AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements (including the notes thereto) contained elsewhere in this report. Certain information contained in this discussion and analysis includes forward-looking statements that involve risk and uncertainties. You are therefore encouraged to read the section in this annual report on Form 10-K titled, "CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS." Overview
We are a
OnApril 7, 2020 , AVCT (formerly known asPensare Acquisition Corp. ), consummated the Computex Business Combination in which it acquiredComputex , a private operating company that does business as Computex Technology Solutions. In connection with the Computex Business Combination, the Company changed its name toAmerican Virtual Cloud Technologies, Inc. OnDecember 1, 2020 , we acquired Kandy from 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 UCaaS. Kandy, a provider of cloud-based enterprise services, globally deploys a white-label, carrier-grade cloud-based platform for UCaaS, CPaaS and CCaaS for mid-market and enterprise customers across a proprietary multi-tenant, highly scalable cloud platform. The Kandy platform also includes pre-built customer engagement tools, based on WebRTC technology, known as Kandy Wrappers, and provides white-labeled services to a variety of customers including communications service providers and systems integrators. With Kandy, companies can quickly embed real-time communications capabilities into their existing applications and business processes. Recent developments
OnSeptember 16, 2021 , the Company announced that as a result of a decision by the Company's Board of Directors to explore strategic alternatives previously announced 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 divestiture ofComputex . The Company believed that the change would allow it to optimize resource allocation, focus on core competencies, and improve its ability to invest in areas of maximal growth potential. OnDecember 2, 2021 , the Company entered into the Credit Agreement withMonroe for a$27.0 million Credit Facility, part of which was used to pay off amounts owing under the Prior Credit Agreement which was assumed as part of theComputex Business Combination. The remainder of the proceeds from the Credit Facility were scheduled to be used for working capital and general business purposes. However, onMarch 1, 2022 , all amounts owing under the Credit Agreement were repaid from the proceeds of a securities sale executed onMarch 1, 2022 and cash on hand. The terms of the Credit Agreement are discussed in Note 9 in the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K. 19 OnJanuary 27, 2022 , the Company announced that it had executed a definitive agreement to sellComputex and onMarch 15, 2022 , the sale ofComputex was consummated, completing the Company's transition to a pure-play cloud communications and collaboration company, centered on the Kandy platform. As a result,Computex was classified as held for sale as ofDecember 31, 2021 and its operations are classified as discontinued operations. In connection with the planned sale ofComputex , we recorded a noncash goodwill impairment charge of$32.1 million during Fiscal 2021 which represented the excess of the carrying value of theComputex reporting unit over the expected sale proceeds less costs to sell. Net proceeds from the sale ofComputex , after payment of closing obligations and certain indebtedness, are being used for working capital and general business purposes. In addition, as more fully discussed in Note 10 in the Notes to our Consolidated Financial Statements included elsewhere in this Form 10-K, during the fourth quarter of Fiscal 2021, the Company completed the sale of certain securities, including the sale of common stock, preferred stock and warrants. In connection with the sale of these securities, the Company also completed certain share registrations. Two of the five series of warrants were exercised soon after they were issued resulting in proceeds of approximately$5.0 million during Fiscal 2021.
Subsequent toDecember 31, 2021 , and as more fully discussed in Note 18 in the Notes to our Consolidated Financial Statements, the Company sold additional securities. Also, the Company repaid amounts that were outstanding under the Credit Agreement and closed on the sale ofComputex . 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.
20
Key trends affecting our results of operations
The following are key trends that we believe can positively impact our results of operations:
? The acceleration of digital transformation
? The change in how people work, including the "work from anywhere" mindset
? The increased complexity in mid & large enterprises and the desire by
enterprises for integrated internal and external communications for UCaaS,
CPaaS and CCaaS
? The demand for services similar to WebEx, Teams, & Zoom and partners that can
add to and/or complement such tools and players
? The trend towards CPaaS technology - Product developers &
Vendors (ISVs) are increasingly seen as the influencers
? The general trend towards movement to the cloud
? The lack of sufficient internal IT resources at mid-sized and large
enterprises, and the scarcity of IT personnel in certain high-demand
disciplines
? Disruptive technologies that are creating complexity and challenges for
customers and vendors
? The recognition that certain IT services provide the opportunity of funding via
recurring payments over a period of time, rather than large upfront payments
? The increasing use of multi-cloud strategies, whereby cloud architectures and
cloud-enabled frameworks, whether public, private, or hybrid, provide the core
foundation of modern IT
? The explosive growth in remote workforce needs.
Covid-19 COVID-19 continues to significantly impact local, regional, and global economies, businesses, supply chains, production and sales across a range of industries. The extent of its impact on our operational and financial performance is uncertain and difficult to predict and we remain cautious about the global recovery. To protect the health and safety of our employees, our daily execution has evolved into a largely virtual model. However, we have found ways to continue to engage with and assist our customers and partners as they work to navigate the current environment. We will continue to monitor the current environment and may take further actions that may be required by federal, state or local authorities or that we determine to be in the interests of our employees, customers, and partners.
Nature of revenue categories discussed below:
Hardware revenue is generated from the sale of data storage, desktops, servers, and other hardware which are sourced from a network of leading manufacturers.
