UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, ~~2020~~2021

☐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)

Delaware		81-2402421
(State or other jurisdiction of incorporation)		(IRS Employer Identification Number)

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:

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

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.

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Smaller reporting company ☒

Emerging growth company ☒

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

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

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

As of November ~~11, 2020, 19,753,061~~8, 2021, 67,773,027 shares of the Company’s common stock, par value $0.0001 per share, were ~~outstanding.~~outstanding.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION

Item 1.	Unaudited Condensed Consolidated Financial Statements	1-28

	~~Condensed Consolidated Balance Sheets~~	1

	~~Condensed Consolidated Statements of Operations~~	2

	~~Condensed Consolidated Statements of Changes in Stockholders’ (Deficit) Equity~~	3

	~~Condensed Consolidated Statements of Cash Flows~~	5

	~~Notes to Unaudited Condensed Consolidated Financial Statements~~	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3229

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4541

Item 4.	Controls and Procedures	4541

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	4643

Item 1A.	Risk Factors	4643

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4744

Item 3.	Defaults Upon Senior Securities	4744

Item 4.	Mine Safety Disclosures	4744

Item 5.	Other Information	4744

Item 6.	Exhibits	4744

SIGNATURES		4845

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)

	September 30, 2021			December 31, 2020
	(Unaudited)
ASSETS
Current assets:
Cash	$	4,201		$	9,944
Restricted cash		-			561
Trade receivables, net of allowances of $537 and $111 at September 30, 2021 and December 31, 2020, respectively		25,686			22,837
Prepaid expenses and other current assets		3,400			1,601
Inventory		2,172			1,057
Total current assets		35,459			36,000
Property and equipment, net		9,024			10,061
Other assets:
Goodwill		42,323			66,273
Other intangible assets, net		36,719			40,606
Other noncurrent assets		959			67
Total other assets		80,001			106,946
TOTAL ASSETS	$	124,484		$	153,007

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses	$	41,372		$	32,705
Deferred revenue		3,065			4,608
Line of credit		8,839			7,355
Current portion of notes payable and capital leases		3,247			9,232
Subordinated promissory note - related party		5,000			-
Subordinated promissory note - other		500			500

Total current liabilities		62,023			54,400
Long-term liabilities
Notes payable and capital leases (net of current portion and deferred financing fees)		28			963
Convertible Debentures, net of discount - related parties		-			31,969
Convertible Debentures, net of discount and deferred financing fees		-			9,675
Warrant liabilities		2,262			5,303
Deferred tax liability		-			3,459
Other liabilities		86			69
Total long-term liabilities		2,376			51,438
Total liabilities		64,399			105,838

Commitments and contingent liabilities (see note 16)

Stockholders’ equity:

Successor:
Preferred stock, $0.0001 par value; 5,000,000 authorized; NaN issued and outstanding		-			-
Common stock, $0.0001 par value; 500,000,000 shares authorized; 65,228,070 and 19,753,061 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		7			2
Additional paid-in capital		178,370			90,828
Accumulated deficit		(118,292	)		(43,661	)
Total stockholders’ equity		60,085			47,169
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	124,484		$	153,007

September 30,
2020 December 31,
2019
Successor Predecessor
(Unaudited)
ASSETS
Current assets:
Cash $ 3,715 $ 18
Restricted cash 688 -
Trade receivables, net of allowances of $339 and $138 at September 30, 2020 and December 31, 2019, respectively 19,030 16,092
Prepaid expenses 2,213 397
Inventory 649 350
Other current assets 53 224
Total current assets 26,348 17,081
Property and equipment, net 7,765 9,608
Other assets:
Goodwill 42,129 21,215
Other intangible assets, net 23,142 2,404
Other noncurrent assets 67 69
Total other assets 65,338 23,688
TOTAL ASSETS $ 99,451 $ 50,377

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses $ 27,524 $ 21,731
Deferred revenue 1,536 6,431
Line of credit 8,487 -
Current portion of notes payable and capital leases 8,991 2,506
Subordinated promissory note 500 -
Total current liabilities 47,038 30,668
Long-term liabilities
Line of credit - 6,051
Notes payable and capital leases (net of current portion and deferred financing fees) 1,558 5,685
Convertible Debentures, net of discount - related party 10,632 -
Convertible Debentures, net of discount 26,634 -
Deferred tax liability 3,443 -
Other liabilities 82 180
Total long-term liabilities 42,349 11,916
Total liabilities 89,387 42,584

Commitments and contingent liabilities (see note 15)

Stockholders’ equity:

Successor:

Preferred stock, $0.0001 par value; 5,000,000 authorized; none issued and outstanding - -
Common stock, $0.0001 par value; 500,000,000 shares authorized; 19,753,061 shares issued and outstanding as of September 30, 2020 2 -
Additional paid-in capital 34,988 -
Accumulated deficit (24,926 ) -

Predecessor:
Predecessor common stock, $0.001 par value; 1,000 shares authorized; 1,000 shares issued and outstanding as of December 31, 2019 - -
Additional paid-in capital - 18,717
Accumulated deficit - (10,924 )
Total stockholders’ equity 10,064 7,793
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 99,451 $ 50,377

The accompanying notes are an integral part of the ~~unaudited~~ 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)

July 1,
2020 April 7,
2020 January 1,
2020 July 1,
2019 January 1,
2019
through through through through through
September 30,
2020 September 30,
2020 April 6,
2020 September 30,
2019 September 30,
2019
Successor Successor Predecessor Predecessor Predecessor

Revenues:
Hardware $ 16,428 $ 26,870 $ 10,587 $ 12,160 $ 40,649
Software and maintenance 1,202 2,734 1,459 1,418 4,447
Managed and professional services 8,204 15,188 6,880 6,599 20,557
Other 134 273 111 155 503
Total revenues 25,968 45,065 19,037 20,332 66,156

Cost of revenue 18,445 31,362 12,426 14,249 47,589

Gross profit 7,523 13,703 6,611 6,083 18,567

Selling, general and administrative expenses 9,929 17,617 7,835 6,928 20,403

Loss from operations (2,406 ) (3,914 ) (1,224 ) (845 ) (1,836 )

Other (expense) income
Interest expense - related party (597 ) (1,151 ) - - -
Interest expense (1,782 ) (3,389 ) (384 ) (309 ) (979 )
Other (expense) income (12 ) (25 ) 31 2 147
Total other expenses (2,391 ) (4,565 ) (353 ) (307 ) (832 )

Net loss before income taxes (4,797 ) (8,479 ) (1,577 ) (1,152 ) (2,668 )

Benefit (provision) for income taxes (41 ) (33 ) (12 ) 55 (33 )

Net loss $ (4,838 ) $ (8,512 ) $ (1,589 ) $ (1,097 ) $ (2,701 )

Loss per share - basic and diluted $ (0.25 ) $ (0.43 ) $ (1,587.30 ) $ (1,096.00 ) $ (2,700.60 )

Weighted average shares outstanding - basic and diluted 19,678,342 19,657,811 1,000 1,000 1,000

	Three Months Ended						Nine Months Ended			April 7, 2020 through			January 1, 2020 through
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020			April 6, 2020
	Successor			Successor			Successor			Successor			Predecessor

Revenues:
Hardware	$	13,000		$	16,428		$	39,219		$	26,870		$	10,587
Third party software and maintenance		2,080			1,202			5,115			2,734			1,459
Managed and professional services		8,623			8,204			26,323			15,188			6,880
Cloud subscription and software		3,575			-			10,790			-			-
Other		233			134			793			273			111
Total revenues		27,511			25,968			82,240			45,065			19,037

Cost of revenue		20,281			18,445			60,152			31,362			12,426

Gross profit		7,230			7,523			22,088			13,703			6,611
Goodwill impairment		20,500			-			20,500			-			-
Research and development		4,508			-			13,606			-			-
Selling, general and administrative		20,099			9,929			51,484			17,617			7,835

Loss from operations		(37,877	)		(2,406	)		(63,502	)		(3,914	)		(1,224	)

Other (expense) income
Gain on extinguishment of debt		4,177			-			4,177			-			-
Change in fair value of warrants liabilities		3,064			(783	)		3,041			(1,980	)		-
Interest expense - related parties		(4,602	)		(1,613	)		(14,611	)		(3,078	)		-
Interest expense		(2,029	)		(766	)		(4,835	)		(1,462	)		(384	)
Other (expense) income		(33	)		(12	)		(52	)		(25	)		31
Total other income (expenses)		577			(3,174	)		(12,280	)		(6,545	)		(353	)

Net loss before income taxes		(37,300	)		(5,580	)		(75,782	)		(10,459	)		(1,577	)

Provision for income taxes		(17	)		(41	)		(68	)		(33	)		(12	)

Net loss	$	(37,317	)	$	(5,621	)	$	(75,850	)	$	(10,492	)	$	(1,589	)

Loss per share - basic and diluted	$	(1.20	)	$	(0.29	)	$	(3.19	)	$	(0.53	)	$	(1,587.30	)

Weighted average shares outstanding - basic and diluted		31,089,649			19,678,342			23,791,532			19,657,811			1,000

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

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

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

(Unaudited)

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

For the period January 1, 2019 through September 30, 2019
Common Stock Additional
Paid-In Accumulated Stockholders’
Equity
Shares Amount Capital Deficit (Deficit)
Predecessor
Balance, January 1, 2019 1,000 $ - $ 18,717 $ (6,640 ) $ 12,077
Cumulative effect of accounting change (See Note 4) - - - 99 99
Net loss - - - (2,701 ) (2,701 )
Balance, September 30, 2019 1,000 $ - $ 18,717 $ (9,242 ) $ 9,475

	For the period April 7, 2020 through September 30, 2020
						Additional
	Common Stock					Paid-In			Accumulated			Stockholders’
	Shares			Amount		Capital			Deficit			Equity (Deficit)
Successor
Balance, April 7, 2020		7,932,977		$	1	$	-		$	(17,081	)	$	(17,080	)
Conversion of rights (previously issued in the IPO) into shares		3,105,000			-		-			-			-
Issuance of shares in connection with the acquisition of Computex (as defined in Note 1)		8,189,490			1		24,567			-			24,568
Additional shares issued in connection with the acquisition of Computex (working capital adjustment)		117,231			-		557			-			557
Issuance of shares in exchange for services		500,000			-		1,500			-			1,500
Deferred underwriting fees relating to IPO		-			-		(3,000	)		-			(3,000	)
Debenture discount relative value of warrants		-			-		9,937			-			9,937
Redemption of shares held in trust		(91,637	)		-		-			(1,004	)		(1,004	)
Share-based compensation		-			-		1,420			-			1,420
Net loss		-			-		-			(10,492	)		(10,492	)
Balance, September 30, 2020		19,753,061		$	2	$	34,981		$	(28,577	)	$	6,406

For the period July 1, 2019 through September 30, 2019
Common Stock Additional
Paid-In Accumulated Stockholders’
Equity
Shares Amount Capital Deficit (Deficit)
Predecessor
Balance, July 1, 2019 1,000 $ - $ 18,717 $ (8,145 ) $ 10,572
Net loss - - - (1,097 ) (1,097 )
Balance, September 30, 2019 1,000 $ - $ 18,717 $ (9,242 ) $ 9,475

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

	For the period July 1, 2020 through September 30, 2020
					Additional
	Common Stock				Paid-In		Accumulated			Stockholders’
	Shares		Amount		Capital		Deficit			Equity
Successor
Balance, July 1, 2020		19,635,830	$	2	$	33,622	$	(22,956	)	$	10,668
Additional shares issued in connection with the acquisition of Computex (working capital adjustment)		117,231		-		557		-			557
Share-based compensation		-		-		802		-			802
Net loss		-		-		-		(5,621	)		(5,621	)
Balance, September 30, 2020		19,753,061	$	2	$	34,981	$	(28,577	)	$	6,406

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

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

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

(Unaudited)

	For the period July 1, 2021 through September 30, 2021
					Additional
	Common Stock				Paid-In		Accumulated			Stockholders’
	Shares		Amount		Capital		Deficit			Equity (Deficit)
Successor
Balance, July 1, 2021		20,302,452	$	2	$	65,727	$	(80,975	)	$	(15,246	)
Common stock issued on conversion of Debentures		38,811,223		4		109,691		-			109,695
Common stock issued on conversion of Penny Warrants		5,974,395		1		1		-			2
Vested and delivered RSUs		140,000		-		-		-			-
Share-based compensation		-		-		2,951		-			2,951
Net loss		-		-		-		(37,317	)		(37,317	)
Balance, September 30, 2021		65,228,070	$	7	$	178,370	$	(118,292	)	$	60,085

For the period April 7, 2020 through September 30, 2020
Common Stock Additional
Paid-In Accumulated Stockholders’
Equity
Shares Amount Capital Deficit (Deficit)
Successor
Balance, April 7, 2020 7,932,977 $ 1 $ 7 $ (15,410 ) $ (15,402 )
Conversion of rights (previously issued in the IPO) into shares 3,105,000 - - - -
Original issuance of shares in connection with the acquisition of Computex (as defined in Note 1) 8,189,490 1 24,567 - 24,568
Additional shares issued in connection with the acquisition of Computex (working capital adjustment) 117,231 - 557 - 557
Issuance of shares in exchange for services 500,000 - 1,500 - 1,500
Deferred underwriting fees relating to IPO - - (3,000 ) - (3,000 )
Debenture discount relative to value of warrants - - 9,937 - 9,937
Redemption of shares held in trust (91,637 ) - - (1,004 ) (1,004 )
Share-based compensation - - 1,420 - 1,420
Net loss - - - (8,512 ) (8,512 )
Balance, September 30, 2020 19,753,061 $ 2 $ 34,988 $ (24,926 ) $ 10,064

	For the period January 1, 2021 through September 30, 2021
						Additional
	Common Stock					Paid-In			Accumulated			Stockholders’
	Shares			Amount		Capital			Deficit			Equity
Successor
Balance, January 1, 2021		19,753,061		$	2	$	90,828		$	(43,661	)	$	47,169
Common stock issued on conversion of Debentures		38,811,223			4		109,691						109,695
Common stock issued on conversion of Penny Warrants		5,974,395			1		1						2
Cumulative effect of accounting change related to adoption of ASU 2020-06 (See Note 4)		-			-		(36,983	)		1,219			(35,764	)
Debenture discount relative to fair value of warrants		-			-		9,223			-			9,223
Vested and delivered RSUs		842,500			-		-			-			-
Shares repurchased for tax withholding		(153,109	)		-		(1,142	)		-			(1,142	)
Share-based compensation		-			-		6,752			-			6,752
Net loss		-			-		-			(75,850	)		(75,850	)
Balance, September 30, 2021		65,228,070		$	7	$	178,370		$	(118,292	)	$	60,085

For the period July 1, 2020 through September 30, 2020
Common Stock Additional
Paid-In Accumulated Stockholders’
Equity
Shares Amount Capital Deficit (Deficit)
Successor
Balance, July 1, 2020 19,635,830 $ 2 $ 33,629 $ (20,088 ) $ 13,543
Additional shares issued in connection with the acquisition of Computex (working capital adjustment) 117,231 - 557 - 557
Share-based compensation - - 802 - 802
Net loss - - - (4,838 ) (4,838 )
Balance, September 30, 2020 19,753,061 $ 2 $ 34,988 $ (24,926 ) $ 10,064

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

April 7,
2020 January 1,
2020 January 1,
2019
through through through
September 30,
2020 April 6,
2020 September 30,
2019
Successor Predecessor Predecessor

Cash Flows from Operating Activities:
Net loss $ (8,512 ) $ (1,589 ) $ (2,701 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation 1,745 933 2,835
Amortization of intangible assets 1,158 263 740
Amortization of convertible debenture discount relative to warrants 1,921 - -
Interest on convertible debt paid-in-kind 2,112 - -
Share-based compensation 1,420 - -
Deferred income taxes (7 ) - -
Amortization and write-off of deferred financing costs 21 128 34
Changes in operating assets and liabilities:
Accounts receivable (5,234 ) 2,296 30,373
Prepaid expenses (680 ) (1,074 ) -
Inventory 785 (1,084 ) (45 )
Accounts payable and accrued expenses (4,723 ) 745 (25,967 )
Other current assets (53 ) 217 391
Other current liabilities - 2 -
Deferred revenue (2,551 ) (2,353 ) (3,250 )
Other liabilities (27 ) (76 ) (88 )
Net cash (used in) provided by operating activities (12,625 ) (1,592 ) 2,322
Cash Flows from Investing Activities:
Cash from the acquisition of Computex (See Note 1) 269 - -
Purchase of property and equipment (396 ) (146 ) (486 )
Net cash used in investing activities (127 ) (146 ) (486 )
Cash Flows from Financing Activities:
Net change in line of credit (593 ) 3,029 623
Debt repayments (including capital lease obligations) (747 ) (1,040 ) (2,176 )
Proceeds from PPP Loan (See Note 8) 4,135 - -
Issuance of convertible Debentures (See Note 9) 12,104 - -
Issuance of common stock 1,500 - -
Redemption of shares held in trust (1,004 ) - -
Payment of deferred financing fees (113 ) - -
Net cash provided by (used in) financing activities 15,282 1,989 (1,553 )
Net change in cash and restricted cash 2,530 251 283
Cash and restricted cash, beginning of period 1,873 18 260
Cash and restricted cash, end of period $ 4,403 $ 269 $ 543
Supplemental Disclosures about Cash Flow Information
Cash paid for interest $ 452 $ 384 $ 979
Cash paid (refunds received) for income taxes $ 62 $ (4 ) $ 61
Supplemental Schedule of Noncash Investing and Financing Activities
Noncash acquisition of Computex in exchange for common stock, convertible Debentures and assumed debt $ 61,768 $ - $ -
Relative fair value of warrants issued with convertible Debentures 9,937 - -
Promissory note - related party, exchanged for convertible Debentures 8,566 - -
Deferred underwriting fees settled via the issuance of common stock and the issuance of subordinated promissory note 3,000 - -
Capital expenditures included in accounts payable and accrued expenses 287 125 141
Assets acquired by capital lease - - 299

	Nine months ended			April 7, 2020 through			January 1, 2020 through
	September 30, 2021			September 30, 2020			April 6, 2020
	Successor			Successor			Predecessor
Cash Flows from Operating Activities:
Net loss	$	(75,850	)	$	(10,492	)	$	(1,589	)
Adjustments to reconcile net loss to net cash used in operating activities:
Goodwill impairment		20,500			-			-
Depreciation		3,414			1,745			933
Amortization of intangible assets		3,887			1,158			263
Amortization of Convertible Debenture discount		9,253			1,921			-
Interest on convertible debt paid-in-kind		8,257			2,112			-
Gain on extinguishment of debt		(4,177	)		-			-
Share-based compensation		6,752			1,420			-
Change in fair value of warrant liabilities		(3,041	)		1,980			-
Deferred income taxes		(9	)		(7	)		-
Amortization and write-off of deferred financing costs		809			21			128
Loss on disposal of property and equipment		183			-			-
Changes in operating assets and liabilities:
Accounts receivable		(2,849	)		(5,234	)		2,296
Prepaid expenses and other current assets		(1,799	)		(733	)		(857	)
Inventory		(1,115	)		785			(1,084	)
Accounts payable and accrued expenses		8,672			(4,723	)		756
Other current liabilities		-			-			2
Deferred revenue		(1,543	)		(2,551	)		(2,353	)
Other		(259	)		(27	)		(76	)
Net cash used in operating activities		(28,915	)		(12,625	)		(1,581	)
Cash Flows from Investing Activities:
Cash from the acquisition of Computex (See Note 5)		-			269			-
Purchase of property and equipment		(2,551	)		(396	)		(157	)
Deferred development costs		(462	)		-			-
Net cash used in investing activities		(3,013	)		(127	)		(157	)
Cash Flows from Financing Activities:
Net change in line of credit		1,484			(593	)		3,029
Payment of taxes from withheld shares		(1,142	)		-			-
Debt repayments (including capital lease obligations)		(2,767	)		(747	)		(1,040	)
Proceeds from issuance of promissory note - related party		5,000			-			-
Proceeds from PPP Loan (See Note 8)		-			4,135			-
Proceeds from issuance of Convertible Debentures (See Note 9)		24,000			12,104			-
Proceeds from issuance of common stock		2			1,500			-
Redemption of shares held in trust		-			(1,004	)		-
Payment of deferred financing fees		(953	)		(113	)		-
Net cash provided by financing activities		25,624			15,282			1,989
Net change in cash and restricted cash		(6,304	)		2,530			251
Cash and restricted cash, beginning of period		10,505			1,873			18
Cash and restricted cash, end of period	$	4,201		$	4,403		$	269
Supplemental Disclosures about Cash Flow Information
Cash paid for interest	$	666		$	452		$	384
Cash paid (refunds received) for income taxes	$	248		$	62		$	(4	)
Supplemental Schedule of Noncash Investing and Financing Activities
Noncash conversion of Debentures to common stock	$	109,695		$	-
Fair value of Penny Warrants related to the issuance of Convertible Debentures		9,223			9,937		$	-
Noncash acquisition of Computex in exchange for common stock, Convertible Debentures and assumed debt		-			61,768			-
Promissory note - related party, exchanged for Convertible Debentures		-			8,566			-
Deferred underwriting fees settled via the issuance of common stock and the issuance of subordinated promissory note		-			3,000			-
Capital expenditures included in accounts payable and accrued expenses		79			287			125

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

September 30, ~~2020~~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 ~~“Closing~~“Computex Closing Date”), AVCT (formerly known as Pensare Acquisition Corp.) consummated a business combination transaction (the ~~“Business~~“Computex Business Combination”) in which it acquired Stratos Management Systems, Inc. (“Computex”), ~~a private~~an operating company that does business as Computex Technology Solutions. ~~The Business Combination was consummated pursuant to the terms of an amended agreement originally entered into on July 25, 2019.~~ In connection with the closing of the Computex Business Combination, the Company changed its name to American Virtual Cloud Technologies, Inc. ~~See Note 5 for additional information about the Business Combination.~~

~~In the Business Combination,~~On December 1, 2020 (the “Kandy Closing Date”), the Company isacquired 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 ~~acquirer~~acquirees, and ~~Computex is~~the Company was considered the ~~acquiree and the Predecessor, for accounting purposes.~~acquirer. The ~~Business Combination was~~acquisitions were accounted for using the acquisition method of ~~accounting,~~accounting. See Note 5 for additional information.

