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Form 10-Q American Virtual Cloud For: Sep 30

November 16, 2020 6:39 AM EST

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

or

 

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

 

Commission File Number: 001-38167

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   81-2402421
(State or other jurisdiction
of incorporation)
  (IRS Employer
Identification Number)

 

1720 Peachtree Street, Suite 629

Atlanta, GA 30309
(Address of principal executive offices)

 

(404) 239-2863

(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   AVCT   The Nasdaq Stock Market LLC
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. ☒ Yes ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (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). ☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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 11, 2020, 19,753,061 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  
     
  Condensed Consolidated Balance Sheets 1
     
  Condensed Consolidated Statements of Operations 2
     
  Condensed Consolidated Statements of Changes in Stockholders’ (Deficit) Equity 3
     
  Condensed Consolidated Statements of Cash Flows 5
     
  Notes to Unaudited Condensed Consolidated Financial Statements 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 45
     
Item 4. Controls and Procedures 45
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 46
     
Item 1A. Risk Factors 46
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 47
     
Item 3. Defaults Upon Senior Securities 47
     
Item 4. Mine Safety Disclosures 47
     
Item 5. Other Information 47
     
Item 6. Exhibits 47
     
SIGNATURES 48

 

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,
2020
   December 31,
2019
 
   Successor   Predecessor 
   (Unaudited)     
ASSETS        
Current assets:        
Cash  $3,715   $18 
Restricted cash   688    - 
Trade receivables, net of allowances of $339 and $138 at September 30, 2020 and December 31, 2019, respectively   19,030    16,092 
Prepaid expenses   2,213    397 
Inventory   649    350 
Other current assets   53    224 
Total current assets   26,348    17,081 
Property and equipment, net   7,765    9,608 
Other assets:          
Goodwill   42,129    21,215 
Other intangible assets, net   23,142    2,404 
Other noncurrent assets   67    69 
Total other assets   65,338    23,688 
TOTAL ASSETS  $99,451   $50,377 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable and accrued expenses  $27,524   $21,731 
Deferred revenue   1,536    6,431 
Line of credit   8,487    - 
Current portion of notes payable and capital leases   8,991    2,506 
Subordinated promissory note   500    - 
Total current liabilities   47,038    30,668 
Long-term liabilities          
Line of credit   -    6,051 
Notes payable and capital leases (net of current portion and deferred financing fees)   1,558    5,685 
Convertible Debentures, net of discount - related party   10,632    - 
Convertible Debentures, net of discount   26,634    - 
Deferred tax liability   3,443    - 
Other liabilities   82    180 
Total long-term liabilities   42,349    11,916 
Total liabilities   89,387    42,584 
           
Commitments and contingent liabilities (see note 15)          
           
Stockholders’ equity:          
           
Successor:          
           
Preferred stock, $0.0001 par value; 5,000,000 authorized; none issued and outstanding   -    - 
Common stock, $0.0001 par value; 500,000,000 shares authorized; 19,753,061 shares issued and outstanding as of September 30, 2020   2    - 
Additional paid-in capital   34,988    - 
Accumulated deficit   (24,926)   - 
           
Predecessor:          
Predecessor common stock, $0.001 par value; 1,000 shares authorized; 1,000 shares issued and outstanding as of December 31, 2019   -    - 
Additional paid-in capital   -    18,717 
Accumulated deficit   -    (10,924)
Total stockholders’ equity   10,064    7,793 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $99,451   $50,377 

 

The accompanying notes are an integral part of the unaudited 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)

 

   July 1,
2020
   April 7,
2020
   January 1,
2020
   July 1,
2019
   January 1,
2019
 
   through   through   through   through   through 
   September 30,
2020
   September 30,
2020
   April 6,
2020
   September 30,
2019
   September 30,
2019
 
   Successor   Successor   Predecessor   Predecessor   Predecessor 
                     
Revenues:                    
Hardware  $16,428   $26,870   $10,587   $12,160   $40,649 
Software and maintenance   1,202    2,734    1,459    1,418    4,447 
Managed and professional services   8,204    15,188    6,880    6,599    20,557 
Other   134    273    111    155    503 
Total revenues   25,968    45,065    19,037    20,332    66,156 
                          
Cost of revenue   18,445    31,362    12,426    14,249    47,589 
                          
Gross profit   7,523    13,703    6,611    6,083    18,567 
                          
Selling, general and administrative expenses   9,929    17,617    7,835    6,928    20,403 
                          
Loss from operations   (2,406)   (3,914)   (1,224)   (845)   (1,836)
                          
Other (expense) income                         
Interest expense - related party   (597)   (1,151)   -    -    - 
Interest expense   (1,782)   (3,389)   (384)   (309)   (979)
Other (expense) income   (12)   (25)   31    2    147 
Total other expenses   (2,391)   (4,565)   (353)   (307)   (832)
                          
Net loss before income taxes   (4,797)   (8,479)   (1,577)   (1,152)   (2,668)
                          
Benefit (provision) for income taxes   (41)   (33)   (12)   55    (33)
                          
Net loss  $(4,838)  $(8,512)  $(1,589)  $(1,097)  $(2,701)
                          
Loss per share - basic and diluted  $(0.25)  $(0.43)  $(1,587.30)  $(1,096.00)  $(2,700.60)
                          
Weighted average shares outstanding - basic and diluted   19,678,342    19,657,811    1,000    1,000    1,000 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

2

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (Deficit) EQUITY

(In thousands, except share and per share data, or as otherwise noted)

(Unaudited)

 

   For the period January 1, 2019 through September 30, 2019 
   Common Stock   Additional
Paid-In
   Accumulated   Stockholders’
Equity
 
   Shares   Amount   Capital   Deficit   (Deficit) 
Predecessor                    
Balance, January 1, 2019   1,000   $-   $18,717   $(6,640)  $12,077 
Cumulative effect of accounting change (See Note 4)   -    -    -    99    99 
Net loss   -    -    -    (2,701)   (2,701)
Balance, September 30, 2019   1,000   $-   $18,717   $(9,242)  $9,475 

 

   For the period July 1, 2019 through September 30, 2019 
   Common Stock   Additional
Paid-In
   Accumulated   Stockholders’
Equity
 
   Shares   Amount   Capital   Deficit   (Deficit) 
Predecessor                    
Balance, July 1, 2019   1,000   $-   $18,717   $(8,145)  $10,572 
Net loss   -    -    -    (1,097)   (1,097)
Balance, September 30, 2019   1,000   $-   $18,717   $(9,242)  $9,475 

 

   For the period January 1, 2020 through April 6, 2020 
   Common Stock   Additional
Paid-In
   Accumulated   Stockholders’
Equity
 
   Shares   Amount   Capital   Deficit   (Deficit) 
Predecessor                    
Balance, January 1, 2020   1,000   $-   $18,717   $(10,924)  $7,793 
Net loss   -    -    -    (1,589)   (1,589)
Balance, April 6, 2020   1,000   $-   $18,717   $(12,513)  $6,204 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

3

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (Deficit) EQUITY (continued)

(In thousands, except share and per share data, or as otherwise noted)

(Unaudited)

 

   For the period April 7, 2020 through September 30, 2020 
   Common Stock   Additional
Paid-In
   Accumulated   Stockholders’
Equity
 
   Shares   Amount   Capital   Deficit   (Deficit) 
Successor                    
Balance, April 7, 2020   7,932,977   $1   $7   $(15,410)  $(15,402)
Conversion of rights (previously issued in the IPO) into shares   3,105,000    -    -    -    - 
Original issuance of shares in connection with the acquisition of Computex (as defined in Note 1)   8,189,490    1    24,567    -    24,568 
Additional shares issued in connection with the acquisition of Computex (working capital adjustment)   117,231    -    557    -    557 
Issuance of shares in exchange for services   500,000    -    1,500    -    1,500 
Deferred underwriting fees relating to IPO   -    -    (3,000)   -    (3,000)
Debenture discount relative to value of warrants   -    -    9,937    -    9,937 
Redemption of shares held in trust   (91,637)   -    -    (1,004)   (1,004)
Share-based compensation   -    -    1,420    -    1,420 
Net loss   -    -    -    (8,512)   (8,512)
Balance, September 30, 2020   19,753,061   $2   $34,988   $(24,926)  $10,064 

 

   For the period July 1, 2020 through September 30, 2020 
   Common Stock   Additional
Paid-In
   Accumulated   Stockholders’
Equity
 
   Shares   Amount   Capital   Deficit   (Deficit) 
Successor                    
Balance, July 1, 2020   19,635,830   $2   $33,629   $(20,088)  $13,543 
Additional shares issued in connection with the acquisition of Computex (working capital adjustment)   117,231    -    557    -    557 
Share-based compensation   -    -    802    -    802 
Net loss   -    -    -    (4,838)   (4,838)
Balance, September 30, 2020   19,753,061   $2   $34,988   $(24,926)  $10,064 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

4

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

  

   April 7,
2020
   January 1,
2020
   January 1,
2019
 
   through   through   through 
   September 30,
2020
   April 6,
2020
   September 30,
2019
 
   Successor   Predecessor   Predecessor 
             
Cash Flows from Operating Activities:            
Net loss  $(8,512)  $(1,589)  $(2,701)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:               
Depreciation   1,745    933    2,835 
Amortization of intangible assets   1,158    263    740 
Amortization of convertible debenture discount relative to warrants   1,921    -    - 
Interest on convertible debt paid-in-kind   2,112    -    - 
Share-based compensation   1,420    -    - 
Deferred income taxes   (7)   -    - 
Amortization and write-off of deferred financing costs   21    128    34 
Changes in operating assets and liabilities:               
Accounts receivable   (5,234)   2,296    30,373 
Prepaid expenses   (680)   (1,074)   - 
Inventory   785    (1,084)   (45)
Accounts payable and accrued expenses   (4,723)   745    (25,967)
Other current assets   (53)   217    391 
Other current liabilities   -    2    - 
Deferred revenue   (2,551)   (2,353)   (3,250)
Other liabilities   (27)   (76)   (88)
Net cash (used in) provided by operating activities   (12,625)   (1,592)   2,322 
Cash Flows from Investing Activities:               
Cash from the acquisition of Computex (See Note 1)   269    -    - 
Purchase of property and equipment   (396)   (146)   (486)
Net cash used in investing activities   (127)   (146)   (486)
Cash Flows from Financing Activities:               
Net change in line of credit   (593)   3,029    623 
Debt repayments (including capital lease obligations)   (747)   (1,040)   (2,176)
Proceeds from PPP Loan (See Note 8)   4,135    -    - 
Issuance of convertible Debentures (See Note 9)   12,104    -    - 
Issuance of common stock   1,500    -    - 
Redemption of shares held in trust   (1,004)   -    - 
Payment of deferred financing fees   (113)   -    - 
Net cash provided by (used in) financing activities   15,282    1,989    (1,553)
Net change in cash and restricted cash   2,530    251    283 
Cash and restricted cash, beginning of period   1,873    18    260 
Cash and restricted cash, end of period  $4,403   $269   $543 
Supplemental Disclosures about Cash Flow Information               
Cash paid for interest  $452   $384   $979 
Cash paid (refunds received) for income taxes  $62   $(4)  $61 
Supplemental Schedule of Noncash Investing and Financing Activities               
Noncash acquisition of Computex in exchange for common stock, convertible Debentures and assumed debt  $61,768   $-   $- 
Relative fair value of warrants issued with convertible Debentures   9,937    -    - 
Promissory note - related party, exchanged for convertible Debentures   8,566    -    - 
Deferred underwriting fees settled via the issuance of common stock and the issuance of subordinated promissory note   3,000    -    - 
Capital expenditures included in accounts payable and accrued expenses   287    125    141 
Assets acquired by capital lease   -    -    299 

 

The accompanying notes are an integral part of the unaudited 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, 2020

(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 “Closing Date”), AVCT (formerly known as Pensare Acquisition Corp.) consummated a business combination transaction (the “Business Combination”) in which it acquired Stratos Management Systems, Inc. (“Computex”), a private operating company that does business as Computex Technology Solutions. The Business Combination was consummated pursuant to the terms of an amended agreement originally entered into on July 25, 2019. In connection with the closing of the Business Combination, the Company changed its name to American Virtual Cloud Technologies, Inc. See Note 5 for additional information about the Business Combination.

 

In the Business Combination, the Company is considered the acquirer and Computex is considered the acquiree and the Predecessor, for accounting purposes. The Business Combination was accounted for using the acquisition method of accounting, and the Successor’s 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 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 accompanying condensed consolidated financial statements of the Company include the accounts of AVCT and its wholly owned subsidiary, Computex. 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.

 

Currently, the Company’s primary operations are through its wholly owned subsidiary, Computex.

 

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, 2020

(Unaudited)

  

Nature of 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. The breadth of its offerings enables Computex to offer each customer a complete technology solution. After performing an assessment of its customers’ needs, Computex designs best-fit solutions, and with the help of leading vendors in the industry, helps its customers to procure products that fit their global needs.

 

With primary operating locations in Minnesota, Michigan, Florida and Texas, services offered by Computex include Unified Communications-as-a-Service (“UCaaS”), directory and messaging, enterprise networking, cybersecurity, collaboration, data center services, integration, storage, backup, virtualization, and converged infrastructures.

 

Recent Development

 

On August 5, 2020, we entered into a Purchase Agreement (the “Purchase Agreement”) with Ribbon Communications, Inc. (“Ribbon”), Ribbon Communications Operating Company, Inc. (“RCOCI”) and Ribbon Communications International Limited (together with RCOCI, the “Sellers”), pursuant to which AVCT has agreed to purchase the Sellers’ cloud-based enterprise services business (also known as the Kandy Communications business) (the “Kandy Business”) by acquiring certain of the Sellers’ and their respective affiliates assets (and assuming certain of the Sellers’ and their respective affiliates’ liabilities) primarily associated with the Kandy Business, and acquiring all of the outstanding interests of Kandy Communications LLC. See Note 16 of the condensed consolidated financial statements for more information.

 

Covid-19

 

Commencing in December 2019, the novel strain of coronavirus (“COVID-19”) began spreading throughout the world, including the first outbreak in the US in February 2020. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. COVID-19 has disrupted and continues to significantly disrupt local, regional, and global economies and businesses. The COVID-19 outbreak is disrupting supply chains and affecting production and sales across a range of industries. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers, employees and vendors, all of which are uncertain and cannot be predicted. At this point, the extent to which COVID-19 may impact our financial condition and/or results of operations is uncertain.

 

In response to COVID-19, we have put into place certain restrictions, requirements and guidelines to protect the health of our employees and clients, including requiring that certain conditions be met before employees return to the Company’s offices. Also, to protect the health and safety of our employees, our daily execution has evolved into a largely virtual model. Between April 1, 2020 and September 1, 2020, salaries of Computex’s employees were reduced and there are efforts to reduce other operating expenses relative to revenue. We plan to 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 are in the interests of our employees, customers, and partners.

 

NASDAQ listing

 

On April 9, 2020, the Company was notified by the NASDAQ via a certified letter (the “Determination Letter”) that it had not complied with the requirements of the NASDAQ Listing Rule IM-5101-2, which required the Company to meet the requirements for initial listing after the completion of the business combination. The Determination Letter stated that the Company’s common stock did not meet the minimum $4.00 bid price and the $15 million market value requirement for publicly held shares, which are set forth in the NASDAQ Listing Rule 5505. On May 27, 2020, the NASDAQ granted the Company an extension to demonstrate compliance with the applicable requirements. During the third quarter of 2020, the Company achieved compliance and was so notified by the NASDAQ via letter dated August 26, 2020.

 

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, 2020

(Unaudited)

 

2. Liquidity

 

At September 30, 2020, the Company had unrestricted and restricted cash of $3,715 and $688, respectively, in its operating bank accounts and had a working capital deficit of $20,690. Also, the Company’s Credit Agreement (as defined in Note 8) matures on June 30, 2021.

