American Virtual Cloud Technologies, Inc. - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2021

or

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

For the transition period from    to

Commission File Number: 001-38167

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

1720 Peachtree Street, Suite 629

Atlanta, GA 30309
(Address of principal executive offices)

(404) 239-2863

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of November 8, 2021, 67,773,027 shares of the Company’s common stock, par value $0.0001 per share, were outstanding.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

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

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

(Unaudited)

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) - CONTINUED

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

(Unaudited)

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

September 30, 2021

(Unaudited)

1. Organization and Business Operations

Organization

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

On April 7, 2020 (the “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”), an 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 Note 5 for additional information.

Nature of current 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. 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 unified communications-as-a-service (“UCaaS”).

Kandy, a provider of cloud-based enterprise services, globally deploys a white-label, carrier-grade cloud-based platform for 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 white-labeled services that are offered 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 development

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 planned divestiture of Computex. The Company believes that the change will allow it to optimize resource allocation, focus on core competencies, and improve its ability to invest in areas of maximal growth potential. Proceeds from any potential sale transaction are expected to be used to further deleverage the balance sheet and provide working capital.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

Computex was not classified as held for sale as of September 30, 2021 as the criteria for the reporting unit to be classified as held for sale were not met as of September 30, 2021. However, in connection with the potential 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 $20,500 during the three and nine months ended September 30, 2021.

Also, in July 2021, the Board of Directors approved and executed certain organizational and personnel changes as part of a strategic plan to flatten the Company’s corporate structure, reduce overhead and more directly align its business units with their respective markets.

Also see Note 17, Subsequent Events, regarding a registered direct offering and a concurrent private placement that were announced on November 2, 2021.

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 its Credit Agreement (defined and more fully discussed in Note 8). From time to time, the Company may also choose to access the debt and equity markets to fund acquisitions and fund working capital to diversify its capital sources. The Company’s current principal capital requirements are to fund working capital, fund capital expenditures and make investments that are in line with its business strategy.

The Credit Agreement, as amended, matures on December 31, 2021, and, as of September 30, 2021, provided for maximum borrowings of $13,000 on the line of credit portion with scheduled reductions of $1,000 in availability on October 1, 2021, November 1, 2021 and December 1, 2021. As amended, the Credit Agreement requires the Company to maintain a minimum monthly liquidity (defined as unrestricted cash plus availability under the line of credit) of $3,000 and limits unfinanced capital expenditures to $3,000. As of September 30, 2021, amounts outstanding under the term loan and the line of credit under the Credit Agreement were $3,200 and $8,839, respectively.

In addition, at September 30, 2021, the Company had an unrestricted cash balance of $4,201 in its operating bank accounts and, as of October 1, 2021, had availability under its line of credit of $4,183. Also, as of September 30, 2021, the Company’s current liabilities exceeded its current assets by $26,564, primarily as a result of the classification of certain debt as current, specifically, the components of the Credit Agreement and all promissory notes.

On or before the maturity date of the Credit Agreement, the Company expects to seek to either negotiate an extension of the Credit Agreement or enter into a new agreement with another lender.

Also see Note 8 for information regarding a new promissory note in the principal amount of $5,000 entered into on September 16, 2021 (the “2021 Note”).

Whereas the Company continues to analyze its liquidity to ensure that it is able to execute on its operational plan, it believes that cash anticipated to be generated from future operations, as well as borrowings from lending and project financing sources and proceeds from equity and debt offerings will provide sufficient liquidity to fund operations for at least one year after the date the financial statements are issued. However, if the Company is unable to achieve its forecasts, fails to meet any of the financial covenants in the Credit Agreement and is unable to obtain a waiver or an amendment under the Credit Agreement to allow it to continue to borrow, or raise additional equity or debt capital, the Company may need to pursue one or more alternatives, such as to reduce or delay investments in its business, or seek additional financing. The Company can provide no assurance that future funding will be available if and when required or that such funding will be available on terms that it finds acceptable. Any projection is based on the Company’s current expectations regarding new project financing and product sales and service, cost structure, cash burn rate and other operating assumptions.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

3. Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited condensed consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.

These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2020, as filed with the SEC on May 14, 2021. The interim results for the period ended September 30, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021 or any future interim periods.

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 condensed 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 condensed 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 5 for a discussion of the fair value estimates utilized in the allocation of the Computex and Kandy purchase prices.

Principles of consolidation

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

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.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that estimates made as of the date of the financial statements could change in the near term due to one or more future events. Accordingly, the actual results could differ significantly from those estimates. Significant accounting estimates reflected in the Company’s condensed consolidated financial statements include, but are not limited to, revenue recognition, allowance for doubtful accounts, accounting for warrants, recognition and measurement of income tax assets, valuation of share-based compensation, discount related to the fair value of warrants, and the valuation of net assets acquired.