Nature of current business

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

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

Recent development

On September 16, 2021, the Company issued a press release announcing that as a result of a decision by the Company’s Board of Directors to explore strategic alternatives previously announced on April 7, 2021, the Board had authorized the Company to focus its strategy on acquisitions and organic growth in its cloud technologies business as well as to explore strategic opportunities for its IT solutions business, including the planned divestiture of Computex. The Company believes that the change will allow it to optimize resource allocation, focus on core competencies, and improve its ability to invest in areas of maximal growth potential. Proceeds from any potential sale transaction are expected to be used to further deleverage the balance sheet and provide working capital.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

Computex was not classified as held for sale as of September 30, 2021 as the criteria for the reporting unit to be classified as held for sale were not met as of September 30, 2021. However, in connection with the potential sale of Computex, the Company compared the expected proceeds less costs to sell with the carrying value of the reporting unit and in connection therewith recorded a noncash goodwill impairment charge of $20,500 during the three and nine months ended September 30, 2021.

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

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

Covid-19

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

2. Liquidity

Historically, the Company’s primary sources of liquidity have been cash and cash equivalents, cash flows from operations (when available) and cash flows from financing activities, including funding under its Credit Agreement (defined and more fully discussed in Note 8). From time to time, the Company may also choose to access the debt and equity markets to fund acquisitions and fund working capital to diversify its capital sources. The Company’s current principal capital requirements are to fund working capital, fund capital expenditures and make investments that are in line with its business strategy.

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

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

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

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

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

3. Summary of Significant Accounting Policies

Basis of presentation

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

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

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

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

~~Currently, the Company’s primary operations are through its wholly owned subsidiary, Computex.~~

~~AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED~~

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

~~September 30, 2020~~

~~(Unaudited)~~

~~Nature of business~~

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

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

~~Recent Development~~

On August 5, 2020, we entered into a Purchase Agreement (the “Purchase Agreement”) with Ribbon Communications, Inc. (“Ribbon”), Ribbon Communications Operating Company, Inc. (“RCOCI”) and Ribbon Communications International Limited (together with RCOCI, the “Sellers”), pursuant to which AVCT has agreed to purchase the Sellers’ cloud-based enterprise services business (also known as the Kandy Communications business) (the “Kandy Business”) by acquiring certain of the Sellers’ and their respective affiliates assets (and assuming certain of the Sellers’ and their respective affiliates’ liabilities) primarily associated with the Kandy Business, and acquiring all of the outstanding interests of Kandy Communications LLC. See Note 16 of the condensed consolidated financial statements for more information.

~~Covid-19~~

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

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

~~NASDAQ listing~~

On April 9, 2020, the Company was notified by the NASDAQ via a certified letter (the “Determination Letter”) that it had not complied with the requirements of the NASDAQ Listing Rule IM-5101-2, which required the Company to meet the requirements for initial listing after the completion of the business combination. The Determination Letter stated that the Company’s common stock did not meet the minimum $4.00 bid price and the $15 million market value requirement for publicly held shares, which are set forth in the NASDAQ Listing Rule 5505. On May 27, 2020, the NASDAQ granted the Company an extension to demonstrate compliance with the applicable requirements. During the third quarter of 2020, the Company achieved compliance and was so notified by the NASDAQ via letter dated August 26, 2020.

~~AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED~~

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

~~September 30, 2020~~

~~(Unaudited)~~

~~2. Liquidity~~

At September 30, 2020, the Company had unrestricted and restricted cash of $3,715 and $688, respectively, in its operating bank accounts and had a working capital deficit of $20,690. Also, the Company’s Credit Agreement (as defined in Note 8) matures on June 30, 2021.

On or before the maturity date of the Credit Agreement, the Company plans to seek to either negotiate an extension of the Credit Agreement or enter into a new agreement with another lender. In addition, the Company is in the process of seeking to raise working capital for its current operations and also to fund the pending acquisition of the Kandy Business (as more fully discussed in Note 16). There can be no assurance that financing will be available in the amounts that the Company requires or on terms that are acceptable, if at all.

~~3. Summary of Significant Accounting Policies~~

~~Basis of presentation~~

These condensed consolidated financial statements should be read in conjunction with Stratos Management Systems, Inc.’s consolidated financial statements and notes as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017, included in the Report on Form 8-K/A filed with the SEC on April 14, 2020. The interim results for the periods ended September 30, 2020 are not necessarily indicative of the results expected for the year ending December 31, 2020 or any future interim periods.

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

~~AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED~~

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

~~September 30, 2020~~

~~(Unaudited)~~

Determining fair values of certain assets acquired and liabilities assumed requires the exercise of judgment and often involves the use of significant estimates and assumptions. See Note 5 for a discussion of the fair value estimates ~~that were recorded~~utilized in ~~connection with~~ the ~~Company’s acquisition~~allocation of ~~Computex.~~the Computex and Kandy purchase prices.

Principles of consolidation

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

As more fully discussed above, the historical financial information of AVCT prior to the business combination (a SPAC) has not been reflected in the Predecessor financial statements as such historical amounts have been determined not to be useful information to a user of the financial statements. Accordingly, all activity reported prior to April 7, 2020 (the Predecessor period) reflect only the operations of Computex.

Use of estimates

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

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

Significant accounting policies

The significant accounting policies used in preparing these condensed consolidated financial statements were applied on a basis consistent with those reflected in our consolidated financial statements that are included in the ~~Business Combination.~~

~~Revenue recognition~~

~~Effective January 1, 2019,~~annual report on Form 10-K for the ~~Company adopted~~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 ~~Standard~~Standards Board (“FASB”) Accounting Standards Update (“ASU”) ~~2014-09,~~ No. 2020-06, “~~Revenue~~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 ~~Contracts~~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 ~~Customers. This ASU created~~each of Pensare Sponsor Group, LLC, a Delaware limited liability company (the “Sponsor”), MasTec, Inc., a Florida corporation, and EarlyBirdCapital, Inc., a Delaware corporation (“EBC” and, together with the ~~Financial Accounting Standard Board’s (“FASB’s”~~Sponsor and MasTec, Inc., the “Purchasers”), ~~Accounting Standard Codification (ASC), Topic 606 (“Topic 606”)~~pursuant to which ~~provides a comprehensive new revenue recognition guide. Below are~~the Purchasers purchased an aggregate of 10,512,500 warrants in connection with and simultaneously with the closing of the Company’s ~~significant revenue recognition policies~~initial public offering (the “IPO”), including ~~those that were changed as~~the full over-allotment amount (the “Private Placement Warrants”), at a ~~result~~purchase price of $1.00 per Private Placement Warrant.

On or about August 1, 2017, in the IPO, the Company sold units of the ~~adoption~~Company’s equity securities, each such unit consisting of ~~Topic 606.~~

~~Revenue from contracts~~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 ~~customers are not recorded until~~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 ~~has~~for $11.50 per share, subject to adjustments. Subsequent to the ~~approval~~Computex Closing Date and ~~commitment from~~as of September 30, 2021, 15,525,000 Public Warrants, 10,512,500 Private Placement Warrants and 675,000 EBC Warrants remained outstanding.

The Private Placement Warrants and EBC Warrants are exercisable on a cashless basis, at the ~~parties,~~holder’s option, and are non-redeemable so long as they are held by the ~~rights~~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 ~~parties~~Company and are ~~identified, payment terms are established,~~generally not exercisable on a cashless basis.

The Company evaluated the ~~contract has commercial substance~~Warrants under Accounting Standards Codification (“ASC”) 815-40, Derivatives and ~~collectability~~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 ~~consideration~~warrant holder and because the holder of a warrant is ~~probable. The Company also evaluates~~not an input into the ~~following indicators, amongst others, when determining whether it is acting~~pricing of a fixed-for-fixed option on equity shares, such provision would preclude the Private Placement Warrants and the EBC Warrants from being classified in equity. Therefore, the Private Placement Warrants and the EBC Warrants are classified as ~~a principal~~liabilities at fair value, with subsequent changes in fair values recognized in earnings at each reporting date. Changes in the ~~transaction (and therefore whether to record revenue on a gross basis): (i) whether~~fair value of the Company is primarily responsible for fulfilling the promise to provide the specified good or service, (ii) whether the Company has the inventory risk before the specified good or service has been transferred to a customer or after transfer of controlPrivate Placement Warrants and EBC Warrants may be material to the customer and (iii) whether the Company has the discretion to establish the price for the specified good or service. If the terms of a transaction do not indicate that the Company is acting as a principal in the transaction, then the Company is acting as an agent in the transaction and therefore, the associated revenue is recognized on a net basis (that is revenue net of costs).Company’s future operating results.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, ~~2020~~2021

(Unaudited)

Revenue is recognized once control passes to the customer. The following indicators are evaluated in determining when control has passed to the customer: (i) whether the Company has a right to payment for the product or service, (ii) whether the customer has legal title to the product, (iii) whether the Company has transferred physical possession of the product to the customer, (iv) whether the customer has the significant risk and rewards of ownership of the product and (v) whether the customer has accepted the product. The Company’s products can be delivered to customers in a variety of ways, including (i) physical shipment from the Company’s warehouse, (ii) via drop-shipment by the vendor or supplier or (iii) via electronic delivery of keys for software licenses. The Company’s shipping terms typically allow for the Company to recognize revenue when the product is shipped to the customer’s location.

~~Hardware~~

Revenue from the sale of hardware is recognized on a gross basis, as the Company is deemed to be acting as the principal in these transactions. The selling price to the customer is recorded as revenue and the acquisition cost is recorded within cost of revenue. The Company recognizes revenue from these transactions when control has passed to the customer, which is usually upon shipment.

In some instances, the customer agrees to buy the product from the Company, but requests delivery at a later date, commonly known as a bill-and-hold arrangement. For these transactions, the Company deems that control passes to the customer when the product is ready for delivery. The Company classifies such products as products ready for delivery when the customer is in possession of a signed agreement, the significant risk and rewards for the product has passed to the customer, the customer has the ability to direct the asset, the product has been set aside specifically for the customer and the Company cannot redirect the product for the benefit of another customer.

In drop-shipment arrangements, whereby the Company arranges for the vendor to deliver the product directly to the customer without the inventory first being held at its warehouses, the Company considers itself to be the principal and therefore, recognizes the related revenue on a gross basis.

~~Software~~

Revenues from most software license sales are recognized as a single performance obligation on a net basis, as the Company is deemed to be acting as an agent in these transactions. Revenues in these instances are recognized at the point the software license is delivered to the customer. Generally, software licenses are sold with accompanying third-party delivered software support, which is a product that allows customers to upgrade, at no additional cost, to the latest technology if new capabilities are introduced during the period that the software support is in effect. The Company evaluates whether the software support is a separate performance obligation by assessing whether the third-party delivered software support is critical or essential to the core functionality of the software itself. This involves considering whether the software provides its original intended functionality to the customer without the updates, whether the customer would ascribe a higher value to the upgrades versus the up-front deliverable, whether the customer would expect frequent intelligence updates to the software (such as updates that maintain the original functionality), and whether the customer chooses to not delay or always install upgrades. If the Company determines that the accompanying third-party delivered software support is critical or essential to the core functionality of the software license, the software license and the accompanying third-party delivered software support are recognized as a single performance obligation. The value of the product is primarily based on the accompanying support delivered by a third-party, and therefore the Company is acting as an agent in these transactions and therefore, recognizes the associated revenue on a net basis at the point that the associated software license is delivered to the customer.

~~Third-party services~~

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

~~AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED~~

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

~~September 30, 2020~~

~~(Unaudited)~~

~~Managed and professional services~~

Professional services offerings include assessments, project management, staging, configuration, and integration. Managed services offerings range from monitoring and notification to a fully outsourced network management solution. In these arrangements, the Company satisfies the performance obligations and recognizes revenue over time.

Such professional services are provided under both time and materials and fixed price contracts. When services are provided on a time and materials basis, the Company recognizes revenues at agreed-upon billing rates as services are performed. When services are provided on a fixed fee basis, the Company recognizes revenues over time in proportion to the Company’s progress towards satisfaction of the performance obligation.

In arrangements for managed services, the Company’s arrangement is typically a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The ~~Company typically recognizes revenue from these services on a straight-line basis over the period services are provided, which is consistent with the timing of services rendered.~~

~~Freight and sales tax~~

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

~~Contract liabilities~~

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

~~Costs of obtaining and fulfilling a contract~~

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

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

~~Cash, cash equivalents and restricted cash~~

The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at September 30, 2020 and December 31, 2019. Restricted cash consists of the balance of amounts placed in escrow at Comerica Bank in connection with the third amendment to the Credit Agreement (as defined in Note 8) to be applied to interest payments. In the event such amounts in escrow are insufficient to satisfy interest payments, such interest payments may be paid using other funds.

~~AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED~~

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

~~September 30, 2020~~

~~(Unaudited)~~

~~Trade receivables, net~~

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

~~Inventories~~

Inventories, which consist of purchased components for resale, are valued at the lower of average cost (which approximates the first-in, first-out method) and net realizable value. The need for an inventory obsolescence reserve is based on an evaluation of slow-moving or obsolete inventory. No obsolescence reserve was deemed necessary at September 30, 2020 and December 31, 2019.

~~Business combinations~~

~~The Company accounts for business combinations in accordance with ASC 805,~~ ~~Business Combinations~~~~. Accordingly, identifiable tangible and intangible assets acquired and liabilities assumed are recorded at their estimated fair values, the excess of the purchase consideration over the~~ fair values of ~~net assets acquired is recorded as goodwill,~~the Private Placement Warrants and ~~transaction costs are expensed as incurred.~~

~~Long-lived assets~~

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

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

The Company reviews its long-lived assets for impairment whenever events or circumstances exist that indicate the carrying amount of an asset or asset group may not be recoverable. The recoverability of long-lived assets is measured by a comparison of the carrying amount of the asset or asset group to the future undiscounted cash flows expected to be generated by that asset group. If the asset or asset group is considered to be impaired, an impairment loss would be recorded to adjust the carrying amounts to the estimated fair value. No such impairment was recorded during the periods covered by this report.

~~Goodwill~~

Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. Goodwill is reviewed for impairment at least annually, in December, or more frequently if a triggering event occurs between impairment testing dates. Currently, the Company operates as a single operating segment and as a single reporting unit for the purpose of evaluating goodwill impairment. The Company’s impairment assessment begins with a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. The qualitative assessment includes comparing the overall financial performance of the Company against the planned results used in the last quantitative goodwill impairment test. Additionally, the Company’s fair value is assessed in light of certain events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity and Company specific events. The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves significant judgment and estimates. If it is determined under the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a two-step quantitative impairment test is performed. Under the first step, the estimated fair value of the Company would be compared with its carrying value (including goodwill). If the fair value of the Company exceeds its carrying value, step two does not need to be performed. If the estimated fair value of the Company is less than its carrying value, an indication of goodwill impairment exists for the Company and it would need to perform step two of the impairment test. Under step two, an impairment loss would be recognized for any excess of the carrying amount of the Company’s goodwill over the implied fair value of that goodwill. Fair value of the Company under the two-step assessment isEBC Warrants were determined using ~~a combination of both income and market-based approaches. No goodwill impairments were identified for~~ the ~~periods covered by this report.~~

~~AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED~~

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

~~September 30, 2020~~

~~(Unaudited)~~

~~Deferred financing fees and debt discount~~

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

~~Income taxes~~

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

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

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

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

~~AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED~~

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

three months ended September 30, ~~2020~~2021:

~~(Unaudited)~~

stock price volatility – 55%

exercise price – $11.50

~~Share-based compensation~~

	o	discount rate – 0.6446% and 0.0561% for the Private Placement and EBC warrants, respectively
	o	remaining useful life – 3.52 years and 0.82 years for the Private Placement and EBC warrants, respectively

stock price – $2.79

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

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

~~Net loss per common share~~

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

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

Concentration of business and credit risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and trade receivables. Cash held by the Company, in financial institutions, regularly exceeds the federally insured limit of $250. At September 30, ~~2020,~~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~~None of the Company’s customers accounted for 10% or more ~~than 10%~~ of sales in ~~each~~any of the periods presented in the accompanying condensed consolidated financial statements.

~~One~~Similarly, no customer accounted for 10% or more of accounts receivable atas of September 30, ~~2020. At~~2021 or December 31, 2019, one customer accounted for 11% of accounts receivable. During the Successor three months ended September 30, 2020, and the Successor period April 7, 2020 through September 30, 2020, one of our vendors2020. NaN vendor accounted for at least 10% of ~~costs~~accounts payable as of ~~revenue~~September 30, 2021 (accounting for ~~$18.9 million and $31.1 million, respectively)~~$14,137). ~~At September 30,~~As of December 31, 2020, ~~one~~1 vendor accounted for at least 10% of accounts payable (accounting for ~~$16.0 million)~~$13,602).

~~AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED~~

~~(In thousands, except share~~ During the three and ~~per share data, or as otherwise noted)~~

nine months ended September 30, ~~2020~~2021, 1 of our vendors at our Computex subsidiary accounted for approximately 56% of purchases in each respective period.

~~(Unaudited)~~

Fair value of financial instruments

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

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

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

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

The carrying amounts of the Company’s financial instruments, which include trade receivables, deposits, accounts payable and accrued expenses and debt at floating interest rates, approximate their fair values, ~~at September 30, 2020 and December 31, 2019,~~ principally due to their short-term nature, maturities or nature of interest rates.

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

~~Advertising and vendor considerations~~Reclassifications

~~Advertising costs are expensed as incurred.~~

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

~~Reclassifications~~

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

~~AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.~~Change in Segment reporting

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED~~

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.

~~(In thousands, except share~~

This change in reportable segments was a result of the Kandy acquisition and ~~per share data, or as otherwise noted)~~

~~September 30, 2020~~

~~(Unaudited)~~

~~Seasonality~~

~~Our hardware revenue tends~~the integration of the Kandy business into the Company’s operations. These changes resulted in revisions to ~~be seasonal with higher revenues occurring~~the financial information provided to the CODM on a recurring basis in the ~~first and fourth quarter~~evaluation of ~~each year.~~

~~Segment reporting~~

Asfinancial performance of September 30, 2020, the Company reports operating results and financial data in one operating and reportable segment. The Chief Executive Officer, who is the chief operating decision maker, manages the Company as a single profit center in order to promote collaboration, provide comprehensive service offerings across the entire customer base, and provide incentives to employees based on the success of the organization as a whole. Although certain information regarding selected products or services is discussed for purposes of promoting an understanding of the Company’s business, the chief operating decision maker manages the Company and ~~allocates resources at~~in the ~~consolidated level.~~decision-making process. As the Company continues to integrate Kandy into its operations, changes to segments may be required, based on changes to the way that the CODM views the business. Refer to Note 15 for additional information.

