AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC. References in this report to "we," "us," "our," or the "Company" refer toAmerican Virtual Cloud Technologies, Inc. (or "AVCT") and its wholly-owned subsidiaries. References to our "management" or our "management team" refer to our officers and directors. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements (including the notes thereto) contained elsewhere in this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risk and uncertainties.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as "expect," "believe," "anticipate," "intend," "estimate," "seek" and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performances, but reflect management's current beliefs, based on information currently available. A number of factors could cause actual events, performances or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to Part II, Item 1A of this Quarterly report and the Risk Factors section of our Annual Report on Form 10-K, as amended, filed onMay 14, 2021 with theU.S. Securities and Exchange Commission (the "SEC"). The Company's securities filings can be accessed on the EDGAR section of theSEC'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
On
OnDecember 1, 2020 , we acquired theKandy 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 ofKandy Communications LLC .Computex is a leading multi-brand technology solutions provider to large global customers, providing a comprehensive and integrated set of technology solutions, through its extensive hardware, software and value-added service offerings.Computex designs best-fit solutions, and with the help of leading vendors in the industry, helps its customers with the procurement of suitable hardware and software that are appropriate for their specific needs. With primary operating locations inMinnesota ,Michigan ,Florida andTexas , services offered byComputex 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 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. 29 Recent development OnSeptember 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 onApril 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 ofComputex . 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.Computex was not classified as held for sale as ofSeptember 30, 2021 as the criteria for the reporting unit to be classified as held for sale were not met as ofSeptember 30, 2021 . However, in connection with the potential sale ofComputex , 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 endedSeptember 30, 2021 . 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:
o Strategic Alliances with companies looking to co-invest to monetize cloud
communication technology; and
o 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:
o Organically - By targeting select vertical markets with high growth potential
for example, government, retail, financial, & healthcare; or
o 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 &
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.
30
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 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 toApril 7, 2020 relate to the operations ofComputex . The historical financial information of AVCT prior to the Computex Business Combination (a special purpose acquisition company, or "SPAC") has not been reflected in the Predecessor financial statements as these historical amounts have been determined to be not useful information to a user of the financial statements. To distinguish between the different bases of accounting due to theComputex Business Combination that occurred onApril 7, 2020 , certain tables in this quarterly report include a blackline between certain columns to separate: (1) the periods prior to the closing date ofApril 7, 2020 ("Predecessor") and (2) the period that started onApril 7, 2020 ("Successor"). We refer to the periods beforeApril 7, 2020 as the "Predecessor" periods and refer to the periods that started onApril 7, 2020 as the "Successor" periods. For the reasons discussed above, management believes it remains useful to review the operating results for the three and nine months endedSeptember 30, 2021 with the operating results for the three and nine months endedSeptember 30, 2020 . Accordingly, in the discussion below, for purposes of a year-to-date (YTD) comparison, the financial information for the periodJanuary 1, 2020 throughApril 6, 2020 is combined with the financial information for the periodApril 7, 2020 throughSeptember 30, 2020 and, together, is referred to as the "S/P combined YTD period endedSeptember 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 endedSeptember 30, 2020 . 31
3rd Quarter of 2021 versus the 3rd Quarter of 2020
3rd Quarter
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 3rd quarter of 2021 and the 3rd quarter of 2020
include related party interest of $4,602 and $1,613 , respectively.
Net loss
Net loss for the 3rd quarter of 2021 was
Hardware revenue Hardware revenue is seasonal and tends to be higher in the fourth quarter of each year. Our hardware revenue was$13.0 million in the 3rd quarter of 2021 compared with$16.4 million in the 3rd 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 ourComputex subsidiary. The margin on hardware revenue was 22.2%, a 130-basis points increase compared with the 20.9% recorded in the 3rd quarter of 2020. We attribute the basis points increase to a more favorable price structure in
the 3rd 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 3rd quarter of 2021 compared to$1.2 million in the 3rd 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.