 

On or before the maturity date of the Credit Agreement, the Company plans to seek to either negotiate an extension of the Credit Agreement or enter into a new agreement with another lender. In addition, the Company is in the process of seeking to raise working capital for its current operations and also to fund the pending acquisition of the Kandy Business (as more fully discussed in Note 16). There can be no assurance that financing will be available in the amounts that the Company requires or on terms that are acceptable, if at all.

 

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 Stratos Management Systems, Inc.’s consolidated financial statements and notes as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017, included in the Report on Form 8-K/A filed with the SEC on April 14, 2020. The interim results for the periods ended September 30, 2020 are not necessarily indicative of the results expected for the year ending December 31, 2020 or any future interim periods.

 

As a result of the Business Combination, the Company is considered the acquirer and Computex is considered the acquiree and the accounting predecessor. The Business Combination was accounted for using the acquisition method of accounting, and the Successor’s financial statements reflect a new basis of accounting that is based on the fair value of the net assets acquired. In the accompanying condensed consolidated financial statements, the Company clearly distinguishes between the entity that existed before the 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.

  

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, 2020

(Unaudited)

 

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 that were recorded in connection with the Company’s acquisition of Computex.

 

Principles of consolidation

 

The accompanying Successor condensed consolidated financial statements include the accounts of AVCT and its wholly owned subsidiary, Computex. The Predecessor condensed consolidated financial statements reflect only the accounts of Computex and its subsidiaries. All intercompany balances and transactions have been eliminated.

 

As more fully discussed above, the historical financial information of AVCT prior to the business combination (a SPAC) has not been reflected in the Predecessor financial statements as such historical amounts have been determined not to be useful information to a user of the financial statements. Accordingly, all activity reported prior to April 7, 2020 (the Predecessor period) reflect only the operations of Computex.

 

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.

 

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, recognition and measurement of income tax assets, valuation of share-based compensation, and the valuation of net assets acquired in the Business Combination.

 

Revenue recognition

 

Effective January 1, 2019, the Company adopted Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This ASU created the Financial Accounting Standard Board’s (“FASB’s”), Accounting Standard Codification (ASC), Topic 606 (“Topic 606”) which provides a comprehensive new revenue recognition guide. Below are the Company’s significant revenue recognition policies including those that were changed as a result of the adoption of Topic 606.

 

Revenue from contracts with customers are not recorded until the Company has the approval and commitment from the parties, the rights of the parties are identified, payment terms are established, the contract has commercial substance and collectability of the consideration is probable. The Company also evaluates the following indicators, amongst others, when determining whether it is acting as a principal in the transaction (and therefore whether to record revenue on a gross basis): (i) whether the Company is primarily responsible for fulfilling the promise to provide the specified good or service, (ii) whether the Company has the inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer and (iii) whether the Company has the discretion to establish the price for the specified good or service. If the terms of a transaction do not indicate that the Company is acting as a principal in the transaction, then the Company is acting as an agent in the transaction and therefore, the associated revenue is recognized on a net basis (that is revenue net of costs).

 

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, 2020

(Unaudited)

 

Revenue is recognized once control passes to the customer. The following indicators are evaluated in determining when control has passed to the customer: (i) whether the Company has a right to payment for the product or service, (ii) whether the customer has legal title to the product, (iii) whether the Company has transferred physical possession of the product to the customer, (iv) whether the customer has the significant risk and rewards of ownership of the product and (v) whether the customer has accepted the product. The Company’s products can be delivered to customers in a variety of ways, including (i) physical shipment from the Company’s warehouse, (ii) via drop-shipment by the vendor or supplier or (iii) via electronic delivery of keys for software licenses. The Company’s shipping terms typically allow for the Company to recognize revenue when the product is shipped to the customer’s location.

 

Hardware

Revenue from the sale of hardware is recognized on a gross basis, as the Company is deemed to be acting as the principal in these transactions. The selling price to the customer is recorded as revenue and the acquisition cost is recorded within cost of revenue. The Company recognizes revenue from these transactions when control has passed to the customer, which is usually upon shipment.

 

In some instances, the customer agrees to buy the product from the Company, but requests delivery at a later date, commonly known as a bill-and-hold arrangement. For these transactions, the Company deems that control passes to the customer when the product is ready for delivery. The Company classifies such products as products ready for delivery when the customer is in possession of a signed agreement, the significant risk and rewards for the product has passed to the customer, the customer has the ability to direct the asset, the product has been set aside specifically for the customer and the Company cannot redirect the product for the benefit of another customer.

 

In drop-shipment arrangements, whereby the Company arranges for the vendor to deliver the product directly to the customer without the inventory first being held at its warehouses, the Company considers itself to be the principal and therefore, recognizes the related revenue on a gross basis.

 

Software

Revenues from most software license sales are recognized as a single performance obligation on a net basis, as the Company is deemed to be acting as an agent in these transactions. Revenues in these instances are recognized at the point the software license is delivered to the customer. Generally, software licenses are sold with accompanying third-party delivered software support, which is a product that allows customers to upgrade, at no additional cost, to the latest technology if new capabilities are introduced during the period that the software support is in effect. The Company evaluates whether the software support is a separate performance obligation by assessing whether the third-party delivered software support is critical or essential to the core functionality of the software itself. This involves considering whether the software provides its original intended functionality to the customer without the updates, whether the customer would ascribe a higher value to the upgrades versus the up-front deliverable, whether the customer would expect frequent intelligence updates to the software (such as updates that maintain the original functionality), and whether the customer chooses to not delay or always install upgrades. If the Company determines that the accompanying third-party delivered software support is critical or essential to the core functionality of the software license, the software license and the accompanying third-party delivered software support are recognized as a single performance obligation. The value of the product is primarily based on the accompanying support delivered by a third-party, and therefore the Company is acting as an agent in these transactions and therefore, recognizes the associated revenue on a net basis at the point that the associated software license is delivered to the customer.

 

Third-party services

The Company is deemed to be the agent in the sale of third-party maintenance, software support and services, as the third-party controls the service until it is transferred to the customer. In these instances, the Company recognizes the revenue on a net basis equal to the selling price to the customer less the acquisition costs. Such revenue is recognized when the customer and vendor accept the terms and conditions of the arrangement.

 

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, 2020

(Unaudited)

 

Managed and professional services

Professional services offerings include assessments, project management, staging, configuration, and integration. Managed services offerings range from monitoring and notification to a fully outsourced network management solution. In these arrangements, the Company satisfies the performance obligations and recognizes revenue over time.

 

Such professional services are provided under both time and materials and fixed price contracts. When services are provided on a time and materials basis, the Company recognizes revenues at agreed-upon billing rates as services are performed. When services are provided on a fixed fee basis, the Company recognizes revenues over time in proportion to the Company’s progress towards satisfaction of the performance obligation.

 

In arrangements for managed services, the Company’s arrangement is typically a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The Company typically recognizes revenue from these services on a straight-line basis over the period services are provided, which is consistent with the timing of services rendered.

 

Freight and sales tax

Freight billed to customers is included within sales on the condensed consolidated statement of operations. The related freight charged to the Company is included within cost of revenue. Sales tax collected from customers is remitted to governmental authorities on a net basis.

 

Contract liabilities

Contract liabilities (or deferred or unearned revenue) are recognized when cash payments are received or due in advance of the Company’s performance obligations.

 

Costs of obtaining and fulfilling a contract

The Company capitalizes costs that are incremental to obtaining customer contracts, predominately sales commissions. Such deferrals are then amortized to expense, in proportion to each completed contract performance obligation, on a straight-line basis over the period during which the Company fulfills its performance obligation.

 

Costs associated with contracts whereby the Company has an obligation to perform services, are incurred specifically to assist the Company in rendering services to its customers and are recorded as deferred customer support contract costs at the time the costs are incurred. The costs are amortized to expense on a straight-line basis over the period during which the Company fulfills its performance obligation.

 

Cash, cash equivalents and restricted cash

 

The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at September 30, 2020 and December 31, 2019. Restricted cash consists of the balance of amounts placed in escrow at Comerica Bank in connection with the third amendment to the Credit Agreement (as defined in Note 8) to be applied to interest payments. In the event such amounts in escrow are insufficient to satisfy interest payments, such interest payments may be paid using other funds.

 

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, 2020

(Unaudited)

 

Trade receivables, net

 

Trade receivables arise from granting credit to customers in the normal course of business, are unsecured and are presented net of an allowance for doubtful accounts. The allowance is based on a number of factors, including the length of time the receivable is past due, the Company’s previous loss history, the customer’s current ability to pay, and the general condition of the economy and industry as a whole. Depending on the customer, payment is due between 30 and 60 days after the customer receives an invoice. Accounts that are more than 45 days past due are individually analyzed for collectability. When all collection efforts have been exhausted, the accounts are written off. Historically, the Company has not suffered significant losses with respect to its trade receivables.

 

Inventories

 

Inventories, which consist of purchased components for resale, are valued at the lower of average cost (which approximates the first-in, first-out method) and net realizable value. The need for an inventory obsolescence reserve is based on an evaluation of slow-moving or obsolete inventory. No obsolescence reserve was deemed necessary at September 30, 2020 and December 31, 2019.

 

Business combinations

 

The Company accounts for business combinations in accordance with ASC 805, Business Combinations. Accordingly, identifiable tangible and intangible assets acquired and liabilities assumed are recorded at their estimated fair values, the excess of the purchase consideration over the fair values of net assets acquired is recorded as goodwill, and transaction costs are expensed as incurred.

 

Long-lived assets

 

Property and equipment are recorded at cost and presented net of accumulated depreciation. Major additions and betterments are capitalized while maintenance and repairs, which do not improve or extend the life of the respective assets, are expensed. Property and equipment are depreciated on the straight-line basis over their estimated useful lives.

 

Definite-lived and indefinite-lived intangible assets arising from business combinations include customer relationships, trademarks and noncompete agreements. Definite-lived intangible assets are amortized over the estimated period during which the asset is expected to contribute directly or indirectly to future cash flows. Intangible assets that are considered to be indefinite-lived are not amortized.

 

The Company reviews its long-lived assets for impairment whenever events or circumstances exist that indicate the carrying amount of an asset or asset group may not be recoverable. The recoverability of long-lived assets is measured by a comparison of the carrying amount of the asset or asset group to the future undiscounted cash flows expected to be generated by that asset group. If the asset or asset group is considered to be impaired, an impairment loss would be recorded to adjust the carrying amounts to the estimated fair value. No such impairment was recorded during the periods covered by this report.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. Goodwill is reviewed for impairment at least annually, in December, or more frequently if a triggering event occurs between impairment testing dates. Currently, the Company operates as a single operating segment and as a single reporting unit for the purpose of evaluating goodwill impairment. The Company’s impairment assessment begins with a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. The qualitative assessment includes comparing the overall financial performance of the Company against the planned results used in the last quantitative goodwill impairment test. Additionally, the Company’s fair value is assessed in light of certain events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity and Company specific events. The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves significant judgment and estimates. If it is determined under the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a two-step quantitative impairment test is performed. Under the first step, the estimated fair value of the Company would be compared with its carrying value (including goodwill). If the fair value of the Company exceeds its carrying value, step two does not need to be performed. If the estimated fair value of the Company is less than its carrying value, an indication of goodwill impairment exists for the Company and it would need to perform step two of the impairment test. Under step two, an impairment loss would be recognized for any excess of the carrying amount of the Company’s goodwill over the implied fair value of that goodwill. Fair value of the Company under the two-step assessment is determined using a combination of both income and market-based approaches. No goodwill impairments were identified for the periods covered by this report.

 

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, 2020

(Unaudited)

 

Deferred financing fees and debt discount

 

Deferred financing fees, which are debt issuance costs that qualify for deferral in connection with the issuance of new debt or the modification of existing debt facilities, are amortized over the term of the related debt using the effective interest method (straight-line method for revolving credit arrangements). Debt discounts are also amortized using the effective interest method, unless the interest method approximates the straight-line method. Amortization of such costs are included in interest expense, while the unamortized balances of deferred financing fees and debt discount are presented as reductions of the carrying value of the related debt.

 

Income taxes

 

Income taxes are accounted for under the asset and liability method pursuant to ASC Topic 740, Income Taxes (ASC 740). Under this method, deferred tax assets and liabilities are recognized for the expected future consequences attributable to the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the change. Further, deferred tax assets are recognized for the expected realization of available net operating loss and tax credit carryforwards. A valuation allowance is recorded on gross deferred tax assets when it is “more likely than not” that such asset will not be realized. When evaluating the realizability of deferred tax assets, all evidence, both positive and negative, is evaluated. Items considered in this analysis include the ability to carry back losses, the reversal of temporary differences, tax planning strategies, and expectations of future earnings. The Company reviews its deferred tax assets on a quarterly basis to determine if a valuation allowance is required based upon these factors. Changes in the Company’s assessment of the need for a valuation allowance could give rise to a change in such allowance, potentially resulting in additional expense or benefit in the period of change.

 

The Company’s income tax provision or benefit includes U.S. federal, state and local income taxes and is based on pre-tax income or loss. In determining the annual effective income tax rate, the Company analyzed various factors, including its annual earnings and taxing jurisdictions in which the earnings were generated, the impact of state and local income taxes, and its ability to use tax credits and net operating loss carryforwards.

 

Under ASC 740, the amount of tax benefit to be recognized is the amount of benefit that is “more likely than not” to be sustained upon examination. The Company analyzes its tax filing positions in all of the U.S. federal, state, local, and foreign tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, the Company determines that uncertainties in tax positions exist, a liability is established in the condensed consolidated financial statements. The Company recognizes accrued interest and penalties related to unrecognized tax positions in the provision for income taxes.

 

The Company’s income tax returns are subject to examination by federal and state authorities in accordance with prescribed statutes.

 

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, 2020

(Unaudited)

 

Share-based compensation

 

The Company accounts for share-based compensation in accordance with ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense, based on estimated fair values, for share-based awards made to employees and directors. Based on the grant date fair value of the award, the Company recognizes compensation expense, over the requisite service periods on a straight-line basis, and accounts for forfeitures as they occur.

 

For restricted stock awards with a time-based vesting condition, the fair value, which is fixed at the grant date for purposes of recognizing compensation costs, is determined by reference to the Company’s stock price on the grant date. A portion of the Company’s restricted stock awards contains a market condition. For such restricted stock awards, the fair value is estimated using a Monte Carlo simulation model, whereby the fair value of such awards is fixed at the grant date and amortized over the shorter of the performance or service period. The Monte Carlo simulation valuation model utilizes the following assumptions: expected stock price volatility, the expected life of the awards and a risk-free interest rate. Significant judgment is required in estimating the expected volatility of our common stock. Due to the limited trading history of the Company’s common stock, estimated volatility was based on a peer group of public companies and took into consideration the increased short-term volatility in historical data due to COVID-19.

 

Net loss per common share

 

Pursuant to ASC Topic 260, Earnings Per Share, basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the reporting periods.

 

Diluted net loss per share is based on the weighted average number of shares outstanding during the periods plus the effect, if any, of the potential exercise or conversion of securities, such as warrants and restricted stock units that would cause the issuance of additional shares of common stock. In computing the basic and diluted net loss per share applicable to common stockholders during the periods listed in the condensed consolidated statements of operations, the weighted average number of shares are the same for both basic and diluted net loss per share due to the fact that when a net loss exists, dilutive shares are not included in the calculation as the impact is anti-dilutive. An anti-dilutive impact is an increase in earnings per share or a decrease in net loss per share that would result from the conversion, exercise, or issuance of certain contingent securities.

 

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 $250. At September 30, 2020, cash balances held with a financial institution exceeded the federally insured limit. However, management does not believe this poses a significant credit risk.

 

No customer accounted for more than 10% of sales in each of the periods presented in the accompanying condensed consolidated financial statements.