Emerging growth company

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

Further, Section 102(b) (1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. Private companies are those companies that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange ~~Act.~~Act of 1934, as amended (the “Exchange Act”). The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised, it adopts the new or revised standard at the time private companies adopt the new or revised standard, unless it chooses to early-adopt the new or revised accounting standard. Therefore, the Company’s financial statements may not be comparable to certain public companies.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

4. Recently Issued and Adopted Accounting Standards

Recently issued accounting standards

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

ASU No. 2021-04 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Entities are required to apply the amendments prospectively to modifications or exchanges that occur on or after the effective date. Early adoption ~~afforded to privately held companies.~~is permitted.

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

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”), which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. It clarifies that single-member limited liability companies and similar disregarded entities that are not subject to income tax are not required to recognize an allocation of consolidated income tax expense in their separate financial statements, but they could elect to do so.

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

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

Recently adopted accounting standards

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, ~~2020~~2021

(Unaudited)

~~Recently adopted accounting standards~~

In ~~July 2017,~~August 2020, the FASB issued ASU ~~2017-11, Earnings Per Share (Topic 260),~~ No. 2020-06, “~~Distinguishing Liabilities from Equity (Topic 480~~Debt - Debt with Conversion and Other Options) (Subtopic 470-20) and Derivatives and Hedging ~~(Topic 815)~~- Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU No. 2020-06”) which simplifies the accounting for some financial instruments with characteristics of liabilities and equity, including the Convertible Debentures (or Debentures, as described and defined in Note 9). ~~The amendments in Part I~~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 ~~Update change the reclassification analysis of certain equity-linked financial instruments (or embedded features) with down-round features. The amendments in Part II~~if-converted method for calculating diluted earnings per share instead of the ~~update re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the ASC, to a scope exception.~~treasury stock method. The ~~amendments in Part I of this update was~~Company early adopted ASU No. 2020-06 effective ~~for the Company on~~ January 1, 2020 (the date it was effective for private companies). The amendments in Part II of the update did not require any transition guidance because those amendments did not have an accounting effect. The adoption did not have a material effect on the Company’s condensed consolidated financial statements as of the date of adoption.

~~The Company adopted Topic 606 with an initial application date of January 1, 2019. Topic 606 also includes Subtopic 340-40,~~ ~~Other Assets and Deferred Costs – Contracts with Customers~~~~, (Subtopic 340) which requires the deferral of incremental costs of obtaining a contract with a customer.~~

~~The Company applied Topic 606~~2021 using the modified retrospective ~~transition method. In adopting~~approach. Upon adoption, the ~~new standard, the net cumulative effect from prior periods of applying the guidance in Topic 606 was recognized as a~~following changes resulted:

●

the intrinsic value of the beneficial conversion feature recorded between April 7, 2020 and December 31, 2020 was reversed as of the effective date of adoption, thereby resulting in an increase in the Convertible Debentures, as of January 1, 2021, with an offsetting adjustment to additional paid in capital.

●

the discount amortization expense (included within interest expense) which was recorded between April 7, 2020 and December 31, 2020 that was related to the beneficial conversion feature was reversed against opening accumulated deficit.

The cumulative effect adjustment tothat the ~~opening~~Company recognized in the condensed consolidated balance ~~of accumulated deficit~~sheet, as of January 1, ~~2019. Additionally,~~2021, as an adjustment to accumulated deficit, was $1,218 and is reflected in the Company has elected the option to only account for contracts that remained open as of the January 1, 2019 transition date in accordance with Topic 606. Revenue recognition for contracts for which substantially all of the revenue was recognized in accordance with the revenue guidance in effect before January 1, 2019 has not been changed. A summary of the significant changes and the quantitative impact of the changes as of the application date are set forth below.following table:

●

For sales transactions of certain software products that are sold with integral third-party delivered software support, the Company changed its accounting policy to record both the software license and the accompanying software support on a net basis, as the Company is considered to be the agent in the arrangement, given the predominant nature of the goods and services provided to the customer. Under previous guidance, the Company bifurcated the sale of the software license from the sale of the support contract and recorded the sale of both the software product and software support on a gross sales recognition basis. This change had no effect on reported gross profit dollars associated with these transactions.

●

For sales transactions for maintenance, software support and services that are to be performed by a third-party, the Company changed its accounting policy to record these sales on a net basis equal to the selling price to the customer less the acquisition cost, as the third-party controls the service. The Company recognizes revenue from these sales transactions when the customer and vendor accept the terms and conditions of the arrangement. Under previous guidance, the Company recorded the sales of third-party maintenance, software support and service contracts on a gross sales recognition basis.

●

The accounting for sales commissions on contracts with performance periods that exceed one year changed such that the Company records such sales commissions as an asset and recognizes the expense over the related contract performance period. Under previous guidance, certain sales commissions were expensed in the period the transaction was generated.

	December 31, 2020			Adjustments			January 1, 2021
	Successor						Successor
	(as reported)						(as adjusted)
Long term liabilities
Convertible Debentures, net of discount	$	41,644		$	35,765		$	77,409
Total long-term liabilities		51,438			35,765			87,203
Total liabilities		105,838			35,765			141,603

Stockholders’ equity:
Successor:
Additional paid-in capital	$	90,828		$	(36,983	)	$	53,845
Accumulated deficit		(43,661	)		1,218			(42,443	)
Total stockholders’ equity		47,169		$	(35,765	)		11,404
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		153,007			(35,765	)		117,242

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:

	Successor (as reported)			With Adoption of ASC 2020-06			ASC 2020-06 Impact
Interest expense	$	(9,316	)	$	(8,098	)	$	1,218
Total other expenses		(12,931	)		(11,713	)		1,218
Net loss before income taxes		(25,506	)		(24,288	)		1,218
Net loss		(25,576	)		(24,358	)		1,218
Loss per share - basic and diluted	$	(1.30	)	$	(1.24	)	$	0.06

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, ~~2020~~2021

(Unaudited)

5. Acquisitions

~~The total cumulative effect adjustment from prior periods that~~Computex

On April 7, 2020, the Company ~~recognized~~consummated the Computex Business Combination that resulted in the ~~consolidated balance sheet~~acquisition of Computex. The acquisition qualified as a business combination under ASC 805, Business Combinations (“ASC 805”). Accordingly, the Company recorded assets acquired and liabilities assumed at their acquisition-date fair values. The excess of ~~January 1, 2019~~the purchase price over the fair value of assets acquired and liabilities assumed was recorded as goodwill. The goodwill, which is not deductible for tax purposes, resulted from factors such as an ~~adjustment to accumulated deficit was $99 as reflected in the following table (in thousands):~~assembled workforce and management’s industry knowledge.

December 31,
2018 Adjustments January 1,
2019
Predecessor Predecessor
(as reported) (as adjusted)
ASSETS
Trade receivables, net $ 41,328 $ - $ 41,328
Other current assets 972 99 1,071
Deferred contract costs 9 - 9
TOTAL ASSETS $ 42,309 $ 99 $ 42,408

LIABILITIES
Accounts payable $ 38,694 $ 38,694
Deferred revenue 6,953 6,953
$ 45,647 $ - $ 45,647

STOCKHOLDERS’ EQUITY
Accumulated deficit $ (6,640 ) $ 99 $ (6,541 )

The following ~~tables summarize~~table presents the ~~effects~~allocation of ~~adopting Topic 606 on~~ the ~~Company’s consolidated~~purchase consideration among the assets acquired and liabilities assumed at their estimated acquisition-date fair values.

Consideration paid:
Convertible Debentures with warrants that granted the right to acquire 2,000,000 shares of common stock at an exercise price of $0.01 per share	$	20,000
Assumed debt		16,643
AVCT common stock (8,189,490 shares at $3.00 per share)		24,568
Working capital adjustment satisfied by the issuance of AVCT common stock (117,231 shares at $4.75 per share)		557
Total consideration paid	$	61,768

Net assets acquired:
Current assets	$	16,972
Customer relationships (estimated useful life - 10 years)		17,300
Trade names (estimated useful life - 10 years)		7,000
Furniture & equipment		6,435
Leasehold improvements		2,375
Other assets		88
Current liabilities		(26,965	)
Other liabilities		(116	)
Total net assets acquired	$	23,089
Goodwill		38,679
Total consideration paid	$	61,768

Identifiable intangible assets acquired consisted of customer relationships of $17,300 and trade names of $7,000. Both the customer relationships and the trade names were valued using a form of the income approach. The customer relationship was valued using the Multi-Period Excess Earnings Method (or “MPEEM”) and the method used for the trade names was the Relief from Royalty Method. AVCT incurred transaction costs of $142, which was net of a credit of $903 granted by a creditor whose account was settled by the issuance of $2,500 in Debentures, $1,500 in shares of common stock and cash of $100. During the nine months ended September 30, 2021, there was a measurement period adjustment to goodwill of $3,450 related to a deferred tax liability that was previously recorded as of the Computex Closing Date.

Since the results of operations prior to April 7, 2020 relate to the operations of Computex, investment income and transaction costs incurred by AVCT were excluded from the Predecessor statement of ~~operations~~operations. Accordingly, for the ~~year ended December 31, 2019 (in thousands):~~

For the Year Ended
December 31, 2019
Without
Adoption
Predecessor of Topic 606
(as reported) Topic 606 Impact

Sales $ 85,716 $ 121,053 $ (35,337 )
Cost of revenue 61,309 96,646 (35,337 )
Gross profit 24,407 24,407 -

Selling, general and administrative expenses 28,021 27,922 99

Loss from operations (3,614 ) (3,515 ) (99 )

period April 1, 2020 through April 6, 2020, transaction costs of $714 were excluded. For the ~~year ended December 31, 2019, the adoption~~period January 1, 2020 through April 6, 2020, investment income and transaction costs of ~~Topic 606 increased net cash provided by operating activities by $99~~$1,365 and ~~had no impact on net cash used in investing and financing activities.~~$6,887, respectively, were excluded.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, ~~2020~~2021

(Unaudited)

Kandy

~~5. Acquisitions~~

On ~~April 7,~~December 1, 2020, the Company ~~consummated~~acquired Kandy from Ribbon, by acquiring certain assets, assuming certain liabilities and acquiring all of the ~~Business Combination that resulted in the acquisition~~outstanding interests of ~~Computex.~~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 ~~not~~ deductible for tax purposes, ~~results~~resulted from factors such as an assembled workforce and management’s industry knowledge.

The following table represents the allocation of the ~~preliminary~~ purchase consideration among the assets acquired and liabilities assumed at their estimated acquisition-date fair values. ~~Management’s evaluation and allocation of such purchase consideration is preliminary and subject to working capital and other adjustments.~~

Consideration paid:
Convertible debentures with warrants that grant the right to acquire 2,000,000 shares of common stock at an exercise price of $0.01 per share $ 20,000
Assumed debt 16,643
AVCT common stock (8,189,490 shares at $3.00 per share) 24,568
Working capital adjustment satisfied by the issuance of AVCT common stock (117,231 shares at $4.75 per share) 557
Total consideration paid $ 61,768

Net assets acquired:
Current assets $ 16,972
Customer relationships (weighted average life - 10 years) 17,300
Trade names (weighted average life - 10 years) 7,000
Furniture & equipment 6,435
Leasehold improvements 2,375
Other assets 88
Current liabilities (26,965 )
Deferred tax liability (3,450 )
Other liabilities (116 )
Total net assets acquired $ 19,639
Goodwill 42,129
Total consideration paid $ 61,768

Consideration paid:
Convertible Debentures with warrants that granted the right to acquire 4,377,800 shares of common stock at an exercise price of $0.01 per share	$	43,778
Net assets acquired:
Current assets	$	3,659
Acquired technology (estimated useful life - 6 years)		8,200
Customer relationships (estimated useful life - 10 years)		7,600
Trade names (estimated useful life - 4 years)		2,500
Property, plant & equipment		3,034
Current liabilities		(5,245	)
Other liabilities		(114	)
Total net assets acquired	$	19,634
Goodwill		24,144
Total consideration paid	$	43,778

Identifiable intangible assets acquired ~~consist~~consisted of acquired technology of $8,200, customer relationships of ~~$17,300~~$7,600 and trade names of ~~$7,000. Both the customer relationships and the trade names~~$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) ~~and~~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 $142 between April 7, 2020 and September 30, 2020, which was net of a credit of $903 granted by a creditor whose account was settled by the issuance of $2,500 in Debentures, $1,500 in shares of common stock and cash of $100.$2,649.

~~AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED~~

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

~~September 30, 2020~~

~~(Unaudited)~~

Since the results of operations prior to April 7, 2020 relate to the operations of Computex, excluded from the Predecessor statement of operations are investment income earned and transaction costs incurred by AVCT. Accordingly, excluded are the following:

January 1,
2020 July 1,
2019 January 1,
2019
through through through
April 6,
2020 September 30,
2019 September 30,
2019
Predecessor Predecessor Predecessor
Investment income $ 1,365 $ 133 $ 1,352
Transaction costs 6,887 2,731 3,428

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents the combined results of operations for the Company and gives effect to the Computex ~~business combination~~and Kandy acquisitions as if the ~~business combination~~acquisitions had occurred on January 1, ~~2019~~2020 (in thousands):

Three months ended Nine months ended

September 30,
2020

September 30,
2019

September 30,
2020

September 30,
2019

Revenues $ 25,968 $ 20,332 $ 64,102 $ 66,156
Net loss (4,838 ) (1,458 ) (10,625 ) (3,927 )

	Three months ended						Nine months ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Revenues	$	27,511		$	29,888		$	82,240		$	74,348
Net loss		(37,317	)		(9,953	)		(75,850	)		(25,632	)

The pro forma financial information isincluded herein are not necessarily indicative of the results of operations that would have been realized if the ~~Business Combination~~acquisitions had been completed on January 1, ~~2019.~~2020. Such pro forma financial information does not give effect to any integration costs related to the acquired ~~company.~~companies.

The combined net loss in the table above was adjusted for the transaction costs related to the ~~Business Combination~~acquisitions (included as ~~an expense in the nine months ended September 30, 2019 and excluded as an expense~~expenses in the nine months ended September 30, 2020) and the incremental ~~change~~changes in the amortization of intangible ~~assets (adjustment relates to the three and nine months ended September 30, 2019 and the portion of the nine months ended September 30, 2020 that relates to the Predecessor period).~~assets.

~~6. Goodwill and intangible assets~~

~~The Company’s intangible assets as of September 30, 2020 and December 31, 2019 consisted of the following:~~

September 30,
2020

December 31,
2019

Successor Predecessor

Customer relationships $ 17,300 $ 9,355
Tradenames 7,000 2,110
Noncompete agreements - 6,380
Less accumulated amortization (1,158 ) (15,441 )
Intangible assets, net of accumulated amortization 23,142 2,404

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, ~~2020~~2021

(Unaudited)

6. Goodwill and intangible assets

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

	September 30, 2021							December 31, 2020
	Gross carrying amount		Accumulated amortization			Net		Gross carrying amount		Accumulated amortization			Net
Customer relationships	$	24,900	$	(3,183	)	$	21,717	$	24,900	$	(1,304	)	$	23,596
Tradenames		9,500		(1,559	)		7,941		9,500		(576	)		8,924
Acquired technology		8,200		(1,139	)		7,061		8,200		(114	)		8,086
Intangible assets	$	42,600	$	(5,881	)	$	36,719	$	42,600	$	(1,994	)	$	40,606

The estimated lives of the intangible assets ~~which approximate their weighted average useful lives, as of September 30, 2020,~~ are included in Note 5. The weighted average useful life of the intangible assets as of September 30, 2021 was 7.7 years. Amortization ~~of intangibles were as follows:~~

~~As of~~expense was $1,296 and 3,887 for the three and nine months ended September 30, 2021, respectively. For the three months ended September 30, 2020, the ~~expected~~period April 7, 2020 through September 30, 2020 and the period January 1, 2020 through April 6, 2020, amortization expense ~~for definite-lived intangible assets for~~was $608, $1,158 and $263, respectively.

Goodwill activity during the ~~next five years~~nine months ended September 30, 2021 was as follows:

Three months ended December 31, 2020 $ 624
Fiscal year 2021 2,430
Fiscal year 2022 2,430
Fiscal year 2023 2,430
Fiscal year 2024 2,430
Thereafter 12,798
Total $ 23,142

	Carrying
	amount
Balance, January 1, 2021	$	66,273
Goodwill impairment		(20,500	)
Measurement period adjustment - Computex		(3,450	)
Balance, September 30, 2021	$	42,323

~~There~~The noncash goodwill impairment charge in the table above relates to our Computex subsidiary and is discussed in Note 1. The measurement period adjustment relates to a deferred tax liability that was ~~no impairment of goodwill~~previously recorded as of ~~September 30, 2020 and December 31, 2019.~~the Computex Closing Date.

7. Accounts payable and accrued expenses

Accounts payable and accrued expenses were as follows atas of September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:

September 30,
2020

December 31,
2019

Successor Predecessor
Accounts payable $ 21,226 $ 18,999
Accrued compensation, benefits and related accruals 2,458 1,847
Accrued professional fees 2,547 -
Other 1,293 885
27,524 21,731

	September 30, 2021		December 31, 2020
Accounts payable	$	25,594	$	20,696
Accrued compensation, benefits and related accruals		9,258		5,780
Accrued professional fees		2,470		2,736
Due to related parties		2,211		1,542
Sales tax payable		882		467
Other		957		1,484
	$	41,372	$	32,705

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

8. Long-Term Debt

Credit Agreement

In connection with the consummation of the Computex Business Combination, the Company assumed the obligations of Computex under a credit agreement with Comerica Bank (as amended, the “Credit Agreement”)., which includes a term note and a line of credit. On the Computex Closing Date, the Company and Comerica Bank entered into a third amendment to the Credit Agreement that added the Company as ~~borrowers~~a borrower and amended certain provisions of the Credit Agreement, including changing the maturity date of the loans under the Credit Agreement to December 31, 2020, and removing certain financial covenants. On November 13, 2020, the Company and Comerica Bank entered into a fifth amendment to the Credit Agreement (the “Fifth Amendment”) that ~~extends~~extended the maturity date to June 30, 2021, ~~provides~~provided for a decrease in maximum borrowings on the ~~revolving note~~line of credit effective April 1, 2021, ~~amends~~amended the interest rates and, commencing January 31, 2021, ~~provides~~provided for a minimum monthly liquidity (defined as unrestricted cash plus availability under the ~~revolving note)~~line of ~~$3,000. As~~credit) of November 13, 2020, the maximum borrowings permitted under the revolving note remained unchanged at $16,500. However, on April 1, 2021, maximum borrowings permitted under the revolving note will decrease by $3,500 to $13,000.$3,000. In connection with the Fifth Amendment on November 13, 2020, the Company was required to make a one-time principal payment of $250 on the term loan. Also, in connection with the Fifth Amendment, maximum borrowings permitted under the line of credit decreased by $3,500 to $13,000 effective April 1, 2021.

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

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

(i)

reduced the availability under the line of credit by $1,000 per month starting on October 1, 2021 (subsequently amended by a ninth amendment entered into on November 1, 2021, which limits such availability to the borrowing base, if lower);

(ii)

increased the monthly payments under the term loan to $800 beginning September 1, 2021 (subsequently amended in a ninth amendment which changed the due date for the October 2021 payment to November 2021); and

(iii)

increased the applicable interest rates under the Credit Agreement.

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

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

On or before the maturity date of the Credit Agreement, the Company ~~plans~~expects to seek to either negotiate an extension of the Credit Agreement or enter into a new agreement with another lender. However, there can be no assurance that financing will be available in the amounts the Company requires or on terms acceptable to it, if at all. At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the balance on the ~~revolving note~~line of credit was ~~$8,487~~$8,839 and ~~$6,051,~~$7,355, respectively.

~~AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED~~

~~(In thousands, except share~~The effective rate under the Credit Agreement was 8.0% and ~~per share data, or~~5.00% as ~~otherwise noted)~~

of September 30, ~~2020~~

~~(Unaudited)~~

~~Between November 13, 2020~~2021 and December 31, 2020, all obligations outstanding under the Credit Agreement will continue to accrue interest at the higher of the one-month London Interbank Offered Rate (LIBOR) or 1.00%, plus a margin of 4.00% (the “margin”). The margin then increases gradually each month to a maximum of 6.50% on June 1, 2021. The effective rate of the revolving note was 5.00% and 5.48% at September 30, 2020 and December 31, 2019, respectively. The effective rate of the term note was 5.00% and 5.53% at September 30, 2020 and December 31, 2019, respectively.

