American Virtual Cloud Technologies, Inc. - Annual Report: 2020 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

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

For the fiscal year ended December 31, 2020

OR

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

Commission file number: 001-38167

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

1720 Peachtree Street, Suite 629

Atlanta, GA 30309

(404) 239-2863

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $0.0001 per share

Warrants, each exercisable for one share of Common Stock at an exercise price of $11.50

Name of each exchange on which registered:

NASDAQ Capital Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes  ☐  No ☒.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒  No  ☐.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No  ☐.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No  ☒.

The aggregate market value of the voting common stock held by non-affiliates of the registrant as of March 19, 2021 computed by reference to the closing sales price of $3.31 for the registrant’s common stock on June 30, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter), as reported on the NASDAQ Capital Market, was approximately $12,193,510. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.

Securities registered pursuant to Section 12(b) of the Act:

As of March 19, 2021, 19,753,061 shares of the Company’s common stock, par value $0.0001 per share, were outstanding.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC. AND SUBSIDIARIES

Annual Report on Form 10-K

For the Fiscal Year ended December 31, 2020

Table of Contents

References to “we,” “us,” “our” or “the Company” refer to American Virtual Cloud Technologies, Inc. and its consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires. When we refer to “AVCT,” we mean American Virtual Cloud Technologies, Inc. (f/k/a Pensare Acquisition Corp.).

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this annual report on Form 10-K and in certain documents incorporated by reference constitute “forward-looking statements” for purposes of federal securities laws. Our forward-looking statements include, but are not limited to, statements regarding management’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this report may include, for example, statements about:

The forward-looking statements contained in this report are based on our current expectations and beliefs concerning future developments and their potential effects on us. Future developments affecting us may not be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors” elsewhere in this report. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by forward-looking statements. Some factors that could cause actual results to differ from those expressed or implied by forward-looking statements include:

PART I

Item 1. Business

Company History

We were incorporated, in Delaware, as Pensare Acquisition Corp, a special purpose acquisition company (“SPAC”) on April 7, 2016 for the purpose of entering into one or more mergers, share exchanges, asset acquisitions, stock purchases, recapitalizations, reorganizations or other similar business combinations with one or more target businesses.

On April 7, 2020 (the “Computex Closing Date”), we consummated a business combination transaction (the “Computex Business Combination”) in which we acquired Stratos Management Systems, Inc. (“Computex”), a private operating company that does business as Computex Technology Solutions. The Computex 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 Computex Business Combination, the Company changed its name to American Virtual Cloud Technologies, Inc.

On December 1, 2020 (the “Kandy Closing Date”), we acquired the Kandy Communications business (hereafter referred to as “Kandy” or “Kandy Communications”) from Ribbon Communications, Inc. and certain of its affiliates (“Ribbon”), by acquiring certain assets, assuming certain liabilities and acquiring all of the outstanding membership interests of Kandy Communications LLC.

Our Business

Kandy Communications

As a provider of cloud-based enterprise services, Kandy deploys a global carrier grade cloud communication platform that supports the digital and cloud transformation of mid-market and enterprise customers across any device, on any network, in any location. Based on a powerful, proprietary multi-tenant, highly scalable, and secure cloud platform, our platform supports unified communications as a service (“UCaaS”), communications platform as a service (“CPaaS”) and contact center as a service (“CCaaS”) including pre-built customer engagement tools, based on web real-time communication technology (“WebRTC technology”) enabling frictionless communications. Further, we support rapid service creation and multiple go to market models including white labelling, multi-tier channel distribution, enterprise direct, and self-service via our SaaS (software as a service) web portals.

Our cloud-based, real-time communications platform, enables service providers, enterprises, software vendors, systems integrators, partners and developers to enrich their applications and their services with real-time contextual communications empowering the API (Application Programming Interface) economy. With Kandy’s platform, companies of various sizes and types can quickly embed real-time communications capabilities into their existing applications and business processes, providing a more engaging user experience.

While the cloud communications business is focused on highly complex, medium and large enterprise deployments, the customer experience is augmented by our managed services capabilities. In addition, our strategic partnerships with companies such as AT&T, IBM, and Etisalat give us access to a marquee customer base and the ability to sell end to end solutions.

Computex

Our Computex subsidiary, which has been in business for over 30 years, is an award-winning multi-brand technology solutions provider to small, midsize and large global customers. With a team of talented architects and engineers who specialize in the delivery of private and hybrid data centers, enterprise networking solutions, cloud, cybersecurity, managed services and unified communications, we provide a comprehensive and integrated set of technology solutions, along with an extensive hardware, software and value-added service offering. Our managed services and managed security services provide customers 24x7 access to a world class service desk, network operations centers and security operations center through which we maintain, upgrade and troubleshoot IT systems. Our security operations center (“SOC”) provides comprehensive cybersecurity services to proactively protect customers from cyber threats and, in case of a breach, our managed detection and response services provide incident response, remediation and recovery services. The breadth of this offering enables us to offer our customers a complete technology solution. We design best-fit solutions for our customers, based on a thorough assessment of their needs. Leveraging our relationships with industry leading technology partners, we also assist our customers with the procurement of suitable hardware and software to fit their customized needs.

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

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

Our professional and managed services include managed IT services, virtualization, storage, networking and data center services. As part of these services, we offer customized solutions for business continuity, back-up and recovery, capacity on-demand, regulatory compliance and data center best practice methodologies as well as infrastructure as a service (“IaaS”) and software as a service (“SaaS”). Our customers utilize our solutions to optimize their current and planned investments in IT infrastructure and data centers. We believe the breadth of our service offering and our consultative approach to working with our clients distinguishes us from other providers.

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

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

Growth Strategy

The acquisition of Kandy serves to complement the services provided by Computex by giving us the opportunity to provide a full suite of UCaaS, CPaaS, and CCaaS products to serve the rapidly growing cloud communications market. Customers today demand a highly reliable, secure, and scalable communications platform along with a world class customer experience. We offer end-to-end services spanning connectivity, managed IT solutions, managed services, and cloud communications, delivered by certified experts that provide exceptional white glove customer experiences to businesses, service providers, independent software vendors, and systems integrators. Our capabilities around adjacent technologies such as SD WAN (software-defined networking in a wide area network), SASE (secure access service edge) and cybersecurity, combined with our own software platform, position us as a premier white label provider of choice for UCaaS, CPaaS and CCaaS solutions.

The acquisition of Kandy also enables us to provide carrier grade global cloud communications that address the needs of medium and large enterprises. As the velocity of public, hybrid, and private cloud communications continues, we believe we are in a position to focus on execution while competitors in our space need to concentrate on platform capabilities, global expansion and improved customer experience.  Our world class, globally-deployed, carrier grade, white-labeled proprietary communications platform gives us the ability to solve customer communication needs. We believe our IP platform, growth trajectory, global marquee customer and partner base, should accelerate our go to market plans and enable us to expand our award-winning portfolio.

We have developed a clear go-to-market strategy that leverages our teams’ prior experiences and that utilizes multiple avenues to attack the total addressable market. Our goal is to accelerate current enterprise momentum, cross-sell into the Computex enterprise customer base, ramp up channel partner and strategic alliance sales with additional headcount, ramp up white label partner sales with additional head count, access certain enterprise customer leads and continue to grow our IT managed services. By “enterprise,” we mean a corporation or customer having over 1,000 employees.

In July 2019, AVCT entered into a contract with AT&T and formally joined the AT&T Partner Exchange®, building on AVCT management’s proven track record. Kandy also has strategic partnerships with major service providers such as Etisalat and IBM in addition to AT&T. We will continue to expand our strategic partnership network. Our strategy is to offer bundled, white-label, white-glove managed services targeted at mid-market, multi-location business customers, with a particular focus on offerings in the fast growing UCaaS industry. When we say mid-market, we mean companies with 100-1000 employees.

Computex-focused growth strategies include:

Strategies to grow organically by seeking to become our customers’ primary IT Solutions Provider

Regardless of the type of IT service that our customers require, whether those services relate to security requirements, on-premise solutions, cloud-based solutions or professional managed services needs, we seek to become their primary IT provider. As a result, we focus on providing excellent customer service, competitive pricing, and efficient and advanced professional services, while endeavoring to remain available to respond to their requests. Our managed security services provide customers with a comprehensive solution as technology continues to expand into more complex service offerings. Our cybersecurity managed services complete our portfolio to deliver a robust “as a service” model to our customers that provides IT and cybersecurity services to them via a contractual engagement, thereby providing us with monthly recurring revenue. Our experienced pre-sales engineers engage with customers in their search for advanced technologies. Our account executives, who are supported by experienced internal sales representatives, are trained on broad solutions capabilities with access to numerous category-focused subject matter experts, which allow them to take a consultative sales approach that focuses on our customers’ desired business outcomes. Such an approach enhances our ability to cross-sell our solutions.

Continue to focus on building our expertise

We focus on gaining top-level engineering certifications and expertise in the advanced technologies of our strategic partners. We also submit to rigorous vendor audits and certification processes each year that validate our capabilities. Our customers can harness this expertise as they seek to develop their cloud capabilities. We believe our ability to deliver advanced professional services benefits us in two ways. Firstly, we gain recognition from our strategic vendor partners, resulting in us becoming their preferred partner, which, in turn, can provide direct and referral sales opportunities for us, and which can also positively impact pricing. Secondly, within our existing and potential customer base, our advanced professional services are a key differentiator against competitors who cannot provide the products or advanced services for these key technologies nor can they provide such products and services across as many vendor product lines.

Investing in scalable managed services

We continue to invest in our profitable and scalable managed services and have built a team of focused sellers to strictly focus on driving monthly recurring revenue through subscription contracts. We plan to further invest and build capabilities that allow us to accelerate our MRR (monthly recurring revenue) growth. We have also invested in top tier security talent, and have acquired penetration testers, threat hunters and SOC analysts to boost our managed security offering. In addition, we have invested in a Security Operations Center, which complements our Network Operations Center. Currently, we provide our customers with 24 hour managed security services, such as managed advanced endpoint security, managed SIEM (security information and event management), security awareness and training programs. The success of our solutions portfolio is evident in the various awards and recognitions we have received including, national recognition from AT&T for our significant growth.

The building of our geographic footprint

We intend to increase our direct sales and go-to-market capabilities and actively seek to acquire new account relationships through face-to-face field sales, through digital outreach, through the leveraging of the relationships with our partners, and through targeted demand-generation activities that increase awareness to our solutions. We also seek to expand our customer base and geographic reach. Our managed services and managed security services capabilities allow us to deliver solutions to customers without geographic restrictions.

Strategies to improve operational efficiencies

We continue to invest in our internal technology infrastructure and software platforms to optimize our operations and engage in process re-engineering efforts to become more streamlined and cost effective. Recently, we separated our Network Operations Center and Security Operations Center into two separate, air gapped operational teams. We took this action to, among other things, better secure our clients’ information so that access to clients’ information is only granted to those operational team members that are working with that client.

Key Trends Affecting Our Business

We believe the following key trends present growth opportunities for our business:

Successor/Predecessor References

In the Computex Business Combination, AVCT was considered the acquirer and Computex was considered the acquiree and the Predecessor for accounting purposes. The Computex Business Combination, which was accounted for using the acquisition method of accounting, reflects a new basis of accounting that is based on the fair value of the net assets acquired and liabilities assumed. In the consolidated financial statements and elsewhere in this annual report on Form 10-K, we distinguish between the entity that existed before the Computex Closing Date (“Predecessor”) and the entity that existed on and after such date (“Successor”).

Major customers

The five top customers during the Successor period, the Predecessor period January 1, 2020 to April 6, 2020 and the Predecessor year ended December 31, 2019 accounted for 24%, 25%, and 26% of total revenue, respectively. No single customer accounted for more than 10% of our total revenue in such periods.

Competition

Computex’s competitors are varied, offer a variety of solutions, and include:

Example of such competitors include Presidio Inc., Ahead, Datalink Software LLC and CDW Corporation.

Despite the competition, we believe we possess certain attributes that differentiates us from our competitors. Our competitive strengths include:

We participate in the large IT market with a focus on the data center, network, cloud, security, virtualization, and emerging segments of the industry, facilitated by our professional and managed service solutions. We believe we are well-positioned in the complex high-growth IT solutions segment through our offering of services related to hybrid and public datacenter implementations, cybersecurity management, incident response and remediation, SD-Wan, IOT and complex network projects.

Our products and services target large enterprise companies, the roughly 37,000 middle market companies with revenues between $100 million and $2 billion, the approximately 96,000 state and local governmental organizations, large school districts, and the approximately 3,800 higher educational institutions in the U.S. We believe that IT departments within these organizations are unable, on their own, to provide the ever-increasing range of services to their end users, leading to an increased dependence on third-parties such as us, who can provide them with the complex, multi-vendor technology solutions that their businesses demand.

In the small to medium-sized business (“SMB”) segment, we believe there is demand for our services and we believe we will be able to use certain competitive advantages to capture a significant portion of the IT business in this segment through our IT sales and managed services.

We have a broad and diverse customer base of over 600 customers across a wide range of end-markets, including oil and gas, financial services, healthcare, education, state and local government, technology, retail, manufacturing and telecommunications. In addition, we are not reliant on any single customer in any given year and customarily our top customers change from year to year.

We believe we are a trusted IT advisor to our clients through our delivery of differentiated products and services that enable our customers to meet their increasingly complex IT requirements. We can provide complete, turn-key solutions aligned to the entire IT lifecycle starting with an assessment of the IT problem, designing and creating architecture solutions, assisting with the procurement of the required IT solution, assisting with the implementation of the solution and then providing on-going professional and managed services and cyber-security assistance.

We believe our customers choose us for their complex IT infrastructure needs based on our track record of delivering top-tier solutions, offering value-added services, and our close relationships with both established and emerging vendors. We focus on obtaining and maintaining top-level engineering certifications for each of our strategic vendor’s most advanced technologies. We possess more than 500 certifications, which we leverage to help our customers achieve positive business outcomes. For example, we received our fourth Cisco Master Certification in July 2019. We are one of only 10 companies in the Americas, and one of only 16 companies worldwide, that hold these four certifications. This is one example of our high level of technical expertise and commitment to obtaining the industry’s highest level of certifications possible.

