American Virtual Cloud Technologies, Inc. - Quarter Report: 2023 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

or

☐      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38167

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

1720 Peachtree Street, Suite 629

Atlanta, GA 30309
(Address of principal executive offices)

(404) 239-2863

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☒ No ☐

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No  ☐.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of May 11, 2023, a total of 33,532,473 shares of the Company’s common stock, par value $0.0001 per share, were outstanding.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

TABLE OF CONTENTS

References to “we,” “us,” “our” or “the Company” refer to American Virtual Cloud Technologies, Inc. and its consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires. When we refer to “AVCT,” we mean American Virtual Cloud Technologies, Inc.

INTRODUCTORY NOTE

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. On March 21, 2023, the Debtors filed a proposed Combined Disclosure Statement and Chapter 11 Plan of Liquidation (as amended for solicitation purposes and filed on April 6, 2023, the “Plan”) describing its anticipated plan to liquidate its operations and to solicit votes to approve the same from certain of the Debtors’ creditors with respect to the Cases. On April 6, 2023, the Court entered an order (a) conditionally approving the Plan for solicitation purposes only, (b) establishing procedures for solicitation and tabulation of votes to accept or reject the Plan, (c) approving the form of ballot and solicitation materials, (d) establishing a voting record date, (e) fixing the date, time and place for the hearing to approve the Plan and deadline for filing objections thereto, and (f) approving the related notice provisions.

The Plan provides that the holders of equity interests in the Company will receive no recovery, that the Company’s outstanding securities shall be cancelled upon confirmation of the Plan, and that the Debtors will be dissolved under applicable law as soon as practicable following the closing of the Cases.

Except as otherwise specifically stated herein, the description and disclosures of the Company’s business and operations presented elsewhere in this Form 10-Q reflect the Company’s 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.

CAUTIONARY INFORMATION REGARDING TRADING IN THE COMPANY’S SECURITIES

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.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this quarterly report on Form 10-Q 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” in our annual report on Form 10-K filed with the SEC on April 7, 2023. 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 — FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data, or as otherwise noted)

The accompanying notes are an integral part of the condensed consolidated financial statements.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data, or as otherwise noted)

(Unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share and per share data, or as otherwise noted)

(Unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data, or as otherwise noted)

March 31, 2023

(Unaudited)

1. Organization, Business Operations and Certain Recent Developments

Overview

American Virtual Cloud Technologies, Inc. (“AVCT,” the “Company,” “we,” “us,” or “our”) was incorporated in Delaware on April 7, 2016.

On April 7, 2020 (the “Computex Closing Date”), AVCT (formerly known as Pensare Acquisition Corp.) consummated a business combination transaction (the “Computex Business Combination”) in which it acquired Stratos Management Systems, Inc. (“Computex”), an operating company that does business as Computex Technology Solutions. In connection with the closing of the Computex Business Combination, the Company changed its name to American Virtual Cloud Technologies, Inc.

On December 1, 2020 (the “Kandy Closing Date”), the Company acquired the Kandy Communications business (hereafter referred to as “Kandy”) from Ribbon Communications, Inc. and certain of its affiliates (“Ribbon”), by acquiring certain assets, assuming certain liabilities of Kandy from Ribbon and acquiring all of the outstanding interests of Kandy Communications LLC.

For accounting purposes, both Computex and Kandy were considered the acquirees, and the Company was considered the acquirer. The acquisitions were accounted for using the acquisition method of accounting.

Recent Events

On January 27, 2022, the Company announced that it had executed a definitive agreement to sell Computex and on March 15, 2022, the Computex sale was consummated, thereby completing the Company’s then transition to a cloud communications company, centered on the Kandy platform. As a result, the revenue and expenses, for the three months ended March 31, 2022, are reflected as discontinued operations in the accompanying condensed consolidated financial statements.

Unless otherwise noted, discussion in these Notes to Consolidated Financial Statements refers to Kandy and the Company’s corporate activities. Refer to Note 5, Asset sales and other sale activities, for additional information.

On August 25, 2022, the Company announced that it had retained Northland Capital Markets to advise the Company in connection with a comprehensive strategic review process that had the potential to lead to the sale of the Company or of selected assets.

On January 11, 2023 (the “Petition Date”), American Virtual Cloud Technologies, Inc. and two of its subsidiaries, AVCtechnologies USA, Inc. and Kandy Communications, LLC (together the “Debtors”) filed voluntary petitions (the “Cases”) under Chapter 11 (“Chapter 11”) of the US Bankruptcy Code in the US Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The respective Case numbers for each of the Debtors are 23-10020, 23-10021 and 23-10022. However, the Cases are being jointly administered under Case number 23-10020. The Debtors are continuing to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the US Bankruptcy Code and orders of the Bankruptcy Court. To ensure their ability to continue operating in the ordinary course of business, the Debtors filed various “first day” motions with the Bankruptcy Court requesting customary relief, including the authority to pay employee wages and benefits, that have enabled the Debtors to continue to operate their business during the pendency of the Chapter 11 proceedings without material disruption to their ordinary operations.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(In thousands, except share and per share data, or as otherwise noted)

March 31, 2023

(Unaudited)

On February 14, 2023, the Company and certain of its subsidiaries (collectively, the “Sellers”) entered into a “stalking horse” Asset Purchase Agreement (the “Stalking Horse APA”) with Skyvera, LLC (the “Purchaser”), and in connection with the Cases, and pursuant to bid procedures approved by the Court, on March 7, 2023, the Debtors held an auction (the “Auction”) under Section 363 of the US Bankruptcy Code relating to the disposition of substantially all of the Debtors’ assets. The winning bid at the Auction was submitted by the Purchaser, which agreed to pay cash consideration in the amount of $6,780 plus $500 towards contract cure costs.

