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American Virtual Cloud Technologies, Inc. - Annual Report: 2021 (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, 2021

 

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.

 

Delaware   81-2402421
(State or other jurisdiction of   (I.R.S. Employer
 incorporation or organization)   Identification Number)

 

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:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.0001 per share   AVCT   The Nasdaq Stock Market LLC
Warrants, each whole Warrant entitling the holder to purchase one share of Common Stock at an exercise price of $11.50   AVCTW   The Nasdaq Stock Market LLC

 

As of March 31, 2022, 89,566,997 shares of the Company’s common stock, par value $0.0001 per share, were outstanding.

 

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 whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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.

 

Large accelerated filer      Accelerated filer 
Non-accelerated filer     ☒   Smaller reporting company ☒
Emerging growth company  ☒    

 

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

 

Indicate by check mark whether the registrant has fi led a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting fi rm that prepared or issued its audit report. ☐

 

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 on June 30, 2021 (the last business day of the registrant’s most recently completed second fiscal quarter), as reported on the NASDAQ Capital Market, was approximately $23,545,150. 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.

 

 

 

 

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC. AND SUBSIDIARIES

Annual Report on Form 10-K

For the Fiscal Year ended December 31, 2021

Table of Contents

  

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS 1
   
PART I  
     
Item 1. Business 2
Item 1A. Risk Factors 8
Item 1B. Unresolved Staff Comments 17
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Mine Safety Disclosures 17
     
PART II  
     
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 18
Item 6. [Reserved] 18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 33
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 33
Item 9A. Controls and Procedures 34
Item 9B. Other Information 34
Item 9C Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. 34
     
PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance 35
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 43
Item 13. Certain Relationships and Related Transactions, and Director Independence 45
Item 14. Principal Accountant Fees and Services 47
     
PART IV  
     
Item 15. Exhibits and Financial Statement Schedules 48
Item 16. Form 10-K Summary 51

 

i

 

 

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 benefits of business combinations, including our acquisition of the Kandy Communications business;
     
  future financial performance following business combinations, including our acquisition of the Kandy Communications business;
     
  changes in our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management;
     
  our ability to complete acquisitions of other businesses;
     
  expansion plans and opportunities; and
     
 

the outcome of any known and unknown litigation and regulatory proceedings.

 

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:

 

  risks associated with our ability to grow our Kandy Business and/or realize business opportunities following the sale of Computex;
     
  our ability to realize the anticipated benefits of business combinations, including the Kandy Communications business, which may be affected by, among other things, competition and our ability to grow and manage growth and profitably following business combinations;
     
  our ability to retain a certain volume of customers, partner relationships and the ability of those partners to maintain the availability of their products;
     
  fluctuations in demand for the Company’s services and technology.
     
  Risks associated with the protection of the Company’s intellectual property, and government policies and regulations, including, but not limited to those affecting the Company’s industry;
     
  our ability to hire and/or retain key sales personnel, key executive officers and other key personnel, and our ability to successfully implement succession plans;
     

  adverse effects of the novel coronavirus (COVID-19) on the Company and/or the economy in general;
     
  changes in applicable laws or regulations;
     
  fluctuations in oil and gas prices, which could directly or indirectly impact the Company’s customers;
     
  our ability to maintain the listing of our securities on the Nasdaq Capital Market (“Nasdaq”); and
     
  other risks and uncertainties including those set forth in the “Risk Factors” section of this Form 10-K, which begin on page 8.

 

1

 

 

PART I

 

Item 1. Business

 

Company History and Certain Recent Developments

 

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. 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.

 

On September 16, 2021, the Company announced that as a result of a decision by the Company’s Board of Directors to explore strategic alternatives previously announced on April 7, 2021, the Board had authorized the Company to focus its strategy on acquisitions and organic growth in its cloud technologies business as well as to explore strategic opportunities for its IT solutions business, including the divestiture of Computex. The Company believed that such changes would allow it to optimize resource allocation, focus on core competencies, and improve its ability to invest in areas of maximal growth potential.

 

On December 2, 2021, the Company entered into a Credit Agreement (the “Credit Agreement”) with Monroe Capital Management Advisors, LLC and certain affiliated entities (“Monroe”) for a $27 million term loan facility (or the “Credit Facility”), part of which was used to pay off amounts owing under a prior credit agreement with Comerica Bank (the “Prior Credit Agreement”) which was assumed as part of the Computex Business Combination. The remainder of the proceeds from the Credit Agreement was to be used for working capital and general business purposes. The terms of the Credit Agreement are discussed in Note 9 in the Notes to our Consolidated Financial Statements included elsewhere in this Form 10-K.

 

On January 27, 2022, the Company announced that it had executed a definitive agreement to sell Computex, and on March 15, 2022, the sale of Computex was consummated, completing the Company’s transition to a pure-play cloud communications and collaboration company, centered on the Kandy platform. As a result, Computex is classified as held for sale as of December 31, 2021 and its operations are classified as discontinued operations. In connection with the planned sale of Computex, we recorded a noncash goodwill impairment charge of $32.1 million during the year ended December 31, 2021 (“Fiscal 2021”) which represented the excess of the carrying value of the Computex reporting unit over the expected sale proceeds less costs to sell. Net proceeds from the sale of Computex, after payment of closing obligations and certain indebtedness are being used for working capital and general business purposes.

 

In addition, as more fully discussed in Note 10 in the Notes to our Consolidated Financial Statements included elsewhere in this Form 10-K, during the fourth quarter of Fiscal 2021, the Company completed the sale of certain securities, including the sale of common stock, preferred stock and warrants. In connection with the sale of these securities, the Company also completed certain share registrations. Two of the five series of warrants were exercised soon after they were issued resulting in proceeds of approximately $5.0 million during Fiscal 2021.

 

Subsequent to December 31, 2021, and as more fully discussed in Note 18 in the Notes to our Consolidated Financial Statements, the Company sold additional securities.

 

2

 

 

Our Business

 

The Kandy cloud communications platform is a cloud-based, real-time communications platform, offering proprietary unified communications as a service (“UCaaS”), communications platform as a service (“CPaaS”), contact center as a service (“CCaaS”), Microsoft Teams Direct Routing as a Service (“DRaaS”), and SIP Trunking as a Service capabilities. Kandy is one of the largest pure-play providers of UCaaS, CCaaS, CPaaS and Direct Routing as a Service (DRaaS) for enterprise customers.

 

As a provider of cloud-based enterprise services, Kandy deploys a global carrier grade cloud communications platform that supports the digital and cloud transformation of mid-market and enterprise customers across any device, on any network, in any location. The Kandy platform is based on a powerful, proprietary multi-tenant, highly scalable, and secure cloud platform that includes pre-built customer engagement tools, based on web real-time communications technology (“WebRTC technology”) that enables 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.

 

Growth Strategy

 

The acquisition of Kandy has given us the opportunity to provide a full suite of UCaaS, CPaaS, and CCaaS products to serve the rapidly growing cloud communications market.  Customers today demand a highly reliable, secure, and scalable communications platform along with a world class customer experience.

 

With demand for cloud technology increasing, we believe that the already sizable total addressable market (“TAM”) for cloud communications is on track to continue to expand and we believe that we are positioned to monetize mega trends in enterprise cloud communications, gain market share as a premier white-label cloud communications provider, checking the CPaaS, CCaaS, UCaaS and DRaaS boxes, while also capitalizing on our direct to enterprise capabilities (for example, Tier 1 support) to sell through our partners or sell directly.

 

Certain areas of our growth plan, which also includes continued investment in research and development, are as follows:

 

Channel (white label) - Target technology providers, such as Service Providers (SPs), Resellers, Independent Software Vendors (ISVs), and Systems Integrators (SIs) through

 

oStrategic Alliances with companies looking to co-invest to monetize cloud communications technology; and

 

oOur partners that are looking to white-label or resell cloud technologies, which we believe offer significant opportunity to grow revenue with existing partners while identifying new ones.

 

Direct to Enterprise - Target enterprises looking to deploy their own cloud technology using APIs/SDKs (application programming interface/software development kit) and are looking to enable cloud communications to support their business and customer communications and interactions either

 

oOrganically - By targeting select vertical markets with high growth potential for example, government, retail, financial, & healthcare; or

 

oInorganically - By making selective acquisitions to expand the use of the Kandy platform.

 

3

 

 

Key Trends Affecting Our Business

 

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

 

  Disruptive technologies are creating complexity and challenges for customers and vendors. The rapid evolution of disruptive technologies, and the speed by which they impact an organization’s technology platforms, has made it difficult for customers to effectively design, procure, implement and manage their own IT systems. Moreover, increased budget pressures, fewer internal resources, a fragmented vendor landscape and fast time-to-value expectations make it challenging for customers to design, implement and manage, efficient, secure and cost-effective IT environments. Customers are increasingly turning to IT solutions providers to implement or help them implement complex IT offerings, including software defined infrastructure, cloud computing, converged and hyper-converged infrastructures, big data analytics, and flash storage.
     
  Migration from on-premise communication solutions to cloud hosted services. The migration to cloud hosted services is in full swing with years of solid market growth.  For years, on-premise PBX and Centrex carrier-hosted telephony switches dominated the market. In recent years, cloud communications technologies have eclipsed those functions which has led to lower human, capital and operational costs. The transformation to the cloud is accelerating.  Complimenting those technologies with video, messaging and embedded communications is adding to revenue streams and productivity enhancements in the workplace.
     
    Increasing trend away from the use of hard phones. Business communications are rapidly moving away from hard phones to work-from-anywhere-applications on desktops and mobile phones.  Further, customers are rapidly evolving to communications that are embedded within applications and business process flows without context switching between applications which leads to increased productivity and contextual communications.

 

Additional growth opportunities for our business include:

 

The acceleration of digital transformation
   
The change in how people work, including the “work from anywhere” mindset
   
  The increased complexity in mid & large enterprises and the desire by enterprises for integrated internal and external communications for UCaaS, CPaaS, CCaaS and DRaaS

 

The demand for services similar to WebEx, Teams, & Zoom and partners that can add to and/or complement such tools and players
   
The trend towards CPaaS technology – Product developers & Independent Software Vendors (ISVs) are increasingly seen as the influencers
   
The general trend towards movement to the cloud
   
The lack of sufficient internal IT resources at mid-sized and large enterprises, and the scarcity of IT personnel in certain high-demand disciplines
   
The recognition that certain IT services provide the opportunity of funding via recurring payments over a period of time, rather than large upfront payments
   
The increasing use of multi-cloud strategies, whereby cloud architectures and cloud-enabled frameworks, whether public, private, or hybrid, provide the core foundation of modern IT
   
The explosive growth in remote workforce needs.

 

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

 

All segments (Kandy and Computex)

 

The five top customers during Fiscal 2021 accounted for 17% of revenues. The top five customers during the Successor period April 7, 2020 to December 31, 2020 accounted for 24% of total revenue. No customer accounted for more than 10% of total revenue during the year ended December 31, 2021 nor during the Successor period April 7, 2020 to December 31, 2020.

 

4

 

 

Kandy only

 

The five top customers during Fiscal 2021 accounted for 68% of revenues. Three customers accounted for more than 10% of total revenue during the year ended December 31, 2021, accounting for $9.9 million of Kandy’s revenue.

 

Competition

 

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

 

The Company’s reportable segments in Fiscal 2021 were Computex and Kandy. At December 31, 2021, approximately 110 associates were employed in our international operations. All such international employees were employed in our Kandy segment.

 

Research and Development

 

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.

 

As of December 31, 2021, our research and development team consisted of approximately 65 associates (excluding contractors). All of our research and development associates are employed by Kandy.

 

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.

 

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.

 

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.

 

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.

 

5

 

 

COVID-19

 

COVID-19 continues to significantly impact local, regional, and global economies, businesses, supply chains, production and sales across a range of industries. The extent of its impact on our operational and financial performance is uncertain and difficult to predict and we remain cautious about the global recovery.

 

To protect the health and safety of our employees, our daily execution has evolved into a largely virtual model. However, we have found ways to continue to engage with and assist our customers and partners as they work to navigate the current environment. We will continue to monitor the current environment and may take further actions that may be required by federal, state or local authorities or that we determine to be in the interests of our employees, customers, and partners.

 

Human Capital

 

Our core values – Integrity, innovation, delighting our clients, diversity and teamwork are communicated to our employees on joining our company and we strive to maintain and demonstrate these values to our associates in the decisions we make and the actions we take. We believe one of our greatest assets is our people and believe adherence to such policies play a key role in the success of our company.

 

Integrity – We strive to earn the trust of our customers, partners, and associates through honesty, openness, and ethical, and fair behavior. We respect everyone and believe we should treat others as we expect to be treated.

 

Innovation - We are committed to continuous progress, never settling for yesterday’s solutions or successes.

 

Delighting our clients – We are committed to delighting our clients with exceptional and personalized services.

 

Diversity – We believe it takes people with different ideas, experiences, strengths, interests and backgrounds to succeed.

 

Teamwork – We understand that we achieve everything together and are accountable to each other for our results.

 

At December 31, 2021, our employee base stood at approximately 356 employees worldwide, of which more than 30% were employed in our international operations. At March 15, 2022, following the sale of Computex, our employee base stood at approximately 175 employees worldwide, of which more than 63% were employed in our international operations. We have offices in Canada, Mexico, and the United States, as well as representatives in the United Kingdom, Israel and the United Arab Emirates. None of our employees are represented by unions and we consider the relationships with our employees to be good. As of December 31, 2021, women represented 19.1% of our workforce. The attrition rate in Fiscal 2021 was 19.8%.

 

As of December 31, 2021, the composition of our employee base was as follows:

 

           Computex     
           (held for sale at     
   Corporate   Kandy   December 31, 2021)   Total 
Sales and marketing        -    36    54    90 
Product support and R&D   -    124    3    127 
Engineers   -    -    108    108 
Admin   9    6    16    31 
Total number of employees   9    166    181    356 

 

But for the Computex employees, the above table also approximates our employee base as of March 15, 2022, after the sale of Computex.

 

We offer fair and competitive compensation and benefit packages to our employees that include base salary, incentives, adequate paid time off and various health insurance plan options. To protect the health and safety of our employees and others, in response to COVID-19, our daily execution has evolved into a largely virtual model. We support the development of our employees by reimbursing them for certain continuous education programs. COVID-19 has changed the way people work and we have endeavored to facilitate an environment that allows our employees to work from where they are and have adopted hybrid options. We recognize the importance of remaining flexible and agile in the current environment with respect to the needs of our employees.

 

6

 

 

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 $3.3 million at December 31, 2021, of which $3.2 million relates to the Computex reporting unit which was classified as held for sale at December 31, 2021 and was sold on March 15, 2022. 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 in the applicable company’s financial statements, within 12 months of the reporting date, most of which will be recognized as revenue by the buyer of Computex after the sale of Computex.

 

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. As of December 31, 2021, total transaction price for remaining performance obligations associated with non-cancelable contracts longer than 12 months that are expected to be recognized over future periods by the Computex segment was approximately $27.9 million, most of which will be recognized as revenue by the buyer of Computex after the sale of Computex.

 

Seasonality

 

Except for Computex’s hardware revenue, the Company’s revenue is not considered to be seasonal. Computex’s hardware revenue tends to be seasonal with higher revenues occurring in the fourth quarter of each year. As previously indicated, Computex was sold in the first quarter of 2022.

 

Available Information

 

Our website address is http;//www.avctechnologies.com. Our common stock and public 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 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 on our website and 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.

 

7

 

 

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

 

Our operations and revenue will be substantially reduced following the sale of Computex, which may negatively impact the value and liquidity of our common stock.

 

Upon the sale of Computex, our operations will be limited to our Kandy Business, unless the Company acquires one or more companies. There can be no assurance that we will be successful at growing our Kandy Business or that the Kandy business will be successful or that we will be able to make acquisitions. A failure by us to grow our Kandy Business or to secure additional sources of revenue following the sale of Computex could negatively impact the value and liquidity of our common stock.

 

We will continue to incur the expense of complying with public company reporting requirements following the sale of Computex.

 

After the sale of Computex, we will continue to be required to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as amended, even though compliance with such reporting requirements may be economically burdensome.

 

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.

 

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The Company has customer concentration, and if the Company loses one or more of its large volume customers, its earnings may be materially affected.

 

Following the Company’s sale of the Computex business in March 2022, it has significant concentration of customers. The five top customers of the Company’s Kandy business, which is the Company’s sole business segment following the sale of Computex, accounted for 68% of the revenues of that business segment during Fiscal 2021. There are inherent risks whenever a significant percentage of total revenues are concentrated with a limited number of customers. Revenues from our largest customers may fluctuate from time to time based on numerous factors, including market conditions, which may be outside of our control. 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 technology 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.

 

Fluctuations in oil and gas prices could directly or indirectly impact the Company’s customers, 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. 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.

 

9

 

 

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.  

 

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 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.

 

10

 

 

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.

 

11

 

 

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 30% of the Company’s employees are based outside of the US. For Kandy, more than 60% of its 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:

 

  greater reliance on local partners;
     
  possible difficulties collecting accounts receivable and longer collection cycles;
     
  difficulties and costs of staffing and managing international operations;
     
  compliance with international trade, customs and export control regulations;
     
  foreign government regulations limiting or prohibiting potential sales or increasing the cost of doing business in such markets, including adverse tax policies, tariffs, customs regulations, trade protection measures, export quotas and qualifications to transact business;
     
  foreign currency controls, restrictions on repatriation of cash and changes in currency exchange rates;
     
  a possible need to adapt and localize our products for specific countries;
     
  our ability to effectively price our products in competitive international markets;
     
  political, social and economic instability, including as a result of possible volatility of global financial markets, health pandemics or epidemics and/or acts of war or terrorism;
     
  exchange rate fluctuations that could negatively impact our financial results; and risks associated with our use and reliance on research and development resources in global locations.

 

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.

 

12

 

 

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

 

As of December 31, 2021, 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 locations, 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, 2021, for assets not held for sale, the carrying value of the Company’s goodwill was $10.5 million.

 

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 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 public 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:

 

  a limited availability of market quotations for our securities;
     
  reduced liquidity with respect to our securities;
     
  a determination that our shares of common stock are “penny stock” which will require brokers trading in our shares of common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our shares of common stock;
     
  a limited amount of news and analyst coverage for our company; and
     
  a decreased ability to issue additional securities or obtain additional financing in the future.

 

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 public warrants are currently listed on the Nasdaq, our common stock and public 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.

 

13

 

 

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:

 

  actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
     
  changes in the market’s expectations about our operating results;
     
  success of competitors;
     
  our operating results failing to meet the expectation of securities analysts or investors in a particular period;
     
  changes in financial estimates and recommendations by securities analysts concerning the Company or the IT industry in general;
     
  operating and stock price performance of other companies that investors deem comparable to the Company;
     
  our ability to market new and enhanced products on a timely basis;
     
  changes in laws and regulations affecting our business;
     
  our ability to meet compliance requirements;
     
  commencement of, or involvement in, litigation involving the Company;
     
  changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
     
  the volume of shares of our common stock available for public sale;
     
  any major change in our board of directors or management;
     
  sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; and
     
  general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations, acts of war or terrorism and global health crises, including the COVID-19 pandemic.

 

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 2017 initial public offering (“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.

 

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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 February 1, 2022, directors and executive officers beneficially owned 42.7% of our common stock, and four shareholders and their affiliates beneficially owned more than 5% of our common stock, of which three beneficially owned more than 10% of our common stock, including certain warrants. 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.

 

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 issuance of one or more 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.

 

15

 

 

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, 2021, we had various types of warrants to purchase shares of our common stock at various exercise prices. To the extent any such warrants are exercised, 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 987,000 shares of our common stock were available for issuance as of December 31, 2021. All of our outstanding 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 may be exercised, 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.

 

16

 

 

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.

 

The periodic valuation of certain warrants could increase the volatility in our net income (loss).

 

The change in fair value of our warrants is the result of changes in the Company’s stock price and warrants outstanding at each reporting period and represents the mark-to-market fair value adjustments to the outstanding warrants. Significant changes in our stock price or number of warrants outstanding may adversely affect our net income (loss).

 

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.

 

As of December 31, 2021, locations leased by Computex (all of which were transferred as part of our sale of Computex in March 2022) were as follows:

 

Computex Headquarters in Houston, Texas with approximately 5,222 square feet
   
North Texas/DFW headquarters in Westlake, Texas with approximately 2,575 square feet
   
Security Operations Center and Network Operations Center in Houston, Texas with approximately 15,000 square feet;
   
Warehouse in Houston, Texas with approximately 5,175 square feet;
   
Sales and training offices in: (i) Odessa, Texas; (ii) St. Petersburg, Florida; and (iii) Excelsior, Minnesota.

 

Locations leased by Kandy are as follows:

 

Administrative offices located in the Brier Creek Office Parke, Wake County, North Carolina;
   
A lab and related facilities in Ottawa and North Carolina;
   
A facility in Mexico City; and
   
Approximately 10 co-located data centers that are used as server locations.

 

We believe our current facilities meet the needs of our employee base and can accommodate our currently contemplated growth. Also, 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. From time to time, we may be involved in certain legal proceedings and claims, which arise in the ordinary course of business. Currently, we not aware of any matter or matters that, individually or in the aggregate, would have a material adverse effect on our results of operations, financial condition, or cash flow. If we should determine that an unfavorable outcome is probable on a claim and that the amount of probable loss is reasonably estimable, we will record an accrual for such claim or claims. If any such accrual is recorded, it could be material and could adversely impact our results of operations, financial condition, and cash flows.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

17

 

 

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 public warrants trade under the symbols “AVCT,” and “AVCTW,” respectively. Each such whole warrant entitles the holder to purchase one share of common stock at an exercise 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. Such warrants will expire on April 7, 2025.

 

Holders of Record

 

On March 31, 2022, there were approximately 62 holders of record of our common stock and 4 holders of record of our publicly-traded 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, results, 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.

 

Equity Compensation Plans

 

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

 

Plan Category  Number of
securities
to be issued
upon
exercise of
outstanding
rights
   Weighted-average
exercise price of
outstanding
rights
   Number of
securities
remaining
available for
future
issuance
under equity
compensation
plans
 
Equity compensation plans approved by security holders    5,794,500           -    987,000 
Equity compensation plans not approved by security holders    -    -    - 
Total    5,794,500    -    987,000 

 

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

 

Item 6. [Reserved]

 

18

 

 

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 Ottawa, North Carolina and Mexico City as of March 31, 2022.

 

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.

 

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.

 

Computex is a leading multi-brand technology solutions provider to large global customers, providing a comprehensive and integrated set of technology solutions, through its extensive hardware, software and value-added service offerings. Computex designs best-fit solutions, and with the help of leading vendors in the industry, helps its customers with the procurement of suitable hardware and software that are appropriate for their specific needs. With primary operating locations in Minnesota, Michigan, Florida and Texas, services offered by Computex include directory and messaging, enterprise networking, cybersecurity, collaboration, data center services, integration, storage, backup, virtualization, converged infrastructures and UCaaS.

 

Kandy, a provider of cloud-based enterprise services, globally deploys a white-label, carrier-grade cloud-based platform for UCaaS, CPaaS and CCaaS for mid-market and enterprise customers across a proprietary multi-tenant, highly scalable cloud platform. The Kandy platform also includes pre-built customer engagement tools, based on WebRTC technology, known as Kandy Wrappers, and provides white-labeled services to a variety of customers including communications service providers and systems integrators. With Kandy, companies can quickly embed real-time communications capabilities into their existing applications and business processes.

 

Recent developments

 

On September 16, 2021, the Company announced that as a result of a decision by the Company’s Board of Directors to explore strategic alternatives previously announced on April 7, 2021, the Board had authorized the Company to focus its strategy on acquisitions and organic growth in its cloud technologies business as well as to explore strategic opportunities for its IT solutions business, including the divestiture of Computex. The Company believed that the change would allow it to optimize resource allocation, focus on core competencies, and improve its ability to invest in areas of maximal growth potential.

 

On December 2, 2021, the Company entered into the Credit Agreement with Monroe for a $27.0 million Credit Facility, part of which was used to pay off amounts owing under the Prior Credit Agreement which was assumed as part of the Computex Business Combination. The remainder of the proceeds from the Credit Facility were scheduled to be used for working capital and general business purposes. However, on March 1, 2022, all amounts owing under the Credit Agreement were repaid from the proceeds of a securities sale executed on March 1, 2022 and cash on hand. The terms of the Credit Agreement are discussed in Note 9 in the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K.