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

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

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

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

In 2018, Computex entered into an interest rate swap arrangement to partially mitigate the variability of cash flows due to changes in the Eurodollar rate, specifically related to interest payments on the term note under the Credit Agreement. The interest rate swap ~~has~~which had a notional amount of ~~$4,464~~$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~~did not qualify for hedge ~~accounting. No~~accounting, matured on August 2, 2021. A liability of $51 was recorded for the fair value of the related derivative at ~~September 30, 2020 or~~ December 31, ~~2019, as the liability~~2020 and was ~~not considered material.~~included in accounts payable and accrued expenses. No new interest rate swap agreement was entered into subsequent to August 2, 2021.

PPP Loan

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, ~~2020~~2021

(Unaudited)

Total long-term debt ~~excluding the revolving note,~~ as of September 30, ~~2020~~2021 and December 31, ~~2019~~2020 consisted of the following:

September 30,
2020 December 31,
2019
Successor Predecessor
Senior debt - Term note payable to Comerica Bank; quarterly principal payments of $357 plus interest through the maturity date of June 30, 2021; interest rate variable with effective rate of 5.00% and 5.48% at September 30, 2020 and December 31, 2019, respectively $ 6,369 $ 7,143
PPP Loan administered by Comerica Bank; monthly principal payments plus interest starting November 1, 2020 through the maturity date of April 13, 2022; interest rate 1.00% at September 30, 2020 4,135 -
Subordinated debt - Term note payable to Synetra Inc.; fixed interest rate of 8.50% at December 31, 2019 - 573
Subordinated debt - Term note payable to John Sorensen and Paul Sorenson; interest rate variable with effective rate of 8.50% at December 31, 2019 - 375
Capital lease obligations 138 236
Total long-term debt 10,642 8,327
Less: unamortized debt issuance costs (93 ) (136 )
Total notes payable, net of unamortized debt issuance costs 10,549 8,191
Less: current maturities of notes payable and capital lease obligations (8,991 ) (2,506 )
Long-term debt, net of current maturities and unamortized debt issuance costs $ 1,558 $ 5,685

	September 30, 2021			December 31, 2020
Senior debt - Term note payable to Comerica Bank; monthly principal payments of $800 (starting September 1, 2021) plus interest through the maturity date of December 31, 2021; variable interest rate with effective rate of 8.00% and 5.00% at September 30, 2021 and December 31, 2020, respectively	$	3,200		$	5,702
PPP Loan previously administered by Comerica Bank; interest rate 1.00%; amount was forgiven in July 2021		-			4,135
Line of credit, maturing December 31, 2021		8,839			7,355
Capital lease obligations		163			427
Total long-term debt		12,202			17,619
Less: unamortized debt issuance costs		(88	)		(69	)
Total notes payable and line of credit, net of unamortized debt issuance costs		12,114			17,550
Less: current maturities of notes payable and line of credit		(12,086	)		(16,587	)
Long-term debt, net of current maturities and unamortized debt issuance costs	$	28		$	963

~~Scheduled principal payments of long-term debt at September 30, 2020 (excluding the revolving note) was as follows:~~

Three months ended December 31, 2020 $ 1,139
Fiscal year 2021 8,575
Fiscal year 2022 928
Total $ 10,642

Subordinated promissory note – related party

The 2021 Note (as defined in Note 2) is secured by a shareholder that owns more than five percent of the Company’s shares and matures on the earliest of (a) September 16, 2022, (b) the Company’s consummation of a debt financing resulting in the receipt of gross proceeds of not less than $20,000, (c) the Company’s consummation of primary sales of registered equity securities resulting in receipt of gross proceeds of not less than $20,000, (d) the Company’s consummation of the sale of Computex and (e) the date of any event of default. The 2021 Note is subordinate to any amounts owed under the Credit Agreement and has a minimum required return of 25.00% over the applicable period.

Subordinated promissory note - other

On the Computex Closing Date, the Company issued a subordinated promissory note of $500 (or the “2020 Note”) in partial settlement of a deferred underwriting fee ~~which was agreed at~~of $3,000. The remaining $2,500 was settled via the issuance of ~~Debentures.~~Convertible Debentures (See Note 9). The ~~subordinated promissory note~~2020 Note bears interest at the rate of 12.00% per ~~annum, matures on June~~annum. Previously, the 2020 Note had a maturity date of September 30, ~~2021 and~~2021. The 2020 Note is ~~subordinated~~subordinate to any amounts owed under the Credit Agreement. ~~The entire principal together with any accrued and unpaid interest is due and payable on~~On November 5, 2021, all amounts owing under the ~~maturity date.~~2020 Note were paid.

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

Preferred stock — The Company is authorized to issue 5,000,000 shares of preferred stock, par value $0.0001. AtAs of September 30, ~~2020~~2021 and December 31, ~~2019,~~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~~1 vote for each share. As of September 30, ~~2020, 19,753,061~~2021, there were 65,228,070 issued and outstanding shares of common ~~stock were issued and outstanding.~~stock.

~~AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED~~

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

~~September 30, 2020~~

~~(Unaudited)~~

Registration rights agreement

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

Convertible ~~debentures,~~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~~consisted of (i) $1,000 in principal amount of the Company’s Series A convertible debentures (the “Convertible Debentures” or “Debentures”) and (ii) a warrant to purchase 100 shares of Common Stock at an exercise price of $0.01 per whole share (the ~~“Warrants”~~“Penny Warrants”). The issuances of such securities were not registered under the Securities Act in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.

In addition, in connection with the acquisition of Kandy on December 1, 2020 and pursuant to the terms of the Kandy purchase agreement, the Company, in December 2020, issued 43,778 Units to Ribbon as consideration for the Kandy purchase, sold 10,000 Units to SPAC Opportunity Partners, LLC, a significant shareholder of the Company and 1,000 Units to a director of the Company. Also, the Company sold 24,000 additional Units during the nine months ended September 30, 2021 (none of which was sold during the three months ended September 30, 2021). Amounts sold during the nine months ended September 30, 2021 included 9,540 Units that were sold to related parties.

Debentures

The Debentures issued on the Computex Closing Date ~~have~~had an aggregate principal amount of approximately $43,169 (including $3,000 in aggregate principal amount issued as part of Units sold to MasTec, Inc., a greater than ~~5.0%~~five percent stockholder of the Company, ~~(“MasTec”),~~ and $20,000 in aggregate principal of which was part of Units issued to Holdings pursuant to the terms of the Computex Business Combination ~~Agreement~~agreement and approximately $8,566 in aggregate principal amount of which was issued to the Sponsor as part of Units issued in exchange for the cancellation of indebtedness previously incurred by the Company to the Sponsor).

The Debentures ~~bear~~issued in connection with the acquisition of Kandy on December 1, 2020 and pursuant to the terms of the Kandy purchase agreement consisted of aggregate principal amounts of $43,778 issued to Ribbon, $10,000 sold to SPAC Opportunity Partners, LLC, a significant shareholder of the Company and $1,000 sold to a director of the Company. In addition, during the nine months ended September 30, 2021, $24,000 were sold to various investors (including $9,540 sold to related parties). The Debentures sold in December 2020 and during the nine months ended September 30, 2021 (none of which were sold in the three months ended September 30, 2021) were in the same form as those issued in connection with the acquisition of Kandy.

The Debentures bore interest at a rate of 10.0% per annum, previously payable quarterly on the last day of each calendar quarter in the form of additional ~~Debentures, except upon maturity, in which case accrued and unpaid interest is payable in cash. The~~Debentures. Unless converted, the entire principal amount of each Debenture together with accrued and unpaid interest thereon, iswas due and payable on the earlier of (i) such date, ~~commencing on or~~that was thirty months after ~~October 7, 2022,~~the issuance date, as the holder thereof, at its sole option, upon not less than 30 days’ prior written notice to the Company, ~~demands~~demanded payment thereof and (ii) the occurrence of a Change in Control (as defined in the Debentures).

Each Debenture iswas 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 iswas subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and iswas 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~~were subject to mandatory conversion if the closing price of the Company’s common stock ~~exceeds~~exceeded $6.00 for any 40 trading days within a consecutive 60 trading day-period, subject to the satisfaction of certain other conditions.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

Pursuant to the terms of the Debentures, on September 8, 2021, the Debentures and related accrued interest were mandatorily converted to 38,811,223 shares of common stock. The ~~Debentures~~components of the Debenture prior to conversion are ~~subordinated to all Senior Indebtedness (as defined~~reflected in the ~~Debentures), including indebtedness under the Credit Agreement.~~table below.

Penny Warrants

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

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

The Penny Warrants issued between January 1, 2021 and September 30, 2021 (none of which were issued in the three months ended September 30, 2021), as part of the Units sold during that period, entitled the holders to purchase an aggregate of up to 2,400,000 warrants (including 954,000 warrants issued to related parties).

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

~~AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED~~

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

During the three months ended September 30, ~~2020~~

~~(Unaudited)~~2021 and pursuant to the terms of the Penny Warrant agreements, holders of 5,974,395 Penny Warrants exercised their right to convert such Penny Warrants to 5,974,395 shares of common stock. As of September 30, 2021, unexercised Penny Warrants totaled 6,205,675.

~~Guaranty~~

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

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

Based on ASC 815, Derivatives and Hedging, the convertible feature of the Debentures isissued on the Computex Closing Date was not considered a derivative and therefore ~~has been~~was not recorded in liabilities, as part of the Debentures, and was not bifurcated. However, an embedded beneficial conversion feature was previously assessed in relation to the Debentures issued in December 2020 and was previously recorded in equity at its intrinsic value with a corresponding debt discount recorded to the Debentures at December 31, 2020. The ~~warrant qualifies~~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 ~~derivative~~result of the conversion price of such Debentures being below the stock price on the issuance dates. Such debt discount, that was related to the embedded beneficial conversion feature, was limited to the proceeds allocated to the Debentures, and, along with the relative fair value of the warrants, was recognized as additional paid-in capital and reduced the carrying value of the Convertible Debentures. However, as more fully discussed in Note 4, effective January 1, 2021, the Company early-adopted ASU 2020-06 and, accordingly, the discount related to the beneficial conversion feature was reversed effective January 1, 2021.

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

The relative fair values of the Penny Warrants were determined using the Black-Scholes model. Weighted average assumptions used in determining fair values of Penny Warrants issued in the nine months ended September 30, 2021 (none of which were issued in the three months ended September 30, 2021) were: stock price volatility – 70%, exercise price - $0.01, interest rate – 0.78%, stock price - $6.28.

Prior to the conversion of the Debentures to common stock, the discount (consisting of the relative fair value of the ~~warrant~~warrants) was ~~determined to be $9,937, using the Black-Scholes model. Accordingly, the carrying value of the Debentures at the issuance date was $33,232. The discount is~~ being expensed as interest over the then term of the ~~Debenture~~Debentures to increase the carrying value to ~~its~~ face value. However, effective September 8, 2021, the remaining unamortized discount was transferred to additional paid in capital in connection with the conversion of the Debentures to shares of common stock. During the ~~Successor three-month period~~three and nine months ended September 30, 2021, the Company recorded accretion of the discount of $2,792 and $9,253, respectively, and paid-in-kind interest of $2,518 and $8,257, respectively. During the three months ended September 30, 2020, the Company recorded accretion of the discount ~~of $994~~ and paid-in-kind interest of ~~$1,097.~~$994 and $1,097, respectively. During the ~~Successor~~ period April 7, 2020 through September 30, 2020, the Company recorded accretion of the discount ~~of $1,921~~ and paid-in-kind interest of ~~$2,112. As a result, the carrying value~~$1,921 and $2,112, respectively.

The components of the Debentures, ~~increased~~prior to ~~$37,266 ($10,632 of which is classified as “Convertible Debentures, net of discount – related party”~~conversion on September 8, 2021 and the ~~condensed consolidated balance sheet as of September 30, 2020).~~amounts converted, are summarized in the table below:

~~The significant assumptions used in the Black-Scholes model were as follows:~~

~~stock price volatility – 35%~~

~~exercise price – $0.01~~

~~interest rate – 0.20%~~

~~stock price – $3.00~~

			Discount consisting of
			relative fair
	Principal		value of Penny Warrants			Net
Issued on the Computex Closing Date	$	43,169	$	(9,937	)	$	33,232
Issued in the Successor periods:
Issued to Ribbon		43,778		(14,159	)		29,619
Issued to SPAC Opportunity Partners, LLC		17,990		(6,249	)		11,741
Other issuances (various holders)		17,010		(6,610	)		10,400
	$	121,947	$	(36,955	)	$	84,992
Amortization of discount							12,752
Paid-in-kind interest							11,951
Deferred financing fees							(523	)
Net Debentures as of September 8, 2021, prior to conversion						$	109,172
Less reduction due to conversion							(109,172	)
Balance at September 30, 2021						$	-
Financial statement line items impacted by the conversion:
Additional paid in capital						$	109,691
Common stock (38,811,223 shares at par value of $0.0001 per share)							4
Interest expense - write off of deferred financing fees							(523	)
						$	109,172

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.~~operations in the Predecessor periods. This agreement was terminated on the Computex Closing Date.

AVCT shares corporate office space with an affiliate and participates in a cost sharing arrangement in a month-to-month leasing arrangement. The space ~~was~~is not being used ~~during the period April 7, 2020 through September 30, 2020~~ and therefore, by mutual agreement between the parties, no expenses ~~were~~have been incurred by the Company during ~~such period.~~the Successor periods.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, ~~2020~~2021

(Unaudited)

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

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

	Three Months		Nine Months
	Ended September 30, 2021
Professional fees charged by Ribbon:
Cost of revenue	$	305	$	1,013
Research and development		116		331
Selling, general and administrative expenses		534		1,448
		955		2,792
Other services provided by Ribbon:
Cost of revenue		68		68
Selling, general and administrative expenses		173		447
		241		515

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

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

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

11. Revenue Recognition

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

July 1,
2020 April 7,
2020 January 1,
2020 July 1,
2019 January 1,
2019
through through through through through

September 30,
2020
September 30,
2020 April 6,
2020
September 30,
2019

September 30,
2019

Successor Successor Predecessor Predecessor Predecessor
Geography
Domestic $ 24,722 $ 43,443 $ 18,961 $ 20,027 $ 63,774
International 1,246 1,622 76 305 2,382
Total revenues $ 25,968 $ 45,065 $ 19,037 $ 20,332 $ 66,156
Revenues by Verticals (or Sector)
Energy $ 3,819 $ 7,118 $ 2,716 $ 3,644 $ 16,651
Finance 1,623 3,373 2,510 1,258 3,390
Healthcare 6,517 10,736 5,586 5,827 18,010
Manufacturing and logistics 5,802 11,432 3,322 1,907 9,052
Public sector 3,352 4,733 889 1,711 3,661
Retail and hospitality 907 1,711 2,206 2,016 3,694
Technology service providers 285 828 478 1,124 5,713
Other Services 3,663 5,134 1,330 2,845 5,985
Total revenues $ 25,968 $ 45,065 $ 19,037 $ 20,332 $ 66,156

Gross versus net
Gross (principal) $ 24,766 $ 42,331 $ 17,578 $ 18,914 $ 61,709
Net (agent) 1,202 2,734 1,459 1,418 4,447
Total revenues $ 25,968 $ 45,065 $ 19,037 $ 20,332 $ 66,156

	Three Months		Three Months		Nine Months		April 7, 2020		January 1, 2020
	Ended		Ended		Ended		through		through
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		April 6, 2020
	Successor		Successor		Successor		Successor		Predecessor
Geography
Domestic	$	25,623	$	24,722	$	75,995	$	43,443	$	18,961
International		1,888		1,246		6,245		1,622		76
Total revenues	$	27,511	$	25,968	$	82,240	$	45,065	$	19,037
Revenues by Verticals (or Sector)
Energy	$	2,740	$	3,819	$	9,481	$	7,118	$	2,716
Finance		1,972		1,623		7,470		3,373		2,510
Healthcare		5,157		6,517		16,039		10,736		5,586
Manufacturing and logistics		4,681		5,802		14,679		11,432		3,322
Public sector		1,700		3,352		4,135		4,733		889
Retail and hospitality		2,366		907		7,106		1,711		2,206
Technology service providers		7,147		285		15,331		828		478
Other Services		1,748		3,663		7,999		5,134		1,330
Total revenues	$	27,511	$	25,968	$	82,240	$	45,065	$	19,037

Gross versus net
Gross (principal)	$	25,431	$	24,766	$	77,125	$	42,331	$	17,578
Net (agent)		2,080		1,202		5,115		2,734		1,459
Total revenues	$	27,511	$	25,968	$	82,240	$	45,065	$	19,037

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

Contract liabilities and remaining performance obligations

The Company’s contract liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. ~~As of~~On September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the contract liability balance (deferred revenue) was ~~$1,536~~$3,065 and ~~$6,453,~~$4,608, respectively. All of the performance obligations related to such deferred revenue ~~as of September 30, 2020~~ are expected to be performed within 12 months and consist of payments received from customers, or such consideration that is contractually due, in advance of providing the product or performing the services.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, 2021

(Unaudited)

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. ~~For more information regarding the Company’s performance obligations, see Note 3.~~ The following table represents the total transaction price for remaining performance obligations, as of September 30, ~~2020~~2021, related to non-cancelable contracts longer than 12 months in duration that are expected to be recognized over future ~~periods.~~periods:

Three months ended December 31, 2020 $ 5,272
Fiscal year 2021 13,256
Fiscal year 2022 5,482
Fiscal year 2023 1,925
Fiscal year 2024 1,386
Thereafter 231
Total remaining performance obligations $ 27,552

Three months ended December 31, 2021	$	5,656
Fiscal year 2022		15,203
Fiscal year 2023		5,454
Fiscal year 2024		2,540
Fiscal year 2025		144
Total remaining performance obligations		28,997

~~AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED~~

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

~~September 30, 2020~~

~~(Unaudited)~~

12. Share-Based Compensation

Successor

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

As of September 30, ~~2020,~~2021, 5,794,500 shares had been authorized for issuance under the Plan, of which ~~2,474,500~~902,000 shares remained available for issuance. The RSUs were issued to certain directors and employees and can only be settled in shares. RSUs awarded to directors are time-based. RSUs issued to nondirectors are generally 50% time-based and 50% performance-based. ~~Twenty-five percent~~Generally, 25% of the time-based awards vests on each ~~grant date~~grant-date anniversary, while 25% of the performance-based awards vests on December 31^st of each year, if the market condition (stock price target) is met. If the market condition attached to the performance-based awards is not met in any year, the eligibility is delayed until the market condition is met, except that the market condition must be met by December 31 ~~2023.~~^st of the fourth year after issuance.

