NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
InterCloud Systems, Inc.
(the “Company”) was incorporated on November 22, 1999 under the laws of the State of Delaware. The Company began filing
periodic reports with the Securities and Exchange Commission in November 2000. On October 31, 2013, the Company’s common
stock and warrants were listed on The NASDAQ Capital Market under the symbols “ICLD” and “ICLDW,” respectively.
Since
January 2014, the Company has completed the following material and other acquisitions:
|
●
|
Integration
Partners-NY Corporation.
In January 2014, the Company acquired Integration Partners-NY Corporation (“IPC”),
a full-service voice and data network engineering firm based in New York. IPC serves both corporate enterprises, government entities and telecommunications
service providers.
|
|
●
|
RentVM,
Inc.
In February 2014, the Company acquired RentVM, Inc. (“RentVM”), a New Jersey-based provider of
infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS) and software-as-a-service (SaaS) technology for small to mid-sized
businesses, enterprise, and carrier customers across all major verticals. Iaas, Paas and Saas allow customers to run their applications
on RentVM equipment without the customer purchasing capital equipment in a private, public, or hybrid cloud environment. RentVM
expands the Company’s managed services capabilities by providing a software-defined data center (SDDC) platform to offer
enterprise-grade cloud computing solutions.
|
|
●
|
Highwire
Broadview Technologies, Inc.
On April 1, 2014, the Company’s subsidiary, ADEX Corporation, acquired the assets of
Broadview Technologies, Inc., DBA High Wire Networks (“High Wire”), a telecommunications infrastructure engineering
firm based in Alabama.
|
|
●
|
Nottingham
Enterprises LLC.
In July 2014, the Company purchased a 40% interest of Nottingham Enterprises LLC (“Nottingham”)
,
a reseller of telecommunications hardware.
|
|
●
|
VaultLogix,
LLC.
In October 2014, the Company acquired VaultLogix, LLC and certain related entities (“VaultLogix”), a
leading provider of cloud backup services to nearly 10,000 businesses around the world. VaultLogix safeguards a wide range
of enterprise-class operating systems and applications through its unique combination of encryption, block-level data duplication
and compression. In addition, through its partner program, VaultLogix offers software branding, a robust partner portal and
dedicated account management.
|
|
●
|
PCS
Holding LLC.
On December 1, 2014, the Company’s subsidiary, VaultLogix, purchased the assets of PCS Holding LLC,
DBA Axim Cloud (“Axim”). Axim sells Amazon web services, including cloud storage services.
|
|
●
|
Logical Link.
On December 1, 2014, the Company’s subsidiary, AW Solutions LLC, acquired the assets of FRJ, LLC, DBA Logical Link (“Logical
Link”), an Outside Plant (OSP) engineering company that specializes in field design and drafting of Wireline, Fiber
and distributed antenna system (DAS) deployments. Logical Link also performs construction and installation through subcontractors.
|
Business
Combinations
The
Company accounts for its business combinations under the provisions of Accounting Standards Codification ("ASC") Topic
805-10,
Business Combinations
("ASC 805-10"), which requires that the purchase method of accounting be used for
all business combinations. Assets acquired and liabilities assumed, including non-controlling interests, are recorded at the date
of acquisition at their respective fair values. ASC 805-10 also specifies criteria that intangible assets acquired in a business
combination must meet to be recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the
fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are
recognized separately from the business combinations and are expensed as incurred. If the business combination provides for contingent
consideration, the Company records the contingent consideration at fair value at the acquisition date and any changes in fair
value after the acquisition date are accounted for as measurement-period adjustments if they pertain to additional information
about facts and circumstances that existed at the acquisition date and that the Company obtained during the measurement period.