We believe our expertise in architecting data center and cloud environments allows us to provide differentiated offerings that help our customers transition significant portions of their business—and sometimes all of their critical business workloads—to the cloud. Combined with our strong foundations in networking and security, we are uniquely poised to help customers adopt a multi-cloud strategy that utilizes our cloud cost management framework that helps them to overcome the inherent challenges. We also leverage our strategic partnerships with leading vendors such Cisco Systems, Nutanix, PureStorage, Amazon AWS, Dell EMC, Hewlett Packard Enterprise, Microsoft Azure, NetApp, Palo Alto Networks, and VMware in conjunction with our professional, managed, and lifecycle services to help our customers achieve their desired business outcomes.

We believe that our Company has been properly constructed with the correct ratio of technical experts, sales experts, and operational experts. More than two-thirds of our current employees are technical experts in their requisite fields, allowing us to customize solutions for customers of all sizes. The engineering talent we possess, coupled with the wide range of IT solutions that our talent covers, gives us a large competitive advantage around creating, implementing, and maintaining large-scale IT solutions. Our managed services department also relies on this pool of engineers to solve the toughest IT challenges for our customers.

All of Computex’s employees are full time and, therefore, we do not rely on a pool of independent contractors or other outsourced IT talent for the services provided by Computex. This advantage in personnel, which we call “brainware,” further differentiates us from many IT service providers. Our IT personnel also focus on ensuring a human component in every IT project in which we are involved, which results in creating meaningful long-term customer relationships.

Though we believe we have developed competitive differentiation through the breadth of our offering and our consultative approach to working with our clients, among others, in order to increase our market share, we must continue to respond promptly to economic models such as cloud subscription versus perpetual license, technological change and our competitors’ innovations. As a result, we can provide no assurance that we will not be required to make substantial additional investments in research, development, marketing, sales and customer service in order to maintain or build our competitive edge, or that we will be able to successfully compete in the future.

Kandy primarily competes with technology and cloud providers such as 8X8, RingCentral, Vonage, Twilio, Nice and Five 9, among others. However, Kandy differentiates itself from its competitors largely by the nature of its route to market - its platform is a proprietary white label, and global cloud platform that support one or a multi-tier distribution via the CSP (communications service provider), VAR (value-added reseller) or ISV (independent software vendor) brand.  Further, in addition to being a true multi-tenant platform, Kandy supports a BYOD (bring your own data) and BYOC (bring your own carrier) model while providing both a light weight and heavy weight OSS/BSS (Ordering/Billing) system and automation integration with its channel partners.  Lastly, the Kandy platform brings a ubiquitous experience across UCaaS, CCaaS, and CPaaS versus most of the competition who play in one or two of these communications market verticals.

International Operations and Segments

We have been reporting our operating results and financial data in one operating and reportable segment. However, as the Company integrates the Kandy business, which it recently acquired, the way the chief operating decision makers view the business may change. Accordingly, the Company’s operating and reportable segments may change. During 2020, our revenues were primarily domestic, with international revenues representing 3.2% of total revenues. At December 31, 2020, approximately 80 associates were employed in our international operations.

Research and Development

Through the Computex technology team, we have continued to invest in engineering and technology resources to endeavor to stay in the forefront of technology trends. Our expertise in core and emerging innovative technologies, fortified by our robust portfolio of consulting, professional, and managed services, has enabled us to remain a trusted advisor for our customers. This broad portfolio enables us to deliver a unique customer experience that spans the gamut from fast delivery of competitively priced products, services, subsequent management and upkeep, through to end-of-life disposal services. This approach permits us to deploy ever-more-sophisticated solutions that positively impact the business outcomes of our customers.

Through Kandy, we incur software development costs to enhance, improve, expand and/or upgrade our proprietary software in an agile software environment with releases broken down into several iterations called sprints. These development activities are performed by internal staff primarily located outside of the US.

Through our Kandy R&D team, we focus our research and development efforts on building a carrier-grade communications platform, middleware, software application clients and believe that our future success depends, in part, on our ability to continue to innovate and sustain a competitive differentiation. Therefore, our research and development focuses on deploying next generation software technologies, making communications more frictionless, and supporting multiple go-to-market strategies, including channel and direct sales models.

On December 31, 2020, our research and development team consisted of 115 employees and 159 contractors.

Sales and Marketing

We target customers of varying sizes in both the private and public sector and develop relationships with them through direct marketing efforts as well as through strategic relationships with our technology partners. As of December 31, 2020, we had relationships with over 100 technology partners and during 2020, we did business with over 600 customers spanning various industries including oil and gas, finance, healthcare, manufacturing and retail. Our sales teams consist of seasoned account executives and regionally focused sales support teams who work within assigned territories to provide customized solutions to our customers.

We acquire new account relationships through face-to-face field sales, through relationships with our partners and through targeted direct marketing efforts that aim to increase awareness of our solutions. We target large enterprise companies, the roughly 37,000 middle market companies with revenues between $100 million and $2 billion, the over 96,000 state and local governmental organizations, larger school districts, and the over 3,800 higher educational institutions in the U.S.

Our sales representatives are compensated through a combination of fixed and variable compensation. Variable compensation or commission becomes the primary basis of compensation as sales representatives gain more experience.

At December 31, 2020, our sales and marketing team consisted of approximately 60 associates, including sales support personnel.

Proprietary Rights

We rely on a combination of copyrights, patents, trade secrets, trademarks, and contractual provisions to protect the proprietary rights of our products, processes and technology. In addition, we sometimes enter into confidentiality and assignment-of-rights agreements with our employees, consultants and customers and limit access to, and distribution of, our proprietary information. We license our proprietary products to our customers under license agreements that we believe contain appropriate use and other restrictions. However, despite our efforts to safeguard our proprietary rights, we can provide no assurance that we will be able to successfully deter misappropriation or unauthorized third-party use of such rights. As is the case with any software company, safeguarding unauthorized use of our software is difficult, and piracy could become a problem. In addition, if we are engaged in transactions in countries where intellectual property laws are not well developed or are not well enforced, our efforts to protect our proprietary rights may not be effective. Enforcing our proprietary rights in the U.S. and abroad and any litigation to enforce such rights, can result in significant costs and can divert resources, which could cause a material adverse effect on our business, financial condition, results of operations or cash flows.

As the number of solutions available in the marketplace increases and solution functionality continues to overlap, software companies may increasingly become subject to claims of infringement or other misappropriation of intellectual property. Third parties may assert infringement or misappropriation claims against us relating to our software, processes or technology. Following up such claims, whether or not they have merit, can be time-consuming and can result in costly litigation, divert management’s attention away from operations or cause delays in our business or require us to enter into royalty or licensing arrangements. Defending such claims, entering into royalty or licensing agreements, or adverse determinations in proprietary rights litigation could have a material adverse effect on our business, results of operations, cash flow and financial condition.

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.

Human Capital

At December 31, 2020, our employee base stood at approximately 316 employees worldwide. We have offices in Canada, Mexico and the United States, as well as representatives in the United Kingdom and Israel. None of our employees are represented by unions and we consider the relationships with our employees to be good. The composition of our employee base is as follows:

Backlog

Deferred revenue on our consolidated balance sheet, which relate to payments received but for which the related performance obligations have not yet been performed, was $4.6 million at December 31, 2020. These amounts primarily relate to payments received that were contractually due, in advance of providing the products or performing the services. The related performance obligations for such payments are expected to be performed, and the related revenue recognized, within 12 months of the reporting date.

Further, we allocate a contract’s transaction price to each distinct performance obligation and recognize the revenue when, or as, the performance obligations are satisfied. Total transaction price for remaining performance obligations as of December 31, 2020 related to non-cancelable contracts longer than 12 months in duration that are expected to be recognized over future periods was approximately $27.2 million, of which 62% is expected to be recognized as revenue within one year of the reporting date.

Seasonality

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

Available Information

Our common stock and warrants are registered under the Securities Exchange Act of 1934 (the “Exchange Act”) and we have reporting obligations, including the requirement to file annual, quarterly and current reports with the SEC. In accordance with the requirements of the Exchange Act, our annual report will contain financial statements that are audited and reported on by our independent registered public accountants. These filings are available to the public via the Internet at the SEC’s website located at http://www.sec.gov. You may also read and copy any document that we file with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. For more information, please call the SEC at 1-800-SEC-0330. You may request a copy of our filings with the SEC (excluding exhibits) at no cost by writing or telephoning us at the following address or telephone number:

American Virtual Cloud Technologies, Inc.

1720 Peachtree Street

Suite 629

Atlanta, GA 30309

Tel: (404) 239-2863

We are an emerging growth company (“EGC”) as defined in the Jumpstart our Business Startups Act of 2012, (the “JOBS Act”) and will remain an EGC for up to five years. However, if our non-convertible debt issued within a three-year period exceeds $1.0 billion or our total annual revenues exceed $1.07 billion or the market value of our ordinary shares that are held by non-affiliates exceeds $700 million on the last day of the second fiscal quarter of any given fiscal year, we would cease to be an EGC as of the following fiscal year. As an EGC, we have elected, under Section 107(b) of the JOBS Act, to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards.

Item 1A. Risk Factors

An investment in our common stock involves a high degree of risk. You should consider carefully all of the risks described below, together with the other information contained in this Annual Report on Form 10-K, before making a decision to invest in our common stock. If any of the following events occur, our business, financial condition and operating results may be materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose all or part of your investment.

Risks Related to Our Business and Industry

General economic weakness may harm the Company’s operating results and financial condition.

The Company’s results of operations are largely dependent upon the state of the economy. Global economic weakness and uncertainty may result in decreased sales, gross margin, earnings and/or growth rates. In addition, material changes in trade agreements between the U.S. and other countries may, for example, negatively affect the Company’s ability to purchase products, its ability to import or export products, and could negatively affect pricing and product availability. Adverse economic conditions could negatively affect demand for the Company’s products and services and could impair the ability of customers to pay for such products and services.

The Company’s business could be adversely affected by the COVID-19 outbreak.

Commencing in December 2019, the COVID-19 outbreak 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, and is disrupting supply chains and affecting production and sales across a range of industries.

In response to the COVID-19 outbreak, the US governments and governments in many countries have taken preventative or protective actions, such as imposing restrictions on travel and business operations. Temporary closures of businesses have been ordered and numerous other businesses have temporarily closed voluntarily. These actions may continue to expand in scope, type and impact, and such measures, while intended to protect human life, are expected to have significant adverse impacts on domestic and foreign economies. It is likely that the current outbreak or continued spread of COVID-19 will cause an economic slowdown, which may result in a global recession. The effectiveness of economic stabilization efforts being taken to mitigate the effects of the COVID-19 outbreak is currently uncertain.

A public health pandemic, including COVID-19, poses the risk that the Company, its affiliates, employees, suppliers, customers and others may be prevented from conducting business activities for an indefinite period of time, due to shutdowns, travel restrictions and other actions that may be requested or mandated by governmental authorities. Such actions may prevent the Company from accessing the facilities of its customers, thereby affecting its ability to deliver products and provide services. In addition, the Company’s customers may choose to delay or abandon projects.

The Company has modified its business practices (including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and may take further actions as may be required by governmental authorities or that the Company determines to be in the best interests of its employees, customers, partners, and suppliers.

If such conditions continue for a significant period of time, the Company’s liquidity could be negatively impacted and it may be required to pursue additional sources of financing to obtain working capital, maintain appropriate inventory levels and meet its financial obligations. The Company’s ability to obtain any required financing is not guaranteed and is largely dependent upon evolving market conditions and other factors. The Company cannot assure you that it would be able to take any of these actions on terms that are favorable or at all, or that these actions would be successful in permitting the Company to meet its scheduled debt service obligations or satisfy its capital requirements, or that these actions would be permitted under the terms of its existing or future debt agreements, including the Company’s Comerica Credit Agreement (the “Credit Agreement”).

Even after the COVID-19 outbreak has subsided, the Company may continue to experience significant impacts to its business as a result of the global economic impact of the COVID-19 outbreak, including any economic downturn or recession or other long-term effects that have occurred or may occur in the future. 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.

If the Company loses one or more of its large volume customers, its earnings may be materially affected.

Contracts between the Company and its customers for the provision of products and/or services are generally in the form of non-exclusive agreements that do not contain volume purchase commitments, and are terminable by either party upon 30 days’ notice. The loss of one or more of the Company’s largest customers, the failure of such customers to pay amounts due, or a material reduction in sales dollars by such customers could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.

Changes in the IT industry, customers’ usage, IT procurement, and/or rapid changes in product standards may result in reduced demand for the IT hardware, software solutions and services that the Company sells.

The Company’s results of operations are influenced by a variety of factors, including the condition of the IT industry, shifts in demand for, or availability of IT hardware, software, peripherals and services. In addition, the Company’s results of operations may be influenced by industry introductions of new products, upgrades, changes in the methods of distribution, and changes in the nature of IT consumption and procurement. Further, the industry is characterized by rapid technological change and frequent introduction of new products, product enhancements and new distribution methods or channels, each of which can decrease demand for current products or render them obsolete. In addition, the proliferation of cloud technology, infrastructure as a service (IaaS), software as a service (SaaS), platform as a service (PaaS), software defined networking, or other emerging technologies could reduce the demand for products and services that the Company sells. Introduction of certain cloud offerings could influence the Company’s customers to move workloads to other cloud providers, which may reduce the procurement of products and services from the Company. With the significant investment in personnel, any of these shifts or changes could adversely impact the Company’s financial position due to competition or changes in the industry or improper focus or selection of the products and services that the Company sells. Also, if the Company fails to react in a timely manner to such changes, its results of operations could be adversely affected.

A substantial or an extended decline in oil and gas prices could result in lower expenditures by the Company’s customers in the oil and gas industry, which could have a material adverse impact on the Company’s financial condition, results of operations and cash flows.

Demand for the Company’s products and services depends, in part, on expenditures by its customers in the oil and natural gas industry. These expenditures are generally dependent on customers’ views of future oil and natural gas prices, which are sensitive to customers’ views of future economic growth. Declines, as well as anticipated declines, in oil and gas prices could result in project modifications, delays or cancellations, general business disruptions, and delays in payment of, or nonpayment of, amounts that are owed to the Company. These effects could have a material adverse effect on the Company’s financial condition, results of operations and cash flows. The oil and gas industry has historically experienced periodic downturns, which have been characterized by diminished demand for the Company’s products and services as well as downward pressure on the prices it charges. A significant downturn or sustained market uncertainty could result in a reduction in demand for the Company’s services and could adversely affect its financial condition, results of operations and cash flows.

The Company may fail to innovate or create new solutions which align with changing market and customer demand.