 

19

 

 

On January 27, 2022, the Company announced that it had executed a definitive agreement to sell Computex and on March 15, 2022, the sale of Computex was consummated, completing the Company’s transition to a pure-play cloud communications and collaboration company, centered on the Kandy platform. As a result, Computex was classified as held for sale as of December 31, 2021 and its operations are classified as discontinued operations. In connection with the planned sale of Computex, we recorded a noncash goodwill impairment charge of $32.1 million during Fiscal 2021 which represented the excess of the carrying value of the Computex reporting unit over the expected sale proceeds less costs to sell. Net proceeds from the sale of Computex, after payment of closing obligations and certain indebtedness, are being used for working capital and general business purposes.

 

In addition, as more fully discussed in Note 10 in the Notes to our Consolidated Financial Statements included elsewhere in this Form 10-K, during the fourth quarter of Fiscal 2021, the Company completed the sale of certain securities, including the sale of common stock, preferred stock and warrants. In connection with the sale of these securities, the Company also completed certain share registrations. Two of the five series of warrants were exercised soon after they were issued resulting in proceeds of approximately $5.0 million during Fiscal 2021.

 

Subsequent to December 31, 2021, and as more fully discussed in Note 18 in the Notes to our Consolidated Financial Statements, the Company sold additional securities. Also, the Company repaid amounts that were outstanding under the Credit Agreement and closed on the sale of Computex.

 

Growth strategy

 

The acquisition of Kandy has given us the opportunity to provide a full suite of UCaaS, CPaaS, and CCaaS products to serve the rapidly growing cloud communications market.  Customers today demand a highly reliable, secure, and scalable communications platform along with a world class customer experience.

 

With demand for cloud technology increasing, we believe that the already sizable total addressable market (TAM) for cloud communications is on track to continue to expand and we believe that we are positioned to monetize mega trends in enterprise cloud communications, gain market share as a premier white-label cloud communications provider, checking the CPaaS, CCaaS & UCaaS boxes, while also capitalizing on our direct to enterprise capabilities (for example, Tier 1 support) to sell through our partners or sell directly.

 

Certain areas of our growth plan, which also includes continued investment in research and development, are as follows:

 

Channel (white label) - Target technology providers, such as Service Providers (SPs), Resellers, Independent Software Vendors (ISVs), and System Integrators (SIs) through

 

oStrategic Alliances with companies looking to co-invest to monetize cloud communication technology; and

 

oOur partners that are looking to white label or resell cloud technologies, which we believe offer significant opportunity to grow revenue with existing partners while identifying new ones.

 

Direct to Enterprise - Target enterprises looking to deploy their own cloud technology using APIs/SDKs (application programming interface/software development kit) and/or looking to enable cloud communications to support their business and customer communications and interactions either

 

oOrganically - By targeting select vertical markets with high growth potential for example, government, retail, financial, & healthcare; or

 

oInorganically - By making selective acquisitions to expand the use of the Kandy platform.

 

20

 

 

Key trends affecting our results of operations

 

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

 

The acceleration of digital transformation

 

The change in how people work, including the “work from anywhere” mindset

 

The increased complexity in mid & large enterprises and the desire by enterprises for integrated internal and external communications for UCaaS, CPaaS and CCaaS

 

The demand for services similar to WebEx, Teams, & Zoom and partners that can add to and/or complement such tools and players

 

The trend towards CPaaS technology – Product developers & Independent Software Vendors (ISVs) are increasingly seen as the influencers

 

The general trend towards movement to the cloud

 

The lack of sufficient internal IT resources at mid-sized and large enterprises, and the scarcity of IT personnel in certain high-demand disciplines

 

Disruptive technologies that are creating complexity and challenges for customers and vendors

 

The recognition that certain IT services provide the opportunity of funding via recurring payments over a period of time, rather than large upfront payments

 

The increasing use of multi-cloud strategies, whereby cloud architectures and cloud-enabled frameworks, whether public, private, or hybrid, provide the core foundation of modern IT

 

The explosive growth in remote workforce needs.

 

Covid-19

 

COVID-19 continues to significantly impact local, regional, and global economies, businesses, supply chains, production and sales across a range of industries. The extent of its impact on our operational and financial performance is uncertain and difficult to predict and we remain cautious about the global recovery. To protect the health and safety of our employees, our daily execution has evolved into a largely virtual model. However, we have found ways to continue to engage with and assist our customers and partners as they work to navigate the current environment. We will continue to monitor the current environment and may take further actions that may be required by federal, state or local authorities or that we determine to be in the interests of our employees, customers, and partners.

 

Nature of revenue categories discussed below:

 

Hardware revenue is generated from the sale of data storage, desktops, servers, and other hardware which are sourced from a network of leading manufacturers.

 

Third party software and maintenance revenue include licensing, licensing management, software solutions and other services, which typically are delivered as part of a complete technology solution. Such solutions range from configuration services for computer devices to fully integrated solutions such as virtualization, collaboration, security, mobility, data center optimization and cloud computing. Such services also include complementary services including installations, warranty services and certain managed services such as remote network and data center monitoring.

 

Professional and managed services revenue include managed IT services, virtualization, storage, networking and data center services. These services include customized solutions for business continuity, back-up and recovery, capacity on-demand, regulatory compliance and data center best practice methodologies as well as IaaS and SaaS. These solutions are used by customers to optimize investments in IT infrastructure and data centers.

 

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

 

21

 

 

Financial statement presentation and results of operations

 

The consolidated financial statements of the Company include the accounts of AVCT and its wholly-owned subsidiaries. As discussed in Note 3 of the Notes to the Consolidated Financial Statements, the financial position, results of operations and cash flows described herein for the dates and periods prior to April 7, 2020 relate to the operations of Computex. The historical financial information of AVCT prior to the Computex Business Combination (a special purpose acquisition company, or “SPAC”) has not been reflected in the Predecessor financial statements as such historical amounts have been determined to be not useful information to a user of the financial statements.

 

To distinguish between the different bases of accounting, due to the Computex Business Combination that occurred on April 7, 2020, certain tables in this quarterly report include a blackline between certain columns to separate: (1) the periods prior to the closing date of April 7, 2020 (“Predecessor”) and (2) the period that started on April 7, 2020 (“Successor”). We refer to the periods before April 7, 2020 as the “Predecessor” periods and refer to the periods that started on April 7, 2020 as the “Successor” periods.

 

For the reasons discussed above, management believes it remains useful to review the operating results for Fiscal 2021 with the operating results for the year ended December 31, 2020. 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, which also include the identification of continuing and discontinued operations, the tables and certain discussions below present the non-GAAP combined results for the year ended December 31, 2020, which also combines continuing and discontinued operations.

 

FY 2021 versus the S/P Combined 2020 Year (in thousands)

 

  Year    April 7,
2020
   January 1,
2020
   S/P 
  Ended   through   through   Combined 
  December 31,
2021
   December 31,
2020
   April 6,
2020
   2020
Year
 
  (Non-GAAP)   (Non-GAAP)   Predecessor   (Non-GAAP) 
Revenues:                
Hardware  $55,551   $38,334   $10,587   $48,921 
Third party software and maintenance   7,611    4,341    1,459    5,800 
Managed and professional services   35,915    23,851    6,880    30,731 
Cloud subscription and software   16,930    1,383    -    1,383 
Other   978    668    111    779 
Total revenues   116,985    68,577    19,037    87,614 
Cost of revenue   83,678    47,326    12,426    59,752 
Gross profit   33,307    21,251    6,611    27,862 
Impairment of goodwill and intangible assets   61,095    -    -    - 
Research and development   17,916    1,285    -    1,285 
Selling, general and administrative   67,252    32,541    7,835    40,376 
Loss from operations   (112,956)   (12,575)   (1,224)   (13,799)
Other (expense) income                    
Gain on extinguishment of debt   4,177    -    -    - 
Change in fair value of warrant liabilities   (19,608)   (3,625)   -    (3,625)
Interest expense (1)   (32,857)   (9,316)   (384)   (9,700)
Other (expense) income   (71)   10    31    41 
Total other expenses   (48,359)   (12,931)   (353)   (13,284)
Loss before income taxes   (161,315)   (25,506)   (1,577)   (27,083)
Provision for income taxes   (71)   (70)   (12)   (82)
Net loss  $(161,386)  $(25,576)  $(1,589)  $(27,165)

 

(1)Interest expense in the year ended December 31, 2021 and the period April 7, 2020 through December 31, 2020 include related party interest of $14,958 and $6,899, respectively.

 

22

 

 

Net loss

 

Net loss for Fiscal 2021 was $161.4 million compared with $27.2 million for the S/P Combined 2020 Year. The increase in the net loss for Fiscal 2021 includes an increase in noncash charges of $99.0 million consisting of the following:

 

  Fiscal 2021   S/P Combined
2020 Year
   Increase 
Impairment of goodwill and other intangible assets  $61,095   $-   $61,095 
Depreciation   4,637    3,713    924 
Amortization of intangible assets   5,183    2,257    2,926 
Amortization of Convertible Debenture discount   9,253    4,717    4,536 
Interest on convertible debt paid-in-kind   8,257    3,695    4,562 
Gain on extinguishment of debt   (4,177)   -    (4,177)
Share-based compensation   8,629    2,489    6,140 
Change in fair value of warrant liabilities   19,608    3,625    15,983 
Deferred income taxes   (9)   10    (19)
Amortization and write-off of deferred financing costs   1,172    232    940 
Noncash financing fees   5,948    -    5,948 
Loss on disposal of property and equipment   185    -    185 
   $119,781   $20,738   $99,043 

 

Discussed below are the revenue and expense factors that primarily contributed to the net loss change, including additional discussion of the noncash charges.

 

Hardware revenue

 

Hardware revenue was $55.6 million in Fiscal 2021 compared with $48.9 million in the S/P Combined 2020 Year, an increase of $6.6 million, or 13.6%. We attribute this increase to the impact of COVID-19 due to increased demand for equipment in the manufacturing, logistics and public sectors in the earlier part of 2021, as more customers transitioned to remote work. There was some normalization of the demand for hardware in the latter months of 2021, however, the positive impact of the higher demand in the earlier months of 2021 more than offset the impact that the flattening of hardware demand in the latter months of Fiscal 2021 had on overall Fiscal 2021 demand. The gross margin on hardware revenue was 21.9% for Fiscal 2021, a 120-basis points decrease from the 23.1% recorded in the S/P Combined 2020 Year. We attribute the basis points decrease to a shift in product mix towards lower margin products during the period.

 

Third party software and maintenance revenue

 

Revenues from software and maintenance, which are recorded net of direct expenses, increased to $7.6 million in Fiscal 2021 from $5.8 million in the S/P Combined 2020 Year, an increase of 31.2% or $1.8 million. We attribute this increase to continued customer penetration in the retail and hospitality sector. Since this revenue is recorded net, the revenue is also the gross margin.

 

23

 

 

Managed and professional services revenue

 

Managed and professional services revenues increased $5.2 million, or 16.9%, to $35.9 million in Fiscal 2021 from $30.7 million in the S/P Combined 2020 Year. Of the $5.2 million increase, $2.8 million is attributable to the Kandy acquisition. We attribute the remaining increase to increasing demand for infrastructure assessment, cyber security and managed services monitoring at our Computex segment, primarily in the 1st half of the year. Though revenues from managed and professional services in the Computex segment increased $2.4 million, the margin decreased from 33.4% to 29.0 %, a decrease of 440 basis points. We attribute this decrease to increased investments in direct labor and software tools to support an increasing customer base as well as to the normalization of demand for certain services that were in higher demand in 2020 due to Covid-19.

 

Cloud subscription and software revenue

 

Cloud subscription and software revenue was $16.9 million in Fiscal 2021 and represents revenue from subscriptions to the Company’s cloud-based technology platform as well as revenue from the Company’s on-premise software, both of which are offered by the Company’s recently-acquired Kandy segment, which the Company acquired in December 2020.

 

Other revenue

 

Other revenue, which consists primarily of freight and reimbursables, including travel, meals and entertainment, was $1.0 million and $0.8 million for Fiscal 2021 and the S/P Combined 2020 Year, respectively. By its nature, this type of revenue fluctuates depending on the revenue of the other product lines.

 

Total revenue, cost of revenue and gross margin

 

Aggregate revenue for the five product lines together was $117.0 million in Fiscal 2021, compared with $87.6 million in the S/P Combined 2020 Year, an increase of $29.4 million, or 33.5%. Of the $29.4 million revenue increase, $18.4 million was related to the Kandy acquisition. The remainder of the increase is due to an increase in each of the four product lines at the Computex segment.

 

Aggregate gross profit was also up, reflecting an increase of $5.4 million, or 19.5%, due in part to the Kandy acquisition, which contributed $3.4 million to the increase. The remaining increase in aggregate gross profit was due primarily to the gross profit increase in software and maintenance revenue.

 

Though gross profit increased, aggregate gross margin percent decreased from 31.8% in the S/P Combined 2020 Year to 28.5%, a 330-basis points decrease, primarily due to the lower margin recorded by Kandy vis-à-vis Computex. Aggregate gross margin percent for the Computex segment was 30.4% for Fiscal 2021 compared with 31.8% for the S/P Combined 2020 Year, which was only a 140-basis point decrease. Gross margin at our Kandy segment was 19.3% in Fiscal 2021 as the Company continues to ramp up costs in the segment as part of its strategic investment in the Kandy segment. The 140-basis point decrease in margin at our Computex segment was due primarily to increased investments in direct labor and telecommunications in the managed and professional services line of business.

 

Impairment of goodwill and other intangible assets

 

The noncash impairment charges recorded in Fiscal 2021 are discussed in Notes 1 and 3 of the Notes to the Consolidated Financial Statements and relates to goodwill of the Computex reporting unit, goodwill of the Kandy reporting unit and Kandy’s other intangible assets. In connection with the announced sale of Computex, the Company compared the expected proceeds less costs to sell with the carrying value of the reporting unit and in connection therewith recorded a noncash goodwill impairment charge of $32.1 million during Fiscal 2021. The remaining impairment charges relate to Kandy’s goodwill and other intangible assets, which resulted from a quantitative impairment analysis during the Company’s annual impairment assessment, effective December 2021, after an evaluation based on certain factors considered to be triggering events, such as changes in Kandy’s forecasts. As a result of the quantitative assessment, the Company recorded an impairment charge to goodwill and intangible assets of $13.7 million and $15.3 million, respectively.

 

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Research and development

 

The Company began recognizing research and development expenses when it acquired Kandy in December 2020. In Fiscal 2021, research and development expenses were $17.9 million and represent research and development costs related to certain proprietary software incurred in an agile software environment with releases broken down into several iterations called sprints involving short cycles of development (typically 4-6 weeks in duration) in which the research and development teams create potentially sellable products. Currently, such costs are expensed as incurred, and include personnel-related costs, depreciation related to engineering and test equipment, allocated costs of facilities and information technology, outside services and consultants, supplies, software tools and product certification.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for Fiscal 2021 and the S/P Combined 2020 Year consisted of the components in the following table (in thousands):

 

   Year   S/P      
   Ended   Combined    
   December 31,
2021
   2020
Year
   Increase
(decrease)
 
    (Non-GAAP)      (Non-GAAP)        
Salaries, benefits, subcontracting & personnel administration costs  $45,131   $27,379   $17,752 
Building occupancy costs, utilities, office supplies & repairs and maintenance   3,207    2,002    1,205 
Depreciation and amortization   3,268    3,082    186 
Dues, subscriptions and memberships   1,717    895    822 
Sales and marketing   3,558    727    2,831 
Professional fees   6,113    4,608    1,505 
Insurance   2,195    1,326    869 
Other   2,063    357    1,706 
   $67,252   $40,376   $26,876 

 

Selling, general and administrative expenses increased $26.9 million, primarily as a result of added expenses related to the Kandy acquisition ($15.2 million of the increase), certain termination expenses recorded in Fiscal 2021, increased stock compensation expenses and increased insurance costs. The termination expenses, which were approximately $3.2 million (excluding stock compensation expenses related to the terminations), were primarily recorded in July 2021 and were primarily due to a reduction in the Company’s corporate workforce. Stock compensation expenses included in selling, administrative and general expenses (excluding those related to Kandy) increased approximately $2.9 million in Fiscal 2021 compared with the S/P Combined 2020 Year due to certain amounts related to the terminations as well as to an increase in the number of awardees. Increased insurance expenses are related to the Company’s expanded public company activities.

 

Gain on extinguishment of debt

 

The gain on extinguishment of debt of $4.2 million in Fiscal 2021 was due to the forgiveness, in July 2021, of a loan that was granted under the Paycheck Protection Program (“PPP loan) plus related accrued interest. Under the terms of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), PPP loan recipients had the option to apply for forgiveness for all or a portion of such loans, if the loan was used for eligible purposes, including to fund payroll costs.

 

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Change in fair value of warrant liabilities

 

The change in the fair value of warrant liabilities in FY 2021 and the S/P Combined 2020 Year represent mark-to-market fair value adjustments related to certain warrants, and primarily fluctuate due to changes in and the volatility of the Company’s stock price. The income statement amounts in Fiscal 2021 and the S/P Combined 2020 Year consisted of fair value adjustments related to the following:

 

   Year   S/P  
   Ended   Combined 
   December 31,
2021
   2020
Year
 
   Successor   (Non-GAAP) 
Series A Warrants  $        7,834   $             - 
Series B Warrants   2,296    - 
Series C Warrants   (675)   - 
Series D Warrants   9,688    - 
Monroe Warrants   2,394    - 
2017 Private Placement and EBC Warrants   (1,929)   3,625 
   $19,608   $3,625 

 

Interest expense

 

Interest expense in Fiscal 2021 increased compared with the S/P Combined 2020 Year, due primarily to interest and financing fees related to the new Credit Agreement entered into with Monroe, amendment fees related to certain warrants and the related party note as well as to an increase in interest on Debentures due to new issuances in Fiscal 2021 and the compounding effect of paid-in-kind interest on such Debentures. The Debentures were converted to common stock during the 3rd quarter of 2021 (on September 8, 2021), but prior to conversion, bore interest at the rate of 10.00% per annum compounded quarterly. Interest expense, which was also impacted by increases in Debenture discount amortization charges consisted of the following (in thousands):

 

   Year   S/P  
   Ended   Combined 
   December 31,
2021
   2020
Year
 
   Successor   (Non-GAAP) 
Amortization of debenture discount  $     9,253   $      4,717 
Debenture interest paid-in-kind   8,257    3,695 
Amortization of debenture deferred fees   628    - 
Interest on term note and line of credit - Prior Credit Agreement   1,028    1,122 
Interest and financing fees - Monroe   9,131    - 
Interest and amendment fee on related party promissory note   1,986    - 
Hudson bay waiver fee   2,000    - 
Placement agent fees   350    - 
Other   224    166 
   $32,857   $9,700 

 

Benefit/provision for income taxes

 

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

 

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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 the Prior Credit Agreement. From time to time, the Company may also choose to access the debt and equity markets to fund acquisitions to diversify its capital sources. The Company’s current principal capital requirements are to fund working capital and make investments in line with its business strategy. At December 31, 2021, the Company had unrestricted cash of $35.3 million in its operating bank account compared with $9.9 million at December 31, 2020. At December 31, 2021, there was a working capital deficit (excess of current liabilities over current assets) of $7.6 million, primarily as a result of the classification of certain debt as current, primarily, the Credit Agreement and a promissory note. The working capital deficit of $7.6 million reflects an improvement over the previous year’s working capital deficit of $18.4 million as of December 31, 2020.

 

The cash balance and working capital position as of December 31, 2021 were impacted by the following events or actions during Fiscal 2021, which together contributed to the net improvements discussed above:

 

A cash capital raise of $24.0 million via the sale of Units (consisting of Debentures and certain penny warrants) to fund expansion, capital expenditures and working capital. Pursuant to the terms of the Debentures, on September 8, 2021, the Debentures with related accrued interest were converted to shares of common stock. See Note 10 of the Notes to the Consolidated Financial Statements for additional information.

 

The forgiveness, in July 2021, of the $4.1 million that was payable under the PPP loan. Under the terms of the CARES Act, PPP loan recipients had the option to apply for forgiveness for all or a portion of such loans, if the loan was used for eligible purposes, including to fund payroll costs.

 

  The entry into the Credit Agreement with Monroe, on December 2, 2021, for a $27 million term loan facility, to fund working capital, other general business activities and pay off amounts owing under the Prior Credit Agreement that was assumed as part of the Computex Business Combination. The payoff of amounts owing under the Prior Credit Agreement, which consisted of a line of credit balance and a term loan, was $12.8 million. The Credit Agreement matures on December 2, 2022, at the latest, or on the date that Computex is sold, at the earliest. Interest on the Credit agreement is payable monthly at the rate of 12% per annum. However, the lenders are guaranteed a minimum return of $7.3 million. Monroe was also granted warrants to purchase 2.5 million shares of the Company’s common stock for an exercise price of $0.0001 per share (the “Monroe Warrants”). See Notes 9 and 10 in the Notes to our Consolidated Financial Statements included elsewhere in this Form 10-K for further discussion of the terms of the Credit Agreement and the Monroe Warrants, respectively.

 

 

The issuance of a $5.0 million subordinated promissory note (the “2021 Note”), on September 16, 2021, which was secured by a shareholder that owns more than five percent of the Company’s common stock. The 2021 Note, as amended, was scheduled to mature on the earliest of (a) September 16, 2022, (b) the Company’s consummation of a debt financing resulting in the receipt of gross proceeds of not less than $20.0 million, (c) the Company’s consummation of primary sales of registered equity securities resulting in receipt of gross proceeds of not less than $20.0 million, (d) the Company’s consummation of the sale of Computex and (e) the date of any event of default. The 2021 Note was subordinate to any amounts owed under the Credit Agreement and had a minimum return of 25%. The 2021 Note became due on March 1, 2022 due to the early pay off of the Credit Agreement. However, for a waiver fee of $250,000, the lender extended the maturity date to May 1, 2022. The 2021 Note was paid in full on March 15, 2022 from proceeds received from the sale of Computex.

 

 

The receipt of gross proceeds of $5.0 million (before deduction of offering costs), in November 2021, from the sale to an institutional investor in a registered direct offering, of 2,500,000 shares (the “Registered Shares”) of common stock at a purchase price of $2.00 per share. At the closing of such sale, the Company issued to the buyer, in addition to the 2,500,000 shares of the Company’s common stock: (i) a warrant to purchase up to 5,000,000 shares of the Company’s common stock (the “Series A Warrant”) and (ii) a warrant to purchase up to 2,500,000 shares of the Company’s common stock (the “Series B Warrant”). The Series A Warrant and the Series B Warrant were each exercisable at an initial exercise price of $2.00. However, the number of such warrants were later increased, the exercise price of each was reduced to $1.50 per share and the buyer received warrants to purchase 1,500,000 shares of the Company’s common stock (the “Series C Warrants”) at an exercise price of $0.001 per share. Subsequent to December 31, 2021, the exercise price of the Series A and Series B Warrants were reduced to $1.00 per share (with a proportional increase to the number of shares of the Company’s common stock issuable upon exercise of such warrants). See Note 10 of the Notes to the Consolidated Financial Statements for further discussion of the Series A and Series B warrants, including a discussion of the modifications that occurred during Fiscal 2021. In December, the Company received an additional $5.0 million in gross proceeds from the subsequent exercise of the Series B Warrants.

 

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The repayment of a subordinated note of $0.5 million along with related accrued interest in November 2021.

 

The receipt of gross proceeds of $25.0 million (before deduction of offering costs), in December 2021, from the sale of securities consisting of 7,840,000 shares of common stock, 12,456 units of convertible preferred stock and certain Series D Warrants to purchase up to 15,625,000 shares of the Company’s common stock at an exercise price of $2.00 per share. See Note 10 of the Notes to the Consolidated Financial Statements for further discussion of such securities.

 

In July 2021, prior to the sale of the securities discussed above, the Company filed a registration statement on Form S-3 containing the following two prospectuses:

 

a base prospectus for the sale and issuance by us of up to $100 million of our common stock, preferred stock, warrants, subscriptions rights, debt securities and/or units; and

 

a resale prospectus covering the resale by certain selling stockholders of up to 67,797,774 shares of common stock.

 

The Company believes that current cash balances as well as proceeds from debt and equity 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 product sales and service, cost structure, cash burn rate and other operating assumptions.

 

Successor cash flows (Fiscal 2021 and the period April 7, 2020 through December 31, 2020)

 

Operating activities

 

Net cash used in continuing operating activities was $47.4 million in Fiscal 2021, primarily consisting of cash used in Kandy’s operating activities, including its research and development activities, as well as cash used in the operating activities of the corporate division.

 

Net cash used in continuing operating activities was $14.6 million for the period April 7, 2020 through December 31, 2020 and primarily consisted of cash used in the operating activities of the corporate division. Net cash used in continuing operating activities was also impacted by 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

 

Cash used in continuing investing activities of $3.9 million, in Fiscal 2021, were primarily for capital purchases.