Changes in fair value of contingent consideration resulting from events after the acquisition date, such as earn-outs, are recognized
as follows: 1) if the contingent consideration is classified as equity, the contingent consideration is not re-measured and its
subsequent settlement is accounted for within equity, or 2) if the contingent consideration is classified as a liability, the
changes in fair value are recognized in earnings.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
The
estimated fair value of net assets acquired, including the allocation of the fair value to identifiable assets and liabilities,
was determined using Level 3 inputs in the fair value hierarchy (see Fair Value of Financial Instruments in Note 1). The estimated
fair value of the net assets acquired was determined using the income approach to valuation based on the discounted cash flow
method. Under this method, expected future cash flows of the business on a stand-alone basis are discounted back to a present
value. The estimated fair value of identifiable intangible assets, consisting of customer relationships, the trade names and non-compete
agreements acquired, also were determined using an income approach to valuation based on excess cash flow, relief of royalty and
discounted cash flow methods.
The
discounted cash flow valuation method requires the use of assumptions, the most significant of which include: future revenue growth,
future earnings before interest, taxes, depreciation and amortization, estimated synergies to be achieved by a market participant
as a result of the business combination, marginal tax rate, terminal value growth rate, weighted average cost of capital and discount
rate.
The
excess earnings method used to value customer relationships requires the use of assumptions, the most significant of which include:
the remaining useful life, expected revenue, survivor curve, earnings before interest and tax margins, marginal tax rate, contributory
asset charges, discount rate and tax amortization benefit.
The
most significant assumptions under the relief of royalty method used to value trade names include: estimated remaining useful
life, expected revenue, royalty rate, tax rate, discount rate and tax amortization benefit. The discounted cash flow method used
to value non-compete agreements includes assumptions such as: expected revenue, term of the non-compete agreements, probability
and ability to compete, operating margin, tax rate and discount rate. Management, with the assistance of a third-party valuation
specialist, has developed these assumptions on the basis of historical knowledge of the business and projected financial information
of the Company. These assumptions may vary based on future events, perceptions of different market participants and other factors
outside the control of management, and such variations may be significant to estimated values.
Going Concern Uncertainty, Financial Condition
and Management’s Plans
The Company’s management
believes that there is substantial doubt about the Company’s ability to continue as a going concern. The Company believes
that its available cash balance as of the date of this filing will not be sufficient to fund its anticipated level of operations
for at least the next 12 months. The Company’s management believes that its ability to continue operations depends on the
ability to sustain and grow revenue and results of operations as well as the ability to access capital markets when necessary
to accomplish the Company’s strategic objectives. The Company’s management believes that the Company will continue
to incur losses for the immediate future. For the quarter ended September 30, 2015, the Company has generated gross profits from
operations and is trying to achieve positive cash flow from operations. The Company expects to finance future cash needs from
the results of operations and, depending on the results of operations, the Company may need additional equity or debt financing
until the Company can achieve profitability and positive cash flows from operating activities, if ever.
During the nine months ended
September 30, 2015 and the year ended December 31, 2014, the Company suffered recurring losses from operations. At September 30,
2015 and December 31, 2014, the Company had stockholders’ equity of $29,974 and $36,240, respectively. The decrease of $9,337
in the Company’s working capital from December 31, 2014 to September 30, 2015 was primarily the result of $12,920 in related-party
notes payable and $10,683 in term loans becoming due within one year as of September 30, 2015, $1,278 in amortization of deferred
loan costs, $1,117 in amortization of prepaid expenses, $975 of derivative liabilities becoming due within one year as of September
30, 2015, and a decrease in a cash of $1,613 due primarily to the increase in net loss. The decrease in working capital was offset
by the restructuring of approximately $9,370 of related-party notes payable, as described in Note 13 Related Parties, and re-valuation
of $2,485 in contingent consideration.
On
or prior to September 30, 2016, the Company has obligations relating to the payment of indebtedness as follows:
|
●
|
$6,865
related to promissory notes held by a related party that are due on or before September
30, 2016;
|
|
●
|
$6,082
related to term loans due on May 15, 2016;
|
|
●
|
$5,755
related to a promissory note held by a related party that is due on May 30, 2016;
|
|
●
|
$2,000
related to term loans that are payable in quarterly installments through June 2016;
|
|
●
|
$1,231
of amortization payments due within one year related to a term loan due on February 6, 2017
;
|
|
●
|
$1,060
related to a term loan due on May 14, 2016;
|
|
●
|
$308
of amortization payments due within one year related to a term loan due on February 11, 2017
;
|
|
●
|
$225
related to a promissory note held by a related party that is due on May 30, 2016;
|
|
●
|
$134
related to current payments due on bank loans; and
|
|
●
|
$75
related to a promissory note held by a related party that is due on demand.