 

One customer accounted for 10% or more of accounts receivable at September 30, 2020. At December 31, 2019, one customer accounted for 11% of accounts receivable. During the Successor three months ended September 30, 2020, and the Successor period April 7, 2020 through September 30, 2020, one of our vendors accounted for at least 10% of costs of revenue (accounting for $18.9 million and $31.1 million, respectively). At September 30, 2020, one vendor accounted for at least 10% of accounts payable (accounting for $16.0 million).

 

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, 2020

(Unaudited)

 

Fair value of financial instruments

 

Fair value is 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.

 

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 at September 30, 2020 and December 31, 2019, principally due to their short-term nature, maturities or nature of interest rates.

 

Advertising and vendor considerations

 

Advertising costs are expensed as incurred.

 

Vendor considerations are payments and credits that the Company receives from its vendors and distributors on a quarterly basis. Such consideration includes volume-based incentives and reimbursement for marketing expenses. Volume-based incentive payments are deducted from cost of revenue, while marketing-based incentives are deducted from advertising expense in the period in which the program takes place.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current period presentation.

 

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, 2020

(Unaudited)

 

Seasonality

 

Our hardware revenue tends to be seasonal with higher revenues occurring in the first and fourth quarter of each year.

 

Segment reporting

 

As of September 30, 2020, the Company reports operating results and financial data in one operating and reportable segment. The Chief Executive Officer, who is the chief operating decision maker, manages the Company as a single profit center in order to promote collaboration, provide comprehensive service offerings across the entire customer base, and provide incentives to employees based on the success of the organization as a whole. Although certain information regarding selected products or services is discussed for purposes of promoting an understanding of the Company’s business, the chief operating decision maker manages the Company and allocates resources at the consolidated level.

 

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 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. Therefore, the Company’s financial statements may not be comparable to certain public companies.

 

4. Recently Issued and Adopted Accounting Standards

 

Recently issued accounting standards

 

As an emerging growth company, the Company has the option of adopting new accounting pronouncements on a delayed basis and has opted to take advantage of this option. As a result, the Company plans to adopt new accounting standards based on the timeline for adoption afforded to privately held companies.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 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.

 

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, 2020

(Unaudited)

 

Recently adopted accounting standards

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815). The amendments in Part I of the Update change the reclassification analysis of certain equity-linked financial instruments (or embedded features) with down-round features. The amendments in Part II of the update re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the ASC, to a scope exception. The amendments in Part I of this update was effective for the Company on January 1, 2020 (the date it was effective for private companies). The amendments in Part II of the update did not require any transition guidance because those amendments did not have an accounting effect. The adoption did not have a material effect on the Company’s condensed consolidated financial statements as of the date of adoption.

 

The Company adopted Topic 606 with an initial application date of January 1, 2019. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers, (Subtopic 340) which requires the deferral of incremental costs of obtaining a contract with a customer.

 

The Company applied Topic 606 using the modified retrospective transition method. In adopting the new standard, the net cumulative effect from prior periods of applying the guidance in Topic 606 was recognized as a cumulative effect adjustment to the opening balance of accumulated deficit as of January 1, 2019. Additionally, the Company has elected the option to only account for contracts that remained open as of the January 1, 2019 transition date in accordance with Topic 606. Revenue recognition for contracts for which substantially all of the revenue was recognized in accordance with the revenue guidance in effect before January 1, 2019 has not been changed. A summary of the significant changes and the quantitative impact of the changes as of the application date are set forth below.

 

  For sales transactions of certain software products that are sold with integral third-party delivered software support, the Company changed its accounting policy to record both the software license and the accompanying software support on a net basis, as the Company is considered to be the agent in the arrangement, given the predominant nature of the goods and services provided to the customer. Under previous guidance, the Company bifurcated the sale of the software license from the sale of the support contract and recorded the sale of both the software product and software support on a gross sales recognition basis. This change had no effect on reported gross profit dollars associated with these transactions.

 

  For sales transactions for maintenance, software support and services that are to be performed by a third-party, the Company changed its accounting policy to record these sales on a net basis equal to the selling price to the customer less the acquisition cost, as the third-party controls the service. The Company recognizes revenue from these sales transactions when the customer and vendor accept the terms and conditions of the arrangement. Under previous guidance, the Company recorded the sales of third-party maintenance, software support and service contracts on a gross sales recognition basis.

 

  The accounting for sales commissions on contracts with performance periods that exceed one year changed such that the Company records such sales commissions as an asset and recognizes the expense over the related contract performance period. Under previous guidance, certain sales commissions were expensed in the period the transaction was generated.

 

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, 2020

(Unaudited)

 

The total cumulative effect adjustment from prior periods that the Company recognized in the consolidated balance sheet as of January 1, 2019 as an adjustment to accumulated deficit was $99 as reflected in the following table (in thousands):

 

   December 31,
2018
   Adjustments   January 1,
2019
 
   Predecessor       Predecessor 
   (as reported)       (as adjusted) 
ASSETS            
Trade receivables, net  $41,328   $-   $41,328 
Other current assets   972    99    1,071 
Deferred contract costs   9    -    9 
TOTAL ASSETS  $42,309   $99   $42,408 
                
LIABILITIES               
Accounts payable  $38,694        $38,694 
Deferred revenue   6,953         6,953 
   $45,647   $-   $45,647 
                
STOCKHOLDERS’ EQUITY               
Accumulated deficit  $(6,640)  $99   $(6,541)

  

The following tables summarize the effects of adopting Topic 606 on the Company’s consolidated statement of operations for the year ended December 31, 2019 (in thousands):

 

   For the Year Ended
December 31, 2019
 
       Without     
       Adoption     
   Predecessor   of   Topic 606 
   (as reported)   Topic 606   Impact 
             
Sales  $85,716   $121,053   $(35,337)
Cost of revenue   61,309    96,646    (35,337)
Gross profit   24,407    24,407    - 
                
Selling, general and administrative expenses   28,021    27,922    99 
                
Loss from operations   (3,614)   (3,515)   (99)

 

For the year ended December 31, 2019, the adoption of Topic 606 increased net cash provided by operating activities by $99 and had no impact on net cash used in investing and financing activities.

 

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, 2020

(Unaudited)

 

5. Acquisitions

 

On April 7, 2020, the Company consummated the Business Combination that resulted in the acquisition of Computex. 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 not deductible for tax purposes, results from factors such as an assembled workforce and management’s industry knowledge.

 

The following table represents the allocation of the preliminary purchase consideration among the assets acquired and liabilities assumed at their estimated acquisition-date fair values. Management’s evaluation and allocation of such purchase consideration is preliminary and subject to working capital and other adjustments.

 

Consideration paid:    
Convertible debentures with warrants that grant the right to acquire 2,000,000 shares of common stock at an exercise price of $0.01 per share  $20,000 
Assumed debt   16,643 
AVCT common stock (8,189,490 shares at $3.00 per share)   24,568 
Working capital adjustment satisfied by the issuance of AVCT common stock (117,231 shares at $4.75 per share)   557 
Total consideration paid  $61,768 
      
Net assets acquired:     
Current assets  $16,972 
Customer relationships (weighted average life  - 10 years)   17,300 
Trade names (weighted average life  - 10 years)   7,000 
Furniture & equipment   6,435 
Leasehold improvements   2,375 
Other assets   88 
Current liabilities   (26,965)
Deferred tax liability   (3,450)
Other liabilities   (116)
Total net assets acquired  $19,639 
Goodwill   42,129 
Total consideration paid  $61,768 

 

Identifiable intangible assets acquired consist of customer relationships of $17,300 and trade names of $7,000. Both the customer relationships and the trade names were valued using a form of the income approach. The customer relationship was valued using the Multi-Period Excess Earnings Method (or MPEEM) and the method used for the trade names was the Relief from Royalty Method. AVCT incurred transaction costs of $142 between April 7, 2020 and September 30, 2020, which was net of a credit of $903 granted by a creditor whose account was settled by the issuance of $2,500 in Debentures, $1,500 in shares of common stock and cash of $100.

 

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, 2020

(Unaudited)

 

Since the results of operations prior to April 7, 2020 relate to the operations of Computex, excluded from the Predecessor statement of operations are investment income earned and transaction costs incurred by AVCT. Accordingly, excluded are the following:

 

   January 1,
2020
   July 1,
2019
   January 1,
2019
 
   through   through   through 
   April 6,
2020
   September 30,
2019
   September 30,
2019
 
   Predecessor   Predecessor   Predecessor 
Investment income  $1,365   $133   $1,352 
Transaction costs   6,887    2,731    3,428 

 

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 business combination as if the business combination had occurred on January 1, 2019 (in thousands):

 

   Three months ended   Nine months ended 
  

September 30,

2020

  

September 30,

2019

  

September 30,

2020

  

September 30,

2019

 
Revenues  $25,968   $20,332   $64,102   $66,156 
Net loss   (4,838)   (1,458)   (10,625)   (3,927)

 

The pro forma financial information is not necessarily indicative of the results of operations that would have been realized if the Business Combination had been completed on January 1, 2019. Such pro forma financial information does not give effect to any integration costs related to the acquired company.

 

The combined net loss in the table above was adjusted for the transaction costs related to the Business Combination (included as an expense in the nine months ended September 30, 2019 and excluded as an expense in the nine months ended September 30, 2020) and the incremental change in the amortization of intangible assets (adjustment relates to the three and nine months ended September 30, 2019 and the portion of the nine months ended September 30, 2020 that relates to the Predecessor period).

 

6. Goodwill and intangible assets

 

The Company’s intangible assets as of September 30, 2020 and December 31, 2019 consisted of the following:

 

  

September 30,

2020

  

December 31,

2019

 
   Successor   Predecessor 
         
Customer relationships  $17,300   $9,355 
Tradenames   7,000    2,110 
Noncompete agreements   -    6,380 
Less accumulated amortization   (1,158)   (15,441)
Intangible assets, net of accumulated amortization   23,142    2,404 

 

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, 2020

(Unaudited)

 

The estimated lives of the intangible assets, which approximate their weighted average useful lives, as of September 30, 2020, are included in Note 5. Amortization of intangibles were as follows:

 

   July 1,
2020
   April 7,
2020
   January 1,
2020
   July 1,
2019
   January 1,
2019
 
   through   through   through   through   through 
   September 30,
2020
   September 30,
2020
   April 6,
2020
   September 30,
2019
   September 30,
2019
 
   Successor   Successor   Predecessor   Predecessor   Predecessor 
Amortization of intangibles  $608   $1,158   $263   $247   $740 

 

As of September 30, 2020, the expected amortization expense for definite-lived intangible assets for the next five years was as follows:

 

Three months ended December 31, 2020  $624 
Fiscal year 2021   2,430 
Fiscal year 2022   2,430 
Fiscal year 2023   2,430 
Fiscal year 2024   2,430 
Thereafter   12,798 
Total  $23,142 

 

There was no impairment of goodwill as of September 30, 2020 and December 31, 2019.

 

7. Accounts payable and accrued expenses

 

Accounts payable and accrued expenses were as follows at September 30, 2020 and December 31, 2019:

 

  

September 30,

2020

  

December 31,

2019

 
   Successor   Predecessor 
Accounts payable  $21,226   $18,999 
Accrued compensation, benefits and related accruals   2,458    1,847 
Accrued professional fees   2,547    - 
Other   1,293    885 
    27,524    21,731 

 

8. Long-Term Debt

 

In connection with the consummation of the Business Combination, the Company assumed the obligations of Computex under a credit agreement with Comerica Bank (as amended, the “Credit Agreement”). On the Closing Date, the Company and Comerica Bank entered into a third amendment to the Credit Agreement that added the Company as borrowers and amended certain provisions of the Credit Agreement, including changing the maturity date of the loans under the Credit Agreement to December 31, 2020, and removing certain financial covenants. On November 13, 2020, the Company and Comerica Bank entered into a fifth amendment to the Credit Agreement (the “Fifth Amendment”) that extends the maturity date to June 30, 2021, provides for a decrease in maximum borrowings on the revolving note effective April 1, 2021, amends the interest rates and, commencing January 31, 2021, provides for a minimum monthly liquidity (defined as unrestricted cash plus availability under the revolving note) of $3,000. As of November 13, 2020, the maximum borrowings permitted under the revolving note remained unchanged at $16,500. However, on April 1, 2021, maximum borrowings permitted under the revolving note will decrease by $3,500 to $13,000. In connection with the Fifth Amendment on November 13, 2020, the Company was required to make a one-time principal payment of $250 on the term loan. Availability on the revolving note is determined weekly, based on a weekly borrowing base computation that is primarily based on certain percentages of accounts receivable and inventory.

 

On or before the maturity date of the Credit Agreement, the Company plans 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, 2020 and December 31, 2019, the balance on the revolving note was $8,487 and $6,051, respectively.

 

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, 2020

(Unaudited)

 

Between November 13, 2020 and December 31, 2020, all obligations outstanding under the Credit Agreement will continue to accrue interest at the higher of the one-month London Interbank Offered Rate (LIBOR) or 1.00%, plus a margin of 4.00% (the “margin”). The margin then increases gradually each month to a maximum of 6.50% on June 1, 2021. The effective rate of the revolving note was 5.00% and 5.48% at September 30, 2020 and December 31, 2019, respectively. The effective rate of the term note was 5.00% and 5.53% at September 30, 2020 and December 31, 2019, respectively.

 

The Credit Agreement is subject to a security agreement which includes substantially all assets of the Company and a pledge of Computex’s equity. Effective on the Closing Date, the previous Computex shareholder was released from the guaranty agreement made in connection with the Credit Agreement.

 

A previous amendment to the Credit Agreement, that was effected on May 4, 2020, included a modification to the covenant in the Credit Agreement that prohibits the incurrence by the borrowers of additional indebtedness to exclude (i) indebtedness incurred by the borrowers under the U.S. Small Business Association’s (“SBA”) Paycheck Protection Program established under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) and the related rules and regulations (the “PPP loan”) and (ii) up to $1.5 million in indebtedness incurred for the sole purpose of financing insurance premiums.

 

In April 2020, the Company received a PPP loan of $4,135, after its application was approved by the SBA. The PPP loan is administered by the SBA. 

 

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of such loans after eight weeks, if the loan is used for eligible purposes, including to fund payroll costs, mortgage interest, rent and/or utility costs, and loan recipients meet certain other requirements, including, the maintenance of employment and compensation levels. The Company believes it has used the entire PPP Loan for qualifying expenses and expects to qualify for full or partial forgiveness under the program.  However, the Company can provide no assurance that it will obtain forgiveness for any portion.

 

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 has a notional amount of $4,464 and a maturity date of August 2, 2021. The fixed interest rate is 3.04% with a corresponding floating interest rate of 1-month LIBOR. The interest rate swap does not qualify for hedge accounting. No liability was recorded for the fair value of the related derivative, at September 30, 2020 or December 31, 2019, as the liability was not considered material.

 

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, 2020

(Unaudited)

 

Total long-term debt, excluding the revolving note, as of September 30, 2020 and December 31, 2019 consisted of the following:  

 

   September 30,
2020
   December 31,
2019
 
   Successor   Predecessor 
Senior debt - Term note payable to Comerica Bank; quarterly principal payments of $357 plus interest through the maturity date of June 30, 2021; interest rate variable with effective rate of 5.00% and 5.48% at September 30, 2020 and December 31, 2019, respectively  $6,369   $7,143 
PPP Loan administered by Comerica Bank; monthly principal payments plus interest starting November 1, 2020 through the maturity date of April 13, 2022; interest rate 1.00% at September 30, 2020   4,135    - 
Subordinated debt - Term note payable to Synetra Inc.; fixed interest rate of 8.50% at December 31, 2019   -    573 
Subordinated debt - Term note payable to John Sorensen and Paul Sorenson; interest rate variable with effective rate of 8.50% at December 31, 2019   -    375 
Capital lease obligations   138    236 
Total long-term debt   10,642    8,327 
Less: unamortized debt issuance costs   (93)   (136)
Total notes payable, net of unamortized debt issuance costs   10,549    8,191 
Less: current maturities of notes payable and capital lease obligations   (8,991)   (2,506)
Long-term debt, net of current maturities and unamortized debt issuance costs  $1,558   $5,685 

 

Scheduled principal payments of long-term debt at September 30, 2020 (excluding the revolving note) was as follows:

 

Three months ended December 31, 2020  $1,139 
Fiscal year 2021   8,575 
Fiscal year 2022   928 
Total  $10,642 

 

Subordinated promissory note

On the Closing Date, the Company issued a subordinated promissory note of $500 in partial settlement of a deferred underwriting fee which was agreed at $3,000. The remaining $2,500 was settled via the issuance of Debentures. The subordinated promissory note bears interest at 12.00% per annum, matures on June 30, 2021 and is subordinated to any amounts owed under the Credit Agreement. The entire principal together with any accrued and unpaid interest is due and payable on the maturity date.

