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 the Risk Factors section of our Annual Report on Form 10-K filed onJune 29, 2020 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
In the Business Combination, the Company is considered the acquirer and Computex
is considered the acquiree and the accounting predecessor. The Business
Combination was accounted for using the acquisition method of accounting, and
the Successor's financial statements reflect a new basis of accounting that is
based on the fair value of the net assets acquired. In the accompanying
condensed consolidated financial statements, the Company clearly distinguishes
between the entity that existed before the Closing Date ("Predecessor") and the
entity that existed on and after such date ("Successor"). Because the
Successor's financial statements are presented on a different basis from the
Predecessor's financial statements, the two entities may not be comparable, in
certain respects. As a result, a black line is used to separate the Successor
and the Predecessor columns or sections in certain tables included in the
condensed consolidated financial statements.
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The condensed consolidated financial statements of the Company include the accounts of AVCT and its wholly owned subsidiary, Computex. The financial position, results of operations and cash flows described herein for the dates and periods prior toApril 7, 2020 relate to the operations of Computex. The historical financial information of AVCT prior to the business combination (a special purpose acquisition company, or "SPAC") has not been reflected in the Predecessor financial statements as these historical amounts have been determined to be not useful information to a user of the financial statements. SPACs typically deposit the proceeds received from their initial public offerings into a separate trust account until a business combination occurs. Once the business combination occurs, such funds are then used to satisfy the consideration for the acquiree and/or to pay stockholderswho elect to redeem their shares of common stock in connection with the business combination. The operations of aSPAC , until the closing of a business combination, other than income from the trust account investments and transaction expenses, are nominal. Accordingly, no other activity in the Company was reported for periods prior toApril 7, 2020 besides Computex's operations as Predecessor. We are a leading multi-brand technology solutions provider to large global customers, providing a comprehensive and integrated set of technology solutions to our customers, through our extensive hardware, software and value-added service offerings. The breadth of our offerings enables us to offer each customer a complete technology solution. After performing an assessment of our customers' needs, we design best-fit solutions, and with the help of leading vendors in the industry, we help our customers to procure products that fit
their global needs. Covid-19
Commencing inDecember 2019 , COVID-19 began spreading throughout the world, including the first outbreak in the US inFebruary 2020 . OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. COVID-19 has disrupted and continues to significantly disrupt local, regional, and global economies and businesses. The COVID-19 outbreak is disrupting supply chains and affecting production and sales across a range of industries. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers, employees and vendors, all of which are uncertain and cannot be predicted. At this point, the extent to which COVID-19 may impact our financial condition and/or results of operations is uncertain. In response to COVID-19, we have put into place certain restrictions, requirements and guidelines, to protect the health of our employees and clients, including requiring certain conditions to be met before employees return to the Company's offices. Also, to protect the health and safety of our employees, our daily execution has evolved into a largely virtual model and we continue to endeavor to find innovative ways to engage with customers and prospects as we, our customers and prospects endeavor to navigate the current environment. EffectiveApril 1, 2020 , Computex reduced the salaries of its employees and we are endeavoring to reduce other operating expenses. We plan to continue to monitor the current environment and may take further actions that may be required by federal, state or local authorities or that we determine are in the interests of our employees, customers, and partners. Our business
Our hardware offerings are sourced from a network of leading manufacturers, and include, data storage, desktops, servers, and other hardware.
Our software and maintenance offeringsinclude licensing, licensing management,
software solutions and other services. We offer a full suite of value-added
services, which typically are delivered as part of a complete technology
solution, to help our customers meet their specific needs. Our solutions range
from configuration services for computer devices to fully integrated solutions
such as virtualization, collaboration, security, mobility, data center
optimization and cloud computing. We also offer complementary services including
installations, warranty services and certain managed services such as remote
network and data center monitoring. We believe our software and service
offerings are important growth areas for us.
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Our professional and managed servicesinclude managed IT services,
virtualization, storage, networking and data center services. As part of these
services, we offer customized solutions for business continuity, back-up and
recovery, capacity on-demand, regulatory compliance and data center best
practice methodologies as well as infrastructure as a service ("IaaS") and
software as a service ("SaaS"). Our customers utilize our solutions to optimize
their current and planned investments in IT infrastructure and data centers. We
believe the breadth of our service offering and our consultative approach to
working with our clients distinguishes us from other providers.