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
The Company anticipates
meeting its cash obligations on indebtedness that is payable on or prior to September 30, 2016 from earnings from operations and
possibly from the proceeds of additional indebtedness or equity raises. If the Company is not successful in obtaining additional
financing when required, the Company expects that it will be able to renegotiate and extend certain of its notes payable as required
to enable it to meet its remaining debt obligations as they become due, although there can be no assurance that the Company will
be able to do so.
The
Company’s future capital requirements for its operations will depend on many factors, including the profitability of its
businesses, the number and cash requirements of other acquisition candidates that the Company pursues, and the costs of operations.
The Company has been investing in sales personnel in anticipation of increasing revenue opportunities in the cloud and managed
services segments of its business, which contributed to the losses from operations. The Company’s management has taken several
actions to ensure that it will have sufficient liquidity to meet its obligations, including the reduction of certain general and
administrative expenses, consulting expenses and other professional services fees. During the nine months ended September 30,
2015, the Company restructured the terms of certain related-party promissory notes and term loans which extended the maturity
dates and reduced the interest rates accruing on such notes and loans. Additionally, if the Company’s actual revenues are
less than forecasted, the Company anticipates implementing headcount reductions to a level that more appropriately matches then-current
revenue and expense levels. The Company is evaluating other measures to further improve its liquidity, including the sale of equity
or debt securities and entering into joint ventures with third parties. Lastly, the Company may elect to reduce certain related-party
and third-party debt by converting such debt into common shares. The Company’s management believes that these actions will
enable the Company to meet its liquidity requirements through September 30, 2016. There is no assurance that the Company will
be successful in any capital-raising efforts that it may undertake to fund operations over the next 12 months.
The
Company plans to generate positive cash flow from its recently-completed acquisitions to address some of the liquidity concerns.
However, to execute the Company’s business plan, service existing indebtedness and implement its business strategy, the
Company anticipates that it will need to obtain additional financing from time to time and may choose to raise additional funds
through public or private equity or debt financings, a bank line of credit, borrowings from affiliates or other arrangements.
The Company cannot be sure that any additional funding, if needed, will be available on terms favorable to the Company or at all.
Furthermore, any additional capital raised through the sale of equity or equity-linked securities may dilute the Company’s
current stockholders’ ownership and could also result in a decrease in the market price of the Company’s common stock.
The terms of any securities issued by the Company in future capital transactions may be more favorable to new investors and may
include the issuance of warrants or other derivative securities, which may have a further dilutive effect. The Company also may
be required to recognize non-cash expenses in connection with certain securities it issues, such as convertible notes and warrants,
which may adversely impact the Company’s financial condition. Furthermore, any debt financing, if available, may subject
the Company to restrictive covenants and significant interest costs. There can be no assurance that the Company will be able to
raise additional capital, when needed, to continue operations in their current form.
Principles
of Consolidation and Accounting for Investments in Affiliate Companies
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in
the United States. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries, which include Tropical Communications, Inc. (“Tropical”) (since August 2011), Rives-Monteiro Leasing,
LLC (“RM Leasing”) (since December 2011), ADEX Corporation, ADEX Puerto Rico, LLC and HighWire (collectively, “ADEX”
or “ADEX entities”) (since September 2012), TNS, Inc. (“TNS”) (since September 2012), AW Solutions, Inc.
(“AWS”) and AW Solutions Puerto Rico, LLC (“AWS Puerto Rico”) (collectively, the “AWS Entities”)
(since April 2013), IPC (since January 2014), RentVM (since February 2014), and VaultLogix (since October 2014). All significant
inter-company accounts and transactions have been eliminated in consolidation.
The
Company consolidates all entities in which it has a controlling voting interest and a variable interest in a variable interest
entity (“VIE”) in which the Company is deemed to be the primary beneficiary.
The
unaudited condensed consolidated financial statements include the accounts of Rives-Montiero Engineering, LLC ("RM Engineering")
(since December 2011), in which the Company owns an interest of 49%. The Company has the ability to exercise its call option to
acquire the remaining 51% of RM Engineering for a nominal amount and thus makes all significant decisions related to RM Engineering
even though it absorbs only 49% of the losses. Additionally, substantially all of the entity’s activities either involve
or are conducted on behalf of the entity by the 51% holder of RM Engineering.
The
unaudited condensed consolidated financial statements include the accounts of Nottingham Enterprises LLC (“Nottingham”),
in which the Company owns an interest of 40%. Nottingham is a VIE because it meets the following criteria: (i) the entity has
insufficient equity to finance its activities without additional subordinated financial support from other parties and the 60%
owner guarantees its debt, (ii) the voting rights of some investors are not proportional to their obligations to absorb the expected
losses of the legal entity, and (iii) substantially all of the legal entity’s activities either involve or are conducted
on behalf of an investor that has disproportionately few voting rights. The Company has the ability to exercise its call option
to acquire the remaining 60% of Nottingham for a nominal amount and thus makes all significant decisions related to Nottingham
even though it absorbs only 40% of the losses. Additionally, substantially all of the entity’s activities either involve
or are conducted on behalf of the entity by the 60% holder of Nottingham.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
The
unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which
are, in the opinion of management, necessary for a fair presentation of such statements. These unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”)
pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Additionally, the results
of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be
expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the
Company’s audited consolidated financial statements for the year ended December 31, 2014 included in the Company’s
2014 Annual Report on Form 10-K, filed with the SEC on March 23, 2015.
Segment
Information
As
of December 31, 2014, the Company operated in four operating segments - as an applications and infrastructure provider, as a professional
services provider, as a cloud services provider and as a managed services provider. The applications and infrastructure segment
provides engineering and professional consulting services and voice, data and optical solutions. The engineering, design, installation
and maintenance services of the applications and infrastructure segment support the build-out and operation of enterprise, fiber
optic, Ethernet and wireless networks. The professional services segment provides outsourced services to the wireless and wireline
industry and information technology industry. The cloud services segment provides cloud computing and storage services to customers.
The managed services segment provides hardware and software products to customers and provides maintenance and support for those
products. As of December 31, 2014, the Company had concluded that it had three reportable segments, the applications and infrastructure
operating segment and the professional services operating segment were considered individual reporting segments, while the cloud
services and managed services operating segments were aggregated into one reportable segment.
During
the three months ended March 31, 2015, the Company re-evaluated its cloud services and managed services reportable segment. The
Company concluded that, due to the material nature of the cloud services operating activities and the gross margins achieved within
the managed services and cloud services operating segments, the cloud services segment should be presented separately within the
unaudited condensed consolidated financial statements. As such, the Company concluded that it had four reportable segments as
of September 30, 2015: applications and infrastructure, professional services, managed services, and cloud services.
The
Company’s reporting units have been aggregated into one of four operating segments due to their similar economic characteristics,
products, or production and distribution methods. The first operating segment is applications and infrastructure, which is comprised
of the components TNS, the AWS Entities, Tropical and RM Engineering. The Company’s second operating segment is professional
services, which consists of the ADEX entities. The Company’s third operating segment is managed services, which consists
of the IPC and RentVM components and the fourth operating segment is cloud services, which consists of the VaultLogix component.
The operating segments mentioned above constitute reporting segments.
Revenue
Recognition
The
Company’s revenues are generated from its four reportable segments: applications and infrastructure, professional
services, managed services, and cloud services. The Company recognizes revenue on arrangements in accordance with ASC Topic
605-10, “
Revenue Recognition
”. The Company recognizes revenue only when the price is fixed or
determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the resulting
receivable is reasonably assured.
The
applications and infrastructure segment revenues are derived from contracted services to provide technical engineering services
along with contracting services to commercial and governmental customers. The contracts of TNS, Tropical and RM Engineering provide
that payment for the Company’s services may be based on either direct labor hours at fixed hourly rates or fixed-price contracts.
The services provided under the contracts are generally provided within one month. Occasionally, the services may be provided
over a period of up to six months.
The AWS Entities generally
recognizes revenue using the percentage of completion method. Revenues and fees on these contracts were recognized utilizing the
efforts-expended method, which used measures such as task duration and completion. The efforts-expended approach is an input method
used in situations where it is more representative of progress on a contract than the cost-to-cost or the labor-hours methods.
Provisions for estimated losses on uncompleted contracts, if any, are made in the period in which such losses are determined.
Changes in job performance conditions and final contract settlements may result in revisions to costs and income, which are recognized
in the period in which revisions are determined.
The AWS Entities also generate
revenue from service contracts with certain customers. These contracts are accounted for under the proportional performance method.
Under this method, revenue is recognized in proportion to the value provided to the customer for each project as of each reporting
date.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
The
revenues of the Company’s professional services segment, which is comprised of the ADEX subsidiaries, are derived from contracted
services to provide technical engineering and management solutions to large voice and data communications providers, as specified
by their clients. The contracts provide that payments made for the Company’s services may be based on either direct labor
hours at fixed hourly rates or fixed-price contracts. The services provided under these contracts are generally provided within
one month. Occasionally, the services may be provided over a period of up to four months. If it is anticipated that the services
will span a period exceeding one month, depending on the contract terms, the Company will provide either progress billing at least
once a month or upon completion of the clients’ specifications. The aggregate amount of unbilled work-in-progress recognized
as revenues was insignificant at September 30, 2015 and 2014, respectively.
ADEX’s
HighWire division generates revenue through its telecommunications engineering group, which contracts with telecommunications
infrastructure manufacturers to install the manufacturer’s products for end users. The Highwire division recognizes revenue
using the proportional performance method. Under the proportional performance method, the Company recognizes revenue when a project
within a contract is completed. Management judgments and estimates must be made and used in connection with revenue recognized
using the proportional performance method. If management made different judgments and estimates, then the amount and timing of
revenue for any period could differ materially from the reported revenue.
The
Company’s TNS and IPC subsidiaries, as well as ADEX’s HighWire division, sometimes requires customers to provide a
deposit prior to beginning work on a project. When this occurs, the deposit is recorded as deferred revenue and is recognized
in revenue when the work is complete.
The
Company’s IPC subsidiary, which is included in the Company’s managed services segment, is a value-added reseller whose
revenues are generated from the resale of voice, video and data networking hardware and software contracted services for design,
implementation and maintenance services for voice, video, and data networking infrastructure. IPC’s customers are higher
education organizations, governmental agencies and commercial customers. IPC also provides maintenance and support and professional
services. For certain maintenance contracts, IPC assumes responsibility for fulfilling the support to customers and recognizes
the associated revenue either on a ratable basis over the life of the contract or, if a customer purchases a time and materials
maintenance program, as maintenance is provided to the customer. Revenue for the sale of third-party maintenance contracts
is recognized net of the related cost of revenue. In a maintenance contract, all services are provided by our third-party
providers and as a result, the Company concluded that IPC is acting as an agent and recognizes revenue on a net basis at the date
of sale with revenue being equal to the gross margin on the transaction. As IPC is under no obligation to perform additional
services, revenue is recognized at the time of sale as opposed to over the life of the maintenance agreement.
IPC
also generates revenue through the sale of a subscription-based cloud service to its customers. Revenue related to these customers
is deferred until the services are performed.
For
multiple-element arrangements, IPC recognizes revenue in accordance with ASC 605-25, “
Arrangements with Multiple Deliverables
”.