As a provider of a comprehensive set of solutions, which involves the offering of bundled solutions consisting of direct IT sales, advanced professional and managed services, the Company expects to encounter some of the challenges, risks, difficulties, and uncertainties frequently encountered by companies providing bundled solutions in rapidly evolving markets. Some of these challenges include the Company’s ability to increase the total number of users of its services, its ability to adapt to meet changes in its markets as well as competitive developments. The Company’s personnel must continually stay current with vendor and marketplace technology advancements and continue to create solutions which can integrate evolving vendor products and services. Further, the Company may provide customized solutions and services that are solely reliant on its own marketing, design and fulfillment services, and the Company may lack the skills or personnel to execute. The Company’s failure to innovate and provide value to its customers may erode its competitive position and market share and may lead to a decrease in revenue and financial performance.

In all of the Company’s markets, some of its competitors have greater financial, technical, marketing, and other resources than the Company does. In addition, some of these competitors may be able to respond more quickly to new or changing opportunities, technologies, and customer requirements. Many current and potential competitors engage in more extensive promotional marketing and advertising activities, offer more attractive terms to customers, and adopt more aggressive pricing and credit policies than the Company does. The Company may not be successful in achieving revenue growth which may have a material adverse effect on its future operating results as a whole.

The Company’s business depends on its vendor partner relationships and the availability of their products.

The Company’s solutions portfolio includes products from OEMs, software publishers and cloud providers. Further, the Company is authorized by these vendor partners to sell all or some of their products via direct marketing activities. The authorization from each vendor partner is subject to specific terms and conditions including sales channel restrictions, product return privileges, price protection policies, purchase discounts, vendor partner programs and funding, including purchase rebates, sales volume rebates, purchasing incentives and cooperative advertising reimbursements. However, the Company does not have long-term contracts with its vendor partners and many of these arrangements are terminable upon notice by either party. A reduction in vendor partner programs or funding or the Company’s failure to timely react to changes in vendor partner programs or funding could have an adverse effect on the Company’s business, results of operations or cash flows. In addition, a reduction in the amount or a change in the terms of credit granted to the Company by its vendor partners could increase the Company’s need for, and the cost of, working capital and could have an adverse effect on the Company’s business, results of operations or cash flows, particularly given the Company’s substantial indebtedness.

From time to time, vendor partners may terminate or limit the Company’s right to sell some or all of their products or change the terms and conditions or reduce or discontinue the incentives that they offer the Company. For example, there is no assurance that, as the Company’s vendor partners continue to sell directly to end users and through resellers, they will not limit or curtail the availability of their products to solutions providers like the Company. Any such termination or limitation or the implementation of such changes could have a negative impact on the Company’s business, results of operations or cash flows.

The Company purchases the products included in its solutions portfolio both directly from its vendor partners and from wholesale distributors. Although the Company purchases from a diverse vendor base, in the year ended December 31, 2020, products it purchased from one wholesale distributor represented about 60% of total purchases. In addition, sales of products manufactured by five of its vendor partners, whether purchased directly from these vendor partners or from a wholesale distributor, represented in the aggregate nearly 42% of the Company’s fiscal year 2020 consolidated net sales. The loss of, or a change in the business relationship with, any of these or any other key vendor partners, or the diminished availability of their products, including due to backlogs for their products, could reduce the supply and increase the cost of products that the Company sells and could negatively impact its competitive position.

Additionally, the relocation of key distributors utilized in the Company’s purchasing model could increase its need for, and the cost of, working capital and have an adverse effect on its business, results of operations or cash flows. Further, the sale, spin-off or combination of any of the Company’s vendor partners and/or certain of their business units, including any such sale to or combination with a vendor with whom the Company does not currently have a commercial relationship or whose products the Company does not sell, could have an adverse impact on the Company’s business, results of operations or cash flows.

In addition, much of our SaaS growth trajectory is based on the success and execution of our strategic alliance partners (IBM, Etisalat, AT&T) to successfully monetize their white labelling of the Kandy platform.

Breaches of data security and the failure to protect the Company’s IT systems from cybersecurity threats could adversely impact its business.

The Company’s business involves the storage and transmission of proprietary information and sensitive or confidential data, including personal information of its employees, customers and others. In addition, the Company operates data centers for its customers that host their technology infrastructure and may store and transmit both business-critical data and confidential information. In connection with the services that the Company provides, some of its employees also have access to customers’ confidential data and other information. Though the Company has privacy and data security policies in place that are designed to prevent security breaches, as newer technologies evolve, and the Company’s portfolio grows and more confidential information is exchanged, the Company could be exposed to increased risk of breaches in security and other illegal or fraudulent acts, including cyberattacks. The evolving nature of such threats, in light of new and sophisticated methods used by criminals and cyberterrorists, including computer viruses, malware, phishing, misrepresentation, social engineering and forgery, are making it increasingly challenging to anticipate and adequately mitigate these risks.

The Company may not be able to hire and/or retain the personnel that it needs.

To increase market awareness and sales of the Company’s offerings, the Company may need to expand its marketing efforts and sales operations in the future. The Company’s products and services require a sophisticated sales effort and significant technical engineering talent. For example, its sales and engineering candidates must have highly technical hardware and software knowledge to create a customized solution for its customers’ business processes. Competition for qualified sales, marketing and engineering personnel fluctuates depending on market conditions, and the Company may not be able to hire or retain sufficient personnel to maintain and grow its business. Frequently, the Company’s competitors require their employees to agree to non-compete and non-solicitation agreements as part of their employment. This makes it more difficult for the Company to hire, and also may increase the costs of reviewing and managing non-compete restrictions. Additionally, in some cases, the Company’s relationship with a customer may be impacted by turnover in its sales or engineering team. For example, in the first quarter of fiscal year 2019, several sales representatives and managers voluntarily resigned their employment with the Company. These sales representatives and managers were the relationship managers to a number of the Company’s customers. The loss of these customers adversely affected the net sales of the Company for fiscal year 2019 and could have the same effect on subsequent periods if such lost sales are not offset by the Company’s new sales representatives and newly acquired customers.

The Company faces substantial competition from other companies.

The Company competes in all areas of its business against local, regional, national, and international firms, including other direct marketers; national and regional resellers; online marketplace competitors; and regional and national service providers. In addition, the Company faces competition from vendors, which may choose to market their products directly to end-users, rather than through channel partners such as the Company, and this could adversely affect the Company’s future sales. Many competitors compete principally on price and may have lower costs or charge lower prices than the Company does and, therefore, the Company’s gross margins may not be maintainable. Online market place competitors are continually improving their pricing and offerings to customers as well as making it easier to use their online marketplaces. Also, the Company’s competitors may offer better or different products and services than the Company does. In addition, the Company does not have guaranteed purchasing volume commitments from its customers and, therefore, its sales volume may be volatile.

The Company may not have designed or maintained its IT systems to support its business.

The Company depends heavily upon the accuracy and reliability of its information, telecommunication, cybersecurity and other systems including the operation of redundant systems if there are failures in its primary systems, which are used for customer management, sales, distribution, marketing, purchasing, inventory management, order processing, fulfillment, customer service and general accounting functions. The Company must continually maintain, secure and improve its systems. The protections that the Company has in place address a variety of threats to its IT systems, both internal and external, including human error. Inadequate security practices or design of the Company’s IT systems, or design of IT systems from third-parties which it utilizes, or failure by third-party service providers to provide adequate services could result in the disclosure of sensitive, personal or confidential information or could cause other business interruptions that could damage the Company’s reputation and disrupt its business. Inadequate design or interruption of the Company’s information systems, internet availability, telecommunications systems or power failures could have a material adverse effect on its business, its reputation, financial condition, cash flows, or results of operations.

The Company’s managed services business requires it to monitor its customers’ devices on their networks across varying levels of service. If the Company has not designed its IT systems to provide this service accurately or if there is a security breach in its IT system or the customers’ systems, the Company may be liable for claims.

The Company relies on the competency of its internal IT personnel. The Company’s failure to hire, develop, retain, and supervise competent IT personnel to secure its data, design redundant systems, or design and maintain its technology systems including its data and voice networks, and applications, could significantly interrupt its business causing a negative impact on its results.

The Company may not adequately protect itself through its contracts, or its insurance policies may not be adequate to address potential losses or claims.

The Company’s contracts may not protect it against the risks inherent in its business including, but not limited to, warranties, limitations of liability, indemnification obligations, human resources and subcontractor-related claims, patent and product liability, regulatory and compliance obligations, and data security and privacy. Also, the Company faces pressure from its customers for competitive pricing and contract terms. The Company also is subject to audits by various vendor partners and customers relating to purchases and sales under various contracts. In addition, the Company is subject to indemnification claims under various contracts.

The Company depends on having creditworthy customers to avoid an adverse impact on its operating results and financial condition.

If the credit quality of the Company’s customer base materially decreases, or if the Company experiences a material increase in its credit losses, the Company may find it difficult to continue to obtain the required capital for its business, and its operating results and financial condition may be harmed. In addition to the impact on the Company’s ability to attract capital, a material increase in its delinquency and default experience would itself have a material adverse effect on its business, operating results, and financial condition.

The Company may be liable for misuse of its customers’ or employees’ information.

Third-parties, such as hackers, could circumvent or sabotage the security practices and products used in the Company’s product and service offerings, and/or the security practices or products used in the Company’s internal IT systems, which could result in disclosure of sensitive or personal information, unauthorized procurement, or other business interruptions that could damage the Company’s reputation and disrupt its business. Attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced persistent threats.

If third-parties or the Company’s employees are able to maliciously penetrate its network security or otherwise misappropriate its customers’ information or employees’ personal information, or other information for which its customers may be responsible and for which the Company agrees to be responsible in connection with service contracts into which it may enter, or if the Company gives third-parties or its employees improper access to certain information, the Company could be subject to liability. This liability could include claims related to unauthorized access to devices on its network; unauthorized access to its customers’ networks, applications, data, devices, or software; and identity theft or other similar fraud-related claims. This liability could also include claims related to other misuses of or inappropriate access to personal information. Other liability could arise from claims alleging misrepresentation of the Company’s privacy and data security practices. Any such liability for misappropriation of information could decrease the Company’s profitability. In addition, federal and state agencies have been investigating various companies to determine whether they misused or inadequately secured information. The Company could incur additional expenses when new laws or regulations regarding the use of information are enacted, or if governmental agencies require the Company to substantially modify its privacy or security practices. The Company could fail to comply with applicable data privacy laws, the violation of which may result in audits, fines, penalties, litigation, or administrative enforcement actions with associated costs.

Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the security practices the Company uses to protect sensitive customer transaction information and employee information. A party who is able to circumvent the Company’s security measures could misappropriate proprietary information or cause interruptions in the Company’s operations. Further, third-parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords, or other information or otherwise compromise the security of the Company’s internal networks and/or its customers’ information. Since techniques used to obtain unauthorized access change frequently and the size and severity of security breaches are increasing, the Company may be unable to implement adequate preventative measures or timely identify or stop security breaches while they are occurring.

The Company may be required to expend significant capital and other resources to protect against security breaches or to remediate the subsequent risks and issues caused by such breaches. The Company’s security measures are designed to protect against security breaches, but its failure to prevent such security breaches could cause it to incur significant expense to investigate and respond to a security breach and correct any problems caused by any breach, subject it to liability, damage its reputation, and diminish the value of its brand. There can be no assurance that the limitations of liability in Company contracts would be enforceable or adequate or would otherwise protect the Company from any such liabilities or damages with respect to any particular claim. The Company also cannot be sure that its existing insurance coverage for errors and omissions or security breaches will continue to be available on acceptable terms or in sufficient amounts to cover one or more large claims, or that its insurers will not deny coverage as to any future claim. The successful assertion of one or more large claims against the Company that exceeds its available insurance coverage, or changes in its insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have an adverse effect on the Company’s business, financial condition, and results of operations.

Failure to comply with new laws or changes to existing laws may adversely impact the Company’s business.

The Company’s operations are subject to numerous laws and regulations in a number of areas including, but not limited to, laws relating to labor and employment, immigration, advertising, e-commerce, tax, imports and exports, data privacy, competition, the environment, health, and safety. Compliance with these laws and regulations may be onerous and expensive, and may not be consistent across jurisdictions, thereby further increasing the cost of compliance, the cost of doing business, and the risk of noncompliance. Though the Company has designed policies and procedures to comply with applicable laws and regulations, there can be no certainty that employees, contractors, or agents will fully comply with such policies and procedures.

We may face risks associated with our growing international operations that could adversely affect the Company.

The Company’s operations outside the United States include a Canadian division that was acquired as part of the Kandy acquisition. The Company also has employees in Mexico as well as representatives in the United Kingdom and Israel. Approximately 25% of the Company’s employees are based outside of the US. In addition, the Company has plans to expand its geographic footprint both within and outside the US. Foreign operations are subject to risks that are inherent in operating within different legal, political and economic environments. Among the risks are changes in tax laws, possible limitations on foreign investment and income repatriation, government price or foreign exchange controls, and restrictions on currency exchange. Such operations may require significant management attention and financial resources to successfully grow. In addition, international operations are subject to other inherent risks, including:

The departure of certain of the Company’s key executives or key members of its senior management team and/or failure to successfully implement a succession plan could adversely affect the Company’s business.

The departure of certain key executives or key members of the Company’s senior management team and/or failure to successfully implement a succession plan could disrupt the Company’s business and impair the execution of its business strategies. The Company’s executive officers are at the forefront of its strategic direction and focus, and therefore believes that its success depends in part upon its ability to retain the services of certain executive officers and senior members of its management team and also depends on its ability to successfully implement a succession plan. Therefore, the departure of any of such persons without replacement by qualified successors could adversely affect the Company’s ability to effectively manage its overall operations and successfully execute current or future business strategies and could cause instability within the Company’s workforce.

Changes in accounting standards, or the misapplication of current accounting standards, may adversely affect the Company’s future financial results.

The Company prepares its financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”). These accounting principles are subject to interpretation by the Financial Accounting Standards Board, the Public Company Accounting Oversight Board (“PCAOB”), the SEC, the American Institute of Certified Public Accountants (“AICPA”) and various other bodies formed to interpret and create appropriate accounting policies. Periodic assessments required by current or new accounting standards may result in noncash charges and/or changes in presentation or disclosure. In addition, any change in accounting standards could influence the Company’s customers’ decision to purchase from the Company or finance transactions with the Company, which could have a significant adverse effect on the Company’s financial position or results of operations.