Third party software and maintenance revenue include licensing, licensing management, software solutions and other services, which typically are delivered as part of a complete technology solution. Such solutions range from configuration services for computer devices to fully integrated solutions such as virtualization, collaboration, security, mobility, data center optimization and cloud computing. Such services also include complementary services including installations, warranty services and certain managed services such as remote network and data center monitoring. Professional and managed services revenue include managed IT services, virtualization, storage, networking and data center services. These services include customized solutions for business continuity, back-up and recovery, capacity on-demand, regulatory compliance and data center best practice methodologies as well as IaaS and SaaS. These solutions are used by customers to optimize investments in IT infrastructure and data centers.
Cloud subscription and software revenue include subscriptions to the Company's cloud-based technology platform.
21
Financial statement presentation and results of operations
The consolidated financial statements of the Company include the accounts of AVCT and its wholly-owned subsidiaries. As discussed in Note 3 of the Notes to the Consolidated Financial Statements, the financial position, results of operations and cash flows described herein for the dates and periods prior 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 such historical amounts have been determined to be not useful information to a user of the financial statements. To distinguish between the different bases of accounting, due to 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 Fiscal 2021 with the operating results for the year endedDecember 31, 2020 . Accordingly, in the discussion below, for purposes of a year over year comparison, the financial information for the periodJanuary 1, 2020 throughApril 6, 2020 is combined with the financial information for the periodApril 7, 2020 throughDecember 31, 2020 and, together, is referred to as the "S/P combined 2020 Year." Accordingly, in addition to presenting our results of operations in our consolidated financial statements in accordance with GAAP, which also include the identification of continuing and discontinued operations, the tables and certain discussions below present the non-GAAP combined results for the year endedDecember 31, 2020 , which also combines continuing and discontinued operations.
FY 2021 versus the S/P Combined 2020 Year (in thousands)
April 7, January 1,
Year 2020 2020 S/P
Ended through through Combined
December 31, December 31, April 6, 2020
2021 2020 2020 Year
(Non-GAAP) (Non-GAAP) Predecessor (Non-GAAP)
Revenues:
Hardware $ 55,551 $ 38,334 $ 10,587 $ 48,921
Third party software and maintenance 7,611 4,341 1,459 5,800
Managed and professional services 35,915 23,851 6,880 30,731
Cloud subscription and software 16,930 1,383 - 1,383 Other 978 668 111 779 Total revenues 116,985 68,577 19,037 87,614 Cost of revenue 83,678 47,326 12,426 59,752 Gross profit 33,307 21,251 6,611 27,862
Impairment of goodwill and intangible assets 61,095 - - - Research and development 17,916 1,285 - 1,285 Selling, general and administrative 67,252 32,541 7,835 40,376 Loss from operations (112,956 ) (12,575 ) (1,224 ) (13,799 ) Other (expense) income Gain on extinguishment of debt 4,177 - - - Change in fair value of warrant liabilities (19,608 ) (3,625 ) - (3,625 ) Interest expense (1) (32,857 ) (9,316 ) (384 ) (9,700 ) Other (expense) income (71 ) 10 31 41 Total other expenses (48,359 ) (12,931 ) (353 ) (13,284 ) Loss before income taxes (161,315 ) (25,506 ) (1,577 ) (27,083 ) Provision for income taxes (71 ) (70 ) (12 ) (82 ) Net loss$ (161,386 ) $ (25,576 ) $ (1,589 ) $ (27,165 )
(1) Interest expense in the year ended
2020 through
$6,899 , respectively. 22 Net loss Net loss for Fiscal 2021 was$161.4 million compared with$27.2 million for the S/P Combined 2020 Year. The increase in the net loss for Fiscal 2021 includes an increase in noncash charges of$99.0 million consisting of the following: S/P Combined Fiscal 2021
2020 Year Increase
Impairment of goodwill and other intangible assets
- $ 61,095
Depreciation 4,637 3,713 924
Amortization of intangible assets 5,183 2,257 2,926
Amortization of Convertible Debenture discount 9,253 4,717 4,536
Interest on convertible debt paid-in-kind 8,257 3,695 4,562
Gain on extinguishment of debt (4,177 ) - (4,177 )
Share-based compensation 8,629 2,489 6,140
Change in fair value of warrant liabilities 19,608 3,625 15,983
Deferred income taxes (9 ) 10 (19 )
Amortization and write-off of deferred financing costs 1,172 232 940
Noncash financing fees 5,948 - 5,948
Loss on disposal of property and equipment 185
- 185
$ 119,781 $ 20,738 $ 99,043 Discussed below are the revenue and expense factors that primarily contributed to the net loss change, including additional discussion of the noncash charges.
Hardware revenue Hardware revenue was$55.6 million in Fiscal 2021 compared with$48.9 million in the S/P Combined 2020 Year, an increase of$6.6 million , or 13.6%. We attribute this increase to the impact of COVID-19 due to increased demand for equipment in the manufacturing, logistics and public sectors in the earlier part of 2021, as more customers transitioned to remote work. There was some normalization of the demand for hardware in the latter months of 2021, however, the positive impact of the higher demand in the earlier months of 2021 more than offset the impact that the flattening of hardware demand in the latter months of Fiscal 2021 had on overall Fiscal 2021 demand. The gross margin on hardware revenue was 21.9% for Fiscal 2021, a 120-basis points decrease from the 23.1% recorded in the S/P Combined 2020 Year. We attribute the basis points decrease to a shift in product mix towards lower margin products during the period.
