American Virtual Cloud Technologies, Inc. - Quarter Report: 2021 March (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 March 31, 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 May 14, 2021, 20,080,021 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’ (DEFICIT) EQUITY

(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)

March 31, 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”), a private operating company that does business as Computex Technology Solutions. The Computex Business Combination was consummated pursuant to the terms of an amended agreement originally entered into on July 25, 2019. In connection with the closing of the Computex Business Combination, the Company changed its name to American Virtual Cloud Technologies, Inc.

On December 1, 2020 (the “Kandy Closing Date”), 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 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

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

March 31, 2021

(Unaudited)

In response to COVID-19, the Company put into place certain restrictions, requirements and guidelines to protect the health of its employees and clients, including requiring that certain conditions be met before employees return to the Company’s offices. Also, to protect the health and safety of its employees, the Company’s daily execution has evolved into a largely virtual model. Between April 1, 2020 and September 1, 2020, salaries of Computex’s employees were reduced. The Company plans to continue to monitor the current environment and may take further actions that may be required by federal, state or local authorities or that it determines to be in the interests of its 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. The Credit agreement is 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, fund working capital and 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.

The Credit Agreement matures on June 30, 2021, and, as amended, provides for maximum borrowings of $16,500 on the line of credit portion with a scheduled reduction of $3,500 in availability under the line of credit as of April 1, 2021. As amended, the Credit Agreement provides for a minimum monthly liquidity (defined as unrestricted cash plus availability under the line of credit) of $3,000 commencing January 31, 2021. As of March 31, 2021, amounts outstanding under the term loan and the line of credit with Comerica Bank were $5,345 and $6,763, respectively.

In addition, at March 31, 2021, the Company had unrestricted and restricted cash of $15,313 and $369, respectively, in its operating bank accounts, and had availability under its line of credit of $5,466. Stockholders’ deficit at March 31, 2021 was $4,396. Also, as of March 31, 2021, the Company’s current liabilities exceeded its current assets by $15,324, primarily as a result of the classification of the components of the Credit Agreement as current.

On or before the maturity date of the Credit Agreement, the Company may seek to either negotiate an extension of the Credit Agreement or enter into a new agreement with another lender. In addition, the Company has, since December 31, 2020, raised additional capital and plans to raise an additional amount which it plans to use to fund expansion, capital expenditures and working capital for its current operations.

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

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.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

March 31, 2021

(Unaudited)

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 March 31, 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 price.

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.

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.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

March 31, 2021

(Unaudited)

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., (“EBC”) a Delaware corporation (together with the Sponsor and MasTec, Inc., 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 “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 March 31, 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 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 and 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.

The fair value of the Private Placement Warrants and EBC Warrants were determined using the Black-Scholes model in which the following weighted average assumptions were used for the valuation performed during the three months ended March 31, 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)

March 31, 2021

(Unaudited)

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 March 31, 2021, 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 during the three months ended March 31, 2021 nor the three months ended March 31, 2020.

No customer accounted for 10% or more of accounts receivable at March 31, 2021 or December 31, 2020. For accounts payable, one vendor accounted for at least 10% of accounts payable at March 31, 2021 and December 31, 2020 (accounting for $15,288 and $13,602, respectively). During the three months ended March 31, 2021, one of our vendors accounted for approximately 57% of purchases at our Computex subsidiary.

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:

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 March 31, 2021 are disclosed above in the section titled, “Public, Private Placement and EBC Warrants.”

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

March 31, 2021

(Unaudited)

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 Exchange Act. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised, it adopts the new or revised standard at the time private companies adopt the new or revised standard. Therefore, the Company’s financial statements may not be comparable to certain public companies.

4. Recently Issued and Adopted Accounting Standards

Recently issued accounting standards

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

March 31, 2021

(Unaudited)

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

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 Company’s convertible debentures. 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:

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

March 31, 2021

(Unaudited)

The cumulative effect adjustment from prior periods that the Company recognized in the condensed consolidated balance sheet as of January 1, 2021 as an adjustment to accumulated deficit was $1,218 as 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 provided by operating activities, net cash used in investing activities or net cash provided by financing activities.