~~The fair values of time-based awards are estimated by reference to the Company’s stock price and stock marketability on the grant date,~~ while the fair values of the performance-based awards are determined using the Monte Carlo simulation model, once the stock price target is set. Weighted average assumptions used in estimating the performance-based awards were as follows: estimated expected stock price volatility - 40%; expected life of the awards - ~~0.68~~ years; risk-free interest rate – 0.19%; Significant judgment is required in estimating the expected volatility of our common stock. Due to the limited trading history of the Company’s common stock, estimated volatility was based on a peer group of public companies and took into consideration the increased short-term volatility in historical data due to COVID-19. ~~Performance targets are set annually for the performance-based awards that are scheduled to vest in that year.~~

The following summarizes RSU activity between ~~April 7, 2020~~January 1, 2021 and September 30, ~~2020:~~2021:

Weighted Average
Number Grant Date
of RSUs Fair Value
Outstanding at April 7, 2020 - -
Granted 2,395,000 $ 2.47
Vested - -
Forfeited (31,250 ) $ 2.51
Outstanding at September 30, 2020 2,363,750 $ 2.47

				Weighted Average
	Number			Grant Date
	of RSUs			Fair Value
Outstanding at January 1, 2021		2,345,000		$	3.29
Granted		2,406,255		$	5.58
Vested and delivered		(536,250	)	$	3.20
Vested, not delivered		(407,500	)	$	3.65
Forfeited		(937,500	)	$	4.92
Unvested RSUs at September 30, 2021		2,870,005		$	4.51

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, ~~2020~~2021

(Unaudited)

Awards outstanding in the table above ~~include 318,750 RSUs that are~~consist of 2,508,750 time-based awards and 361,255 performance-based awards and exclude ~~956,250~~772,495 performance-based RSUs that have been awarded but deemed not granted as the performance targets have not yet been determined. The Company’s policy is to determine the fair value of performance-based awards and begin recognizing compensation expense for such awards when the targets are set. For performance-based awards, compensation cost is recognized over the shorter of the performance or service period. For time-based awards, compensation expense is recognized over the vesting period, based on the grant date fair value. Share-based compensation ~~expense~~expenses recognized during the Successor periods were as follows:

	Three Months		Three Months		Nine Months		April 7, 2020
	Ended		Ended		Ended		through
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
	Successor		Successor		Successor		Successor
Cost of revenue	$	104	$	-	$	291	$	-
Research and development		309		-		691		-
Selling, general and administrative expenses		2,538		802		5,770		1,420
	$	2,951	$	802	$	6,752	$	1,420

Selling, general and administrative expenses for the three and nine months ended September 30, ~~2020 was $802,~~2021, in the table above, include $119 of ~~which $759 related to time-based awards and $43 related to performance-based awards. Share-based~~stock compensation expense ~~recognized between April 7, 2020 and September 30, 2020 was $1,420,~~for services rendered by a shareholder that owns more than five percent of which $1,337 related to time-based awards and $83 related to performance-based awards. Total compensation cost not yet recognized related to unvested awards as of September 30, 2020 was $4,420 and is expected to be recognized over the ~~weighted average period of 2.2 years.~~Company’s shares.

13. Reconciliation of Net Loss per Common Share

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

							Nine Months			April 7, 2020			January 1, 2020
	Three Months Ended						Ended			through			through
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020			April 6, 2020
	Successor			Successor			Successor			Successor			Predecessor
Net loss	$	(37,317	)	$	(5,621	)	$	(75,850	)	$	(10,492	)	$	(1,589	)
Weighted average shares outstanding, basic and diluted		31,089,649			19,678,342			23,791,532			19,657,811			1,000
Basic and diluted net loss per ordinary share	$	(1.20	)	$	(0.29	)	$	(3.19	)	$	(0.53	)	$	(1,587.30	)

Since their inclusion would have been antidilutive, excluded from the computation of diluted net loss per share for the Successor periods ~~ended September 30, 2020 were: 3,320,000 unvested RSUs, 30,354,436 Warrants and 13,124,946 shares underlying~~were the ~~Debentures,~~following were they to be ~~converted.~~converted:

~~14. Income Taxes~~

~~The benefit (provision) for income taxes consisted of the following:~~

	Successor periods ended
	September 30, 2021		September 30, 2020
Warrants		26,712,500		26,712,500
Penny Warrants		6,205,675		4,316,936
Unvested RSUs		3,642,500		3,320,000
Vested, not delivered RSUs		407,500		-
Shares underlying Debentures		-		13,124,946
		36,968,175		47,474,382

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, ~~2020~~2021

(Unaudited)

14. Income Taxes

~~Principal components of the Company’s deferred tax assets as of September 30, 2020 and December 31, 2019 were as follows:~~

September 30,
2020 December 31, 2019
Successor Predecessor
Prepaid expenses $ (293 ) $ (50 )
Accrued reserves 81 37
Deferred revenue 58 460
Accrued liabilities 318 202
Uniform capitalization of inventory for tax 21 11
Contribution carryover 13 17
Tax depreciation in excess of book (1,252 ) (1,598 )
Intangible assets (3,419 ) (345 )
Disallowed interest 1,022 497
Transaction costs - pending 130 -
Stock compensation 341 -
Net operating loss carryforwards 5,104 4,318
Total 2,124 3,549
Less: valuation allowance (5,567 ) (3,549 )
Net deferred tax liability $ (3,443 ) $ -

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

AtAs of December 31, ~~2019,~~2020, the Company had net operating loss carryforwards of approximately ~~$11,900~~$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, ~~2019.~~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, 2019,~~ the Company recognized a full valuation allowance against its net deferred tax assets, pursuant to ASC 740, as of September 30, 2021 and December 31, 2019. In calculating the valuation allowance as of September 30, 2020, the Company was not permitted to use its existing deferred tax liabilities related to its indefinite-lived intangible assets as a source of taxable income to support the realization of its existing finite-lived deferred tax assets.2020. Based on the Company’s evaluation, it was determined that no uncertain tax positions existed as of September 30, ~~2020~~2021 or December 31, ~~2019.~~2020.

15. Segments

The Company’s reportable segments during the three and nine months ended September 30, 2021 were Computex and Kandy.

29Computex is a leading multi-brand technology solutions provider to large global customers, providing a comprehensive and integrated set of technology solutions, through its extensive hardware, software and value-added service offerings.

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

Presented below is certain information by reportable segment. The Company uses the same accounting policies for each reportable segment as it uses for the Company as a whole. The chief operating decision makers evaluate the performance of each reportable segment based on revenue and a measure that approximates income/loss from operations. There was no intersegment revenue during the three and nine months ended September 30, 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 periods related only to Computex as Kandy was acquired in December 2020.

	Three Months Ended September 30, 2021									Nine Months Ended September 30, 2021
	Computex			Kandy			Consolidated			Computex			Kandy			Consolidated
Revenues:
Hardware	$	13,000		$	-		$	13,000		$	39,219		$	-		$	39,219
Third party software and maintenance		2,080			-			2,080			5,115			-			5,115
Managed and professional services		8,050			573			8,623			24,497			1,826			26,323
Cloud subscription and software		-			3,575			3,575			-			10,790			10,790
Other		233			-			233			793			-			793
Total revenues		23,363			4,148			27,511			69,624			12,616			82,240
Cost of revenue		16,039			4,242			20,281			48,674			11,478			60,152
Gross profit (loss)		7,324			(94	)		7,230			20,950			1,138			22,088
Goodwill impairment		20,500			-			20,500			20,500			-			20,500
Research and development		-			4,508			4,508			-			13,606			13,606
Selling, general and administrative		7,824			4,234			12,058			23,621			10,955			34,576
Loss from operations	$	(21,000	)	$	(8,836	)	$	(29,836	)	$	(23,171	)	$	(23,423	)	$	(46,594	)
Selling, general and administrative - Corporate								(8,041	)								(16,908	)
Loss from operations per condensed consolidated statement of operations							$	(37,877	)							$	(63,502	)

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, ~~2020~~2021

(Unaudited)

	September 30, 2021
	Computex		Kandy		Corporate		Consolidated
Goodwill	$	18,179	$	24,144	$	-	$	42,323
Long-lived assets		5,131		3,806		87		9,024
Total assets		68,609		50,580		5,295		124,484

~~15.~~

	December 31, 2020
	Computex		Kandy		Corporate		Consolidated
Goodwill	$	42,129	$	24,144	$	-	$	66,273
Long-lived assets		7,022		2,993		46		10,061
Total assets		92,776		49,101		11,130		153,007

16. Commitments and Contingencies

Registration Rights

~~Operating lease obligations~~

See Note 9 for a discussion of certain registration rights.

The Company is party to operating leases under which it leases various facilities and equipment. The majority of the facility leases provide that the Company pay, in addition to the minimum rent, certain operating expenses. The leases expire at various dates through August 2024.

~~Future minimum rent payments, excluding operating expenses and month-to-month leases, required under noncancelable operating leases were as follows as of September 30, 2020:~~

Three months ended December 31, 2020 $ 257
Fiscal year 2021 672
Fiscal year 2022 524
Fiscal year 2023 453
Fiscal year 2024 336
Total $ 2,242

Contingencies

On December 16, 2019, the Company received a complaint filed by one of its vendors for alleged breach of contract asking for approximately $351. This suit was settled during the ~~second~~nine months ended September 30, 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 nine months ended September 30, 2021.

In June 2021, the Company became aware of a claim by a vendor who asserted a claim for $188 for the remaining scope of work in connection with a contract which the Company terminated. The Company and the parties agreed on a settlement of $85, which was paid in the 3^rd quarter ~~for $281.~~of 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 September 30, ~~2020,~~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.

~~16. Pending Transaction~~

On August 5, 2020, AVCT entered into the Purchase Agreement with Ribbon, RCOCI and Ribbon Communications International Limited, pursuant to which AVCT has agreed to purchase the Kandy Business by acquiring certain assets and assuming certain liabilities and acquiring all of the outstanding interests of Kandy Communications LLC (the “Transaction”).

Under the terms of the Purchase Agreement, AVCT has agreed to issue to Ribbon 13.0 million shares of AVCT’s common stock (the “Issued Shares”), subject to certain adjustments, as consideration for the Transaction (the “Purchase Price”).

Pursuant to the terms of the Purchase Agreement, AVCT is required to complete an equity offering (the “Equity Offering”) prior to, or simultaneously with, the closing of the Transaction (the “Closing”), and in the event AVCT is successful in raising at least $100.0 million in the Equity Offering, AVCT will sell additional securities in the Equity Offering resulting in proceeds in an amount up to the value of 20% of the Issued Shares being issued to Ribbon, with the value of each Issued Share being equal to (i) the value of the AVCT common stock or other securities convertible into a share of AVCT common stock that is being sold in the Equity Offering, or (ii) in the event another form of securities is being offered in the Equity Offering, or if the Equity Offering is consummated more than five days prior to the Closing, the volume weighted average price of AVCT common stock for the ten trading days immediately prior to the Closing (the equivalent shares sold, “Sold Shares”). AVCT will deliver to Ribbon, as part of the Purchase Price, the gross proceeds from the sale of additional securities in the Equity Offering in excess of $100.0 million, in lieu of the Sold Shares at the Closing. In the event that AVCT’s Pro Forma Total Enterprise Value (as defined in the Purchase Agreement), after taking into account the Equity Offering proceeds, would be below $275.0 million, AVCT and Ribbon have agreed to negotiate a potential change in the number of Issued Shares. If an agreement cannot be reached on any change in the number of Issued Shares, AVCT will not proceed with the Equity Offering.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

September 30, ~~2020~~2021

(Unaudited)

The obligations of each of the Ribbon Parties and AVCT are subject to specified conditions, including, among other matters: (i) the approval by AVCT’s shareholders of the issuance to Ribbon of the Issued Shares (the “Share Issuance”), (ii) the successful completion of the Equity Offering, and (iii) the absence of any injunctions being entered into or law being adopted that would make the Transaction illegal.

The Purchase Agreement contains customary representations and warranties from the Ribbon Parties and AVCT. It also contains customary covenants, including (i) covenants providing for each of the parties to use its commercially reasonable efforts to cause the Transaction to be consummated, and for each of the Sellers and AVCT to carry on their respective businesses in the ordinary course of business consistent with past practice during the period between the execution of the Purchase Agreement and the Closing, (ii) non-competition and non-solicitation of employee covenants applicable to Ribbon for a period of three years following the Closing and (iii) non-solicitation of employee covenants applicable to AVCT for a period of three years following the Closing. The Sellers have also agreed not to initiate, solicit, knowingly encourage the submission of any proposal or offer relating to alternate transactions or, engage in any discussions or negotiations with respect to alternate transactions regarding the Kandy Business, during the period between the execution of the Purchase Agreement and the Closing. AVCT is required to seek stockholder approval of the issuance of the Issued Shares pursuant to Nasdaq listing rules.

The Purchase Agreement contains termination rights for each of the Sellers and AVCT, including, without limitation, in the event that (i) the Transaction is made illegal or any governmental entity issues a non-appealable final order permanently enjoining the Transaction; (ii) the Transaction is not consummated by December 4, 2020; or (iii) the other party breaches its representations, warranties or covenants under the Purchase Agreement which would give rise to the failure of a closing condition and such breach is not cured with 30-days of receipt of written notice of such breach.

The Purchase Agreement provides that AVCT will be obligated to pay Ribbon a termination fee of $1.0 million if the Purchase Agreement is terminated under certain circumstances at a time when the Equity Offering has not been completed.

The Purchase Agreement contemplates that Ribbon and AVCT will enter into an Investor Rights Agreement (the “Investor Rights Agreement”) at the Closing pursuant to which Ribbon will receive customary registration rights with respect to the Issued Shares. In addition, under the Investor Rights Agreement, so long as Ribbon holds at least 25% of the shares of AVCT common stock issued to Ribbon at Closing, Ribbon will have the right to nominate one director to the AVCT board of directors. The Investor Rights Agreement also provides that each of Pensare Sponsor Group, LLC and Stratos Management Systems Holdings, LLC (each, a “Significant Stockholder”) will agree to support AVCT’s obligation to nominate and have elected Ribbon’s director nominee.

17. Subsequent Events

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

On November 2, 2021, the Company announced that it had signed a definitive agreement for a registered direct offering with an institutional investor of 2,500,000 shares (the “Registered Shares”) of its common stock at a purchase price of $2.00 per share and a warrant (the “Series B Warrant”) to purchase an additional 2,500,000 shares of common stock, for total gross proceeds of $5,000, before payment of commissions and expenses. The Company will receive an additional $5,000 in gross proceeds if the Series B Warrant is exercised in full. The Series B Warrant has an exercise price of $2.00 per share, is exercisable on the date of issuance and expires two years from the date of issuance. Commencing ten trading days after the issuance of the Series B Warrant, the Company may force the investor to exercise its Series B Warrant in the event shares of the Company’s common stock trade at or above $2.40/share for a period of 5 consecutive trading days, subject to certain conditions, including equity conditions.

In a concurrent private placement, the institutional investor received from the Company an unregistered warrant (the “Series A Warrant”) to purchase, initially, an additional 2,500,000 shares of the Company’s common stock. In addition, for each share of common stock purchased by the institutional investor upon the exercise of the Series B Warrant, the Series B Warrant will become exercisable to purchase one additional share of common stock.

The Series A Warrant has an exercise price of $2.00 per share, is exercisable on the date of issuance, and expires five years from the date of issuance.

The consummation of the issuance and sale of the Registered Shares, the Series B Warrant and the Series A Warrant occurred on November 5, 2021. The Company plans to use the net proceeds of approximately $4,500 from the offering for reduction of debt and working capital. Northland Capital Markets served as sole placement agent in the transaction. The offering of the Registered Shares and the Series B Warrant (and underlying shares of common stock) was made pursuant to an effective shelf registration statement on Form S-3 previously filed with the SEC.

Other than ~~the Fifth Amendment to the Credit Agreement that is~~as disclosed in ~~Note 8,~~this note and as may be disclosed elsewhere in the accompanying notes, 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~~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 Part II, Item 1A of this Quarterly report and the Risk Factors section of our Annual Report on Form 10-K, as amended, filed on ~~June 29, 2020~~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 ~~Texas.~~Mexico City.

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

On December 1, 2020, we acquired the Kandy Communications business (“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.

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

Recent development

On September 16, 2021, the Company issued a press release announcing that as a result of a decision by the Company’s Board of Directors (the “Board”) to explore strategic alternatives previously announced on April 7, 2021, the Board had authorized the Company to focus its strategy on acquisitions and organic growth in its cloud technologies business as well as to explore strategic opportunities for its IT solutions business, including the planned divestiture of Computex. The Company believes that the change will allow it to optimize resource allocation, focus on core competencies, and improve its ability to invest in areas of maximal growth potential. Proceeds from any potential sale transaction are expected to be used to further deleverage the balance sheet and provide working capital.

Growth strategy

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

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

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

●

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

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

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

●

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

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

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

Key trends affecting our results of operations

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

●

The acceleration of digital transformation

●

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

●

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

●

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

●

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

●

The general trend towards movement to the cloud

●

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

●

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

●

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

●

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

●

The explosive growth in remote workforce needs.

Covid-19

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

Nature of revenue categories discussed below

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

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

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

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

Financial statement presentation and results of operations

The condensed consolidated financial statements of the Company include the accounts of AVCT and its ~~wholly owned subsidiary, Computex. The~~wholly-owned subsidiaries. As discussed in Note 3 of 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. The historical financial information of AVCT prior to the ~~business combination~~Computex 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 and value-added service offerings. The breadth of our offerings enables us to offer each customer a complete technology solution. After performing an assessment of our customers’ needs, we design best-fit solutions, and with the help of leading vendors in the industry, we help our customers to procure products that fit their global needs.

~~Covid-19~~

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

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

~~Our business~~

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

~~Our~~ ~~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.

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

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

~~Key trends affecting our results of operations~~

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

●

~~Increasing need for third-party services~~. We believe that customers are relying on third-party service providers, such as Computex Technology Solutions, to manage significant aspects of their IT environment, from design, to implementation, to pre- and post-sales support, to maintenance, engineering, cloud management, security operations, and other services.

●

~~Reduction in the number of IT solutions providers~~. Our view is that customers are seeking to reduce the number of solutions providers they do business with to improve supply chain and internal efficiencies, enhance accountability, improve supplier management practices, and reduce costs. As a result, customers are looking to find IT solutions providers that can provide a whole suite of solutions to meet their IT needs.

●

~~Lack of sufficient internal IT resources at mid-sized and large enterprises, and scarcity of IT personnel in certain high-demand disciplines.~~ We believe that IT departments at mid-sized and large enterprises are facing pressure to deliver emerging technologies and business outcomes but lack the properly trained staff and the ability to hire personnel with high in-demand disciplines such as security and data analytics. At the same time, the prevalence of security threats; increased use of cloud computing, software-defined networking, new architectures, and rapid software development frameworks; the proliferation of mobile devices and bring-your-own-device (BYOD) policies; and the complexity of multi-vendor solutions, have made it difficult for these departments to implement high-quality IT solutions.

●

~~Disruptive technologies are creating complexity and challenges for customers and vendors~~. The rapid evolution of disruptive technologies, and the speed by which they impact an organization’s technology platforms, has made it difficult for customers to effectively design, procure, implement and manage their own IT systems. Moreover, increased budget pressures, fewer internal resources, a fragmented vendor landscape and fast time-to-value expectations make it challenging for customers to design, implement and manage, efficient, secure and cost-effective IT environments. Customers are increasingly turning to IT solutions providers such as Computex Technology Solutions to implement complex IT offerings, including software defined infrastructure, cloud computing, converged and hyper-converged infrastructures, big data analytics, and flash storage.

●

~~Increasing sophistication and incidences of IT security breaches and cyber-attacks~~. In recent years, cyber-attacks have become more sophisticated, numerous, and pervasive. Organizations are finding it increasingly difficult to effectively safeguard their confidential and personal information from a constant stream of advanced threats, both internal and external. Moreover, cyber-threats have shifted from uncoordinated individual efforts to highly coordinated and well-funded attacks by criminal organizations and nation-state actors. For most organizations, it is no longer a matter of “if a cyber-attack will occur;” the question is “when” and “what impact will it have” on the organization. We believe our customers are focused on all aspects of cyber security, including information and physical security, intellectual property, and compliance requirements related to industry and government regulations. To meet current and future security threats, enterprises must implement security controls and technology solutions that leverage integrated services and products to help monitor, mitigate, and remediate security threats and attacks.

●

~~Customer IT decision-making is shifting from IT departments to line-of-business personnel~~. As IT consumption shifts from legacy, on-premise infrastructure to agile “on-demand” and “as-a-service” solutions, customer procurement decisions are shifting from traditional IT personnel to lines-of-business personnel, which is changing the customer engagement model and types of consultative services required to fulfill the needs of customers. In addition, many such services create recurring revenue streams paid for over a period of time, rather than paid for upfront.

●

~~Multi-Cloud Strategy~~. Over the past several years, cloud architectures and cloud-enabled frameworks, whether public, private, or hybrid, have become the core foundation of modern IT. In order to take advantage of this trend, we focus on assisting our customers with their assessment, definition, deployment, and management of private and hybrid clouds that align with their business needs. This strategy leverages our strength in deploying private clouds, while also incorporating elements of the public cloud. By assessing our client’s applications, workloads and business requirements, among others, we are able to deploy solutions that leverage the best available technology platforms and consumption models. For example, we may build a private cloud solution to host mission critical applications, while utilizing a public cloud solution for development, collaboration, or disaster recovery. Our cloud strategy is tightly aligned with key strategic initiatives, including security, and digital workspace.