 

Cash provided by continuing investing activities was $0.2 million in the period April 7, 2020 through December 31, 2020 and primarily consisted of cash from the Computex acquisition.

 

Financing activities

 

Cash provided by continuing financing activities was $71.9 million in Fiscal 2021 and was generated from the issuance of common stock of $27.8 million, proceeds of $5.0 million from the exercise of certain warrants, proceeds from the issuance of Debentures of $24.0 million, proceeds of $30.1 million from the issuance of debt (net of deferred financing fees), partially offset by debt repayments of $13.9 million, and payments for shares withheld of $1.1 million related to employee tax withholding associated with the delivery of vested RSUs under the Company’s equity incentive plan.

 

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Cash provided by continuing financing activities was $23.6 million in the period April 7, 2020 through December 31, 2020, and was generated from the issuance of $23.1 million in Debentures and $1.5 million from the issuance of common stock, partially offset by the redemption of shares held in trust of $1.0 million.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2021, we had no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and had not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

 

Critical Accounting Policies, Judgements and Estimates

 

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 warrants, 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 Notes to the Consolidated Financial Statements.

 

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.

 

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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.

 

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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, 2021.

 

The Company also recognizes revenue for 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.

 

Goodwill and intangibles impairment assessment

 

The Company reviews its long-lived assets for impairment whenever events or circumstances exist that indicate the carrying amount of an asset or asset group may not be recoverable. The recoverability of long-lived assets is measured by a comparison of the carrying amount of the asset or asset group to the future undiscounted cash flows expected to be generated by that asset group. If the asset or asset group is considered to be impaired, an impairment loss is recorded to adjust the carrying amounts to the estimated fair value. During the year ended December 31, 2021, the Company recorded impairment of intangible assets of $15.3 million relating to the Kandy reporting unit based on a comparison of the reporting unit’s fair value with its carrying value. The excess of the carrying value of the reporting over the estimated fair value was first allocated to the intangibles and then to goodwill. Fair value was determined using the income approach.

 

Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. Goodwill is reviewed for impairment at least annually, in December, or more frequently if a triggering event occurs between impairment testing dates. As of December 31, 2021, the Company had two operating segments and two reporting units for the purpose of evaluating goodwill impairment.

 

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The Company’s impairment assessment begins with a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. Qualitative factors may include, macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity and Company specific events. If, based on the qualitative test, the Company determines that it is “more likely than not” that the fair value of a reporting unit is less than its carrying value, then we evaluate goodwill for impairment by comparing the fair value of each of our reporting unit to its respective carrying value, including its goodwill. If it is determined that it is “not likely” that the fair value of the reporting unit is less than its carrying value, then no further testing is required.

 

The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves significant judgment and estimates. Fair values may be determined using a combination of both income and market-based approaches.

 

As indicated in Note 1 of the Notes to the Consolidated Financial Statements, in connection with the planned sale of Computex, the Company recorded a noncash goodwill impairment charge of $32.1 million during the year ended December 31, 2021 which represents the excess of the carrying value of the Computex reporting unit over the expected sale proceeds less costs to sell. As indicated above, impairment of Kandy’s goodwill was also recorded during the year ended December 31, 2021. Goodwill impairment of the Kandy reporting unit was $13.7 million.

 

Public Warrants, 2017 Private Placement Warrants and 2017 EBC Warrants

 

On July 27, 2017, the Company entered into certain Warrant Purchase Agreements with each of Pensare Sponsor Group, LLC, a Delaware limited liability company (the “Sponsor”), and certain other investors (collectively, the “Purchasers”), pursuant to which the Purchasers purchased an aggregate of 10,512,500 warrants (including the full over-allotment amount) in connection with and simultaneously with the closing of the IPO (the “2017 Private Placement Warrants”) at a purchase price of $1.00 per Private Placement Warrant.

 

On or about August 1, 2017, in the IPO, the Company sold units of the Company’s equity securities, each such unit consisting of one share of Common Stock, one-half of one Public Warrant and one-tenth of one right to acquire one share of Common Stock upon the closing of our initial business combination (the “Units”) and, in connection therewith, issued and delivered 15,525,000 warrants to public investors in the Offering (the “Public Warrants”). In addition, 675,000 warrants, underlying unit purchase options issued to the underwriters of the IPO and certain of their designees (the “2017 EBC Warrants”), were issuable. The 2017 EBC Warrants together with the 2017 Private Placement Warrants and the Public Warrants are collectively referred to as the “2017 Warrants.” Each whole 2017 Warrant entitles the holder thereof to purchase one share of the Company’s common stock for $11.50 per share, subject to adjustments. In addition to the 675,000 warrants, the unit purchase options, which expire in July 2022, entitle the holders to receive 1,485,000 shares of common stock for an exercise price of $10 per unit.

 

As of December 31, 2021, a total of 15,525,000 Public Warrants and 10,512,500 of the 2017 Private Placement Warrants remained outstanding. The 2017 EBC Warrants totaled 675,000 units as of December 31, 2021.

 

The 2017 Private Placement Warrants and the 2017 EBC Warrants, if issued upon exercise of the unit purchase options, are exercisable on a cashless basis, at the holder’s option, and are non-redeemable so long as they are held by the initial Purchasers or their permitted transferees. Public Warrants and any 2017 Private Placement Warrants or any 2017 EBC Warrants that are transferred to nonpermitted transferees are redeemable at the option of the Company and are not exercisable on a cashless basis.

 

The Company evaluated the 2017 Warrants under ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, and concluded that the 2017 Private Placement Warrants and the 2017 EBC Warrants did not meet the criteria to be classified in stockholders’ equity. A recent SEC Statement focused in part on provisions in warrant agreements that provide for potential changes to the settlement amounts dependent upon the characteristics of the warrant holder and because the holder of a warrant is not an input into the pricing of a fixed-for-fixed option on equity shares, such provision would preclude the 2017 Private Placement Warrants and 2017 EBC Warrants from being classified in equity and therefore the 2017 Private Placement Warrants and 2017 EBC Warrants are classified as liabilities at fair value, with subsequent changes in fair values recognized in earnings at each reporting date. The 2017 Private Placement Warrants and 2017 EBC Warrants were valued using a Black-Scholes pricing model as described in Note 3 of the Notes to the Consolidated Financial Statements. Changes in the fair value of the 2017 Private Placement Warrants and the 2017 EBC Warrants requires significant judgment, including the determination of the appropriate valuation model to use and the inputs to the valuation model.

 

Series A, Series B, Series C, Series D and Monroe Warrants

 

In November and December 2021, the Company issued certain warrants as defined and discussed in Note 10 in the Notes to the Consolidated Financial Statements (Series A Warrants, Series B Warrants, Series C Warrants, Series D Warrants and Monroe Warrants). Each such whole Warrant entitles the holder thereof to purchase one share of the Company’s common stock.

 

The Company evaluated the terms of such warrants and determined that they qualified to be treated as liabilities under ASC 480, Distinguishing Liabilities from Equity, with subsequent changes in fair values recognized in earnings at each reporting date. The Series A Warrants were valued using the Black-Scholes pricing model, the Series B and Series D Warrants were valued using the Monte Carlo simulation, and the Series C and Monroe Warrants were valued based on the Company’s stock price. Changes in the fair values of such warrants requires significant judgment, including the determination of the appropriate valuation model to apply and the inputs to the valuation model. See Notes 3 and 10 of the Notes to the Consolidated Financial Statements for further discussion of the accounting policies of warrants issued by the Company.

 

32

 

 

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 3 of the Notes to the Consolidated Financial Statements.

 

 Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

Foreign exchange risk

 

Our business is primarily conducted within US markets. Though there is some exposure to currency fluctuations, we do not currently consider exchange rate fluctuations to materially impact our financial statements. International revenues in Fiscal 2021 was 7.6% of total revenues. For Kandy, international revenues were 26.6% of total Kandy revenues.

 

Interest rate risk

 

As of December 31, 2021, the Company had no significant interest rate risk.

 

Item 8. Financial Statements and Supplementary Data

 

Reference is made to Pages F-1 through F-41 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.

 

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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.

 

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, 2021. 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, 2021.

 

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.”

 

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.

 

Item 9B. Other Information

 

Not applicable.

 

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

 

Not applicable.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

Our current directors and executive officers are as follows:

 

Name   Age   Position
Michael Tessler   60   Chairman of the Board
Darrell J. Mays   56   Chief Executive Officer and Director
Kevin Keough   62   President
Thomas H. King   66   Chief Financial Officer
Larry Mock   74   Director
Mark Downs   57   Director
U. Bertram Ellis, Jr.   66   Director
Carolyn Byrd   72   Director
Karl Krapek   71   Director
Dennis Lockhart   73   Director
Dr. Klaas Baks   47   Director
Kent Mathy   60   Director
Robert Willis   53   Director and Vice Chairman – Capital Markets

 

Michael Tessler, Chairman of the Board, has served on our board of directors since January 2022. Mr. Tessler was a co-founder of Broadsoft, Inc. (“BroadSoft”), and served as a director of BroadSoft from its inception, and as its President and Chief Executive Officer from December 1998, until its sale to Cisco Systems, Inc. (“Cisco”) in February 2018. Following the sale of BroadSoft, Mr. Tessler served as General Manager of Cisco’s Cloud Calling Business Unit until March 2020, and since April 2020, Mr. Tessler has served as a Managing Partner at True North Advisory, a strategic advisory firm. Prior to co-founding BroadSoft, Mr. Tessler was Vice President of Engineering of Celcore, Inc. (“Celcore”), a wireless equipment company, and the Celcore organization of DSC Communications Corporation, which acquired Celcore in 1997 and which was then acquired by Alcatel USA, Inc. Before joining Celcore, Mr. Tessler held a number of senior management positions at Nortel Networks Corporation and founded and led a services development business unit that helped local exchange carriers build and deploy advanced services on their digital networks. Mr. Tessler currently serves as a non-executive director at BAI Communications, a global communications infrastructure provider, and on the Internet2 Technology Evaluation Center advisory board at Texas A&M University.

 

Darrell Mays, Chief Executive Officer and Director, 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.

 

Kevin Keough has served as our President since July 2021. Mr. Keough has served as Managing Director, Operations, for Navigation Capital Partners, Inc. (“Navigation”), an Atlanta-based private equity firm, since March 2021. Prior to joining Navigation, from October 2020 to March 2021, Mr. Keough was an independent management consultant, serving clients on a range of consulting engagements. From October 2017 to September 2020, he was the Managing Director and Head of Post-Acquisition for Investcorp’s North American Private Equity Group. Prior to joining Investcorp, from 2006 to September 2017 he had been with Arcapita Investment Management and its predecessor firm, Arcapita Inc., ultimately serving in the role of Managing Director and Global Head of Portfolio Management. Before his move into private equity, Mr. Keough spent seven years as a senior executive with FirstEnergy Corporation, a public energy company headquartered in Akron, Ohio. During this period, he held several corporate strategic planning and shared services roles, and served as President of the Ohio Edison Company. He had been a Management Consultant for ten years in the Cleveland Office of McKinsey & Company, Inc, serving as a partner and leader in the Firm’s North American Energy Practice. Mr. Keough holds an MBA from Stanford Graduate School of Business and a BS in Engineering Mechanics, with honors, from the United States Military Academy at West Point.

 

35

 

 

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.

 

Lawrence E. Mock, Jr., a former director of Computex, is currently Managing Partner of Navigation, 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.

 

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.

 

36

 

 

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.

 

Robert Willis has served on our board of directors, including as Vice Chairman – Capital Markets, since July 2021. Dr. Willis has served as a Managing Partner of the SPAC Operations Group at Navigation since April 2020. Dr. Willis previously served as the Company’s President from April 2016 until the completion of its initial business combination with Computex in April 2021. Dr. Willis became the President of nsoro in 2007 and served in that capacity until its acquisition by MasTec in 2008 and, following its acquisition, served in an advisory role from 2010 through July 2016. From December 2013 until December 2015, Dr. Willis served as Chairman of U.S. Shale Solutions, Inc., a shale services company which he founded in 2013. Prior to nsoro, Dr. Willis served as Chief Executive Officer of Foxcode Inc., a merchant-banking firm. In July 2004, Dr. Willis founded Gaming VC, S.A., an online gaming enterprise which completed a GBP 81 million initial public offering in London in 2004, and served as a member of its board and as its Finance Director until 2007. Prior to that, Dr. Willis was the founder and Chief Executive Officer of Alpine Computer Systems, Inc., a systems integration engineering company established in the 1980s that grew rapidly and was acquired by Delphi Group plc. in 1996, at which time he became Senior Vice President and Chief Information Officer of the parent company. Dr. Willis was awarded a Doctorate in Humane Letters (Hon.) from Newbury College in Boston, MA, in May 2001.

 

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 annual meeting of stockholders to be held in 2024. The term of office of the second class of directors, consisting of Ms. Byrd and Messrs. Tessler, Mays and Mock, will expire at the annual meeting of stockholders to be held in 2022. The term of office of the third class of directors, consisting of Mr. Downs, Mr. Mathy and Mr. Willis, will expire at the annual meeting of stockholders to be held in 2023.

 

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.

 

37

 

 

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:

 

  reviewing and discussing with management and the independent auditor the annual audited financial statements, and recommending to the board whether the audited financial statements should be included in our Form 10-K;
     
  discussing with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of our financial statements;
     
  discussing with management major risk assessment and risk management policies;
     
  monitoring the independence of the independent auditor;
     
  verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law;
     
  reviewing and approving all related-party transactions;
     
  inquiring and discussing with management our compliance with applicable laws and regulations;
     
  pre-approving all audit services and permitted non-audit services to be performed by our independent auditor, including the fees and terms of the services to be performed;
     
  appointing or replacing the independent auditor;
     
  determining the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work;
     
  establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or reports which raise material issues regarding our financial statements or accounting policies; and
     
  approving reimbursement of expenses incurred by our management team in identifying potential target businesses.

 

Nominating Committee

 

Our nominating committee consists of Messrs. Lockhart, Mathy 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:

 

  should have demonstrated notable or significant achievements in business, education or public service;
     
  should possess the requisite intelligence, education and experience to make a significant contribution to the board of directors and bring a range of skills, diverse perspectives and backgrounds to its deliberations; and
     
  should have the highest ethical standards, a strong sense of professionalism and intense dedication to serving the interests of our stockholders.

 

38

 

 

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. Mr. Krapek serves as the Chairman of the compensation committee. The compensation committee’s duties, which are specified in our Compensation Committee Charter, include, but are not limited to:

 

  reviewing and approving on an annual basis the corporate goals and objectives relevant to our Chief Executive Officer’s compensation, evaluating our Chief Executive Officer’s performance in light of such goals and objectives and determining and approving the remuneration (if any) of our Chief Executive Officer based on such evaluation;

 

  reviewing and approving the compensation of all of our other executive officers;

 

  reviewing our executive compensation policies and plans;

 

  implementing and administering our incentive compensation equity-based remuneration plans;

 

  assisting management in complying with our proxy statement and annual report disclosure requirements;

 

  approving all special perquisites, special cash payments and other special compensation and benefit arrangements for our executive officers and employees;

 

  if required, producing a report on executive compensation to be included in our annual proxy statement; and

 

  reviewing, evaluating and recommending changes, if appropriate, to the remuneration for directors.

 

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.

 

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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 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 Fiscal Year 2021 and the fiscal year ended December 31, 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 2021, (ii) our two most highly compensated executive officers other than the principal executive officers who were serving as executive officers at December 31, 2021 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, 2021. Our named executive officers for 2021 were Xavier Williams, our previous Chief Executive Officer until July 24, 2021, Thomas King, our Chief Financial Officer, and Darrell Mays, who served as our Chief Executive Officer until September 2020 and then again starting July 16, 2021.

 

Name and principal position  Title  Period  Year 

Salary

($)

  

Bonus

($)

  

Stock
Awards

($)

  

All

other
compen-sation
($) [6]  

  

Total

($)

 
Darrell Mays  CEO   July 2021
to present
  2021   -    -    -    -    - 
      February 2017
to September 2020
  2020   20,055    -    -    -    20,055 
                                   
Thomas King  CFO   April 2020
to present
  2021   420,000[4]   420,000[5]   538,500[3]   -    1,378,500 
        2020   212,830[4]   -[5]   -   -    212,830 
                                   
Xavier Williams  CEO   October 2020
to July 2021
  2021   950,000[1]   448,767[2]   1,198,125[3]            -    2,596,892 
        2020   125,000[1]   750,000[2]   -   -    875,000 

 

[1]Represents Mr. Williams’ salary. For 2020, this represents his salary from the start date of October 1, 2020 through December 31, 2020. For 2021, this represents his salary for the period January 1, 2021 until the date of his termination plus severance of $600,000 that was paid in connection with a termination agreement entered into with the Company in July 2021.

 

[2]Represents bonus paid to Mr. Williams. For 2020, this represents a one-time sign on bonus of $300,000 and the bonus for 2020 of $450,000, which was paid in 2021. For 2021, this represents the pro-rata share of Mr. Williams’ bonus for 2021, which was paid in 2021.

 

[3]Represents RSU awards that were delivered during the respective year times the stock price on or about the date of delivery.

 

[4]Represents Mr. Kings’ salary. For 2020, this represents his salary from the start date of April 2020 through December 31, 2020. For 2021, this represents his salary for the full year.

 

[5]Represents bonus paid or to be paid to Mr. King. The bonus for 2021 is to be paid in 2022. No bonus was paid to Mr. King for 2020.

 

[6]For 2021 and 2020, there were no option awards, non-equity incentive plan amounts, non-qualified deferred compensation earnings or any other compensation for the named executive officers other than as disclosed in the “All other compensation” column in the table above.

 

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.  

 

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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 987,000 shares remained available for issuance as of December 31, 2021. The RSUs were issued to certain directors and employees and can only be settled in shares. RSUs awarded to directors are time-based. RSUs issued to nondirectors are 50% time-based and 50% performance-based. Twenty-five percent of the time-based awards vests on each grant date anniversary, while 25% of the performance-based awards vests on December 31st of each year, if the market condition (stock price target) is met. If the market condition attached to the performance-based awards is not met in any year, the eligibility is delayed until the market condition is met, except that the market condition must be met on the third anniversary of the stock price target date.

 

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 was $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 was 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 was 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 was also entitled to additional annual RSU awards if the Company’s stock price exceeded certain specified targets, as described in the employment agreement.

 

Mr. Williams’s employment was terminated by the Company without “cause” (as such term is defined in the employment agreement) effective July 24, 2021, and the Company paid to Mr. Williams, in addition to accrued but unpaid salary and benefits, (i) continued payment of base salary for one year, (ii) a pro-rated bonus, and (iii) continued benefits, including health care and life insurance. Mr. Williams released the Company of any claims against the Company and is subject to certain non-compete, non-solicitation, and confidentiality and assignment of inventions obligations to the Company.

 

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.

 

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.

 

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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):”

 

Name  Award date  Shares underlying
RSUs issued
  

Grant date fair

value (1)

  

Unvested

RSUs

 
Thomas King  4/7/2020   300,000    659,250    225,000 
Darrell Mays  10/1/2020   350,000    1,519,000    262,500 

 

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 as of December 31, 2021:

 

Name  Award date  Shares underlying
RSUs issued
   Grant date
fair value
   Unvested
RSUs
 
Larry Mock  4/7/2020   350,000    1,050,000    262,500 
Bert Ellis  4/7/2020   60,000    180,000    45,000 
Karl Krapek  4/7/2020   60,000    180,000    45,000 
Dennis Lockhart  4/7/2020   60,000    180,000    45,000 
Carolyn Byrd   3/1/2021   60,000    420,600    60,000 
Klass Baks  4/7/2020   60,000    180,000    45,000 
Mark Downs  4/7/2020   60,000    180,000    45,000 
Kent Mathy  8/1/2020   60,000    255,000    45,000 

 

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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 31, 2022 by:

 

  each person known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock;
     
  each of our executive officers and directors; and
     
  all of our executive officers and directors as a group.

 

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 89,566,997 shares of common stock outstanding as of March 31, 2022:

 

Name  Number of
Shares
Beneficially
Owned(1)
   Percent of
Common
Stock
 
Directors and Executive Officers of the Company:        
Lawrence E. Mock, Jr.(3)   21,173,995(4)(6)   23.6%
Darrell J. Mays   14,792,930(2)   15.3%
Kevin Keough   -    - 
Thomas H. King   51,811    * 
Mark Downs   15,000    * 
U. Bertram Ellis, Jr.   563,821    * 
Karl Krapek   42,000    * 
Dennis Lockhart   42,000    * 
Dr. Klaas Baks   42,000    * 
Kent Mathy   15,000    * 
Dr. Robert Willis   -    - 
Carolyn Byrd   -    - 
Kevin Keough   -    - 
Xavier Williams (resigned August 31, 2021)   187,500    * 
Michael Tessler   1,000,000    1.1%
All directors and executive officers as a group (15 individuals)   37,926,057    39.3%
Five Percent or More Holders and Certain Other Holders:          
Ribbon Communications Inc.(5)   18,078,221    19.2%
Pensare Sponsor Group, LLC(9)   13,815,858    14.3%
Navigation Capital Partners II, L.P.(6)   10,228,929    11.54%
Hudson Bay Capital Management LP(7)   9,661,377    9.9%
MasTec, Inc.(8)   5,002,060    5.4%

 

* Less than 1% of outstanding shares

 

(1) Unless otherwise indicated, the business address of each of the persons and entities is 1720 Peachtree Street, Suite 629, Atlanta, GA 30309.

 

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(2) Includes 556,017 shares of Common Stock held by certain of Mr. Mays’ family members (or affiliated entities) who reside at least part-time with Mr. Mays. Mr. Mays disclaims beneficial ownership of all shares of Common Stock held by his family members. Also includes shares of Common Stock beneficially owned by Pensare Sponsor Group, LLC, as described in footnote (8).

 

(3) Mr. Mock holds an economic interest in Pensare Sponsor Group, LLC and a pecuniary interest in the securities held by Pensare Sponsor Group, LLC. Mr. Mock disclaims beneficial ownership of such securities except to the extent of his pecuniary interest therein.
   
(4) According to the Amendment to Schedule 13D referred to in footnote (6) below, includes (i) 1,783,035 shares of Common Stock held directly by Holdings, (ii) 8,445,894 shares of Common Stock held directly by Navigation Capital, (iii) 905,342 shares of Common Stock held directly by Nobadeer L.P. (“Nobadeer”) and (iv) 10,039,724 shares of Common Stock held directly by Investment Sub.

 

(5) According to an Amendment to Schedule 13D filed with the SEC on September 14, 2021 by Ribbon Communications Inc. (“Ribbon”), Ribbon holds 13,700,421 shares of Common Stock and warrants currently exercisable for a total of 4,377,800 shares of Common Stock. The business address of Ribbon is 6500 Chase Oaks Boulevard, Suite 100, Plano, TX 75023.

 

(6) According to an Amendment to Schedule 13D filed with the SEC on November 17, 2021, on behalf of  (i) Navigation Capital Partners II, L.P., a Delaware limited partnership (“Navigation Capital”), (ii) NCP General Partner II, LLC, a Delaware limited liability company, and the general partner of Navigation Capital (“NCP GP”), (iii) Stratos Management Systems Holdings, LLC, a Delaware limited liability company (“Holdings”), (iv) Navigation Capital Partners SOF I, LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of New SPAC Opps (as defined below) (“Investment Sub”), (v) SPAC Opportunity Fund I, L.P., a Delaware limited liability company (“New SPAC Opps”), (vi) Navigation Capital Partners, Inc., a Delaware corporation which controls New SPAC Opps (“SPAC NCP”), (vii) Lawrence E. Mock, a citizen of the United States of America (“Mr. Mock”) and (x) a manager of NCP GP and (y) an officer that controls SPAC NCP, and (viii) John S. Richardson, a citizen of the United States of America (“Mr. Richardson” and collectively with Navigation Capital, NCP GP, Holdings, Investment Sub, New SPAC Opps, SPAC NCP and Mr. Mock, the “Reporting Persons”) and a manager of NCP GP, (a) Holdings directly owns 1,783,035 shares of Common Stock, (b) Navigation Capital directly owns 8,445,894 shares of Common Stock, and as the controlling member of Holdings, may, pursuant to Rule 13d-3, be deemed to beneficially own 1,783,035 shares of Common Stock directly held by Holdings, (c) NCP GP, as the general partner of Navigation Capital, and Mr. Richardson, as a manager of NCP GP, may, pursuant to Rule 13d-3, be deemed to beneficially own 10,228,929 shares of Common Stock, (d) Investment Sub directly owns 10,039,724 shares of Common Stock, (e) New SPAC Opps, as the sole member of Investment Sub, may, pursuant to Rule 13d-3, be deemed to beneficially own 10,039,724 shares of Common Stock, (f) SPAC NCP, as the manager of New SPAC Opps, may, pursuant to Rule 13d-3, be deemed to beneficially own 10,039,724 shares of Common Stock, and (g) Mr. Mock, as a manager of NCP GP, may, pursuant to Rule 13d-3, be deemed to beneficially own (i) 1,783,035 shares of Common Stock held directly by Holdings and (ii) 8,445,894 shares of Common Stock held directly by Navigation Capital. Mr. Mock, given his ability to control SPAC NCP, may, pursuant to Rule 13d-3, be deemed to beneficially own 10,039,724 shares of Common Stock held directly by Investment Sub. In addition, Nobadeer, an unaffiliated entity of all of the Reporting Persons, except for Mr. Mock, directly holds 905,342 shares of Common Stock. Mr. Mock is the general partner of Nobadeer, and as a result, may be deemed to indirectly beneficially own securities held by Nobadeer, Navigation Capital disclaims beneficial ownership of the securities directly held by Holdings except to the extent of its pecuniary interest therein. Mr. Richardson disclaim beneficial ownership of the securities described above except to the extent of his pecuniary interest therein. New SPAC Opps disclaims beneficial ownership of the securities held directly by Investment Sub except to the extent of its pecuniary interest therein. SPAC NCP disclaims beneficial ownership of such securities except to the extent of its pecuniary interest therein. Mr. Mock disclaims beneficial ownership of the securities described above except to the extent of his pecuniary interest therein. The business address of each of these stockholders is 2870 Peachtree Rd NW, Unit 509, Atlanta, GA 30305.

