The accompanying notes are an
integral part of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
The accompanying notes are an
integral part of the unaudited condensed consolidated financial statements.
The accompanying
notes are an integral part of the unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
1. Organization and Business Operations
Organization
American Virtual Cloud Technologies, Inc.
(“AVCT,” the “Company,” “we,” “us,” “our” or “Successor”)
was incorporated in Delaware on April 7, 2016.
On April 7, 2020 (the “Closing Date”),
AVCT (formerly known as Pensare Acquisition Corp.) consummated a business combination transaction (the “Business Combination”)
in which it acquired Stratos Management Systems, Inc. (“Computex”), a private operating company that does business
as Computex Technology Solutions. The Business Combination was consummated pursuant to the terms of an amended agreement originally
entered into on July 25, 2019. In connection with the closing of the Business Combination, the Company changed its name to American
Virtual Cloud Technologies, Inc. See Note 5 for additional information about the Business Combination.
In the Business Combination,
the Company is considered the acquirer and Computex is considered the acquiree and the Predecessor, for accounting purposes. The
Business Combination was accounted for using the acquisition method of accounting, and the Successor’s financial statements
reflect a new basis of accounting that is based on the fair value of the net assets acquired and liabilities assumed. In the accompanying
condensed consolidated financial statements, the Company clearly distinguishes between the entity that existed before the Closing
Date (“Predecessor”) and the entity that existed on and after such date (“Successor”). Because the Successor’s
financial statements are presented on a different basis from the Predecessor’s financial statements, the two entities may
not be comparable in certain respects. As a result, a black line is used to separate the Successor and the Predecessor columns
or sections in certain tables included in the condensed consolidated financial statements.
The accompanying condensed consolidated
financial statements of the Company include the accounts of AVCT and its wholly owned subsidiary, Computex. The financial position,
results of operations and cash flows described herein for the dates and periods prior to April 7, 2020 relate to the operations
of Computex and its subsidiaries. The historical financial information of AVCT prior to the business combination (a special purpose
acquisition company, or “SPAC”) are not reflected in the Predecessor financial statements as it is believed that including
such amounts would make those financial statements less useful to users. SPACs typically deposit the proceeds received from their
initial public offerings into a separate trust account until a business combination occurs. Once the business combination occurs,
such funds are then used to satisfy the consideration for the acquiree and/or to pay stockholders who elect to redeem their shares
of common stock in connection with the business combination. The operations of a SPAC, until the closing of a business combination,
usually consists of transaction expenses and income earned from the trust account investments.
Currently, the Company’s
primary operations are through its wholly owned subsidiary, Computex.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
Nature of business
Computex is a leading multi-brand technology
solutions provider to large global customers, providing a comprehensive and integrated set of technology solutions, through its
extensive hardware, software and value-added service offerings. The breadth of its offerings enables Computex to offer each customer
a complete technology solution. After performing an assessment of its customers’ needs, Computex designs best-fit solutions,
and with the help of leading vendors in the industry, helps its customers to procure products that fit their global needs.
With primary operating locations
in Minnesota, Michigan, Florida and Texas, services offered by Computex include Unified Communications-as-a-Service (“UCaaS”),
directory and messaging, enterprise networking, cybersecurity, collaboration, data center services, integration, storage, backup,
virtualization, and converged infrastructures.
Recent Development
On August 5, 2020, we entered into a Purchase
Agreement (the “Purchase Agreement”) with Ribbon Communications, Inc. (“Ribbon”), Ribbon Communications
Operating Company, Inc. (“RCOCI”) and Ribbon Communications International Limited (together with RCOCI, the “Sellers”),
pursuant to which AVCT has agreed to purchase the Sellers’ cloud-based enterprise services business (also known as the Kandy
Communications business) (the “Kandy Business”) by acquiring certain of the Sellers’ and their respective affiliates
assets (and assuming certain of the Sellers’ and their respective affiliates’ liabilities) primarily associated with
the Kandy Business, and acquiring all of the outstanding interests of Kandy Communications LLC. See Note 16 of the condensed consolidated
financial statements for more information.
Covid-19
Commencing in December 2019, the novel
strain of coronavirus (“COVID-19”) began spreading throughout the world, including the first outbreak in the US in February
2020. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation
measures worldwide. COVID-19 has disrupted and continues to significantly disrupt local, regional, and global economies and businesses.
The COVID-19 outbreak is disrupting supply chains and affecting production and sales across a range of industries. The extent of
the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration
and spread of the outbreak, impact on our customers, employees and vendors, all of which are uncertain and cannot be predicted.
At this point, the extent to which COVID-19 may impact our financial condition and/or results of operations is uncertain.
In response to COVID-19, we have put into
place certain restrictions, requirements and guidelines to protect the health of our employees and clients, including requiring
that certain conditions be met before employees return to the Company’s offices. Also, to protect the health and safety of
our employees, our daily execution has evolved into a largely virtual model. Between April 1, 2020 and September 1, 2020,
salaries of Computex’s employees were reduced and there are efforts to reduce other operating expenses relative to revenue. We
plan to continue to monitor the current environment and may take further actions that may be required by federal, state or local
authorities or that we determine are in the interests of our employees, customers, and partners.
NASDAQ listing
On April 9, 2020, the Company was notified
by the NASDAQ via a certified letter (the “Determination Letter”) that it had not complied with the requirements of
the NASDAQ Listing Rule IM-5101-2, which required the Company to meet the requirements for initial listing after the completion
of the business combination. The Determination Letter stated that the Company’s common stock did not meet the minimum $4.00
bid price and the $15 million market value requirement for publicly held shares, which are set forth in the NASDAQ Listing Rule
5505. On May 27, 2020, the NASDAQ granted the Company an extension to demonstrate compliance with the applicable requirements.
During the third quarter of 2020, the Company achieved compliance and was so notified by the NASDAQ via letter dated August 26,
2020.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
2. Liquidity
At September 30, 2020, the Company had
unrestricted and restricted cash of $3,715 and $688, respectively, in its operating bank accounts and had a working capital deficit
of $20,690. Also, the Company’s Credit Agreement (as defined in Note 8) matures on June 30, 2021.
On or before the maturity date of the Credit
Agreement, the Company plans to seek to either negotiate an extension of the Credit Agreement or enter into a new agreement
with another lender. In addition, the Company is in the process of seeking to raise working capital for its current operations
and also to fund the pending acquisition of the Kandy Business (as more fully discussed in Note 16). There can be no assurance
that financing will be available in the amounts that the Company requires or on terms that are acceptable, if at all.
3. Summary of Significant Accounting Policies
Basis of presentation
The accompanying unaudited condensed consolidated
financial statements are presented in conformity with accounting principles generally accepted in the United States of America
(“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8
of Regulation S-X of the Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures normally
included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and
regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary
for a comprehensive presentation of financial position, results of operations, or cash flows. In the opinion of management, the
accompanying condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which
are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.
These condensed consolidated financial
statements should be read in conjunction with Stratos Management Systems, Inc.’s consolidated financial statements and notes
as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017, included in the Report on Form 8-K/A
filed with the SEC on April 14, 2020. The interim results for the periods ended September 30, 2020 are not necessarily indicative
of the results expected for the year ending December 31, 2020 or any future interim periods.
As a result of the Business Combination,
the Company is considered the acquirer and Computex is considered the acquiree and the accounting predecessor. The Business Combination
was accounted for using the acquisition method of accounting, and the Successor’s financial statements reflect a new basis
of accounting that is based on the fair value of the net assets acquired. In the accompanying condensed consolidated financial
statements, the Company clearly distinguishes between the entity that existed before the Closing Date (“Predecessor”)
and the entity that existed on and after such date (“Successor”). Because the Successor’s financial statements
are presented on a different basis from the Predecessor’s financial statements, the two entities may not be comparable, in
certain respects. As a result, a black line is used to separate the Successor and the Predecessor columns or sections in certain
tables included in the condensed consolidated financial statements.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
Determining fair values of certain
assets acquired and liabilities assumed requires the exercise of judgment and often involves the use of significant estimates and
assumptions. See Note 5 for a discussion of the fair value estimates that were recorded in connection with the Company’s
acquisition of Computex.
Principles of consolidation
The accompanying Successor condensed
consolidated financial statements include the accounts of AVCT and its wholly owned subsidiary, Computex. The Predecessor condensed
consolidated financial statements reflect only the accounts of Computex and its subsidiaries. All intercompany balances and transactions
have been eliminated.
As more fully discussed above,
the historical financial information of AVCT prior to the business combination (a SPAC) has not been reflected in the Predecessor
financial statements as such historical amounts have been determined not to be useful information to a user of the financial statements.
Accordingly, all activity reported prior to April 7, 2020 (the Predecessor period) reflect only the operations of Computex.
Use of estimates
The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales (or
revenues) and expenses during the reporting period.
Making estimates requires management to
exercise significant judgment. It is at least reasonably possible that estimates made as of the date of the financial statements
could change in the near term due to one or more future events. Accordingly, the actual results could differ significantly from
those estimates. Significant accounting estimates reflected in the Company’s condensed consolidated financial statements
include, but are not limited to, revenue recognition, allowance for doubtful accounts, recognition and measurement of income tax
assets, valuation of share-based compensation, and the valuation of net assets acquired in the Business Combination.
