UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended September 30, 2021
or
For the transition period from to
Commission File Number:
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
| (State or other jurisdiction of incorporation) | (IRS Employer Identification Number) |
1720 Peachtree Street,
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, par value $0.0001 per share | The | |||
| Warrants, each whole Warrant entitling the holder to purchase one share of Common Stock at an exercise price of $11.50 | AVCTW | The Nasdaq Stock Market LLC |
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. ☒
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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
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.
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 8, 2021, 67,773,027 shares of the Company’s common stock, par value $0.0001 per share, were outstanding.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
TABLE OF CONTENTS
| Page | ||
| PART I. FINANCIAL INFORMATION | ||
| Item 1. | Unaudited Condensed Consolidated Financial Statements | 1-28 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 41 |
| Item 4. | Controls and Procedures | 41 |
| PART II. OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 43 |
| Item 1A. | Risk Factors | 43 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 44 |
| Item 3. | Defaults Upon Senior Securities | 44 |
| Item 4. | Mine Safety Disclosures | 44 |
| Item 5. | Other Information | 44 |
| Item 6. | Exhibits | 44 |
| SIGNATURES | 45 | |
i
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data, or as otherwise noted)
| September 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | - | |||||||
| Trade receivables, net of allowances of $ | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Inventory | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Other assets: | ||||||||
| Goodwill | ||||||||
| Other intangible assets, net | ||||||||
| Other noncurrent assets | ||||||||
| Total other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Deferred revenue | ||||||||
| Line of credit | ||||||||
| Current portion of notes payable and capital leases | ||||||||
| Subordinated promissory note - related party | - | |||||||
| Subordinated promissory note - other | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities | ||||||||
| Notes payable and capital leases (net of current portion and deferred financing fees) | ||||||||
| Convertible Debentures, net of discount - related parties | - | |||||||
| Convertible Debentures, net of discount and deferred financing fees | - | |||||||
| Warrant liabilities | ||||||||
| Deferred tax liability | ||||||||
| Other liabilities | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingent liabilities (see note 16) | ||||||||
| Stockholders’ equity: | ||||||||
| Successor: | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
1
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data, or as otherwise noted)
(Unaudited)
| Three Months Ended | Nine Months Ended | April 7, 2020 through | January 1,
2020 through | |||||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | April 6, 2020 | ||||||||||||||||
| Successor | Successor | Successor | Successor | Predecessor | ||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Hardware | $ | $ | $ | $ | $ | |||||||||||||||
| Third party software and maintenance | ||||||||||||||||||||
| Managed and professional services | ||||||||||||||||||||
| Cloud subscription and software | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total revenues | ||||||||||||||||||||
| Cost of revenue | ||||||||||||||||||||
| Gross profit | ||||||||||||||||||||
| Goodwill impairment | - | - | - | |||||||||||||||||
| Research and development | ||||||||||||||||||||
| Selling, general and administrative | ||||||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Other (expense) income | ||||||||||||||||||||
| Gain on extinguishment of debt | - | - | - | |||||||||||||||||
| Change in fair value of warrants liabilities | ( | ) | ( | ) | ||||||||||||||||
| Interest expense - related parties | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Other (expense) income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Total other income (expenses) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Net loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| Loss per share - basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| Weighted average shares outstanding - basic and diluted | ||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share and per share data, or as otherwise noted)
(Unaudited)
| For the period January 1, 2020 through April 6, 2020 | ||||||||||||||||||||
| Additional | ||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Predecessor | ||||||||||||||||||||
| Balance, January 1, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, April 6, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| For the period April 7, 2020 through September 30, 2020 | ||||||||||||||||||||
| Additional | ||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity (Deficit) | ||||||||||||||||
| Successor | ||||||||||||||||||||
| Balance, April 7, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Conversion of rights (previously issued in the IPO) into shares | - | - | - | - | ||||||||||||||||
| Issuance of shares in connection with the acquisition of Computex (as defined in Note 1) | ||||||||||||||||||||
| Additional shares issued in connection with the acquisition of Computex (working capital adjustment) | ||||||||||||||||||||
| Issuance of shares in exchange for services | ||||||||||||||||||||
| Deferred underwriting fees relating to IPO | - | ( | ) | ( | ) | |||||||||||||||
| Debenture discount relative value of warrants | - | |||||||||||||||||||
| Redemption of shares held in trust | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Share-based compensation | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| For the period July 1, 2020 through September 30, 2020 | ||||||||||||||||||||
| Additional | ||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Successor | ||||||||||||||||||||
| Balance, July 1, 2020 | $ | | $ | $ | ( | ) | $ | |||||||||||||
| Additional shares issued in connection with the acquisition of Computex (working capital adjustment) | ||||||||||||||||||||
| Share-based compensation | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
(Unaudited)
| For the period July 1, 2021 through September 30, 2021 | ||||||||||||||||||||
| Additional | ||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity (Deficit) | ||||||||||||||||
| Successor | ||||||||||||||||||||
| Balance, July 1, 2021 | $ | | $ | $ | ( | ) | $ | ( | ) | |||||||||||
| Common stock issued on conversion of Debentures | ||||||||||||||||||||
| Common stock issued on conversion of Penny Warrants | ||||||||||||||||||||
| Vested and delivered RSUs | - | - | - | - | ||||||||||||||||
| Share-based compensation | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| For the period January 1, 2021 through September 30, 2021 | ||||||||||||||||||||
| Additional | ||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Successor | ||||||||||||||||||||
| Balance, January 1, 2021 | $ | | $ | $ | ( | ) | $ | |||||||||||||
| Common stock issued on conversion of Debentures | ||||||||||||||||||||
| Common stock issued on conversion of Penny Warrants | ||||||||||||||||||||
| Cumulative effect of accounting change related to adoption of ASU 2020-06 (See Note 4) | - | ( | ) | ( | ) | |||||||||||||||
| Debenture discount relative to fair value of warrants | - | |||||||||||||||||||
| Vested and delivered RSUs | - | - | - | - | ||||||||||||||||
| Shares repurchased for tax withholding | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Share-based compensation | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine months ended | April 7, 2020 through | January 1, 2020 through | ||||||||||
| September 30, 2021 | September 30, 2020 | April 6, 2020 | ||||||||||
| Successor | Successor | Predecessor | ||||||||||
| Cash Flows from Operating Activities: | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Goodwill impairment | ||||||||||||
| Depreciation | ||||||||||||
| Amortization of intangible assets | ||||||||||||
| Amortization of Convertible Debenture discount | ||||||||||||
| Interest on convertible debt paid-in-kind | ||||||||||||
| Gain on extinguishment of debt | ( | ) | ||||||||||
| Share-based compensation | ||||||||||||
| Change in fair value of warrant liabilities | ( | ) | ||||||||||
| Deferred income taxes | ( | ) | ( | ) | ||||||||
| Amortization and write-off of deferred financing costs | ||||||||||||
| Loss on disposal of property and equipment | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | ( | ) | ( | ) | ||||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ( | ) | ||||||
| Inventory | ( | ) | ( | ) | ||||||||
| Accounts payable and accrued expenses | ( | ) | ||||||||||
| Other current liabilities | ||||||||||||
| Deferred revenue | ( | ) | ( | ) | ( | ) | ||||||
| Other | ( | ) | ( | ) | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ( | ) | ||||||
| Cash Flows from Investing Activities: | ||||||||||||
| Cash from the acquisition of Computex (See Note 5) | ||||||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ( | ) | ||||||
| Deferred development costs | ( | ) | ||||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ( | ) | ||||||
| Cash Flows from Financing Activities: | ||||||||||||
| Net change in line of credit | ( | ) | ||||||||||
| Payment of taxes from withheld shares | ( | ) | ||||||||||
| Debt repayments (including capital lease obligations) | ( | ) | ( | ) | ( | ) | ||||||
| Proceeds from issuance of promissory note - related party | ||||||||||||
| Proceeds from PPP Loan (See Note 8) | ||||||||||||
| Proceeds from issuance of Convertible Debentures (See Note 9) | ||||||||||||
| Proceeds from issuance of common stock | ||||||||||||
| Redemption of shares held in trust | ( | ) | ||||||||||
| Payment of deferred financing fees | ( | ) | ( | ) | ||||||||
| Net cash provided by financing activities | ||||||||||||
| Net change in cash and restricted cash | ( | ) | ||||||||||
| Cash and restricted cash, beginning of period | ||||||||||||
| Cash and restricted cash, end of period | $ | $ | $ | |||||||||
| Supplemental Disclosures about Cash Flow Information | ||||||||||||
| Cash paid for interest | $ | $ | $ | |||||||||
| Cash paid (refunds received) for income taxes | $ | $ | $ | ( | ) | |||||||
| Supplemental Schedule of Noncash Investing and Financing Activities | ||||||||||||
| Noncash conversion of Debentures to common stock | $ | $ | ||||||||||
| Fair value of Penny Warrants related to the issuance of Convertible Debentures | $ | |||||||||||
| Noncash acquisition of Computex in exchange for common stock, Convertible Debentures and assumed debt | ||||||||||||
| Promissory note - related party, exchanged for Convertible Debentures | ||||||||||||
| Deferred underwriting fees settled via the issuance of common stock and the issuance of subordinated promissory note | ||||||||||||
| Capital expenditures included in accounts payable and accrued expenses | ||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
1. Organization and Business Operations
Organization
American Virtual Cloud Technologies, Inc. (“AVCT,” the “Company,” “we,” “us,” “our” or “Successor”) was incorporated in Delaware on April 7, 2016.
On April 7, 2020 (the “Computex Closing Date”), AVCT (formerly known as Pensare Acquisition Corp.) consummated a business combination transaction (the “Computex Business Combination”) in which it acquired Stratos Management Systems, Inc. (“Computex”), an operating company that does business as Computex Technology Solutions. In connection with the closing of the Computex Business Combination, the Company changed its name to American Virtual Cloud Technologies, Inc.
On December 1, 2020 (the “Kandy Closing Date”), the Company acquired the Kandy Communications business (hereafter referred to as “Kandy”) from Ribbon Communications, Inc. and certain of its affiliates (“Ribbon”), by acquiring certain assets, assuming certain liabilities and acquiring all of the outstanding interests of Kandy Communications LLC.
For accounting purposes, both Computex and Kandy were considered the acquirees, and the Company was considered the acquirer. The acquisitions were accounted for using the acquisition method of accounting. See Note 5 for additional information.
Nature of current business
Computex is a leading multi-brand technology solutions provider to large global customers, providing a comprehensive and integrated set of technology solutions, through its extensive hardware, software and value-added service offerings. Computex designs best-fit solutions, and with the help of leading vendors in the industry, helps its customers with the procurement of suitable hardware and software that are appropriate for their specific needs. With primary operating locations in Minnesota, Michigan, Florida and Texas, services offered by Computex include directory and messaging, enterprise networking, cybersecurity, collaboration, data center services, integration, storage, backup, virtualization, converged infrastructures and unified communications-as-a-service (“UCaaS”).
Kandy, a provider of cloud-based enterprise services, globally deploys a white-label, carrier-grade cloud-based platform for UCaaS, communications platform as a service (“CPaaS”) and contact center as a service (“CCaaS”) for mid-market and enterprise customers across a proprietary multi-tenant, highly scalable cloud platform. The Kandy platform also includes pre-built customer engagement tools, based on web real-time communication technology (“WebRTC technology”), known as Kandy Wrappers, and white-labeled services that are offered to a variety of customers including communications service providers and systems integrators. With Kandy, companies can quickly embed real-time communications capabilities into their existing applications and business processes.
Recent development
On September 16, 2021, the Company issued a press release announcing that as a result of a decision by the Company’s Board of Directors to explore strategic alternatives previously announced on April 7, 2021, the Board had authorized the Company to focus its strategy on acquisitions and organic growth in its cloud technologies business as well as to explore strategic opportunities for its IT solutions business, including the planned divestiture of Computex. The Company believes that the change will allow it to optimize resource allocation, focus on core competencies, and improve its ability to invest in areas of maximal growth potential. Proceeds from any potential sale transaction are expected to be used to further deleverage the balance sheet and provide working capital.
6
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
Computex
was not classified as held for sale as of September 30, 2021 as the criteria for the reporting unit to be classified as held for sale
were not met as of September 30, 2021. However, in connection with the potential sale of Computex, the Company compared the expected
proceeds less costs to sell with the carrying value of the reporting unit and in connection therewith recorded a noncash goodwill impairment
charge of $
Also, in July 2021, the Board of Directors approved and executed certain organizational and personnel changes as part of a strategic plan to flatten the Company’s corporate structure, reduce overhead and more directly align its business units with their respective markets.
