The accompanying notes are
an integral part of the condensed consolidated financial statements.
The accompanying notes are
an integral part of the condensed consolidated financial statements.
The accompanying notes are
an integral part of the condensed consolidated financial statements.
The accompanying notes are
an integral part of the condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data,
or as otherwise noted)
March 31, 2023
(Unaudited)
1. Organization, Business Operations and Certain Recent Developments
Overview
American Virtual Cloud Technologies, Inc. (“AVCT,”
the “Company,” “we,” “us,” or “our”) was incorporated in Delaware on April 7, 2016.
On April 7, 2020 (the “Computex Closing
Date”), AVCT (formerly known as Pensare Acquisition Corp.) consummated a business combination transaction (the “Computex
Business Combination”) in which it acquired Stratos Management Systems, Inc. (“Computex”), an operating company that
does business as Computex Technology Solutions. In connection with the closing of the Computex Business Combination, the Company changed
its name to American Virtual Cloud Technologies, Inc.
On December 1, 2020 (the “Kandy
Closing Date”), the Company acquired the Kandy Communications business (hereafter referred to as “Kandy”) from Ribbon
Communications, Inc. and certain of its affiliates (“Ribbon”), by acquiring certain assets, assuming certain liabilities
of Kandy from Ribbon and acquiring all of the outstanding interests of Kandy Communications LLC.
For accounting purposes, both Computex
and Kandy were considered the acquirees, and the Company was considered the acquirer. The acquisitions were accounted for using the acquisition
method of accounting.
Recent Events
On January 27, 2022, the Company announced that
it had executed a definitive agreement to sell Computex and on March 15, 2022, the Computex sale was consummated, thereby completing
the Company’s then transition to a cloud communications company, centered on the Kandy platform. As a result, the revenue and expenses,
for the three months ended March 31, 2022, are reflected as discontinued operations in the accompanying condensed consolidated financial
statements.
Unless otherwise noted, discussion in these Notes
to Consolidated Financial Statements refers to Kandy and the Company’s corporate activities. Refer to Note 5, Asset sales and
other sale activities, for additional information.
On August 25, 2022, the Company announced
that it had retained Northland Capital Markets to advise the Company in connection with a comprehensive strategic review process that
had the potential to lead to the sale of the Company or of selected assets.
On January 11, 2023 (the “Petition
Date”), American Virtual Cloud Technologies, Inc. and two of its subsidiaries, AVCtechnologies USA, Inc. and Kandy Communications,
LLC (together the “Debtors”) filed voluntary petitions (the “Cases”) under Chapter 11 (“Chapter 11”)
of the US Bankruptcy Code in the US Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The respective
Case numbers for each of the Debtors are 23-10020, 23-10021 and 23-10022. However, the Cases are being jointly administered under Case
number 23-10020. The Debtors are continuing to operate their businesses as “debtors-in-possession” under the jurisdiction
of the Bankruptcy Court and in accordance with the applicable provisions of the US Bankruptcy Code and orders of the Bankruptcy Court.
To ensure their ability to continue operating in the ordinary course of business, the Debtors filed various “first day” motions
with the Bankruptcy Court requesting customary relief, including the authority to pay employee wages and benefits, that have enabled
the Debtors to continue to operate their business during the pendency of the Chapter 11 proceedings without material disruption to their
ordinary operations.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
(Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
March 31, 2023
(Unaudited)
On February 14, 2023, the Company and certain
of its subsidiaries (collectively, the “Sellers”) entered into a “stalking horse” Asset Purchase
Agreement (the “Stalking Horse APA”) with Skyvera, LLC (the “Purchaser”), and in connection with the Cases, and
pursuant to bid procedures approved by the Court, on March 7, 2023, the Debtors held an auction (the “Auction”) under Section
363 of the US Bankruptcy Code relating to the disposition of substantially all of the Debtors’ assets. The winning bid at the Auction
was submitted by the Purchaser, which agreed to pay cash consideration in the amount of $6,780 plus $500 towards contract cure costs.
On March 10, 2023, the Sellers and the Purchaser
executed an amended and restated Asset Purchase Agreement (the “Purchase Agreement”), which is substantially the same as
the Stalking Horse APA, except that it reflects the cash purchase price of $6,780 resulting from the Auction. Pursuant to the Purchase
Agreement, the Purchaser agreed to purchase substantially all of the assets of the Sellers (such assets, the “Purchased Assets,”
and such transaction, the “Asset Sale”). The Purchased Assets include, among other things, all rights of the Sellers under
the Assumed Contracts and Assumed Leases that are defined in the Purchase Agreement, tangible personal property, intellectual property
rights, books and records and any goodwill, but excludes certain assets, including all cash. On March 15, 2023, the Court entered an
order authorizing the Asset Sale pursuant to the terms of the Purchase Agreement. On March 24, 2023, the Asset Sale closed, thereby completing
the disposition of substantially all of the Company’s assets. The purchase price paid for the Purchased Assets (the “Purchase
Price”) consisted of (i) cash in the amount of $6,780, subject to certain adjustments (including a reduction by the amount, if
any, by which the deferred revenues of the Sellers as of the date of the closing of the Purchase Agreement exceeds the deferred revenues
of the Sellers as of the date of the Purchase Agreement), and (ii) the Purchaser’s assumption of certain liabilities of the Sellers.