Revenue recognition
Effective January 1, 2019, the Company
adopted Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This ASU created
the Financial Accounting Standard Board’s (“FASB’s”), Accounting Standard Codification (ASC), Topic 606
(“Topic 606”) which provides a comprehensive new revenue recognition guide. Below are the Company’s significant
revenue recognition policies including those that were changed as a result of the adoption of Topic 606.
Revenue from contracts with customers are
not recorded until the Company has the approval and commitment from the parties, the rights of the parties are identified, payment
terms are established, the contract has commercial substance and collectability of the consideration is probable. The Company also
evaluates the following indicators, amongst others, when determining whether it is acting as a principal in the transaction (and
therefore whether to record revenue on a gross basis): (i) whether the Company is primarily responsible for fulfilling the promise
to provide the specified good or service, (ii) whether the Company has the inventory risk before the specified good or service
has been transferred to a customer or after transfer of control to the customer and (iii) whether the Company has the discretion
to establish the price for the specified good or service. If the terms of a transaction do not indicate that the Company is acting
as a principal in the transaction, then the Company is acting as an agent in the transaction and therefore, the associated revenue
is recognized on a net basis (that is revenue net of costs).
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
Revenue is recognized once control passes
to the customer. The following indicators are evaluated in determining when control has passed to the customer: (i) whether the
Company has a right to payment for the product or service, (ii) whether the customer has legal title to the product, (iii) whether
the Company has transferred physical possession of the product to the customer, (iv) whether the customer has the significant risk
and rewards of ownership of the product and (v) whether the customer has accepted the product. The Company’s products can be delivered
to customers in a variety of ways, including (i) physical shipment from the Company’s warehouse, (ii) via drop-shipment by the
vendor or supplier or (iii) via electronic delivery of keys for software licenses. The Company’s shipping terms typically allow
for the Company to recognize revenue when the product is shipped to the customer’s location.
Hardware
Revenue from the sale of hardware is recognized
on a gross basis, as the Company is deemed to be acting as the principal in these transactions. The selling price to the customer
is recorded as revenue and the acquisition cost is recorded within cost of revenue. The Company recognizes revenue from these transactions
when control has passed to the customer, which is usually upon shipment.
In some instances, the customer agrees
to buy the product from the Company, but requests delivery at a later date, commonly known as a bill-and-hold arrangement. For
these transactions, the Company deems that control passes to the customer when the product is ready for delivery. The Company classifies
such products as products ready for delivery when the customer is in possession of a signed agreement, the significant risk and
rewards for the product has passed to the customer, the customer has the ability to direct the asset, the product has been set
aside specifically for the customer and the Company cannot redirect the product for the benefit of another customer.
In drop-shipment arrangements, whereby
the Company arranges for the vendor to deliver the product directly to the customer without the inventory first being held at its
warehouses, the Company considers itself to be the principal and therefore, recognizes the related revenue on a gross basis.
Software
Revenues from most software license sales
are recognized as a single performance obligation on a net basis, as the Company is deemed to be acting as an agent in these transactions.
Revenues in these instances are recognized at the point the software license is delivered to the customer. Generally, software
licenses are sold with accompanying third-party delivered software support, which is a product that allows customers to upgrade,
at no additional cost, to the latest technology if new capabilities are introduced during the period that the software support
is in effect. The Company evaluates whether the software support is a separate performance obligation by assessing whether the
third-party delivered software support is critical or essential to the core functionality of the software itself. This involves
considering whether the software provides its original intended functionality to the customer without the updates, whether the
customer would ascribe a higher value to the upgrades versus the up-front deliverable, whether the customer would expect frequent
intelligence updates to the software (such as updates that maintain the original functionality), and whether the customer chooses
to not delay or always install upgrades. If the Company determines that the accompanying third-party delivered software support
is critical or essential to the core functionality of the software license, the software license and the accompanying third-party
delivered software support are recognized as a single performance obligation. The value of the product is primarily based on the
accompanying support delivered by a third-party, and therefore the Company is acting as an agent in these transactions and therefore,
recognizes the associated revenue on a net basis at the point that the associated software license is delivered to the customer.
Third-party services
The Company is deemed to be the agent in
the sale of third-party maintenance, software support and services, as the third-party controls the service until it is transferred
to the customer. In these instances, the Company recognizes the revenue on a net basis equal to the selling price to the customer
less the acquisition costs. Such revenue is recognized when the customer and vendor accept the terms and conditions of the arrangement.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
Managed and professional services
Professional services offerings include
assessments, project management, staging, configuration, and integration. Managed services offerings range from monitoring and
notification to a fully outsourced network management solution. In these arrangements, the Company satisfies the performance obligations
and recognizes revenue over time.
Such professional services are provided
under both time and materials and fixed price contracts. When services are provided on a time and materials basis, the Company
recognizes revenues at agreed-upon billing rates as services are performed. When services are provided on a fixed fee basis, the
Company recognizes revenues over time in proportion to the Company’s progress towards satisfaction of the performance obligation.
In arrangements for managed services, the
Company’s arrangement is typically a single performance obligation comprised of a series of distinct services that are substantially
the same and that have the same pattern of transfer (i.e., distinct days of service). The Company typically recognizes revenue
from these services on a straight-line basis over the period services are provided, which is consistent with the timing of services
rendered.
Freight and sales tax
Freight billed to customers is included
within sales on the condensed consolidated statement of operations. The related freight charged to the Company is included within
cost of revenue. Sales tax collected from customers is remitted to governmental authorities on a net basis.
Contract liabilities
Contract liabilities (or deferred or unearned
revenue) are recognized when cash payments are received or due in advance of the Company’s performance obligations.
Costs of obtaining and fulfilling a
contract
The Company capitalizes costs that are
incremental to obtaining customer contracts, predominately sales commissions. Such deferrals are then amortized to expense, in
proportion to each completed contract performance obligation, on a straight-line basis over the period during which the Company
fulfills its performance obligation.
Costs associated with contracts whereby
the Company has an obligation to perform services, are incurred specifically to assist the Company in rendering services to its
customers and are recorded as deferred customer support contract costs at the time the costs are incurred. The costs are amortized
to expense on a straight-line basis over the period during which the Company fulfills its performance obligation.
Cash, cash equivalents and restricted cash
The Company considers all short-term investments
with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at September
30, 2020 and December 31, 2019. Restricted cash consists of the balance of amounts placed in escrow at Comerica Bank in connection
with the third amendment to the Credit Agreement (as defined in Note 8) to be applied to interest payments. In the event such amounts
in escrow are insufficient to satisfy interest payments, such interest payments may be paid using other funds.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
Trade receivables, net
Trade receivables arise from granting credit
to customers in the normal course of business, are unsecured and are presented net of an allowance for doubtful accounts. The allowance
is based on a number of factors, including the length of time the receivable is past due, the Company’s previous loss history,
the customer’s current ability to pay, and the general condition of the economy and industry as a whole. Depending on the
customer, payment is due between 30 and 60 days after the customer receives an invoice. Accounts that are more than 45 days past
due are individually analyzed for collectability. When all collection efforts have been exhausted, the accounts are written off.
Historically, the Company has not suffered significant losses with respect to its trade receivables.
Inventories
Inventories, which consist of purchased
components for resale, are valued at the lower of average cost (which approximates the first-in, first-out method) and net realizable
value. The need for an inventory obsolescence reserve is based on an evaluation of slow-moving or obsolete inventory. No obsolescence
reserve was deemed necessary at September 30, 2020 and December 31, 2019.
Business combinations
The Company accounts for business combinations
in accordance with ASC 805, Business Combinations. Accordingly, identifiable tangible and intangible assets acquired and
liabilities assumed are recorded at their estimated fair values, the excess of the purchase consideration over the fair values
of net assets acquired is recorded as goodwill, and transaction costs are expensed as incurred.
Long-lived assets
Property and equipment are recorded at
cost and presented net of accumulated depreciation. Major additions and betterments are capitalized while maintenance and repairs,
which do not improve or extend the life of the respective assets, are expensed. Property and equipment are depreciated on the straight-line
basis over their estimated useful lives.
Definite-lived and indefinite-lived intangible
assets arising from business combinations include customer relationships, trademarks and noncompete agreements. Definite-lived
intangible assets are amortized over the estimated period during which the asset is expected to contribute directly or indirectly
to future cash flows. Intangible assets that are considered to be indefinite-lived are not amortized.
The Company reviews its long-lived assets
for impairment whenever events or circumstances exist that indicate the carrying amount of an asset or asset group may not be recoverable.
The recoverability of long-lived assets is measured by a comparison of the carrying amount of the asset or asset group to the future
undiscounted cash flows expected to be generated by that asset group. If the asset or asset group is considered to be impaired,
an impairment loss would be recorded to adjust the carrying amounts to the estimated fair value. No such impairment was recorded
during the periods covered by this report.