Also see Note 17, Subsequent Events, regarding a registered direct offering and a concurrent private placement that were announced on November 2, 2021.
Covid-19
The novel strain of coronavirus (“COVID-19”) continues to significantly impact local, regional, and global economies, businesses, supply chains, production and sales across a range of industries. The extent of its impact on our operational and financial performance is uncertain and difficult to predict and we remain cautious about the global recovery.
To protect the health and safety of our employees, our daily execution has evolved into a largely virtual model. However, we have found ways to continue to engage with and assist our customers and partners as they work to navigate the current environment. We will continue to monitor the current environment and may take further actions that may be required by federal, state or local authorities or that we determine to be in the interests of our employees, customers, and partners.
2. Liquidity
Historically, the Company’s primary sources of liquidity have been cash and cash equivalents, cash flows from operations (when available) and cash flows from financing activities, including funding under its Credit Agreement (defined and more fully discussed in Note 8). From time to time, the Company may also choose to access the debt and equity markets to fund acquisitions and fund working capital to diversify its capital sources. The Company’s current principal capital requirements are to fund working capital, fund capital expenditures and make investments that are in line with its business strategy.
The Credit Agreement, as amended, matures on
December 31, 2021, and, as of September 30, 2021, provided for maximum borrowings of $
In
addition, at September 30, 2021, the Company had an unrestricted cash balance of $
On or before the maturity date of the Credit Agreement, the Company expects to seek to either negotiate an extension of the Credit Agreement or enter into a new agreement with another lender.
Also see Note 8 for information regarding a new
promissory note in the principal amount of $
Whereas the Company continues to analyze its liquidity to ensure that it is able to execute on its operational plan, it believes that cash anticipated to be generated from future operations, as well as borrowings from lending and project financing sources and proceeds from equity and debt offerings will provide sufficient liquidity to fund operations for at least one year after the date the financial statements are issued. However, if the Company is unable to achieve its forecasts, fails to meet any of the financial covenants in the Credit Agreement and is unable to obtain a waiver or an amendment under the Credit Agreement to allow it to continue to borrow, or raise additional equity or debt capital, the Company may need to pursue one or more alternatives, such as to reduce or delay investments in its business, or seek additional financing. The Company can provide no assurance that future funding will be available if and when required or that such funding will be available on terms that it finds acceptable. Any projection is based on the Company’s current expectations regarding new project financing and product sales and service, cost structure, cash burn rate and other operating assumptions.
7
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
3. Summary of Significant Accounting Policies
Basis of presentation
The accompanying unaudited condensed consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.
These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2020, as filed with the SEC on May 14, 2021. The interim results for the period ended September 30, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021 or any future interim periods.
In the Computex Business Combination, Computex was considered the predecessor for accounting purposes, and the successor financial statements reflect a new basis of accounting that is based on the fair value of the net assets acquired and liabilities assumed. In the accompanying condensed consolidated financial statements, the Company clearly distinguishes between the entity that existed before the Computex Closing Date (“Predecessor”) and the entity that existed on and after such date (“Successor”). Because the Successor’s financial statements are presented on a different basis from the Predecessor’s financial statements, the two entities may not be comparable in certain respects. As a result, a black line is used to separate the Successor and the Predecessor columns or sections in certain tables included in the condensed consolidated financial statements.
The financial position, results of operations and cash flows described herein for the dates and periods prior to April 7, 2020 relate to the operations of Computex and its subsidiaries. The historical financial information of AVCT prior to the business combination (a special purpose acquisition company, or “SPAC”) are not reflected in the Predecessor financial statements as it is believed that including such amounts would make those financial statements less useful to users. SPACs typically deposit the proceeds received from their initial public offerings into a separate trust account until a business combination occurs. Once the business combination occurs, such funds are then used to satisfy the consideration for the acquiree and/or to pay stockholders who elect to redeem their shares of common stock in connection with the business combination. The operations of a SPAC, until the closing of a business combination, usually consists of transaction expenses and income earned from the trust account investments.
Determining fair values of certain assets acquired and liabilities assumed requires the exercise of judgment and often involves the use of significant estimates and assumptions. See Note 5 for a discussion of the fair value estimates utilized in the allocation of the Computex and Kandy purchase prices.
Principles of consolidation
The accompanying Successor condensed consolidated financial statements include the accounts of AVCT and its wholly owned subsidiaries. The Predecessor condensed consolidated financial statements reflect only the accounts of Computex and its subsidiaries. All intercompany balances and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales (or revenues) and expenses during the reporting period.
8
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that estimates made as of the date of the financial statements could change in the near term due to one or more future events. Accordingly, the actual results could differ significantly from those estimates. Significant accounting estimates reflected in the Company’s condensed consolidated financial statements include, but are not limited to, revenue recognition, allowance for doubtful accounts, accounting for warrants, recognition and measurement of income tax assets, valuation of share-based compensation, discount related to the fair value of warrants, and the valuation of net assets acquired.
Significant accounting policies
The significant accounting policies used in preparing these condensed consolidated financial statements were applied on a basis consistent with those reflected in our consolidated financial statements that are included in the annual report on Form 10-K for the year ended December 31, 2020, as amended, that was filed with the SEC on May 14, 2021, except for changes from the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,” (“ASU No. 2020-06”). The updates to our accounting policies from adopting ASU 2020-06 are provided in Note 4.
Public, Private Placement and EBC Warrants
On July 27, 2017, the Company entered into certain
Warrant Purchase Agreements with each of Pensare Sponsor Group, LLC, a Delaware limited liability company (the “Sponsor”),
MasTec, Inc., a Florida corporation, and EarlyBirdCapital, Inc., a Delaware corporation (“EBC” and, together with the Sponsor
and MasTec, Inc., the “Purchasers”), pursuant to which the Purchasers purchased an aggregate of
On
or about August 1, 2017, in the IPO,
The Private Placement Warrants and EBC Warrants are exercisable on a cashless basis, at the holder’s option, and are non-redeemable so long as they are held by the initial Purchasers or their permitted transferees. Public Warrants and any Private Placement Warrants or EBC Warrants that are transferred to nonpermitted transferees are redeemable at the option of the Company and are generally not exercisable on a cashless basis.
The Company evaluated the Warrants under Accounting Standards Codification (“ASC”) 815-40, Derivatives and Hedging—Contracts in an Entity’s Own Equity, and concluded that the Private Placement Warrants and the EBC Warrants do not meet the criteria to be classified in stockholders’ equity. A recent SEC Statement focused in part on provisions in warrant agreements that provide for potential changes to the settlement amounts dependent upon the characteristics of the warrant holder and because the holder of a warrant is not an input into the pricing of a fixed-for-fixed option on equity shares, such provision would preclude the Private Placement Warrants and the EBC Warrants from being classified in equity. Therefore, the Private Placement Warrants and the EBC Warrants are classified as liabilities at fair value, with subsequent changes in fair values recognized in earnings at each reporting date. Changes in the fair value of the Private Placement Warrants and EBC Warrants may be material to the Company’s future operating results.
9
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
The fair values of the Private Placement Warrants and EBC Warrants were determined using the Black-Scholes model in which the following assumptions were used for the valuation performed during the three months ended September 30, 2021:
| o | stock price volatility – |
| o | exercise price – $ |
| o | discount rate – | |
| o | remaining useful life – |
| o | stock price – $ |
Concentration of business and credit risk
Financial
instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and trade receivables.
Cash held by the Company, in financial institutions, regularly exceeds the federally insured limit of $
None
of the Company’s customers accounted for
Similarly,
no customer accounted for
Fair value of financial instruments
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability.
ASC Topic 820, Fair Value Measurements and Disclosures provides a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:
| ● | Level 1 — inputs are based upon unadjusted quoted prices for identical assets or liabilities traded in active markets. | |
| ● | Level 2 — inputs are based upon quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
| ● | Level 3 — inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. |
10
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
Assets measured at fair value on a non-recurring basis include goodwill, and tangible and intangible assets. Such assets are reviewed annually for impairment indicators. If a triggering event has occurred, the assets are re-measured when the estimated fair value of the corresponding asset group is less than the carrying value. The fair value measurements, in such instances, are based on significant unobservable inputs (Level 3).
The carrying amounts of the Company’s financial instruments, which include trade receivables, deposits, accounts payable and accrued expenses and debt at floating interest rates, approximate their fair values, principally due to their short-term nature, maturities or nature of interest rates.
The fair values of the Private Placement Warrants and EBC Warrants are reflected on the condensed consolidated balance sheet as “Warrant Liabilities,” are determined using a Black-Scholes model, and are considered to be Level 2 valuations. The significant assumptions used to determine the fair value as of September 30, 2021 are disclosed above in the section titled “Public, Private Placement and EBC Warrants.”
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Change in Segment reporting
Effective
January 1, 2021, the Company changed its segment reporting pursuant to ASC 280, Segment Reporting.
This change in reportable segments was a result of the Kandy acquisition and the integration of the Kandy business into the Company’s operations. These changes resulted in revisions to the financial information provided to the CODM on a recurring basis in the evaluation of financial performance of the Company and in the decision-making process. As the Company continues to integrate Kandy into its operations, changes to segments may be required, based on changes to the way that the CODM views the business. Refer to Note 15 for additional information.
Emerging growth company
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, (the “Securities Act”), as modified by the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further, Section 102(b) (1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. Private companies are those companies that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised, it adopts the new or revised standard at the time private companies adopt the new or revised standard, unless it chooses to early-adopt the new or revised accounting standard. Therefore, the Company’s financial statements may not be comparable to certain public companies.
11
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
4. Recently Issued and Adopted Accounting Standards
Recently issued accounting standards
In May 2021, the FASB issued ASU No. 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU No. 2021-04”), which provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. Under ASU 2021-04, an entity is required to treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option, that remains equity classified, as an exchange of the original instrument for a new instrument. ASU 2021-04 also provides guidance on the measurement of the effect of a modification or exchange and requires entities to recognize the effect of any such modification or exchange on the basis of the substance of the transaction.
ASU No. 2021-04 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Entities are required to apply the amendments prospectively to modifications or exchanges that occur on or after the effective date. Early adoption is permitted.
In February 2016, the FASB issued Accounting Standard Update (“ASU”) No. 2016-02, Leases (ASC 842), as amended by multiple updates, hereafter ASC 842. ASC 842 requires lessees to recognize, on the balance sheet, a lease liability and a lease asset for all leases, including operating leases with a lease term greater than 12 months and requires lessors to classify leases as either sales-type, direct financing or operating. ASC 842 also expands the required quantitative and qualitative disclosures surrounding leases. As long as the Company is an emerging growth company, the current effective date of adoption is fiscal year 2023, which is the required date of adoption for private companies. Early adoption is permitted. While the Company continues to assess the effects of adoption, it currently believes the most significant effects relate to the recognition, on the consolidated balance sheet, of right-of-use assets and lease liabilities related to operating leases.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”), which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. It clarifies that single-member limited liability companies and similar disregarded entities that are not subject to income tax are not required to recognize an allocation of consolidated income tax expense in their separate financial statements, but they could elect to do so.
ASU No. 2019-12 is effective for calendar-year public business entities in 2021 and interim periods within that year. For all other calendar-year entities, it is effective for annual periods beginning in 2022 and interim periods in 2023. Early adoption is permitted. ASU No. 2019-12 allows companies to treat tax law changes as intraperiod items, rather than as discrete items within the interim period.
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated balance sheets, statements of changes in equity, statements of operations and statements of cash flows.
Recently adopted accounting standards
Effective July 1, 2021, the Company adopted ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 of goodwill impairment tests. The adoption did not materially impact the Company’s consolidated financial statements.