For example, a relatively new accounting standard requires the Company to determine if it is the principal or agent in transactions with its customers. In addition, the manner in which some of the Company’s products are bundled, and the voluminous number of products and services the Company sells can add to the level of complexity. Mischaracterization of these products and services could result in misapplication of revenue recognition policies. In addition, judgements and estimates are made in the application of GAAP, such as to determine the fair value of assets acquired, and liabilities assumed in business combinations, assessments of goodwill impairment, the estimating of the allowance for doubtful accounts and the determination of the cost of professional and managed services. If the Company is unable to accurately estimate such amounts, including the time-line for completion of contracts, the profitability of its contracts and its profits overall may be materially and adversely affected.

A natural disaster or other adverse occurrence at one of the Company’s facilities could damage its business.

The Company has one warehouse and a distribution facility in the U.S. If such facilities were to be seriously damaged by a natural disaster or other adverse occurrence, the Company could utilize another distribution center or third-party distributors to ship products to its customers. However, this may not be sufficient to avoid interruptions in the Company’s business and may not be enough to meet the needs of all of the Company’s customers and could cause increased operating costs. In addition, the Company operates two customer facing data centers which contain its Securities Operations Center and Network Operations Center. The Company also operates certain sales offices as well as leased facilities in Ottawa, North Carolina and Mexico, along with a number of rented spaces that are used as server lcoations, all of which may contain business-critical data and confidential customer information. A natural disaster or other adverse occurrence at any such locations could negatively impact its business, results of operations or cash flows.

The Company could be exposed to additional risks if it continues to make strategic investments or acquisitions or enter into alliances.

The Company may continue to pursue transactions, including strategic investments, acquisitions or alliances, in an effort to extend or complement its existing business. These types of transactions involve numerous business risks, including risks related to the suitability of transaction partners, negotiated terms, the diversion of management’s attention from other business concerns, new product or service offerings into areas in which the Company has limited experience, entries into new geographic markets, its ability to retain key coworkers, its ability to retain key business relationships and risks related to integrating acquired businesses. There can be no assurance that the intended benefits of the Company’s investments, acquisitions and alliances will be realized, or that those benefits will offset the numerous risks or unforeseen factors, any of which could adversely affect the Company’s business, results of operations or cash flows.

In addition, the Company’s financial results could be adversely affected by impairment charges if goodwill and/or intangible assets that are recorded at the acquisition date should later become impaired, which could occur if market and economic conditions deteriorate. At December 31, 2020, the carrying value of the Company’s goodwill and other intangible assets was $66.3 million and $40.6 million, respectively.

The Company faces risks of claims from third-parties for intellectual property infringement, including counterfeit products, that could harm its business.

The Company may be subject to claims if products that it resells is considered to infringe on the intellectual property rights of third-parties and/or are considered to be counterfeit products. Also, the vendors of certain products or services that the Company resells may not provide the Company with indemnification for infringement. However, the Company’s customers may seek indemnification from the Company, which could cause the Company to incur substantial costs in defending infringement claims against itself and its customers. In the event of such claims, the Company and its customers may be required to obtain one or more licenses from third-parties, and the Company may not be able to obtain such licenses at a reasonable cost, if at all. Defense of any lawsuit or failure to obtain any such required license could significantly increase the Company’s expenses and/or adversely affect its ability to offer one or more of its services.

Risks Related to Our Indebtedness

The Company has a substantial amount of indebtedness, some of which is scheduled to mature on June 30, 2021, which could have important consequences to its business.

The Company has a substantial amount of indebtedness. As of December 31, 2020, total debt related to notes payable, line of credit draws and capital leases was $17.6 million (including current portion and before deducting unamortized debt issuance costs) as well as a promissory note of $0.5 million. Maximum borrowings permitted under the line of credit was $16.5 million as of December 31, 2020 but will decrease to $13.0 million effective April 1, 2021, subject to a borrowing base and a liquidity condition. In addition, convertible debenture principal outstanding was $41.6 million (including related party amounts of $32.0 million). The Company’s substantial indebtedness could have important consequences, including the following:

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

The Company relies on its primary credit facility and normal accounts payable credit to fund its working capital.

The loss of the Company’s primary credit facility with Comerica Bank pursuant to a credit agreement could have a material adverse effect on its future results as it relies on this facility and its components for daily working capital along with normal accounts payable credit to fund its working capital. Availability on the line of credit is determined weekly, based on a weekly borrowing base computation that is primarily based on certain percentages of accounts receivable and inventory. There can be no assurance that the Company will continue to meet the borrowing base requirements of the credit agreement and failure to do so may limit availability of, or cause the Company to lose, such financing. There can be no assurance that such financing will continue to be available to the Company in the future on acceptable terms or at all.

The Company will be required to generate sufficient cash to service its indebtedness and, if not successful, may be forced to take other actions to satisfy its obligations under its indebtedness.

The Company’s ability to make scheduled payments on or to refinance its debt obligations depends on its financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond its control. The Company’s outstanding long-term debt will impose significant cash interest payment obligations on the Company and, accordingly, the Company may need to generate significant cash flow from operating activities to fund its debt service obligations. The Company cannot assure you that it will maintain a level of cash flow sufficient to pay the principal and interest on its indebtedness.

If the Company’s cash flows and capital resources are insufficient to fund its debt service obligations, the Company may be forced to reduce or delay capital expenditures, sell assets, seek additional debt or equity capital, restructure or refinance its indebtedness, or revise or delay its strategic plan. The Company cannot assure you that it would be able to take any of these actions on terms that are favorable, if at all, or that these actions would be successful in permitting it to meet its scheduled debt service obligations or to satisfy its capital requirements, or that these actions would be permitted under the terms of its existing or future debt agreements, including the Credit Agreement. In the absence of such operating results and resources, the Company could face substantial liquidity problems and might be required to dispose of material assets or operations to meet its debt service and other obligations. The Credit Agreement restricts the Company’s ability to dispose of assets and use the proceeds from the disposition. The Company may not be able to consummate those dispositions or to obtain the proceeds which it could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.

If the Company cannot make scheduled payments on its debt, it will be in default and, as a result:

Despite the Company’s indebtedness levels, the Company may incur substantially more debt, including secured debt. This could further increase the risks associated with its leverage.

The Company may incur substantial additional indebtedness in the future. The terms of the Credit Agreement do not fully prohibit it from doing so. To the extent that the Company incurs additional indebtedness, the risks associated with its substantial indebtedness described above, including its possible inability to service its debt, will increase. As of December 31, 2020, the Company had $6.5 million available for additional borrowing under the Credit Agreement, subject to a borrowing base and a liquidity condition. 

Variable rate indebtedness subjects the Company to interest rate risk, which could cause its debt service obligations to increase significantly.

Certain of the Company’s borrowings, primarily borrowings under the Credit Agreement, are at variable rates of interest and expose the Company to interest rate risk. As of December 31, 2020, the Company had $13.1 million of variable rate debt outstanding. Even if the amount borrowed remained the same, the Company’s debt service obligations on variable rate indebtedness would increase if interest rates increase, thereby negatively impacting its results.

Risks Related to Our Securities and Recent Acquisitions

Nasdaq may delist our securities from quotation on its exchange which could limit investors’ ability to trade in our securities and subject us to additional trading restrictions.

Our common stock and warrants are currently listed on the Nasdaq. There can be no assurance that we will continue to be able to meet Nasdaq’s listing standards with respect to our securities. If Nasdaq delists our common stock from trading on its exchange for failure to meet the listing standards, we and our stockholders could face significant material adverse consequences including:

The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Because our common stock and warrants are currently listed on the Nasdaq, our common stock and warrants are covered securities. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. Further, if we were no longer listed on the Nasdaq, our securities would not be covered securities and we would be subject to regulation in each state in which we offer our securities.

If the benefits of our Kandy acquisition do not meet the expectations of investors or securities analysts, the market price of our securities may decline.

If the benefits of our Kandy acquisition do not meet the expectations of investors or securities analysts, the market price of our securities may decline. Fluctuations in the price of our securities could contribute to the loss of all or part of your investment. Even though there is an active market for our securities, the trading price of our securities could be volatile and be subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in our securities and our securities may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of our securities may not recover and may experience a further decline.

Factors affecting the trading price of our securities may include:

Broad market and industry factors may materially harm the market price of our securities irrespective of our operating performance. The stock market in general, and the Nasdaq in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors perceive to be similar to the Company could depress our stock price regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.

As an emerging growth company and a smaller reporting company, the Company is exempt from certain public company reporting requirements for so long as the Company qualifies as an emerging growth company and/or a smaller reporting company.

The Company qualifies as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the JOBS Act. As such, the Company is eligible for and has taken advantage of certain reporting exemptions, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements. The Company will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of its common stock that is held by non-affiliates exceeds $700 million as of June 30 of that fiscal year, (ii) the last day of the fiscal year in which it has total annual gross revenue of $1.07 billion or more during such fiscal year, (iii) the date on which it has issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) the last day of the fiscal year following the fifth anniversary of the date of the first sale of its common stock in the IPO, which would be December 31, 2022. If the Company continues to expand its business through acquisitions and/or continues to grow revenues organically, we may cease to be an emerging growth company prior to December 31, 2022.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as such company is an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the same time that private companies adopt the new or revised standard.

Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our common stock held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (2) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter. Investors may find our common stock less attractive because we rely on these exemptions, which may result in a less active trading market for our common stock and/or could result in our stock price being more volatile. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible.

Our management and their affiliates control a substantial interest in us and thus may influence certain actions requiring a stockholder vote.

As of December 31, 2020, our management and their affiliates beneficially owned approximately 86.0% of our issued shares of common stock, including 8,734,361 shares underlying penny warrants and 26,156,877 shares underlying convertible debentures. In addition, there were 10,512,500 shares underlying warrants issued to Pensare Sponsor Group, LLC (the “Sponsor”), which have an exercise price of $11.50. Accordingly, these individuals have considerable influence regarding the outcome of any transaction that requires stockholder approval. Furthermore, our board of directors is divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. As a consequence of our “staggered board,” only a minority of our board of directors will be considered for election in any given year. In addition, our management and their affiliates, because of their ownership position, will have considerable influence regarding the outcome of such elections.

We may not be able to timely and effectively implement controls and procedures required by Section 404 of the Sarbanes-Oxley Act that are applicable to us.

As a public company, we are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of internal control over financial reporting. To comply with the requirements of being a public company, we are required to provide attestation on internal controls, and we may need to undertake various actions, such as implementing additional internal controls and procedures and hiring additional accounting or internal audit staff. Management may not be able to effectively and timely implement the required controls and procedures that adequately respond to the regulatory compliance and reporting requirements of such statutes. If we are not able to implement the additional requirements of Section 404 in a timely manner or with adequate compliance, the Company may not be able to assess whether its internal control over financial reporting is effective, which may subject it to adverse regulatory consequences and could harm investor confidence and the market price of our common stock. Further, as an emerging growth company, our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event that it is not satisfied with the level at which our controls are documented, designed or operating.

In addition, our management and other personnel will need to continue to devote a substantial amount of time to compliance initiatives applicable to public companies, including compliance with Section 404 and the evaluation of the effectiveness of our internal control over financial reporting within the prescribed timeframe. In connection with the audit of Computex’s consolidated financial statements for the years ended December 31, 2019 and 2018, certain material weaknesses and significant deficiencies were identified in its internal control over financial reporting. The Company has begun the process of evaluating the adequacy of its accounting personnel staffing level and other matters related to internal control over financial reporting to remediate these deficiencies. The Company may discover additional deficiencies in existing systems and controls that it may not be able to remediate in an efficient or timely manner.

Provisions in our Charter and Bylaws and Delaware law may inhibit a takeover of us, which could limit the price investors might be willing to pay for our common stock and could entrench management.

Our Charter and Bylaws contain provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. Our board of directors is divided into three classes, each of which serves for a term of three years with only one class of directors being elected in each year. As a result, at a given annual meeting only a minority of the board of directors may be considered for election. Since our “staggered board” may prevent our stockholders from replacing a majority of our board of directors at any given annual meeting, it may entrench management and discourage unsolicited stockholder proposals that may be in the best interests of stockholders. Moreover, our board of directors has the ability to designate the terms of and issue new series of preferred stock.

We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together, these provisions may make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.

Changes in laws or regulations, or a failure to comply with any laws and regulations, may adversely affect our business, investments and results of operations.

We are subject to laws and regulations enacted by national, regional and local governments. In particular, we are required to comply with certain SEC and other legal requirements. Compliance with, and monitoring of, applicable laws and regulations may be difficult, time consuming and costly. Those laws and regulations and their interpretation and application may also change from time to time and those changes could have a material adverse effect on our business, investments and results of operations. In addition, a failure to comply with applicable laws or regulations, as interpreted and applied, could have a material adverse effect on our business and results of operations.

Our Charter provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.

Our Charter provides, to the fullest extent permitted by law, that derivative actions brought in our name, actions against directors, officers and employees for breach of fiduciary duty and other similar actions may be brought only in the Court of Chancery in the State of Delaware and, if brought outside of Delaware, the stockholder bringing the suit will be deemed to have consented to service of process on such stockholder’s counsel; provided that the exclusive forum provision will not apply to (i) suits brought to enforce any liability or duty created by the Exchange Act, (ii) any other claim for which the federal courts have exclusive jurisdiction, (iii) any claim as to which the Court of Chancery determines that there is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction of the Court of Chancery within ten days following such determination), (iv) any claim which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery, or (v) any claim for which the Court of Chancery does not have subject matter jurisdiction. Furthermore, our Charter also provides that unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, there is uncertainty as to whether a court would enforce such provision with respect to suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our Charter.

This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims, although our stockholders will not be deemed to have waived our compliance with federal securities laws and the rules and regulations thereunder. Alternatively, if a court were to find the choice of forum provision contained in our Charter to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.

Sales of a substantial number of shares of our common stock in the public market, or the perception that they might occur, could have an adverse effect on the market price of our common stock.

As of December 31, 2020, we had warrants to purchase 9,794,736 shares of common stock at the nominal exercise price of $0.01 (penny warrants), warrants to purchase 26,037,500 shares of common stock at an exercise price of $11.50, and debentures that were convertible into an aggregate of 29,461,374 shares of common stock. Our outstanding debentures are convertible, in whole or in part, at any time at the option of the holder thereof into that number of shares of common stock calculated by dividing the principal amount being converted, together with all accrued but unpaid interest thereon, by the applicable conversion price, and are subject to mandatory conversion under certain conditions, as described elsewhere in this Current Report on Form 10-K. To the extent any such warrants or debentures are exercised or converted, as applicable, additional shares of common stock will be issued, which will result in dilution to our stockholders and an increase in the number of shares of common stock eligible for resale in the public market. In addition, pursuant to the Incentive Plan, equity incentive awards representing an aggregate of up to 2,224,500 shares of our common stock were available for issuance as of December 31, 2020. All of our outstanding debentures and warrants are subject to agreements requiring us to register for resale the underlying shares of common stock. Sales of substantial numbers of such shares in the public market or the fact that the warrants or debentures may be exercised or converted, as applicable, could adversely affect the market price of our common stock or on our ability to obtain future financing.

Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends as a public company in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur. As a result, you may not receive any return on an investment in our common stock unless you sell your shares of common stock for a price greater than that which you paid for it.

Future issuances of any equity securities may dilute the interests of our stockholders and decrease the trading price of our common stock.

Any future issuance of equity securities could dilute the interests of our stockholders and could substantially decrease the trading price of our common stock. We may issue equity or equity-linked securities in the future for a number of reasons, including to finance the Company’s operations and business strategy (including in connection with acquisitions and other transactions), to adjust the Company’s ratio of debt to equity, to satisfy its obligations upon the exercise of then-outstanding options or other equity-linked securities, if any, or for other reasons.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

We currently maintain our principal executive offices at 1720 Peachtree Street, Suite 629, Atlanta, GA 30309, along with several additional offices, all of which are leased. The additional office locations include:

We believe our current facilities meet the needs of our employee base and can accommodate our currently contemplated growth. We believe that we will able to obtain suitable additional facilities on commercially reasonable terms to meet any future needs.

Item 3. Legal Proceedings

There is no material litigation, arbitration, governmental proceeding or any other legal proceeding currently pending or known to be contemplated against any members of our management team in their capacity as such. We are involved in certain legal proceedings and claims, which arise in the ordinary course of business. In our opinion, based on consultations with outside counsel, the results of any of these ordinary course matters, individually and in the aggregate, are not expected to have a material effect on our results of operations, financial condition, or cash flow. As more information becomes available, if we should determine that an unfavorable outcome is probable on a claim and that the amount of probable loss that we will incur on the claim is reasonably estimable, we will record an accrued expense for the claim in question. If and when we record such accrual, it could be material and could adversely impact our results of operations, financial condition, and cash flows.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Our equity securities trade on the Nasdaq Capital Market. The common stock and warrants trade under the symbols “AVCT,” and “AVCTW,” respectively. Each whole warrant entitles the holder to purchase one share of common stock at a price of $11.50 per share, subject to adjustment as described in our registration statement. Only whole warrants are exercisable and only whole warrants trade. The warrants will expire on April 7, 2025.

Holders of Record

On March 23, 2021, there were approximately twelve holders of record of our common stock and four holders of record of our warrants. Such numbers do not include beneficial owners holding our securities through nominee names.

Dividends

We have not paid any cash dividends on our common stock to date and do not anticipate declaring any dividends in the foreseeable future. The payment of cash dividends will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition and will be at the discretion of our board of directors. Currently, our board of directors plan to retain all earnings, if any, for use in our business operations. Further, our ability to declare dividends may be limited by restrictive covenants in the Credit Agreement.

Equity Compensation Plans

The following table provides certain information regarding our equity compensation plans:

Additional information is included in Note 13 in the Notes to our Consolidated Financial Statements.

Item 6. Selected Financial Data

We are a smaller reporting company and, therefore, we are not required to include, in this section, financial data that is already included in our consolidated financial statements which is included elsewhere in this Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements (including the notes thereto) contained elsewhere in this report. Certain information contained in this discussion and analysis includes forward-looking statements that involve risk and uncertainties. You are therefore encouraged to read the section in this annual report on Form 10-K titled, “CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS.”

Overview

We are a Delaware-incorporated entity with operating locations in Minnesota, Michigan, Florida, Texas, Ottawa, North Carolina and Mexico City.

On April 7, 2020, AVCT (formerly known as Pensare Acquisition Corp.), consummated the Computex Business Combination in which it acquired Computex, a private operating company that does business as Computex Technology Solutions. In connection with the Computex Business Combination, the Company changed its name to American Virtual Cloud Technologies, Inc. The purchase price consisted primarily of the issuance of 20,000 Units (consisting of (i) $1,000 in principal amount of the Company’s Series A convertible debentures (the “Debentures”) and (ii) a warrant to purchase 100 shares of Common Stock at an exercise price of $0.01 per whole share (the “Warrants”), assumed debt of $16.6 million and 8.2 million shares of common stock.

On December 1, 2020, we acquired Kandy from Ribbon, by acquiring certain assets, assuming certain liabilities and acquiring all of the outstanding interests of Kandy Communications LLC. The purchase price consisted of 43,778 Units substantially similar to the Units issued in the Computex Business Combination. In connection with the purchase of Kandy, the Company also sold 10,000 Units to SPAC Opportunity Partners, LLC and 1,000 Units to a director, both related parties, with plans to sell additional Units.

The consolidated financial statements of the Company include the accounts of AVCT and its wholly owned subsidiaries. The financial position, results of operations and cash flows described herein for the dates and periods prior to April 7, 2020 relate to the operations of Computex. The historical financial information of AVCT prior to the business combination (a special purpose acquisition company, or “SPAC”) has not been reflected in the Predecessor financial statements as these historical amounts have been determined to be not useful information to a user of the financial statements.

We are a leading multi-brand technology solutions provider to large global customers, providing a comprehensive and integrated set of technology solutions to our customers, through our extensive hardware, software, value-added service offerings and cloud subscription services. The breadth of our offerings enables us to offer our customers a complete technology solution.

Covid-19

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

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

Our business

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

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

Our professional and managed services include managed IT services, virtualization, storage, networking and data center services. As part of these services, we offer customized solutions for business continuity, back-up and recovery, capacity on-demand, regulatory compliance and data center best practice methodologies as well as infrastructure as a service (“IaaS”) and software as a service (“SaaS”). Our customers utilize our solutions to optimize their current and planned investments in IT infrastructure and data centers. We believe the breadth of our service offering and our consultative approach to working with our clients distinguishes us from other providers.

Cloud subscription and software products include subscriptions to the Company’s cloud-based technology platform.

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

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

Key trends affecting our results of operations

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

Growth Strategy

The acquisition of Kandy serves to complement the services provided by Computex by giving us the opportunity to provide a full suite of UCaaS, CPaaS, and CCaaS products to serve the rapidly growing cloud communications market. Customers today demand a highly reliable, secure, and scalable communications platform along with a world class customer experience. We offer end-to-end services spanning connectivity, managed IT solutions, managed services, and cloud communications, delivered by certified experts that provide exceptional white glove customer experiences to businesses, service providers, independent software vendors, and systems integrators. Our capabilities around adjacent technologies such as SD WAN (software-defined networking in a wide area network), SASE (secure access service edge) and cybersecurity, combined with our own software platform position us as a premier white label provider of choice for UCaaS, CPaaS and CCaaS solutions.

The acquisition of Kandy also enables us to provide carrier grade global cloud communications that address the needs of medium and large enterprises. As the velocity of public, hybrid, and private cloud communications continues, we believe we are in a position to focus on execution while competitors in our space need to concentrate on platform capabilities, global expansion and improved customer experience.  Our world class, globally-deployed, carrier grade, white-labeled proprietary communications platform gives us the ability to solve customer communication needs. Our IP platform, growth trajectory, global marquee customer and partner base, should accelerate our go to market plans and enable us to expand our award-winning portfolio.

We have developed a clear go-to-market strategy that leverages our teams’ prior experiences and that utilizes multiple avenues to attack the total addressable market. Our goal is to accelerate current enterprise momentum, cross-sell into the Computex enterprise customer base, ramp up channel partner and strategic alliance sales with additional headcount, ramp up white label partner sales with additional head count, access certain enterprise customer leads and continue to grow our IT managed services. By “enterprise,” we mean a corporation or customer having over 1,000 employees.

We also plan to continue to invest in research and development, whilst also aiming to grow our international business.

Our other growth strategies include a focus on the following areas:

Results of operations

To distinguish between the different bases of accounting due to the Computex Business Combination that occurred on April 7, 2020, the tables below separate the Company’s results using a black line presentation that separates: (1) the periods prior to the closing date of April 7, 2020 (“Predecessor”) and (2) the period that started on April 7, 2020 (“Successor”). We refer to the periods before April 7, 2020 as the “Predecessor” periods and refer to the periods that started on April 7, 2020 as the “Successor” periods.

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

For the reasons discussed above, management believes it remains useful to review the operating results for the year ended December 31, 2020 with the operating results for the year ended December 31, 2019 (Fiscal Year 2019 or FY 2019). Accordingly, in the discussion below, for purposes of a year over year comparison, the financial information for the period January 1, 2020 through April 6, 2020 is combined with the financial information for the period April 7, 2020 through December 31, 2020 and, together, is referred to as the “S/P combined 2020 Year.” Accordingly, in addition to presenting our results of operations in our consolidated financial statements in accordance with GAAP, the tables and certain discussions below present the non-GAAP combined results for the year ended December 31, 2020.

S/P Combined 2020 Year versus FY 2019 (in thousands)

⁽¹⁾ Interest expense in the Successor period includes related party interest of $6,899

Net loss

Net loss for the S/P Combined 2020 Year was $23.5 million compared with $4.4 million for FY 2019. Discussed below are the revenue and expense factors that primarily contributed to the year over year net loss change.

Hardware revenue

Hardware revenue decreased 6.0%, from $52.1 million in FY 2019 to $48.9 million in the S/P Combined 2020 Year. Though our hardware revenue was down, the margin was up 390 basis points in the S/P Combined 2020 Year compared with FY 2019. We attribute the decrease in hardware revenue to reduced demand in the energy sector, related to COVID-19 and the negative impact of a sales force transition, partially offset by increased demand in the manufacturing, logistics and public sector, also related to COVID-19 as more customers transitioned to remote work. We attribute the increase in margin to actions by the Company, beginning in the third quarter of 2019, to deliver improved margins.

Third party software and maintenance revenue

Revenues from third party software and maintenance services, which are recorded net of direct expenses, decreased 6.6%, to $5.8 million in the S/P Combined 2020 Year from $6.2 million in FY 2019. Since this revenue is recorded net, the revenue is also the gross margin. We attribute the decrease to a shift in customers’ IT spend towards mobile computing equipment and other mobile computing services as a result of increased telecommuting arrangements in response to COVID-19.

Managed and professional services revenue

Managed and professional services revenues increased 13.8% to $30.7 million in the S/P Combined 2020 Year from $27.0 million in FY 2019. We attribute this increase primarily to more demand for infrastructure assessment, cyber security and managed service monitoring services due to COVID-19, as customers continue to invest in their IT environment to allow them to seamlessly work from home. Remote workers require highly available systems and around the clock services. The additional complexity of remote work setups and the additional cybersecurity needs for a distributed workforce resulted in the higher revenue trend. Managed and professional services related to Kandy, contributed $0.3 million to the increase.

The gross margin on managed and professional services at our Computex division (which represented 99% of our managed and professional services in the S/P Combined 2020 Year) also improved, increasing approximately 310 basis points compared with FY 2019. The increased margins were primarily due to actions taken by the Company to deliver higher margins and also as a result of increased utilization of personnel driven by the higher customer demand discussed previously.

Cloud subscription and software revenue

Cloud subscription and software revenues of $1.4 million were generated from the Company’s Kandy subsidiary, which the Company acquired on December 1, 2020.

Other revenue

Other revenue, which consists primarily of freight and reimbursables, including travel, meals and entertainment, increased 76.2% or $0.3 million. By its nature, this type of revenue fluctuates depending on the revenue of the other product lines.

Total revenue, cost of revenue and gross margin

Aggregate revenues for the five product lines together was $87.6 million in the S/P Combined 2020 Year, an increase of $1.9 million, or 2.2%, compared with $85.7 million in FY 2019. The increase is primarily due to revenues from the Kandy acquisition which contributed $1.7 million to the increase.

Aggregate gross profit was also up, increasing 14.2% (or $3.5 million) in the S/P Combined 2020 Year, to $27.9 million (including $0.4 million related to Kandy), compared to $24.4 million in Fiscal 2019. Gross margin was also up, increasing 330 basis points as the 2.2% increase in aggregate revenues was accompanied by a 2.5% decrease in aggregate cost of revenues.

Selling, general and administrative expenses

Selling, general and administrative expenses (including transaction costs) for the S/P Combined 2020 Year and Fiscal 2019 consisted of the components in the following table (in thousands):

Selling, general and administrative expenses increased 44.1% in the S/P Combined 2020 Year compared with Fiscal 2019, primarily as a result of an increase in personnel-related costs, professional fees, insurance expenses and depreciation and amortization. Personnel-related expenses increased primarily as a result of the inclusion of AVCT corporate salaries in the Successor period, which were not included in the Predecessor period, an increase in commissions due to improved margins, and an increase in share-based compensation expenses related to awards issued in the Successor periods, partially offset by a reduction in salaries for employees of Computex, that was effected between April 1, 2020 and September 1, 2020. The increased insurance expenses are related to the Company’s expanded public company activities. Increased professional fees are also related to the Company’s expanded public company activities as well as to fees related to the acquisition of Kandy. The increase in depreciation and amortization was due to increased amortization expense related to intangible assets recognized as of the Computex Closing Date and the Kandy Closing Date. Meals, entertainment and travel decreased as a result of less travel and meetings with clients due to COVID-19 restrictions. To a lesser extent, the increase was also impacted by selling, general and administrative expenses related to the Kandy acquisition, which contributed $0.7 million to the increase (primarily sales and marketing).

Interest expense

Interest expense in the S/P Combined 2020 Year was up compared with Fiscal 2019, primarily as a result of interest on the Debentures which were issued in connection with the Computex Business Combination and in connection with the acquisition of Kandy. The Debentures bear interest at the rate of 10.00% per annum. Interest expense also includes amortization of the discount on the Debentures. The discount related to the Debentures that were issued in connection with the acquisition of Kandy include the impact of a beneficial conversion feature. See Note 10 for further discussion of the Debentures.

Benefit/provision for income taxes

For all periods presented, the provision for income taxes consists of provisions for state taxes, and reflect effective tax rates that differ from the federal statutory rate as a result of certain expenses being deductible for financial reporting purposes that are not deductible for tax purposes, the existence of research and development tax credits, operating loss carryforwards, and adjustments to previously recorded deferred tax assets and liabilities related to the enactment of the Tax Cuts and Jobs Act in 2017. For the Successor periods, the benefit for income taxes also reflects the impact of amortization of intangible assets recognized as of the Computex Closing Date and the Kandy Closing Date.