On March 10, 2023, the Sellers and the Purchaser executed an amended and restated Asset Purchase Agreement (the “Purchase Agreement”), which is substantially the same as the Stalking Horse APA, except that it reflects the cash purchase price of $6,780 resulting from the Auction. Pursuant to the Purchase Agreement, the Purchaser agreed to purchase substantially all of the assets of the Sellers (such assets, the “Purchased Assets,” and such transaction, the “Asset Sale”). The Purchased Assets include, among other things, all rights of the Sellers under the Assumed Contracts and Assumed Leases that are defined in the Purchase Agreement, tangible personal property, intellectual property rights, books and records and any goodwill, but excludes certain assets, including all cash. On March 15, 2023, the Court entered an order authorizing the Asset Sale pursuant to the terms of the Purchase Agreement. On March 24, 2023, the Asset Sale closed, thereby completing the disposition of substantially all of the Company’s assets. The purchase price paid for the Purchased Assets (the “Purchase Price”) consisted of (i) cash in the amount of $6,780, subject to certain adjustments (including a reduction by the amount, if any, by which the deferred revenues of the Sellers as of the date of the closing of the Purchase Agreement exceeds the deferred revenues of the Sellers as of the date of the Purchase Agreement), and (ii) the Purchaser’s assumption of certain liabilities of the Sellers.

On March 21, 2023, the Debtors filed a proposed Combined Disclosure Statement and Chapter 11 Plan of Liquidation (as amended for solicitation purposes and filed on April 6, 2023, the “Plan”) describing its anticipated plan to liquidate its operations and to solicit votes to approve the same from certain of the Debtors’ creditors with respect to the Cases. On April 6, 2023, the US Bankruptcy Court entered an order (a) conditionally approving the Plan for solicitation purposes only, (b) establishing procedures for solicitation and tabulation of votes to accept or reject the Plan, (c) approving the form of ballot and solicitation materials, (d) establishing a voting record date, (e) fixing the date, time and place for the hearing to approve the Plan and deadline for filing objections thereto, and (f) approving the related notice provisions.

The Plan provides that the holders of equity interests in the Company will receive no recovery, that the Company’s outstanding securities shall be cancelled upon confirmation of the Plan, and that the Debtors will be dissolved under applicable law as soon as practicable following the closing of the Cases. 

The Company plans to pursue steps to facilitate an orderly winding up of its remaining operations and believes it has sufficient liquidity to achieve such. However, no assurance can be provided that such projections will be realized.

Reverse Stock Split and Stock Exchange

On September 30, 2022, the Company filed a Certificate of Amendment of the Company’s Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware (the “Certificate of Amendment”), which effected, upon filing on September 30, 2022 (the “Effective Stock Split Date”), a one-for-fifteen reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding shares of common stock. In connection with the Reverse Stock Split, the CUSIP number (Committee on Uniform Securities Identification Procedures number) for the Company’s common stock changed.

As a result of the Reverse Stock Split, each share of the Company’s common stock issued and outstanding immediately prior to the Effective Stock Split Date was automatically reclassified as and converted into one-fifteenth (1/15) of a share of the Company’s common stock. The Reverse Stock Split affected all stockholders uniformly and did not alter any stockholder’s percentage interest in the Company’s equity, except to the extent that the Reverse Stock Split resulted in some stockholders owning a fractional share. No fractional shares were issued in connection with the Reverse Stock Split. Instead, stockholders who would otherwise have been entitled to fractional shares of the Company’s common stock became entitled to receive cash payments in lieu of such fractional shares.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(In thousands, except share and per share data, or as otherwise noted)

March 31, 2023

(Unaudited)

The Reverse Stock Split did not change the par value of the Company’s common stock nor the authorized number of shares. All outstanding warrants and preferred stock entitling their holders to purchase, obtain or convert into shares of the Company’s common stock were adjusted, as required by the terms of such securities. The Company’s common stock began trading on a Reverse Stock Split-adjusted basis when the market opened on October 3, 2022.

The Reverse Stock Split has been retroactively reflected throughout this report, including in the computation of basic and diluted earnings/loss per common share, which has been adjusted retroactively for all periods presented.

On January 25, 2023, the Company’s securities ceased trading on The Nasdaq Stock Market (“Nasdaq”) as the Company did not meet the requirements for continued trading thereon. Currently, the Company’s securities trade on the Pink sheets, an over-the-counter (OTC) market.

Nature of business

As a result of the Asset Sale on March 24, 2023, the Company no longer has any operations, other than those relating to the wind-down of its business and completion of the Chapter 11 process.

Prior to the sale on March 24, 2023, the Company provided cloud-based enterprise services, through Kandy. The Kandy platform, now sold, deploys a carrier grade proprietary cloud communication platform that supports unified communications as a service (“UCaaS”), communications platform as a service (“CPaaS”) and contact center as a service (“CCaaS”) for mid-market and enterprise customers across a proprietary multi-tenant, highly scalable cloud platform. The Kandy platform provides white-labeled services to a variety of customers including communications service providers and systems integrators. With Kandy, companies can quickly embed real-time communications capabilities into their existing applications and business processes.

Covid-19

The novel strain of coronavirus (“COVID-19”) continues to impact local, regional, and global economies, businesses, supply chains, production and sales across a range of industries. To protect the health and safety of its employees, the Company’s daily execution evolved into a largely virtual model.

2. Going Concern and Liquidity

Based on the Company’s forecasts regarding product sales and service, cost structure, cash burn rate and other operating assumptions, during 2022, the Company announced that it would need additional capital to fund its operations, including its research & development activities and its capital investment requirements. This and other factors lead the Company to also announce that there was substantial doubt about its ability to continue as a going concern. In addition, the Company announced that it was pursuing strategic initiatives that had the potential to lead to a sale of all or a portion of the assets of the Company. Further, during 2022, the Company was forced to scale back operations, and on January 11, 2023, filed for protection under Chapter 11 of the US Bankruptcy Code, followed by a sale, on March 24, 2023, of substantially all of its assets.

The accompanying condensed consolidated financial statements have been prepared on a going concern basis of accounting, which generally contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. As discussed previously, the US Bankruptcy Court entered an order conditionally approving the Plan for solicitation purposes only, which, if approved, will effectively result in the distribution of substantially all remaining assets of the Company through an orderly wind-down process.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(In thousands, except share and per share data, or as otherwise noted)

March 31, 2023

(Unaudited)

The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability of recorded asset amounts or the amounts of liabilities that might result from the outcome of the Chapter 11 proceedings and any related uncertainties.

Historically, the Company’s primary sources of liquidity have been cash and cash equivalents, cash flows from operations (when available) and cash flows from financing activities, including funding under credit agreements and the sale of equity securities. As of March 31, 2023, the Company had an aggregate cash balance of $13,260 in its operating bank accounts. As of May 9, 2023, aggregate cash in the Company’s operating bank accounts was $8,654. As noted above, the Company believes it has sufficient liquidity to facilitate an orderly wind-down of its remaining operations. However, no assurance can be provided that such projections will be realized.

3. Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited condensed consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.

The accompanying condensed consolidated financial statements include the accounts of AVCT and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on April 7, 2023. The Company has reclassified certain prior period amounts, including reportable segment information and shares of common stock, to conform to the current period presentation.

Chapter 11 Accounting

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 852 – Reorganizations (“ASC 852”), we have segregated liabilities and obligations whose treatment and satisfaction are dependent on the outcome of the Chapter 11 Cases and have classified these items as liabilities subject to compromise in the accompanying condensed consolidated financial statements. In addition, we have classified all expenses that were incurred as a direct result of the Chapter 11 proceedings, since filing for Chapter 11, as Reorganization items.

Certain subsidiary entities are not debtors under the Chapter 11 Cases. However, condensed combined financial statements of the Debtors are not presented in the notes to the condensed consolidated financial statements as the assets and liabilities, operating results and cash flows of the non-debtor entities included in the accompanying condensed consolidated financial statements are not significant and, therefore, the accompanying condensed consolidated financial statements presented herein materially represent the condensed combined financial statements of the debtor entities for all periods presented. As of March 31, 2023, total assets and total liabilities of the non-debtor entities represent 2.1% and 2.4% of total consolidated assets and liabilities, respectively. Total revenues were nil, and expenses were nominal. As of March 31, 2023, the non-debtor entities have intercompany payables to the debtor entities of $17.4 million.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(In thousands, except share and per share data, or as otherwise noted)

March 31, 2023

(Unaudited)

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales (or revenues) and expenses during the reporting period.

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that estimates made as of the date of the financial statements could change in the near term due to one or more future events. Accordingly, the actual results could differ significantly from those estimates. Significant accounting estimates reflected in the Company’s condensed consolidated financial statements include, but are not limited to, revenue recognition, allowance for doubtful accounts, accounting for warrants, recognition and measurement of income tax assets, valuation of share-based compensation, discount related to the fair value of warrants, and the valuation of net assets acquired.

Significant accounting policies

The significant accounting policies used in preparing these condensed consolidated financial statements were applied on a basis consistent with those reflected in our consolidated financial statements that are included in the annual report on Form 10-K for the year ended December 31, 2022 that was filed with the SEC on April 7, 2023.

Concentration of business and credit risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and trade receivables. Cash held by the Company, in financial institutions, regularly exceeds the federally insured limit of $250. At March 31, 2023, cash balances held with a financial institution exceeded the federally insured limit by $12,576. However, management does not believe this poses a significant credit risk. During the three months ended March 31, 2022, no vendor accounted for more than 10% of cost of revenue. Additional concentration of business risks are summarized in the following table:

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(In thousands, except share and per share data, or as otherwise noted)

March 31, 2023

(Unaudited)

Trade receivables, net

Trade receivables on the accompanying condensed consolidated balance sheets are net of allowances of $362 and $471, as of March 31, 2023 and December 31, 2022, respectively.

Fair value of financial instruments

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability.