32
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 3rd quarter of 2021 compared with the$8.2 million that was recorded in the 3rd quarter of 2020. Of the total managed and professional services revenue generated by the Company in the 3rd quarter of 2021, approximately 93.3% or$8.0 million , was generated by theComputex segment, while$0.6 million was generated by our Kandy segment. Compared to 3rd quarter 2020, managed and professional services revenue for ourComputex segment was relatively flat, while the margin decreased from 34.8% in the 3rd quarter of 2020 to 28.4% in the 3rd 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 3rd 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 inDecember 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 3rd quarter of 2021 and the 3rd 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 3rd quarter of 2021, an increase of$1.5 million , or 5.9%, from the$26.0 million recorded in the 3rd quarter of 2020. The increase was due to the Kandy acquisition, partially offset by a decrease in total revenue at ourComputex segment. The Kandy segment generated revenue of$4.1 million in the 3rdquarter of 2021. Revenues from theComputex segment decreased$2.6 million or 10.0%. Factors causing the decrease in revenue at ourComputex segment are discussed above.
Aggregate gross profit was$7.2 million in the 3rd quarter of 2021 compared with$7.5 million in the 3rd quarter of 2020, a decrease of$0.3 million , or 3.9%, primarily due to a gross profit decrease at ourComputex 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 3rd quarter of 2020 to 26.3% in the 3rd quarter of 2021, due primarily to the impact of the Kandy acquisition. Gross margin for ourComputex segment in the 3rd quarter of 2021 was 31.4%, a 240-basis point increase from the 29.0% recorded in the 3rd 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 3rd quarter of 2021 is discussed in Note 1 of the condensed consolidated financial statements and relates to goodwill of theComputex reporting unit. In connection with the potential sale ofComputex , 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 inDecember 2020 . In the 3rd 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. 33
Selling, general and administrative expenses
Selling, general and administrative expenses for the 3rd quarter of 2021 and the
3rd quarter of 2020 consisted of the components in the following table (in
thousands):
3rd Quarter 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 3rd 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 3rd quarter of 2021 compared with
the 3rd 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 3rd quarter of 2021 was due to the forgiveness, inJuly 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 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 3rd 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 3rd quarter of 2021 increased compared with the 3rd 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 3rd quarter of 2021 (onSeptember 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): 3rd Quarter 2021 2020 (In thousands)
Amortization of debenture discount
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
34
YTD period ended September 30, 2021 versus the S/P Combined YTD period ended
September 30, 2020
April 7, January 1, S/P Combined YTD
YTD period 2020 2020 period
Ended through through ended
September 30, September 30, April 6, September 30,
2021 2020 2020 2020
Successor Successor Predecessor (Non-GAAP)
(In thousands) (In thousands) (In thousands) (In thousands)
Revenues:
Hardware $ 39,219 $ 26,870 $ 10,587 $ 37,457Third 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
$14,611 and$3,078 , respectively. Net loss Net loss for the YTD period endedSeptember 30, 2021 was$75.9 million compared with$12.1 million for the S/P Combined YTD period endedSeptember 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 endedSeptember 30, 2021 compared with$37.5 million in the S/P Combined YTD period endedSeptember 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. There was some normalization of the demand for hardware in the 3rd quarter of 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 3rdquarter of 2021 had on the YTD period endedSeptember 30, 2021 . The gross margin on hardware revenue was 21.9% for the YTD period endedSeptember 30, 2021 , an 80-basis points decrease from the 22.7% recorded in the S/P Combined YTD period endedSeptember 30, 2020 . We attribute the basis points decrease to a shift in product mix towards lower margin products during the period.