On March 21, 2023, the Debtors filed a proposed
Combined Disclosure Statement and Chapter 11 Plan of Liquidation (as amended for solicitation purposes and filed on April 6, 2023, the
“Plan”) describing its anticipated plan to liquidate its operations and to solicit votes to approve the same from certain
of the Debtors’ creditors with respect to the Cases. On April 6, 2023, the US Bankruptcy Court entered an order (a) conditionally
approving the Plan for solicitation purposes only, (b) establishing procedures for solicitation and tabulation of votes to accept
or reject the Plan, (c) approving the form of ballot and solicitation materials, (d) establishing a voting record date, (e) fixing
the date, time and place for the hearing to approve the Plan and deadline for filing objections thereto, and (f) approving the related
notice provisions.
The Plan provides that the holders of equity
interests in the Company will receive no recovery, that the Company’s outstanding securities shall be cancelled upon confirmation
of the Plan, and that the Debtors will be dissolved under applicable law as soon as practicable following the closing of the Cases.
The Company plans to pursue steps to facilitate an orderly winding
up of its remaining operations and believes it has sufficient liquidity to achieve such. However, no assurance can be provided that such
projections will be realized.
Reverse Stock Split and Stock Exchange
On September 30, 2022, the Company filed a Certificate
of Amendment of the Company’s Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware
(the “Certificate of Amendment”), which effected, upon filing on September 30, 2022 (the “Effective Stock Split Date”),
a one-for-fifteen reverse stock split (the “Reverse Stock Split”) of the Company’s issued
and outstanding shares of common stock. In connection with the Reverse Stock Split, the CUSIP number (Committee on Uniform
Securities Identification Procedures number) for the Company’s common stock changed.
As a result of the Reverse Stock Split,
each share of the Company’s common stock issued and outstanding immediately prior to the Effective Stock Split Date was automatically
reclassified as and converted into one-fifteenth (1/15) of a share of the Company’s common stock. The Reverse Stock Split affected
all stockholders uniformly and did not alter any stockholder’s percentage interest in the Company’s equity, except to the
extent that the Reverse Stock Split resulted in some stockholders owning a fractional share. No fractional shares
were issued in connection with the Reverse Stock Split. Instead, stockholders who would otherwise have been entitled to
fractional shares of the Company’s common stock became entitled to receive cash payments in lieu of such fractional shares.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
(Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
March 31, 2023
(Unaudited)
The Reverse Stock Split did
not change the par value of the Company’s common stock nor the authorized number of shares. All outstanding warrants and preferred
stock entitling their holders to purchase, obtain or convert into shares of the Company’s common stock were adjusted, as required
by the terms of such securities. The Company’s common stock began trading on a Reverse Stock Split-adjusted basis
when the market opened on October 3, 2022.
The Reverse Stock Split has been retroactively
reflected throughout this report, including in the computation of basic and diluted earnings/loss per common share, which has been adjusted
retroactively for all periods presented.
On January 25, 2023, the Company’s securities
ceased trading on The Nasdaq Stock Market (“Nasdaq”) as the Company did not meet the requirements for continued trading thereon.
Currently, the Company’s securities trade on the Pink sheets, an over-the-counter (OTC) market.
Nature of business
As a result of the Asset Sale on March 24, 2023,
the Company no longer has any operations, other than those relating to the wind-down of its business and completion of the Chapter 11
process.
Prior to the sale on March 24, 2023, the Company
provided cloud-based enterprise services, through Kandy. The Kandy platform, now sold, deploys a carrier grade proprietary cloud communication
platform that supports unified communications as a service (“UCaaS”), communications platform as a service (“CPaaS”)
and contact center as a service (“CCaaS”) for mid-market and enterprise customers across a proprietary multi-tenant, highly
scalable cloud platform. The Kandy platform 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.
Covid-19
The novel strain of coronavirus (“COVID-19”)
continues to impact local, regional, and global economies, businesses, supply chains, production and sales across a range of industries.
To protect the health and safety of its employees, the Company’s daily execution evolved into a largely virtual model.
2. Going Concern and Liquidity
Based on the Company’s forecasts regarding
product sales and service, cost structure, cash burn rate and other operating assumptions, during 2022, the Company announced that it
would need additional capital to fund its operations, including its research & development activities and its capital investment
requirements. This and other factors lead the Company to also announce that there was substantial doubt about its ability to continue
as a going concern. In addition, the Company announced that it was pursuing strategic initiatives that had the potential to lead to a
sale of all or a portion of the assets of the Company. Further, during 2022, the Company was forced to scale back operations, and on
January 11, 2023, filed for protection under Chapter 11 of the US Bankruptcy Code, followed by a sale, on March 24, 2023, of substantially
all of its assets.
The accompanying condensed consolidated financial
statements have been prepared on a going concern basis of accounting, which generally contemplates continuity of operations, realization
of assets, and satisfaction of liabilities and commitments in the normal course of business. As discussed previously, the US Bankruptcy
Court entered an order conditionally approving the Plan for solicitation purposes only, which, if approved, will effectively result in
the distribution of substantially all remaining assets of the Company through an orderly wind-down process.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
(Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
March 31, 2023
(Unaudited)
The accompanying unaudited condensed consolidated
financial statements do not include any adjustments related to the recoverability of recorded asset amounts or the amounts of liabilities
that might result from the outcome of the Chapter 11 proceedings and any related uncertainties.
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 credit agreements and the sale of equity securities. As of March 31, 2023, the Company had an aggregate cash balance
of $13,260 in its operating bank accounts. As of May 9, 2023, aggregate cash in the Company’s operating bank accounts was $8,654.
As noted above, the Company believes it has sufficient liquidity to facilitate an orderly wind-down of its remaining operations. However,
no assurance can be provided that such projections will be realized.
3. Summary of Significant Accounting Policies
Basis of presentation
The accompanying unaudited condensed consolidated
financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X of the
Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures normally included in financial statements
prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial
reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial
position, results of operations, or cash flows. In the opinion of management, the accompanying condensed consolidated financial statements
include all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the financial position,
operating results and cash flows for the periods presented.
The accompanying condensed consolidated financial
statements include the accounts of AVCT and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K
for the year ended December 31, 2022, filed with the SEC on April 7, 2023. The Company has reclassified certain prior period amounts,
including reportable segment information and shares of common stock, to conform to the current period presentation.
Chapter 11 Accounting
In accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 852 – Reorganizations (“ASC
852”), we have segregated liabilities and obligations whose treatment and satisfaction are dependent on the outcome of the Chapter
11 Cases and have classified these items as liabilities subject to compromise in the accompanying condensed consolidated financial statements.
In addition, we have classified all expenses that were incurred as a direct result of the Chapter 11 proceedings, since filing for Chapter
11, as Reorganization items.
Certain subsidiary entities are not debtors under
the Chapter 11 Cases. However, condensed combined financial statements of the Debtors are not presented in the notes to the condensed
consolidated financial statements as the assets and liabilities, operating results and cash flows of the non-debtor entities included
in the accompanying condensed consolidated financial statements are not significant and, therefore, the accompanying condensed consolidated
financial statements presented herein materially represent the condensed combined financial statements of the debtor entities for all
periods presented. As of March 31, 2023, total assets and total liabilities of the non-debtor entities represent 2.1% and 2.4% of total
consolidated assets and liabilities, respectively. Total revenues were nil, and expenses were nominal. As of March 31, 2023, the non-debtor
entities have intercompany payables to the debtor entities of $17.4 million.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
(Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
March 31, 2023
(Unaudited)
Use of estimates
The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales (or revenues) and expenses
during the reporting period.
Making estimates requires management to exercise
significant judgment. It is at least reasonably possible that estimates made as of the date of the financial statements could change
in the near term due to one or more future events. Accordingly, the actual results could differ significantly from those estimates. Significant
accounting estimates reflected in the Company’s condensed consolidated financial statements include, but are not limited to, revenue
recognition, allowance for doubtful accounts, accounting for warrants, recognition and measurement of income tax assets, valuation of
share-based compensation, discount related to the fair value of warrants, and the valuation of net assets acquired.
Significant accounting policies
The significant accounting policies used in preparing
these condensed consolidated financial statements were applied on a basis consistent with those reflected in our consolidated financial
statements that are included in the annual report on Form 10-K for the year ended December 31, 2022 that was filed with the SEC on April
7, 2023.