ASC Topic 820, Fair Value Measurements and Disclosures provides a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:

Assets measured at fair value on a non-recurring basis include goodwill, tangible and intangible assets. Such assets are reviewed annually for impairment indicators. If a triggering event has occurred, the assets are re-measured when the estimated fair value of the corresponding asset group is less than the carrying value. The fair value measurements, in such instances, are based on significant unobservable inputs (Level 3).

The carrying amounts of the Company’s financial instruments, which include trade receivables, deposits, accounts payable and accrued expenses and debt at floating interest rates, approximate their fair values, principally due to their short-term nature, maturities or nature of interest rates.

The fair values of warrant liabilities are reflected on the condensed consolidated balance sheets as “Warrant Liabilities.” Such valuations are considered to be Level 2 valuations. As of March 31, 2023, all warrants had either been converted to common stock or determined to have no value.

Segment reporting

Effective January 1, 2021, the Company identified two operating segments, Computex and Kandy, pursuant to ASC 280, Segment Reporting, consistent with the information that was presented to the Chief Operating Decision Maker. Upon the sale of Computex in March 2022, the Company began operating as one reportable segment.

Emerging growth company

In December 2022, the Company ceased being an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, (the “Securities Act”), as modified by the Jumpstart our Business Startups Act of 2012, (the “JOBS Act”). 

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(In thousands, except share and per share data, or as otherwise noted)

March 31, 2023

(Unaudited)

4. Chapter 11 Cases

Voluntary Petition

As noted above, on January 11, 2023, the Debtors voluntarily filed petitions under Chapter 11 of the US Bankruptcy Code. Pursuant to an order of the Bankruptcy Court, the Chapter 11 Cases are being jointly administered under the caption In re: AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC., et al., Case No. 23-10020. Documents filed and other information related to the Chapter 11 Cases are available free of charge online at https://cases.ra.kroll.com/AVCT.

Pursuant to the US Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed most actions against the Debtors.

The Debtors have continued to operate their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the US Bankruptcy Code and the orders of the US Bankruptcy Court. Following the petition, the US Bankruptcy Court entered certain interim and final orders facilitating the Debtors’ operational transition into Chapter 11. These orders authorized the Debtors to, among other things, pay employee wages and benefits and pay vendors and suppliers in the ordinary course for all goods and services provided after the Petition Date. Such orders have allowed the Debtors to operate their businesses in the normal course.

Liabilities Subject to Compromise

As a result of the Chapter 11 Cases, the payment of pre-petition liabilities is generally subject to compromise pursuant to a plan of liquidation. Generally, actions to enforce or otherwise effect payment of pre-Chapter 11 liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the Debtors authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtors’ business and assets.

Pre-petition liabilities that are subject to compromise are required to be reported at the amounts expected to be allowed by the Bankruptcy Court, even though they may be settled for different amounts. The amounts classified as liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, proof of claims or other events.

The following table presents a summary of liabilities subject to compromise, as reported in the accompanying condensed consolidated balance sheet at March 31, 2023 (in thousands):

Executory Contracts

With certain exceptions, under the US Bankruptcy Code, the Debtors may assume, assign or reject executory contracts and unexpired leases subject to the approval of the Bankruptcy Court. Generally, the rejection of an executory contract or unexpired lease, subject to certain exceptions, relieves the Debtors from performing future obligations under such contract but entitles the counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. The assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease, if any, and provide adequate assurance of future performance.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(In thousands, except share and per share data, or as otherwise noted)

March 31, 2023

(Unaudited)

Reorganization Items

Reorganization items represent amounts incurred after the Petition Date as a direct result of the Chapter 11 Cases and are comprised of the following for the three months ended March 31, 2023 (in thousands):

Reorganization expenses paid in the three months ended March 31, 2023 was $190 

5. Recently Issued and Adopted Accounting Standards

The Company adopted ASC 842 effective January 1, 2022. ASC 842 requires lessees to recognize, on the balance sheet, a lease liability and a leased asset for all leases, including operating leases with a lease term greater than 12 months and requires lessors to classify leases as either sales-type, direct financing or operating. Accordingly, a right-of-use asset and related lease liability for the Company’s only qualifying operating lease is reflected on the balance sheet, and lease expense is included in selling, general and administrative expenses. ASC 842 also expands the required quantitative and qualitative disclosures surrounding leases. See Note 7.

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated balance sheets, statements of changes in equity, statements of operations and statements of cash flows.

6. Asset Sale and Other Sale Activities

As described above, on March 24, 2023, the Asset Sale closed, thereby completing the disposition of substantially all of the remaining assets of the Company. Gross proceeds from the sale consisted of cash in the amount of $6,780 plus $500 towards contract cure costs. The gain on sale of such assets consisted of the following:

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(In thousands, except share and per share data, or as otherwise noted)

March 31, 2023

(Unaudited)

As described above, on January 26, 2022, the Company entered into an asset purchase agreement to sell substantially all of the assets of its Computex business, with the buyer agreeing to assume certain liabilities. The sale of Computex was consummated on March 15, 2022. Net sale proceeds received was $32,112. Revenues and expenses associated with the Computex business are classified as discontinued operations and consist of the following:

7. Right-of-Use Asset and Operating Lease Liabilities

The Company is party to operating leases under which it leases certain facilities. All leases were considered noncancellable and were considered short term except for a lease of certain office space in Raleigh, North Carolina, which provided that the Company pay, in addition to the minimum rent, certain operating expenses. The Raleigh lease was scheduled to expire in May 2027 and had a commencement date of January 1, 2022.

As mentioned in Note 5, the Company adopted ASC 842 effective January 1, 2022. Accordingly, the condensed consolidated balance sheet as of December 31, 2022 included a right-of-use asset and a current and noncurrent operating lease liability pertaining to a lease for office space in Raleigh, North Carolina. Effective April 30, 2023, the Company rejected the lease and, accordingly, the right-of-use asset and related leases liabilities were written off as of March 31, 2023, resulting in a net impact on the condensed consolidated statement of operations of $41.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(In thousands, except share and per share data, or as otherwise noted)

March 31, 2023

(Unaudited)

Total lease costs during the three months ended March 31, 2023 was $132, consisting of $98 of operating lease costs, and $34 of short-term lease costs. There were no material variable lease costs during the three months ended March 31, 2023. Cash paid for amounts included in the measurement of operating lease liabilities was $36.

8. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses were as follows:

9. Long-Term Debt

Credit Agreements

On December 2, 2021, the Company entered into a $27,000 term loan facility (the “Credit Facility”) under a Credit Agreement (the “Credit Agreement”) with Monroe Capital Management Advisors, LLC and certain affiliated entities (“Monroe”), proceeds of which were used, in part, to repay amounts owing under a prior credit agreement, which the Company had assumed when it acquired Computex. On March 1, 2022, all amounts owing under the Credit Agreement were repaid in full, including related accrued interest and other charges.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(In thousands, except share and per share data, or as otherwise noted)

March 31, 2023

(Unaudited)

The Credit Facility was scheduled to mature on the earlier of (i) December 2, 2022 and (ii) the date on which the Computex sale was consummated. As part of the Credit Agreement, the Company was required to comply with certain sales milestone terms, conditions and timeframes in connection with the then-pending sale of Computex. In connection with such sales milestone requirements, the Company paid amendment fees of $920 on January 18, 2022 as it was apparent that certain of the milestone dates for the closing of the Computex sale were not going to be met.

Loans under the Credit Facility previously bore interest at a rate equal to, at the Company’s option, either the Base Rate for the interest period in effect for such borrowing plus 10.00% per annum, or the LIBOR Rate for the interest period in effect for such borrowing plus 11.00% per annum. Notwithstanding such interest rates, Monroe was guaranteed a minimum return of $7,290, including a closing fee of $675 that was paid to the administrative agent on the closing date. Additional fees would have been payable if the Credit Facility was not repaid in full by certain dates.

In connection with the closing of the Credit Facility and pursuant to a subscription agreement, the Company issued, to certain funds affiliated with Monroe, warrants to purchase certain shares of the Company’s common stock at an exercise price of $0.0015 per share (the “Monroe Warrants”). The number of shares of the Company’s common stock issuable upon exercise of the Monroe Warrants was subject to, in addition to customary adjustments for stock dividends, stock splits, reclassifications and the like, adjustment for certain issuances (or deemed issuances) of the Company’s common stock at a price per share below $23.46 while the Monroe Warrants were outstanding, such that the Monroe Warrants would remain exercisable for, in the aggregate, approximately 2.5% of the total number of shares of the Company’s common stock outstanding, calculated on a fully-diluted basis. The Monroe Warrants were fully exercised for 1,061,632 shares of the Company’s common stock on January 17, 2023.

October 2022 promissory note

On October 20, 2022, the Company entered into an amended agreement with a significant supplier, that resulted in the conversion of a trade payable balance to a promissory note having a principal balance of approximately $2,430 on such date. Such promissory note was due on the earlier of (i) March 31, 2023; (ii) a sale transaction by the Company requiring shareholder approval, including a transfer of a majority of the Company’s capital stock or (iii) a payment default by the Company. The promissory note is unsecured and bears interest at a rate of 6% per annum, compounded semi-annually. Additionally, the amended agreement provided for a $400 monthly prepayment towards actual costs incurred. Any excess of that prepayment over actual costs resulted in a reduction of the promissory note balance, while any excess of actual costs over the $400 monthly payment was added to such promissory note. The note payable balance as of March 31, 2023 and December 31, 2022 was $2,336 and $2,315, respectively. In April 2023, a total of $2,271 of the note payable balance was repaid.

10. Stockholders’ Equity

Preferred stock

The Company is authorized to issue 5,000,000 shares of preferred stock, par value $0.0001. At March 31, 2023 and December 31, 2022, no preferred stock was outstanding.

Common stock

The Company is authorized to issue 500,000,000 shares of common stock with a par value of $0.0001 per share. Holders of the Company’s common stock are entitled to one vote for each share.

On September 30, 2022, the Company filed the Certificate of Amendment with the Secretary of State of the State of Delaware, which effected a one-for-fifteen reverse stock split of the Company’s issued and outstanding shares of common stock. The Reverse Stock Split, which has been retroactively reflected throughout this report, did not change the par value of the Company’s common stock nor the authorized number of shares.

As of March 31, 2023, a total of 33,532,473 shares of common stock were issued and outstanding.

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(In thousands, except share and per share data, or as otherwise noted)

March 31, 2023

(Unaudited)

Warrants and other securities

In addition to the Monroe warrants that are discussed above in Note 9, during 2022 and the fourth quarter of 2021, the Company issued certain warrants (Series A, Series B, Series C, Series D and the February 2022 Warrants) in connection with the sale of certain securities. Such sales of securities included sales of certain Series B preferred stock and convertible notes. As of March 31, 2023, all such warrants and such securities have been converted to common stock, repaid or otherwise satisfied in accordance with the agreements.

11. Related Party Transactions

Services provided by Navigation Capital Partners, Inc.

Effective October 1, 2020, the Company and Navigation Capital Partners, Inc. (“Navigation”), an affiliate of a significant shareholder, entered into an agreement whereby Navigation provided capital markets advisory and business consulting services to the Company for a fee of $50 per month. In addition, the Company’s then President, Kevin Keough, and Mr. Robert Willis, a Company director and Vice Chairman of Capital Markets, provided such services to the Company via Navigation. Accordingly, Mr. Keough and Mr. Willis did not receive any direct compensation from the Company between July 21, 2021 (the effective date of their appointment) and April 21, 2022. Instead, Mr. Keough and Mr. Willis were compensated by Navigation. In consideration for such services provided by Navigation to the Company, Navigation was granted 12,000 restricted stock units (“RSUs”) that were scheduled to vest over four years, similar to time-based RSUs granted to directors in lieu of director’s fees.

On April 21, 2022, the agreement with Navigation was terminated and therefore the RSUs were forfeited prior to any being vested. At the date of termination, the unpaid balance owing under the consulting agreement was $900, which was scheduled to be paid at the rate of $100 per month. Selling, general and administrative expenses for the three months ended March 31, 2022 include $150 related to such agreement. Also, accounts payable and accrued expenses as of December 31, 2022 include $500 in connection therewith. With respect to the RSUs issued to Navigation, selling, general and administrative expenses include stock compensation expenses of $180 for the three months ended March 31, 2022.

Services provided by True North Advisory LLC

On January 21, 2022, the Company entered into a Services Agreement (the “Services Agreement”) with True North Advisory LLC (“True North”), a company affiliated with Michael Tessler, who at that time served as Chairman of the Board. Pursuant to the Services Agreement, among other things, True North provided strategic advice with respect to the Company’s business as requested by the Company from time to time, for a fee of $25 per month, plus reimbursement for out-of-pocket expenses. As a result, selling, general and administrative expenses for the three months ended March 31, 2022 include $34, related to such agreement. The Services Agreement had an initial term of three months, after which it could continue on a month-to-month basis until terminated by either party on 30 days’ prior notice. The Services Agreement, which contained customary mutual provisions regarding confidentiality and ownership of intellectual property, was terminated during the third quarter of 2022.

Transactions with Ribbon

Pursuant to a transition services agreement entered into with Ribbon in connection with the acquisition of Kandy, Ribbon previously provided certain services to the Company. The Company also rented certain office space and purchased certain software from Ribbon. Additionally, from time to time, the Company provided certain services to Ribbon. The following summarizes such revenues and expenses:

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(In thousands, except share and per share data, or as otherwise noted)

March 31, 2023

(Unaudited)

On August 29, 2022, the Company entered into a settlement agreement with Ribbon (the “Ribbon Settlement Agreement”), pursuant to which the Company and Ribbon modified and/or terminated certain previous agreements between the parties. Pursuant to the Ribbon Settlement Agreement, a reseller agreement between the parties was terminated, the Company received $2,500 in cash, Ribbon was granted certain non-exclusive perpetual rights to use certain intellectual property owned by the Company, and all shares of the Company’s common stock along with warrants previously owned by Ribbon were returned and retired. Due to the redemption of the shares previously owned by Ribbon, Ribbon is no longer considered a related party.

12. Revenue Recognition

In the following tables, revenue is disaggregated by geographies and by verticals (or sector).

Revenues by geography, in the table above, is generally based on the “ship-to address,” with the exception of certain services that may be performed at, or on behalf of, multiple locations, which are categorized based on the “bill-to address.”

13. Share-Based Compensation and 401(k) Plan

Effective January 1, 2023, the American Virtual Cloud Technologies, Inc. 2020 Equity Incentive Plan (the “Equity Incentive Plan”), was terminated. In addition, the American Virtual Cloud Technologies, Inc. 401(k) Plan (the “401(k) Plan”) is scheduled to be terminated on May 31, 2023. Previously, the Equity Incentive Plan provided for the issuance of stock options, stock appreciation rights, RSUs and other share-based awards. As of January 1, 2023, a total of 666,666 shares had been authorized for issuance under the Plan, of which 328,997 shares remained available for issuance. As a result of the cancellation of the Equity Incentive Plan, all unrecognized compensation as of January 1, 2023 was recognized during the three months ended March 31, 2023.

Share-based compensation expenses recognized were as follows:

AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.

(Debtor-in-Possession)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(In thousands, except share and per share data, or as otherwise noted)

March 31, 2023

(Unaudited)

14. Reconciliation of Net loss per Common Share

Basic and diluted net loss per common share was calculated as follows:

Since their inclusion would have been antidilutive, excluded from the computation of diluted net loss per common share are the following, were they to be converted:

15. Income Taxes

The Company’s effective tax rate for the three months ended March 31, 2023 and 2022 were -0.66% and -0.04%, respectively. The effective tax rate for both periods differed from the federal statutory rate primarily due to state taxes and the Company’s full valuation allowance.