 

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(7) According to a Schedule 13G filed with the SEC on February 8, 2022 by Hudson Bay Capital Management LP (“HBCM”) and Mr. Sandy Gerber (together with HBCM, the “HB Reporting Persons”), the shares of Common Stock reported assume the exercise of warrants and the conversion of convertible notes held by Hudson Bay Master Fund Ltd. (collectively, the "Securities"), subject to the 9.99% Blocker (as defined below). Pursuant to the terms of the Securities, the HB Reporting Persons cannot exercise or convert such Securities if the HB Reporting Persons would beneficially own, after such exercise or conversion, more than 9.99% of the outstanding shares of Common Stock (the "9.99% Blocker").  The number of shares of Common Stock and percentage reported give effect to the 9.99% Blocker. Consequently, at the time of the filing of the Schedule 13G, the HB Reporting Persons were not able to exercise or convert all of the Securities due to the 9.99% Blocker. HBCM serves as the investment manager to Hudson Bay Master Fund Ltd. (“HBMF”), in whose name the Securities are held, and as such may be deemed to be the beneficial owner of all shares of Common Stock, if any, owned by HBMF, and Mr. Gerber serves as the managing member of Hudson Bay Capital GP LLC, which is the general partner of HBCM. Mr. Gerber disclaims beneficial ownership of the reported securities. The business address of each of the HB Reporting Persons is 28 Havemeyer Place, 2nd Floor, Greenwich, Connecticut 06830.

 

(8) According to an Amendment to Schedule 13G filed with the SEC on September 10, 2021 by MasTec, Inc., (“MasTec”), MasTec holds 2,702,060 shares of Common Stock and warrants currently exercisable for a total of 2,300,000 shares of Common Stock. The business address of MasTec is 800 S. Douglas Road, 11th Floor, Coral Gables, FL 33134.
   
(9)

Includes 7,017,290 shares of Common Stock underlying warrants that are currently exercisable.

 

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

 

The following paragraph discusses related party transactions that occurred during 2020 and 2021 and/or that are contemplated during 2022 (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 the 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 the annual report on Form 10-K).

 

Services provided by Navigation Capital Partners, Inc.

 

Selling, general and administrative expenses for the year ended December 31, 2021 and the Successor period April 7, 2020 to December 31, 2020 include $600,000 and $150,000 respectively, related to consulting services provided by Navigation, a significant stockholder and an affiliate of certain of our directors. These amounts relate to an agreement entered into effective October 1, 2020 whereby Navigation provides capital markets advisory and business consulting services to the Company for a fee of $50,000 per month. As of December 31, 2021, no payments were required to be paid, and therefore, accounts payable and accrued expenses as of December 31, 2021 include $750,000 in connection therewith.

 

In addition, the Company’s President, Kevin Keough, and Mr. Robert Willis, a company director and Vice Chairman of Capital Markets provided such services to the Company via Navigation. Accordingly, Mr. Keough and Mr. Willis did not receive any direct compensation from the Company between July 21, 2021 (the effective date of their appointment) and December 31, 2021. Instead, Mr. Keough and Mr. Willis were compensated by Navigation. In consideration for such services provided by Navigation to the Company, Navigation was granted 300,000 RSUs that vest over four years, which is being expensed over 4 years, similar to time-based RSUs granted to directors in lieu of director’s fees. With respect to such RSU’s issued to Navigation, selling, general and administrative expenses include stock compensation expenses of $302,000 during the year ended December 31, 2021.

 

Transactions with Ribbon.

 

Pursuant to a transition services agreement entered into with Ribbon, a significant stockholder, in connection with the acquisition of Kandy, accounts payable and accrued expenses as of December 31, 2021 include $799,000 due to Ribbon for professional fees provided and certain software and other support. Prepaid expenses and other current assets as of December 31, 2021 include $190,000 due from Ribbon for collections in excess of reimbursable expenses. Also, trade receivables, net as of December 31, 2021 include $2,511,000 due from Ribbon.

 

Included in the consolidated statement of operations are certain revenues for services provided to Ribbon, certain expenses for services provided by Ribbon and certain expenses for rental of office space from Ribbon. The expenses for services provided by Ribbon relate primarily to professional services provided by Ribbon as part of the transition services agreement and, to a lesser extent, to certain software support purchased from Ribbon. Details of such revenue and expenses are included in the Company’s consolidated financial statements included elsewhere in this Form 10-K.

 

The 2021 Note

 

A subordinated Note, which is secured by a related party, is separately identified on the consolidated balance sheet. The related interest expense of $736,000 is included in “Interest expense – related parties” in the consolidated statement of operations for the year ended December 31, 2021 and is also included in “Accounts payable and accrued expenses” on the consolidated balance sheet as of December 31, 2021. The Note was repaid in full on March 15, 2022 out of proceeds received from the sale of Computex.

 

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Services provided by True North Advisory LLC

 

On January 21, 2022, the Company entered into a Services Agreement (the “Services Agreement”) with True North Advisory LLC (“True North”), a company affiliated with Michael Tessler, the Chairman of the Company’s board of directors.

 

Pursuant to the Services Agreement, among other things, True North will provide strategic advice with respect to the Company’s business as requested by the Company from time to time, for a fee of $25,000 per month, plus reimbursement for out-of-pocket expenses. The Services Agreement has an initial term of three months, after which it will continue on a month-to-month basis until terminated by either party on 30 days’ prior notice. The Services Agreement contains customary mutual provisions regarding confidentiality and ownership of intellectual property.

 

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.

 

46

 

 

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.

 

As of March 9, 2022, the aggregate fees billed to our Company by UHY LLP for the years ended December 31, 2021 and 2020 were as follows:

 

Fees Billed by UHY LLP  Year Ended
December 31,
 2021
   Year Ended
December 31,
2020
 
Audit Fees(1)  $405,473   $381,732 
Audit-Related Fees(2)  $-   $36,388 
Tax Fees(3)  $-   $92,935 
All Other Fees(4)  $-   $- 
Total  $405,473   $511,055 

 

(1) Audit Fees consist of fees incurred for the audits of our annual financial statements and for the reviews of our unaudited interim consolidated financial statements included in our quarterly reports on Form 10-Q for the applicable quarters of the fiscal year.

 

(2) Audit-Related Fees consist of all fees incurred related to various SEC filings, consents and proformas.

 

(3) Tax Fees consist of fees incurred for tax compliance, planning and advisory services and due diligence in connection with planned acquisitions.

 

(4) All Other Fees consist of products and services provided, other than the products and services described in the other rows of the foregoing table.

 

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.  

 

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PART IV

 

Item 15. Exhibits, Financial Statement Schedules.

 

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

 

(1) Our Financial Statements are listed on page F-1 of this Annual Report

 

(2) Financial Statements Schedule

 

None

 

(3) Exhibits:

 

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

 

Exhibit No.   Description
2.1(2)   Business Combination Agreement, dated as of July 24, 2019, by and among Pensare Acquisition Corp., Tango Merger Sub Corp., Stratos Management Systems Holdings, LLC, and Stratos Management Systems, Inc.
2.2(3)   Amendment No. 1 to the Business Combination Agreement, dated as of December 20, 2019, by and among Pensare Acquisition Corp., Tango Merger Sub Corp., Stratos Management Systems Holdings, LLC, and Stratos Management Systems, Inc.
2.3(4)   Amendment No. 2 to the Business Combination Agreement, dated as of April 3, 2019, by and among Pensare Acquisition Corp., Tango Merger Sub Corp., Stratos Management Systems Holdings, LLC, and Stratos Management Systems, Inc.
2.4(7)   Purchase Agreement, dated August 5, 2020, by and among American Virtual Cloud Technologies, Inc., Ribbon Communications Inc., Ribbon Communications Operating Company, Inc. and Ribbon Communications International Limited.
2.5(11)   Amended and Restated Purchase Agreement, dated December 1, 2020, by and among American Virtual Cloud Technologies, Inc., Ribbon Communications Inc., Ribbon Communications Operating Company, Inc. and Ribbon Communications International Limited
3.1(5)   Amended and Restated Certificate of Incorporation.
3.2(1)   Amended and Restated Bylaws.
3.3(4)   Second Amended and Restated Certificate of Incorporation.
4.1(1)   Warrant Agreement, dated as of July 27, 2017, between Pensare Acquisition Corp. and Continental Stock Transfer & Trust Company.
4.2(11)   Form of Debenture
4.3(11)   Form of Warrant
4.4(15)   Specimen Common Stock Certificate

 

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4.5(14)   Form of Indenture
4.6(17)   Series A Warrant, dated November 5, 2021
4.7(17)   Series B Warrant, dated November 5, 2021
4.8(19)   Form of Monroe Warrant.
4.9(19)   Series C Warrant, dated December 2, 2021.
4.10(21)   Series D Warrant, dated December 15, 2021.
4.11(21)   Certificate of Designation of Series A Convertible Preferred Stock, filed December 13, 2021
10.1(h)(1)   Letter Agreement, dated July 27, 2017, among Jose Mas, Pensare Acquisition Corp. and EarlyBirdCapital, Inc.
10.1(i)(1)   Letter Agreement, dated July 27, 2017, among Darrell J. Mays, Pensare Acquisition Corp. and EarlyBirdCapital, Inc.
10.1(j)(1)   Letter Agreement, dated July 27, 2017, among Lawrence E. Mock, Jr., Pensare Acquisition Corp. and EarlyBirdCapital, Inc.
10.1(k)(1)   Letter Agreement, dated July 27, 2017, among Suzanne Shank, Pensare Acquisition Corp. and EarlyBirdCapital, Inc.
10.1(l)(1)   Letter Agreement, dated July 27, 2017, among Rayford Wilkins, Pensare Acquisition Corp. and EarlyBirdCapital, Inc.
10.1(m)(1)   Letter Agreement, dated July 27, 2017, among Dr. Robert Willis, Pensare Acquisition Corp. and EarlyBirdCapital, Inc.
10.2(1)   Investment Management Trust Agreement, dated July 27, 2017, between Pensare Acquisition Corp. and Continental Stock Transfer & Trust Company.
10.3(1)   Stock Escrow Agreement, dated July 27, 2017 by and among Pensare Acquisition Corp., Continental Stock Transfer & Trust Company, Pensare Sponsor Group, LLC and the other parties thereto.
10.4(1)   Registration Rights Agreement, dated July 27, 2017 by and between Pensare Acquisition Corp. and the other parties thereto.
10.5(a) (1)   Warrant Purchase Agreement, dated July 27, 2017 by and between Pensare Acquisition Corp. and MasTec, Inc.
10.5(b) (1)   Warrant Purchase Agreement, dated July 27, 2017 by and between Pensare Acquisition Corp. and Pensare Sponsor Group, LLC.
10.5(c) (1)   Warrant Purchase Agreement, dated July 27, 2017 by and between Pensare Acquisition Corp. and EarlyBirdCapital, Inc.
10.6(1)   Administrative Services Agreement, dated July 27, 2017 by and between Pensare Acquisition Corp.  and Pensare Sponsor Group, LLC.
10.7(1)   Right Agreement, dated July 27, 2017 by and between Pensare Acquisition Corp. and Continental Stock Transfer & Trust Company.
10.8(1)   Letter Agreement, dated July 27, 2017 by and between Pensare Acquisition Corp. and EarlyBirdCapital, Inc.
10.9(1)   Form of Unit Purchase Option.
10.10(6)   Form of Indemnification Agreement for officers, directors and special advisors.
10.11(4)   Securities Purchase Agreement, dated as of April 3, 2020.
10.12(7)   Voting Agreement, dated August 5, 2020, by and among Ribbon Communications Inc., Ribbon Communications Operating Company, Inc., Ribbon Communications International Limited and Pensare Sponsor Group, LLC.
10.13(7)   Voting Agreement, dated August 5, 2020, by and among Ribbon Communications Inc., Ribbon Communications Operating Company, Inc., Ribbon Communications International Limited and Stratos Management Systems Holdings, LLC.
10.14(8)   Employment Agreement between the Company and Xavier Williams.
10.15(9)    Fifth Amendment to Credit Agreement, dated November 13, 2020.
10.16(10)   Services Agreement, dated as of March 4, 2021, between American Virtual Cloud Technologies, Inc., and Navigation Capital Partners, Inc.
10.17(11)   Employment Agreement between the Company and Michael Dennis.
10.18(11)   Employment Agreement between the Company and Thomas King.

 

49

 

 

10.19(11)   Form of Guaranty of Debentures
10.20(11)   Amended and Restated Voting Agreement, dated December 1, 2020, by and among Ribbon Communications Inc., Ribbon Communications Operating Company, Inc., Ribbon Communications International Limited and Pensare Sponsor Group, LLC.
10.21(11)   Amended and Restated Voting Agreement, dated December 1, 2020, by and among Ribbon Communications Inc., Ribbon Communications Operating Company, Inc., Ribbon Communications International Limited and Stratos Management Systems Holdings, LLC
10.22(11)   Investor Rights Agreement, dated December 1, 2020, by and among American Virtual Cloud Technologies, Inc., Ribbon Communications Inc., Pensare Sponsor Group, LLC and Stratos Management Systems Holdings, LLC
10.23(11)   Securities Purchase Agreement, dated December 1, 2020, by and between American Virtual Cloud Technologies, Inc. and SPAC Opportunity Partners Investment Sub LLC
10.24(11)   Amendment and Joinder to Registration Rights Agreement, dated December 1, 2020, by and among American Virtual Cloud Technologies, Inc. and the Holders Party thereto
10.25(11)   Sixth Amendment to Loan Documents, dated as of December 1, 2020
10.26(12)   Seventh Amendment to Loan Documents, dated as of June 24, 2021.
10.27(13)   Separation Agreement and Release between the Company and Xavier Williams.
10.29(16)   Securities Purchase Agreement, dated as of November 2, 2021
10.30(17)   Registration Rights Agreement, dated November 5, 2021
10.31(19)   Credit Agreement, dated December 2, 2021
10.32(19)   Amendment and Waiver, dated December 2, 2021
10.1(19)   Credit Agreement, dated December 2, 2021.
10.2(19)   Registration Rights Agreement, dated December 2, 2021.
10.3(19)   Amendment and Waiver, dated December 2, 2021.
10.4(19)   Form of Voting Agreement.
10.5(19)   Subscription Agreement, dated December 2, 2021.
10.6(19)   Amended and Restated Promissory Note, dated December 2, 2021.
10.1(20)   Securities Purchase Agreement, dated as of December 13, 2021
10.1(21)   Registration Rights Agreement, dated December 15, 2021.
14(6)   Code of Ethics.
21.1*   List of subsidiaries.
23.1*   Consent of UHY, LLP.
99.1(6)   Audit Committee Charter.
99.2(6)   Compensation Committee Charter.
99.3(6)   Nominating Committee Charter.
99.4(22)   Waiver, dated December 28, 2021.
31.1*   Certification of the Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).
31.2*   Certification of the Principal Financial and Accounting Officer required by Rule 13a-14(a) or Rule 15d-14(a).
32.1**   Certification of the Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
101.INS***   Inline XBRL Instance Document
101.SCH***   Inline XBRL Taxonomy Extension Schema Document.
101.CAL***   Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF***   Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB***   Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE***   Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

* Filed herewith.

 

** Furnished herewith.

 

*** XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

50

 

 

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

 

(2) Incorporated by reference to an exhibit to the Company’s current report on Form 8-K filed with the SEC on July 30, 2019.

 

(3) Incorporated by reference to an exhibit to the Company’s current report on Form 8-K filed with the SEC on December 30, 2019.
   
(4) Incorporated by reference to an exhibit to the Company’s current report on Form 8-K filed with the SEC on April 7, 2020.

 

(5) Incorporated by reference to an exhibit to the Company’s current report on Form 8-K filed with the SEC on April 30, 2019.

 

(6) Incorporated by reference to an exhibit to the Company’s Form S-1/A, filed with the SEC on July 24, 2017.
   
(7) Incorporated by reference to an exhibit to the Company’s current report on Form 8-K filed with the SEC on August 11, 2020.
   
(8) Incorporated by reference to an exhibit to the Company’s Form current report on Form 8-K filed with the SEC on September 16, 2020.
   
(9) Incorporated by reference to an exhibit to the Company’s Form 10-Q, filed with the SEC on November 16, 2020.
   
(10) Incorporated by reference to an exhibit to the Company’s Form 8-K, filed with the SEC on March 5, 2021.

 

(11) Incorporated by reference to an exhibit to the Company’s Form 8-K, filed with the SEC on December 7, 2020.
   
(12) Incorporated by reference to an exhibit to the Company’s Form 8-K, filed with the SEC on June 25, 2021.
   
(13) Incorporated by reference to an exhibit to the Company’s Form 8-K, filed with the SEC on July 22, 2021.
   
(14) Incorporated by reference to an exhibit to the Company’s Form S-3/A, filed with the SEC on August 25, 2021.
   
(15) Incorporated by reference to an exhibit to the Company’s Form S-1, filed with the SEC on April 29, 2020.
   
(16) Incorporated by reference to an exhibit to the Company’s Form 8-K, filed with the SEC on November 3, 2021.
   
(17) Incorporated by reference to an exhibit to the Company’s Form 8-K, filed with the SEC on November 8, 2021.
   
(19) Incorporated by reference to an exhibit to the Company’s Form 8-K, filed with the SEC on December 3, 2021.
   
(20) Incorporated by reference to an exhibit to the Company’s Form 8-K, filed with the SEC on December 13, 2021.
   
(21) Incorporated by reference to an exhibit to the Company’s Form 8-K, filed with the SEC on December 16, 2021.
   
(22) Incorporated by reference to an exhibit to the Company’s Form 8-K, filed with the SEC on December 29, 2021.

 

Item 16. Form 10-K Summary

 

None

 

51

 

 

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 (PCAOB ID: 1195)   F-2
Financial Statements    
Consolidated Balance Sheets as of December 31, 2021 and December 31, 2020   F-3
Consolidated Statements of Operations for the Successor Year Ended December 31, 2021, the Successor Period from April 7, 2020 to December 31, 2020, and the Predecessor Period from January 1, 2020 to April 6, 2020   F-4
Consolidated Statements of Changes in Stockholders’ Equity for the Predecessor Period from January 1, 2020 to April 6, 2020, the Successor Period from April 7, 2020 to December 31, 2020 and the Successor Year Ended December 31, 2021   F-5
Consolidated Statements of Cash Flows for the Successor Year Ended December 31, 2021, the Successor Period from April 7, 2020 to December 31, 2020, and the Predecessor Period from January 1, 2020 to April 6, 2020   F-6
Notes to Consolidated Financial Statements   F-7 – F-41

 

F-1

 

 

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 sheets of American Virtual Cloud Technologies, Inc. (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the Successor year ended December 31, 2021, the Successor period April 7, 2020 through December 31, 2020, the Predecessor period January 1, 2020 through April 6, 2020, 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, 2021 and 2020, and the results of its operations and its cash flows for the Successor year ended December 31, 2021, the Successor period April 7, 2020 through December 31, 2020, and the Predecessor period January 1, 2020 through April 6, 2020, 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits 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 audits 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

April 15, 2022

PCAOB ID Number 1195

 

F-2

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

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

 

   December 31,
2021
   December 31,
2020
 
         
ASSETS        
Current assets:        
Cash  $31,119   $9,944 
Restricted cash   
-
    561 
Trade receivables, net (including related party amount of $2,511 at December 31, 2021)   9,137    3,810 
Prepaid expenses and other current assets   2,192    662 
Assets held for sale - current (See Note 5)   27,775    21,023 
Total current assets   70,223    36,000 
Property and equipment, net   4,753    3,039 
Goodwill   10,468    24,144 
Other intangible assets, net   
-
    18,071 
Assets held for sale - noncurrent (See Note 5)   31,258    71,753 
Other noncurrent assets   1,269    
-
 
TOTAL ASSETS  $117,971   $153,007 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable and accrued expenses (including related party amounts of $2,285 and $1,542, respectively)  $17,082   $10,341 
Deferred revenue (including related party amount of $41 as of December 31, 2021)   82    271 
Current portion of notes payable and capital leases   26,393    216 
Subordinated promissory note - related party   5,000    
-
 
Subordinated promissory note - other   
-
    500 
Liabilities associated with assets held for sale - current (See Note 5)   29,237    43,072 
Total current liabilities   77,794    54,400 
Long-term liabilities          
Notes payable and capital leases (net of current portion and deferred financing fees)   11    104 
Convertible Debentures, net of discount - related parties   
-
    31,969 
Convertible Debentures, net of discount and deferred financing fees   
-
    9,675 
Warrant liabilities   39,162    5,303 
Deferred tax liability   
-
    3,459 
Liabilities associated with assets held for sale - noncurrent (See Note 5)   102    928 
Total long-term liabilities   39,275    51,438 
Total liabilities   117,069    105,838 
           
Commitments and contingent liabilities (see note 17)   
 
    
 
 
           
Stockholders’ equity:          
Successor:          
Preferred stock, $0.0001 par value; 5,000,000 authorized; none outstanding   
-
    
-
 
Common stock, $0.0001 par value; 500,000,000 shares authorized; 88,584,773 and 19,753,061 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively   9    2 
Additional paid-in capital   204,721    90,828 
Accumulated deficit   (203,828)   (43,661)
Total stockholders’ equity   902    47,169 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $117,971   $153,007 

 

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

 

F-3

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

   Year   April 7,
2020
   January 1,
2020
 
   Ended   through   through 
   December 31,
2021
   December 31,
2020
   April 6,
2020
 
   Successor   Successor   Predecessor 
             
Revenues:               
Managed and professional services  $3,119   $314   $
-
 
Cloud subscription and software (including related party amount of $2,437 for the year ended December 31, 2021)   16,930    1,383    
-
 
Total revenues   20,049    1,697    
-
 
                
Cost of revenue (including related party amount of $1,570 and $126, respectively)   16,181    1,263    
-
 
                
Gross profit   3,868    434    
-
 
Impairment of goodwill and other intangible assets (Note 3)   28,995    
-
      
Research and development (including related party amount of $331 and $33, respectively)   17,916    1,285    
-
 
Selling, general and administrative (including related party amount of $3,458 and $352, respectively)   36,405    12,445    
-
 
                
Loss from continuing operations   (79,448)   (13,296)   
-
 
                
Other (expense) income               
Change in fair value of warrant liabilities   (19,608)   (3,625)   
-
 
Interest expense - related parties   (14,958)   (6,899)   
-
 
Interest expense   (16,747)   (1,611)   
-
 
Other (expense) income   (93)   3    
-
 
Total other expenses   (51,406)   (12,132)   
-
 
                
Net loss from continuing operations before income taxes   (130,854)   (25,428)   
-
 
                
Provision for income taxes   
-
    
-
    
-
 
                
Net loss from continuing operations, net of tax   (130,854)   (25,428)   
-
 
                
Loss on discontinued operations, net of tax (Note 1)   (30,532)   (148)   (1,589)
                
Net loss  $(161,386)  $(25,576)  $(1,589)
                
Basic and diluted loss per common share               
Loss from continuing operations  $(3.67)  $(1.29)  $
-
 
Loss from discontinued operations   (0.86)   (0.01)   (1,587.30)
Loss per common share  $(4.53)  $(1.30)  $(1,587.30)
                
Weighted average shares outstanding - basic and diluted   35,640,669    19,690,509    1,000 

