(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
As previously disclosed, on January 11, 2023,
the Company and two of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions under Chapter 11 of the US
Bankruptcy Code (“Chapter 11”) in the United States Bankruptcy Court for the District of Delaware (such court, the “Court”,
and such cases, the “Cases”). Also as previously disclosed, on February 14, 2023, the Company and certain of its subsidiaries
(collectively, the “Sellers”) entered into a “stalking horse” Asset Purchase Agreement (as subsequently
modified, 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 $6,780,062. On March 10, 2023, the Sellers and
the Purchaser executed an amended and restated Asset Purchase Agreement (the “Purchase Agreement”), reflecting the cash purchase
price of $6,780,062 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 (as such terms
are defined in the Purchase Agreement), tangible personal property, intellectual property rights, books and records and goodwill, but
excludes all Excluded Assets (as such term is defined in the Purchase Agreement), 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. As identified in the Debtors’ Combined Disclosure Statement
and Chapter 11 Plan of Liquidation (the “Plan”), filed with the Court on March 21, 2023, and subject to Court approval,
the Company anticipates that there will be no proceeds available for distribution to the Company’s stockholders and that the Company’s
outstanding securities shall be cancelled upon confirmation of the Plan. Nothing herein is intended to act as a solicitation of
the Plan.
Except as otherwise specifically stated herein,
the description and disclosures presented elsewhere in this Form 10-K reflect the Company’s business as of December 31, 2022, prior
to the consummation of the Asset Sale. As a result of the Asset Sale, 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.
Holders of the Company’s equity securities will likely be entitled
to no recovery on their investment following the Cases, and recoveries to other stakeholders cannot be determined at this time. The Company
cautions that trading in the Company’s securities given the pendency of the Cases is highly speculative and poses substantial risks.
Trading prices for the Company’s securities may bear little or no relationship to the actual value realized, if any, by holders
of the Company’s securities in the Cases. Accordingly, the Company urges extreme caution with respect to existing and future investments
in its securities.
Certain statements contained in this annual report
on Form 10-K and in certain documents incorporated by reference constitute “forward-looking statements” for purposes of federal
securities laws. Our forward-looking statements include, but are not limited to, statements regarding management’s expectations,
hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other
characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words
“anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,”
“intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,”
“project,” “should,” “would” and similar expressions may identify forward-looking statements, but
the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this report may include,
for example, statements about:
The forward-looking statements contained in this
report are based on our current expectations and beliefs concerning future developments and their potential effects on us. Future developments
affecting us may not be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some
of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those
expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors
described under the heading “Risk Factors” elsewhere in this report. Should one or more of these risks or uncertainties materialize,
or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in forward-looking
statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise, except as may be required under applicable securities laws.
As a result of a number of known and unknown
risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by forward-looking
statements. Some factors that could cause actual results to differ from those expressed or implied by forward-looking statements include:
PART I
Item 1. Business
Company History and Certain Recent Developments
We were incorporated, in Delaware, as Pensare
Acquisition Corp, a special purpose acquisition company (“SPAC”) on April 7, 2016 for the purpose of entering into one or
more mergers, share exchanges, asset acquisitions, stock purchases, recapitalizations, reorganizations or other similar business combinations
with one or more target businesses.
On April 7, 2020 (the “Computex Closing
Date”), we consummated a business combination transaction (the “Computex Business Combination”) in which we acquired
Stratos Management Systems, Inc. (“Computex”), a private 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”), we acquired the Kandy Communications business (hereafter referred to as “Kandy” or “Kandy Communications”)
from Ribbon Communications, Inc. and certain of its affiliates (“Ribbon”), by acquiring certain assets, assuming certain
liabilities and acquiring all of the outstanding membership interests of Kandy Communications LLC.
On September 16, 2021, the Company announced
that as a result of a decision by the Company’s Board of Directors to explore strategic alternatives previously announced on April
7, 2021, the Board had authorized the Company to focus its strategy on acquisitions and organic growth in its cloud technologies business
as well as to explore strategic opportunities for its IT solutions business, including the divestiture of Computex. The Company believed
that such changes would have allowed it to optimize resource allocation, focus on core competencies, and improve its ability to invest
in areas of maximal growth potential.
On January 27, 2022, the Company announced that it had executed a definitive
agreement to sell Computex, and on March 15, 2022, the sale of Computex was consummated, which completed the Company’s transition
to a cloud communications company, centered on its Kandy platform. In connection with the then pending sale of Computex, Computex was
classified as held for sale as of December 31, 2021 and its operations were separated and classified as discontinued operations. The discussions
in this Form 10-K primarily focuses on the Company’s corporate activities and its Kandy segment. Net proceeds from the sale of Computex,
after payment of closing and certain other obligations were used for working capital and general business purposes.
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 could
lead to the sale of the Company or of selected assets.
During 2022, the Company continued to explore
strategic opportunities, including the rationalization of resource allocation and core competencies. Further, the Company took actions
that it believed resulted in significant cost savings. Such savings were generated from selective reductions in workforce and negotiated
conversions of certain material vendor support costs from fixed to variable, thereby eliminating certain cost burdens related to unused
capacity. In addition, the Company obtained strategic and operating restructuring support services of certain capital advisors.
Additionally, during 2022, the Company projected
and announced that it would need additional capital to fund its operations including research & development and capital investment
requirements until the Company scaled to a revenue level that would permit cash self-sufficiency. Such factors raised substantial
doubt about the ability of the Company to continue as a going concern. The projection was based on the Company’s forecasts
regarding product sales and service, cost structure, cash burn rate and other operating assumptions.
On January 11, 2023, the Debtors filed the Cases
as voluntary petitions under Chapter 11 in the 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 Court and in accordance with the applicable provisions of the US Bankruptcy Code and orders of the Court. To ensure
their ability to continue operating in the ordinary course of business, the Debtors filed various “first day” motions with
the 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 course operations.
On February 14, 2023, the Sellers entered into
the Stalking Horse APA with the Purchaser, and in connection with the Cases, and pursuant to bid procedures approved by the Court, on
March 7, 2023, the Debtors held 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, who agreed to pay cash consideration of approximately
$6.8 million.
On March 10, 2023, the Sellers and the Purchaser executed the Purchase
Agreement, which is substantially the same as the Stalking Horse APA, except that it reflects the cash purchase price of approximately
$6.8 million resulting from the Auction. Pursuant to the Purchase Agreement, the Purchaser agreed to purchase the Purchased Assets, consisting
of substantially all of the assets of the Sellers. 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 cash, accounts receivable and certain other assets. Under the Purchase Agreement, the
Purchaser is expected to acquire the Purchased Assets for a purchase price (the “Purchase Price”) consisting of (i) cash of
approximately $6.8 million, 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 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. As identified in the Debtors’ Combined Disclosure Statement
and Chapter 11 Plan of Liquidation (the “Plan”), filed with the Court on March 21, 2023, and subject to Court approval,
the Company anticipates that there will be no proceeds available for distribution to the Company’s stockholders and that the Company’s
outstanding securities shall be cancelled upon confirmation of the Plan. Nothing herein is intended to act as a solicitation of
the Plan.
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.
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.
The Business
The description of the Company’s business
contained herein reflects the Company’s operation of its business prior to the completion of the Asset Sale on March 24, 2023.
As a result of the Asset Sale, 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.
The Kandy cloud communications platform is a cloud-based, real-time
communications platform, offering proprietary unified communications as a service (“UCaaS”), communications platform as a
service (“CPaaS”), Microsoft Teams Direct Routing as a Service (“DRaaS”), and SIP Trunking as a Service capabilities
(“STaaS”).
As a provider of cloud-based enterprise services, Kandy deploys a global
carrier grade cloud communications platform that supports the digital and cloud transformation of mid-market and enterprise customers
across virtually any device, on virtually any network, in virtually any location. The Kandy platform is based on a powerful, proprietary
multi-tenant, highly scalable, and secure cloud platform. Further, Kandy supports rapid service creation and multiple go to market models
including white labelling, multi-tier channel distribution, enterprise direct, and self-service via its SaaS (software as a service) web
portals.
Kandy’s cloud-based, real-time communications
platform enables service providers, enterprises, software vendors, systems integrators, partners and developers to enrich their applications
and their services with real-time contextual communications empowering the API (Application Programming Interface) economy. With Kandy’s
platform, companies of various sizes and types can quickly embed real-time communications capabilities into their existing applications
and business processes, thereby providing a more engaging user experience.
While the cloud communications business is focused
on highly complex, medium and large enterprise deployments, the customer experience is augmented by our managed services capabilities.
In addition, our strategic partnerships with companies such as AT&T, IBM/Kyndryl, and Etisalat, give us access to a marquee customer
base and the ability to sell end-to-end solutions.
Computex, sold in March 2022 and classified within
discontinued operations, is a leading multi-brand technology solutions provider to large global customers, providing a comprehensive
and integrated set of technology solutions, through its extensive hardware, software and value-added service offerings.
Major customers
Kandy only
The five top customers
during Fiscal 2022 accounted for 79% of total Kandy revenues. Four customers accounted for more than 10% of total revenue, accounting
for $11.8 million of total Kandy revenue.
Competition
Kandy primarily competes with technology and
cloud providers such as 8X8, RingCentral, Vonage, Twilio, Nice and Five 9, among others. However, Kandy differentiates itself from its
competitors largely by the nature of its route to market - its platform is a proprietary white label, global cloud platform that supports
a single or a multi-tier distribution via a CSP (communications service provider), VAR (value-added reseller) or ISV (independent software
vendor) brand. Further, in addition to being a true multi-tenant platform, Kandy supports a BYOD (bring your own data) and BYOC
(bring your own carrier) model while providing both a light weight and heavy weight OSS/BSS (Ordering/Billing) system and automation
integration with its channel partners. Lastly, the Kandy platform brings a ubiquitous experience across UCaaS, CCaaS, and CPaaS
versus most of the competition who play in one or two of these communications market verticals.
International Operations and Segments
During 2021, the Company operated
two segments, Computex and Kandy. With the sale of Computex during the first quarter of 2022, the Company began operating as one reportable
segment beginning in the second quarter of 2022. At December 31, 2022, approximately 70 associates were employed in our international
operations.
Research and Development
Through Kandy, we have incurred software development
costs to enhance, improve, expand and/or upgrade our proprietary software in an agile software environment with releases broken down
into several iterations called sprints. These development activities have been performed by internal staff as well as by certain contractors.
Through our Kandy R&D team, our research
and development efforts have been focused, in part, on building a carrier-grade communications platform with a focus on next generation
software technologies and frictionless communications with multiple go-to-market strategies, including channel and direct sales models.
As of December 31, 2022, our research and development
team consisted of approximately 31 associates (excluding contractors).
Sales and Marketing
We have been targeting customers of varying sizes
in both the private and public sector and have developed relationships with them through direct marketing efforts as well as through
strategic relationships with our technology partners.
We acquire new account relationships through
face-to-face field sales, through relationships with our partners and through targeted direct marketing efforts that aim to increase
awareness of our solutions.
Our sales representatives are generally compensated
through a combination of fixed and variable compensation. Variable compensation or commission becomes the primary basis of compensation
as sales representatives gain more experience.
Proprietary Rights
We have relied on a combination of copyrights,
patents, trade secrets, trademarks, and contractual provisions to protect the proprietary rights of our products, processes and technology.
In addition, we have, at times, entered into confidentiality and assignment-of-rights agreements with our employees, consultants and
customers and have limited access to, and distribution of, our proprietary information. We licensed our proprietary products to our customers
under license agreements that we believe contain appropriate use and other restrictions. However, despite our efforts to safeguard our
proprietary rights, we can provide no assurance that we will be able to successfully deter misappropriation or unauthorized third-party
use of such rights. As is the case with any software company, safeguarding unauthorized use of our software is difficult, and piracy
could become a problem. In addition, if we are engaged in transactions in countries where intellectual property laws are not well developed
or are not well enforced, our efforts to protect our proprietary rights may not be effective. Enforcing our proprietary rights in the
U.S. and abroad and any litigation to enforce such rights, can result in significant costs and can divert resources, which could cause
a material adverse effect on our business, financial condition, results of operations or cash flows.
As the number of solutions available in the marketplace
increases and solution functionality continues to overlap, software companies may increasingly become subject to claims of infringement
or other misappropriation of intellectual property. Third parties may assert infringement or misappropriation claims against us relating
to our software, processes or technology. Following up such claims, whether or not they have merit, can be time-consuming and can result
in costly litigation, cause delays in our business or have other negative consequences. Defending such claims, entering into royalty
or licensing agreements, or adverse determinations in proprietary rights litigation could have a material adverse effect on our business,
results of operations, cash flow and financial condition.
COVID-19
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 our employees,
our daily execution evolved into a largely virtual model. However, we found ways to continue to engage with and assist our customers
and partners as they worked to navigate the changed environment.
Human Capital
Our core values – Integrity, innovation,
delighting our clients, diversity and teamwork are communicated to our employees upon joining our company. We strive
to maintain and demonstrate these values to our associates in the decisions we make and the actions we take. We believe one of our greatest
assets is our people and believe adherence to such policies plays a key role in our company.
Integrity – We strive to earn the
trust of our customers, partners, and associates through honesty, openness, and ethical, and fair behavior. We respect everyone and believe
we should treat others as we expect to be treated.
Innovation - We are committed to continuous
progress, never settling for yesterday’s solutions or successes.
Delighting our clients – We are
committed to delighting our clients with exceptional and personalized services.
Diversity – We believe it takes
people with different ideas, experiences, strengths, interests and backgrounds to succeed.