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. Accordingly, the Company recorded assets acquired and liabilities assumed at their acquisition-date fair values. The excess of the purchase price over the fair value of assets acquired and liabilities assumed was recorded as goodwill. The goodwill, which is not deductible for tax purposes, results from factors such as an assembled workforce and management’s industry knowledge.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

March 31, 2021

(Unaudited)

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 consist of customer relationships of $17,300 and trade names of $7,000. Both the customer relationships and the trade names were valued using a form of the income approach. The customer relationship was valued using the Multi-Period Excess Earnings Method (or MPEEM) and the method used for the trade names was the Relief from Royalty Method. With respect to the Computex acquisition, 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 three months ended March 31, 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, excluded from the Predecessor statement of operations are investment income and transaction costs incurred by AVCT. Accordingly, excluded are transaction costs and investment income of $6,173 and $1,365, respectively, for the three months ended March 31, 2020.

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, results from factors such as an assembled workforce and management’s industry knowledge.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

March 31, 2021

(Unaudited)

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 consist 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.

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 three months ended March 31, 2020) and the incremental changes in the amortization of intangible assets.

6. Goodwill and intangible assets

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

March 31, 2021

(Unaudited)

The estimated lives of the intangible assets are included in Note 5. The weighted average useful life of the intangible assets, as of March 31, 2021 was 7.7 years. Amortization expense was $1,296 and $247 for the three months ended March 31, 2021 and 2020, respectively.

There was no goodwill activity during the three months ended March 31, 2020. Goodwill activity during the three months ended March 31, 2021 was as follows:

The measurement period adjustment to goodwill in the table above 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 at March 31, 2021 and December 31, 2020:

8. Long-Term Debt

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 borrowers and amended certain provisions to the Credit Agreement, including changing the maturity date of the loans under the Credit Agreement to December 31, 2020, and removing certain financial covenants. On November 13, 2020, the Company and Comerica Bank entered into a fifth amendment to the Credit Agreement (the “Fifth Amendment”) that extends the maturity date to June 30, 2021, provides for a decrease in maximum borrowings on the line of credit effective April 1, 2021, amends the interest rates and, commencing January 31, 2021, provides for a minimum monthly liquidity (defined as unrestricted cash plus availability under the line of credit) of $3,000. As of November 13, 2020, the maximum borrowings permitted under the line of credit remained unchanged at $16,500. However, on April 1, 2021, maximum borrowings permitted under the line of credit decreased by $3,500 to $13,000. In connection with the Fifth Amendment on November 13, 2020, the Company was required to make a one-time principal payment of $250 on the term loan. Availability on the line of credit is determined weekly, based on a weekly borrowing base computation that is primarily based on certain percentages of accounts receivable and inventory. At March 31, 2021, maximum borrowings under the line of credit was $12,229, of which $5,466 was available.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

March 31, 2021

(Unaudited)

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

On or before the maturity date of the Credit Agreement, the Company plans to seek to either negotiate an extension of the Credit Agreement or enter into a new agreement with another lender. However, there can be no assurance that financing will be available in the amounts the Company requires or on terms acceptable to it, if at all. At March 31, 2021 and December 31, 2020, the balance on the line of credit was $6,763 and $7,355, respectively.

Between November 13, 2020 and December 31, 2020, all obligations outstanding under the Credit Agreement continued to accrue interest at the higher of the one-month London Interbank Offered Rate (LIBOR) or 1.00%, plus a margin of 4.00% (the “margin”). The margin then increases gradually each month to a maximum of 6.50% on June 1, 2021. The effective rate of the line of credit was 6.00% and 5.00% at March 31, 2021 and December 31, 2020, respectively. The effective rate of the term note was 6.00% and 5.00% at March 31, 2021 and December 31, 2020, respectively.

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

A previous amendment to the Credit Agreement, that was effective May 4, 2020, included a modification to the covenant in the Credit Agreement that prohibits the incurrence by the borrowers of additional indebtedness to exclude (i) indebtedness incurred by the borrowers under the U.S. Small Business Association’s (“SBA”) Paycheck Protection Program established under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) and the related rules and regulations (the “PPP loan”) and (ii) up to $1.5 million in indebtedness incurred for the sole purpose of financing insurance premiums.