We believe our business is well-diversified across verticals, technology
solution offerings and procurement partners from whom we procure products and
software for resale. Our sales teams consist of seasoned account executives and
regionally focused sales support teams who work within assigned territories and
focus on providing customized solutions to our customers. Our sales teams are
supported by industry leading technologists who design end to end solutions and
who take projects from design, to implementation, to management. We boast an
extensive network of OEMs and distributors which allow us to direct-sell a
diverse selection of products and software to our ever-growing customer base, as
packaged software or as licensed products and services.
We have developed an infrastructure that enables us to deliver our IT solutions
and service agnostic as to technology platform and location through a flexible,
customer-focused delivery model which spans three datacenter environments
(customer-owned, co-location, and the cloud). By optimizing our customers' use
of secure, energy efficient and reliable data centers combined with a
comprehensive suite of related IT infrastructure services, we are able to offer
our customers highly customized solutions to address their need for data center
availability, data management, data security, business continuity disaster
recovery and data center consolidation, as well as a variety of other related
managed services.
Key trends affecting our results of operations
The following are key trends that we believe may impact our results of operations:
? Increasing need for third-party services. We believe that customers are relying
on third-party service providers, such as Computex Technology Solutions, to
manage significant aspects of their IT environment, from design, to
implementation, to pre- and post-sales support, to maintenance, engineering,
cloud management, security operations, and other services.
? Reduction in the number of IT solutions providers. Our view is that customers
are seeking to reduce the number of solutions providers they do business with
to improve supply chain and internal efficiencies, enhance accountability,
improve supplier management practices, and reduce costs. As a result, customers
are looking to find IT solutions providers that can provide a whole suite of
solutions to meet their IT needs.
? Lack of sufficient internal IT resources at mid-sized and large enterprises,
and scarcity of IT personnel in certain high-demand disciplines. We believe
that IT departments at mid-sized and large enterprises are facing pressure to
deliver emerging technologies and business outcomes but lack the properly
trained staff and the ability to hire personnel with high in-demand disciplines
such as security and data analytics. At the same time, the prevalence of
security threats; increased use of cloud computing, software-defined
networking, new architectures, and rapid software development frameworks; the
proliferation of mobile devices and bring-your-own-device (BYOD) policies; and
complexity of multi-vendor solutions, have made it difficult for these
departments to implement high-quality IT solutions.
? Disruptive technologies are creating complexity and challenges for customers
and vendors. The rapid evolution of disruptive technologies, and the speed by
which they impact an organization's technology platforms, has made it difficult
for customers to effectively design, procure, implement and manage their own IT
systems. Moreover, increased budget pressures, fewer internal resources, a
fragmented vendor landscape and fast time-to-value expectations make it
challenging for customers to design, implement and manage secure, efficient and
cost-effective IT environments. Customers are increasingly turning to IT
solution providers such as Computex Technology Solutions to implement complex
IT offerings, including software defined infrastructure, cloud computing,
converged and hyper-converged infrastructures, big data analytics, and flash
storage.
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? Increasing sophistication and incidences of IT security breaches and
cyber-attacks. In recent years, cyber-attacks have become more sophisticated,
numerous, and pervasive. Organizations are finding it increasingly difficult to
effectively safeguard their confidential and personal information from a
constant stream of advanced threats, both internal and external. Moreover,
cyber-threats have shifted from uncoordinated individual efforts to highly
coordinated and well-funded attacks by criminal organizations and nation-state
actors. For most organizations, it is no longer a matter of "if a cyber-attack
will occur;" the question is "when" and "what impact will it have" on the
organization. We believe our customers are focused on all aspects of cyber
security, including information and physical security, intellectual property,
and compliance requirements related to industry and government regulations. To
meet current and future security threats, enterprises must implement security
controls and technology solutions that leverage integrated services and
products to help monitor, mitigate, and remediate security threats and attacks.
? Customer IT decision-making is shifting from IT departments to line-of-business
personnel. As IT consumption shifts from legacy, on-premise infrastructure to
agile "on-demand" and "as-a-service" solutions, customer procurement decisions
are shifting from traditional IT personnel to lines-of-business personnel,
which is changing the customer engagement model and types of consultative
services required to fulfill the needs of customers. In addition, many of the
services create recurring revenue streams paid for over a period of time,
rather than paid for upfront.
