AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC. References in this report to "we," "us," "our," or the "Company" refer toAmerican Virtual Cloud Technologies, Inc. (or "AVCT") and its wholly-owned subsidiaries. References to our "management" or our "management team" refer to our officers and directors. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements (including the notes thereto) contained elsewhere in this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risk and uncertainties.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as "expect," "believe," "anticipate," "intend," "estimate," "seek" and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performances, but reflect management's current beliefs, based on information currently available. A number of factors could cause actual events, performances or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to Part II, Item 1A of this Quarterly report and the Risk Factors section of our Annual Report on Form 10-K filed onApril 15, 2022 with theU.S. Securities and Exchange Commission (the "SEC"). The Company's securities filings can be accessed on the EDGAR section of theSEC's website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Overview
We are a
OnApril 7, 2020 , AVCT (formerly known asPensare Acquisition Corp. ), consummated a business combination transaction (the "Computex Business Combination") in which it acquiredStratos Management Systems, Inc. ("Computex"), an operating company that does business as Computex Technology Solutions. In connection with the Computex Business Combination, the Company changed its name toAmerican Virtual Cloud Technologies, Inc. OnDecember 1, 2020 , we acquired theKandy Communications business (hereafter referred to as "Kandy") from Ribbon Communications, Inc. and certain of its affiliates ("Ribbon"), by acquiring certain assets and assuming certain liabilities of Kandy from Ribbon and acquiring all of the outstanding interests ofKandy Communications LLC . Kandy, a provider of cloud-based enterprise services, globally deploys a white-label, carrier-grade cloud-based platform for unified communications as a service ("UCaaS"), communications platform as a service ("CPaaS"), Microsoft Teams Direct Routing as a Service ("DRaaS"), and SIP Trunking as a Service capabilities for mid-market and enterprise customers across a proprietary multi-tenant, highly scalable cloud platform. The Kandy platform also includes pre-built customer engagement tools, based on web real-time communications technology ("WebRTC technology"), known as Kandy Wrappers, and 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. 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. 29 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/Kyndryl and Etisalat, give us access to a marquee customer base and the ability to sell end to end solutions.Computex
OnSeptember 16, 2021 , the Company announced that as a result of a decision by the Company's Board of Directors to explore strategic alternatives previously announced onApril 7, 2021 , the Board had authorized the Company to focus its strategy on acquisitions and organic growth in its cloud technologies business as well as to explore strategic opportunities for its IT solutions business, including the divestiture ofComputex . The Company believed that the change would allow it to optimize resource allocation, focus on core competencies, and improve its ability to invest in areas of maximal growth potential. OnJanuary 27, 2022 , the Company announced that it had executed a definitive agreement to sellComputex and onMarch 15, 2022 , the sale ofComputex was consummated, completing the Company's transition to a pure-play cloud communications and collaboration company, centered on the Kandy platform. As a result,Computex was classified as held for sale as ofDecember 31, 2021 and its operations are classified as discontinued operations in the condensed consolidated statement of operations. During fiscal year 2021, we recorded a noncash goodwill impairment charge of$32.1 million due to the planned sale ofComputex at that time, which represented the excess of the carrying value of theComputex reporting unit over the expected sale proceeds less costs to sell. Net proceeds from the sale ofComputex after payment of closing obligations and certain indebtedness, were used for working capital and general business purposes. In the condensed consolidated financial statements, the results of operations ofComputex for current and prior periods are separated and classified as discontinued operations. This management's discussion and analysis of financial condition and results of operations primarily focuses on the Company's continuing operations and so, unless otherwise indicated, amounts discussed herein, pertain to the Company's continuing operations. 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 equity
holders and/or holders of any debt we may incur in the future, or may require
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.
30
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 OnAugust 25, 2022 , the Company announced that it had retainedNorthland Capital Markets to advise the Company in connection with a comprehensive strategic review process that could lead to the sale of the Company or selected assets. No assurance can be given that the Company's review of strategic alternatives will result in one or more transactions being entered into or consummated, or if any transaction is undertaken, as to its terms, structure or timing of such transaction. Furthermore, any ultimate sale transaction(s), if any, may require a shareholder or judicial approval process that may or may not result in such approval being obtained. The Company continues to explore strategic opportunities, 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. Further, the Company has taken actions to date that it believes will result in significant cost savings going forward, some of which were realized in the third quarter of 2022 and are expected to continue into the fourth quarter. Such savings have been and are to be generated from the Company's ongoing operating restructuring initiatives including, but not limited to, selective reductions in workforce and negotiated conversions of certain material vendor support costs from fixed to variable, thereby eliminating certain cost burdens related to unused capacity. In conjunction with the Company's ongoing focus to enhance its enterprise value as a going concern business, the Company has also obtained strategic and operating restructuring support services of capital advisors and expects to pursue additional cost saving initiatives in the fourth quarter of 2022. In support of the ongoing strategic, operating and capital restructuring initiatives, the Company has incurred increased expenses associated with non-recurring items related to legal, operating, and financial advisory professional fees.
Nasdaq Notices and Reverse Stock Split
See Note 1 of the accompanying condensed consolidated financial statements
regarding notices received from the Nasdaq on
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.
31
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 the remote workforce.
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.
32
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 endedSeptember 30, 2022 and 2021 as the "3rd quarter of 2022" and the "3rd quarter of 2021," respectively, and the nine months endedSeptember 30, 2022 and 2021 as the "YTD period endedSeptember 30, 2022 " and the "YTD period endedSeptember 30, 2021 ," respectively.
3rd quarter of 2022 versus the 3rd quarter of 2021
3rd Quarter of
2022 2021
(in thousands)
Revenues:Cloud subscription and software$ 4,198 $
3,575
Managed and professional services 540
573 Total revenues 4,738 4,148 Cost of revenue 4,530 4,242 Gross profit (loss) 208 (94 ) Research and development 3,709 4,508
Selling, general and administrative 8,689
12,290
Loss from continuing operations (12,190 ) (16,892 ) Other (expense) income Change in fair value of warrant liabilities (5,174 )
3,064
Change in fair value of derivative liability 750
-
Interest expense (1) (10,012 ) (6,289 )
Other income (expense) 1,081 (33 )
Total other expenses (13,355 ) (3,258 )
Net loss from continuing operations before income taxes (25,545 ) (20,150 )
Provision (benefit) for income taxes (2 ) 6
Net loss from continuing operations, net of tax (25,547 ) (20,144 ) Net loss on discontinued operations, net of tax - (17,173 ) Net loss$ (25,547 ) $ (37,317 )
(1) Interest expense in the 3rd quarter of 2021 includes related party interest
of $4,602 .
Net loss from continuing operations, net of tax
Net loss from continuing operations, net of tax, for the 3rdquarter of 2022 was$25.5 million compared with a net loss of$20.1 million in the 3rd quarter of 2021. Discussed below are the revenue and expense factors that primarily contributed to the quarter over quarter change.
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$4.2 million in the 3rd quarter of 2022 compared to$3.6 million in the 3rd quarter of 2021, an increase of$0.6 million or 17.4%, primarily attributable to increased UCaaS business from 2 of our customers. 33
Managed and professional services revenue
Managed and professional services revenues in the 3rd quarter of 2022 of
Total revenue, cost of revenue and gross margin
Aggregate revenue for all product lines together was$4.7 million in the 3rd quarter of 2022 compared with$4.1 million , an increase of 14.2% compared with the 3rd quarter of 2021. Cost of revenue, which primarily consists of labor costs and costs of software support, was$4.5 million in the 3rd quarter of 2022 compared with$4.2 million in the 3rd quarter of 2021, an increase of$0.3 million , due primarily to a$0.7 million increase in platform software support and a$0.3 million increase in employee-related costs, partially offset by a$0.3 million decrease in amortization of intangibles and a$0.5 million decrease in certain consultant and outside services. The aggregate gross margin in the 3rd quarter of 2022 was 4.4% compared with a negative gross margin in the 3rd quarter of 2021. The improved margin is due to a combination of the increase in revenues coupled with the impact of recent cost saving actions taken by the Company. Such savings have been generated from the Company's ongoing operating restructuring initiatives including, but not limited to, selective reductions in workforce and the negotiated conversions of certain material vendor support costs from fixed to variable, thereby eliminating certain cost burdens associated with unused capacity. Research and development In the 3rd quarter of 2022 and the 3rd quarter of 2021, research and development expenses was$3.7 million and$4.5 million , respectively. The decrease of$0.8 million or 17.7% also reflects the impact of the recent cost saving efforts discussed above, primarily via reduced salaries and outsourced contractor costs. Research and development expenses consist of costs related to certain proprietary software incurred in an agile software environment with releases broken down into several iterations called sprints involving short cycles of development (typically 4-6 weeks in duration) in which the research and development teams create potentially shippable products. Currently, such costs are expensed as incurred, and include personnel-related costs, depreciation related to engineering and test equipment, allocated costs of facilities and information technology, outside services and consultants, supplies, software tools and product certification.
Selling, general and administrative expenses
Selling, general and administrative expenses for the 3rd quarter of 2022 and the
3rd quarter of 2021 consisted of the components in the following table (in
thousands):
3rd Quarter of Increase
2022 2021 (decrease)
Salaries, benefits, subcontracting & personnel
administration costs $ 3,181 $ 8,931 $ (5,750 )
Building occupancy costs, utilities, office
supplies & repairs and maintenance 251 178 73
Sales and marketing 354 689 (335 )
Professional fees 2,929 1,338 1,591
Insurance 943 611 332ERP/CRM(1) implementation costs 509
- 509
Other 522 543 (21 )
$ 8,689 $ 12,290 $ (3,601 ) (1) Refers to enterprise resource planning/customer relationship management
system
34
Selling, general and administrative expenses was $8.7 million and $12.3 million
in the 3rd quarter of 2022 and 2021, respectively, a decrease of $3.6 million or
29.3%, primarily due to reductions in salaries and related costs.
The decrease in salaries and related costs reflects a reduction in corporate
headcount including at the executive level along with a related reduction in
stock compensation expenses. Excluding stock compensation expense, corporate
salaries and related costs decreased $3.7 million in the 3rd quarter of 2022
compared with the 3rd quarter of 2021, while such costs at the Kandy business
unit increased $0.1 million . The decrease in salaries was primarily due to the
inclusion, in the 3rd quarter of 2021, of $3.1 million of termination expenses
in connection with a reduction in headcount. The stock compensation expense
component included in selling, general and administrative expenses decreased
$2.2 million in the 3rd quarter of 2022 compared with the 3rd quarter of 2021
due to the reduction in corporate executive headcount and lower stock prices
that impact the fair value of new awards.
The increase in professional fees of $1.6 million , from $1.3 million in the 3rd
quarter of 2021 to $2.9 million in the 3rd quarter of 2022 are due to a
combination of i) increased financing activities that required the services of
legal and other professionals as well as ii) an increase in financial advisory
professional fees. As discussed previously, the Company undertook a number of
financing transactions during the 3rdquarter of 2022. Also, as previously
discussed, the Company has obtained strategic and operating restructuring
support services of capital advisors in support of its ongoing strategic,
operating and capital restructuring initiatives, which has resulted in increased
non-recurring legal and financial advisory professional expenses.
ERP/CRM implementation costs began being expensed in
Change in fair value of warrant liabilities
The change in the fair value of warrant liabilities 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. The fair value
change of each warrant was as follows in the 3rd quarter of 2022 and 2021 (in
thousands):
3rd Quarter of
2022 2021
Income (expense)
Series A Warrants $ (760 ) $ -
Series D Warrants (2,219 ) -
Monroe Warrants (921 ) -
February 2022 Warrants (1,274 ) -
2017 Private Placement and EBC Warrants - 3,064
$ (5,174 ) $ 3,064 Change in fair value of derivative liabilities
The change in the fair value of derivative liabilities of$0.8 million in the 3rd quarter of 2022 represents the write back of the fair value of certain embedded derivatives that were previously assessed in the 2nd quarter 2022 with respect to the probability of events of default and the probability of a change of control associated with the Convertible Notes. Such derivatives were assessed at an aggregate estimated value of$0.7 million as of the issuance date of the Convertible Notes and were recorded as derivative liabilities as of the issuance date with a corresponding discount reflected in the Convertible Notes. During the third quarter of 2022, the Convertible Notes were fully satisfied and therefore the related derivative liabilities, at the time, were written back. 35 Interest expense Interest expense in the 3rd quarter of 2022 and 2021 consisted of the following (in thousands): 3rd Quarter of 2022 2021
Financing charges due to a triggering event related to a floor price, as defined - Series B Preferred Stock
$ 7,141
$ - Amortization of deferred financing costs and discount - Series B Preferred Stock
563 -
Amortization of deferred financing costs and discount - Convertible Notes 2,308
-
Amortization of debenture discount and debenture deferred fees -
3,357
Debenture interest paid-in-kind -
2,518
Interest and extension fee on related party promissory note -
389
Other - 25
$ 10,012 $ 6,289
Interest expense in the 3rd quarter of 2022 increased $3.7 million from $6.3
million in the 3rd quarter of 2021 to $10.0 million in the 3rd quarter of 2022
and substantially consist of charges that are not expected to recur. Of the
$10.0 million incurred in the 3rd quarter of 2022, charges of $7.1 million were
amounts paid to the previous holders of the Series B Preferred Stock as a result
of the Company's stock price falling below a stipulated floor price, as defined
in the Series B Preferred Stock agreement. The $7.1 million was satisfied with
cash of $3.2 million , while the remainder of $3.9 million was satisfied via the
issuance of shares of common stock as detailed in the Exchange Agreement
discussed in Note 8 of the Notes to the condensed consolidated financial
statements. The remainder of the 3rd quarter interest expense of $2.9 million
relates to noncash amortizations of deferred financing fees and discounts
associated with the Series B Preferred Stock and the Convertible Notes. All
outstanding amounts and obligations under the Series B Preferred Stock and the
Convertible Notes have since been paid.
Interest expense in the 3rd quarter of 2021 primarily consisted of the
amortization of debenture discount and debenture interest paid-in-kind recorded
in the 3rd quarter of 2021. The Debentures were fully converted to common stock
during the 3rd quarter of 2021 (on September 8, 2021 ), but, prior to conversion,
bore interest at the rate of 10.00% per annum compounded quarterly.
Other income (expense)
Other income of$1.1 million in the 3rd quarter of 2022 consist of the gain of$1.7 million recorded in connection with the Ribbon Settlement Agreement (See Note 9 of the condensed consolidated financial statements), partially offset by other expenses of$0.6 million .
Net loss on discontinued operations, net of tax
Net loss on discontinued operations, net of tax, for the 3nd quarter of 2021 was$17.2 million , primarily as a result of a$20.5 million impairment charge assessed in the 3rd quarter of 2021 in connection with the then pending sale ofComputex at that time. Discontinued operations relate toComputex , which was sold in the 1st quarter of 2022. 36 YTD period endedSeptember 30, 2022 versus the YTD period endedSeptember 30, 2021 YTD period endedSeptember 30, 2022 2021 (in thousands) Revenues:
Cloud subscription and software$ 11,618 $
10,770
Managed and professional services 897
1,846 Other 41 - Total revenues 12,556 12,616 Cost of revenue 14,643 11,505 Gross (loss) profit (2,087 ) 1,111 Goodwill impairment 10,468 - Research and development 12,932 13,606
Selling, general and administrative 23,041
27,878
Loss from continuing operations (48,528 ) (40,373 ) Other (expense) income Change in fair value of warrant liabilities 35,314
3,041
Change in fair value of derivative liability 721
-
Interest expense (1) (20,276 ) (18,586 )
Other income (expense) 958 (80 )
Total other income (expenses) 16,717 (15,625 )Net loss from continuing operations before income taxes (31,811 ) (55,998 ) Provision for income taxes (13 ) (26 ) Net loss from continuing operations, net of tax (31,824 ) (56,024 ) Net income (loss) on discontinued operations, net of tax 748
(19,826 ) Net loss$ (31,076 ) $ (75,850 )
(1) Interest expense in the YTD period ended
period ended
$14,611 , 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$11.6 million in the YTD period endedSeptember 30, 2022 compared with$10.8 million in the YTD period endedSeptember 30, 2021 , an increase of$0.8 million or 7.9%, due primarily to increased UCaaS business by 4 of our customers, partially offset by the impact of the conversion of a previous arrangement with a major customer from a direct relationship to an indirect relationship via a reseller agreement with another customer. No revenue was recognized in the YTD period endedSeptember 2022 under the reseller agreement, while$1.0 million was recognized in the YTD period endedSeptember 30, 2021 under the direct relationship.
Managed and professional services revenue
Managed and professional services revenues was$0.9 million in the YTD period endedSeptember 30, 2022 , compared with$1.8 million in the YTD period endedSeptember 30, 2021 , a decrease of$0.9 million . Of the$0.9 million decrease,$0.6 million is attributable to the same arrangement that negatively impacted cloud subscription and software revenues in the YTD discussion. 37
Total revenue, cost of revenue and gross margin
Aggregate revenue for all product lines together was$12.6 million in both the YTD period endedSeptember 30, 2022 and the YTD period endedSeptember 30, 2021 . In connection with the Ribbon Settlement Agreement, particularly, the termination of the reseller agreement, revenues for full year 2022 may be negatively impacted by more than$2.5 million which is the approximate revenue earned from the reseller agreement in the fourth quarter of 2021. Cost of revenue increased$3.1 million or 27.0% from$11.5 million in the YTD period endedSeptember 30, 2021 to$14.6 million in the YTD period endedSeptember 30, 2022 , due primarily to a$3.0 million increase in platform software support and a$1.8 million increase in employee-related costs, partially offset by a$1.0 million decrease in amortization of intangibles and a$1.3 million decrease in certain consultant and outside services.
The gross margin in the YTD period ended
Goodwill impairment
Research and development For the YTD period endedSeptember 30, 2022 , and the YTD period endedSeptember 30, 2021 , research and development expenses were$12.9 million and$13.6 million , respectively. The decrease of$0.7 million , or 5.0%, was primarily due to reductions in salaries and related costs, which reflect the impact of the recent cost saving efforts discussed above.
Selling, general and administrative expenses
Selling, general and administrative expenses for the YTD period endedSeptember 30, 2022 and the YTD period endedSeptember 30, 2021 consisted of the components in the following table (in thousands): YTD period ended September 30, September 30, Increase 2022 2021 (decrease) Salaries, benefits, subcontracting & personnel administration costs $ 9,262$ 18,636 $ (9,374 ) Building occupancy costs, utilities, office supplies & repairs and maintenance 751
536 215
Sales and marketing 1,261 1,744 (483 )
Professional fees 6,209 4,114 2,095
Insurance 2,277 1,543 734ERP/CRM implementation costs 2,107
- 2,107
Other 1,174 1,305 (131 )
$ 23,041 $ 27,878 $ (4,837 )
38
Selling, general and administrative expenses was $23.0 million and $27.9 million
in the YTD period ended September 30, 2022 and the YTD period ended September
30, 2021 , respectively, a decrease of $4.8 million or 17.3%.
The salaries and related costs component of selling, general and administrative
expenses decreased due to a reduction in corporate headcount including at the
executive level along with a related reduction in stock compensation expenses.
Excluding stock compensation expense, corporate salaries and related costs
decreased $5.6 million in the YTD period ended September 30, 2022 , compared with
the YTD period ended September 30, 2021 , while such costs at the Kandy business
unit increased $1.2 million . As previously indicated, the decrease in salaries
was impacted by the inclusion, in the YTD period ended September 30, 2021 , of
$3.1 million of termination expenses in connection with a reduction in
headcount. The stock compensation expenses component included in selling,
general and administrative expenses decreased $5.5 million in the YTD period
ended September 30, 2022 , compared with the YTD period ended September 30, 2021
due to the reduction in corporate executive headcount and lower stock prices
that impact the fair value of new awards.
The professional fees component of selling, general and administrative expenses
increased $2.1 million , from $4.1 million in the YTD period ended September 30,
2021 to $6.2 million in the YTD period ended September 30, 2022 , due to the
reasons discussed in the quarter over quarter discussion above.
The ERP/CRM implementation costs component of selling, general and administrative expenses are discussed in the quarter over quarter comparison.
Change in fair value of warrant liabilities
The factors that impact the change in the fair value of warrant liabilities are discussed in the quarter over quarter discussion. The fair value change of each warrant was as follows for the YTD period endedSeptember 30, 2022 and 2021
(in
thousands):
YTD period ended
September 30,
2022 2021
Income (expense)
Series A Warrants $ 8,133 $ -
Series D Warrants 13,469 -
Monroe Warrants 4,039 -
February 2022 Warrants 6,676 -2017 Private Placement and EBC Warrants 2,997 3,041
$ 35,314 $ 3,041 Interest expense
Interest expense for the YTD period ended
YTD period ended
September 30,
2022 2021
Interest expense and financing fees - Credit Agreement
$ -
Amortization of deferred financing costs and issue discount
-
1,431 -
Interest and extension fee on related party promissory note 764
389
Amortization of deferred financing costs and discount - Series B Preferred Stock
844 -
Amortization of deferred financing costs and discount - Convertible Note 3,171
-
Amortization of debenture discount and debenture deferred fees -
9,881
Debenture interest paid-in-kind -
8,257
Financing charges due to a triggering event related to a floor price, as defined - Series B Preferred Stock
7,141 -
Other 55 59
$ 20,276 $ 18,586
Interest expense was 20.3 million in the YTD period ended September 30, 2022
compared with $18.6 million in the YTD period ended September 30, 2021 , an
increase of $1.7 million . Substantially all of such charges are not expected to
recur due to the following:
i) In aggregate,
ended
charges relating to the Series B Preferred Stock and the Convertible Notes.
All amounts outstanding and all obligations under the Series B Preferred Stock
and the Convertible Notes have since been repaid
39
ii) An aggregate
ended
March 1, 2022
iii) An aggregate
ended September 2022 relate to the February Warrants which have been
converted to common stock
iv) The
of debenture paid-in-kind interest and amortization of debenture discount. As
previously indicated, all Debentures were fully converted to common stock
during the 3rd quarter of 2021.
Other income (expense)
Other income for 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 endedSeptember 30, 2022 was$0.7 million compared with a net loss on discontinued operations, net of tax, for the YTD period endedSeptember 30, 2021 of$19.8 million . The loss in the YTD period endedSeptember 30, 2021 was primarily a result of the$20.5 million impairment charge recorded in the YTD period endedSeptember 30, 2021 at theComputex business unit, in connection with the pending sale ofComputex at that time. Discontinued operations relate toComputex , which was sold in the 1st 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 endedSeptember 30, 2022 andSeptember 30, 2021 . 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 ofSeptember 30, 2022 andSeptember 30, 2021 . Based on the Company's evaluation, it was determined that no uncertain tax positions existed as ofSeptember 30, 2022 orSeptember 30, 2021 .
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 ofSeptember 30, 2022 , the Company had an aggregate cash balance of$10.7 million in its operating bank accounts and net working capital of$14.4 million . As ofNovember 10, 2022 , aggregate cash in the Company's operating bank accounts was$17.0 million . 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 equity holders and/or holders of any debt we may incur in the future, or may require 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. ` 40
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 as of
? The entry into and subsequent repayment of the Credit Agreement with
which was entered into on
facility, to fund working capital, general business activities and to pay off
amounts owing under a prior credit agreement (
previously assumed when it acquired
was payable monthly at the rate of 12% per annum. However, the lenders under
the Credit Agreement were guaranteed a minimum return of
including the unpaid amounts of the minimum return.
