As of June 29, 2020,
19,635,830 shares of the Company’s common stock, par value $0.0001 per share, were outstanding.
PART
I
Item
1. Business
Introduction
We
were incorporated as a blank check company on April 7, 2016 in Delaware for the purpose of entering into a merger, share exchange,
asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination with one or more target
businesses (a “Business Combination”).
The
registration statements for the Company’s initial public offering of securities (the “Initial Public Offering”)
were declared effective on July 27, 2017. On August 1, 2017, the Company consummated the Initial Public Offering of 27,000,000
units (“Units” and with respect to the common stock included in the Units, the “Public Shares”) at $10.00
per Unit, generating gross proceeds of $270,000,000.
Simultaneously
with the closing of the Initial Public Offering, the Company consummated the sale of private placement warrants (“Private
Placement Warrants”) at a price of $1.00 per Private Placement Warrant in a private placement (the “Private Placement”)
to the Sponsor, MasTec, Inc. and EarlyBirdCapital, Inc., generating gross proceeds of $9,500,000.
Following the closing
of the Initial Public Offering on August 1, 2017, an amount of $270,000,000 ($10.00 per Unit) from the net proceeds of the sale
of the Units in the Initial Public Offering and the Private Placement Warrants was placed in a trust account (the “Trust
Account”) and were invested in U.S. government securities, within the meaning set forth in Section 2(a)(16) of the Investment
Company Act of 1940, as amended (the “Investment Company Act”), with a maturity of 180 days or less or in any open-ended
investment company that holds itself out as a money market fund selected by the Company meeting the conditions of paragraphs (d)(2),
(d)(3) and (d)(4) of Rule 2a-7 of the Investment Company Act, as determined by the Company, until the earlier of: (i) the completion
of a Business Combination and (ii) the distribution of the Trust Account, as described below, except that interest earned on the
Trust Account can be released to pay the Company’s income tax obligations
On
August 4, 2017, the underwriters exercised their over-allotment option in full resulting in an additional 4,050,000 Units being
issued for $40,500,000, less the underwriters’ discount of $1,012,500, netting $39,487,500, which was deposited into the
Trust Account. In connection with the underwriters’ exercise of their over-allotment option in full, the Company also consummated
the sale of an additional 1,012,500 Private Placement Warrants at $1.00 per Private Placement Warrant, generating total gross
proceeds of $1,012,500, less the advance payment on August 1, 2017 of $600,000 towards this transaction (see Note 5), resulting
in another $412,500 being deposited into the Trust Account bringing the balance in the Trust Account on August 4, 2017 to $310,500,000.
Transaction
costs amounted to $8,646,303, consisting of $7,762,500 of underwriting fees, and $883,803 of other costs. In addition, as of December
31, 2019, $163,211 of cash was held outside of the Trust Account, available for working capital purposes.
On January 28, 2019,
at the Special Meeting in lieu of the 2019 Annual Meeting of the Company’s Stockholders (the “Special Meeting”),
the Company’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation
(the “Charter Amendment”) to extend the date by which the Company has to consummate a business combination (the “Extension”)
for an additional three months, from February 1, 2019 to May 1, 2019 (the “Extended Date”). The purpose of the Extension
is to allow the Company more time to complete a Business Combination. In connection with the Special Meeting and the resulting
Charter Amendment, 2,796,290 of the shares of the Company’s Common Stock were redeemed from funds available in the Trust
Account, for a redemption amount of approximately $10.18 per share.
On April 29, 2019, at the Special Meeting
in lieu of the 2019 Annual Meeting of the Company’s Stockholders (the “Special Meeting”), the Company’s
stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation (the “Charter
Amendment”) to extend the date by which the Company has to consummate a business combination (the “Extension”)
for an additional three months, from May 1, 2019 to August 1, 2019 (the “Extended Date”). The purpose of the Extension
is to allow the Company more time to complete a Business Combination. In connection with the Special Meeting and the resulting
Charter Amendment, 3,381,985of the shares of the Company’s Common Stock were redeemed from funds available in the Trust Account,
for a redemption amount of approximately $10.33 per share.
On July 18, 2019, at
the Special Meeting of the Company’s stockholders, the Company’s stockholders approved an amendment to the Company’s
Amended and Restated Certificate of Incorporation to extend the date by which the Company has to consummate a business combination
for an additional four months, from August 1, 2019 to December 1, 2019. The affirmative vote of at least a majority of the outstanding
shares of Common Stock was required to approve the extension. The charter amendment was approved with 11,297,309 votes cast in
favor of the proposal, 886,001 votes cast against the proposal and no abstentions. The purpose of the extension was to allow the
Company more time to complete a business combination. In connection with the special meeting and the resulting charter amendment,
5,754,273 of the shares of the Company’s Common Stock were redeemed from funds available in the Trust Account, for a redemption
amount of approximately $10.48 per share.
On
July 25, 2019, we issued a press release announcing the execution
of the Agreement among the Company, Stratos Management Systems, Inc., a Delaware corporation (“Computex”), Tango Merger
Sub Corp., a Delaware corporation (“Merger Sub”) and Stratos Management Systems Holdings, LLC, a Delaware limited liability
company (“Holdings”), pursuant to which the Company agreed to acquire Computex in a transaction (the “Transaction”)
that would result in Computex becoming a wholly owned subsidiary of the Company. Computex is an industry-leading IT service provider
of choice focused on helping customers transform their businesses through technology. Computex offers a comprehensive portfolio
of managed IT services to a wide range of clients including Unified Communications-as-a-Service (“UCaaS”), directory
and messaging services, enterprise networking, cybersecurity, collaboration, data center, integration, storage, backup, virtualization,
and converged infrastructure. On December 20, 2019, we entered into Amendment No. 1 to the Agreement (the “Amendment”).
The Amendment amended the Agreement to, among other things, (i) reduce the aggregate merger consideration payable from $65 million
to $60 million, (ii) change the allocation of the merger consideration so that would be payable as follows: (a) an amount in cash
equal to two-thirds of the cash raised by Pensare in the PIPE transaction less $5 million, subject to a cap of $20 million, (b)
$5 million of any securities, other than shares of Pensare’s common stock, sold in the PIPE transaction (the “PIPE
Securities”), and (c) the balance of the merger consideration in shares of the Company’s common stock, (iii) provide
for the optional redemption of some or all of the PIPE Securities following the closing of the merger, to the extent that Pensare
raises additional funds in private placements following the of the merger, (iv) adjust a condition to the closing of the merger
to require that Pensare shall have at least an aggregate of $35 million of cash held either in or outside of the Trust Account
at the effective time of the merger (reduced from $150 million); and (v) adjust the date by which the closing of the merger must
occur from December 31, 2019 to April 1, 2020.
On
November 26, 2019, at the Special Meeting of the Company’s stockholders, the Company’s stockholders approved an amendment
to the Company’s Amended and Restated Certificate of Incorporation to extend the date by which the Company has to consummate
a business combination for an additional four months, from December 1, 2019 to April 1, 2020. The affirmative vote of at least
a majority of the outstanding shares of common stock was required to approve the charter amendment. The charter amendment was
approved with 7,731,372 votes cast in favor of the proposal, one vote cast against the proposal and no abstentions. The purpose
of the extension was to allow the Company more time to complete a business combination. In connection with the special meeting
and the resulting charter amendment, 135,288 of the shares of the Company’s common stock were redeemed from funds available
in the Trust Account, for a redemption amount of approximately $10.56 per share.
In
connection with the proposed Transaction, the Company filed a definitive proxy statement with the Securities Exchange Commission
(“SEC”) relating to the Transaction on February 13, 2020. The definitive proxy statement was mailed to the Company’s
stockholders as of a record date established for voting on the Transaction.
On
February 27, 2020, the Company held a special meeting of stockholders in connection with the proposed business combination of
the Company and Computex. At the special meeting, the Company’s stockholders approved the Business Combination Proposal,
the Certificate Proposal and the Incentive Plan Proposal, in each case as defined and described in greater detail in the definitive
proxy statement. Approval of the Business Combination Proposal required the affirmative vote of a majority of the outstanding
shares of the Company’s common stock present and entitled to vote at the Special Meeting. Approval of the Certificate Proposal
required the affirmative vote of a majority of the outstanding shares of the Company’s common stock entitled to vote at
the Special Meeting. Approval of the Incentive Plan Proposal required the affirmative vote of the holders of a majority of the
shares of the Company’s common stock that were voted thereon at the Special Meeting. Each of the proposals were approved
with 6,030,888 votes cast in favor of the proposals, two votes cast against the proposals and no abstentions. 91,637 shares of
the Company’s common stock were redeemed in connection with the special meeting.
On April 3, 2020, the Company, Merger Sub,
Holdings, and Computex entered into Amendment No. 2, which provided for, among other things: (i) changing the aggregate merger
consideration payable to $65 million (subject to adjustment based on Computex’s working capital and net debt at closing),
consisting of $20 million of units of the Company, shares of Pensare’s common stock, and the assumption of Computex’s
indebtedness; (ii) extending the date by which the combined company must file a resale registration statement from five days to
fifteen business days following the closing of the Transaction; (iii) the right of Holdings to nominate one, two or three members
of the board of directors of the combined company, provided that Holdings owns at least 10%, 30% or 50%, respectively, of the
stock consideration and converted shares, collectively, issuable to Holdings in connection with the closing of the Transaction;
(iv) adjusting certain terms and definitions relating to the consideration issued in the Transaction to, among other things, provide
for the Units to be issued by the Company in the private placement; (v) the removal of the previously contemplated Lock-Up Agreement
by and among the Company, Holdings and Navigation Capital Partners II, L.P.; and (vi) the acknowledgement by the Company and Merger
Sub that certain actions taken by Computex prior to the effective time of the Transaction related to the Coronavirus Disease 2019
shall not constitute a Company Material Adverse Effect under the Agreement.
Also on April 3, 2020,
the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) pursuant to which certain
investors (each an “Investor”) agreed to purchase, and the Company agreed to sell to the Investors, in a private placement
(the “Private Placement”), units of securities of the Company (“Units”), each Unit consisting 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 the Company’s common stock at an exercise price of $0.01 per whole share. The initial closing of the
sale of Units pursuant to the Securities Purchase Agreement was contingent upon, among other customary closing conditions, the
substantially concurrent consummation of the Transaction, and occurred on April 7, 2020.
On
April 7, 2020, we consummated the transaction pursuant to the Agreement pursuant to which Computex merged with and into Merger
Sub (the “Merger”), with Merger Sub surviving the Merger as a wholly owned subsidiary of the Company.
In
connection with the Closing, the Company changed its name from “Pensare Acquisition Corp.” to “American Virtual
Cloud Technologies, Inc.” and Merger Sub changed its name from “Tango Merger Sub Corp.” to “Stratos Management
Systems, Inc.” As a result of the consummation of the Merger, the Company ceased to be a shell company, as defined in Rule
12b-2 of the Exchange Act, as of the Closing Date.
Employees
As
of March 31, 2020, we had three executive officers. These individuals are not obligated to devote any specific number of hours
to our matters and intend to devote only as much time as they deem necessary to our affairs. The amount of time they will devote
in any time period will vary based on whether a target business has been selected for the business combination and the stage of
the business combination process the company is in. Subsequent to the closing of the Business Combination, the Company has seven
full-time employees including three executive officers.
Periodic
Reporting and Audited Financial Statements
We
have registered our units, common stock, rights and warrants under the Securities Exchange Act of 1934 (the “Exchange Act”)
and have reporting obligations, including the requirement that we file annual, quarterly and current reports with the SEC. In
accordance with the requirements of the Exchange Act, our annual report will contain financial statements audited and reported
on by our independent registered public accountants. These filings are available to the public via the Internet at the SEC’s
website located at http://www.sec.gov. You may also read and copy any document that we file with the SEC at the SEC’s public
reference room located at 100 F Street, N.E., Washington, D.C. 20549. For more information, please call the SEC at 1-800-SEC-0330.
You may request a copy of our filings with the SEC (excluding exhibits) at no cost by writing or telephoning us at the following
address or telephone number:
American
Virtual Cloud Technologies, Inc.
1720
Peachtree Street
Suite
629
Atlanta,
GA 30309
Tel:
(404) 234-3098
We
are an emerging growth company as defined in the JOBS Act and will remain such for up to five years. However, if our non-convertible
debt issued within a three-year period exceeds $1.0 billion or our total annual revenues exceed $1.07 billion or the market value
of our ordinary shares that are held by non-affiliates exceeds $700 million on the last day of the second fiscal quarter of any
given fiscal year, we would cease to be an emerging growth company as of the following fiscal year. As an emerging growth company,
we have elected, under Section 107(b) of the JOBS Act, to take advantage of the extended transition period provided in Section
7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards.
Item
1A. Risk Factors
An
investment in our common stock involves a high degree of risk. You should consider carefully all of the risks described below,
together with the other information contained in this Current Report on Form 10-K, before making a decision to invest in our common
stock. If any of the following events occur, our business, financial condition and operating results may be materially adversely
affected. In that event, the trading price of our common stock could decline, and you could lose all or part of your investment.
Risks
Related to Our Business and Industry
General
economic weakness may harm the Company’s operating results and financial condition.
The
Company’s results of operations are largely dependent upon the state of the economy. Global economic weakness and uncertainty
may result in decreased sales, gross margin, earnings and/or growth rates from its U.S. based customers and from customers outside
the U.S. In addition, material changes in trade agreements between the U.S. and other countries may, for example, negatively affect
the Company’s ability to purchase product, and import or export product, increasing product pricing and negatively impacting
availability of product. Adverse economic conditions may decrease the Company’s customers’ demand for its products
and services or impair the ability of its customers to pay for products and services they have purchased. As a result, the Company’s
sales could decrease, and reserves for its credit losses and write-offs of receivables may increase.
The
Company’s business could be adversely affected by the recent coronavirus (COVID-19) outbreak.
In
December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China, which has and is continuing
to spread throughout China and other parts of the world, including the United States. On January 30, 2020, the World Health Organization
declared the outbreak of COVID-19 a “Public Health Emergency of International Concern.” On January 31, 2020, U.S.
Health and Human Services Secretary Alex M. Azar II declared a public health emergency for the United States to aid the U.S. healthcare
community in responding to COVID-19, and on March 11, 2020, the World Health Organization characterized the COVID-19 outbreak
as a “pandemic.” The COVID-19 outbreak has severely restricted the level of economic activity within the United States
and around the world.