In April 2020, the Company received a PPP loan of $4,135, after its application was approved by the SBA. 

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of such loans after eight weeks, if the loan is used for eligible purposes, including to fund payroll costs, mortgage interest, rent and/or utility costs, and loan recipients meet certain other requirements, including, the maintenance of employment and compensation levels. The Company believes it has used the entire PPP Loan for qualifying expenses and expects to qualify for full or partial forgiveness under the program. However, the Company can provide no assurance that it will obtain forgiveness for any portion.

In 2018, Computex entered into an interest rate swap arrangement to partially mitigate the variability of cash flows due to changes in the Eurodollar rate, specifically related to interest payments on the term note under the Credit Agreement. The interest rate swap has a notional amount of $2,857 and a maturity date of August 2, 2021. The fixed interest rate is 3.04% with a corresponding floating interest rate of 1-month LIBOR. The interest rate swap does not qualify for hedge accounting. A liability of $31 and $51 was recorded for the fair value of the related derivative at March 31, 2021 and December 31, 2020, respectively, and is included in accounts payable and accrued expenses.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

March 31, 2021

(Unaudited)

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

Subordinated promissory note

On the Computex Closing Date, the Company issued a subordinated promissory note of $500 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 subordinated promissory note bears interest at 12.00% per annum, matures on June 30, 2021 and is subordinated to any amounts owed under the Credit Agreement. The entire principal together with any accrued and unpaid interest is due and payable on the maturity date.

9. Stockholders’ (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. At March 31, 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 March 31, 2021, 19,968,390 shares of common stock were issued and outstanding.

Registration rights agreement

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 “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. Such registration rights are also available to purchasers of the Units (as defined below). Pursuant to the terms of the Registration Rights Agreement, the holders of certain of the Company’s securities, including holders of the Company’s founders’ shares, shares of common stock underlying the Company’s private warrants, 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)

March 31, 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 consists of (i) $1,000 in principal amount of the Company’s Series A convertible debentures (the “Debentures”) and (ii) a warrant to purchase 100 shares of Common Stock at an exercise price of $0.01 per whole share (the “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 issued 43,778 Units to Ribbon as consideration for the Kandy purchase and sold 10,000 Units to SPAC Opportunity Partners, LLC, a shareholder of the Company and 1,000 Units to a director. Also, the Company sold 14,510 additional Units during the three months ended March 31, 2021 (including 1,300 Units sold to related parties).

Debentures

The Debentures issued on the Computex Closing Date have an aggregate principal amount of approximately $43,169 (including $3,000 in aggregate principal amount issued as part of Units sold to MasTec, Inc. (“Mastec”), a greater than 5.0% 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 consist of aggregate principal amounts of $43,778 issued to Ribbon, $10,000 issued to SPAC Opportunity Partners, LLC, a shareholder of the Company and $1,000 issued to a director.

The Debentures issued in the three months ended March 31, 2021 are in the same form as those issued in connection with the acquisition of Kandy and consist of aggregate principal amounts of $14,510 (including $1,300 issued to related parties).

The Debentures bear interest at a rate of 10.0% per annum, payable quarterly on the last day of each calendar quarter in the form of additional Debentures, except upon maturity, in which case accrued and unpaid interest is payable in cash. The entire principal amount of each Debenture, together with accrued and unpaid interest thereon, is due and payable on the earlier of (i) such date, that is 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, demands payment thereof and (ii) the occurrence of a Change in Control (as defined in the Debentures).

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

March 31, 2021

(Unaudited)

Penny Warrants

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

The Penny Warrants issued in connection with the acquisition of Kandy and between the Kandy Closing Date and December 31, 2020 entitle the holders to purchase an aggregate of up to 5,477,800 shares of the Company’s common stock (consisting of 4,377,800 issued to Ribbon, 1,000,000 issued to SPAC Opportunity Partners, LLC and 100,000 issued to a director), at an exercise price of $0.01 per share.

The Penny Warrants issued in the three months ended March 31, 2021 entitle the holders to purchase an aggregate of up to 1,451,000 warrants (including 130,000 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.