12
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
In August 2020, the FASB issued ASU No. 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU No. 2020-06”) which simplifies the accounting for some financial instruments with characteristics of liabilities and equity, including the Convertible Debentures (or Debentures, as described and defined in Note 9). ASU No. 2020-06 eliminates the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature. In addition, with respect to convertible instruments, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share instead of the treasury stock method. The Company early adopted ASU No. 2020-06 effective January 1, 2021 using the modified retrospective approach. Upon adoption, the following changes resulted:
| ● | the intrinsic value of the beneficial conversion feature recorded between April 7, 2020 and December 31, 2020 was reversed as of the effective date of adoption, thereby resulting in an increase in the Convertible Debentures, as of January 1, 2021, with an offsetting adjustment to additional paid in capital. |
| ● | the discount amortization expense (included within interest expense) which was recorded between April 7, 2020 and December 31, 2020 that was related to the beneficial conversion feature was reversed against opening accumulated deficit. |
The cumulative effect adjustment that the Company
recognized in the condensed consolidated balance sheet, as of January 1, 2021, as an adjustment to accumulated deficit, was $
| December 31, 2020 | Adjustments | January 1, 2021 | ||||||||||
| Successor | Successor | |||||||||||
| (as reported) | (as adjusted) | |||||||||||
| Long term liabilities | ||||||||||||
| Convertible Debentures, net of discount | $ | $ | $ | |||||||||
| Total long-term liabilities | ||||||||||||
| Total liabilities | ||||||||||||
| Stockholders’ equity: | ||||||||||||
| Successor: | ||||||||||||
| Additional paid-in capital | $ | $ | ( | ) | $ | |||||||
| Accumulated deficit | ( | ) | ( | ) | ||||||||
| Total stockholders’ equity | $ | ( | ) | |||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | ( | ) | ||||||||||
The following table summarizes the effects of adopting ASU 2020-06 on the Company’s consolidated statement of operations for the Successor period April 7, 2020 to December 31, 2020:
| Successor (as reported) | With Adoption of ASC 2020-06 | ASC 2020-06 Impact | ||||||||||
| Interest expense | $ | ( | ) | $ | ( | ) | $ | |||||
| Total other expenses | ( | ) | ( | ) | ||||||||
| Net loss before income taxes | ( | ) | ( | ) | ||||||||
| Net loss | ( | ) | ( | ) | ||||||||
| Loss per share - basic and diluted | $ | ( | ) | $ | ( | ) | $ | |||||
The adoption of ASU 2020-06 had no impact on net cash used in operating activities, net cash used in investing activities or net cash provided by financing activities.
13
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
5. Acquisitions
Computex
On April 7, 2020, the Company consummated the Computex Business Combination that resulted in the acquisition of Computex. The acquisition qualified as a business combination under ASC 805, Business Combinations (“ASC 805”). Accordingly, the Company recorded assets acquired and liabilities assumed at their acquisition-date fair values. The excess of the purchase price over the fair value of assets acquired and liabilities assumed was recorded as goodwill. The goodwill, which is not deductible for tax purposes, resulted from factors such as an assembled workforce and management’s industry knowledge.
The following table presents the allocation of the purchase consideration among the assets acquired and liabilities assumed at their estimated acquisition-date fair values.
| Consideration paid: | ||||
| Convertible Debentures with warrants that granted the right to acquire | $ | |||
| Assumed debt | ||||
| AVCT common stock ( | ||||
| Working capital adjustment satisfied by the issuance of AVCT common stock ( | ||||
| Total consideration paid | $ | |||
| Net assets acquired: | ||||
| Current assets | $ | |||
| Customer relationships (estimated useful life - 10 years) | ||||
| Trade names (estimated useful life - 10 years) | ||||
| Furniture & equipment | ||||
| Leasehold improvements | ||||
| Other assets | ||||
| Current liabilities | ( | ) | ||
| Other liabilities | ( | ) | ||
| Total net assets acquired | $ | |||
| Goodwill | ||||
| Total consideration paid | $ | |||
Identifiable intangible assets acquired consisted
of customer relationships of $
Since the results of operations prior to April
7, 2020 relate to the operations of Computex, investment income and transaction costs incurred by AVCT were excluded from the Predecessor
statement of operations. Accordingly, for the period April 1, 2020 through April 6, 2020, transaction costs of $
14
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
Kandy
On December 1, 2020, the Company acquired Kandy from Ribbon, by acquiring certain assets, assuming certain liabilities and acquiring all of the outstanding interests of Kandy Communications LLC. The acquisition qualified as a business combination under ASC 805. Accordingly, the Company recorded assets acquired and liabilities assumed at their acquisition-date fair values. The excess of the purchase price over the fair value of assets acquired and liabilities assumed was recorded as goodwill. The goodwill, which is deductible for tax purposes, resulted from factors such as an assembled workforce and management’s industry knowledge.
The following table represents the allocation of the purchase consideration among the assets acquired and liabilities assumed at their estimated acquisition-date fair values.
| Consideration paid: | ||||
| Convertible Debentures with warrants that granted the right to acquire | $ | |||
| Net assets acquired: | ||||
| Current assets | $ | |||
| Acquired technology (estimated useful life - 6 years) | ||||
| Customer relationships (estimated useful life - 10 years) | ||||
| Trade names (estimated useful life - 4 years) | ||||
| Property, plant & equipment | ||||
| Current liabilities | ( | ) | ||
| Other liabilities | ( | ) | ||
| Total net assets acquired | $ | |||
| Goodwill | ||||
| Total consideration paid | $ | |||
Identifiable intangible assets acquired consisted
of acquired technology of $
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information presents the combined results of operations for the Company and gives effect to the Computex and Kandy acquisitions as if the acquisitions had occurred on January 1, 2020 (in thousands):
| Three months ended | Nine months ended | |||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
The pro forma financial information included herein are not necessarily indicative of the results of operations that would have been realized if the acquisitions had been completed on January 1, 2020. Such pro forma financial information does not give effect to any integration costs related to the acquired companies.
The combined net loss in the table above was adjusted for the transaction costs related to the acquisitions (included as expenses in the nine months ended September 30, 2020) and the incremental changes in the amortization of intangible assets.
15
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
6. Goodwill and intangible assets
The Company’s intangible assets as of September 30, 2021 and December 31, 2020 consisted of the following:
| September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||
| Gross carrying amount | Accumulated amortization | Net | Gross carrying amount | Accumulated amortization | Net | |||||||||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Tradenames | ( | ) | ( | ) | ||||||||||||||||||||
| Acquired technology | ( | ) | ( | ) | ||||||||||||||||||||
| Intangible assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
The estimated lives of the intangible assets are
included in Note 5. The weighted average useful life of the intangible assets as of September 30, 2021 was
Goodwill activity during the nine months ended September 30, 2021 was as follows:
| Carrying | ||||
| amount | ||||
| Balance, January 1, 2021 | $ | |||
| Goodwill impairment | ( | ) | ||
| Measurement period adjustment - Computex | ( | ) | ||
| Balance, September 30, 2021 | $ | |||
The noncash goodwill impairment charge in the table above relates to our Computex subsidiary and is discussed in Note 1. The measurement period adjustment relates to a deferred tax liability that was previously recorded as of the Computex Closing Date.
7. Accounts payable and accrued expenses
Accounts payable and accrued expenses were as follows as of September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued compensation, benefits and related accruals | ||||||||
| Accrued professional fees | ||||||||
| Due to related parties | ||||||||
| Sales tax payable | ||||||||
| Other | ||||||||
| $ | $ | |||||||
16
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
8. Long-Term Debt
Credit Agreement
In connection with
In connection with the acquisition of Kandy, the Company later entered into a sixth amendment to the Credit Agreement that required the Company to repay $250 under the Credit Agreement, for every $12,500 of capital raised.
On June 24, 2021,
| (i) | reduced the availability under the line of credit by $1,000 per month starting on October 1, 2021 (subsequently amended by a ninth amendment entered into on November 1, 2021, which limits such availability to the borrowing base, if lower); |
| (ii) | increased the monthly payments under the term loan to $800 beginning September 1, 2021 (subsequently amended in a ninth amendment which changed the due date for the October 2021 payment to November 2021); and |
| (iii) | increased the applicable interest rates under the Credit Agreement. |
Availability on the line of credit is determined
weekly. The borrowing base computation is primarily based on certain percentages of accounts receivable and inventory. As of October 1,
2021, maximum borrowing under the line of credit was $
An eighth amendment to the Credit Agreement on
September 22, 2021 was effected to allow the Company to incur borrowings of $
On or before the maturity date of the Credit Agreement,
the Company expects to seek to either negotiate an extension of the Credit Agreement or enter into a new agreement with another lender.
However, there can be no assurance that financing will be available in the amounts the Company requires or on terms acceptable to it,
if at all. At September 30, 2021 and December 31, 2020, the balance on the line of credit was $
The effective rate under the Credit Agreement
was
The Credit Agreement is subject to a security agreement which includes substantially all of the Company’s assets and a pledge of Computex’s equity. Effective on the Computex Closing Date, the previous Computex shareholder was released from a guaranty agreement made in connection with the Credit Agreement.
In 2018, Computex entered into an interest rate
swap arrangement to partially mitigate the variability of cash flows due to changes in the Eurodollar rate, specifically related to interest
payments on the term note under the Credit Agreement. The interest rate swap which had a notional amount of $
PPP Loan
In July 2021, the Company’s application
for forgiveness of a PPP loan of $
17
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
Total long-term debt as of September 30, 2021 and December 31, 2020 consisted of the following:
| September 30, 2021 | December 31, 2020 | |||||||
| Senior debt - Term note payable to Comerica Bank; monthly principal payments of $ | $ | $ | ||||||
| PPP Loan previously administered by Comerica Bank; interest rate | ||||||||
| Line of credit, maturing December 31, 2021 | ||||||||
| Capital lease obligations | ||||||||
| Total long-term debt | ||||||||
| Less: unamortized debt issuance costs | ( | ) | ( | ) | ||||
| Total notes payable and line of credit, net of unamortized debt issuance costs | ||||||||
| Less: current maturities of notes payable and line of credit | ( | ) | ( | ) | ||||
| Long-term debt, net of current maturities and unamortized debt issuance costs | $ | $ | ||||||
Subordinated promissory note – related party
The 2021 Note (as defined in Note 2) is secured by a shareholder that owns more than five percent of the Company’s shares and matures on the earliest of (a) September 16, 2022, (b) the Company’s consummation of a debt financing resulting in the receipt of gross proceeds of not less than $20,000, (c) the Company’s consummation of primary sales of registered equity securities resulting in receipt of gross proceeds of not less than $20,000, (d) the Company’s consummation of the sale of Computex and (e) the date of any event of default. The 2021 Note is subordinate to any amounts owed under the Credit Agreement and has a minimum required return of 25.00% over the applicable period.
Subordinated promissory note - other
On the Computex Closing Date, the Company issued a subordinated promissory note of $500 (or the “2020 Note”) in partial settlement of a deferred underwriting fee of $3,000. The remaining $2,500 was settled via the issuance of Convertible Debentures (See Note 9). The 2020 Note bears interest at the rate of 12.00% per annum. Previously, the 2020 Note had a maturity date of September 30, 2021. The 2020 Note is subordinate to any amounts owed under the Credit Agreement. On November 5, 2021, all amounts owing under the 2020 Note were paid.
9. Stockholders’ (Deficit) Equity, Related Warrants, Debentures and Guaranty
Preferred stock — The Company is authorized to
issue
Common stock — The Company
is authorized to issue
Registration rights agreement
On the Computex Closing Date, the Company, the Sponsor and certain other initial stockholders of the Company, as well as Stratos Management Systems Holdings, LLC (“Holdings”), and certain other Investors (as defined below), entered into a Registration Rights Agreement (the “Registration Rights Agreement”). The Registration Rights Agreement amended, restated and replaced a previous registration rights agreement entered into among AVCT, the Sponsor and certain other initial stockholders of AVCT on July 27, 2017. Pursuant to the terms of the Registration Rights Agreement, the holders of certain of the Company’s securities, including holders of the Company’s founders’ shares, shares of common stock underlying the Private Placement Warrants, and shares of common stock underlying the securities issued in the Private Placement (as defined below) are entitled to certain registration rights under the Securities Act and applicable state securities laws with respect to such shares of common stock, including up to eight demand registrations in the aggregate and customary “piggy-back” registration rights.
18
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
Convertible Debentures, related warrants and guaranty
On the Computex Closing Date, the Company also
consummated the sale, in a private placement (the “Private Placement”), of units of securities of the Company (“Units”)
to certain investors (each, an “Investor”), as contemplated by the terms of the previously disclosed Securities Purchase Agreement,
dated as of April 3, 2020 (the “Securities Purchase Agreement”). Each Unit consisted of (i) $
In addition, in connection with the acquisition of Kandy on December
1, 2020 and pursuant to the terms of the Kandy purchase agreement, the Company, in December 2020, issued 43,778 Units to Ribbon as consideration
for the Kandy purchase, sold 10,000 Units to SPAC Opportunity Partners, LLC, a significant shareholder of the Company and 1,000 Units
to a director of the Company. Also, the Company sold
Debentures
The Debentures issued on the Computex Closing Date had an aggregate principal amount of approximately $43,169 (including $3,000 in aggregate principal amount issued as part of Units sold to MasTec, Inc., a greater than five percent stockholder of the Company, and $20,000 in aggregate principal of which was part of Units issued to Holdings pursuant to the terms of the Computex Business Combination agreement and approximately $8,566 in aggregate principal amount of which was issued to the Sponsor as part of Units issued in exchange for the cancellation of indebtedness previously incurred by the Company to the Sponsor).