Third party software and maintenance revenue
Revenues from software and maintenance, which are recorded net of direct expenses, increased to$5.1 million in the YTD period endedSeptember 30, 2021 from$4.2 million in the YTD period endedSeptember 30, 2020 , an increase of 22.0% or$0.9 million . Similar to the quarter 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. 35
Managed and professional services revenue
Managed and professional services revenues increased$4.3 million , or 19.3%, to$26.3 million in the YTD period endedSeptember 30, 2021 from$22.1 million in the S/P Combined YTD period endedSeptember 30, 2020 . Of the$4.3 million increase,$1.8 million is attributable to the Kandy acquisition. We attribute the remaining increase to increasing demand for infrastructure assessment, cyber security and managed services monitoring at ourComputex segment, primarily in the 1st half of the year. Though revenues from managed and professional services in theComputex 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 decrease to the same 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 endedSeptember 30, 2021 . The nature of this revenue is discussed in the quarter over quarter discussion above. Other revenue Other revenue, which is discussed above in the quarter over quarter comparison, was$0.8 million and$0.4 million in the YTD period endedSeptember 30, 2021 and the S/P Combined period endedSeptember 30 2020 , respectively.
Total revenue, cost of revenue and gross margin
Aggregate revenue for the five product lines together was$82.2 million in the YTD period endedSeptember 30, 2021 , compared with$64.1 million in the S/P Combined period endedSeptember 30 2020 , an increase of$18.1 million , or 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 four product lines at theComputex segment. Aggregate gross profit was also up, 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 S/P Combined YTD period endedSeptember 30, 2020 to 26.9%, a 480-basis points decrease, primarily due to the Kandy acquisition. Aggregate gross margin percent for ourComputex segment was 30.2%, for the YTD period endedSeptember 30, 2021 compared with 31.6% for the S/P Combined period endedSeptember 30 2020 , a 140-basis point decrease primarily due to 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 endedSeptember 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
Research and development
Research and development expenses, which are discussed in the quarter over
quarter discussion, were
36
Selling, general and administrative expenses
Selling, general and administrative expenses for the YTD period endedSeptember 30, 2021 and the S/P Combined YTD period endedSeptember 30, 2020 consisted of the components in the following table (in thousands): S/P Combined YTD period Ended YTD period ended September 30, September 30, Increase 2021 2020 (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 $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.
Personnel-related expenses increased, in part, as a result of the termination
expenses in July 2021 that were previously mentioned in the 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
quarter over quarter comparison. Increased professional fees are related to the
Company's expanded public company activities.
Change in fair value of warrant liabilities
The nature of the change in the fair value of warrant liabilities is discussed in the quarter over quarter comparison.
37
Interest expense
The primary reasons for the increase in interest expense are discussed in the
quarter over quarter comparison. For the YTD period ended September 30, 2021 and
the S/P Combined YTD period ended September 30, 2020 , interest expense consisted
of the following (in thousands):
S/P Combined
YTD period Ended YTD period ended
September 30 , September 30,
2021 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. The effective tax rates differ from the federal statutory rate as a result of certain expenses being deductible for financial reporting purposes that are not deductible for tax purposes, the existence of research and development tax credits, operating loss carryforwards, and adjustments to previously recorded deferred tax assets and liabilities related to the enactment of the Tax Cuts and Jobs Act in 2017. For the Successor periods, the benefit/provision for income taxes also reflects the impact of amortization of intangible assets recognized as of the Computex Closing Date and the Kandy Closing Date.