Teamwork – We understand that we
achieve everything together and are accountable to each other for our results.
On December 31, 2022, our employee base stood
at approximately 127 employees worldwide, of which more than 55% were employed in our international operations. We have offices in Canada,
Mexico, and the United States, as well as representatives in the United Kingdom and the United Arab Emirates. None of our employees are
represented by unions and we consider the relationships with our employees to be good. As of December 31, 2022, women represented 26.7%
of our workforce. Due in large part to a scaling back in the Company’s operations during Fiscal 2022, the attrition rate in Fiscal
2022 was 44.6%.
As of December 31, 2022, the composition of our employee base was
as follows:
| |
Corporate | | |
Kandy | | |
Total | |
Sales and marketing | |
| - | | |
| 17 | | |
| 17 | |
Product support and R&D | |
| - | | |
| 94 | | |
| 94 | |
Admin | |
| 6 | | |
| 10 | | |
| 16 | |
Total number of employees | |
| 6 | | |
| 121 | | |
| 127 | |
We offer fair and competitive compensation and
benefit packages to our employees that include base salary, incentives, adequate paid time off and various health insurance plan options.
Available Information
Our website address is http;//www.avctechnologies.com.
Our common stock and public warrants are registered under the Securities Exchange Act of 1934 (the “Exchange Act”) and we
have reporting obligations, including the requirement to file annual, quarterly and current reports with the SEC. In accordance with
the requirements of the Exchange Act, our annual report contain financial statements that are audited and reported on by our independent
registered public accountants. These filings are available to the public via the Internet on our website and at the SEC’s website
located at http://www.sec.gov. You may also read and copy any document that we file with the SEC at the SEC’s public reference
room located at 100 F Street, N.E., Washington, D.C. 20549. For more information, please call the SEC at 1-800-SEC-0330. You may request
a copy of our filings with the SEC (excluding exhibits) at no cost by writing or telephoning us at the following address or telephone
number:
American Virtual Cloud Technologies,
Inc.
1720 Peachtree Street
Suite 629
Atlanta, GA 30309
Tel: (404) 239-2863
The Company’s status as an emerging growth
company (“EGC”) as defined in the Jumpstart our Business Startups Act of 2012, (the “JOBS Act”), ended on December
31, 2022.
Item 1A. Risk Factors
An investment in our common stock involves
a high degree of risk. You should consider carefully all of the risks described below, together with the other information contained
in this Annual Report on Form 10-K, before making a decision to invest in our common stock. If any of the following events occur, our
business, financial condition and operating results may be materially and adversely affected. In that event, the trading price of our
common stock could decline, and you could lose all or part of your investment.
Risks Related to Our
Bankruptcy
We have sold substantially
all of our assets as part of our Chapter 11 bankruptcy process, and we anticipate that our outstanding securities will be cancelled,
without any proceeds being available for distribution to our stockholders.
On March 24, 2023, we completed
the Asset Sale and disposed of substantially all of our assets. As identified in the Debtors’ Combined Disclosure
Statement and Chapter 11 Plan of Liquidation (the “Plan”), filed with the Court on March 21, 2023, and subject to
Court approval, the Company anticipates that there will be no proceeds available for distribution to the Company’s stockholders
and that the Company’s outstanding securities shall be cancelled upon confirmation of the Plan.
We may not be able to obtain confirmation of the Plan.
To complete our Chapter 11 bankruptcy process,
we must meet certain statutory requirements with respect to the adequacy of disclosure with respect to the Plan, solicit and obtain the
requisite acceptances of such Plan and fulfill other statutory conditions for confirmation of such Plan.
We may be subject to claims that will not be discharged in the
Chapter 11 Cases.
The US Bankruptcy Code provides that the confirmation
of a plan of reorganization discharges a debtor from, among other things, substantially all debts arising prior to consummation of a plan
of reorganization. With few exceptions, all claims against us that arose prior to the filing of the Cases or before consummation of a
plan of reorganization (i) would be subject to compromise and/or treatment under a plan of reorganization and/or (ii) would be discharged
in accordance with the US Bankruptcy Code and the terms of a plan of reorganization. Subject to the terms of a plan of reorganization
and orders of the Bankruptcy Court, any claims not ultimately discharged pursuant to a plan of reorganization could be asserted against
us and may have an adverse effect on our liquidity and financial condition.
Risks Related to Our
Business and Industry
While the Company remains a public company,
it will continue to incur the expense of complying with public company reporting requirements even though its operations have been reduced
following the sale of Computex.
We will continue to be required
to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as amended, even though compliance with
such reporting requirements may be economically burdensome.
General economic weakness
may harm the Company’s operating results and financial condition.
The Company’s results of operations are
largely dependent upon the state of the economy. Global economic weakness and uncertainty may result in decreased sales, gross margin,
earnings and/or growth rates. In addition, material changes in trade agreements between the U.S. and other countries may, for example,
negatively affect the Company’s ability to purchase products, its ability to import or export products, and could negatively affect
pricing and product availability. Adverse economic conditions could negatively affect demand for the Company’s products and services
and could impair the ability of customers to pay for such products and services.
The Company’s
business could be adversely affected by COVID-19.
Even though the COVID-19 outbreak has subsided,
the Company may continue to experience significant impacts to its business as a result of the global economic impact of COVID-19, including
any economic downturn or recession or other long-term effects that have occurred or may occur in the future.
The Company has customer
concentration, and if the Company loses one or more of its large volume customers, its earnings may be materially affected.
Following the Company’s sale of the Computex
business in March 2022, it had significant concentration of customers. The five top customers of the Company’s Kandy business,
which is the Company’s sole business segment following the sale of Computex, accounted for 68% of the revenues of that business
segment during Fiscal 2021. There are inherent risks whenever a significant percentage of total revenues are concentrated with a limited
number of customers. Revenues from our largest customers may fluctuate from time to time based on numerous factors, including market
conditions, which may be outside of our control. Contracts between the Company and its customers for the provision of products and/or
services are generally in the form of non-exclusive agreements that do not contain volume purchase commitments, and are terminable by
either party upon 30 days’ notice. The loss of one or more of the Company’s largest customers, the failure of such customers
to pay amounts due, or a material reduction in sales dollars by such customers could have a material adverse effect on the Company’s
business, financial position, results of operations and cash flows.
The Company may not
be able to hire and/or retain the personnel that it needs.
To increase market awareness and sales of the
Company’s offerings, the Company may need to expand its marketing efforts and sales operations in the future. The Company’s
products and services require a sophisticated sales effort and significant technical engineering talent. For example, its sales and engineering
candidates must have highly technical hardware and software knowledge to create a customized solution for its customers’ business
processes. Competition for qualified sales, marketing and engineering personnel fluctuates depending on market conditions, and the Company
may not be able to hire or retain sufficient personnel to maintain and grow its business. Frequently, the Company’s competitors
require their employees to agree to non-compete and non-solicitation agreements as part of their employment. This makes it more difficult
for the Company to hire, and also may increase the costs of reviewing and managing non-compete restrictions. Additionally, in some cases,
the Company’s relationship with a customer may be impacted by turnover in its sales or engineering team.
The Company may not
adequately protect itself through its contracts, or its insurance policies may not be adequate to address potential losses or claims.
The Company’s contracts may not protect
it against the risks inherent in its business including, but not limited to, warranties, limitations of liability, indemnification obligations,
human resources and subcontractor-related claims, patent and product liability, regulatory and compliance obligations, and data security
and privacy. Also, the Company faces pressure from its customers for competitive pricing and contract terms. The Company also is subject
to audits by various vendor partners and customers relating to purchases and sales under various contracts. In addition, the Company
is subject to indemnification claims under various contracts.
The Company depends
on having creditworthy customers to avoid an adverse impact on its operating results and financial condition.
If the credit quality of the Company’s
customer base materially decreases, or if the Company experiences a material increase in its credit losses, the Company may find it difficult
to continue to obtain the required capital for its business, and its operating results and financial condition may be harmed. In addition
to the impact on the Company’s ability to attract capital, a material increase in its delinquency and default experience would
itself have a material adverse effect on its business, operating results, and financial condition.
The Company may be
liable for misuse of its customers’ or employees’ information.
Third-parties, such as hackers, could circumvent
or sabotage the security practices and products used in the Company’s product and service offerings, and/or the security practices
or products used in the Company’s internal IT systems, which could result in disclosure of sensitive or personal information, unauthorized
procurement, or other business interruptions that could damage the Company’s reputation and disrupt its business. Attacks may range
from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced persistent threats.
If third-parties or the Company’s employees
are able to maliciously penetrate its network security or otherwise misappropriate its customers’ information or employees’
personal information, or other information for which its customers may be responsible and for which the Company agrees to be responsible
in connection with service contracts into which it may enter, or if the Company gives third-parties or its employees improper access
to certain information, the Company could be subject to liability. This liability could include claims related to unauthorized access
to devices on its network; unauthorized access to its customers’ networks, applications, data, devices, or software;
and identity theft or other similar fraud-related claims. This liability could also include claims related to other misuses of or inappropriate
access to personal information. Other liability could arise from claims alleging misrepresentation of the Company’s privacy and
data security practices. Any such liability for misappropriation of information could decrease the Company’s profitability. In
addition, federal and state agencies have been investigating various companies to determine whether they misused or inadequately secured
information. The Company could incur additional expenses when new laws or regulations regarding the use of information are enacted, or
if governmental agencies require the Company to substantially modify its privacy or security practices. The Company could fail to comply
with applicable data privacy laws, the violation of which may result in audits, fines, penalties, litigation, or administrative enforcement
actions with associated costs.
Advances in computer capabilities, new discoveries
in the field of cryptography, or other events or developments may result in a compromise or breach of the security practices the Company
uses to protect sensitive customer transaction information and employee information. A party who is able to circumvent the Company’s
security measures could misappropriate proprietary information or cause interruptions in the Company’s operations. Further, third-parties
may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords, or other
information or otherwise compromise the security of the Company’s internal networks and/or its customers’ information. Since
techniques used to obtain unauthorized access change frequently and the size and severity of security breaches are increasing, the Company
may be unable to implement adequate preventative measures or timely identify or stop security breaches while they are occurring.
The Company may be required to expend significant
capital and other resources to protect against security breaches or to remediate the subsequent risks and issues caused by such breaches.
The Company’s security measures are designed to protect against security breaches, but its failure to prevent such security breaches
could cause it to incur significant expense to investigate and respond to a security breach and correct any problems caused by any breach,
subject it to liability, damage its reputation, and diminish the value of its brand. There can be no assurance that the limitations of
liability in Company contracts would be enforceable or adequate or would otherwise protect the Company from any such liabilities or damages
with respect to any particular claim. The Company also cannot be sure that its existing insurance coverage for errors and omissions or
security breaches will continue to be available on acceptable terms or in sufficient amounts to cover one or more large claims, or that
its insurers will not deny coverage as to any future claim. The successful assertion of one or more large claims against the Company
that exceeds its available insurance coverage, or changes in its insurance policies, including premium increases or the imposition of
large deductible or co-insurance requirements, could have an adverse effect on the Company’s business, financial condition, and
results of operations.
Failure to comply
with new laws or changes to existing laws may adversely impact the Company’s business.
The Company’s operations are subject to
numerous laws and regulations in a number of areas including, but not limited to, laws relating to labor and employment, immigration,
advertising, e-commerce, tax, imports and exports, data privacy, competition, the environment, health, and safety. Compliance with these
laws and regulations may be onerous and expensive, and may not be consistent across jurisdictions, thereby further increasing the cost
of compliance, the cost of doing business, and the risk of noncompliance. Though the Company has designed policies and procedures to
comply with applicable laws and regulations, there can be no certainty that employees, contractors, or agents will fully comply with
such policies and procedures.
We may face risks associated with our international
operations that could adversely affect the Company.
The Company’s operations outside the United
States include a Canadian division that was acquired as part of the Kandy acquisition. The Company also has employees in Mexico as well
as representatives in the United Kingdom and the United Arab Emirates. At December 31, 2022, approximately 70 associates were employed
in our international operations. Foreign operations are subject to risks that are inherent in operating within different legal, political
and economic environments. Among the risks are changes in tax laws, possible limitations on foreign investment and income repatriation,
government price or foreign exchange controls, and restrictions on currency exchange. Such operations may require significant management
attention and financial resources to successfully grow. In addition, international operations are subject to other inherent risks, including:
|
● |
greater reliance on local partners; |
|
● |
possible difficulties collecting accounts receivable and longer collection
cycles; |
|
● |
difficulties and costs of staffing and managing international operations; |
|
● |
compliance with international trade, customs and export control regulations; |
|
● |
foreign government regulations limiting or prohibiting potential sales
or increasing the cost of doing business in such markets, including adverse tax policies, tariffs, customs regulations, trade protection
measures, export quotas and qualifications to transact business; |
|
● |
foreign currency controls, restrictions on repatriation of cash and
changes in currency exchange rates; |
|
● |
a possible need to adapt and localize our products for specific countries; |
|
● |
our ability to effectively price our products in competitive international
markets; |
|
● |
political, social and economic instability, including as a result of
possible volatility of global financial markets, health pandemics or epidemics and/or acts of war or terrorism; |
|
● |
exchange rate fluctuations that could negatively impact our financial
results; and risks associated with our use and reliance on research and development resources in global locations. |
The departure of certain
of the Company’s key executives or key members of its senior management team and/or failure to successfully implement a succession
plan could adversely affect the Company’s business.