Guaranty

On the Computex Closing Date, Computex and its subsidiaries issued to the Investors a Guaranty, pursuant to which such entities jointly and severally guaranteed the obligations of the Company under the Debentures.

Derivative consideration and other disclosures relating to the Debentures and 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 has been recorded in liabilities as part of the Debentures and not bifurcated. However, an embedded beneficial conversion feature was previously assessed in relation to the Debentures issued on and subsequent to the Kandy acquisition 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 closing date of the Kandy acquisition. Such debt discount, that is 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 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 qualify as derivatives, but satisfied the criteria for classification as equity instruments, and were bifurcated from the host contract - 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, in which the following weighted average assumptions were used during the three months ended March 31, 2021:

The discount (consisting of the relative fair value of the warrants) is being expensed as interest over the term of the Debentures to increase the carrying value to face value. During the Successor three months ended March 31, 2021, the Company recorded accretion of the discount of $2,954 and paid-in-kind interest of $2,657.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

March 31, 2021

(Unaudited)

The components of the Debentures 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. 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.

Effective October 1, 2020, the Company and Navigation Capital Partners, Inc., an affiliate of a shareholder, entered into an agreement whereby, Navigation Capital Partners, Inc. will provide capital markets advisory and business consulting services to the Company for a fee of $50 per month. Included in selling and administrative expenses for the Successor three months ended March 31, 2021 was $150, and included in accounts payable and accrued liabilities as of March 31, 2021 and December 31, 2020 is $300 and $150, respectively, related to such agreement.

Also, accounts payable and accrued expenses at March 31, 2021 and December 31, 2020 include $1,684 and $1,031, respectively, of amounts due to Ribbon for reimbursable expenses incurred on the Company’s behalf, net of amounts they collected on the Company’s behalf. Professional fees incurred during the Successor three months ended March 31, 2021 that are related to services provided by Ribbon after the acquisition as part of an agreed-upon transition services arrangement are reflected in cost of revenue ($355), research and development ($99) and selling and administrative expenses ($469).

In addition to the related party amounts discussed above, certain Debentures and the related interest are separately identified as related party amounts on the condensed consolidated balance sheets and condensed consolidated statements of operations, respectively.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

March 31, 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. At March 31, 2021 and December 31, 2020, the contract liability balance (deferred revenue) was $3,338 and $4,608, respectively. All of the performance obligations related to such deferred revenue as of March 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.

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For more information regarding the Company’s performance obligations, see Note 3. The following table represents the total transaction price for remaining performance obligations as of March 31, 2021 related to non-cancelable contracts longer than 12 months in duration that are expected to be recognized over future 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)

March 31, 2021

(Unaudited)

12. Share-Based Compensation

Successor

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

As of March 31, 2021, 5,794,500 shares had been authorized for issuance under the Plan, of which 910,421 shares remained available for issuance. The RSUs were issued to certain directors and employees and can only be settled in shares. RSUs awarded to directors are time-based. RSUs issued to nondirectors are 50% time-based and 50% performance-based. Twenty-five percent of the time-based awards vests on each grant-date anniversary, while 25% of the performance-based awards vests on December 31^st of each year, if the market condition (stock price target) is met. If the market condition attached to the performance-based awards is not met in any year, the eligibility is delayed until the market condition is met, except that the market condition must be met by December 31^st of the fourth year after issuance.

The following summarizes RSU activity between January 1, 2021 and March 31, 2021:

Awards outstanding in the table above consist of 3,077,500 time-based awards and 512,083 performance-based awards, and exclude 1,079,167 performance-based RSUs that have been awarded but deemed not granted as the performance targets have not yet been determined. Share-based compensation expense recognized in the Successor three months ended March 31, 2021 was $1,941, of which $1,698 related to time-based awards and $243 related to performance-based awards. Of the total expense for the three months ended March 31, 2021, $104 is included in cost of revenue, $215 is included in research and development and $1,622 is included in selling, general and administrative expenses.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

March 31, 2021

(Unaudited)

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 three months ended March 31, 2021 were: 4,668,750 unvested RSUs, 37,958,236 Warrants and 34,437,182 shares underlying the Debentures, were they to be converted.