 

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

 

F-4

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

 

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

 

   For the period April 7, 2020 through December 31, 2020 
   Common Stock   Additional
Paid-In
   Accumulated   Stockholders’
Equity
 
   Shares   Amount   Capital   Deficit   (Deficit) 
Successor                    
Balance, April 7, 2020   7,932,977   $        1   $
-
   $(17,081)  $(17,080)
Conversion of rights (previously issued in the IPO) into shares   3,105,000    
-
    
-
    
-
    
-
 
Issuance of shares in connection with the acquisition of Computex (as defined in Note 1)   8,189,490    1    24,567    
-
    24,568 
Additional shares issued in connection with the acquisition of Computex (working capital adjustment)   117,231    
-
    557    
-
    557 
Issuance of shares in exchange for services   500,000    
-
    1,500    
-
    1,500 
Deferred underwriting fees relating to IPO   -    
-
    (3,000)   
-
    (3,000)
Debenture discount relative to fair value of warrants and beneficial conversion feature   -    
-
    64,715    
-
    64,715 
Redemption of shares held in trust   (91,637)   
-
    
-
    (1,004)   (1,004)
Share-based compensation   -    
-
    2,489    
-
    2,489 
Net loss   -    
-
    
-
    (25,576)   (25,576)
Balance, December 31, 2020   19,753,061   $2   $90,828   $(43,661)  $47,169 

 

   For the period January 1, 2021 through December 31, 2021 
           Additional         
   Common Stock   Paid-In   Accumulated   Stockholders’ 
   Shares   Amount   Capital   Deficit   Equity 
Successor                    
Balance, January 1, 2021   19,753,061   $       2   $90,828   $(43,661)  $47,169 
Sale of common stock, preferred stock and Series D Warrants   7,840,000    1    23,199    
-
    23,200 
Less fair value of Preferred Stock   -    
-
    (12,456)   
-
    (12,456)
Less fair value of Series D warrants   -    
-
    (9,844)   
-
    (9,844)
Sale of common stock, Series A and Series B warrants   2,500,000    
-
    4,585    
-
    4,585 
Less fair value of Series A and Series B Warrants   -    
-
    (3,175)   
-
    (3,175)
Common stock issued on exercise of Series B Warrants   3,333,334    
-
    8,171    
-
    8,171 
Common stock issued on exercise of Series C Warrants   1,500,000    
-
    1,545    
-
    1,545 
Common stock issued on conversion of Preferred Stock   7,785,000    1    12,455    
-
    12,456 
Common stock issued on conversion of Debentures   38,811,223    4    109,691    
-
    109,695 
Common stock issued on conversion of Penny Warrants   6,243,308    1    1    
-
    2 
Cumulative effect of accounting change related to adoption of ASU 2020-06 (See Note 3)   -    
-
    (36,983)   1,219    (35,764)
Debenture discount relative to fair value of warrants   -    
-
    9,223    
-
    9,223 
Vested and delivered RSUs   975,000    
-
    
-
    
-
    
-
 
Shares repurchased for tax withholding   (156,153)   
-
    (1,148)   
-
    (1,148)
Share-based compensation   -    
-
    8,629    
-
    8,629 
Net loss   -    
-
    
-
    (161,386)   (161,386)
Balance, December 31, 2021   88,584,773   $9   $204,721   $(203,828)  $902 

 

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

 

F-5

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

   Year   April 7,
2020
   January 1,
2020
 
   Ended   through   through 
   December 31,
2021
   December 31,
2020
   April 6,
2020
 
   Successor   Successor   Predecessor 
Cash Flows from Continuing Operations            
Net loss from continuing  operations  $(130,854)  $(25,428)  $
-
 
Adjustments to reconcile net loss from continuing operations to net cash used in continuing operating activities:               
Impairment of goodwill and other intangible assets   28,995    
-
    
-
 
Depreciation   1,275    112    
-
 
Amortization of intangible assets   2,752    229    
-
 
Amortization of Convertible Debenture discount   9,253    4,717    
-
 
Interest on convertible debt paid-in-kind   8,257    3,695    
-
 
Share-based compensation   8,629    2,489    
-
 
Change in fair value of warrant liabilities   19,608    3,625    
-
 
Amortization and write-off of deferred financing costs   1,143    
-
    
-
 
Noncash financing fees   5,948    
-
    
-
 
Loss on disposal of property and equipment   2    
-
    
-
 
Changes  in operating assets and liabilities:               
Accounts receivable   (5,327)   (262)   
-
 
Prepaid expenses and other current assets   (1,530)   (491)   
-
 
Accounts payable and accrued expenses   6,761    (3,304)   
-
 
Deferred revenue   (189)   77    
-
 
Other   (2,075)   (13)   
-
 
Net cash used in continuing operating activities   (47,352)   (14,554)   
-
 
Cash Flows from Continuing Investing Activities:               
Cash from the acquisition of Computex (See Note 4)   
-
    269    
-
 
Purchase of property and equipment   (2,990)   (52)   
-
 
Proceeds from sale of property and equipment   1    
-
    
-
 
Deferred development costs   (931)   
-
    
-
 
Net cash (used in) provided by continuing investing activities   (3,920)   217    
-
 
Cash Flows from Continuing Financing Activities:               
Net change in line of credit   (7,355)   
-
    
-
 
Payment of taxes from withheld shares   (1,148)   
-
    
-
 
Debt repayments (including capital lease obligations and Promissory Note)   (6,525)   (21)   
-
 
Proceeds from issuance of promissory note - related party   5,000    
-
    
-
 
Proceeds from issuance of debt   27,000    
-
    
-
 
Proceeds from issuance of Convertible Debentures (See Note 10)   24,000    23,103    
-
 
Proceeds from issuance of securities   27,784    1,500    
-
 
Proceeds from exercise of warrants   5,002    
-
      
Redemption of shares held in trust   
-
    (1,004)   
-
 
Payment of deferred financing fees   (1,872)   
-
    
-
 
Net cash provided by continuing financing activities   71,886    23,578    
-
 
                
Cash Flows from Discontinued Operations               
Net cash used in operating activities   5,148    (889)   (1,581)
Net cash used in investing activities   (1,012)   (857)   (157)
Net cash provided by financing activities   
-
    1,137    1,989 
Net cash provided by (used in) discontinued operations   4,136    (609)   251 
                
Net change in cash and restricted cash   24,750    8,632    251 
Cash and restricted cash, beginning of period   10,505    1,873    18 
Cash and restricted cash, end of period  $35,255   $10,505   $269 
Supplemental Disclosures about Cash Flow Information               
Cash paid for interest  $1,058   $677   $384 
Cash paid (refunds received) for income taxes  $266   $10   $(4)
Supplemental Schedule of Noncash Investing and Financing Activities               
Noncash conversion of Debentures to common stock  $109,695   $
-
  $
-
 
Fair value of Penny Warrants related to the issuance of ConvertibleDebentures  $9,223   $27,732   $
-
 
Noncash acquisition of Computex in exchange for common stock,Convertible Debentures and assumed debt  $
-
   $61,768   $
-
 
Noncash acquisition of Computex in exchange for Convertible Debentures  $
-
   $43,778   $
-
 
Promissory note - related party, exchanged for Convertible Debentures  $
-
   $8,566   $
-
 
Deferred underwriting fees settled via the issuance of common stock and the issuance of subordinated promissory note  $
-
   $3,000   $
-
 
Capital expenditures included in accounts payable and accrued expenses  $64   $42   $125 
Noncash conversion of Series A Preferred to common stock  $12,456   $
-
   $
-
 

 

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

 

F-6

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

December 31, 2021

 

1. Organization and Business Operations

 

Organization

 

American Virtual Cloud Technologies, Inc. (“AVCT,” the “Company,” “we,” “us,” “our” or “Successor”) was incorporated in Delaware on April 7, 2016.

 

On April 7, 2020 (the “Computex Closing Date”), AVCT (formerly known as Pensare Acquisition Corp.) consummated a business combination transaction (the “Computex Business Combination”) in which it acquired Stratos Management Systems, Inc. (“Computex”), a private operating company that does business as Computex Technology Solutions. In connection with the closing of the Computex Business Combination, the Company changed its name to American Virtual Cloud Technologies, Inc.

 

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

 

For accounting purposes, both Computex and Kandy were considered the acquirees, and the Company was considered the acquirer. The acquisitions were accounted for using the acquisition method of accounting. See Notes 3 and 4 for additional information.

 

On January 27, 2022, the Company announced that it had executed a definitive agreement to sell Computex, which would complete the Company’s transition to a pure-play cloud communications and collaboration company, centered on the Kandy platform. As a result, Computex was classified as held for sale as of December 31, 2021 and its operations are classified as discontinued operations. In connection with the planned sale of Computex, we recorded a noncash goodwill impairment charge of $32,100 during the year ended December 31, 2021 which represents the excess of the carrying value of the Computex reporting unit over the expected sale proceeds less costs to sell. On March 15, 2022, the Computex sale was consummated.

 

Unless otherwise noted, discussion in these Notes to Consolidated Financial Statements refers to our continuing operations. Refer to Note 5, Assets held for sale and operations classified as discontinued operations, for additional information.

 

F-7

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

Nature of business

 

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

 

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

 

Kandy is a provider of cloud-based enterprise services. It deploys a carrier grade proprietary cloud communication platform that supports UCaaS, communications platform as a service (“CPaaS”) and contact center as a service (“CCaaS”) for mid-market and enterprise customers across a proprietary multi-tenant, highly scalable cloud platform. The Kandy platform also includes pre-built customer engagement tools, based on web real-time communication technology (“WebRTC technology”), known as Kandy Wrappers, and provides white-labeled services to a variety of customers including communications service providers and systems integrators. With Kandy, companies can quickly embed real-time communications capabilities into their existing applications and business processes.

 

Covid-19

 

The novel strain of coronavirus (“COVID-19”) continues to significantly impact local, regional, and global economies, businesses, supply chains, production and sales across a range of industries. The extent of its impact on our operational and financial performance is uncertain and difficult to predict and we remain cautious about the global recovery

 

To protect the health and safety of our employees, our daily execution has evolved into a largely virtual model. However, we have found ways to continue to engage with and assist our customers and partners as they work to navigate the current environment. We will continue to monitor the current environment and may take further actions that may be required by federal, state or local authorities or that we determine to be in the interests of our employees, customers, and partners.

 

2. Liquidity

 

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

 

On December 2, 2021, the Company entered into the Credit Agreement with Monroe for a $27,000 Credit Facility (as such terms are defined in Note 9), part of which was used to pay off amounts owing under the Prior Credit Agreement (as defined in Note 9) which was assumed as part of the acquisition of Computex. The remainder of the proceeds from the Credit Facility were scheduled to be used for working capital and general business purposes. However, on March 1, 2022, all amounts owing under the Credit Agreement were repaid from the proceeds of a securities sale executed on March 1, 2022 and cash on hand. The terms of the Credit Agreement are discussed in Note 9.

 

On January 27, 2022, the Company announced that it had executed a definitive agreement to sell Computex, which would complete the Company’s transition to a pure-play cloud communications and collaboration company, centered on its Kandy platform. On March 15, 2022, the sale of Computex was consummated. Previously, proceeds from the sale along with some of the cash on hand were initially scheduled to be used to pay off the amounts owing under the Credit Agreement. However, the Credit Agreement was repaid on March 1, 2022, which was prior to the sale of Computex. Accordingly, net proceeds from the sale of Computex, after payment of closing obligations and amounts owed under the Subordinated Note – Related Party are being used for working capital and general business purposes.

 

F-8

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

In addition, as more fully discussed in Note 10, in November and December 2021, the Company completed the sale of certain securities, including the sale of common stock, Series A Preferred and certain warrants. The Company also completed certain share registrations. Certain of the warrants were exercised soon after they were issued, thereby providing additional capital.

 

As of December 31, 2021, the Company had unrestricted cash of $35,255 in its operating bank accounts. Working capital deficit as of December 31, 2021 was $7,571, primarily as a result of the classification of certain debt as current, including the Credit Agreement. The working capital deficit as of December 31, 2020 was $18,400.

 

As more fully discussed in Note 18, subsequent to December 31, 2021, the Company sold additional securities for net cash proceeds of approximately $13,820, which, along with cash on hand, were used to repay all amounts owing under the Credit Agreement. Also, on April 14, 2022, the Company executed the sale of additional securities to a buyer that owns greater than 5% of the Company’s common stock, which, when funded, is expected to provide additional proceeds of $10,000 before closing costs. See Note 18 for further discussion of such securities.

 

The Company believes that cash on hand, as well as proceeds from planned equity and executed 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 product sales and service, cost structure, cash burn rate and other operating assumptions.

 

3. Summary of Significant Accounting Policies

 

Basis of presentation

 

The accompanying consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

 

See Note 5, Assets held for sale and operations classified as discontinued, for additional information.

 

In the Computex Business Combination, Computex was considered the predecessor for accounting purposes. and the successor financial statements reflect a new basis of accounting that is based on the fair value of the net assets acquired and liabilities assumed. In the accompanying consolidated financial statements, the Company clearly distinguishes between the entity that existed before the Computex Closing Date (“Predecessor”) and the entity that existed on and after such date (“Successor”). Because the Successor’s financial statements are presented on a different basis from the Predecessor’s financial statements, the two entities may not be comparable in certain respects. As a result, a black line is used to separate the Successor and the Predecessor columns or sections in certain tables included in the consolidated financial statements.

 

The financial position, results of operations and cash flows described herein for the dates and periods prior to April 7, 2020 relate to the operations of Computex and its subsidiaries. The historical financial information of AVCT prior to the business combination (a special purpose acquisition company, or “SPAC”) are not reflected in the Predecessor financial statements as it is believed that including such amounts would make those financial statements less useful to users. SPACs typically deposit the proceeds received from their initial public offerings into a separate trust account until a business combination occurs. Once the business combination occurs, such funds are then used to satisfy the consideration for the acquiree and/or to pay stockholders who elect to redeem their shares of common stock in connection with the business combination. The operations of a SPAC, until the closing of a business combination, usually consists of transaction expenses and income earned from the trust account investments.

 

Determining fair values of certain assets acquired and liabilities assumed requires the exercise of judgment and often involves the use of significant estimates and assumptions. See Note 4 for a discussion of the fair value estimates utilized in the allocation of the Computex and Kandy purchase prices.

 

The Company has reclassified certain prior year amounts, including the results of discontinued operations and reportable segment information, to conform to the current year presentation. Unless otherwise indicated, amounts provided in these Notes pertain to continuing operations. See Note 5 for information on discontinued operations.

 

Principles of consolidation

 

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

 

F-9

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

Use of estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales (or revenues) and expenses during the reporting period.

 

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that estimates made as of the date of the financial statements could change in the near term due to one or more future events. Accordingly, the actual results could differ significantly from those estimates. Significant accounting estimates reflected in the Company’s consolidated financial statements include, but are not limited to, revenue recognition, estimates of impairment on long-lived assets, allowance for doubtful accounts, recognition and measurement of income tax assets, valuation of share-based compensation, the valuation of net assets acquired and the identification and measurements inherent in the classification of certain components of our operations as discontinued operations.

 

Discontinued Operations

 

The Company classifies assets and liabilities of a business or asset group as held for sale, and the results of its operations as income (loss) from discontinued operations, net, for all periods presented, when it commits to a plan to divest a business or asset group, actively begin marketing it for sale, the sale is deemed probable of occurrence within the ensuing twelve months, and the business or asset group reflects a strategic shift that has, or will have, a major effect on the Company’s operations and its financial results. In measuring the assets and liabilities held for sale, the Company evaluates which businesses or asset groups are being marketed for sale. Upon designation as held for sale, the Company records the carrying value of the assets at the lower of the carrying value or estimated fair value, less costs to sell. Fair value is determined based on external data available or management’s estimates, depending upon the nature of the assets and liabilities.

 

The results of discontinued operations, as well as any gain or loss on the disposal transaction, are presented separately, net of tax, from the results of continuing operations for all periods presented. The revenue and expenses included in the results of discontinued operations are the revenue and direct operating expenses incurred by the discontinued component that may be reasonably segregated from the revenue and costs of the ongoing operations of the Company. The assets and liabilities for the Computex business have been accounted for as assets and liabilities held for sale in the consolidated balance sheets and the operating results have been included in discontinued operations in the consolidated statements of operations. The prior periods have been adjusted to reflect the assets and liabilities held for sale and discontinued operations.

 

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.

 

F-10

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

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.

 

F-11

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

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 the Company’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. The Company 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, 2021.

 

The Company also recognizes revenue for 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.

 

Cash, cash equivalents and restricted cash

 

The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. Restricted cash at December 31, 2020 consisted of the balance of amounts that were placed in escrow in connection with a previous amendment to its Prior Credit Agreement, which were to be applied to interest payments. Amounts owing under the Prior Credit Agreement were repaid during the year ended December 31, 2021.

 

F-12

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

Trade receivables, net

 

Trade receivables arise from granting credit to customers in the normal course of business, are unsecured and are presented net of an allowance for doubtful accounts. The allowance is based on a number of factors, including the length of time the receivable is past due, the Company’s previous loss history, the customer’s current ability to pay, and the general condition of the economy and industry as a whole. Depending on the customer, payment is due within 30, 60 or 90 days after the customer receives an invoice. Accounts that are more than 45 days past due are individually analyzed for collectability. When all collection efforts have been exhausted, the accounts are written off. Historically, the Company has not suffered significant losses with respect to its trade receivables. The allowance for doubtful accounts was approximately $147 and $13 at December 31, 2021 and 2020, respectively.

 

Inventories

 

Inventories, which consist of purchased components for resale, are valued at the lower of average cost (which approximates the first-in, first-out method) and net realizable value. The need for an inventory obsolescence reserve is based on an evaluation of slow-moving or obsolete inventory. No obsolescence reserve was deemed necessary at December 31, 2021 or December 31, 2020.

 

Business combinations

 

The Company accounts for business combinations in accordance with the Financial Accounting Standard Board’s (“FASB”) Accounting Standard Codification (“ASC”) 805, Business Combinations. Accordingly, identifiable tangible and intangible assets acquired and liabilities assumed are recorded at their estimated fair values, the excess of the purchase consideration over the fair values of net assets acquired is recorded as goodwill, and transaction costs are expensed as incurred.

 

Long-lived assets

 

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

 

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

 

The Company reviews its long-lived assets for impairment whenever events or circumstances exist that indicate the carrying amount of an asset or asset group may not be recoverable. The recoverability of long-lived assets is measured by a comparison of the carrying amount of the asset or asset group to the future undiscounted cash flows expected to be generated by that asset group. If the asset or asset group is considered to be impaired, an impairment loss is recorded to adjust the carrying amounts to the estimated fair value. During the year ended December 31, 2021, the Company recorded impairment of intangible assets of $15,319 relating to the Kandy reporting unit based on a comparison of the reporting unit’s fair value with its carrying value. The excess of the carrying value of the reporting over the estimated fair value was first allocated to the intangibles and then to goodwill. Fair value was determined using the income approach.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. Goodwill is reviewed for impairment at least annually, in December, or more frequently if a triggering event occurs between impairment testing dates. As of December 31, 2021, the Company had two operating segments and two reporting units for the purpose of evaluating goodwill impairment.

 

F-13

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

The Company’s impairment assessment begins with a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. Qualitative factors may include, macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity and Company specific events. If, based on the qualitative test, the Company determines that it is “more likely than not” that the fair value of a reporting unit is less than its carrying value, then we evaluate goodwill for impairment by comparing the fair value of each of our reporting unit to its respective carrying value, including its goodwill. If it is determined that it is “not likely” that the fair value of the reporting unit is less than its carrying value, then no further testing is required.

 

The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves significant judgment and estimates. Fair values may be determined using a combination of both income and market-based approaches.

 

As indicated in Note 1, in connection with the planned sale of Computex, the Company recorded a noncash goodwill impairment charge of $32,100 during the year ended December 31, 2021, which represents the excess of the carrying value of the Computex reporting unit over the expected sale proceeds less costs to sell. As indicated above, impairment of Kandy’s goodwill was also recorded during the year ended December 31, 2021. Goodwill impairment of the Kandy reporting unit was $13,676.

 

Deferred financing fees and debt discount

 

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

 

Research and development

 

The Company incurs software development costs to enhance, improve, expand and/or upgrade certain proprietary software in an agile software environment with releases broken down into several iterations called sprints. Such software development costs, research and development costs, and any new product development costs, are expensed as incurred, and include personnel-related costs, depreciation related to engineering and test equipment, allocated costs of facilities and information technology, outside services and consultant costs, supplies, software tools and product certification.

 

Software developed for internal use is capitalized. Capitalization ceases and amortization starts when the software is ready for its intended use.

 

Warrants

 

Warrants issued by the Company are evaluated under ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815-40, Derivatives and Hedging—Contracts in an Entity’s Own Equity, to determine whether they meet the criteria to be accounted for as liabilities or as stockholders’ equity. If the Company determines that they should be accounted for as liabilities, then they are recorded at fair value on the issuance dates with subsequent changes in fair values recognized in the consolidated statement of operations at each reporting date. Changes in the fair values of the Company’s warrants may be material to the Company’s future operating results.

 

Series A, Series B, Series C, Series D and Monroe Warrants

 

As more fully discussed and defined in Note 10, in November and December 2021, the Company issued certain Series A, Series B, Series C, Series D and Monroe Warrants in a series of transactions, which were determined to qualify for treatment under ASC 480.

 

F-14

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

Public Warrants, Private Placement Warrants and EBC Warrants issued in 2017

 

On July 27, 2017, the Company entered into certain Warrant Purchase Agreements with each of Pensare Sponsor Group, LLC, a Delaware limited liability company (the “Sponsor”), MasTec, Inc., a Florida corporation, and EarlyBirdCapital, Inc., (“EBC”) a Delaware corporation (together with the Sponsor and MasTec, Inc., the “Purchasers”), pursuant to which the Purchasers, in connection with and simultaneously with the closing of the Company’s initial public offering (the “IPO”), purchased an aggregate of 10,512,500 warrants, including the full over-allotment amount, (the “2017 Private Placement Warrants”) at a purchase price of $1.00 per Warrant.

 

On or about August 1, 2017, in the IPO, the Company sold units of the Company’s equity securities, each such unit consisting of one share of Common Stock, one-half of one Public Warrant and one-tenth of one right to acquire one share of Common Stock (the “Units”) and, in connection therewith, issued and delivered 15,525,000 warrants to public investors in the Offering (the “Public Warrants”). In addition, at that time, there were 675,000 warrants underlying unit purchase options granted to EBC or its designees (the “2017 EBC Warrants”). The 2017 EBC Warrants, together with the 2017 Private Placement Warrants and the Public Warrants are referred to as the “2017 Warrants.” Each whole Warrant entitles the holder thereof to purchase one share of common stock of the Company for $11.50 per share, subject to adjustments. In addition to the 675,000 warrants, the unit purchase options, which expire in July 2022, entitle the holders to receive 1,485,000 shares of common stock for an exercise price of $10 per unit.

 

As of December 31, 2021, 15,525,000 Public Warrants and 10,512,500 of the 2017 Private Placement Warrants remained outstanding. Also, as of December 31, 2021, the 2017 EBC Warrants totaled 675,000.

 

The 2017 Private Placement Warrants and the 2017 EBC Warrants, if appropriately exercised, are exercisable on a cashless basis, at the holder’s option, and are non-redeemable so long as they are held by the initial Purchasers or their permitted transferees. The 2017 Public Warrants and any 2017 Private Placement Warrants or 2017 EBC Warrants that are transferred to nonpermitted transferees are redeemable at the option of the Company and are not exercisable on a cashless basis.

 

The Company evaluated the 2017 Warrants under ASC 815-40, Derivatives and Hedging—Contracts in an Entity’s Own Equity, and concluded that the 2017 Private Placement Warrants and 2017 EBC Warrants did not meet the criteria to be classified in stockholders’ equity. A recent SEC Statement focused in part on provisions in warrant agreements that provide for potential changes to the settlement amounts dependent upon the characteristics of the warrant holder and because a holder of a warrant is not an input into the pricing of a fixed-for-fixed option on equity shares, such provision precludes the 2017 Private Placement Warrants and the 2017 EBC Warrants from being classified in equity and therefore the 2017 Private Placement Warrants and the 2017 EBC Warrants are classified as liabilities at fair value, with subsequent changes in fair values recognized in the consolidated statement of operations at each reporting date.