Third party software and maintenance revenue
Revenues from software and maintenance, which are recorded net of direct expenses, increased to$7.6 million in Fiscal 2021 from$5.8 million in the S/P Combined 2020 Year, an increase of 31.2% or$1.8 million . We attribute this increase to continued customer penetration in the retail and hospitality sector. Since this revenue is recorded net, the revenue is also the gross margin. 23
Managed and professional services revenue
Managed and professional services revenues increased$5.2 million , or 16.9%, to$35.9 million in Fiscal 2021 from$30.7 million in the S/P Combined 2020 Year. Of the$5.2 million increase,$2.8 million is attributable to the Kandy acquisition. We attribute the remaining increase to increasing demand for infrastructure assessment, cyber security and managed services monitoring at 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 33.4% to 29.0 %, a decrease of 440 basis points. We attribute this decrease to increased investments in direct labor and software tools to support an increasing customer base as well as to the normalization of demand for certain services that were in higher demand in
2020 due to Covid-19.
Cloud subscription and software revenue
Cloud subscription and software revenue was$16.9 million in Fiscal 2021 and represents revenue from subscriptions to the Company's cloud-based technology platform as well as revenue from the Company's on-premise software, both of which are offered by the Company's recently-acquired Kandy segment, which the Company acquired inDecember 2020 . Other revenue Other revenue, which consists primarily of freight and reimbursables, including travel, meals and entertainment, was$1.0 million and$0.8 million for Fiscal 2021 and the S/P Combined 2020 Year, respectively. By its nature, this type of revenue fluctuates depending on the revenue of the other product lines.
Total revenue, cost of revenue and gross margin
Aggregate revenue for the five product lines together was
Aggregate gross profit was also up, reflecting an increase of$5.4 million , or 19.5%, due in part to the Kandy acquisition, which contributed$3.4 million to the increase. The remaining increase in aggregate gross profit was due primarily to the gross profit increase in software and maintenance revenue. Though gross profit increased, aggregate gross margin percent decreased from 31.8% in the S/P Combined 2020 Year to 28.5%, a 330-basis points decrease, primarily due to the lower margin recorded by Kandy vis-à-visComputex . Aggregate gross margin percent for theComputex segment was 30.4% for Fiscal 2021 compared with 31.8% for the S/P Combined 2020 Year, which was only a 140-basis point decrease. Gross margin at our Kandy segment was 19.3% in Fiscal 2021 as the Company continues to ramp up costs in the segment as part of its strategic investment in the Kandy segment. The 140-basis point decrease in margin at ourComputex segment was due primarily to increased investments in direct labor and telecommunications in the managed and professional services line of business.
Impairment of goodwill and other intangible assets
The noncash impairment charges recorded in Fiscal 2021 are discussed in Notes 1 and 3 of the Notes to the Consolidated Financial Statements and relates to goodwill of theComputex reporting unit, goodwill of the Kandy reporting unit and Kandy's other intangible assets. In connection with the announced 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$32.1 million during Fiscal 2021. The remaining impairment charges relate to Kandy's goodwill and other intangible assets, which resulted from a quantitative impairment analysis during the Company's annual impairment assessment, effectiveDecember 2021 , after an evaluation based on certain factors considered to be triggering events, such as changes in Kandy's forecasts. As a result of the quantitative assessment, the Company recorded an impairment charge to goodwill and intangible assets of$13.7 million and$15.3 million , respectively. 24 Research and development The Company began recognizing research and development expenses when it acquired Kandy inDecember 2020 . In Fiscal 2021, research and development expenses were$17.9 million and represent research and development costs related to certain proprietary software incurred in an agile software environment with releases broken down into several iterations called sprints involving short cycles of development (typically 4-6 weeks in duration) in which the research and development teams create potentially sellable products. Currently, such costs are expensed as incurred, and include personnel-related costs, depreciation related to engineering and test equipment, allocated costs of facilities and information technology, outside services and consultants, supplies, software tools and product certification.
Selling, general and administrative expenses
Selling, general and administrative expenses for Fiscal 2021 and the S/P
Combined 2020 Year consisted of the components in the following table (in
thousands):
Year S/P
Ended Combined
December 31, 2020 Increase
2021 Year (decrease)
(Non-GAAP) (Non-GAAP)
Salaries, benefits, subcontracting & personnel
administration costs $ 45,131 $ 27,379 $ 17,752
Building occupancy costs, utilities, office
supplies & repairs and maintenance 3,207 2,002 1,205
Depreciation and amortization 3,268 3,082 186
Dues, subscriptions and memberships 1,717
895 822
Sales and marketing 3,558 727 2,831
Professional fees 6,113 4,608 1,505
Insurance 2,195 1,326 869
Other 2,063 357 1,706
$ 67,252 $ 40,376 $ 26,876
Selling, general and administrative expenses increased $26.9 million , primarily
as a result of added expenses related to the Kandy acquisition ($15.2 million of
the increase), certain termination expenses recorded in Fiscal 2021, increased
stock compensation expenses and increased insurance costs. The termination
expenses, which were approximately $3.2 million (excluding stock compensation
expenses related to the terminations), were primarily recorded in July 2021 and
were primarily due to a reduction in the Company's corporate workforce. Stock
compensation expenses included in selling, administrative and general expenses
(excluding those related to Kandy) increased approximately $2.9 million in
Fiscal 2021 compared with the S/P Combined 2020 Year due to certain amounts
related to the terminations as well as to an increase in the number of awardees.
Increased insurance expenses are related to the Company's expanded public
company activities.
