Stockholder
Proposals and Director Nominations for 2021 Annual Meeting
Stockholder
proposals and director nominations pursuant to the advance notice provision in our Bylaws should be sent to us at our principal
executive offices. To be considered for inclusion in our proxy statement for the 2021 Annual Meeting of Stockholders, the deadline
for submission of stockholder proposals, pursuant to Rule 14a-8 of the Securities Exchange Act of 1934, as amended, is [●].
Additionally, pursuant to the advance notice provision in our Bylaws, we must receive notice of any stockholder proposal or nomination
for election as director to be submitted at the 2021 Annual Meeting of Stockholders, but not required to be included in our proxy
statement, no earlier than [●] and no later than [●]. In the case of director nominations, the notice must be accompanied
by the information concerning the director candidate and nominating stockholder described in Section 3.2(d) of our Bylaws.
List
of Stockholders Entitled to Vote at the Special Meeting
The
names of stockholders of record entitled to vote at the Special Meeting will be available at our corporate office for a period
of 10 days prior to the Special Meeting and continuing through the Special Meeting.
Expenses
Relating to this Proxy Solicitation
We
will pay all expenses relating to this proxy solicitation. In addition to this solicitation by mail, our officers, directors,
and employees may solicit proxies by telephone or personal call without extra compensation for that activity. We also expect to
reimburse banks, brokers and other persons for reasonable out-of-pocket expenses in forwarding proxy materials to beneficial owners
of our stock and obtaining the proxies of those owners.
We
have adopted a procedure approved by the SEC called “householding.” Under this procedure, stockholders of record who
have the same address and last name will receive only one copy of our proxy statement and other proxy materials, unless one or
more of these stockholders notifies us that they wish to continue receiving individual copies. This procedure will reduce our
printing costs and postage fees.
If
you are eligible for householding, but you and other stockholders of record with whom you share an address currently receive multiple
copies of the Notice, or if you hold stock in more than one account, and in either case you wish to receive only a single copy
of the proxy materials for your household, please contact our transfer agent, Continental Stock Transfer & Trust Company in
writing: 1 State Street, New York, New York 10004, or by telephone: in the U.S., [ ]; outside the U.S., [ ].
If
you participate in householding and wish to receive a separate copy of the proxy materials, or if you do not wish to participate
in householding and prefer to receive separate copies of the proxy materials in the future, please contact Continental Stock Transfer
& Trust Company as indicated above. Beneficial stockholders can request information about householding from their nominee.
American Virtual Cloud Technologies, Inc. | Proxy Statement 14
Annex A
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Kandy
Communications Business of
Ribbon Communications Inc.
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|
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|
|
Abbreviated
Financial Statements
|
|
|
|
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|
For the
Years Ended December 31, 2019 and 2018
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INDEPENDENT
AUDITOR’S REPORT
To
the Board of Directors
Ribbon Communications, Inc.
We
have audited the accompanying abbreviated financial statements of the Kandy Communications Business of Ribbon Communications Inc.
(the “Business”), which comprise the statements of assets acquired and liabilities assumed as of December 31, 2019
and 2018 and the related statements of revenues and direct expenses for the years ended December 31 2019 and 2018, and the related
notes to the abbreviated financials statements.
Management’s
Responsibility for the Financial Statements
Management
is responsible for the preparation and fair presentation of these abbreviated financial statements in accordance with U.S. generally
accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of abbreviated financial statements that are free from material misstatement, whether due to
fraud or error.
Auditor’s
Responsibility
Our
responsibility is to express an opinion on these abbreviated financial statements based on our audits. We conducted our audits
in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the abbreviated financial statements are free from material
misstatement.
An
audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the abbreviated financial statements.
The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement
of the abbreviated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the entity’s preparation and fair presentation of the abbreviated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating
the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management,
as well as evaluating the overall presentation of the abbreviated financial statements.
We
believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In
our opinion, the abbreviated financial statements referred to above present fairly, in all material respects, the financial position
of the Business, as of December 31, 2019 and 2018 and its revenues and direct expenses for the years ended December 31, 2019 and
2018, in accordance with U.S. generally accepted accounting principles.
Emphasis
of Matter
We
draw attention to Note 1 to the abbreviated financial statements, which describes that the accompanying abbreviated financial
statements were prepared for the purpose of complying with the rules and regulations of the U.S. Securities and Exchange Commission
for inclusion in a Form 8-K/A of American Virtual Cloud Technologies, Inc. in connection with Ribbon Communications Inc.’s
sale of its Kandy Communications Business to American Virtual Cloud Technologies, Inc., and are not intended to be a complete
presentation of the Business’ assets, liabilities, revenues, and expenses. Our opinion is not modified with respect to this
matter.
Melville,
NY
September
24, 2020
Kandy
Communications Business of Ribbon Communications Inc.
Statements of Assets Acquired and Liabilities Assumed
(In thousands)
|
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December 31,
2019
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|
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December 31,
2018
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Assets
acquired
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|
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Current
assets:
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|
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Accounts
receivable, net
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$
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2,011
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$
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1,226
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Other
current assets
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50
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|
|
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24
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Total
current assets
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2,061
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1,250
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Property
and equipment, net
|
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1,797
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|
|
|
1,527
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|
Total
assets acquired
|
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$
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3,858
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$
|
2,777
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|
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Liabilities
assumed
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Current
liabilities:
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Accounts
payable
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$
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2,690
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$
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2,259
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Accrued
expenses and other
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2,265
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2,899
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Deferred
revenue
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1,427
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1,360
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Total
current liabilities
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6,382
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6,518
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Other
long-term liabilities
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942
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951
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Total
liabilities assumed
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7,324
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7,469
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|
|
|
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|
|
|
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Net
liabilities assumed
|
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$
|
(3,466
|
)
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$
|
(4,692
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)
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The
accompanying notes are an integral part of these abbreviated financial statements
Kandy
Communications Business of Ribbon Communications Inc.
Statements of Revenues and Direct Expenses
(In thousands)
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Year
ended
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December 31,
2019
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December 31,
2018
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Revenues
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$
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8,547
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|
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$
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7,281
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Cost
of revenues
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8,065
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6,045
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Gross
Profit
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482
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1,236
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Direct
expenses:
|
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Research
and development
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15,767
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14,323
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Sales
and marketing
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4,787
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6,341
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General
and administrative
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1,163
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2,350
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Restructuring
and related
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1,524
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485
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Total
direct expenses
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|
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23,241
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23,499
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|
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|
|
|
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Direct
expenses in excess of revenues
|
|
$
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(22,759
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)
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$
|
(22,263
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)
|
The
accompanying notes are an integral part of these abbreviated financial statements
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements
(In thousands)
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1.
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Nature
of Operations and Presentation
|
On
August 5, 2020, American Virtual Cloud Technologies, Inc. (“AVCT”) entered into a Purchase Agreement (the “Purchase
Agreement”) with Ribbon Communications Inc. (“Ribbon”), Ribbon Communications Operating Company, Inc. (“RCOCI”)
and Ribbon Communications International Limited (together with RCOCI, the “Sellers”, and together with Ribbon, the
“Ribbon Parties”), pursuant to which AVCT agreed to purchase the Sellers’ cloud-based enterprise services business
(also known as the Kandy Communications Business) (the “Business” or “Kandy”) by acquiring certain of
the Sellers’ and their respective affiliates’ assets and assuming certain of the Sellers’ and their respective
affiliates’ liabilities primarily associated with the Business, and acquiring all of the outstanding interests of Kandy
Communications LLC (the “Transaction”).
Under
the terms of the Purchase Agreement, AVCT agreed to issue to Ribbon 13.0 million shares of AVCT’s common stock (the “Issued
Shares”), subject to certain adjustments, as consideration for the Transaction (the “Purchase Price”).
Founded
in 2014, Kandy is a global provider of complex deployments of unified communications as a service (“UCaaS”), communications
platform as a service (“CPaaS”), and contact center as a service (“CCaaS”) for mid- market and enterprise
customers across its powerful, proprietary multi-tenant, highly scalable cloud platform. The Kandy platform also includes pre-built
customer engagement tools, based on 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 of all sizes and types
can quickly embed real-time communications capabilities into their existing applications and business processes.
Basis
of Presentation
The
accompanying Statements of Assets Acquired and Liabilities Assumed as of December 31, 2019 and 2018 and the related Statements
of Revenues and Direct Expenses for each of the years ended December 31, 2019 and 2018 (collectively, the “Abbreviated Financial
Statements”) of the Business have been prepared in accordance with accounting principles generally accepted in the United
States (“GAAP”) and have been prepared for purposes of providing financial information of an acquired business that
is considered significant pursuant to the Securities and Exchange Commission (“SEC”) Rule 3-05 of Regulation S-X and
early application of SEC Final Rule Release No. 33-10786, Amendments to Financial Disclosures About Acquired and Disposed Businesses.
Ribbon
management determined that it is impracticable to prepare full carve-out financial statements for Kandy in accordance with Regulation
S-X for the following reasons:
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●
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Kandy
has not been previously managed by Ribbon as a stand-alone business, but instead was
part of a fully integrated company.
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●
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Audited
financial statements of Kandy have never been prepared because distinct and separate
accounts necessary to present complete stand-alone balance sheets, statements of operations,
and cash flows have not been maintained.
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●
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Working
capital accounts, including accounts receivable, other current assets, fixed assets,
accounts payable, and other current accrued liabilities related to Kandy have not been
maintained separately, but have been maintained in the aggregate at the Ribbon corporate
level with similar accounts of other Ribbon businesses.
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|
●
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All
cash flow requirements of the various activities and locations comprising Kandy are funded
by Ribbon and no cash management functions are performed at the Business level. In addition,
the Business does not maintain separate cash balances. Major sources of cash come from
revenues and major uses of cash are for capital expenditures, research and development,
and payroll-related costs.
|
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements
(In thousands)
As
a result of the foregoing, it is impracticable to prepare full financial statements as required by Regulation S-X. In addition,
the preparation of statements of invested equity and cash flows was not practicable due to the integration of Kandy into the total
operations of Ribbon. The Abbreviated Financial Statements represent the Business subject to the sale under the Purchase Agreement
and have been derived from the financial statements and accounting records of Ribbon and its subsidiaries. All intercompany accounts
and transactions have been eliminated.
The
accompanying Abbreviated Financial Statements are not intended to be a complete presentation of financial position, results of
operations, or cash flows of the Business in conformity with GAAP. In addition, the Statements of Revenues and Direct expenses
may not be indicative of operating results given the omission of certain corporate overhead, interest and income tax allocations.
For
the years ended December 31, 2019 and 2018, certain assets, revenues and expenses in the Abbreviated Financial Statements include
allocations from Ribbon. To the extent that a revenue or expense is identifiable and directly related to the Business, it is reflected
in the accompanying Abbreviated Financial Statements, and accounted for in conformity with GAAP. Direct expenses include certain
Ribbon corporate allocations attributable to the Business and are included as components of research and development expense,
sales and marketing expense, and restructuring and related expense. These corporate allocations include, but are not limited to,
stock-based compensation and other human resource related expenses.
Management
believes that the assumptions underlying the allocations in the Abbreviated Financial Statements are reasonable. However, the
Abbreviated Financial Statements included herein do not necessarily reflect the results of operations and financial position of
the Business as if it had operated as a stand-alone entity, nor are they intended to provide an indication of how the Business
will perform in the future. Allocations used in preparation of the Abbreviated Financial Statements are as follows:
Statements
of Revenues and Direct Expenses
The
Statements of Revenues and Direct Expenses include the revenues and expenses directly attributable to the Business, and do not
include interest expense, other non-operating income and expenses, income taxes or any other indirect expense.
After
the completion of the transaction, the Business will develop and sell its products and services to third parties. For purposes
of the Statement of Revenues and Direct Expenses, revenues represent amounts generated from the sale of Kandy products to third
parties.