In
response to the COVID-19 outbreak, the governments of many countries, states, cities and other geographic regions have taken preventative
or protective actions, such as imposing restrictions on travel and business operations. Temporary closures of businesses have
been ordered and numerous other businesses have temporarily closed voluntarily. These actions may continue to expand in scope,
type and impact. These measures, while intended to protect human life, are expected to have significant adverse impacts on domestic
and foreign economies of uncertain severity and duration. It is likely that the current outbreak or continued spread of COVID-19
will cause an economic slowdown, which may result in a global recession. The effectiveness of economic stabilization efforts being
taken to mitigate the effects of the COVID-19 outbreak is currently uncertain.
A
public health pandemic, including COVID-19, poses the risk that the Company or its affiliates, employees, suppliers, customers
and others may be prevented from conducting business activities for an indefinite period of time, including as a result of shutdowns,
travel restrictions and other actions that may be requested or mandated by governmental authorities. Such actions may prevent
the Company from accessing the facilities of its customers to deliver products and provide services. In addition, the Company’s
customers may choose to delay or abandon projects on which it provides products and/or services as a result of such actions. Further,
the Company has experienced, and may continue to experience, disruptions or delays in its supply chain as a result of such actions.
The Company can give no assurance that its businesses will be classified as essential in each of the jurisdictions in which it
operates.
The
COVID-19 outbreak has impacted, and may continue to impact, the Company’s facilities, as well as those of its third-party
vendors and customers, including through the effects of facility closures, reductions in operating hours and other social distancing
efforts. In addition, the Company has modified its business practices (including employee travel, employee work locations, and
cancellation of physical participation in meetings, events and conferences), and the Company may take further actions as may be
required by government authorities or that the Company determines are in the best interests of its employees, customers, partners,
and suppliers.
The
Company’s liquidity could be negatively impacted if these conditions continue for a significant period of time and we may
be required to pursue additional sources of financing to obtain working capital, maintain appropriate inventory levels and meet
our financial obligations. Our ability to obtain any required financing is not guaranteed and largely dependent upon evolving
market conditions and other factors. Depending on the continued impact of the COVID-19 outbreak, further actions may be required
to improve the Company’s cash position and capital structure. The Company cannot assure you that it would be able to take
any of these actions on terms that are favorable to the Company or at all, that these actions would be successful and permit the
Company to meet its scheduled debt service obligations or satisfy its capital requirements, or that these actions would be permitted
under the terms of its existing or future debt agreements, including the Company’s Comerica Credit Agreement assumed by
American Virtual as of April 7, 2020 (the “Credit Agreement”).
The
Company may also experience impacts from market downturns and changes in demand for the Company’s products and services
related to pandemic fears and impacts on its workforce as a result of COVID-19. If the COVID-19 outbreak becomes more pronounced
in the Company’s markets, or if another significant natural disaster or pandemic were to occur in the future, the Company’s
operations in areas impacted by such events could experience further adverse financial impacts due to market changes and other
resulting events and circumstances. The extent to which the COVID-19 outbreak impacts the Company’s results of operations,
financial condition and cash flows will depend on future developments that are highly uncertain and cannot be predicted, including
new information that may emerge concerning the severity of COVID-19, the longevity of COVID-19 and the actions to contain COVID-19
or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Although it is difficult
to predict the effect and ultimate impact of the COVID-19 outbreak on the Company’s business, it is likely that the impact
of COVID-19 will adversely affect the Company’s results of operations, financial conditions and cash flows in fiscal year
2020.
Even
after the COVID-19 outbreak has subsided, the Company may continue to experience significant impacts to its business as a result
of the global economic impact of the COVID-19 outbreak, including any economic downturn or recession or other long-term effects
that have occurred or may occur in the future.
If
the Company loses one or more of its large volume customers, its earnings may be materially affected.
Many
of the contracts for the provision of products and services from the Company to its customers are generally non-exclusive agreements
without volume purchase commitments and are terminable by either party upon 30 days’ notice. The loss of one or more of
its largest customers, the failure of such customers to pay amounts due to it, or a material reduction in the amount of purchases
made by such customers could have a material adverse effect on the Company’s business, financial position, results of operations
and cash flows.
Changes
in the IT industry, customers’ usage or procurement of IT, and/or rapid changes in product standards may result in reduced
demand for the IT hardware and software solutions and services the Company sells.
The
Company’s results of operations are influenced by a variety of factors, including the condition of the IT industry, shifts
in demand for, or availability of, IT hardware, software, peripherals and services, and industry introductions of new products,
upgrades, methods of distribution, and the nature of how IT is consumed and procured. The IT industry is characterized by rapid
technological change and the frequent introduction of new products, product enhancements and new distribution methods or channels,
each of which can decrease demand for current products or render them obsolete. In addition, the proliferation of cloud technology,
infrastructure as a service (IaaS), software as a service (SaaS), platform as a service (PaaS), software defined networking, or
other emerging technologies may reduce the demand for products and services the Company sells to its customers. Cloud offerings
may influence the Company’s customers to move workloads to cloud providers, which may reduce the procurement of products
and services from the Company. Changes in the IT industry may also affect the demand for the Company’s advanced professional
and managed services. The Company has invested a significant amount of capital in personnel, and this strategy may adversely impact
its financial position due to competition or changes in the industry or improper focus or selection of the products and services
the Company decides to offer. If the Company fails to react in a timely manner to such changes, its results of operations may
be adversely affected. The Company’s sales can be dependent on demand for specific product categories, and any change in
demand for or supply of such products could have a material adverse effect on its results of operations.
A
substantial or an extended decline in oil and gas prices could result in lower expenditures by the Company’s customers in
the oil and gas industry, which could have a material adverse impact on its financial condition, results of operations and cash
flows.
Demand
for the Company’s products and services depends on expenditures by its customers involved in the oil and natural gas industry.
These expenditures are generally dependent on the Company’s customers’ views of future oil and natural gas prices
and are sensitive to its customers’ views of future economic growth and the resulting impact on demand for oil and natural
gas. Declines, as well as anticipated declines, in oil and gas prices could result in project modifications, delays or cancellations,
general business disruptions, and delays in payment of, or nonpayment of, amounts that are owed to the Company. These effects
could have a material adverse effect on the Company’s financial condition, results of operations and cash flows. The oil
and gas industry has historically experienced periodic downturns, which have been characterized by diminished demand for the Company’s
products and services as well as and downward pressure on the prices it charges. Sustained market uncertainty can also result
in lower demand and pricing for the Company’s products and services within such industry. A significant downturn or sustained
market uncertainty could result in a reduction in demand for the Company’s services and could adversely affect its financial
condition, results of operations and cash flows.
The
Company may fail to innovate or create new solutions which align with changing market and customer demand.
As
a provider of a comprehensive set of solutions, which involves the offering of bundled solutions consisting of direct IT sales,
advanced professional and managed services, the Company expects to encounter some of the challenges, risks, difficulties, and
uncertainties frequently encountered by companies providing bundled solutions in rapidly evolving markets. Some of these challenges
include the Company’s ability to increase the total number of users of its services or adapt to meet changes in its markets
and competitive developments. The Company’s personnel must continually stay current with vendor and marketplace technology
advancements, create solutions which may integrate evolving vendor products and services as well as services and solutions the
Company provides, to meet changing marketplace and customer demand. Further, the Company may provide customized solutions and
services that are solely reliant on its own marketing, design and fulfillment services, and the Company may lack the skills or
personnel to execute. The Company’s failure to innovate and provide value to its customers may erode its competitive position
and market share and may lead to a decrease in revenue and financial performance.
In
all of the Company’s markets, some of its competitors have greater financial, technical, marketing, and other resources
than the Company does. In addition, some of these competitors may be able to respond more quickly to new or changing opportunities,
technologies, and customer requirements. Many current and potential competitors engage in more extensive promotional marketing
and advertising activities, offer more attractive terms to customers, and adopt more aggressive pricing and credit policies than
the Company does. The Company may not be successful in achieving revenue growth which may have a material adverse effect on its
future operating results as a whole.
The
Company’s business depends on its vendor partner relationships and the availability of their products.
The
Company’s solutions portfolio includes products from OEMs, software publishers and cloud providers. The Company is authorized
by these vendor partners to sell all or some of their products via direct marketing activities. Its authorization with each vendor
partner is subject to specific terms and conditions regarding such things as sales channel restrictions, product return privileges,
price protection policies, purchase discounts and vendor partner programs and funding, including purchase rebates, sales volume
rebates, purchasing incentives and cooperative advertising reimbursements. However, the Company does not have any long-term contracts
with its vendor partners and many of these arrangements are terminable upon notice by either party. A reduction in vendor partner
programs or funding or the Company’s failure to timely react to changes in vendor partner programs or funding could have
an adverse effect on the Company’s business, results of operations or cash flows. In addition, a reduction in the amount
or a change in the terms of credit granted to the Company by its vendor partners could increase the Company’s need for,
and the cost of, working capital and could have an adverse effect on the Company’s business, results of operations or cash
flows, particularly given the Company’s substantial indebtedness.
From
time to time, vendor partners may terminate or limit the Company’s right to sell some or all of their products or change
the terms and conditions or reduce or discontinue the incentives that they offer the Company. For example, there is no assurance
that, as the Company’s vendor partners continue to sell directly to end users and through resellers, they will not limit
or curtail the availability of their products to solutions providers like the Company. Any such termination or limitation or the
implementation of such changes could have a negative impact on the Company’s business, results of operations or cash flows.
The
Company purchases the products included in its solutions portfolio both directly from its vendor partners and from wholesale distributors.
Although the Company purchases from a diverse vendor base, in the year ended December 31, 2019, products it purchased from wholesale
distributors Ingram Micro and Techdata, both represented more than 5% of total purchases. In addition, sales of products manufactured
by Cisco, Dell, and Nutanix whether purchased directly from these vendor partners or from a wholesale distributor, represented
in the aggregate nearly 30% of the Company’s fiscal year 2019 consolidated net sales. The loss of, or change in business
relationship with, any of these or any other key vendor partners, or the diminished availability of their products, including
due to backlogs for their products, could reduce the supply and increase the cost of products the Company sells and negatively
impact its competitive position.
Additionally,
the relocation of key distributors utilized in the Company’s purchasing model could increase its need for, and the cost
of, working capital and have an adverse effect on its business, results of operations or cash flows. Further, the sale, spin-off
or combination of any of the Company’s vendor partners and/or certain of their business units, including any such sale to
or combination with a vendor with whom the Company does not currently have a commercial relationship or whose products the Company
does not sell, could have an adverse impact on the Company’s business, results of operations or cash flows.
Breaches
of data security and the failure to protect the Company’s information technology systems from cybersecurity threats could
adversely impact its business.
The
Company’s business involves the storage and transmission of proprietary information and sensitive or confidential data,
including personal information of its employees, customers and others. In addition, the Company operates data centers for its
customers that host their technology infrastructure and may store and transmit both business-critical data and confidential information.
In connection with the Company’s services business, some of its employees also have access to its customers’ confidential
data and other information. The Company has privacy and data security policies in place that are designed to prevent security
breaches; however, as newer technologies evolve, and the portfolio of the service providers with which the Company shares
confidential information with grows, the Company could be exposed to increased risk of breaches in security and other illegal
or fraudulent acts, including cyberattacks. The evolving nature of such threats, in light of new and sophisticated methods used
by criminals and cyberterrorists, including computer viruses, malware, phishing, misrepresentation, social engineering and forgery,
are making it increasingly challenging to anticipate and adequately mitigate these risks.
The
Company may not be able to hire and/or retain personnel that it needs.
To
increase market awareness and sales of the Company’s offerings, the Company may need to expand its marketing efforts and
sales operations in the future. The Company’s products and services require a sophisticated sales effort and significant
technical engineering talent. For example, its sales and engineering candidates must have highly technical hardware and software
knowledge to create a customized solution for its customers’ business processes. Competition for qualified sales, marketing
and engineering personnel fluctuates depending on market conditions, and the Company may not be able to hire or retain sufficient
personnel to maintain and grow its business. Frequently, the Company’s competitors require their employees to agree to non-compete
and non-solicitation agreements as part of their employment. This makes it more difficult for the Company to hire and increases
the Company’s costs by reviewing and managing non-compete restrictions. Additionally, in some cases the Company’s
relationship with a customer may be impacted by turnover in its sales or engineering team. For example, in the first quarter of
fiscal year 2019, several sales representatives and managers voluntarily resigned their employment with the Company. These sales
representatives and managers were the relationship managers to a number of the Company’s customers. The loss of these customers
adversely affected the net sales of the Company for fiscal year 2019 and could have the same effect on subsequent periods if such
lost sales are not offset by the Company’s new sales representatives and newly acquired customers.
The
Company faces substantial competition from other companies.
In
its technology segment, the Company competes in all areas of its business against local, regional, national, and international
firms, including other direct marketers; national and regional resellers; online marketplace competitors; and regional
and national service providers. In addition, the Company faces competition from vendors, which may choose to market their products
directly to end-users, rather than through channel partners such as the Company, and this could adversely affect the Company’s
future sales. Many competitors compete based principally on price and may have lower costs or accept lower selling prices than
the Company does and, therefore, the Company’s gross margins may not be maintainable. Online market place competitors are
continually improving their pricing and offerings to customers as well as ease of use of their online marketplaces. The Company’s
competitors may offer better or different products and services than the Company offers. In addition, the Company does not have
guaranteed purchasing volume commitments from its customers and, therefore, its sales volume may be volatile.
The
Company may not have designed or maintained its IT systems to support its business.
The
Company depends heavily upon the accuracy and reliability of its information, telecommunication, cybersecurity and other systems
including the operation of redundant systems if there are failures in its primary systems, which are used for customer management,
sales, distribution, marketing, purchasing, inventory management, order processing and fulfillment, customer service and general
accounting functions. The Company must continually maintain, secure and improve its systems. The protections the Company has in
place address a variety of threats to its information technology systems, both internal and external, including human error. Inadequate
security practices or design of the Company’s IT systems, or IT systems from third-parties which it utilizes, or third-party
service providers’ failure to provide adequate services could result in the disclosure of sensitive or confidential information
or personal information or cause other business interruptions that could damage the Company’s reputation and disrupt its
business. Inadequate design or interruption of the Company’s information systems, Internet availability, telecommunications
systems or power failures could have a material adverse effect on its business, its reputation, financial condition, cash flows,
or results of operations.
The
Company’s managed services business requires it to monitor its customers’ devices on their networks across varying
levels of service. If the Company has not designed its IT systems to provide this service accurately or if there is a security
breach in its IT system or the customers’ systems, the Company may be liable for claims.
The
Company relies on the competency of its internal IT personnel. The Company’s failure to hire, develop, retain, and supervise
competent IT personnel to secure its data, design redundant systems, or design and maintain its technology systems including its
data and voice networks, and applications, could significantly interrupt its business causing a negative impact on its results.
The
Company may not adequately protect itself through its contracts, or its insurance policies may not be adequate to address potential
losses or claims.