Liquidity and Capital Resources
Overview
Historically, the Company's primary sources of liquidity have been cash and cash equivalents, cash flows from operations (when available) and cash flows from financing activities, including funding under its Credit Agreement (defined and more fully discussed in Note 8 of the condensed consolidated financial statements). From time to time, the Company may also choose to access the debt and equity markets to fund acquisitions, fund working capital and to diversify its capital sources. The Company's current principal capital requirements are to fund working capital, fund capital expenditures and make investments that are in line with its business strategy. OnSeptember 30, 2021 , the Company had unrestricted cash of$4.2 million in its operating bank account and, as ofOctober 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 onDecember 31, 2021 , and, as ofSeptember 30, 2021 , provides for maximum borrowings of$13.0 million on the line of credit portion with scheduled reductions of$1.0 million in availability onOctober 1, 2021 ,November 1, 2021 andDecember 1, 2021 , which can be impacted by the borrowing base as, based on a ninth amendment entered into on November, 1, 2021, such availability is the lower of 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 line of credit) of$3.0 million . As amended, the Credit Agreement limits unfinanced capital expenditures to$3.0 million . As ofOctober 1, 2021 , maximum borrowings under the line of credit were$12,000 ,
of which$4,183 was available. As ofSeptember 30, 2021 , amounts outstanding under the term loan and the line of credit withComerica Bank were$3.2 million and$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, the Company expects to seek to either negotiate an extension of the Credit Agreement or enter into a new agreement with another lender. In addition to 43,778 units of securities of the Company (as described in Note 9 to the accompanying condensed consolidated financial statements, "Units"), issued to Ribbon as consideration for Kandy, inDecember 2020 , the Company raised additional capital of$11.0 million via the sale of Units consisting of Debentures and warrants, and, during the nine months endedSeptember 30, 2021 (all prior to the 3rd quarter), raised an additional$24.0 million through the sale of additional Units, which was used to fund expansion, capital expenditures and working capital. See Note 9 to the condensed consolidated financial statements for additional information. Pursuant to the terms of the Debentures, onSeptember 8, 2021 , the Debentures with related accrued interest were converted to shares of common stock. 38 InJuly 2021 , the Company's application for forgiveness of a PPP loan of$4.1 million was approved. Under the terms of the CARES Act, PPP loan recipients had the option to apply for forgiveness for all or a portion of such loans, if the loan was used for eligible purposes, including to fund payroll costs.
Also in
? a base prospectus for the sale and issuance by us of up to
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. OnSeptember 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 ofComputex 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 return of 25% over the applicable period. OnNovember 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. 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
The Company plans to use the net proceeds of approximately
As COVID-19 continues to negatively impact global supply chains, revenues and liquidity at ourComputex 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 atComputex , increasing from a typical product-related order backlog of approximately$6.8 million as ofDecember 31, 2020 to approximately$16.0 million as ofSeptember 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, 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, 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 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.
39
Successor cash flows (Nine months ended
Operating activities Net cash used in operating activities was$28.9 million in the nine months endedSeptember 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 in the periodApril 7, 2020 throughSeptember 30, 2020 , which was the result of an increase in receivables, due primarily to the acquisition of Kandy, and lower current liabilities atSeptember 30, 2020 compared withApril 6, 2020 , as a substantial portion of the current liabilities atApril 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 as ofApril 6, 2020 were converted to Debentures, and$1.5 million was converted to common stock. Investing activities
Investing activities used net cash of
Investing activities used net cash of$0.1 million in the periodApril 7, 2020 throughSeptember 30, 2020 and consisted of capital expenditures of$0.4 million , partially offset by cash acquired from theComputex acquisition of
$0.3 million . Financing activities Financing activities provided net cash of$25.6 million during the nine months endedSeptember 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. 40
Financing activities provided
Predecessor cash flows (
Operating activities Net cash used in operating activities was$1.6 million for the periodJanuary 1, 2020 throughApril 6, 2020 and primarily consisted of funding for inventory and the impact of changes in deferred revenue, partially offset by funds provided by accounts receivable. Investing activities
Investing activities used
Financing activities Financing activities provided$2.0 million of cash for the periodJanuary 1, 2020 throughApril 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 .
Off-Balance Sheet Arrangements
On
Critical Accounting Policies, Judgements and Estimates
Except for the adoption of ASU No. 2020-06, which is discussed in Note 4 of the condensed consolidated financial statements, there were no significant changes to our critical accounting policies and estimates from those disclosed in the section "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the year endedDecember 31, 2020 , as amended.
Recent Accounting Pronouncements Issued and Adopted
See Note 4 of the accompanying condensed consolidated financial statements.
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