14. Income Taxes

The Company’s effective income tax rate differs from the federal statutory rate primarily as a result of certain expenses being deductible for financial reporting purposes that are not deductible for tax purposes, the existence of research and development tax credits, operating loss carryforwards, and adjustments to previously recorded deferred tax assets and liabilities due to the enactment of the Tax Cuts and Jobs Act in 2017.

At December 31, 2020, the Company had net operating loss carryforwards of approximately $44,534 that begin to expire in 2036.

The Company files a federal income tax return and separate income tax returns in various states. For federal and certain states, the 2017 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, 2020. 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, 2020, the Company recognized a full valuation allowance against its net deferred tax assets, pursuant to ASC 740, as of March 31, 2021 and December 31, 2020. In calculating the valuation allowance as of March 31, 2021 and December 31, 2020, the Company was not permitted to use its existing deferred tax liabilities related to its indefinite-lived intangible assets as a source of taxable income to support the realization of its existing finite-lived deferred tax assets. Based on the Company’s evaluation, it was determined that no uncertain tax positions existed as of March 31, 2021 or December 31, 2020.

15. Segments

The Company’s reportable segments during the three months ended March 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.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

March 31, 2021

(Unaudited)

Kandy is a provider of cloud-based enterprise services. It 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, and provides white-labeled services to a variety of customers including communications service providers and systems integrators.

Presented below is certain information by reportable segment. The Company uses the same accounting policies for each reportable segment. 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 three months ended March 31, 2021. 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 three months ended March 31, 2020 related only to Computex as Kandy was acquired in December 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)

March 31, 2021

(Unaudited)

16. Commitments and Contingencies

Registration Rights

See Note 9 for a discussion of certain registration rights.

Contingencies

On December 16, 2019, the Company received a complaint filed by one of its vendors for alleged breach of contract asking for approximately $351. This suit was settled during the second quarter of 2020 for $281.

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 paid during the three months ended March 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 March 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.

17. Subsequent Events

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

In April 2021, an additional 1,500 Units were sold, including 250 units sold to a related party. See Note 9 for additional information on the Units.

Other than as disclosed in this note and as may be disclosed elsewhere in the Notes to the financial statements, there were no subsequent events that required adjustment or disclosure in the condensed consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

References in this report to “we,” “us,” “our,” or the “Company” refer to American Virtual Cloud Technologies, Inc. (or “AVCT”) and its wholly owned subsidiaries. References to our “management” or our “management team” refer to our officers and directors. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements (including the notes thereto) contained elsewhere in this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risk and uncertainties.

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performances, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performances or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of our Annual Report on Form 10-K, as amended, filed on May 14, 2021 with the U.S. Securities and Exchange Commission (the “SEC”). The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Overview

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

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

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

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

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

Covid-19

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

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

Our business

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

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

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

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

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

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

Key trends affecting our results of operations

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

Growth Strategy

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

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

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

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

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

Results of operations

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

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

For the reasons discussed above, management believes it remains useful to review the operating results for the three months ended March 31, 2021 with the operating results for the three months ended March 31, 2020 (or 1^st quarter 2021 and 1^st quarter 2020, respectively).

1st Quarter of 2021 (January 1, 2021 through March 31, 2021) versus the 1st Quarter of 2020 (January 1, 2020 through March 31, 2020)

Net loss

Net loss for the 1^st quarter of 2021 was $22.6 million compared with $0.1 million for the 1^st quarter of 2020. Discussed below are the revenue and expense factors that primarily contributed to the quarter over quarter net loss change.

Hardware revenue

Hardware revenue is seasonal and tends to be higher in the fourth quarter of each year. Our hardware revenue was $13.9 million in the 1^st quarter of 2021 compared with $10.4 million in the 1^st quarter of 2020, an increase of $3.6 million, or 34.4%. We attribute this increase to the impact of COVID-19 due to increased demand for equipment in the manufacturing, logistics and public sectors as more customers transitioned to remote work. Though our hardware revenue was up in the 1^st quarter of 2021 compared with the 1^st quarter of 2020, the margin decreased 540 basis points due to upfront entry costs related to new customers and changes in product mix.