Goodwill
Goodwill represents the excess of the purchase
price over the fair value of the net identifiable assets acquired in a business combination. Goodwill is reviewed for impairment
at least annually, in December, or more frequently if a triggering event occurs between impairment testing dates. Currently, the
Company operates as a single operating segment and as a single reporting unit for the purpose of evaluating goodwill impairment.
The Company’s impairment assessment begins with a qualitative assessment to determine whether it is more likely than not that the
fair value of the reporting unit is less than its carrying value. The qualitative assessment includes comparing the overall financial
performance of the Company against the planned results used in the last quantitative goodwill impairment test. Additionally, the
Company’s fair value is assessed in light of certain events and circumstances, including macroeconomic conditions, industry and
market considerations, cost factors, and other relevant entity and Company specific events. The selection and assessment of qualitative
factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value
involves significant judgment and estimates. If it is determined under the qualitative assessment that it is more likely than not
that the fair value of a reporting unit is less than its carrying value, then a two-step quantitative impairment test is performed.
Under the first step, the estimated fair value of the Company would be compared with its carrying value (including goodwill). If
the fair value of the Company exceeds its carrying value, step two does not need to be performed. If the estimated fair value of
the Company is less than its carrying value, an indication of goodwill impairment exists for the Company and it would need to perform
step two of the impairment test. Under step two, an impairment loss would be recognized for any excess of the carrying amount of
the Company’s goodwill over the implied fair value of that goodwill. Fair value of the Company under the two-step assessment is
determined using a combination of both income and market-based approaches. No goodwill impairments were identified for the periods
covered by this report.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
Deferred financing fees and debt
discount
Deferred financing fees, which are debt
issuance costs that qualify for deferral in connection with the issuance of new debt or the modification of existing debt facilities,
are amortized over the term of the related debt using the effective interest method (straight-line method for revolving credit
arrangements). Debt discounts are also amortized using the effective interest method, unless the interest method approximates the
straight-line method. Amortization of such costs are included in interest expense, while the unamortized balances of deferred financing
fees and debt discount are presented as reductions of the carrying value of the related debt.
Income taxes
Income taxes are accounted for under the
asset and liability method pursuant to ASC Topic 740, Income Taxes (ASC 740). Under this method, deferred tax assets and
liabilities are recognized for the expected future consequences attributable to the differences between the financial statement
carrying amounts and the tax basis of assets and liabilities. The effect of a change in tax rates on deferred tax assets and liabilities
is recognized in the period of the change. Further, deferred tax assets are recognized for the expected realization of available
net operating loss and tax credit carryforwards. A valuation allowance is recorded on gross deferred tax assets when it is “more
likely than not” that such asset will not be realized. When evaluating the realizability of deferred tax assets, all evidence,
both positive and negative, is evaluated. Items considered in this analysis include the ability to carry back losses, the reversal
of temporary differences, tax planning strategies, and expectations of future earnings. The Company reviews its deferred tax assets
on a quarterly basis to determine if a valuation allowance is required based upon these factors. Changes in the Company’s assessment
of the need for a valuation allowance could give rise to a change in such allowance, potentially resulting in additional expense
or benefit in the period of change.
The Company’s income tax provision or benefit
includes U.S. federal, state and local income taxes and is based on pre-tax income or loss. In determining the annual effective
income tax rate, the Company analyzed various factors, including its annual earnings and taxing jurisdictions in which the earnings
were generated, the impact of state and local income taxes, and its ability to use tax credits and net operating loss carryforwards.
Under ASC 740, the amount of tax benefit
to be recognized is the amount of benefit that is “more likely than not” to be sustained upon examination. The Company
analyzes its tax filing positions in all of the U.S. federal, state, local, and foreign tax jurisdictions where it is required
to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, the Company determines
that uncertainties in tax positions exist, a liability is established in the condensed consolidated financial statements. The Company
recognizes accrued interest and penalties related to unrecognized tax positions in the provision for income taxes.
The Company’s income tax returns
are subject to examination by federal and state authorities in accordance with prescribed statutes.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
Share-based compensation
The Company accounts for share-based compensation
in accordance with ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement
and recognition of compensation expense, based on estimated fair values, for share-based awards made to employees and directors.
Based on the grant date fair value of the award, the Company recognizes compensation expense, over the requisite service periods
on a straight-line basis, and accounts for forfeitures as they occur.
For restricted
stock awards with a time-based vesting condition, the fair value, which is fixed at the grant date for purposes of recognizing
compensation costs, is determined by reference to the Company’s stock price on the grant date. A portion of the Company’s
restricted stock awards contains a market condition. For such restricted stock awards, the fair value is estimated using a Monte
Carlo simulation model, whereby the fair value of such awards is fixed at the grant date and amortized over the shorter of the
performance or service period. The Monte Carlo simulation valuation model utilizes the following
assumptions: expected stock price volatility, the expected life of the awards and a risk-free interest rate. Significant judgment
is required in estimating the expected volatility of our common stock. Due to the limited trading history of the Company’s
common stock, estimated volatility was based on a peer group of public companies and took into consideration the increased short-term
volatility in historical data due to COVID-19.
Net loss per common share
Pursuant to ASC Topic 260, Earnings
Per Share, basic net loss per common share is computed by dividing net loss by the weighted average number of common shares
outstanding during the reporting periods.
Diluted net loss per share is based on
the weighted average number of shares outstanding during the periods plus the effect, if any, of the potential exercise or conversion
of securities, such as warrants and restricted stock units that would cause the issuance of additional shares of common stock.
In computing the basic and diluted net loss per share applicable to common stockholders during the periods listed in the condensed
consolidated statements of operations, the weighted average number of shares are the same for both basic and diluted net loss per
share due to the fact that when a net loss exists, dilutive shares are not included in the calculation as the impact is anti-dilutive.
An anti-dilutive impact is an increase in earnings per share or a decrease in net loss per share that would result from the conversion,
exercise, or issuance of certain contingent securities.
Concentration of business and credit risk
Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist primarily of cash and trade receivables. Cash held by the Company,
in financial institutions, regularly exceeds the federally insured limit of $250. At September 30, 2020, cash balances held with
a financial institution exceeded the federally insured limit. However, management does not believe this poses a significant credit
risk.
No customer accounted for more than 10%
of sales in each of the periods presented in the accompanying condensed consolidated financial statements.
One customer accounted
for 10% or more of accounts receivable at September 30, 2020. At December 31, 2019, one customer accounted for 11% of accounts
receivable. During the Successor three months ended September 30, 2020, and the Successor period April 7, 2020 through September
30, 2020, one of our vendors accounted for at least 10% of costs of revenue (accounting for $18.9 million and $31.1 million, respectively).
At September 30, 2020, one vendor accounted for at least 10% of accounts payable (accounting for $16.0 million).
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
Fair value of financial instruments
Fair value is the price that would be received
from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value,
the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market
participants would use when pricing the asset or liability.
ASC Topic 820, Fair Value Measurements
and Disclosures provides a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair
value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based
upon the lowest level of input that is significant to the fair value measurement as follows:
|
●
|
Level 1 — inputs are based upon unadjusted quoted prices for identical assets or liabilities traded in active markets.
|
|
|
|
|
●
|
Level 2 — inputs are based upon quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
|
●
|
Level 3 — inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
|
Assets measured at fair value on a non-recurring
basis include goodwill, and tangible and intangible assets. Such assets are reviewed annually for impairment indicators. If a triggering
event has occurred, the assets are re-measured when the estimated fair value of the corresponding asset group is less than the
carrying value. The fair value measurements, in such instances, are based on significant unobservable inputs (Level 3).
The carrying amounts of the Company’s
financial instruments, which include trade receivables, deposits, accounts payable and accrued expenses and debt at floating interest
rates, approximate their fair values at September 30, 2020 and December 31, 2019, principally due to their short-term nature, maturities
or nature of interest rates.
Advertising and vendor considerations
Advertising costs are expensed as incurred.
Vendor considerations are payments and
credits that the Company receives from its vendors and distributors on a quarterly basis. Such consideration includes volume-based
incentives and reimbursement for marketing expenses. Volume-based incentive payments are deducted from cost of revenue, while marketing-based
incentives are deducted from advertising expense in the period in which the program takes place.
Reclassifications
Certain prior period amounts have been
reclassified to conform to the current period presentation.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
Seasonality
Our hardware revenue tends to be seasonal with higher revenues
occurring in the first and fourth quarter of each year.
Segment reporting
As of September 30, 2020, the Company reports
operating results and financial data in one operating and reportable segment. The Chief Executive Officer, who is the chief operating
decision maker, manages the Company as a single profit center in order to promote collaboration, provide comprehensive service
offerings across the entire customer base, and provide incentives to employees based on the success of the organization as a whole.
Although certain information regarding selected products or services is discussed for purposes of promoting an understanding of
the Company’s business, the chief operating decision maker manages the Company and allocates resources at the consolidated level.
Emerging growth company
The Company is an “emerging growth
company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, (the “Securities Act”),
as modified by the Jumpstart our Business Startups Act of 2012, (the “JOBS Act”), and it may take advantage of certain
exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies
including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements,
and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of
any golden parachute payments not previously approved.
