The accompanying notes are
an integral part of the condensed consolidated financial statements.
The accompanying notes are an integral part of
the condensed consolidated financial statements.
The accompanying notes are an integral part of
the condensed consolidated financial statements.
The accompanying notes are an integral part of
the condensed consolidated financial statements.
The accompanying notes are an integral part of
the condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data,
or as otherwise noted)
September 30, 2022
(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.
On January 27, 2022, the Company announced that
it had executed a definitive agreement to sell Computex, which would complete the Company’s transition to a pure-play cloud communications
and collaboration company, centered on its Kandy platform. On March 15, 2022, the sale of Computex was consummated. Net proceeds from
the sale of Computex, after payment of closing and certain other obligations were used for working capital and general business purposes.
On August 25, 2022, the Company announced that it had retained Northland
Capital Markets to advise the Company in connection with a comprehensive strategic review process that could lead to the sale of the Company
or 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.
Unless otherwise noted, the discussion
in these Notes to our condensed consolidated financial statements refers to our continuing operations. Refer to Note 5, Assets held
for sale and operations classified as discontinued operations, for additional information.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
September 30, 2022
(Unaudited)
Nature of Continuing and Discontinued Operations
Continuing Operations
The Kandy cloud communications platform is a cloud-based,
real-time communications platform, offering proprietary unified communications as a service (“UCaaS”), communications platform
as a service (“CPaaS”), Microsoft Teams Direct Routing as a Service (“DRaaS”), and SIP Trunking as a Service capabilities
(“STaaS”). Kandy is considered to be a pure-play provider of such offerings for enterprise customers.
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 web real-time communications technology (“WebRTC technology”) that enables frictionless communications. Further, Kandy
supports rapid service creation and multiple go to market models including white labelling, multi-tier channel distribution, enterprise
direct, and self-service via its SaaS (software as a service) web portals.
Kandy’s cloud-based, real-time communications
platform enables service providers, enterprises, software vendors, systems integrators, partners and developers to enrich their applications
and their services with real-time contextual communications empowering the API (Application Programming Interface) economy. With Kandy’s
platform, companies of various sizes and types can quickly embed real-time communications capabilities into their existing applications
and business processes, 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.
Discontinued Operations
Computex, classified within discontinued operations,
is a leading multi-brand technology solutions provider to large global customers, providing a comprehensive and integrated set of technology
solutions, through its extensive hardware, software and value-added service offerings.
Reverse Stock Split
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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
September 30, 2022
(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.
Recent Financing Transactions
On December 2, 2021, the Company entered into
the Credit Agreement with Monroe for a $27,000 Credit Facility (as such terms are defined in Note 7), part of which was used to pay off
amounts owing under a prior credit agreement which was assumed as part of the acquisition of Computex. The remainder of the proceeds
from the Credit Facility were scheduled to be used for working capital and general business purposes. However, on March 1, 2022, all
amounts owing under the Credit Agreement were repaid from the proceeds of a securities sale executed on March 1, 2022, along with a portion
of cash on hand.
The net proceeds from the sale of Computex, after
payment of closing and certain other obligations were used for working capital and general business purposes.
As more fully discussed in Note 8, between November 2021 and October
2022, the Company completed a number of financing transactions, including amendments to certain such financing arrangements.
In addition, on August 29, 2022, the Company
entered into a settlement agreement (the “Ribbon Settlement Agreement”) with Ribbon, pursuant to which the Company and Ribbon
modified and/or terminated certain previous agreements between the parties (See Note 9), and on October 20, 2022, entered into an amended
agreement with a significant supplier, that resulted in the conversion of a trade payable balance to a promissory note (See Note 7).
Nasdaq Notices
Our common stock and public warrants are currently
listed on the Nasdaq.
On May 20, 2022, we received a written notice
from the Nasdaq indicating that we were not in compliance with the Nasdaq Listing Rule which requires us to maintain a minimum bid price
of $1.00 per share. Such notice had provided us with a period of 180 calendar days, or until November 16, 2022, to regain compliance
by maintaining a minimum bid price of $1.00 per share for at least ten consecutive business days.
On September 30, 2022, the Reverse Stock Split
was completed, as a result of which the Company subsequently regained compliance with the minimum share price requirement, as confirmed
in a letter from the Nasdaq which the Company received on October 18, 2022.
On July 27, 2022, we received a written notice
from the Nasdaq notifying us that for 30 consecutive business days, the Company’s Minimum Value of Listed Securities (“MVLS”)
was below the minimum of $35 million that was required for continued listing on the Nasdaq Capital Market pursuant to Nasdaq listing
rule 5550(b)(2), and providing us with a period of 180 calendar days, or until January 23, 2023, to regain compliance by having a closing
MVLS of at least $35 million for at least ten consecutive business days (or such longer period of time as the Nasdaq staff
may require in some circumstances, but generally not more than 20 consecutive business days). We intend to continue to monitor our MLVS.