The Debentures bore interest at a rate of
Each Debenture was convertible, in whole or in
part, at any time at the option of the holder thereof into that number of shares of common stock calculated by dividing the principal
amount being converted, together with all accrued but unpaid interest thereon, by the applicable conversion price, initially $
19
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
Pursuant to the terms of the Debentures, on September
8, 2021, the Debentures and related accrued interest were mandatorily converted to
Penny Warrants
The Penny Warrants issued on the Computex Closing Date entitled the holders to purchase an aggregate of up to 4,316,936 shares of the Company’s common stock (including warrants to purchase up to 2,000,000 shares, 856,600 shares, and 300,000 shares issued to Holdings, the Sponsor and MasTec Inc., respectively, as part of the Units issued to them), at an exercise price of $0.01 per share.
The Penny Warrants issued in December 2020, as
part of the Units sold, entitled the holders to purchase an aggregate of up to
The Penny Warrants issued between January 1, 2021
and September 30, 2021 (none of which were issued in the three months ended September 30, 2021), as part of the Units sold during that
period, entitled the holders to purchase an aggregate of up to
The Penny Warrants may be exercised at any time through the fifth anniversary of the date of issuance. The number of shares issuable upon exercise of each Penny Warrant is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like.
During the three months ended September 30, 2021
and pursuant to the terms of the Penny Warrant agreements, holders of
Derivative consideration and other disclosures relating to the Debentures and Penny Warrants
Based on ASC 815, Derivatives and Hedging,
the convertible feature of the Debentures issued on the Computex Closing Date was not considered a derivative and therefore was not recorded
in liabilities, as part of the Debentures, and was not bifurcated. However, an embedded beneficial conversion feature was previously assessed
in relation to the Debentures issued in December 2020 and was previously recorded in equity at its intrinsic value with a corresponding
debt discount recorded to the Debentures at December 31, 2020. The beneficial conversion feature on such Debentures, which was evaluated
in accordance with ASC 470-20 “Debt with Conversion and Other Options” was determined to be $
Both the Penny Warrants issued on the Computex Closing Date as well as the Penny Warrants issued on and after the Kandy acquisition date had qualified as derivatives, but satisfied the criteria for classification as equity instruments, and were bifurcated from the host contract (the Convertible Debentures) and recorded in equity at their relative fair values with a corresponding debt discount recorded to the Debentures.
20
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
The relative fair values of the Penny Warrants
were determined using the Black-Scholes model. Weighted average assumptions used in determining fair values of Penny Warrants issued in
the nine months ended September 30, 2021 (none of which were issued in the three months ended September 30, 2021) were: stock price volatility
–
Prior to the conversion of the Debentures to common
stock, the discount (consisting of the relative fair value of the warrants) was being expensed as interest over the then term of the Debentures
to increase the carrying value to face value. However, effective September 8, 2021, the remaining unamortized discount was transferred
to additional paid in capital in connection with the conversion of the Debentures to shares of common stock. During the three and nine
months ended September 30, 2021, the Company recorded accretion of the discount of $
The components of the Debentures, prior to conversion on September 8, 2021 and the amounts converted, are summarized in the table below:
| Discount consisting of | ||||||||||||
| relative fair | ||||||||||||
| Principal | value of Penny Warrants | Net | ||||||||||
| Issued on the Computex Closing Date | $ | $ | ( | ) | $ | |||||||
| Issued in the Successor periods: | ||||||||||||
| Issued to Ribbon | ( | ) | ||||||||||
| Issued to SPAC Opportunity Partners, LLC | ( | ) | ||||||||||
| Other issuances (various holders) | ( | ) | ||||||||||
| $ | $ | ( | ) | $ | ||||||||
| Amortization of discount | ||||||||||||
| Paid-in-kind interest | ||||||||||||
| Deferred financing fees | ( | ) | ||||||||||
| Net Debentures as of September 8, 2021, prior to conversion | $ | |||||||||||
| Less reduction due to conversion | ( | ) | ||||||||||
| Balance at September 30, 2021 | $ | |||||||||||
| Financial statement line items impacted by the conversion: | ||||||||||||
| Additional paid in capital | $ | |||||||||||
| Common stock (38,811,223 shares at par value of $0.0001 per share) | ||||||||||||
| Interest expense - write off of deferred financing fees | ( | ) | ||||||||||
| $ | ||||||||||||
10. Related Party Transactions
During the Predecessor periods, Computex paid
management fees at the rate of $
AVCT shares corporate office space with an affiliate and participates in a cost sharing arrangement in a month-to-month leasing arrangement. The space is not being used and therefore, by mutual agreement between the parties, no expenses have been incurred by the Company during the Successor periods.
21
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
Effective October 1, 2020, the Company and Navigation Capital Partners,
Inc. (“Navigation”), an affiliate of a shareholder, entered into an agreement under which Navigation provides capital markets
advisory and business consulting services to the Company for a fee of $
Pursuant to a transition services agreement entered into with Ribbon
in connection with the acquisition of Kandy, accounts payable and accrued expenses as of September 30, 2021 and December 31, 2020 include
$
| Three Months | Nine Months | |||||||
| Ended September 30, 2021 | ||||||||
| Professional fees charged by Ribbon: | ||||||||
| Cost of revenue | $ | $ | ||||||
| Research and development | ||||||||
| Selling, general and administrative expenses | ||||||||
| Other services provided by Ribbon: | ||||||||
| Cost of revenue | ||||||||
| Selling, general and administrative expenses | ||||||||
In addition to the related party amounts discussed above, certain Debentures as of December 31, 2020 are separately identified as related party amounts on the condensed consolidated balance sheet as of December 31, 2020. Similarly, the related Debenture interest is separately identified as related party amounts on the condensed consolidated statements of operations. As indicated in Note 9, the Debentures were converted to common stock on September 8, 2021. Accordingly, there were no Debentures outstanding as of September 30, 2021, and interest for the three and nine months ended September 30, 2021 relate to the period up to and including September 8, 2021.
The 2021 Note, which is secured by a related party,
is discussed in Note 8 and is separately identified on the condensed consolidated balance sheet. The related interest expense of $
22
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
11. Revenue Recognition
In the following tables, revenue is disaggregated by geographies and by verticals (or sector). Also presented is the portion of revenue that is recognized on a gross basis (which occurs when the Company is deemed to be the principal in the arrangement) and the portion that is recognized on a net basis (which occurs when the Company is deemed to be acting as the agent).
| Three Months | Three Months | Nine Months | April 7, 2020 | January 1, 2020 | ||||||||||||||||
| Ended | Ended | Ended | through | through | ||||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | April 6, 2020 | ||||||||||||||||
| Successor | Successor | Successor | Successor | Predecessor | ||||||||||||||||
| Geography | ||||||||||||||||||||
| Domestic | $ | $ | $ | $ | $ | |||||||||||||||
| International | ||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Revenues by Verticals (or Sector) | ||||||||||||||||||||
| Energy | $ | $ | $ | $ | $ | |||||||||||||||
| Finance | ||||||||||||||||||||
| Healthcare | ||||||||||||||||||||
| Manufacturing and logistics | ||||||||||||||||||||
| Public sector | ||||||||||||||||||||
| Retail and hospitality | ||||||||||||||||||||
| Technology service providers | ||||||||||||||||||||
| Other Services | ||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Gross versus net | ||||||||||||||||||||
| Gross (principal) | $ | $ | $ | $ | $ | |||||||||||||||
| Net (agent) | ||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | |||||||||||||||
Revenues by geography, in the table above, is generally based on the “ship-to address,” with the exception of certain services that may be performed at, or on behalf of, multiple locations, which are categorized based on the “bill-to address.”
Contract liabilities and remaining performance obligations
The Company’s contract liabilities are reported
in a net position on a contract-by-contract basis at the end of each reporting period. On September 30, 2021 and December 31, 2020, the
contract liability balance (deferred revenue) was $
23
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
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 table represents the total transaction price for remaining performance obligations, as of September 30, 2021, related to non-cancelable contracts longer than 12 months in duration that are expected to be recognized over future periods:
| Three months ended December 31, 2021 | $ | |||
| Fiscal year 2022 | ||||
| Fiscal year 2023 | ||||
| Fiscal year 2024 | ||||
| Fiscal year 2025 | ||||
| Total remaining performance obligations |
12. Share-Based Compensation
Successor
The American Virtual Cloud Technologies, Inc. 2020 Equity Incentive Plan (the “Plan”) provides for the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”) and other share-based awards. Stock options have a maximum term of ten years from the grant date.
As of September 30, 2021,
The following summarizes RSU activity between January 1, 2021 and September 30, 2021:
| Weighted Average | ||||||||
| Number | Grant Date | |||||||
| of RSUs | Fair Value | |||||||
| Outstanding at January 1, 2021 | $ | |||||||
| Granted | $ | |||||||
| Vested and delivered | ( | ) | $ | |||||
| Vested, not delivered | ( | ) | $ | |||||
| Forfeited | ( | ) | $ | |||||
| Unvested RSUs at September 30, 2021 | $ | |||||||
24
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
| Three Months | Three Months | Nine Months | April 7, 2020 | |||||||||||||
| Ended | Ended | Ended | through | |||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Successor | Successor | Successor | Successor | |||||||||||||
| Cost of revenue | $ | $ | $ | $ | ||||||||||||
| Research and development | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Selling, general and administrative expenses for
the three and nine months ended September 30, 2021, in the table above, include $
13. Reconciliation of Net Loss per Common Share
Basic and diluted net loss per common share was calculated as follows:
| Nine Months | April 7, 2020 | January 1, 2020 | ||||||||||||||||||
| Three Months Ended | Ended | through | through | |||||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | April 6, 2020 | ||||||||||||||||
| Successor | Successor | Successor | Successor | Predecessor | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| Weighted average shares outstanding, basic and diluted | ||||||||||||||||||||
| Basic and diluted net loss per ordinary share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
Since their inclusion would have been antidilutive, excluded from the computation of diluted net loss per share for the Successor periods were the following were they to be converted:
| Successor periods ended | ||||||||
| September 30, 2021 | September 30, 2020 | |||||||
| Warrants | ||||||||
| Penny Warrants | ||||||||
| Unvested RSUs | ||||||||
| Vested, not delivered RSUs | ||||||||
| Shares underlying Debentures | ||||||||
25
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
14. Income Taxes
The Company’s effective income tax rate differs from the federal statutory rate primarily as a result of certain expenses being deductible for financial reporting purposes that are not deductible for tax purposes, the existence of research and development tax credits, operating loss carryforwards, and adjustments to previously recorded deferred tax assets and liabilities due to the enactment of the Tax Cuts and Jobs Act in 2017.
As of December 31, 2020, the Company had net operating
loss carryforwards of approximately $
The Company files a federal income tax return and separate income tax returns in various states. For federal and certain states, the 2017 through 2020 tax years remain open for examination by the tax authorities under the normal three-year statute of limitations.
The Company assesses available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant component of objective negative evidence identified during management’s evaluation was the cumulative loss incurred over the three-year period ended December 31, 2020. Such objective evidence limits the ability to consider other subjective evidence, such as our forecasts of future taxable income and tax planning strategies. On the basis of this evaluation, the Company recognized a full valuation allowance against its net deferred tax assets, pursuant to ASC 740, as of September 30, 2021 and December 31, 2020. Based on the Company’s evaluation, it was determined that no uncertain tax positions existed as of September 30, 2021 or December 31, 2020.
15. Segments
The Company’s reportable segments during the three and nine months ended September 30, 2021 were Computex and Kandy.
Computex is a leading multi-brand technology solutions provider to large global customers, providing a comprehensive and integrated set of technology solutions, through its extensive hardware, software and value-added service offerings.
Kandy is a provider of cloud-based enterprise services that deploys a carrier grade proprietary cloud communication platform that supports UCaaS, CPaaS and CCaaS for mid-market and enterprise customers across a proprietary multi-tenant, highly scalable cloud platform. The Kandy platform also includes pre-built customer engagement tools, based on WebRTC technology, known as Kandy Wrappers. Kandy provides white-labeled services to a variety of customers including communications service providers and systems integrators.