Gain on extinguishment of debt
The gain on extinguishment of debt of$4.2 million in Fiscal 2021 was due to the forgiveness, inJuly 2021 , of a loan that was granted under the Paycheck Protection Program ("PPP loan) plus related accrued interest. Under the terms of the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), PPP loan recipients had the option to apply for forgiveness for all or a portion of such loans, if the loan was used for eligible purposes, including to fund payroll costs. 25
Change in fair value of warrant liabilities
The change in the fair value of warrant liabilities in FY 2021 and the S/P
Combined 2020 Year represent mark-to-market fair value adjustments related to
certain warrants, and primarily fluctuate due to changes in and the volatility
of the Company's stock price. The income statement amounts in Fiscal 2021 and
the S/P Combined 2020 Year consisted of fair value adjustments related to the
following:
Year S/P
Ended Combined
December 31, 2020
2021 Year
Successor (Non-GAAP)
Series A Warrants $ 7,834 $ -
Series B Warrants 2,296 -
Series C Warrants (675 ) -
Series D Warrants 9,688 -
Monroe Warrants 2,394 -
2017 Private Placement and EBC Warrants (1,929 ) 3,625
$ 19,608 $ 3,625
Interest expense
Interest expense in Fiscal 2021 increased compared with the S/P Combined 2020
Year, due primarily to interest and financing fees related to the new Credit
Agreement entered into with Monroe , amendment fees related to certain warrants
and the related party note as well as to an increase in interest on Debentures
due to new issuances in Fiscal 2021 and the compounding effect of paid-in-kind
interest on such Debentures. The Debentures were converted to common stock
during the 3rd quarter of 2021 (on September 8, 2021 ), but prior to conversion,
bore interest at the rate of 10.00% per annum compounded quarterly. Interest
expense, which was also impacted by increases in Debenture discount amortization
charges consisted of the following (in thousands):
Year S/P
Ended Combined
December 31, 2020
2021 Year
Successor (Non-GAAP)Amortization of debenture discount$ 9,253 $ 4,717 Debenture interest paid-in-kind 8,257 3,695 Amortization of debenture deferred fees 628 - Interest on term note and line of credit - Prior Credit Agreement 1,028 1,122 Interest and financing fees - Monroe 9,131 - Interest and amendment fee on related party promissory note
1,986 -
Hudson bay waiver fee 2,000 -
Placement agent fees 350 -
Other 224 166
$ 32,857 $ 9,700 Benefit/provision for income taxes
For all periods presented, the benefit/provision for income taxes consists of
provisions for state taxes. The effective tax rates differ from the federal
statutory rate as a result of certain expenses being deductible for financial
reporting purposes that are not deductible for tax purposes, the existence of
research and development tax credits, operating loss carryforwards, and
adjustments to previously recorded deferred tax assets and liabilities related
to the enactment of the Tax Cuts and Jobs Act in 2017. For the Successor
periods, the benefit/provision for income taxes also reflects the impact of
amortization of intangible assets recognized as of the Computex Closing Date and
the Kandy Closing Date.
26
Liquidity and Capital Resources
Overview
Historically, the Company's primary sources of liquidity have been cash and cash equivalents, cash flows from operations (when available) and cash flows from financing activities, including funding under the Prior Credit Agreement. From time to time, the Company may also choose to access the debt and equity markets to fund acquisitions to diversify its capital sources. The Company's current principal capital requirements are to fund working capital and make investments in line with its business strategy. AtDecember 31, 2021 , the Company had unrestricted cash of$35.3 million in its operating bank account compared with$9.9 million atDecember 31, 2020 . AtDecember 31, 2021 , there was a working capital deficit (excess of current liabilities over current assets) of$7.6 million , primarily as a result of the classification of certain debt as current, primarily, the Credit Agreement and a promissory note. The working capital deficit of$7.6 million reflects an improvement over the previous year's working capital deficit of$18.4 million as ofDecember 31, 2020 .
The cash balance and working capital position as of
? A cash capital raise of
Debentures and certain penny warrants) to fund expansion, capital expenditures
and working capital. Pursuant to the terms of the Debentures, on
2021, the Debentures with related accrued interest were converted to shares of
common stock. See Note 10 of the Notes to the Consolidated Financial Statements
for additional information.
? The forgiveness, in
PPP loan. Under the terms of the CARES Act, PPP loan recipients had the option
to apply for forgiveness for all or a portion of such loans, if the loan was
used for eligible purposes, including to fund payroll costs.
? The entry into the Credit Agreement with
a
business activities and pay off amounts owing under the Prior Credit
Agreement that was assumed as part of the Computex Business Combination.
The payoff of amounts owing under the Prior Credit Agreement, which
consisted of a line of credit balance and a term loan, was
The Credit Agreement matures on December 2, 2022 , at the latest, or on the
date that Computex is sold, at the earliest. Interest on the Credit
agreement is payable monthly at the rate of 12% per annum. However, the
lenders are guaranteed a minimum return of $7.3 million . Monroe was also
granted warrants to purchase 2.5 million shares of the Company's common
stock for an exercise price of
See Notes 9 and 10 in the Notes to our Consolidated Financial Statements
included elsewhere in this Form 10-K for further discussion of the terms
of the Credit Agreement and the Monroe Warrants, respectively.