 

9. Stockholders’ Equity, Warrants, Debentures and Guaranty

 

Preferred stock — The Company is authorized to issue 5,000,000 shares of preferred stock, par value $0.0001. At September 30, 2020 and December 31, 2019, no preferred stock was issued or outstanding.

 

Common stock — The Company is authorized to issue 500,000,000 shares of common stock with a par value of $0.0001 per share. Holders of the Company’s common stock are entitled to one vote for each share. As of September 30, 2020, 19,753,061 shares of common stock were issued and outstanding.

 

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, 2020

(Unaudited)

 

Registration rights agreement

On the Closing Date, the Company, Pensare Sponsor Group, LLC (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 Company’s private warrants, 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.

 

Convertible debentures, warrants and guaranty

On the 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 consists of (i) $1,000 in principal amount of the Company’s Series A convertible debentures (the “Debentures”) and (ii) a warrant to purchase 100 shares of Common Stock at an exercise price of $0.01 per whole share (the “Warrants”). The issuances of such securities were not registered under the Securities Act in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.

 

Debentures

The Debentures issued on the Closing Date have 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 5.0% stockholder of the Company (“MasTec”), and $20,000 in aggregate principal of which was part of Units issued to Holdings pursuant to the terms of the 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 bear interest at a rate of 10.0% per annum, payable quarterly on the last day of each calendar quarter in the form of additional Debentures, except upon maturity, in which case accrued and unpaid interest is payable in cash. The entire principal amount of each Debenture, together with accrued and unpaid interest thereon, is due and payable on the earlier of (i) such date, commencing on or after October 7, 2022, as the holder thereof, at its sole option, upon not less than 30 days’ prior written notice to the Company, demands payment thereof and (ii) the occurrence of a Change in Control (as defined in the Debentures).

 

Each Debenture is 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 $3.45. The conversion price is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and is also subject to price-based adjustment, on a “full ratchet” basis, in the event of any issuances of common stock, or securities convertible, exercisable or exchangeable for, common stock at a price below the then-applicable conversion price (subject to certain exceptions). The Debentures are subject to mandatory conversion if the closing price of the Company’s common stock exceeds $6.00 for any 40 trading days within a consecutive 60 trading day-period, subject to the satisfaction of certain other conditions. The Debentures are subordinated to all Senior Indebtedness (as defined in the Debentures), including indebtedness under the Credit Agreement.

 

Warrants

The Warrants issued on the Closing Date entitle 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, respectively, as part of the Units issued to them), at an exercise price of $0.01 per share. The Warrants are exercisable at any time through the fifth anniversary of the date of issuance. The number of shares issuable upon exercise of each Warrant is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like.

 

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, 2020

(Unaudited)

 

Guaranty

On the Closing Date, Computex and its subsidiaries issued to the Investors a Guaranty, pursuant to which such entities jointly and severally guaranteed the obligations of the Company under the Debentures.

 

Derivative consideration and other disclosures relating to the Debentures and warrants

 

Based on ASC 815, Derivatives and Hedging, the convertible feature of the Debentures is not considered a derivative and therefore has been recorded in liabilities as part of the Debentures and not bifurcated. The warrant qualifies as a derivative and was bifurcated from the host contract - convertible debentures and was recorded in equity at its relative fair value with a corresponding debt discount recorded to the Debentures.

 

The relative fair value of the warrant was determined to be $9,937, using the Black-Scholes model. Accordingly, the carrying value of the Debentures at the issuance date was $33,232. The discount is being expensed as interest over the term of the Debenture to increase the carrying value to its face value. During the Successor three-month period ended September 30, 2020, the Company recorded accretion of the discount of $994 and paid-in-kind interest of $1,097. During the Successor period April 7, 2020 through September 30, 2020, the Company recorded accretion of the discount of $1,921 and paid-in-kind interest of $2,112. As a result, the carrying value of the Debentures increased to $37,266 ($10,632 of which is classified as “Convertible Debentures, net of discount – related party” on the condensed consolidated balance sheet as of September 30, 2020).

 

The significant assumptions used in the Black-Scholes model were as follows:

ostock price volatility – 35%
oexercise price – $0.01
ointerest rate – 0.20%
ostock price – $3.00

 

10. Related Party Transactions

 

During the Predecessor periods, Computex paid management fees at the rate of $300 per annum to a shareholder, under a management agreement. Such amounts are included in selling, general and administrative expenses in the condensed consolidated statement of operations. This agreement was terminated on the Closing Date.

 

AVCT shares corporate office space with an affiliate and participates in a cost sharing arrangement in a month-to-month leasing arrangement. The space was not used during the period April 7, 2020 through September 30, 2020 and therefore, by mutual agreement between the parties, no expenses were incurred, by the Company, during such period.

 

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, 2020

(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).

 

   July 1,
2020
   April 7,
2020
   January 1,
2020
   July 1,
2019
   January 1,
2019
 
   through   through   through   through   through 
  

September 30,

2020

   September 30,
2020
   April 6,
2020
  

September 30,

2019

  

September 30,

2019

 
   Successor   Successor   Predecessor   Predecessor   Predecessor 
Geography                         
Domestic  $24,722   $43,443   $18,961   $20,027   $63,774 
International   1,246    1,622    76    305    2,382 
Total revenues  $25,968   $45,065   $19,037   $20,332   $66,156 
Revenues by Verticals (or Sector)                         
Energy  $3,819   $7,118   $2,716   $3,644   $16,651 
Finance   1,623    3,373    2,510    1,258    3,390 
Healthcare   6,517    10,736    5,586    5,827    18,010 
Manufacturing and logistics   5,802    11,432    3,322    1,907    9,052 
Public sector   3,352    4,733    889    1,711    3,661 
Retail and hospitality   907    1,711    2,206    2,016    3,694 
Technology service providers   285    828    478    1,124    5,713 
Other Services   3,663    5,134    1,330    2,845    5,985 
Total revenues  $25,968   $45,065   $19,037   $20,332   $66,156 
                          
Gross versus net                         
Gross (principal)  $24,766   $42,331   $17,578   $18,914   $61,709 
Net (agent)   1,202    2,734    1,459    1,418    4,447 
Total revenues  $25,968   $45,065   $19,037   $20,332   $66,156 

 

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. As of September 30, 2020 and December 31, 2019, the contract liability balance (deferred revenue) was $1,536 and $6,453, respectively. All of the performance obligations related to such deferred revenue as of September 30, 2020 are expected to be performed within 12 months and consist of payments received from customers, or such consideration that is contractually due, in advance of providing the product or performing the services.

 

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For more information regarding the Company’s performance obligations, see Note 3. The following table represents the total transaction price for remaining performance obligations as of September 30, 2020 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, 2020  $5,272 
Fiscal year 2021   13,256 
Fiscal year 2022   5,482 
Fiscal year 2023   1,925 
Fiscal year 2024   1,386 
Thereafter   231 
Total remaining performance obligations  $27,552 

 

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, 2020

(Unaudited)

 

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, 2020, 5,794,500 shares had been authorized for issuance under the Plan, of which 2,474,500 shares remained available for issuance. The RSUs were issued to certain directors and employees and can only be settled in shares. RSUs awarded to directors are time-based. RSUs issued to nondirectors are 50% time-based and 50% performance-based. Twenty-five percent of the time-based awards vests on each grant date anniversary, while 25% of the performance-based awards vests on December 31st of each year, if the market condition (stock price target) is met. If the market condition attached to the performance-based awards is not met in any year, the eligibility is delayed until the market condition is met, except that the market condition must be met by December 31, 2023.

 

The fair values of time-based awards are estimated by reference to the Company’s stock price and stock marketability on the grant date, while the fair values of the performance-based awards are determined using the Monte Carlo simulation model, once the stock price target is set. Weighted average assumptions used in estimating the performance-based awards were as follows: estimated expected stock price volatility - 40%; expected life of the awards - 0.68 years; risk-free interest rate – 0.19%; Significant judgment is required in estimating the expected volatility of our common stock. Due to the limited trading history of the Company’s common stock, estimated volatility was based on a peer group of public companies and took into consideration the increased short-term volatility in historical data due to COVID-19. Performance targets are set annually for the performance-based awards that are scheduled to vest in that year.

 

The following summarizes RSU activity between April 7, 2020 and September 30, 2020:

 

       Weighted Average 
   Number   Grant Date 
   of RSUs   Fair Value 
Outstanding at April 7, 2020   -    - 
Granted   2,395,000   $2.47 
Vested   -    - 
Forfeited   (31,250)  $2.51 
Outstanding at September 30, 2020   2,363,750   $2.47 

 

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, 2020

(Unaudited)

 

Awards outstanding in the table above include 318,750 RSUs that are performance-based, and exclude 956,250 performance-based RSUs that have been awarded but deemed not granted as the performance targets have not yet been determined. The Company’s policy is to determine the fair value of performance-based awards and begin recognizing compensation expense for such awards when the targets are set. For performance-based awards, compensation cost is recognized over the shorter of the performance or service period. For time-based awards, compensation expense is recognized over the vesting period, based on the grant date fair value. Share-based compensation expense recognized during the three months ended September 30, 2020 was $802, of which $759 related to time-based awards and $43 related to performance-based awards. Share-based compensation expense recognized between April 7, 2020 and September 30, 2020 was $1,420, of which $1,337 related to time-based awards and $83 related to performance-based awards. Total compensation cost not yet recognized related to unvested awards as of September 30, 2020 was $4,420 and is expected to be recognized over the weighted average period of 2.2 years.

 

13. Reconciliation of Net Loss per Common Share

 

Basic and diluted net loss per common share was calculated as follows:

 

   July 1,
2020
   April 7,
2020
   January 1,
2020
   July 1,
2019
   January 1,
2019
 
   through   through   through   through   through 
   September 30,
2020
  

September 30,

2020

   April 6,
2020
  

September 30,

2019

  

September 30,

2019

 
   Successor   Successor   Predecessor   Predecessor   Predecessor 
Net loss  $(4,838)  $(8,512)  $(1,589)  $(1,097)  $(2,701)
Weighted average shares outstanding, basic and diluted   19,678,342    19,657,811    1,000    1,000    1,000 
Basic and diluted net loss per ordinary share  $(0.25)  $(0.43)  $(1,587.30)  $(1,096.00)  $(2,700.60)

 

Since their inclusion would have been antidilutive, excluded from the computation of diluted net loss per share for the Successor periods ended September 30, 2020 were: 3,320,000 unvested RSUs, 30,354,436 Warrants and 13,124,946 shares underlying the Debentures, were they to be converted.

 

14. Income Taxes

 

The benefit (provision) for income taxes consisted of the following:

 

   July 1,
2020
   April 7,
2020
   January 1,
2020
   July 1,
2019
   January 1,
2019
 
   through   through   through   through   through 
   September 30,
2020
   September 30,
2020
   April 6,
2020
   September 30,
2019
   September 30,
2019
 
   Successor   Successor   Predecessor   Predecessor   Predecessor 
Current:                         
Federal  $-   $-   $-   $-   $- 
State   (24)   (40)   (12)   55    (33)
    (24)   (40)   (12)   55    (33)
Deferred                         
Federal   (15)   6    -    -    - 
State   (2)   1    -    -    - 
    (17)   7    -    -    - 
Total benefit (provision)  $(41)  $(33)  $(12)  $55   $(33)

 

28

 

 

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, 2020

(Unaudited)

 

Principal components of the Company’s deferred tax assets as of September 30, 2020 and December 31, 2019 were as follows: 

 

   September 30,
2020
   December 31, 2019 
   Successor   Predecessor 
Prepaid expenses  $(293)  $(50)
Accrued reserves   81    37 
Deferred revenue   58    460 
Accrued liabilities   318    202 
Uniform capitalization of inventory for tax   21    11 
Contribution carryover   13    17 
Tax depreciation in excess of book   (1,252)   (1,598)
Intangible assets   (3,419)   (345)
Disallowed interest   1,022    497 
Transaction costs - pending   130    - 
Stock compensation   341    - 
Net operating loss carryforwards   5,104    4,318 
Total   2,124    3,549 
Less: valuation allowance   (5,567)   (3,549)
Net deferred tax liability  $(3,443)  $- 

 

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.

 

At December 31, 2019, the Company had net operating loss carryforwards of approximately $11,900 that begin to expire in 2036.

 

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, 2019. 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 as of December 31, 2019, the Company recognized a full valuation allowance against its net deferred tax assets, pursuant to ASC 740, as of December 31, 2019. In calculating the valuation allowance as of September 30, 2020, the Company was not permitted to use its existing deferred tax liabilities related to its indefinite-lived intangible assets as a source of taxable income to support the realization of its existing finite-lived deferred tax assets. Based on the Company’s evaluation, it was determined that no uncertain tax positions existed as of September 30, 2020 or December 31, 2019.

 

29

 

 

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, 2020

(Unaudited)

 

15. Commitments and Contingencies

 

Operating lease obligations

 

The Company is party to operating leases under which it leases various facilities and equipment. The majority of the facility leases provide that the Company pay, in addition to the minimum rent, certain operating expenses. The leases expire at various dates through August 2024.

 

Future minimum rent payments, excluding operating expenses and month-to-month leases, required under noncancelable operating leases were as follows as of September 30, 2020:

 

Three months ended December 31, 2020  $257 
Fiscal year 2021   672 
Fiscal year 2022   524 
Fiscal year 2023   453 
Fiscal year 2024   336 
Total  $2,242 

 

Contingencies

 

On December 16, 2019, the Company received a complaint filed by one of its vendors for alleged breach of contract asking for approximately $351.  This suit was settled during the second quarter for $281.

 

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, 2020, 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.

 

16. Pending Transaction

 

On August 5, 2020, AVCT entered into the Purchase Agreement with Ribbon, RCOCI and Ribbon Communications International Limited, pursuant to which AVCT has agreed to purchase the Kandy Business by acquiring certain assets and assuming certain liabilities and acquiring all of the outstanding interests of Kandy Communications LLC (the “Transaction”).

 

Under the terms of the Purchase Agreement, AVCT has agreed to issue to Ribbon 13.0 million shares of AVCT’s common stock (the “Issued Shares”), subject to certain adjustments, as consideration for the Transaction (the “Purchase Price”).

 

Pursuant to the terms of the Purchase Agreement, AVCT is required to complete an equity offering (the “Equity Offering”) prior to, or simultaneously with, the closing of the Transaction (the “Closing”), and in the event AVCT is successful in raising at least $100.0 million in the Equity Offering, AVCT will sell additional securities in the Equity Offering resulting in proceeds in an amount up to the value of 20% of the Issued Shares being issued to Ribbon, with the value of each Issued Share being equal to (i) the value of the AVCT common stock or other securities convertible into a share of AVCT common stock that is being sold in the Equity Offering, or (ii) in the event another form of securities is being offered in the Equity Offering, or if the Equity Offering is consummated more than five days prior to the Closing, the volume weighted average price of AVCT common stock for the ten trading days immediately prior to the Closing (the equivalent shares sold, “Sold Shares”). AVCT will deliver to Ribbon, as part of the Purchase Price, the gross proceeds from the sale of additional securities in the Equity Offering in excess of $100.0 million, in lieu of the Sold Shares at the Closing. In the event that AVCT’s Pro Forma Total Enterprise Value (as defined in the Purchase Agreement), after taking into account the Equity Offering proceeds, would be below $275.0 million, AVCT and Ribbon have agreed to negotiate a potential change in the number of Issued Shares. If an agreement cannot be reached on any change in the number of Issued Shares, AVCT will not proceed with the Equity Offering.