? The issuance and repayment of a
"2021 Note"), which was entered into on
by an affiliate of a shareholder that owns more than five percent of the
Company's common stock and which was repaid on
which had a minimum return of 25%, became due on
Company's sale of registered equity securities and the early pay-off of the
Credit Agreement. However, for a waiver fee of
the maturity date to
paid in full using proceeds received from the sale of Computex .
? The receipt of gross proceeds of
costs), in
registered direct offering, of 166,666 shares of common stock at a purchase
price of
common stock, the buyer received certain warrants. In December, the Company
received an additional
exercise of one group of the warrants.
? The repayment of a subordinated note of $0.5 million along with related
accrued interest in November 2021 .
? The receipt of gross proceeds of
costs), in
shares of common stock, 12,456 units of convertible preferred stock and
certain warrants.
? The receipt of gross proceeds of
the first tranche of a sale of securities in connection with a
2022 securities purchase agreement (the "
entered into with a buyer.
? The sale in
proceeds of$9.9 million .
? Cash financing charges of
Series B Preferred Stock as a result of the Company's stock price falling below
a stipulated floor price, as defined in the Series B Preferred Stock agreement
? the sale of 4,515,000 shares of the Company's common stock, in
for net proceeds of
offering costs
? Increased payments for legal, professional and advisory fees during the YTD
period ended
? The consummation, on
entered into with two institutional accredited investors, which netted cash
proceeds of
5,000,000 shares of the Company's common stock, in a registered direct offering
and (ii) warrants to purchase up to an aggregate of 10,000,000 shares of the
Company's common stock, at an exercise price of
concurrent private placement, for a combined purchase price of
? Cash of
Agreement.
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 4,519,851 shares of the Company's common stock.
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Cash flows (YTD period ended
Operating activities Net cash used in continuing operating activities was$54.4 million and$30.2 million in the YTD period endedSeptember 30, 2022 and the YTD period endedSeptember 30, 2021 , 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 included cash interest and other financing costs of$10.9 million primarily related to the Credit Agreement that was repaid in the 1st quarter of 2022 as well as$2.8 million in financing charges that were paid to the previous holders of the
Series B Preferred Stock. Investing activities Cash used in continuing investing activities was$1.2 million and$2.2 million in the YTD period endedSeptember 30, 2022 and the YTD period endedSeptember 30, 2021 , respectively. Cash used in continuing investing activities during the YTD period endedSeptember 30, 2022 consisted of$0.9 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$0.3 million . For the YTD period endedSeptember 30, 2021 , cash used in continuing investing activities was primarily for capital spending. Financing activities Cash provided by continuing financing activities was$4.7 million in the YTD period endedSeptember 30, 2022 and consisted of proceeds of$39.3 million from the issuance of securities, partially offset by debt repayments of$33.4 million and payment of deferred financing fees of$1.2 million . Cash provided by continuing financing activities was$26.7 million in the YTD period endedSeptember 30, 2021 and consisted primarily of$24.0 million from the issuance of Debentures,$5.0 million from the issuance of a promissory note, partially offset by$1.1 million of tax payment for withheld shares associated with vested restricted stock units issued under the Company's equity incentive plan, payment of deferred financing fees of$1.0 million and debt repayments of$0.2 million .
Cash flows from discontinued operations
Net cash (used in) provided by discontinued operations were as follows:
Nine Months Ended
September 30, September 30,
2022 2021
Net cash (used in) provided by operating activities $ (5,503 ) $ 421
Net cash provided by (used in) investing activities 31,948 (822 )
Net cash used in financing activities - (167 )
Net cash provided by (used in) discontinued operations $ 26,445 $ (568 )
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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