? The issuance of a $5.0 million subordinated promissory note (the "2021
Note"), on September 16, 2021 , which was secured by a shareholder that
owns more than five percent of the Company's common stock. The 2021 Note,
as amended, was scheduled to mature on the earliest of (a)
2022, (b) the Company's consummation of a debt financing resulting in the
receipt of gross proceeds of not less than
Company's consummation of primary sales of registered equity securities
resulting in receipt of gross proceeds of not less than
the Company's consummation of the sale of Computex and (e) the date of any
event of default. The 2021 Note was subordinate to any amounts owed under
the Credit Agreement and had a minimum return of 25%. The 2021 Note became
due on
However, for a waiver fee of
date to
proceeds received from the sale of Computex .
? The receipt of gross proceeds of $5.0 million (before deduction of
offering costs), in
investor in a registered direct offering, of 2,500,000 shares (the
"Registered Shares") of common stock at a purchase price of
share. At the closing of such sale, the Company issued to the buyer, in
addition to the 2,500,000 shares of the Company's common stock: (i) a
warrant to purchase up to 5,000,000 shares of the Company's common stock
(the "Series A Warrant") and (ii) a warrant to purchase up to 2,500,000
shares of the Company's common stock (the "Series B Warrant"). The Series
A Warrant and the Series B Warrant were each exercisable at an initial
exercise price of
increased, the exercise price of each was reduced to
the buyer received warrants to purchase 1,500,000 shares of the Company's
common stock (the "Series C Warrants") at an exercise price of
share. Subsequent to
and Series B Warrants were reduced to
increase to the number of shares of the Company's common stock issuable
upon exercise of such warrants). See Note 10 of the Notes to the
Consolidated Financial Statements for further discussion of the Series A
and Series B warrants, including a discussion of the modifications that
occurred during Fiscal 2021. In December, the Company received an
additional
the Series B Warrants.
27
? The repayment of a subordinated note of
interest inNovember 2021 .
? The receipt of gross proceeds of
costs), in
shares of common stock, 12,456 units of convertible preferred stock and certain
Series D Warrants to purchase up to 15,625,000 shares of the Company's common
stock at an exercise price of
Consolidated Financial Statements for further discussion of such securities.
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. The Company believes that current cash balances as well as proceeds from debt and equity offerings will provide sufficient liquidity to fund operations for at least one year after the date the financial statements are issued. However, there is no assurance that future funding will be available if and when required or at terms acceptable to the Company. This projection is based on the Company's current expectations regarding product sales and service, cost structure, cash burn rate and other operating assumptions.
Successor cash flows (Fiscal 2021 and the period
Operating activities Net cash used in continuing operating activities was$47.4 million in Fiscal 2021, primarily consisting of cash used in Kandy's operating activities, including its research and development activities, as well as cash used in the operating activities of the corporate division. Net cash used in continuing operating activities was$14.6 million for the periodApril 7, 2020 throughDecember 31, 2020 and primarily consisted of cash used in the operating activities of the corporate division. Net cash used in continuing operating activities was also impacted by lower current liabilities atDecember 31, 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 as increases in cash provided by financing activities). Current liabilities of$2.6 million atApril 6, 2020 were converted to Debentures and$1.5 million was converted to common stock. Investing activities
Cash used in continuing investing activities of
Cash provided by continuing investing activities was$0.2 million in the periodApril 7, 2020 throughDecember 31, 2020 and primarily consisted of cash from theComputex acquisition. Financing activities Cash provided by continuing financing activities was$71.9 million in Fiscal 2021 and was generated from the issuance of common stock of$27.8 million , proceeds of$5.0 million from the exercise of certain warrants, proceeds from the issuance of Debentures of$24.0 million , proceeds of$30.1 million from the issuance of debt (net of deferred financing fees), partially offset by debt repayments of$13.9 million , and payments for shares withheld of$1.1 million related to employee tax withholding associated with the delivery of vested RSUs under the Company's equity incentive plan. 28 Cash provided by continuing financing activities was$23.6 million in the periodApril 7, 2020 throughDecember 31, 2020 , and was generated from the issuance of$23.1 million in Debentures and$1.5 million from the issuance of common stock, partially offset by the redemption of shares held in trust of$1.0 million .
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies, Judgements and Estimates
This discussion of critical accounting policies, judgments and estimates should
be read in conjunction with our consolidated financial statements and other
disclosures included elsewhere in this annual report. The preparation of
financial statements and related disclosures in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and income and expenses during the periods
reported. Actual results could differ materially from those estimates. We
believe the accounting policies that involve the most significant judgments and
estimates used in the preparation of the consolidated financial statements
include those relating to revenue recognition, accounting for warrants,
accounting for income taxes, accounting for business combinations, the
recognition and impairment evaluation relating to tangible and intangible
assets, including goodwill, and accounting for share-based compensation. We
discuss some of these policies below. The ones not discussed below are discussed
in Note 3 of the Notes to the Consolidated Financial Statements.
Revenue recognition
Revenue from contracts with customers are not recorded until the Company has the
approval and commitment from the parties, the rights of the parties are
identified, payment terms are established, the contract has commercial substance
and collectability of the consideration is probable. The Company also evaluates
the following indicators, amongst others, when determining whether it is acting
as a principal in the transaction (and therefore whether to record revenue on a
gross basis): (i) whether the Company is primarily responsible for fulfilling
the promise to provide the specified good or service, (ii) whether the Company
has the inventory risk before the specified good or service has been transferred
to a customer or after transfer of control to the customer and (iii) whether the
Company has the discretion to establish the price for the specified good or
service. If the terms of a transaction do not indicate that the Company is
acting as a principal in the transaction, then the Company is acting as an agent
in the transaction and therefore, the associated revenue is recognized on a net
basis (that is revenue net of costs).