? Multi-Cloud Strategy. Over the past several years, cloud architectures and
cloud-enabled frameworks, whether public, private, or hybrid, have become the
core foundation of modern IT. In order to take advantage of this trend, we
focus on assisting our customers with their assessment, definition, deployment,
and management of private and hybrid clouds that align with their business
needs. This strategy leverages our strength in deploying private clouds, while
also incorporating elements of the public cloud. By assessing our client's
applications, workloads and business requirements, among others, we are able to
deploy solutions that leverage the best available technology platforms and
consumption models. For example, we may build a private cloud solution to host
mission critical applications, while utilizing a public cloud solution for
development, collaboration, or disaster recovery. Our cloud strategy is tightly
aligned with key strategic initiatives, including security, and digital
workspace.
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Results of operations
To distinguish between the different bases of accounting due to the Business
Combination that occurred on April 7, 2020 , the tables below separate the
Company's results using a black line presentation that separates: (1) the
periods prior to the closing date of April 7, 2020 ("Predecessor") and (2) the
period that started on April 7, 2020 ("Successor"). We refer to the periods
before April 7, 2020 as the "Predecessor" periods and refer to the periods that
started on April 7, 2020 as the "Successor" periods.
As discussed more fully above, the historical financial information of AVCT
prior to the Business Combination (a 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.
Accordingly, no other activity in the Company was reported for periods prior to
April 7, 2020 besides Computex's operations as Predecessor. As a result, the
financial results of the Successor and Predecessor entities, presented herein
are expected to be largely consistent, excluding any impact of the Business
Combination.
For the reasons discussed above, management believes it remains useful to review
the operating results for the three and six months ended June 30, 2020 with the
operating results for the three and six months ended June 30, 2019 . Accordingly,
in the discussion below, the financial information for the period April 1, 2020
through April 6, 2020 is combined with the financial information for the period
April 7, 2020 through June 30, 2020 and, together, is referred to as the "S/P
combined 2nd quarter of 2020." Similarly, for purposes of a year-to-date (YTD)
comparison, the financial information for the period January 1, 2020 through
April 6, 2020 is combined with the financial information for the period April 7,
2020 through June 30, 2020 and, together, is referred to as "S/P combined YTD
period ended June 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 both the second quarter of 2020 and the six months ended
June 30, 2020 .
35
S/P Combined 2nd Quarter of 2020 versus the 2nd Quarter of 2019
April 7, April 1, 2020
2020 through through S/P Combined
June 30, April 6, 2nd Quarter of 2nd Quarter of
2020 2020 2020 2019
Successor Predecessor (non-GAAP) Predecessor
Revenues:
Hardware $ 10,442 $ 234 $ 10,676 $ 12,165
Software and maintenance 1,532 - 1,532 1,383
Services 6,984 441 7,425 7,276
Other 139 - 139 119
Total revenues 19,097 675 19,772 20,943
Cost of revenue 12,917 402 13,319 15,315
Gross profit 6,180 273 6,453 5,628
Selling, general and administrative
expenses (including transaction costs) 7,688 760
8,448 6,472
Loss from operations (1,508 ) (487 ) (1,995 ) (844 )
Other (expense) income
Interest expense (1) (2,161 ) (143 ) (2,304 ) (371 )
Other (expense) income (13 ) 13 - 103
Total other expenses (2,174 ) (130 ) (2,304 ) (268 )
Loss before income taxes (3,682 ) (617 ) (4,299 ) (1,112 )Benefit (provision) for income taxes 8 (1
) 7 (65 ) Net loss$ (3,674 ) $ (618 )$ (4,292 ) $ (1,177 )
(1) Interest expense in the Successor period includes related party interest of
$554 . Net loss Net loss for the S/P Combined 2ndquarter of 2020 was$4.3 million compared with$1.2 million for the 2nd quarter of 2019. Discussed below are the revenue and expense factors that primarily contributed to the quarter over quarter net
loss change. Hardware revenue
Hardware revenue was$10.7 million in the S/P Combined 2nd quarter of 2020 compared with$12.2 million in the 2nd quarter of 2019, representing a decrease of 12.2%. We attribute this decrease to the impact of COVID-19 and a sales force transition. Hardware revenue is seasonal and tends to be higher in the first and fourth quarters of each year. Though our hardware revenue was down in the S/P 2nd quarter of 2020 compared with the 2nd quarter of 2019, the margin was up 690 basis points due to actions by the Company to deliver improved margins.