If our common stock does not trade at a level that is likely to regain compliance with the Nasdaq requirements, our board of directors
may consider other options that may be available to achieve compliance.
We cannot provide assurance that we will be able
to demonstrate compliance with the MVLS listing rule described above by the applicable deadline, in which case our common stock may then
be subject to delisting.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
September 30, 2022
(Unaudited)
Covid-19
The novel strain of coronavirus (“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.
2. Liquidity
Historically, the Company’s primary sources
of liquidity have been cash and cash equivalents, cash flows from operations (when available) and cash flows from financing activities,
including funding under credit agreements and the sale of equity securities. As of September 30, 2022, the Company had an aggregate cash
balance of $10,747 in its operating bank accounts and net working capital of $14,402. As of November 10, 2022, aggregate cash in the Company’s
operating bank accounts was $16,951.
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. 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 achievable 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.
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. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
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.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
September 30, 2022
(Unaudited)
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, 2021, as
filed with the SEC on April 15, 2022. The interim results for the period ended September 30, 2022 are not necessarily indicative of the
results expected for the year ending December 31, 2022 or any future interim periods.
The Company has reclassified certain prior period
amounts, including the results of discontinued operations, reportable segment information and shares of common stock, to conform to the
current period presentation. Unless otherwise indicated, amounts provided in these Notes pertain to the Company’s continuing operations.
See Note 5, Assets held for sale and operations classified as discontinued, for additional information.
Principles of consolidation
The accompanying condensed consolidated
financial statements include the accounts of AVCT and its wholly owned subsidiaries. All intercompany balances and transactions have
been eliminated.
Use of estimates
The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales (or revenues) and expenses
during the reporting period.
Making estimates 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, 2021 that was filed with the SEC on April
15, 2022.
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 September 30, 2022, cash balances held with a financial institution
exceeded the federally insured limit. However, management does not believe this poses a significant credit risk. Concentration of business
risks are summarized in the following table:
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
Number of customers or vendors | | |
Aggregate total | | |
Number of customers or vendors | | |
Aggregate total | |
Customers that individually accounted for 10% or more of trade accounts receivable | |
3 | | |
$ | 5,783 | | |
3 | | |
$ | 6,104 | |
Vendors that individually accounted for 10% or more of trade accounts payable | |
3 | | |
$ | 5,255 | | |
2 | | |
$ | 2,527 | |
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September 30,
2022 | | |
September 30,
2021 | | |
September 30,
2022 | | |
September 30,
2021 | |
| |
| | |
| | |
| | |
| |
Number of customers that individually accounted for 10% or more of sales from continuing operations | |
4 | | |
4 | | |
4 | | |
4 | |
Aggregate total sales of customers that individually accounted for 10% or more of sales from continuing operations | |
$ | 3,461 | | |
$ | 3,470 | | |
$ | 8,720 | | |
$ | 7,894 | |
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
September 30, 2022
(Unaudited)
Trade receivables, net
Trade receivables on the accompanying condensed consolidated balance
sheets are net of allowances of $739 and $147, as of September 30, 2022 and December 31, 2021, respectively.
Fair value of financial instruments
Fair value is defined as the price that would
be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the
Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants
would use when pricing the asset or liability.
ASC Topic 820, Fair Value Measurements and
Disclosures provides a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest
level of input that is significant to the fair value measurement as follows:
|
● |
Level 1 — inputs are based upon unadjusted quoted prices for
identical assets or liabilities traded in active markets. |
|
|
|
|
● |
Level 2 — inputs are based upon quoted prices for similar assets
and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active and
model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable
market data for substantially the full term of the assets or liabilities. |
|
|
|
|
● |
Level 3 — inputs are generally unobservable and typically reflect
management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values
are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar
techniques. |
Assets measured at fair value on a non-recurring
basis include goodwill, tangible and intangible assets. Such assets are reviewed annually for impairment indicators. If a triggering
event has occurred, the assets are re-measured when the estimated fair value of the corresponding asset group is less than the carrying
value. The fair value measurements, in such instances, are based on significant unobservable inputs (Level 3).
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
September 30, 2022
(Unaudited)
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.”
The fair values of certain warrants issued in
2017 (the “2017 Private Placement Warrants”) were determined using the Black-Scholes model in which the following weighted
average assumptions were used for the valuations performed as of September 30, 2022:
| o | stock price volatility – 145% |
| o | exercise price – $11.50 |
| o | discount rate – 4.1531% |
| | |
| o | remaining useful life – 2.52 years |
The valuations of the warrant liabilities are considered to be Level
2 valuations.
Change in Segment reporting
Effective January 1, 2021, the Company identified two operating
segments, Computex and Kandy, pursuant to ASC 280, Segment Reporting, consistent with the information that was presented to the
Chief Operating Decision Maker (“CODM”). With the sale of Computex during the first quarter of the current year, the Company
began operating as one reportable segment beginning in the second quarter of 2022.
Goodwill
Goodwill represents the excess of the purchase
price over the fair value of the net identifiable assets acquired in a business combination. Goodwill is reviewed for impairment at least
annually, in December, or more frequently if a triggering event occurs between impairment testing dates.
The Company’s impairment assessment begins
with a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than
its carrying value. Qualitative factors may include, macroeconomic conditions, industry and market considerations, cost factors, and
other relevant entity and Company specific events. If, based on the qualitative test, the Company determines that it is “more likely
than not” that the fair value of a reporting unit is less than its carrying value, then the Company evaluates goodwill for impairment
by reviewing the fair value of the reporting unit versus its respective carrying value, including its goodwill. If it is determined that
it is “not likely” that the fair value of the reporting unit is less than its carrying value, then no further testing is
required.
The selection and assessment of qualitative factors
used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves significant
judgment and estimates. Fair values may be determined using a combination of both income and market-based approaches.
Goodwill in the Kandy operating segment was recognized
as a result of the Kandy Business Combination in December 2020, at which time approximately $24,144 of goodwill was attributed to the
Kandy reporting unit. Subsequently, in the fourth quarter of 2021, as part of the Company’s annual impairment analysis, the Company
recorded an impairment charge of approximately $13,676 to Kandy’s goodwill.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
September 30, 2022
(Unaudited)
During
the second quarter of 2022, the Company concluded that a triggering event had occurred in the Company’s sole reporting unit, comprised
of Kandy, as a result of declining financial performance coupled with changes in market conditions. Therefore, the Company conducted
both qualitative and quantitative assessments and determined that it was appropriate to write off the entire remaining goodwill of $10,468.
Therefore, the Company recognized a non-cash impairment charge of $10,468 during the nine months ended September 30, 2022 and
therefore goodwill activity was as follows:
Balance, January 1, 2022 | |
$ | 10,468 | |
Goodwill impairment | |
| (10,468 | ) |
Balance, September 30, 2022 | |
$ | - | |
The selection and assessment of qualitative factors
used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves significant
judgment and estimates. Fair values may be determined using a combination of both income and market-based approaches.
Emerging growth company
The Company is 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”), and it may take advantage of certain exemptions from various
reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited
to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure
obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding
a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further, Section 102(b) (1) of
the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until
private companies are required to comply with the new or revised financial accounting standards. Private companies are those companies
that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). The JOBS Act provides that a company can elect to opt out
of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election
to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when a standard
is issued or revised, it adopts the new or revised standard at the time private companies adopt the new or revised standard, unless it
chooses to early-adopt the new or revised accounting standard. Therefore, the Company’s financial statements may not be comparable
to certain public companies.
4. Recently Issued and Adopted Accounting Standards
Recently issued accounting standards
In February 2016, the FASB issued Accounting
Standard Update (“ASU”) No. 2016-02, Leases (ASC 842), as amended by multiple updates, hereafter ASC 842. ASC 842
requires lessees to recognize, on the balance sheet, a lease liability and a lease 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. ASC
842 also expands the required quantitative and qualitative disclosures surrounding leases. As long as the Company is an emerging growth
company, the current effective date of adoption is fiscal year 2023, which is the required date of adoption for private companies. Early
adoption is permitted. While the Company continues to assess the effects of adoption, it currently believes the most significant effects
relate to the recognition, on the consolidated balance sheet, of right-of-use assets and lease liabilities related to operating leases.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
September 30, 2022
(Unaudited)
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.
Recently adopted accounting standards
Effective July 1, 2021, the Company adopted ASU
No. 2017-04, Intangibles—Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment, which simplifies the
subsequent measurement of goodwill by eliminating Step 2 of goodwill impairment tests. The adoption did not materially impact the Company’s
consolidated financial statements.
In May 2021, the FASB issued ASU No. 2021-04,
Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU
No. 2021-04”), which provides guidance for a modification or an exchange of a freestanding equity-classified written call option
that is not within the scope of another Topic. Under ASU 2021-04, an entity is required to treat a modification of the terms or conditions
or an exchange of a freestanding equity-classified written call option, that remains equity classified, as an exchange of the original
instrument for a new instrument. ASU 2021-04 also provides guidance on the measurement of the effect of a modification or exchange and
requires entities to recognize the effect of any such modification or exchange on the basis of the substance of the transaction.
Entities were required to apply the amendments
prospectively to modifications or exchanges that occur on or after the effective date. ASU No. 2021-04 was effective for the Company
on January 1, 2022. The adoption had no significant impact on the Company’s financial statements.
In December 2019, the FASB issued ASU No. 2019-12,
Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”), which simplifies the accounting for income taxes
by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology
for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.
The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies
the accounting for transactions that result in a step-up in the tax basis of goodwill. It clarifies that single-member limited liability
companies and similar disregarded entities that are not subject to income tax are not required to recognize an allocation of consolidated
income tax expense in their separate financial statements, but they could elect to do so.
ASU No. 2019-12 allows companies to treat tax
law changes as intraperiod items, rather than as discrete items within the interim period. The adoption of ASU No. 2019-12, which was
effective for the Company during the first quarter of the current year, had no significant impact on the Company’s financial statements.
5. Assets held for sale and operations classified as discontinued
operations
On September 16, 2021, the Company issued a press
release announcing that as a result of a decision by the Company’s Board of Directors to explore strategic alternatives previously
announced on April 7, 2021, the Board had authorized the Company to focus its strategy on acquisitions and organic growth in its cloud
technologies business as well as to explore strategic opportunities for its IT solutions business, including the divestiture of Computex.
The Company believed that the change would allow the Company to optimize resource allocation, focus on core competencies, and improve
its ability to invest in areas of maximal growth potential.
On January 26, 2022, the Company entered into
an asset purchase agreement to sell substantially all of the assets of its Computex business. Net sale proceeds received for the sale
of substantially all of the assets and liabilities of Computex was $32,112.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
September 30, 2022
(Unaudited)
At December 31, 2021, the assets and liabilities
of Computex were classified as held for sale, and the related revenues and expenses are classified as discontinued operations in the
accompanying condensed consolidated statements of operations. During 2021, in connection with the planned sale of Computex, the Company
compared the expected sales proceeds less costs to sell with the carrying value of the reporting unit and in connection therewith recorded
a noncash goodwill impairment charge of $32,100 during the year ended December 31, 2021. The sale of Computex was consummated on March
15, 2022.
Assets and liabilities classified as held for
sale at December 31, 2021 consisted of the following:
| |
December 31,
2021 | |
Current assets: | |
| |
Cash | |
$ | 4,136 | |
Prepaid expenses | |
| 937 | |
Trade receivables (net allowance of $146) | |
| 19,965 | |
Inventory | |
| 2,737 | |
Assets held for sale - current | |
| 27,775 | |
Noncurrent assets: | |
| | |
Property and equipment, net | |
| 4,489 | |
Goodwill | |
| 6,579 | |
Other intangible assets, net | |
| 20,105 | |
Other noncurrent assets | |
| 85 | |
Assets held for sale - noncurrent | |
| 31,258 | |
Total assets held for sale | |
$ | 59,033 | |
| |
| | |
Current liabilities: | |
| | |
Accounts payable and accrued expenses | |
$ | 26,023 | |
Deferred revenue | |
| 3,214 | |
Liabilities associated with assets held for sale - current | |
| 29,237 | |
Long-term liabilities | |
| | |
Other liabilities | |
| 102 | |
Liabilities associated with assets held for sale - noncurrent | |
| 102 | |
Total liabilities associated with assets held for sale | |
$ | 29,339 | |
Revenues and expenses classified as discontinued
operations consist of the following:
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September 30, 2022 | | |
September 30, 2021 | | |
September 30, 2022 | | |
September 30, 2021 | |
Revenues: | |
| | |
| | |
| | |
| |
Hardware | |
$ | - | | |
$ | 13,000 | | |
$ | 10,948 | | |
$ | 39,219 | |
Third party software and maintenance | |
| - | | |
| 2,080 | | |
| 1,815 | | |
| 5,115 | |
Managed and professional services | |
| - | | |
| 8,050 | | |
| 7,214 | | |
| 24,497 | |
Other | |
| - | | |
| 233 | | |
| 165 | | |
| 793 | |
Total revenues | |
| - | | |
| 23,363 | | |
| 20,142 | | |
| 69,624 | |
Cost of revenue | |
| - | | |
| 16,039 | | |
| 14,176 | | |
| 48,647 | |
Gross profit | |
| - | | |
| 7,324 | | |
| 5,966 | | |
| 20,977 | |
Goodwill impairment | |
| - | | |
| 20,500 | | |
| - | | |
| 20,500 | |
Selling, general and administrative | |
| - | | |
| 7,809 | | |
| 9,520 | | |
| 23,423 | |
Loss from operations | |
| - | | |
| (20,985 | ) | |
| (3,554 | ) | |
| (22,946 | ) |
Other (expense) income | |
| | | |
| | | |
| | | |
| | |
Gain on sale of Computex | |
| - | | |
| - | | |
| 4,314 | | |
| - | |
Gain on extinguishment of debt | |
| - | | |
| 4,177 | | |
| - | | |
| 4,177 | |
Interest expense | |
| - | | |
| (342 | ) | |
| - | | |
| (860 | ) |
Other expense | |
| - | | |
| - | | |
| - | | |
| (155 | ) |
Total other (expenses) income | |
| - | | |
| 3,835 | | |
| 4,314 | | |
| 3,162 | |
(Loss) income from discontinued operations before income taxes | |
| - | | |
| (17,150 | ) | |
| 760 | | |
| (19,784 | ) |
Income tax provision on discontinued operations | |
| - | | |
| (23 | ) | |
| (12 | ) | |
| (42 | ) |
Net (loss) income from discontinued operations | |
$ | - | | |
$ | (17,173 | ) | |
$ | 748 | | |
$ | (19,826 | ) |
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
September 30, 2022
(Unaudited)
6. Accounts payable and accrued expenses
Accounts payable and accrued expenses were as follows as of September
30, 2022 and December 31, 2021:
| |
September 30,
2022 | | |
December 31,
2021 | |
Accounts payable | |
$ | 6,327 | | |
$ | 3,692 | |
Accrued compensation, benefits and related accruals | |
| 3,154 | | |
| 6,412 | |
Accrued professional fees | |
| 990 | | |
| 1,867 | |
Due to related parties | |
| 500 | | |
| 2,285 | |
Third party interest accrual | |
| - | | |
| 2,180 | |
Other | |
| 99 | | |
| 578 | |
| |
$ | 11,070 | | |
$ | 17,014 | |
7. Long-Term Debt
Credit Agreement
On December 2, 2021, the Company entered into
a $27,000 term loan facility (the “Credit Facility”) under a Credit Agreement (the “Credit Agreement”) with Monroe
Capital Management Advisors, LLC and certain affiliated entities (“Monroe”), proceeds of which were used, in part, to repay
amounts owing under a prior credit agreement, which the Company had assumed when it acquired Computex.
On March 1, 2022, all amounts owing under the
Credit Agreement were repaid in full, including related accrued interest and other charges.
The Credit Facility was scheduled to mature on
the earlier of (i) December 2, 2022 and (ii) the date on which the Computex sale was consummated. As part of the Credit Agreement, the
Company was required to comply with certain sales milestone terms, conditions and timeframes in connection with the then-pending sale
of Computex. In connection with such sales milestone requirements, the Company paid amendment fees of $920 on January 18, 2022 as it
was apparent that certain of the milestone dates for the closing of the Computex sale were not going to be met.
Loans under the Credit Facility previously bore
interest at a rate equal to, at the Company’s option, either the Base Rate for the interest period in effect for such borrowing
plus 10.00% per annum, or the LIBOR Rate for the interest period in effect for such borrowing plus 11.00% per annum. Notwithstanding
such interest rates, Monroe was guaranteed a minimum return of $7,290, including a closing fee of $675 that was paid to the administrative
agent on the closing date. Additional fees would have been payable if the Credit Facility was not repaid in full by certain dates.
In connection with the closing of the Credit
Facility and pursuant to a subscription agreement, the Company issued, to certain funds affiliated with Monroe, warrants to purchase
certain shares of the Company’s common stock at an exercise price of $0.0015 per share (the “Monroe Warrants”). The
number of shares of the Company’s common stock issuable upon exercise of the Monroe Warrants is 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 are outstanding, such that the Monroe
Warrants will remain exercisable for, in the aggregate, approximately 2.5% of the total number of shares of the Company’s common
stock outstanding, calculated on a fully-diluted basis. The Monroe Warrants were exercisable
starting on the date of issuance and are scheduled to expire on January 31, 2029. The Monroe Warrants were exercisable for an aggregate
of 687,587 shares of common stock as of September 30, 2022.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
September 30, 2022
(Unaudited)
Total long-term debt consisted of the following:
| |
September 30,
2022 | | |
December 31,
2021 | |
Term Note payable to Monroe; guaranteed interest of $7,290 | |
$ | - | | |
$ | 27,000 | |
Capital lease obligations | |
| 28 | | |
| 104 | |
Total long-term debt | |
| 28 | | |
| 27,104 | |
Less: unamortized debt issuance
costs | |
$ | - | | |
| (700 | ) |
Total notes payable and line of credit, net of unamortized
debt issuance costs | |
| 28 | | |
| 26,404 | |
Less: current maturities of notes
payable and line of credit | |
| (28 | ) | |
| (26,393 | ) |
Long-term debt, net of current maturities
and unamortized debt issuance costs | |
$ | - | | |
$ | 11 | |
Subordinated promissory note – related party
On September 16, 2021, the Company entered into
a promissory note in the principal amount of $5,000 (the “2021 Note”). The 2021 Note, which was secured by an affiliate of
a shareholder that owns more than five percent of the Company’s shares, was originally scheduled to mature on the earliest of (a)
September 16, 2022, (b) the Company’s consummation of a debt financing resulting in the receipt of gross proceeds of not less than
$20,000, (c) the Company’s consummation of primary sales of registered equity securities resulting in the receipt of gross proceeds
of not less than $20,000, (d) the Company’s consummation of the sale of Computex and (e) the date of any event of default. However,
in connection with the closing of the Credit Facility, the 2021 Note was amended to, among other things, revise the definition of the
maturity date so that the consummation of the Credit Agreement would not have resulted in the maturity of the 2021 Note. In consideration
of the amendment, the Company paid the lender an amendment fee in the amount of $1,250.
The amended maturity date of the 2021 Note was
scheduled to be the earliest of (a) September 16, 2022, (b) the Company’s consummation of primary sales of registered equity securities
resulting in the receipt of gross proceeds of not less than $20,000 (c) the consummation of the sale of the Computex business unit and
(d) the date of any event of default, subject to extension if the Credit Agreement was not paid off as of such date. The 2021 Note became
due on March 1, 2022 due to the Company’s sale of registered and equity securities and the early pay off of the Credit Agreement.
However, for a waiver fee of $250, the lender extended the maturity date to May 1, 2022. On March 15, 2022, all amounts outstanding under
the 2021 Note were paid. The 2021 Note had a minimum required return of 25.00%.
October 2022 promissory note
On October 20, 2022, the Company entered into
an amended agreement with a significant supplier, that resulted in the conversion of a trade payable balance to a promissory note having
a principal balance of approximately $2,430. Such promissory note is due on the earlier of (i) March 31, 2023; (ii) a sale transaction
by the Company requiring shareholder approval, including a transfer of a majority of the Company’s capital stock or (iii) a payment
default by the Company. The promissory note is unsecured and bears interest at a rate of 6% per annum, compounded semi-annually. Additionally,
the amended agreement provides for new payment terms, with a $400 monthly prepayment towards actual costs incurred. Any excess of that
prepayment over actual costs results in a reduction of the promissory note balance, while any excess of actual costs over the $400 monthly
payment is to be added to such promissory note. The amended agreement also contains certain changes to notice provision clauses with
respect to work force reductions as well as new loaded labor rates.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
September 30, 2022
(Unaudited)
8. Stockholders’ Equity (Deficit), Related Warrants, Securities,
Debentures and Guaranty
Preferred stock
During the first quarter of 2022, the Board of
Directors created and established a new series of preferred stock, designated as “Series B Convertible Preferred Stock” (the
“Series B Preferred Stock”). The authorized number of shares of the Series B Preferred Stock was established at 21,500 with
a par value of $0.0001 per share. The number of shares of Series B Preferred Stock issued during the nine months ended September 30,
2022 was 16,125, none of which were outstanding as of September 30, 2022. The Series B Preferred Stock that were issued during the nine
months ended September 30, 2022 were mandatorily redeemable and are further discussed below.
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 September 30, 2022, a total of 24,605,474
shares of the Company’s common stock were issued and outstanding.
Recent sales of securities
The November Purchase Agreement
On November 2, 2021, the Company entered into
a securities purchase agreement (the “November Purchase Agreement”) with a buyer for the purchase and sale of (i) a warrant
to purchase up to 333,333 shares (at the time) of the Company’s common stock, subject to increases as described below (the “Series
A Warrants”), in a private placement; and (ii) an aggregate of 166,666 shares of the Company’s common stock, and a warrant
to purchase up to 166,666 shares of the Company’s common stock (the “Series B Warrants” and, collectively with the
Series A Warrants, the “A&B Warrants,” in a registered direct offering. The aggregate purchase price for the shares and
the A&B Warrants was $5,000.
Upon any exercise of the Series B Warrant, the
number of shares issuable upon exercise of the Series A Warrant increased by the number of shares of the Company’s common stock
issued upon exercise of the Series B Warrant. Northland Securities, Inc. (the “Placement Agent”) received fees of 7% of the
aggregate gross proceeds.