Revenue is recognized once control passes to the customer. The following
indicators are evaluated in determining when control has passed to the customer:
(i) whether the Company has a right to payment for the product or service, (ii)
whether the customer has legal title to the product, (iii) whether the Company
has transferred physical possession of the product to the customer, (iv) whether
the customer has the significant risk and rewards of ownership of the product
and (v) whether the customer has accepted the product. The Company's products
can be delivered to customers in a variety of ways, including (i) physical
shipment from the Company's warehouse, (ii) via drop-shipment by the vendor or
supplier or (iii) via electronic delivery of keys for software licenses. The
Company's shipping terms typically allow for the Company to recognize revenue
when the product is shipped to the customer's location.
When an arrangement contains more than one performance obligation, the Company
will allocate the transaction price to each performance obligation on a relative
standalone selling price basis. The Company utilizes the observable price of
goods and services when they are sold separately to similar customers in order
to estimate standalone selling price.
Hardware
Revenue from the sale of hardware is recognized on a gross basis, as the Company
is deemed to be acting as the principal in these transactions. The selling price
to the customer is recorded as revenue and the acquisition cost is recorded
within cost of revenue. The Company recognizes revenue from these transactions
when control has passed to the customer, which is usually upon shipment.
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In some instances, the customer agrees to buy the product from the Company, but requests delivery at a later date, commonly known as a bill-and-hold arrangement. For these transactions, the Company deems that control passes to the customer when the product is ready for delivery. The Company classifies such products as products ready for delivery when the customer is in possession of a signed agreement, the significant risk and rewards for the product has passed to the customer, the customer has the ability to direct the asset, the product has been set aside specifically for the customer and the Company cannot redirect the product for the benefit of another customer. In drop-shipment arrangements, whereby the Company arranges for the vendor to deliver the product directly to the customer without the inventory first being held at its warehouses, the Company considers itself to be the principal and therefore, recognizes the related revenue on a gross basis. Third party software Revenues from most software license sales are recognized as a single performance obligation on a net basis, as the Company is deemed to be acting as an agent in these transactions. Revenues in these instances are recognized at the point the software license is delivered to the customer. Generally, software licenses are sold with accompanying third-party delivered software support, which is a product that allows customers to upgrade, at no additional cost, to the latest technology if new capabilities are introduced during the period that the software support is in effect. The Company evaluates whether the software support is a separate performance obligation by assessing whether the third-party delivered software support is critical or essential to the core functionality of the software itself. This involves considering whether the software provides its original intended functionality to the customer without the updates, whether the customer would ascribe a higher value to the upgrades versus the up-front deliverable, whether the customer would expect frequent intelligence updates to the software (such as updates that maintain the original functionality), and whether the customer chooses to not delay or always install upgrades. If the Company determines that the accompanying third-party delivered software support is critical or essential to the core functionality of the software license, the software license and the accompanying third-party delivered software support are recognized as a single performance obligation. The value of the product is primarily based on the accompanying support delivered by a third-party, and therefore the Company is acting as an agent in these transactions and therefore, recognizes the associated revenue on a net basis at the point that the associated software license is delivered to the
customer. Third party maintenance The Company is deemed to be the agent in the sale of third-party maintenance, software support and services, as the third-party controls the service until it is transferred to the customer. In these instances, the Company recognizes the revenue on a net basis equal to the selling price to the customer less the acquisition costs. Such revenue is recognized when the customer and vendor accept the terms and conditions of the arrangement.
Managed and professional services
Professional services offered by the Company include assessments, project management, staging, configuration, customer training and integration. Managed services offerings range from monitoring and notification to a fully outsourced network management solution. In these arrangements, the Company satisfies the performance obligations and recognizes revenue over time. Such professional services are provided under both time and materials and fixed price contracts. When services are provided on a time and materials basis, the Company recognizes revenues at agreed-upon billing rates as services are performed. When services are provided on a fixed fee basis, the Company recognizes revenues over time in proportion to the Company's progress towards satisfaction of the performance obligation. In arrangements for managed services, the Company's arrangement is typically a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The Company typically recognizes revenue from these services on a straight-line basis over the period services are provided, which is consistent with the timing of services rendered.
Cloud subscription and software revenue
Revenue from subscriptions to Kandy's cloud-based technology platform is
recognized on a ratable basis over the contractual subscription term beginning
on the date that the platform is made available to the customer until the end of
the contractual period. Payments received in advance of subscription services
are recorded as deferred revenue; revenue recognized for services rendered in
advance of payments received are recorded as contract assets. Usage fees, when
bundled, are billed in advance and recognized on a ratable basis over the
contractual subscription term, which is usually the monthly contractual billing
period. Non-bundled usage fees are recognized as actual usage occurs.
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When services do not meet certain service levels of commitments, customers are entitled to receive service credits, and in certain cases, refunds, each representing a form of variable consideration. Kandy historically has not experienced any significant incidents affecting the defined levels of reliability and performance as required by its subscription contracts. Therefore, the variable consideration has been insignificant and there are no reserves for such service credits as ofDecember 31, 2021 . The Company also recognizes revenue for term-based software licenses and has concluded that its software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own. The software license revenue is typically recognized upon transfer of control or when the software is made available for download, as this is the point at which the user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual property. Freight and sales tax
Freight billed to customers is included within sales on the consolidated statement of operations. The related freight charged to the Company is included within cost of revenue. Sales tax collected from customers is remitted to governmental authorities on a net basis.