 

30

 

 

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, 2020

(Unaudited)

 

The obligations of each of the Ribbon Parties and AVCT are subject to specified conditions, including, among other matters: (i) the approval by AVCT’s shareholders of the issuance to Ribbon of the Issued Shares (the “Share Issuance”), (ii) the successful completion of the Equity Offering, and (iii) the absence of any injunctions being entered into or law being adopted that would make the Transaction illegal.

 

The Purchase Agreement contains customary representations and warranties from the Ribbon Parties and AVCT. It also contains customary covenants, including (i) covenants providing for each of the parties to use its commercially reasonable efforts to cause the Transaction to be consummated, and for each of the Sellers and AVCT to carry on their respective businesses in the ordinary course of business consistent with past practice during the period between the execution of the Purchase Agreement and the Closing, (ii) non-competition and non-solicitation of employee covenants applicable to Ribbon for a period of three years following the Closing and (iii) non-solicitation of employee covenants applicable to AVCT for a period of three years following the Closing. The Sellers have also agreed not to initiate, solicit, knowingly encourage the submission of any proposal or offer relating to alternate transactions or, engage in any discussions or negotiations with respect to alternate transactions regarding the Kandy Business, during the period between the execution of the Purchase Agreement and the Closing.  AVCT is required to seek stockholder approval of the issuance of the Issued Shares pursuant to Nasdaq listing rules. 

 

The Purchase Agreement contains termination rights for each of the Sellers and AVCT, including, without limitation, in the event that (i) the Transaction is made illegal or any governmental entity issues a non-appealable final order permanently enjoining the Transaction; (ii) the Transaction is not consummated by December 4, 2020; or (iii) the other party breaches its representations, warranties or covenants under the Purchase Agreement which would give rise to the failure of a closing condition and such breach is not cured with 30-days of receipt of written notice of such breach.

 

The Purchase Agreement provides that AVCT will be obligated to pay Ribbon a termination fee of $1.0 million if the Purchase Agreement is terminated under certain circumstances at a time when the Equity Offering has not been completed.

 

The Purchase Agreement contemplates that Ribbon and AVCT will enter into an Investor Rights Agreement (the “Investor Rights Agreement”) at the Closing pursuant to which Ribbon will receive customary registration rights with respect to the Issued Shares. In addition, under the Investor Rights Agreement, so long as Ribbon holds at least 25% of the shares of AVCT common stock issued to Ribbon at Closing, Ribbon will have the right to nominate one director to the AVCT board of directors. The Investor Rights Agreement also provides that each of Pensare Sponsor Group, LLC and Stratos Management Systems Holdings, LLC (each, a “Significant Stockholder”) will agree to support AVCT’s obligation to nominate and have elected Ribbon’s director nominee.

 

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.

 

Other than the Fifth Amendment to the Credit Agreement that is disclosed in Note 8, there were no subsequent events that required adjustment or disclosure in the condensed consolidated financial statements.

 

31

 

 

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 the Risk Factors section of our Annual Report on Form 10-K filed on June 29, 2020 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 and Texas.

 

On April 7, 2020 (the “Closing Date”), AVCT (formerly known as Pensare Acquisition Corp.), consummated a business combination transaction (the “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 closing of the Business Combination, the Company changed its name to American Virtual Cloud Technologies, Inc. 

 

The condensed consolidated financial statements of the Company include the accounts of AVCT and its wholly owned subsidiary, Computex. 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 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.

 

We are a leading multi-brand technology solutions provider to large global customers, providing a comprehensive and integrated set of technology solutions to our customers, through our extensive hardware, software and value-added service offerings. The breadth of our offerings enables us to offer each customer a complete technology solution. After performing an assessment of our customers’ needs, we design best-fit solutions, and with the help of leading vendors in the industry, we help our customers to procure products that fit their global needs.

 

32

 

 

Covid-19

 

Commencing in December 2019, COVID-19 began spreading throughout the world, including the first outbreak in the US in February 2020. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. COVID-19 has disrupted and continues to significantly disrupt local, regional, and global economies and businesses. The COVID-19 outbreak is disrupting supply chains and affecting production and sales across a range of industries. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers, employees and vendors, all of which are uncertain and cannot be predicted. At this point, the extent to which COVID-19 may impact our financial condition and/or results of operations is uncertain.

 

In response to COVID-19, we have put into place certain restrictions, requirements and guidelines, to protect the health of our employees and clients, including requiring certain conditions to be met before employees return to the Company’s offices. Also, to protect the health and safety of our employees, our daily execution has evolved into a largely virtual model and we continue to endeavor to find innovative ways to engage with customers and prospects as we, our customers and prospects endeavor to navigate the current environment.  Between April 1, 2020 and September 1, 2020, Computex reduced the salaries of its employees and we are endeavoring to reduce other operating expenses. We plan to 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 are in the interests of our employees, customers, and partners.

 

Our business

 

Our hardware offerings are sourced from a network of leading manufacturers, and include, data storage, desktops, servers, and other hardware.

 

Our software and maintenance offerings include licensing, licensing management, software solutions and other services. We offer a full suite of value-added services, which typically are delivered as part of a complete technology solution, to help our customers meet their specific needs. Our solutions range from configuration services for computer devices to fully integrated solutions such as virtualization, collaboration, security, mobility, data center optimization and cloud computing. We also offer complementary services including installations, warranty services and certain managed services such as remote network and data center monitoring. We believe our software and service offerings are important growth areas for us.

 

Our professional and managed services include managed IT services, virtualization, storage, networking and data center services. As part of these services, we offer 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”). Our customers utilize our solutions to optimize their current and planned investments in IT infrastructure and data centers. We believe the breadth of our service offering and our consultative approach to working with our clients distinguishes us from other providers.

 

In addition, we believe our business is well-diversified across verticals, technology solutions offerings and procurement partners from whom we procure products and software for resale. Our sales teams consist of seasoned account executives and regionally focused sales support teams who work within assigned territories to provide customized solutions to our customers. Our sales teams are supported by industry leading technologists who design end to end solutions and who take projects from design, to implementation, to management. We boast an extensive network of OEMs and distributors which allow us to direct-sell a diverse selection of products and software to our ever-growing customer base, as packaged software or as licensed products and services.

 

We have developed an infrastructure that enables us to deliver our IT solutions and service agnostic as to technology platform and location through a flexible, customer-focused delivery model which spans three datacenter environments (customer-owned, co-location, and the cloud). By optimizing our customers’ use of secure, energy efficient and reliable data centers combined with a comprehensive suite of related IT infrastructure services, we are able to offer our customers highly customized solutions to address their needs for data center availability, data management, data security, business continuity disaster recovery and data center consolidation, as well as a variety of other related managed services.

 

33

 

 

Key trends affecting our results of operations

 

The following are key trends that we believe can impact our results of operations:

 

Increasing need for third-party services. We believe that customers are relying on third-party service providers, such as Computex Technology Solutions, to manage significant aspects of their IT environment, from design, to implementation, to pre- and post-sales support, to maintenance, engineering, cloud management, security operations, and other services.

 

Reduction in the number of IT solutions providers. Our view is that customers are seeking to reduce the number of solutions providers they do business with to improve supply chain and internal efficiencies, enhance accountability, improve supplier management practices, and reduce costs. As a result, customers are looking to find IT solutions providers that can provide a whole suite of solutions to meet their IT needs.

 

Lack of sufficient internal IT resources at mid-sized and large enterprises, and scarcity of IT personnel in certain high-demand disciplines. We believe that IT departments at mid-sized and large enterprises are facing pressure to deliver emerging technologies and business outcomes but lack the properly trained staff and the ability to hire personnel with high in-demand disciplines such as security and data analytics. At the same time, the prevalence of security threats; increased use of cloud computing, software-defined networking, new architectures, and rapid software development frameworks; the proliferation of mobile devices and bring-your-own-device (BYOD) policies; and the complexity of multi-vendor solutions, have made it difficult for these departments to implement high-quality IT solutions.

 

Disruptive technologies are creating complexity and challenges for customers and vendors. The rapid evolution of disruptive technologies, and the speed by which they impact an organization’s technology platforms, has made it difficult for customers to effectively design, procure, implement and manage their own IT systems. Moreover, increased budget pressures, fewer internal resources, a fragmented vendor landscape and fast time-to-value expectations make it challenging for customers to design, implement and manage, efficient, secure and cost-effective IT environments. Customers are increasingly turning to IT solutions providers such as Computex Technology Solutions to implement complex IT offerings, including software defined infrastructure, cloud computing, converged and hyper-converged infrastructures, big data analytics, and flash storage.

 

Increasing sophistication and incidences of IT security breaches and cyber-attacks. In recent years, cyber-attacks have become more sophisticated, numerous, and pervasive. Organizations are finding it increasingly difficult to effectively safeguard their confidential and personal information from a constant stream of advanced threats, both internal and external. Moreover, cyber-threats have shifted from uncoordinated individual efforts to highly coordinated and well-funded attacks by criminal organizations and nation-state actors. For most organizations, it is no longer a matter of “if a cyber-attack will occur;” the question is “when” and “what impact will it have” on the organization. We believe our customers are focused on all aspects of cyber security, including information and physical security, intellectual property, and compliance requirements related to industry and government regulations. To meet current and future security threats, enterprises must implement security controls and technology solutions that leverage integrated services and products to help monitor, mitigate, and remediate security threats and attacks.

 

Customer IT decision-making is shifting from IT departments to line-of-business personnel. As IT consumption shifts from legacy, on-premise infrastructure to agile “on-demand” and “as-a-service” solutions, customer procurement decisions are shifting from traditional IT personnel to lines-of-business personnel, which is changing the customer engagement model and types of consultative services required to fulfill the needs of customers. In addition, many such services create recurring revenue streams paid for over a period of time, rather than paid for upfront.

 

34

 

 

Multi-Cloud Strategy. Over the past several years, cloud architectures and cloud-enabled frameworks, whether public, private, or hybrid, have become the core foundation of modern IT. In order to take advantage of this trend, we focus on assisting our customers with their assessment, definition, deployment, and management of private and hybrid clouds that align with their business needs. This strategy leverages our strength in deploying private clouds, while also incorporating elements of the public cloud. By assessing our client’s applications, workloads and business requirements, among others, we are able to deploy solutions that leverage the best available technology platforms and consumption models. For example, we may build a private cloud solution to host mission critical applications, while utilizing a public cloud solution for development, collaboration, or disaster recovery. Our cloud strategy is tightly aligned with key strategic initiatives, including security, and digital workspace.

 

Results of operations

 

To distinguish between the different bases of accounting due to the Business Combination that occurred on April 7, 2020, the tables below separate the Company’s results using a black line presentation that separates: (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.

 

As discussed more fully above, the historical financial information of AVCT prior to the Business Combination (a SPAC) has not been reflected in the Predecessor financial statements as these historical amounts have been determined not to be useful information to a user of the financial statements. Accordingly, all activity reported for periods prior to April 7, 2020 (the Predecessor period) reflect only the operations of Computex. As a result, the financial results of the Successor and Predecessor entities, presented herein are expected to be largely consistent, excluding any impact of the Business Combination.

 

For the reasons discussed above, management believes it remains useful to review the operating results for the three and nine months ended September 30, 2020 with the operating results for the three and nine months ended September 30, 2019. 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.

 

35

 

 

3rd Quarter of 2020 (July 1, 2020 through September 30, 2020) versus the 3rd Quarter of 2019 (July 1, 2019 through September 30, 2019)

 

 

   July 1,
2020
   July 1,
2019
 
   through   through 
   September 30,
2020
   September 30,
2019
 
   Successor   Predecessor 
Revenues:          
Hardware  $16,428   $12,160 
Software and maintenance   1,202    1,418 
Managed and professional services   8,204    6,599 
Other   134    155 
Total revenues   25,968    20,332 
Cost of revenue   18,445    14,249 
Gross profit   7,523    6,083 
Selling, general and administrative expenses (including transaction costs)   9,929    6,928 
Loss from operations   (2,406)   (845)
Other (expense) income          
Interest expense (1)   (2,379)   (309)
Other (expense) income   (12)   2 
Total other expenses   (2,391)   (307)
Loss before income taxes   (4,797)   (1,152)
Benefit (provision) for income taxes   (41)   55 
Net loss  $(4,838)  $(1,097)

 

 

(1) Interest expense in the Successor period includes related party interest of $597.

 

Net loss

 

Net loss for the 3rd quarter of 2020 was $4.8 million compared with $1.1 million for the 3rd quarter of 2019. 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 first and fourth quarters of each year. Our hardware revenue was $16.4 million in the 3rd quarter of 2020 compared with $12.2 million in the 3rd quarter of 2019, an increase of $4.2 million, or 35.1%. We attribute this increase to the impact of COVID-19 due to increased demand for equipment in the manufacturing, logistics and public sectors as more customers transitioned to remote work. The increase in hardware revenue was partially offset by the negative impact of a sales force transition. Though our hardware revenue was up in the 3rd quarter of 2020 compared with the 3rd quarter of 2019, the margin was relatively flat as both quarters reflect management’s actions to deliver higher margins.

 

Software and maintenance revenue

 

Revenues from software and maintenance services, which are recorded net of direct expenses, decreased 15.2%, to $1.2 million in the 3rd quarter of 2020 compared with $1.4 million in the 3rd quarter of 2019. Since this revenue is recorded net, the revenue is also the gross margin. We attribute the decrease to a shift in customers’ IT spend towards mobile computing equipment and other mobile computing services as a result of increased telecommuting arrangements in response to COVID-19.

 

36

 

 

Managed and professional services revenue

 

Managed and professional services revenues increased 24.3%, to $8.2 million in the 3rd quarter of 2020 compared with $6.6 million in the 3rd quarter of 2019. We attribute this increase to more demand for infrastructure assessment, cyber security and managed service monitoring services due to COVID-19, as customers continue to invest in their IT environment to allow them to seamlessly work from home. The gross margin also increased in the 3rd quarter of 2020, increasing 380 basis points compared with the 3rd quarter of 2019. Increased margins are due to actions taken by the Company to deliver higher margins and also as a result of increased utilization of personnel driven by the higher customer demand discussed previously.

 

Other revenue

 

Other revenue, which consists primarily of freight and reimbursables, including travel, meals and entertainment, was relatively flat at $0.1 million and $0.2 million for the 3rd quarter of 2020 and the 3rd quarter of 2019, 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 four product lines together was $26.0 million in the 3rd quarter of 2020, an increase of $5.7 million, or 27.7%, compared with $20.3 million in the 3rd quarter of 2019. Aggregate gross profit was also up, increasing 23.7% in the 3rd quarter of 2020, to $7.5 million, compared to $6.1 million in the 3rd quarter of 2019. Gross margin was down 90 basis points as the percentage increase in aggregate cost of revenues (29.4%), quarter over quarter, outpaced the percentage increase in aggregate revenues (27.7%).