~~Results of operations~~

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

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

For the reasons discussed above, management believes it remains useful to review the operating results for the three and nine months ended September 30, ~~2020~~2021 with the operating results for the three and nine months ended September 30, ~~2019.~~2020. Accordingly, in the discussion below, for purposes of a year-to-date (YTD) comparison, the financial information for the period January 1, 2020 through April 6, 2020 is combined with the financial information for the period April 7, 2020 through September 30, 2020 and, together, is referred to as the “S/P combined YTD period ended September 30, 2020.” Accordingly, in addition to presenting our results of operations in our condensed consolidated financial statements in accordance with GAAP, the tables and certain discussions below present the non-GAAP combined results for the nine months ended September 30, 2020.

3^rdQuarter of ~~2020 (July 1, 2020 through September 30, 2020)~~2021 versus the 3^rd Quarter of ~~2019 (July 1, 2019 through September 30, 2019)~~2020

July 1,
2020 July 1,
2019
through through
September 30,
2020 September 30,
2019
Successor Predecessor
Revenues:
Hardware $ 16,428 $ 12,160
Software and maintenance 1,202 1,418
Managed and professional services 8,204 6,599
Other 134 155
Total revenues 25,968 20,332
Cost of revenue 18,445 14,249
Gross profit 7,523 6,083
Selling, general and administrative expenses (including transaction costs) 9,929 6,928
Loss from operations (2,406 ) (845 )
Other (expense) income
Interest expense ⁽¹⁾ (2,379 ) (309 )
Other (expense) income (12 ) 2
Total other expenses (2,391 ) (307 )
Loss before income taxes (4,797 ) (1,152 )
Benefit (provision) for income taxes (41 ) 55
Net loss $ (4,838 ) $ (1,097 )

	3^rdQuarter
	2021			2020
	In thousands
Revenues:
Hardware	$	13,000		$	16,428
Third party software and maintenance		2,080			1,202
Managed and professional services		8,623			8,204
Cloud subscription and software		3,575			-
Other		233			134
Total revenues		27,511			25,968
Cost of revenue		20,281			18,445
Gross profit		7,230			7,523
Goodwill impairment		20,500			-
Research and development		4,508			-
Selling, general and administrative		20,099			9,929
Loss from operations		(37,877	)		(2,406	)
Other (expense) income
Gain on extinguishment of debt		4,177			-
Change in fair value of warrant liabilities		3,064			(783	)
Interest expense ⁽¹⁾		(6,631	)		(2,379	)
Other expense		(33	)		(12	)
Total other income (expenses)		577			(3,174	)
Loss before income taxes		(37,300	)		(5,580	)
Provision for income taxes		(17	)		(41	)
Net loss	$	(37,317	)	$	(5,621	)

⁽¹⁾ ~~Interest expense in the Successor period includes related party interest of $597.~~

⁽¹⁾	Interest expense in the 3^rd quarter of 2021 and the 3^rd quarter of 2020 include related party interest of $4,602 and $1,613, respectively.

Net loss

Net loss for the 3^rd quarter of ~~2020~~2021 was ~~$4.8~~$37.3 million compared with ~~$1.1~~$5.6 million for the 3^rd quarter of ~~2019.~~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 ~~first and~~ fourth ~~quarters~~quarter of each year. Our hardware revenue was $13.0 million in the 3^rdquarter of 2021 compared with $16.4 million in the 3^rd quarter of 2020, a decrease of $3.4 million, or 20.9%. We attribute the decrease to the normalization of demand for equipment that were in higher demand in 2020 and early 2021 due to COVID-19, as well as to the negative impact of product-related order backlog at our Computex subsidiary. The margin on hardware revenue was 22.2%, a 130-basis points increase compared with ~~$12.2~~the 20.9% recorded in the 3^rd quarter of 2020. We attribute the basis points increase to a more favorable price structure in the 3^rd quarter of 2021.

Third party software and maintenance revenue

Revenues from third party software and maintenance, which are recorded net of direct expenses, was $2.1 million in the 3^rd quarter of ~~2019,~~2021 compared to $1.2 million in the 3^rd quarter of 2020, an increase of $0.9 million or 73.0%. We attribute the increase to continued customer penetration in the retail and hospitality sector. Since this revenue is recorded net, the revenue is also the gross margin.

Managed and professional services revenue

Primarily as a result of the Kandy acquisition, managed and professional services revenues increased 5.1% or $0.4 million to $8.6 million in the 3^rd quarter of 2021 compared with the $8.2 million that was recorded in the 3^rd quarter of 2020. Of the total managed and professional services revenue generated by the Company in the 3^rd quarter of 2021, approximately 93.3% or $8.0 million, was generated by the Computex segment, while $0.6 million was generated by our Kandy segment. Compared to 3^rd quarter 2020, managed and professional services revenue for our Computex segment was relatively flat, while the margin decreased from 34.8% in the 3^rd quarter of 2020 to 28.4% in the 3^rd quarter of 2021, a 640-basis points decrease. We attribute this decrease to increased investments in direct labor and software tools to support an increasing customer base as well as to the normalization of demand for certain services that were in higher demand in 2020 due to Covid-19.

Cloud subscription and software revenue

Cloud subscription and software revenue was $3.6 million in the 3^rd quarter of 2021 and represents revenue from subscriptions to the Company’s cloud-based technology platform as well as revenue from the Company’s on-premise software, both of which are offered by the Company’s recently-acquired Kandy segment, which the Company acquired in December 2020.

Other revenue

Other revenue, which consists primarily of freight and reimbursables, including travel, meals and entertainment, was $0.2 million and $0.1 million for the 3^rd quarter of 2021 and the 3^rd 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 $27.5 million in the 3^rd quarter of 2021, an increase of $1.5 million, or 5.9%, from the $26.0 million recorded in the 3^rd quarter of 2020. The increase was due to the Kandy acquisition, partially offset by a decrease in total revenue at our Computex segment. The Kandy segment generated revenue of $4.1 million in the 3^rd quarter of 2021. Revenues from the Computex segment decreased $2.6 million or 10.0%. Factors causing the decrease in revenue at our Computex segment are discussed above.

Aggregate gross profit was $7.2 million in the 3^rd quarter of 2021 compared with $7.5 million in the 3^rd quarter of 2020, a decrease of $0.3 million, or 3.9%, primarily due to a gross profit decrease at our Computex segment, which recorded a decrease of $0.2 million. Aggregate gross profit was negatively impacted by lower gross profit on managed and professional services as well as a lower gross profit on hardware revenue, which were partially offset by an increase in the gross profit on software and maintenance revenue.

Aggregate gross margin percent decreased 270 basis points from 29.0% in the 3^rd quarter of 2020 to 26.3% in the 3^rd quarter of 2021, due primarily to the impact of the Kandy acquisition. Gross margin for our Computex segment in the 3^rd quarter of 2021 was 31.4%, a 240-basis point increase from the 29.0% recorded in the 3^rd quarter of 2020, primarily as a result of improved margins on software and maintenance revenue and on hardware revenue. Though the Kandy segment contributed revenues of $4.1 million in the quarter, the revenue was exceeded by direct expenses as the Company continues to ramp up costs in the segment as part of its strategic investment in the Kandy segment.

Goodwill impairment

The noncash goodwill impairment charge recorded during the 3^rd quarter of 2021 is discussed in Note 1 of the condensed consolidated financial statements and relates to goodwill of the Computex reporting unit. In connection with the potential sale of Computex, the Company compared the expected proceeds less costs to sell with the carrying value of the reporting unit and in connection therewith recorded a noncash goodwill impairment charge of $20,500 during the quarter.

Research and development

The Company began recognizing research and development expenses when it acquired Kandy in December 2020. In the 3^rd 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 (typically 4-6 weeks in duration) in which the research and development teams create potentially shippable products. Currently, such costs are expensed as incurred, and include personnel-related costs, depreciation related to engineering and test equipment, allocated costs of facilities and information technology, outside services and consultants, supplies, software tools and product certification.

Selling, general and administrative expenses

Selling, general and administrative expenses for the 3^rd quarter of 2021 and the 3^rd quarter of 2020 consisted of the components in the following table (in thousands):

	3^rdQuarter						Increase
	2021			2020			(decrease)
	(In thousands)

Salaries, benefits, subcontracting & personnel administration costs	$	13,959		$	6,436		$	7,523
Building occupancy costs, utilities, office supplies & repairs and maintenance		1,050			564			486
Depreciation and amortization		738			884			(146	)
Dues, subscriptions and memberships		462			235			227
Sales and marketing		944			184			760
Vendor marketing funds		(189	)		(110	)		(79	)
Meals, entertainment & travel		50			17			33
Management fees		-			-			-
Professional fees		1,604			1,266			338
Insurance		616			414			202
Other		865			39			826
	$	20,099		$	9,929		$	10,170

Selling, general and administrative expenses increased $10.2 million, primarily as a result of added expenses related to the Kandy acquisition ($4.2 million of the increase), certain termination expenses recorded in the 3^rd quarter of 2021 and increased stock compensation expenses. The termination expenses, which were approximately $3.1 million (excluding stock compensation expenses related to the termination), were primarily recorded in July 2021 and were primarily due to a reduction in the Company’s corporate workforce. Stock compensation expenses increased approximately $2.1 million in the 3^rd quarter of 2021 compared with the 3^rd quarter of 2020 due to certain amounts related to the terminations discussed previously as well as to an increase in the number of awardees.

Gain on extinguishment of debt

The gain on extinguishment of debt of $4.2 million in the 3^rd quarter of 2021 was due to the forgiveness, in July 2021, of a PPP loan plus related accrued interest. Under the terms of the CARES Act, PPP loan recipients had the option to apply for forgiveness for all or ~~35.1%~~a portion of such loans, if the loan was used for eligible purposes, including to fund payroll costs.

Change in fair value of warrant liabilities

The change in the fair value of warrant liabilities in the 3^rd quarter of 2021 and 2020 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 3^rd quarter of 2021 increased compared with the 3^rd quarter of 2020, due in part to an increase in interest on Debentures due to new issuances as well as to the compounding effect of paid-in-kind interest. The Debentures were converted to common stock during the 3^rd quarter of 2021 (on September 8, 2021), but prior to conversion, bore interest at the rate of 10.00% per annum compounded quarterly. Interest expense, which was also impacted by increases in Debenture discount amortization charges consisted of the following (in thousands):

	3^rdQuarter
	2021		2020
	(In thousands)
Amortization of debenture discount	$	2,792	$	994
Debenture interest paid-in-kind		2,518		1,097
Amortization of debenture deferred fees		565		-
Interest on term note and line of credit		340		230
Interest on related party promissory note		389		-
Other		27		58
	$	6,631	$	2,379

YTD period ended September 30, 2021 versus the S/P Combined YTD period ended September 30, 2020

	YTD period			April 7, 2020			January 1, 2020			S/P Combined YTD period
	Ended			through			through			ended
	September 30, 2021			September 30, 2020			April 6, 2020			September 30, 2020
	Successor			Successor			Predecessor			(Non-GAAP)
	(In thousands)			(In thousands)			(In thousands)			(In thousands)
Revenues:
Hardware	$	39,219		$	26,870		$	10,587		$	37,457
Third party software and maintenance		5,115			2,734			1,459			4,193
Managed and professional services		26,323			15,188			6,880			22,068
Cloud subscription and software		10,790			-			-			-
Other		793			273			111			384
Total revenues		82,240			45,065			19,037			64,102
Cost of revenue		60,152			31,362			12,426			43,788
Gross profit		22,088			13,703			6,611			20,314
Goodwill impairment		20,500			-			-			-
Research and development		13,606			-			-			-
Selling, general and administrative		51,484			17,617			7,835			25,452
Loss from operations		(63,502	)		(3,914	)		(1,224	)		(5,138	)
Other (expense) income
Gain on extinguishment of debt		4,177			-			-			-
Change in fair value of warrant liabilities		3,041			(1,980	)		-			(1,980	)
Interest expense ⁽¹⁾		(19,446	)		(4,540	)		(384	)		(4,924	)
Other (expense) income		(52	)		(25	)		31			6
Total other expenses		(12,280	)		(6,545	)		(353	)		(6,898	)
Loss before income taxes		(75,782	)		(10,459	)		(1,577	)		(12,036	)
Provision for income taxes		(68	)		(33	)		(12	)		(45	)
Net loss	$	(75,850	)	$	(10,492	)	$	(1,589	)	$	(12,081	)

⁽¹⁾	Interest expense in the YTD period ended September 30, 2021 and the period April 7, 2020 through September 30, 2020 include related party interest of $14,611 and $3,078, respectively.

Net loss

Net loss for the YTD period ended September 30, 2021 was $75.9 million compared with $12.1 million for the S/P Combined YTD period ended September 30, 2020. Discussed below are the revenue and expense factors that primarily contributed to the net loss change.

Hardware revenue

Hardware revenue was $39.2 million in the YTD period ended September 30, 2021 compared with $37.5 million in the S/P Combined YTD period ended September 30, 2020, an increase of $1.8 million, or 4.7%. We attribute this increase to the impact of COVID-19 due to increased demand for equipment in the manufacturing, logistics and public sectors in the earlier part of 2021, as more customers transitioned to remote work. ~~The increase in~~There was some normalization of the demand for hardware ~~revenue was partially offset by the negative impact of a sales force transition~~. ~~Though our hardware revenue was up~~ in the 3^rd quarter of ~~2020 compared with~~2021, however, the positive impact of the higher demand in the earlier part of 2021 more than offset the impact that the flattening of hardware demand in the 3^rd quarter of ~~2019,~~2021 had on the YTD period ended September 30, 2021. The gross margin on hardware revenue was ~~relatively flat as both quarters reflect management’s actions~~21.9% for the YTD period ended September 30, 2021, an 80-basis points decrease from the 22.7% recorded in the S/P Combined YTD period ended September 30, 2020. We attribute the basis points decrease to ~~deliver higher margins.~~a shift in product mix towards lower margin products during the period.

~~Software~~Third party software and maintenance revenue

Revenues from software and maintenance, ~~services,~~ which are recorded net of direct expenses, ~~decreased 15.2%,~~increased to ~~$1.2~~$5.1 million in the 3^rd ~~quarter of 2020 compared with $1.4~~YTD period ended September 30, 2021 from $4.2 million in the 3^rdYTD period ended September 30, 2020, an increase of 22.0% or $0.9 million. Similar to the quarter ~~of 2019. Since~~over quarter increase, we attribute this increase to continued customer penetration in the retail and hospitality sector. As previously mentioned, since this revenue is recorded net, the revenue is also the gross margin. We attribute the decrease to a shift in customers’ IT spend towards mobile computing equipment and other mobile computing services as a result of increased telecommuting arrangements in response to COVID-19.

Managed and professional services revenue

Managed and professional services revenues increased ~~24.3%~~$4.3 million, or 19.3%, to ~~$8.2~~$26.3 million in the 3^rd ~~quarter of 2020 compared with $6.6~~YTD period ended September 30, 2021 from $22.1 million in the 3^rd ~~quarter of 2019.~~S/P Combined YTD period ended September 30, 2020. Of the $4.3 million increase, $1.8 million is attributable to the Kandy acquisition. We attribute ~~this~~the remaining increase to ~~more~~increasing demand for infrastructure assessment, cyber security and managed ~~service~~services monitoring ~~services due to COVID-19, as customers continue to invest in their IT environment to allow them to seamlessly work from home. The gross margin also increased~~at our Computex segment, primarily in the 31^rdst ~~quarter~~half of ~~2020, increasing 380~~the year. Though revenues from managed and professional services in the Computex segment increased $2.4 million, the margin decreased from 34.1% to 29.0 %, a decrease of 510 basis points. We attribute the basis points ~~compared with~~decrease to the 3^rdsame factors discussed in the quarter over quarter comparison.

Cloud subscription and software revenue

Cloud subscription and software revenue, offered by our Kandy segment, was $10.8 million in the YTD period ended September 30, 2021. The nature of ~~2019. Increased margins are due to actions taken by~~this revenue is discussed in the ~~Company to deliver higher margins and also as a result of increased utilization of personnel driven by the higher customer demand discussed previously.~~quarter over quarter discussion above.

Other revenue

Other revenue, which ~~consists primarily of freight and reimbursables, including travel, meals and entertainment,~~is discussed above in the quarter over quarter comparison, was ~~relatively flat at $0.1~~$0.8 million and ~~$0.2~~$0.4 million ~~for~~in the 3^rd ~~quarter of 2020~~YTD period ended September 30, 2021 and the 3^rd ~~quarter of 2019,~~S/P Combined period ended September 30 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 ~~four~~five product lines together was ~~$26.0~~$82.2 million in the 3^rd ~~quarter of~~YTD period ended September 30, 2021, compared with $64.1 million in the S/P Combined period ended September 30 2020, an increase of ~~$5.7~~$18.1 million, or ~~27.7%, compared with $20.3~~28.3%. Of the $18.1 million revenue increase, $12.6 million was related to the Kandy acquisition. The remainder of the increase is due to an increase in each of the ~~3rd quarter of 2019.~~ four product lines at the Computex segment.

Aggregate gross profit was also up, ~~increasing 23.7%~~reflecting an increase of $1.8 million, or 8.7%, due in part to the Kandy acquisition, which contributed $1.1 million to the increase. The remaining increase in aggregate gross profit was due primarily to the gross profit increase in software and maintenance revenue.

Though gross profit increased, aggregate gross margin percent decreased from 31.7% in the 3^rd ~~quarter of~~S/P Combined YTD period ended September 30, 2020 to ~~$7.5 million,~~26.9%, a 480-basis points decrease, primarily due to the Kandy acquisition. Aggregate gross margin percent for our Computex segment was 30.2%, for the YTD period ended September 30, 2021 compared with 31.6% for the S/P Combined period ended September 30 2020, a 140-basis point decrease primarily due to ~~$6.1~~increased investments in direct labor and telecommunications in the managed and professional services line of business. Gross margin at our Kandy segment was 9% in the YTD period ended September 30, 2021 as the Company continues to ramp up costs in the segment as part of its strategic investment in the Kandy segment.

Goodwill impairment

The noncash goodwill impairment charge recorded during the YTD period ended September 30, 2021 is discussed in the quarter over quarter comparison above.

Research and development

Research and development expenses, which are discussed in the quarter over quarter discussion, were $13.6 million in the 3^rd quarter of 2019. Gross margin was down 90 basis points as the percentage increase in aggregate cost of revenues (29.4%), quarter over quarter, outpaced the percentage increase in aggregate revenues (27.7%).YTD period ended September 30, 2021.

Selling, general and administrative expenses

Selling, general and administrative expenses ~~(including transaction costs)~~ for the 3^rd ~~quarter of 2020~~YTD period ended September 30, 2021 and the 3^rd ~~quarter of 2019~~S/P Combined YTD period ended September 30, 2020 consisted of the components in the following table (in thousands):

July 1,
2020 July 1,
2019
through through Change
September 30,
2020 September 30,
2019 Increase
(decrease)
Successor Predecessor
Salaries, benefits, subcontracting & personnel administration costs $ 6,428 $ 5,352 $ 1,076
Building occupancy costs, utilities, office supplies & repairs and maintenance 564 445 119
Depreciation and amortization 884 545 339
Dues, subscriptions and memberships 235 210 25
Vendor marketing funds (110 ) (283 ) 173
Meals, entertainment & travel 65 349 (284 )
Management fees - 75 (75 )
Professional fees 1,266 36 1,230
Insurance 414 83 331
Other 183 116 67
$ 9,929 $ 6,928 $ 3,001

	YTD period Ended			S/P Combined YTD period ended
	September 30, 2021			September 30, 2020			Increase (decrease)
	Successor			(Non-GAAP)
	(In thousands)			(In thousands)			(In thousands)
Salaries, benefits, subcontracting & personnel administration costs	$	35,157		$	18,235		$	16,922
Building occupancy costs, utilities, office supplies & repairs and maintenance		2,657			1,510			1,147
Depreciation and amortization		2,449			2,186			263
Dues, subscriptions and memberships		1,227			629			598
Sales and marketing		2,321			448			1,873
Vendor marketing funds, net of vendor fees		(405	)		(590	)		185
Meals, entertainment & travel		110			163			(53	)
Management fees		-			80			(80	)
Professional fees		4,562			1,489			3,073
Insurance		1,564			852			712
Other		1,842			450			1,392
	$	51,484		$	25,452		$	26,032

Selling, general and administrative expenses increased ~~43.3% in the 3~~^rd ~~quarter of 2020 compared with the 3~~^rd ~~quarter of 2019,~~$26.0 million, primarily as a result of added expenses related to the Kandy acquisition ($11.0 million of the increase), an increase in personnel-related costs and professional ~~fees, insurance expenses and depreciation and amortization.~~fees. Personnel-related expenses increased, ~~primarily~~in part, as a result of the ~~inclusion of AVCT corporate salaries~~termination expenses in July 2021 that were previously mentioned in the ~~Successor period, which were not included~~quarter over quarter discussion and increased stock compensation expenses of approximately $5.3 million. The reasons for the stock compensation increases are discussed in the Predecessor period, an increase in commissions due to improved margins, and an increase in share-based compensation expenses related to awards issued in the Successor periods, partially offset by a reduction in salaries for employees of Computex, that was effected between April 1, 2020 and September 1, 2020. The increased insurance expensesquarter over quarter comparison. Increased professional fees are related to the Company’s expanded public company activities. ~~Increased professional fees are also related to the Company’s expanded public company activities as well as to fees related to the pending acquisition~~

Change in fair value of warrant liabilities

The nature of the ~~Kandy Business (as defined~~change in ~~Note 1~~the fair value of warrant liabilities is discussed in the condensed consolidated financial statements). The increase in depreciation and amortization was due to increased amortization expense related to intangible assets recognized as of the Closing Date. Meals, entertainment and travel decreased as a result of less travel and meetings with clients due to COVID-19 restrictions.quarter over quarter comparison.