Contract liabilities
Contract liabilities (or deferred or unearned revenue) are recognized when cash payments are received or due in advance of the Company's performance obligations.
Costs of obtaining and fulfilling a contract
The Company capitalizes costs that are incremental to obtaining customer contracts, predominately sales commissions. Such deferrals are then amortized to expense, in proportion to each completed contract performance obligation, on a straight-line basis over the period during which the Company fulfills its performance obligation. Costs associated with contracts whereby the Company has an obligation to perform services, are incurred specifically to assist the Company in rendering services to its customers and are recorded as deferred customer support contract costs at the time the costs are incurred. The costs are amortized to expense on a straight-line basis over the period during which the Company fulfills its performance obligation. We consider revenue recognition to be a critical accounting policy and one that involves critical accounting estimates because of the materiality of this item to our financial statements and the level of judgement involved. Judgement is required in some of the factors discussed above including whether we are acting as a principal or an agent, the determination of when risk effectively passes to the customer, the determination of the price expected to be collected from the customer, the determination of whether revenue from certain software sales should be recognized as a single performance obligation or whether certain software support should be recognized as a separate performance obligation, and the assessment of whether the third-party delivered software support is critical or essential to the core functionality of the software itself.
The Company reviews its long-lived assets for impairment whenever events or circumstances exist that indicate the carrying amount of an asset or asset group may not be recoverable. The recoverability of long-lived assets is measured by a comparison of the carrying amount of the asset or asset group to the future undiscounted cash flows expected to be generated by that asset group. If the asset or asset group is considered to be impaired, an impairment loss is recorded to adjust the carrying amounts to the estimated fair value. During the year endedDecember 31, 2021 , the Company recorded impairment of intangible assets of$15.3 million relating to the Kandy reporting unit based on a comparison of the reporting unit's fair value with its carrying value. The excess of the carrying value of the reporting over the estimated fair value was first allocated to the intangibles and then to goodwill. Fair value was determined using the income approach.Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination.Goodwill is reviewed for impairment at least annually, in December, or more frequently if a triggering event occurs between impairment testing dates. As ofDecember 31, 2021 , the Company had two operating segments and two reporting units for the purpose of evaluating goodwill impairment. 31
The Company's impairment assessment begins with a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. Qualitative factors may include, macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity and Company specific events. If, based on the qualitative test, the Company determines that it is "more likely than not" that the fair value of a reporting unit is less than its carrying value, then we evaluate goodwill for impairment by comparing the fair value of each of our reporting unit to its respective carrying value, including its goodwill. If it is determined that it is "not likely" that the fair value of the reporting unit is less than its carrying value, then no further testing is required. The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves significant judgment and estimates. Fair values may be determined using a combination of both income and market-based approaches. As indicated in Note 1 of the Notes to the Consolidated Financial Statements, in connection with the planned sale ofComputex , the Company recorded a noncash goodwill impairment charge of$32.1 million during the year endedDecember 31, 2021 which represents the excess of the carrying value of theComputex reporting unit over the expected sale proceeds less costs to sell. As indicated above, impairment of Kandy's goodwill was also recorded during the year endedDecember 31, 2021 .Goodwill impairment of the Kandy reporting unit was$13.7 million .
Public Warrants, 2017 Private Placement Warrants and 2017 EBC Warrants
OnJuly 27, 2017 , the Company entered into certain Warrant Purchase Agreements with each ofPensare Sponsor Group, LLC , aDelaware limited liability company (the "Sponsor"), and certain other investors (collectively, the "Purchasers"), pursuant to which the Purchasers purchased an aggregate of 10,512,500 warrants (including the full over-allotment amount) in connection with and simultaneously with the closing of the IPO (the "2017 Private Placement Warrants") at a purchase price of$1.00 per Private Placement Warrant. On or aboutAugust 1, 2017 , in the IPO, the Company sold units of the Company's equity securities, each such unit consisting of one share of Common Stock, one-half of one Public Warrant and one-tenth of one right to acquire one share of Common Stock upon the closing of our initial business combination (the "Units") and, in connection therewith, issued and delivered 15,525,000 warrants to public investors in the Offering (the "Public Warrants"). In addition, 675,000 warrants, underlying unit purchase options issued to the underwriters of the IPO and certain of their designees (the "2017 EBC Warrants"), were issuable. The 2017 EBC Warrants together with the 2017 Private Placement Warrants and the Public Warrants are collectively referred to as the "2017 Warrants." Each whole 2017 Warrant entitles the holder thereof to purchase one share of the Company's common stock for$11.50 per share, subject to adjustments. In addition to the 675,000 warrants, the unit purchase options, which expire inJuly 2022 , entitle the holders to receive 1,485,000 shares of common stock for an exercise price of$10 per unit. As ofDecember 31, 2021 , a total of 15,525,000 Public Warrants and 10,512,500 of the 2017 Private Placement Warrants remained outstanding. The 2017 EBC Warrants totaled 675,000 units as ofDecember 31, 2021 . The 2017 Private Placement Warrants and the 2017 EBC Warrants, if issued upon exercise of the unit purchase options, are exercisable on a cashless basis, at the holder's option, and are non-redeemable so long as they are held by the initial Purchasers or their permitted transferees. Public Warrants and any 2017 Private Placement Warrants or any 2017 EBC Warrants that are transferred to nonpermitted transferees are redeemable at the option of the Company and are not exercisable on a cashless basis. The Company evaluated the 2017 Warrants under ASC 815-40, Derivatives and Hedging-Contracts in Entity's Own Equity, and concluded that the 2017 Private Placement Warrants and the 2017 EBC Warrants did not meet the criteria to be classified in stockholders' equity. A recent SEC Statement focused in part on provisions in warrant agreements that provide for potential changes to the settlement amounts dependent upon the characteristics of the warrant holder and because the holder of a warrant is not an input into the pricing of a fixed-for-fixed option on equity shares, such provision would preclude the 2017 Private Placement Warrants and 2017 EBC Warrants from being classified in equity and therefore the 2017 Private Placement Warrants and 2017 EBC Warrants are classified as liabilities at fair value, with subsequent changes in fair values recognized in earnings at each reporting date. The 2017 Private Placement Warrants and 2017 EBC Warrants were valued using a Black-Scholes pricing model as described in Note 3 of the Notes to the Consolidated Financial Statements. Changes in the fair value of the 2017 Private Placement Warrants and the 2017 EBC Warrants requires significant judgment, including the determination of the appropriate valuation model to use and the inputs to the valuation model.