Further, Section 102(b) (1) of
the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards
until private companies are required to comply with the new or revised financial accounting standards. Private companies are those
companies that have not had a Securities Act registration statement declared effective or do not have a class of securities registered
under the Exchange Act. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply
with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company
has elected not to opt out of such extended transition period, which means that when a standard is issued or revised, it adopts
the new or revised standard at the time private companies adopt the new or revised standard. Therefore, the Company’s financial
statements may not be comparable to certain public companies.
4. Recently Issued and Adopted Accounting Standards
Recently issued accounting standards
As an emerging growth company, the Company
has the option of adopting new accounting pronouncements on a delayed basis and has opted to take advantage of this option. As
a result, the Company plans to adopt new accounting standards based on the timeline for adoption afforded to privately held companies.
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842), as amended by multiple updates, hereafter ASC 842. ASC 842 requires lessees to recognize, on
the balance sheet, a lease liability and a lease asset for all leases, including operating leases with a lease term greater than
12 months and requires lessors to classify leases as either sales-type, direct financing or operating. ASC 842 also expands the
required quantitative and qualitative disclosures surrounding leases. As long as the Company is an emerging growth company, the
current effective date of adoption is fiscal year 2023, which is the required date of adoption for private companies. Early adoption
is permitted. While the Company continues to assess the effects of adoption, it currently believes the most significant effects
relate to the recognition, on the consolidated balance sheet, of right-of-use assets and lease liabilities related to operating
leases.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
Recently adopted accounting standards
In July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic
815). The amendments in Part I of the Update change the reclassification analysis of certain equity-linked financial instruments
(or embedded features) with down-round features. The amendments in Part II of the update re-characterize the indefinite deferral
of certain provisions of Topic 480 that now are presented as pending content in the ASC, to a scope exception. The amendments in
Part I of this update was effective for the Company on January 1, 2020 (the date it was effective for private companies). The amendments
in Part II of the update did not require any transition guidance because those amendments did not have an accounting effect. The
adoption did not have a material effect on the Company’s condensed consolidated financial statements as of the date of adoption.
The Company adopted Topic 606 with an initial
application date of January 1, 2019. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs – Contracts
with Customers, (Subtopic 340) which requires the deferral of incremental costs of obtaining a contract with a customer.
The Company applied Topic 606 using the
modified retrospective transition method. In adopting the new standard, the net cumulative effect from prior periods of applying
the guidance in Topic 606 was recognized as a cumulative effect adjustment to the opening balance of accumulated deficit as of
January 1, 2019. Additionally, the Company has elected the option to only account for contracts that remained open as of the January
1, 2019 transition date in accordance with Topic 606. Revenue recognition for contracts for which substantially all of the revenue
was recognized in accordance with the revenue guidance in effect before January 1, 2019 has not been changed. A summary of the
significant changes and the quantitative impact of the changes as of the application date are set forth below.
|
●
|
For sales transactions of certain software products that are sold with integral third-party delivered software support, the Company changed its accounting policy to record both the software license and the accompanying software support on a net basis, as the Company is considered to be the agent in the arrangement, given the predominant nature of the goods and services provided to the customer. Under previous guidance, the Company bifurcated the sale of the software license from the sale of the support contract and recorded the sale of both the software product and software support on a gross sales recognition basis. This change had no effect on reported gross profit dollars associated with these transactions.
|
|
●
|
For sales transactions for maintenance, software support and services that are to be performed by a third-party, the Company changed its accounting policy to record these sales on a net basis equal to the selling price to the customer less the acquisition cost, as the third-party controls the service. The Company recognizes revenue from these sales transactions when the customer and vendor accept the terms and conditions of the arrangement. Under previous guidance, the Company recorded the sales of third-party maintenance, software support and service contracts on a gross sales recognition basis.
|
|
●
|
The accounting for sales commissions on contracts with performance periods that exceed one year changed such that the Company records such sales commissions as an asset and recognizes the expense over the related contract performance period. Under previous guidance, certain sales commissions were expensed in the period the transaction was generated.
|
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
The total cumulative effect adjustment
from prior periods that the Company recognized in the consolidated balance sheet as of January 1, 2019 as an adjustment to accumulated
deficit was $99 as reflected in the following table (in thousands):
|
|
December 31,
2018
|
|
|
Adjustments
|
|
|
January 1,
2019
|
|
|
|
Predecessor
|
|
|
|
|
|
Predecessor
|
|
|
|
(as reported)
|
|
|
|
|
|
(as adjusted)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Trade receivables, net
|
|
$
|
41,328
|
|
|
$
|
-
|
|
|
$
|
41,328
|
|
Other current assets
|
|
|
972
|
|
|
|
99
|
|
|
|
1,071
|
|
Deferred contract costs
|
|
|
9
|
|
|
|
-
|
|
|
|
9
|
|
TOTAL ASSETS
|
|
$
|
42,309
|
|
|
$
|
99
|
|
|
$
|
42,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
38,694
|
|
|
|
|
|
|
$
|
38,694
|
|
Deferred revenue
|
|
|
6,953
|
|
|
|
|
|
|
|
6,953
|
|
|
|
$
|
45,647
|
|
|
$
|
-
|
|
|
$
|
45,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(6,640
|
)
|
|
$
|
99
|
|
|
$
|
(6,541
|
)
|
The following tables summarize the effects
of adopting Topic 606 on the Company’s consolidated statement of operations for the year ended December 31, 2019 (in thousands):
|
|
For the Year Ended
December 31, 2019
|
|
|
|
|
|
|
Without
|
|
|
|
|
|
|
|
|
|
Adoption
|
|
|
|
|
|
|
Predecessor
|
|
|
of
|
|
|
Topic 606
|
|
|
|
(as reported)
|
|
|
Topic 606
|
|
|
Impact
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
85,716
|
|
|
$
|
121,053
|
|
|
$
|
(35,337
|
)
|
Cost of revenue
|
|
|
61,309
|
|
|
|
96,646
|
|
|
|
(35,337
|
)
|
Gross profit
|
|
|
24,407
|
|
|
|
24,407
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
28,021
|
|
|
|
27,922
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,614
|
)
|
|
|
(3,515
|
)
|
|
|
(99
|
)
|
For the year ended December 31, 2019, the
adoption of Topic 606 increased net cash provided by operating activities by $99 and had no impact on net cash used in investing
and financing activities.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
5. Acquisitions
On April 7, 2020, the Company
consummated the Business Combination that resulted in the acquisition of Computex. The acquisition qualified as a business combination
under ASC 805. Accordingly, the Company recorded assets acquired and liabilities assumed at their acquisition-date fair values.
The excess of the purchase price over the fair value of assets acquired and liabilities assumed was recorded as goodwill. The goodwill,
which is not deductible for tax purposes, results from factors such as an assembled workforce and management’s industry knowledge.
The following table represents the allocation
of the preliminary purchase consideration among the assets acquired and liabilities assumed at their estimated acquisition-date
fair values. Management’s evaluation and allocation of such purchase consideration is preliminary and subject to working
capital and other adjustments.
Consideration paid:
|
|
|
|
Convertible debentures with warrants that grant the right
to acquire 2,000,000 shares of common stock at an exercise price of $0.01 per share
|
|
$
|
20,000
|
|
Assumed debt
|
|
|
16,643
|
|
AVCT common stock (8,189,490 shares at $3.00 per share)
|
|
|
24,568
|
|
Working capital adjustment satisfied by the issuance of AVCT common stock (117,231 shares at $4.75 per share)
|
|
|
557
|
|
Total consideration paid
|
|
$
|
61,768
|
|
|
|
|
|
|
Net assets acquired:
|
|
|
|
|
Current assets
|
|
$
|
16,972
|
|
Customer relationships (weighted average life - 10 years)
|
|
|
17,300
|
|
Trade names (weighted average life - 10 years)
|
|
|
7,000
|
|
Furniture & equipment
|
|
|
6,435
|
|
Leasehold improvements
|
|
|
2,375
|
|
Other assets
|
|
|
88
|
|
Current liabilities
|
|
|
(26,965
|
)
|
Deferred tax liability
|
|
|
(3,450
|
)
|
Other liabilities
|
|
|
(116
|
)
|
Total net assets acquired
|
|
$
|
19,639
|
|
Goodwill
|
|
|
42,129
|
|
Total consideration paid
|
|
$
|
61,768
|
|
Identifiable intangible assets
acquired consist of customer relationships of $17,300 and trade names of $7,000. Both the customer relationships and the trade
names were valued using a form of the income approach. The customer relationship was valued using the Multi-Period Excess Earnings
Method (or MPEEM) and the method used for the trade names was the Relief from Royalty Method. AVCT incurred transaction costs of
$142 between April 7, 2020 and September 30, 2020, which was net of a credit of $903 granted by a creditor whose account was settled
by the issuance of $2,500 in Debentures, $1,500 in shares of common stock and cash of $100.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
Since the results of operations
prior to April 7, 2020 relate to the operations of Computex, excluded from the Predecessor statement of operations are investment
income earned and transaction costs incurred by AVCT. Accordingly, excluded are the following:
|
|
January 1,
2020
|
|
|
July 1,
2019
|
|
|
January 1,
2019
|
|
|
|
through
|
|
|
through
|
|
|
through
|
|
|
|
April 6,
2020
|
|
|
September 30,
2019
|
|
|
September 30,
2019
|
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
Investment income
|
|
$
|
1,365
|
|
|
$
|
133
|
|
|
$
|
1,352
|
|
Transaction costs
|
|
|
6,887
|
|
|
|
2,731
|
|
|
|
3,428
|
|
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial
information presents the combined results of operations for the Company and gives effect to the Computex business combination as
if the business combination had occurred on January 1, 2019 (in thousands):
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
Revenues
|
|
$
|
25,968
|
|
|
$
|
20,332
|
|
|
$
|
64,102
|
|
|
$
|
66,156
|
|
Net loss
|
|
|
(4,838
|
)
|
|
|
(1,458
|
)
|
|
|
(10,625
|
)
|
|
|
(3,927
|
)
|
The pro forma financial information is
not necessarily indicative of the results of operations that would have been realized if the Business Combination had been completed
on January 1, 2019. Such pro forma financial information does not give effect to any integration costs related to the acquired
company.