16. Commitments and Contingencies

From time to time, the Company may be involved in various legal proceedings and claims in the ordinary course of business. As of March 31, 2023, and through the filing date of this report, the Company does not believe the resolution of any legal proceedings or claims of which it is aware or any potential actions will have a material effect on its financial position, results of operations or cash flows.

17. Subsequent Events

The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the consolidated financial statements are issued. Other than as disclosed elsewhere in the Notes to the financial statements, there have been no subsequent events that require adjustment or disclosure in the condensed consolidated financial statements. 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements (including the notes thereto) contained elsewhere in this report. Certain information contained in this discussion and analysis includes forward-looking statements that involve risk and uncertainties.

For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the sections in this quarterly report on Form 10-Q titled, “CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS, ” Part II, Item 1A of this quarterly report and the Risk Factors section of our Annual Report on Form 10-K filed on April 7, 2023 with the SEC. The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Overview

Overview and recent developments

We are a Delaware-incorporated entity. On April 7, 2020, we acquired Computex, a private operating company doing business as Computex Technology Solutions, and in connection therewith changed our name from Pensare Acquisition Corp to American Virtual Cloud Technologies, Inc. On December 1, 2020, we acquired Kandy, a provider of cloud-based enterprise services, from Ribbon.

On March 15, 2022, we sold Computex and transitioned to a cloud communications company, centered on the Kandy platform.

During 2022, we retained Northland Capital Markets to advise us in connection with a comprehensive strategic review process and announced that such a review process could potentially lead to the sale of the Company or selected assets, while we continued to explore strategic opportunities, including the rationalization of resource allocation and core competencies. Further, during 2022, we took actions that resulted in significant cost savings. Such savings were generated from selective reductions in workforce and renegotiations of certain vendor support contracts. In addition, we engaged strategic and operating restructuring advisors.

Further, based on our forecasts regarding product sales and service, cost structure, cash burn rate and other operating assumptions, during 2022, we determined that we would need additional capital to fund our operations including our research & development activities and our capital investment requirements, and disclosed that there was substantial doubt about the ability of our company to continue as a going concern.

During 2022, our company was forced to scale back operations, and, as more fully discussed in the Notes to the accompanying condensed consolidated financial statements, on January 11, 2023, filed for protection under Chapter 11 of the US Bankruptcy Code. On March 10, 2023, the Company entered into an agreement to sell substantially all of its assets for a cash purchase price of $6.8 million and, on March 24, 2023, such sale was consummated (refer to the accompanying condensed consolidated financial statements for further details).

On March 21, 2023, the Debtors filed a proposed Plan (as amended for solicitation purposes and filed on April 6, 2023) describing an anticipated plan to liquidate its operations and to solicit votes to approve the same from certain of the Debtors’ creditors with respect to the Cases. On April 6, 2023, the Bankruptcy Court entered an order, which, among other things, conditionally approved the Plan for solicitation purposes only.

If the Plan is confirmed, holders of equity interests in the Company will receive no recovery, the Company’s outstanding securities will be cancelled and the Debtors will be dissolved under applicable law as soon as practicable following the closing of the Cases. 

The Company plans to pursue 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 plans will be realized.

As a result of the Asset Sale on March 24, 2023, the Company no longer has any operations, other than those relating to the wind-down of its business and completion of the Chapter 11 process.

Nature of revenue categories discussed below:

Cloud subscription and software revenue, included herein, relate to periods prior to March 24, 2023, and represent subscriptions to Kandy’s cloud-based technology platform as well as revenue from its on-premise software

Professional and managed services revenue, included herein, relate to periods prior to March 24, 2023, and include services provided to customers to assist with product integration.

Financial statement presentation and results of operations

The consolidated financial statements of the Company include the accounts of AVCT and its wholly-owned subsidiaries. In the discussion that follows, we will refer to the three months ended March 31, 2023 and 2022 as the “1^st quarter of 2023” and the “1^st quarter of 2022,” respectively.

1^st quarter of 2023 versus the 1^st quarter of 2022

Net loss from continuing operations, net of tax

Net loss from continuing operations, net of tax, for the 1^st quarter of 2023 was $10.0 million compared with a net loss of $14.6 million in the 1^st quarter of 2022. Discussed below are the revenue and expense factors that primarily contributed to the quarter over quarter change.

Total revenue, cost of revenue and gross margin

Total revenue was $4.1 million in both the 1^st quarter of 2023 and the 1^st quarter of 2022, despite a shorter earnings period in the 1^st quarter of 2023 due to the sale of substantially all of the Company’s assets on March 24, 2023, which reduced the earnings period in the quarter by 8 days. Cloud subscription revenue in the 1^st quarter of 2023 was positively impacted by increased UCaaS business from 2 customers.

Due primarily to the impact of cost saving actions taken by the Company starting in the later quarters of 2022, cost of revenue decreased $1.7 million, or 35.8%, from $4.8 million in the1^st quarter of 2022 to $3.1 million in the 1^st quarter of 2023. Contributing to the decrease was a $1.1 million decrease in platform software support and a $0.5 million decrease in employee-related costs.

The cost saving actions mentioned above also had a positive impact on gross margin, which was 23.6% in the 1^st quarter of 2023 compared with negative 18.1% in the 1st quarter of 2022. Cost savings included selective reductions in workforce and renegotiations of certain vendor contracts.