Significant accounting policies

The significant accounting policies used in preparing these condensed consolidated financial statements were applied on a basis consistent with those reflected in our consolidated financial statements that are included in the annual report on Form 10-K for the year ended December 31, 2020, as amended, that was filed with the SEC on May 14, 2021, except for changes from the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“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”). The updates to our accounting policies from adopting ASU 2020-06 are provided in Note 4.

Public, Private Placement and 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”), MasTec, Inc., a Florida corporation, and EarlyBirdCapital, Inc., a Delaware corporation (“EBC” and, together with the Sponsor and MasTec, Inc., the “Purchasers”), pursuant to which the Purchasers purchased an aggregate of 10,512,500 warrants in connection with and simultaneously with the closing of the Company’s initial public offering (the “IPO”), including the full over-allotment amount (the “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 and one-half of one Public Warrant (the “IPO Units”) and, in connection therewith, issued and delivered 15,525,000 warrants to public investors in the Offering (the “Public Warrants”) and 675,000 warrants (underlying unit purchase options) to EBC or its designees (the “EBC Warrants” and, together with the Private Placement Warrants and the Public Warrants, the “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. Subsequent to the Computex Closing Date and as of September 30, 2021, 15,525,000 Public Warrants, 10,512,500 Private Placement Warrants and 675,000 EBC Warrants remained outstanding.

The Private Placement Warrants and EBC Warrants 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 Private Placement Warrants or EBC Warrants that are transferred to nonpermitted transferees are redeemable at the option of the Company and are generally not exercisable on a cashless basis.

The Company evaluated the Warrants under Accounting Standards Codification (“ASC”) 815-40, Derivatives and Hedging—Contracts in an Entity’s Own Equity, and concluded that the Private Placement Warrants and the EBC Warrants do 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 Private Placement Warrants and the EBC Warrants from being classified in equity. Therefore, the Private Placement Warrants and the EBC Warrants are classified as liabilities at fair value, with subsequent changes in fair values recognized in earnings at each reporting date. Changes in the fair value of the Private Placement Warrants and EBC Warrants may be material to the Company’s future operating results.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

The fair values of the Private Placement Warrants and EBC Warrants were determined using the Black-Scholes model in which the following assumptions were used for the valuation performed during the three months ended September 30, 2021:

Concentration of business and credit risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and trade receivables. Cash held by the Company, in financial institutions, regularly exceeds the federally insured limit of $250. At September 30, 2021, cash balances held with a financial institution exceeded the federally insured limit. However, management does not believe this poses a significant credit risk.

None of the Company’s customers accounted for 10% or more of sales in any of the periods presented in the accompanying condensed consolidated financial statements.

Similarly, no customer accounted for 10% or more of accounts receivable as of September 30, 2021 or December 31, 2020. One vendor accounted for at least 10% of accounts payable as of September 30, 2021 (accounting for $14,137). As of December 31, 2020, one vendor accounted for at least 10% of accounts payable (accounting for $13,602). During the three and nine months ended September 30, 2021, one of our vendors at our Computex subsidiary accounted for approximately 56% of purchases in each respective period.

Fair value of financial instruments

Fair value is defined as 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:

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

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 the Private Placement Warrants and EBC Warrants are reflected on the condensed consolidated balance sheet as “Warrant Liabilities,” are determined using a Black-Scholes model, and are considered to be Level 2 valuations. The significant assumptions used to determine the fair value as of September 30, 2021 are disclosed above in the section titled “Public, Private Placement and EBC Warrants.”

Reclassifications

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

Change in Segment reporting

Effective January 1, 2021, the Company changed its segment reporting pursuant to ASC 280, Segment Reporting. For periods prior to January 1, 2021, the Company operated under one operating segment, consistent with the information that was presented to the Chief Operating Decision Maker (“CODM”). Effective January 1, 2021, the Company identified two operating segments, Computex and Kandy.

This change in reportable segments was a result of the Kandy acquisition and the integration of the Kandy business into the Company’s operations. These changes resulted in revisions to the financial information provided to the CODM on a recurring basis in the evaluation of financial performance of the Company and in the decision-making process. As the Company continues to integrate Kandy into its operations, changes to segments may be required, based on changes to the way that the CODM views the business. Refer to Note 15 for additional information.

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 Securities Exchange Act of 1934, as amended (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, unless it chooses to early-adopt the new or revised accounting standard. Therefore, the Company’s financial statements may not be comparable to certain public companies.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

4. Recently Issued and Adopted Accounting Standards

Recently issued accounting standards

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.