The combined net loss in the table above
was adjusted for the transaction costs related to the Business Combination (included as an expense in the nine months ended September
30, 2019 and excluded as an expense in the nine months ended September 30, 2020) and the incremental change in the amortization
of intangible assets (adjustment relates to the three and nine months ended September 30, 2019 and the portion of the nine months
ended September 30, 2020 that relates to the Predecessor period).
6. Goodwill and intangible assets
The Company’s intangible assets as of September 30, 2020
and December 31, 2019 consisted of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
17,300
|
|
|
$
|
9,355
|
|
Tradenames
|
|
|
7,000
|
|
|
|
2,110
|
|
Noncompete agreements
|
|
|
-
|
|
|
|
6,380
|
|
Less accumulated amortization
|
|
|
(1,158
|
)
|
|
|
(15,441
|
)
|
Intangible assets, net of accumulated amortization
|
|
|
23,142
|
|
|
|
2,404
|
|
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
The estimated lives of the intangible assets, which approximate
their weighted average useful lives, as of September 30, 2020, are included in Note 5. Amortization of intangibles were as follows:
|
|
July 1,
2020
|
|
|
April 7,
2020
|
|
|
January 1,
2020
|
|
|
July 1,
2019
|
|
|
January 1,
2019
|
|
|
|
through
|
|
|
through
|
|
|
through
|
|
|
through
|
|
|
through
|
|
|
|
September 30,
2020
|
|
|
September 30,
2020
|
|
|
April 6,
2020
|
|
|
September 30,
2019
|
|
|
September 30,
2019
|
|
|
|
Successor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
Amortization of intangibles
|
|
$
|
608
|
|
|
$
|
1,158
|
|
|
$
|
263
|
|
|
$
|
247
|
|
|
$
|
740
|
|
As of September 30, 2020, the expected amortization expense
for definite-lived intangible assets for the next five years was as follows:
Three months ended December 31, 2020
|
|
$
|
624
|
|
Fiscal year 2021
|
|
|
2,430
|
|
Fiscal year 2022
|
|
|
2,430
|
|
Fiscal year 2023
|
|
|
2,430
|
|
Fiscal year 2024
|
|
|
2,430
|
|
Thereafter
|
|
|
12,798
|
|
Total
|
|
$
|
23,142
|
|
There was no impairment of goodwill as of September 30, 2020
and December 31, 2019.
7. Accounts payable and accrued expenses
Accounts payable and accrued expenses were as follows at September
30, 2020 and December 31, 2019:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Accounts payable
|
|
$
|
21,226
|
|
|
$
|
18,999
|
|
Accrued compensation, benefits and related accruals
|
|
|
2,458
|
|
|
|
1,847
|
|
Accrued professional fees
|
|
|
2,547
|
|
|
|
-
|
|
Other
|
|
|
1,293
|
|
|
|
885
|
|
|
|
|
27,524
|
|
|
|
21,731
|
|
8. Long-Term Debt
In connection with the consummation of
the Business Combination, the Company assumed the obligations of Computex under a credit agreement with Comerica Bank (as amended,
the “Credit Agreement”). On the Closing Date, the Company and Comerica Bank entered into a third amendment to the Credit
Agreement that added the Company as borrowers and amended certain provisions of the Credit Agreement, including changing the maturity
date of the loans under the Credit Agreement to December 31, 2020, and removing certain financial covenants. On November 13, 2020,
the Company and Comerica Bank entered into a fifth amendment to the Credit Agreement (the “Fifth Amendment”) that extends
the maturity date to June 30, 2021, provides for a decrease in maximum borrowings on the revolving note effective April 1, 2021,
amends the interest rates and, commencing January 31, 2021, provides for a minimum monthly liquidity (defined as unrestricted cash
plus availability under the revolving note) of $3,000. As of November 13, 2020, the maximum borrowings permitted under the revolving
note remained unchanged at $16,500. However, on April 1, 2021, maximum borrowings permitted under the revolving note will decrease
by $3,500 to $13,000. In connection with the Fifth Amendment on November 13, 2020, the Company was required to make a one-time
principal payment of $250 on the term loan. Availability on the revolving note is determined weekly, based on a weekly borrowing
base computation that is primarily based on certain percentages of accounts receivable and inventory.
On or before the maturity date of the Credit
Agreement, the Company plans to seek to either negotiate an extension of the Credit Agreement or enter into a new agreement
with another lender. However, there can be no assurance that financing will be available in the amounts the Company requires or
on terms acceptable to it, if at all. At September 30, 2020 and December 31, 2019, the balance on the revolving note was $8,487
and $6,051, respectively.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
Between November 13, 2020 and December
31, 2020, all obligations outstanding under the Credit Agreement will continue to accrue interest at the higher of the one-month
London Interbank Offered Rate (LIBOR) or 1.00%, plus a margin of 4.00% (the “margin”). The margin then increases gradually
each month to a maximum of 6.50% on June 1, 2021. The effective rate of the revolving note was 5.00% and 5.48% at September 30,
2020 and December 31, 2019, respectively. The effective rate of the term note was 5.00% and 5.53% at September 30, 2020 and December
31, 2019, respectively.
The Credit Agreement is subject to a security
agreement which includes substantially all assets of the Company and a pledge of Computex’s equity. Effective on the Closing
Date, the previous Computex shareholder was released from the guaranty agreement made in connection with the Credit Agreement.
A previous amendment to the Credit Agreement,
that was effected on May 4, 2020, included a modification to the covenant in the Credit Agreement that prohibits the incurrence
by the borrowers of additional indebtedness to exclude (i) indebtedness incurred by the borrowers under the U.S. Small Business
Association’s (“SBA”) Paycheck Protection Program established under the Coronavirus Aid, Relief and Economic
Security Act (the “CARES Act”) and the related rules and regulations (the “PPP loan”) and (ii) up to $1.5
million in indebtedness incurred for the sole purpose of financing insurance premiums.
In April 2020, the Company received a PPP
loan of $4,135, after its application was approved by the SBA. The PPP loan is administered by the SBA.
Under the terms of the CARES Act, PPP loan
recipients can apply for and be granted forgiveness for all or a portion of such loans after eight weeks, if the loan is used for
eligible purposes, including to fund payroll costs, mortgage interest, rent and/or utility costs, and loan recipients meet certain
other requirements, including, the maintenance of employment and compensation levels. The Company believes it has used the entire
PPP Loan for qualifying expenses and expects to qualify for full or partial forgiveness under the program. However, the Company
can provide no assurance that it will obtain forgiveness for any portion.
In 2018, Computex entered into an interest
rate swap arrangement to partially mitigate the variability of cash flows due to changes in the Eurodollar rate, specifically related
to interest payments on the term note under the Credit Agreement. The interest rate swap has a notional amount of $4,464 and a
maturity date of August 2, 2021. The fixed interest rate is 3.04% with a corresponding floating interest rate of 1-month LIBOR.