Presented below is certain information by reportable segment. The Company uses the same accounting policies for each reportable segment as it uses for the Company as a whole. The chief operating decision makers evaluate the performance of each reportable segment based on revenue and a measure that approximates income/loss from operations. There was no intersegment revenue during the three and nine months ended September 30, 2021. Revenues presented in the table below are from external customers only. Certain corporate expenses are not allocated to the segments. Such corporate expenses consist primarily of executive and certain other compensation, professional and legal fees, insurance, interest and other financing expenses. Revenue for the Predecessor periods related only to Computex as Kandy was acquired in December 2020.
| Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | |||||||||||||||||||||||
| Computex | Kandy | Consolidated | Computex | Kandy | Consolidated | |||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||
| Hardware | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Third party software and maintenance | ||||||||||||||||||||||||
| Managed and professional services | ||||||||||||||||||||||||
| Cloud subscription and software | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Total revenues | ||||||||||||||||||||||||
| Cost of revenue | ||||||||||||||||||||||||
| Gross profit (loss) | ( | ) | ||||||||||||||||||||||
| Goodwill impairment | - | - | ||||||||||||||||||||||
| Research and development | ||||||||||||||||||||||||
| Selling, general and administrative | ||||||||||||||||||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Selling, general and administrative - Corporate | ( | ) | ( | ) | ||||||||||||||||||||
| Loss from operations per condensed consolidated statement of operations | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
26
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
| September 30, 2021 | ||||||||||||||||
| Computex | Kandy | Corporate | Consolidated | |||||||||||||
| Goodwill | $ | $ | $ | $ | ||||||||||||
| Long-lived assets | ||||||||||||||||
| Total assets | ||||||||||||||||
| December 31, 2020 | ||||||||||||||||
| Computex | Kandy | Corporate | Consolidated | |||||||||||||
| Goodwill | $ | $ | $ | $ | ||||||||||||
| Long-lived assets | ||||||||||||||||
| Total assets | ||||||||||||||||
16. Commitments and Contingencies
Registration Rights
See Note 9 for a discussion of certain registration rights.
Contingencies
On
December 16, 2019,
In
November 2020,
In June 2021,
In addition, from time to time, the Company may be involved in various legal proceedings and claims in the ordinary course of business. As of September 30, 2021, and through the filing date of this report, the Company does not believe the resolution of any legal proceedings or claims of which it is aware or any potential actions will have a material effect on its financial position, results of operations or cash flows.
27
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share data, or as otherwise noted)
September 30, 2021
(Unaudited)
17. Subsequent Events
The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the condensed consolidated financial statements are issued.
On November 2, 2021,
In a concurrent private placement, the institutional investor received from the Company an unregistered warrant (the “Series A Warrant”) to purchase, initially, an additional 2,500,000 shares of the Company’s common stock. In addition, for each share of common stock purchased by the institutional investor upon the exercise of the Series B Warrant, the Series B Warrant will become exercisable to purchase one additional share of common stock.
The Series A Warrant has an exercise price of $2.00 per share, is exercisable on the date of issuance, and expires five years from the date of issuance.
The consummation of the issuance and sale of the Registered Shares, the Series B Warrant and the Series A Warrant occurred on November 5, 2021. The Company plans to use the net proceeds of approximately $4,500 from the offering for reduction of debt and working capital. Northland Capital Markets served as sole placement agent in the transaction. The offering of the Registered Shares and the Series B Warrant (and underlying shares of common stock) was made pursuant to an effective shelf registration statement on Form S-3 previously filed with the SEC.
Other than as disclosed in this note and as may be disclosed elsewhere in the accompanying notes, there were no subsequent events that required adjustment or disclosure in the condensed consolidated financial statements.
28
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References in this report to “we,” “us,” “our,” or the “Company” refer to American Virtual Cloud Technologies, Inc. (or “AVCT”) and its wholly-owned subsidiaries. References to our “management” or our “management team” refer to our officers and directors. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements (including the notes thereto) contained elsewhere in this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risk and uncertainties.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performances, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performances or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to Part II, Item 1A of this Quarterly report and the Risk Factors section of our Annual Report on Form 10-K, as amended, filed on May 14, 2021 with the U.S. Securities and Exchange Commission (the “SEC”). The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Overview
We are a Delaware-incorporated entity with operating locations in Minnesota, Michigan, Florida, Texas, Ottawa, North Carolina and Mexico City.
On April 7, 2020, AVCT (formerly known as Pensare Acquisition Corp.), consummated a business combination (the “Computex Business Combination“) in which it acquired Stratos Management Systems, Inc. (“Computex”), a private operating company that does business as Computex Technology Solutions. In connection with the Computex Business Combination, the Company changed its name to American Virtual Cloud Technologies, Inc.
On December 1, 2020, we acquired the Kandy Communications business (“Kandy”) from Ribbon Communications, Inc. and certain of its affiliates (“Ribbon”), by acquiring certain assets, assuming certain liabilities and acquiring all of the outstanding interests of Kandy Communications LLC.
Computex is a leading multi-brand technology solutions provider to large global customers, providing a comprehensive and integrated set of technology solutions, through its extensive hardware, software and value-added service offerings. Computex designs best-fit solutions, and with the help of leading vendors in the industry, helps its customers with the procurement of suitable hardware and software that are appropriate for their specific needs. With primary operating locations in Minnesota, Michigan, Florida and Texas, services offered by Computex include directory and messaging, enterprise networking, cybersecurity, collaboration, data center services, integration, storage, backup, virtualization, converged infrastructures and unified communications-as-a-service (“UCaaS”).
Kandy, a provider of cloud-based enterprise services, globally deploys a white-label, carrier-grade cloud-based platform for UCaaS, communications platform as a service (“CPaaS”) and contact center as a service (“CCaaS”) for mid-market and enterprise customers across a proprietary multi-tenant, highly scalable cloud platform. The Kandy platform also includes pre-built customer engagement tools, based on web real-time communication technology (“WebRTC technology”), known as Kandy Wrappers, and provides white-labeled services to a variety of customers including communications service providers and systems integrators. With Kandy, companies can quickly embed real-time communications capabilities into their existing applications and business processes.
29
Recent development
On September 16, 2021, the Company issued a press release announcing that as a result of a decision by the Company’s Board of Directors (the “Board”) to explore strategic alternatives previously announced on April 7, 2021, the Board had authorized the Company to focus its strategy on acquisitions and organic growth in its cloud technologies business as well as to explore strategic opportunities for its IT solutions business, including the planned divestiture of Computex. The Company believes that the change will allow it to optimize resource allocation, focus on core competencies, and improve its ability to invest in areas of maximal growth potential. Proceeds from any potential sale transaction are expected to be used to further deleverage the balance sheet and provide working capital.
Computex was not classified as held for sale as of September 30, 2021 as the criteria for the reporting unit to be classified as held for sale were not met as of September 30, 2021. However, in connection with the potential sale of Computex, the Company compared the expected proceeds less costs to sell with the carrying value of the reporting unit and in connection therewith recorded a noncash goodwill impairment charge of $20,500 during the three and nine months ended September 30, 2021.
Growth strategy
The acquisition of Kandy has given us the opportunity to provide a full suite of UCaaS, CPaaS, and CCaaS products to serve the rapidly growing cloud communications market. Customers today demand a highly reliable, secure, and scalable communications platform along with a world class customer experience.
With demand for cloud technology increasing, we believe that the already sizable total addressable market (“TAM”) for cloud communications is on track to continue to expand and we believe that we are positioned to monetize mega trends in enterprise cloud communications, gain market share as a premier white-label cloud communications provider, checking the CPaaS, CCaaS & UCaaS boxes, while also capitalizing on our direct to enterprise capabilities (for example, Tier 1 support) to sell through our partners or sell directly.
Certain areas of our growth plan, which also includes continued investment in research and development, are as follows:
| ● | Channel (white label) - Target technology providers, such as Service Providers (SPs), Resellers, Independent Software Vendors (ISVs), and System Integrators (SIs) through: |
| o | Strategic Alliances with companies looking to co-invest to monetize cloud communication technology; and |
| o | Our partners that are looking to white label or resell cloud technologies, which we believe offer significant opportunity to grow revenue with existing partners while identifying new ones. |
| ● | Direct to Enterprise - Target enterprises looking to deploy their own cloud technology using APIs/SDKs (application programming interface/software development kit) and/or looking to enable cloud communications to support their business and customer communications and interactions either: |
| o | Organically - By targeting select vertical markets with high growth potential for example, government, retail, financial, & healthcare; or |
| o | Inorganically - By making selective acquisitions to expand the use of the Kandy platform. |
Key trends affecting our results of operations
The following are key trends that we believe can positively impact our results of operations:
| ● | The acceleration of digital transformation |
| ● | The change in how people work, including the “work from anywhere” mindset |
| ● | The increased complexity in mid & large enterprises and the desire by enterprises for integrated internal and external communications for UCaaS, CPaaS and CCaaS |
| ● | The demand for services similar to WebEx, Teams, & Zoom and partners that can add to and/or complement such tools and players |
| ● | The trend towards CPaaS technology – Product developers & Independent Software Vendors (ISVs) are increasingly seen as the influencers |
| ● | The general trend towards movement to the cloud |
| ● | The lack of sufficient internal IT resources at mid-sized and large enterprises, and the scarcity of IT personnel in certain high-demand disciplines |
| ● | Disruptive technologies that are creating complexity and challenges for customers and vendors |
| ● | The recognition that certain IT services provide the opportunity of funding via recurring payments over a period of time, rather than large upfront payments |
| ● | The increasing use of multi-cloud strategies, whereby cloud architectures and cloud-enabled frameworks, whether public, private, or hybrid, provide the core foundation of modern IT |
| ● | The explosive growth in remote workforce needs. |
30
Covid-19
The novel strain of coronavirus (“COVID-19”) continues to significantly impact local, regional, and global economies, businesses, supply chains, production and sales across a range of industries. The extent of its impact on our operational and financial performance is uncertain and difficult to predict and we remain cautious about the global recovery. To protect the health and safety of our employees, our daily execution has evolved into a largely virtual model. However, we have found ways to continue to engage with and assist our customers and partners as they work to navigate the current environment. We will continue to monitor the current environment and may take further actions that may be required by federal, state or local authorities or that we determine to be in the interests of our employees, customers, and partners.
Nature of revenue categories discussed below
Hardware revenue is generated from the sale of data storage, desktops, servers, and other hardware which are sourced from a network of leading manufacturers.
Third party software and maintenance revenue include licensing, licensing management, software solutions and other services, which typically are delivered as part of a complete technology solution. Such solutions range from configuration services for computer devices to fully integrated solutions such as virtualization, collaboration, security, mobility, data center optimization and cloud computing. Such services also include complementary services including installations, warranty services and certain managed services such as remote network and data center monitoring.
Professional and managed services revenue include managed IT services, virtualization, storage, networking and data center services. These services include customized solutions for business continuity, back-up and recovery, capacity on-demand, regulatory compliance and data center best practice methodologies as well as infrastructure as a service (“IaaS”) and software as a service (“SaaS”). These solutions are used by customers to optimize investments in IT infrastructure and data centers.
Cloud subscription and software revenue include subscriptions to the Company’s cloud-based technology platform.
Financial statement presentation and results of operations
The condensed consolidated financial statements of the Company include the accounts of AVCT and its wholly-owned subsidiaries. As discussed in Note 3 of the condensed consolidated financial statements, the financial position, results of operations and cash flows described herein for the dates and periods prior to April 7, 2020 relate to the operations of Computex. The historical financial information of AVCT prior to the Computex Business Combination (a special purpose acquisition company, or “SPAC”) has not been reflected in the Predecessor financial statements as these historical amounts have been determined to be not useful information to a user of the financial statements.
To distinguish between the different bases of accounting due to the Computex Business Combination that occurred on April 7, 2020, certain tables in this quarterly report include a blackline between certain columns to separate: (1) the periods prior to the closing date of April 7, 2020 (“Predecessor”) and (2) the period that started on April 7, 2020 (“Successor”). We refer to the periods before April 7, 2020 as the “Predecessor” periods and refer to the periods that started on April 7, 2020 as the “Successor” periods.
For the reasons discussed above, management believes it remains useful to review the operating results for the three and nine months ended September 30, 2021 with the operating results for the three and nine months ended September 30, 2020. Accordingly, in the discussion below, for purposes of a year-to-date (YTD) comparison, the financial information for the period January 1, 2020 through April 6, 2020 is combined with the financial information for the period April 7, 2020 through September 30, 2020 and, together, is referred to as the “S/P combined YTD period ended September 30, 2020.” Accordingly, in addition to presenting our results of operations in our condensed consolidated financial statements in accordance with GAAP, the tables and certain discussions below present the non-GAAP combined results for the nine months ended September 30, 2020.