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses (including transaction costs) for the 3rd quarter of 2020 and the 3rd quarter of 2019 consisted of the components in the following table (in thousands):

 

   July 1,
2020
   July 1,
2019
     
   through   through   Change 
   September 30,
2020
   September 30,
2019
   Increase
(decrease)
 
   Successor   Predecessor     
Salaries, benefits, subcontracting & personnel administration costs  $6,428   $5,352   $1,076 
Building occupancy costs, utilities, office supplies & repairs and maintenance   564    445    119 
Depreciation and amortization   884    545    339 
Dues, subscriptions and memberships   235    210    25 
Vendor marketing funds   (110)   (283)   173 
Meals, entertainment & travel   65    349    (284)
Management fees   -    75    (75)
Professional fees   1,266    36    1,230 
Insurance   414    83    331 
Other   183    116    67 
   $9,929   $6,928   $3,001 

 

Selling, general and administrative expenses increased 43.3% in the 3rd quarter of 2020 compared with the 3rd quarter of 2019, primarily as a result of an increase in personnel-related costs, professional fees, insurance expenses and depreciation and amortization. Personnel-related expenses increased primarily as a result of the inclusion of AVCT corporate salaries in the Successor period, which were not included in the Predecessor period, an increase in commissions due to improved margins, and an increase in share-based compensation expenses related to awards issued in the Successor periods, partially offset by a reduction in salaries for employees of Computex, that was effected between April 1, 2020 and September 1, 2020. The increased insurance expenses are related to the Company’s expanded public company activities. Increased professional fees are also related to the Company’s expanded public company activities as well as to fees related to the pending acquisition of the Kandy Business (as defined in Note 1 of the condensed consolidated financial statements). The increase in depreciation and amortization was due to increased amortization expense related to intangible assets recognized as of the Closing Date. Meals, entertainment and travel decreased as a result of less travel and meetings with clients due to COVID-19 restrictions.

 

37

 

 

Interest expense

 

Interest expense in the 3rd quarter of 2020 was up compared with the 3rd quarter of 2019, primarily as a result of interest on the Debentures and the subordinated promissory note which were both issued on the Closing Date. The Debentures bear interest at the rate of 10.00% and the subordinated promissory note bears interest at the rate of 12.00%. Interest expense also includes amortization of the discount on the Debentures.

 

Benefit/provision for income taxes

 

For all periods presented, the provision for income taxes consists of provisions for state taxes, and reflect effective tax rates that 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 for income taxes also reflects the impact of amortization of intangible assets recognized as of the Closing Date.

 

S/P Combined YTD Period Ended September 30, 2020 versus the YTD Period Ended September 30, 2019

  

   April 7,
2020
   January 1,
2020
  

S/P Combined

YTD

   YTD 
   through   through   period ended   period ended 
   September 30,
2020
   April 6,
2020
  

September 30,

2020

   September 30,
2019
 
   Successor   Predecessor   (non-GAAP)   Predecessor 
Revenues:                
Hardware  $26,870   $10,587   $37,457   $40,649 
Software and maintenance   2,734    1,459    4,193    4,447 
Managed and professional services   15,188    6,880    22,068    20,557 
Other   273    111    384    503 
Total revenues   45,065    19,037    64,102    66,156 
Cost of revenue   31,362    12,426    43,788    47,589 
Gross profit   13,703    6,611    20,314    18,567 
Selling, general and administrative expenses (including transaction costs)   17,617    7,835    25,452    20,403 
Loss from operations   (3,914)   (1,224)   (5,138)   (1,836)
Other (expense) income                    
Interest expense   (4,540)   (384)   (4,924)   (979)
Other (expense) income   (25)   31    6    147 
Total other expenses   (4,565)   (353)   (4,918)   (832)
Loss before income taxes   (8,479)   (1,577)   (10,056)   (2,668)
Benefit (provision) for income taxes   (33)   (12)   (45)   (33)
Net loss  $(8,512)  $(1,589)  $(10,101)  $(2,701)

 

 

(1)Interest expense in the Successor period includes related party interest of $1,151.

 

Net loss

 

Net loss for the S/P Combined YTD period ended September 30, 2020 was $10.1 million compared to $2.7 million for the YTD period ended September 30, 2019. Discussed below are the revenue and expense factors that primarily contributed to the YTD change in the net loss between the two periods.

 

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Hardware revenue

 

Hardware revenue decreased 7.9%, from $40.6 million in the YTD period ended September 30, 2019 to $37.5 million in the S/P Combined YTD period ended September 30, 2020. Though our hardware revenue was down, the margin was up 350 basis points in the S/P Combined YTD period ended September 30, 2020 compared with the YTD period ended September 30, 2019. We attribute the decrease in hardware revenue to reduced demand in the energy sector, related to COVID-19 and the negative impact of a sales force transition, partially offset by increased demand in the manufacturing, logistics and public sector, also related to COVID-19 as more customers transitioned to remote work. We attribute the increase in margin to actions by the Company, beginning in the 3rd quarter of 2019, to deliver improved margins.

 

Software and maintenance revenue

 

Revenue from software and maintenance services was down $0.3 million, or 5.7% in the YTD periods for the same reason discussed in the quarter over quarter comparison. As discussed above, since this revenue is reported net, the revenue is also the margin.

 

Managed and professional services revenue

 

Managed and professional services revenues was up 7.4%, or $1.5 million in the S/P Combined YTD period ended September 30, 2020, increasing to $22.1 million from $20.6 million in the YTD period ended September 30, 2019. The margin on our services revenue for the S/P Combined YTD period ended September 30, 2020 was up 440 basis points compared to the YTD period ended September 30, 2019 due to the same reason discussed in the quarter over quarter comparison.

 

Other revenue

 

Other revenue was relatively flat at $0.4 million and $0.5 million in the S/P Combined YTD period ended September 30, 2020 and the YTD period ended September 30, 2019, respectively. The nature of other revenue is discussed in the quarter over quarter comparison section above.

 

Total revenue, cost of revenue and gross margin

 

Aggregate revenue for the four product lines together was $64.1 million in the S/P Combined YTD period ended September 30, 2020 compared to $66.2 million in the YTD period ended September 30, 2019, a decrease of $2.1 million, or 3.1%. Though aggregate revenues were down, overall gross profit increased 9.4% and gross margin was up 360 basis points as cost of revenue decreased 8.0%.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses (including transaction costs) for the S/P Combined YTD period ended September 30, 2020 and the YTD period ended September 30, 2019, consisted of the components in the following table (in thousands), and increased 24.8% primarily as a result of the same factors discussed in the quarter over quarter discussion.

 

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   S/P Combined         
   YTD period ended   YTD period ended   Change 
  

September 30,

2020

  

September 30,

2019

   Increase
(decrease)
 
   (non-GAAP)   Predecessor     
Salaries, benefits, subcontracting & personnel administration costs  $18,226   $15,484   $2,742 
Building occupancy costs, utilities, office supplies & repairs and maintenance   1,510    1,583    (73)
Depreciation and amortization   2,186    1,611    575 
Dues, subscriptions and memberships   629    620    9 
Vendor marketing funds, net of vendor fees   (589)   (715)   126 
Meals, entertainment & travel   409    961    (552)
Management fees   80    225    (145)
Professional fees   1,596    159    1,438 
Insurance   852    173    679 
Other   553    302    251 
   $25,452   $20,403   $5,050 

 

Included in the table above are transaction costs of $0.1 million incurred in connection with the acquisition of Computex on April 7, 2020. Such costs consist primarily of legal and professional fees, and are net of a credit of $0.9 million granted by a creditor whose account was settled via a combination of cash, Debentures and common stock.

 

Interest expense

 

Interest expense increased in the S/P Combined YTD period ended September 30, 2020, compared with the YTD period ended September 30, 2019, for the same primary reasons discussed above in the quarter over quarter discussion.

 

Liquidity and Capital Resources

 

Overview

 

Our primary sources of liquidity are funds generated from operations and funding under our Credit Agreement, which have been sufficient to meet our working capital and substantially all our capital expenditure requirements. The Credit Agreement, which is more fully discussed in Note 8 of the condensed consolidated financial statements, matures on June 30, 2021, and, as amended, provides for maximum borrowings of $16.5 million on the revolving note portion with a scheduled reduction of $3.5 million in availability under the revolving note as of April 1, 2021. As amended, the Credit Agreement provides for a minimum monthly liquidity (defined as unrestricted cash plus availability under the revolving note) of $3.0 million commencing January 31, 2021. In connection with an amendment on November 13, 2020, the Company was required to make a one-time principal payment of $0.3 million on the term loan. Availability on the revolving note is determined weekly, based on a weekly borrowing base computation that is primarily based on certain percentages of accounts receivable and inventory. As of September 30, 2020, amounts outstanding under the term loan and revolving note with Comerica Bank were $6.4 million and $8.5 million, respectively.

 

On or before the maturity date of the Credit Agreement, we plan 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 we require or on terms acceptable to us, if at all. Unrestricted and restricted cash on hand was approximately $3.7 million and $0.7 million at September 30, 2020, respectively. We may also seek to access the debt and equity markets to fund acquisitions and/or pursue large capital expenditure projects or to reduce our cost of capital.

 

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In April 2020, we received a PPP loan of $4,135. The PPP loan is administered by the SBA.  Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of such loans after eight weeks, if the loan is used for eligible purposes, including to fund payroll costs, mortgage interest, rent and/or utility costs, and meet certain other requirements, including, the maintenance of employment and compensation levels. We believe that we have used the entire PPP Loan for qualifying expenses and expect to qualify for full or partial forgiveness under the program.  However, we can provide no assurance that we will obtain forgiveness for any portion.

 

Successor cash flows

 

Operating activities

 

Net cash used in operating activities was $12.6 million for the period April 7, 2020 through September 30, 2020, which was the result of an increase in receivables, due to the acquisition of Computex, 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 at April 6, 2020 were converted to Debentures and $1.5 million was converted to common stock.

 

Investing activities

 

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 $0.3 million of cash from the Computex acquisition.

 

Financing activities

 

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

 

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 changes in unearned revenue, partially offset by funds provided by accounts receivable.

 

Net cash provided by operating activities was $2.3 million for the nine months ended September 30, 2019 and primarily consisted of funds provided by accounts receivable, partially offset by funding for accounts payable and accruals.

 

Investing activities

 

Investing activities used $0.1 million of cash for the period January 1, 2020 through April 6, 2020, which consisted of funding for capital expenditures.

 

Investing activities used $0.5 million for the nine months ended September 30, 2019, 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.

 

Financing activities used $1.6 million for the nine months ended September 30, 2019, consisting of debt repayments of $2.2 million, partially offset by net funds from the line of credit of $0.6 million.

 

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Capital expenditures

 

Capital expenditures were $0.4 million during the period April 7, 2020 through September 30, 2020, and primarily were related to the purchase of computer and other equipment. For the remainder of fiscal year 2020, we estimate our capital expenditures to be between $0.1 million and $0.3 million, a significant portion of which we expect to spend on equipment to be used in our after-sales service centers.

 

Off-Balance Sheet Arrangements

 

At September 30, 2020, 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

 

This discussion of critical accounting policies, judgments and estimates should be read in conjunction with our condensed consolidated financial statements and other disclosures included elsewhere in this quarterly report. The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could differ materially from those estimates. We believe the accounting policies that involve the most significant judgments and estimates used in the preparation of the condensed consolidated financial statements include those relating to revenue recognition, accounting for income taxes, accounting for business combinations, the recognition and impairment evaluation relating to tangible and intangible assets, including goodwill, and accounting for share-based compensation. We discuss some of these policies below. The ones not discussed below are discussed in Note 3 of the condensed consolidated financial statements. Additional discussions regarding the ones discussed below are also included in Note 3.

 

Revenue recognition

 

Revenue from contracts with customers are not recorded until the Company has the approval and commitment from both parties, the rights of the parties are identified, payment terms are established, the contract has commercial substance and collectability of the consideration is probable. The Company also evaluates the following indicators, amongst others, when determining whether it is acting as a principal in the transaction (and therefore whether to record revenue on a gross basis): (i) whether the Company is primarily responsible for fulfilling the promise to provide the specified good or service, (ii) whether the Company has the inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer and (iii) whether the Company has the discretion to establish the price for the specified good or service. If the terms of a transaction do not indicate that the Company is acting as a principal in the transaction, then the Company is acting as an agent in the transaction and therefore, the associated revenue is recognized on a net basis (that is revenue net of costs).

 

Revenue is recognized once control passes to the customer. The following indicators are evaluated in determining when control has passed to the customer: (i) whether the Company has a right to payment for the product or service, (ii) whether the customer has legal title to the product, (iii) whether the Company has transferred physical possession of the product to the customer, (iv) whether the customer has the significant risk and rewards of ownership of the product and (v) whether the customer has accepted the product. The Company’s products can be delivered to customers in a variety of ways, including (i) physical shipment from the Company’s warehouse, (ii) via drop-shipment by the vendor or supplier or (iii) via electronic delivery of keys for software licenses. The Company’s shipping terms typically allow for the Company to recognize revenue when the product reaches the customer’s location.

 

42

 

 

Hardware

 

Revenue from the sale of hardware is recognized on a gross basis, as the Company is deemed to be acting as the principal in these transactions. The selling price to the customer is recorded as revenue and the acquisition cost is recorded within cost of revenue. The Company recognizes revenue from these transactions when control has passed to the customer, which is usually upon shipment.

 

In some instances, the customer agrees to buy the product from the Company, but requests delivery at a later date, commonly known as bill-and-hold arrangements. For these transactions, the Company deems that control passes to the customer when the product is ready for delivery. The Company classifies such products as products ready for delivery when the customer has a signed agreement, the significant risk and rewards for the product has passed to the customer, the customer has the ability to direct the assets, the products have been set aside specifically for the customer and the Company cannot redirect the product for the benefit of another customer.

 

In drop-shipment arrangements, whereby the Company arranges for the vendor to deliver products directly to its customers without the inventory first being physically held at its warehouses, the Company considers itself to be the principal in the transaction and therefore, recognizes the related revenue on a gross basis.

 

Software

 

Revenues from most software license sales are recognized as a single performance obligation on a net basis, as the Company is deemed to be acting as an agent in these transactions. Revenues in these instances are recognized at the point the software license is delivered to the customer. Generally, software licenses are sold with accompanying third-party delivered software support, which is a product that allows customers to upgrade, at no additional cost, to the latest technology if new capabilities are introduced during the period that the software support is in effect. The Company evaluates whether the software support is a separate performance obligation by assessing whether the third-party delivered software support is critical or essential to the core functionality of the software itself. This involves considering whether the software provides its original intended functionality to the customer without the updates, whether the customer would ascribe a higher value to the upgrades versus the up-front deliverable, whether the customer would expect frequent intelligence updates to the software (such as updates that maintain the original functionality), and whether the customer chooses to not delay or always install upgrades. If the Company determines that the accompanying third-party delivered software support is critical or essential to the core functionality of the software license, the software license and the accompanying third-party delivered software support are recognized as a single performance obligation. The value of the product is primarily based on the accompanying support delivered by a third-party, and therefore the Company is acting as an agent in these transactions and therefore, recognizes the associated revenue on a net basis at the point that the associated software license is delivered to the customer.

 

Third-party services

 

The Company is deemed to be the agent in the sale of third-party maintenance, software support and services, as the third-party controls the service until it is transferred to the customer. In these instances, the Company recognizes the revenue on a net basis equal to the selling price to the customer less the acquisition costs. Such revenue is recognized when the customer and vendor accept the terms and conditions of the arrangement.

 

Managed and professional services

 

Professional services offerings include assessments, project management, staging, configuration, and integration. Managed services offerings range from monitoring and notification to a fully outsourced network management solution. In these arrangements, the Company satisfies the performance obligations and recognizes revenue over time.

 

Such professional services are provided under both time and materials and fixed price contracts. When services are provided on a time and materials basis, the Company recognizes revenues at agreed-upon billing rates as services are performed. When services are provided on a fixed fee basis, the Company recognizes revenues over time in proportion to the Company’s progress towards complete satisfaction of the performance obligation.

 

In arrangements for managed services, the Company’s arrangement is typically a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The Company typically recognize revenues from these services on a straight-line basis over the period services are provided, which is consistent with the timing of services rendered.

 

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Freight and sales tax

 

Freight billed to customers is included within revenue on the condensed consolidated statement of operations. The related freight charged to the Company is included within cost of revenue. Sales tax collected from customers is remitted to governmental authorities on a net basis.