The departure of certain key executives or key
members of the Company’s senior management team and/or failure to successfully implement a succession plan could disrupt the Company’s
business and impair the execution of its business strategies. The Company’s executive officers are at the forefront of its strategic
direction and focus, and therefore believes that its success depends in part upon its ability to retain the services of certain executive
officers and senior members of its management team and also depends on its ability to successfully implement a succession plan. Therefore,
the departure of any of such persons without replacement by qualified successors could adversely affect the Company’s ability to
effectively manage its overall operations and successfully execute current or future business strategies and could cause instability
within the Company’s workforce.
Changes in accounting
standards, or the misapplication of current accounting standards, may adversely affect the Company’s future financial results.
The Company prepares its financial statements
in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”). These accounting principles are subject to interpretation
by the Financial Accounting Standards Board, the Public Company Accounting Oversight Board (“PCAOB”), the SEC, the American
Institute of Certified Public Accountants (“AICPA”) and various other bodies formed to interpret and create appropriate accounting
policies. Periodic assessments required by current or new accounting standards may result in noncash charges and/or changes in presentation
or disclosure. In addition, any change in accounting standards could influence the Company’s customers’ decision to purchase
from the Company or finance transactions with the Company, which could have a significant adverse effect on the Company’s financial
position or results of operations.
For example, a relatively new accounting standard
requires the Company to determine if it is the principal or agent in transactions with its customers. In addition, the manner in which
some of the Company’s products are bundled, and the voluminous number of products and services the Company sells can add to the
level of complexity. Mischaracterization of these products and services could result in misapplication of revenue recognition policies.
In addition, judgements and estimates are made in the application of GAAP, such as to determine the fair value of assets acquired, and
liabilities assumed in business combinations, assessments of goodwill impairment, the estimating of the allowance for doubtful accounts
and the determination of the cost of professional and managed services. If the Company is unable to accurately estimate such amounts,
including the time-line for completion of contracts, the profitability of its contracts and its profits overall may be materially and
adversely affected.
A natural disaster
or other adverse occurrence at one of the Company’s facilities could damage its business.
As of December 31, 2021, the Company has one
warehouse and a distribution facility in the U.S. If such facilities were to be seriously damaged by a natural disaster or other adverse
occurrence, the Company could utilize another distribution center or third-party distributors to ship products to its customers. However,
this may not be sufficient to avoid interruptions in the Company’s business and may not be enough to meet the needs of all of the
Company’s customers and could cause increased operating costs. In addition, the Company operates two customer facing data centers
which contain its Securities Operations Center and Network Operations Center. The Company also operates certain sales offices as well
as leased facilities in Ottawa, North Carolina and Mexico, along with a number of rented spaces that are used as server locations, all
of which may contain business-critical data and confidential customer information. A natural disaster or other adverse occurrence at
any such locations could negatively impact its business, results of operations or cash flows.
The Company faces
risks of claims from third-parties for intellectual property infringement, including counterfeit products, that could harm its business.
The Company may be subject to claims if products
that it resells is considered to infringe on the intellectual property rights of third-parties and/or are considered to be counterfeit
products. Also, the vendors of certain products or services that the Company resells may not provide the Company with indemnification
for infringement. However, the Company’s customers may seek indemnification from the Company, which could cause the Company to
incur substantial costs in defending infringement claims against itself and its customers. In the event of such claims, the Company and
its customers may be required to obtain one or more licenses from third-parties, and the Company may not be able to obtain such licenses
at a reasonable cost, if at all. Defense of any lawsuit or failure to obtain any such required license could significantly increase the
Company’s expenses and/or adversely affect its ability to offer one or more of its services.
Risks Related to Our Securities and Recent Acquisitions
As smaller reporting company, the Company is exempt from certain
public company reporting requirements.
The Company is a “smaller reporting company”
as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations,
including, among other things, providing only two years of audited financial statements. The Company will remain a smaller reporting
company until the last day of the fiscal year in which (1) the market value of our common stock held by non-affiliates exceeds $250
million as of the end of that year’s second fiscal quarter, or (2) our annual revenues exceeded $100 million during such completed
fiscal year and the market value of its common stock held by non-affiliates exceeds $700 million as of the end of that year’s second
fiscal quarter. Investors may find the Company’s common stock less attractive because of the Company’s reliance on these
exemptions, which may result in a less active trading market the Company’s common stock and/or could result in the Company’s
stock price being more volatile. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison
of our financial statements with other public companies difficult or impossible.
Our management and their affiliates control a substantial
interest in us and thus may influence certain actions requiring a stockholder vote.
As of March 31, 2023, directors and executive
officers beneficially owned 7.5% of our common stock. Accordingly, these individuals have considerable influence regarding the outcome
of any transaction that requires stockholder approval. Furthermore, our board of directors is divided into three classes, each of which
will generally serve for a term of three years with only one class of directors being elected in each year. As a consequence of our “staggered
board,” only a minority of our board of directors will be considered for election in any given year. In addition, our management
and their affiliates, because of their ownership position, will have considerable influence regarding the outcome of such elections.
Changes in laws or
regulations, or a failure to comply with any laws and regulations, may adversely affect our business, investments and results of operations.
We are subject to laws and regulations enacted
by national, regional and local governments. In particular, we are required to comply with certain SEC and other legal requirements.
Compliance with, and monitoring of, applicable laws and regulations may be difficult, time consuming and costly. Those laws and regulations
and their interpretation and application may also change from time to time and those changes could have a material adverse effect on
our business, investments and results of operations. In addition, a failure to comply with applicable laws or regulations, as interpreted
and applied, could have a material adverse effect on our business and results of operations.
Our Charter provides,
subject to limited exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder
litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our
directors, officers, employees or stockholders.
Our Charter provides, to the fullest extent permitted
by law, that derivative actions brought in our name, actions against directors, officers and employees for breach of fiduciary duty and
other similar actions may be brought only in the Court of Chancery in the State of Delaware and, if brought outside of Delaware, the
stockholder bringing the suit will be deemed to have consented to service of process on such stockholder’s counsel; provided
that the exclusive forum provision will not apply to (i) suits brought to enforce any liability or duty created by the Exchange Act,
(ii) any other claim for which the federal courts have exclusive jurisdiction, (iii) any claim as to which the Court of Chancery determines
that there is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent
to the personal jurisdiction of the Court of Chancery within ten days following such determination), (iv) any claim which is vested in
the exclusive jurisdiction of a court or forum other than the Court of Chancery, or (v) any claim for which the Court of Chancery does
not have subject matter jurisdiction. Furthermore, our Charter also provides that unless we consent in writing to the selection of an
alternative forum, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint
asserting a cause of action arising under the Securities Act. Section 22 of the Securities Act creates concurrent jurisdiction for federal
and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder.
Accordingly, there is uncertainty as to whether a court would enforce such provision with respect to suits brought to enforce any duty
or liability created by the Securities Act or the rules and regulations thereunder. Stockholders will not be deemed to have waived our
compliance with the federal securities laws and the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring
any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our Charter.
This choice of forum provision may limit a stockholder’s
ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees
or stockholders, which may discourage lawsuits with respect to such claims, although our stockholders will not be deemed to have waived
our compliance with federal securities laws and the rules and regulations thereunder. Alternatively, if a court were to find the choice
of forum provision contained in our Charter to be inapplicable or unenforceable in an action, we may incur additional costs associated
with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.
Sales of a substantial
number of shares of our common stock in the public market, or the perception that they might occur, could have an adverse effect on the
market price of our common stock.
As of December 31, 2022, we had warrants to purchase
shares of our common stock. To the extent any such warrants are exercised, additional shares of common stock will be issued, which will
result in dilution to our stockholders and an increase in the number of shares of common stock eligible for resale in the public market.
All of our outstanding warrants are subject to agreements requiring us to register for resale the underlying shares of common stock. Sales
of substantial numbers of such shares in the public market or the fact that the warrants may be exercised, could adversely affect the
market price of our common stock.
Because we have no
current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless
you sell your common stock for a price greater than that which you paid for it.
We may retain future earnings, if any, for future
operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision
to declare and pay dividends as a public company in the future will be made at the discretion of our board of directors and will depend
on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors
that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing
and future outstanding indebtedness we or our subsidiaries incur. As a result, you may not receive any return on an investment in our
common stock unless you sell your shares of common stock for a price greater than that which you paid for it.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We currently maintain our principal executive
offices at 1720 Peachtree Street, Suite 629, Atlanta, GA 30309, along with certain additional offices, all of which are leased.
As of December 31, 2022, locations leased by Kandy were as follows:
| ● | Administrative offices
located in the Brier Creek Office Parke, Wake County, North Carolina; |
| ● | A lab and related
facilities in Ottawa and North Carolina; |
| ● | A facility in Mexico
City; and |
| ● | Approximately 4 co-located
data centers that are used as server locations. |
We believe our current facilities meet the current
needs of our employee base.
Item 3. Legal Proceedings
There is no material litigation, arbitration,
governmental proceeding or any other legal proceeding currently pending or known to be contemplated against any members of our management
team in their capacity as such. From time to time, we may be involved in certain legal proceedings and claims, which arise in the ordinary
course of business. Currently, we not aware of any matter or matters that, individually or in the aggregate, would have a material adverse
effect on our results of operations, financial condition, or cash flow. If we should determine that an unfavorable outcome is probable
on a claim and that the amount of probable loss is reasonably estimable, we will record an accrual for such claim or claims. If any such
accrual is recorded, it could be material and could adversely impact our results of operations, financial condition, and cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
The accompanying notes are an integral part of
the consolidated financial statements.
The accompanying notes are an integral part of
the consolidated financial statements.
The accompanying notes are an integral part of
the consolidated financial statements.
The accompanying notes are
an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
1. Organization and Business Operations
Organization
American Virtual Cloud Technologies, Inc. (“AVCT,”
the “Company,” “we,” “us,” “our” or “Successor”) 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”), a private 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
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, which would complete the Company’s transition to a cloud communications company, centered on the Kandy
platform. As a result, Computex was classified as held for sale as of December 31, 2021, and its operations became classified as discontinued
operations. In connection with the planned sale of Computex, the Company recorded a noncash goodwill impairment charge of $32,100 during
the year ended December 31, 2021, which represented the excess of the carrying value of the Computex reporting unit over the expected
sale proceeds less costs to sell. On March 15, 2022, the Computex sale was consummated.
Unless otherwise noted, discussion in these Notes
to Consolidated Financial Statements refers to Kandy and the Company’s corporate activities. Refer to Note 4, Assets held for
sale and operations classified as discontinued operations, 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 could
lead to the sale of the Company or of selected assets.
On January 11, 2023, 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 “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 Court and in accordance with the applicable provisions of the US Bankruptcy Code and orders of the 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.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
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.
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.
As identified in the Debtors’ Combined Disclosure Statement and Chapter 11 Plan of Liquidation (the “Plan”),
filed with the Court on March 21, 2023, and subject to Court approval, the Company anticipates that there will be no proceeds available
for distribution to the Company’s stockholders and that the Company’s outstanding securities shall be cancelled upon confirmation
of the Plan.
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.
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.
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 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
The description of the Company’s business
contained herein reflects the Company’s operation of its business prior to the completion of the Asset Sale on March 24, 2023.
As a result of the Asset Sale, 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.
Kandy is a provider of cloud-based enterprise services. It deploys
a carrier grade proprietary cloud communication platform that supports 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.
Discontinued Operations
Computex, sold in March 2022 and classified within
discontinued operations, is a leading multi-brand technology solutions provider to large global customers, providing a comprehensive
and integrated set of technology solutions, through its extensive hardware, software and value-added service offerings.
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. However, the Company found ways to continue to engage with
and assist its customers and partners as they worked to navigate the changed environment.
2. Liquidity
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 December 31 2022, the Company had an aggregate cash balance of $12,627
in its operating bank accounts and net working capital of $15,298. As of March 31, 2023, aggregate cash in the Company’s operating
bank accounts was $13,260.
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 research & development and capital investment requirements until the
Company scaled to a revenue level that would permit cash self-sufficiency. Such factors raise substantial doubt about the ability of
the Company to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
During 2022, the Company also announced that it was pursuing strategic
initiatives that could result in 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.
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
As
indicated in Note 1 of the accompanying consolidated financial statements, the Company entered into an asset purchase agreement in March
2023 for the sale of substantially all of the assets of the Company, and after the consummation of the sale, plans to pursue steps to
facilitate an orderly winding up of its remaining operations. The Company believes it has sufficient liquidity to execute the sale
and wind up 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 consolidated financial statements
are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
The Company has reclassified certain
prior year amounts to conform to the current year presentation. Unless otherwise indicated, amounts provided in these Notes exclude operations
classified as discontinued operations as of December 31, 2022. See Note 4 for information on discontinued operations.
Principles of consolidation
The accompanying consolidated financial
statements include the accounts of AVCT and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
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 require 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 consolidated financial statements include, but are not limited to, revenue recognition,
estimates of impairment on long-lived assets, allowance for doubtful accounts, recognition and measurement of income tax assets, valuation
of share-based compensation, the valuation of net assets acquired and the identification and measurements inherent in the classification
of certain components of our operations as discontinued operations.
Discontinued Operations
The Company classifies assets and liabilities
of a business or asset group as held for sale, and the results of such operations as discontinued operations, for all periods presented,
when it commits to a plan to divest a business or asset group, actively begin marketing it for sale, the sale is deemed probable of occurrence
within the ensuing twelve months, and the business or asset group reflects a strategic shift that has, or will have, a major effect on
the Company’s operations and its financial results. In measuring the assets and liabilities held for sale, the Company evaluates
which businesses or asset groups are being marketed for sale. Upon designation as held for sale, the Company records the carrying value
of the assets at the lower of the carrying value or estimated fair value, less costs to sell. Fair value is determined based on external
data available or management’s estimates, depending upon the nature of the assets and liabilities.