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”), which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.  The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. It clarifies that single-member limited liability companies and similar disregarded entities that are not subject to income tax are not required to recognize an allocation of consolidated income tax expense in their separate financial statements, but they could elect to do so.

ASU No. 2019-12 is effective for calendar-year public business entities in 2021 and interim periods within that year. For all other calendar-year entities, it is effective for annual periods beginning in 2022 and interim periods in 2023. Early adoption is permitted. ASU No. 2019-12 allows companies to treat tax law changes as intraperiod items, rather than as discrete items within the interim period.

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.

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.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

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 cumulative effect adjustment that the Company recognized in the condensed consolidated balance sheet, as of January 1, 2021, as an adjustment to accumulated deficit, was $1,218 and is reflected in the following table:

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:

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.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

5. 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, Business Combinations (“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 presents the allocation of the purchase consideration among the assets acquired and liabilities assumed at their estimated acquisition-date fair values.

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. AVCT incurred transaction costs of $142, 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. During the nine months ended September 30, 2021, there was a measurement period adjustment to goodwill of $3,450 related to a deferred tax liability that was previously recorded as of the Computex Closing Date.

Since the results of operations prior to April 7, 2020 relate to the operations of Computex, investment income and transaction costs incurred by AVCT were excluded from the Predecessor statement of operations. Accordingly, for the period April 1, 2020 through April 6, 2020, transaction costs of $714 were excluded. For the period January 1, 2020 through April 6, 2020, investment income and transaction costs of $1,365 and $6,887, respectively, were excluded.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

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.

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

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.

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):

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 does not give effect to any integration costs related to the acquired companies.

The combined net loss in the table above was adjusted for the transaction costs related to the acquisitions (included as expenses in the nine months ended September 30, 2020) and the incremental changes in the amortization of intangible assets.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

6. Goodwill and intangible assets

The Company’s intangible assets as of September 30, 2021 and December 31, 2020 consisted of the following:

The estimated lives of the intangible assets are included in Note 5. The weighted average useful life of the intangible assets as of September 30, 2021 was 7.7 years. Amortization expense was $1,296 and 3,887 for the three and nine months ended September 30, 2021, respectively. For the three months ended September 30, 2020, the period April 7, 2020 through September 30, 2020 and the period January 1, 2020 through April 6, 2020, amortization expense was $608, $1,158 and $263, respectively.

Goodwill activity during the nine months ended September 30, 2021 was as follows:

The noncash goodwill impairment charge in the table above relates to our Computex subsidiary and is discussed in Note 1. The measurement period adjustment relates to a deferred tax liability that was previously recorded as of the Computex Closing Date.

7. Accounts payable and accrued expenses

Accounts payable and accrued expenses were as follows as of September 30, 2021 and December 31, 2020:

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

8. Long-Term Debt

Credit Agreement

In connection with the consummation of the Computex Business Combination, the Company assumed the obligations of Computex under a credit agreement with Comerica Bank (as amended, the “Credit Agreement”), which includes a term note and a line of credit. On the Computex Closing Date, the Company and Comerica Bank entered into a third amendment to the Credit Agreement that added the Company as a borrower and amended certain provisions of the Credit Agreement, including changing the maturity date of the loans under the Credit Agreement to December 31, 2020, and removing certain financial covenants. On November 13, 2020, the Company and Comerica Bank entered into a fifth amendment to the Credit Agreement (the “Fifth Amendment”) that extended the maturity date to June 30, 2021, provided for a decrease in maximum borrowings on the line of credit effective April 1, 2021, amended the interest rates and, commencing January 31, 2021, provided for a minimum monthly liquidity (defined as unrestricted cash plus availability under the line of credit) of $3,000. In connection with the Fifth Amendment on November 13, 2020, the Company was required to make a one-time principal payment of $250 on the term loan. Also, in connection with the Fifth Amendment, maximum borrowings permitted under the line of credit decreased by $3,500 to $13,000 effective April 1, 2021.

In connection with the acquisition of Kandy, the Company later entered into a sixth amendment to the Credit Agreement that required the Company to repay $250 under the Credit Agreement, for every $12,500 of capital raised.

On June 24, 2021, the Company entered into a seventh amendment to the Credit Agreement that extended the maturity date of the Credit Agreement to December 31, 2021. The seventh amendment also:

Availability on the line of credit is determined weekly. The borrowing base computation is primarily based on certain percentages of accounts receivable and inventory. As of October 1, 2021, maximum borrowing under the line of credit was $12,000, of which $4,183 was available.