Concentration of business and credit risk
Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist primarily of cash and trade receivables. Cash held by the Company, in financial
institutions, regularly exceeds the federally insured limit of $250. At March 31, 2023, cash balances held with a financial institution
exceeded the federally insured limit by $12,576. However, management does not believe this poses a significant credit risk. During the
three months ended March 31, 2022, no vendor accounted for more than 10% of cost of revenue. Additional concentration of business risks
are summarized in the following table:
| | |
March 31, 2023 | | |
December 31, 2022 | |
| | |
Number of
customers or
vendors | | |
Aggregate
total | | |
Number of
customers or
vendors | | |
Aggregate
total | |
| Customers that individually accounted for 10% or more of trade accounts receivable | |
| 3 | | |
$ | 4,395 | | |
| 3 | | |
$ | 6,217 | |
| Vendors that individually accounted for 10% or more of trade accounts payable | |
| 4 | | |
$ | 3,697 | | |
| 2 | | |
$ | 3,139 | |
| | |
Three Months Ended | |
| | |
March 31,
2023 | | |
March 31,
2022 | |
| | |
| | |
| |
| Number of customers that individually accounted for 10% or more of sales from continuing operations | |
| 4 | | |
| 4 | |
| Aggregate total sales of customers that individually accounted for 10% or more of sales from continuing operations | |
$ | 3,118 | | |
$ | 2,815 | |
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
(Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
March 31, 2023
(Unaudited)
Trade receivables, net
Trade receivables on the accompanying condensed
consolidated balance sheets are net of allowances of $362 and $471, as of March 31, 2023 and December 31, 2022, respectively.
Fair value of financial instruments
Fair value is defined as the price that would
be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the
Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants
would use when pricing the asset or liability.
ASC Topic 820, Fair Value Measurements and
Disclosures provides a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest
level of input that is significant to the fair value measurement as follows:
| |
● |
Level 1 — inputs are based upon unadjusted quoted prices for
identical assets or liabilities traded in active markets. |
| |
|
|
| |
● |
Level 2 — inputs are based upon quoted prices for similar assets
and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active and
model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable
market data for substantially the full term of the assets or liabilities. |
| |
|
|
| |
● |
Level 3 — inputs are generally unobservable and typically reflect
management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values
are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar
techniques. |
Assets measured at fair value on a non-recurring
basis include goodwill, tangible and intangible assets. Such assets are reviewed annually for impairment indicators. If a triggering
event has occurred, the assets are re-measured when the estimated fair value of the corresponding asset group is less than the carrying
value. The fair value measurements, in such instances, are based on significant unobservable inputs (Level 3).
The carrying amounts of the Company’s financial
instruments, which include trade receivables, deposits, accounts payable and accrued expenses and debt at floating interest rates, approximate
their fair values, principally due to their short-term nature, maturities or nature of interest rates.
The fair values of warrant liabilities are reflected
on the condensed consolidated balance sheets as “Warrant Liabilities.” Such valuations are considered to be Level 2 valuations.
As of March 31, 2023, all warrants had either been converted to common stock or determined to have no value.
Segment reporting
Effective January 1, 2021, the Company identified two operating
segments, Computex and Kandy, pursuant to ASC 280, Segment Reporting, consistent with the information that was presented to the
Chief Operating Decision Maker. Upon the sale of Computex in March 2022, the Company began operating as one reportable segment.
Emerging growth company
In December 2022, the Company ceased being an
“emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, (the “Securities
Act”), as modified by the Jumpstart our Business Startups Act of 2012, (the “JOBS Act”).
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
(Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
March 31, 2023
(Unaudited)
4. Chapter 11 Cases
Voluntary Petition
As noted above, on January 11, 2023, the Debtors
voluntarily filed petitions under Chapter 11 of the US Bankruptcy Code. Pursuant to an order of the Bankruptcy Court, the Chapter 11 Cases
are being jointly administered under the caption In re: AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC., et al., Case No. 23-10020. Documents
filed and other information related to the Chapter 11 Cases are available free of charge online at https://cases.ra.kroll.com/AVCT.
Pursuant to the US Bankruptcy Code, the filing
of the Chapter 11 Cases automatically stayed most actions against the Debtors.
The Debtors have continued to operate their businesses
as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the US Bankruptcy
Code and the orders of the US Bankruptcy Court. Following the petition, the US Bankruptcy Court entered certain interim and final orders
facilitating the Debtors’ operational transition into Chapter 11. These orders authorized the Debtors to, among other things, pay
employee wages and benefits and pay vendors and suppliers in the ordinary course for all goods and services provided after the Petition
Date. Such orders have allowed the Debtors to operate their businesses in the normal course.
Liabilities Subject to Compromise
As a result of the Chapter 11 Cases, the payment
of pre-petition liabilities is generally subject to compromise pursuant to a plan of liquidation. Generally, actions to enforce or otherwise
effect payment of pre-Chapter 11 liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy
Court granted the Debtors authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions.
This relief generally was designed to preserve the value of the Debtors’ business and assets.
Pre-petition liabilities that are subject to
compromise are required to be reported at the amounts expected to be allowed by the Bankruptcy Court, even though they may be settled
for different amounts. The amounts classified as liabilities subject to compromise may be subject to future adjustments depending on
Bankruptcy Court actions, further developments with respect to disputed claims, proof of claims or other events.
The following table presents a summary of liabilities
subject to compromise, as reported in the accompanying condensed consolidated balance sheet at March 31, 2023 (in thousands):
| Note payable | |
$ | 2,336 | |
| Accounts payable | |
| 1,588 | |
| Accrued compensation, benefits and related accruals | |
| 1,930 | |
| Accrued professional fees | |
| 864 | |
| Due to related parties | |
| 500 | |
| Other | |
| 9 | |
| | |
$ | 7,227 | |
Executory Contracts
With certain exceptions, under the US Bankruptcy
Code, the Debtors may assume, assign or reject executory contracts and unexpired leases subject to the approval of the Bankruptcy Court.
Generally, the rejection of an executory contract or unexpired lease, subject to certain exceptions, relieves the Debtors from performing
future obligations under such contract but entitles the counterparty or lessor to a pre-petition general unsecured claim for damages
caused by such deemed breach. The assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary
defaults under such executory contract or unexpired lease, if any, and provide adequate assurance of future performance.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
(Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
March 31, 2023
(Unaudited)
Reorganization Items
Reorganization items represent amounts incurred
after the Petition Date as a direct result of the Chapter 11 Cases and are comprised of the following for the three months ended March
31, 2023 (in thousands):
| Legal, advisory and other professional fees | |
$ | 2,720 | |
| Committee of unsecured creditors expenses | |
| 348 | |
| US Trustee fees | |
| 34 | |
| | |
$ | 3,102 | |
Reorganization expenses paid in the three months ended March 31, 2023
was $190
5. Recently Issued and Adopted Accounting Standards
The Company adopted ASC 842 effective January
1, 2022. ASC 842 requires lessees to recognize, on the balance sheet, a lease liability and a leased asset for all leases, including
operating leases with a lease term greater than 12 months and requires lessors to classify leases as either sales-type, direct financing
or operating. Accordingly, a right-of-use asset and related lease liability for the Company’s only qualifying operating lease is
reflected on the balance sheet, and lease expense is included in selling, general and administrative expenses. ASC 842 also expands the
required quantitative and qualitative disclosures surrounding leases. See Note 7.
The Company does not believe other recently issued
but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated balance
sheets, statements of changes in equity, statements of operations and statements of cash flows.
6. Asset Sale and Other Sale Activities
As described above, on March 24, 2023, the Asset
Sale closed, thereby completing the disposition of substantially all of the remaining assets of the Company. Gross proceeds from the sale
consisted of cash in the amount of $6,780 plus $500 towards contract cure costs. The gain on sale of such assets consisted of the following:
| Gross proceeds | |
$ | 7,280 | |
| Expenses deducted | |
| (1,141 | ) |
| Net proceeds | |
| 6,139 | |
| Assets sold | |
| | |
| Fixed assets | |
| 4,354 | |
| Prepaids | |
| 770 | |
| Other assets | |
| 213 | |
| | |
| 5,337 | |
| Gain on sale | |
$ | 802 | |
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
(Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
March 31, 2023
(Unaudited)
As described above, on January 26, 2022, the Company
entered into an asset purchase agreement to sell substantially all of the assets of its Computex business, with the buyer agreeing to
assume certain liabilities. The sale of Computex was consummated on March 15, 2022. Net sale proceeds received was $32,112. Revenues and
expenses associated with the Computex business are classified as discontinued operations and consist of the following:
| | |
Three Months Ended | |
| | |
March 31, 2022 | |
| Revenues: | |
| |
| Hardware | |
$ | 10,948 | |
| Third party software and maintenance | |
| 1,815 | |
| Managed and professional services | |
| 7,214 | |
| Other | |
| 165 | |
| Total revenues | |
| 20,142 | |
| Cost of revenue | |
| 14,176 | |
| Gross profit | |
| 5,966 | |
| Selling, general and administrative expenses | |
| 9,520 | |
| Loss from operations | |
| (3,554 | ) |
| Other income | |
| | |
| Gain on sale of Computex | |
| 4,314 | |
| Total other income | |
| 4,314 | |
| Income from discontinued operations before income taxes | |
| 760 | |
| Income tax provision on discontinued operations | |
| (12 | ) |
| Net income from discontinued operations | |
$ | 748 | |
7. Right-of-Use Asset and Operating Lease Liabilities
The Company is party to operating leases under
which it leases certain facilities. All leases were considered noncancellable and were considered short term except for a lease of certain
office space in Raleigh, North Carolina, which provided that the Company pay, in addition to the minimum rent, certain operating expenses.
The Raleigh lease was scheduled to expire in May 2027 and had a commencement date of January 1, 2022.
As mentioned in Note 5, the Company adopted ASC
842 effective January 1, 2022. Accordingly, the condensed consolidated balance sheet as of December 31, 2022 included a right-of-use
asset and a current and noncurrent operating lease liability pertaining to a lease for office space in Raleigh, North Carolina. Effective
April 30, 2023, the Company rejected the lease and, accordingly, the right-of-use asset and related leases liabilities were written off
as of March 31, 2023, resulting in a net impact on the condensed consolidated statement of operations of $41.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
(Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
March 31, 2023
(Unaudited)
Total lease costs during the three months ended
March 31, 2023 was $132, consisting of $98 of operating lease costs, and $34 of short-term lease costs. There were no material variable
lease costs during the three months ended March 31, 2023. Cash paid for amounts included in the measurement of operating lease liabilities
was $36.
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses were as follows:
| | |
March 31,
2023 | | |
December 31,
2022 | |
| Accounts payable | |
$ | 807 | | |
$ | 2,980 | |
| Accrued compensation, benefits and related accruals | |
| 1,552 | | |
| 3,637 | |
| Accrued professional fees | |
| 2,549 | | |
| 1,181 | |
| Due to related parties | |
| - | | |
| 500 | |
| Sales tax payable | |
| 315 | | |
| 260 | |
| Other | |
| 383 | | |
| 93 | |
| | |
$ | 5,606 | | |
$ | 8,651 | |
9. Long-Term Debt
Credit Agreements
On December 2, 2021, the Company entered into
a $27,000 term loan facility (the “Credit Facility”) under a Credit Agreement (the “Credit Agreement”) with Monroe
Capital Management Advisors, LLC and certain affiliated entities (“Monroe”), proceeds of which were used, in part, to repay
amounts owing under a prior credit agreement, which the Company had assumed when it acquired Computex. On March 1, 2022, all amounts
owing under the Credit Agreement were repaid in full, including related accrued interest and other charges.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
(Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
March 31, 2023
(Unaudited)
The Credit Facility was scheduled to mature on
the earlier of (i) December 2, 2022 and (ii) the date on which the Computex sale was consummated. As part of the Credit Agreement, the
Company was required to comply with certain sales milestone terms, conditions and timeframes in connection with the then-pending sale
of Computex. In connection with such sales milestone requirements, the Company paid amendment fees of $920 on January 18, 2022 as it
was apparent that certain of the milestone dates for the closing of the Computex sale were not going to be met.
Loans under the Credit Facility previously bore
interest at a rate equal to, at the Company’s option, either the Base Rate for the interest period in effect for such borrowing
plus 10.00% per annum, or the LIBOR Rate for the interest period in effect for such borrowing plus 11.00% per annum. Notwithstanding
such interest rates, Monroe was guaranteed a minimum return of $7,290, including a closing fee of $675 that was paid to the administrative
agent on the closing date. Additional fees would have been payable if the Credit Facility was not repaid in full by certain dates.
In connection with the closing of the Credit
Facility and pursuant to a subscription agreement, the Company issued, to certain funds affiliated with Monroe, warrants to purchase
certain shares of the Company’s common stock at an exercise price of $0.0015 per share (the “Monroe Warrants”). The
number of shares of the Company’s common stock issuable upon exercise of the Monroe Warrants was subject to, in addition to customary
adjustments for stock dividends, stock splits, reclassifications and the like, adjustment for certain issuances (or deemed issuances)
of the Company’s common stock at a price per share below $23.46 while the Monroe Warrants were outstanding, such that the Monroe
Warrants would remain exercisable for, in the aggregate, approximately 2.5% of the total number of shares of the Company’s common
stock outstanding, calculated on a fully-diluted basis. The Monroe Warrants were fully exercised for 1,061,632 shares of the Company’s
common stock on January 17, 2023.
October 2022 promissory note
On October 20, 2022, the Company entered into
an amended agreement with a significant supplier, that resulted in the conversion of a trade payable balance to a promissory note having
a principal balance of approximately $2,430 on such date. Such promissory note was due on the earlier of (i) March 31, 2023; (ii) a sale
transaction by the Company requiring shareholder approval, including a transfer of a majority of the Company’s capital stock or
(iii) a payment default by the Company. The promissory note is unsecured and bears interest at a rate of 6% per annum, compounded semi-annually.
Additionally, the amended agreement provided for a $400 monthly prepayment towards actual costs incurred. Any excess of that prepayment
over actual costs resulted in a reduction of the promissory note balance, while any excess of actual costs over the $400 monthly payment
was added to such promissory note. The note payable balance as of March 31, 2023 and December 31, 2022 was $2,336 and $2,315, respectively.
In April 2023, a total of $2,271 of the note payable balance was repaid.
10. Stockholders’ Equity
Preferred stock
The Company is authorized to issue 5,000,000
shares of preferred stock, par value $0.0001. At March 31, 2023 and December 31, 2022, no preferred stock was outstanding.
Common stock
The Company is authorized to issue 500,000,000
shares of common stock with a par value of $0.0001 per share. Holders of the Company’s common stock are entitled to one vote for
each share.
On September 30, 2022, the Company filed the
Certificate of Amendment with the Secretary of State of the State of Delaware, which effected a one-for-fifteen reverse stock split
of the Company’s issued and outstanding shares of common stock. The Reverse Stock Split, which has been retroactively
reflected throughout this report, did not change the par value of the Company’s common stock nor the authorized number of
shares.
As of March 31, 2023, a total of 33,532,473 shares
of common stock were issued and outstanding.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
(Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
March 31, 2023
(Unaudited)
Warrants and other securities
In addition to the Monroe warrants that are discussed
above in Note 9, during 2022 and the fourth quarter of 2021, the Company issued certain warrants (Series A, Series B, Series C, Series
D and the February 2022 Warrants) in connection with the sale of certain securities. Such sales of securities included sales of certain
Series B preferred stock and convertible notes. As of March 31, 2023, all such warrants and such securities have been converted to common
stock, repaid or otherwise satisfied in accordance with the agreements.
11. Related Party Transactions
Services provided by Navigation Capital
Partners, Inc.
Effective October 1, 2020, the Company and Navigation
Capital Partners, Inc. (“Navigation”), an affiliate of a significant shareholder, entered into an agreement whereby Navigation
provided capital markets advisory and business consulting services to the Company for a fee of $50 per month. In addition, the Company’s
then President, Kevin Keough, and Mr. Robert Willis, a Company director and Vice Chairman of Capital Markets, provided such services to
the Company via Navigation. Accordingly, Mr. Keough and Mr. Willis did not receive any direct compensation from the Company between July
21, 2021 (the effective date of their appointment) and April 21, 2022. Instead, Mr. Keough and Mr. Willis were compensated by Navigation.
In consideration for such services provided by Navigation to the Company, Navigation was granted 12,000 restricted stock units (“RSUs”)
that were scheduled to vest over four years, similar to time-based RSUs granted to directors in lieu of director’s fees.
On April 21, 2022, the agreement with Navigation
was terminated and therefore the RSUs were forfeited prior to any being vested. At the date of termination, the unpaid balance owing under
the consulting agreement was $900, which was scheduled to be paid at the rate of $100 per month. Selling, general and administrative expenses
for the three months ended March 31, 2022 include $150 related to such agreement. Also, accounts payable and accrued expenses as of December
31, 2022 include $500 in connection therewith. With respect to the RSUs issued to Navigation, selling, general and administrative expenses
include stock compensation expenses of $180 for the three months ended March 31, 2022.
Services provided
by True North Advisory LLC
On January 21, 2022, the Company entered into
a Services Agreement (the “Services Agreement”) with True North Advisory LLC (“True North”), a company affiliated
with Michael Tessler, who at that time served as Chairman of the Board. Pursuant to the Services Agreement, among other things, True North
provided strategic advice with respect to the Company’s business as requested by the Company from time to time, for a fee of $25
per month, plus reimbursement for out-of-pocket expenses. As a result, selling, general and administrative expenses for the three months
ended March 31, 2022 include $34, related to such agreement. The Services Agreement had an initial term of three months, after which it
could continue on a month-to-month basis until terminated by either party on 30 days’ prior notice. The Services Agreement, which
contained customary mutual provisions regarding confidentiality and ownership of intellectual property, was terminated during the third
quarter of 2022.
Transactions with Ribbon
Pursuant to a transition services agreement entered
into with Ribbon in connection with the acquisition of Kandy, Ribbon previously provided certain services to the Company. The Company
also rented certain office space and purchased certain software from Ribbon. Additionally, from time to time, the Company provided certain
services to Ribbon. The following summarizes such revenues and expenses:
| | |
Three Months Ended | |
| | |
March 31,
2022 | |
| | |
| |
| Revenue earned from Ribbon | |
$ | 62 | |
| Service fees charged by Ribbon: | |
| | |
| Selling, general and administrative expenses | |
| 517 | |
| | |
| 517 | |
| Rent and software purchased from Ribbon: | |
| | |
| Cost of revenue | |
| 487 | |
| Selling, general and administrative expenses | |
| 189 | |
| | |
$ | 676 | |
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
(Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
March 31, 2023
(Unaudited)
On August 29, 2022, the Company entered into
a settlement agreement with Ribbon (the “Ribbon Settlement Agreement”), pursuant to which the Company and Ribbon modified
and/or terminated certain previous agreements between the parties. Pursuant to the Ribbon Settlement Agreement, a reseller agreement
between the parties was terminated, the Company received $2,500 in cash, Ribbon was granted certain non-exclusive perpetual rights to
use certain intellectual property owned by the Company, and all shares of the Company’s common stock along with warrants previously
owned by Ribbon were returned and retired. Due to the redemption of the shares previously owned by Ribbon, Ribbon is no longer considered
a related party.
