AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC. References in this report to "we," "us," "our," or the "Company" refer to
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act that are not historical facts, and involve risks and uncertainties that
could cause actual results to differ materially from those expected and
projected. All statements other than statements of historical fact included in
this Form 10-Q including, without limitation, statements in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the Company's financial position, business strategy and the plans and
objectives of management for future operations, are forward-looking statements.
Words such as "expect," "believe," "anticipate," "intend," "estimate," "seek"
and variations and similar words and expressions are intended to identify such
forward-looking statements. Such forward-looking statements relate to future
events or future performances, but reflect management's current beliefs, based
on information currently available. A number of factors could cause actual
events, performances or results to differ materially from the events,
performance and results discussed in the forward-looking statements. For
information identifying important factors that could cause actual results to
differ materially from those anticipated in the forward-looking statements,
please refer to Part II, Item 1A of this Quarterly report and the Risk Factors
section of our Annual Report on Form 10-K filed on
Overview
We are a
On
On
Kandy
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 that includes pre-built customer engagement tools, based on WebRTC technology that enables frictionless communications. Further, we support rapid service creation and multiple go to market models including white labelling, multi-tier channel distribution, enterprise direct, and self-service via our SaaS (software as a service) web portals.
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Our 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, 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, and Etisalat give us access to a marquee customer base and the ability to sell end to end solutions.
Computex
On
On
In the condensed consolidated financial statements, the results of operations of
Need for Additional Funding
The Company currently projects that it will need additional capital to fund its current operations including research & development and capital investment requirements until the Company scales to a revenue level that permits cash self-sufficiency. As a result, the Company needs to raise additional capital or secure debt funding to support on-going operations until such time. This projection is based on the Company's current expectations regarding product sales and service, cost structure, cash burn rate and other operating assumptions. The sources of this capital are anticipated to be from the sale of equity and/or debt. Alternatively, or in addition, the Company may seek to sell additional assets or portions of its business. Any of the foregoing may not be available on favorable terms, if at all, and may require the consent of current debt and/or equity holders to the modification of existing agreements, which may or may not be granted. Additionally, any debt or equity transactions may cause significant dilution to existing stockholders.
If the Company is unable to raise additional capital moving forward, its ability to operate in the normal course and continue to invest in its product portfolio may be negatively impacted and the Company may be forced to scale back operations or divest some or all of its products.
These factors raise substantial doubt about the ability of the Company to continue as a going concern. Unless management is able to obtain additional financing, it is unlikely that the Company will be able to meet its funding requirements during the next 12 months.
Other Recent developments
The Company continues to explore strategic opportunities for its IT solutions business, including the rationalization of resource allocation and core competencies, while seeking to focus on areas with growth potential. As part of such strategy, the Company may terminate certain contracts that do not align with its strategic direction, or which are deemed unprofitable. Termination of any such contracts could result in breakage costs, which would negatively impact the Company's results of operations, financial position and cash flows.
On
Additionally, as more fully discussed in Note 8 of the Notes to the condensed
consolidated financial statements, during the fourth quarter of fiscal year
2021, the first quarter of 2022 and
Nasdaq Notices
See Note 1 to the accompanying condensed consolidated financial statements
regarding notices received from the Nasdaq on
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Growth strategy
The acquisition of Kandy has given us the opportunity to provide a full suite of UCaaS and CPaaS products to serve the rapidly growing cloud communications market. Customers today demand a highly reliable, secure, and scalable communications platform along with a world class customer experience.
With demand for cloud technology increasing, we believe that the already sizable total addressable market (TAM) for cloud communications is on track to continue to expand and we believe that we are positioned to monetize mega trends in enterprise cloud communications and gain market share as a premier white-label cloud communications provider.
Certain areas of our growth plan, which also include continued investment in research and development, are as follows:
? Channel (white label) - Target technology providers, such as Service Providers
(SPs), Resellers, Independent Software Vendors (ISVs), and System Integrators
(SIs) through
? Partners that are looking to white label or resell cloud technologies, which we
believe offer significant opportunity to grow revenue with existing partners
while identifying new ones.