An eighth amendment to the Credit Agreement on September 22, 2021 was effected to allow the Company to incur borrowings of $5,000 under the 2021 Note discussed below in the section titled “Subordinated promissory note – related party.”

On or before the maturity date of the Credit Agreement, the Company expects to seek to either negotiate an extension of the Credit Agreement or enter into a new agreement with another lender. However, there can be no assurance that financing will be available in the amounts the Company requires or on terms acceptable to it, if at all. At September 30, 2021 and December 31, 2020, the balance on the line of credit was $8,839 and $7,355, respectively.

The effective rate under the Credit Agreement was 8.0% and 5.00% as of September 30, 2021 and December 31, 2020, respectively.

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

In 2018, Computex entered into an interest rate swap arrangement to partially mitigate the variability of cash flows due to changes in the Eurodollar rate, specifically related to interest payments on the term note under the Credit Agreement. The interest rate swap which had a notional amount of $2,857 and did not qualify for hedge accounting, matured on August 2, 2021. A liability of $51 was recorded for the fair value of the related derivative at December 31, 2020 and was included in accounts payable and accrued expenses. No new interest rate swap agreement was entered into subsequent to August 2, 2021.

PPP Loan

In July 2021, the Company’s application for forgiveness of a PPP loan of $4,135 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 condensed consolidated statements of operations as “Gain on extinguishment of debt.”

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

Total long-term debt as of September 30, 2021 and December 31, 2020 consisted of the following:

Subordinated promissory note – related party

The 2021 Note (as defined in Note 2) is secured by a shareholder that owns more than five percent of the Company’s shares and matures 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 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. The 2021 Note is subordinate to any amounts owed under the Credit Agreement and has a minimum required return of 25.00% over the applicable period.

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 (See Note 9). The 2020 Note bears interest at the rate of 12.00% per annum. Previously, the 2020 Note had a maturity date of September 30, 2021. The 2020 Note is subordinate to any amounts owed under the Credit Agreement. On November 5, 2021, all amounts owing under the 2020 Note were paid.

9. Stockholders’ (Deficit) Equity, Related Warrants, Debentures and Guaranty

Preferred stock — The Company is authorized to issue 5,000,000 shares of preferred stock, par value $0.0001. As of September 30, 2021 and December 31, 2020, no preferred stock was issued or outstanding.

Common stock — The Company is authorized to issue 500,000,000 shares of common stock with a par value of $0.0001 per share. Holders of the Company’s common stock are entitled to one vote for each share. As of September 30, 2021, there were 65,228,070 issued and outstanding shares of common stock.

Registration rights agreement

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

Convertible Debentures, related warrants and guaranty

On the Computex Closing Date, the Company also consummated the sale, in a private placement (the “Private Placement”), of units of securities of the Company (“Units”) to certain investors (each, an “Investor”), as contemplated by the terms of the previously disclosed Securities Purchase Agreement, dated as of April 3, 2020 (the “Securities Purchase Agreement”). Each Unit 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 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 during the nine months ended September 30, 2021 (none of which was sold during the three months ended September 30, 2021). Amounts sold during the nine months ended September 30, 2021 included 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., 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, during the nine months ended September 30, 2021, $24,000 were sold to various investors (including $9,540 sold to related parties). The Debentures sold in December 2020 and during the nine months ended September 30, 2021 (none of which were sold in the three months ended September 30, 2021) were in the same form as those issued in connection with the acquisition of Kandy.

The Debentures 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. Unless 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.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

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 issued to Ribbon, 1,000,000 issued to SPAC Opportunity Partners, LLC and 100,000 issued to a director of the Company.

The Penny Warrants issued between January 1, 2021 and September 30, 2021 (none of which were issued in the three months ended September 30, 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 may be exercised 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 three months ended September 30, 2021 and pursuant to the terms of the Penny Warrant agreements, holders of 5,974,395 Penny Warrants exercised their right to convert such Penny Warrants to 5,974,395 shares of common stock. As of September 30, 2021, unexercised Penny Warrants totaled 6,205,675.

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 warrants, was recognized as additional paid-in capital and reduced the carrying value of the Convertible Debentures. However, as more fully discussed in Note 4, 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.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

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 in the nine months ended September 30, 2021 (none of which were issued in the three months ended September 30, 2021) were: stock price volatility – 70%, exercise price - $0.01, interest rate – 0.78%, stock price - $6.28.