12. Revenue Recognition
In the following tables, revenue is disaggregated
by geographies and by verticals (or sector).
| | |
Three Months Ended | |
| | |
March 31, 2023 | | |
March 31, 2022 | |
| Geography | |
| | |
| |
| Domestic | |
$ | 2,766 | | |
$ | 2,758 | |
| International | |
| 1,297 | | |
| 1,336 | |
| Total revenues | |
$ | 4,063 | | |
$ | 4,094 | |
| | |
| | | |
| | |
| Revenues by Verticals (or Sector) | |
| | | |
| | |
| Technology service providers | |
$ | 3,754 | | |
$ | 3,744 | |
| Public sector | |
| 278 | | |
| 327 | |
| Other | |
| 31 | | |
| 23 | |
| Total revenues | |
$ | 4,063 | | |
$ | 4,094 | |
Revenues by geography, in the table above, is
generally based on the “ship-to address,” with the exception of certain services that may be performed at, or on behalf of,
multiple locations, which are categorized based on the “bill-to address.”
13. Share-Based Compensation and 401(k) Plan
Effective January 1, 2023, the American Virtual
Cloud Technologies, Inc. 2020 Equity Incentive Plan (the “Equity Incentive Plan”), was terminated. In addition, the American
Virtual Cloud Technologies, Inc. 401(k) Plan (the “401(k) Plan”) is scheduled to be terminated on May 31, 2023. Previously,
the Equity Incentive Plan provided for the issuance of stock options, stock appreciation rights, RSUs and other share-based awards. As
of January 1, 2023, a total of 666,666 shares had been authorized for issuance under the Plan, of which 328,997 shares remained available
for issuance. As a result of the cancellation of the Equity Incentive Plan, all unrecognized compensation as of January 1, 2023 was recognized
during the three months ended March 31, 2023.
Share-based compensation expenses recognized
were as follows:
| | |
Three Months Ended | |
| | |
March 31, 2023 | | |
March 31, 2022 | |
| Cost of revenue | |
$ | 66 | | |
$ | 54 | |
| Research and development | |
| 164 | | |
| 152 | |
| Selling, general and administrative expenses | |
| 1,128 | | |
| 1,170 | |
| | |
$ | 1,358 | | |
$ | 1,376 | |
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
(Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
March 31, 2023
(Unaudited)
14. Reconciliation of Net loss per Common Share
Basic and diluted net loss per common share was calculated as follows:
| | |
Three Months Ended | |
| | |
March 31, 2023 | | |
March 31, 2022 | |
| Loss from continuing operations, net of tax | |
$ | (10,005 | ) | |
$ | (14,626 | ) |
| Income from discontinued operations, net of tax | |
| - | | |
| 748 | |
| Net loss | |
$ | (10,005 | ) | |
$ | (13,878 | ) |
Weighted average shares outstanding, basic and diluted | |
| 33,331,942 | | |
| 5,929,288 | |
| Basic and diluted net (loss) income per common share | |
| | | |
| | |
| Continuing operations | |
$ | (0.30 | ) | |
$ | (2.47 | ) |
| Discontinued operations | |
| - | | |
| 0.13 | |
| Net loss per common share | |
$ | (0.30 | ) | |
$ | (2.34 | ) |
Since their inclusion would have been antidilutive, excluded
from the computation of diluted net loss per common share are the following, were they to be converted:
| | |
March 31,
2023 | | |
March 31,
2022 | |
| Public Warrants | |
| 1,035,000 | | |
| 1,035,000 | |
| 2017 Private Placement | |
| 700,833 | | |
| 700,833 | |
| 2017 EBC Warrants | |
| - | | |
| 45,000 | |
| Penny Warrants | |
| 75,525 | | |
| 367,378 | |
| Series A Warrants | |
| - | | |
| 666,666 | |
| Series D Warrants | |
| - | | |
| 2,083,333 | |
| February 2022 Warrants | |
| - | | |
| 1,075,000 | |
| Monroe Warrants | |
| - | | |
| 307,573 | |
| Shares underlying certain unit purchase options (issued in 2017) | |
| - | | |
| 99,000 | |
| Unvested RSUs | |
| - | | |
| 259,111 | |
| Vested, not delivered RSUs | |
| - | | |
| 28,166 | |
| | |
| 1,811,358 | | |
| 6,667,060 | |
15. Income Taxes
The Company’s effective tax rate for the
three months ended March 31, 2023 and 2022 were -0.66% and -0.04%, respectively. The effective tax rate for both periods differed from
the federal statutory rate primarily due to state taxes and the Company’s full valuation allowance.
16. Commitments and Contingencies
From time to time, the Company may be involved
in various legal proceedings and claims in the ordinary course of business. As of March 31, 2023, and through the filing date of this
report, the Company does not believe the resolution of any legal proceedings or claims of which it is aware or any potential actions
will have a material effect on its financial position, results of operations or cash flows.
17. Subsequent Events
The Company evaluates subsequent events and transactions
that occur after the balance sheet date up to the date that the consolidated financial statements are issued. Other than as disclosed
elsewhere in the Notes to the financial statements, there have been no subsequent events that require adjustment or disclosure in the
condensed consolidated financial statements.