Research and development

For the 1^st quarter of 2023 and 2022, research and development expenses were $2.9 million and $4.5 million, respectively. The decrease of $1.6 million, or 36.2%, was primarily due to reductions in salaries and related costs as well as reductions in certain external contractor costs, both of which reflect the recent cost savings actions.

Selling, general and administrative expenses

Selling, general and administrative expenses consisted of the following (in thousands):

Selling, general and administrative expenses were $6.7 million and $7.1 million in the 1^st quarter of 2023 and 2022, respectively, a decrease of $0.4 million or 5.0%. The decrease in selling, general and administrative expenses also reflect the impact of recent cost-saving efforts, partially offset by slight increases in certain other costs, including salaries and related costs and insurance expenses. Salaries and related costs increased by $0.2 million, primarily as a result of certain retention programs.

Change in fair value of warrant liabilities

The change in the fair value of warrant liabilities represents mark-to-market fair value adjustments related to certain warrants, and primarily fluctuates as the Company’s stock price fluctuates. The following table summarizes such fair value changes (in thousands):

Reorganization expenses

Reorganization expenses are expenses attributable to the Chapter 11 proceedings, and are further discussed in Note 4 of the Notes to the condensed consolidated financial statements.

Gain on sale of assets

The gain on sale of assets that occurred in the 1^st quarter of 2023 are discussed in Note 6 of the Notes to the condensed consolidated financial statements.

Interest expense

Interest expense consisted of the following (in thousands):

Substantially all of the interest expense in the 1^st quarter of 2022 did not recur in the 1^st quarter of 2023, as the related obligations were either repaid, were otherwise satisfied in full, or were only one-time charges that were expensed on the date of the respective agreements.

Net income on discontinued operations, net of tax

Net income on discontinued operations, net of tax, for the 1^st quarter of 2022 was $0.7 million. Discontinued operations relate to Computex, which was sold in the 1^st quarter of 2022.

Benefit/provision for income taxes

The Company assesses available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of existing deferred tax assets. A significant component of objective negative evidence identified during management’s evaluation was the three-year cumulative loss for the periods ended March 31, 2023 and March 31, 2022. Such objective negative evidence outweighed the positive evidence identified by the Company. On the basis of this evaluation, the Company maintained a full valuation allowance as of March 31, 2023, and March 31, 2022.

Liquidity and Capital Resources

Overview

Historically, the Company’s primary sources of liquidity have been cash and cash equivalents, cash flows from operations (when available) and cash flows from financing activities, including funding under credit agreements and the sale of equity securities. As of March 31, 2023, the Company had an aggregate cash balance of $13,260 in its operating bank accounts. As of May 9, 2023, aggregate cash in the Company’s operating bank accounts was $8.7 million. The Company believes it has sufficient liquidity to facilitate an orderly wind-down of its remaining operations. However, no assurance can be provided that such projections will be realized.

Cash flows (1^st quarter of 2023 and 1^st quarter of 2022)

Operating activities

Net cash used in continuing operating activities was $5.4 million and $24.5 million in the 1^st quarter of 2023 and the 1^st quarter of 2022, respectively, and primarily consisted of cash used in Kandy’s operating activities (including its research and development activities), interest and certain financing costs, professional fees, insurance premiums and corporate support costs. Interest and financing costs in the 1^st quarter of 2022 included cash interest and other financing costs of $7.7 million, which were primarily related to the Credit Agreement that was repaid in the 1^st quarter of 2022.

Investing activities

Cash provided by continuing investing activities in the 1^st quarter of 2023 was $6.1 million and consisted primarily of net proceeds from the sale of substantially all of the Company’s assets. Cash used in continuing investing activities in the 1^st quarter of 2022 was $0.9 million and consisted primarily of $0.6 million of deferred development costs on the enterprise resource planning and customer relationship management system (commonly referred to as ERP and CRM systems) and other capital spending of $0.2 million.

Financing activities

Cash related to continuing financing activities in the 1^st quarter of 2023 were nominal. Cash used in continuing financing activities in the 1^st quarter of 2022 was $17.5 million, and consisted primarily of debt repayments of $32.0 million and payment of deferred financing fees of $0.4 million, partially offset by proceeds of $15.0 million from the issuance of securities.

Cash flows from discontinued operations

Net cash provided by discontinued operations were as follows:

Off-Balance Sheet Arrangements

On March 31, 2023, we had no off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, and had not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

Critical Accounting Policies, Judgements and Estimates

There were no significant changes to our critical accounting policies and estimates from those disclosed in the section, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our annual report on Form 10-K for the year ended December 31, 2022.

Recent Accounting Pronouncements Issued and Adopted

See Note 5 of the Notes to the condensed consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide the information required by this Item.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the fiscal quarter ended March 31, 2023. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective at a reasonable assurance level and, accordingly, provided reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during the quarter ended March 31, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we are named as a defendant in legal actions arising from our normal business activities. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, prospects, financial condition, cash flows or results of our operations.

ITEM 1A. RISK FACTORS.

Factors that could cause our actual results to differ materially from those in this quarterly report are any of the risks described in our Annual Report on Form 10-K, filed with the SEC on April 7, 2023. Any of these factors could result in a significant or material adverse effect on our results of operations, financial condition or cash flows. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business. As of the date of this quarterly report, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K, filed with the SEC on April 7, 2023. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Other than as previously disclosed, none.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None

ITEM 6. EXHIBITS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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