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 three and nine months ended September 30, 2021, the Company recorded accretion of the discount of $2,792 and $9,253, respectively, and paid-in-kind interest of $2,518 and $8,257, respectively. During the three months ended September 30, 2020, the Company recorded accretion of the discount and paid-in-kind interest of $994 and $1,097, respectively. During the period April 7, 2020 through September 30, 2020, the Company recorded accretion of the discount and paid-in-kind interest of $1,921 and $2,112, respectively.

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

10. Related Party Transactions

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

AVCT shares corporate office space with an affiliate and participates in a cost sharing arrangement in a month-to-month leasing arrangement. The space is not being used and therefore, by mutual agreement between the parties, no expenses have been incurred by the Company during the Successor periods.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

Effective October 1, 2020, the Company and Navigation Capital Partners, Inc. (“Navigation”), an affiliate of a shareholder, entered into an agreement under which Navigation provides capital markets advisory and business consulting services to the Company for a fee of $50 per month. Expenses recorded during the three and nine months ended September 30, 2021, in connection with the agreement, were $150 and $450, respectively, and are included within selling, general and administrative expenses. Also, accounts payable and accrued liabilities as of September 30, 2021 and December 31, 2020 included $600 and $150, respectively, related to such agreement. Also included in selling, general and administrative expenses for the three and nine months ended September 30, 2021 and accounts payable and accrued expenses as of September 30, 2021 are reimbursable expenses of $59 due to Navigation. See Note 12.

Pursuant to a transition services agreement entered into with Ribbon in connection with the acquisition of Kandy, accounts payable and accrued expenses as of September 30, 2021 and December 31, 2020 include $1,163 and $1,392, respectively, of amounts due to Ribbon for reimbursable expenses in excess of collections, professional fees provided and certain software and other support. Included in the condensed statement of operations are the following expenses for services provided by Ribbon during the three and nine months ended September 30, 2021, which primarily relate to professional fees for services provided by Ribbon as part of the transition services agreement, rental for office space and certain software support:

In addition to the related party amounts discussed above, certain Debentures as of December 31, 2020 are separately identified as related party amounts on the condensed consolidated balance sheet as of December 31, 2020. Similarly, the related Debenture interest is separately identified as related party amounts on the condensed consolidated statements of operations. As indicated in Note 9, the Debentures were converted to common stock on September 8, 2021. Accordingly, there were no Debentures outstanding as of September 30, 2021, and interest for the three and nine months ended September 30, 2021 relate to the period up to and including September 8, 2021.

The 2021 Note, which is secured by a related party, is discussed in Note 8 and is separately identified on the condensed consolidated balance sheet. The related interest expense of $389 is included in “Interest expense – related parties” in the condensed consolidated statement of operations for the three and nine months ended September 30, 2021 and is also included in “Accounts payable and accrued expenses” on the condensed consolidated balance sheet as of September 30, 2021.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

11. Revenue Recognition

In the following tables, revenue is disaggregated by geographies and by verticals (or sector). Also presented is the portion of revenue that is recognized on a gross basis (which occurs when the Company is deemed to be the principal in the arrangement) and the portion that is recognized on a net basis (which occurs when the Company is deemed to be acting as the agent).

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. On September 30, 2021 and December 31, 2020, the contract liability balance (deferred revenue) was $3,065 and $4,608, respectively. All of the performance obligations related to such deferred revenue 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.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The following table represents the total transaction price for remaining performance obligations, as of September 30, 2021, related to non-cancelable contracts longer than 12 months in duration that are expected to be recognized over future periods:

12. Share-Based Compensation

Successor

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

As of September 30, 2021, 5,794,500 shares had been authorized for issuance under the Plan, of which 902,000 shares remained available for issuance. The RSUs were issued to certain directors and employees and can only be settled in shares. RSUs awarded to directors are time-based. RSUs issued to nondirectors are generally 50% time-based and 50% performance-based. Generally, 25% of the time-based awards vests on each grant-date anniversary, while 25% of the performance-based awards vests on December 31^st of each year, if the market condition (stock price target) is met. If the market condition attached to the performance-based awards is not met in any year, the eligibility is delayed until the market condition is met, except that the market condition must be met by December 31^st of the fourth year after issuance.

The following summarizes RSU activity between January 1, 2021 and September 30, 2021:

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

Awards outstanding in the table above consist of 2,508,750 time-based awards and 361,255 performance-based awards and exclude 772,495 performance-based RSUs that have been awarded but deemed not granted as the performance targets have not yet been determined. Share-based compensation expenses recognized during the Successor periods were as follows:

Selling, general and administrative expenses for the three and nine months ended September 30, 2021, in the table above, include $119 of stock compensation expense for services rendered by a shareholder that owns more than five percent of the Company’s shares.

13. Reconciliation of Net Loss per Common Share

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

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: