AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC. References in this report to "we," "us," "our," or the "Company" refer toAmerican Virtual Cloud Technologies, Inc. (or "AVCT") and its wholly owned subsidiaries. References to our "management" or our "management team" refer to our officers and directors. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements (including the notes thereto) contained elsewhere in this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risk and uncertainties.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as "expect," "believe," "anticipate," "intend," "estimate," "seek" and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performances, but reflect management's current beliefs, based on information currently available. A number of factors could cause actual events, performances or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to Part II, Item 1A of this Quarterly report and the Risk Factors section of our Annual Report on Form 10-K, as amended, filed onMay 14, 2021 with theU.S. Securities and Exchange Commission (the "SEC"). The Company's securities filings can be accessed on the EDGAR section of theSEC's website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Overview
We are a
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. The purchase price consisted primarily of the issuance of 20,000 Units (consisting of (i)$1,000 in principal amount of the Company's Debentures and (ii) a warrant to purchase 100 shares of Common Stock at an exercise price of$0.01 per whole share, assumed debt of$16.6 million and 8.2 million shares of common stock. 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 . The purchase price consisted of 43,778 Units substantially similar to the Units issued in the Computex Business Combination. In connection with the purchase of Kandy, the Company also sold 10,000 Units toSPAC Opportunity Partners, LLC and 1,000 Units to a director. Also, the Company sold 24,000 Units betweenJanuary 1, 2021 andJune 30, 2021 (including 9,540 Units sold to related parties).
The condensed consolidated financial statements of the Company include the
accounts of AVCT and its wholly owned subsidiaries. The financial position,
results of operations and cash flows described herein for the dates and periods
prior to
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We are a leading multi-brand technology solutions provider to large global
customers, providing a comprehensive and integrated set of technology solutions
to our customers, through our extensive hardware, software, value-added service
offerings and cloud subscription services. The breadth of our offerings enables
us to offer our customers a complete technology solution.
Covid-19
The novel strain of coronavirus ("COVID-19") continues to significantly impact
local, regional, and global economies, businesses, supply chains, production and
sales across a range of industries. The extent of its impact on our operational
and financial performance is uncertain and difficult to predict and we remain
cautious about the global recovery.
To protect the health and safety of our employees, our daily execution has
evolved into a largely virtual model. However, we have found ways to continue to
engage with and assist our customers and partners as they work to navigate the
current environment. We will continue to monitor the current environment and may
take further actions that may be required by federal, state or local authorities
or that we determine to be in the interests of our employees, customers, and
partners.
Our business
Our hardware offerings are sourced from a network of leading manufacturers, and include, data storage, desktops, servers, and other hardware.
Third party software and maintenance 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.
Our professional and managed services include managed IT services,
virtualization, storage, networking and data center services. As part of these
services, we offer customized solutions for business continuity, back-up and
recovery, capacity on-demand, regulatory compliance and data center best
practice methodologies as well as infrastructure as a service ("IaaS") and
software as a service ("SaaS"). Our customers utilize our solutions to optimize
their current and planned investments in IT infrastructure and data centers. We
believe the breadth of our service offering and our consultative approach to
working with our clients distinguishes us from other providers.
Cloud subscription and software productsinclude subscriptions to the Company's cloud-based technology platform.
We believe our business is well-diversified across verticals (sectors),
technology solutions offerings and procurement partners from whom we procure
products and software for resale. Our sales teams consist of seasoned account
executives and regionally focused sales support teams who work within assigned
territories to provide customized solutions to our customers. Our sales teams
are supported by industry leading technologists who design end to end solutions
and who take projects from design, to implementation, to management. We boast an
extensive network of OEMs and distributors which allow us to direct-sell a
diverse selection of products and software to our growing customer base, as
packaged software or as licensed products and services.
We have developed an infrastructure that enables us to deliver our IT solutions
and service agnostic as to technology platform and location through a flexible,
customer-focused delivery model which spans three datacenter environments
(customer-owned, co-location, and the cloud). By optimizing our customers' use
of secure, energy efficient and reliable data centers combined with a
comprehensive suite of related IT infrastructure services, we are able to offer
our customers highly customized solutions to address their needs for data center
availability, data management, data security, business continuity disaster
recovery and data center consolidation, as well as a variety of other related
managed services.
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Key trends affecting our results of operations
The following are key trends that we believe can impact our results of operations:
? The increasing need, by organizations, for third-party service providers to
manage significant aspects of the IT environment
? The increasing need, by organizations, to reduce the number of solutions
providers that they do business with to improve supply chain and internal
efficiencies, enhance accountability, improve supplier management practices,
and reduce costs
? 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 increasing sophistication and incidences of IT security breaches and
cyber-attacks
? The IT decision-making shift by some companies, whereby IT decision-making is
shifting from IT departments to line-of-business personnel, which is changing
the customer engagement model and types of consultative services required to
fulfill the needs of customers
? 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.
Growth Strategy The acquisition of Kandy serves to complement the services provided byComputex by giving us the opportunity to provide a full suite of UCaaS, CPaaS, and CCaaS products to serve the rapidly growing cloud communications market. Customers today demand a highly reliable, secure, and scalable communications platform along with a world class customer experience. We offer end-to-end services spanning connectivity, managed IT solutions, managed services, and cloud communications, delivered by certified experts that provide exceptional white glove customer experiences to businesses, service providers, independent software vendors, and systems integrators. Our capabilities around adjacent technologies such as SD WAN (software-defined networking in a wide area network), SASE (secure access service edge) and cybersecurity, combined with our own software platform position us as a premier white label provider of choice for UCaaS, CPaaS and CCaaS solutions. The acquisition of Kandy also enables us to provide carrier grade global cloud communications that address the needs of medium and large enterprises. As the velocity of public, hybrid, and private cloud communications continues, we believe we are in a position to focus on execution while competitors in our space need to concentrate on platform capabilities, global expansion and improved customer experience. Our world class, globally-deployed, carrier grade, white-labeled proprietary communications platform gives us the ability to solve customer communication needs. Our IP platform, growth trajectory, global marquee customer and partner base, should accelerate our go-to-market plans and enable us to expand our award-winning portfolio. We have developed a clear go-to-market strategy that leverages our teams' prior experiences and that utilizes multiple avenues to attack the total addressable market. Our goal is to accelerate current enterprise momentum, cross-sell into theComputex enterprise customer base, ramp up channel partner and strategic alliance sales with additional headcount, ramp up white label partner sales with additional head count, access certain enterprise customer leads and continue to grow our IT managed services. By "enterprise," we mean a corporation or customer having over 1,000 employees.
We also plan to continue to invest in research and development, whilst also aiming to grow our international business.
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Our other growth strategies include a focus on the following areas:
? Organic growth, by seeking to become our customers' primary IT Solutions
Provider
? Investment in scalable managed services
? The building of our geographic footprint
? Operational efficiencies, through investment in internal technology
infrastructure and software platforms.
Results of operations To distinguish between the different bases of accounting due to theComputex Business Combination that occurred onApril 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 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. As more fully discussed in Note 3, of the condensed consolidated financial statements, the historical financial information of AVCT (previously aSPAC ) prior to the Computex Business Combination has not been reflected in the Predecessor financial statements as such historical amounts have been determined not to be useful information to a user of the financial statements. Accordingly, all activity reported for periods prior toApril 7, 2020 (the Predecessor period) reflect only the operations ofComputex . As a result, the financial results of the Successor and Predecessor entities, presented herein are expected to be largely consistent, excluding any impact of the Computex Business Combination. For the reasons discussed above, management believes it remains useful to review the operating results for the three and six months endedJune 30, 2021 with the operating results for the three and six months endedJune 30, 2020 . Accordingly, in the discussion below, the financial information for the periodApril 1, 2020 throughApril 6, 2020 is combined with the financial information for the periodApril 7, 2020 throughJune 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 periodJanuary 1, 2020 throughApril 6, 2020 is combined with the financial information for the periodApril 7, 2020 throughJune 30, 2020 and, together, is referred to as the "S/P combined YTD period endedJune 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 endedJune 30, 2020 . 30
2nd Quarter of 2021 versus the S/P Combined 2nd Quarter of 2020)
April 1, 2020
April 7, 2020 through S/P Combined
2nd Quarter of through June 30, April 6, 2nd Quarter
2021 2020 2020 of 2020
Successor Successor Predecessor (Non-GAAP)
(in thousands) (in thousands) (in thousands) (in thousands)
Revenues:
Hardware $ 12,309 $ 10,442 $ 234 $ 10,676
Third party software and maintenance 1,585 1,532 - 1,532
Managed and professional services 9,219 6,984 441 7,425
Cloud subscription and software 4,057
- - -
Other 392 139 - 139
Total revenues 27,562 19,097 675 19,772
Cost of revenue 19,078 12,917 402 13,319
Gross profit 8,484 6,180 273 6,453
Research and development 4,604 - - -Selling, general and administrative 16,274 7,688 760 8,448 Loss from operations (12,394 ) (1,508 ) (487 ) (1,995 ) Other (expense) income Change in fair value of warrant liabilities 3,535
(1,197 ) - (1,197 )
Interest expense (1) (6,985 ) (2,161 ) (143 ) (2,304 )
Other (expense) income (16 ) (13 ) 13 -
Total other expenses (3,466 ) (3,371 ) (130 ) (3,501 )
Loss before income taxes (15,860 ) (4,879 ) (617 ) (5,496 )(Provision) benefit for income taxes (46 )
8 (1 ) 7
Net loss $ (15,906 ) $ (4,871 ) $ (618 ) $ (5,489 )
(1) Interest expense in the 2nd quarter of 2021 and the period
through
respectively
Net loss
Net loss for the 2nd quarter of 2021 was
Hardware revenue Hardware revenue is seasonal and tends to be higher in the fourth quarter of each year. Our hardware revenue was$12.3 million in the 2nd quarter of 2021 compared with$10.7 million in the S/P Combined 2nd quarter of 2020, an increase of$1.6 million , or 15.3%. We attribute this increase to the impact of COVID-19 due to increased demand for equipment in the manufacturing, logistics and public sectors as more customers transitioned to remote work. The margin on hardware revenue was 23.2%, an 80-basis points increase compared with the 22.4% recorded in the S/P Combined 2nd quarter of 2020. We attribute the basis points increase to a more favorable price structure in the 2nd quarter.
Third party software and maintenance revenue
Revenues from third party software and maintenance, which are recorded net of direct expenses, was relatively flat at$1.6 million in the 2nd quarter of 2021 compared to$1.5 million in the S/P Combined 2nd quarter of 2020. Since this revenue is recorded net, the revenue is also the gross margin.
Managed and professional services revenue
Managed and professional services revenues increased 24.2% to$9.2 million in the 2nd quarter of 2021 compared with the$7.4 million that was recorded in the S/P Combined 2nd quarter of 2020. Of the$1.8 million increase,$0.9 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. Though revenues from managed and professional services in theComputex segment increased$0.9 million , the margin decreased from 33.4% in the S/P Combined YTD period endedJune 30, 2020 to 30.9% in the YTD period endedJune 30, 2021 , a 250-basis points decrease. We attribute the basis points decrease to increased investments in direct labor and telecommunications 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.
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Cloud subscription and software revenue
Cloud subscription and software revenue was$4.1 million in the 2nd quarter of 2021 and represents revenue from subscriptions to the Company's cloud-based technology platform as well as revenue from the Company's on-premise software, both of which are offered by the Company's recently-acquired Kandy segment, which the Company acquired inDecember 2020 . Other revenue Other revenue, which consists primarily of freight and reimbursables, including travel, meals and entertainment, was$0.4 million and$0.1 million for the 2nd quarter of 2021 and the S/P Combined 2nd quarter of 2020, respectively. By its nature, this type of revenue fluctuates depending on the revenue of the other product lines.
Total revenue, cost of revenue and gross margin
Aggregate revenue for the five product lines together was$27.6 million in the 2nd quarter of 2021, an increase of$7.8 million , or 39.5%, from the$19.8 million recorded in the S/P Combined 2nd quarter of 2020. Of the$7.8 million revenue increase,$5.0 million was related to the Kandy acquisition. Aggregate gross profit was also up, reflecting an increase of$2.0 million , or 31.1% in the 2nd quarter of 2021 compared with the S/P Combined 2nd quarter of 2020, due in part to the Kandy acquisition, which contributed$1.4 million to the increase. Aggregate gross profit was also positively impacted by the margin on hardware revenue, which contributed$0.5 million of the gross profit increase. Though aggregate gross margin dollars increased, aggregate gross margin decreased 180 basis points from 32.6% in the S/P Combined 2nd quarter of 2020 to 30.8% in the 2nd quarter of 2021. Gross margin for ourComputex segment in the 2nd quarter of 2021 was 31.2%, a 130-basis point decrease from the 32.5% recorded in the S/P Combined 2nd quarter of 2020, primarily due to increased investments in direct labor and telecommunications in the managed and professional services line of business. Gross margin at our Kandy segment was 28.3% in the 2nd quarter of 2021. Research and development The Company began recognizing research and development expenses when it acquired Kandy inDecember 2020 . In the 2nd quarter of 2021, research and development expenses were$4.6 million and represent research and development costs related to certain proprietary software incurred in an agile software environment with releases broken down into several iterations called sprints involving short cycles of development (typically 4-6 weeks in duration) in which the research and development teams create potentially shippable products. Currently, such costs are expensed as incurred, and include personnel-related costs, depreciation related to engineering and test equipment, allocated costs of facilities and information technology, outside services and consultants, supplies, software tools and product certification. 32
Selling, general and administrative expenses
Selling, general and administrative expenses for the 2nd quarter of 2021 and the
S/P Combined 2nd quarter of 2020 consisted of the components in the following
table (in thousands):
S/P Combined
2nd Quarter 2nd Quarter of Change Increase
of 2021 2020 (decrease)
Successor (Non-GAAP)
Salaries, benefits, subcontracting & personnel
administration costs $ 11,076 $ 6,193 $ 4,883
Building occupancy costs, utilities, office
supplies & repairs and maintenance 644 453 191
Depreciation and amortization 812 815 (3 )
Dues, subscriptions and memberships 431
186 245
Sales and marketing 714 73 641
Vendor marketing funds (88 ) (199 ) 111
Meals, entertainment & travel 36 9 27
Management fees - 5 (5 )
Professional fees 1,571 142 1,429
Insurance 483 396 87
Other 595 375 220
$ 16,274 $ 8,448 $ 7,826
Selling, general and administrative expenses increased$7.8 million , partly as a result of added expenses related to the Kandy acquisition ($3.8 million of the increase) as well as an increase in personnel-related costs and professional fees. Personnel-related expenses increased, in part, as a result of increased corporate headcount. Increased professional fees are related to the Company's expanded public company activities. EffectiveJuly 2021 , the Company effected a reduction in its corporate workforce which, except for termination costs, could result in reduced personnel expenses in subsequent quarters.
Change in fair value of warrant liabilities
The change in the fair value of warrant liabilities of
Interest expense
Interest expense in the 2nd quarter of 2021 increased compared with the S/P
Combined 2nd quarter of 2020, due in part to an increase in interest on
Debentures due to new issuances as well to as the compounding effect of