 

Contract liabilities

 

Contract liabilities (or deferred or unearned revenue) are recognized when cash payments are received or due in advance of the Company’s performance obligations.

 

Costs of obtaining and fulfilling a contract

 

The Company capitalizes costs that are incremental to obtaining customer contracts, predominately sales commissions. Such deferrals are then amortized to expense, in proportion to each completed contract performance obligation, on a straight-line basis over the period during which the Company fulfills its performance obligation.

 

Costs associated with contracts whereby the Company has an obligation to perform services, are incurred specifically to assist the Company in rendering services to its customers and are recorded as deferred customer support contract costs at the time the costs are incurred. The costs are amortized to expense on a straight-line basis over the period during which the Company fulfills its performance obligation.

 

We consider revenue recognition to be a critical accounting policy and one that involves critical accounting estimates because of the materiality of this item to our financial statements and the level of judgement involved. Judgement is required in some of the factors discussed above including whether we are acting as a principal or an agent, the determination of when risk effectively passes to the customer, the determination of the price expected to be collected from the customer, the determination of whether revenue from certain software sales should be recognized as a single performance obligation or whether certain software support should be recognized as a separate performance obligation, and the assessment of whether the third-party delivered software support is critical or essential to the core functionality of the software itself.

 

Accounting for income taxes

 

Under ASC 740, income tax expense is recorded for the amount of income tax payable or refundable for the current period and for the change in net deferred tax assets or liabilities resulting from events that are recorded for financial reporting purposes in a different reporting period than recorded in the tax return. We make significant assumptions, judgments, and estimates in the determination of our provision for income taxes and also our deferred tax assets and liabilities and any valuation allowances.

 

Our judgments, assumptions, and estimates relating to the current tax provision take into account current tax laws, our interpretation of current tax laws, allowable deductions, projected tax credits, and possible outcomes of current and future tax audits. We do not recognize a tax benefit unless we conclude that it is more likely than not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. If the recognition threshold is met, we recognize a tax benefit measured at the largest amount of the tax benefit that, in our judgment, is greater than a 50 percent likelihood of realization. Changes in tax laws or our interpretation of tax laws and the resolution of current and future tax audits could materially impact the amounts provided for income taxes. Our assumptions, judgments, and estimates relative to the value of our net deferred tax assets take into account predictions of the amount and category of future taxable income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments, and estimates inaccurate, thus materially impacting our financial position and results of operations.

 

44

 

 

Purchase price allocation

 

The Company accounts for business combinations in accordance with ASC 805. Accordingly, tangible and intangible assets acquired and liabilities assumed are recorded at their estimated fair values, the excess of the purchase consideration over the fair values of net assets acquired is recorded as goodwill, and transaction costs are expensed as incurred. 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. Also, assigning useful lives to intangible assets, which determine the related amortization expense, involves subjectivity.

 

Share-based compensation

 

The Company accounts for share-based compensation in accordance with ASC 718, which requires the measurement and recognition of compensation expense, based on estimated fair values, for share-based awards made to employees and directors. Based on the grant date fair value of the award, the Company recognizes compensation expense over the requisite service period or performance period on a straight-line basis, and accounts for forfeitures as they occur.

 

Significant judgement is required in the estimation of fair values of stock awards. For the restricted stock awards with a time-based vesting condition, the fair value is determined by reference to the Company’s stock price on the grant date. A portion of the Company’s restricted stock awards are performance-based with a market condition that must be met for the award to vest. For those restricted stock awards, the fair value is estimated using a Monte Carlo simulation model, whereby the fair value of such awards is fixed at the grant date and amortized over the shorter of the remaining performance or service period. The Monte Carlo simulation valuation model utilizes the following assumptions: expected stock price volatility, expected life of the awards and a risk-free interest rate. Significant judgment is required in estimating the expected volatility of our common stock. Due to the limited trading history of the Company’s common stock, estimated volatility was based on a peer group of public companies and took into consideration the increased short-term volatility in historical data due to COVID-19.

 

Recent Accounting Pronouncements Issued and Adopted

 

See Note 3 of the 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 we have no material exposure to currency fluctuations.

 

Interest rate risk

 

Interest rate risks are inherent in the Credit Agreement, partially mitigated by an interest rate swap. See Note 8. Currently, management does not view this exposure as 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.

 

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 fiscal quarter ended September 30, 2020. 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 effective at a reasonable assurance level and, accordingly, provided reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting during the quarter ended September 30, 2020, 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 filed with the SEC on June 29, 2020. 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 filed with the SEC on June 29, 2020, other than the amended and restated risk factor 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 Company has a substantial amount of indebtedness, some of which is scheduled to mature on June 30, 2021, which could have important consequences to its business.

 

The Company has a substantial amount of indebtedness. As of September 30, 2020, the Company had total debt of $10.5 million (including current portion and before deducting unamortized debt issuance costs) plus line of credit borrowings of $8.5 million and a promissory note of $0.5 million along with the ability to borrow an additional $8.0 million under the Credit Agreement, subject to a borrowing base and a liquidity condition. The Company’s substantial indebtedness could have important consequences, including the following:

 

making it more difficult for the Company to satisfy its obligations with respect to its indebtedness;

 

requiring the Company to dedicate a substantial portion of its cash flow from operations to debt service payments on its debt, which reduces the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes;

 

requiring the Company to comply with restrictive covenants in the Credit Agreement, which limit the manner in which it conducts its business;

 

making it more difficult for the Company to obtain vendor financing from its vendor partners, including original equipment manufacturers and software publishers;

 

limiting the Company’s flexibility in planning for, or reacting to, changes in the industry in which it operates;

 

placing the Company at a competitive disadvantage compared to any of its less-leveraged competitors;

 

increasing the Company’s vulnerability to both general and industry-specific adverse economic conditions; and

 

limiting the Company’s ability to obtain additional debt or equity financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements and increasing its cost of borrowing.

 

In addition, the Credit Agreement is scheduled to mature on June 30, 2021. We intend to seek to either negotiate an extension of the maturity date or refinance the Credit Agreement on or prior to such date. We may not be able to extend the maturity date of the Credit Agreement or to refinance our existing indebtedness on acceptable terms, or at all, and may be forced to choose from a number of unfavorable options. These options may include agreeing to otherwise unfavorable financing terms, selling assets on disadvantageous terms or defaulting on the loan and permitting the lender to foreclose.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

Other than as previously reported in a Current Report on Form 8-K, none.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

On November 13, 2020, the Company and Comerica Bank entered into a fifth amendment (the “Fifth Amendment”) to the existing credit agreement to which the Company and Comerica Bank are parties (the “Credit Agreement”). Among other things, the Fifth Amendment extends the maturity date of the Credit Agreement from December 31. 2020 to June 30, 2021, provides for a decrease in maximum borrowings on April 1, 2021, amends the interest rates and, commencing January 31, 2021, provides for a minimum monthly liquidity (defined as unrestricted cash plus availability under the revolving note) of $3,000,000. Pursuant to the terms of the Fifth Amendment, on April 1, 2021, maximum borrowings permitted under the revolving note under the Credit Agreement will decrease by $3,500,000 to $13,000,000. Until December 31, 2020, all obligations outstanding under the Credit Agreement will continue to accrue interest at the higher of the one-month London Interbank Offered Rate (LIBOR) or 1.00%, plus a margin of 4.00% (the “margin”). Pursuant to the terms of the Fifth Amendment, the margin then increases gradually each month to a maximum of 6.50% on June 1, 2021. In connection with the Fifth Amendment on November 13, 2020, the Company was required to make a one-time principal payment of $250,000 on the term loan under the Credit Agreement.

 

The foregoing description of the Fifth Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the Fifth Amendment, which is filed as Exhibit 10.4 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.

  

ITEM 6. EXHIBITS.

 

2.1(3)   Purchase Agreement, dated August 5, 2020, by and among American Virtual Cloud Technologies, Inc., Ribbon Communications Inc., Ribbon Communications Operating Company, Inc. and Ribbon Communications International Limited.
     
3.1(1)   Second Amended and Restated Certificate of Incorporation.
     
3.2(2)   Amended and Restated Bylaws.
     
10.1(3)   Voting Agreement, dated August 5, 2020, by and among Ribbon Communications Inc., Ribbon Communications Operating Company, Inc., Ribbon Communications International Limited and Pensare Sponsor Group, LLC.
     
10.2(3)   Voting Agreement, dated August 5, 2020, by and among Ribbon Communications Inc., Ribbon Communications Operating Company, Inc., Ribbon Communications International Limited and Stratos Management Systems Holdings, LLC.
     
10.3(4)   Employment Agreement between the Company and Xavier Williams.
     
10.4**   Fifth Amendment to Credit Agreement, dated November 13, 2020.
     
31.1*   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32*   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS   XBRL Instance Document.
     
101.SCH   XBRL Taxonomy Extension Schema Document.
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.

 

*Furnished herewith.

 

**Filed herewith.

 

(1)Incorporated by reference to an exhibit to the Company’s current report on Form 8-K filed with the SEC on April 7, 2020.

 

(2)Incorporated by reference to an exhibit to the Company’s current report on Form 8-K filed with the SEC on August 2, 2017.

 

(3)Incorporated by reference to an exhibit to the Company’s current report on Form 8-K filed with the SEC on August 11, 2020.

 

(4)Incorporated by reference to an exhibit to the Company’s current report on Form 8-K filed with the SEC on September 16, 2020.

 

47

 

 

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 16, 2020   /s/ Xavier D. Williams
  Name: Xavier D. Williams
  Title: Chief Executive Officer
    (Principal Executive Officer)
     
    /s/ Thomas H. King
  Name:  Thomas H. King
  Title Chief Financial Officer
   

(Principal Financial and Accounting Officer)

 

 

  

48

 

  

Exhibit 10.4

 

FIFTH AMENDMENT TO LOAN DOCUMENTS

 

THIS FIFTH AMENDMENT TO LOAN DOCUMENTS (this “Amendment”), dated as of November __, 2020, is among Stratos Management Systems, Inc. (f/k/a Tango Merger Sub Corp.), a Delaware corporation (“Stratos”), American Virtual Cloud Technologies, Inc. (f/k/a Pensare Acquisition Corp.), a Delaware corporation (“Parent” and together with Stratos, collectively and individually, “Borrower”), COMPUTEX, INC., a Texas corporation (“Computex”), FIRST BYTE COMPUTERS, INC., a Minnesota corporation (“First Byte”), ENETSOLUTIONS, L.L.C., a Texas limited liability company (“eNET”, and together with Computex and First Byte, collectively, “Guarantors”, and each, individually, a “Guarantor”), and COMERICA BANK (“Bank”).

 

RECITALS:

 

A. Borrower and Bank are party to that certain Credit Agreement dated as of December 18, 2017 (as the same has been or may hereafter be amended, restated or otherwise modified from time to time, the “Credit Agreement”).

 

B. In connection with the Credit Agreement, (i) Borrower and the Guarantors (other than Parent) are party to that certain Security Agreement dated as of December 18, 2017 in favor of Bank and (ii) Parent is party to that certain Security Agreement dated as of April 7, 2020 in favor of Bank (collectively, as the same have been or may be amended, restated or modified from time to time, the “Security Agreement”).

 

C. In connection with the Credit Agreement, (i) the Guarantors (other than Parent) are party to that certain Guaranty dated as of December 18, 2017 in favor of Bank and (ii) Parent is party to that certain Guaranty dated as of April 7, 2020 in favor of Bank (collectively, as the same have been or may hereafter be amended, restated or otherwise modified from time to time, the “Guaranties”).

 

D. In connection with the Credit Agreement, the Borrower and Guarantors are party to that certain Advance Formula Agreement dated as of December 18, 2017 (as the same has been or may hereafter be amended, restated or otherwise modified from time to time, the “Advance Formula Agreement”).

 

E. Borrower, Guarantors, and Bank now desire to amend the Credit Agreement and the other Loan Documents as provided herein.

 

NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows (all provisions of this Amendment being effective as of the date hereof unless otherwise stated herein):

 

Fifth Amendment to Loan Documents – Page 1

 

 

ARTICLE I

Definitions

 

Section 1.1 Definitions. Capitalized terms used in this Amendment, to the extent not otherwise defined herein, shall have the same meanings as in the Credit Agreement, as amended hereby.

 

ARTICLE II

Amendments to Loan Documents

 

Section 2.1 Additions to Definitions in Section 1(a) of the Credit Agreement. The following definitions are hereby added to Section 1(a) of the Credit Agreement in alphabetical order in their entirety as follows:

 

Fifth Amendment Effective Date” shall mean November                , 2020.

 

Liquidity” shall mean the sum of (a) the unrestricted cash and cash equivalents of Borrower and Guarantors on deposit with or held by Bank, plus (b) the Unused Availability.

 

Unused Availability” shall mean, on any date of determination, the amount equal to the sum of (a) the Advance Formula, minus (b) the aggregate outstanding principal amount under the Revolving Credit Note.

 

Section 2.2 Amendments to Definitions in Section 1(a) of the Credit Agreement. The following definitions in Section 1(a) of the Credit Agreement are amended and restated to read in their entirety as follows:

 

2020 Subordinated Debt” shall mean the Debt owed by Parent, Borrower and Borrower’s Subsidiaries pursuant to the following documents: (a) the Securities Purchase Agreement dated on or about the Third Amendment Effective Date, by and among Parent and the investors party thereto and any and all convertible debentures (including any such debentures issued following the Third Amendment Effective Date in accordance with the terms of such Securities Purchase Agreement) and warrants to purchase common stock issued pursuant thereto; (b) any other convertible debentures and warrants having substantially the same terms, conditions and subordination provisions as the debentures and warrants issued pursuant to the foregoing clause (a) issued pursuant to one or more agreements entered into on or after the Fifth Amendment Effective Date; (c) the Registration Rights Agreement dated on or about the Third Amendment Effective Date, by and among Parent and the holders party thereto; (d) the subordinated promissory notes dated on or about or within 60 days following, the Third Amendment Effective Date in an amount not to exceed $7,000,000 in the aggregate, by Parent in favor of certain holders party thereto and issued in settlement of certain obligations of Parent to the holders thereof as evidenced by letter agreements (or other agreements evidencing such settlements) dated on or about or within 60 days following, the Third Amendment Effective Date between Parent and each holder of such subordinated promissory notes; and (e) any other documents, agreement, and instruments related thereto; provided, however, that the aggregate principal amount of any convertible debentures issued pursuant to the foregoing clauses (a) and (b) shall not exceed, in the aggregate, $100,000,000.

 

Fifth Amendment to Loan Documents – Page 2

 

 

Revolving Credit Note” shall mean the Fourth Amended and Restated Master Revolving Note dated the Fifth Amendment Effective Date in the maximum original principal amount of $16,500,000 made by Borrower payable to the order of Bank, as the same has been or may be renewed, extended, modified, increased, or restated from time to time.

 

Term Note” shall mean the Second Amended and Restated Term Note dated the Third Amendment Effective Date in the maximum original principal amount of $5,821,428.54 made by Borrower payable to the order of Bank, as the same has been or may be amended, renewed, extended, modified, increased or restated from time to time.

 

Section 2.3 Addition to Section 2 of the Credit Agreement. A new clause (c) is added to the end of Section 2 of the Credit Agreement to read in its entirety as follows:

 

(c) Amendment Fee. An amendment fee equal to $100,000 (the “Amendment Fee”) shall be deemed fully earned as of the Fifth Amendment Effective Date and shall be due and payable as follows:

 

(i) $50,000 shall be due and payable as of the Fifth Amendment Effective Date; and

 

(ii) $50,000 shall be due and payable on April 1, 2021; provided, however, if the Borrower satisfied one of the following conditions, then Bank agrees that payment of this portion of the Amendment Fee is waived:

 

(A) Borrower has paid in full all Indebtedness and all of Bank’s commitments under the Credit Agreement have been terminated; or

 

(B) Borrower has provided sufficient cash collateral to Bank to secure all of the outstanding Indebtedness.