Software and maintenance revenue

Revenues from software and maintenance services, which are recorded net of direct expenses, was flat at $1.5 million in the 1^st quarter of 2021 as well as the 1^st quarter of 2020. Since this revenue is recorded net, the revenue is also the gross margin.

Managed and professional services revenue

Managed and professional services revenues increased 32.0%, to $8.5 million in the 1^st quarter of 2021 compared with $6.4 million in the 1^st quarter of 2020. We attribute this increase to increasing demand for infrastructure assessment, cyber security and managed services monitoring, primarily in the Computex segment which recorded 95.6% of our managed and professional services revenue during the quarter. Though revenues from managed and professional services in the Computex segment increased, the margin decreased 690 basis points compared with the 1^st quarter of 2020. Such reduced margins reflect increased investments in direct labor personnel and telecommunications to support our increasing customer base and related service offerings. The newly acquired Kandy segment accounted for $0.4 million of the managed and professional services revenue recorded during the 1^st quarter of 2021.

Cloud subscription and software revenue

Cloud subscription and software revenue was $3.1 million in the 1^st quarter of 2021 and represents revenue from subscriptions to the Company’s cloud-based technology platform, offered through the Kandy segment, which the Company acquired on December 1, 2020.

Other revenue

Other revenue, which consists primarily of freight and reimbursables, including travel, meals and entertainment, was $0.2 million and $0.1 million for the 1^st quarter of 2021 and the 1^st quarter of 2020, 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 $27.2 million in the 1^st quarter of 2021, an increase of $8.8 million, or 48.0%, compared with $18.4 million in the 1^st quarter of 2020. Though aggregate revenues increased, aggregate gross profit was flat at $6.3 million in both quarters due primarily to the impact of increased margins on hardware revenue being offset by lower margins on managed and professional services revenue. Of the $8.8 million increase, $3.5 million related to the Kandy acquisition.

Research and development

The Company began recognizing research and development expenses when it acquired Kandy in December 2020. In the 1^st quarter of 2021, research and development expenses were $4.5 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 in which the research and development teams create potentially shippable products. Currently, because the development phases (called sprints) are so short (typically 4-6 weeks long), 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 (including transaction costs) for the 1^st quarter of 2021 and the 1^st quarter of 2020 consisted of the components in the following table (in thousands):

Selling, general and administrative expenses increased $7.9 million, partly as a result of added expenses related to the Kandy acquisition ($2.9 million of the increase) as well as an increase in personnel-related costs, professional fees, insurance and depreciation and amortization. Personnel-related expenses increased primarily as a result of the inclusion of AVCT corporate salaries in the Successor period, which were not included in the Predecessor period, and the inclusion of share-based compensation expenses in the Successor period which are related to awards issued in the Successor period. The increased insurance expenses are related to the Company’s expanded public company activities. Increased professional fees are also related to the Company’s expanded public company activities. The increase in depreciation and amortization was due to increased amortization expense related to intangible assets recognized as of the Computex Closing Date and the Kandy Closing Date. Meals, entertainment and travel decreased as a result of less travel and meetings with clients due to COVID-19 restrictions.

Change in fair value of warrant liabilities

The change in the fair value of warrant liabilities of $3.6 million represent mark-to-market fair value adjustments related to certain warrants issued in connection with the IPO in 2017. Such changes primarily result from changes in the Company’s stock price.

Interest expense

Interest expense in the 1^st quarter of 2021 was up compared with the 1^st quarter of 2020, primarily as a result of interest on the Debentures (which includes paid-in-kind interest) and the subordinated promissory note which were both issued in the Successor period. The Debentures bear interest at the rate of 10.00% per annum and the subordinated promissory note bears interest at the rate of 12.00% per annum. Interest expense, which also includes amortization of the discount on the Debentures, consisted of the following (in thousands):

Benefit/provision for income taxes

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

Liquidity and Capital Resources

Overview

Historically, the Company’s primary sources of liquidity have been cash and cash equivalents, cash flows from operations (when available) and cash flows from financing activities, including funding under its Credit Agreement. The Credit agreement is more fully discussed in Note 8 to the condensed consolidated financial statements. From time to time, the Company may also choose to access the debt and equity markets to fund acquisitions, fund working capital and 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, including capital expenditures.