 

The fair values of the 2017 Private Placement Warrants and the 2017 EBC Warrants were determined using the Black-Scholes model in which the following weighted average assumptions were used for the valuations performed as of December 31, 2021 and December 31, 2020:

 

   December 31,
2021
   December 31,
2020
 
stock price volatility             70%               37%
exercise price  $11.50   $11.50 
discount rate   0.9577%   0.3240%
remaining useful life (in years)   3.11    4.64 
stock price  $2.43   $4.43 

 

F-15

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

Income taxes

 

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

 

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

 

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

 

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

 

Share-based compensation

 

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

 

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

 

F-16

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

Net loss per common share

 

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

 

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

 

Concentration of business and credit risk

 

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and trade receivables. Cash held by the Company, in financial institutions, regularly exceeds the federally insured limit of $250. At December 31, 2021 and 2020, cash balances held with a financial institution exceeded the federally insured limit. However, management does not believe this poses a significant credit risk.

 

No customer accounted for more than 10% of sales (including sales of discontinued operations) during the year ended December 31, 2021 nor during the Successor period April 7, 2020 to December 31, 2020. For Kandy, three customers accounted for more than 10% of total revenue during the year ended December 31, 2021, accounting for $9,929 of Kandy’s revenue.

 

No customer accounted for 10% or more of accounts receivable (including accounts receivable held for sale) at December 31, 2021. For accounts payable, one vendor accounted for at least 10% of accounts payable at December 31, 2021 (accounting for $12,876). During the year ended December 31, 2021, one of Computex’s vendors accounted for approximately 54% of its purchases.

 

Deferred rent

 

The Company leases real estate which calls for escalating rent payments. In accordance with GAAP, the Company recognizes rent expense on a straight-line basis over the lease term. The differences between the cash payments called for under the lease arrangements and the rent expense recognized on a straight-line basis are recorded as deferred rent. The deferred rent will be reduced when the cash payments exceed the straight-line rent expense. Cumulative straight-line rent expense exceeded cash payments for rent by approximately $102 and $69 at December 31, 2021 and 2020, respectively.

 

Fair value of financial instruments

 

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability.

 

ASC Topic 820, Fair Value Measurements and Disclosures provides a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:

 

  Level 1 — inputs are based upon unadjusted quoted prices for identical assets or liabilities traded in active markets.
     
  Level 2 — inputs are based upon quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
     
  Level 3 — inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

 

F-17

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

Assets measured at fair value on a non-recurring basis include goodwill, and tangible and intangible assets. Such assets are reviewed annually for impairment indicators. If a triggering event has occurred, the assets are re-measured when the estimated fair value of the corresponding asset group is less than the carrying value. The fair value measurements, in such instances, are based on significant unobservable inputs (Level 3).

 

The carrying amounts of the Company’s financial instruments, which include trade receivables, deposits, accounts payable and accrued expenses and debt at floating interest rates, approximate their fair values, principally due to their short-term nature, maturities or nature of interest rates.

 

The fair values of warrants liabilities are reflected on the consolidated balance sheet as “Warrant Liabilities.” For the valuation methodologies and significant assumptions used in the valuations, see the section above titled, “Public Warrants, Private Placement Warrants and EBC Warrants issued in 2017” and Note 10. The warrant liabilities are considered to be Level 2 valuations.

 

Foreign operations

 

The Company’s reporting currency is the U.S. dollar and the Company’s records are maintained in US dollars. Any amounts due or receivable from foreign entities are translated into U.S. dollars at the current exchange rate on the balance sheet date. Any revenues or expenses that are billed in foreign currency are converted at the average rates of exchange prevailing during each period. Realized and unrealized foreign currency exchange gains and losses arising from transactions denominated in currencies other than the U.S dollar are reflected in earnings.

 

Operations outside the United States include a Canadian division that was acquired as part of the Kandy acquisition. The Company also transacts certain business in other foreign countries. Foreign operations are subject to risks inherent in operating under different legal systems and various political and economic environments. Among the risks are changes in existing tax laws, possible limitations on foreign investment and income repatriation, government price or foreign exchange controls, and restrictions on currency exchange.

 

Advertising and vendor considerations

 

Advertising costs are expensed as incurred.

 

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

 

Reclassifications

 

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

 

Seasonality

 

Hardware revenue of the Computex segment tends to be seasonal with higher revenues occurring in the fourth quarter of each year.

 

Segment reporting

 

The Company’s reportable segments are based on the “management” approach, that is they are based on the way management views the business, the internal reports it reviews and the way it manages the business, assess performance and makes decisions. The chief operating decision makers review revenue, gross margin and the operating performance of each reportable segment. The Company’s reportable segments during the year ended December 31, 2021 were Computex and Kandy.

 

F-18

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

Emerging growth company

 

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, (the “Securities Act”), as modified by the Jumpstart our Business Startups Act of 2012, (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

 

Further, Section 102(b) (1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. Private companies are those companies that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised, it adopts the new or revised standard at the time private companies adopt the new or revised standard. Therefore, the Company’s financial statements may not be comparable to certain public companies.

 

Recently issued accounting standards

 

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

 

In May 2021, the FASB issued ASU No. 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU No. 2021-04”), which provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. Under ASU 2021-04, an entity is required to treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option, that remains equity classified, as an exchange of the original instrument for a new instrument. ASU 2021-04 also provides guidance on the measurement of the effect of a modification or exchange and requires entities to recognize the effect of any such modification or exchange on the basis of the substance of the transaction.

 

ASU No. 2021-04 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Entities are required to apply the amendments prospectively to modifications or exchanges that occur on or after the effective date. Early adoption is permitted. The adoption of ASU No. 2021-04 is not expected to materially impact the treatment of the Company’s warrants as the Company’s treatment of such modifications is consistent with the guidance in ASU 2021-04.

 

In February 2016, the FASB issued Accounting Standard Update (“ASU”) No. 2016-02, Leases (ASC 842), as amended by multiple updates, hereafter ASC 842. ASC 842 requires lessees to recognize, on the balance sheet, a lease liability and a lease asset for all leases, including operating leases with a lease term greater than 12 months and requires lessors to classify leases as either sales-type, direct financing or operating. ASC 842 also expands the required quantitative and qualitative disclosures surrounding leases. As long as the Company is an emerging growth company, the current effective date of adoption is fiscal year 2023, which is the required date of adoption for private companies. Early adoption is permitted. While the Company continues to assess the effects of adoption, it currently believes the most significant effects relate to the recognition, on the consolidated balance sheet, of right-of-use assets and lease liabilities related to operating leases.

 

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”), to help reduce complexity related to accounting for income taxes. This amendment removes scope exceptions including: the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items and the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendment also simplifies areas such as franchise tax, step up in tax basis of goodwill, allocation of tax to legal entities, inclusion of tax laws or rate change impact in annual effective tax rate computation, and income taxes for employee stock ownership plans. The amendments in this update are effective for the Company for 2021 and were adopted in the first quarter of 2021.  The adoption of ASU 2019-12 did not have a material impact on the Company’s financial statements.

 

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated balance sheets, statements of changes in equity, statements of operations and statements of cash flows.

 

F-19

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

Recently adopted accounting standards

 

Effective July 1, 2021, the Company adopted ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 of goodwill impairment tests. The adoption did not materially impact the Company’s consolidated financial statements. 

 

In August 2020, the FASB issued ASU No. 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU No. 2020-06”) which simplifies the accounting for some financial instruments with characteristics of liabilities and equity, including the Convertible Debentures (or Debentures, as described and defined in Note 9). ASU No. 2020-06 eliminates the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature. In addition, with respect to convertible instruments, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share instead of the treasury stock method. The Company early adopted ASU No. 2020-06 effective January 1, 2021 using the modified retrospective approach. Upon adoption, the following changes resulted:

 

the intrinsic value of the beneficial conversion feature recorded between April 7, 2020 and December 31, 2020 was reversed as of the effective date of adoption, thereby resulting in an increase in the Convertible Debentures, as of January 1, 2021, with an offsetting adjustment to additional paid in capital.
   
the discount amortization expense (included within interest expense) which was recorded between April 7, 2020 and December 31, 2020 that was related to the beneficial conversion feature was reversed against opening accumulated deficit.

 

The cumulative effect adjustment that the Company recognized in the consolidated balance sheet, as of January 1, 2021, as an adjustment to accumulated deficit, was $1,219 and is reflected in the following table:

 

   December 31,
2020
   Adjustments   January 1,
2021
 
   Successor       Successor 
   (as reported)       (as adjusted) 
Long term liabilities            
Convertible Debentures, net of discount  $41,644   $35,764   $77,408 
Total long-term liabilities   51,438    35,764    87,202 
Total liabilities   105,838    35,764    141,602 
                
Stockholders’ equity:               
Successor:               
Additional paid-in capital  $90,828   $(36,983)  $53,845 
Accumulated deficit   (43,661)   1,219    (42,442)
Total stockholders’ equity   47,169   $(35,764)   11,405 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   153,007    (35,764)   117,243 

 

The following table summarizes the effects of adopting ASU 2020-06 on the Company’s consolidated statement of operations for the Successor period April 7, 2020 to December 31, 2020:

 

       With     
       Adoption     
   Successor   of   ASC 2020-06 
   (as reported)   ASC 2020-06   Impact 
             
Interest expense  $(9,316)  $(8,097)  $1,219 
Total other expenses   (12,931)   (11,712)   1,219 
Net loss before income taxes   (25,506)   (24,287)   1,219 
Net loss   (25,576)   (24,357)   1,219 
Loss per share - basic and diluted  $(1.30)  $(1.24)  $0.06 

 

The adoption of ASU 2020-06 had no impact on net cash used in operating activities, net cash used in investing activities or net cash provided by financing activities.

 

F-20

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

4. Acquisitions

 

Computex

 

On April 7, 2020, the Company consummated the Computex Business Combination that resulted in the acquisition of Computex. The acquisition qualified as a business combination under ASC 805. Accordingly, the Company recorded assets acquired and liabilities assumed at their acquisition-date fair values. The excess of the purchase price over the fair value of assets acquired and liabilities assumed was recorded as goodwill. The goodwill, which is not deductible for tax purposes, resulted from factors such as an assembled workforce and management’s industry knowledge.

 

The following table represents the allocation of the preliminary purchase consideration among the assets acquired and liabilities assumed at their estimated acquisition-date fair values.

 

Consideration paid:    
    
Convertible Debentures with warrants that granted the right to acquire 2,000,000 shares of common stock at an exercise price of $0.01 per share  $20,000 
Assumed debt   16,643 
AVCT common stock (8,189,490 shares at $3.00 per share)   24,568 
Working capital adjustment satisfied by the issuance of AVCT common stock (117,231 shares at $4.75 per share)   557 
Total consideration paid  $61,768 
      
Net assets acquired:     
Current assets  $16,972 
Customer relationships (estimated useful life  - 10 years)   17,300 
Trade names (estimated useful life  - 10 years)   7,000 
Furniture & equipment   6,435 
Leasehold improvements   2,375 
Other assets   88 
Current liabilities   (26,965)
      
Other liabilities   (116)
Total net assets acquired  $23,089 
Goodwill   38,679 
Total consideration paid  $61,768 

 

 

Identifiable intangible assets acquired consisted of customer relationships of $17,300 and trade names of $7,000. Both the customer relationships and the trade names were valued using a form of the income approach. The customer relationship was valued using the Multi-Period Excess Earnings Method (or MPEEM) and the method used for the trade names was the Relief from Royalty Method. With respect to the Computex acquisition, AVCT incurred transaction costs of $142 during the Successor period April 7, 2020 to December 31, 2020, which was net of a credit of $903 granted by a creditor whose account was settled by the issuance of $2,500 in Debentures, $1,500 in shares of common stock and cash of $100.

 

Since the results of operations prior to April 7, 2020 relate to the operations of Computex, excluded from the Predecessor statement of operations were investment income earned and transaction costs incurred by AVCT of $1,365 and $6,887, respectively.

 

Kandy

 

On December 1, 2020, the Company acquired Kandy from Ribbon, by acquiring certain assets, assuming certain liabilities and acquiring all of the outstanding interests of Kandy Communications LLC. The acquisition qualified as a business combination under ASC 805. Accordingly, the Company recorded assets acquired and liabilities assumed at their acquisition-date fair values. The excess of the purchase price over the fair value of assets acquired and liabilities assumed was recorded as goodwill. The goodwill, which is deductible for tax purposes, resulted from factors such as an assembled workforce and management’s industry knowledge.

 

F-21

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

The following table represents the allocation of the preliminary purchase consideration among the assets acquired and liabilities assumed at their estimated acquisition-date fair values.

 

Consideration paid:    
Convertible Debentures with warrants that granted the right to acquire 4,377,800 shares of common stock at an exercise price of $0.01 per share  $43,778 
Net assets acquired:     
Current assets  $3,659 
Acquired technology   8,200 
Customer relationships   7,600 
Trade names   2,500 
Property, plant & equipment   3,034 
Current liabilities   (5,245)
Other liabilities   (114)
Total net assets acquired  $19,634 
Goodwill   24,144 
Total consideration paid  $43,778 

 

Identifiable intangible assets acquired consisted of acquired technology of $8,200, customer relationships of $7,600 and trade names of $2,500. The intangible assets were valued using a form of the income approach. The customer relationship was valued using the Multi-Period Excess Earnings Method (or MPEEM) while the method used for the acquired technology and trade names was the Relief from Royalty Method. With respect to the Kandy acquisition, AVCT incurred transaction costs of $2,649 during the Successor period April 7, 2020 to December 31, 2020.

 

Unaudited Pro Forma Financial Information

 

The following unaudited pro forma financial information presents the combined results of operations for the Company and gives effect to the Computex and Kandy acquisitions as if the acquisitions had occurred on January 1, 2020 (in thousands):

 

   Year ended December 31, 2020 
   Continuing   Discontinued 
   Operations   Operations 
         
Revenues  $14,297   $85,917 
Net loss   (44,426)   (2,140)

 

 

The pro forma financial information included herein are not necessarily indicative of the results of operations that would have been realized if the acquisitions had been completed on January 1, 2020. Such pro forma financial information do not give effect to any integration costs related to the acquired companies.

 

The combined net loss in the table above was adjusted for the incremental changes in the amortization of intangible assets.

 

5. Assets held for sale and operations classified as discontinued operations

 

On September 16, 2021, the Company issued a press release announcing that as a result of a decision by the Company’s Board of Directors to explore strategic alternatives previously announced on April 7, 2021, the Board had authorized the Company to focus its strategy on acquisitions and organic growth in its cloud technologies business as well as to explore strategic opportunities for its IT solutions business, including the divestiture of Computex. The Company believed that the change would allow the Company to optimize resource allocation, focus on core competencies, and improve its ability to invest in areas of maximal growth potential.

 

On January 26, 2022, the Company entered into an asset purchase agreement to sell substantially all of the assets of its Computex business for $30,000, subject to certain adjustments, with the buyer agreeing to assume certain liabilities.

 

Accordingly, certain assets and liabilities of Computex are classified as held for sale as of December 31, 2021 in the accompanying consolidated balance sheets, and the related revenues and expenses are classified as discontinued operations in the accompanying consolidated statements of operations. Also, in connection with the planned sale of Computex, the Company compared the expected sales proceeds less costs to sell with the carrying value of the reporting unit and in connection therewith recorded a noncash goodwill impairment charge of $32,100 during the year ended December 31, 2021. The sale of Computex was consummated on March 15, 2022.

 

F-22

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

Assets and liabilities classified as held for sale consist of the following:

 

   December 31, 
   2021   2020 
Current assets:        
Cash  $4,136   $
-
 
Prepaid expenses   937    939 
Trade receivables (net allowances of $146 and $98, as of December 31, 2021 and 2020, respectively)   19,965    19,027 
Inventory   2,737    1,057 
Assets held for sale - current   27,775    21,023 
Noncurrent assets:          
Property and equipment, net   4,489    7,022 
Goodwill   6,579    42,129 
Other intangible assets, net   20,105    22,535 
Other noncurrent assets   85    67 
Assets held for sale - noncurrent   31,258    71,753 
Total assets held for sale  $59,033   $92,776 
           
Current liabilities:          
Accounts payable and accrued expenses  $26,023   $22,364 
Deferred revenue   3,214    4,337 
Line of credit   
-
    7,355 
Current portion of notes payable and capital leases   
-
    9,016 
Liabilities associated with assets held for sale - current   29,237    43,072 
Long-term liabilities          
Notes payable and capital leases  (net of current portion and deferred financing fees)   
-
    859 
Other liabilities   102    69 
Liabilities associated with assets held for sale - noncurrent   102    928 
Total liabilities associated with assets held for sale  $29,339   $44,000 

 

Revenues and expenses classified as discontinued operations consist of the following:

 

   Year   April 7,
2020
   January 1,
2020
 
   Ended   through   through 
   December 31,
2021
   December 31,
2020
   April 6,
2020
 
   Successor   Successor   Predecessor 
Revenues:            
Hardware  $55,551   $38,334   $10,587 
Third party software and maintenance   7,611    4,341    1,459 
Managed and professional services   32,796    23,537    6,880 
Other   978    668    111 
Total revenues   96,936    66,880    19,037 
Cost of revenue   67,497    46,063    12,426 
Gross profit   29,439    20,817    6,611 
Impairment of goodwill   32,100    
-
    
-
 
Selling, general and administrative   30,847    20,096    7,835 
(Loss) income from operations   (33,508)   721    (1,224)
Other (expense) income               
Gain on extinguishment of debt   4,177    
-
    
-
 
Interest expense   (1,152)   (806)   (384)
Other (expense) income   22    7    31 
Total other income (expenses)   3,047    (799)   (353)
Loss from discontinued operations before income taxes   (30,461)   (78)   (1,577)
Income tax (benefit) provision on discontinued operations   (71)   (70)   (12)
Net loss from discontinued operations  $(30,532)  $(148)  $(1,589)

 

F-23

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

6. Property and equipment

 

Property and equipment consisted of the following:

 

  

December 31,

2021

  

December 31,

2020

 
Furniture and equipment  $5,230   $2,679 
Software   693    262 
Capital lease assets   219    219 
    6,142    3,160 
Less accumulated depreciation   (1,389)   (121)
Property, plant and equipment, net  $4,753   $3,039 

 

Furniture and equipment, vehicles and software are depreciated on the straight-line basis over their estimated useful lives (3 to 7 years for furniture and equipment, 5 years for vehicles, 3 years for software). Leasehold improvements and capital lease assets are depreciated on the straight-line basis over the lesser of their estimated useful lives and the life of the respective lease. Depreciation expense (which includes amortization of capital lease assets) was $1.275 and $112 for the year ended December 31, 2021 and the Successor period April 7, 2020 to December 31, 2020, respectively. Assets under capital lease in the table above relate to the lease of equipment. Related accumulated amortization for such leased assets was $162 and $20 as of December 31, 2021 and 2020, respectively.

 

7. Goodwill and other intangible assets

 

The Company’s intangible assets consisted of the following:

 

   December 31, 2020 
   Gross carrying amount   Accumulated amortization   Net 
Customer relationships  $7,600   $(52)  $7,548 
Tradenames   2,500    (63)   2,437 
Acquired technology   8,200    (114)   8,086 
   $18,300   $(229)  $18,071 

 

Intangible assets activities were as follows:

 

   Customer relationships   Tradenames   Acquired technology   Total 
Balance, April 7, 2020  $
-
   $
-
   $
-
   $
-
 
Acquisition - Kandy   7,600    2,500    8,200    18,300 
Amortization   (52)   (63)   (114)   (229)
Balance, December 31, 2020   7,548    2,437    8,086    18,071 
Amortization   (771)   (614)   (1,367)   (2,752)
Impairment   (6,777)   (1,823)   (6,719)   (15,319)
Balance, December 31, 2021  $
-
   $
-
   $
-
   $
-
 

 

F-24

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

Amortization of intangibles were as follows:

 

      

April 7,
2020

 
   Year ended   through 
  

December 31,
2021

  

December 31,
2020

 
   Successor   Successor 
           
Amortization of intangibles  $2,752   $229 

 

Goodwill activity for the Kandy reporting unit was as follows:

 

   Carrying 
   amount 
Balance, April 7, 2020  $
-
 
Acquisition - Kandy   24,144 
Balance, December 31, 2020   24,144 
Impairment   (13,676)
Balance, December 31, 2021  $10,468 

 

8. Accounts payable and accrued expenses

 

Accounts payable and accrued expenses were as follows:

 

  

December 31,

2021

  

December 31,

2020

 
Accounts payable  $3,692   $2,017 
Accrued compensation, benefits and related accruals   6,412    3,115 
Accrued professional fees   1,867    2,586 
Due to related parties   2,285    1,542 
Third party interest accrual   2,180    
-
 
Sales tax payable   111    
-
 
Other   535    1,081 
   $17,082   $10,341 

 

9. Long-Term Debt

 

Credit Agreements

 

In connection with the consummation of the Computex Business Combination, the Company assumed the obligations of Computex under a prior credit agreement with Comerica Bank (as amended, the “Prior Credit Agreement”) which included a term note and a line of credit. Subsequent to the Computex Closing Date, the Company and Comerica Bank entered into a number of amendments to the Prior Credit Agreement, and on December 2, 2021, the Company repaid all amounts owed thereunder using part of the proceeds received from a $27,000 term loan facility (the “Credit Facility”) under a Credit Agreement (the “Credit Agreement”) with Monroe Capital Management Advisors, LLC and certain affiliated entities (“Monroe”). The remainder of the proceeds from the Credit Facility was used for working capital and general business purposes.

 

On March 1, 2022, the Monroe loan was repaid in full along with all accrued interest and related charges.

 

The Credit Facility was scheduled to mature on the earlier of (i) December 2, 2022 and (ii) the date on which the Computex Sale was to be consummated. As part of the Credit Agreement, the Company was required to comply with certain sales milestone terms, conditions and timeframes in connection with the pending sale of Computex. In connection with such sales milestone requirements, the Company paid amendment fees of $920 on January 18, 2022 as it was apparent that certain of the milestone dates for the closing of the Computex sale were not going to be met.

 

Loans under the Credit Facility bore interest at a rate equal to, at the Company’s option, either the Base Rate for the interest period in effect for such borrowing plus 10.00% per annum, or the LIBOR Rate for the interest period in effect for such borrowing plus 11.00% per annum. Notwithstanding such interest rates, Monroe was guaranteed a minimum return of $7,290, including a closing fee of $675 that was paid to the administrative agent on the closing date. Additional fees would have been payable if the Credit Facility was not repaid in full by certain dates, commencing on or about March 2, 2022.

F-25

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

The obligations of the Company, as borrower, under the Credit Agreement, was previously guaranteed by the Company’s wholly-owned domestic subsidiaries (together with the Company, the “Loan Parties”). The obligations of the Loan Parties under the Credit Agreement and other loan documents were secured, subject to customary permitted liens and other agreed upon exceptions, by a perfected security interest in all tangible and intangible assets of the Loan Parties, except for certain excluded assets.

 

The Credit Agreement contained customary events of default, representations and warranties and affirmative and negative covenants applicable to the Loan Parties and their consolidated subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions. Under the terms of the Credit Agreement, the Company and Computex were each required to comply with a minimum EBITDA test and the Company’s Kandy business was required to comply with a minimum revenue test. In addition, the Loan Parties were required to comply with a minimum liquidity test.

 

In connection with the closing of the Credit Facility and pursuant to a Subscription Agreement (the “Subscription Agreement”), the Company issued, to certain funds affiliated with Monroe, warrants to purchase, in the aggregate, up to 2,519,557 shares of the Company’s common stock at an exercise price of $0.0001 per share (the “Monroe Warrants”). The number of shares of the Company’s common stock issuable upon exercise of the Monroe Warrants is subject to, in addition to customary adjustments for stock dividends, stock splits, reclassifications and the like, adjustment for certain issuances (or deemed issuances) of the Company’s common stock at a price per share below $1.564 while the Monroe Warrants are outstanding, such that the Monroe Warrants will remain exercisable for, in the aggregate, approximately 2.5% of the total number of shares of the Company’s common stock outstanding, calculated on a fully-diluted basis. The Monroe Warrants were exercisable starting on the date of issuance and will expire on January 31, 2029. The Monroe Warrants are further discussed in Note 10.

 

PPP Loan

 

In April 2020, the Company received a loan of $4,135 under the Paycheck Protection Program (the “PPP loan”). In July 2021, the Company’s application for forgiveness of such loan was approved. Under the terms of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), PPP loan recipients had the option to apply for forgiveness for all or a portion of such loans, if the loan was used for eligible purposes, including to fund payroll costs. The gain that resulted from the loan forgiveness is reflected in the consolidated statements of operations as “Gain on extinguishment of debt.”