 

Section 2.4 Amendment to Section 4(k) of the Credit Agreement. The reference to the phrase "Within thirty (30) days of the Third Amendment Effective Date" in Section 4(k) of the Credit Agreement is hereby deleted and the reference to the phrase "On or before December 31, 2020" is inserted in lieu thereof.

 

Section 2.5 Amendment to Section 4(l) of the Credit Agreement. Section 4(l) of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

 

(l) Liquidity. At all times beginning January 31, 2021 and tested monthly at the end of each month thereafter, maintain Liquidity of at least Three Million and No/100 Dollars ($3,000,000.00).

 

Fifth Amendment to Loan Documents – Page 3

 

 

Section 2.6 Amendment to Section 4(q) of the Credit Agreement. The reference to the phrase "Within forty-five (45) days of the Third Amendment Effective Date" in Section 4(q) of the Credit Agreement is hereby deleted and the reference to the phrase "On or before December 31, 2020" is inserted in lieu thereof.

 

Section 2.7 Amendment to Section 4 of the Credit Agreement. A new clause (w) is added to the end of Section 4 of the Credit Agreement to read in its entirety as follows:

 

(w) Fifth Amendment Post-Closing Deliverables. On or before December 31, 2020, Borrower shall deliver to Bank evidence that all insurance required under Section 4(d) of the Credit Agreement shall have been endorsed to list Bank as an additional insured or lender loss payee, as appropriate, all in form and substance satisfactory to Bank.

 

Section 2.8 Amendment to Section 5(d) of the Credit Agreement. Section 5(d) of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

 

(d) Debt. Incur, create, assume or permit to exist any Debt of any kind or nature whatsoever, except (without duplication) for (i) the Indebtedness, (ii) Subordinated Debt, (iii) existing indebtedness (if any) to the extent set forth in the Schedule of Debt attached hereto or in the most recent financial statements of Borrower delivered to Bank prior to the date of this Agreement, (iv) unsecured trade indebtedness, utility indebtedness and non-extraordinary accounts payable incurred and paid in the ordinary course of business, (v) purchase money indebtedness and lease obligations (whether in respect of capitalized leases, operating leases or otherwise, but not leases in respect of real property pursuant to which the Loan Parties are a tenant), not otherwise disclosed in said Schedule of Debt or such most recent financial statements, not to exceed $1,000,000, in aggregate, at any time, (vi) Debt owing solely between or among Loan Parties, (vii) Debt owed by any Foreign Subsidiary to a Loan Party in an aggregate outstanding amount not to exceed $100,000 at any time, (viii) Ingram Micro Debt, (ix) other unsecured Debt not to exceed $100,000, in aggregate, at any time outstanding; (x) any Debt incurred in connection with any Capital Expenditure set forth on the Schedule of Permitted Capital Expenditures, (xi) unsecured Debt incurred for the sole purpose of financing insurance premiums in an aggregate outstanding amount not to exceed $1,500,000 at any time, (xii) the Permitted PPP Loan so long as (1) it is unsecured and (2) the aggregate principal amount of the Permitted PPP Loan shall not exceed $4,200,000 at any one time outstanding; (xiii) the 2020 Subordinated Debt; and (xiv) any Debt incurred to refinance any Debt referred to in this Section 5(d); provided, that the principal amount of the Indebtedness secured thereby is not increased.

 

ARTICLE III 

 

No Waiver

 

Section 3.1 No Waiver. Nothing contained herein shall be construed as a consent to or waiver of any Default or Event of Default, which may now exist or hereafter occur or any violation of any term, covenant or provision of the Credit Agreement or any other Loan Document. All rights and remedies of Bank are hereby expressly reserved with respect to any such Default or Event of Default. Nothing contained herein shall affect or diminish the right of Bank to require strict performance by each Loan Party of each provision of any Loan Document to which such Loan Party is a party, except as expressly provided herein. Except as amended hereby, all terms and provisions and all rights and remedies of Bank under the Loan Documents shall continue in full force and effect and are hereby confirmed and ratified in all respects.

 

Fifth Amendment to Loan Documents – Page 4

 

 

ARTICLE IV

Conditions Precedent

 

Section 4.1 Conditions Precedent. The effectiveness of this Amendment is subject to the satisfaction of the following conditions precedent:

 

(a) Bank shall have received this Amendment properly executed by Borrower, Guarantors and Bank.

 

(b) Bank shall have received payment of not less than $250,000 to be applied as a prepayment to the outstanding principal balance of the Term Note.

 

(c) The representations and warranties contained herein and in all other Loan Documents, as amended hereby, shall be true and correct in all material respects as of the date hereof as if made on the date hereof.

 

(d) No Default or Event of Default shall have occurred and be continuing.

 

(e) Bank shall have received payment of $50,000 of the Amendment Fee due and payable as of the date hereof.

 

ARTICLE V

Ratifications, Representations and Warranties

 

Section 5.1 Ratifications. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Credit Agreement and except as expressly modified and superseded by this Amendment, the terms and provisions of the Credit Agreement and the other Loan Documents are ratified and confirmed and shall continue in full force and effect. Each of Borrower, Guarantors and Bank agree that the Credit Agreement, as amended hereby, and the other Loan Documents shall continue to be legal, valid, binding and enforceable in accordance with their respective terms. Each Guarantor hereby consents and agrees to this Amendment and agrees that each Loan Document to which such Person is a party shall remain in full force and effect and shall continue to (a) in the case of the Guaranty, guarantee the Indebtedness (as defined in the Guaranty) and the other amounts and obligations as provided in the Guaranty, and (b) be the legal, valid and binding obligation of such Person and enforceable against such Person in accordance with its terms.

 

Section 5.2 Representations and Warranties. Each of Borrower and Guarantors hereby represents and warrants to the Bank that (a) with respect to Borrower, the execution, delivery and performance of this Amendment and any and all other Loan Documents executed and/or delivered in connection herewith have been authorized by all requisite company or other action on the part of Borrower and will not violate the charter or organizational documents of Borrower, (b) the representations and warranties contained in the Credit Agreement and each other Loan Document are true and correct in all material respects on and as of the date hereof as though made on and as of the date hereof (except for such representations and warranties as are limited by their express terms to a specific date), and (c) effective upon the execution of this Amendment and the Loan Documents executed in connection herewith, no Default or Event of Default (other than the Subject Default) has occurred and is continuing.

 

Fifth Amendment to Loan Documents – Page 5

 

 

ARTICLE VI

Miscellaneous

 

Section 6.1 Survival of Representations and Warranties. All representations and warranties made in this Amendment or any other document executed in connection herewith shall survive the execution and delivery of this Amendment, and no investigation by Bank or any closing shall affect the representations and warranties or the right of Bank to rely upon them.

 

Section 6.2 Reference to Agreement. Each of the Credit Agreement, the Loan Documents and any and all other agreements, documents, or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Credit Agreement and the Loan Documents, as amended hereby, are hereby amended so that any reference in such documents to the Credit Agreement and the Loan Documents shall mean a reference to the Credit Agreement and the Loan Documents as amended hereby.

 

Section 6.3 Expenses of Bank. As provided in the Credit Agreement, each of Borrower agrees to pay on written demand all reasonable and documented costs and expenses incurred by Bank in connection with the preparation, negotiation, and execution of this Amendment and any other documents executed pursuant hereto and any and all amendments, modifications, and supplements thereto, including without limitation the reasonable costs and fees of Bank’s legal counsel, and all costs and expenses incurred by Bank in connection with the enforcement or preservation of any rights under the Credit Agreement, as amended hereby, or any other document executed in connection therewith, including without limitation the costs and reasonable fees of Bank’s legal counsel.

 

Section 6.4 Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable.

 

Section 6.5 Applicable Law. This Amendment and all other documents executed pursuant hereto shall be deemed to have been made and to be performable in Dallas, Dallas County, Texas and shall be governed by and construed in accordance with the laws of the State of Texas.

 

Section 6.6 Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of Bank, each Borrower, each Guarantor, and their respective successors, assigns, heirs, executors and personal representatives, except neither Borrower, nor any Guarantor may assign or transfer any of its rights or obligations hereunder without the prior written consent of Bank.

 

Fifth Amendment to Loan Documents – Page 6

 

 

Section 6.7 Counterparts. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same agreement. The signature of a party to any counterpart shall be sufficient to legally bind such party. Bank may remove the signature pages from one or more counterparts and attach them to any other counterpart for the purpose of having a single document containing the signatures of all parties. Delivery of an executed counterpart of a signature page to this Amendment by facsimile, emailed portable document format (“pdf”), or tagged image file format (“tiff”) or any other electronic means that reproduces an image of the actual executed signature page shall be effective as delivery of an original executed counterpart of a signature page to this Amendment. Any party sending an executed counterpart of a signature page to this Amendment by facsimile, pdf, tiff or any other electronic means shall also send the original thereof to Bank within five (5) days thereafter, but failure to do so shall not affect the validity, enforceability, or binding effect of this Amendment.

 

Section 6.8 Headings. The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment.

 

Section 6.9 ENTIRE AGREEMENT. THE CREDIT AGREEMENT, THIS AMENDMENT AND ALL OTHER INSTRUMENTS, DOCUMENTS AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THE CREDIT AGREEMENT OR THIS AMENDMENT EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THIS AMENDMENT, AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO.

 

Section 6.10 INDEMNIFICATION OF BANK. EACH OF THE LOAN PARTIES HEREBY AGREES TO INDEMNIFY BANK AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE OFFICERS, DIRECTORS, SHAREHOLDERS, EMPLOYEES, ATTORNEYS, AFFILIATES, AND AGENTS (COLLECTIVELY, “RELEASED PARTIES”) FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING ATTORNEYS’ FEES) TO WHICH ANY OF THEM MAY BECOME SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR RELATE TO (a) ANY AND ALL FAILURES BY SUCH LOAN PARTY TO COMPLY WITH ITS AGREEMENTS CONTAINED IN THE LOAN DOCUMENTS, (b) THE NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION, OR ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS PRIOR TO THE DATE HEREOF, (c) ANY OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS PRIOR TO THE DATE HEREOF, (d) ANY BREACH PRIOR TO THE DATE HEREOF BY SUCH LOAN PARTY OR SUMMIT OF ANY REPRESENTATION, WARRANTY, COVENANT, OR OTHER AGREEMENT CONTAINED IN ANY OF THE LOAN DOCUMENTS OR (e) ANY INVESTIGATION, LITIGATION, OR OTHER PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY THREATENED INVESTIGATION, LITIGATION, OR OTHER PROCEEDING RELATING TO ANY OF THE FOREGOING (COLLECTIVELY, “RELEASED CLAIMS”). WITHOUT LIMITING ANY PROVISION OF THIS AMENDMENT, IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED UNDER THIS SECTION SHALL BE INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING ATTORNEYS’ FEES) ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF SUCH PERSON; PROVIDED, HOWEVER, NO PERSON SHALL BE INDEMNIFIED HEREUNDER FOR ITS OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

 

Fifth Amendment to Loan Documents – Page 7

 

 

Section 6.11 WAIVER AND RELEASE. TO INDUCE BANK TO AGREE TO THE TERMS OF THIS AMENDMENT, EACH OF THE LOAN PARTIES REPRESENTS AND WARRANTS THAT AS OF THE DATE OF THIS AMENDMENT IT OR HE HAS NO CLAIMS AGAINST RELEASED PARTIES AND IN ACCORDANCE THEREWITH IT:

 

(a) WAIVER. WAIVES ANY AND ALL SUCH CLAIMS, WHETHER KNOWN OR UNKNOWN, ARISING PRIOR TO THE DATE OF THIS AMENDMENT; AND

 

(b) RELEASE. RELEASES, ACQUITS AND FOREVER DISCHARGES RELEASED PARTIES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE STATE AND FEDERAL LAW, FROM ANY AND ALL OBLIGATIONS, INDEBTEDNESS, LIABILITIES, CLAIMS, COUNTERCLAIMS, CONTROVERSIES, COSTS, DEBTS, SUMS OF MONEY, ACCOUNTS, BONDS, BILLS, RIGHTS, CAUSES OF ACTION OR DEMANDS WHATSOEVER, WHETHER KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED, IN LAW OR EQUITY, WHICH SUCH LOAN PARTY EVER HAD, NOW HAS, CLAIMS TO HAVE OR MAY HAVE AGAINST ANY RELEASED PARTY ARISING PRIOR TO THE DATE HEREOF AND FROM OR IN CONNECTION WITH THIS AMENDMENT, THE LOAN DOCUMENTS OR THE TRANSACTIONS DIRECTLY OR INDIRECTLY CONTEMPLATED THEREBY.

 

Section 6.12 COVENANT NOT TO SUE. EACH OF THE LOAN PARTIES FURTHER COVENANTS NOT TO SUE THE RELEASED PARTIES ON ACCOUNT OF ANY OF THE RELEASED CLAIMS, AND EXPRESSLY WAIVES ANY AND ALL DEFENSES IT OR HE MAY HAVE IN CONNECTION WITH ITS OR HIS OBLIGATIONS UNDER THIS AMENDMENT OR THE OTHER LOAN DOCUMENTS. THIS SECTION IS IN ADDITION TO AND SHALL NOT IN ANY WAY LIMIT ANY OTHER RELEASE, COVENANT NOT TO SUE, OR WAIVER BY SUCH LOAN PARTY IN FAVOR OF THE RELEASED PARTIES.

 

[Remainder of Page Intentionally Left Blank. Signature Pages Follow.]

 

Fifth Amendment to Loan Documents – Page 8

 

 

Executed as of the date first written above.

 

  BORROWER:
   
  Stratos Management Systems, Inc. (f/k/a Tango Merger Sub Corp.) and
       
  By:

/s/ Thomas H. King

    Name:  Thomas H. King
    Title:

Treasurer & Secretary

       
  American Virtual Cloud Technologies, Inc.
  (f/k/a Pensare Acquisition Corp.)
       
  By: /s/ Thomas H. King
    Name: Thomas H. King
    Title:

Chief Financial Officer

       
  GUARANTORS:
       
  COMPUTEX, INC.
  FIRST BYTE COMPUTERS, INC.
  eNETsolutions, L.L.C.
       
  By: /s/ Thomas H. King
    Name: Thomas H. King
    Title: Treasurer & Secretary
      of each entity listed above
       
  BANK:
   
  COMERICA BANK
       
  By:

/s/ Chris D. Reed

    Chris D. Reed
    Vice President

 

 

 

Fifth Amendment to Loan Documents – Signature Page

 

Exhibit 31.1

 

CERTIFICATE PURSUANT TO
RULES 13a-14(a) and 15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Xavier D. Williams, certify that:

 

1.I have reviewed this quarterly report on Form 10-Q of American Virtual Cloud Technologies, Inc.;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: November 16, 2020 /s/ Xavier D. Williams
  Xavier D. Williams
  Chief Executive Officer
  (Principal executive officer)

 

Exhibit 31.2

 

CERTIFICATE PURSUANT TO
RULES 13a-14(a) and 15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Thomas H. King, certify that:

 

1.I have reviewed this quarterly report on Form 10-Q of American Virtual Cloud Technologies, Inc;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: November 16, 2020 /s/ Thomas H. King
  Thomas H. King
  Chief Financial Officer
  (Principal financial and accounting officer)

 

 

Exhibit 32

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of American Virtual Cloud Technologies, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Xavier D. Williams, Chief Executive Officer of the Company, and Thomas H. King, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. section 1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

Dated: November 16, 2020 /s/ Xavier D. Williams
  Xavier D. Williams
  Chief Executive Officer
  (Principal executive officer)
   
Dated: November 16, 2020 /s/ Thomas H. King
  Thomas H. King
  Chief Financial Officer
  (Principal financial and accounting officer)

 



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