Interest expense

~~Interest~~The primary reasons for the increase in interest expense are discussed in the 3^rdquarter ~~of 2020 was up compared with~~over quarter comparison. For the 3^rd ~~quarter of 2019, primarily as a result of interest on the Debentures~~YTD period ended September 30, 2021 and the ~~subordinated promissory note which were both issued on the Closing Date. The Debentures bear~~S/P Combined YTD period ended September 30, 2020, interest ~~at the rate of 10.00% and the subordinated promissory note bears interest at the rate of 12.00%. Interest~~ expense ~~also includes amortization~~consisted of the ~~discount on the Debentures.~~following (in thousands):

	YTD period Ended		S/P Combined YTD period ended
	September 30, 2021		September 30, 2020
	Successor		(Non-GAAP)
	(In thousands)		(In thousands)
Amortization of debenture discount	$	9,253	$	1,921
Debenture interest paid-in-kind		8,257		2,112
Amortization of debenture deferred fees		628		-
Interest on term note and line of credit		739		780
Interest on related party promissory note		389		-
Other		180		111
	$	19,446	$	4,924

Benefit/provision for income taxes

For all periods presented, the benefit/provision for income taxes consists of provisions for state ~~taxes, and reflect~~taxes. The 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~~benefit/provision for income taxes also reflects the impact of amortization of intangible assets recognized as of the Computex Closing ~~Date.~~

~~S/P Combined YTD Period Ended September 30, 2020 versus the YTD Period Ended September 30, 2019~~

April 7,
2020 January 1,
2020
S/P Combined
YTD
YTD
through through period ended period ended
September 30,
2020 April 6,
2020
September 30,
2020
September 30,
2019
Successor Predecessor (non-GAAP) Predecessor
Revenues:
Hardware $ 26,870 $ 10,587 $ 37,457 $ 40,649
Software and maintenance 2,734 1,459 4,193 4,447
Managed and professional services 15,188 6,880 22,068 20,557
Other 273 111 384 503
Total revenues 45,065 19,037 64,102 66,156
Cost of revenue 31,362 12,426 43,788 47,589
Gross profit 13,703 6,611 20,314 18,567
Selling, general and administrative expenses (including transaction costs) 17,617 7,835 25,452 20,403
Loss from operations (3,914 ) (1,224 ) (5,138 ) (1,836 )
Other (expense) income
Interest expense (4,540 ) (384 ) (4,924 ) (979 )
Other (expense) income (25 ) 31 6 147
Total other expenses (4,565 ) (353 ) (4,918 ) (832 )
Loss before income taxes (8,479 ) (1,577 ) (10,056 ) (2,668 )
Benefit (provision) for income taxes (33 ) (12 ) (45 ) (33 )
Net loss $ (8,512 ) $ (1,589 ) $ (10,101 ) $ (2,701 )

⁽¹⁾

~~Interest expense in the Successor period includes related party interest of $1,151.~~

~~Net loss~~

Net loss for the S/P Combined YTD period ended September 30, 2020 was $10.1 million compared to $2.7 million for the YTD period ended September 30, 2019. Discussed below are the revenue and expense factors that primarily contributed to the YTD change in the net loss between the two periods.

~~Hardware revenue~~

Hardware revenue decreased 7.9%, from $40.6 million in the YTD period ended September 30, 2019 to $37.5 million in the S/P Combined YTD period ended September 30, 2020. Though our hardware revenue was down, the margin was up 350 basis points in the S/P Combined YTD period ended September 30, 2020 compared with the YTD period ended September 30, 2019. We attribute the decrease in hardware revenue to reduced demand in the energy sector, related to COVID-19Date and the negative impact of a sales force transition, partially offset by increased demand in the manufacturing, logistics and public sector, also related to COVID-19 as more customers transitioned to remote work. We attribute the increase in margin to actions by the Company, beginning in the 3^rd ~~quarter of 2019, to deliver improved margins.~~Kandy Closing Date.

~~Software and maintenance revenue~~

Revenue from software and maintenance services was down $0.3 million, or 5.7% in the YTD periods for the same reason discussed in the quarter over quarter comparison. As discussed above, since this revenue is reported net, the revenue is also the margin.

~~Managed and professional services revenue~~

Managed and professional services revenues was up 7.4%, or $1.5 million in the S/P Combined YTD period ended September 30, 2020, increasing to $22.1 million from $20.6 million in the YTD period ended September 30, 2019. The margin on our services revenue for the S/P Combined YTD period ended September 30, 2020 was up 440 basis points compared to the YTD period ended September 30, 2019 due to the same reason discussed in the quarter over quarter comparison.

~~Other revenue~~

Other revenue was relatively flat at $0.4 million and $0.5 million in the S/P Combined YTD period ended September 30, 2020 and the YTD period ended September 30, 2019, respectively. The nature of other revenue is discussed in the quarter over quarter comparison section above.

~~Total revenue, cost of revenue and gross margin~~

Aggregate revenue for the four product lines together was $64.1 million in the S/P Combined YTD period ended September 30, 2020 compared to $66.2 million in the YTD period ended September 30, 2019, a decrease of $2.1 million, or 3.1%. Though aggregate revenues were down, overall gross profit increased 9.4% and gross margin was up 360 basis points as cost of revenue decreased 8.0%.

~~Selling, general and administrative expenses~~

Selling, general and administrative expenses (including transaction costs) for the S/P Combined YTD period ended September 30, 2020 and the YTD period ended September 30, 2019, consisted of the components in the following table (in thousands), and increased 24.8% primarily as a result of the same factors discussed in the quarter over quarter discussion.

S/P Combined
YTD period ended YTD period ended Change

September 30,
2020

September 30,
2019
Increase
(decrease)
(non-GAAP) Predecessor
Salaries, benefits, subcontracting & personnel administration costs $ 18,226 $ 15,484 $ 2,742
Building occupancy costs, utilities, office supplies & repairs and maintenance 1,510 1,583 (73 )
Depreciation and amortization 2,186 1,611 575
Dues, subscriptions and memberships 629 620 9
Vendor marketing funds, net of vendor fees (589 ) (715 ) 126
Meals, entertainment & travel 409 961 (552 )
Management fees 80 225 (145 )
Professional fees 1,596 159 1,438
Insurance 852 173 679
Other 553 302 251
$ 25,452 $ 20,403 $ 5,050

Included in the table above are transaction costs of $0.1 million incurred in connection with the acquisition of Computex on April 7, 2020. Such costs consist primarily of legal and professional fees, and are net of a credit of $0.9 million granted by a creditor whose account was settled via a combination of cash, Debentures and common stock.

~~Interest expense~~

Interest expense increased in the S/P Combined YTD period ended September 30, 2020, compared with the YTD period ended September 30, 2019, for the same primary reasons discussed above in the quarter over quarter discussion.

Liquidity and Capital Resources

Overview

~~Our~~Historically, the Company’s primary sources of liquidity ~~are funds generated~~have been cash and cash equivalents, cash flows from operations (when available) and cash flows from financing activities, including funding under ~~our~~its Credit Agreement ~~which have been sufficient to meet our working capital~~(defined and ~~substantially all our capital expenditure requirements. The Credit Agreement, which is~~ more fully discussed in Note 8 of the condensed consolidated financial ~~statements,~~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, fund capital expenditures and make investments that are in line with its business strategy.

On September 30, 2021, the Company had unrestricted cash of $4.2 million in its operating bank account and, as of October 1, 2021, had availability under its line of credit of $4.2 million. Current liabilities exceeded current assets by $26.6 million primarily as a result of the classification of certain debt as current, specifically, the components of the Credit Agreement and all promissory notes.

The Credit Agreement, as amended, matures on ~~June 30,~~December 31, 2021, and, as ~~amended,~~of September 30, 2021, provides for maximum borrowings of ~~$16.5~~$13.0 million on the ~~revolving note~~line of credit portion with a scheduled ~~reduction~~reductions of ~~$3.5~~$1.0 million in availability ~~under~~on October 1, 2021, November 1, 2021 and December 1, 2021, which can be impacted by the ~~revolving note~~borrowing base as, based on a ninth amendment entered into on November, 1, 2021, such availability is the lower of ~~April 1, 2021.~~such amounts and the borrowing base. The borrowing base is determined weekly and is primarily based on certain percentages of accounts receivable and inventory. As amended, the Credit Agreement provides for a minimum monthly liquidity (defined as unrestricted cash plus availability under the ~~revolving note)~~line of credit) of $3.0 ~~million commencing January 31, 2021. In connection with an amendment on November 13, 2020,~~million. As amended, the ~~Company~~Credit Agreement limits unfinanced capital expenditures to $3.0 million. As of October 1, 2021, maximum borrowings under the line of credit were $12,000, of which $4,183 was required to make a one-time principal payment of $0.3 million on the term loan. Availability on the revolving note is determined weekly, based on a weekly borrowing base computation that is primarily based on certain percentages of accounts receivable and inventory. available.

As of September 30, ~~2020,~~2021, amounts outstanding under the term loan and ~~revolving note~~the line of credit with Comerica Bank were ~~$6.4~~$3.2 million and ~~$8.5~~$8.8 million, respectively. Principal payments of $1.6 million and $0.8 million are due in November and December, respectively on the term loan plus accrued interest. See Note 8 for a more detailed discussion of the Credit Agreement.

On or before the maturity date of the Credit Agreement, ~~we plan~~the Company expects to seek to either negotiate an extension of the Credit Agreement or enter into a new agreement with another lender. ~~However, there can be no assurance that financing will be available~~In addition to 43,778 units of securities of the Company (as described in Note 9 to the ~~amounts we require or on terms acceptable~~accompanying condensed consolidated financial statements, “Units”), issued to ~~us, if at all. Unrestricted~~Ribbon as consideration for Kandy, in December 2020, the Company raised additional capital of $11.0 million via the sale of Units consisting of Debentures and ~~restricted cash on hand was approximately $3.7 million~~warrants, and, ~~$0.7 million at~~during the nine months ended September 30, ~~2020, respectively. We may also seek~~2021 (all prior to ~~access~~ the ~~debt and equity markets~~3^rd quarter), raised an additional $24.0 million through the sale of additional Units, which was used to fund ~~acquisitions and/or pursue large~~expansion, capital ~~expenditure projects or~~expenditures and working capital. See Note 9 to ~~reduce our cost~~the condensed consolidated financial statements for additional information. Pursuant to the terms of ~~capital.~~the Debentures, on September 8, 2021, the Debentures with related accrued interest were converted to shares of common stock.

In ~~April 2020, we received~~July 2021, the Company’s application for forgiveness of a PPP loan of ~~$4,135. The PPP loan is administered by the SBA.~~$4.1 million was approved. Under the terms of the CARES Act, PPP loan recipients ~~can~~had the option to apply for ~~and be granted~~ forgiveness for all or a portion of such loans, ~~after eight weeks,~~ if the loan iswas used for eligible purposes, including to fund payroll ~~costs, mortgage interest, rent and/or utility costs,~~costs.

Also in July 2021, the Company filed a registration statement on Form S-3 containing the following two prospectuses:

●

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

●

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

On September 16, 2021, the Company borrowed $5.0 million under a subordinated promissory note (the “2021 Note”), which is secured by a shareholder that owns more than five percent of the Company’s shares. The 2021 Note matures on the earliest of (a) September 16, 2022, (b) the Company’s consummation of a debt financing resulting in the receipt of gross proceeds of not less than $20.0 million, (c) the Company’s consummation of primary sales of registered equity securities resulting in receipt of gross proceeds of not less than $20.0 million, (d) the Company’s consummation of the sale of Computex and ~~meet certain other requirements, including,~~(e) the ~~maintenance~~date of ~~employment and compensation levels. We believe that we have used the entire PPP Loan for qualifying expenses and expect~~any event of default. The 2021 Note is subordinate to ~~qualify for full or partial forgiveness~~any amounts owed under the ~~program.~~Credit Agreement and has a minimum return of 25% over the applicable period.

On November 2, 2021, the Company announced that it had signed a definitive agreement for a registered direct offering with an institutional investor of 2,500,000 shares (the “Registered Shares”) of its common stock at a purchase price of $2.00 per share and a warrant (the “Series B Warrant”) to purchase an additional 2,500,000 shares of common stock, for total gross proceeds of $5.0 million, before payment of commissions and expenses. The Company will receive an additional $5.0 million in gross proceeds if the Series B Warrant is exercised in full. The Series B Warrant has an exercise price of $2.00 per share, is exercisable on the date of issuance and expires two years from the date of issuance. Commencing ten trading days after the issuance of the Series B Warrant, the Company may force the investor to exercise its Series B Warrant in the event shares of the Company’s common stock trade at or above $2.40/share for a period of 5 consecutive trading days, subject to certain conditions, including equity conditions.

The Series A Warrant has an exercise price of $2.00 per share, is exercisable on the date of issuance, and expires five years from the date of issuance.

The Company plans to use the net proceeds of approximately $4.5 million from the offering for reduction of debt and working capital.

As COVID-19 continues to negatively impact global supply chains, revenues and liquidity at our Computex subsidiary have been negatively impacted. The current computer chip and other component shortages, along with elongated product shipping transit times have caused an increase in product-related order backlog at Computex, increasing from a typical product-related order backlog of approximately $6.8 million as of December 31, 2020 to approximately $16.0 million as of September 30, 2021. Computex primarily sources its products from distributors who generally consider backlogged orders outstanding when computing the subsidiary’s credit limit usage. Hence, higher backlog orders negatively impact such credit limit usage and therefore negatively impact the subsidiary’s cash flows.

Whereas the Company continues to analyze its liquidity to ensure that it is able to execute on its operational plan, it expects 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, weif the Company is unable to achieve its forecasts, fails to meet any of the financial covenants in the Credit Agreement and is unable to obtain a waiver or an amendment under the Credit Agreement to allow it to continue to borrow, is unable to extend or refinance its existing Credit Agreement, or is unable to raise additional equity or debt capital, the Company may need to pursue one or more alternatives, such as to reduce or delay investments in its business, or seek additional financing. The Company can provide no assurance that wefuture funding will ~~obtain forgiveness for any portion.~~be available if and when required or that such funding will be available on terms that it finds acceptable. Any projection is based on the Company’s current expectations regarding new project financing and product sales and service, cost structure, cash burn rate and other operating assumptions.

Successor cash flows (Nine months ended September 30, 2021 and April 7, 2020 to September 30, 2020)

Operating activities

Net cash used in operating activities was $28.9 million in the nine months ended September 30, 2021, which included operating expenses for Kandy’s operations, including its research and development activities.

Net cash used in operating activities was $12.6 million ~~for~~in the period April 7, 2020 through September 30, 2020, which was the result of an increase in receivables, due primarily to the acquisition of ~~Computex,~~Kandy, and lower current liabilities at September 30, 2020 compared with April 6, 2020, as a substantial portion of the current liabilities at April 6, 2020 was converted to common stock and Debentures (and therefore reflected in increases in cash provided by financing activities). Current liabilities of $2.6 million atas of April 6, 2020 were converted to Debentures, and $1.5 million was converted to common stock.

Investing activities

Investing activities used net cash of $3.0 million during the nine months ended September 30, 2021 and primarily consisted of capital expenditures.

Investing activities used net cash of $0.1 million in the period April 7, 2020 through September 30, 2020 and consisted of capital expenditures of $0.4 million, partially offset by ~~$0.3 million of~~ cash acquired from the Computex ~~acquisition.~~acquisition of $0.3 million.

Financing activities

Financing activities provided net cash of $25.6 million during the nine months ended September 30, 2021 and was generated from the issuance of Debentures of $24.0 million, proceeds of $5.0 million from the issuance of a related party promissory note and drawdowns of $1.5 million under the line of credit, partially offset by debt repayments of $2.8 million, payments of deferred financing fees of $1.0 million and payments for shares withheld of $1.1 million related to employee tax withholding associated with the delivery of vested RSUs under the Company’s equity incentive plan.

Financing activities provided $15.3 million in the period April 7, 2020 through September 30, 2020 and was generated from the issuance of $12.1 million in Debentures, $4.1 million in new debt and $1.5 million from the issuance of common stock, partially offset by net debt repayments of $1.3 million, redemption of shares held in trust of $1.0 million and payment of deferred financing fees of $0.1 million.

Predecessor cash flows (January 1, 2020 to April 6, 2020)

Operating activities

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

Net cash provided by operating activities was $2.3 million for the nine months ended September 30, 2019 and primarily consisted of funds provided by accounts receivable, partially offset by funding for accounts payable and accruals.

Investing activities

Investing activities used ~~$0.1~~$0.2 million of cash for the period January 1, 2020 through April 6, 2020, which consisted of funding for capital expenditures.

~~Investing activities used $0.5 million for the nine months ended September 30, 2019, which consisted of funding for capital expenditures.~~

Financing activities

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

~~Financing activities used $1.6 million for the nine months ended~~Off-Balance Sheet Arrangements

On September 30, ~~2019, consisting of debt repayments of $2.2 million, partially offset by net funds from the line of credit of $0.6 million.~~

~~Capital expenditures~~

Capital expenditures were $0.4 million during the period April 7, 2020 through September 30, 2020, and primarily were related to the purchase of computer and other equipment. For the remainder of fiscal year 2020, we estimate our capital expenditures to be between $0.1 million and $0.3 million, a significant portion of which we expect to spend on equipment to be used in our after-sales service centers.

~~Off-Balance Sheet Arrangements~~

~~At September 30, 2020,~~2021, we had no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and had not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

Critical Accounting Policies, Judgements and Estimates

~~This discussion~~Except for the adoption of ~~critical accounting policies, judgments and estimates should be read~~ASU No. 2020-06, which is discussed in conjunction with our condensed consolidated financial statements and other disclosures included elsewhere in this quarterly report. The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could differ materially from those estimates. We believe the accounting policies that involve the most significant judgments and estimates used in the preparationNote 4 of the condensed consolidated financial statements, ~~include~~there were no significant changes to our critical accounting policies and estimates from those relating to revenue recognition, accounting for income taxes, accounting for business combinations, the recognition and impairment evaluation relating to tangible and intangible assets, including goodwill, and accounting for share-based compensation. We discuss some of these policies below. The ones not discussed below are discussed in Note 3 of the condensed consolidated financial statements. Additional discussions regarding the ones discussed below are also included in Note 3.

~~Revenue recognition~~

Revenue from contracts with customers are not recorded until the Company has the approval and commitment from both parties, the rights of the parties are identified, payment terms are established, the contract has commercial substance and collectability of the consideration is probable. The Company also evaluates the following indicators, amongst others, when determining whether it is acting as a principaldisclosed in the ~~transaction (and therefore whether to record revenue~~section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on a gross basis): (i) whether the Company is primarily responsible for fulfilling the promise to provide the specified good or service, (ii) whether the Company has the inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer and (iii) whether the Company has the discretion to establish the priceForm 10-K for the ~~specified good or service. If the terms of a transaction do not indicate that the Company is acting~~year ended December 31, 2020, as ~~a principal in the transaction, then the Company is acting as an agent in the transaction and therefore, the associated revenue is recognized on a net basis (that is revenue net of costs).~~amended.