The
Company’s contracts may not protect it against the risks inherent in its business including, but not limited to, warranties,
limitations of liability, indemnification obligations, human resources and subcontractor-related claims, patent and product liability,
regulatory and compliance obligations, and data security and privacy. Also, the Company faces pressure from its customers for
competitive pricing and contract terms. The Company also is subject to audits by various vendor partners and customers relating
to purchases and sales under various contracts. In addition, the Company is subject to indemnification claims under various contracts.
The
Company depends on having creditworthy customers to avoid an adverse impact on its operating results and financial condition.
If
the credit quality of the Company’s customer base materially decreases, or if the Company experiences a material increase
in its credit losses, the Company may find it difficult to continue to obtain the required capital for its business, and its operating
results and financial condition may be harmed. In addition to the impact on the Company’s ability to attract capital, a
material increase in its delinquency and default experience would itself have a material adverse effect on its business, operating
results, and financial condition.
The
Company’s ability to successfully attract and retain qualified sales personnel is important to its success.
The
Company’s success depends on its ability to attract, motivate, and retain a sufficient number of qualified sales representatives,
who understand and appreciate the Company’s strategy and culture and are able to adequately represent the Company to its
customers. Qualified individuals of the requisite caliber and number needed to fill these positions may be in short supply in
some areas. If the Company is unable to hire and retain personnel capable of consistently providing a high level of customer service
its sales could be materially adversely affected. Additionally, any material increases in existing employee turnover rates or
increases in labor costs could have a material adverse effect on the Company’s business, financial condition or operating
results.
The
Company may be liable for misuse of its customers’ or employees’ information.
Third-parties,
such as hackers, could circumvent or sabotage the security practices and products used in the Company’s product and service
offerings, and/or the security practices or products used in the Company’s internal IT systems, which could result in disclosure
of sensitive or personal information, unauthorized procurement, or other business interruptions that could damage the Company’s
reputation and disrupt its business. Attacks may range from random attempts to coordinated and targeted attacks, including sophisticated
computer crime and advanced persistent threats.
If
third-parties or the Company’s employees are able to maliciously penetrate its network security or otherwise misappropriate
its customers’ information or employees’ personal information, or other information for which its customers may be
responsible and for which the Company agrees to be responsible in connection with service contracts into which it may enter, or
if the Company gives third-parties or its employees improper access to certain information, the Company could be subject to liability.
This liability could include claims for unauthorized access to devices on its network; unauthorized access to its customers’
networks, applications, data, devices, or software; and identity theft or other similar fraud-related claims. This liability
could also include claims for other misuses of or inappropriate access to personal information. Other liability could include
claims alleging misrepresentation of the Company’s privacy and data security practices. Any such liability for misappropriation
of this information could decrease the Company’s profitability. In addition, federal and state agencies have been investigating
various companies regarding whether they misused or inadequately secured information. The Company could incur additional expenses
when new laws or regulations regarding the use of information are enacted, or if governmental agencies require the Company to
substantially modify its privacy or security practices. The Company could fail to comply with applicable data privacy laws, the
violation of which may result in audits, fines, penalties, litigation, or administrative enforcement actions with associated costs.
Advances
in computer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise
or breach of the security practices the Company uses to protect sensitive customer transaction information and employee information.
A party who is able to circumvent the Company’s security measures could misappropriate proprietary information or cause
interruptions in the Company’s operations. Further, third-parties may attempt to fraudulently induce employees or customers
into disclosing sensitive information such as user names, passwords, or other information or otherwise compromise the security
of the Company’s internal networks and/or its customers’ information. Since techniques used to obtain unauthorized
access change frequently and the size and severity of security breaches are increasing, the Company may be unable to implement
adequate preventative measures or timely identify or stop security breaches while they are occurring.
The
Company may be required to expend significant capital and other resources to protect against security breaches or to remediate
the subsequent risks and issues caused by such breaches. The Company’s security measures are designed to protect against
security breaches, but its failure to prevent such security breaches could cause it to incur significant expense to investigate
and respond to a security breach and correct any problems caused by any breach, subject it to liability, damage its reputation,
and diminish the value of its brand. There can be no assurance that the limitations of liability in Company contracts would be
enforceable or adequate or would otherwise protect the Company from any such liabilities or damages with respect to any particular
claim. The Company also cannot be sure that its existing insurance coverage for errors and omissions or security breaches will
continue to be available on acceptable terms or in sufficient amounts to cover one or more large claims, or that its insurers
will not deny coverage as to any future claim. The successful assertion of one or more large claims against the Company that exceeds
its available insurance coverage, or changes in its insurance policies, including premium increases or the imposition of large
deductible or co-insurance requirements, could have an adverse effect on the Company’s business, financial condition, and
results of operations.
Failure
to comply with new laws or changes to existing laws may adversely impact the Company’s business.
The
Company’s operations are subject to numerous U.S. laws and regulations in a number of areas including, but not limited to,
areas of labor and employment, immigration, advertising, e-commerce, tax, import and export requirements, data privacy requirements,
anti-competition, and environmental, health, and safety. Compliance with these laws, regulations, and similar requirements may
be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction, further increasing the cost of compliance
and doing business, and the risk of noncompliance. The Company has implemented policies and procedures designed to help comply
with applicable laws and regulations, but there can be no certainty that employees, contractors, or agents will fully comply with
laws and regulations or the Company’s policies and procedures.
Loss
of services by any of the Company’s executive officers or senior management and/or failure to successfully implement a succession
plan could adversely affect the Company’s business.
The
loss of the services by the Company’s executive officers or senior management and/or failure to successfully implement a
succession plan could disrupt management of the Company’s business and impair the execution of its business strategies.
The Company believes that its success depends in part upon its ability to retain the services of its executive officers and senior
management and successfully implement a succession plan. The Company’s executive officers are at the forefront in determining
its strategic direction and focus. The loss of its executive officers’ and senior management’s services without replacement
by qualified successors could adversely affect the Company’s ability to manage effectively its overall operations and successfully
execute current or future business strategies, and could cause other instability within the Company’s workforce.
The
Company relies on its primary credit facility for working capital and its accounts payable processing.
The
loss of the Company’s primary credit facility with Comerica Bank pursuant to the Credit Agreement could have a material
adverse effect on its future results as it relies on this facility and its components for daily working capital and the operational
function of its accounts payable process. The Credit Agreement contains various covenants that must be met each quarter and either
party may terminate the agreement for any reason with a 90-days’ notice. There can be no assurance that the Company will
continue to meet those covenants and failure to do so may limit availability of, or cause the Company to lose, such financing.
There can be no assurance that such financing will continue to be available to the Company in the future on acceptable terms.
Changes
in accounting standards, or the misapplication of current accounting standards, may adversely affect the Company’s future
financial results.
The
Company prepares its financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”).
These accounting principles are subject to interpretation by the Financial Accounting Standards Board, the Public Company Accounting
Oversight Board (“PCAOB”), the SEC, the American Institute of Certified Public Accountants (“AICPA”) and
various other bodies formed to interpret and create appropriate accounting policies. Future periodic assessments required by current
or new accounting standards may result in noncash charges and/or changes in presentation or disclosure. In addition, any change
in accounting standards may influence the Company’s customers’ decision to purchase from the Company or finance transactions
with the Company, which could have a significant adverse effect on the Company’s financial position or results of operations.
The
Company is required to determine if it is the principal or agent in all transactions with its customers. The voluminous number
of products and services the Company sells, and the manner in which they are bundled, are technologically complex. Mischaracterization
of these products and services could result in misapplication of revenue recognition polices. The Company uses estimates where
necessary, such as the fair value of assets acquired, and liabilities assumed in a business combination, the analysis for goodwill
impairment, allowance for doubtful accounts and the cost to perform professional and managed services, which require judgment
and are based on best available information. If the Company is unable to accurately estimate the cost of these services or the
time-line for completion of contracts, the profitability of its contracts may be materially and adversely affected.
A
natural disaster or other adverse occurrence at one of the Company’s facilities could damage its business.
The
Company has one warehouse and distribution facility in the U.S. If the warehouse and distribution equipment at its distribution
center were to be seriously damaged by a natural disaster or other adverse occurrence, the Company could utilize another distribution
center or third-party distributors to ship products to its customers. However, this may not be sufficient to avoid interruptions
in the Company’s service and may not enable the Company to meet all of the needs of its customers and would cause the Company
to incur incremental operating costs. In addition, the Company operates two customer facing data centers which contain its Securities
Operations Center, Network Operations Center, and numerous sales offices which may contain both business-critical data and confidential
information of the Company’s customers. A natural disaster or other adverse occurrence at any of the customer data centers
or at any of the Company’s major sales offices could negatively impact its business, results of operations or cash flows.
The
Company could be exposed to additional risks if it continues to make strategic investments or acquisitions or enter into alliances.
The
Company may continue to pursue transactions, including strategic investments, acquisitions or alliances, in an effort to extend
or complement its existing business. These types of transactions involve numerous business risks, including finding suitable transaction
partners and negotiating terms that are acceptable to the Company, the diversion of management’s attention from other business
concerns, extending the Company’s product or service offerings into areas in which the Company has limited experience, entering
into new geographic markets, the potential loss of key coworkers or business relationships and successfully integrating acquired
businesses. There can be no assurance that the intended benefits of the Company’s investments, acquisitions and alliances
will be realized, or that those benefits will offset these numerous risks or other unforeseen factors, any of which could adversely
affect the Company’s business, results of operations or cash flows.
In
addition, the Company’s financial results could be adversely affected by financial adjustments required by U.S. GAAP in
connection with these types of transactions where significant goodwill or intangible assets are recorded. To the extent the value
of goodwill or identifiable intangible assets with indefinite lives becomes impaired, the Company may be required to incur material
charges relating to the impairment of those assets.
The
Company may be required to take impairment charges for goodwill or other intangible assets related to acquisitions.
The
Company has acquired certain portions of its business and assets through acquisitions. Further, as part of its long-term business
strategy, the Company may continue to pursue acquisitions of other companies or assets. In connection with prior acquisitions,
the Company has accounted for the portion of the purchase price paid in excess of the book value of the assets acquired as goodwill
or intangible assets, and it may be required to account for similar premiums paid on future acquisitions in the same manner.
Under
the applicable accounting principles, goodwill is not amortized and is carried on the Company’s books at its original value,
subject to annual review and evaluation for impairment, whereas intangible assets are amortized over the life of the asset. Changes
in the business itself, the economic environment (including business valuation levels and trends), or the legislative or regulatory
environment may trigger a review and evaluation of the Company’s goodwill and intangible assets for potential impairment
outside of the normal review periods. These changes may adversely affect either the fair value of the business or the Company’s
individual reporting units and the Company may be required to take an impairment charge.
If
market and economic conditions deteriorate, this could increase the likelihood that the Company will need to record impairment
charges to the extent the carrying value of its goodwill exceeds the fair value of its overall business. Such impairment charges
could materially adversely affect the Company’s net earnings during the period in which the charge is taken. As of December
31, 2019, the Company had goodwill and other intangible assets of $21.2 million and $2.4 million, respectively.
The
Company faces risks of claims from third-parties for intellectual property infringement, including counterfeit products, that
could harm its business.
The
Company may be subject to claims that products that it resells infringe on the intellectual property rights of third-parties and/or
are counterfeit products. The vendor of certain products or services the Company resells may not provide the Company with indemnification
for infringement or indemnification; however, the Company’s customers may seek indemnification from the Company. The
Company could incur substantial costs in defending infringement claims against itself and its customers. In the event of such
claims, the Company and its customers may be required to obtain one or more licenses from third-parties. The Company may not be
able to obtain such licenses from third-parties at a reasonable cost or at all. Defense of any lawsuit or failure to obtain any
such required license could significantly increase the Company’s expenses and/or adversely affect its ability to offer one
or more of its services.
Risks
Related to Our Indebtedness
The
Company has a substantial amount of indebtedness, which could have important consequences to its business.
The
Company has a substantial amount of indebtedness. As of March 31, 2020, the Company had $16.4 million of total debt outstanding,
as defined by U.S. GAAP, and $0.2 million of obligations outstanding under equipment financing agreements, and the ability to
borrow an additional $10.9 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:
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making
it more difficult for the Company to satisfy its obligations with respect to its indebtedness;
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requiring
the Company to dedicate a substantial portion of its cash flow from operations to debt
service payments on its and its subsidiaries’ debt, which reduces the funds available
for working capital, capital expenditures, acquisitions and other general corporate purposes;
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requiring
the Company to comply with restrictive covenants in the Credit Agreement, which limit
the manner in which it conducts its business;
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making
it more difficult for the Company to obtain vendor financing from its vendor partners,
including original equipment manufacturers and software publishers;
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limiting
the Company’s flexibility in planning for, or reacting to, changes in the industry
in which it operates;
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placing
the Company at a competitive disadvantage compared to any of its less-leveraged competitors;
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increasing
the Company’s vulnerability to both general and industry-specific adverse economic
conditions; and
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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.
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Restrictive
covenants under the Credit Agreement may adversely affect its operations and liquidity.
The
Credit Agreement contains and any future indebtedness of the Company may contain, various covenants that limit its ability to,
among other things:
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incur
or guarantee additional debt;
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pay
dividends or make distributions to holders of the Company’s capital stock or to
make certain other restricted payments or investments;
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repurchase
or redeem capital stock;
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make
loans, capital expenditures or investments or acquisitions;
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receive
dividends or other payments from its subsidiaries;
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enter
into transactions with affiliates;
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pledge
its assets as collateral;
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merge
or consolidate with other companies or transfer all or substantially all of its assets;
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transfer
or sell assets, including capital stock of subsidiaries; and
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prepay,
repurchase or redeem debt.
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As
a result of these covenants, the Company is limited in the manner in which it conducts its business and it may be unable to engage
in favorable business activities or finance future operations or capital needs. A breach of any of these covenants or any of the
other covenants in the Credit Agreement (including without limitation financial covenants) would result in a default under the
Credit Agreement. Upon the occurrence of an event of default under the Credit Agreement, the lenders:
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will
not be required to lend any additional amounts to the Company;
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could
elect to declare all borrowings outstanding thereunder, together with accrued and unpaid
interest and fees, to be due and payable; or
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could
require the Company to apply all of its available cash to repay these borrowings.
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If
the Company were unable to repay those amounts, the lender under the Credit Agreement could proceed against the collateral granted
to it to secure the Company’s borrowings thereunder. The Company has pledged a significant portion of its assets as collateral
under the Credit Agreement. If the lender under the Credit Agreement accelerates the repayment of borrowings, the Company cannot
assure you that it will have sufficient assets to repay the Credit Agreement and its other indebtedness or the ability to borrow
sufficient funds to refinance such indebtedness. Even if the Company were able to obtain new financing, it may not be on commercially
reasonable terms, or terms that are acceptable to the Company.
As of March 31, 2020,
under the Credit Agreement’s revolving credit facility, the Company is permitted to borrow up to $20.0 million. However,
its ability to borrow under the Credit Agreement is limited by a borrowing base and a liquidity condition. The borrowing base
at any time equals the sum of up to 85% of eligible accounts receivable plus 50% of eligible inventory. The borrowing base in
effect as of March 31, 2020 was $10.4 million and, therefore, did restrict the Company’s ability to borrow under the Credit
Agreement as of that date.
The
Company will be required to generate sufficient cash to service its indebtedness and, if not successful, the Company may be forced
to take other actions to satisfy its obligations under its indebtedness.
The
Company’s ability to make scheduled payments on or to refinance its debt obligations depends on its financial and operating
performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors
beyond its control. The Company’s outstanding long-term debt will impose significant cash interest payment obligations on
the Company and, accordingly, the Company will have to generate significant cash flow from operating activities to fund its debt
service obligations. The Company cannot assure you that it will maintain a level of cash flows from operating activities sufficient
to permit it to pay the principal, premium, if any, and interest on its indebtedness.
If
the Company’s cash flows and capital resources are insufficient to fund its debt service obligations, the Company may be
forced to reduce or delay capital expenditures, sell assets or operations, seek additional debt or equity capital, restructure
or refinance its indebtedness, or revise or delay its strategic plan. The Company cannot assure you that it would be able to take
any of these actions on terms that are favorable to the Company or at all, that these actions would be successful and permit the
Company to meet its scheduled debt service obligations or satisfy its capital requirements, or that these actions would be permitted
under the terms of its existing or future debt agreements, including the Credit Agreement. In the absence of such operating results
and resources, the Company could face substantial liquidity problems and might be required to dispose of material assets or operations
to meet its debt service and other obligations. The Credit Agreement restricts the Company’s ability to dispose of assets
and use the proceeds from the disposition. The Company may not be able to consummate those dispositions or to obtain the proceeds
which it could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.
If
the Company cannot make scheduled payments on its debt, it will be in default and, as a result:
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the
Company’s debt holders could declare all outstanding principal and interest to
be due and payable;
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the
lenders under the Credit Agreement could foreclose against the assets securing the borrowings
from them and the lenders under the Credit Agreement could terminate their commitments
to lend it money; and
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the
Company could be forced into bankruptcy or liquidation.
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Despite
the Company’s indebtedness levels, the Company may be able to incur substantially more debt, including secured debt. This
could further increase the risks associated with its leverage.
The
Company may be able to incur substantial additional indebtedness in the future. The terms of the Credit Agreement do not
fully prohibit it from doing so. To the extent that the Company incurs additional indebtedness, the risks associated with its
substantial indebtedness described above, including its possible inability to service its debt, will increase. As of March
31, 2020, the Company had $10.9 million available for additional borrowing under the Credit Agreement, subject to a borrowing
base and a liquidity condition.
Variable
rate indebtedness subjects the Company to interest rate risk, which could cause its debt service obligations to increase significantly.
Certain of the Company’s
borrowings, primarily borrowings under the Credit Agreement, are at variable rates of interest and expose the Company to interest
rate risk. As of March 31, 2020, the Company had $15.8 million of variable rate debt outstanding. If interest rates increase, the
Company’s debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained
the same, and its net income would decrease.
Risks
Related to Our Securities and the Business Combination
Nasdaq
may delist our securities from quotation on its exchange which could limit investors’ ability to make transactions in our
securities and subject us to additional trading restrictions.
Our
common stock and warrants are currently listed on Nasdaq. There can be no assurance that we will continue to be able to meet Nasdaq’s
listing standards with respect to our securities. If Nasdaq delists our common stock from trading on its exchange for failure
to meet the listing standards, we and our stockholders could face significant material adverse consequences including:
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a
limited availability of market quotations for our securities;
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reduced
liquidity with respect to our securities;
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a
determination that our shares of common stock are “penny stock” which will
require brokers trading in our shares of common stock to adhere to more stringent rules,
possibly resulting in a reduced level of trading activity in the secondary trading market
for our shares of common stock;
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a
limited amount of news and analyst coverage for our company; and
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a
decreased ability to issue additional securities or obtain additional financing in the
future.
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On
April 9, 2020, the Company received a letter (the “Determination Letter”) from Nasdaq notifying the Company that it
had not complied with the requirements of Nasdaq Listing Rule IM-5101-2, which requires that the Company meet the requirements
for initial listing after completion of the Business Combination. The Determination Letter stated that the Company’s common
stock does not meet the minimum $4.00 bid price and the $15 million market value of publicly held shares requirements, which are
set forth in Nasdaq Listing Rule 5505. On May 27, 2020 Nasdaq granted the Company an extension to September 7, 2020 to demonstrate
compliance Nasdaq Listing Rule IM-5101-2.
The
National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating
the sale of certain securities, which are referred to as “covered securities.” Because our common stock and warrants
are currently listed on Nasdaq, our common stock and warrants are covered securities. Although the states are preempted from regulating
the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud,
and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular
case. Further, if we were no longer listed on Nasdaq, our securities would not be covered securities and we would be subject to
regulation in each state in which we offer our securities.
If
the Business Combination’s benefits do not meet the expectations of investors or securities analysts, the market price of
our securities may decline.
If
the benefits of the Business Combination do not meet the expectations of investors or securities analysts, the market price of
our securities may decline. Fluctuations in the price of our securities could contribute to the loss of all or part of your investment.
Prior to the Business Combination, there was not a public market for Computex’s securities. Even if an active market for
our securities develops and continues, the trading price of our securities could be volatile and subject to wide fluctuations
in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse
effect on your investment in our securities and our securities may trade at prices significantly below the price you paid for
them. In such circumstances, the trading price of our securities may not recover and may experience a further decline.
Factors
affecting the trading price of our securities may include:
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actual
or anticipated fluctuations in our quarterly financial results or the quarterly financial
results of companies perceived to be similar to us;
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changes
in the market’s expectations about our operating results;
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success
of competitors;
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our
operating results failing to meet the expectation of securities analysts or investors
in a particular period;
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changes
in financial estimates and recommendations by securities analysts concerning the Company
or the IT industry in general;
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operating
and stock price performance of other companies that investors deem comparable to the
Company;
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our
ability to market new and enhanced products on a timely basis;
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changes
in laws and regulations affecting our business;
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our
ability to meet compliance requirements;
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commencement
of, or involvement in, litigation involving the Company;
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changes
in our capital structure, such as future issuances of securities or the incurrence of
additional debt;
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the
volume of shares of our common stock available for public sale;
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any
major change in our board of directors or management;
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sales
of substantial amounts of common stock by our directors, executive officers or significant
stockholders or the perception that such sales could occur; and
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general
economic and political conditions such as recessions, interest rates, fuel prices, international
currency fluctuations, acts of war or terrorism and global health crises, including the
coronavirus (COVID-19) pandemic.
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Broad
market and industry factors may materially harm the market price of our securities irrespective of our operating performance.
The stock market in general, and Nasdaq in particular, have experienced price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these
stocks, and of our securities, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks
of other companies which investors perceive to be similar to the Company could depress our stock price regardless of our business,
prospects, financial conditions or results of operations. A decline in the market price of our securities also could adversely
affect our ability to issue additional securities and our ability to obtain additional financing in the future.
The
JOBS Act permits the Company to take advantage of certain exemptions from various reporting requirements applicable to other public
companies that are not emerging growth companies for so long as the Company is an “emerging growth company.”
The
Company qualifies as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified
by the JOBS Act. As such, the Company is eligible for and intends to take advantage of certain exemptions from various reporting
requirements applicable to other public companies that are not emerging growth companies for as long as it continues to be an
emerging growth company, including (i) the exemption from the auditor attestation requirements with respect to internal control
over financial reporting under Section 404 of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and
say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in its periodic
reports and proxy statements. The Company will remain an emerging growth company until the earliest of (i) the last day of the
fiscal year in which the market value of its common stock that is held by non-affiliates exceeds $700 million as of June 30 of
that fiscal year, (ii) the last day of the fiscal year in which it has total annual gross revenue of $1.07 billion or more during
such fiscal year, (iii) the date on which it has issued more than $1 billion in non-convertible debt in the prior three-year period
or (iv) the last day of the fiscal year following the fifth anniversary of the date of the first sale of its common stock in the
IPO, which would be December 31, 2022. If the Company continues to expand its business through acquisitions and/or continues to
grow revenues organically, we may cease to be an emerging growth company prior to December 31, 2022.
In
addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying
with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as such company is an emerging
growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards
would otherwise apply to private companies. We have elected to take advantage of such extended transition period, which means
that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging
growth company, can adopt the new or revised standard at the same time private companies adopt the new or revised standard. Investors
may find our common stock less attractive because the Company will rely on these exemptions, which may result in a less active
trading market for our common stock and its stock price may be more volatile.
Our
management and their affiliates control a substantial interest in us and thus may influence certain actions requiring a stockholder
vote.
As of June 26, 2020,
our management and their affiliates beneficially own approximately 86.0% of our issued and outstanding shares of common stock,
including an aggregate of 18,787,253 shares underlying warrants and convertible debentures. Accordingly, these individuals would
have considerable influence regarding the outcome of any transaction that requires stockholder approval. Furthermore, our board
of directors is divided into three classes, each of which will generally serve for a term of three years with only one class of
directors being elected in each year. As a consequence of our “staggered board,” only a minority of our board of directors
will be considered for election in any given year and our management and their affiliates, because of their ownership position,
will have considerable influence regarding the outcome of such elections.
We
may not be able to timely and effectively implement controls and procedures required by Section 404 of the Sarbanes-Oxley Act
that are applicable to us.
As
a public company, we are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley
Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual
management report on the effectiveness of internal control over financial reporting. To comply with the requirements of being
a public company, we are required to provide attestation on internal controls, and we may need to undertake various actions, such
as implementing additional internal controls and procedures and hiring additional accounting or internal audit staff. The standards
required for a public company under Section 404 of the Sarbanes-Oxley Act are significantly more stringent than those that were
required of Computex as a privately held company. Management may not be able to effectively and timely implement controls and
procedures that adequately respond to the increased regulatory compliance and reporting requirements that are applicable to us
after the Business Combination. If we are not able to implement the additional requirements of Section 404 in a timely manner
or with adequate compliance, the Company may not be able to assess whether its internal control over financial reporting is effective,
which may subject it to adverse regulatory consequences and could harm investor confidence and the market price of our common
stock. Further, as an emerging growth company, our independent registered public accounting firm is not required to formally attest
to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the date we are no longer
an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse
in the event that it is not satisfied with the level at which our controls are documented, designed or operating.
In
addition, our management and other personnel will need to continue to devote a substantial amount of time to compliance initiative
applicable to public companies, including compliance with Section 404 and the evaluation of the effectiveness of our internal
control over financial reporting within the prescribed timeframe. In connection with the audit of Computex’s consolidated
financial statements for the years ended December 31, 2019 and 2018, certain material weaknesses and significant deficiencies
were identified in its internal control over financial reporting. The Company has begun the process of evaluating the adequacy
of its accounting personnel staffing level and other matters related to internal control over financial reporting to remediate
these deficiencies. The Company may discover additional deficiencies in existing systems and controls that it may not be able
to remediate in an efficient or timely manner.
Provisions
in our Charter and Bylaws and Delaware law may inhibit a takeover of us, which could limit the price investors might be willing
to pay in the future for our common stock and could entrench management.
Our
Charter and Bylaws contain provisions that may discourage unsolicited takeover proposals that stockholders may consider to be
in their best interests. Our board of directors is divided into three classes, each of which serves for a term of three years
with only one class of directors being elected in each year. As a result, at a given annual meeting only a minority of the board
of directors may be considered for election. Since our “staggered board” may prevent our stockholders from replacing
a majority of our board of directors at any given annual meeting, it may entrench management and discourage unsolicited stockholder
proposals that may be in the best interests of stockholders. Moreover, our board of directors has the ability to designate the
terms of and issue new series of preferred stock.
We
are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together these
provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment
of a premium over prevailing market prices for our securities.
Changes
in laws or regulations, or a failure to comply with any laws and regulations, may adversely affect our business, investments and
results of operations.
We
are subject to laws and regulations enacted by national, regional and local governments. In particular, we are required to comply
with certain SEC and other legal requirements. Compliance with, and monitoring of, applicable laws and regulations may be difficult,
time consuming and costly. Those laws and regulations and their interpretation and application may also change from time to time
and those changes could have a material adverse effect on our business, investments and results of operations. In addition, a
failure to comply with applicable laws or regulations, as interpreted and applied, could have a material adverse effect on our
business and results of operations.
Our
Charter provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive
forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial
forum for disputes with us or our directors, officers, employees or stockholders.
Our
Charter provides, to the fullest extent permitted by law, that derivative actions brought in our name, actions against directors,
officers and employees for breach of fiduciary duty and other similar actions may be brought only in the Court of Chancery in
the State of Delaware and, if brought outside of Delaware, the stockholder bringing the suit will be deemed to have consented
to service of process on such stockholder’s counsel; provided that the exclusive forum provision will not apply to
(i) suits brought to enforce any liability or duty created by the Exchange Act, (ii) any other claim for which the federal courts
have exclusive jurisdiction, (iii) any claim as to which the Court of Chancery determines that there is an indispensable party
not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction
of the Court of Chancery within ten days following such determination), (iv) any claim which is vested in the exclusive jurisdiction
of a court or forum other than the Court of Chancery, or (v) any claim for which the Court of Chancery does not have subject matter
jurisdiction. Furthermore, our Charter also provides that unless we consent in writing to the selection of an alternative forum,
the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a
cause of action arising under the Securities Act. Section 22 of the Securities Act creates concurrent jurisdiction for federal
and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations
thereunder. Accordingly, there is uncertainty as to whether a court would enforce such provision with respect to suits brought
to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Stockholders will not
be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. Any person
or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and
consented to the forum provisions in our Charter.
This
choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable
for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect
to such claims, although our stockholders will not be deemed to have waived our compliance with federal securities laws and the
rules and regulations thereunder. Alternatively, if a court were to find the choice of forum provision contained in our Charter
to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other
jurisdictions, which could harm our business, operating results and financial condition.
Sales
of a substantial number of shares of our common stock in the public market, or the perception that they might occur, could have
an adverse effect on the market price of our common stock.
As of March 31, 2020,
we had warrants to purchase an aggregate of 25,531,250 shares of common stock outstanding. In connection with the IPO, we issued
unit purchase options to purchase 1,350,000 units which, if exercised, will result in the issuance of up to 1,485,000 shares of
common stock and warrants to purchase an additional 675,000 shares of common stock. Additionally, the PIPE Debentures (“PIPE
Debentures”) are 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, and are subject to mandatory conversion under certain conditions, as described elsewhere in
this Current Report on Form 10-K. To the extent such warrants, unit purchase options or PIPE Debentures are exercised or converted,
as applicable, additional shares of common stock will be issued, which will result in dilution to our stockholders and increase
the number of shares of common stock eligible for resale in the public market. In addition, pursuant to the Incentive Plan, equity
incentive awards representing an aggregate of up to 5,794,500 shares of our common stock were available for issuance as of June
26, 2020. Sales of substantial numbers of such shares in the public market or the fact that the warrants, unit purchase options
or PIPE Debentures may be exercised or converted, as applicable, could adversely affect the market price of our common stock or
on our ability to obtain future financing.
Because
we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return
on investment unless you sell your common stock for a price greater than that which you paid for it.
We
may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash
dividends for the foreseeable future. Any decision to declare and pay dividends as a public company in the future will be made
at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition,
cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our
ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries
incur. As a result, you may not receive any return on an investment in our common stock unless you sell your shares of common
stock for a price greater than that which you paid for it.
Following
the consummation of the Business Combination, the Company has incurred and will continue to incur significant increased expenses
and administrative burdens as a public company, which could have an adverse effect on its business, financial condition and results
of operations.
Following
the consummation of the Business Combination, the Company has face increased legal, accounting, administrative and other costs
and expenses as a public company that Computex did not incur as a private company. The Sarbanes-Oxley Act, including the requirements
of Section 404, as well as rules and regulations subsequently implemented by the SEC, the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 and the rules and regulations promulgated and to be promulgated thereunder, the PCAOB and the securities
exchanges, impose additional reporting and other obligations on public companies. Compliance with public company requirements
will increase costs and make certain activities more time-consuming. A number of those requirements will require the Company to
carry out activities Computex has not done previously. In addition, additional expenses associated with SEC reporting requirements
have been and will continue to be incurred. In connection with the audit of Computex’s consolidated financial statements
for the years ended December 31, 2019 and 2018, certain material weaknesses and significant deficiencies were identified in its
internal control over financial reporting. The Company has begun the process of evaluating the adequacy of its accounting personnel
staffing level and other matters related to internal control over financial reporting to remediate these deficiencies. Furthermore,
if any issues in complying with those requirements are identified (for example, if the auditors identify additional material weaknesses
or significant deficiencies in the internal control over financial reporting), the Company could incur additional costs rectifying
those issues, and the existence of those issues could adversely affect the Company’s reputation or investor perceptions
of it. It may also be more expensive to obtain director and officer liability insurance. Risks associated with the Company’s
status as a public company may make it more difficult to attract and retain qualified persons to serve on the board of directors
or as executive officers. The additional reporting and other obligations imposed by these rules and regulations will increase
legal and financial compliance costs and the costs of related legal, accounting and administrative activities. These increased
costs will require the Company to divert a significant amount of money that could otherwise be used to expand the business and
achieve strategic objectives. Advocacy efforts by stockholders and third parties may also prompt additional changes in governance
and reporting requirements, which could further increase costs.
Our
public stockholders at the time of the Business Combination who purchased their units in our initial public offering and who did
not exercise their redemption rights may pursue rescission rights and related claims.
Our
public stockholders may allege that some aspects of the Business Combination were inconsistent with the disclosure contained in
the final prospectus for our initial public offering of units, including the structure of the Business Combination. Consequently,
a public stockholder who purchased shares in the initial public offering (excluding the Initial Stockholders) and still held them
at the time of the Business Combination and who did not seek to exercise redemption rights might seek rescission of the purchase
of the units such holder acquired in the initial public offering. A successful claimant for damages under federal or state law
could be awarded an amount to compensate for the decrease in the value of such holder’s shares caused by the alleged violation
(including, possibly, punitive damages), together with interest, while retaining the shares. If public stockholders bring successful
rescission claims against the Company, our results of operations could be adversely affected and we may be required in connection
with the defense of such claims to incur expenses and divert employee attention from other business matters.
Future
issuances of any equity securities may dilute the interests of our stockholders and decrease the trading price of our common stock.
Any
future issuance of equity securities could dilute the interests of our stockholders and could substantially decrease the trading
price of our common stock. We may issue equity or equity-linked securities in the future for a number of reasons, including to
finance the Company’s operations and business strategy (including in connection with acquisitions and other transactions),
to adjust the Company’s ratio of debt to equity, to satisfy its obligations upon the exercise of then-outstanding options
or other equity-linked securities, if any, or for other reasons.
Item
1B. Unresolved Staff Comments
Not
applicable.
Item
2. Properties
We
currently maintain our principal executive offices at 1720 Peachtree Street, Suite 629, Atlanta, GA 30309, along with several
additional offices, all of which are leased. The additional office locations include:
●
|
|
Computex Headquarters in Houston, Texas with approximately 18,450 square feet;
|
●
|
|
North Texas/DFW headquarters in Westlake, Texas with approximately 2,575 square feet;
|
●
|
|
Security Operations Center and Network Operations Center in Houston, Texas with approximately
15,000 square feet;
|
●
|
|
Warehouse in Houston, Texas with approximately 5,175 square feet; and
|
●
|
|
Sales and training offices in: (i) Lubbock, Texas; (ii) Odessa, Texas; (iii) St. Petersburg,
Florida; and (iv) Minnetonka, Minnesota.
|
We
believe our current facilities meet the needs of our employee base and can accommodate our currently contemplated growth. We believe
that we will able to obtain suitable additional facilities on commercially reasonable terms to meet any future needs.
Item
3. Legal Proceedings
There
is no material litigation, arbitration, governmental proceeding or any other legal proceeding currently pending or known to be
contemplated against any members of our management team in their capacity as such. We are involved in certain legal proceedings
and claims, which arise in the ordinary course of business. In our opinion, based on consultations with outside counsel, the results
of any of these ordinary course matters, individually and in the aggregate, are not expected to have a material effect on our
results of operations, financial condition, or cash flow. As more information becomes available, if we should determine that an
unfavorable outcome is probable on a claim and that the amount of probable loss that we will incur on the claim is reasonably
estimable, we will record an accrued expense for the claim in question. If and when we record such accrual, it could be material
and could adversely impact our results of operations, financial condition, and cash flows.
Item
4. Mine Safety Disclosures
Not
applicable.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
American Virtual Cloud Technologies, Inc.
(f/k/a Pensare Acquisition Corp.) (collectively the “Company” or “AVCT”), was a blank check company incorporated
in Delaware on April 7, 2016. The Company was formed for the purpose of acquiring, through a merger, capital stock exchange, asset
acquisition, stock purchase, reorganization, recapitalization, exchangeable share transaction or other similar business transaction,
one or more operating businesses or assets with one or more targets (a “Business Combination”). Although the Company
is not limited to a particular industry or geographic region for purposes of consummating a Business Combination, the Company intends
to focus on businesses in the wireless telecommunications industry in the United States.
All activity through March 31, 2020 relates
to the Company’s formation, its initial public offering (“Initial Public Offering”) as described below, identifying
a target company for a Business Combination and activities in connection with the proposed mergers with U.S. TelePacific Holdings
Corp. d/b/a TPx Communications (“TPx”) and Stratos Management Systems, Inc., a Delaware corporation (“Computex”).
On May 20, 2019, the Company mutually agreed with TPx to terminate the Business Combination Agreement (the “TPx Agreement”)
between the Company, TPx and Tango Merger Sub Corp., a Delaware corporation and a wholly-owned subsidiary of the Company (“Merger
Sub”), pursuant to a Termination of Business Combination Agreement dated as of May 20, 2019, effective as of such date. As
a result of the termination of the TPx Agreement, effective as of May 20, 2019, the TPx Agreement is of no further force or effect,
and no party to the TPx Agreement shall have any liability under the TPx Agreement except as otherwise expressly set forth in the
agreement. On July 25, 2019, the Company entered into a Business Combination Agreement (the “Agreement”) among the
Company, Computex, Merger Sub and Stratos Management Systems Holdings, LLC, a Delaware limited liability company (“Holdings”).
On April 7, 2020, the Company consummated
the Business Combination pursuant to the Agreement, by and among AVCT, Merger Sub, Holdings, and Computex, pursuant to which Computex
merged with and into Merger Sub (the “Merger”), with Merger Sub surviving the Merger as a wholly owned subsidiary of
AVCT (the “Surviving Corporation”).
Upon consummation of the Merger, the Company
issued to Holdings an aggregate of 8,189,490 shares of common stock. The aggregate value of the consideration issued to Holdings
in exchange for the equity of Computex was $61,211,000 as follows: $20,000,000 in convertible debt, $16,642,530 in assumed debt
and $24,576,659 in equity (8,189,490 shares of AVCT common stock valued at $3.00 per share). As a result of the Merger, Computex
received approximately $9,000,000 in cash at closing of which approximately $8,000,000 was received directly by Computex and approximately
$1,000,000 was paid directly to Comerica Bank for the prepayment of interest of Computex’s Credit Agreement which is described
in Note 11.
The Company will engage an independent
valuation firm to assist with the valuation of intangible assets acquired in connection with the acquisition of Computex; however,
that valuation is not yet complete. In future filings, if the allocation of the purchase price of Computex is not yet final AVCT
will disclose the item(s) that still remain outstanding in accordance with the requirement contained in Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations”.
Following the completion of the
Merger (the “Closing”), substantially all of AVCT’s assets and operations are held and conducted by the
Surviving Corporation and its subsidiaries, and AVCT’s only assets are all of the issued and outstanding equity
interests in the Surviving Corporation. Prior to the Closing, but in contemplation thereof, the Company changed its name from
“Pensare Acquisition Corp.” to “American Virtual Cloud Technologies, Inc.” and “Tango Merger
Sub Corp.” to “Stratos Management Systems, Inc.” As of and as a result of the consummation of the Merger,
AVCT ceased to be a shell company, as defined in Rule 12b-2 of the Exchange Act.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION
CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS (continued)
The registration statements for the Company’s
Initial Public Offering were declared effective on July 27, 2017. On August 1, 2017, the Company consummated the Initial Public
Offering of 27,000,000 units (“Units” and with respect to the shares of the Company’s common stock, par value
$0.001 per share (the “Common Stock”), included in the Units, the “Public Shares”) at $10.00 per Unit,
generating gross proceeds of $270,000,000, which is described in Note 4.
Simultaneously with the closing of the Initial Public Offering,
the Company consummated the sale of 9,500,000 private placement warrants (“Private Placement Warrants”) at a price
of $1.00 per warrant in a private placement to the Sponsor, MasTec, Inc. (“MasTec”) and EarlyBirdCapital, Inc. (“EBC”),
generating gross proceeds of $9,500,000, which is described in Note 5.
Following the closing of the Initial Public
Offering on August 1, 2017, an amount of $270,000,000 ($10.00 per Unit) from the net proceeds of the sale of the Units in the Initial
Public Offering and the Private Placement Warrants were placed in a trust account (the “Trust Account”) and invested
in U.S. government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company Act of 1940, as amended
(the “Investment Company Act”), with a maturity of 180 days or less or in any open-ended investment company that holds
itself out as a money market fund selected by the Company meeting the conditions of paragraphs (d)(2), (d)(3) and (d)(4) of Rule
2a-7 of the Investment Company Act, as determined by the Company, until the earlier of: (i) the completion of a Business Combination
and (ii) the distribution of the Trust Account, as described below, except that interest earned on the Trust Account can be released
to pay the Company’s tax obligations.
On August 4, 2017, the underwriters exercised
their over-allotment option in full resulting in an additional 4,050,000 Units being issued for $40,500,000, less the underwriters’
discount of $1,012,500, netting $39,487,500, which was deposited into the Trust Account. In connection with the underwriters’
exercise of their over-allotment option in full, the Company also consummated the sale of an additional 1,012,500 Private Placement
Warrants at $1.00 resulting in a total of $310,500,000 held in the Trust Account.
On August 7, 2017, the Company
announced that the holders of the Company’s units may elect to separately trade the Common Stock, warrants and rights underlying
the units commencing on August 8, 2017. No fractional warrants will be issued upon separation of the units only whole warrants
will trade. Those units that are not separated will continue to trade on the NASDAQ Capital
Market under the symbol “WRLSU” and the Common Stock, warrants and rights are expected to trade under the symbols “WRLS,”
“WRLSW” and “WRLSR”, respectively.
Transaction costs amounted to $8,646,303,
consisting of $7,762,500 of underwriting fees, and $883,803 of other costs. In addition, as of March 31, 2020, $10,239 of cash
was held outside of the Trust Account, which is available for working capital purposes.
The Company’s management had broad
discretion with respect to the specific application of the net proceeds of its Initial Public Offering and Private Placement Warrants
(subject to terms and conditions set forth in the certain trust agreement), although substantially all of the net proceeds were
intended to be applied generally toward consummating a Business Combination.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION
CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS (continued)
The Company will provide its stockholders
with the opportunity to redeem all or a portion of their Public Shares upon the completion of a Business Combination either (i)
in connection with a stockholder meeting called to approve the Business Combination or (ii) by means of a tender offer. The decision
as to whether the Company will seek stockholder approval of a Business Combination or conduct a tender offer will be made by the
Company, solely in its discretion. The stockholders will be entitled to redeem their Public Shares for a pro rata portion of the
amount then on deposit in the Trust Account, net of taxes payable (initially $10.00 per share, plus any pro rata interest earned
on the funds held in the Trust Account and not previously released to the Company to pay its tax obligations). There will be no
redemption rights upon the completion of a Business Combination with respect to the Company’s warrants or rights. The Common
Stock subject to redemption has been recorded at redemption value and classified as temporary equity upon the completion of the
Offering, in accordance with ASC Topic 480 “Distinguishing Liabilities from Equity.” The Company will proceed with
a Business Combination if the Company has net tangible assets of at least $5,000,001 upon such consummation of a Business Combination
and, in the case of a stockholder vote, a majority of the outstanding shares voted are voted in favor of the Business Combination.
If a stockholder vote is not required by law and the Company does not decide to hold a stockholder vote for business or other legal
reasons, the Company will, pursuant to its Amended and Restated Certificate of Incorporation, conduct the redemptions pursuant
to the tender offer rules of the Securities and Exchange Commission (“SEC”), and file tender offer documents with the
SEC prior to completing a Business Combination. If, however, a stockholder approval of the transaction is required by law, or the
Company decides to obtain stockholder approval for business or other legal reasons, the Company will offer to redeem shares in
conjunction with a proxy solicitation pursuant to the proxy rules and not pursuant to the tender offer rules. If the Company seeks
stockholder approval in connection with a Business Combination, the Initial Stockholders (as defined below) have agreed to vote
their Founder Shares (as defined in Note 6), and any Public Shares held by them in favor of approving a Business Combination and
not to redeem any shares. Additionally, each public stockholder may elect to redeem their Public Shares irrespective of whether
they vote for or against the proposed transaction.
On July 25, 2019, the Company issued
a press release announcing the execution of a Business Combination Agreement (the “Agreement”) among the Company,
Stratos Management Systems, Inc. a Delaware Corporation (“Computex”), Tango Merger Sub Corp., a Delaware
corporation and Stratos Management Systems Holdings, LLC, a Delaware limited liability company, pursuant to which the Company
agreed to acquire Computex in a transaction (the “Transaction”) that will result in Computex becoming a wholly
owned subsidiary of the Company. Computex is an industry-leading IT service provider of choice focused on helping customers
transform their businesses through technology. Computex offers a comprehensive portfolio of managed IT services to a wide
range of clients including Unified Communications-as-a-Service (“UCaaS”), directory and messaging services,
enterprise networking, cybersecurity, collaboration, data center, integration, storage, backup, virtualization, and converged
infrastructure. On December 20, 2019, the Company entered into Amendment No. 1 to the Agreement (the
“Amendment”). The Amendment amends the Agreement to among other things (i) reduce the aggregate merger
consideration payable from $65 million to $60 million, (ii) change the allocation of the merger consideration so that it is
payable as follows: (a) an amount in cash equal to two-thirds of the cash raised by the Company in the PIPE transactions less
$5 million, subject to a cap of $20 million, (b) $5 million of any securities, other than shares of the Company’s
common stock, sold in the PIPE transaction (the “PIPE Securities”), and (c) the balance of the merger
consideration in shares of the Company’s common stock, (iii) provide for the optional redemption of some or all of the
PIPE Securities following the closing of the merger, to the extent that the Company raises additional funds in private
placements following the merger of , (iv) adjust a condition to the closing of the merger to require that the Company shall
have at least an aggregate of $35 million of cash held either in or outside of the Trust Account at the effective time of the
merger (reduced from $150 million): and (v) adjust the date by which the closing of the merger must occur from December 31,
2019 to April 1, 2020.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION
CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
1. DESCRIPTION OF ORGANIZATION AND BUSINESS
OPERATIONS (continued)
Additionally, on July 25, 2019, the Company
announced that they entered into a non-binding letter of intent to acquire a second company, a leading developer of UCaaS technology
and that they have joined AT&T Partner Exchange®, a platform pursuant to which they will be able to bundle and resell certain
AT&T branded products and solutions with their own services following the consummation of the Transaction.
On September 11, 2019 and September 23,
2019, the Company received written notices from the Listing Qualifications Department of NASDAQ indicating that the Company was
not in compliance with Listing Rule 5550(a)(3), which requires the Company to have at least 300 public holders for continued
listing on the NASDAQ Capital Market and Listing Rule 5550(a)(4), due to the Company’s failure to meet the minimum 500,000
publicly held shares requirement for continued listing on the NASDAQ Capital Market. The Company submitted a plan to regain compliance
with these rules on October 25, 2019 and were subsequently granted an extension to complete a business combination and demonstrate
compliance with Nasdaq's initial listing requirements by March 9, 2020.
On November 26, 2019, at the Special Meeting
of the Company’s Stockholders (the “Special Meeting”), the Company’s stockholders approved an amendment
to the Company’s Amended and Restated Certificate of Incorporation (the “Charter Amendment”) to extend the date
by which the Company has to consummate a business combination (the “Extension”) for an additional four months, from
December 1, 2019 to April 1, 2020. The affirmative vote of at least a majority of the outstanding shares of Common Stock was required
to approve the Charter Amendment. The Charter Amendment was approved with 7,731,372 votes cast in favor of the proposal, one vote
cast against the proposal and no abstentions. The purpose of the Extension is to allow the Company more time to complete a Business
Combination. In connection with the Special Meeting and the resulting Charter Amendment, 135,288 of the shares of the Company’s
Common Stock were redeemed from funds available in the Trust Account, for a redemption amount of approximately $10.56 per share.
In connection with the proposed Transaction,
the Company filed a preliminary proxy statement with the SEC relating to the Transaction on October 8, 2019. Amendment No. 1 to
the preliminary proxy statement was filed with the SEC on December 26, 2019. The Company will mail a definitive proxy statement
and other relevant documents to its stockholders. The Company’s stockholders and other interested persons are advised to
read, when available, the preliminary proxy statement, and amendments thereto, and definitive proxy statement in connection with
our solicitation of proxies for the special meeting to be held to approve the Transaction because these proxy statements will contain
important information about the Company, Computex, and the Transaction. The definitive proxy statement will be mailed to the Company’s
stockholders as of a record date to be established for voting on the Transaction. Stockholders will also be able to obtain copies
of the proxy statement, without charge, once available, at the SEC’s Internet site at http://www.sec.gov or by directing
a request to: Pensare Acquisition Corp., 1720 Peachtree Street, Suite 629, Atlanta, GA 30309, or by calling (404) 234-3098.
The Sponsor and other holders of Founder
Shares prior to the Initial Public Offering (the “Initial Stockholders”) have agreed to (i) waive their redemption
rights with respect to their Founder Shares and Public Shares in connection with the consummation of a Business Combination, (ii)
to waive their rights to liquidating distributions from the Trust Account with respect to their Founder Shares if the Company fails
to consummate a Business Combination within the Combination Period and (iii) not to propose an amendment to the Company’s
Amended and Restated Certificate of Incorporation that would affect the substance or timing of the Company’s obligation to
redeem 100% of its Public Shares if the Company does not complete a Business Combination within the Combination Period, unless
the Company provides the public stockholders with the opportunity to redeem their Public Shares in conjunction with any such amendment.
However, the Initial Stockholders will be entitled to liquidating distributions with respect to any Public Shares acquired if the
Company fails to consummate a Business Combination and liquidates within the Combination Period. In the event of such distribution,
it is possible that the per share value of all the assets available for distribution (including Trust Account assets) will be less
than the $10.00 per Unit in the Offering.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION
CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
1. DESCRIPTION OF ORGANIZATION AND BUSINESS
OPERATIONS (continued)
In order to protect the amounts held
in the Trust Account, the Sponsor has agreed to be liable to the Company if and to the extent any claims by a vendor for
services rendered or products sold to the Company, or a prospective target business with which the Company has discussed
entering into a transaction agreement, reduce the amount of funds in the Trust Account. This liability will not apply with
respect to any claims by a third party who executed a waiver of any right, title, interest or claim of any kind in or to any
monies held in the Trust Account or to any claims under the Company’s indemnity of the underwriters of the Offering
against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities
Act”). Moreover, in the event that an executed waiver is deemed to be unenforceable against a third party, the Sponsor
will not be responsible to the extent of any liability for such third-party claims. The Company will seek to reduce the
possibility that the Sponsor will have to indemnify the Trust Account due to claims of creditors by endeavoring to have all
vendors, service providers (other than the Company’s independent auditors), prospective target businesses or other
entities with which the Company does business, execute agreements with the Company waiving any right, title, interest or
claim of any kind in or to monies held in the Trust Account.
2. LIQUIDITY
As of March 31, 2020, the Company had $10,239
in its operating bank accounts, $813 in cash and marketable securities held in the Trust Account and $1,868,304 in a Trust Escrow
Account to be used for a Business Combination, to repurchase or convert stock, or to pay corporate taxes in connection therewith
and a working capital deficit of $14,698,868. To date, the Company has withdrawn $418,674 of interest from the Trust Account in
order to pay the Company’s tax obligations. On April 7, 2020, in conjunction with the business combination, 91,637 shares
of common stock were redeemed at a Trust price of $10.96 for a total redemption payment of $1,004,729. The redemptions were paid
from the funds in Trust Escrow to the redeeming shareholders, leaving a net trust balance of $864,419, which became available for
working capital.
Until the consummation of a Business Combination,
the Company will be using the funds not held in the Trust Account for identification and evaluation of prospective acquisition
candidates, performing due diligence on prospective target businesses, paying for travel expenditures, selecting target businesses
to acquire, and structuring, negotiating and consummating the Business Combination.
The Company may need to raise additional
capital through loans or additional investments from our Sponsor, stockholders, officers, directors, or third parties. Our officers,
directors and Sponsor may, but are not obligated to, loan us funds, from time to time, in whatever amount they deem reasonable
in their sole discretion, to meet our working capital needs (“Working Capital Loans”).
For the year ended March 31, 2020, the
Sponsor advanced the Company $3,204,986 for working capital purposes. As of March 31, 2020, total Sponsor advances to the Company
totaled $4,562,614 for working capital purposes.
On August 8, 2019, the Company signed a
$700,000 promissory note with an affiliate of the Sponsor. This promissory note is payable without interest and due upon the consummation
of a Business Combination.
These advances are included on the balance
sheet as part of promissory notes-related party in addition to the Trust Loans discussed in note 6.
As of March 31, 2020, the Working Capital
Loans, evidenced by promissory notes, were payable without interest upon consummation of a Business Combination or, at the holder’s
discretion, up to $1,500,000 of the note may be converted into warrants (“Warrants”) at a conversion price of $1.00
per Warrant. Each Warrant would contain terms identical to those of the warrants issued in the private placement, entitling the
holder thereof to purchase one share of Common Stock at an exercise price of $11.50 per share as more fully described in the prospectus
for the IPO dated July 27, 2017. The Working Capital Loans would either be paid upon consummation of a Business Combination, without
interest, or, at the holders’ discretion, up to $1,500,000 of the Working Capital Loans may be converted into Warrants at
a price of $1.00 per Warrant.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION
CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
2. LIQUIDITY (continued)
At the Closing, the Company issued approximately
$8.6 million in aggregate principal amount issued to the Sponsor as part of the PIPE Units issued in exchange for the cancellation
of indebtedness previously incurred by the Company to the Sponsor. The PIPE Debentures bear interest at a rate of 10% per annum,
payable quarterly on the last day of each calendar quarter in the form of additional PIPE Debentures, except upon maturity in which
case accrued and unpaid interest is payable in cash. The entire principal amount of each PIPE 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 PIPE Debentures).
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying financial statements are
presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
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 (that is, those that have not had a Securities Act registration statement declared effective or do
not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial
accounting standards. 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
and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt
the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the
Company’s financial statements with another public company, which is neither an emerging growth company nor an emerging
growth company, which has opted out of using the extended transition period, difficult or impossible because of the potential
differences in accounting standards used.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION
CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 revenues
and expenses during the reporting period.
Making estimates requires management to
exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or
set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate,
could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly
from those estimates.
Cash and cash equivalents
The Company considers all short-term investments
with an original maturity of three months or less when purchased to be cash equivalents.
Cash held in Trust Escrow
The Escrowed Amount is being held in a non-interest bearing
account, is under the Company’s full control and is restricted to be used for a Business Combination, to repurchase or convert
stock, or to pay corporate taxes.
Cash and marketable securities held in Trust Account
The assets held in the Trust Account are
held in cash and U.S. Treasury Bills and are classified as trading securities.
Common stock subject to possible redemption
The Company accounts for its Common Stock
subject to possible redemption in accordance with the guidance in ASC Topic 480 “Distinguishing Liabilities from Equity.”
Common Stock subject to mandatory redemption (if any) is classified as a liability instrument and is measured at fair value. Conditionally
redeemable Common Stock (including Common Stock that features redemption rights that are either within the control of the holder
or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) is classified as
temporary equity. At all other times, common stock is classified as stockholders’ equity. The Common Stock features certain
redemption rights that are considered to be outside of the Company’s control and subject to occurrence of uncertain future
events. Accordingly, at March 31, 2020 and March 31, 2019, Common Stock subject to possible redemption is presented at redemption
value as temporary equity, outside of the stockholders’ equity section of the financial statements.
Income taxes
The Company complies with the accounting
and reporting requirements of ASC Topic 740 “Income Taxes,” which requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the
financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on
enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred income tax asset to the amount expected to be realized.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION
CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
At March 31, 2020, management had determined
that it is more likely than not, that its deferred income tax asset, will not be realized within this year and accordingly has
recorded a valuation allowance reducing the full amount of the deferred income tax asset to zero.
ASC Topic 740 prescribes a recognition
threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected
to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon
examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as
income tax expense. As of March 31, 2020 and March 31, 2019, there were no unrecognized tax benefits and no amounts accrued for
interest and penalties.
The Company is currently not aware of any
issues under review that could result in significant payments, accruals or material deviation from its position.
The Company may be subject to
potential examination by federal, state and city taxing authorities in the areas of income taxes. These potential
examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions
and compliance with federal, state and city tax laws. The Company has identified its Federal tax return and its State tax
returns in Delaware, Georgia, New York and North Carolina as “major” tax jurisdictions. The Company’s
management does not expect that the total amount of unrecognized tax benefits will materially change over the next year.
Net loss per common share
The Company complies with accounting and
disclosure requirements of ASC Topic 260, “Earnings Per Share.” Net loss per common share is computed by dividing net
loss by the weighted average number of common shares outstanding for the period. Shares of Common Stock subject to possible redemption
at March 31, 2020 and March 31, 2019 have been excluded from the calculation of basic income (loss) per share since such shares,
if redeemed, only participate in their pro rata share of the Trust Account earnings. The Company has not considered the effect
of (1) warrants sold in the Initial Public Offering and private placement to purchase 15,525,000 and 10,512,500 shares of Common
Stock, respectively, (2) rights sold in the Initial Public Offering that convert into 3,105,000 shares of Common Stock, (3) the
unit purchase option of up to 1,350,000 Units sold to the underwriters, exercisable at $10.00 per Unit, which consists of 1,350,000
shares of Common Stock, 675,000 warrants (convertible into 675,000 shares of Common Stock), and 1,350,000 rights (convertible into
135,000 shares of Common Stock) and, 4) $1,500,000 of promissory notes, which is payable without interest upon consummation of
a Business Combination or, at the holder’s discretion, which may be converted, in part, into Warrants at a conversion price
of $1.00 per Warrant, in the calculation of diluted loss per share, since the exercise of the warrants, the conversion of the rights
into shares of Common Stock and conversion of the working capital loan are contingent upon the occurrence of a future event. As
a result, diluted loss per common share is the same as basic loss per common share for the periods.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION
CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Reconciliation of net loss per common
share
The Company’s net income is
adjusted for the portion of income that is attributable to Common Stock subject to redemption, as these shares only
participate in the income of the Trust Account and not the income (losses) of the Company. Accordingly, basic and diluted
loss per common share is calculated as follows:
|
|
For the Year Ended March 31, 2020
|
|
|
For the Year Ended March 31, 2019
|
|
Net (loss) income
|
|
$
|
(5,024,004
|
)
|
|
$
|
989,799
|
|
Less: Income attributable to ordinary shares subject to redemption (a)
|
|
|
-
|
|
|
|
(4,841,402
|
)
|
Adjusted loss
|
|
$
|
(5,024,004
|
)
|
|
$
|
(3,851,603
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average share outstanding, basic and diluted
|
|
|
8,375,507
|
|
|
|
8,563,373
|
|
Basic and diluted net loss per ordinary share
|
|
$
|
(0.60
|
)
|
|
$
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
(a) Interest Income
|
|
$
|
1,365,456
|
|
|
$
|
5,281,923
|
|
Less: Income Taxes
|
|
|
216,275
|
|
|
|
163
|
|
Less: Franchise Taxes
|
|
|
10,980
|
|
|
|
212,569
|
|
|
|
|
1,138,201
|
|
|
|
5,069,191
|
|
Percentage of ordinary shares subject to redemption to total ordinary shares
|
|
|
0.00
|
%
|
|
|
95.51
|
%
|
Income attributable to ordinary shares subject to redemption
|
|
$
|
0
|
|
|
$
|
4,481,402
|
|
Concentration of credit risk
Financial instruments that potentially
subject the Company to concentration of credit risk consist of cash accounts in a financial institution, which, at times may exceed
the Federal depository insurance coverage of $250,000. At March 31, 2020 and March 31, 2019, the Company had not experienced losses
on this account and management believes the Company is not exposed to significant risks on such account.
Fair value of financial instruments
The fair value of the Company’s assets
and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurements and Disclosures,”
approximates the carrying amounts represented in the accompanying balance sheets, primarily due to their short-term nature.
Recently issued accounting pronouncements
Management does not believe that any recently
issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company’s
financial statements.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION
CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
4. INITIAL PUBLIC OFFERING
Pursuant to the Initial Public Offering,
the Company sold 27,000,000 units at a purchase price of $10.00 per Unit. Each Unit consists of one share of Common Stock, par
value of $0.001 of the Company (“Common Stock”), one right (“Public Right”) and one-half of one redeemable
warrant (“Public Warrant”). Each Public Right will convert into one-tenth (1/10) of one share of Common Stock upon
consummation of a Business Combination (see Note 8). Each whole Public Warrant entitles the holder to purchase one share of Common
Stock at an exercise price of $11.50 (see Note 8).
On August 4, 2017, the over-allotment option
was exercised in full and the underwriters purchased 4,050,000 additional Units at $10.00 per Unit, generating gross proceeds of
$40,500,000.
Proceeds of $310,500,000 from the Initial
Public Offering and Private Placement Warrants were held in the trust account, along with any additional interest earned thereon
not used to pay for taxes.
5. PRIVATE PLACEMENT
Simultaneously with the Initial Public
Offering, the Sponsor, MasTec and EBC purchased 9,500,000 Private Placement Warrants at $1.00 per warrant in a private placement
generating gross proceeds of $9,500,000. Simultaneously with the sale of the over- allotment Units, the Company consummated the
sale of an additional 1,012,500 warrants at $1.00 per warrant, generating gross proceeds of $1,012,500. The proceeds from the sale
of the Private Placement Warrants were added to the net proceeds from the Initial Public Offering to be held in the Trust Account.
If the Company does not complete a Business Combination within the Combination Period, the proceeds of the sale of the Private
Placement Warrants will be used to fund the redemption of the Public Shares (subject to the requirements of applicable law) and
the Private Placement Warrants will expire worthless. The Private Placement Warrants are identical to the Warrants sold in the
Offering except that the Private Placement Warrants (i) will not be redeemable by the Company and (ii) may be exercised for cash
or on a cashless basis, so long as they are held by the initial purchaser or any of its permitted transferees. In addition, the
Private Placement Warrants and their component securities may not be transferable, assignable or salable until 30 days after the
consummation of a Business Combination, subject to certain limited exceptions.
6. RELATED PARTY TRANSACTIONS
Founder Shares
In May 2016, the Company issued 10,000 shares of Common Stock
to the Sponsor for $10.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION
CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
6. RELATED PARTY TRANSACTIONS (continued)
In May 2017, the Company issued an additional
7,177,500 shares of Common Stock to the Sponsor and certain other persons (collectively, the “Founder Shares”) for
an aggregate purchase price of $24,990, or approximately $0.0035 per share. In June 2017, the Sponsor transferred 1,575,000 of
such shares to MasTec for the same purchase price originally paid for such shares.
In July 2017, the company effected a stock dividend with respect to the Common Stock of 575,000 shares, resulting in the Initial
Stockholders holding an aggregate of 7,762,500 shares. All share and per share, amounts have been retroactively restated to reflect
the stock dividend. The Founder Shares included an aggregate of up to 1,012,500 shares that were subject to forfeiture by the Initial
Stockholders to the extent that the underwriters’ over-allotment was not exercised in full or in part, so that the Initial
Stockholders would own, on an as-converted basis, 20% of the Company’s issued and outstanding shares after the Offering.
As a result of the underwriters’ election to exercise their over-allotment option in full on August 4, 2017, 1,012,500 Founder
shares are no longer subject to forfeiture.
The Initial Stockholders have agreed that,
subject to certain limited exceptions, the Founder Shares will not be transferred, assigned or sold until one year after the date
of the consummation of a Business Combination or earlier if, subsequent to a Business Combination, the last sales price of the
Company’s Common Stock equals or exceeds $12.50 per share (as adjusted for stock splits, stock dividends, reorganizations
and recapitalizations) for any 20 trading days within any 30-trading day period.
Related Party Loans
For the year ended March 31, 2020, the
Sponsor advanced the Company $3,204,986 for working capital purposes. As of March 31, 2020 and March 31, 2019, the Sponsor loaned
the Company $4,562,614 and $1,357,628 for working capital purposes, respectively. These advances are included on the balance sheet
as part of promissory notes-related party in addition to the Trust Loans discussed below in Note 6. The Working Capital Loans,
evidenced by a promissory note, shall be payable without interest upon consummation of a Business Combination or, at the holder’s
discretion, the note may be converted into Warrants at a conversion price of $1.00 per Warrant. Each Warrant will contain terms
identical to those of the warrants issued in the private placement, entitling the holder thereof to purchase one share of Common
Stock at an exercise price of $11.50 per share.
In order to finance transaction costs in
connection with a Business Combination, the Sponsor, the Company’s officers and directors may, but are not obligated to,
loan the Company funds from time to time or at any time, as may be required. Each Working Capital Loan would be evidenced by a
promissory note. The Working Capital Loans would either be paid upon consummation of a Business Combination, without interest,
or, at the holder’s discretion, up to $1,500,000 of the Working Capital Loans may be converted into Warrants at a price of
$1.00 per Warrant. The Warrants would be identical to the Private Placement Warrants.
On January 16, 2019, the Company announced
that the Sponsor, had agreed to contribute to the Trust Account, as a loan, $0.033 for each public share that was not redeemed
in connection with the stockholder vote to approve an amendment to the Company’s amended and restated certificate of incorporation
to extend the date by which the Company has to consummate a business combination for an additional three months, from February
1, 2019 to May 1, 2019, for each calendar month (commencing on February 2, 2019 and on the second day of each subsequent month),
or portion thereof, that is needed by the Company to complete a Business Combination from February 2, 2019 until May 1, 2019.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION
CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
6. RELATED PARTY TRANSACTIONS (continued)
On February 1, 2019, the Company signed
a promissory note agreeing to pay up to $2,797,117 of advances to be made by the Sponsor to cover contribution payments due to
the Trust Account. On April 29, 2019, the Company held a special meeting of stockholders at which time the stockholders of the
Company approved an amendment to the Company’s amended and restated certificate of incorporation to extend the date by which
the Company has to consummate a business combination for an additional three months, from May 1, 2019 to August 1, 2019
On April 22, 2019, the Company announced
that the Sponsor, had agreed to contribute to the Trust Account, as a loan, $0.033 for each share of Common Stock issued in the
initial public offering that was not redeemed in connection with the stockholder vote to approve an amendment to the Company’s
amended and restated certificate of incorporation to extend the date by which they have to consummate a Business Combination for
an additional three months, from May 1, 2019 to August 1, 2019. The contribution was deposited in the trust account established
in connection with the Company’s initial public offering. On May 9, 2019, the Company signed a promissory note agreeing to
repay $805,916 for an advance made by the Sponsor as an additional contribution payment to the Trust Account. On May 31, 2019,
the Company announced that the Sponsor will reduce its contributions to the Trust Account. The Sponsor will continue to pay to
the Trust Account $0.033 per public share that has not been redeemed per month, but the total monthly payment will be no greater
than $200,000. If more than 6,060,038 public shares remain outstanding after redemptions in connection with this adjustment, then
the amount paid per share will be reduced proportionately. In connection with this announcement, the Company offered the public
stockholders the right to redeem their shares of common stock for their pro rata portion of the funds available in the Trust Account.
On August 5, 2019, the Company again updated its promissory note to include $399,962 of additional advances made by the Sponsor
to cover contribution payments due to the Trust.
As of March 31, 2020 and March 31, 2019,
$4,002,997 and $1,864,745 in Trust Loans were advanced under that note, respectively.
Promissory notes payable - related party
loans were $7,065,611 and $1,864,745, at March 31, 2020 and March 31, 2019, respectively.
Convertible promissory notes payable -
related party loans were $1,500,000 and $1,357,628, at March 31, 2020 and March 31, 2019, respectively.
Subsequent to March 31. 2020, at the Closing,
the Company issued to the PIPE Investors PIPE Debentures having an aggregate principal amount of approximately $43.2 million (including
$3.0 million in aggregate principal amount issued as part of PIPE Units sold to MasTec, $20.0 million in aggregate principal amount
issued as part of PIPE Units issued to Holdings pursuant to the terms of the Business Combination Agreement, approximately $8.6
million in aggregate principal amount issued to the Sponsor as part of the PIPE Units issued in exchange for the cancellation of
indebtedness previously incurred by the Company to the Sponsor and $11.6 million in aggregate principal amount issued to various
vendors in exchange for payment of previously incurred expenses.). The PIPE Debentures bear interest at a rate of 10% per annum,
payable quarterly on the last day of each calendar quarter in the form of additional PIPE Debentures, except upon maturity in which
case accrued and unpaid interest is payable in cash. The entire principal amount of each PIPE 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 PIPE Debentures).
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION
CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
6. RELATED PARTY TRANSACTIONS (continued)
Related Party Fees
The Company has incurred related party
administrative fees of $20,000 per month from August 2017 through March 31, 2020. These costs have been included in the operating
costs in the Company’s statements of operations. The administrative fees incurred by the Company were $240,000 for the years
ended March 31, 2020 and 2019, respectively.
The Company shares office space with an
affiliate and participates in a cost sharing arrangement in a month to month leasing arrangement. Expenses incurred under this
agreement for the year ended March 31, 2020 were $192,987. These expenses have been incurred but not paid and are reflected in
the promissory notes - related party.
7. COMMITMENTS AND CONTINGENCIES
Registration Rights
The holders of the Founder Shares, Private
Placement Warrants (and their underlying securities) and any warrants that may be issued upon conversion of the Working Capital
Loans (and their underlying securities) will be entitled to registration rights pursuant to a registration rights agreement signed
prior to or on the effective date of the Initial Public Offering. The holders of a majority of these securities are entitled to
make up to three demands, excluding short form demands, that the Company register such securities. In addition, the holders will
have certain “piggy-back” registration rights with respect to registration statements filed subsequent to the completion
of a Business Combination and rights to require the Company to register for resale such securities pursuant to Rule 415 under the
Securities Act. However, the registration rights agreement will provide that the Company will not permit any registration statement
filed under the Securities Act to become effective until termination of the applicable lock up period. The Company will bear the
expenses incurred in connection with the filing of any such registration statements.
Business Combination Marketing Agreement
The Company has engaged EBC as an advisor
in connection with a Business Combination to assist the Company in holding meetings with its stockholders to discuss a potential
Business Combination and the target business’ attributes, introduce the Company to potential investors that are interested
in purchasing securities, assist the Company in obtaining stockholder approval for the Business Combination and assist the Company
with its press releases and public filings in connection with a Business Combination. The Company will pay EBC a cash fee for such
services upon the consummation of an initial Business Combination in an amount equal to 3.5% of the gross proceeds of the offering
(exclusive of any applicable finders’ fees which might become payable); provided that the Company has the right to allocate
up to 30% of the fee to any of the underwriters in the offering or other FINRA member firms the Company retains to assist it in
connection with its initial Business Combination.
Subsequent to March 31, 2020, at the Closing,
EBC was issued 2,500,000 PIPE Units consisting of (i) $1,000 in principal amount of the PIPE Debentures and (ii) one PIPE Warrant
to purchase 100 shares of common stock at an exercise price of $0.01and a $500,000 promissory note which bears interest at a rate
of 12% per annum.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION
CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
8. STOCKHOLDERS’ EQUITY
Preferred Stock — The
Company is authorized to issue 1,000,000 shares of preferred stock, par value $0.001. At March 31, 2020 and March 31, 2019, there
were no shares of preferred stock issued or outstanding.
Common Stock — The
Company is authorized to issue 100,000,000 shares of Common Stock with a par value of $0.001 per share. Holders of the Company’s
Common Stock are entitled to one vote for each share. As of March 31, 2020 and March 31, 2019, there were 7,932,977 and 9,032,109,
respectively, shares of Common Stock issued and outstanding (excluding 0 and 26,984,101 shares subject to possible redemption).
Rights — Each holder
of a right will receive one-tenth (1/10) of one share of Common Stock upon consummation of a Business Combination, even if the
holder of such right redeemed all shares held by it in connection with a Business Combination. No fractional shares will be issued
upon exchange of the rights. No additional consideration will be required to be paid by a holder of rights in order to receive
its additional shares upon consummation of a Business Combination as the consideration related thereto has been included in the
Unit purchase price paid for by investors in the Initial Public Offering. If the Company enters into a definitive agreement for
a Business Combination in which the Company will not be the surviving entity, the definitive agreement will provide for the holders
of rights to receive the same per share consideration the holders of the Common Stock will receive in the transaction on an as-converted
into Common Stock basis and each holder of a right will be required to affirmatively covert its rights in order to receive 1/10
share underlying each right (without paying additional consideration). The shares issuable upon exchange of the rights will be
freely tradable (except to the extent held by affiliates of the Company).
If the Company is unable to complete a
Business Combination within the Combination Period and the Company liquidates the funds held in the Trust Account, holders of rights
will not receive any of such funds with respect to their rights, nor will they receive any distribution from the Company’s
assets held outside of the Trust Account with respect to such rights, and the rights will expire worthless. Further, there are
no contractual penalties for failure to deliver securities to the holders of the rights upon consummation of a Business Combination.
Additionally, in no event will the Company be required to net cash settle the rights.
Subsequent to March 31, 2020, concurrently
with the Closing, AVCT, the Sponsor, the Initial Stockholders, Holdings and the other PIPE Investors entered into the Registration
Rights Agreement. The Registration Rights Agreement amended, restated and replaced the registration rights agreement entered into
by and among AVCT, the Sponsor and the initial Stockholders on July 27, 2017. Pursuant to the terms of the Registration Rights
Agreement, the holders of certain of securities, including Founder Shares, the shares of common stock underlying the Private Placement
Warrants, and the shares of common stock underlying the securities issued in the PIPE, 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.
Warrants — Public Warrants may only be exercised
for a whole number of shares. No fractional shares will be issued upon exercise of the Public Warrants. The Public Warrants will
become exercisable on the later of (a) 30 days after the completion of a Business Combination or; provided in each case that the
Company has an effective registration statement under the Securities Act covering the shares of Common Stock issuable upon exercise
of the Public Warrants and a current prospectus relating to them is available.
The Private Placement Warrants are identical
to the Public Warrants underlying the Units being sold in the Offering, except that the Private Placement Warrants and the Common
Stock issuable upon the exercise of the Private Placement Warrants will not be transferable, assignable or salable until 30 days
after the completion of a Business Combination, subject to certain limited exceptions. Additionally, the Private Placement Warrants
will be exercisable on a cashless basis and be non-redeemable so long as they are held by the initial purchasers or their permitted
transferees. If the Private Placement Warrants are held by someone other than the initial purchasers or their permitted transferees,
the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public
Warrants.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION
CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
8. STOCKHOLDERS’ EQUITY (continued)
Subsequent to March 31, 2020, at the Closing,
the Company issued to PIPE Investors the PIPE Warrants to purchase an aggregate of up to 4,316,936 shares of common stock (including
PIPE Warrants to purchase up to 2,000,000 shares, 856,561 shares and 300,000 shares of common stock issued to Holdings, the Sponsor
and MasTec, respectively, as part of the PIPE Units issued to them), at an exercise price of $0.01 per share. The PIPE Warrants
are exercisable at any time through the fifth anniversary of the date of issuance. The number of shares issuable upon exercise
of each PIPE Warrant is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like.
The Company may redeem the Public Warrants
(except with respect to the Placement Warrants):
|
·
|
in whole and not in part;
|
|
·
|
at a price of $0.01 per warrant;
|
|
·
|
at any time during the exercise period;
|
|
·
|
upon a minimum of 30 days’ prior written notice of redemption;
|
|
·
|
if, and only if, the last sale price of the Company’s Common Stock equals or exceeds $18.00 per share for any 20 trading
days within a 30-trading day period ending on the third trading day prior to the date on which the Company sends the notice of
redemption to the warrant holders; and
|
|
·
|
if, and only if, there is a current registration statement in effect with respect to the shares of Common Stock underlying
such warrants.
|
If the Company calls the Public Warrants for redemption, management
will have the option to require all holders that wish to exercise the Public Warrants to do so on a “cashless basis,”
as described in the warrant agreement.
The exercise price and number of shares
of Common Stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock
dividend, or recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuance
of Common Stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle
the warrants. If the Company is unable to complete a Business Combination within the Combination Period and the Company liquidates
the funds held in the Trust Account, holders of warrants will not receive any of such funds with respect to their warrants, nor
will they receive any distribution from the Company’s assets held outside of the Trust Account with the respect to such warrants.
Accordingly, the warrants may expire worthless.
Unit Purchase Options —
The Company sold to EBC and its co-underwriters, for $100, an option to purchase up to 1,350,000 units exercisable at $10.00 per
Unit (or an aggregate exercise price of $13,500,000) commencing on the consummation of a Business Combination. The unit purchase
option may be exercised for cash or on a cashless basis, at the holder’s option, and expires on July 27, 2022. The Units
issuable upon exercise of this option are identical to those offered in the Offering. The Company has accounted for the unit purchase
option, inclusive of the receipt of $100 cash payment, as an expense of the Offering resulting in a charge directly to stockholders’
equity.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION
CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
8. STOCKHOLDERS’ EQUITY (continued)
The Company estimated that the fair value
of this unit purchase option was $4,547,505 (or $3.37 per Unit) using a Black-Scholes option-pricing model. The fair value of the
unit purchase option granted to the underwriters was estimated as of the date of grant using the following assumptions: (1) expected
volatility of 35%, (2) risk-free interest rate of 1.80% and (3) expected life of five years. The option and the 1,350,000 Units
have been deemed compensation by FINRA and GAAP and are therefore subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA’s
NASDAQ Conduct Rules. Additionally, the option may not be sold, transferred, assigned, pledged or hypothecated for a one-year period
(including the foregoing 180-day period) following the date of Offering except to any underwriter and selected dealer participating
in the Offering and their bona fide officers or partners. The option grants to holders demand and “piggy back” rights
for periods of five and seven years, respectively, from the effective date of the registration statement with respect to the registration
under the Securities Act of the securities directly and indirectly issuable upon exercise of the option. The Company will bear
all fees and expenses attendant to registering the securities, other than underwriting commissions, which will be paid for by the
holders themselves.
The exercise price and number of units
issuable upon exercise of the option may be adjusted in certain circumstances including in the event of a stock dividend, or the
Company’s recapitalization, reorganization, merger or consolidation. However, the option will not be adjusted for issuances
of Common Stock at a price below its exercise price.
9. FAIR VALUE MEASUREMENTS
The Company follows guidance in ASC 820
for its financial assets and liabilities that are re-measured at fair value at each reporting period, and non-financial assets
and liabilities that are re-measured and reported at fair value at least annually.
The fair value of the Company’s financial
assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection with
the sale of the assets paid in connection with the transfer of the liabilities in an orderly transaction between market participants
at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize
the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal
assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify
assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:
Level 1: Quoted prices in active markets
for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset
or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2: Observable inputs other than Level
1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices
for identical assets or liabilities in markets that are not active.
Level 3: Unobservable inputs based on our assessment of the
assumptions that market participants would use in pricing the asset or liability.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION
CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
9. FAIR VALUE MEASUREMENTS (continued)
The following table presents information
about the Company’s assets that are measured at fair value on a recurring basis at March 31, 2020 and March 31, 2019, and
indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
Description
|
|
Level
|
|
|
March 31,
2020
|
|
|
March 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and marketable securities held in Trust Account
|
|
|
1
|
|
|
$
|
813
|
|
|
$
|
290,454,757
|
|
10. INCOME TAX
On December 31, 2017, the U.S. Tax Cuts
and Job Acts of 2017 (“Tax Reform”) was signed into law. As a result of Tax Reform, the U.S. statutory tax rate was
lowered from 35% to 21% effective January 1, 2018, among other changes. ASC Topic 740 requires companies to recognize the effect
of tax law changes in the period of enactment; therefore, the Company would be required to revalue its deferred tax assets and
liabilities at December 31, 2017 at the new rate. The SEC issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application
of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations)
in reasonable detail to complete the accounting for certain tax effects of Tax Reform.
The financial statement impact related to the adoption of Tax
Act 2017 had no impact on the total provision for income tax (expense) benefit for the years ended March 31, 2020 and 2019.
The Company’s net deferred tax assets
are as follows:
|
|
Year Ended March 31, 2020
|
|
|
Year Ended March 31, 2019
|
|
Deferred tax asset
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
1,382,083
|
|
|
$
|
378,831
|
|
Total deferred tax assets
|
|
|
1,382,083
|
|
|
|
378,831
|
|
Valuation allowance
|
|
|
(1,382,083
|
)
|
|
|
(162,831
|
)
|
Deferred tax asset, net of allowance
|
|
$
|
-
|
|
|
$
|
216,000
|
|
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION
CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
10. INCOME TAX (continued)
The income tax benefit (provision) consist of the following:
|
|
Year Ended March 31, 2020
|
|
|
Year Ended March 31, 2019
|
|
Federal
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
(164,627
|
)
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(275
|
)
|
|
$
|
(163
|
)
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(216,000
|
)
|
|
|
380,627
|
|
Income tax (provision) benefit
|
|
$
|
(216,275
|
)
|
|
$
|
215,837
|
|
A reconciliation of federal income tax rate to the Company’s
effective tax rate at March 31, 2020 and 2019 is as follows:
|
|
Year Ended March 31, 2020
|
|
|
Year Ended March 31, 2019
|
|
|
|
|
|
|
|
|
Statutory federal income tax rate
|
|
|
21.00
|
%
|
|
|
21.00
|
%
|
State taxes, net of federal tax benefit
|
|
|
0.01
|
%
|
|
|
0.02
|
%
|
Permanent items
|
|
|
0.00
|
%
|
|
|
0.27
|
%
|
Change in valuation allowance
|
|
|
(16.50
|
)%
|
|
|
(49.18
|
)%
|
Income tax provision (benefit)
|
|
|
4.51
|
%
|
|
|
(27.89
|
)%
|
As of March 31, 2020, the Company has a
federal net operating loss carryforward of approximately $6,581,349, which may be carried forward indefinitely. Upon confirmation
of an ownership change, the net operating loss would be reduced and any remaining net operating loss utilization would be subject
to an annual limitation under Section 382 of the Internal Revenue Code. At the time of the business combination on April 7, 2020,
the value of the Company’s stock prior to the ownership change was negative, which would therefore limit the NOL to zero.
A valuation allowance has been established
to offset the net deferred tax asset to the extent the Company has determined that it is more likely than not that the future tax
benefits will not be realized.
The Company files a federal income tax
return and separate income tax returns in various states. For federal and certain states, the 2016 through 2019 tax years remain
open for examination by the tax authorities under the normal three-year statute of limitations. The Company plans to change to
a calendar year end and file a short year return for the period ending December 31, 2019.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION
CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2020
11. SUBSEQUENT EVENTS
The Company evaluates subsequent events
and transactions that occur after the balance sheet date up to the date that the financial statements were issued.
Except as described in these financial
statements and below, the Company did not identify subsequent events that would have required adjustment or disclosure in the financial
statements other than the following.
In December 2019, a novel strain of coronavirus
was reported in Wuhan, China. The World Health Organization has declared the outbreak to constitute a “Public Health Emergency
of International Concern.” 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 the Company’s operational and financial performance will depend
on certain developments, including the duration and spread of the outbreak, impact on the Company’s customers, employees
and vendors all of which are uncertain and cannot be predicted. At this point, the extent to which COVID-19 may impact the Company’s
financial condition or results of operations is uncertain.
On April 3, 2020, AVCT and the PIPE Investors
entered into the Securities Purchase Agreement, pursuant to which the PIPE Investors agreed to purchase, and the Company agreed
to sell the PIPE Units, each PIPE Unit consisting of (i) $1,000 in principal amount of the PIPE Debentures and (ii) one PIPE Warrant
to purchase 100 shares of common stock at an exercise price of $0.01 per whole share. Pursuant to the terms of the Securities
Purchase Agreement, the Company issued to PIPE Investors approximately 43,169 PIPE Units at the Closing. The Company received
approximately $9,500,000 in new funding as a result of the issuance. The Company may issue up to approximately 56,861 additional
PIPE Units in the aggregate in one or more subsequent dates through August 5, 2020.
At the time of the business combination
on April 7, 2020, Computex merged with and into Merger Sub, with Merger Sub surviving the Merger as a wholly-owned subsidiary
of AVCT, on the terms and subject to the conditions set forth in the Business Combination Agreement. As a result, all shares of
Computex common stock issued and outstanding immediately prior to the Closing were cancelled and all shares of Computex common
stock held in the treasury of Computex were cancelled without any conversion thereof. Each share of common stock of Merger Sub
issued and outstanding immediately prior to the Closing was converted into and exchanged for one validly issued, fully paid and
nonassessable share of Common Stock, par value $0.01 per share, of the Surviving Corporation; and AVCT delivered to Holdings (i)
the Stock Consideration, consisting of 8,189,490 shares of Common Stock of AVCT and (ii) the PIPE Consideration, consisting of
20,000 Units. The Company will need to engage an independent valuation firm to assist in the valuation of intangible assets acquired
in conjunction with the acquisition of Computex; however, that valuation has not yet been completed. Upon consummation of the Merger,
the Company issued to Holdings an aggregate of 8,189,490 shares of common stock. The aggregate value of the consideration issued
to Holdings in exchange for the equity of Computex was $61,211,000 as follows: $20,000,000 in convertible debt, $16,642,530 in
assumed debt and $24,576,659 in equity (8,189,490 shares of AVCT common stock valued at $3.00 per share).
Concurrently with the Closing, the Company,
the Surviving Corporation, the subsidiaries of the Surviving Corporation and Comerica Bank (“Comerica”) entered into
a Third Amendment to Loan Documents (the “Third Amendment”). The Third Amendment added the Company and the Surviving
Corporation as borrowers under the existing Credit Agreement, dated December 18, 2017 (as amended, the “Credit Agreement”),
to which Computex and Comerica are parties, 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 under the Credit Agreement.
To finance its growth strategy, the Surviving
Corporation continues to pursue strategic acquisitions and related growth opportunities and is seeking additional funding through
equity financing, including the sale of additional shares of common and preferred stock and conversion of PIPE debentures, and
debt financing.
In addition, on April 7, 2020, AVCT issued
to the PIPE Investors the Guaranty, pursuant to which such entities jointly and severally guaranteed the obligations of the Company
under the PIPE Debentures. Concurrently with the Closing, the Company issued approximately $8.6 million in aggregate principal
to the Sponsor as part of the PIPE Units issued in exchange for the cancellation of related party indebtedness previously incurred
by the Company and recorded as liabilities as of March 31, 2020.
On May 4, 2020, the
Company and Comerica entered into a Fourth Amendment to the Credit Agreement (the “Fourth Amendment”). The Fourth Amendment
amended certain provisions of the existing Credit Agreement, dated December 18, 2017, as amended, including 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 Paycheck Protection Program (“PPP”) established
under the Coronavirus Aid, Relief and Economic Security Act and the related rules and regulations and (ii) up to $1.5 million in
indebtedness incurred for the sole purpose of financing insurance premiums.
The Company obtained a PPP loan in the
amount of $4.1 million in April 2020 and presently anticipates meeting the PPP requirements for the loan to be forgiven in total.
Additionally, the Company obtained $1.2 million of insurance premium financing in May 2020, payable in nine equal monthly instalments
through February 2021.