paid-in-kind interest. The Debentures bear interest at the rate of 10.00% per
annum compounded quarterly. Interest expense, which was also impacted by
increases in Debenture discount amortization charges consisted of the following
(in thousands):
S/P Combined
2nd Quarter 2nd Quarter of
of 2021 2020
Successor (Non-GAAP)Amortization of debenture discount$ 3,507 $ 927 Debenture interest paid-in-kind 3,082 1,015 Interest on term note and line of credit 242
340
Other 154 22
$ 6,985 $ 2,304
33
YTD period ended June 30, 2021 versus the S/P Combined YTD period ended June 30,
2020 )
April 7, 2020 January 1, 2020
YTD period Ended through through S/P Combined YTD
June 30, June 30, April 6, period ended
2021 2020 2020 June 30, 2020
Successor Successor Predecessor (Non-GAAP)
(in thousands) (in thousands) (in thousands) (in thousands)
Revenues:
Hardware $ 26,219 $ 10,442 $ 10,587 $ 21,029Third party software and maintenance 3,035 1,532 1,459 2,991 Managed and professional services 17,728 6,984 6,880 13,864 Cloud subscription and software 7,187
- - -
Other 560 139 111 250
Total revenues 54,729 19,097 19,037 38,134
Cost of revenue 39,871 12,917 12,426 25,343
Gross profit 14,858 6,180 6,611 12,791
Research and development 9,098 - - -Selling, general and administrative 31,385 7,688 7,835 15,523 Loss from operations (25,625 ) (1,508 ) (1,224 ) (2,732 ) Other (expense) income Change in fair value of warrant liabilities (23 )
(1,197 ) - (1,197 )
Interest expense (1) (12,815 ) (2,161 ) (384 ) (2,545 )
Other (expense) income (19 ) (13 ) 31 18
Total other expenses (12,857 ) (3,371 ) (353 ) (3,724 )
Loss before income taxes (38,482 ) (4,879 ) (1,577 ) (6,456 )(Provision) benefit for income taxes (51 )
8 (12 ) (4 )
Net loss $ (38,533 ) $ (4,871 ) $ (1,589 ) $ (6,460 )
(1) Interest expense in the YTD period ended
7, 2020 through
$1,465 , respectively. Net loss Net loss for the YTD period endedJune 30, 2021 was$38.5 million compared with$6.5 million for the S/P Combined YTD period endedJune 30, 2020 . Discussed below are the revenue and expense factors that primarily contributed to the
net loss change. Hardware revenue Hardware revenue was$26.2 million in the YTD period endedJune 20, 2021 compared with$21.0 million in the S/P Combined YTD period endedJune 30, 2020 , an increase of$5.2 million , or 24.7%. Similar to the quarter over quarter comparison, we attribute this increase to the impact of COVID-19 due to increased demand for equipment in the manufacturing, logistics and public sectors as more customers transitioned to remote work. The gross margin on hardware revenue was 21.8% for the YTD period endedJune 30, 2021 , a 230-basis points decrease from the 24.1% recorded in the S/P Combined YTD period endedJune 30, 2020 . We attribute the basis points decrease to certain unfavorable pricing on a few large deals in the 1st quarter that were viewed as having
longer term benefits.
34
Third party software and maintenance revenue
Revenues from software and maintenance, which are recorded net of direct
expenses, was flat at
Managed and professional services revenue
Managed and professional services revenues increased$3.9 million or 27.9%, from$13.9 million in the S/P Combined YTD period endedJune 30, 2020 to$17.7 million in the YTD period endedJune 30, 2021 . Of the$3.9 million increase,$1.3 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. Though revenues from managed and professional services in theComputex segment increased$2.6 million , the margin decreased from 33.6% to 29.0 %, a decrease of 460 basis points. We attribute the basis points decrease to the same factors discussed in the quarter over quarter comparison.
Cloud subscription and software revenue
Cloud subscription and software revenue, offered by our Kandy segment, was
Other revenue Other revenue, which is discussed above in the quarter over quarter comparison, was$0.6 million and$0.3 million in the YTD period endedJune 30, 2021 and the S/P Combined period endedJune 30 2020 , respectively.