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3rd Quarter of 2021 versus the 3rd Quarter of 2020
| 3rd Quarter | ||||||||
| 2021 | 2020 | |||||||
| In thousands | ||||||||
| Revenues: | ||||||||
| Hardware | $ | 13,000 | $ | 16,428 | ||||
| Third party software and maintenance | 2,080 | 1,202 | ||||||
| Managed and professional services | 8,623 | 8,204 | ||||||
| Cloud subscription and software | 3,575 | - | ||||||
| Other | 233 | 134 | ||||||
| Total revenues | 27,511 | 25,968 | ||||||
| Cost of revenue | 20,281 | 18,445 | ||||||
| Gross profit | 7,230 | 7,523 | ||||||
| Goodwill impairment | 20,500 | - | ||||||
| Research and development | 4,508 | - | ||||||
| Selling, general and administrative | 20,099 | 9,929 | ||||||
| Loss from operations | (37,877 | ) | (2,406 | ) | ||||
| Other (expense) income | ||||||||
| Gain on extinguishment of debt | 4,177 | - | ||||||
| Change in fair value of warrant liabilities | 3,064 | (783 | ) | |||||
| Interest expense (1) | (6,631 | ) | (2,379 | ) | ||||
| Other expense | (33 | ) | (12 | ) | ||||
| Total other income (expenses) | 577 | (3,174 | ) | |||||
| Loss before income taxes | (37,300 | ) | (5,580 | ) | ||||
| Provision for income taxes | (17 | ) | (41 | ) | ||||
| Net loss | $ | (37,317 | ) | $ | (5,621 | ) | ||
| (1) | Interest expense in the 3rd quarter of 2021 and the 3rd quarter of 2020 include related party interest of $4,602 and $1,613, respectively. |
Net loss
Net loss for the 3rd quarter of 2021 was $37.3 million compared with $5.6 million for the 3rd quarter of 2020. Discussed below are the revenue and expense factors that primarily contributed to the quarter over quarter net loss change.
Hardware revenue
Hardware revenue is seasonal and tends to be higher in the fourth quarter of each year. Our hardware revenue was $13.0 million in the 3rd quarter of 2021 compared with $16.4 million in the 3rd quarter of 2020, a decrease of $3.4 million, or 20.9%. We attribute the decrease to the normalization of demand for equipment that were in higher demand in 2020 and early 2021 due to COVID-19, as well as to the negative impact of product-related order backlog at our Computex subsidiary. The margin on hardware revenue was 22.2%, a 130-basis points increase compared with the 20.9% recorded in the 3rd quarter of 2020. We attribute the basis points increase to a more favorable price structure in the 3rd quarter of 2021.
Third party software and maintenance revenue
Revenues from third party software and maintenance, which are recorded net of direct expenses, was $2.1 million in the 3rd quarter of 2021 compared to $1.2 million in the 3rd quarter of 2020, an increase of $0.9 million or 73.0%. We attribute the increase to continued customer penetration in the retail and hospitality sector. Since this revenue is recorded net, the revenue is also the gross margin.
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Managed and professional services revenue
Primarily as a result of the Kandy acquisition, managed and professional services revenues increased 5.1% or $0.4 million to $8.6 million in the 3rd quarter of 2021 compared with the $8.2 million that was recorded in the 3rd quarter of 2020. Of the total managed and professional services revenue generated by the Company in the 3rd quarter of 2021, approximately 93.3% or $8.0 million, was generated by the Computex segment, while $0.6 million was generated by our Kandy segment. Compared to 3rd quarter 2020, managed and professional services revenue for our Computex segment was relatively flat, while the margin decreased from 34.8% in the 3rd quarter of 2020 to 28.4% in the 3rd quarter of 2021, a 640-basis points decrease. We attribute this decrease to increased investments in direct labor and software tools to support an increasing customer base as well as to the normalization of demand for certain services that were in higher demand in 2020 due to Covid-19.
Cloud subscription and software revenue
Cloud subscription and software revenue was $3.6 million in the 3rd quarter of 2021 and represents revenue from subscriptions to the Company’s cloud-based technology platform as well as revenue from the Company’s on-premise software, both of which are offered by the Company’s recently-acquired Kandy segment, which the Company acquired in December 2020.
Other revenue
Other revenue, which consists primarily of freight and reimbursables, including travel, meals and entertainment, was $0.2 million and $0.1 million for the 3rd quarter of 2021 and the 3rd quarter of 2020, respectively. By its nature, this type of revenue fluctuates depending on the revenue of the other product lines.
Total revenue, cost of revenue and gross margin
Aggregate revenue for the five product lines together was $27.5 million in the 3rd quarter of 2021, an increase of $1.5 million, or 5.9%, from the $26.0 million recorded in the 3rd quarter of 2020. The increase was due to the Kandy acquisition, partially offset by a decrease in total revenue at our Computex segment. The Kandy segment generated revenue of $4.1 million in the 3rd quarter of 2021. Revenues from the Computex segment decreased $2.6 million or 10.0%. Factors causing the decrease in revenue at our Computex segment are discussed above.
Aggregate gross profit was $7.2 million in the 3rd quarter of 2021 compared with $7.5 million in the 3rd quarter of 2020, a decrease of $0.3 million, or 3.9%, primarily due to a gross profit decrease at our Computex segment, which recorded a decrease of $0.2 million. Aggregate gross profit was negatively impacted by lower gross profit on managed and professional services as well as a lower gross profit on hardware revenue, which were partially offset by an increase in the gross profit on software and maintenance revenue.
Aggregate gross margin percent decreased 270 basis points from 29.0% in the 3rd quarter of 2020 to 26.3% in the 3rd quarter of 2021, due primarily to the impact of the Kandy acquisition. Gross margin for our Computex segment in the 3rd quarter of 2021 was 31.4%, a 240-basis point increase from the 29.0% recorded in the 3rd quarter of 2020, primarily as a result of improved margins on software and maintenance revenue and on hardware revenue. Though the Kandy segment contributed revenues of $4.1 million in the quarter, the revenue was exceeded by direct expenses as the Company continues to ramp up costs in the segment as part of its strategic investment in the Kandy segment.
Goodwill impairment
The noncash goodwill impairment charge recorded during the 3rd quarter of 2021 is discussed in Note 1 of the condensed consolidated financial statements and relates to goodwill of the Computex reporting unit. In connection with the potential sale of Computex, the Company compared the expected proceeds less costs to sell with the carrying value of the reporting unit and in connection therewith recorded a noncash goodwill impairment charge of $20,500 during the quarter.
Research and development
The Company began recognizing research and development expenses when it acquired Kandy in December 2020. In the 3rd quarter of 2021, research and development expenses were $4.5 million and represent research and development costs related to certain proprietary software incurred in an agile software environment with releases broken down into several iterations called sprints involving short cycles of development (typically 4-6 weeks in duration) in which the research and development teams create potentially shippable products. Currently, such costs are expensed as incurred, and include personnel-related costs, depreciation related to engineering and test equipment, allocated costs of facilities and information technology, outside services and consultants, supplies, software tools and product certification.
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Selling, general and administrative expenses
Selling, general and administrative expenses for the 3rd quarter of 2021 and the 3rd quarter of 2020 consisted of the components in the following table (in thousands):
| 3rd Quarter | Increase | |||||||||||
| 2021 | 2020 | (decrease) | ||||||||||
| (In thousands) | ||||||||||||
| Salaries, benefits, subcontracting & personnel administration costs | $ | 13,959 | $ | 6,436 | $ | 7,523 | ||||||
| Building occupancy costs, utilities, office supplies & repairs and maintenance | 1,050 | 564 | 486 | |||||||||
| Depreciation and amortization | 738 | 884 | (146 | ) | ||||||||
| Dues, subscriptions and memberships | 462 | 235 | 227 | |||||||||
| Sales and marketing | 944 | 184 | 760 | |||||||||
| Vendor marketing funds | (189 | ) | (110 | ) | (79 | ) | ||||||
| Meals, entertainment & travel | 50 | 17 | 33 | |||||||||
| Management fees | - | - | - | |||||||||
| Professional fees | 1,604 | 1,266 | 338 | |||||||||
| Insurance | 616 | 414 | 202 | |||||||||
| Other | 865 | 39 | 826 | |||||||||
| $ | 20,099 | $ | 9,929 | $ | 10,170 | |||||||
Selling, general and administrative expenses increased $10.2 million, primarily as a result of added expenses related to the Kandy acquisition ($4.2 million of the increase), certain termination expenses recorded in the 3rd quarter of 2021 and increased stock compensation expenses. The termination expenses, which were approximately $3.1 million (excluding stock compensation expenses related to the termination), were primarily recorded in July 2021 and were primarily due to a reduction in the Company’s corporate workforce. Stock compensation expenses increased approximately $2.1 million in the 3rd quarter of 2021 compared with the 3rd quarter of 2020 due to certain amounts related to the terminations discussed previously as well as to an increase in the number of awardees.
Gain on extinguishment of debt
The gain on extinguishment of debt of $4.2 million in the 3rd quarter of 2021 was due to the forgiveness, in July 2021, of a PPP loan plus related accrued interest. Under the terms of the CARES Act, PPP loan recipients had the option to apply for forgiveness for all or a portion of such loans, if the loan was used for eligible purposes, including to fund payroll costs.
Change in fair value of warrant liabilities
The change in the fair value of warrant liabilities in the 3rd quarter of 2021 and 2020 represent mark-to-market fair value adjustments related to certain warrants issued in connection with the IPO in 2017. Such changes primarily result from changes in the Company’s stock price.
Interest expense
Interest expense in the 3rd quarter of 2021 increased compared with the 3rd quarter of 2020, due in part to an increase in interest on Debentures due to new issuances as well as to the compounding effect of paid-in-kind interest. The Debentures were converted to common stock during the 3rd quarter of 2021 (on September 8, 2021), but prior to conversion, bore interest at the rate of 10.00% per annum compounded quarterly. Interest expense, which was also impacted by increases in Debenture discount amortization charges consisted of the following (in thousands):
| 3rd Quarter | ||||||||
| 2021 | 2020 | |||||||
| (In thousands) | ||||||||
| Amortization of debenture discount | $ | 2,792 | $ | 994 | ||||
| Debenture interest paid-in-kind | 2,518 | 1,097 | ||||||
| Amortization of debenture deferred fees | 565 | - | ||||||
| Interest on term note and line of credit | 340 | 230 | ||||||
| Interest on related party promissory note | 389 | - | ||||||
| Other | 27 | 58 | ||||||
| $ | 6,631 | $ | 2,379 | |||||
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YTD period ended September 30, 2021 versus the S/P Combined YTD period ended September 30, 2020
| YTD period | April 7, 2020 | January 1, 2020 | S/P Combined YTD period | |||||||||||||
| Ended | through | through | ended | |||||||||||||
| September 30, 2021 | September 30, 2020 | April
6, 2020 | September 30, 2020 | |||||||||||||
| Successor | Successor | Predecessor | (Non-GAAP) | |||||||||||||
| (In thousands) | (In thousands) | (In thousands) | (In thousands) | |||||||||||||
| Revenues: | ||||||||||||||||
| Hardware | $ | 39,219 | $ | 26,870 | $ | 10,587 | $ | 37,457 | ||||||||
| Third party software and maintenance | 5,115 | 2,734 | 1,459 | 4,193 | ||||||||||||
| Managed and professional services | 26,323 | 15,188 | 6,880 | 22,068 | ||||||||||||
| Cloud subscription and software | 10,790 | - | - | - | ||||||||||||
| Other | 793 | 273 | 111 | 384 | ||||||||||||
| Total revenues | 82,240 | 45,065 | 19,037 | 64,102 | ||||||||||||
| Cost of revenue | 60,152 | 31,362 | 12,426 | 43,788 | ||||||||||||
| Gross profit | 22,088 | 13,703 | 6,611 | 20,314 | ||||||||||||
| Goodwill impairment | 20,500 | - | - | - | ||||||||||||
| Research and development | 13,606 | - | - | - | ||||||||||||
| Selling, general and administrative | 51,484 | 17,617 | 7,835 | 25,452 | ||||||||||||
| Loss from operations | (63,502 | ) | (3,914 | ) | (1,224 | ) | (5,138 | ) | ||||||||
| Other (expense) income | ||||||||||||||||
| Gain on extinguishment of debt | 4,177 | - | - | - | ||||||||||||
| Change in fair value of warrant liabilities | 3,041 | (1,980 | ) | - | (1,980 | ) | ||||||||||
| Interest expense (1) | (19,446 | ) | (4,540 | ) | (384 | ) | (4,924 | ) | ||||||||
| Other (expense) income | (52 | ) | (25 | ) | 31 | 6 | ||||||||||
| Total other expenses | (12,280 | ) | (6,545 | ) | (353 | ) | (6,898 | ) | ||||||||
| Loss before income taxes | (75,782 | ) | (10,459 | ) | (1,577 | ) | (12,036 | ) | ||||||||
| Provision for income taxes | (68 | ) | (33 | ) | (12 | ) | (45 | ) | ||||||||
| Net loss | $ | (75,850 | ) | $ | (10,492 | ) | $ | (1,589 | ) | $ | (12,081 | ) | ||||
| (1) | Interest expense in the YTD period ended September 30, 2021 and the period April 7, 2020 through September 30, 2020 include related party interest of $14,611 and $3,078, respectively. |
Net loss
Net loss for the YTD period ended September 30, 2021 was $75.9 million compared with $12.1 million for the S/P Combined YTD period ended September 30, 2020. Discussed below are the revenue and expense factors that primarily contributed to the net loss change.