Software and maintenance revenue
Revenues from software and maintenance services, which are recorded net of direct expenses increased 10.8%, increasing to$1.5 million in the S/P Combined 2ndquarter of 2020 compared with$1.4 million in the 2nd quarter of 2019. Since this revenue is recorded net, the revenue is the gross margin.
Services revenue
Services revenues was slightly up (2.0%), increasing to$7.4 million in the S/P Combined 2nd quarter of 2020 compared with$7.3 million in the 2ndquarter of 2019. We attribute this increase to more demand for these types of services due to COVID-19, as more customers reached out for IT help to allow them to work from home. The margin was also up in the S/P Combined 2nd quarter of 2020, increasing 150 basis points compared with the 2nd quarter of 2019. Improved margins are due to actions by the Company to deliver higher margins and also as a result of increased utilization of personnel driven by the higher customer demand discussed previously. 36 Other revenue Other revenue, which consists primarily of freight and reimbursables, including travel, meals and entertainment, was flat at$0.1 million , quarter over quarter. By its nature, this type of revenue fluctuates depending on the revenue of
the other product lines.
Total revenue, cost of revenue and gross margin
Aggregate revenue for the four product lines together was down 5.6%, decreasing from$20.9 million in the second quarter of 2019 to$19.8 million in the S/P Combined 2nd quarter of 2020. Though aggregate revenues were down, overall gross profit increased 14.7% and gross margin was up 577 basis points as cost of revenue decreased 13.0%, quarter over quarter.
Selling, general and administrative expenses
Selling, general and administrative expenses (including transaction costs) for
the S/P Combined 2nd quarter of 2020 and the 2nd quarter of 2019, consisted of
the components in the following table (in thousands):
S/P Combined
2nd Quarter of 2nd Quarter Change Increase
2020 of 2019 (decrease)
(non-GAAP) Predecessor
Salaries, benefits, subcontracting & personnel
administration costs $ 4,722 $ 3,760 $ 962
Commissions 1,471 995 476
Building occupancy costs, utilities, office
supplies & repairs and maintenance 453 591 (138 )
Depreciation and amortization 815 540 275
Dues, subscriptions and memberships 186 190 (5 )
Vendor marketing funds (199 ) (223 ) 25
Meals, entertainment & travel 50
311 (261 )
Management fees 5 75 (70 )
Transaction costs 142 - 142
Insurance 396 49 347
Other 407 184 223
$ 8,448 $ 6,472 $ 1,976
Selling, general and administrative expenses increased 30.5% in the S/P Combined
2nd quarter of 2020, compared with the 2nd quarter of 2019, primarily as a
result of an increase in personnel-related costs, commissions and insurance
expenses. Personnel-related expenses increased primarily as a result of the
inclusion of AVCT salaries in the Successor period, which were not included in
the Predecessor period, and an increase in share-based compensation expenses
related to awards issued in the S/P Combined 2nd quarter of 2020, partially
offset by a reduction in salaries for employees of Computex, that took effect as
of April 1, 2020 . Commissions increased as a result of improved margins. The
increased insurance expenses are related to the Company's expanded public
company activities. Meals, entertainment and travel decreased as a result of
less travel and meetings with clients due to COVID-19.
Transaction costs of $0.1 million (included in the table above) represent costs
incurred in connection with the acquisition of Computex on April 7, 2020 . Such
costs consist primarily of legal and professional fees, and are net of a credit
of $0.9 million granted by a creditor whose account was settled via a
combination of cash, Debentures and common stock.
37
Interest expense
Interest expense in the S/P Combined 2ndquarter of 2020 was up, compared with
the 2nd quarter of 2019, primarily as a result of interest on the Debentures and
the subordinated promissory note which were both issued on the Closing Date. The
Debentures bear interest at the rate of 10.00% and the subordinated promissory
note bears interest at the rate of 12.00%. Interest expense also includes
amortization of the discount on the Debentures.