The results of discontinued operations, as well
as any gain or loss on the disposal transaction, are presented separately, net of tax, from the results of continuing operations for
all periods presented. The revenue and expenses included in the results of discontinued operations are the revenue and direct operating
expenses incurred by the discontinued component that may be reasonably segregated from the revenue and costs of the ongoing operations
of the Company. The assets and liabilities for the Computex business have been accounted for as assets and liabilities held for sale
in the consolidated balance sheet as of December 31, 2021 and the operating results have been included in discontinued operations in
the consolidated statements of operations.
AMERICAN
VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
Revenue recognition
Revenue from contracts with customers are not
recorded until the Company has the approval and commitment from the parties, the rights of the parties are identified, payment terms
are established, the contract has commercial substance and collectability of the consideration is probable. The Company also evaluates
the following indicators, amongst others, when determining whether it is acting as a principal in the transaction (and therefore whether
to record revenue on a gross basis): (i) whether the Company is primarily responsible for fulfilling the promise to provide the specified
good or service, (ii) whether the Company has the inventory risk before the specified good or service has been transferred to a customer
or after transfer of control to the customer and (iii) whether the Company has the discretion to establish the price for the specified
good or service. If the terms of a transaction do not indicate that the Company is acting as a principal in the transaction, then the
Company is acting as an agent in the transaction and therefore, the associated revenue is recognized on a net basis (that is revenue
net of costs).
Revenue is recognized once control passes to
the customer. The following indicators are evaluated in determining when control has passed to the customer: (i) whether the Company
has a right to payment for the product or service, (ii) whether the customer has legal title to the product, (iii) whether the Company
has transferred physical possession of the product to the customer, (iv) whether the customer has the significant risk and rewards of
ownership of the product and (v) whether the customer has accepted the product. The Company’s products can be delivered to customers
in a variety of ways, including (i) physical shipment from the Company’s warehouse, (ii) via drop-shipment by the vendor or supplier
or (iii) via electronic delivery of keys for software licenses. The Company’s shipping terms typically allow for the Company to recognize
revenue when the product is shipped to the customer’s location.
When an arrangement contains more than one performance
obligation, the Company will allocate the transaction price to each performance obligation on a relative standalone selling price basis.
The Company utilizes the observable price of goods and services when they are sold separately to similar customers in order to estimate
standalone selling price.
Cloud subscription and software revenue
Revenue from subscriptions to the Company’s
cloud-based technology platform is recognized on a ratable basis over the contractual subscription term beginning on the date that the
platform is made available to the customer until the end of the contractual period. Payments received in advance of subscription services
are recorded as deferred revenue; revenue recognized for services rendered in advance of payments received are recorded as contract assets.
Usage fees, when bundled, are billed in advance and recognized on a ratable basis over the contractual subscription term, which is usually
the monthly contractual billing period. Non-bundled usage fees are recognized as actual usage occurs.
The Company also recognizes revenue for term-based
software licenses and has concluded that its software licenses are functional intellectual property that are distinct, as the user can
benefit from the software on its own. The software license revenue is typically recognized upon transfer of control or when the software
is made available for download, as this is the point at which the user of the software can direct the use of, and obtain substantially
all of the remaining benefits from, the functional intellectual property.
When services do not meet certain service levels
of commitments, customers are entitled to receive service credits, and in certain cases, refunds, each representing a form of variable
consideration. The Company historically has not experienced any significant incidents affecting the defined levels of reliability and
performance as required by its subscription contracts. Therefore, the variable consideration has been insignificant and there are no
reserves for such service credits as of December 31, 2022.
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
Managed and professional services
Professional and managed services revenue include
services for deployment, configuration, system integration, optimization, customer training and education.
Such professional services are provided under
both time and materials and fixed price contracts. When services are provided on a time and materials basis, the Company recognizes revenues
at agreed-upon billing rates as services are performed. When services are provided on a fixed fee basis, the Company recognizes revenues
over time in proportion to the Company’s progress towards satisfaction of the performance obligation.
In arrangements for managed services, the Company’s
arrangement is typically a single performance obligation comprised of a series of distinct services that are substantially the same and
that have the same pattern of transfer (i.e., distinct days of service). The Company typically recognizes revenue from these services
on a straight-line basis over the period services are provided, which is consistent with the timing of services rendered.
Freight and sales tax
Freight billed to customers is included within
sales on the consolidated statement of operations. The related freight charged to the Company is included within cost of revenue. Sales
tax collected from customers is remitted to governmental authorities and is reflected as a payable until paid.
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 and significant 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.
Any significant 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.
Cash, cash equivalents
The Company considers all short-term investments
with an original maturity of three months or less when purchased to be cash equivalents.
Trade receivables, net
Trade receivables arise from granting credit
to customers in the normal course of business, are unsecured and are presented net of an allowance for doubtful accounts. The allowance
is based on a number of factors, including the length of time the receivable is past due, the Company’s previous loss history,
the customer’s current ability to pay, and the general condition of the economy and industry as a whole. Depending on the customer,
payment is due within 30, 60 or 90 days after the customer receives an invoice. Accounts that are more than 45 days past due are individually
analyzed for collectability. When all collection efforts have been exhausted, the accounts are written off. Historically, the Company
has not suffered significant losses with respect to its trade receivables. The allowance for doubtful accounts was approximately $471
and $147 at December 31, 2022 and 2021, respectively.
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
Business combinations
The Company accounts for business combinations
in accordance with the Financial Accounting Standard Board’s (“FASB”) Accounting Standard Codification (“ASC”)
805, Business Combinations. Accordingly, identifiable 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.
Long-lived assets
Property and equipment are recorded at cost and
presented net of accumulated depreciation. Major additions and betterments are capitalized while maintenance and repairs, which do not
improve or extend the life of the respective assets, are expensed. Property and equipment are depreciated on the straight-line basis
over their estimated useful lives.
Definite-lived and indefinite-lived intangible
assets arising from business combinations have, in the past, included customer relationships, trademarks, acquired technology and noncompete
agreements. Definite-lived intangible assets are amortized over the estimated period during which the asset is expected to contribute
directly or indirectly to future cash flows. Intangible assets that are considered to be indefinite-lived are not amortized.
The Company reviews its long-lived assets for
impairment whenever events or circumstances exist that indicate the carrying amount of an asset or asset group may not be recoverable.
The recoverability of long-lived assets is measured by a comparison of the carrying amount of the asset or asset group to the future
undiscounted cash flows expected to be generated by that asset group. If the asset or asset group is considered to be impaired, an impairment
loss is recorded to adjust the carrying amounts to the estimated fair value. During the year ended December 31, 2021, the Company recorded
impairment of intangible assets of $15,319 relating to the Kandy reporting unit based on a comparison of the reporting unit’s fair
value with its carrying value. The excess of the carrying value of the reporting over the estimated fair value was first allocated to
the intangibles and then to goodwill. Fair value was determined using the income approach. No impairment was evident on the Company’s
other long-lived assets as of December 31, 2022.
Goodwill
Goodwill represents the excess of the purchase
price over the fair value of the net identifiable assets acquired in a business combination. Goodwill is reviewed for impairment at least
annually, in December, or more frequently if a triggering event occurs between impairment testing dates. As of December 31, 2021, the
Company had two operating segments and two reporting units for the purpose of evaluating goodwill impairment.
The Company’s impairment assessment begins with
a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying
value. Qualitative factors may include, macroeconomic conditions, industry and market considerations, cost factors, and other relevant
entity and Company specific events. If, based on the qualitative test, the Company determines that it is “more likely than not”
that the fair value of a reporting unit is less than its carrying value, then the
Company evaluates goodwill for impairment by comparing the fair value of the reporting unit to its respective carrying value, including
its goodwill. If it is determined that it is “not likely” that the fair value of the reporting unit is less than its
carrying value, then no further testing is required.
The selection and assessment of qualitative factors
used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves significant
judgment and estimates. Fair values may be determined using a combination of both income and market-based approaches.
As indicated in Note 1, in connection with the
planned sale of Computex, the Company recorded a noncash goodwill impairment charge of $32,100 during the year ended December 31, 2021,
which represented the excess of the carrying value of the Computex reporting unit over the expected sale proceeds less costs to sell.
Impairment of Kandy’s goodwill was also recorded during the years ended December 31, 2022 and 2021. Goodwill impairment of the
Kandy reporting unit was $10,468 and $13,676 during the years ended December 31, 2022 and 2021, respectively.
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
Deferred financing fees and debt discount
Deferred financing fees, which are debt issuance
costs that qualify for deferral in connection with the issuance of new debt or the modification of existing debt facilities, are amortized
over the term of the related debt using the effective interest method (straight-line method for revolving credit arrangements). Debt
discounts are also amortized using the effective interest method, unless the interest method approximates the straight-line method. Amortization
of such costs are included in interest expense, while the unamortized balances of deferred financing fees and debt discount are presented
as reductions of the carrying value of the related debt.
Research and development
The Company incurs software development costs
to enhance, improve, expand and/or upgrade certain proprietary software in an agile software environment with releases broken down into
several iterations called sprints. Such software development costs, research and development costs, and any new product development 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 consultant costs, supplies, software tools and product certification.
Software developed for internal use is capitalized.
Capitalization ceases and amortization starts when the software is ready for its intended use.
Leases
As discussed below, the Company adopted the FASB
issued Accounting Standard Update (“ASU”) No. 2016-02, Leases (ASC 842), as amended by multiple updates, hereafter
ASC 842, as of January 1, 2022.
The Company determines if an arrangement is a
lease at inception by determining whether the agreement conveys the right to control the use of the identified asset for a period of
time, whether the Company has the right to obtain substantially all of the economic benefits from use of the identified asset, and the
right to direct the use of the asset. Lease liabilities are recognized at the commencement date based upon the present value of the remaining
future minimum lease payments over the lease term using the rate implicit in the lease or the incremental borrowing rate. The Company’s
lease terms include options to renew or terminate the lease when it is reasonably certain that it will exercise the option.
The right-of-use assets are initially measured
at the carrying amount of the lease liability and adjusted for any prepaid or accrued lease payments, remaining balance of lease incentives
received, unamortized initial direct costs, or impairment charges relating to the right-of-use-asset. Certain leases contain escalation
clauses, which are factored into the right-of-use asset where appropriate. Lease expense for minimum lease payments are recognized on
straight-line basis over the lease term.
Variable lease expenses include payments based
upon changes in a rate or index, such as real estate taxes, common area maintenance, insurance, and utilities are expensed as incurred.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Warrants
Warrants issued by the Company are evaluated
under ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815-40, Derivatives and Hedging—Contracts
in an Entity’s Own Equity, to determine whether they meet the criteria to be accounted for as liabilities or as stockholders’
equity. If the Company determines that they should be accounted for as liabilities, then they are recorded at fair value on the issuance
dates with subsequent changes in fair values recognized in the consolidated statement of operations at each reporting date. Changes in
the fair values of the Company’s warrants may be material to the Company’s future operating results.
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
Series A, Series B, Series C, Series D, February
2022 and Monroe Warrants
As more fully discussed and defined in Note 10,
between November 2021 and February 2022, the Company issued certain Series A, Series B, Series C, Series D and Monroe Warrants as well
as certain February 2022 Warrants in a series of transactions, which were determined to qualify for treatment under ASC 480. All such
warrants, except the Monroe warrants, were exercised and/or converted during the year ended December 31, 2022. The Monroe warrants were
exercised in January 2023.
Public Warrants, Private Placement Warrants
and EBC Warrants issued in 2017
On July 27, 2017, the Company entered into certain
Warrant Purchase Agreements with each of Pensare Sponsor Group, LLC, a Delaware limited liability company (the “Sponsor”),
MasTec, Inc., a Florida corporation, and EarlyBirdCapital, Inc., (“EBC”) a Delaware corporation (together with the Sponsor
and MasTec, Inc., the “Purchasers”), pursuant to which the Purchasers, in connection with and simultaneously with
the closing of the Company’s initial public offering (the “IPO”), purchased an aggregate of 700,833 warrants, including
the full over-allotment amount, (the “2017 Private Placement Warrants.
On or about August 1, 2017, in the IPO, the Company
sold units of the Company’s equity securities, each such unit consisting of one share of Common Stock, one-half of one Public Warrant
and one-tenth of one right to acquire one share of the Company’s common stock (the “Units”) and, in connection
therewith, issued and delivered 1,035,000 warrants to public investors in the Offering (the “Public Warrants”). In
addition, at that time, there were 45,000 warrants underlying unit purchase options granted to EBC or its designees (the “2017
EBC Warrants”). The 2017 EBC Warrants, together with the 2017 Private Placement Warrants and the Public Warrants are referred
to as the “2017 Warrants.” Each whole Warrant entitled the holder thereof to purchase one share of common stock of
the Company for $172.50 per share, subject to adjustments. In addition to the 45,000 warrants, the unit purchase options, which expired
in July 2022, entitled the holders to receive 99,000 shares of common stock for an exercise price of $150 per unit.
As of December 31, 2022, 1,035,000 Public Warrants
and 700,833 of the 2017 Private Placement Warrants remained outstanding.
The 2017 Private Placement Warrants, if appropriately
exercised, are exercisable on a cashless basis, at the holder’s option, and are non-redeemable so long as they are held by the
initial Purchasers or their permitted transferees. The 2017 Public Warrants and any 2017 Private Placement Warrants that are transferred
to nonpermitted transferees are redeemable at the option of the Company and are not exercisable on a cashless basis.
The Company evaluated the 2017 Warrants under
ASC 815-40, Derivatives and Hedging—Contracts in an Entity’s Own Equity, and concluded that the 2017 Private Placement
Warrants and 2017 EBC Warrants did not meet the criteria to be classified in stockholders’ equity. A recent SEC Statement focused
in part on provisions in warrant agreements that provide for potential changes to the settlement amounts dependent upon the characteristics
of the warrant holder and because a holder of a warrant is not an input into the pricing of a fixed-for-fixed option on equity shares,
such provision precluded the 2017 Private Placement Warrants and the 2017 EBC Warrants from being classified in equity and therefore
the 2017 Private Placement Warrants and the 2017 EBC Warrants were classified as liabilities at fair value, with subsequent changes in
fair values recognized in the consolidated statement of operations at each reporting date.
The fair values of the 2017 Private Placement
Warrants and the 2017 EBC Warrants were determined using the Black-Scholes model in which the following weighted average assumptions
were used for the applicable valuations:
| |
December 31,
2022 (2017 Private Placement
Warrants) | | |
December 31, 2021 (2017 Private Placement and 2017 EBC Warrants) | |
stock price volatility | |
| 295 | % | |
| 70 | % |
exercise price | |
$ | 172.50 | | |
$ | 172.50 | |
discount rate | |
| 4.2139 | % | |
| 0.9577 | % |
remaining useful life (in years) | |
| 2.27 | | |
| 3.11 | |
stock price | |
$ | 1.16 | | |
$ | 36.45 | |
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
Income taxes
The Company accounts for income taxes under the
asset and liability method, which requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable
to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. The Company measures deferred tax assets and liabilities using the enacted tax rates for the years and jurisdictions in which
the temporary differences are expected to be recovered. A change to the tax rates used to measure the Company’s deferred taxes
is recognized in income during the period in which the new rate(s) were enacted.
The Company recognizes deferred tax assets to
the extent the Company’s assets are more likely than not to be realized. In making such a determination, the Company considers
all available positive and negative evidence, including the future reversals of existing taxable temporary differences, projected future
taxable income exclusive of reversing temporary differences and carryforwards, tax-planning strategies, taxable income in prior carryback
years if permitted under tax law, and the results from prior years. If the Company determines it is more likely than not, that all or
a portion of a deferred tax asset will not be realized, a valuation allowance is recorded with a charge to income tax expense. Alternatively,
if the Company determines that all or a portion of a deferred tax asset previously not meeting the more likely than not threshold will
be realized, the Company reduces its valuation allowance and recognizes a benefit in income tax expense.
The Company recognizes and measure uncertain
tax benefits in accordance with ASC Topic 740, Income Taxes (“ASC 740”), based on a two-step process in which (1)
the Company determines whether it is more likely than not that the tax position will be sustained based on the technical merits of the
position, and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest
amount of tax benefit that is more than fifty percent likely to be realized upon ultimate settlement with the related tax authority.
The Company’s policy is to recognize interest and penalties related to uncertain tax positions, if any, in income tax expense.
Share-based compensation
The Company accounts for share-based compensation
in accordance with ASC 718, Compensation—Stock Compensation (“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 periods on a straight-line
basis, and accounts for forfeitures as they occur.
For restricted stock
awards with a time-based vesting condition, the fair value, which is fixed at the grant date for purposes of recognizing compensation
costs, is determined by reference to the Company’s stock price on the grant date. A portion of the Company’s restricted stock awards
contains a market condition. For such restricted stock awards, the fair value is estimated using a Monte Carlo simulation model, whereby
the fair value of such awards is fixed at the grant date and amortized over the shorter of the performance or service period. The Monte
Carlo simulation valuation model utilizes the following assumptions: expected stock price volatility, the 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.
Net loss per common share
Pursuant to ASC Topic 260, Earnings Per Share,
basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the
reporting periods.
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
Diluted net loss per share is based on the weighted
average number of shares outstanding during the periods plus the effect, if any, of the potential exercise or conversion of securities,
such as warrants and restricted stock units that would cause the issuance of additional shares of common stock. In computing the basic
and diluted net loss per share applicable to common stockholders during the periods listed in the consolidated statements of operations,
the weighted average number of shares are the same for both basic and diluted net loss per share due to the fact that when a net loss
exists, dilutive shares are not included in the calculation as the impact is anti-dilutive. An anti-dilutive impact is an increase in
earnings per share or a decrease in net loss per share that would result from the conversion, exercise, or issuance of certain contingent
securities.
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 December 31, 2022, cash balances held with a financial
institution exceeded the federally insured limit by $11,955. However, management does not believe this poses a significant credit risk.
During the year ended December 31, 2022, one vendor accounted for more than 10% of cost of revenue, accounting for approximately $3,230.
Additional concentration of business risks are summarized in the following table:
| |
December 31, 2022 | | |
December 31, 2021 | |
| |
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 | | |
$ | 6,217 | | |
3 | | |
$ | 6,104 | |
Vendors that individually accounted for 10% or more of trade accounts payable | |
2 | | |
$ | 3,139 | | |
2 | | |
$ | 2,527 | |
| |
Year Ended December 31, | |
| |
2022 | | |
2021 | |
Number of customers that individually accounted for 10% or more of sales | |
| 4 | | |
| 3 | |
Aggregate total sales of customers that individually accounted for 10% or more of sales | |
$ | 11,849 | | |
$ | 9,929 | |
Fair value of financial instruments
Fair value is 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.
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
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, and 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 consolidated balance sheet as “Warrant Liabilities.” For the valuation methodologies and significant assumptions used
in the valuations, see the section above titled, “Public Warrants, Private Placement Warrants and EBC Warrants issued in 2017.”
The warrant liabilities are considered to be Level 2 valuations.
Foreign operations
The Company’s reporting currency is the
U.S. dollar and the Company’s records are maintained in US dollars. Any amounts due or receivable from foreign entities are translated
into U.S. dollars at the current exchange rate on the balance sheet date. Any revenues or expenses that are billed in foreign currency
are converted at the average rates of exchange prevailing during each period. Realized and unrealized foreign currency exchange gains
and losses arising from transactions denominated in currencies other than the U.S dollar are reflected in earnings.
Operations outside the United States include
a Canadian division. The Company also transacts certain business in other foreign countries. Foreign operations are subject to risks
inherent in operating under different legal systems and various political and economic environments. Among the risks are changes in existing
tax laws, possible limitations on foreign investment and income repatriation, government price or foreign exchange controls, and restrictions
on currency exchange. Long-lived assets located outside of the US was $1,301 as of December 31, 2022.
Advertising
Advertising costs are expensed as incurred.
Reclassifications
Certain prior period amounts have been reclassified
to conform to the current period presentation.
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
Change in 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 (“CODM”). Upon the sale of Computex in March 2022, the Company began operating as one reportable
segment.
Emerging growth company
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”), in December of 2022.
Recently adopted accounting standards
In May 2021, the FASB issued ASU No. 2021-04,
Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU
No. 2021-04”), which provides guidance for a modification or an exchange of a freestanding equity-classified written call option
that is not within the scope of another Topic. Under ASU 2021-04, an entity is required to treat a modification of the terms or conditions
or an exchange of a freestanding equity-classified written call option, that remains equity classified, as an exchange of the original
instrument for a new instrument. ASU 2021-04 also provides guidance on the measurement of the effect of a modification or exchange and
requires entities to recognize the effect of any such modification or exchange on the basis of the substance of the transaction.
ASU No. 2021-04 was effective for fiscal years
beginning after December 15, 2021, including interim periods within those fiscal years. Entities were required to apply the amendments
prospectively to modifications or exchanges that occurred on or after the effective date. ASU No. 2021-04 was effective for the Company
on January 1, 2022. The adoption did not materially impact the Company’s financial condition or results as the Company’s
treatment of such modifications were already consistent with the guidance in ASU 2021-04.
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.
Recently issued accounting standards
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.
4. Assets held for sale and operations classified as discontinued
operations
On September 16, 2021, the Company issued a press
release announcing that as a result of a decision by the Company’s Board of Directors to explore strategic alternatives previously
announced on April 7, 2021, the Board had authorized the Company to focus its strategy on acquisitions and organic growth in its cloud
technologies business as well as to explore strategic opportunities for its IT solutions business, including the divestiture of Computex.
The Company believed that the change would allow the Company to optimize resource allocation, focus on core competencies, and improve
its ability to invest in areas of maximal growth potential.
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.
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
Accordingly, certain assets and liabilities of
Computex were classified as held for sale as of December 31, 2021 in the accompanying consolidated balance sheets, and the related revenues
and expenses became classified as discontinued operations. Also, in connection with the planned sale of Computex, the Company compared
the expected sales proceeds less costs to sell with the carrying value of the reporting unit and in connection therewith recorded a noncash
goodwill impairment charge of $32,100 during the year ended December 31, 2021. Such impairment is included within discontinued operations.
The sale of Computex was consummated on March 15, 2022. Net sale proceeds received was $32,112.
Assets and liabilities classified as held for
sale as of December 31, 2021 consisted of the following:
| |
December 31,
2021 | |
Current assets: | |
| |
Cash | |
$ | 4,136 | |
Prepaid expenses | |
| 937 | |
Trade receivables (net allowance of $146) | |
| 19,965 | |
Inventory | |
| 2,737 | |
Assets held for sale - current | |
| 27,775 | |
Noncurrent assets: | |
| | |
Property and equipment, net | |
| 4,489 | |
Goodwill | |
| 6,579 | |
Other intangible assets, net | |
| 20,105 | |
Other noncurrent assets | |
| 85 | |
Assets held for sale - noncurrent | |
| 31,258 | |
Total assets held for sale | |
$ | 59,033 | |
| |
| | |
Current liabilities: | |
| | |
Accounts payable and accrued expenses | |
$ | 26,023 | |
Deferred revenue | |
| 3,214 | |
Liabilities associated with assets held for sale - current | |
| 29,237 | |
Long-term liabilities | |
| | |
Other liabilities | |
| 102 | |
Liabilities associated with assets held for sale - noncurrent | |
| 102 | |
Total liabilities associated with assets held for sale | |
$ | 29,339 | |
Revenues and expenses classified as discontinued
operations consist of the following:
| |
Year Ended | |
| |
December 31,
2022 | | |
December 31,
2021 | |
Revenues: | |
| | |
| |
Hardware | |
$ | 10,948 | | |
$ | 55,551 | |
Third party software and maintenance | |
| 1,815 | | |
| 7,611 | |
Managed and professional services | |
| 7,214 | | |
| 32,796 | |
Other | |
| 165 | | |
| 978 | |
Total revenues | |
| 20,142 | | |
| 96,936 | |
Cost of revenue | |
| 14,176 | | |
| 67,497 | |
Gross profit | |
| 5,966 | | |
| 29,439 | |
Goodwill impairment | |
| - | | |
| 32,100 | |
Selling, general and administrative | |
| 9,520 | | |
| 30,847 | |
Loss from operations | |
| (3,554 | ) | |
| (33,508 | ) |
Other income (expense) | |
| | | |
| | |
Gain on sale of Computex | |
| 4,314 | | |
| - | |
Gain on extinguishment of debt | |
| - | | |
| 4,177 | |
Interest expense | |
| - | | |
| (1,152 | ) |
Other expense | |
| - | | |
| 22 | |
Total other income | |
| 4,314 | | |
| 3,047 | |
Income (loss) from discontinued operations before income taxes | |
| 760 | | |
| (30,461 | ) |
Income tax provision on discontinued operations | |
| (36 | ) | |
| (71 | ) |
Net income (loss) from discontinued operations | |
$ | 724 | | |
$ | (30,532 | ) |
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
5. Property and equipment
Property and equipment consisted of the following:
| |
December 31,
2022 | | |
December 31,
2021 | |
Furniture and equipment | |
$ | 5,502 | | |
$ | 5,230 | |
ERP development costs | |
| 1,848 | | |
| - | |
Software | |
| 729 | | |
| 693 | |
Other | |
| 134 | | |
| 219 | |
| |
| 8,213 | | |
| 6,142 | |
Less accumulated depreciation | |
| (3,429 | ) | |
| (1,389 | ) |
Property, plant and equipment, net | |
$ | 4,784 | | |
$ | 4,753 | |
Furniture and equipment and software are depreciated
on the straight-line basis over their estimated useful lives (3 to 7 years for furniture and equipment, and 3 years for software). Leasehold
improvements and leased assets are depreciated on the straight-line basis over the lesser of their estimated useful lives and the life
of the respective lease. Depreciation expense was $2,029 and $1,275 for the years ended December 31, 2022 and 2021, respectively.
6. Goodwill and other intangible assets
As more fully described in Note 3, the Company recorded an impairment
loss on the entire balance of Kandy’s intangible assets during the year ended December 31, 2021. Amortization of intangibles during
the year ended December 31, 2021, prior to such impairment, was $2,751. The activity for intangible assets during the year ended December
31, 2021 was as follows:
| |
Customer
relationships | | |
Tradenames | | |
Acquired
technology | | |
Total | |
Balance, January 1, 2021 | |
$ | 7,548 | | |
$ | 2,437 | | |
$ | 8,086 | | |
$ | 18,071 | |
Amortization | |
| (771 | ) | |
| (614 | ) | |
| (1,367 | ) | |
| (2,752 | ) |
Impairment | |
| (6,777 | ) | |
| (1,823 | ) | |
| (6,719 | ) | |
| (15,319 | ) |
Balance, December 31, 2021 | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Goodwill activity for the Kandy reporting unit was as follows:
| |
Carrying
amount | |
Balance, January 1, 2021 | |
$ | 24,144 | |
Impairment | |
| (13,676 | ) |
Balance, December 31, 2021 | |
$ | 10,468 | |
Impairment | |
| (10,468 | ) |
Balance, December 31, 2022 | |
$ | - | |
7. Right-of-use asset and operating lease liabilities
The Company is party to operating leases under
which it leases certain facilities. All leases are noncancellable and are considered short term except for a lease of certain office
space in Raleigh, North Carolina, which provides that the Company pay, in addition to the minimum rent, certain operating expenses. The
Raleigh lease expires in May 2027 and had a commencement date of January 1, 2022.
As mentioned in Note 3, the Company adopted ASC
842 effective January 1, 2022. Accordingly, the consolidated balance sheet as of December 31, 2022 includes a right-of-use asset and
operating lease liabilities pertaining to the Raleigh operating lease. The Company elected to adopt certain of the optional practical
expedients, including the package of practical expedients, which, among other things, gives the Company the option to not reassess: (1)
whether expired or existing contracts are or contain leases; (2) the lease classification for expired or existing leases; and (3) initial
direct costs for existing leases. We elected the optional transition method that allows for a cumulative-effect adjustment as of the
adoption date coupled with the option to not restate prior periods.
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
Additionally, the Company elected a short-term
lease exception policy, which allows entities to not apply the new standard to short-term leases (i.e. leases with terms of 12 months
or less) and a hindsight policy, which allows an entity to include current considerations for existing leases when determining initial
lease terms.
Adoption of ASC 842 resulted in the recording
of a right-of-use asset and an operating lease liability of $592 as of January 1, 2022. The adoption had no impact on accumulated deficit,
the consolidated statements of operations or the consolidated statements of cash flows.
Right-of-use asset and operating lease liabilities were as follows
as of December 31, 2022
| |
| |
ASSETS | |
| |
Operating lease right-of-use asset (included in other noncurrent assets on the consolidated
balance sheet | |
$ | 503 | |
| |
| | |
LIABILITIES | |
| | |
Operating lease liability - current (included in other current liabilities on the consolidated balance
sheet) | |
$ | 104 | |
Operating lease liability - long-term (included in other liabilities on the consolidated
balance sheet) | |
| 441 | |
Total operating lease liability | |
$ | 545 | |
Future minimum rent payments, excluding operating
expenses, were as follows as of December 31, 2022:
2023 | |
$ | 146 | |
2024 | |
| 149 | |
2025 | |
| 152 | |
2026 | |
| 155 | |
2027 | |
| 52 | |
Total minimum payments required | |
| 654 | |
Imputed interest | |
| (109 | ) |
Total operating lease liabilities | |
$ | 545 | |
Total lease costs during the year ended December
31, 2022 was $780, consisting of $139 of operating lease costs, and $641 of short-term lease costs. There were no material variable lease
costs during the year ended December 31, 2022. Rent expense for the year ended December 31, 2021 was $586. The following provides additional
information about the long-term lease for the year ended December 31, 2022:
Weighted average lease term | |
| 4.3 years | |
Weighted average discount rate | |
| 8.28 | % |
Supplemental cash flow information - operating cash flows (in thousands) | |
| | |
Cash paid for amounts included in the measurement of operating lease liabilities | |
$ | 96 | |
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
8. Accounts payable and accrued expenses
Accounts payable and accrued expenses were as follows:
| |
December 31,
2022 | | |
December 31,
2021 | |
Accounts payable | |
$ | 2,980 | | |
$ | 3,692 | |
Accrued compensation, benefits and related accruals | |
| 3,637 | | |
| 6,412 | |
Accrued professional fees | |
| 1,181 | | |
| 1,867 | |
Due to related parties | |
| 500 | | |
| 2,285 | |
Third party interest accrual | |
| - | | |
| 2,180 | |
Other | |
| 353 | | |
| 578 | |
| |
$ | 8,651 | | |
$ | 17,014 | |
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.
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 exercisable for an aggregate of 1,061,779 shares of the Company’s common stock
as of December 31, 2022, and, on January 17, 2023, were fully exercised for 1,061,632 shares of the Company’s common stock.
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
Subordinated promissory note – related party
On September 16, 2021, the Company entered into
a promissory note in the principal amount of $5,000 (the “2021 Note”). For a fee of $1,250, the maturity date of the 2021
Note, which was secured by a shareholder that owned more than five percent of the Company’s shares, was amended to occur on the
earliest of (a) September 16, 2022, (b) the Company’s consummation of primary sales of registered equity securities resulting in
the receipt of gross proceeds of not less than $20,000 and (c) the consummation of the sale of the Computex business unit. The 2021 Note
became due on March 1, 2022 due to the early pay off of the Credit Agreement. However, for a waiver fee of $250, the lender extended
the maturity date to May 1, 2022. On March 15, 2022, all amounts outstanding under the 2021 Note were paid. The 2021 Note had a minimum
required return of 25.00%.
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 is 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 provides for new payment terms, with a $400 monthly prepayment towards actual costs incurred. Any
excess of that prepayment over actual costs results in a reduction of the promissory note balance, while any excess of actual costs over
the $400 monthly payment is to be added to such promissory note. The amended agreement also contains certain changes to notice provision
clauses with respect to work force reductions as well as new loaded labor rates. The note payable balance as of December 31, 2022 was
$2,315 and is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet.
10. Stockholders’ Equity, Warrants, Debentures and Guaranty
Preferred stock — The Company
is authorized to issue 5,000,000 shares of preferred stock, par value $0.0001. At December 31, 2022 and December 31, 2021, 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 December 31, 2022, a total of 33,532,473
shares of common stock were issued and outstanding.
Recent sales of securities
The November Purchase Agreement
On November 2, 2021, the Company entered into
a securities purchase agreement (the “November Purchase Agreement”) with a buyer for the purchase and sale of (i) a warrant
to purchase up to 333,333 shares (at the time) of the Company’s common stock, subject to increases as described below (the “Series
A Warrants”), in a private placement; and (ii) an aggregate of 166,666 shares of the Company’s common stock, and a warrant
to purchase up to 166,666 shares of the Company’s common stock (the “Series B Warrants” and, collectively with the
Series A Warrants, the “A&B Warrants,” in a registered direct offering. The aggregate purchase price for the shares and
the A&B Warrants was $5,000.
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
Upon any exercise of the Series B Warrant, the
number of shares issuable upon exercise of the Series A Warrant increased by the number of shares of the Company’s common stock
issued upon exercise of the Series B Warrant. Northland Securities, Inc. (the “Placement Agent”) received fees of 7% of the
aggregate gross proceeds.
In connection with the Company’s consummation
of the Credit Agreement, the exercise price of the A&B Warrants were subsequently reduced by 25%, the number of warrants were increased
and the buyers received certain newly-issued warrants (the “Series C Warrants”). As of the date of such modification, the
Company recognized a change in fair value of the warrant liabilities equal to the excess of the fair value of the modified instrument
over the previous fair value. The fair value of the Series C Warrants as of the issuance date was considered to be analogous to a financing
charge and was included in interest expense.
The December 2021 securities sale
On December 15, 2021, the Company consummated
the sale of certain securities pursuant to a securities purchase agreement, dated as of December 13, 2021 between the Company and a buyer.
At the closing, the Company issued to such buyer (i) a warrant (the “Series D Warrant”) to purchase up to 1,041,666 shares
of the Company’s common stock, in a private placement; and (ii) an aggregate of 522,666 shares of the Company’s common stock,
and 12,456 shares of Series A Preferred Stock (“Series A Preferred”) with a stated value of $1,000 per share, initially convertible
into 519,000 shares of the Company’s common stock, in a registered direct offering. The aggregate purchase price paid at the closing
for the common stock, the Series A Preferred and the Series D Warrants was $25,000.
The Series A Preferred shares were convertible
into shares of the Company’s common stock at the election of the holders at any time at an initial conversion price of $1.60. In
December 2021, the holders of the Series A Preferred exercised their conversion rights and the Series A Preferred Shares were converted
to 519,000 shares of the Company’s common stock.
February 2022 Purchase Agreement
On February 28, 2022, the Company entered into
a securities purchase agreement (the “February 2022 Purchase Agreement”) with a buyer for the purchase and sale of (i) an
aggregate of up to 21,500 shares of Series B Preferred Stock with a stated value of $1,000 per share, initially convertible into up to
1,433,333 shares of the Company’s common stock and (ii) warrants (the “February 2022 Warrants”) to purchase up to that
number of shares of the Company’s common stock equal to the number of shares of the Company’s common stock into which the
shares of Series B Preferred Stock actually sold pursuant to the purchase agreement were initially convertible, in a registered direct
offering.
Pursuant to the February 2022 Purchase Agreement,
an aggregate of 16,125 shares of Series B Preferred Stock, initially convertible into 1,075,000 shares of the Company’s common
stock, together with the February 2022 Warrants, initially exercisable for 1,075,000 shares of the Company’s common stock, were
issued and sold at an initial closing on March 1, 2022 (the “Initial Closing”). The aggregate purchase price paid for the
Series B Preferred Stock and the February 2022 Warrants at the Initial Closing was $15,000. The remaining 5,375 Preferred Shares were
never issued by the Company and any rights that the Company had to require such a purchase subsequently expired.
On March 1, 2022, the Company consummated the
Initial Closing in which the Company issued to such buyer (i) 16,125 Series B Preferred Stock with a stated value of $1,000 per share,
initially convertible into up to 1,075,000 shares of the Company’s common stock and (ii) the February 2022 Warrants that were initially
exercisable for up to 1,075,000 shares of the Company’s common stock, in a registered direct offering.
As a result of the issuance of the Series B Preferred
Stock and February 2022 Warrants, the exercise price of the Series A Warrants, the Series B Warrants and the Series D Warrants previously
issued by the Company to an affiliate of such buyer was automatically reduced by 33.3% (with a proportional increase to the number of
shares of the Company’s common stock issuable upon exercise of such warrants).
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
The Series B Preferred
Stock was convertible into shares of the Company’s common stock at the election of the holder with the conversion price being subject
to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment, on
a “full ratchet” basis, in the event of any issuances of the Company’s common stock, or securities convertible, exercisable
or exchangeable for, the Company’s common stock at a price below the then-applicable Conversion Price (subject to certain exceptions).
The Company was required to redeem the Series B Preferred Stock in 12 equal monthly installments, commencing on April 1, 2022. Subject
to certain conditions, including certain equity conditions, the Company could redeem the applicable number of Series B Preferred Stock
on each monthly redemption date either in cash, shares of the Company’s common stock or a combination. The number of shares used
to redeem any Series B Preferred Stock in such event would have been calculated as 88% of the lowest daily volume weighted average price
of the Company’s common stock during the eight trading days immediately prior to the payment date.
Based on an evaluation
of ASC 480, the Company had previously classified the Series B Preferred Stock as stock settled debt and therefore recorded the instrument
as a liability on the issuance date, as the instrument was mandatorily redeemable and thus (1) embodied an unconditional obligation (2)
required the Company to settle the unconditional obligation in cash or by issuing a variable number of its common shares and (3) was
based on a monetary amount known at inception.
The exercise price of
the February 2022 Warrants were subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and
subject to price-based adjustment, on a “full ratchet” basis, in the event of any issuances of the Company’s common
stock, or securities convertible, exercisable or exchangeable for, the Company’s common stock at a price below the then-applicable
exercise price (subject to certain exceptions).
All of the outstanding
shares of the Series B Preferred Stock have since been converted. Of the $16,125 principal, $14,781 was converted into 4,089,594 shares
of the Company’s common stock and $1,344 was paid in cash. Certain installments were based on exercises of the buyer’s acceleration
right with respect to installment payments.
April 2022 Purchase Agreement
On April 14, 2022, the Company entered into a
securities purchase agreement (the “April 2022 Purchase Agreement”) with a buyer affiliated with a greater than 5% stockholder
for the purchase and sale of a new series of senior secured convertible notes of the Company, in the aggregate original principal amount
of $12,000 (the “Convertible Notes”). The transaction funded on April 19, 2022. The Convertible Notes were convertible into
shares of the Company’s common stock. The purchase price of the Convertible Notes was $10,000 and net proceeds received totaled
$9,950.
The Convertible Notes
were scheduled to mature on October 1, 2023. Interest was only payable if there was an event of default. The Company was required to
redeem $800 of the outstanding amounts under the Convertible Notes on a monthly basis, commencing on August 1, 2022, until the maturity
date of October 1, 2023. Subject to certain conditions, including certain equity conditions, the Company was permitted to pay the amount
due on each monthly redemption date, and the amount due at maturity, either in cash, shares of the Company’s common stock or a
combination. The number of shares used to pay any portion of the Convertible Notes was generally calculated using a conversion rate of
88% of the lowest daily volume weighted average price of the common stock during the eight trading days immediately prior to the payment
date.
The full principal amount
of $12,000 due under the Convertible Notes have since been satisfied with 5,862,247 shares of the Company’s common stock.
Based on ASC 815, Derivatives
and Hedging (“ASC 815”), the convertible feature of the Convertible Note was considered to be a derivative but was considered
to have met the scope exception in ASC 815 and therefore was not bifurcated from the host instrument. However, embedded derivatives were
assessed with respect to the probability of events of default and the probability of a change of control in relation to the Convertible
Note. Such derivatives were assessed at an aggregate estimated value of $721 as of the issuance date of the Convertible Note and were
recorded as derivative liabilities as of the issuance date with a corresponding discount reflected in the Convertible Note. The Convertible
Note was fully satisfied during the year ended December 31, 2022 and therefore, as of the date of satisfaction, the related derivative
had no value.