Hardware revenue
Hardware revenue was $39.2 million in the YTD period ended September 30, 2021 compared with $37.5 million in the S/P Combined YTD period ended September 30, 2020, an increase of $1.8 million, or 4.7%. We attribute this increase to the impact of COVID-19 due to increased demand for equipment in the manufacturing, logistics and public sectors in the earlier part of 2021, as more customers transitioned to remote work. There was some normalization of the demand for hardware in the 3rd quarter of 2021, however, the positive impact of the higher demand in the earlier part of 2021 more than offset the impact that the flattening of hardware demand in the 3rd quarter of 2021 had on the YTD period ended September 30, 2021. The gross margin on hardware revenue was 21.9% for the YTD period ended September 30, 2021, an 80-basis points decrease from the 22.7% recorded in the S/P Combined YTD period ended September 30, 2020. We attribute the basis points decrease to a shift in product mix towards lower margin products during the period.
Third party software and maintenance revenue
Revenues from software and maintenance, which are recorded net of direct expenses, increased to $5.1 million in the YTD period ended September 30, 2021 from $4.2 million in the YTD period ended September 30, 2020, an increase of 22.0% or $0.9 million. Similar to the quarter over quarter increase, we attribute this increase to continued customer penetration in the retail and hospitality sector. As previously mentioned, since this revenue is recorded net, the revenue is also the gross margin.
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Managed and professional services revenue
Managed and professional services revenues increased $4.3 million, or 19.3%, to $26.3 million in the YTD period ended September 30, 2021 from $22.1 million in the S/P Combined YTD period ended September 30, 2020. Of the $4.3 million increase, $1.8 million is attributable to the Kandy acquisition. We attribute the remaining increase to increasing demand for infrastructure assessment, cyber security and managed services monitoring at our Computex segment, primarily in the 1st half of the year. Though revenues from managed and professional services in the Computex segment increased $2.4 million, the margin decreased from 34.1% to 29.0 %, a decrease of 510 basis points. We attribute the basis points decrease to the same factors discussed in the quarter over quarter comparison.
Cloud subscription and software revenue
Cloud subscription and software revenue, offered by our Kandy segment, was $10.8 million in the YTD period ended September 30, 2021. The nature of this revenue is discussed in the quarter over quarter discussion above.
Other revenue
Other revenue, which is discussed above in the quarter over quarter comparison, was $0.8 million and $0.4 million in the YTD period ended September 30, 2021 and the S/P Combined period ended September 30 2020, respectively.
Total revenue, cost of revenue and gross margin
Aggregate revenue for the five product lines together was $82.2 million in the YTD period ended September 30, 2021, compared with $64.1 million in the S/P Combined period ended September 30 2020, an increase of $18.1 million, or 28.3%. Of the $18.1 million revenue increase, $12.6 million was related to the Kandy acquisition. The remainder of the increase is due to an increase in each of the four product lines at the Computex segment.
Aggregate gross profit was also up, reflecting an increase of $1.8 million, or 8.7%, due in part to the Kandy acquisition, which contributed $1.1 million to the increase. The remaining increase in aggregate gross profit was due primarily to the gross profit increase in software and maintenance revenue.
Though gross profit increased, aggregate gross margin percent decreased from 31.7% in the S/P Combined YTD period ended September 30, 2020 to 26.9%, a 480-basis points decrease, primarily due to the Kandy acquisition. Aggregate gross margin percent for our Computex segment was 30.2%, for the YTD period ended September 30, 2021 compared with 31.6% for the S/P Combined period ended September 30 2020, a 140-basis point decrease primarily due to increased investments in direct labor and telecommunications in the managed and professional services line of business. Gross margin at our Kandy segment was 9% in the YTD period ended September 30, 2021 as the Company continues to ramp up costs in the segment as part of its strategic investment in the Kandy segment.
Goodwill impairment
The noncash goodwill impairment charge recorded during the YTD period ended September 30, 2021 is discussed in the quarter over quarter comparison above.
Research and development
Research and development expenses, which are discussed in the quarter over quarter discussion, were $13.6 million in the YTD period ended September 30, 2021.
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Selling, general and administrative expenses
Selling, general and administrative expenses for the YTD period ended September 30, 2021 and the S/P Combined YTD period ended September 30, 2020 consisted of the components in the following table (in thousands):
| YTD period Ended | S/P Combined YTD period ended | |||||||||||
| September 30, 2021 | September 30, 2020 | Increase (decrease) | ||||||||||
| Successor | (Non-GAAP) | |||||||||||
| (In thousands) | (In thousands) | (In thousands) | ||||||||||
| Salaries, benefits, subcontracting & personnel administration costs | $ | 35,157 | $ | 18,235 | $ | 16,922 | ||||||
| Building occupancy costs, utilities, office supplies & repairs and maintenance | 2,657 | 1,510 | 1,147 | |||||||||
| Depreciation and amortization | 2,449 | 2,186 | 263 | |||||||||
| Dues, subscriptions and memberships | 1,227 | 629 | 598 | |||||||||
| Sales and marketing | 2,321 | 448 | 1,873 | |||||||||
| Vendor marketing funds, net of vendor fees | (405 | ) | (590 | ) | 185 | |||||||
| Meals, entertainment & travel | 110 | 163 | (53 | ) | ||||||||
| Management fees | - | 80 | (80 | ) | ||||||||
| Professional fees | 4,562 | 1,489 | 3,073 | |||||||||
| Insurance | 1,564 | 852 | 712 | |||||||||
| Other | 1,842 | 450 | 1,392 | |||||||||
| $ | 51,484 | $ | 25,452 | $ | 26,032 | |||||||
Selling, general and administrative expenses increased $26.0 million, primarily as a result of added expenses related to the Kandy acquisition ($11.0 million of the increase), an increase in personnel-related costs and professional fees. Personnel-related expenses increased, in part, as a result of the termination expenses in July 2021 that were previously mentioned in the quarter over quarter discussion and increased stock compensation expenses of approximately $5.3 million. The reasons for the stock compensation increases are discussed in the quarter over quarter comparison. Increased professional fees are related to the Company’s expanded public company activities.
Change in fair value of warrant liabilities
The nature of the change in the fair value of warrant liabilities is discussed in the quarter over quarter comparison.
37
Interest expense
The primary reasons for the increase in interest expense are discussed in the quarter over quarter comparison. For the YTD period ended September 30, 2021 and the S/P Combined YTD period ended September 30, 2020, interest expense consisted of the following (in thousands):
| YTD period
Ended | S/P Combined YTD period ended | |||||||
| September
30, 2021 | September
30, 2020 | |||||||
| Successor | (Non-GAAP) | |||||||
| (In thousands) | (In thousands) | |||||||
| Amortization of debenture discount | $ | 9,253 | $ | 1,921 | ||||
| Debenture interest paid-in-kind | 8,257 | 2,112 | ||||||
| Amortization of debenture deferred fees | 628 | - | ||||||
| Interest on term note and line of credit | 739 | 780 | ||||||
| Interest on related party promissory note | 389 | - | ||||||
| Other | 180 | 111 | ||||||
| $ | 19,446 | $ | 4,924 | |||||
Benefit/provision for income taxes
For all periods presented, the benefit/provision for income taxes consists of provisions for state taxes. The effective tax rates differ from the federal statutory rate as a result of certain expenses being deductible for financial reporting purposes that are not deductible for tax purposes, the existence of research and development tax credits, operating loss carryforwards, and adjustments to previously recorded deferred tax assets and liabilities related to the enactment of the Tax Cuts and Jobs Act in 2017. For the Successor periods, the benefit/provision for income taxes also reflects the impact of amortization of intangible assets recognized as of the Computex Closing Date and the Kandy Closing Date.
Liquidity and Capital Resources
Overview
Historically, the Company’s primary sources of liquidity have been cash and cash equivalents, cash flows from operations (when available) and cash flows from financing activities, including funding under its Credit Agreement (defined and more fully discussed in Note 8 of the condensed consolidated financial statements). From time to time, the Company may also choose to access the debt and equity markets to fund acquisitions, fund working capital and to diversify its capital sources. The Company’s current principal capital requirements are to fund working capital, fund capital expenditures and make investments that are in line with its business strategy.
On September 30, 2021, the Company had unrestricted cash of $4.2 million in its operating bank account and, as of October 1, 2021, had availability under its line of credit of $4.2 million. Current liabilities exceeded current assets by $26.6 million primarily as a result of the classification of certain debt as current, specifically, the components of the Credit Agreement and all promissory notes.
The Credit Agreement, as amended, matures on December 31, 2021, and, as of September 30, 2021, provides for maximum borrowings of $13.0 million on the line of credit portion with scheduled reductions of $1.0 million in availability on October 1, 2021, November 1, 2021 and December 1, 2021, which can be impacted by the borrowing base as, based on a ninth amendment entered into on November, 1, 2021, such availability is the lower of such amounts and the borrowing base. The borrowing base is determined weekly and is primarily based on certain percentages of accounts receivable and inventory. As amended, the Credit Agreement provides for a minimum monthly liquidity (defined as unrestricted cash plus availability under the line of credit) of $3.0 million. As amended, the Credit Agreement limits unfinanced capital expenditures to $3.0 million. As of October 1, 2021, maximum borrowings under the line of credit were $12,000, of which $4,183 was available.
As of September 30, 2021, amounts outstanding under the term loan and the line of credit with Comerica Bank were $3.2 million and $8.8 million, respectively. Principal payments of $1.6 million and $0.8 million are due in November and December, respectively on the term loan plus accrued interest. See Note 8 for a more detailed discussion of the Credit Agreement.
On or before the maturity date of the Credit Agreement, the Company expects to seek to either negotiate an extension of the Credit Agreement or enter into a new agreement with another lender. In addition to 43,778 units of securities of the Company (as described in Note 9 to the accompanying condensed consolidated financial statements, “Units”), issued to Ribbon as consideration for Kandy, in December 2020, the Company raised additional capital of $11.0 million via the sale of Units consisting of Debentures and warrants, and, during the nine months ended September 30, 2021 (all prior to the 3rd quarter), raised an additional $24.0 million through the sale of additional Units, which was used to fund expansion, capital expenditures and working capital. See Note 9 to the condensed consolidated financial statements for additional information. Pursuant to the terms of the Debentures, on September 8, 2021, the Debentures with related accrued interest were converted to shares of common stock.
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In July 2021, the Company’s application for forgiveness of a PPP loan of $4.1 million was approved. Under the terms of the CARES Act, PPP loan recipients had the option to apply for forgiveness for all or a portion of such loans, if the loan was used for eligible purposes, including to fund payroll costs.
Also in July 2021, the Company filed a registration statement on Form S-3 containing the following two prospectuses:
| ● | a base prospectus for the sale and issuance by us of up to $100 million of our common stock, preferred stock, warrants, subscriptions rights, debt securities and/or units; and |
| ● | a resale prospectus covering the resale by certain selling stockholders of up to 67,797,774 shares of common stock. |
On September 16, 2021, the Company borrowed $5.0 million under a subordinated promissory note (the “2021 Note”), which is secured by a shareholder that owns more than five percent of the Company’s shares. The 2021 Note matures on the earliest of (a) September 16, 2022, (b) the Company’s consummation of a debt financing resulting in the receipt of gross proceeds of not less than $20.0 million, (c) the Company’s consummation of primary sales of registered equity securities resulting in receipt of gross proceeds of not less than $20.0 million, (d) the Company’s consummation of the sale of Computex and (e) the date of any event of default. The 2021 Note is subordinate to any amounts owed under the Credit Agreement and has a minimum return of 25% over the applicable period.
On
November 2, 2021, the Company announced that it had signed a definitive agreement for a registered direct offering with an institutional
investor of 2,500,000 shares (the “Registered Shares”) of its common stock at a purchase price of $2.00 per share and a warrant
(the “Series B Warrant”) to purchase an additional 2,500,000 shares of common stock, for total gross proceeds of $5.0 million,
before payment of commissions and expenses. The Company will receive an additional $5.0 million in gross proceeds if the Series B Warrant
is exercised in full. The Series B Warrant has an exercise price of $2.00 per share, is exercisable on the date of issuance and expires
two years from the date of issuance. Commencing ten trading days after the issuance of the Series B Warrant, the Company may force
the investor to exercise its Series B Warrant in the event shares of the Company’s common stock trade at or above $2.40/share for
a period of 5 consecutive trading days, subject to certain conditions, including equity conditions.