Liquidity and Capital Resources

Overview

Historically, the Company’s primary sources of liquidity have been cash and cash equivalents, cash flows from operations (when available) and cash flows from financing activities, including funding under its Credit Agreement. The Credit agreement is more fully discussed in Note 9. From time to time, the Company may also choose to access the debt and equity markets to fund acquisitions to diversity its capital sources. The Company’s current principal capital requirements are to fund working capital and make investments in line with its business strategy.

The Credit Agreement matures on June 30, 2021, and, as amended, provides for maximum borrowings of $16.5 million on the line of credit portion with a scheduled reduction of $3.5 million in availability under the line of credit as of April 1, 2021. As amended, the Credit Agreement provides for a minimum monthly liquidity (defined as unrestricted cash plus availability under the line of credit) of $3.0 million commencing January 31, 2021. As of December 31, 2020, amounts outstanding under the term loan and the line of credit with Comerica Bank were $5.7 million and $7.4 million, respectively.

In addition, at December 31, 2020, the Company had unrestricted and restricted cash of $9.9 million and $0.6 million, respectively, in its operating bank accounts, and had availability under its line of credit of $6.5 million. Total equity at December 31, 2020 was $52.5 million. However, as of December 31, 2020, the Company’s current liabilities exceeded its current assets by $18.4 million, primarily as a result of the classification of the components of the Credit Agreement as current.

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 has, since December 31, 2020, raised additional capital and plans to raise an additional amount which it plans to use to fund expansion, capital expenditures and working capital for its current operations.

The Company believes that cash anticipated to be generated from future operations, as well as borrowings from lending and project financing sources and proceeds from equity and debt offerings will provide sufficient liquidity to fund operations for at least one year after the date the financial statements are issued. However, there is no assurance that future funding will be available if and when required or at terms acceptable to the Company. This projection is based on the Company’s current expectations regarding new project financing and product sales and service, cost structure, cash burn rate and other operating assumptions.

In April 2020, we received a PPP loan of $4.1 million. The PPP loan is administered by the SBA. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of such loans after eight weeks, if the loan is used for eligible purposes, including to fund payroll costs, mortgage interest, rent and/or utility costs, and meet certain other requirements, including, the maintenance of employment and compensation levels. We believe that we have used the entire PPP Loan for qualifying expenses and expect to qualify for full or partial forgiveness under the program. However, we can provide no assurance that we will obtain forgiveness for any portion.

See Note 9 for additional disclosures about the Company’s debt.

Successor cash flows

Operating activities

Net cash used in operating activities was $15.1 million for the period April 7, 2020 through December 31, 2020, which was the result of an increase in receivables, due to the acquisition of Computex, and lower current liabilities at December 31, 2020 compared with April 6, 2020, as a substantial portion of the current liabilities at April 6, 2020 was converted to common stock and Debentures (and therefore reflected as increases in cash provided by financing activities). Current liabilities of $2.6 million at April 6, 2020 were converted to Debentures and $1.5 million was converted to common stock.

Investing activities

Investing activities used net cash of $0.6 million in the period April 7, 2020 through December 31, 2020, and consisted of capital expenditures of $0.9 million, partially offset by $0.3 million of cash from the Computex acquisition.

Financing activities

Financing activities provided $24.4 million in the period April 7, 2020 through December 31, 2020, and was generated from the issuance of $23.1 million in Debentures, $4.1 million in new debt and $1.5 million from the issuance of common stock, partially offset by net debt repayments of $3.2 million, redemption of shares held in trust of $1.0 million and payment of deferred financing fees of $0.2 million.

Predecessor cash flows

Operating activities

Net cash used in operating activities was $1.6 million for the period January 1, 2020 through April 6, 2020 and primarily consisted of funding for inventory and changes in unearned revenue, partially offset by funds provided by accounts receivable.

Net cash provided by operating activities was $5.3 million for the year ended December 31, 2019 and primarily consisted of funds provided by accounts receivable, partially offset by a decreased funding related to accounts payable and accruals.

Investing activities

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

Investing activities used $0.9 million for the year ended December 31, 2019, which primarily consisted of funding for capital expenditures.

Financing activities

Financing activities provided $2.0 million of cash for the period January 1, 2020 through April 6, 2020, consisting primarily of net funds from the line of credit of $3.0 million, partially offset by debt repayments of $1.0 million.

Financing activities used $4.6 million for the year ended December 31, 2019, consisting of debt repayments, including net repayments on the line of credit.

Capital expenditures

Capital expenditures were $0.9 million during the period April 7, 2020 through December 31, 2020, and primarily were related to the purchase of computer and other equipment. For fiscal year 2021, we estimate our capital expenditures to be approximately $6.2 million, a significant portion of which we expect to spend on cloud infrastructure with the remainder to be spent on equipment to be used in our after-sales service centers.

Off-Balance Sheet Arrangements

At December 31, 2020, we had no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and had not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

Critical Accounting Policies, Judgements and Estimates

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

Revenue recognition

Revenue from contracts with customers are not recorded until the Company has the approval and commitment from 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).

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.

When an arrangement contains more than one performance obligation, the Company will allocate the transaction price to each performance obligation on a relative standalone selling price basis. The Company utilizes the observable price of goods and services when they are sold separately to similar customers in order to estimate standalone selling price.

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.

Third party 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 maintenance

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

Managed and professional services

Professional services offered by the Company include assessments, project management, staging, configuration, customer training 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.

Cloud subscription and software revenue

Revenue from subscriptions to Kandy’s cloud-based technology platform is recognized on a ratable basis over the contractual subscription term beginning on the date that the platform is made available to the customer until the end of the contractual period. Payments received in advance of subscription services are recorded as deferred revenue; revenue recognized for services rendered in advance of payments received are recorded as contract assets. Usage fees, when bundled, are billed in advance and recognized on a ratable basis over the contractual subscription term, which is usually the monthly contractual billing period. Non-bundled usage fees are recognized as actual usage occurs.

When services do not meet certain service levels of commitments, customers are entitled to receive service credits, and in certain cases, refunds, each representing a form of variable consideration. Kandy historically has not experienced any significant incidents affecting the defined levels of reliability and performance as required by its subscription contracts. Therefore, the variable consideration has been insignificant and there are no reserves for such service credits as of December 31, 2020.

The Company also recognizes revenue for perpetual and term-based software licenses and has concluded that its software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own. The software license revenue is typically recognized upon transfer of control or when the software is made available for download, as this is the point at which the user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual property.

Freight and sales tax

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

Contract liabilities

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

Costs of obtaining and fulfilling a contract

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

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

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

Accounting for income taxes

Under the Financial Accounting Standard Board’s (“FASB”) Accounting Standard Codification (“ASC”) No. 740 (“ASC No. 740”), income tax expense is recorded for the amount of income tax payable or refundable for the current period and for the change in net deferred tax assets or liabilities resulting from events that are recorded for financial reporting purposes in a different reporting period than recorded in the tax return. We make significant assumptions, judgments, and estimates in the determination of our provision for income taxes and also our deferred tax assets and liabilities and any valuation allowances.

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

Purchase price allocation

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

Share-based compensation

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

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

Recent Accounting Pronouncements Issued and Adopted

See Note 4 of the consolidated financial statements.

 Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Foreign exchange risk

Our business is primarily conducted within US markets and, hence we have no material exposure to currency fluctuations. International revenues in 2020 was 3.2% of total revenues.

Interest rate risk

Interest rate risks are inherent in the Credit Agreement, partially mitigated by an interest rate swap. See Note 9. Currently, management does not view this exposure as a significant risk.

Item 8. Financial Statements and Supplementary Data

Reference is made to Pages F-1 through F-33 following Item 15, which comprise a portion of this Annual Report on Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act) were effective at a reasonable assurance level and, accordingly, provided reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting 

During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Controls Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process used to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our board of directors and management; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

An internal control system over financial reporting has inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design safeguards into the process to reduce, though not fully eliminate, risk.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Controls—Integrated Framework. Based on our management’s assessment and those criteria, our management believes that we maintained effective internal control over financial reporting as of December 31, 2020.

This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm on our internal control over financial reporting due to an exemption established by the JOBS Act for “emerging growth companies.”

Item 9B. Other Information

Not applicable.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Our current directors and executive officers are as follows:

Darrell Mays, Chairman of the Board, has served on our board of directors since July 2017 and was our Chief Executive Officer until September 30, 2020. He was the Founder and Chief Executive Officer of nsoro, a turnkey wireless installation services provider, from 2003 to 2008, which was acquired by MasTec in August 2008. Mr. Mays has served as an executive of MasTec since 2008, during which period the revenues and EBITDA of MasTec’s communications division, of which nsoro is a component, increased to approximately $2.3 billion and $245.0 million in 2016, respectively. Mr. Mays holds a Bachelor of Arts degree in Business from Georgia State University.

Lawrence E. Mock, Jr., Vice Chairman of the Board and a former director of Computex, is currently Managing Partner of Navigation Capital Partners, Inc. (“Navigation”), an Atlanta-based private equity firm which he founded in partnership with Goldman Sachs in 2006. Mr. Mock also serves as a director of Stratos Management Systems Holdings, LLC, a Delaware limited liability company (“Holdings”). From 1995 to 2006, he served as President and Chief Executive Officer of Mellon Ventures, Inc., which he founded in partnership with Mellon Financial Corporation, to make private equity and venture capital investments in operating companies. From 1983 to 1995, Mr. Mock was Chief Executive Officer of River Capital, Inc., a company he founded. He holds a Master of Science degree from Florida State University and a Bachelor of Arts degree from Harvard College.

Xavier Williams has served as our Chief Executive Officer since October 1, 2020. Prior to joining the Company, Mr. Williams served in a number of leadership roles at AT&T, where he worked for over 30 years across multiple disciplines including finance, strategy, sales, product management, global operations and human resources. Between July 2020 and September 2020, Mr. Williams was President of Public Sector and FirstNet. Between October 2019 and June 2020, he served as President of Government Solutions and National Business, as President of Global Public Sector and Wholesale Markets from October 2017 to September 2019, as President of Business Operations between March 2017 and September 2017, as President of National Business between November 2016 and March 2017, and as Executive Vice President of AT&T’s Global Customer Service business between January 2015 and October 2016. Mr. Williams received a BS in Business Administration from Edinboro University of Pennsylvania and an MBA from the University of Pittsburgh’s Katz School of Business.

Thomas H. King has served as our Chief Financial Officer and as a director of Computex since April 2020 and was the Chief Financial Officer of Tier One Holding Corp. and its subsidiaries from January 2017 to June 2019, after serving as its interim Chief Financial Officer between January 2016 and December 2017. Prior to January 2016, Mr. King served as Chief Financial Officer to numerous private equity sponsored companies primarily as an engagement partner with Tatum, a Randstad Company. Also, while at Tatum, he was Chief Financial Officer at Allied Systems Holdings, Inc. between August 2004 and September 2008 and served as Vice President-Finance at Rock-Tenn Company (currently known as WestRock Company) between November 2000 and July 2004. Mr. King was also an Assurance Manager at PricewaterhouseCoopers. Mr. King received a MS Industrial Administration degree from Carnegie-Mellon University and a BS in Business Administration from Pennsylvania State University.

Michael Dennis has served as our Chief Operating Officer since December 1, 2020. He is a veteran in the telecommunications and technology industries with twenty-five years of executive leadership and strategic execution leveraged across AT&T, Lucent Technologies, and Avaya. Over the course of his career, Mr. Dennis has held various executive leadership positions responsible for sales, sales operations, customer service, project management, manufacturing, outsourcing, professional services, infrastructure, and digital platform management. In his most recent position before joining the Company, from July 2010 to November 2020, Mr. Dennis served as the President and Chief Executive Officer of Big Green Group, a Cellular Telecommunication and Broadband Services provider.

Mr. Dennis is an entrepreneur with a proven track record for delivering extraordinary profits by leveraging executive relationships to drive sales growth and access to new opportunities and partnerships. He was the principal owner of General Sports Venue-Astro Turf, a certified minority business enterprise and national synthetic turf company with exclusive rights to the AstroTurf brand, which he sold in 2009. In 2002, he served as Partner and Chief Operating Officer for JNET Communications, a minority-owned firm serving the cable industry through installation and construction services. Mr. Dennis provided executive oversight for an $80M portfolio managing fiber and coax construction and infrastructure programs across the United States.

In his most recent position, before joining the Company, Mr. Dennis served as the President and Chief Executive Officer of Big Green Group (BGG), a Cellular Telecommunication and Broadband Services provider. He developed strategies to generate margins of twenty-five percent over the $8M revenue base, managing fiber deployment, installation, and maintenance for cellular towers. BGG’s clients included Ericsson, Sprint, T-Mobile, AT&T, and Sirius/XM, and that company received MetLife’s small business of the year award in 2016.

Graham McGonigal, our Chief Strategy Officer, was previously our Chief Operating Officer through November 2020, and, since April 2020, has been a director of Computex. He has served as a technology consultant since March 2018. Prior to that, Mr. McGonigal served as Chief Network Officer at Vonage Holdings (NYSE: VG) from December 2015 to February 2018, and as Senior Vice President of Network Operations at Vonage from February 2012 to December 2015. Mr. McGonigal has more than 30 years of technical experience and has held senior leadership roles within AT&T (NYSE: T), Cingular Wireless and Bellsouth. From September 2007 to January 2012, Mr. McGonigal was the Chief Operating Officer at MasTec Network Solutions, a division of MasTec Inc. (NYSE: MTZ). At AT&T Mobility, Mr. McGonigal led the national data and service delivery networks and created highly competitive wireless data networks. Mr. McGonigal holds a Bachelor of Science degree in Chemistry from Mercer University.

Mark Downs has served on our board of directors since April 2020 and is the founder of Navigation, a private equity firm where he has served as a partner since January 2007. Mr. Downs has in excess of 20 years of experience serving on for profit boards of directors as a control investor. Mr. Downs served as a director of Computex, Inc. from January 2017 to April 2020; a director of Stratos from January 2017 to April 2020; a director of Holdings from January 2017 to April 2020; a director of Michon, Inc. (d/b/a Definition6) from July 2015 to the present; a director of Brown Integrated Logistics, Inc. from January 2017 to the present; a director of Brightwell Payments, Inc. from May 2015 to Present; and a director of Five Star Food Service, Inc. from October 2016 to March 2019. Mr. Downs holds a Bachelor’s degree in Economics from the University of Pittsburgh and a Master’s of Management degree from Northwestern University.