The interest rate swap does not qualify for hedge accounting. No liability was recorded for the fair value of the related derivative,
at September 30, 2020 or December 31, 2019, as the liability was not considered material.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
Total long-term debt, excluding the revolving
note, as of September 30, 2020 and December 31, 2019 consisted of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Senior debt - Term note payable to Comerica Bank; quarterly principal payments of $357 plus interest through the maturity date of June 30, 2021; interest rate variable with effective rate of 5.00% and 5.48% at September 30, 2020 and December 31, 2019, respectively
|
|
$
|
6,369
|
|
|
$
|
7,143
|
|
PPP Loan administered by Comerica Bank; monthly principal payments plus interest starting November 1, 2020 through the maturity date of April 13, 2022; interest rate 1.00% at September 30, 2020
|
|
|
4,135
|
|
|
|
-
|
|
Subordinated debt - Term note payable to Synetra Inc.; fixed interest rate of 8.50% at December 31, 2019
|
|
|
-
|
|
|
|
573
|
|
Subordinated debt - Term note payable to John Sorensen and Paul Sorenson; interest rate variable with effective rate of 8.50% at December 31, 2019
|
|
|
-
|
|
|
|
375
|
|
Capital lease obligations
|
|
|
138
|
|
|
|
236
|
|
Total long-term debt
|
|
|
10,642
|
|
|
|
8,327
|
|
Less: unamortized debt issuance costs
|
|
|
(93
|
)
|
|
|
(136
|
)
|
Total notes payable, net of unamortized debt issuance costs
|
|
|
10,549
|
|
|
|
8,191
|
|
Less: current maturities of notes payable and capital lease obligations
|
|
|
(8,991
|
)
|
|
|
(2,506
|
)
|
Long-term debt, net of current maturities and unamortized debt issuance costs
|
|
$
|
1,558
|
|
|
$
|
5,685
|
|
Scheduled principal payments of long-term debt at September
30, 2020 (excluding the revolving note) was as follows:
Three months ended December 31, 2020
|
|
$
|
1,139
|
|
Fiscal year 2021
|
|
|
8,575
|
|
Fiscal year 2022
|
|
|
928
|
|
Total
|
|
$
|
10,642
|
|
Subordinated promissory note
On the Closing Date, the Company issued
a subordinated promissory note of $500 in partial settlement of a deferred underwriting fee which was agreed at $3,000. The remaining
$2,500 was settled via the issuance of Debentures. The subordinated promissory note bears interest at 12.00% per annum, matures
on June 30, 2021 and is subordinated to any amounts owed under the Credit Agreement. The entire principal together with any accrued
and unpaid interest is due and payable on the maturity date.
9. Stockholders’ Equity, Warrants, Debentures and Guaranty
Preferred stock — The Company is authorized
to issue 5,000,000 shares of preferred stock, par value $0.0001. At September 30, 2020 and December 31, 2019, no preferred
stock was issued or outstanding.
Common stock — The
Company is authorized to issue 500,000,000 shares of common stock with a par value of $0.0001 per share. Holders of the Company’s
common stock are entitled to one vote for each share. As of September 30, 2020, 19,753,061 shares of common stock were issued and
outstanding.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
Registration rights agreement
On the Closing Date, the Company, Pensare
Sponsor Group, LLC (the “Sponsor”) and certain other initial stockholders of the Company, as well as Stratos Management
Systems Holdings, LLC, (“Holdings”), and certain other Investors (as defined below), entered into a Registration Rights
Agreement (the “Registration Rights Agreement”). The Registration Rights Agreement amended, restated and replaced a
previous registration rights agreement entered into among AVCT, the Sponsor and certain other initial stockholders of AVCT on July
27, 2017. Pursuant to the terms of the Registration Rights Agreement, the holders of certain of the Company’s securities,
including holders of the Company’s founders’ shares, shares of common stock underlying the Company’s private
warrants, shares of common stock underlying the securities issued in the Private Placement (as defined below) are entitled to certain
registration rights under the Securities Act and applicable state securities laws with respect to such shares of common stock,
including up to eight demand registrations in the aggregate and customary “piggy-back” registration rights.
Convertible debentures, warrants
and guaranty
On the Closing Date, the Company also consummated
the sale, in a private placement (the “Private Placement”), of units of securities of the Company (“Units”)
to certain investors (each, an “Investor”), as contemplated by the terms of the previously disclosed Securities Purchase
Agreement, dated as of April 3, 2020 (the “Securities Purchase Agreement”). Each Unit consists of (i) $1,000 in principal
amount of the Company’s Series A convertible debentures (the “Debentures”) and (ii) a warrant to purchase 100
shares of Common Stock at an exercise price of $0.01 per whole share (the “Warrants”). The issuances of such securities
were not registered under the Securities Act in reliance on the exemption from registration provided by Section 4(a)(2) of the
Securities Act.
Debentures
The Debentures issued on the Closing Date
have an aggregate principal amount of approximately $43,169 (including $3,000 in aggregate principal amount issued as part of Units
sold to MasTec, Inc., a greater than 5.0% stockholder of the Company (“MasTec”), and $20,000 in aggregate principal
of which was part of Units issued to Holdings pursuant to the terms of the Business Combination Agreement and approximately $8,566
in aggregate principal amount of which was issued to the Sponsor as part of Units issued in exchange for the cancellation of indebtedness
previously incurred by the Company to the Sponsor). The Debentures bear interest at a rate of 10.0% per annum, payable quarterly
on the last day of each calendar quarter in the form of additional Debentures, except upon maturity, in which case accrued and
unpaid interest is payable in cash. The entire principal amount of each Debenture, together with accrued and unpaid interest thereon,
is due and payable on the earlier of (i) such date, commencing on or after October 7, 2022, as the holder thereof, at its sole
option, upon not less than 30 days’ prior written notice to the Company, demands payment thereof and (ii) the occurrence
of a Change in Control (as defined in the Debentures).
Each Debenture is convertible, in whole
or in part, at any time at the option of the holder thereof into that number of shares of common stock calculated by dividing the
principal amount being converted, together with all accrued but unpaid interest thereon, by the applicable conversion price, initially
$3.45. The conversion price is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like,
and is also subject to price-based adjustment, on a “full ratchet” basis, in the event of any issuances of common stock,
or securities convertible, exercisable or exchangeable for, common stock at a price below the then-applicable conversion price
(subject to certain exceptions). The Debentures are subject to mandatory conversion if the closing price of the Company’s
common stock exceeds $6.00 for any 40 trading days within a consecutive 60 trading day-period, subject to the satisfaction of certain
other conditions. The Debentures are subordinated to all Senior Indebtedness (as defined in the Debentures), including indebtedness
under the Credit Agreement.
Warrants
The Warrants issued on the Closing Date
entitle the holders to purchase an aggregate of up to 4,316,936 shares of the Company’s common stock (including Warrants
to purchase up to 2,000,000 shares, 856,600 shares, and 300,000 shares issued to Holdings, the Sponsor and MasTec, respectively,
as part of the Units issued to them), at an exercise price of $0.01 per share. The Warrants are exercisable at any time through
the fifth anniversary of the date of issuance. The number of shares issuable upon exercise of each Warrant is subject to customary
adjustments for stock dividends, stock splits, reclassifications and the like.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
Guaranty
On the Closing Date, Computex and its subsidiaries
issued to the Investors a Guaranty, pursuant to which such entities jointly and severally guaranteed the obligations of the Company
under the Debentures.
Derivative consideration and other disclosures relating to
the Debentures and warrants
Based on ASC 815, Derivatives and Hedging,
the convertible feature of the Debentures is not considered a derivative and therefore has been recorded in liabilities as part
of the Debentures and not bifurcated. The warrant qualifies as a derivative and was bifurcated from the host contract - convertible
debentures and was recorded in equity at its relative fair value with a corresponding debt discount recorded to the Debentures.
The relative fair value of the warrant
was determined to be $9,937, using the Black-Scholes model. Accordingly, the carrying value of the Debentures at the issuance date
was $33,232. The discount is being expensed as interest over the term of the Debenture to increase the carrying value to its face
value. During the Successor three-month period ended September 30, 2020, the Company recorded accretion of the discount of $994
and paid-in-kind interest of $1,097. During the Successor period April 7, 2020 through September 30, 2020, the Company recorded
accretion of the discount of $1,921 and paid-in-kind interest of $2,112. As a result, the carrying value of the Debentures increased
to $37,266 ($10,632 of which is classified as “Convertible Debentures, net of discount – related party” on the
condensed consolidated balance sheet as of September 30, 2020).
The significant assumptions used in the
Black-Scholes model were as follows:
|
o
|
stock price volatility – 35%
|
10. Related Party Transactions
During the Predecessor periods, Computex
paid management fees at the rate of $300 per annum to a shareholder, under a management agreement. Such amounts are included in
selling, general and administrative expenses in the condensed consolidated statement of operations. This agreement was terminated
on the Closing Date.