The Credit Agreement matures on June 30, 2021, and, as amended, provides for maximum borrowings of $16.5 million on the line of credit portion with a scheduled reduction of $3.5 million in availability under the line of credit as of April 1, 2021. As amended, the Credit Agreement provides for a minimum monthly liquidity (defined as unrestricted cash plus availability under the line of credit) of $3.0 million commencing January 31, 2021. As of March 31, 2021, amounts outstanding under the term loan and the line of credit with Comerica Bank were $5.3 million and $6.8 million, respectively.

In addition, at March 31, 2021, the Company had unrestricted and restricted cash of $15.3 million and $0.4 million, respectively, in its operating bank accounts, and had availability under its line of credit of $5.5 million. Shareholders’ deficit at March 31, 2021 was $4.4 million. Also, as of March 31, 2021, the Company’s current liabilities exceeded its current assets by $15.3 million, primarily as a result of the classification of the components of the Credit Agreement as current.

On or before the maturity date of the Credit Agreement, the Company may seek to either negotiate an extension of the Credit Agreement or enter into a new agreement with another lender. In addition, during the 1^st quarter and early 2^nd quarter, the Company raised additional capital through the issuance of Debentures which it plans to use to fund expansion, capital expenditures and working capital for its current operations. See Note 8 to the condensed consolidated financial statements for additional information on the Debentures.

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

In April 2020, we received a PPP loan of $4.1 million. The PPP loan is administered by the SBA. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of such loans after eight weeks, if the loan is used for eligible purposes, including to fund payroll costs, mortgage interest, rent and/or utility costs, and meet certain other requirements, including, the maintenance of employment and compensation levels. We believe that we have used the entire PPP Loan for qualifying expenses and expect to qualify for full or partial forgiveness under the program. However, we can provide no assurance that we will obtain forgiveness for any portion. See Note 8 for additional disclosures about the Company’s debt.

Successor cash flows

Operating activities

Net cash used in operating activities was $7.2 million in the 1^st quarter of 2021, which was the result of net cash used to fund operating expenses, including operating expenses for Kandy which include research and development costs, and lower cash available from deferred revenue, partially offset by cash flows from receivables and accounts payable and accrued liabilities.

Investing activities

Investing activities used net cash of $0.3 million in the 1^st quarter of 2021 and consisted of capital expenditures.

Financing activities

Financing activities provided net cash of $12.7 million in the 1^st quarter of 2021, and was generated from the issuance of Debentures of $14.5 million, partially offset by net debt repayments of $1.0 million and share repurchases of $0.8 million related to employee tax withholding associated with the delivery of vested RSUs under the Company’s equity incentive plan.

Predecessor cash flows

Operating activities

Net cash used in operating activities was $2.1 million in the 1^st quarter of 2020 and was primarily due to lower cash flows available from deferred revenue and the use of cash flows to fund prepaid expenses, partially offset by cash flows from accounts receivable.

Investing activities

Investing activities used cash flows of $0.1 million in the 1^st quarter of 2020, which consisted of funding for capital expenditures.

Financing activities

Financing activities provided cash flows of $2.3 million in the 1^st quarter of 2020, consisting primarily of net funding under the line of credit of $3.0 million, partially offset by $0.7 million of debt repayments.

Off-Balance Sheet Arrangements

At March 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

Except for the adoption of ASU No. 2020-06, which is discussed in Note 4 to the condensed consolidated financial statements, there were no significant changes to our critical accounting policies and estimates from those disclosed in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K, as amended, for the year ended December 31, 2020.

Recent Accounting Pronouncements Issued and Adopted

See Note 3 of the condensed consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign exchange risk

Our business is primarily conducted within US markets and, hence we have no material exposure to currency fluctuations. International revenues in the 1^st quarter of 2021 was 3.9% of total revenues.

Interest rate risk

Interest rate risks are inherent in the Credit Agreement, partially mitigated by an interest rate swap. See Note 8 to the condensed consolidated financial statements. Currently, management does not view this exposure to be a significant risk.