? Strategic Alliances with companies looking to co-invest to monetize cloud
communication technology; and
? Organic growth - By targeting select vertical markets with high growth
potential for example, government, retail, finance, and healthcare
? Inorganic growth - By making selective acquisitions to expand the use of the
Kandy platform and distribution channels.
Key trends affecting our results of operations
The following are key trends that we believe can positively impact our results of operations:
? The acceleration of digital transformation
? The change in how people work, including the "work from anywhere" mindset
? The increased complexity in mid & large enterprises and the desire by
enterprises for integrated internal and external communications for UCaaS,
CPaaS and DRaas
? The demand for services similar to Teams, Zoom and WebEx, and partners that can
add to and/or complement such tools and players
? The trend towards CPaaS technology - Product developers &
Vendors (ISVs) are increasingly seen as the influencers
? The general trend towards movement to the cloud
? The recognition that certain IT services provide the opportunity of funding via
recurring payments over a period of time, rather than large upfront payments
? The increasing use of multi-cloud strategies, whereby cloud architectures and
cloud-enabled frameworks, whether public, private, or hybrid, provide the core
foundation of modern IT
? The explosive growth in remote workforce needs.
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Covid-19
COVID-19 continues to significantly impact local, regional, and global economies, businesses, supply chains, production and sales across a range of industries. The extent of its impact on our operational and financial performance is uncertain and difficult to predict and we remain cautious about the global recovery. To protect the health and safety of our employees, our daily execution has evolved into a largely virtual model. However, we have found ways to continue to engage with and assist our customers and partners as they work to navigate the current environment. We will continue to monitor the current environment and may take further actions that may be required by federal, state or local authorities or that we determine to be in the interests of our employees, customers, and partners.
Nature of revenue categories discussed below:
Cloud subscription and software revenue represent subscriptions to the Company's cloud-based technology platform as well as revenue from the Company's on-premise software.
Professional and managed services revenue include services provided to our customers to assist them with the integration of our products to their network.
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
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2nd quarter of 2022 versus the 2nd quarter of 2021
2nd Quarter of
2022 2021
Revenues: (in thousands)
Cloud subscription and software $ 3,617 $ 4,057
Managed and professional services 66 898
Other 41 -
Total revenues 3,724 4,955
Cost of revenue 5,277 3,579
Gross (loss) profit (1,553 ) 1,376
Goodwill impairment 10,468 -
Research and development 4,713 4,604
Selling, general and administrative 7,278 8,450
Loss from continuing operations (24,012 ) (11,678 )
Other (expense) income
Change in fair value of warrant liabilities 33,577 3,535
Change in fair value of derivative liabilities (29 ) -
Interest expense (1) (1,096 ) (6,669 )
Other expense (86 ) (31 )
Total other income (expenses) 32,366 (3,165 )
Net income (loss) from continuing operations before income taxes 8,354 (14,843 ) Provision for income taxes
(5 ) (29 )
Net income (loss) from continuing operations, net of tax 8,349 (14,872 )
Net income (loss) on discontinued operations, net of tax - (1,034 )
Net income (loss) $ 8,349 $ (15,906 ) (1) Interest expense in the 2nd quarter of 2021 include related party interest of
$5,164 .
Net income (loss) from continuing operations, net of tax
Net income from continuing operations, net of tax, for the 2nd quarter of 2022
was
Cloud subscription and software revenue
Cloud subscription and software revenue, which represents revenue from
subscriptions to the Company's cloud-based technology platform as well as
revenue from the Company's on-premise software, was
Managed and professional services revenue
Managed and professional services revenues was minimal in the 2nd quarter of
2022 compared with
Total revenue, cost of revenue and gross margin
Aggregate revenue for all product lines together was
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Cost of revenue increased
The aggregate gross margin in the 2nd quarter of 2022 was negative as the Company continues to ramp up operations as part of its strategic investment in the Kandy platform. Direct expenses primarily consist of labor costs and costs of software support, both of which are primarily fixed.
Goodwill impairment
Research and development
The Company began recognizing research and development expenses when it acquired
Kandy in
Selling, general and administrative expenses
Selling, general and administrative expenses for the 2nd quarter of 2022 and the
2nd quarter of 2021 consisted of the components in the following table (in
thousands):
2nd Quarter of Increase
2022 2021 (decrease)
Salaries, benefits, subcontracting & personnel
administration costs $ 2,554 $ 5,256 $ (2,702 ) Building occupancy costs, utilities, office supplies & repairs and maintenance
251 228 23
Sales and marketing 270 603 (333 )
Professional fees 1,567 1,440 127
Insurance 681 483 198
ERP/CRM(1) implementation costs 1,598 - 1,598
Other 357 440 (83 )
$ 7,278 $ 8,450 $ (1,172 ) (1) Refers to enterprise resource planning/customer relationship management
system
Selling, general and administrative expenses was
The decrease in salaries and related costs was primarily a result of a reduction
in corporate headcount, primarily at the executive level along with a related
reduction in stock compensation expenses, partially offset by an increase in
salaries at the Kandy business unit which saw an increase in headcount.
Excluding stock compensation expense, corporate salaries and related costs
decreased
ERP/CRM implementation costs incurred began being expensed during the 2nd quarter of 2022 as a new ERP/CRM system went live during the 2nd quarter of 2022. Such costs in previous quarters were deferred as the ERP/CRM system was in the development phase.
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Change in fair value of warrant liabilities
The change in the fair value of warrant liabilities in the 2nd quarter of 2022 and 2021 represent mark-to-market fair value adjustments related to certain warrants, and primarily fluctuate due to changes in and the volatility of the Company's stock price. Such changes primarily result from changes in the Company's stock price. The income statement amounts in the 2nd quarter of 2022 and 2021 consisted of the following (in thousands):
2nd Quarter of
2022 2021
Income (expense)
Series A Warrants $ 5,290 $ -
Series D Warrants 15,531 -
Monroe Warrants 3,152 -
February 2022 Warrants 8,595 -2017 Private Placement and EBC Warrants 1,009 3,535
$ 33,577 $ 3,535 Interest expense
Interest expense consisted of the following (in thousands):
2nd Quarter of
2022 2021
Amortization of deferred financing costs and discount - Series B Preferred Stock
$ 210 $ -
Amortization of deferred financing costs and discount - Convertible Note
863 -
Amortization of debenture discount - 3,507
Debenture interest paid-in-kind - 3,082
Other 23 80
$ 1,096 $ 6,669 Interest expense in the 2nd quarter of 2022 decreased
Net loss on discontinued operations, net of tax
Net loss on discontinued operations, net of tax, for the 2nd quarter of 2021 was
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YTD period ended
YTD period ended June 30,
2022 2021
Revenues: (in thousands)
Cloud subscription and software $ 7,420 $ 7,195
Managed and professional services 357 1,273
Other 41 -
Total revenues 7,818 8,468
Cost of revenue 10,113 7,263
Gross (loss) profit (2,295 ) 1,205
Goodwill impairment 10,468 -
Research and development 9,223 9,098
Selling, general and administrative 14,352 15,588
Loss from continuing operations (36,338 ) (23,481 )
Other (expense) income
Change in fair value of warrant liabilities 40,488 (23 )
Change in fair value of derivative liabilities (29 ) -
Interest expense (1) (10,264 ) (12,297 )
Other expense (123 ) (47 )
Total other income (expenses) 30,072 (12,367 )
Net loss from continuing operations before income taxes (6,266 ) (35,848 )
Provision for income taxes (11 ) (32 )
Net loss from continuing operations, net of tax (6,277 ) (35,880 )
Net income (loss) on discontinued operations, net of tax 748 (2,653 )
Net loss $ (5,529 ) $ (38,533 ) (1) Interest expense in the YTD period ended
ended June 30, 2021 include related party interest of $764 and $10,009 ,
respectively
Net loss from continuing operations, net of tax
Net loss from continuing operations, net of tax for the YTD period ended
Cloud subscription and software revenue
Cloud subscription and software revenue was
Managed and professional services revenue
Managed and professional services revenues was
Total revenue, cost of revenue and gross margin
Aggregate revenue for all product lines together was
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Cost of revenue increased
The aggregate gross margin in the YTD period ended
Research and development
For the YTD period ended
Selling, general and administrative expenses
Selling, general and administrative expenses for the YTD period ended
YTD period ended
June 30, June 30, Increase
2022 2021 (decrease)
Salaries, benefits, subcontracting & personnel
administration costs $ 6,081 $ 9,705 $ (3,624 )
Building occupancy costs, utilities, office
supplies & repairs and maintenance 500 358 142
Sales and marketing 907 1,055 (148 )
Professional fees 3,280 2,776 504
Insurance 1,334 932 402
ERP/CRM implementation costs 1,598 - 1,598
Other 652 762 (110 )
$ 14,352 $ 15,588 $ (1,236 ) Selling, general and administrative expenses was
The decrease in salaries and related costs was primarily a result of a reduction
in corporate headcount, primarily at the executive level, and a related
reduction in stock compensation expense, partially offset by an increase in
salaries at the Kandy business unit which saw an increase in headcount.
Excluding stock compensation expenses, corporate salaries and related costs
decreased
Professional fees increased due to increased financing activities, in the YTD
period ended
The ERP/CRM implementation costs are discussed in the quarter over quarter comparison.
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Change in fair value of warrant liabilities
The nature of the change in the fair value of warrant liabilities in the YTD
period ended
YTD period ended
2022 2021
Income (expense)
Series A Warrants $ 8,893 $ -
Series D Warrants 15,688 -
Monroe Warrants 4,960 -
February 2022 Warrants 7,950 -2017 Private Placement and EBC Warrants 2,997 (23 )
$ 40,488 $ (23 ) Interest expense
Interest expense consisted of the following (in thousands):
YTD period ended June 30,
2022 2021
Interest expense and financing fees - Credit Agreement $ 6,870 $ -
Amortization of deferred financing costs and issue discount
-
1,431 -
Interest and extension fee on related party promissory note 764 -
Amortization of deferred financing costs and discount - Series B Preferred Stock
281 -
Amortization of deferred financing costs and discount - Convertible Note
863 -
Amortization of debenture discount - 6,461
Debenture interest paid-in-kind - 5,739
Other 55 97
$ 10,264 $ 12,297 Interest expense decreased
The reduction in interest expense in the YTD period ended
Net income (loss) on discontinued operations, net of tax
Net income on discontinued operations, net of tax, for the YTD period ended
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
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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
The Company currently projects that it will need additional capital to fund its current operations including research & development and capital investment requirements until the Company scales to a revenue level that permits cash self-sufficiency. As a result, the Company needs to raise additional capital or secure debt funding to support on-going operations until such time. This projection is based on the Company's current expectations regarding product sales and service, cost structure, cash burn rate and other operating assumptions. The sources of this capital are anticipated to be from the sale of equity and/or debt. Alternatively, or in addition, the Company may sell additional assets or portions of its business. Any of the foregoing may not be available on favorable terms, if at all, and may require the consent of current debt and/or equity holders to the modification of existing agreements, which may or may not be granted. Additionally, any debt or equity transactions may cause significant dilution to existing stockholders.
If the Company is unable to raise additional capital moving forward, its ability to operate in the normal course and continue to invest in its product portfolio may be negatively impacted and the Company may be forced to scale back operations or divest some or all of its products.
These factors raise substantial doubt about the ability of the Company to continue as a going concern. Unless management is able to obtain additional financing, it is unlikely that the Company will be able to meet its funding requirements during the next 12 months.
Current cash balances and working capital have been impacted by the following historical events or actions.
? A cash capital raise of
convertible debentures ("Debentures") and certain penny warrants) to fund
expansion, capital expenditures and working capital. Pursuant to the terms of
the Debentures, on
interest were converted to shares of common stock. See Note 8 of the Notes to
the condensed consolidated financial statements for additional information.
? The entry into and subsequent repayment of the Credit Agreement with Monroe.
Such Credit Agreement was entered into on
term loan facility, to fund working capital, other general business activities
and pay off amounts owing under a prior credit agreement that the Company
previously assumed when it acquired
the prior credit agreement, which consisted of a line of credit balance and a
term loan, was
was payable monthly at the rate of 12% per annum. However, the lenders under
the Credit Agreement were guaranteed a minimum return of
1, 2022, all amounts owing under the Credit Agreement were repaid, including
the unpaid amounts of the minimum return, and the Credit Agreement was
terminated.
? The issuance and repayment of a
"2021 Note"), which was entered into on
affiliate of a shareholder that owns more than five percent of the Company's
common stock and which was repaid on
minimum return of 25%, became due on
of registered equity securities and the early pay-off of the Credit Agreement.
However, for a waiver fee of
proceeds received from the sale of
? The receipt of gross proceeds of
costs), in
registered direct offering, of 2,500,000 shares (the "Registered Shares") of
common stock at a purchase price of
sale, the Company issued to the buyer, in addition to the 2,500,000 shares of
the Company's common stock: (i) a warrant to purchase up to 5,000,000 shares of
the Company's common stock (the "Series A Warrant") and (ii) a warrant to
purchase up to 2,500,000 shares of the Company's common stock (the "Series B
Warrant"). The Series A Warrant and the Series B Warrant were each exercisable
at an initial exercise price of
were later increased, the exercise price of each was reduced to
and the buyer received warrants to purchase 1,500,000 shares of the Company's
common stock (the "Series C Warrants") at an exercise price of
share. Subsequent to
Series B Warrants were reduced to
to the number of shares of the Company's common stock issuable upon exercise of
such warrants). See Note 8 of the Notes to the condensed consolidated financial
statements for further discussion of the Series A and Series B warrants,
including a discussion of the modifications that occurred during 2021. In
December, the Company received an additional
from the subsequent exercise of the Series B Warrants.
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? The repayment of a subordinated note of $0.5 million along with related
accrued interest in November 2021 .
? The receipt of gross proceeds of $25.0 million (before deduction of
offering costs), in December 2021 , from the sale of securities consisting
of 7,840,000 shares of common stock, 12,456 units of convertible preferred
stock and certain Series D Warrants to purchase up to 15,625,000 shares of
the Company's common stock at an exercise price of $2.00 per share. See
Note 8 of the Notes to the condensed consolidated financial statements for
further discussion of such securities.
? The receipt of gross proceeds of $15.0 million on March 1, 2022 ,
representing the first tranche of a sale of securities in connection with
a February 28, 2022 securities purchase agreement (the "February 2022
Purchase Agreement") entered into with a buyer. See Note 8 of the Notes to
the condensed consolidated financial statements for further discussion of
such securities.
? The sale in April 2022 of additional securities, which resulted in net
cash proceeds of $9.9 million . See Note 8 of the Notes to the condensed
consolidated financial statements for further discussion of such
securities.
In
? a base prospectus for the sale and issuance by us of up to
common stock, preferred stock, warrants, subscriptions rights, debt securities
and/or units; and
? a resale prospectus covering the resale by certain selling stockholders of up
to 67,797,774 shares of common stock.
Cash flows (YTD period ended
Operating activities
Net cash used in continuing operating activities was
Investing activities
Cash used in continuing investing activities was
Financing activities
Cash used in continuing financing activities was
Cash provided by continuing financing activities was
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Cash flows from discontinued operations
Net cash used in discontinued operations were as follows:
Six Months Ended
June 30 , June 30,
2022 2021
Net cash (used in) provided by operating activities
(618 )
Net cash used in financing activities - 242
Net cash provided by (used in) discontinued operations
Off-Balance Sheet Arrangements
On
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
Recent Accounting Pronouncements Issued and Adopted
See Note 4 of the Notes to the condensed consolidated financial statements.
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