AVCT shares corporate office space with
an affiliate and participates in a cost sharing arrangement in a month-to-month leasing arrangement. The space was not used during
the period April 7, 2020 through September 30, 2020 and therefore, by mutual agreement between the parties, no expenses were incurred,
by the Company, during such period.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
11. Revenue Recognition
In the following tables, revenue is disaggregated
by geographies and by verticals (or sector). Also presented is the portion of revenue that is recognized on a gross basis (which
occurs when the Company is deemed to be the principal in the arrangement) and the portion that is recognized on a net basis (which
occurs when the Company is deemed to be acting as the agent).
|
|
July 1,
2020
|
|
|
April 7,
2020
|
|
|
January 1,
2020
|
|
|
July 1,
2019
|
|
|
January 1,
2019
|
|
|
|
through
|
|
|
through
|
|
|
through
|
|
|
through
|
|
|
through
|
|
|
|
September 30,
2020
|
|
|
September 30,
2020
|
|
|
April 6,
2020
|
|
|
September 30,
2019
|
|
|
September 30,
2019
|
|
|
|
Successor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
Geography
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
24,722
|
|
|
$
|
43,443
|
|
|
$
|
18,961
|
|
|
$
|
20,027
|
|
|
$
|
63,774
|
|
International
|
|
|
1,246
|
|
|
|
1,622
|
|
|
|
76
|
|
|
|
305
|
|
|
|
2,382
|
|
Total revenues
|
|
$
|
25,968
|
|
|
$
|
45,065
|
|
|
$
|
19,037
|
|
|
$
|
20,332
|
|
|
$
|
66,156
|
|
Revenues by Verticals (or Sector)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
$
|
3,819
|
|
|
$
|
7,118
|
|
|
$
|
2,716
|
|
|
$
|
3,644
|
|
|
$
|
16,651
|
|
Finance
|
|
|
1,623
|
|
|
|
3,373
|
|
|
|
2,510
|
|
|
|
1,258
|
|
|
|
3,390
|
|
Healthcare
|
|
|
6,517
|
|
|
|
10,736
|
|
|
|
5,586
|
|
|
|
5,827
|
|
|
|
18,010
|
|
Manufacturing and logistics
|
|
|
5,802
|
|
|
|
11,432
|
|
|
|
3,322
|
|
|
|
1,907
|
|
|
|
9,052
|
|
Public sector
|
|
|
3,352
|
|
|
|
4,733
|
|
|
|
889
|
|
|
|
1,711
|
|
|
|
3,661
|
|
Retail and hospitality
|
|
|
907
|
|
|
|
1,711
|
|
|
|
2,206
|
|
|
|
2,016
|
|
|
|
3,694
|
|
Technology service providers
|
|
|
285
|
|
|
|
828
|
|
|
|
478
|
|
|
|
1,124
|
|
|
|
5,713
|
|
Other Services
|
|
|
3,663
|
|
|
|
5,134
|
|
|
|
1,330
|
|
|
|
2,845
|
|
|
|
5,985
|
|
Total revenues
|
|
$
|
25,968
|
|
|
$
|
45,065
|
|
|
$
|
19,037
|
|
|
$
|
20,332
|
|
|
$
|
66,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross versus net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (principal)
|
|
$
|
24,766
|
|
|
$
|
42,331
|
|
|
$
|
17,578
|
|
|
$
|
18,914
|
|
|
$
|
61,709
|
|
Net (agent)
|
|
|
1,202
|
|
|
|
2,734
|
|
|
|
1,459
|
|
|
|
1,418
|
|
|
|
4,447
|
|
Total revenues
|
|
$
|
25,968
|
|
|
$
|
45,065
|
|
|
$
|
19,037
|
|
|
$
|
20,332
|
|
|
$
|
66,156
|
|
Revenues by geography, in the table above,
is generally based on the “ship-to address,” with the exception of certain services that may be performed at, or on
behalf of, multiple locations, which are categorized based on the “bill-to address.”
Contract liabilities and remaining
performance obligations
The Company’s contract liabilities are
reported in a net position on a contract-by-contract basis at the end of each reporting period. As of September 30, 2020 and December
31, 2019, the contract liability balance (deferred revenue) was $1,536 and $6,453, respectively. All of the performance obligations
related to such deferred revenue as of September 30, 2020 are expected to be performed within 12 months and consist of payments
received from customers, or such consideration that is contractually due, in advance of providing the product or performing the
services.
A contract’s transaction price is allocated
to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For more
information regarding the Company’s performance obligations, see Note 3. The following table represents the total transaction price
for remaining performance obligations as of September 30, 2020 related to non-cancelable contracts longer than 12 months in duration
that are expected to be recognized over future periods.
Three months ended December 31, 2020
|
|
$
|
5,272
|
|
Fiscal year 2021
|
|
|
13,256
|
|
Fiscal year 2022
|
|
|
5,482
|
|
Fiscal year 2023
|
|
|
1,925
|
|
Fiscal year 2024
|
|
|
1,386
|
|
Thereafter
|
|
|
231
|
|
Total remaining performance obligations
|
|
$
|
27,552
|
|
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
12. Share-Based Compensation
Successor
The American Virtual Cloud Technologies,
Inc. 2020 Equity Incentive Plan (the “Plan”) provides for the issuance of stock options, stock appreciation rights,
restricted stock, restricted stock units (“RSUs”) and other share-based awards. Stock options have a maximum term of
ten years from the grant date.
As of September 30, 2020, 5,794,500 shares
had been authorized for issuance under the Plan, of which 2,474,500 shares remained available for issuance. The RSUs were issued
to certain directors and employees and can only be settled in shares. RSUs awarded to directors are time-based. RSUs issued to
nondirectors are 50% time-based and 50% performance-based. Twenty-five percent of the time-based awards vests on each grant date
anniversary, while 25% of the performance-based awards vests on December 31st of each year, if the market condition
(stock price target) is met. If the market condition attached to the performance-based awards is not met in any year, the eligibility
is delayed until the market condition is met, except that the market condition must be met by December 31, 2023.
The fair values
of time-based awards are estimated by reference to the Company’s stock price and stock marketability on the grant date, while
the fair values of the performance-based awards are determined using the Monte Carlo simulation model, once the stock price target
is set. Weighted average assumptions used in estimating the performance-based awards were as follows: estimated expected stock
price volatility - 40%; expected life of the awards - 0.68 years; risk-free interest
rate – 0.19%; Significant judgment is required in estimating the expected volatility of our common stock. Due to the
limited trading history of the Company’s common stock, estimated volatility was based on a peer group of public companies
and took into consideration the increased short-term volatility in historical data due to COVID-19. Performance targets
are set annually for the performance-based awards that are scheduled to vest in that year.
The following
summarizes RSU activity between April 7, 2020 and September 30, 2020:
|
|
|
|
|
Weighted Average
|
|
|
|
Number
|
|
|
Grant Date
|
|
|
|
of RSUs
|
|
|
Fair Value
|
|
Outstanding at April 7, 2020
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
2,395,000
|
|
|
$
|
2.47
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(31,250
|
)
|
|
$
|
2.51
|
|
Outstanding at September 30, 2020
|
|
|
2,363,750
|
|
|
$
|
2.47
|
|
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
Awards outstanding in the table above include
318,750 RSUs that are performance-based, and exclude 956,250 performance-based RSUs that have been awarded but deemed not granted
as the performance targets have not yet been determined. The Company’s policy is to determine the fair value of performance-based
awards and begin recognizing compensation expense for such awards when the targets are set. For performance-based awards, compensation
cost is recognized over the shorter of the performance or service period. For time-based awards, compensation expense is recognized
over the vesting period, based on the grant date fair value. Share-based compensation expense recognized during the three months
ended September 30, 2020 was $802, of which $759 related to time-based awards and $43 related to performance-based awards. Share-based
compensation expense recognized between April 7, 2020 and September 30, 2020 was $1,420, of which $1,337 related to time-based
awards and $83 related to performance-based awards. Total compensation cost not yet recognized related to unvested awards as of
September 30, 2020 was $4,420 and is expected to be recognized over the weighted average period of 2.2 years.
13. Reconciliation of Net Loss per Common Share
Basic and diluted net loss per common share was calculated as
follows:
|
|
July 1,
2020
|
|
|
April 7,
2020
|
|
|
January 1,
2020
|
|
|
July 1,
2019
|
|
|
January 1,
2019
|
|
|
|
through
|
|
|
through
|
|
|
through
|
|
|
through
|
|
|
through
|
|
|
|
September 30,
2020
|
|
|
September 30,
2020
|
|
|
April 6,
2020
|
|
|
September 30,
2019
|
|
|
September 30,
2019
|
|
|
|
Successor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
Net loss
|
|
$
|
(4,838
|
)
|
|
$
|
(8,512
|
)
|
|
$
|
(1,589
|
)
|
|
$
|
(1,097
|
)
|
|
$
|
(2,701
|
)
|
Weighted average shares outstanding, basic and diluted
|
|
|
19,678,342
|
|
|
|
19,657,811
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
1,000
|
|
Basic and diluted net loss per ordinary share
|
|
$
|
(0.25
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(1,587.30
|
)
|
|
$
|
(1,096.00
|
)
|
|
$
|
(2,700.60
|
)
|
Since their inclusion would have been antidilutive,
excluded from the computation of diluted net loss per share for the Successor periods ended September 30, 2020 were: 3,320,000
unvested RSUs, 30,354,436 Warrants and 13,124,946 shares underlying the Debentures, were they to be converted.