~~Hardware~~

In some instances, the customer agrees to buy the product from the Company, but requests delivery at a later date, commonly known as bill-and-hold arrangements. For these transactions, the Company deems that control passes to the customer when the product is ready for delivery. The Company classifies such products as products ready for delivery when the customer has a signed agreement, the significant risk and rewards for the product has passed to the customer, the customer has the ability to direct the assets, the products have been set aside specifically for the customer and the Company cannot redirect the product for the benefit of another customer.

In drop-shipment arrangements, whereby the Company arranges for the vendor to deliver products directly to its customers without the inventory first being physically held at its warehouses, the Company considers itself to be the principal in the transaction and therefore, recognizes the related revenue on a gross basis.

~~Software~~

~~Third-party services~~

~~Managed and professional services~~

In arrangements for managed services, the Company’s arrangement is typically a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The Company typically recognize revenues from these services on a straight-line basis over the period services are provided, which is consistent with the timing of services rendered.

~~Freight and sales tax~~

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

~~Contract liabilities~~

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

~~Costs of obtaining and fulfilling a contract~~

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

~~Accounting for income taxes~~

Under ASC 740, income tax expense is recorded for the amount of income tax payable or refundable for the current period and for the change in net deferred tax assets or liabilities resulting from events that are recorded for financial reporting purposes in a different reporting period than recorded in the tax return. We make significant assumptions, judgments, and estimates in the determination of our provision for income taxes and also our deferred tax assets and liabilities and any valuation allowances.

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

~~Purchase price allocation~~

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

~~Share-based compensation~~

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

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

Recent Accounting Pronouncements Issued and Adopted

See Note 34 of the accompanying 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~~our exposure to currency ~~fluctuations.~~fluctuations is limited. International revenues during the three and nine months ended September 30, 2021 was 6.9% and 7.6% of revenues, respectively.

Interest rate risk

Interest rate risks are inherent in the Credit ~~Agreement, partially mitigated by an interest rate swap.~~Agreement. See Note 8.8 of the condensed consolidated financial statements. Currently, management does not view this exposure asto 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 ~~fiscal quarter ended September 30, 2020.~~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)~~13a-15 (e) and ~~15d-15(e)~~15d-15 (e) under the Exchange Act) were not effective atas of September 30, 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 ~~level~~regarding the reliability of our financial reporting and ~~accordingly, provided~~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 ~~information required~~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 ~~disclosed~~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 usPensare Acquisition Corp. (“Pensare”) issued in ~~reports filed under~~connection with the ~~Exchange Act is recorded, processed, summarized and reported within the time periods specified~~initial public offering, as described in the ~~SEC’s rules~~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 ~~forms.~~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~~over Financial Reporting

~~There was~~During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting ~~during the quarter ended September 30, 2020,~~ that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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 ~~June 29, 2020.~~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 ~~June 29, 2020,~~May 14, 2021, other than the amended and restated risk ~~factor~~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.

The ~~Company~~COVID-19 pandemic and related impact on global economies may continue to materially and adversely impact global supply chains and therefore adversely impact the Company’s financial position and results of operations.

The COVID-19 pandemic has had a ~~substantial amount~~negative impact on global economies, has caused disruptions in manufacturing and financial markets, has caused an increase in volatility, and has impeded global supply chains, including those of ~~indebtedness,~~our vendors. Our ability to deliver our solutions to our customers depends in large part on the ability of our vendors and other business partners to deliver products we have procured from them. If the COVID-19 pandemic impairs the ability of our business partners to support us on a timely basis, or negatively impacts the demand for our products and services, our ability to fulfil orders from our customers as well as the demand for our solutions may be negatively impacted. Disruptions from the COVID-19 pandemic has affected the Company’s ability, particularly the ability of Computex, to get product on the same cycle time as historically typical, thereby causing an increase in order backlog, due to various factors impacting our vendors, including workforce disruptions due to illness, quarantines, government actions, facility closures, and other actions that limit the capacity of production facilities.

The degree to which the global supply chain disruption will continue to impact our business, financial position and results of operations will depend on future developments, some of which ~~is scheduled~~are beyond our control, including the frequency and duration of any waves of infection, the effectiveness and timing of any vaccines, the extent of actions to ~~mature~~contain or treat the virus, and the timing and extent to which normal economic and operating conditions can resume locally and internationally.

We may not complete the planned divestiture of Computex on ~~June 30,~~our anticipated timeline or at all, and, even if completed, we may not achieve the benefits we anticipate.

In September 2021, ~~which could have important consequences~~we announced that our Board had authorized us to ~~its business.~~

~~The Company has a substantial amount~~explore strategic opportunities for our IT solutions business, including the planned divestiture of ~~indebtedness. As of September 30, 2020,~~Computex (the “Divestiture”). We believe that the ~~Company had total debt of $10.5 million (including current portion~~change will allow us to optimize resource allocation, focus on core competencies, and ~~before deducting unamortized debt issuance costs) plus line of credit borrowings of $8.5 million and a promissory note of $0.5 million along with the~~improve our ability to ~~borrow an additional $8.0 million under~~invest in areas of maximal growth potential. We expect that the ~~Credit Agreement, subject~~proceeds from any potential sale transaction will be used to ~~a borrowing base~~further deleverage our balance sheet and ~~a liquidity condition. The Company’s substantial indebtedness could have important consequences, including the following:~~provide working capital.

●

~~making it more difficult for the Company to satisfy its obligations with respect to its indebtedness;~~

●

requiring the Company to dedicate a substantial portion of its cash flow from operations to debt service payments on its debt, which reduces the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes;

●

~~requiring the Company to comply with restrictive covenants in the Credit Agreement, which limit the manner in which it conducts its business;~~

●

~~making it more difficult for the Company to obtain vendor financing from its vendor partners, including original equipment manufacturers and software publishers;~~

●

~~limiting the Company’s flexibility in planning for, or reacting to, changes in the industry in which it operates;~~

●

~~placing the Company at a competitive disadvantage compared to any of its less-leveraged competitors;~~

●

~~increasing the Company’s vulnerability to both general and industry-specific adverse economic conditions; and~~

●

limiting the Company’s ability to obtain additional debt or equity financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements and increasing its cost of borrowing.

In addition, the Credit Agreement is scheduled to mature on June 30, 2021. We intend to seek to either negotiate an extension of the maturity date or refinance the Credit Agreement on or prior to such date. We may not be able to ~~extend~~find an acquiror for Computex on terms acceptable to us, or at all. Even if the ~~maturity~~Divestiture is completed, we may not achieve some or all of the anticipated benefits, including those described above, and our future investments and other business opportunities that we anticipate will be facilitated by the Divestiture may not be successful and may prove not to be superior alternatives to the continued operation of Computex. Further, execution of the Divestiture will require significant time and attention from management and other employees, including following the closing of the Divestiture, which may divert the attention of our management and other employees from the execution of our other initiatives and could adversely affect our financial condition, results of operations, or cash flows.

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 September 30, 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 common stock and public warrants 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 ~~Credit Agreement~~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 ~~refinance our existing indebtedness on acceptable terms, or at all, and may be forced to choose from~~complete a number of unfavorable options. These options may include agreeing to otherwise unfavorable financing terms, selling assets on disadvantageous terms or defaulting on the loan and permitting the lender to foreclose.

business combination.

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

~~Other than as previously reported in a Current Report on Form 8-K, none.~~None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

On September 22, 2021, the Company and Comerica Bank entered into an eighth amendment to the Credit Agreement to allow the Company to incur borrowings of $5,000,000 under a subordinated promissory note. On November ~~13, 2020,~~1, 2021, the Company and Comerica Bank entered into a ~~fifth~~ninth amendment ~~(the “Fifth Amendment”)~~ to ~~the existing credit agreement to which the Company and Comerica Bank are parties (the “Credit Agreement”). Among other things, the Fifth Amendment extends the maturity date of~~ the Credit Agreement ~~from December 31. 2020~~pursuant to ~~June 30, 2021, provides~~which a payment of principal that was scheduled for ~~a decrease in maximum borrowings on April~~October 1, 2021 ~~amends the interest rates~~was agreed to be paid in November, and ~~commencing January 31, 2021, provides for a minimum monthly liquidity (defined as unrestricted cash plus~~ availability under the ~~revolving note)~~line of ~~$3,000,000. Pursuant~~credit was revised to be based on the ~~terms~~lower of the ~~Fifth Amendment,~~amount determined based on ~~April 1, 2021, maximum borrowings permitted under~~(i) the ~~revolving note under~~borrowing base and (ii) the line of credit availability amounts in the seventh amendment to the Credit Agreement will decrease by $3,500,000 to $13,000,000. Until December 31, 2020, all obligations outstanding under the Credit Agreement will continue to accrue interest at the higher of the one-month London Interbank Offered Rate (LIBOR) or 1.00%, plus a margin of 4.00% (the “margin”). Pursuant to the terms of the Fifth Amendment, the margin then increases gradually each month to a maximum of 6.50% on June 1, 2021. In connection with the Fifth Amendment on November 13, 2020, the Company was required to make a one-time principal payment of $250,000 on the term loan under the Credit Agreement.

The foregoing description of the Fifth Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the Fifth Amendment, which is filed as Exhibit 10.4 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.

ITEM 6. EXHIBITS.

~~2.1~~10.1⁽³⁾⁽¹⁾		~~Purchase~~Separation Agreement ~~dated August 5, 2020, by~~ and ~~among American Virtual Cloud Technologies, Inc., Ribbon Communications Inc., Ribbon Communications Operating Company, Inc. and Ribbon Communications International Limited.~~

~~3.1~~⁽¹⁾		~~Second Amended and Restated Certificate of Incorporation.~~

~~3.2~~⁽²⁾		~~Amended and Restated Bylaws.~~

~~10.1~~⁽³⁾		Voting Agreement, dated August 5, 2020, by and among Ribbon Communications Inc., Ribbon Communications Operating Company, Inc., Ribbon Communications International Limited and Pensare Sponsor Group, LLC.

~~10.2~~⁽³⁾		Voting Agreement, dated August 5, 2020, by and among Ribbon Communications Inc., Ribbon Communications Operating Company, Inc., Ribbon Communications International Limited and Stratos Management Systems Holdings, LLC.

~~10.3~~⁽⁴⁾		~~Employment Agreement~~Release between the Company and Xavier Williams.
10.2**		Eighth Amendment to Loan Documents, dated as of September 22, 2021
10.410.3*		~~Fifth~~Ninth Amendment to ~~Credit Agreement,~~Loan Documents, dated as of November ~~13, 2020.~~1, 2021.
31.1*
31.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
31.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*
32*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		Inline XBRL Instance Document
~~101.INS~~101.SCH		~~XBRL Instance Document.~~

~~101.SCH~~		Inline XBRL Taxonomy Extension Schema Document.
101.CAL
~~101.CAL~~		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
~~101.DEF~~		Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
~~101.LAB~~		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
~~101.PRE~~		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

⁽¹⁾

Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on July 22, 2021

*	Furnished herewith.

Filed herewith.

~~(1)~~

~~Incorporated by reference to an exhibit to the Company’s current report on Form 8-K filed with the SEC on April 7, 2020.~~

~~(2)~~

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

SIGNATURES

~~(3)~~

~~Incorporated by reference to an exhibit to the Company’s current report on Form 8-K filed with the SEC on August 11, 2020.~~

~~(4)~~

~~Incorporated by reference to an exhibit to the Company’s current report on Form 8-K filed with the SEC on September 16, 2020.~~

~~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.

	AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

Date: November ~~16, 2020~~12, 2021		/s/ ~~Xavier D. Williams~~Darrell J. Mays
	Name:	~~Xavier D. Williams~~Darrell J. Mays
	Title:	Chief Executive Officer
		(Principal Executive Officer)

		/s/ Thomas H. King
	Name:	Thomas H. King
	Title	Chief Financial Officer
		(Principal Financial and Accounting Officer)

	September 30, 2020			December 31, 2019
	Successor			Predecessor
	(Unaudited)
ASSETS
Current assets:
Cash	$	3,715		$	18
Restricted cash		688			-
Trade receivables, net of allowances of $339 and $138 at September 30, 2020 and December 31, 2019, respectively		19,030			16,092
Prepaid expenses		2,213			397
Inventory		649			350
Other current assets		53			224
Total current assets		26,348			17,081
Property and equipment, net		7,765			9,608
Other assets:
Goodwill		42,129			21,215
Other intangible assets, net		23,142			2,404
Other noncurrent assets		67			69
Total other assets		65,338			23,688
TOTAL ASSETS	$	99,451		$	50,377

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses	$	27,524		$	21,731
Deferred revenue		1,536			6,431
Line of credit		8,487			-
Current portion of notes payable and capital leases		8,991			2,506
Subordinated promissory note		500			-
Total current liabilities		47,038			30,668
Long-term liabilities
Line of credit		-			6,051
Notes payable and capital leases (net of current portion and deferred financing fees)		1,558			5,685
Convertible Debentures, net of discount - related party		10,632			-
Convertible Debentures, net of discount		26,634			-
Deferred tax liability		3,443			-
Other liabilities		82			180
Total long-term liabilities		42,349			11,916
Total liabilities		89,387			42,584

Commitments and contingent liabilities (see note 15)

Stockholders’ equity:

Successor:

Preferred stock, $0.0001 par value; 5,000,000 authorized; none issued and outstanding		-			-
Common stock, $0.0001 par value; 500,000,000 shares authorized; 19,753,061 shares issued and outstanding as of September 30, 2020		2			-
Additional paid-in capital		34,988			-
Accumulated deficit		(24,926	)		-

Predecessor:
Predecessor common stock, $0.001 par value; 1,000 shares authorized; 1,000 shares issued and outstanding as of December 31, 2019		-			-
Additional paid-in capital		-			18,717
Accumulated deficit		-			(10,924	)
Total stockholders’ equity		10,064			7,793
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	99,451		$	50,377

	July 1, 2020			April 7, 2020			January 1, 2020			July 1, 2019			January 1, 2019
	through			through			through			through			through
	September 30, 2020			September 30, 2020			April 6, 2020			September 30, 2019			September 30, 2019
	Successor			Successor			Predecessor			Predecessor			Predecessor

Revenues:
Hardware	$	16,428		$	26,870		$	10,587		$	12,160		$	40,649
Software and maintenance		1,202			2,734			1,459			1,418			4,447
Managed and professional services		8,204			15,188			6,880			6,599			20,557
Other		134			273			111			155			503
Total revenues		25,968			45,065			19,037			20,332			66,156

Cost of revenue		18,445			31,362			12,426			14,249			47,589

Gross profit		7,523			13,703			6,611			6,083			18,567

Selling, general and administrative expenses		9,929			17,617			7,835			6,928			20,403

Loss from operations		(2,406	)		(3,914	)		(1,224	)		(845	)		(1,836	)

Other (expense) income
Interest expense - related party		(597	)		(1,151	)		-			-			-
Interest expense		(1,782	)		(3,389	)		(384	)		(309	)		(979	)
Other (expense) income		(12	)		(25	)		31			2			147
Total other expenses		(2,391	)		(4,565	)		(353	)		(307	)		(832	)

Net loss before income taxes		(4,797	)		(8,479	)		(1,577	)		(1,152	)		(2,668	)

Benefit (provision) for income taxes		(41	)		(33	)		(12	)		55			(33	)

Net loss	$	(4,838	)	$	(8,512	)	$	(1,589	)	$	(1,097	)	$	(2,701	)

Loss per share - basic and diluted	$	(0.25	)	$	(0.43	)	$	(1,587.30	)	$	(1,096.00	)	$	(2,700.60	)

Weighted average shares outstanding - basic and diluted		19,678,342			19,657,811			1,000			1,000			1,000

	For the period January 1, 2019 through September 30, 2019
	Common Stock				Additional Paid-In		Accumulated			Stockholders’ Equity
	Shares		Amount		Capital		Deficit			(Deficit)
Predecessor
Balance, January 1, 2019		1,000	$	-	$	18,717	$	(6,640	)	$	12,077
Cumulative effect of accounting change (See Note 4)		-		-		-		99			99
Net loss		-		-		-		(2,701	)		(2,701	)
Balance, September 30, 2019		1,000	$	-	$	18,717	$	(9,242	)	$	9,475

	December 31, 2018			Adjustments		January 1, 2019
	Predecessor					Predecessor
	(as reported)					(as adjusted)
ASSETS
Trade receivables, net	$	41,328		$	-	$	41,328
Other current assets		972			99		1,071
Deferred contract costs		9			-		9
TOTAL ASSETS	$	42,309		$	99	$	42,408

LIABILITIES
Accounts payable	$	38,694				$	38,694
Deferred revenue		6,953					6,953
	$	45,647		$	-	$	45,647

STOCKHOLDERS’ EQUITY
Accumulated deficit	$	(6,640	)	$	99	$	(6,541	)

	For the Year Ended December 31, 2019
				Without
				Adoption
	Predecessor			of			Topic 606
	(as reported)			Topic 606			Impact

Sales	$	85,716		$	121,053		$	(35,337	)
Cost of revenue		61,309			96,646			(35,337	)
Gross profit		24,407			24,407			-

Selling, general and administrative expenses		28,021			27,922			99

Loss from operations		(3,614	)		(3,515	)		(99	)

Three months ended December 31, 2020	$	624
Fiscal year 2021		2,430
Fiscal year 2022		2,430
Fiscal year 2023		2,430
Fiscal year 2024		2,430
Thereafter		12,798
Total	$	23,142

Three months ended December 31, 2020	$	1,139
Fiscal year 2021		8,575
Fiscal year 2022		928
Total	$	10,642

Three months ended December 31, 2020	$	5,272
Fiscal year 2021		13,256
Fiscal year 2022		5,482
Fiscal year 2023		1,925
Fiscal year 2024		1,386
Thereafter		231
Total remaining performance obligations	$	27,552

	September 30, 2020			December 31, 2019
	Successor			Predecessor
Prepaid expenses	$	(293	)	$	(50	)
Accrued reserves		81			37
Deferred revenue		58			460
Accrued liabilities		318			202
Uniform capitalization of inventory for tax		21			11
Contribution carryover		13			17
Tax depreciation in excess of book		(1,252	)		(1,598	)
Intangible assets		(3,419	)		(345	)
Disallowed interest		1,022			497
Transaction costs - pending		130			-
Stock compensation		341			-
Net operating loss carryforwards		5,104			4,318
Total		2,124			3,549
Less: valuation allowance		(5,567	)		(3,549	)
Net deferred tax liability	$	(3,443	)	$	-

	April 7, 2020			January 1, 2020			S/P Combined YTD			YTD
	through			through			period ended			period ended
	September 30, 2020			April 6, 2020			September 30, 2020			September 30, 2019
	Successor			Predecessor			(non-GAAP)			Predecessor
Revenues:
Hardware	$	26,870		$	10,587		$	37,457		$	40,649
Software and maintenance		2,734			1,459			4,193			4,447
Managed and professional services		15,188			6,880			22,068			20,557
Other		273			111			384			503
Total revenues		45,065			19,037			64,102			66,156
Cost of revenue		31,362			12,426			43,788			47,589
Gross profit		13,703			6,611			20,314			18,567
Selling, general and administrative expenses (including transaction costs)		17,617			7,835			25,452			20,403
Loss from operations		(3,914	)		(1,224	)		(5,138	)		(1,836	)
Other (expense) income
Interest expense		(4,540	)		(384	)		(4,924	)		(979	)
Other (expense) income		(25	)		31			6			147
Total other expenses		(4,565	)		(353	)		(4,918	)		(832	)
Loss before income taxes		(8,479	)		(1,577	)		(10,056	)		(2,668	)
Benefit (provision) for income taxes		(33	)		(12	)		(45	)		(33	)
Net loss	$	(8,512	)	$	(1,589	)	$	(10,101	)	$	(2,701	)

	S/P Combined
	YTD period ended			YTD period ended			Change
	September 30, 2020			September 30, 2019			Increase (decrease)
	(non-GAAP)			Predecessor
Salaries, benefits, subcontracting & personnel administration costs	$	18,226		$	15,484		$	2,742
Building occupancy costs, utilities, office supplies & repairs and maintenance		1,510			1,583			(73	)
Depreciation and amortization		2,186			1,611			575
Dues, subscriptions and memberships		629			620			9
Vendor marketing funds, net of vendor fees		(589	)		(715	)		126
Meals, entertainment & travel		409			961			(552	)
Management fees		80			225			(145	)
Professional fees		1,596			159			1,438
Insurance		852			173			679
Other		553			302			251
	$	25,452		$	20,403		$	5,050