Statements
of Assets Acquired and Liabilities Assumed
The
Statements of Assets Acquired and Liabilities Assumed include the specific assets and liabilities that are to be transferred in
accordance with terms of the Purchase Agreement.
2.
|
Significant
Accounting Policies
|
Use
of Estimates
The
preparation of the Abbreviated Financial Statements in conformity with GAAP requires management to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and
liabilities. Management evaluates estimates on an ongoing basis. Management bases estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements
(In thousands)
Accounts
Receivable
Management
evaluates the allowance for doubtful accounts receivable based on historical credit experience, payment trends and other economic
factors. An allowance for doubtful accounts is estimated based on the management’s assessment of the collectability of specific
customer accounts. The allowance for doubtful accounts was approximately $112 and $25 at December 31, 2019 and 2018, respectively.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are charged to expense
as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which
range from two to five years. Leasehold improvements are amortized over the lesser of the lease term or five years. When an asset
is sold or retired, the cost and related accumulated depreciation or amortization are eliminated, and the resulting gain or loss,
if any, is recognized in the Statements of Revenues and Direct Expenses.
Impairment
of Long-Lived Assets
The
Business reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of these assets is measured by comparing their carrying amounts to market
prices or the future undiscounted cash flows the assets are expected to generate. If property and equipment are considered to
be impaired, the impairment to be recognized would equal the amount by which the carrying value of the assets exceeds their fair
value based on market prices.
Revenue
Recognition
Management
adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”),
on January 1, 2018 using the modified retrospective method which resulted in no adjustments to the accompanying Abbreviated Financial
Statements. Additional information and disclosures as a result of this adoption are included below in Recently Adopted Accounting
Standards and in Note 6 – Revenue.
The
Business recognizes service revenue, mainly from subscription services to its cloud-based UCaaS, CPaaS, CCaaS, and collaboration
solutions using the five-step model as prescribed by ASC 606:
|
●
|
identification
of the contract, or contracts, with a customer;
|
|
●
|
identification
of the performance obligations in the contract;
|
|
●
|
determination
of the transaction price;
|
|
●
|
allocation
of the transaction price to the performance obligations in the contract; and
|
|
●
|
recognition
of revenue when or as, the Business satisfies a performance obligation.
|
The
Business identifies performance obligations in contracts with customers, which typically include subscription services and related
usage. The transaction price is determined based on the amount the Business expects to be entitled to receive in exchange for
transferring the promised services or products to the customer. The transaction price in the contract is allocated to each distinct
performance obligation in an amount that represents the relative amount of consideration expected to be received in exchange for
satisfying each performance obligation. Revenue is recognized when performance obligations are satisfied. Revenues are recorded
based on the transaction price, which typically correlates to standalone selling price (“SSP”), excluding amounts
collected on behalf of third parties such as sales and telecommunication taxes, which are collected on behalf of and remitted
to governmental authorities. The Business generally bills customers on a monthly basis. Contracts typically range from annual
to multi-year agreements with payment terms of net 30 days or less. Prior to signing a contract with a customer, collectability
is assessed.
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements
(In thousands)
When
the Business’s services do not meet certain service level commitments, customers are entitled to receive service credits,
and in certain cases, refunds, each representing a form of variable consideration. The Business historically has not experienced
any significant incidents affecting the defined levels of reliability and performance as required by our subscription contracts.
Therefore, the variable consideration is insignificant. There are no reserves for service credits as of December 31, 2019 or 2018.
The
estimation of variable consideration for each performance obligation requires the Business to make subjective judgments. The Business
has service-level agreements with customers warranting defined levels of uptime reliability and performance. Customers may get
credits or refunds if the Business fails to meet such levels. If the services do not meet certain criteria, fees are subject to
adjustment or refund representing a form of variable consideration. The Business may negotiate minimum revenue commitments (“MRC”)
at the inception of the contract.
The
Business enters into contracts with customers that regularly include promises to transfer multiple services, such as subscriptions,
and professional services. For arrangements with multiple services, the Business evaluates whether the individual services qualify
as distinct performance obligations. In its assessment of whether a service is a distinct performance obligation, the Business
determines whether the customer can benefit from the service on its own or with other readily available resources, and whether
the service is separately identifiable from other services in the contract. This evaluation requires the Business to assess the
nature of each individual service offering and how the services are provided in the context of the contract, including whether
the services are significantly integrated, highly interrelated, or significantly modify each other, which may require judgment
based on the facts and circumstances of the contract.
When
agreements involve multiple distinct performance obligations, the Business allocates arrangement consideration to all performance
obligations at the inception of an arrangement based on the relative SSP of each performance obligation. Usage fees deemed to
be variable consideration meet the allocation exception for variable consideration. Where the Business has standalone sales data
for its performance obligations which are indicative of the price at which the Business sells a promised good or service separately
to a customer, such data is used to establish SSP. In instances where standalone sales data is not available for a particular
performance obligation, the Business estimates SSP by the use of observable market and cost-based inputs. The Business continues
to review the factors used to establish list price and will adjust standalone selling price methodologies as necessary on a prospective
basis.
Service
revenue from subscriptions to the Business’s cloud-based technology platform is recognized on a ratable basis over the contractual
subscription term beginning on the date that the platform is made available to the customer until the end of the contractual period.
Payments received in advance of subscription services being rendered are recorded as deferred revenue; revenue recognized for
services rendered in advance of payments received are recorded as contract assets. Usage fees, when bundled, are billed in advance
and recognized on a ratable basis over the contractual subscription term, which is usually the monthly contractual billing period.
Non-bundled usage fees are recognized as actual usage occurs.
Other
revenue is primarily comprised of professional services revenue. Professional services for deployment, configuration, system integration,
optimization, customer training or education are primarily billed on a fixed-fee basis and are performed by the Business directly.
Professional services revenue is recognized as services are performed or upon completion of the deployment. The Business also
recognizes revenue for perpetual and term-based software licenses. The Business has concluded that its software licenses are functional
intellectual property that are distinct, as the user can benefit from the software on its own. The software license revenue is
typically recognized upon transfer of control or when the software is made available for download, as this is the point that the
user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual
property.
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements
(In thousands)
Deferred
Revenue
Deferred
revenues represent billings or payments received in advance of revenue recognition and are recognized upon transfer of control.
Balances consist primarily of annual plan subscription services and professional and training services not yet provided as of
the balance sheet date. Deferred revenues that will be recognized during the succeeding twelve-month period are recorded as deferred
revenues, current, with the remainder recorded as other long-term liabilities in the Business’s statement of assets acquired
and liabilities assumed. During the years ended December 31, 2019 and 2018, the Business recognized revenues of approximately
$1,360 and $2,177, respectively, that was included in deferred revenue at the beginning of the year.
Sales
Commission Costs
Sales
commissions are considered incremental and recoverable costs of acquiring customer contracts. Commissions for Kandy sales are
expensed over the first 12 months of each contract or expensed immediately as part of the practical expedient used in connection
with the adoption of ASC 606.
Cost
of Revenues
Cost
of revenues include direct cost of services and products sold, and an allocation for indirect service and hosting costs related
to the Business incurred by Ribbon.
Research
and Development Expenses
Research
and development costs, including new product development, are charged to direct expenses as incurred in the statements of revenues
and direct expenses. Research and development expenses include personnel-related costs (including stock-based compensation), depreciation
related to engineering and test equipment, allocated costs of facilities and information technology, outside services and consultants,
supplies, software tools and product certification.
Sales
and Marketing Expenses
Sales
and marketing expenses consist primarily of salaries, commissions, and related expenses for personnel engaged in sales and marketing
functions, costs associated with promotional and marketing programs, travel and entertainment expenses, and allocated expenses
related to legal, IT, facilities, and other shared functions.
Advertising
Costs
Advertising
costs are expensed as incurred and included as a component of Sales and Marketing expense in the statements of revenues and expenses.
Stock-Based
Compensation
Stock-based
compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite
service period, which generally represents the vesting period, and includes an estimate of the awards that will be forfeited.
The
Black-Scholes valuation model is used for estimating the fair value on the date of grant of stock options. The fair value of stock
option awards is affected by the Business’s stock price as well as valuation assumptions, including the volatility of Ribbon’s
stock price, expected term of the option, risk-free interest rate and expected dividends.
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements
(In thousands)
Restructuring
and Related Expenses
During
the years ended December 31, 2019 and 2018, the Business was part of a restructuring and facilities consolidation initiative implemented
by Ribbon. The restructuring initiatives included facility consolidations, refinement of research and development activities,
and a reduction in workforce. The Business records costs associated with restructuring-related employee terminations when the
liability is incurred. Employee termination benefits are recorded when the benefit arrangement is communicated to the employee
and no significant future services are required. If employees are required to render service until they are terminated in order
to receive the termination benefits, the fair value of the termination date liability is recognized ratably over the future service
period. Restructuring and related expenses are reported separately in the Statements of Revenues and Direct Expenses.
Foreign
currency translation
The
Business uses the U.S. dollar as its reporting currency. The foreign Ribbon subsidiaries’ functional currency is the U.S.
dollar. Monetary assets and liabilities are translated into U.S. dollars at the current exchange rate on the balance sheet date.
Nonmonetary assets and liabilities are remeasured into U.S. dollars at historical exchange rates. Revenue and expense items are
translated at average rates of exchange prevailing during each period. Realized and unrealized foreign currency exchange gains
and losses arising from transactions denominated in currencies other than the subsidiary’s functional currency are reflected
in earnings.
Recently
Adopted Accounting Standards
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers and in 2015, 2016, and 2017 the FASB issued several clarifying updates to this
new standard (ASU No. 2015-14, 2016-08, 2016-10, 2016-11, 2016-12, 2016-20 and 2017-05), which collectively comprises ASC 606.
ASC 606 provides a five-step model in determining when and how revenue is recognized and requires revenue recognition to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive
in exchange for those goods or services. This new standard was adopted in 2018 using the modified retrospective method and did
not result in any adjustments included in the accompanying Abbreviated Financial Statements. Additional information and disclosures
as a result of this adoption are contained in Note 6.
|
3.
|
Property
and Equipment
|
Property
and equipment consisted of the following at December 31, 2019 and 2018:
|
|
|
|
December 31,
|
|
|
|
Useful
Life
|
|
2019
|
|
|
2018
|
|
Equipment
|
|
2-5 years
|
|
$
|
2,920
|
|
|
$
|
2,108
|
|
Software
|
|
2-5
years
|
|
|
268
|
|
|
|
80
|
|
|
|
|
|
|
3,188
|
|
|
|
2,188
|
|
Less
accumulated depreciation and amortization
|
|
|
|
|
(1,391
|
)
|
|
|
(661
|
)
|
Property
and equipment, net
|
|
|
|
$
|
1,797
|
|
|
$
|
1,527
|
|
Depreciation
and amortization of property and equipment for the years ended December 31, 2019 and 2018, was $722 and $603, respectively.
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements
(In thousands)
|
4.
|
Accrued
Expenses and Other
|
Accrued
expenses and other consisted of the following at December 31, 2019 and 2018:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Employee
compensation and related costs
|
|
$
|
994
|
|
|
$
|
2,319
|
|
Restructuring
|
|
|
216
|
|
|
|
9
|
|
Current
portion of capital lease obligations
|
|
|
179
|
|
|
|
109
|
|
Other
|
|
|
876
|
|
|
|
462
|
|
|
|
$
|
2,265
|
|
|
$
|
2,899
|
|
Long-term
liabilities consisted of the following at December 31, 2019 and 2018:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Capital
lease obligations, net of current portion
|
|
$
|
177
|
|
|
$
|
218
|
|
Canadian
grant liability
|
|
|
765
|
|
|
|
733
|
|
|
|
$
|
942
|
|
|
$
|
951
|
|
In
April 2018, Ribbon entered into a conditional grant agreement (“Canadian Grant”) with the Ontario Minister of Economic
Development and Growth (“OMEDG”). The Canadian Grant was created by the OMEDG to facilitate the Ontario Jobs and Prosperity
Fund (“JPF”) in order to assist Ontario businesses and business development organizations to support business investment
and economic development in key sections of Ontario. Under the agreement, OMEDG has agreed to provide Ribbon an amount not to
exceed $10,000 Canadian dollars over the course of six years through December 31, 2023 to be used solely to finance the costs
to create jobs and a research and development center of excellence for cloud communications.
As
of December 31, 2019, the Business received approximately $765 under the Canadian Grant which is subject to certain clawback provisions
within the Canadian Grant agreement predicated on job creation and other milestones over the course of the six-year term.
Disaggregation
of Revenue
The
Business disaggregates its revenue from contracts with customers based on the geographic regions in which each customer is domiciled.
The
Business’s total revenue for the years ended December 31, 2019 and 2018 was disaggregated geographically as follows:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Americas
|
|
$
|
3,963
|
|
|
$
|
3,255
|
|
Europe,
Middle East and Africa
|
|
|
3,889
|
|
|
|
2,267
|
|
Asia
Pacific
|
|
|
695
|
|
|
|
1,759
|
|
|
|
$
|
8,547
|
|
|
$
|
7,281
|
|
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements
(In thousands)
|
7.
|
Stock-Based
Compensation Plans
|
Kandy
employees participate in Ribbon’s stock-based compensation plans. Under the following plans, Ribbon may grant certain employees
various types of stock awards based upon Ribbon common stock and all employees were eligible to participate in the Employee Stock
Purchase Plan which expired on May 20, 2020.
2019
Stock Incentive Plan
At
Ribbon’s annual meeting of stockholders held on June 5, 2019, Ribbon’s stockholders approved the Ribbon Communications
Inc. Incentive Award Plan (the “2019 Plan”). The 2019 Plan had previously been approved by Ribbon’s Board of
Directors, subject to stockholder approval. Under the 2019 Plan, Ribbon may grant awards aggregating up to 7.0 million shares
of Ribbon common stock (subject to adjustment in the event of stock splits and other similar events), plus 5.1 million shares
of common stock that remained available for issuance under Ribbon’s amended and Restated Stock Incentive Plan (the “2007
Plan”) on June 5, 2019, plus any shares covered by awards under the 2007 Plan (or Ribbon’s other prior equity compensation
plans) that again become available for grant pursuant to the provisions of the 2007 Plan. The 2019 Plan provides for the award
of options to purchase Ribbon’s common stock (“stock options”), stock appreciation rights (“SARs”),
restricted stock awards (“RSAs”), performance-based stock awards (“PSAs”), restricted stock units (“RSUs”),
performance- based stock units (“PSUs”) and other stock- or cash-based awards. Awards can be granted under the 2019
Plan to Ribbon’s employees, officers and non-employee directors, as well as consultants and advisors of Ribbon and its subsidiaries.
At December 31, 2019, there were 7.1 million shares available for future issuance under the 2019 Plan.
2007
Plan
Ribbon’s
2007 Plan provided for the award of stock options, SARs, RSAs, PSAs, RSUs, PSUs and other stock- based awards to employees, officers,
non-employee directors, consultants and advisors of Ribbon and its subsidiaries. On and following June 5, 2019, with the exception
of shares underlying awards outstanding as of that date, no additional shares may be granted under the 2007 Plan.
2012
Stock Incentive Plan
In
connection with Ribbon’s acquisition of Performance Technologies Inc. (“PT”) in 2014, Ribbon assumed PT’s
2012 Amended Performance Technologies, Incorporated Omnibus Incentive Plan and subsequently renamed it the 2012 Stock Incentive
Plan (the “2012 Plan). In December 2014, all of the unissued shares under the 2012 Plan were transferred to the 2007 Plan.
Any outstanding awards under the 2012 Plan that in the future expire, terminate, are cancelled, surrendered or forfeited or are
repurchased by Ribbon will be returned to the 2019 Plan. Accordingly, at December 31, 2019 there were no shares available for
future issuance under the 2012 Plan.
Stock
Options
All
outstanding stock options expired in 2018, and Ribbon did not grant stock options in 2019. Accordingly, the Business has not included
any information related to stock options for the year ended December 31, 2019. The activity related to the Business’s outstanding
stock options for the year ended December 31, 2018 was as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at January 1, 2018
|
|
|
800
|
|
|
$
|
18.10
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(800
|
)
|
|
$
|
18.10
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Vested
or expected to vest at December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Exercisable
at December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
There
were no stock options exercised in the year ended December 31, 2018 and accordingly, the Business has not provided information
regarding the total intrinsic value of stock options exercised or cash received from the exercise of stock options.
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements
(In thousands)
Restricted
Stock Awards and Units
The
activity related to the Business’s RSAs for the years ended December 31, 2019 and 2018 was as follows:
|
|
|
Number
of Shares
|
|
|
Weighted
Average Grant Date Fair Value
|
|
Unvested
balance at January 1, 2018
|
|
|
|
284,668
|
|
|
$
|
6.94
|
|
Granted
|
|
|
|
30,000
|
|
|
$
|
7.04
|
|
Vested
|
|
|
|
(94,892
|
)
|
|
$
|
6.94
|
|
Forfeited
|
|
|
|
(8,500
|
)
|
|
$
|
7.04
|
|
Unvested
balance at December 31, 2018
|
|
|
|
211,276
|
|
|
$
|
6.95
|
|
Granted
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
|
(191,586
|
)
|
|
$
|
6.95
|
|
Forfeited
|
|
|
|
-
|
|
|
|
-
|
|
Unvested
balance at December 31, 2019
|
|
|
|
19,690
|
|
|
$
|
6.99
|
|
The
activity related to the Business’s RSUs for the years ended December 31, 2019 and 2018 was as follows:
|
|
Number of Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
Unvested
balance at January 1, 2018
|
|
|
320
|
|
|
$
|
7.26
|
|
Granted
|
|
|
18,000
|
|
|
$
|
7.04
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(6,320
|
)
|
|
$
|
7.05
|
|
Unvested
balance at December 31, 2018
|
|
|
12,000
|
|
|
$
|
7.04
|
|
Granted
|
|
|
118,895
|
|
|
$
|
5.46
|
|
Vested
|
|
|
(6,002
|
)
|
|
$
|
7.04
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Unvested
balance at December 31, 2019
|
|
|
124,893
|
|
|
$
|
5.54
|
|
Employee
Stock Purchase Plan
Ribbon’s
Amended and Restated 2000 Employee Stock Purchase Plan (“ESPP”) was designed to provide eligible employees of Ribbon
and its participating subsidiaries an opportunity to purchase common stock of Ribbon through accumulated payroll deductions. The
ESPP provided for six-month offering periods with the purchase price of the stock equal to 85% of the lesser of the closing market
price on the first or last day of the offering period. The maximum number of shares of common stock an employee could purchase
during each offering period was 500, subject to certain adjustments pursuant to the ESPP. The last purchase under the ESPP purchase
period was made on November 28, 2019, and the ESPP expired on May 20, 2020.
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements
(In thousands)
Stock-Based
Compensation
The
Statements of Revenues and Direct Expenses include stock-based compensation for the years ended December 31, 2019 and 2018 as
follows:
|
|
Year
ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cost
of revenues
|
|
$
|
29
|
|
|
$
|
-
|
|
Research
and development
|
|
|
56
|
|
|
|
13
|
|
Sales
and marketing
|
|
|
195
|
|
|
|
183
|
|
General
and administrative
|
|
|
1,081
|
|
|
|
813
|
|
|
|
$
|
1,361
|
|
|
$
|
1,009
|
|
At
December 31, 2019, there was $0.6 million, net of expected forfeitures, of unrecognized stock-based compensation expense related
to stock awards and stock units. This expense is expected to be recognized over a weighted average period of approximately two
years.
At
December 31, 2019, common stock of Ribbon reserved for future issuance consisted of the following:
2019
Plan
|
|
|
7,051,559
|
|
ESPP
|
|
|
1,148,867
|
|
|
|
|
8,200,426
|
|
Ribbon’s
policy is to issue authorized but unissued shares upon the exercise of stock options, the granting of restricted common stock,
the settlement of restricted stock units and the purchase of Ribbon’s common stock under the ESPP.
For
the year ended December 31, 2019, three customers accounted for 16%, 14% and 11% of total revenues. For the year ended December
31, 2018, one customer accounted for approximately 20% of total revenues.
At
December 31, 2019, two customers accounted for 19% each of Kandy’s accounts receivable balance, aggregating approximately
38% of total accounts receivable. At December 31, 2018, two customers accounted for 46% and 11% of Kandy’s accounts receivable
balance, representing approximately 57% of total accounts receivable. The Business performs ongoing credit evaluations of its
customers and generally does not require collateral on accounts receivable. The Business maintains an allowance for doubtful accounts
and such losses have been within management’s expectations.
|
9.
|
Commitments
and Contingencies
|
From
time to time, the Business may become involved in various lawsuits, claims, and proceedings that arise in the ordinary course
of business. The Business records a loss provision when management believes it is both probable that a liability has been incurred
and the amount can be reasonably estimated. Management does not believe any current legal proceedings will have a material effect
on these financial statements.
Subsequent
to the year-end, on March 11, 2020, the World Health Organization characterized the outbreak of a strain of the novel coronavirus
(“COVID-19”) as a pandemic which has resulted in a series of public health and emergency measures that have been put
in place to combat the spread of the virus. The duration and impact of COVID-19 are unknown at this time and it is not possible
to reliably estimate the impact that the length and severity of these developments will have on the financial results and condition
of the Business in future periods.
Annex B
|
|
|
Kandy Communications Business
of
Ribbon Communications Inc.
|
|
|
|
|
|
Abbreviated Financial Statements
|
|
|
|
|
|
For the Nine months Ended September 30, 2020 and 2019 (Unaudited)
|
|
|
Kandy
Communications Business of Ribbon Communications Inc.
Statements of Assets Acquired and Liabilities Assumed (Unaudited)
(In
thousands)
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
Assets acquired
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
3,105
|
|
|
$
|
2,644
|
|
Other current assets
|
|
|
168
|
|
|
|
109
|
|
Total current assets
|
|
|
3,273
|
|
|
|
2,753
|
|
Property and equipment, net
|
|
|
3,216
|
|
|
|
1,736
|
|
Total assets acquired
|
|
$
|
6,489
|
|
|
$
|
4,489
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,277
|
|
|
$
|
3,284
|
|
Accrued expenses and other
|
|
|
2,615
|
|
|
|
1,984
|
|
Deferred revenue
|
|
|
459
|
|
|
|
1,557
|
|
Total current liabilities
|
|
|
5,351
|
|
|
|
6,825
|
|
Other long-term liabilities
|
|
|
882
|
|
|
|
978
|
|
Total liabilities assumed
|
|
|
6,233
|
|
|
|
7,803
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired (liabilities assumed)
|
|
$
|
256
|
|
|
$
|
(3,314
|
)
|
The
accompanying notes are an integral part of these abbreviated financial statements
Kandy
Communications Business of Ribbon Communications Inc.
Statements
of Revenues and Direct Expenses (Unaudited)
(In
thousands)
|
|
Nine months ended
|
|
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
Revenues
|
|
$
|
10,246
|
|
|
$
|
6,187
|
|
Cost of revenues
|
|
|
7,469
|
|
|
|
6,052
|
|
Gross Profit
|
|
|
2,777
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
Direct expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
12,356
|
|
|
|
11,528
|
|
Sales and marketing
|
|
|
3,371
|
|
|
|
3,521
|
|
General and administrative
|
|
|
-
|
|
|
|
1,159
|
|
Restructuring and related
|
|
|
356
|
|
|
|
1,508
|
|
Total direct expenses
|
|
|
16,083
|
|
|
|
17,716
|
|
|
|
|
|
|
|
|
|
|
Direct expenses in excess of revenues
|
|
$
|
(13,306
|
)
|
|
$
|
(17,581
|
)
|
The
accompanying notes are an integral part of these abbreviated financial statements
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements (Unaudited)
(In
thousands)
|
1.
|
Nature
of Operations and Presentation
|
On
August 5, 2020, American Virtual Cloud Technologies, Inc. (“AVCT”) entered into a Purchase Agreement (the “Purchase
Agreement”) with Ribbon Communications Inc. (“Ribbon”), Ribbon Communications Operating Company, Inc. (“RCOCI”)
and Ribbon Communications International Limited (together with RCOCI, the “Sellers”, and together with Ribbon, the
“Ribbon Parties”), pursuant to which AVCT agreed to purchase the Sellers’ cloud-based enterprise services business
(also known as the Kandy Communications Business) (the “Business” or “Kandy”) by acquiring certain of
the Sellers’ and their respective affiliates’ assets and assuming certain of the Sellers’ and their respective
affiliates’ liabilities primarily associated with the Business, and acquiring all of the outstanding interests of Kandy
Communications LLC (the “Transaction”).
AVCT
entered into an Amended and Restated Purchase Agreement (the “Amended and Restated Purchase Agreement”) and completed
the Transaction with the Sellers on December 1, 2020.
The
Transaction was completed pursuant to the terms of the Amended and Restated Purchase Agreement. Upon closing, AVCT issued to the
Sellers units of securities consisting of convertible debentures in an aggregate principal amount of approximately $45.0 million
and warrants to purchase an aggregate of approximately 4.5 million shares of AVCT’s common stock for an exercise price of
$0.01 per share (the “Purchase Price”). The Purchase Price is subject to adjustment based on the net working capital
of the Kandy Communications Business as of the closing date.
Founded
in 2014, Kandy is a global provider of complex deployments of unified communications as a service (“UCaaS”), communications
platform as a service (“CPaaS”), and contact center as a service (“CCaaS”) for mid- market and enterprise
customers across its powerful, proprietary multi-tenant, highly scalable cloud platform. The Kandy platform also includes pre-built
customer engagement tools, based on 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 of all sizes and types
can quickly embed real-time communications capabilities into their existing applications and business processes.
Basis
of Presentation
The
accompanying Statements of Assets Acquired and Liabilities Assumed as of September 30, 2020 and 2019 and the related Statements
of Revenues and Direct Expenses for each of the nine months ended September 30, 2020 and 2019 (collectively, the “Abbreviated
Financial Statements”) of the Business have been prepared in accordance with accounting principles generally accepted in
the United States (“GAAP”) and have been prepared for purposes of providing financial information of an acquired business
that is considered significant pursuant to the Securities and Exchange Commission (“SEC”) Rule 3-05 of Regulation
S-X and early application of SEC Final Rule Release No. 33-10786, Amendments to Financial Disclosures About Acquired and Disposed
Businesses.
Ribbon
management determined that it is impracticable to prepare full carve-out financial statements for Kandy in accordance with Regulation
S-X for the following reasons:
|
●
|
Kandy
has not been previously managed by Ribbon as a stand-alone business, but instead was
part of a fully integrated company.
|
|
●
|
Audited
financial statements of Kandy have never been prepared because distinct and separate
accounts necessary to present complete stand-alone balance sheets, statements of operations,
and cash flows have not been maintained.
|
|
●
|
Working
capital accounts, including accounts receivable, other current assets, fixed assets,
accounts payable, and other current accrued liabilities related to Kandy have not been
maintained separately, but have been maintained in the aggregate at the Ribbon corporate
level with similar accounts of other Ribbon businesses.
|
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements (Unaudited)
(In thousands)
|
●
|
All
cash flow requirements of the various activities and locations comprising Kandy are funded
by Ribbon and no cash management functions are performed at the Business level. In addition,
the Business does not maintain separate cash balances. Major sources of cash come from
revenues and major uses of cash are for capital expenditures, research and development,
and payroll-related costs.
|
As
a result of the foregoing, it is impracticable to prepare full financial statements as required by Regulation S-X. In addition,
the preparation of statements of invested equity and cash flows was not practicable due to the integration of Kandy into the total
operations of Ribbon. The Abbreviated Financial Statements represent the Business subject to the sale under the Purchase Agreement
and have been derived from the financial statements and accounting records of Ribbon and its subsidiaries. All intercompany accounts
and transactions have been eliminated.
The
accompanying Abbreviated Financial Statements are not intended to be a complete presentation of financial position, results of
operations, or cash flows of the Business in conformity with GAAP. In addition, the Statements of Revenues and Direct expenses
may not be indicative of operating results given the omission of certain corporate overhead, interest and income tax allocations.
For
the nine months ended September 30, 2020 and 2019, certain assets, revenue and expenses in the Abbreviated Financial Statements
include allocations from Ribbon. To the extent that a revenue or expense is identifiable and directly related to the Business,
it is reflected in the accompanying Abbreviated Financial Statements, and accounted for in conformity with GAAP. Direct expenses
include certain Ribbon corporate allocations attributable to the Business and are included as components of research and development
expense, sales and marketing expense, and restructuring and related expense. These corporate allocations include, but are not
limited to, stock-based compensation and other human resource related expenses.
Management
believes that the assumptions underlying the allocations in the Abbreviated Financial Statements are reasonable. However, the
Abbreviated Financial Statements included herein do not necessarily reflect the results of operations and financial position of
the Business as if it had operated as a stand-alone entity, nor are they intended to provide an indication of how the Business
will perform in the future. Allocations used in preparation of the Abbreviated Financial Statements are as follows:
Statements
of Revenues and Direct Expenses
The
Statements of Revenues and Direct Expenses include the revenues and expenses directly attributable to the Business, and do not
include interest expense, other non-operating income and expenses, income taxes or any other indirect expense.
After
the completion of the transaction, the Business will develop and sell its products and services to third parties. For purposes
of the Statement of Revenues and Direct Expenses, revenues represent amounts generated from the sale of Kandy products to third
parties.
Statements
of Assets Acquired and Liabilities Assumed
The
Statements of Assets Acquired and Liabilities Assumed include the specific assets and liabilities that are to be transferred in
accordance with terms of the Purchase Agreement.
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements (Unaudited)
(In thousands)
|
2.
|
Significant
Accounting Policies
|
Use
of Estimates
The
preparation of the Abbreviated Financial Statements in conformity with GAAP requires management to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and
liabilities. Management evaluates estimates on an ongoing basis. Management bases estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
Accounts
Receivable
Management
evaluates the allowance for doubtful accounts receivable based on historical credit experience, payment trends and other economic
factors. An allowance for doubtful accounts is estimated based on management’s assessment of the collectability of specific
customer accounts. The allowance for doubtful accounts was approximately $4 and $93 at September 30, 2020 and 2019, respectively.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are charged to expense
as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which
range from two to five years. Leasehold improvements are amortized over the lesser of the lease term or five years. When an asset
is sold or retired, the cost and related accumulated depreciation or amortization are eliminated, and the resulting gain or loss,
if any, is recognized in the Statements of Revenues and Direct Expenses.
Impairment
of Long-Lived Assets
The
Business reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of these assets is measured by comparing their carrying amounts to market
prices or the future undiscounted cash flows the assets are expected to generate. If property and equipment are considered to
be impaired, the impairment to be recognized would equal the amount by which the carrying value of the assets exceeds their fair
value based on market prices.
Revenue
Recognition
The
Business recognizes service revenue, mainly from subscription services to its cloud-based UCaaS, CPaaS, CCaaS, and collaboration
solutions using the five-step model as prescribed by Accounting Standards Codification (“ASC”) Topic 606, Revenue
from Contracts with Customers (“ASC 606”):
|
●
|
identification
of the contract, or contracts, with a customer;
|
|
●
|
identification
of the performance obligations in the contract;
|
|
●
|
determination
of the transaction price;
|
|
●
|
allocation
of the transaction price to the performance obligations in the contract; and
|
|
●
|
recognition
of revenue when or as, the Business satisfies a performance obligation.
|
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements (Unaudited)
(In thousands)
The
Business identifies performance obligations in contracts with customers, which typically include subscription services and related
usage. The transaction price is determined based on the amount the Business expects to be entitled to receive in exchange for
transferring the promised services or products to the customer. The transaction price in the contract is allocated to each distinct
performance obligation in an amount that represents the relative amount of consideration expected to be received in exchange for
satisfying each performance obligation. Revenue is recognized when performance obligations are satisfied. Revenues are recorded
based on the transaction price, which typically correlates to standalone selling price (“SSP”), excluding amounts
collected on behalf of third parties such as sales and telecommunication taxes, which are collected on behalf of and remitted
to governmental authorities. The Business generally bills customers on a monthly basis. Contracts typically range from annual
to multi-year agreements with payment terms of net 30 days or less. Prior to signing a contract with a customer, collectability
is assessed.
When
the Business’s services do not meet certain service level commitments, customers are entitled to receive service credits,
and in certain cases, refunds, each representing a form of variable consideration. The Business historically has not experienced
any significant incidents affecting the defined levels of reliability and performance as required by our subscription contracts.
Therefore, the variable consideration is insignificant. There are no reserves for service credits as of September 30, 2020 or
2019.
The
estimation of variable consideration for each performance obligation requires the Business to make subjective judgments. The Business
has service-level agreements with customers warranting defined levels of uptime reliability and performance. Customers may get
credits or refunds if the Business fails to meet such levels. If the services do not meet certain criteria, fees are subject to
adjustment or refund representing a form of variable consideration. The Business may negotiate minimum revenue commitments (“MRC”)
at the inception of the contract.
The
Business enters into contracts with customers that regularly include promises to transfer multiple services, such as subscriptions,
and professional services. For arrangements with multiple services, the Business evaluates whether the individual services qualify
as distinct performance obligations. In its assessment of whether a service is a distinct performance obligation, the Business
determines whether the customer can benefit from the service on its own or with other readily available resources, and whether
the service is separately identifiable from other services in the contract. This evaluation requires the Business to assess the
nature of each individual service offering and how the services are provided in the context of the contract, including whether
the services are significantly integrated, highly interrelated, or significantly modify each other, which may require judgment
based on the facts and circumstances of the contract.
When
agreements involve multiple distinct performance obligations, the Business allocates arrangement consideration to all performance
obligations at the inception of an arrangement based on the relative SSP of each performance obligation. Usage fees deemed to
be variable consideration meet the allocation exception for variable consideration. Where the Business has standalone sales data
for its performance obligations which are indicative of the price at which the Business sells a promised good or service separately
to a customer, such data is used to establish SSP. In instances where standalone sales data is not available for a particular
performance obligation, the Business estimates SSP by the use of observable market and cost-based inputs. The Business continues
to review the factors used to establish list price and will adjust standalone selling price methodologies as necessary on a prospective
basis.
Service
revenue from subscriptions to the Business’s cloud-based technology platform is recognized on a ratable basis over the contractual
subscription term beginning on the date that the platform is made available to the customer until the end of the contractual period.
Payments received in advance of subscription services being rendered are recorded as deferred revenue; revenue recognized for
services rendered in advance of payments received are recorded as contract assets. Usage fees, when bundled, are billed in advance
and recognized on a ratable basis over the contractual subscription term, which is usually the monthly contractual billing period.
Non-bundled usage fees are recognized as actual usage occurs.
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements (Unaudited)
(In thousands)
Other
revenue is primarily comprised of professional services revenue. Professional services for deployment, configuration, system integration,
optimization, customer training or education are primarily billed on a fixed-fee basis and are performed by the Business directly.
