of Martello’s DEM strategy. The Company intends to exit the former Elfiq network technology business, and is in discussions with a possible buyer for the intellectual property and assets of this division. This operational change will allow Martello to allocate more resources to SaaS-based DEM activities, while reducing Martello’s operating cash burn immediately.

About Martello Technologies Group

Martello Technologies Group Inc. (TSXV: MTLO) is a technology company that provides digital experience monitoring (DEM) solutions. The company develops products and solutions that provide monitoring and analytics on the performance of real-time applications on networks, while giving IT teams and service providers control and visibility of their entire IT infrastructure. Martello’s products include unified communications performance analytics software, and IT analytics software. Martello Technologies Group is a public company headquartered in Ottawa, Canada with offices in Montreal, Amsterdam, Paris, Dallas and New York. Learn more at http://www.martellotech.com

About Vistara Capital Partners

Headquartered in Vancouver BC, Vistara Capital provides highly flexible and less dilutive growth debt and hybrid debt-equity financing solutions for mid-late stage technology companies across North America. Founded, managed, and funded by seasoned technology finance and operating executives, “Vistara” (Sanskrit for “expansion”) is focused on enabling the growth and expansion of its portfolio companies. Additional information is available at www.vistaracapital.com.

About National Bank

With $289 billion in assets as at January 31, 2020, National Bank of Canada, together with its subsidiaries, forms one of Canada’s leading integrated financial groups. It has more than 26,000 employees in knowledge-intensive positions and has been recognized numerous times as a top employer and for its commitment to diversity. Its securities are listed on the Toronto Stock Exchange (TSX: NA). Follow the Bank’s activities at nbc.ca or via social media such as Facebook, LinkedIn and Twitter.

This press release does not constitute an offer of the securities of the Company for sale in the United States. The securities of the Company have not been registered under the United States Securities Act of 1933, (the “1933 Act”) as amended, and may not be offered or sold within the United States absent registration or an exemption from registration under the 1933 Act.

This press release shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the securities in any state in which such offer, solicitation or sale would be unlawful.

Neither the TSXV nor its Regulation Services Provider (as that term is defined in the policies of the TSXV) accepts responsibility for the adequacy or accuracy of this news release.

Cautionary Note Regarding Forward-Looking Statements

This news release contains “forward-looking statements”. Forward-looking statements can be identified by words such as:”anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “should,” “will” and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding accretive monthly recurring revenues, closing of the proposed transaction, effect of closing on the Company’s gross margins.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

• Continued volatility in the capital or credit markets.
• Our ability to maintain our current credit rating and the impact on our funding costs and competitive position if we do not do so.
• Changes in customer demand.
• Disruptions to our technology network including computer systems and software, as well as natural events such as severe weather, fires, floods and earthquakes or man-made or other disruptions of our operating systems, structures or equipment.
• Delayed purchase timelines and disruptions to customer budgets, as well as Martello’s ability to maintain business continuity as a result of COVID-19.

Any forward-looking statement made by us in this news release is based only on information currently available to us and speaks only as of the date on which it is made. Except as required by applicable securities laws, we undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.