Series A, Series B, Series C, Series D and Monroe Warrants
In November andDecember 2021 , the Company issued certain warrants as defined and discussed in Note 10 in the Notes to the Consolidated Financial Statements (Series A Warrants, Series B Warrants, Series C Warrants, Series D Warrants and Monroe Warrants). Each such whole Warrant entitles the holder thereof to purchase one share of the Company's common stock. The Company evaluated the terms of such warrants and determined that they qualified to be treated as liabilities under ASC 480, Distinguishing Liabilities from Equity, with subsequent changes in fair values recognized in earnings at each reporting date. The Series A Warrants were valued using the Black-Scholes pricing model, the Series B and Series D Warrants were valued using the Monte Carlo simulation, and the Series C and Monroe Warrants were valued based on the Company's stock price. Changes in the fair values of such warrants requires significant judgment, including the determination of the appropriate valuation model to apply and the inputs to the valuation model. See Notes 3 and 10 of the Notes to the Consolidated Financial Statements for further discussion of the accounting policies of warrants issued by the Company. 32 Accounting for income taxes Under the Financial Accounting Standard Board's ("FASB") Accounting Standard Codification ("ASC") No. 740 ("ASC No. 740"), income tax expense is recorded for the amount of income tax payable or refundable for the current period and for the change in net deferred tax assets or liabilities resulting from events that are recorded for financial reporting purposes in a different reporting period than recorded in the tax return. We make significant assumptions, judgments, and estimates in the determination of our provision for income taxes and also our deferred tax assets and liabilities and any valuation allowances. Our judgments, assumptions, and estimates relating to the current tax provision take into account current tax laws, our interpretation of current tax laws, allowable deductions, projected tax credits, and possible outcomes of current and future tax audits. We do not recognize a tax benefit unless we conclude that it is more likely than not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. If the recognition threshold is met, we recognize a tax benefit measured at the largest amount of the tax benefit that, in our judgment, is greater than a 50 percent likelihood of realization. Changes in tax laws or our interpretation of tax laws and the resolution of current and future tax audits could materially impact the amounts provided for income taxes. Our assumptions, judgments, and estimates relative to the value of our net deferred tax assets take into account predictions of the amount and category of future taxable income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments, and estimates inaccurate, thus materially impacting our financial position and
results of operations. Purchase price allocation
The Company accounts for business combinations in accordance with ASC 805, Business Combinations. Accordingly, tangible and intangible assets acquired and liabilities assumed are recorded at their estimated fair values, the excess of the purchase consideration over the fair values of net assets acquired is recorded as goodwill, and transaction costs are expensed as incurred. Determining fair values of certain assets acquired and liabilities assumed requires the exercise of judgment and often involves the use of significant estimates and assumptions. Also, assigning useful lives to intangible assets, which determine the related amortization expense, involves subjectivity. Share-based compensation The Company accounts for share-based compensation in accordance with ASC 718, Compensation - Stock Compensation, which requires the measurement and recognition of compensation expense, based on estimated fair values, for share-based awards made to employees and directors. Based on the grant date fair value of the award, the Company recognizes compensation expense over the requisite service period or performance period on a straight-line basis, and accounts for forfeitures as they occur. Significant judgement is required in the estimation of fair values of stock awards. For the restricted stock awards with a time-based vesting condition, the fair value is determined by reference to the Company's stock price on the grant date. A portion of the Company's restricted stock awards are performance-based with a market condition that must be met for the award to vest. For those restricted stock awards, the fair value is estimated using a Monte Carlo simulation model, whereby the fair value of such awards is fixed at the grant date and amortized over the shorter of the remaining performance or service period. The Monte Carlo simulation valuation model utilizes the following assumptions: expected stock price volatility, expected life of the awards and a risk-free interest rate. Significant judgment is required in estimating the expected volatility of our common stock. Due to the limited trading history of the Company's common stock, estimated volatility was based on a peer group of public companies and took into consideration the increased short-term volatility in historical data due to COVID-19.
Recent Accounting Pronouncements Issued and Adopted
See Note 3 of the Notes to the Consolidated Financial Statements.
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