American Virtual Cloud Technologies, Inc. – “Pure-Play Cloud Communications and Collaboration Company” Files for Bankruptcy; Onetime SPAC Cites Burdensome Public Company Costs, Will Continue Sale Efforts In-Court

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January 11, 2023 – American Virtual Cloud Technologies, Inc. and two affiliate debtors (dba Kandy; Nasdaq: AVCT; AVCT" or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware lead case number 23-10020 (Judge Mary F. Walrath). Atlanta-based AVCT “establishes and operates cloud-based communications marketplaces for telecom carriers*" and is represented by Patrick J. Reilley of Cole Schotz P.C. Further board-authorized engagements include: (i) SOLIC Capital Advisors, LLC and SOLIC Capital, LLC (collectively, “SOLIC”) as financial advisors, (ii) Northland Securities as investment bankers and (iii) Kroll as claims agent.

The Debtors’ lead petition notes between 100 and 200 creditors; estimated assets of $31.1mn; and estimated liabilities between $13.4mn (each as of September 30, 2022, 10-Q here). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Orion Innovation AG ($2.4mn "service vendor and noteholder" claim), (ii) Ribbon Communications ($1.5mn "service vendor and noteholder settlement" claim) and (iii) Ernst & Young ($902k professional services claim).

* The Debtors' 10-Q elaborates: "The Kandy cloud communications platform is a cloud-based, real-time communications platform, offering proprietary unified communications as a service ('UCaaS'), communications platform as a service ('CPaaS'), Microsoft Teams Direct Routing as a Service ('DRaaS'), and SIP Trunking as a Service capabilities (“STaaS”). Kandy is considered to be a pure-play provider of such offerings for enterprise customers."

Goals of the Chapter 11 Filings

The Keough Declaration (defined below) provides: "The Debtors have chosen to use these Chapter 11 Cases to continue their marketing efforts and run a robust sale process, including a public auction…The Debtors believe that the opportunity to leverage a Chapter 11 marketing process – together with the tools afforded to debtors-in-possession, including the opportunity to sell assets free and clear under section 363 of the Bankruptcy Code – is the optimal way to consummate a transaction that delivers value to stakeholders. However, given the Debtors’ waning liquidity position, and after considering all of their alternatives, the Debtors believe that completing their sale process, through an expeditious post-petition marketing process, following several months of marketing efforts that have already taken place prepetition, would best preserve liquidity, help convert existing interest to tangible results, and otherwise maximize the value of the enterprise.

Events Leading to the Chapter 11 Filing

In a declaration in support of first day filings (the “Keough Declaration”) [Docket No. 9], Kevin J. Keough, the Debtor’s CEO provides: “The Debtors need for chapter 11 protection is driven primarily by an inability to operate profitably as a going concern and its waning liquidity position. Since the Computex Business Combination, the Debtors have sustained consistent losses each fiscal quarter.

The Debtors’ need to seek bankruptcy protection is not due to shortcomings in its products, services, or technology. Rather, the Company remains an emerging growth company and as is typical of such companies at this phase in their life cycle, the Company continues to experience negative cash flow from operations while it has sought to grow to a profitable scale and it will, in short order, face a liquidity shortfall.

Although the Debtors have continued to grow revenue and have made tremendous strides recently in reducing costs to improve profitability and cash flows across its businesses, as a public company, the Debtors have a significant cost structure, including regulatory accounting, auditing and financial disclosure filing requirements that necessitate reporting functions and related professional staff and costs, that are disproportionately high in relation to the Company’s revenues. With those costs, together with costs to fund current operations including research and development and capital investment requirements, the Company has struggled to grow to the scale necessary to generate positive cash flow that permits cash self-sufficiency."

Prepetition Marketing Efforts 

The Keough Declaration continues: "…in July/August 2022, the Debtors retained SOLIC Capital Advisors, LLC and SOLIC Capital, LLC (collectively, 'SOLIC'), and Cole Schotz P.C. to assist the Debtors in analyzing their financial position and exploring potential strategic and operating restructuring initiatives. In late August 2022, the Debtors also retained Northland Capital Markets (“Northland”) to advise the Company in connection with a comprehensive strategic review process that could lead to the sale of the Company or selected assets.

Immediately upon its engagement, Northland identified and conducted a targeted outreach, contacting seventy-nine (79) prospective financial and/or strategic partners to gauge interest in a strategic transaction with the Debtors. A majority of those contacted requested more information, e.g., a 'teaser' relative to the opportunity. Twenty-nine (29) parties executed non- disclosure agreements, were provided access to a virtual data room with more than 500 documents (in addition to the commercial and financial information already publicly available in SEC filings) and these prospective buyers have conducted varying levels of diligence. In addition, the Company held sixteen (16) management presentations for prospective buyers. Based on the robust marketing process to date, the Debtors believe there is interest in some or all of the Debtors’ business segments. To date, the Company has received, subject to further due diligence, three (3) written term sheets/letters of intent to date and at least one other verbal expression of interest; with certain parties expressing an interest in acquiring only a portion of the Debtors’ assets (e.g., some parties expressing an interest in the assets relating to UCaaS only, while others expressing an interest in CPaaS/DRaaS only), while others have having expressed an interest in all of the Debtors’ assets."

Prepetition Indebtedness

The Debtors have no secured debt obligations, having satisfied all secured obligations over the course of the past year. Their books and records reflect approximately $6.0mn in liquidated, non-contingent, general unsecured claims.

Corporate History

Keough again: "The debtor holding company, AVCT (formerly, Pensare Acquisition Corp. 'Pensare'), was incorporated in Delaware on April 7, 2016, as a blank-check acquisition company. On April 7, 2020, Pensare consummated a business combination transaction ('Computex Business Combination') in which Pensare acquired Stratos Management Systems, Inc. ('Computex'), a private operating company that does business as Computex Technology Solutions.
In connection with the closing of the Computex Business Combination, the Company changed its name to American Virtual Cloud Technologies, Inc.

On December 1, 2020, pursuant to the terms of an Amended and Restated Purchase Agreement, dated as of December 1, 2020 (the 'Kandy Purchase Agreement'), AVCT acquired the Kandy Communications business from Ribbon Communications, Inc. and certain of its affiliates (collectively, the 'Ribbon Parties'), by acquiring certain assets, assuming certain liabilities and acquiring all of the outstanding membership interests of Kandy Communications

On September 16, 2021, the Company announced that as a result of a decision by the Company’s Board of Directors to explore strategic alternatives previously announced on April 7, 2021, the Board had authorized the Company to focus its strategy on acquisitions and organic growth in its cloud technologies business as well as to explore strategic opportunities for its IT solutions business, including the divestiture of Computex. The Company believed that such changes would allow it to optimize resource allocation, focus on core competencies, and improve its ability to invest in areas of maximal growth potential. On March 15, 2022, the sale of Computex was consummated, completing the Company’s transition to a pure-play cloud communications and collaboration company, centered on the Kandy platform."

About the Debtors

According to the Debtors: “American Virtual Cloud Technologies now operates under the Kandy brand name. Kandy establishes and operates cloud-based communications marketplaces for telecom carriers, offering proprietary API Enablement services such as Microsoft Teams Direct Routing as a Service, and SIP Trunking as a Service capabilities."

The Debtors' latest 10-Q adds: "The Kandy cloud communications platform is a cloud-based, real-time communications platform, offering proprietary unified communications as a service (“UCaaS”), communications platform as a service (“CPaaS”), Microsoft Teams Direct Routing as a Service (“DRaaS”), and SIP Trunking as a Service capabilities (“STaaS”). Kandy is considered to be a pure-play provider of such offerings for enterprise customers.

 As a provider of cloud-based enterprise services, Kandy deploys a global carrier grade cloud communications platform that supports the digital and cloud transformation of mid-market and enterprise customers across virtually any device, on virtually any network, in virtually any location. The Kandy platform is based on a powerful, proprietary multi-tenant, highly scalable, and secure cloud platform that includes pre-built customer engagement tools, based on web real-time communications technology (“WebRTC technology”) that enables frictionless communications. Further, Kandy supports rapid service creation and multiple go to market models including white labelling, multi-tier channel distribution, enterprise direct, and self-service via its SaaS (software as a service) web portals.

Kandy’s cloud-based, real-time communications platform enables service providers, enterprises, software vendors, systems integrators, partners and developers to enrich their applications and their services with real-time contextual communications empowering the API (Application Programming Interface) economy. With Kandy’s platform, companies of various sizes and types can quickly embed real-time communications capabilities into their existing applications and business processes, providing a more engaging user experience.

While the cloud communications business is focused on highly complex, medium and large enterprise deployments, the customer experience is augmented by our managed services capabilities. In addition, our strategic partnerships with companies such as AT&T, IBM/Kyndryl, and Etisalat, give us access to a marquee customer base and the ability to sell end-to-end solutions.

Corporate Structure Chart


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