ITEM 4. 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 not effective as of March 31, 2021 due solely to the material weakness in our internal control over financial reporting described below in “Management’s Report on Internal Control over Financial Reporting.” In light of such material weakness, we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects our financial position, results of operations and cash flows for the periods presented.

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.

Due solely to the events that led to the restatement of our December 2020 consolidated financial statements, management has identified a material weakness in internal controls related to the accounting for warrants issued by Pensare Acquisition Corp. (“Pensare”) issued in connection with the initial public offering, as described in the section titled, “Restatement of Previously Issued Financial Statements” in Note 3 of the Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K, as amended.

Management is implementing remediation steps to address the material weakness and to improve our internal control over financial reporting. Such remediation steps will include an expansion and improvement of our review process for complex securities and related accounting standards by engaging expert third-party professionals with whom to consult regarding complex accounting applications and consideration.

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, as the circumstances that led to the restatement of the December 2020 financial statements that are described in the Company’s Annual Report on Form 10-K, as amended, had not yet been identified.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Currently, there are no material litigation, arbitration, governmental proceeding or any other legal proceeding currently pending or known to be contemplated against us or any members of our management team in their capacity as such.

ITEM 1A. RISK FACTORS.

Factors that could cause our actual results to differ materially from those in this quarterly report are any of the risks described in our Annual Report on Form 10-K, as amended, filed with the SEC on May 14, 2021. Any of these factors could result in a significant or material adverse effect on our results of operations, financial condition or cash flows. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business. As of the date of this quarterly report, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K, as amended, filed with the SEC on May 14, 2021, other than the amended and restated risk factors set forth below and except as may otherwise be disclosed in this quarterly report. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

We have identified a material weaknesses in our internal control over financial reporting related to the restatement described in our Annual Report on Form 10K, as amended, which, if not remediated, could result in material misstatements in our financial statements.

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. Management is also likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes or material weaknesses identified as a result of such evaluation. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

As described elsewhere in this Quarterly Report on Form 10-Q, we identified a material weakness in our internal control over financial reporting related to accounting for the Private Placement and EBC Warrants issued in connection with Pensare Acquisition Corp.’s initial public offering in 2017. As a result of this material weakness, management concluded that our disclosure controls and procedures were not effective as of March 31, 2021. This material weakness resulted in the need to restate certain financial statement line items in our previously issued financial statements for the period ended December 31, 2020.

Any failure to maintain effective internal control over financial reporting or disclosure controls and procedures could adversely impact our ability to report our financial position and results of operations on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are not filed on a timely basis, we could be subject to sanctions or investigations by the stock exchange on which our ordinary shares are listed, the SEC or other regulatory authorities. In either case, there could result a material adverse effect on our business. Such material weakness could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

We can give no assurance that the measures we have taken and plan to take in the future will remediate the material weakness identified or that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our financial statements.

We may face litigation and other risks as a result of the material weakness in our internal control over financial reporting.

We identified a material weakness in our internal controls over financial reporting. As a result of such material weakness, the restatement described elsewhere in this Report, the change in accounting for the Company’s Private Placement and EBC warrants, and other matters raised or that may in the future be raised by the SEC, the Company could potentially face litigation or other disputes which could include, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the restatement and material weaknesses in our internal control over financial reporting and the preparation of our financial statements. As of the date of this Report, we have no knowledge of any such litigation or dispute. However, we can provide no assurance that any such litigation or dispute will not arise in the future. Any such litigation or dispute, whether successful or not, could have a material adverse effect on our business, results of operations and financial condition or our ability to complete a business combination.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Recent sales, in a private placement, of units of securities of the Company (“Units”), including 14,510 Units sold during the three months ended March 31, 2021 are disclosed in Note 9 to the condensed consolidated financial statements. The issuances of such securities were contemplated by the terms of a previously disclosed Securities Purchase Agreement, dated as of April 3, 2020, and were not registered under the Securities Act in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. See Note 9 for the terms of the Units.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

ITEM 6. EXHIBITS.

SIGNATURES

Pursuant to the requirements 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.

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