Benefit/provision for income taxes
For all periods presented, except the Successor period, the provision for income taxes consists primarily of provisions for state taxes, and reflect effective tax rates that differ from what would be expected if the federal statutory rate were applied to loss before income taxes primarily as a result of certain expenses being deductible for financial reporting purposes that are not deductible for tax purposes, the existence of research and development tax credits, operating loss carryforwards, and adjustments to previously recorded deferred tax assets and liabilities related to the enactment of the Tax Cuts and Jobs Act in 2017. For the Successor period, the benefit for income taxes reflects the impact of amortization of intangibles, partially offset by the items above that impacted the Predecessor periods. S/P Combined YTD Period EndedJune 30, 2020 versus the YTD Period EndedJune 30, 2019 S/P Combined April 7, January 1, 2020 YTD period 2020 through through ended YTD period ended June 30, April 6, June 30, June 30, 2020 2020 2020 2019 Successor Predecessor (non-GAAP) Predecessor Revenues: Hardware$ 10,442 $ 10,587 $ 21,029 $ 28,489 Software and maintenance 1,532 1,459 2,991 3,029 Services 6,984 6,880 13,864 13,958 Other 139 111 250 348 Total revenues 19,097 19,037 38,134 45,824 Cost of revenue 12,917 12,426 25,343 33,340 Gross profit 6,180 6,611 12,791 12,484 Selling, general and administrative expenses (including transaction costs) 7,688 7,835
15,523 13,475
Loss from operations (1,508 ) (1,224 ) (2,732 ) (991 )
Other (expense) income
Interest expense (2,161 ) (384 ) (2,545 ) (670 )
Other (expense) income (13 ) 31 18 145
Total other expenses (2,174 ) (353 ) (2,527 ) (525 )
Loss before income taxes (3,682 ) (1,577 ) (5,259 ) (1,516 )Benefit (provision) for income taxes 8 (12
) (4 ) (88 ) Net loss$ (3,674 ) $ (1,589 ) $ (5,263 ) $ (1,604 )
(1) Interest expense in the Successor period includes related party interest of
$554 . Net loss Net loss for the S/P Combined YTD period endedJune 30, 2020 was$5.3 million compared to$1.6 million for the YTD period endedJune 30, 2019 . Discussed below are the revenue and expense factors that primarily contributed to the YTD change in the net loss between the two periods.
Hardware revenue
Hardware revenue decreased 26.2% from$28.5 million in the YTD period endedJune 30, 2019 to$21.0 million in the S/P Combined period endedJune 30, 2020 . Though our hardware revenue was down, the margin was up 560 basis points in the S/P Combined YTD period endedJune 30, 2020 compared with the YTD period endedJune 30, 2019 . We attribute the decrease in hardware revenue and the increase in margin to the same factors discussed in the quarter over quarter comparison. 38
Software and maintenance revenue
Revenue from software and maintenance services was flat at$3.0 million in the YTD periods. As discussed above, since this revenue is reported net, the revenue is also the margin. Services revenue
Services revenues was essentially flat at$13.9 million in the S/P Combined YTD period endedJune 30, 2020 compared with$14.0 million in the YTD period endedJune 30, 2019 . The margin on our services revenue for the S/P Combined YTD period endedJune 30, 2020 was up 480 basis points compared to the YTD period endedJune 30, 2019 due to the same reason discussed in the quarter over quarter comparison. Other revenue Other revenue was$0.2 million in the S/P Combined YTD period endedJune 30, 2020 and$0.3 million in the YTD period endedJune 30, 2019 . The nature of other revenue is discussed in the quarter over quarter comparison section above.
Total revenue, cost of revenue and gross margin
Aggregate revenue for the four product lines together was down 16.8%, decreasing from$45.8 million in the YTD period endedJune 30, 2019 to$38.1 million in the S/P Combined YTD period endedJune 30, 2020 . Though aggregate revenues were down, overall gross profit increased 2.5% and gross margin was up 630 basis points as cost of revenue decreased 24.0%.
Selling, general and administrative expenses
Selling, general and administrative expenses (including transaction costs) for the S/P Combined YTD period endedJune 30, 2020 and the YTD period endedJune 30, 2019 , consisted of the components in the following table (in thousands), and increased 15.2% primarily as a result of the same factors discussed in the quarter over quarter discussion. S/P Combined YTD period ended YTD period ended June 30, June 30, Change Increase 2020 2019 (decrease) (non-GAAP) Predecessor Salaries, benefits, subcontracting & personnel administration costs$ 8,620 $ 7,425 $ 1,195 Commissions 3,179 2,708 471 Building occupancy costs, utilities, office supplies & repairs and maintenance 946 1,137 (191 ) Depreciation and amortization 1,301 1,066 235 Dues, subscriptions and memberships 394 410 (16 ) Vendor marketing funds (479 ) (432 ) (47 ) Meals, entertainment & travel 345
612 (267 )
Management fees 80 150 (70 )
Transaction costs 142 - 142
Insurance 438 90 348
Other 557 309 248
$ 15,523 $ 13,475 $ 2,048
Interest expense
Interest expense increased in the S/P Combined YTD period ended June 30, 2020 ,
compared with the YTD period ended June 30, 2019 , for the same primary reasons
discussed above in the quarter over quarter discussion.