U. Bertram Ellis, Jr. has served on our board of directors as an independent director since July 2017. He has served as the Chairman and Chief Executive Officer of Ellis Capital, a diversified investment firm, since 1984. In addition, Mr. Ellis was the Founder and Chief Executive Officer of ACT III Broadcasting from 1986 to 1991, which sold for $530 million and Ellis Communication from 1993 to 1996, which sold for $840 million. Mr. Ellis holds a Master of Business Administration from the University of Virginia Darden Business School and a Bachelor of Arts from the University of Virginia.

Carolyn Byrd has served on our board of directors as an independent director since March 2021. Ms. Byrd, age 72, formed GlobalTech Financial, LLC (“GlobalTech”), a private company specializing in business process outsourcing and financial consulting in 2000 and has since served as its Chairman and Chief Executive Officer. Prior to forming GlobalTech, Ms. Byrd had a long career with The Coca-Cola Company, where she was ultimately appointed Vice President, Chief of Internal Audits and Director of the Corporate Auditing Department. She served as a Senior Account Officer at Citibank, N.A. prior to joining Coca Cola. Ms. Byrd has served on the board of directors of Regions Financial Corporation (NYSE: RF) since 2010. She holds a Bachelor’s Degree in Economics and Business Administration from Fisk university and a Master’s Degree in Finance and Business Administration from the University of Chicago Graduate School of Business.

Karl Krapek has served on our board of directors as an independent director since July 2017. He has served as the Lead Director at Prudential Financial, Inc. since 2014, and a Director since 2004, and also as Director of Northrop Grumman Corporation since 2008. From 2002 to 2009, he was the President and Chief Operations Officer of United Technologies Corporation, or UTC, which has a market capitalization of approximately $90 billion. Mr. Krapek has served as an Executive Vice President of UTC since 1997 and as a Director of UTC from 1997 to 2007. Mr. Krapek holds a Master of Science from Purdue University and Bachelor of Science from Kettering University.

Dennis Lockhart has served on our board of directors as an independent director since July 2017. He recently retired from his position as president and Chief Executive Officer of the Federal Reserve Bank of Atlanta, a position he held from 2007 to 2017. Earlier, he was a professor at Georgetown University, School of Foreign Service, from 2003 to 2007. Prior to this, he held senior positions at Heller Financial Inc. and Citicorp (now Citigroup). Mr. Lockhart holds a Master of Arts from Johns Hopkins University and a Bachelor of Arts from Stanford University.

Dr. Klaas Baks has served on our board of directors as an independent director since July 2017. He is the Co-Founder and Executive Director of the Emory Center for Alternative Investments, which was formed in 2008. He also serves as the Atlanta Chair of TIGER 21, which is a peer-to-peer network of high net worth wealth creators, since 2014. In addition, he has been an Associate Professor in the Practice of Finance at Emory University’s Goizueta Business School since 2002. Dr. Baks has a Doctoral degree from the Wharton School at the University of Pennsylvania and a Masters of Arts degree from Brown University.

Kent Mathy has served on our board of directors as an independent director since July 2020. He currently serves on the Board of Directors of Everbridge Inc. (Nasdaq:EVBG) and JourneyCare Hospice and formerly served as the President and CEO of Sequential Technology International, a business process outsourcer serving large enterprises. Mr. Mathy retired in 2016 as AT&T Inc.’s (NYSE:T) President of the Southeast Region. Previously, Mr. Mathy served as President of AT&T’s North Central Region. Prior to that, he was President-Business Markets Group at Cingular Wireless. Mr. Mathy joined AT&T Wireless Services in 2003 as Executive Vice President, leading the Enterprise Solutions Group. Earlier in his career, Mr. Mathy served as Chairman and CEO of Celox Networks, a telecommunications network equipment company. Before joining Celox Networks, he was with AT&T (prior to its merger with SBC Communications Inc.) for more than 18 years holding numerous management positions across the United States.

Mr. Mathy has also served on the Board of Directors of Ribbon Communications (Nasdaq:RBBN) and Rogers Wireless, a subsidiary of Rogers Communications, Inc. (NYSE:RCI). Mr. Mathy holds a Bachelor of Business Administration Degree from the University of Wisconsin-Oshkosh.

Designated Directors

Pursuant to the Computex Business Combination agreement, until the date on which Holdings or Navigation ceases to beneficially hold an aggregate of 10% of (i) the shares of our common stock issued to Holdings as partial consideration for the Computex Business Combination and (ii) the shares of our common stock underlying the PIPE Warrants and the PIPE Debentures issued to Holdings at the Computex Closing (collectively, the “Designation Shares” and such period, the “Nomination Period”), Holdings (or if Holdings has been dissolved, Navigation) has the right to nominate up to three Holdings Designees for election to our board of directors, subject to adjustment as described below, and we are obligated to nominate each Holdings Designee for election as a director as part of the slate that is included in the proxy statement (or consent solicitation or similar document) relating to the election of directors and to support the election of each Holdings Designee.

As of the Computex Closing Date, Holdings’ initial Holdings Designees were Messrs. Downs and Mock. During the Nomination Period, if a Holdings Designee ceases to serve as a director for any reason, Holdings (or if Holdings has been dissolved, Navigation Capital Partners, Inc.) has the right to appoint another individual to fill such vacancy. During the Nomination Period, if Holdings or Navigation Capital Partners, Inc. ceases to beneficially hold at least 50% of the Designation Shares, for the remainder of the Nomination Period, the number of Holdings Designees will be reduced to two, and if Holdings or Navigation Capital Partners, Inc. ceases to beneficially hold at least 30% of the Designation Shares, for the remainder of the Nomination Period, the number of Holdings Designees will be reduced to one.

In addition, pursuant to an Investor Rights Agreement entered into on the Kandy Closing Date, so long as Ribbon holds an amount of shares of Common Stock equal to at least 25% of the total number of shares of Common Stock issuable upon conversion of Debentures issued to Ribbon at the Closing (or Debentures convertible in the aggregate into such amount) (the “Minimum Shares”), Ribbon will have the right to nominate one director to our board of directors. If Ribbon holds the Minimum Shares and does not exercise its right to nominate one director, Ribbon will have the right to designate a board observer.

Number and Terms of Office of Officers and Directors

Our board of directors is divided into three classes with only one class of directors being elected in each year and each class serving a three-year term. The term of office of the first class of directors, consisting of Messrs. Ellis, Krapek, Lockhart and Dr. Baks, will expire at the first annual meeting of stockholders. The term of office of the second class of directors, consisting of Ms. Byrd and Messrs. Mays and Mock, will expire at the second annual meeting of stockholders. The term of office of the third class of directors, consisting of Mr. Downs, and Mr. Mathy, will expire at the third annual meeting of stockholders following the effectiveness of the Charter.

Our officers are elected by the board of directors and serve at the discretion of the board of directors, rather than for specific terms of office. Our board of directors is authorized to appoint persons to the offices set forth in our Bylaws as it deems appropriate. Our Bylaws provide that our officers may consist of a Chairman of the Board, Chief Executive Officer, President, Chief Financial Officer, Secretary and such other officers (including, without limitation, Vice Presidents, Assistant Secretaries and a Treasurer) as may be determined by the board of directors.

Director Independence

Nasdaq listing standards require that a majority of our board of directors be independent. An “independent director” is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship which, in the opinion of the company’s board of directors, would not interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Our board of directors has determined that Messrs. Ellis, Krapek, Lockhart, Baks, Ms. Byrd and Mr. Mathy are “independent directors” as defined in the Nasdaq listing standards.

Committees of the Board of Directors 

Our board of directors has three standing committees: an audit committee, a nominating committee and a compensation committee.

Audit Committee

We have an audit committee comprised of Messrs. Lockhart, Baks and Ms. Byrd, each of whom is an independent director. Mr. Lockhart serves as the Chairman of the audit committee. Each member of the audit committee is financially literate, and our board of directors has determined that Mr. Lockhart qualifies as an “audit committee financial expert” as defined in applicable SEC rules because he meets the requirement for past employment experience in finance or accounting, requisite professional certification in accounting or comparable experience. The responsibilities of our audit committee, which are specified in our Audit Committee Charter, include:

Nominating Committee

Our nominating committee consists of Messrs. Lockhart and Krapek, each of whom is an independent director under Nasdaq’s listing standards. The nominating committee is responsible for overseeing the selection of persons to be nominated to serve on our board of directors. The nominating committee considers persons identified by its members, management, stockholders, investment bankers and others.

The guidelines for selecting nominees, which are specified in our Nominating Committee Charter, generally provide that persons to be nominated:

The nominating committee will consider a number of qualifications relating to management and leadership experience, background, integrity and professionalism in evaluating a person’s candidacy for membership on the board of directors. The nominating committee may require certain skills or attributes, such as financial or accounting experience, to meet specific board needs that arise from time to time and will also consider the overall experience and makeup of its members to obtain a broad and diverse mix of board members. The nominating committee does not distinguish among nominees recommended by stockholders and other persons.

Compensation Committee

Our compensation committee consists of Messrs. Ellis, Baks and Krapek, each of whom is an independent director under Nasdaq’s listing standards. The compensation committee’s duties, which are specified in our Compensation Committee Charter, include, but are not limited to:

Code of Ethics and Committee Charters

We have adopted a Code of Ethics applicable to our directors, officers and employees. We have filed a copy of our Code of Ethics, our Audit Committee Charter, our Nominating Committee Charter and our Compensation Committee Charter as exhibits to our registration statement for our initial public offering. You will be able to review these documents by accessing our public filings at the SEC’s web site at www.sec.gov. In addition, a copy of the Code of Ethics will be provided without charge upon request from us in writing at 1720 Peachtree Street, Suite 629, Atlanta, GA 30309 or by telephone at (404) 239-2863. We intend to disclose any amendments to or waivers of certain provisions of our Code of Ethics in a current report on Form 8-K.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our officers, directors and persons who own more than ten percent of a registered class of our equity securities to file reports of ownership and changes in ownership with the SEC. Officers, directors and ten percent stockholders are required by regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on copies of such forms received, we believe that, during the fiscal year ended December 31, 2020, all filing requirements applicable to our officers, directors and greater than ten percent beneficial owners were complied with, except that the following forms were not timely filed: a Form 4 reporting one transaction by Mr, Mathy, a Form 4 reporting one transaction by Mr. Lockhart, and a Form 3 for Mr. Williams.

Item 11. Executive Compensation

Summary compensation table

Prior to the consummation of the Computex Business Combination, none of our officers or directors received compensation for services rendered to us. The following table summarizes compensation paid to or earned by the Company’s named executive officers during the fiscal year ended December 31, 2020. The following provides, under the scaled reporting rules applicable to smaller reporting companies, an overview of our compensation policies and programs and identifies the elements of compensation for 2020, following the consummation of the Computex Business Combination, with respect to our “named executive officers,” which term is defined by Item 402 of the SEC’s Regulation S-K to include (i) all individuals serving as our principal executive officer at any time during 2020, (ii) our two most highly compensated executive officers other than the principal executive officer who were serving as executive officers at December 31, 2020 and whose total compensation (excluding nonqualified deferred compensation earnings) exceeded $100,000, and (iii) up to two additional individuals for whom disclosure would have been provided pursuant to the foregoing item (ii) but for the fact that the individual was not serving as an executive officer of the Company at December 31, 2020. Our named executive officers for 2020 were Xavier Williams, our Chief Executive Officer since October 2020, Thomas King, our Chief Financial Officer, Graham McGonigal, who served as our Chief Operating Officer through November 2020 and has since served as our Chief Strategy Officer, and Darrell Mays, who served as our Chief Executive Officer until September 2020.

Narrative Disclosure Regarding Summary Compensation Table

Compensation Philosophy

The Company’s executive compensation policies are designed to provide competitive levels of compensation meant to integrate salaries with the Company’s goals and objectives and the interests of shareholders, while rewarding performance and retaining qualified and experienced executives. The Compensation Committee of our board of directors is primarily responsible for implementing the Company’s philosophy with respect to executive compensation. There are three primary elements to our executive compensation programs: base salary, cash bonus and RSUs.

The compensation packages are based on the potential impact the executive may have on the Company, the executive’s skills and experience and comparisons with comparable companies.

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 December 31, 2020, 5,794,500 shares had been authorized for issuance under the Plan, of which 2,224,500 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 31^st 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.

Employment Agreements

Xavier Williams

The Company entered into an employment agreement with Mr. Williams, our CEO, effective October 1, 2020 on an “at-will” basis. Mr. Williams’ initial base salary is $600,000 per year, subject to annual reviews and potential increases, at the discretion of the Board. Mr. Williams also received a one-time bonus of $300,000 that was paid within 30 days of his employment. Mr. Williams is also entitled to an annual bonus for each full fiscal year during his employment term, with a target bonus equal to 150% of his annual base salary, subject to the achievement of performance objectives to be established by the Board each year. For 2020, Mr. Williams is entitled to receive a minimum cash bonus equal to 75% of his annual base salary. Pursuant to the employment agreement, Mr. Williams received grants of equity awards under the “Plan” consisting of 500,000 RSUs which was also approved by the Board. Mr. Williams is also entitled to additional annual RSU awards if the Company’s stock price exceeds certain specified targets, as described in the employment agreement.

If Mr. Williams’s employment is terminated by the Company without “cause” (as such term is defined in the employment agreement), the Company will be obligated to pay to Mr. Williams, in addition to accrued but unpaid salary and benefits, (i) continued payment of base salary for one year, (ii) a pro-grated bonus (if applicable), and (iii) continued benefits, including health care and life insurance. The Company’s obligation to pay any of the foregoing severance obligations (other than salary and benefits accrued through the date of termination of employment) would be subject to Mr. Williams’ execution of a release of claims against the Company and Mr. Williams’ compliance with any surviving non-competition, non-solicitation, confidentiality and assignment of inventions obligations to the Company.

If, during the term of his employment agreement and within 12 months following a change in control of the Company, Mr. Williams’ employment under the employment agreement is terminated by the Company without cause, the Company will be obligated to pay Mr. Williams a lump sum severance benefit equal to one times his base salary plus one and one-half times his target bonus payout. In addition, any shares of restricted stock or other equity awards previously granted to Mr. Williams and scheduled to vest within 12 months of such termination would accelerate and be fully vested.