Professional services revenue is recognized as services are performed or upon completion of the deployment. The Business also
recognizes revenue for perpetual and term-based software licenses. The Business has concluded that its software licenses are functional
intellectual property that are distinct, as the user can benefit from the software on its own. The software license revenue is
typically recognized upon transfer of control or when the software is made available for download, as this is the point that the
user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual
property.
Deferred
Revenue
Deferred
revenues represent billings or payments received in advance of revenue recognition and are recognized upon transfer of control.
Balances consist primarily of annual plan subscription services and professional and training services not yet provided as of
the balance sheet date. Deferred revenues that will be recognized during the succeeding twelve-month period are recorded as deferred
revenues, current, with the remainder recorded as other long-term liabilities in the Business’s statement of assets acquired
and liabilities assumed. During the nine months ended September 30, 2020 and 2019, the Business recognized revenues of approximately
$1,427 and $924, respectively, that was included in deferred revenue at the beginning of the period.
Sales
Commission Costs
Sales
commissions are considered incremental and recoverable costs of acquiring customer contracts. Commissions for Kandy sales are
expensed over the first 12 months of each contract or expensed immediately as part of the practical expedient used in connection
with the adoption of ASC 606.
Cost
of Revenues
Cost
of revenues include direct cost of services and products sold, and an allocation for indirect service and hosting costs related
to the Business incurred by Ribbon.
Research
and Development Expenses
Research
and development costs, including new product development, are charged to direct expenses as incurred in the Statements of Revenues
and Direct Expenses. Research and development expenses include personnel-related costs (including stock-based compensation), depreciation
related to engineering and test equipment, allocated costs of facilities and information technology, outside services and consultants,
supplies, software tools and product certification.
Sales
and Marketing Expenses
Sales
and marketing expenses consist primarily of salaries, commissions, and related expenses for personnel engaged in sales and marketing
functions, costs associated with promotional and marketing programs, travel and entertainment expenses, and allocated expenses
related to legal, information technology, facilities, and other shared functions.
Advertising
Costs
Advertising
costs are expensed as incurred and included as a component of Sales and Marketing expense in the Statements of Revenues and Direct
Expenses.
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements (Unaudited)
(In thousands)
Stock-Based
Compensation
Stock-based
compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite
service period, which generally represents the vesting period, and includes an estimate of the awards that will be forfeited.
The
Black-Scholes valuation model is used for estimating the fair value on the date of grant of stock options. The fair value of stock
option awards is affected by the Business’s stock price as well as valuation assumptions, including the volatility of Ribbon’s
stock price, expected term of the option, risk-free interest rate and expected dividends.
Restructuring
and Related Expenses
During
the nine months ended September 30, 2020 and 2019, the Business was part of a restructuring and facilities consolidation initiative
implemented by Ribbon. The restructuring initiatives included facility consolidations, refinement of research and development
activities, and a reduction in workforce. The Business records costs associated with restructuring-related employee terminations
when the liability is incurred. Employee termination benefits are recorded when the benefit arrangement is communicated to the
employee and no significant future services are required. If employees are required to render service until they are terminated
in order to receive the termination benefits, the fair value of the termination date liability is recognized ratably over the
future service period. Restructuring and related expenses are reported separately in the Statements of Revenues and Direct Expenses.
Foreign
currency translation
The
Business uses the U.S. dollar as its reporting currency. The foreign Ribbon subsidiaries functional currency is the U.S. dollar.
Monetary assets and liabilities are translated into U.S. dollars at the current exchange rate on the balance sheet date. Nonmonetary
assets and liabilities are remeasured into U.S. dollars at historical exchange rates. Revenue and expense items are translated
at average rates of exchange prevailing during each period. Realized and unrealized foreign currency exchange gains and losses
arising from transactions denominated in currencies other than the subsidiary’s functional currency are reflected in earnings.
|
3.
|
Property
and Equipment, net
|
Property
and equipment, net consisted of the following at September 30, 2020 and 2019:
|
|
|
|
September 30,
|
|
|
|
Useful Life
|
|
2020
|
|
|
2019
|
|
Equipment
|
|
2-5 years
|
|
$
|
4,768
|
|
|
$
|
2,617
|
|
Software
|
|
2-5 years
|
|
|
454
|
|
|
|
268
|
|
|
|
|
|
|
5,222
|
|
|
|
2,885
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(2,006
|
)
|
|
|
(1,149
|
)
|
Property and equipment, net
|
|
|
|
$
|
3,216
|
|
|
$
|
1,736
|
|
Depreciation
and amortization of property and equipment for the nine months ended September 30, 2020 and 2019, was $658 and $517, respectively.
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements (Unaudited)
(In thousands)
|
4.
|
Accrued
Expenses and Other
|
Accrued
expenses and other consisted of the following at September 30, 2020 and 2019:
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Employee compensation and related costs
|
|
$
|
1,597
|
|
|
$
|
954
|
|
Restructuring
|
|
|
140
|
|
|
|
554
|
|
Current portion of capital lease obligations
|
|
|
247
|
|
|
|
174
|
|
Other
|
|
|
631
|
|
|
|
302
|
|
|
|
$
|
2,615
|
|
|
$
|
1,984
|
|
Long-term
liabilities consisted of the following at September 30, 2020 and 2019:
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Capital
lease obligations, net of current portion
|
|
$
|
135
|
|
|
$
|
223
|
|
Canadian
grant liability
|
|
|
747
|
|
|
|
755
|
|
|
|
$
|
882
|
|
|
$
|
978
|
|
In
April 2018, Ribbon entered into a conditional grant agreement (“Canadian Grant”) with the Ontario Minister of Economic
Development and Growth (“OMEDG”). The Canadian Grant was created by the OMEDG to facilitate the Ontario Jobs and Prosperity
Fund (“JPF”) in order to assist Ontario businesses and business development organizations to support business investment
and economic development in key sections of Ontario. Under the agreement, OMEDG has agreed to provide Ribbon an amount not to
exceed $10,000 Canadian dollars over the course of six years through December 31, 2023 to be used solely to finance the costs
to create jobs and a research and development center of excellence for cloud communications.
As
of September 30, 2020, the Business received approximately $747 under the Canadian Grant which is subject to certain clawback
provisions within the Canadian Grant agreement predicated on job creation and other milestones over the course of the six-year
term.
Disaggregation
of Revenue
The
Business disaggregates its revenue from contracts with customers based on the geographic regions in which each customer is domiciled.
The
Business’s total revenue for the nine months ended September 30, 2020 and 2019 was disaggregated geographically as follows:
|
|
Nine
months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Americas
|
|
$
|
6,653
|
|
|
$
|
2,861
|
|
Europe, Middle East and Africa
|
|
|
3,028
|
|
|
|
2,778
|
|
Asia Pacific
|
|
|
565
|
|
|
|
548
|
|
|
|
$
|
10,246
|
|
|
$
|
6,187
|
|
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements (Unaudited)
(In thousands)
|
7.
|
Stock-Based
Compensation Plans
|
Kandy
employees participate in Ribbon’s stock-based compensation plans. Under the following plans, Ribbon may grant certain employees
various types of stock awards based upon Ribbon common stock and all employees were eligible to participate in the Employee Stock
Purchase Plan which expired on May 20, 2020.
2019
Stock Incentive Plan
Ribbon’s
Amended and Restated 2019 Incentive Award Plan (the “2019 Plan”) provides for the award of options to purchase shares
of Ribbon common stock (“stock options”), stock appreciation rights (“SARs”), restricted stock awards
(“RSAs”), performance-based stock awards (“PSAs”), restricted stock units (“RSUs”), performance-based
stock units (“PSUs”) and other stock- or cash-based awards. Awards can be granted under the 2019 Plan to Ribbon’s
employees, officers and non-employee directors, as well as consultants and advisors of Ribbon and its subsidiaries.
2007
Plan
Ribbon’s
2007 Plan provided for the award of stock options, SARs, RSAs, PSAs, RSUs, PSUs and other stock-based awards to employees, officers,
non-employee directors, consultants and advisors of Ribbon and its subsidiaries. On and following June 5, 2019, with the exception
of shares underlying awards outstanding as of that date, no additional shares may be granted under the 2007 Plan.
Restricted
Stock Awards and Units
The
activity related to the Business’s RSAs for the nine months ended September 30, 2020 and 2019 was as follows:
|
|
Number
of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Unvested balance at January 1, 2020
|
|
|
19,690
|
|
|
$
|
6.99
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(11,636
|
)
|
|
$
|
7.00
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Unvested balance at September 30, 2020
|
|
|
8,054
|
|
|
$
|
6.98
|
|
|
|
|
|
|
|
|
|
|
Unvested balance at January 1, 2019
|
|
|
211,276
|
|
|
$
|
6.95
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(187,114
|
)
|
|
$
|
6.95
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Unvested balance at September 30, 2019
|
|
|
24,162
|
|
|
$
|
6.98
|
|
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements (Unaudited)
(In thousands)
The
activity related to the Business’s RSUs for the nine months ended September 30, 2020 and 2019, was as follows:
|
|
Number
of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Unvested balance at January 1, 2020
|
|
|
124,893
|
|
|
$
|
5.54
|
|
Granted
|
|
|
136,500
|
|
|
$
|
2.16
|
|
Vested
|
|
|
(54,286
|
)
|
|
$
|
5.53
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Unvested balance at September 30, 2020
|
|
|
207,107
|
|
|
$
|
3.31
|
|
|
|
|
|
|
|
|
|
|
Unvested balance at January 1, 2019
|
|
|
12,000
|
|
|
$
|
7.04
|
|
Granted
|
|
|
118,895
|
|
|
$
|
5.46
|
|
Vested
|
|
|
(6,002
|
)
|
|
$
|
7.04
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Unvested balance at September 30, 2019
|
|
|
124,893
|
|
|
$
|
5.54
|
|
Employee
Stock Purchase Plan
Ribbon’s
Amended and Restated 2000 Employee Stock Purchase Plan (“ESPP”) was designed to provide eligible employees of Ribbon
and its participating subsidiaries an opportunity to purchase shares of Ribbon common stock through accumulated payroll deductions.
The ESPP provided for six-month offering periods with the purchase price of the stock equal to 85% of the lesser of the closing
market price on the first or last day of the offering period. The maximum number of shares of common stock an employee could purchase
during each offering period was 500, subject to certain adjustments pursuant to the ESPP. The last purchase under the ESPP was
made on November 28, 2019, and the ESPP expired on May 20, 2020.
Stock-Based
Compensation
The
statements of revenues and direct expenses include stock-based compensation for the nine months ended September 30, 2020 and 2019
as follows:
|
|
Nine months ended
|
|
|
|
2020
|
|
|
2019
|
|
Cost of revenues
|
|
$
|
46
|
|
|
$
|
16
|
|
Research and development
|
|
|
101
|
|
|
|
28
|
|
Sales and marketing
|
|
|
172
|
|
|
|
128
|
|
General and administrative
|
|
|
-
|
|
|
|
1,081
|
|
|
|
$
|
319
|
|
|
$
|
1,253
|
|
There
was no income tax benefit for employee stock-based compensation expense for the nine months ended September 30, 2020 or 2019 due
to the valuation allowance recorded.
At
September 30, 2020, there was $542, net of expected forfeitures, of unrecognized stock-based compensation expense related to stock
awards and stock units. This expense is expected to be recognized over a weighted average period of approximately two years.
Kandy
Communications Business of Ribbon Communications Inc.
Notes to Abbreviated Financial Statements (Unaudited)
(In thousands)
For
the nine months ended September 30, 2020, three customers accounted for 24%, 13% and 12% of total revenues. For the nine months
ended September 30, 2019, two customers accounted for 19% and 12% of total revenues.
At
September 30, 2020, three customers accounted for 32%, 14% and 13% of Kandy’s accounts receivable balance, aggregating approximately
59% of total accounts receivable. At September 30, 2019, three customers accounted for 25%, 22% and 10% of Kandy’s accounts
receivable balance, representing approximately 57% of total accounts receivable. The Business performs ongoing credit evaluations
of its customers and generally does not require collateral on accounts receivable. The Business maintains an allowance for doubtful
accounts and such losses have been within management’s expectations.
|
9.
|
Commitments
and Contingencies
|
From
time to time, the Business may become involved in various lawsuits, claims, and proceedings that arise in the ordinary course
of business. The Business records a loss provision when management believes it is both probable that a liability has been incurred
and the amount can be reasonably estimated. Management does not believe any current legal proceedings will have a material effect
on these abbreviated financial statements.
On
March 11, 2020, the World Health Organization characterized the outbreak of a strain of the novel coronavirus (“COVID-19”)
as a pandemic which has resulted in a series of public health and emergency measures that have been put in place to combat the
spread of the virus. The duration and impact of COVID-19 are unknown at this time and it is not possible to reliably estimate
the impact that the length and severity of these developments will have on the financial results and condition of the Business
in future periods.
The
Business has evaluated subsequent events through December 21, 2020, the date the abbreviated financial statements were
available to be issued. No events, other than the ones described in the abbreviated financial statements, were identified
requiring additional disclosure
Annex C
PRO
FORMA COMBINED FINANCIAL INFORMATION (UNAUDITED & CONDENSED)
(in
thousands, except share and per share data)
On
December 1, 2020, American Virtual Cloud Technologies, Inc. (“AVCT” or the “Company”) consummated a Purchase
Agreement (the “Purchase Agreement”) that was previously entered into on August 5, 2020 with Ribbon Communications,
Inc. (“Ribbon”), Ribbon Communications Operating Company, Inc. (“RCOCI”) and Ribbon Communications International
Limited (together with RCOCI, the “Sellers”, and together with Ribbon, the “Ribbon Parties”), pursuant
to which AVCT purchased the Sellers’ cloud-based enterprise services business (“Kandy”) by acquiring certain
of the Sellers’ and their respective affiliates’ assets (and assuming certain of the Sellers’ and their respective
affiliates’ liabilities) primarily associated with Kandy, and acquiring all of the outstanding interests of Kandy Communications
LLC (the “Transaction”).
Under
the terms of the amended Purchase Agreement, AVCT issued, to Ribbon, 43,778 units of securities (the “Units”), subject
to certain adjustments, as consideration for the Transaction. Each unit consists of (i) $1,000 in principal amount of the Company’s
Series A convertible debentures (the “Debentures”) and (ii) a warrant to purchase 100 shares of the Company’s
common stock at an exercise price of $0.01 per whole share (the “Warrants”). Accordingly, on December 1, 2020, the
Company issued $43,778 in debentures to the Sellers and 4,377,800 warrants.
In
connection with the Transaction, the Company also issued 10,000 Units to SPAC Opportunity Partners Investment Sub LLC (“SPACOps”).
The
unaudited pro forma condensed combined balance sheet (the “Combined Balance Sheet”) as of September 30, 2020 and the
unaudited pro forma condensed combined statements of operations (the “Combined Statement of Operations”) for the nine
months ended September 30, 2020 and the year ended December 31, 2019 (collectively, the “Pro Forma Combined Financial Information”)
combine the historical financial information of AVCT and the historical financial information of Kandy and gives effect to the
Transaction as if it had been consummated as of September 30, 2020, for the balance sheet, and the beginning of fiscal 2019 for
the statements of operations. The Pro Forma Combined Financial Information is presented pursuant to Article 11 of the Securities
and Exchange Commission’s (“SEC”) Regulation S-X, including early application of the SEC’s Final Rule
Release No. 33-10786, Amendments to Financial Disclosures About Acquired and Disposed Businesses.
We
derived the AVCT portion of the Pro Forma Combined Financial Information from the unaudited condensed consolidated financial statements
of AVCT as of and for the periods ended September 30, 2020 and the audited financial statements of Stratos Management Systems,
Inc. (“Computex”) for the year ended December 31, 2019. We derived the Kandy portion of the Pro Forma Combined Financial
Information from the unaudited abbreviated financial statements of Kandy as of and for the periods ended September 30, 2020 and
its audited abbreviated financial statements as of and for the year ended December 31, 2019, both of which are included elsewhere
in this filing. Accordingly, the Pro Forma Combined Financial Information should be read in conjunction with the following:
|
●
|
AVCT’s
unaudited condensed consolidated financial statements as of and for the periods ended
September 30, 2020 included in AVCT’s 10-Q filed with the SEC on November 16, 2020
|
|
●
|
the
audited financial statements of Computex as of and for the year ended December 31, 2019
included in the Form 8-K filed with the SEC on April 14, 2020
|
|
●
|
Kandy’s
unaudited abbreviated financial statements as of and for the period ended September 30,
2020 included elsewhere in this filing
|
|
●
|
Kandy’s
audited abbreviated financial statements as of and for the year ended December 31, 2019
included elsewhere in this filing
|
|
●
|
The
other information included and/or incorporated by reference into this filing.
|
The
Pro Forma Combined Financial Information reflects Transaction Accounting Adjustments that the Company believes are necessary to
present the Company’s Pro Forma Combined Financial Information following the closing of the Transaction as of and for the
periods indicated. The Transaction Accounting Adjustments are based on currently available information and assumptions that the
Company believes are, under the circumstances and given the information available at this time, reasonable, directly attributable
to the Transaction, and reflective of adjustments necessary to report the Company’s balance sheet and statements of operations
as if AVCT completed the Transaction as of September 30, 2020 for the balance sheet and the beginning of fiscal 2019 for the statements
of operations.
In
the Pro Forma Combined Financial Information, the acquisition of Kandy under the Business Combination Agreement is accounted under
the acquisition method in accordance with FASB ASC 805, Business Combinations (“ASC 805”). Under this method
of accounting, AVCT is treated as the acquirer for financial reporting purposes and Kandy is treated as the acquiree. The acquisition
method of accounting of ASC 805 uses the fair value concepts defined in FASB ASC 820, Fair Value Measurements (“ASC
820”). ASC 805 requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values
as of the acquisition date. Under ASC 805, acquisition-related transaction costs are not included as a component of the consideration
transferred but, instead, are accounted for as expenses in the periods in which such costs are incurred. Acquisition-related transaction
costs generally include advisory, legal and accounting fees.
The
Pro Forma Combined Financial Information is for informational purposes only and is not necessarily indicative of the operating
results and financial position that would have been achieved had the Transaction occurred on the dates indicated. Further, the
Pro Forma Financial Information does not purport to project the future operating results or financial position of the Company
following the completion of the Transaction. The Transaction Accounting Adjustments represent management’s estimates, based
on information available as of the date that the Pro Forma Combined Financial Information was prepared. As a result, the Pro Forma
Combined Financial Information is subject to change as additional information becomes available and as additional analyses are
performed. Accordingly, they do not reflect synergies or actions that management may make at a later date nor do they reflect
the cost of integration activities. Also, the accounting policies applied are those of AVCT’s. More detailed reviews may
result in further changes to accounting policies. In addition, since the purchase consideration has not been finalized and final
valuation procedures have not yet been completed, the final purchase consideration and the purchase price allocation may differ
materially from the Pro Forma Combined Financial Information included herein. Assumptions and estimates underlying the Transaction
Accounting Adjustments are described in the accompanying notes.
American
Virtual Cloud Technologies, Inc.
Unaudited
Pro forma Condensed Combined Balance Sheets
September
30, 2020
(In
thousands, except share and per share data)
|
|
|
|
|
|
|
|
Transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting
|
|
|
|
|
Pro Forma
|
|
|
|
AVCT
(3A)
|
|
|
Kandy
(3B)
|
|
|
Adjustments
|
|
|
|
|
Combined
|
|
|
|
Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,715
|
|
|
$
|
-
|
|
|
$
|
10,000
|
|
3
|
C)
|
|
$
|
13,715
|
|
Restricted
cash
|
|
|
688
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
688
|
|
Trade
receivables, net
|
|
|
19,030
|
|
|
|
3,105
|
|
|
|
-
|
|
|
|
|
|
22,135
|
|
Prepaid
expenses
|
|
|
2,213
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
2,213
|
|
Inventory
|
|
|
649
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
649
|
|
Other
current assets
|
|
|
53
|
|
|
|
168
|
|
|
|
-
|
|
|
|
|
|
221
|
|
Total
current assets
|
|
|
26,348
|
|
|
|
3,273
|
|
|
|
10,000
|
|
|
|
|
|
39,621
|
|
Property
and equipment, net
|
|
|
7,765
|
|
|
|
3,216
|
|
|
|
(286
|
)
|
3
|
D)
|
|
|
10,695
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
42,129
|
|
|
|
-
|
|
|
|
7,320
|
|
3
|
E)
|
|
|
49,449
|
|
Other
intangible assets, net
|
|
|
23,142
|
|
|
|
-
|
|
|
|
35,741
|
|
3
|
F)
|
|
|
58,883
|
|
Other
noncurrent assets
|
|
|
67
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
67
|
|
Total
other assets
|
|
|
65,338
|
|
|
|
-
|
|
|
|
43,061
|
|
|
|
|
|
108,399
|
|
TOTAL
ASSETS
|
|
$
|
99,451
|
|
|
$
|
6,489
|
|
|
$
|
52,775
|
|
|
|
|
$
|
158,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
27,524
|
|
|
$
|
4,892
|
|
|
$
|
1,984
|
|
3
|
G)
|
|
$
|
34,400
|
|
Deferred
revenue
|
|
|
1,536
|
|
|
|
459
|
|
|
|
-
|
|
|
|
|
|
1,995
|
|
Line
of credit
|
|
|
8,487
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
8,487
|
|
Current
portion of notes payable and capital leases
|
|
|
8,991
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
8,991
|
|
Subordinated
promissory note
|
|
|
500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
500
|
|
Total
current liabilities
|
|
|
47,038
|
|
|
|
5,351
|
|
|
|
1,984
|
|
|
|
|
|
54,373
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line
of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Notes
payable and capital leases (net of current portion and deferred financing fees)
|
|
|
1,558
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
1,558
|
|
Convertible
Debentures, net of discount - related party
|
|
|
10,632
|
|
|
|
-
|
|
|
|
-
|
|
3
|
H)
|
|
|
10,632
|
|
Convertible
Debentures, net of discount
|
|
|
26,634
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
26,634
|
|
Deferred
tax liability
|
|
|
3,443
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
3,443
|
|
Other
liabilities
|
|
|
82
|
|
|
|
882
|
|
|
|
(747
|
)
|
3
|
I)
|
|
|
217
|
|
Total
long-term liabilities
|
|
|
42,349
|
|
|
|
882
|
|
|
|
(747
|
)
|
|
|
|
|
42,484
|
|
Total
liabilities
|
|
|
89,387
|
|
|
|
6,233
|
|
|
|
1,237
|
|
|
|
|
|
96,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value; 5,000,000 authorized; none issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Common
stock, $0.0001 par value; 500,000,000 shares authorized; 19,753,061 shares issued and outstanding
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
2
|
|
Additional
paid-in capital
|
|
|
34,988
|
|
|
|
-
|
|
|
|
53,778
|
|
3
|
J)
|
|
|
88,766
|
|
Accumulated
deficit
|
|
|
(24,926
|
)
|
|
|
-
|
|
|
|
(1,984
|
)
|
3
|
K)
|
|
|
(26,910
|
)
|
Total
stockholders’ equity
|
|
|
10,064
|
|
|
|
-
|
|
|
|
51,794
|
|
|
|
|
|
61,858
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
99,451
|
|
|
$
|
6,233
|
|
|
$
|
53,031
|
|
|
|
|
$
|
158,715
|
|
See
notes to the unaudited pro forma condensed combined financial information
American Virtual Cloud Technologies, Inc.
Unaudited Pro Forma Condensed Combined Statements of Operations
For the Nine Months Ended September 30, 2020
(In thousands, except share and per share data)
|
|
AVCT
April 7, 2020
through
September 30,
2020 (4A)
|
|
|
AVCT
January 1, 2020
through
April 6,
2020 (4B)
|
|
|
Kandy
January 1, 2020
through
September 30,
2020 (4C)
|
|
|
Transaction
Accounting
Adjustments
|
|
|
|
|
Pro Forma
Combined
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
|
|
$
|
26,870
|
|
|
$
|
10,587
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
$
|
37,457
|
|
Software and maintenance
|
|
|
2,734
|
|
|
|
1,459
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
4,193
|
|
Managed and professional services
|
|
|
15,188
|
|
|
|
6,880
|
|
|
|
2,753
|
|
|
|
-
|
|
|
|
|
|
24,821
|
|
Cloud subscription
|
|
|
-
|
|
|
|
-
|
|
|
|
7,493
|
|
|
|
-
|
|
|
|
|
|
7,493
|
|
Other
|
|
|
273
|
|
|
|
111
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
384
|
|
Total revenues
|
|
|
45,065
|
|
|
|
19,037
|
|
|
|
10,246
|
|
|
|
-
|
|
|
|
|
|
74,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
31,362
|
|
|
|
12,426
|
|
|
|
7,469
|
|
|
|
2,654
|
|
4
|
D)
|
|
|
53,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13,703
|
|
|
|
6,611
|
|
|
|
2,777
|
|
|
|
(2,654
|
)
|
|
|
|
|
20,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
12,356
|
|
|
|
(51
|
)
|
4
|
D)
|
|
|
12,305
|
|
Selling, general and administrative expenses
|
|
|
17,617
|
|
|
|
7,835
|
|
|
|
3,727
|
|
|
|
547
|
|
4
|
E)
|
|
|
29,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,914
|
)
|
|
|
(1,224
|
)
|
|
|
(13,306
|
)
|
|
|
(3,150
|
)
|
|
|
|
|
(21,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense - related party
|
|
|
(1,151
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,697
|
)
|
4
|
F)
|
|
|
(21,848
|
)
|
Interest expense
|
|
|
(3,389
|
)
|
|
|
(384
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(3,773
|
)
|
Other (expense) income
|
|
|
(25
|
)
|
|
|
31
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
6
|
|
Total other expenses
|
|
|
(4,565
|
)
|
|
|
(353
|
)
|
|
|
-
|
|
|
|
(20,697
|
)
|
|
|
|
|
(25,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(8,479
|
)
|
|
|
(1,577
|
)
|
|
|
(13,306
|
)
|
|
|
(23,847
|
)
|
|
|
|
|
(47,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(33
|
)
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,512
|
)
|
|
$
|
(1,589
|
)
|
|
$
|
(13,306
|
)
|
|
$
|
(23,847
|
)
|
|
|
|
$
|
(47,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share - basic and diluted
|
|
$
|
(0.43
|
)
|
|
$
|
(1,587.30
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
$
|
(2.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and diluted
|
|
|
19,657,811
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
19,657,811
|
|
See notes to the unaudited pro forma condensed combined financial information
American Virtual Cloud Technologies, Inc.
Unaudited Pro Forma Condensed Combined Statements of Operations
For the Year Ended December 31, 2019
(In thousands, except share and per share data)
|
|
AVCT (5A)
|
|
|
Kandy (5B)
|
|
|
Transaction
Accounting
Adjustments
|
|
|
|
|
Pro Forma
Combined
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
|
|
$
|
52,655
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
$
|
52,655
|
|
Software and maintenance
|
|
|
5,615
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
5,615
|
|
Services
|
|
|
27,003
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
27,003
|
|
Cloud subscription
|
|
|
-
|
|
|
|
5,568
|
|
|
|
-
|
|
|
|
|
|
5,568
|
|
Other
|
|
|
443
|
|
|
|
2,979
|
|
|
|
-
|
|
|
|
|
|
3,422
|
|
Total revenues
|
|
|
85,716
|
|
|
|
8,547
|
|
|
|
-
|
|
|
|
|
|
94,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
61,309
|
|
|
|
8,065
|
|
|
|
3,554
|
|
5
|
C)
|
|
|
72,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
24,407
|
|
|
|
482
|
|
|
|
(3,554
|
)
|
|
|
|
|
21,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
-
|
|
|
|
15,767
|
|
|
|
(29
|
)
|
5
|
C)
|
|
|
15,738
|
|
Selling, general and administrative expenses
|
|
|
28,021
|
|
|
|
7,474
|
|
|
|
4,264
|
|
5
|
D)
|
|
|
39,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,614
|
)
|
|
|
(22,759
|
)
|
|
|
(7,789
|
)
|
|
|
|
|
(34,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense - related party
|
|
|
-
|
|
|
|
-
|
|
|
|
(27,094
|
)
|
5
|
E)
|
|
|
(27,094
|
)
|
Interest expense
|
|
|
(1,260
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(1,260
|
)
|
Other (expense) income
|
|
|
524
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
524
|
|
Total other expenses
|
|
|
(736
|
)
|
|
|
-
|
|
|
|
(27,094
|
)
|
|
|
|
|
(27,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(4,350
|
)
|
|
|
(22,759
|
)
|
|
|
(34,883
|
)
|
|
|
|
|
(61,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(33
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,383
|
)
|
|
$
|
(22,759
|
)
|
|
$
|
(34,883
|
)
|
|
|
|
$
|
(62,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share - basic and diluted
|
|
$
|
(4,383.83
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and diluted
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
N/M
|
|
See notes to the unaudited pro forma condensed combined financial information
NOTES
TO PRO FORMA COMBINED FINANCIAL INFORMATION (UNAUDITED & CONDENSED)
(in
thousands, except share and per share data)
Note
1. Basis of Pro Forma Presentation
Overview
The
Pro Forma Combined Financial Information has been prepared assuming the Transaction is accounted for using the acquisition method
of accounting with AVCT as the acquiring entity and Kandy as the acquiree. Under the acquisition method of accounting, AVCT’s
assets and liabilities will retain their carrying amounts while the assets and liabilities of Kandy will be recorded at their
fair values measured as of the acquisition date. The excess of the purchase price over the estimated fair values of net assets
acquired will be recorded as goodwill. The Transaction Accounting Adjustments have been prepared as if the Transaction had taken
place on September 30, 2020 in the case of the Combined Balance Sheet, and on January 1, 2019 in the case of the Combined Statements
of Operations.
As
a result of an earlier merger, AVCT distinguishes between its historical financial information for the period prior to April 7,
2020 (“Predecessor period”) and its historical financial information for the period on and after April 7, 2020 (“Successor”).
That earlier merger was accounted for under the acquisition method of accounting in which AVCT was the acquirer, and the Successor
historical financial statements reflect a different basis of accounting based on the fair values of net assets acquired.
The
acquisition method of accounting is based on ASC 805, and uses the fair value concepts defined in ASC 820. ASC 805 requires, among
other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date.
The
Transaction Accounting Adjustments represent management’s estimates based on information available as of the date of this
filing and are subject to change as additional information becomes available and additional analyses are performed. The Pro Forma
Combined Financial Information does not reflect possible adjustments related to restructuring or integration activities that have
yet to be determined.
Note
2. Preliminary Allocation of Purchase Price
The
allocation of the purchase consideration herein is preliminary. The final allocation of the purchase consideration will be determined
after the completion of a detailed analysis to determine the fair value of all assets acquired, but in no event later than one
year following the closing of the Transaction. Accordingly, the final acquisition accounting adjustments could differ materially
from the preliminary amounts presented herein. Any later adjustments to the fair values of the assets acquired and liabilities
assumed, compared to the information shown herein, could also change the portion of the purchase consideration allocable to goodwill
and could impact the operating results of the Company following the closing of the Transaction, including impacts on depreciation
and amortization related to some of the assets. The purchase consideration was preliminarily allocated as follows:
Consideration paid:
|
|
|
|
Convertible debentures with warrants that grant the right to acquire 4,377,800 shares of common stock at an exercise price of $0.01 per share
|
|
$
|
43,778
|
|
|
|
|
|
|
Assets acquired (liabilities assumed):
|
|
|
|
|
Current assets
|
|
$
|
3,273
|
|
Furniture & equipment
|
|
|
2,930
|
|
Acquired technology
|
|
|
21,531
|
|
Tradenames and trademarks
|
|
|
2,153
|
|
Customer relationships
|
|
|
10,765
|
|
In process research and development (IPR&D)
|
|
|
1,292
|
|
Current liabilities
|
|
|
(5,351
|
)
|
Other liabilities
|
|
|
(135
|
)
|
Total net assets acquired
|
|
|
36,458
|
|
|
|
|
|
|
Goodwill
|
|
$
|
7,320
|
|
Note
3. Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 2020
A.
|
Represents AVCT’s
unaudited historical condensed consolidated balance sheet as of September 30, 2020.
|
|
|
B.
|
Represents Kandy’s
unaudited historical statement of assets and liabilities assumed as of September 30, 2020.
|
|
|
C.
|
Represents cash
received from the issuance of Units to SPACOps in connection with the purchase of Kandy.
|
|
|
D.
|
Represents a fair
value adjustment relating to property, plant and equipment.
|
|
|
E.
|
Represents the excess
of the purchase price over the preliminary net assets acquired (see Note 2).
|
|
|
F.
|
Represents
the preliminary fair value adjustment related to intangible assets, and consists of the following:
|
|
|
Estimated
Useful Life
(in years)
|
|
|
Estimated
Fair Value
|
|
Acquired technology
|
|
6
|
|
|
$
|
21,531
|
|
Tradenames and trademarks
|
|
4
|
|
|
|
2,153
|
|
Customer relationships
|
|
10
|
|
|
|
10,765
|
|
In process research and development (IPR&D)
|
|
NA
|
|
|
|
1,292
|
|
|
|
|
|
|
$
|
35,741
|
|
G.
|
Represents accrued
transaction costs consisting of professional fees.
|
|
|
H.
|
Reflects
no impact to the convertible Debentures as the convertible Debentures issued in connection with the Transaction are expected
to be fully offset by the discount as shown in the following table:
|
|
|
|
|
|
|
Discount (discussed in J below)
|
|
|
|
|
|
|
|
Principal
|
|
|
Relative fair
value of warrants
|
|
|
Beneficial
conversion feature
|
|
|
Total
discount
|
|
|
Net
|
|
Issued to Ribbon
|
|
$
|
43,778
|
|
|
$
|
(14,159
|
)
|
|
$
|
(29,619
|
)
|
|
$
|
(43,778
|
)
|
|
$
|
-
|
|
Issued to SPACOps
|
|
|
10,000
|
|
|
|
(3,234
|
)
|
|
|
(6,766
|
)
|
|
|
(10,000
|
)
|
|
|
-
|
|
|
|
$
|
53,778
|
|
|
$
|
(17,393
|
)
|
|
$
|
(36,385
|
)
|
|
$
|
(53,778
|
)
|
|
$
|
-
|
|
I.
|
Represents the transaction accounting adjustments
for liabilities not assumed by AVCT.
|
|
|
J.
|
Represents
the pro forma discount arising from the issuance of the Debentures, consisting of the relative fair value of the warrants
and the effect of a beneficial conversion feature associated with the Debentures (see H above). The relative fair value
of the warrants was determined to be $17,393, using the Black-Scholes model in which the following assumptions were used:
|
|
○
|
stock price volatility – 75%
|
|
○
|
risk-free
interest rate – 0.42%
|
The
beneficial conversion feature, which was evaluated in accordance with the ASC 470-20 “Debt with Conversion and
Other Options” was determined to be $36,385 and arose as a result of the conversion price of the convertible
Debentures being below the stock price on the closing date of the Transaction. The amount represents the intrinsic value
of the embedded beneficial conversion feature, which was limited to the proceeds allocated to the convertible Debentures,
and, along with the relative fair value of the warrants, was recognized as additional paid-in capital and reduced the
carrying value of the convertible Debentures.
|
K.
|
Represents
the accrued transaction costs discussed in G) above.
|
Note 4. Unaudited Pro Forma Condensed Combined
Statement of Operations for the Nine Months Ended September 30, 2020
A.
|
Represents AVCT’s
unaudited condensed consolidated statement of operations for the Successor period April 7, 2020 through September 30, 2020.
|
|
|
B.
|
Represents AVCT’s
unaudited condensed consolidated statement of operations for the Predecessor period January 1, 2020 through April 6, 2020.
|
|
|
C.
|
Represents Kandy’s
unaudited historical abbreviated statement of revenues and direct expenses for the nine months ended September 30, 2020.
|
|
|
D.
|
Represents a portion
of the incremental amortization of identified definite-lived intangible assets for the nine months ended September 30, 2020.
|
|
|
E.
|
Represents a portion
of the incremental amortization of identified definite-lived intangible assets for the nine months ended September 30, 2020,
net of the elimination of transaction costs incurred during the nine months ended September 30, 2020.
|
|
|
F.
|
Represents amortization
of the discount and paid-in-kind interest on the Debentures (See Note 3H above).
|
Note
5. Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31,
2019
A.
|
Represents Computex’s
audited historical consolidated statement of operations for the year ended December 31, 2019.
|
|
|
B.
|
Represents Kandy’s
audited historical abbreviated statement of revenues and direct expenses for the year ended December 31, 2019.
|
|
|
C.
|
Represents a portion
of the incremental amortization of identified definite-lived intangible assets for the year ended December 31, 2019.
|
|
|
D.
|
Represents estimated
nonrecurring transaction-related expenses incurred related to the Transaction (including amounts incurred and paid prior to
the Transaction) and a portion of the incremental amortization of identified definite-lived intangible assets for the year
ended December 31, 2019.
|
|
|
E.
|
Represents the amortization
of the discount and paid-in-kind interest on the Debentures (See Note 3H above).
|
The
proforma adjustments for the year ended December 31, 2019 include the impact of items with a nonrecurring effect on the proforma
condensed combined statements of operations, such as estimated total transaction costs of $2,649.
Annex D
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results
of Operations
The
following discussion and analysis for the nine months ended September 30, 2020 and 2019 should be read in conjunction with
Kandy’s unaudited abbreviated financial statements for the period ended September 30, 2020 and 2019 included
elsewhere in this filing. The discussion and analysis for the year ended December 31, 2019 and 2018 should be read
in conjunction with Kandy’s audited abbreviated financial statements as of and for the year ended December 31, 2019 and
2018, also included elsewhere in this filing.
Kandy
Nine months ended September 30, 2020 versus nine months ended September 30, 2019
|
|
Nine months ended
|
|
|
Increase (decrease)
|
|
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
Revenues
|
|
$
|
10,246
|
|
|
$
|
6,187
|
|
|
$
|
4,059
|
|
|
|
65.6
|
%
|
Cost of revenues
|
|
|
7,469
|
|
|
|
6,052
|
|
|
|
1,417
|
|
|
|
23.4
|
%
|
Gross profit
|
|
|
2,777
|
|
|
|
135
|
|
|
|
2,642
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
12,356
|
|
|
|
11,528
|
|
|
|
828
|
|
|
|
7.2
|
%
|
Sales and marketing
|
|
|
3,371
|
|
|
|
3,521
|
|
|
|
(150
|
)
|
|
|
-4.3
|
%
|
General and administrative
|
|
|
-
|
|
|
|
1,159
|
|
|
|
(1,159
|
)
|
|
|
-100.0
|
%
|
Restructuring and related
|
|
|
356
|
|
|
|
1,508
|
|
|
|
(1,152
|
)
|
|
|
-76.4
|
%
|
Total direct expenses
|
|
|
16,083
|
|
|
|
17,716
|
|
|
|
(1,633
|
)
|
|
|
-9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct expenses in excess of revenues
|
|
$
|
(13,306
|
)
|
|
$
|
(17,581
|
)
|
|
$
|
4,275
|
|
|
|
-24.3
|
%
|
Net
loss
The
net loss for the nine months ended September 30, 2020 was $13.3 million compared with $17.6 million for the nine months ended
September 30, 2019. Discussed below are the revenue and expense factors that primarily contributed to the net loss change.
Revenues
Revenues
were $10.2 million in the nine months ended September 30, 2020 compared with $6.2 million in the nine months ended September 30,
2019, an increase of $4.1 million or 65.6%. The increase was largely attributable to an increase in the customer base during the
nine months ended September 30, 2020 compared with the nine months ended September 30, 2019. In the nine months ended September
30, 2019, there were 54 individually unique customers while in the nine months ended September 30, 2020, the customer base expanded
to 58 customers. In addition to the increased customer base, the customer retention rate became more steady as evidenced by a
significant influx of repeat business as the monthly recurring revenue became more consistent period over period. The increase
in revenue was largely attributed to customers within the top 10 category. In addition, increased R&D costs resulted in increases
in functionality and product effectiveness, thereby positively impacting revenues.
Gross
profit and gross margin
Gross
profit was $2.8 million in the nine months ended September 30, 2020, compared with $0.1 million in the nine months ended September
30, 2019, an increase of $2.6 million. The percentage increase in revenues (65.6%) outpaced the percentage increase in cost of
revenues (23.4%) resulting in a 2,490 basis point increase in the gross margin from 2.2% in the nine months ended September 30,
2019 to 27.1% in the nine months ended September 30, 2020. The improved margins were a result of the combined impact of an expanded
customer base, an increase in recurring revenues, effective economies of scale and synergies, as well as benefits from further
integration into the Ribbon business (integration into Ribbon began in 2017). Also, as revenues increased, upfront costs charged
to cost of revenue began to level off.
Research
and development
Research
and development (or R&D) expenses were $12.4 million in the nine months ended September 30, 2020, compared with $11.5 million
in the nine months ended September 30, 2019, an increase of $0.8 million or 7.2%. The increase was due to strategic decisions
to expand R&D activities to improve product functionalities in order to drive an increase in the customer base, retain existing
business and continue to innovate to keep up with new technological trends.
Sales
and marketing
Sales
and marketing expenses were relatively flat at $3.4 million in the nine months ended September 30, 2020, compared with $3.5 million
in the nine months ended September 30, 2019.
General
and administrative expenses
General
and administrative expenses for the nine months ended September 30, 2019 consisted primarily of stock compensation expenses related
to stock awards granted to a previous executive of Kandy who left the Company during 2019. Accordingly, there were no general
and administrative expenses in the nine months ended September 30, 2020.
Restructuring
and related expenses
During
the years ended December 31, 2019 and 2018, Kandy was part of a restructuring and facilities consolidation initiative implemented
by its then parent, Ribbon. The restructuring initiatives included facility consolidations, refinement of research and development
activities, and a reduction in workforce. In connection with such restructuring, Kandy recorded restructuring and related expenses
of $0.4 million and $1.5 million in the nine months ended September 30, 2020 and September 30, 2019, respectively.
Kandy
year ended December 31, 2019 versus year ended December 31, 2018
|
|
Year ended
|
|
|
Increase (decrease)
|
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
Revenues
|
|
$
|
8,547
|
|
|
$
|
7,281
|
|
|
$
|
1,266
|
|
|
|
17.4
|
%
|
Cost of revenues
|
|
|
8,065
|
|
|
|
6,045
|
|
|
|
2,020
|
|
|
|
33.4
|
%
|
Gross profit
|
|
|
482
|
|
|
|
1,236
|
|
|
|
(754
|
)
|
|
|
-61.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
15,767
|
|
|
|
14,323
|
|
|
|
1,444
|
|
|
|
10.1
|
%
|
Sales and marketing
|
|
|
4,787
|
|
|
|
6,341
|
|
|
|
(1,554
|
)
|
|
|
-24.5
|
%
|
General and administrative
|
|
|
1,163
|
|
|
|
2,350
|
|
|
|
(1,187
|
)
|
|
|
-50.5
|
%
|
Restructuring and related
|
|
|
1,524
|
|
|
|
485
|
|
|
|
1,039
|
|
|
|
214.2
|
%
|
Total direct expenses
|
|
|
23,241
|
|
|
|
23,499
|
|
|
|
(258
|
)
|
|
|
-1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct expenses in excess of revenues
|
|
$
|
(22,759
|
)
|
|
$
|
(22,263
|
)
|
|
$
|
(496
|
)
|
|
|
2.2
|
%
|
Net
loss
The
net loss for the year ended December 31, 2019 was $22.8 million compared with $22.3 million for the year ended December 31, 2018.
Discussed below are the revenue and expense factors that primarily contributed to the net loss change.
Revenues
Revenues
were $8.5 million in the year ended December 31, 2019 compared with $7.3 million in the year ended December 31, 2018, an increase
of $1.3 million or 17.4%. The increase was largely attributable to an increase in sales volumes made to the largest customers,
partially offset by a slight decrease in the customer base, which decreased from 103 customers in the year ended December 31,
2018 to 100 customers in the year ended December 31, 2019. In addition, the customer retention rate improved as evidenced by an
influx of repeat business and an increase in monthly recurring revenues. The increase in revenue was largely attributed to customers
within the top 10 category.
Gross
profit and gross margin
Gross
profit was $0.5 million in the year ended December 31, 2019, compared with $1.2 million in the year ended December 31, 2018, a
decrease of $0.7 million. The percentage increase in revenues (17.4%) was outweighed by the percentage increase in cost of revenues
(33.4%) thereby causing an 1,140 basis points decrease in the gross margin from 17.0% in the year ended December 31, 2018 to 5.6%
in the year ended December 31, 2019. The reduced margins were attributable to increases in employee headcount, salaries and related
costs, contract labor, increased depreciation expenses related to the purchase of new equipment and software as well as increased
expenses allocated from the Kandy parent.
Research
and development
Research
and development expenses were $15.8 million in the year ended December 31, 2019, compared with $14.3 million in the year ended
December 31, 2018, an increase of $1.4 million or 10.1%. The increase was primarily due to a shift in classification of certain
R&D expenses which were reflected as contra revenue in the year ended December 31, 2018, but were reflected as R&D expenses
in the year ended December 31, 2019. During the year ended December 31, 2018, R&D expenses related to revenue sharing arrangements
with certain customers were treated as contra revenue, but when those revenue sharing arrangements came to an end, those R&D
expenses were shifted from contra revenue to R&D expenses.
Sales
and marketing
Sales
and marketing expenses was $4.8 million in the year ended December 31, 2019, compared with $6.3 million in the year ended December
31, 2018, a decrease of $1.6 million or 24.5% due primarily to a reduction in salaries and related costs and a reduction in travel
and entertainment, which were partially offset by increased expenses allocated from the Kandy parent. The reduction in salaries
and related costs were related to a reduction in head count.
General
and administrative expenses
General
and administrative expenses was $1.2 million in the year ended December 31, 2019 compared with $2.4 million in the year ended
December 31, 2018, a decrease of $1.2 million, or 50.5%. The decrease is primarily attributable to reduced salaries and related
expenses as a result of a previous executive of Kandy leaving the Company during 2019.
Restructuring
and related expenses
In
connection with the restructuring activities discussed in the quarter over quarter comparison above, Kandy recorded restructuring
and related expenses of $1.5 million and $0.5 million in the year ended December 31, 2019 and December 31, 2018, respectively.