14. Income Taxes
The benefit (provision) for income taxes
consisted of the following:
|
|
July 1,
2020
|
|
|
April 7,
2020
|
|
|
January 1,
2020
|
|
|
July 1,
2019
|
|
|
January 1,
2019
|
|
|
|
through
|
|
|
through
|
|
|
through
|
|
|
through
|
|
|
through
|
|
|
|
September 30,
2020
|
|
|
September 30,
2020
|
|
|
April 6,
2020
|
|
|
September 30,
2019
|
|
|
September 30,
2019
|
|
|
|
Successor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
(24
|
)
|
|
|
(40
|
)
|
|
|
(12
|
)
|
|
|
55
|
|
|
|
(33
|
)
|
|
|
|
(24
|
)
|
|
|
(40
|
)
|
|
|
(12
|
)
|
|
|
55
|
|
|
|
(33
|
)
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(15
|
)
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(17
|
)
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total benefit (provision)
|
|
$
|
(41
|
)
|
|
$
|
(33
|
)
|
|
$
|
(12
|
)
|
|
$
|
55
|
|
|
$
|
(33
|
)
|
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
Principal components of the Company’s
deferred tax assets as of September 30, 2020 and December 31, 2019 were as follows:
|
|
September 30,
2020
|
|
|
December 31, 2019
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Prepaid expenses
|
|
$
|
(293
|
)
|
|
$
|
(50
|
)
|
Accrued reserves
|
|
|
81
|
|
|
|
37
|
|
Deferred revenue
|
|
|
58
|
|
|
|
460
|
|
Accrued liabilities
|
|
|
318
|
|
|
|
202
|
|
Uniform capitalization of inventory for tax
|
|
|
21
|
|
|
|
11
|
|
Contribution carryover
|
|
|
13
|
|
|
|
17
|
|
Tax depreciation in excess of book
|
|
|
(1,252
|
)
|
|
|
(1,598
|
)
|
Intangible assets
|
|
|
(3,419
|
)
|
|
|
(345
|
)
|
Disallowed interest
|
|
|
1,022
|
|
|
|
497
|
|
Transaction costs - pending
|
|
|
130
|
|
|
|
-
|
|
Stock compensation
|
|
|
341
|
|
|
|
-
|
|
Net operating loss carryforwards
|
|
|
5,104
|
|
|
|
4,318
|
|
Total
|
|
|
2,124
|
|
|
|
3,549
|
|
Less: valuation allowance
|
|
|
(5,567
|
)
|
|
|
(3,549
|
)
|
Net deferred tax liability
|
|
$
|
(3,443
|
)
|
|
$
|
-
|
|
The Company’s effective income tax
rate differs from the federal statutory rate primarily as a result of certain expenses being deductible for financial reporting
purposes that are not deductible for tax purposes, the existence of research and development tax credits, operating loss carryforwards,
and adjustments to previously recorded deferred tax assets and liabilities due to the enactment of the Tax Cuts and Jobs Act in
2017.
At December 31, 2019, the Company had net
operating loss carryforwards of approximately $11,900 that begin to expire in 2036.
The Company assesses available positive
and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred
tax assets. A significant component of objective negative evidence identified during management’s evaluation was the cumulative
loss incurred over the three-year period ended December 31, 2019. Such objective evidence limits the ability to consider other
subjective evidence, such as our forecasts of future taxable income and tax planning strategies. On the basis of this evaluation
as of December 31, 2019, the Company recognized a full valuation allowance against its net deferred tax assets, pursuant to ASC
740, as of December 31, 2019. In calculating the valuation allowance as of September 30, 2020, the Company was not permitted
to use its existing deferred tax liabilities related to its indefinite-lived intangible assets as a source of taxable income to
support the realization of its existing finite-lived deferred tax assets. Based on the Company’s evaluation, it was determined
that no uncertain tax positions existed as of September 30, 2020 or December 31, 2019.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
15. Commitments and Contingencies
Operating lease obligations
The Company is party to operating leases
under which it leases various facilities and equipment. The majority of the facility leases provide that the Company pay, in addition
to the minimum rent, certain operating expenses. The leases expire at various dates through August 2024.
Future minimum rent payments, excluding
operating expenses and month-to-month leases, required under noncancelable operating leases were as follows as of September 30,
2020:
Three months ended December 31, 2020
|
|
$
|
257
|
|
Fiscal year 2021
|
|
|
672
|
|
Fiscal year 2022
|
|
|
524
|
|
Fiscal year 2023
|
|
|
453
|
|
Fiscal year 2024
|
|
|
336
|
|
Total
|
|
$
|
2,242
|
|
Contingencies
On December 16, 2019, the Company
received a complaint filed by one of its vendors for alleged breach of contract asking for approximately $351. This suit
was settled during the second quarter for $281.
In addition, from time to time, the Company
may be involved in various legal proceedings and claims in the ordinary course of business. As of September 30, 2020, and through
the filing date of this report, the Company does not believe the resolution of any legal proceedings or claims of which it is aware
or any potential actions will have a material effect on its financial position, results of operations or cash flows.
16. Pending Transaction
On August 5, 2020, AVCT entered into the
Purchase Agreement with Ribbon, RCOCI and Ribbon Communications International Limited, pursuant to which AVCT has agreed to purchase
the Kandy Business by acquiring certain assets and assuming certain liabilities and acquiring all of the outstanding interests
of Kandy Communications LLC (the “Transaction”).
Under the terms of the Purchase Agreement,
AVCT has agreed to issue to Ribbon 13.0 million shares of AVCT’s common stock (the “Issued Shares”), subject
to certain adjustments, as consideration for the Transaction (the “Purchase Price”).
Pursuant to the terms of the Purchase Agreement,
AVCT is required to complete an equity offering (the “Equity Offering”) prior to, or simultaneously with, the closing
of the Transaction (the “Closing”), and in the event AVCT is successful in raising at least $100.0 million in the Equity
Offering, AVCT will sell additional securities in the Equity Offering resulting in proceeds in an amount up to the value of 20%
of the Issued Shares being issued to Ribbon, with the value of each Issued Share being equal to (i) the value of the AVCT common
stock or other securities convertible into a share of AVCT common stock that is being sold in the Equity Offering, or (ii) in the
event another form of securities is being offered in the Equity Offering, or if the Equity Offering is consummated more than five
days prior to the Closing, the volume weighted average price of AVCT common stock for the ten trading days immediately prior to
the Closing (the equivalent shares sold, “Sold Shares”). AVCT will deliver to Ribbon, as part of the Purchase Price,
the gross proceeds from the sale of additional securities in the Equity Offering in excess of $100.0 million, in lieu of the Sold
Shares at the Closing. In the event that AVCT’s Pro Forma Total Enterprise Value (as defined in the Purchase Agreement),
after taking into account the Equity Offering proceeds, would be below $275.0 million, AVCT and Ribbon have agreed to negotiate
a potential change in the number of Issued Shares. If an agreement cannot be reached on any change in the number of Issued Shares,
AVCT will not proceed with the Equity Offering.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(In thousands, except share and per share
data, or as otherwise noted)
September 30, 2020
(Unaudited)
The obligations of each of the Ribbon Parties
and AVCT are subject to specified conditions, including, among other matters: (i) the approval by AVCT’s shareholders
of the issuance to Ribbon of the Issued Shares (the “Share Issuance”), (ii) the successful completion of the Equity
Offering, and (iii) the absence of any injunctions being entered into or law being adopted that would make the Transaction
illegal.
The Purchase Agreement contains customary
representations and warranties from the Ribbon Parties and AVCT. It also contains customary covenants, including (i) covenants
providing for each of the parties to use its commercially reasonable efforts to cause the Transaction to be consummated, and for
each of the Sellers and AVCT to carry on their respective businesses in the ordinary course of business consistent with past practice
during the period between the execution of the Purchase Agreement and the Closing, (ii) non-competition and non-solicitation of
employee covenants applicable to Ribbon for a period of three years following the Closing and (iii) non-solicitation of employee
covenants applicable to AVCT for a period of three years following the Closing. The Sellers have also agreed not to initiate, solicit,
knowingly encourage the submission of any proposal or offer relating to alternate transactions or, engage in any discussions or
negotiations with respect to alternate transactions regarding the Kandy Business, during the period between the execution of the
Purchase Agreement and the Closing. AVCT is required to seek stockholder approval of the issuance of the Issued Shares pursuant
to Nasdaq listing rules.
The Purchase Agreement contains termination
rights for each of the Sellers and AVCT, including, without limitation, in the event that (i) the Transaction is made illegal
or any governmental entity issues a non-appealable final order permanently enjoining the Transaction; (ii) the Transaction
is not consummated by December 4, 2020; or (iii) the other party breaches its representations, warranties or covenants under the
Purchase Agreement which would give rise to the failure of a closing condition and such breach is not cured with 30-days of receipt
of written notice of such breach.
The Purchase Agreement provides that AVCT
will be obligated to pay Ribbon a termination fee of $1.0 million if the Purchase Agreement is terminated under certain circumstances
at a time when the Equity Offering has not been completed.
The Purchase Agreement contemplates that
Ribbon and AVCT will enter into an Investor Rights Agreement (the “Investor Rights Agreement”) at the Closing pursuant
to which Ribbon will receive customary registration rights with respect to the Issued Shares. In addition, under the Investor Rights
Agreement, so long as Ribbon holds at least 25% of the shares of AVCT common stock issued to Ribbon at Closing, Ribbon will have
the right to nominate one director to the AVCT board of directors. The Investor Rights Agreement also provides that each of Pensare
Sponsor Group, LLC and Stratos Management Systems Holdings, LLC (each, a “Significant Stockholder”) will agree to support
AVCT’s obligation to nominate and have elected Ribbon’s director nominee.
17. Subsequent Events
The Company evaluates subsequent events
and transactions that occur after the balance sheet date up to the date that the condensed consolidated financial statements are
issued.
Other than the Fifth Amendment to the Credit
Agreement that is disclosed in Note 8, there were no subsequent events that required adjustment or disclosure in the condensed
consolidated financial statements.