Thomas King

Effective April 7, 2020, the Company entered into an employment agreement with Thomas King, our CFO, on an “at-will” basis. Mr. King is entitled to receive a base salary of $420,000 per year. Mr. King will also be entitled to an annual bonus for each full fiscal year during his employment term, with a target bonus amount equal to 100% of his annual base salary, subject to the achievement of performance objectives to be established by the Company each year. In connection with his employment, Mr. King was also awarded 300,000 RSUs effective April 7, 2020.

Such employment agreement contains customary confidentiality provisions, which apply both during and for two years after its term, and customary non-competition and non-solicitation provisions, which apply during its term and for one year thereafter.

If Mr. King’s employment is terminated by the Company without “cause” (as defined), the Company will be obligated to pay to Mr. King, in addition to accrued but unpaid salary and benefits, (i) continued payment of base salary for one year and (ii) continued benefits, including health care and life insurance. The Company’s obligation to pay any of the foregoing severance obligations (other than salary and benefits accrued through the date of termination of employment) would be subject to Mr. King’s execution of a release of claims against the Company and Mr. King’s compliance with any surviving non-competition, non-solicitation, confidentiality and assignment of inventions obligations to the Company.

Michael Dennis

Effective December 1, 2020, Mr. Dennis, our COO, entered into an employment agreement with the Company, on an “at-will” basis. Mr. Dennis is entitled to receive a base salary of $420,000 per year. Mr. Dennis will also be entitled to an annual bonus for each full fiscal year during his employment term, with a target bonus amount equal to 100% of his annual base salary, subject to the achievement of performance objectives to be established by the Company each year. Pursuant to such employment agreement, Mr. Dennis is entitled to receive a grant of 300,000 RSUs under the Company’s 2020 Equity Incentive Plan, subject to approval of the Company’s board of directors.

Such employment agreement contains customary confidentiality provisions, which apply both during and for two years after its term, and customary non-competition and non-solicitation provisions, which apply during its term and for one year thereafter.

If such employment agreement is terminated by the Company without “cause” (as defined), the Company will be obligated to pay Mr. Dennis, in addition to accrued but unpaid salary and benefits, (i) continued payment of base salary for one year and (ii) continued benefits, including health care and life insurance. The Company’s obligation to pay any of the foregoing severance obligations (other than salary and benefits accrued through the date of termination of employment) would be subject to Mr. Dennis’s execution of a release of claims against the Company and Mr. Dennis’s compliance with any surviving non-competition, non-solicitation, confidentiality and assignment of inventions obligations to the Company. Such employment agreement contains customary confidentiality provisions, which apply both during and for two years after its term, and customary non-competition and non-solicitation provisions, which apply during such term and for one year thereafter.

Graham McGonigal

Mr. McGonigal, our Chief Strategy Officer since December 1, 2020, was our COO between July 24, 2019 and November 30, 2020, initially as a consultant and then as an employee effective April 7, 2020. Effective April 7, 2020, Mr. McGonigal entered into an employment agreement with the Company, on an “at-will” basis. Mr. McGonigal is entitled to receive a base salary of $500,000 per year and is entitled to an annual bonus for each full fiscal year during his employment term, with a target bonus amount equal to 100% of his annual base salary, subject to the achievement of performance objectives to be established by the Company each year. Mr. McGonigal also received a one-time bonus of $25,000 that was paid within 30 days of the effective date of his employment. Pursuant to such employment agreement, Mr. McGonigal received a grant of 500,000 RSUs under the Company’s 2020 Equity Incentive Plan, which was approved by the Company’s board of directors.

If such employment agreement is terminated by the Company without “cause” (as defined), the Company will be obligated to pay Mr. McGonigal, in addition to accrued but unpaid salary and benefits, (i) continued payment of base salary for one year and (ii) continued benefits, including health care and life insurance. The Company’s obligation to pay any of the foregoing severance obligations (other than salary and benefits accrued through the date of termination of employment) would be subject to Mr. McGonigal’s execution of a release of claims against the Company and Mr. McGonigal’s compliance with any surviving non-competition, non-solicitation, confidentiality and assignment of inventions obligations to the Company. Such employment agreement contains customary confidentiality provisions, which apply both during and for two years after its term, and customary non-competition and non-solicitation provisions, which apply during such term and for one year thereafter.

Other

Commencing on July 27, 2017, we initially paid our Sponsor an aggregate fee of up to $20,000 per month for providing us with office space and certain office and secretarial services. This arrangement is solely for our benefit and is not intended to provide our executive officers or directors compensation in lieu of a salary. The space was not used during the period April 7, 2020 through December 31, 2020 and therefore, by mutual agreement between the parties, no expenses were incurred, by the Company, during such period.

Our Sponsor, members of our management team or their respective affiliates may, from time to time, receive reimbursement for any out-of-pocket expenses incurred by them in connection with activities on our behalf, such as identifying potential target businesses, performing business due diligence on suitable target businesses and business combinations as well as traveling to and from the offices, plants or similar locations of prospective target businesses to examine their operations. There is no limit on the amount of out-of-pocket expenses reimbursable by us.

Outstanding Equity Awards at Fiscal Year-End

The following table provides information about RSUs held by the named executive officers (vesting schedules are discussed in the section above titled “Compensation Philosophy):”

Director Compensation

Directors who are employees of the Company do not receive additional compensation for their services as directors or as members of board committees. Non-employee directors are also not paid any fees in cash. Instead, non-employee directors receive RSUs on the effective dates of their appointments. Twenty five percent of such RSUs vest on the anniversary date of the respective award. The following summarizes the RSUs issued to non-employee directors during the year ended December 31, 2020, none of which had vested at December 31, 2020:

The table includes only directors appointed during 2020, and therefore excludes the 60,000 RSUs issued to Carolyn Byrd on or about March 1, 2021

Compensation Committee Interlocks and Insider Participation

None.

Compensation Committee Report

Our compensation committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management. Based on that review and discussion, the compensation committee recommended to the Company’s board of directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

U. Bertram Ellis, Jr.

Dr. Klaas Baks

Karl Krapek

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth information known to the Company regarding the beneficial ownership of our common stock as of March 19, 2021 by:

Beneficial ownership is determined according to the rules of the SEC, which generally provide that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power over that security or has the right to acquire securities within 60 days, including options and warrants that are currently exercisable or exercisable within 60 days. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares beneficially owned by them. The calculation of percentage of beneficial ownership is based on 19,753,061 shares of common stock outstanding as of March 19, 2021:

On the Kandy Closing Date, Ribbon entered into amended and restated voting agreements (the “A&R Voting Agreements”) with each of Pensare Sponsor Group, LLC and Stratos Management Systems Holdings, LLC, each of which is a greater than 5% stockholder of the Company, or a Significant Stockholder. The Significant Stockholders held in the aggregate approximately 70% of AVCT’s outstanding shares of Common Stock as of March 19, 2021. Pursuant to the A&R Voting Agreements, each Significant Stockholder has agreed, with respect to all of the voting securities of AVCT that such Significant Stockholder beneficially owns as of the date thereof or thereafter, to vote in favor of the Stockholder Approval. The A&R Voting Agreements will terminate upon the Company obtaining the Stockholder Approval.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The following paragraph discusses related party transactions that occurred during 2020 and/or that are contemplated during 2021 (other than (i) compensation paid or awarded to the Company’s directors, director nominees and executive officers that is required to be discussed, or is exempt from discussion, in the other sections of this annual report on Form 10-K and (ii) equity and Debentures issued in connection with the Computex Business Combination and the Kandy Business Combination, as described elsewhere in this annual report on Form 10-K).

On April 3, 2020, AVCT and the PIPE Investors entered into the Securities Purchase Agreement, pursuant to which the PIPE Investors agreed to purchase, and we agreed to sell to the PIPE Investors, the PIPE Units, each PIPE Unit consisting of (i) $1,000 in principal amount of the PIPE Debentures and (ii) one PIPE Warrant to purchase 100 shares of common stock at an exercise price of $0.01 per whole share. Pursuant to the terms of the Securities Purchase Agreement, we issued to the PIPE Investors approximately 43,169 PIPE Units at the Closing and were allowed to issue up to approximately 56,831 additional PIPE Units in the aggregate in one or more subsequent closings through August 5, 2020. Certain of our officers and directors or their affiliates were issued PIPE Units as follows:

At the Computex Closing Date, we issued to the PIPE Investors the PIPE Debentures having an aggregate principal amount of approximately $43.2 million (including $3.0 million in aggregate principal amount issued as part of PIPE Units sold to MasTec, $20.0 million in aggregate principal amount issued as part of PIPE Units issued to Holdings pursuant to the terms of the Business Combination Agreement and approximately $8.6 million in aggregate principal amount issued to the Sponsor as part of PIPE Units issued in exchange for the cancellation of indebtedness previously incurred by the Company to the Sponsor). The PIPE Debentures bear interest at a rate of 10% per annum, payable quarterly on the last day of each calendar quarter in the form of additional PIPE Debentures, except upon maturity in which case accrued and unpaid interest is payable in cash. The entire principal amount of each PIPE Debenture, together with accrued and unpaid interest thereon, is due and payable on the earlier of (i) such date, commencing on or after October 7, 2022, as the holder thereof, at its sole option, upon not less than 30 days’ prior written notice to the Company, demands payment thereof and (ii) the occurrence of a Change in Control (as defined in the PIPE Debentures).

Each PIPE Debenture is convertible, in whole or in part, at any time at the option of the holder thereof into that number of shares of our 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 PIPE Debentures are subject to mandatory conversion if the closing price of the 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 PIPE Debentures are subordinated to all Senior Indebtedness (as defined in the PIPE Debentures), including indebtedness under the Credit Agreement.

At the Computex Closing Date, we issued to PIPE Investors the PIPE Warrants to purchase an aggregate of up to 4,316,936 shares of our common stock (including PIPE Warrants to purchase up to 2,000,000 shares, 856,561 shares, and 300,000 shares of our common stock issued to Holdings, the Sponsor and MasTec, respectively, as part of the PIPE Units issued to them), at an exercise price of $0.01 per share. The PIPE Warrants are exercisable at any time through the fifth anniversary of the date of issuance. The number of shares issuable upon exercise of each PIPE Warrant is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like.

Computex was party to a Management Services Agreement, effective February 13, 2012, with Navigation Capital Partners, Inc. (“Management Services Agreement”), a private equity management company owned by Mr. Mock. Pursuant to the Management Services Agreement, Navigation Capital Partners, Inc. provided advisory and management services as requested by Computex. As compensation for such advisory and management services, Computex paid Navigation Capital Partners, Inc. an annual management fee equal to $300,000. The Management Services Agreement was terminated in connection with the consummation of the Computex Business Combination.

Accounts payable and accrued expenses include $1,031,272 of amounts due to Ribbon for reimbursable expenses incurred on the Company’s behalf, net of amounts they collected on the Company’s behalf, and $293,404 for professional services provided after the acquisition as part of an agreed upon transition services arrangement. The expense relating to such professional fees are reflected in cost of revenue ($126,002), research and development ($33,000) and selling and administrative expenses ($134,402).

Effective October 1, 2020, the Company and Navigation, an affiliate of a shareholder, entered into an agreement whereby Navigation provides capital markets advisory and business consulting services to the Company for a fee of $50,000 per month. Included in selling and administrative expenses for the period April 7, 2020 through December 31, 2020 and accounts payable and accrued liabilities as of December 31, 2020 is $150,000 related to such agreement.

Related Party Policy

Our Code of Ethics requires us to avoid, wherever possible, all related party transactions that could result in actual or potential conflicts of interests, except under guidelines approved by the board of directors (or the audit committee). Related-party transactions are defined as transactions in which (1) the aggregate amount involved will or may exceed $120,000 in any calendar year, (2) we or any of our subsidiaries is a participant, and (3) any (a) executive officer, director or nominee for election as a director, (b) greater than 5% beneficial owner of our shares of common stock, or (c) immediate family member, of the persons referred to in clauses (a) and (b), has or will have a direct or indirect material interest (other than solely as a result of being a director or a less than 10% beneficial owner of another entity). A conflict of interest situation can arise when a person takes actions or has interests that may make it difficult to perform his or her work objectively and effectively. Conflicts of interest may also arise if a person, or a member of his or her family, receives improper personal benefits as a result of his or her position.

Our audit committee, pursuant to the Audit Committee Charter, will be responsible for reviewing and approving related-party transactions to the extent we enter into such transactions. The audit committee will consider all relevant factors when determining whether to approve a related party transaction, including whether the related party transaction is on terms no less favorable to us than terms generally available from an unaffiliated third-party under the same or similar circumstances and the extent of the related party’s interest in the transaction. No director may participate in the approval of any transaction in which he is a related party, but that director is required to provide the audit committee with all material information concerning the transaction. We also require each of our directors and executive officers to complete a directors’ and officers’ questionnaire that elicits information about related party transactions.

These procedures are intended to determine whether any such related party transaction impairs the independence of a director or presents a conflict of interest on the part of a director, employee or officer.

Item 14. Principal Accountant Fees and Services.

The aggregate fees billed to our Company by UHY LLP for the years ended December 31, 2020 and 2019 were as follows:

Our audit committee has and will pre-approve all auditing services and permitted non-audit services to be performed for us by UHY LLP, including the fees and terms thereof (subject to the de minimus exceptions for non-audit services described in the Exchange Act which are approved by the audit committee prior to the completion of the audit). The audit committee may form and delegate authority to one or more of its members when appropriate, including the authority to grant pre-approvals of audit and permitted non-audit services, provided that decisions of such members to grant pre-approvals shall be presented to the audit committee at its next scheduled meeting. 

PART IV

Item 15. Exhibits, Financial Statement Schedules.

The following documents are filed as part of this report or incorporated herein by reference:

None

The following documents are included as exhibits to this Annual Report:

Item 16. Form 10-K Summary

Not applicable

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
(FORMERLY KNOWN AS PENSARE ACQUISITION CORPORATION)
INDEX TO FINANCIAL STATEMENTS

Audited Financial statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of
American Virtual Cloud Technologies, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated Successor balance sheet of American Virtual Cloud Technologies, Inc. (the “Company”) as of December 31, 2020, the Predecessor balance sheet as of December 31, 2019 and the related consolidated statements of operations, stockholders’ (deficit) equity and cash flows for the Successor period April 7, 2020 through December 31, 2020, and the Predecessor periods January 1, 2020 through April 6, 2020 and the year ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the Successor period April 7, 2020 through December 31, 2020, and the Predecessor periods January 1, 2020 through April 6, 2020 and the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. 

/s/ UHY LLP

We have served as the Company’s auditor since 2020.

Melville, New York

March 31, 2021

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS

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

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

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

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)