In connection with the Company’s consummation
of the Credit Agreement, the exercise price of the A&B Warrants were subsequently reduced by 25%, the number of warrants were increased
and the buyers received certain newly-issued warrants (the “Series C Warrants”). As of the date of such modification, the
Company recognized a change in fair value of the warrant liabilities equal to the excess of the fair value of the modified instrument
over the previous fair value. The fair value of the Series C Warrants as of the issuance date was considered to be analogous to a financing
charge and was included in interest expense.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
September 30, 2022
(Unaudited)
The December 2021 securities sale
On December 15, 2021, the Company consummated
the sale of certain securities pursuant to a securities purchase agreement, dated as of December 13, 2021 between the Company and an
investor (the “Buyer”). At the closing, the Company issued to the Buyer (i) a warrant (the “Series D Warrant”)
to purchase up to 1,041,666 shares of the Company’s common stock, in a private placement; and (ii) an aggregate of 522,666 shares
of the Company’s common stock, and 12,456 shares of Series A Preferred Stock (“Series A Preferred”) with a stated value
of $1,000 per share, initially convertible into 519,000 shares of the Company’s common stock, in a registered direct offering.
The aggregate purchase price paid at the closing for the common stock, the Series A Preferred and the Series D Warrants was $25,000.
The initial exercise price of the Series D Warrants
were subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and were subject to price-based
adjustment, on a “full ratchet” basis, in the event of any issuances of the Company’s common stock, or securities convertible,
exercisable or exchangeable for, common stock at a price below the then-applicable exercise price (subject to certain exceptions).
The Series A Preferred shares were convertible
into shares of the Company’s common stock at the election of the holders at any time at an initial conversion price of $1.60. In
December 2021, the holders of the Series A Preferred exercised their conversion rights and the Series A Preferred Shares were converted
to 519,000 shares of the Company’s common stock.
February 2022 Purchase Agreement
On February 28, 2022, the Company entered into
a securities purchase agreement (the “February 2022 Purchase Agreement”) with a buyer for the purchase and sale of (i) an
aggregate of up to 21,500 shares of Series B Preferred Stock with a stated value of $1,000 per share, initially convertible into up to
1,433,333 shares of the Company’s common stock and (ii) warrants (the “February 2022 Warrants”) to purchase up to that
number of shares of the Company’s common stock equal to the number of shares of the Company’s common stock into which the
shares of Series B Preferred Stock actually sold pursuant to the purchase agreement were initially convertible, in a registered direct
offering.
Pursuant to the February 2022 Purchase Agreement,
an aggregate of 16,125 shares of Series B Preferred Stock, initially convertible into 1,075,000 shares of the Company’s common
stock, together with the February 2022 Warrants, initially exercisable for 1,075,000 shares of the Company’s common stock, were
issued and sold at an initial closing on March 1, 2022 (the “Initial Closing”). The aggregate purchase price paid for the
Series B Preferred Stock and the February 2022 Warrants at the Initial Closing was $15,000. The remaining 5,375 Preferred Shares were
never issued by the Company and any rights that the Company had to require such a purchase subsequently expired.
On March 1, 2022, the Company consummated the
Initial Closing in which the Company issued to the buyer (i) 16,125 Series B Preferred Stock with a stated value of $1,000 per share,
initially convertible into up to 1,075,000 shares of the Company’s common stock and (ii) the February 2022 Warrants that were initially
exercisable for up to 1,075,000 shares of the Company’s common stock, in a registered direct offering.
As a result of the issuance of the Series B Preferred
Stock and February 2022 Warrants, the exercise price of the Series A Warrants, the Series B Warrants and the Series D Warrants previously
issued by the Company to an affiliate of the buyer was automatically reduced by 33.3% (with a proportional increase to the number of
shares of the Company’s common stock issuable upon exercise of such warrants).
The Series B Preferred
Stock was convertible into shares of the Company’s common stock at the election of the holder with the conversion price being subject
to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment, on
a “full ratchet” basis, in the event of any issuances of the Company’s common stock, or securities convertible, exercisable
or exchangeable for, the Company’s common stock at a price below the then-applicable Conversion Price (subject to certain exceptions).
The Company was required to redeem the Series B Preferred Stock in 12 equal monthly installments, commencing on April 1, 2022. Subject
to certain conditions, including certain equity conditions, the Company could redeem the applicable number of Series B Preferred Stock
on each monthly redemption date either in cash, shares of the Company’s common stock or a combination. The number of shares used
to redeem any Series B Preferred Stock in such event would be calculated as 88% of the lowest daily volume weighted average price of
the Company’s common stock during the eight trading days immediately prior to the payment date.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
September 30, 2022
(Unaudited)
Based on an evaluation
of ASC 480, the Company had classified the Series B Preferred Stock as stock settled debt and therefore recorded the instrument as a
liability on the issuance date, as the instrument was mandatorily redeemable and thus (1) embodies an unconditional obligation (2) required
the Company to settle the unconditional obligation in cash or by issuing a variable number of its common shares and (3) is based on a
monetary amount known at inception.