In a concurrent private placement, the institutional investor received from the Company an unregistered warrant (the “Series A Warrant”) to purchase, initially, an additional 2,500,000 shares of the Company’s common stock. In addition, for each share of common stock purchased by the institutional investor upon the exercise of the Series B Warrant, the Series B Warrant will become exercisable to purchase one additional share of common stock.
The Series A Warrant has an exercise price of $2.00 per share, is exercisable on the date of issuance, and expires five years from the date of issuance.
The Company plans to use the net proceeds of approximately $4.5 million from the offering for reduction of debt and working capital.
As COVID-19 continues to negatively impact global supply chains, revenues and liquidity at our Computex subsidiary have been negatively impacted. The current computer chip and other component shortages, along with elongated product shipping transit times have caused an increase in product-related order backlog at Computex, increasing from a typical product-related order backlog of approximately $6.8 million as of December 31, 2020 to approximately $16.0 million as of September 30, 2021. Computex primarily sources its products from distributors who generally consider backlogged orders outstanding when computing the subsidiary’s credit limit usage. Hence, higher backlog orders negatively impact such credit limit usage and therefore negatively impact the subsidiary’s cash flows.
Whereas the Company continues to analyze its liquidity to ensure that it is able to execute on its operational plan, it expects that cash anticipated to be generated from future operations, as well as borrowings from lending and project financing sources and proceeds from equity and debt offerings will provide sufficient liquidity to fund operations for at least one year after the date the financial statements are issued. However, if the Company is unable to achieve its forecasts, fails to meet any of the financial covenants in the Credit Agreement and is unable to obtain a waiver or an amendment under the Credit Agreement to allow it to continue to borrow, is unable to extend or refinance its existing Credit Agreement, or is unable to raise additional equity or debt capital, the Company may need to pursue one or more alternatives, such as to reduce or delay investments in its business, or seek additional financing. The Company can provide no assurance that future funding will be available if and when required or that such funding will be available on terms that it finds acceptable. Any projection is based on the Company’s current expectations regarding new project financing and product sales and service, cost structure, cash burn rate and other operating assumptions.
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Successor cash flows (Nine months ended September 30, 2021 and April 7, 2020 to September 30, 2020)
Operating activities
Net cash used in operating activities was $28.9 million in the nine months ended September 30, 2021, which included operating expenses for Kandy’s operations, including its research and development activities.
Net cash used in operating activities was $12.6 million in the period April 7, 2020 through September 30, 2020, which was the result of an increase in receivables, due primarily to the acquisition of Kandy, and lower current liabilities at September 30, 2020 compared with April 6, 2020, as a substantial portion of the current liabilities at April 6, 2020 was converted to common stock and Debentures (and therefore reflected in increases in cash provided by financing activities). Current liabilities of $2.6 million as of April 6, 2020 were converted to Debentures, and $1.5 million was converted to common stock.
Investing activities
Investing activities used net cash of $3.0 million during the nine months ended September 30, 2021 and primarily consisted of capital expenditures.
Investing activities used net cash of $0.1 million in the period April 7, 2020 through September 30, 2020 and consisted of capital expenditures of $0.4 million, partially offset by cash acquired from the Computex acquisition of $0.3 million.
Financing activities
Financing activities provided net cash of $25.6 million during the nine months ended September 30, 2021 and was generated from the issuance of Debentures of $24.0 million, proceeds of $5.0 million from the issuance of a related party promissory note and drawdowns of $1.5 million under the line of credit, partially offset by debt repayments of $2.8 million, payments of deferred financing fees of $1.0 million and payments for shares withheld of $1.1 million related to employee tax withholding associated with the delivery of vested RSUs under the Company’s equity incentive plan.
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Financing activities provided $15.3 million in the period April 7, 2020 through September 30, 2020 and was generated from the issuance of $12.1 million in Debentures, $4.1 million in new debt and $1.5 million from the issuance of common stock, partially offset by net debt repayments of $1.3 million, redemption of shares held in trust of $1.0 million and payment of deferred financing fees of $0.1 million.
Predecessor cash flows (January 1, 2020 to April 6, 2020)
Operating activities
Net cash used in operating activities was $1.6 million for the period January 1, 2020 through April 6, 2020 and primarily consisted of funding for inventory and the impact of changes in deferred revenue, partially offset by funds provided by accounts receivable.
Investing activities
Investing activities used $0.2 million of cash for the period January 1, 2020 through April 6, 2020, which consisted of funding for capital expenditures.
Financing activities
Financing activities provided $2.0 million of cash for the period January 1, 2020 through April 6, 2020, consisting primarily of net funds from the line of credit of $3.0 million, partially offset by debt repayments of $1.0 million.
Off-Balance Sheet Arrangements
On September 30, 2021, we had no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and had not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
Critical Accounting Policies, Judgements and Estimates
Except for the adoption of ASU No. 2020-06, which is discussed in Note 4 of the condensed consolidated financial statements, there were no significant changes to our critical accounting policies and estimates from those disclosed in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December 31, 2020, as amended.
Recent Accounting Pronouncements Issued and Adopted
See Note 4 of the accompanying condensed consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign exchange risk
Our business is primarily conducted within US markets and, hence our exposure to currency fluctuations is limited. International revenues during the three and nine months ended September 30, 2021 was 6.9% and 7.6% of revenues, respectively.
Interest rate risk
Interest rate risks are inherent in the Credit Agreement. See Note 8 of the condensed consolidated financial statements. Currently, management does not view this exposure to be a significant risk.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
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Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act) were not effective as of September 30, 2021 due solely to the material weakness in our internal control over financial reporting described below in “Management’s Report on Internal Control over Financial Reporting.” In light of such material weakness, we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects our financial position, results of operations and cash flows for the periods presented.
Management’s Report on Internal Controls 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 Rule 13a-15(f). Internal control over financial reporting is a process used to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our board of directors and management; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
An internal control system over financial reporting has inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. 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. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design safeguards into the process to reduce, though not fully eliminate, risk.
Due solely to the events that led to the restatement of our December 2020 consolidated financial statements, management has identified a material weakness in internal controls related to the accounting for warrants issued by Pensare Acquisition Corp. (“Pensare”) issued in connection with the initial public offering, as described in the section titled, “Restatement of Previously Issued Financial Statements” in Note 3 of the Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K, as amended.
Management is implementing remediation steps to address the material weakness and to improve our internal control over financial reporting. Such remediation steps will include an expansion and improvement of our review process for complex securities and related accounting standards by engaging expert third-party professionals with whom to consult regarding complex accounting applications and consideration.
Changes in Internal Control over Financial Reporting
During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Currently, there are no material litigation, arbitration, governmental proceeding or any other legal proceeding currently pending or known to be contemplated against us or any members of our management team in their capacity as such.
ITEM 1A. RISK FACTORS.
Factors that could cause our actual results to differ materially from those in this quarterly report are any of the risks described in our Annual Report on Form 10-K, as amended, filed with the SEC on May 14, 2021. Any of these factors could result in a significant or material adverse effect on our results of operations, financial condition or cash flows. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business. As of the date of this quarterly report, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K, as amended, filed with the SEC on May 14, 2021, other than the amended and restated risk factors set forth below and except as may otherwise be disclosed in this quarterly report. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
The COVID-19 pandemic and related impact on global economies may continue to materially and adversely impact global supply chains and therefore adversely impact the Company’s financial position and results of operations.
The COVID-19 pandemic has had a negative impact on global economies, has caused disruptions in manufacturing and financial markets, has caused an increase in volatility, and has impeded global supply chains, including those of our vendors. Our ability to deliver our solutions to our customers depends in large part on the ability of our vendors and other business partners to deliver products we have procured from them. If the COVID-19 pandemic impairs the ability of our business partners to support us on a timely basis, or negatively impacts the demand for our products and services, our ability to fulfil orders from our customers as well as the demand for our solutions may be negatively impacted. Disruptions from the COVID-19 pandemic has affected the Company’s ability, particularly the ability of Computex, to get product on the same cycle time as historically typical, thereby causing an increase in order backlog, due to various factors impacting our vendors, including workforce disruptions due to illness, quarantines, government actions, facility closures, and other actions that limit the capacity of production facilities.
The degree to which the global supply chain disruption will continue to impact our business, financial position and results of operations will depend on future developments, some of which are beyond our control, including the frequency and duration of any waves of infection, the effectiveness and timing of any vaccines, the extent of actions to contain or treat the virus, and the timing and extent to which normal economic and operating conditions can resume locally and internationally.
We may not complete the planned divestiture of Computex on our anticipated timeline or at all, and, even if completed, we may not achieve the benefits we anticipate.
In September 2021, we announced that our Board had authorized us to explore strategic opportunities for our IT solutions business, including the planned divestiture of Computex (the “Divestiture”). We believe that the change will allow us to optimize resource allocation, focus on core competencies, and improve our ability to invest in areas of maximal growth potential. We expect that the proceeds from any potential sale transaction will be used to further deleverage our balance sheet and provide working capital.
We may not be able to find an acquiror for Computex on terms acceptable to us, or at all. Even if the Divestiture is completed, we may not achieve some or all of the anticipated benefits, including those described above, and our future investments and other business opportunities that we anticipate will be facilitated by the Divestiture may not be successful and may prove not to be superior alternatives to the continued operation of Computex. Further, execution of the Divestiture will require significant time and attention from management and other employees, including following the closing of the Divestiture, which may divert the attention of our management and other employees from the execution of our other initiatives and could adversely affect our financial condition, results of operations, or cash flows.
We have identified a material weaknesses in our internal control over financial reporting related to the restatement described in our Annual Report on Form 10K, as amended, which, if not remediated, could result in material misstatements in our financial statements.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process used to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with GAAP. Management is also likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes or material weaknesses identified as a result of such evaluation. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
As described elsewhere in this Quarterly Report on Form 10-Q, we identified a material weakness in our internal control over financial reporting related to accounting for the Private Placement and EBC Warrants issued in connection with Pensare Acquisition Corp.’s initial public offering in 2017. As a result of this material weakness, management concluded that our disclosure controls and procedures were not effective as of September 30, 2021. This material weakness resulted in the need to restate certain financial statement line items in our previously issued financial statements for the period ended December 31, 2020.
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Any failure to maintain effective internal control over financial reporting or disclosure controls and procedures could adversely impact our ability to report our financial position and results of operations on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are not filed on a timely basis, we could be subject to sanctions or investigations by the stock exchange on which our common stock and public warrants are listed, the SEC or other regulatory authorities. In either case, there could result a material adverse effect on our business. Such material weakness could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.
We can give no assurance that the measures we have taken and plan to take in the future will remediate the material weakness identified or that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our financial statements.
We may face litigation and other risks as a result of the material weakness in our internal control over financial reporting.
We identified a material weakness in our internal controls over financial reporting. As a result of such material weakness, the restatement described elsewhere in this Report, the change in accounting for the Company’s Private Placement and EBC warrants, and other matters raised or that may in the future be raised by the SEC, the Company could potentially face litigation or other disputes which could include, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the restatement and material weaknesses in our internal control over financial reporting and the preparation of our financial statements. As of the date of this Report, we have no knowledge of any such litigation or dispute. However, we can provide no assurance that any such litigation or dispute will not arise in the future. Any such litigation or dispute, whether successful or not, could have a material adverse effect on our business, results of operations and financial condition or our ability to complete a business combination.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
On September 22, 2021, the Company and Comerica Bank entered into an eighth amendment to the Credit Agreement to allow the Company to incur borrowings of $5,000,000 under a subordinated promissory note. On November 1, 2021, the Company and Comerica Bank entered into a ninth amendment to the Credit Agreement pursuant to which a payment of principal that was scheduled for October 1, 2021 was agreed to be paid in November, and availability under the line of credit was revised to be based on the lower of the amount determined based on (i) the borrowing base and (ii) the line of credit availability amounts in the seventh amendment to the Credit Agreement
ITEM 6. EXHIBITS.
| (1) | Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on July 22, 2021 |
| * | Furnished herewith. |
| ** | Filed herewith. |
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SIGNATURES
Pursuant to the requirements 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.
| AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC. | ||
| Date: November 12, 2021 | /s/ Darrell J. Mays | |
| Name: | Darrell J. Mays | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| /s/ Thomas H. King | ||
| Name: | Thomas H. King | |
| Title | Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | ||
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