 

Total long-term debt consisted of the following:  

 

   December 31,
2021
   December 31,
2020
 
Term Note payable to Monroe; guaranteed interest of $7,290  $27,000   $
-
 
Capital lease obligations   104    320 
Total long-term debt   27,104    320 
Less: unamortized debt issuance costs  $(700)   
-
 
Total notes payable and line of credit, net of unamortized debt issuance costs   26,404    320 
Less: current maturities of notes payable and line of credit   (26,393)   (216)
Long-term debt, net of current maturities and unamortized debt issuance costs  $11   $104 

 

Scheduled principal payments of long-term debt at December 31, 2021 were as follows:

 

Fiscal year 2022  $27,093 
Fiscal year 2023   11 
Total  $27,104 

 

Subordinated promissory note – related party

 

On September 16, 2021, the Company entered into a promissory note in the principal amount of $5,000 (the “2021 Note”). The 2021 Note, which was secured by a shareholder that owns more than five percent of the Company’s shares, was originally scheduled to mature on the earliest of (a) September 16, 2022, (b) the Company’s consummation of a debt financing resulting in the receipt of gross proceeds of not less than $20,000, (c) the Company’s consummation of primary sales of registered equity securities resulting in the receipt of gross proceeds of not less than $20,000, (d) the Company’s consummation of the sale of Computex and (e) the date of any event of default. However, in connection with the closing of the Credit Facility, the 2021 Note was amended to, among other things, revise the definition of the maturity date so that the consummation of the Credit Agreement would not result in its maturity. In consideration of the amendment, the Company paid the lender an amendment fee in the amount of $1,250.

 

F-26

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

The amended maturity date of the 2021 Note, as amended, was scheduled to be the earliest of (a) September 16, 2022, (b) the Company’s consummation of primary sales of registered equity securities resulting in the receipt of gross proceeds of not less than $20,000 and (c) the Maker’s consummation of the sale of its Computex business unit. The 2021 Note became due on March 1, 2022 due to the early pay off of the Credit Agreement. However, for a waiver fee of $250, the lender extended the maturity date to May 1, 2022. On March 15, 2022, all amounts outstanding under the 2021 Note were paid.

 

The 2021 Note was subordinate to amounts owed under the Credit Agreement and had a minimum required return of 25.00%.

 

Subordinated promissory note - other

 

On the Computex Closing Date, the Company issued a subordinated promissory note of $500 (or the “2020 Note”) in partial settlement of a deferred underwriting fee of $3,000. The remaining $2,500 was settled via the issuance of Convertible Debentures. The 2020 Note, which previously bore interest at the rate of 12.00% per annum and had a maturity date of September 30, 2021, was repaid on November 5, 2021 along with interest accrued as of that date.

 

10. Stockholders’ Equity, Warrants, Debentures and Guaranty

 

Preferred stock — The Company is authorized to issue 5,000,000 shares of preferred stock, par value $0.0001. At December 31, 2021 and December 31, 2020, no preferred stock was outstanding. However, as further discussed below, in December 2021, the Company issued certain newly-designated Series A convertible preferred stock (the “Series A Preferred”) that were fully converted within a few days of being issued.

 

Common stock — The Company is authorized to issue 500,000,000 shares of common stock with a par value of $0.0001 per share. Holders of the Company’s common stock are entitled to one vote for each share. As of December 31, 2021, a total of 88,584,773 shares of common stock were issued and outstanding.

 

Recent sales of securities

 

On November 2, 2021, the Company entered into a securities purchase agreement (the “November Purchase Agreement”) with a buyer for the purchase and sale of (i) a warrant to purchase up to 5,000,000 shares of the Company’s common stock, subject to increase as described below (the “Series A Warrants”), in a private placement; and (ii) an aggregate of 2,500,000 shares of the Company’s common stock, and a warrant to purchase up to 2,500,000 shares of the Company’s common stock (the “Series B Warrants” and, collectively with the Series A Warrants, the “A&B Warrants”), in a registered direct offering (the “Public Offering”). The aggregate purchase price for the Shares and the Warrants was $5,000.

 

At the date of issuance, the Series A Warrants had an exercise price of $2.00 per share, were exercisable commencing on the date of issuance, and were scheduled to expire five years from the date of issuance. The Series B Warrants had an exercise price of $2.00 per share, were also exercisable on the date of issuance and were scheduled to expire two years from the date of issuance. The Company has the right to force the holders of the Series B Warrants to exercise such warrants in the event shares of the Company’s common stock trade at or above $2.40 per share for a period of five consecutive trading days, subject to certain conditions, including equity conditions. Initially, the Series A Warrants were only exercisable for 2,500,000 shares of our common stock, but upon any exercise of the Series B Warrant, the number of shares issuable upon exercise of the Series A Warrant increased by the number of shares of the Company’s common stock issued upon exercise of the Series B Warrant. Northland Securities, Inc., the placement agent in connection with the offering, received fees of 7% of the aggregate gross proceeds.

 

As summarized in the table below, in connection with the Company’s consummation of the Credit Agreement, the exercise price of the Series A and Series B Warrants were subsequently reduced to $1.50 per share, the number of warrants were increased and the buyers received certain Series C Warrants. As of the date of the modification, the Company recognized a change in fair value of warrant liabilities equal to the excess of the fair value of the modified instrument over the previous fair value. The fair value of the Series C Warrants as of the issuance date was considered to be analogous to a financing charge and is included in interest charges.

 

On December 15, 2021, the Company consummated the sale of certain securities pursuant to a securities purchase agreement, dated as of December 13, 2021 between the Company and an investor ( the “Buyer”). At the closing, the Company issued to the Buyer (i) a warrant (the “Series D Warrant”) to purchase up to 15,625,000 shares of the Company’s common stock, in a private placement; and (ii) an aggregate of 7,840,000 shares of the Company’s common stock, and 12,456 shares of Series A Preferred with a stated value of $1,000 per share, initially convertible into 7,785,000 shares of the Company’s common stock at a conversion price of $1.60 per share, in a registered direct offering (the “Public Offering”). The aggregate purchase price paid at the closing for the common stock, the Series A Preferred and the Series D Warrants was $25,000.

 

The Series D Warrants had an exercise price of $2.00 per share, subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment, on a “full ratchet” basis, in the event of any issuances of the Company’s common stock, or securities convertible, exercisable or exchangeable for, common stock at a price below the then-applicable exercise price (subject to certain exceptions). The Series D Warrants were exercisable starting on the issuance date and will expire on December 15, 2026. The Company has the right to force the buyer to exercise the Series D Warrant in the event the volume weighted average closing price of its common stock is at or above $5.00 per share for a period of three consecutive trading days, subject to certain conditions, including equity conditions.

 

F-27

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

 

The Series A Preferred shares were convertible into shares of the Company’s common stock at the election of the holders at any time at an initial conversion price of $1.60 (the “Conversion Price”). The Conversion Price was subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment, on a “full ratchet” basis, in the event of any issuances of the Company’s common stock, or securities convertible, exercisable or exchangeable for such common stock at a price below the then-applicable Conversion Price (subject to certain exceptions). No dividends were payable on the Series A Preferred, except that holders of the Series A Preferred shares would have been entitled to receive any dividends paid on account of the Company’s common stock, on an as-converted basis. The holders of the Series A Preferred had no voting rights on account of the Series A Preferred, other than with respect to certain matters affecting the rights of the Series A Preferred.

 

In December 2021, the holders of the Series A Preferred exercised their conversion rights and the Series A Preferred Shares were converted to 7,785,000 shares of the Company’s common stock.

 

The following table summarizes certain required and other disclosures and the status, as of December 31, 2021, of the warrants issued in November and December.

 

  Series A
Warrants
Series B
Warrants
Series C
Warrants
Monroe
Warrants
Series D
Warrants
Date issued 11/5/2021 11/5/2021 12/2/2021 12/2/2021 12/15/2021
Number of warrants issued at inception Between 2,500,000 and 5,000,000 2,500,000 1,500,000 Between 2,519,557 and 5,016,704 (3) 15,625,000
Issued in connection with Sale of 2,500,000 shares of common stock Sale of
2,500,000
shares of
common stock
Modification of Series A Warrants and  Series B Warrants Monroe Credit Facility Sale of 7,840,000 shares of common stock and 12,456 units of Series A Preferred Stock
Exercise price on issuance date $2.00 $2.00 $0.0001 $0.0001
$2.00 (5)
Exercise price modified after issue date? Yes Yes No No No
Date of modification, if modified 12/2/2021 12/2/2021 NA - not modified NA - not
modified
NA - not
modified
Assuming no antidilution triggers occur, maximum number of warrants issuable as of the modification date, if modified 6,666,667 (4) 3,333,334 NA - not modified NA - not
modified
NA - not
modified
Modified exercise price, if modified during 2021 $1.50 (5) $1.50 (5) NA - not modified NA - not
modified
NA - not
modified
Maturity date of warrant 11/5/2026 11/5/2023 (1) 12/2/2026 1/31/2029 12/15/2026 (2)
Underlying shares registered? No, on the issuance date; Yes, as of 12/10/21 Yes, beginning on the issuance date Yes, beginning on the issuance date No, on the issuance date; Yes, as of 2/9/22 No, on the issuance date; Yes, as of 1/7/22
Fair value per warrant as of issuance date $0.92 $0.35 $1.48 $1.48 $0.63
Fair value per warrant as of modification date, if modified $0.80 $0.45 NA - not modified NA - not
modified
NA - not
modified
Amounts and dates of warrants exercised during the year  NA 1,800,000 on 12/10/21
700,000 on 12/29/21
833,334 on 12/30/21
1,500,000 on 12/8/21  NA  NA
Fair value per warrant on exercise date(s) NA $0.91 on 12/10/21
$1.00 on 12/29/21
$1.00 on 12/30/21
$1.03 on 12/8/21 NA NA
Warrants exercisable as of 12/31/21 6,666,666  - - 2,519,557 15,625,000
Valuation basis Black-Scholes  Monte Carlo
Simulation
Stock price Stock price  Monte Carlo
Simulation
Fair value per warrant as of 12/31/21, if outstanding $1.52 NA NA $2.43 $1.25
Assumptions used in estimating fair values:          
◦ stock price volatility 60% - 65% 60% - 65% NA NA 60% - 65%
◦ exercise price $1.50 - $2.00 $1.50 - $2.00 NA NA $2.00
◦ discount rate 1.04% - 1.24% 0.39% - 0.68% NA NA 1.25% - 1.26%
◦ remaining useful life (in years) 4.85 - 5.00 1.85 - 2.00 NA NA 4.96 - 5.00
◦ stock price $1.48 - $2.43 $1.48 - $2.43 $1.03 - $1.48 $1.48 - $2.43 $1.53 - $2.43

F-28

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

 

(1)Commencing on November 15, 2021, the Company has the right to force the Buyer to exercise the Series B Warrant in the event shares of the Company’s common stock trade at or above $2.40 per share for a period of five consecutive trading days, subject to certain conditions, including equity conditions.
(2)The Company has the right to force the Buyer to exercise the Series D Warrant in the event the volume weighted average closing price of the Company’s common stock is at or above $5.00 per share for a period of three consecutive trading days, subject to certain conditions, including equity conditions.
(3)The number of shares of the Company’s common stock issuable upon exercise of the Monroe Warrants is subject to adjustment for certain issuances (or deemed issuances) of the Company’s common stock at a price per share below $1.564 while the Monroe Warrants are outstanding, such that the Monroe Warrants will remain exercisable for, in the aggregate, approximately 2.5% of the total number of shares of the Company’s common stock outstanding, calculated on a fully-diluted basis.
(4)For each exercise of the Series B Warrant, the Series A warrants were increased. Accordingly, because all of the 3,333,333 Series B warrants were exercised during the year, the Series A Warrants increased from 3,333,333 Warrants to 6,666,666 Warrants.

(5) See Note 18.

 

Registration rights agreements

 

In connection with the November and December sales of securities and the Credit Agreement with Monroe, the Company entered into certain registration rights agreements with the investors to register the common stock underlying the warrants by specified dates and to use reasonable best efforts to cause such registration statements to be declared effective under the Securities Act of 1933, as amended (the “Securities Act”), as soon as practicable, thereafter, subject to certain fees if the shares were not registered by certain dates. As of February 9, 2022, all such shares were registered.

 

On the Computex Closing Date, the Company, Pensare Sponsor Group, LLC (the “Sponsor”) and certain other initial stockholders of the Company, as well as Stratos Management Systems Holdings, LLC, (“Holdings”), and certain other Investors (as defined below), entered into a Registration Rights Agreement (the “2020 Registration Rights Agreement”). The 2020 Registration Rights Agreement amended, restated and replaced a previous registration rights agreement entered into among AVCT, the Sponsor and certain other initial stockholders of AVCT on July 27, 2017. Pursuant to the terms of the 2020 Registration Rights Agreement, the holders of certain of the Company’s securities, including holders of the Company’s founders’ shares, shares of common stock underlying the Company’s private warrants, shares of common stock underlying the securities issued in the 2020 Private Placement (as defined below) are entitled to certain registration rights under the Securities Act and applicable state securities laws with respect to such shares of common stock, including up to eight demand registrations in the aggregate and customary “piggy-back” registration rights.

 

Convertible Debentures, related warrants and guaranty

 

On the Computex Closing Date, the Company consummated the sale, in a private placement (the “2020 Private Placement”), of units of securities of the Company (“Units”) to certain investors (each, an “Investor”), as contemplated by the terms of the previously disclosed Securities Purchase Agreement, dated as of April 3, 2020 (the “Securities Purchase Agreement”). Each Unit consisted of (i) $1,000 in principal amount of the Company’s Series A convertible debentures (the “Convertible Debentures” or “Debentures”) and (ii) a warrant to purchase 100 shares of the Company’s common stock at an exercise price of $0.01 per whole share (the “Penny Warrants”). The issuances of such securities were not registered under the Securities Act in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.

 

In addition, in connection with the acquisition of Kandy on December 1, 2020 and pursuant to the terms of the Kandy purchase agreement, the Company, in December 2020, issued 43,778 Units to Ribbon as consideration for the Kandy purchase, sold 10,000 Units to SPAC Opportunity Partners, LLC, a significant shareholder of the Company and 1,000 Units to a director of the Company. Also, the Company sold 24,000 additional Units between January 1, 2021 and May 27, 2021, including 9,540 Units that were sold to related parties.

 

Debentures

 

The Debentures issued on the Computex Closing Date had an aggregate principal amount of approximately $43,169 (including $3,000 in aggregate principal amount issued as part of Units sold to MasTec, Inc. (“Mastec”), a greater than five percent stockholder of the Company, and $20,000 in aggregate principal of which was part of Units issued to Holdings pursuant to the terms of the Computex Business Combination agreement and approximately $8,566 in aggregate principal amount of which was issued to the Sponsor as part of Units issued in exchange for the cancellation of indebtedness previously incurred by the Company to the Sponsor).

 

The Debentures issued in connection with the acquisition of Kandy on December 1, 2020 and pursuant to the terms of the Kandy purchase agreement consisted of aggregate principal amounts of $43,778 issued to Ribbon, $10,000 sold to SPAC Opportunity Partners, LLC, a significant shareholder of the Company and $1,000 sold to a director of the Company. In addition, between January 1, 2021 and May 27, 2021, $24,000 were sold to various investors (including $9,540 sold to related parties). The Debentures sold in December 2020 and those sold between January 1, 2021 and May 27, 2021 were in the same form as those issued in connection with the acquisition of Kandy.

 

F-29

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

The Debentures previously bore interest at a rate of 10.0% per annum, previously payable quarterly on the last day of each calendar quarter in the form of additional Debentures. Until converted, the entire principal amount of each Debenture together with accrued and unpaid interest thereon, was due and payable on the earlier of (i) such date, that was thirty months after the issuance date, as the holder thereof, at its sole option, upon not less than 30 days’ prior written notice to the Company, demanded payment thereof and (ii) the occurrence of a Change in Control (as defined in the Debentures).

 

Each Debenture was convertible, in whole or in part, at any time at the option of the holder thereof into that number of shares of common stock calculated by dividing the principal amount being converted, together with all accrued but unpaid interest thereon, by the applicable conversion price, initially $3.45. The conversion price was subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and was also subject to price-based adjustment, on a “full ratchet” basis, in the event of any issuances of common stock, or securities convertible, exercisable or exchangeable for, common stock at a price below the then-applicable conversion price (subject to certain exceptions). The Debentures were subject to mandatory conversion if the closing price of the Company’s common stock exceeded $6.00 for any 40 trading days within a consecutive 60 trading day-period, subject to the satisfaction of certain other conditions.

 

Pursuant to the terms of the Debentures, on September 8, 2021, the Debentures and related accrued interest were mandatorily converted to 38,811,223 shares of common stock. The components of the Debenture prior to conversion are reflected in the table below.

 

Penny Warrants

 

The Penny Warrants issued on the Computex Closing Date entitled the holders to purchase an aggregate of up to 4,316,936 shares of the Company’s common stock (including warrants to purchase up to 2,000,000 shares, 856,600 shares, and 300,000 shares issued to Holdings, the Sponsor and MasTec Inc., respectively, as part of the Units issued to them), at an exercise price of $0.01 per share.

 

The Penny Warrants issued in December 2020, as part of the Units sold, entitled the holders to purchase an aggregate of up to 5,477,800 shares of the Company’s common stock at an exercise price of $0.01 per share. Such warrants consisted of 4,377,800 warrants issued to Ribbon, 1,000,000 warrants issued to SPAC Opportunity Partners, LLC and 100,000 warrants issued to a director of the Company.

 

The Penny Warrants issued between January 1, 2021 and May 27, 2021, as part of the Units sold during that period, entitled the holders to purchase an aggregate of up to 2,400,000 warrants (including 954,000 warrants issued to related parties).

 

The Penny Warrants are exercisable at any time through the fifth anniversary of the date of issuance. The number of shares issuable upon exercise of each Penny Warrant is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like.

 

During the year ended December 31, 2021 and pursuant to the terms of the Penny Warrant agreements, holders of 6,259,061 Penny Warrants exercised their right to convert such Penny Warrants to 6,243,308 shares of common stock. As of December 31, 2021, unexercised Penny Warrants totaled 5,935,675.

 

Derivative consideration and other disclosures relating to the Debentures and Penny Warrants

 

Based on ASC 815, Derivatives and Hedging, the convertible feature of the Debentures issued on the Computex Closing Date was not considered a derivative and therefore was not recorded in liabilities, as part of the Debentures, and was not bifurcated. However, an embedded beneficial conversion feature was previously assessed in relation to the Debentures issued in December 2020 and was previously recorded in equity at its intrinsic value with a corresponding debt discount recorded to the Debentures at December 31, 2020. The beneficial conversion feature on such Debentures, which was evaluated in accordance with ASC 470-20 “Debt with Conversion and Other Options” was determined to be $36,983 and arose as a result of the conversion price of such Debentures being below the stock price on the issuance dates. Such debt discount, that was related to the embedded beneficial conversion feature, was limited to the proceeds allocated to the Debentures, and, along with the relative fair value of the Penny Warrants, was recognized as additional paid-in capital and reduced the carrying value of the Convertible Debentures. However, as more fully discussed in Note 3, effective January 1, 2021, the Company early-adopted ASU 2020-06 and, accordingly, the discount related to the beneficial conversion feature was reversed effective January 1, 2021.

 

Both the Penny Warrants issued on the Computex Closing Date as well as the Penny Warrants issued on and after the Kandy acquisition date had qualified as derivatives, but satisfied the criteria for classification as equity instruments, and were bifurcated from the host contract (the Convertible Debentures) and recorded in equity at their relative fair values with a corresponding debt discount recorded to the Debentures.

 

The relative fair values of the Penny Warrants were determined using the Black-Scholes model. Weighted average assumptions used in determining fair values of Penny Warrants issued during the year ended December, 2021 were: stock price volatility – 70%, exercise price - $0.01, interest rate – 0.78%, stock price - $6.28.

 

F-30

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

Prior to the conversion of the Debentures to common stock, the discount (consisting of the relative fair value of the warrants) was being expensed as interest over the then term of the Debentures to increase the carrying value to face value. However, effective September 8, 2021, the remaining unamortized discount was transferred to additional paid in capital in connection with the conversion of the Debentures to shares of common stock. During the year ended December 31, 2021, the Company recorded accretion of the discount of $9,253, and paid-in-kind interest of $8,257. During the period April 7, 2020 through December 31, 2020, the Company recorded accretion of the discount of $4,717, and paid-in-kind interest of $3,695.

 

The components of the Debentures, prior to conversion on September 8, 2021 and the amounts converted, are summarized in the table below:

 

       Discount consisting of     
       relative fair     
   Principal   value of Penny
Warrants
   Net 
Issued on the Computex Closing Date  $43,169   $(9,937)  $33,232 
Issued in the Successor periods:               
Issued to Ribbon   43,778    (14,159)   29,619 
Issued to SPAC Opportunity Partners, LLC   17,990    (6,249)   11,741 
Other issuances (various holders)   17,010    (6,610)   10,400 
   $121,947   $(36,955)  $84,992 
Amortization of discount             12,752 
Paid-in-kind interest             11,951 
Deferred financing fees             (523)
Net Debentures as of September 8, 2021, prior to conversion            $109,172 
Less reduction due to conversion             (109,172)
Balance at September 8, 2021, after conversion            $
-
 
Financial statement line items impacted by the conversion:               
Additional paid in capital            $109,691 
Common stock (38,811,223 shares at par value of $0.0001 per share)             4 
Interest expense - write off of deferred financing fees             (523)
             $109,172 

 

11. Related Party Transactions

 

Previous management agreement

 

During the Predecessor periods, Computex paid management fees at the rate of $300 per annum to a shareholder, under a management agreement. Such amounts are included in selling, general and administrative expenses in discontinued operations in the consolidated statement of operations of the Predecessor period. This agreement was terminated effective April 7, 2020.

 

Corporate office space

 

AVCT shares corporate office space with an affiliate and participates in a cost sharing arrangement in a month-to-month leasing arrangement. The space was not used during the year ended December 31, 2021 nor 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 periods.

 

Services provided by Navigation Capital Partners, Inc.

 

Effective October 1, 2020, the Company and Navigation Capital Partners, Inc. (“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 per month. As a result, selling, general and administrative expenses for the year ended December 31, 2021 and the Successor period April 7, 2020 to December 31, 2020 include $600 and $150, respectively, related to such agreement; and accounts payable and accrued expenses as of December 31, 2021 and December 31, 2020 include $750 and $150, in connection therewith.

 

In addition, the Company’s President, Kevin Keough, and Mr. Robert Willis, a Company director and Vice Chairman of Capital Markets, provided such services to the Company via Navigation. Accordingly, Mr. Keough and Mr. Willis did not receive any direct compensation from the Company between July 21, 2021 (the effective date of their appointment) and December 31, 2021. Instead, Mr. Keough and Mr. Willis were compensated by Navigation. In consideration for such services provided by Navigation to the Company, Navigation was granted 300,000 RSUs that vest over four years, which is being expensed over 4 years, similar to time-based RSUs granted to directors in lieu of director’s fees. With respect to such RSU’s issued to Navigation, selling, general and administrative expenses include stock compensation expenses of $302 during the year ended December 31, 2021.

 

F-31

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

Transactions with Ribbon

 

Pursuant to a transition services agreement entered into with Ribbon in connection with the acquisition of Kandy, accounts payable and accrued expenses as of December 31, 2021 include $799 due to Ribbon for professional fees provided and certain software and other support. As of December 31, 2020, accounts payable and accrued expenses include $1,392 due to Ribbon for reimbursable expenses in excess of collections, professional fees provided and certain software and other support. Prepaid expenses and other current assets as of December 31, 2021 include $190 due from Ribbon for collections in excess of reimbursable expenses.

 

Included in the consolidated statement of operations are certain revenues for services provided to Ribbon, certain expenses for services provided by Ribbon and certain expenses for rental of office space from Ribbon. The expenses for services provided by Ribbon relate primarily to professional services provided by Ribbon as part of the transition services agreement and, to a lesser extent, to certain software support purchased from Ribbon. The following summarizes such revenue and expenses:

 

   Year Ended
December 31,
2021
  

April 7,
2020

through

December 31,
2020

 
Revenue earned from Ribbon  $2,437   $
-
 
Professional fees charged by Ribbon:          
Cost of revenue  $1,135   $126 
Research and development   331    33 
Selling, general and administrative expenses   1,963    134 
    3,429    293 
Rent and services purchased from Ribbon:          
Cost of revenue   435    
-
 
Selling, general and administrative expenses   593    68 
    1,028    68 

 

Certain Debentures

 

Certain Debentures as of December 31, 2020 are separately identified as related party amounts on the consolidated balance sheet as of December 31, 2020. Similarly, the related Debenture interest is separately identified as related party amounts on the consolidated statements of operations. As indicated in Note 10, the Debentures were converted to common stock on September 8, 2021. Accordingly, there were no Debentures outstanding as of December 31, 2021, and interest for the year ended December 31, 2021 relate to the period up to and including September 8, 2021.