Total revenue, cost of revenue and gross margin
Aggregate revenue for the five product lines together was$54.7 million in the YTD period endedJune 30, 2021 , compared with$38.1 million in the S/P Combined period endedJune 30 2020 , an increase of$16.6 million , or 43.5%. Of the$16.6 million revenue increase,$8.5 million was related to the Kandy acquisition. Aggregate gross profit was also up, reflecting an increase of$2.1 million , or 16.2%, due in part to the Kandy acquisition, which contributed$1.2 million to the increase. Aggregate gross profit was also positively impacted by the margin on hardware revenue, which contributed$0.6 million of the gross profit increase. Though gross margin dollars increased, aggregate gross margin decreased from 33.5% in the S/P Combined YTD period endedJune 30, 2020 to 27.1%, a 640-basis points decrease. Aggregate gross margin for ourComputex segment was 29.4%, for the YTD period endedJune 30, 2021 compared with 33.5% for the S/P Combined period endedJune 30 2020 , a 410-basis point decrease primarily due to increased investments in direct labor and telecommunications in the managed and professional services line of business. Gross margin at our Kandy segment was 14.5% in the YTD period endedJune 30, 2021 . Research and development
Research and development expenses, which are discussed in the quarter over
quarter discussion, was
35
Selling, general and administrative expenses
Selling, general and administrative expenses for the YTD period ended
YTD period S/P Combined Change
Ended YTD period ended Increase
June 30, 2021 June 30, 2020 (decrease)
Successor (Non-GAAP)
Salaries, benefits, subcontracting & personnel
administration costs $ 21,198 $ 11,799 $ 9,399
Building occupancy costs, utilities, office
supplies & repairs and maintenance 1,607 946 661
Depreciation and amortization 1,711 1,302 409
Dues, subscriptions and memberships 765 394 371
Sales and marketing 1,377 264 1,113
Vendor marketing funds, net of vendor fees (216 ) (480 ) 264
Meals, entertainment & travel 60
146 (86 )
Management fees - 80 (80 )
Professional fees 2,958 223 2,735
Insurance 948 438 510
Other 977 411 566
$ 31,385 $ 15,523 $ 15,862
Selling, general and administrative expenses increased $15.9 million , partly as
a result of added expenses related to the Kandy acquisition ($6.7 million of the
increase) as well as an increase in personnel-related costs and professional
fees. Personnel-related expenses increased, in part, as a result of increased
corporate headcount. Increased professional fees are related to the Company's
expanded public company activities. Refer also to the discussion in the quarter
over quarter comparison regarding a corporate workforce reduction subsequent to
the 2nd quarter.
Change in fair value of warrant liabilities
The nature of the change in the fair value of warrant liabilities is discussed in the quarter over quarter comparison. For the YTD period endedJune 30, 2021 , such change was nominal while the change in fair value in the S/P Combined YTD period endedJune 30, 2020 was$1.2 million . 36 Interest expense The primary reasons for the increase in interest expense are discussed in the quarter over quarter comparison. For the YTD period endedJune 30, 2021 and the S/P Combined period endedJune 30, 2020 , interest expense consisted of the
following (in thousands):
YTD period S/P Combined
Ended YTD period ended
June 30, 2021 June 30, 2020
Successor (Non-GAAP)Amortization of debenture discount $ 6,461 $
927
Debenture interest paid-in-kind 5,739
1,015
Interest on term note and line of credit 399
550
Other 216 53
$ 12,815 $ 2,545
Benefit/provision for income taxes
For all periods presented, the benefit/provision for income taxes consists of provisions for state taxes. The effective tax rates differ from the federal statutory rate as a result of certain expenses being deductible for financial reporting purposes that are not deductible for tax purposes, the existence of research and development tax credits, operating loss carryforwards, and adjustments to previously recorded deferred tax assets and liabilities related to the enactment of the Tax Cuts and Jobs Act in 2017. For the Successor periods, the benefit/provision for income taxes also reflects the impact of amortization of intangible assets recognized as of the Computex Closing Date and the Kandy Closing Date.
Liquidity and Capital Resources
Overview
Historically, the Company's primary sources of liquidity have been cash and cash equivalents, cash flows from operations (when available) and cash flows from financing activities, including funding under its Credit Agreement (defined and more fully discussed in Note 8 of the condensed consolidated financial statements). From time to time, the Company may also choose to access the debt and equity markets to fund acquisitions, fund working capital and to diversify its capital sources. The Company's current principal capital requirements are to fund working capital, fund capital expenditures and make investments that are in line with its business strategy. The Credit Agreement, as amended, matures onDecember 31, 2021 , and, as ofJune 30, 2021 , provides for maximum borrowings of$13,000 on the line of credit portion with scheduled reductions of$1,000 in availability onOctober 1, 2021 ,November 1, 2021 , andDecember 1, 2021 . As amended, the Credit Agreement provides for a minimum monthly liquidity (defined as unrestricted cash plus availability under the line of credit) of$3,000 . As amended, the Credit Agreement limits unfinanced capital expenditures to$3,000 . As ofJune 30, 2021 , amounts outstanding under the term loan and the line of credit withComerica Bank were$4.5 million and$8.6 million ,respectively.