AMERICAN
VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
Amendments - recent
securities
During the year ended
December 31, 2022, the Company entered into certain amendments and other agreements with the holders of the securities underlying the
securities discussed above, specifically, the securities underlying i) the November Purchase Agreement ii) the December 2021 securities
sale iii) the February 2022 Purchase Agreement and iv) the April 2022 Purchase Agreement, as follows:
| ● | An
amended waiver agreement (the “Waiver Agreement”) on August 31, 2022, in which
the holders waived certain rights, including, among other things, certain rights that would
have accrued if the Company had sold shares of common stock and certain rights to the timing
of certain payments which the holders agreed to defer. |
| ● | An exchange agreement (the “Exchange Agreement”) on September 11, 2022, with the holders of the Series B Preferred Stock and Convertible Notes, pursuant to which the parties agreed, among other things, to (i) exchange the remaining amount outstanding under the Series B Preferred Stock, consisting of $3,942 in stated value, into rights to acquire an aggregate of 1,720,428 shares of the Company’s common stock and (ii) to convert $1,600 in original principal amount of the Convertible Notes into 698,217 shares of the Company’s common stock. The $3,942 represented the remainder of certain additional financing charges of $7,125 which arose as a result of the stock price being below a floor price, as defined in the agreement. Of the total financing charges of $7,125, an aggregate of $3,183 was paid in cash. |
| ● | A settlement agreement, on September 26, 2022, with the holders of the Company’s convertible notes, and holders of certain warrants, pursuant to which the parties agreed, among other things, to effect, a series of sequential transactions consisting of one or more exercises of certain of the warrants, each followed by an exchange of the shares of the Company’s common stock, into certain rights to acquire an aggregate of 6,186,642 shares of the Company’s common stock (with respect to the warrants) and 480,024 shares of the Company’s common stock (in exchange for the remaining principal amount of the convertible notes), all of which shares have been fully issued and therefore the holders have no further rights to such warrants or the Convertible Notes. |
September 2022 Sale of Securities
Pursuant to an Equity Distribution Agreement
entered into on September 1, 2022 with Northland Securities, Inc., as its sales agent (the “Sales Agent”), the Company sold
4,515,000 shares of its common stock in September 2022. Net proceeds from the sale totaled $14,339, after deduction of a sales agent
commission of 3.0% and other direct costs.
October 2022 Sale of Securities
On October 20, 2022, the Company consummated
a securities purchase agreement entered into with two institutional accredited investors, relating to the sale of (i) an aggregate of
5,000,000 shares of the Company’s common stock, in a registered direct offering and (ii) warrants to purchase up to an aggregate
of 10,000,000 shares of the Company’s common stock at an exercise price of $1.80 per share, in a concurrent private placement,
for a combined purchase price of $2.00 per share. The Company later filed, within the required 30 day period, a registration statement
to register the resale of the shares of common stock issuable upon exercise of the warrants. In addition, the Company had agreed, subject
to certain exceptions, not to issue or agree to issue any shares of the Company’s common stock or common stock equivalents for
a period ending on the later of (i) 90 days after the transaction’s closing date and (ii) the date on which the resale registration
statement was declared effective by the SEC. The resale registration statement was subsequently declared effective.
Status of Recent Warrants
All warrants issued between November 2021 and
March 2022 were converted to common stock during the year ended December 31, 2022, except for the Monroe warrants, which were exercised
in January 2023.
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
Registration rights agreements
In connection with the November and December
sales of securities and the Credit Agreement with Monroe, the Company entered into certain registration rights agreements with the investors
to register the common stock underlying the warrants by specified dates and to use reasonable best efforts to cause such registration
statements to be declared effective under the Securities Act, as soon as practicable, thereafter, subject to certain fees if the shares
were not registered by certain dates. As of February 9, 2022, all such shares were registered. In connection with the April 2022 sale
of Convertible Notes, the Company entered into a substantially similar registration rights agreement with the purchaser of the Convertible
Notes with respect to the registration for resale of the shares of common stock into which the Convertible Notes were convertible. As
of June 1, 2022, all such shares were registered.
On April 7, 2020, the Company, Pensare Sponsor
Group, LLC (the “Sponsor”) and certain other initial stockholders of the Company, as well as Stratos Management Systems Holdings,
LLC, (“Holdings”), and certain other Investors (as defined below), entered into a Registration Rights Agreement (the “2020
Registration Rights Agreement”). The 2020 Registration Rights Agreement amended, restated and replaced a previous registration
rights agreement entered into among AVCT, the Sponsor and certain other initial stockholders of AVCT on July 27, 2017. Pursuant to the
terms of the 2020 Registration Rights Agreement, the holders of certain of the Company’s securities, including holders of the Company’s
founders’ shares, shares of common stock underlying the Company’s private warrants, shares of common stock underlying the
securities issued in the 2020 Private Placement (as defined below) are entitled to certain registration rights under the Securities Act
and applicable state securities laws with respect to such shares of common stock, including up to eight demand registrations in the aggregate
and customary “piggy-back” registration rights.
Convertible Debentures, related warrants
and guaranty
On April 7, 2020, the Company consummated the
sale, in a private placement (the “2020 Private Placement”), of units of securities of the Company (“Units”)
to certain investors (each, an “Investor”), as contemplated by the terms of the previously disclosed Securities Purchase
Agreement, dated as of April 3, 2020 (the “Securities Purchase Agreement”). Each Unit consisted of (i) $1,000 in principal
amount of the Company’s Series A convertible debentures (the “Convertible Debentures” or “Debentures”)
and (ii) a warrant to purchase 6 shares of the Company’s common stock at an exercise price of $0.15 per whole share (the “Penny
Warrants”). The issuances of such securities were not registered under the Securities Act in reliance on the exemption from registration
provided by Section 4(a)(2) of the Securities Act.
In addition, in connection with the acquisition
of Kandy on December 1, 2020 and pursuant to the terms of the Kandy purchase agreement, the Company, in December 2020, issued 43,778
Units to Ribbon as consideration for the Kandy purchase, sold 10,000 Units to SPAC Opportunity Partners, LLC, a significant shareholder
of the Company, and 1,000 Units to a director of the Company. Also, the Company sold 24,000 additional Units between January 1, 2021
and May 27, 2021, including 9,540 Units that were sold to related parties.
Debentures
The Debentures issued on the Computex Closing
Date had an aggregate principal amount of approximately $43,169 (including $3,000 in aggregate principal amount issued as part of Units
sold to MasTec, Inc. (“Mastec”), a greater than five percent stockholder of the Company, and $20,000 in aggregate principal
of which was part of Units issued to Holdings pursuant to the terms of the Computex Business Combination agreement and approximately
$8,566 in aggregate principal amount of which was issued to the Sponsor as part of Units issued in exchange for the cancellation of indebtedness
previously incurred by the Company to the Sponsor).
The Debentures issued in connection with the
acquisition of Kandy on December 1, 2020 and pursuant to the terms of the Kandy purchase agreement consisted of aggregate principal amounts
of $43,778 issued to Ribbon, $10,000 sold to SPAC Opportunity Partners, LLC, a significant shareholder of the Company and $1,000 sold
to a director of the Company. In addition, between January 1, 2021 and May 27, 2021, $24,000 were sold to various investors (including
$9,540 sold to related parties). The Debentures sold in December 2020 and those sold between January 1, 2021 and May 27, 2021 were in
the same form as those issued in connection with the acquisition of Kandy.
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
The Debentures previously bore interest at a
rate of 10.0% per annum, previously payable quarterly on the last day of each calendar quarter in the form of additional Debentures.
Until converted, the entire principal amount of each Debenture together with accrued and unpaid interest thereon, was due and payable
on the earlier of (i) such date, that was thirty months after the issuance date, as the holder thereof, at its sole option, upon not
less than 30 days’ prior written notice to the Company, demanded payment thereof and (ii) the occurrence of a Change in Control
(as defined in the Debentures).
Pursuant to the terms of the Debentures, on September
8, 2021, the Debentures and related accrued interest were mandatorily converted to 2,587,414 shares of common stock.
Penny Warrants
The Penny Warrants issued on April 7, 2020 entitled
the holders to purchase an aggregate of up to 287,795 shares of the Company’s common stock (including warrants to purchase up to
133,333 shares, 57,106 shares, and 20,000 shares issued to Holdings, the Sponsor and MasTec Inc., respectively, as part of the Units
issued to them), at an exercise price of $0.15 per share.
The Penny Warrants issued in December 2020, as
part of the Units sold, entitled the holders to purchase an aggregate of up to 365,186 shares of the Company’s common stock at
an exercise price of $0.15 per share. Such warrants consisted of 291,853 warrants issued to Ribbon, 66,666 warrants issued to SPAC Opportunity
Partners, LLC and 6,666 warrants issued to a director of the Company.
The Penny Warrants issued between January 1,
2021 and May 27, 2021, as part of the Units sold during that period, entitled the holders to purchase an aggregate of up to 160,000 warrants
(including 63,000 warrants issued to related parties).
The Penny Warrants are exercisable at any time
through the fifth anniversary of the date of issuance. The number of shares issuable upon exercise of each Penny Warrant is subject to
customary adjustments for stock dividends, stock splits, reclassifications and the like and have been adjusted to reflect the Reverse
Stock Split.
Starting in 2021 and pursuant to the terms of
the Penny Warrant agreements, holders of 445,604 Penny Warrants exercised their right to convert such Penny Warrants to 444,553 shares
of common stock and 291,853 Penny Warrants were cancelled as part of the Ribbon Settlement. As of December 31, 2022, unexercised Penny
Warrants totaled 75,525.
Derivative consideration and other disclosures relating to the
Debentures and Penny Warrants
Based on ASC 815, the convertible feature of
the Debentures issued on April 7, 2020 was not considered a derivative and therefore was not recorded in liabilities, as part of the
Debentures, and was not bifurcated.
Both the Penny Warrants issued on April 7, 2020
as well as the Penny Warrants issued on and after the Kandy acquisition date had qualified as derivatives, but satisfied the criteria
for classification as equity instruments, and were bifurcated from the host contract (the Convertible Debentures) and recorded in equity
at their relative fair values with a corresponding debt discount recorded to the Debentures.
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
Prior to the conversion of the Debentures to
common stock, the discount (consisting of the relative fair value of the Penny Warrants) was being expensed as interest over the then
term of the Debentures to increase the carrying value to face value. However, effective September 8, 2021, the remaining unamortized
discount was transferred to additional paid in capital in connection with the conversion of the Debentures to shares of common stock.
During the year ended December 31, 2021, the Company recorded accretion of the discount of $9,253, and paid-in-kind interest of $8,257.
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 previous Company director and a previous 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 years ended December 31, 2022 and 2021 include $150 and $600, respectively, related to such agreement. Also, accounts payable
and accrued expenses as of December 31, 2022 and December 31, 2021 include $500 and $750, respectively, in connection therewith.
With respect to the RSU’s issued to Navigation,
selling, general and administrative expenses include stock compensation expenses of $180 and $302 for the years ended December 31, 2022
and 2021, respectively.
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, the previous Chairman of the Board.
Pursuant to the Services Agreement, among other
things, True North previously 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 year ended December 31, 2022 include $109, 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.
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 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:
| |
Year Ended | |
| |
December 31,
2022 | | |
December 31,
2021 | |
| |
| | |
| |
Revenue earned from Ribbon | |
$ | 137 | | |
$ | 2,437 | |
Service fees charged by Ribbon: | |
| | | |
| | |
Cost of revenue | |
$ | - | | |
$ | 1,135 | |
Research and development | |
| - | | |
| 331 | |
Selling, general and administrative expenses | |
| 1,088 | | |
| 1,963 | |
| |
| 1,088 | | |
| 3,429 | |
Rent and software purchased from Ribbon: | |
| | | |
| | |
Cost of revenue | |
| 1,514 | | |
$ | 435 | |
Selling, general and administrative expenses | |
| 2,086 | | |
| 593 | |
| |
$ | 3,600 | | |
$ | 1,028 | |
As of December 31, 2021, accounts payable and
accrued expenses include amounts due to Ribbon of $799, and prepaid expenses and other current assets include $190 due from Ribbon for
collections it received on the Company’s behalf in excess of reimbursable expenses it paid on the Company’s behalf.
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. In particular, pursuant to the Ribbon Settlement Agreement:
| ● | a
reseller agreement between the parties was terminated |
| ● | the
Company granted Ribbon certain non-exclusive perpetual rights to use certain intellectual
property owned by the Company |
| ● | Ribbon paid the Company $2,500 in cash |
| ● | the 913,361 shares of the Company’s common stock previously owned by Ribbon were returned and retired |
| ● | certain warrants, previously owned by Ribbon, which were exercisable to purchase 291,853 shares of the Company’s common stock, were terminated and canceled |
| ● | certain
agreements for rental of certain premises from Ribbon were amended to, among other things,
reduce the portion of the premises used by the Company (and concurrently reduce the corresponding
rent or other fees payable); and |
| ● | certain
agreements for use of certain Ribbon software were amended to, among other things, amend
the license fee structure from a bulked fixed pricing schedule to a variable rate pricing
structure so as to reduce the fees payable by the Company. |
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
In connection with the Ribbon Settlement Agreement,
the Company recorded a gain of $1,708, which is included in “other income (expenses)” in the accompanying consolidated statement
of operations. Due to the redemption of the shares previously owned by Ribbon, Ribbon is no longer considered a related party.
Services provided
by Saw Holdings, LLC
Effective April 1, 2022, the Company entered
into a Consulting Agreement (the “Consulting Agreement”) with Saw Holdings, LLC (“Saw Holdings”), a company affiliated
with Robert Willis, a previous member of the Company’s board of directors.
Pursuant to the Consulting Agreement, Saw Holdings
previously provided consulting and capital markets advisory services to the Company for a fee of $25 per month, plus reimbursement for
out-of-pocket expenses. The Consulting Agreement, which had an initial term of three months, was terminated in July 2022.
The 2021 Note
The 2021 Note, which was secured by a related
party, is discussed in Note 9 and is separately identified in the accompanying consolidated balance sheet at December 31, 2021. The related
interest expense for the year ended December 31, 2022 of $764 is included in “Interest expense – related parties” in
the consolidated statement of operations. As of December 31, 2021, “Accounts payable and accrued expenses” includes related
accrued interest of $736. In March 2022, all amounts owing under the 2021 Note were repaid in connection with the sale of Computex.
12. Revenue Recognition
In the following tables, revenue is disaggregated
by geographies and by verticals (or sector).
| |
Year Ended | |
| |
December 31,
2022 | | |
December 31,
2021 | |
Geography | |
| | |
| |
Domestic | |
$ | 11,672 | | |
$ | 14,720 | |
International | |
| 5,139 | | |
| 5,329 | |
Total revenues | |
$ | 16,811 | | |
$ | 20,049 | |
| |
| | | |
| | |
Revenues by Verticals (or Sector) | |
| | | |
| | |
Finance | |
$ | 34 | | |
$ | 1,696 | |
Manufacturing and logistics | |
| 18 | | |
| 33 | |
Public sector | |
| 1,385 | | |
| 1,344 | |
Technology service providers | |
| 15,250 | | |
| 16,976 | |
Other | |
| 124 | | |
| - | |
Total revenues | |
$ | 16,811 | | |
$ | 20,049 | |
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.”
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
13. Share-Based Compensation
The American Virtual Cloud Technologies, Inc.
2020 Equity Incentive Plan (the “Plan”) provides for the issuance of stock options, stock appreciation rights, restricted
stock, restricted stock units (“RSUs”) and other share-based awards. Stock options, if issued, have a maximum term of ten
years from the grant date.
As of December 31, 2021, 666,666 shares had been
authorized for issuance under the Plan, of which 328,997 shares remained available for issuance. The RSUs were issued to certain directors,
employees and, in one case, a contractor, and can only be settled in shares. RSUs awarded to directors are time-based. RSUs issued to
nondirectors are 50% time-based and 50% performance-based. Twenty-five percent or, in some cases, one-third, of the time-based awards
vests on each grant date anniversary, while 25% or, in some cases, one-third of the performance-based awards vests on December 31st
of each year, if the market condition (stock price target) is met. If the market condition attached to the performance-based awards
is not met in any year, the eligibility is delayed until the market condition is met, except that the market condition must be met by
the third anniversary or, in some cases, the second anniversary of the first target date.
The fair values of time-based
awards are estimated by reference to the Company’s stock price and stock marketability on the grant date, while the fair values
of the performance-based awards are determined using the Monte Carlo simulation model, once the stock price target is set. Weighted average
assumptions used in estimating the performance-based awards were as follows:
| |
Year Ended | |
| |
December 31,
2022 | | |
December 31,
2021 | |
Stock price volatility | |
| 72 | % | |
| 68 | % |
Expected life of awards (in years) | |
| 0.90 | | |
| 0.91 | |
Risk-free interest rate | |
| 0.80 | % | |
| 0.09 | % |
Performance targets
are generally set annually for the performance-based awards that are scheduled to vest in that year.
The following summarizes
RSU activity for the years ended December 31, 2022 and 2021:
| |
| | |
Weighted Average | |
| |
Number of | | |
Grant Date | |
| |
RSUs | | |
Fair Value | |
Outstanding at January 1, 2021 | |
| 156,333 | | |
$ | 49.35 | |
Granted | |
| 160,417 | | |
$ | 83.70 | |
Vested and delivered | |
| (44,583 | ) | |
$ | 52.05 | |
Vested, not delivered | |
| (26,333 | ) | |
$ | 54.60 | |
Forfeited | |
| (66,279 | ) | |
$ | 72.75 | |
Outstanding at December 31, 2021 | |
| 179,555 | | |
$ | 67.80 | |
Granted | |
| 201,264 | | |
$ | 18.00 | |
Vested and delivered | |
| (74,152 | ) | |
$ | 57.90 | |
Vested, not delivered | |
| (6,666 | ) | |
$ | 51.30 | |
Forfeited | |
| (99,556 | ) | |
$ | 33.60 | |
Cancelled | |
| (66,666 | ) | |
$ | 32.10 | |
Unvested RSUs at December 31, 2022 | |
| 133,779 | | |
$ | 40.78 | |
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
Vested but not delivered RSUs represent RSUs
that vested but for which delivery was deferred. Awards outstanding in the table above exclude 37,027 performance-based RSUs that have
been awarded but deemed not granted as the performance targets have not yet been determined. The Company’s policy is to determine
the fair value of performance-based awards and begin recognizing compensation expense for such awards when the targets are set. For performance-based
awards, compensation cost is recognized over the shorter of the performance or service period. For time-based awards, compensation expense
is recognized over the vesting period, based on the grant date fair value. Share-based compensation expense recognized consisted of the
following:
| |
Year Ended | |
| |
December 31,
2022 | | |
December 31,
2021 | |
Cost of revenue | |
$ | 185 | | |
$ | 370 | |
Research and development | |
| 355 | | |
| 1,007 | |
Selling, general and administrative expenses | |
| 1,223 | | |
| 7,252 | |
| |
$ | 1,763 | | |
$ | 8,629 | |
The fair value of awards that vested and were
delivered during the years ended December 31, 2022 and 2021, based on the stock prices on the vesting dates, was $1,018 and $3,521, respectively.
Total compensation cost not yet recognized, related to unvested awards, as of December 31, 2022 was $1,358.
14. Reconciliation of Net Loss per Common Share
Basic and diluted net loss per common share was calculated as follows:
| |
Year Ended | |
| |
December 31, 2022 | | |
December 31, 2021 | |
Loss from continuing operations, net of tax | |
$ | (40,523 | ) | |
$ | (130,854 | ) |
Income (loss) from discontinued operations, net of tax | |
| 724 | | |
| (30,532 | ) |
Net loss | |
$ | (39,799 | ) | |
$ | (161,386 | ) |
Weighted average shares outstanding, basic and diluted | |
| 13,756,856 | | |
| 2,376,044 | |
Basic and diluted net (loss) income per common share | |
| | | |
| | |
Continuing operations | |
$ | (2.95 | ) | |
$ | (55.07 | ) |
Discontinued operations | |
| 0.06 | | |
| (12.85 | ) |
Net loss per common share | |
$ | (2.89 | ) | |
$ | (67.92 | ) |
Since their inclusion would have been antidilutive,
the following were excluded from the computation of diluted net loss per share:
| |
December 31,
2022 | | |
December 31,
2021 | |
Public Warrants | |
| 1,035,000 | | |
| 1,035,000 | |
2017 Private Placement | |
| 700,833 | | |
| 700,833 | |
2017 EBC Warrants | |
| - | | |
| 45,000 | |
Series A Warrants | |
| - | | |
| 444,444 | |
Series D Warrants | |
| - | | |
| 1,041,666 | |
Monroe Warrants | |
| 1,061,779 | | |
| 167,970 | |
Penny Warrants | |
| 75,525 | | |
| 395,711 | |
Shares underlying certain unit purchase options (issued in 2017) | |
| - | | |
| 99,000 | |
Unvested RSUs | |
| 170,806 | | |
| 229,166 | |
Vested, not delivered RSUs | |
| 6,666 | | |
| 26,333 | |
| |
| 3,050,609 | | |
| 4,185,123 | |
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
15. Income Taxes
The Company’s effective income tax rate
for the years ended December 31, 2022 and December 31, 2021 differ from the federal statutory rate primarily due to the Company’s
valuation allowance activity.
The following is a reconciliation of the Company’s
statuary U.S. federal income rate to the effective tax rate reported in the financial statements:
| |
Year Ended | |
| |
December 31, 2022 | | |
December 31, 2021 | |
Statutory tax rate | |
| 21.0 | % | |
| 21.0 | % |
State income taxes, net of federal benefit | |
| 4.0 | % | |
| 2.3 | % |
Permanent differences | |
| (4.6 | )% | |
| 0.1 | % |
Return to provision | |
| 0.2 | % | |
| 0.9 | % |
Change in valuation allowance | |
| (34.4 | )% | |
| (18.9 | )% |
Change in unrecognized tax benefits | |
| (1.3 | )% | |
| - | % |
Warrants | |
| 12.6 | % | |
| (5.4 | )% |
Other deferred tax adjustments | |
| 1.1 | % | |
| - | % |
Provision | |
| (1.4 | )% | |
| - | % |
The tax effect of temporary differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases that give rise to deferred
tax assets and liabilities were as follows:
| |
December 31,
2022 | | |
December 31,
2021 | |
Deferred tax assets | |
| | |
| |
Accrued reserves | |
$ | 113 | | |
$ | 70 | |
Deferred revenue | |
| 5 | | |
| 15 | |
Accrued liabilities | |
| 705 | | |
| 1,428 | |
Uniform capitalization of inventory for tax | |
| - | | |
| 148 | |
Contribution carryover | |
| 15 | | |
| 13 | |
Research and development costs | |
| 3,409 | | |
| - | |
Operating lease liabilities | |
| 131 | | |
| - | |
Intangible assets | |
| 9,275 | | |
| 5,057 | |
Transaction costs | |
| - | | |
| 817 | |
Disallowed interest | |
| 6,835 | | |
| 5,017 | |
Stock compensation | |
| 1,497 | | |
| 2,113 | |
Tax depreciation in excess of book | |
| 12 | | |
| - | |
Net operating loss carryforwards | |
| 23,259 | | |
| 17,402 | |
Gross deferred tax assets | |
| 45,256 | | |
| 32,080 | |
Less: valuation allowance | |
| (44,591 | ) | |
| (30,986 | ) |
Net deferred tax assets | |
$ | 665 | | |
$ | 1,094 | |
Deferred tax liabilities | |
| | | |
| | |
Prepaid expenses | |
$ | (544 | ) | |
$ | (530 | ) |
Operating lease, right-of-use asset | |
| (121 | ) | |
| - | |
Tax depreciation in excess of book | |
| - | | |
| (564 | ) |
Net deferred tax liabilities | |
$ | (665 | ) | |
$ | (1,094 | ) |
| |
| | | |
| | |
Net deferred tax liabilities | |
$ | - | | |
$ | - | |
AMERICAN VIRTUAL CLOUD
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except
share and per share data, or as otherwise noted)
December 31, 2022
At December 31, 2022, the Company had net operating
loss carryforwards of approximately $97,695. Of this amount, $1,117 expires in 2036, while the remaining amounts have an indefinite carryforward
period but are subject to a limitation of 80% of taxable income each year. The Company also had state net operating loss carryforwards
of approximately $44,728 with various expiration periods beginning in 2029. The Company is subject to an annual 382 limitation on the
amount of net operating loss carryforward that can be used in a carryforward year.
The Company assesses available positive and negative evidence to estimate
whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant component
of objective negative evidence identified during management’s evaluation was the cumulative loss incurred over the three-year period
ended December 31, 2022. Such objective negative evidence outweighs the subjective positive evidence identified by the Company. As a result,
the Company retained the full valuation allowance against its net deferred tax asset for the period ended December 31, 2022.
The Company files a consolidated federal income tax return as well
as combined and separate state income tax returns in various states. For federal and certain states, the 2019 through 2021 tax years remain
open for examination by the tax authorities under the normal statute of limitations. In addition, the utilization of NOL carryforwards,
from periods prior to those previously mentioned may also be audited by the taxing authorities once utilized. As a result, the Company
continuously monitors its current and prior filing positions in order to determine if any unrecognized tax positions need to be recorded.
The analysis involves considerable judgement and is based on the best information available. In 2022, the Company identified uncertain
tax positions related to executive compensation and transactions between related parties and recorded uncertain tax position liabilities.
Included within the unrecognized tax benefit balance is tax benefit of $529 that, if recognized, would affect the effective tax rate.
Also, the Company does not expect any of the uncertain tax benefits to significantly increase or decrease within twelve months of the
reporting date. The following is a tabular roll forward of the Company’s uncertain tax position:
| |
December 31,
2022 | |
Unrecognized tax benefits - beginning of year | |
$ | - | |
Additions for tax positions taken in a prior year | |
| 544 | |
Additions for tax positions taken in the current year | |
| 234 | |
Unrecognized tax benefits - end of year | |
$ | 778 | |
16. Commitments and Contingencies
Registration Rights
See Note 10 for a discussion of certain registration
rights.
Contingencies
From time to time, the Company may be involved in various legal proceedings
and claims in the ordinary course of business. As of December 31, 2022, 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.
In June 2021, the Company became aware of a claim
by a vendor who asserted a claim for $188 for the remaining scope of work in connection with a contract which the Company terminated.
The Company and the parties agreed on a settlement of $85, which was paid during the year ended December 31, 2021.
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 in this Note
and as may be disclosed elsewhere in the Notes to the accompanying consolidated financial statements, there have been no subsequent events
that require adjustment or disclosure in the accompanying consolidated financial statements.