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Liquidity and Capital Resources
Overview
Our primary sources of liquidity are funds generated from operations and funding under our Credit Agreement, which have been sufficient to meet our working capital and substantially all our capital expenditure requirements. The Credit Agreement matures onDecember 31, 2020 , and, as amended, provides for maximum borrowings of$22.9 million , consisting of a$16.5 million revolving note (or LOC) and a$6.4 million term note. Availability on the revolving note is determined weekly, based on a weekly borrowing base computation that is primarily based on certain percentages of accounts receivable and inventory. As ofJune 30, 2020 , amounts outstanding under the term loan and revolving note withComerica Bank was$6.4 million and$8.0 million , respectively. On or before the maturity date of the Credit Agreement, we plan to either request an extension of the Credit Agreement or enter into a new agreement with another lender. However, there can be no assurance that financing will be available in the amounts we require or on terms acceptable to us, if at all. Cash on hand was approximately$6.6 million atJune 30, 2020 . We may also access the debt and equity markets to fund acquisitions and/or pursue large capital expenditure projects or to reduce our cost of capital. Successor cash flows Operating activities Net cash used in operating activities was$10.6 million in the Successor period which was the result of an increase in receivables, due to the acquisition of Computex, and lower current liabilities atJune 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 atApril 6, 2020 were converted to Debentures and$1.5 million was converted to common stock. Investing activities Investing activities provided net cash of$0.1 million in the Successor period and consisted of cash acquired from the Computex acquisition of$0.3 million , partially offset by capital expenditures of$0.2 million .
Financing activities
Financing activities provided$15.2 million in the Successor period and was generated from the issuance of$12.1 million in Debentures,$4.1 million in new debt and$1.5 million from the issuance of common stock, partially offset by net debt repayments of$1.4 million , redemption of shares held in trust of$1.0 million and payment of deferred financing fees of$0.1 million . 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 unearned revenue, partially offset by funds provided by accounts receivable.
Net cash provided by operating activities was
Investing activities
Investing activities used
40
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 .
Financing activities used
Capital expenditures Capital expenditures were$0.2 million during the Successor period endedJune 30, 2020 and primarily were related to the purchase of computer and other equipment. For the remainder of fiscal year 2020, we estimate our capital expenditures to be between$0.5 million and$0.6 million , a significant portion of which we expect to spend on equipment to be used in our after-sales service centers.
Off-Balance Sheet Arrangements
AtJune 30, 2020 , we had no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and had not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
Critical Accounting Policies, Judgements and Estimates
This discussion of critical accounting policies, judgments and estimates should be read in conjunction with our condensed consolidated financial statements and other disclosures included elsewhere in this quarterly report. The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could differ materially from those estimates. We believe the accounting policies that involve the most significant judgments and estimates used in the preparation of the condensed consolidated financial statements include those relating to revenue recognition, accounting for income taxes, accounting for business combinations, the recognition and impairment evaluation relating to tangible and intangible assets, including goodwill, and accounting for share-based compensation. We discuss some of these policies below. The ones not discussed below are discussed in Note 3 of the condensed consolidated financial statements. Additional discussions regarding the ones discussed below are also included in Note 3.
Revenue recognition
Revenue from contracts with customers are not recorded until the Company has the
approval and commitment from both parties, the rights of the parties are
identified, payment terms are established, the contract has commercial substance
and collectability of the consideration is probable. The Company also evaluates
the following indicators, amongst others, when determining whether it is acting
as a 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 goods 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).
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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 reaches the customer's location.