The exercise price of
the February 2022 Warrants were subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and
subject to price-based adjustment, on a “full ratchet” basis, in the event of any issuances of the Company’s common
stock, or securities convertible, exercisable or exchangeable for, the Company’s common stock at a price below the then-applicable
exercise price (subject to certain exceptions).
All of the outstanding shares of the Series B Preferred Stock have
since been converted. Of the $16,125 principal, $14,781 was converted into 4,089,594 shares and $1,344 was paid in cash. Certain installments
were based on exercises of the buyer’s acceleration right with respect to installment payments.
April 2022 Purchase Agreement
On April 14, 2022, the Company entered into a
securities purchase agreement (the “April 2022 Purchase Agreement”) with a buyer affiliated with a greater than 5% stockholder
for the purchase and sale of a new series of senior secured convertible notes of the Company, in the aggregate original principal amount
of $12,000 (the “Convertible Notes”). The transaction was funded on April 19, 2022. The Convertible Notes were convertible
into shares of the Company’s common stock. The purchase price of the Convertible Notes was $10,000 and net proceeds received totaled
$9,950.
The Convertible Notes
were scheduled to mature on October 1, 2023. Interest was only payable if there was an event of default, which would have resulted in
interest at the rate of 15.00% per annum. The Company was required to redeem $800 of the outstanding amounts under the Convertible Notes
on a monthly basis, commencing on August 1, 2022, until the maturity date of October 1, 2023. Subject to certain conditions, including
certain equity conditions, the Company was permitted to pay the amount due on each monthly redemption date, and the amount due at maturity,
either in cash, shares of the Company’s common stock or a combination. The number of shares used to pay any portion of the Convertible
Notes was generally calculated as 88% of the lowest daily volume weighted average price of the common stock during the eight trading
days immediately prior to the payment date.
The full principal amount of $12,000 due under the Convertible Notes
have since been satisfied with shares of common stock, with 5,513,138 issued during the three months ended September 30, 2022, and 349,109
issued in October 2022.
Based on ASC 815, Derivatives
and Hedging (“ASC 815”), the convertible feature of the Convertible Note was considered to be a derivative but was considered
to have met the scope exception in ASC 815 and therefore was not bifurcated from the host instrument. However, embedded derivatives were
assessed with respect to the probability of events of default and the probability of a change of control in relation to the Convertible
Note. Such derivatives were assessed at an aggregate estimated value of $721 as of the issuance date of the Convertible Note and were
recorded as derivative liabilities as of the issuance date with a corresponding discount reflected in the Convertible Note. During the
third quarter of 2022, the Convertible Note was fully satisfied and therefore the related derivative had no value as of September 30,
2022.
AMERICAN VIRTUAL CLOUD TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(In thousands, except share and per share data,
or as otherwise noted)
September 30, 2022
(Unaudited)
Amendments - recent
securities
During the third quarter of 2022, the Company entered into certain
amendments and other agreements with the holders of the securities underlying the securities discussed above, specifically, the securities
underlying i) the November Purchase Agreement ii) the December 2021 securities sale iii) the February 2022 Purchase Agreement and iv)
the April 2022 Purchase Agreement, as follows:
| ● | An amended waiver agreement (the “Waiver Agreement”) on
August 31, 2022, in which the holders waived certain rights, including, among other things, certain rights that would have accrued if
the Company had sold shares of common stock and rights to the timing of certain payments which the holders agreed to defer. |
| ● | An exchange agreement (the “Exchange Agreement”) on September 11, 2022, with the holders of the Series B Preferred Stock and Convertible Notes, pursuant to which the parties agreed, among other things, to (i) exchange the remaining amount outstanding under the Series B Preferred Stock, consisting of $3,942 in stated value, into rights to acquire an aggregate of 1,720,428 shares of the Company’s common stock and (ii) to convert $1,600 in original principal amount of the Convertible Notes into 698,217 shares of the Company’s common stock. The $3,942 represented the remainder of certain additional financing charges of $7,125 which arose as a result of the stock price being below a floor price, as defined in the agreement. Of the total financing charges of $7,125, an aggregate of $3,183 was paid in cash. |
| ● | A settlement agreement, on September 26, 2022, with the holders of the Company’s convertible notes, and holders of certain warrants, pursuant to which the parties agreed, among other things, to effect, a series of sequential transactions consisting of one or more exercises of certain of the warrants, each followed by an exchange of the shares of the Company’s common stock, into certain rights to acquire an aggregate of 6,186,642 shares of the Company’s common stock (with respect to the warrants) and 480,024 shares of the Company’s common stock (in exchange for the remaining principal amount of the convertible notes), all of which shares have been fully issued and therefore the holders have no further rights to such warrants or the Convertible Notes. |