 

The 2021 Note

 

The 2021 Note, which is secured by a related party, is discussed in Note 9 and is separately identified on the consolidated balance sheet. The related interest expense of $736 is included in “Interest expense – related parties” in the consolidated statement of operations for the year ended December 31, 2021 and is also included in “Accounts payable and accrued expenses” on the consolidated balance sheet as of December 31, 2021.

 

F-32

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

12. Revenue Recognition

 

In the following tables, revenue is disaggregated by geographies and by verticals (or sector).

 

  

Year Ended

December 31,
2021

  

April 7,
2020

through

December 31,
2020

 
   Successor   Successor 
Geography        
Domestic  $14,720   $1,152 
International   5,329    545 
Total revenues  $20,049   $1,697 
           
Revenues by Verticals (or Sector)          
Finance  $1,696   $433 
Manufacturing and logistics   33    
-
 
Public sector   1,344    126 
Technology service providers   16,976    1,138 
Total revenues  $20,049   $1,697 

 

Revenues by geography, in the table above, is generally based on the “ship-to address,” with the exception of certain services that may be performed at, or on behalf of, multiple locations, which are categorized based on the “bill-to address.”

 

Contract liabilities and remaining performance obligations

 

The Company’s contract liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. At December 31, 2021 and 2020, the contract liability balance (deferred revenue) was $82 and $271, respectively. All of the performance obligations related to such deferred revenue as of December 31, 2021 are expected to be performed within 12 months and consist of payments received from customers, or such consideration that is contractually due, in advance of providing the product or performing the services.

 

13. Share-Based Compensation

 

Successor

 

The American Virtual Cloud Technologies, Inc. 2020 Equity Incentive Plan (the “Plan”) provides for the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”) and other share-based awards. Stock options have a maximum term of ten years from the grant date.

 

As of December 31, 2021, 5,794,500 shares had been authorized for issuance under the Plan, of which 987,000 shares remained available for issuance. The RSUs were issued to certain directors, employees and, in one case, a contractor, and can only be settled in shares. RSUs awarded to directors are time-based. RSUs issued to nondirectors are 50% time-based and 50% performance-based. Twenty-five percent of the time-based awards vests on each grant date anniversary, while 25% of the performance-based awards vests on December 31st of each year, if the market condition (stock price target) is met. If the market condition attached to the performance-based awards is not met in any year, the eligibility is delayed until the market condition is met, except that the market condition must be met by the third anniversary of the first target date.

 

F-33

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

The fair values of time-based awards are estimated by reference to the Company’s stock price and stock marketability on the grant date, while the fair values of the performance-based awards are determined using the Monte Carlo simulation model, once the stock price target is set. Weighted average assumptions used in estimating the performance-based awards were as follows:

 

   Year Ended
December 31,
2021
   April 7,
2020
through
December 31,
2020
 
Stock price volatility   68%   47%
Expected life of awards (in years)   0.91    0.59 
Risk-free interest rate   0.09%   0.17%

 

Due to the limited trading history of the Company’s common stock, estimated volatility was based on a peer group of public companies and took into consideration the increased short-term volatility in historical data due to COVID-19. Performance targets are set annually for the performance-based awards that are scheduled to vest in that year.

 

The following summarizes RSU activity for the year ended December 31, 2021 and the period April 7, 2020 to December 31, 2020:

 

   Number
of RSUs
   Weighted Average
Grant Date
Fair Value
 
Outstanding at April 7, 2020   
-
   $0.00 
Granted   3,182,500   $2.90 
Vested, not delivered   (306,250)  $1.26 
Forfeited   (531,250)  $2.13 
Outstanding at December 31, 2020   2,345,000   $3.29 
Granted   2,406,255   $5.58 
Vested and delivered   (668,750)  $3.47 
Vested, not delivered   (395,000)  $3.64 
Forfeited   (994,167)  $4.85 
Unvested RSUs at December 31, 2021   2,693,338   $4.52 

 

F-34

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

Vested but not delivered RSUs represent RSUs that vested but for which delivery was deferred. Awards outstanding in the table above exclude 744,162 performance-based RSUs that have been awarded but deemed not granted as the performance targets have not yet been determined. The Company’s policy is to determine the fair value of performance-based awards and begin recognizing compensation expense for such awards when the targets are set. For performance-based awards, compensation cost is recognized over the shorter of the performance or service period. For time-based awards, compensation expense is recognized over the vesting period, based on the grant date fair value. Share-based compensation expense recognized consisted of the following:

 

  

Year Ended
December 31,
2021

   April 7,
2020
through
December 31,
2020
 
   Successor   Successor 
Cost of revenue  $370   $
-
 
Research and development   1,007    
-
 
Selling, general and administrative expenses   7,252    2,489 
   $8,629   $2,489 

 

The fair value of awards that vested and were delivered during the year ended December 31, 2021, based on the stock prices on the vesting dates, was $3,521. The RSUs that vested between April 7, 2020 and December 31, 2020 all vested on December 31, 2020, and the fair value of such awards on the vesting date, based on the stock price on the vesting date, was $2,205. Total compensation cost not yet recognized related to unvested awards as of December 31, 2021 was $5,602 and is expected to be recognized over the weighted average period of 1.9 years.

 

14. Reconciliation of Net Loss per Common Share

 

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

 

   Year   April 7,
2020
   January 1,
2020
 
   Ended   through   through 
   December,
2021
   December 31,
2020
   April 6,
2020
 
   Successor   Successor   Predecessor 
Loss from continuing operations, net of tax  $(130,854)  $(25,428)  $
-
 
Loss from discontinued operations, net of tax    (30,532)   (148)   (1,589)
Net loss  $(161,386)  $(25,576)  $(1,589)
Weighted average shares outstanding, basic and diluted   35,640,669    19,690,509    1,000 
Basic and diluted loss per common share               
Continuing operations  $(3.67)  $(1.29)  $
-
 
Discontinued operations   (0.86)   (0.01)   (1,587.30)
Net loss per common share  $(4.53)  $(1.30)  $(1,587.30)

 

F-35

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

Since their inclusion would have been antidilutive, excluded from the computation of diluted net loss per share for the Successor periods were the following, were they to be converted:

 

   December 31,
2021
   December 31,
2020
 
Series A Warrants   6,666,667    
-
 
Series D Warrants   15,625,000    
-
 
Monroe Warrants   2,519,557    
-
 
Public Warrants   15,525,000    15,525,000 
2017 Private Placement and 2017 EBC Warrants   11,187,500    11,187,500 
Penny Warrants   5,935,675    4,316,936 
Shares underlying certain unit purchase options (issued in 2017)   1,485,000    1,485,000 
Unvested RSUs   3,437,500    2,345,000 
Vested, not delivered RSUs   395,000    
-
 
Shares underlying Debentures   
-
    29,461,374 
    62,776,899    64,320,810 

 

15. Income Taxes

 

The Company’s effective income tax rate differs from the federal statutory rate primarily as a result of state taxes, certain expenses being deductible for financial reporting purposes that are not deductible for tax purposes, goodwill impairment and a full valuation allowance recorded on net deferred tax assets.

 

The difference in the provision for income taxes and the amount computed by applying the statutory federal income tax rates consists of the following:

 

  

Year
December 31,
2021

   April 7,
2020
through
December 31,
2020
 
   Successor   Successor 
Statutory tax rate   21.0%   21.0%
State income taxes, net of federal benefit   2.3%   2.4%
Permanent differences   0.1%   -0.2%
Goodwill impairment   0.0%   0.0%
Return to Provision   0.9%   0.0%
Change in valuation allowance   -18.9%   -19.3%
State tax differences from blended rates   0.0%   0.0%
Warrants   -5.4%   -3.9%
Other differences   0.0%   0.0%
Provision   0.0%   0.0%

 

F-36

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

Principal components of the Company’s deferred tax assets were as follows: 

 

   December 31,
2021
   December 31,
2020
 
Prepaid expenses  $(530)  $(104)
Accrued reserves   70    27 
Deferred revenue   15    39 
Accrued liabilities   1,428    438 
Uniform capitalization of inventory for tax   148    34 
Contribution carryover   13    13 
Tax depreciation in excess of book   (564)   (1,137)
Intangible assets   5,057    (2,807)
Transaction costs   817    
-
 
Disallowed interest   5,017    1,410 
Stock compensation   2,113    597 
Net operating loss carryforwards   17,402    6,098 
Total   30,986    4,608 
Less: valuation allowance   (30,986)   (8,067)
Net deferred tax liability  $
-
   $(3,459)

 

At December 31, 2021, the Company had net operating loss carryforwards of approximately $73,288. Of this amount, $1,117 expires in 2036, while the remaining amounts have an indefinite carryforward period but are subject to a limitation of 80% of taxable income each year. The Company also had state net operating loss carryforwards of approximately $28,605 with various expiration periods beginning in 2029.

 

The Company files a federal income tax return and separate income tax returns in various states. For federal and certain states, the 2018 through 2020 tax years remain open for examination by the tax authorities under the normal three-year statute of limitations.

 

The Company assesses available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant component of objective negative evidence identified during management’s evaluation was the cumulative loss incurred over the three-year period ended December 31, 2021. Such objective evidence limits the ability to consider other subjective evidence, such as our forecasts of future taxable income and tax planning strategies. On the basis of this evaluation as of December 31, 2021, the Company recognized a full valuation allowance against its net deferred tax assets, pursuant to ASC 740, as of December 31, 2021. Based on the Company’s evaluation, it was determined that no uncertain tax positions existed as of December 31, 2021 or December 31, 2020.

 

16. Segments

 

The Company’s reportable segments during the year ended December 31, 2021 were Computex and Kandy. Computex is a leading multi-brand technology solutions provider to large global customers, providing a comprehensive and integrated set of technology solutions, through its extensive hardware, software and value-added service offerings.

 

Kandy is a provider of cloud-based enterprise services that deploys a carrier grade proprietary cloud communication platform that supports UCaaS, CPaaS and CCaaS for mid-market and enterprise customers across a proprietary multi-tenant, highly scalable cloud platform. The Kandy platform also includes pre-built customer engagement tools, based on WebRTC technology, known as Kandy Wrappers. Kandy provides white-labeled services to a variety of customers including communications service providers and systems integrators.

 

F-37

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

Presented below is certain information by reportable segment. The Company uses the same accounting policies for each reportable segment as it uses for the Company as a whole. The chief operating decision makers evaluate the performance of each reportable segment based on revenue and a measure that approximates income/loss from operations. There was no intersegment revenue during the year ended December 31, 2021 or during the period April 7, 2020 to December 31, 2020. Revenues presented in the table below are from external customers only. Certain corporate expenses are not allocated to the segments. Such corporate expenses consist primarily of executive and certain other compensation, professional and legal fees, insurance, interest and other financing expenses. Revenue for the Predecessor periods related only to Computex. Kandy was acquired in December 2020.

 

   Year Ended December 31, 2021   April 7, 2020 to December 31, 2020 
   Computex   Kandy   Consolidated   Computex   Kandy   Consolidated 
   Discontinued       Continuing   Discontinued       Continuing 
   Operations       Operations   Operations       Operations 
Revenues:                        
Hardware  $55,551   $
-
   $
-
   $38,334   $
-
   $
-
 
Third party software and maintenance   7,611    
-
    
-
    4,341    
-
    
-
 
Managed and professional services   32,796    3,119    3,119    23,537    314    314 
Cloud subscription and software   
-
    16,930    16,930    
-
    1,383    1,383 
Other   978    
-
    
-
    668    
-
    
-
 
Total revenues   96,936    20,049    20,049    66,880    1,697    1,697 
Cost of revenue   67,497    16,181    16,181    46,063    1,263    1,263 
Gross profit (loss)   29,439    3,868    3,868    20,817    434    434 
Impairment of goodwill and other intangible assets   32,100    28,995    28,995    
-
    
-
    
-
 
Research and development   
-
    17,916    17,916    
-
    1,285    1,285 
Selling, general and administrative   30,847    16,012    16,012    20,096    779    779 
Loss from operations  $(33,508)  $(59,055)  $(59,055)  $721   $(1,630)  $(1,630)
Selling, general and administrative - Corporate             (20,393)             (11,666)
Loss from operations per consolidated statement of operations            $(79,448)            $(13,296)

 

   December 31, 2021 
   Computex   Kandy   Corporate   Consolidated 
   (Held for sale)             
                 
Goodwill  $6,579   $10,468   $
-
   $10,468 
Long-lived assets   4,489    4,678    75    4,753 
Total assets   59,033    25,454    33,484    58,938 

 

   December 31, 2020 
   Computex   Kandy   Corporate   Consolidated 
   (Held for sale)             
                 
Goodwill  $42,129   $24,144   $
-
   $24,144 
Long-lived assets   7,022    2,993    46    3,039 
Total assets   92,776    49,101    11,130    60,231 

 

   December 31, 2021 
   Computex   Kandy   Corporate   Consolidated 
   (Held for sale)             
Capital expenditures  $1,043   $2,946   $44   $2,990 

 

   December 31, 2020 
   Computex   Kandy   Corporate   Consolidated 
   (Held for sale)             
Capital expenditures  $815   $39   $55   $94 

 

F-38

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

17. Commitments and Contingencies

 

Registration Rights

 

See Note 10 for a discussion of certain registration rights.

 

Capital and Operating lease obligations

 

The Company is party to operating leases under which it leases various facilities and equipment. The majority of the facility leases provide that the Company pay, in addition to the minimum rent, certain operating expenses. The leases expire at various dates through November 2027 for Kandy, and through October 2026 for Computex. Rent expense was $586 and $68 for the year ended December 31, 2021 and the Successor period April 7, 2020 to December 31, 2020, respectively.

 

Future minimum rent payments, excluding operating expenses and month-to-month leases, required under noncancelable operating leases were as follows as of December 31, 2021:

 

Fiscal year 2022  $327 
Fiscal year 2023   348 
Fiscal year 2024   351 
Fiscal year 2025   372 
Fiscal year 2026   375 
Thereafter   268 
Total  $2,041 

 

Future payments under capital leases were as follows:     
      
Fiscal year 2022   95 
Fiscal year 2023   11 
    106 
Less amount representing interest   (2)
Present value of future minimum lease payments   104 
Less current maturities   (93)
Long-term capital lease  $11 

 

Contingencies

 

In November 2020, the Company became aware of a claim by a 2018 acquisition target who asserted a claim for $300 for certain unreimbursed compliance-related fees. The Company and the parties to the suit agreed on a settlement of $200, which the Company accrued at December 31, 2020 and paid during the year ended December 31, 2021.

 

In June 2021, the Company became aware of a claim by a vendor who asserted a claim for $188 for the remaining scope of work in connection with a contract which the Company terminated. The Company and the parties agreed on a settlement of $85, which was paid during the year ended December 31, 2021.

 

In addition, from time to time, the Company may be involved in various legal proceedings and claims in the ordinary course of business. As of December 31, 2021, and through the filing date of this report, the Company does not believe the resolution of any legal proceedings or claims of which it is aware or any potential actions will have a material effect on its financial position, results of operations or cash flows.

 

F-39

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

18. Subsequent Events

 

The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the consolidated financial statements are issued.

 

Securities sales

 

February 2022 Purchase Agreement (as defined below)

 

On February 28, 2022, the Company entered into a securities purchase agreement (the “February 2022 Purchase Agreement”) with a buyer for the purchase and sale of (i) an aggregate of up to 21,500 shares of newly-designated Series B convertible preferred stock (the “Series B Preferred”) with a stated value of $1,000 per share, initially convertible into up to 21,500,000 shares of the Company’s common stock at a conversion price of $1.00 per share, and (ii) warrants (the “February 2022 Warrants”) to purchase up to that number of shares of the Company’s common stock equal to the number of shares of the Company’s common stock into which the shares of Series B Preferred actually sold pursuant to the purchase agreement are initially convertible, in a registered direct offering.

 

Pursuant to the February 2022 Purchase Agreement, an aggregate of 16,125 shares of Series B Preferred, initially convertible into 16,125,000 shares of the Company’s common stock, together with the February 2022 Warrants, initially exercisable for 16,125,000 shares of the Company’s common stock, were to be issued and sold at an initial closing (the “Initial Closing”), and the remaining 5,375 Preferred Shares may be issued and sold in one or more subsequent closings (each, an “Additional Closing”), in each case subject to certain closing conditions. The Company can require the buyer to purchase the remaining 5,375 Preferred Shares at an Additional Closing if the Company’s stockholders approve the issuance of all securities issuable pursuant to the February 2022 Purchase Agreement in compliance with the rules and regulations of the Nasdaq Capital Market within a specified period of time after the Initial Closing, subject to certain other closing conditions (including certain equity conditions), and the buyer can require the Company to sell the remaining 5,375 Preferred Shares at one or more Additional Closings, subject to certain conditions. The purchase price for any Preferred Shares sold at an Additional Closing would be approximately $930 per share.

 

On March 1, 2022, the Company consummated the Initial Closing in which the Company issued to the buyer (i) 16,125 Series B Preferred with a stated value of $1,000 per share, initially convertible into up to 16,125,000 shares of the Company’s common stock at a conversion price of $1.00 per share, and (ii) the February 2022 Warrants that are initially exercisable for up to 16,125,000 shares of the Company’s common stock, in a registered direct offering. The aggregate purchase price paid for such Series B Preferred and the February 2022 Warrants at the Initial Closing was $15,000.

 

Pursuant to the February 2022 Purchase Agreement, an additional 5,375 Series B Preferred may be issued and sold in one or more subsequent closings (each, an “Additional Closing”), in each case subject to certain closing conditions.

 

As a result of the issuance of the Preferred Shares and February 2022 Warrants, the exercise price of the Series A Warrant, Series B Warrant and Series D Warrant previously issued by the Company to an affiliate of the buyer will automatically adjust to $1.00 (with a proportional increase to the number of shares of the Company’s common stock issuable upon exercise of such warrants). Pursuant to the February 2022 Purchase Agreement, such affiliate of the buyer will agree to waive any further anti-dilution adjustment of such existing warrants below $1.00 as a result of the transactions contemplated by the February 2022 Purchase Agreement.

 

The Series B Preferred will be convertible into shares of the Company’s common stock at the election of the holder at any time at an initial conversion price of $1.00 (the “Conversion Price”). The Conversion Price is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment, on a “full ratchet” basis, in the event of any issuances of the Company’s common stock, or securities convertible, exercisable or exchangeable for, the Company’s common stock at a price below the then-applicable Conversion Price (subject to certain exceptions). The Company will be required to redeem the Series B Preferred in 12 equal monthly installments, commencing on April 1, 2022. Subject to certain conditions, including certain equity conditions, the Company may redeem the applicable number of Series B Preferred on each monthly redemption date either in cash, shares of the Company’s common stock or a combination. The number of shares used to redeem any Series B Preferred in such event would be calculated as 88% of the lowest daily volume weighted average price of the Company’s common stock during the eight trading days immediately prior to the payment date. No dividends will be payable on the Series B Preferred, except that holders of the Series B Preferred would be entitled to receive any dividends paid on account of the Company’s common stock, on an as-converted basis, and if a “Triggering Event” (as defined in a certain certificate of designations) occurs and is continuing, dividends will accrue on each Series B Preferred Share at a rate of 15% per annum. The holders of the Series B Preferred have no voting rights on account of the Series B Preferred, other than with respect to certain matters affecting the rights of the Series B Preferred.

 

F-40

 

 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

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

December 31, 2021

 

The February 2022 Warrants have an exercise price of $1.00 per share, subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment, on a “full ratchet” basis, in the event of any issuances of the Company’s common stock, or securities convertible, exercisable or exchangeable for, the Company’s common stock at a price below the then-applicable exercise price (subject to certain exceptions). If additional Series B Preferred are sold at one or more Additional Closings, the February 2022 Warrants will automatically adjust such that they are exercisable for, in the aggregate, the total number of shares of the Company’s common stock into which all Series B Preferred sold pursuant to the applicable agreement are convertible. The February 2022 Warrants will be exercisable commencing on the date of issuance, and will expire five years from the date of issuance.

 

On April 1, 2022, a total of 1,625,439 shares of Series B Preferred were converted to 1,625,439 shares of the Company’s common stock.

 

Pursuant to the Purchase Agreement, the Company agreed to seek the approval of its stockholders for the issuance of all securities to be issued pursuant to the February 2022 Purchase Agreement, in compliance with the rules of the Nasdaq Capital Market (the “Stockholder Approval”). It is a condition to the Initial Closing that the Company enter into voting agreements (the “February 2022 Voting Agreements”) with certain significant stockholders of the Company (each, a “Significant Stockholder”), pursuant to which each Significant Stockholder will agree, with respect to all of the voting securities of the Company that such Significant Stockholder beneficially owns as of the date thereof or thereafter, to vote in favor of the Stockholder Approval.

 

The Series B Preferred and February 2022 Warrants (and underlying shares of the Company’s common stock) were offered, and will be issued, pursuant to a Prospectus Supplement, dated February 28, 2022, to the Prospectus included in the Company’s Registration Statement on Form S-3 (Registration No. 333- 258136), originally filed with the SEC on July 23, 2021, as amended, which became effective on August 27, 2021.

 

Pursuant to an engagement letter dated October 16, 2021 between the Company and Northland Securities, Inc. (the “Placement Agent”), the Company engaged the Placement Agent to act as the Company’s placement agent in connection with the offering and agreed to pay the Placement Agent’s fees of 7% of the aggregate gross proceeds the Company receives in connection with the related private placement and public offering.

 

April 2022 Purchase Agreement (as defined below)

 

On April 14, 2022, the Company entered into a securities purchase agreement (the “April 2022 Purchase Agreement”) with a buyer that owns greater than 5% of the Company’s common stock for the purchase and sale of a new series of senior secured convertible notes of the Company, in the aggregate original principal amount of $12,000 (the “Convertible Notes”). The Company expects to close the transaction within the next several days. The Convertible Notes shall be convertible into shares of the Company’s common stock. The purchase price of the Convertible Notes is $10,000.

 

The Convertible Notes will rank senior to all outstanding and future indebtedness of the Company and will be secured by a first priority perfected security interest in all of the existing and future assets of the Company and its direct and indirect Subsidiaries, including a pledge of all of the capital stock of each of the Subsidiaries.

 

The maturity date of the Convertible Notes is October 1, 2023, and no interest shall accrue on the Convertible Notes, unless an event of default (as defined) has occurred. From and after the occurrence and during the continuance of any such event of default, interest shall accrue at the rate of 15.0% per annum. Starting on August 1, 2022 and continuing on the first trading day of each subsequent calendar month, $800 of the Convertible Notes are eligible for conversion to shares of the Company’s common stock, subject to certain exceptions, including the option that the Company has to pay such amount in cash, and the holders’ option to convert the entire Convertible Note to shares of the Company’s common stock at any time.

 

Other than as disclosed in this Note and as may be disclosed elsewhere in the Notes to the financial statements, there have been no subsequent events that require adjustment or disclosure in the consolidated financial statements. 

 

F-41

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
     
    /s/ Darrell J. Mays
  Name:  Darrell J. Mays
  Title: Chief Executive Officer
     (Principal Executive Officer)
     
    /s/ Thomas H. King
  Name:  Thomas H. King
  Title: Chief Financial Officer
     (Principal Financial and Accounting Officer)

  

Date: April 15, 2022

  

POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Darrell J.Mays and Thomas H. King, jointly and severally, his or her attorney-in-fact, each with the full power of substitution, for such person, in any and all capacities, to sign any and all amendments to this annual report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might do or could do in person hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute, may do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

 

Signature   Title   Date
         
 /s/ Michael Tessler   Chairman of the Board   April 15, 2022
Michael Tessler        
         
/s/ Robert Willis   Vice Chairman   April 15, 2022
Robert Willis        
         
 /s/ Lawrence E. Mock, Jr.   Director   April 15, 2022
Lawrence E. Mock, Jr        
         
 /s/ Darrell J. Mays   Chief Executive Officer and Director   April 15, 2022
Darrell J. Mays   (principal executive officer)     
         
 /s/ Thomas H. King   Chief Financial Officer   April 15, 2022
Thomas H. King   (principal financial and accounting officer)     
         
 /s/ Mark Downs   Director   April 15, 2022
Mark Downs        
         
 /s/ U. Bertram Ellis, Jr.   Director   April 15, 2022
U. Bertram Ellis, Jr.        
         
 /s/ Carolyn Byrd   Director   April 15, 2022
Carolyn Byrd        
         
 /s/ Karl Krapek   Director   April 15, 2022
Karl Krapek        
         
 /s/ Dennis Lockhart   Director   April 15, 2022
Dennis Lockhart        

 

/s/ Dr. Klaas Baks

  Director   April 15, 2022
Dr. Klaas Baks        
         
 /s/ Kent Mathy   Director   April 15, 2022
Kent Mathy        

 

 

52