Hardware
Revenue from the sale of hardware is recognized on a gross basis, as the Company is deemed to be acting as the principal in these transactions. The selling price to the customer is recorded as revenue and the acquisition cost is recorded within cost of revenue. The Company recognizes revenue from these transactions when control has passed to the customer, which is usually upon delivery. In some instances, the customer agrees to buy the product from the Company, but requests delivery at a later date, commonly known as bill-and-hold arrangements. For these transactions, the Company deems that control passes to the customer when the product is ready for delivery. The Company classifies such products as products ready for delivery when the customer has a signed agreement, the significant risk and rewards for the product has passed to the customer, the customer has the ability to direct the assets, the products have been set aside specifically for the customer and the Company cannot redirect the product for the benefit of another customer. In drop-shipment arrangements, whereby the Company arranges for the vendor to deliver products directly to its customers without the inventory first being physically held at its warehouses, the Company considers itself to be the principal in the transaction and therefore, recognizes the related revenue
on a gross basis. Software Revenues from most software license sales are recognized as a single performance obligation on a net basis, as the Company is deemed to be acting as an agent in these transactions. Revenues in these instances are recognized at the point the software license is delivered to the customer. Generally, software licenses are sold with accompanying third-party delivered software support, which is a product that allows customers to upgrade, at no additional cost, to the latest technology if new capabilities are introduced during the period that the software support is in effect. The Company evaluates whether the software support is a separate performance obligation by assessing whether the third-party delivered software support is critical or essential to the core functionality of the software itself. This involves considering whether the software provides its original intended functionality to the customer without the updates, whether the customer would ascribe a higher value to the upgrades versus the up-front deliverable, whether the customer would expect frequent intelligence updates to the software (such as updates that maintain the original functionality), and whether the customer chooses to not delay or always install upgrades. If the Company determines that the accompanying third-party delivered software support is critical or essential to the core functionality of the software license, the software license and the accompanying third-party delivered software support are recognized as a single performance obligation. The value of the product is primarily based on the accompanying support delivered by a third-party, and therefore the Company is acting as an agent in these transactions and therefore, recognizes the associated revenue on a net basis at the point that the associated software license is delivered to the
customer. Third-party services The Company is deemed to be the agent in the sale of third-party maintenance, software support and services, as the third-party controls the service until it is transferred to the customer. In these instances, the Company recognizes the revenue on a net basis equal to the selling price to the customer less the acquisition costs. Such revenue is recognized when the customer and vendor accept the terms and conditions of the arrangement.
Managed and professional services
Professional services offerings include assessments, project management,
staging, configuration, and integration. Managed services offerings range from
monitoring and notification to a fully outsourced network management solution.
In these arrangements, the Company satisfies the performance obligations and
recognizes revenue over time.
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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
complete 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 recognize revenues from these
services on a straight-line basis over the period services are provided, which
is consistent with the timing of services rendered.
Freight and sales tax
Freight billed to customers is included within revenue on the condensed consolidated statement of operations. The related freight charged to the Company is included within cost of revenue. Sales tax collected from customers is remitted to governmental authorities on a net basis.
Contract liabilities
Contract liabilities (or deferred or unearned revenue) are recognized when cash payments are received or due in advance of the Company's performance obligations.
Costs of obtaining and fulfilling a contract
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.
Accounting for income taxes
Under ASC 740, income tax expense is recorded for the amount of income tax
payable or refundable for the current period and for the change in net deferred
tax assets or liabilities resulting from events that are recorded for financial
reporting purposes in a different reporting period than recorded in the tax
return. We make significant assumptions, judgments, and estimates in the
determination of our provision for income taxes and also our deferred tax assets
and liabilities and any valuation allowances.
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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 50 percent likely to be realized. Changes in tax law 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 andresults of operations. Purchase price allocation
The Company accounts for business combinations in accordance with ASC 805. Accordingly, tangible and intangible assets acquired and liabilities assumed are recorded at their estimated fair values, the excess of the purchase consideration over the fair values of net assets acquired is recorded as goodwill, and transaction costs are expensed as incurred. Determining fair values of certain assets acquired and liabilities assumed requires the exercise of judgment and often involves the use of significant estimates and assumptions. Also, assigning useful lives to intangible assets, which determine the related amortization expense, involves subjectivity.
Share-based compensation
The Company accounts for share-based compensation in accordance with ASC 718, which requires the measurement and recognition of compensation expense, based on estimated fair values, for share-based awards made to employees and directors. Based on the grant date fair value of the award, the Company recognizes compensation expense over the requisite service period or performance period on a straight-line basis, and accounts for forfeitures as they occur. Significant judgement is required in the estimation of fair values of stock awards. For the restricted stock awards with a time-based vesting condition, the fair value was 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 was 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 condensed consolidated financial statements.
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