On
On or before the maturity date of the Credit Agreement, the Company may seek to either negotiate an extension of the Credit Agreement or enter into a new agreement with another lender. In addition to 43,778 Units issued to Ribbon as consideration for Kandy, inDecember 2020 , the Company raised additional capital of$11.0 million via the sale of Units consisting of Debentures and warrants, and betweenJanuary 1, 2021 andJune 30, 2021 , it raised an additional$24.0 million through the sale of additional Units, which it plans to use to fund expansion, capital expenditures and working capital for its current operations. See Note 9 of the condensed consolidated financial statements for additional information on the Units.
Whereas the Company continues to analyze its liquidity to ensure that it is able
to execute on its operational plan, it believes that cash anticipated to be
generated from future operations, as well as borrowings from lending and project
financing sources and proceeds from equity and debt offerings will provide
sufficient liquidity to fund operations for at least one year after the date the
financial statements are issued. However, if the Company is unable to achieve
its forecasts, fails to meet any of the financial covenants in the Credit
Agreement and is unable to obtain a waiver or an amendment under the Credit
Agreement to allow it to continue to borrow, or raise additional equity or debt
capital, the Company may need to pursue one or more alternatives, such as to
reduce or delay investments in its business, or seek additional financing. The
Company can provide no assurance that future funding will be available if and
when required or that such funding will be available on terms that it finds
acceptable. Any projection is based on the Company's current expectations
regarding new project financing and product sales and service, cost structure,
cash burn rate and other operating assumptions.
37
In July 2021 , the Company's application for forgiveness of a PPP loan of $4.1
million was approved. Under the terms of the CARES Act, PPP loan recipients had
the option to apply for forgiveness for all or a portion of such loans, if the
loan was used for eligible purposes, including to fund payroll costs.
Also, in
? a base prospectus for the sale and issuance by us of up to
common stock, preferred stock, warrants, subscriptions rights, debt securities
and/or units; and
? a resale prospectus covering the resale by certain selling stockholders of up
to 67,797,774 shares of common stock. Successor cash flows Operating activities
Net cash used in operating activities was
Net cash used in operating activities was$10.6 million in the periodApril 7, 2020 throughJune 30, 2020 , which was the result of an increase in receivables, due to the acquisition ofComputex , 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 as ofApril 6, 2020 were converted to Debentures, and$1.5 million was converted to common stock. Investing activities
Investing activities used net cash of
Investing activities provided net cash of$0.1 million in the periodApril 7, 2020 throughJune 30, 2020 and consisted of cash acquired from theComputex acquisition of$0.3 million , partially offset by capital expenditures of$0.2 million . Financing activities Financing activities provided net cash of$22.1 million during the six months endedJune 30, 2021 and was generated from the issuance of Debentures of$24.0 million and drawdowns of$1.3 million under the line of credit, partially offset by debt repayments of$1.4 million , payments of deferred financing fees of$0.6 million and payments for shares withheld of$1.1 million related to employee tax withholding associated with the delivery of vested RSUs under the Company's equity incentive plan.
Financing activities provided
Predecessor cash flows Operating activities Net cash used in operating activities was$1.6 million for the periodJanuary 1, 2020 throughApril 6, 2020 and primarily consisted of funding for inventory and the impact of changes in deferred revenue, partially offset by funds provided by accounts receivable. Investing activities
Investing activities used
Financing activities Financing activities provided$2.0 million of cash for the periodJanuary 1, 2020 throughApril 6, 2020 , consisting primarily of net funds from the line of credit of$3.0 million , partially offset by debt repayments of$1.0 million . 38
Off-Balance Sheet Arrangements
OnJune 30, 2021 , we had no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and had not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
Critical Accounting Policies, Judgements and Estimates
Except for the adoption of ASU No. 2020-06, which is discussed in Note 4 of the condensed consolidated financial statements, there were no significant changes to our critical accounting policies and estimates from those disclosed in the section "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the year endedDecember 31, 2020 , as amended.
Recent Accounting Pronouncements Issued and Adopted
See Note 4 of the condensed consolidated financial statements.
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