The Company allocates revenue for such arrangements based on the relative selling prices of the elements applying the following
hierarchy: first vendor specific objective evidence (“VSOE”), then third-party evidence (“TPE”) of selling
price if VSOE is not available, and finally the Company’s estimate of the selling price if neither VSOE nor TPE is available.
VSOE exists when the Company sells the deliverables separately and represents the actual price charged by the Company for each
deliverable. Estimated selling price reflects the Company’s best estimate of what the selling prices of each deliverable
would be if it were sold regularly on a stand-alone basis taking into consideration the cost structure of the Company’s
business, technical skill required, customer location and other market conditions. Each element that has stand-alone value is
accounted for as a separate unit of accounting. Revenue allocated to each unit of accounting is recognized when the service is
provided or the product is delivered.
The
Company’s VaultLogix subsidiary, which is included in the Company’s cloud services segment, provides on-line data
backup services to its customers. Revenue for these customers is deferred until the services are performed.
Deferred
Loan Costs
Deferred loan costs are
capitalized and amortized to interest expense using the effective interest method over the terms of the related debt agreements.
The amount of amortization of deferred loan costs, which was recorded as interest expense, in the three months ended September
30, 2014 was $167. There was no amortization related to deferred loan costs during the three months ended September 30, 2015.
The amount of amortization of deferred loan costs, which was recorded as interest expense, in the nine months ended September
30, 2015 and 2014 was $475 and $1,165, respectively. As a result of the conversion of a portion of the Company’s convertible
debentures and a term loan in the aggregate principal amount of $13,750 at various dates during 2014, the Company recorded $722
of accelerated amortization of the deferred loan costs related to that debt for the nine months ended September 30, 2014.
Inventory
The inventory balance
at September 30, 2015 and December 31, 2014 relates to the Company’s IPC subsidiary. IPC purchases inventory for resale
to customers and records it at lower of cost or market until sold. Inventory consisted of networking and telecommunications equipment
that was purchased and not delivered to customers as of September 30, 2015 and December 31, 2014, respectively.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
Goodwill
and Indefinite Lived Intangible Assets
Goodwill
was generated through the acquisitions made by the Company. As the total consideration paid exceeded the value of the net assets
acquired, the Company recorded goodwill for each of the completed acquisitions. At the date of acquisition, the Company performed
a valuation to determine the value of the intangible assets, along with the allocation of assets and liabilities acquired. The
goodwill is attributable to synergies and economies of scale provided to the Company by the acquired entity.
The
Company tests its goodwill and indefinite-lived intangible assets for impairment at least annually (as of December 31) and whenever
events or circumstances change that indicate impairment may have occurred. A significant amount of judgment is involved in determining
if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in the Company’s
expected future cash flows; a sustained, significant decline in the Company’s stock price and market capitalization; a significant
adverse change in legal factors or in the business climate of its segments; unanticipated competition; and slower growth rates.
Any adverse change in these factors could have a significant impact on the recoverability of goodwill, the indefinite-lived intangible
assets and the Company’s consolidated financial results.
As
of September 30, 2015 and December 31, 2014, respectively, the Company did not identify any indicators of impairment.
Commitments
and Contingencies
In the normal course
of business, the Company is subject to various contingencies. The Company records any contingencies in the consolidated financial
statements when it is probable that a liability will be incurred and the amount of the loss is reasonably estimable, or otherwise
disclosed, in accordance with ASC Topic 450,
Contingencies
("ASC 450"). Significant judgment is required in both
the determination of probability and the determination as to whether a loss is reasonably estimable. In the event the Company
determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes
to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and
in compliance with ASC 450. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued,
the Company will, when applicable, adjust the accrual in the period in which the determination is made, disclose an estimate of
the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole
or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.
Purported Class Action Suit
In March 2014, a complaint
entitled
In re InterCloud Systems Sec. Litigation,
Case No. 3:14-cv-01982 (D.N.J.)
was filed in the United
States District Court for the District of New Jersey against the Company, the Company’s Chairman of the Board and Chief
Executive Officer, Mark Munro, The DreamTeamGroup and MissionIR, as purported securities advertisers and investor relations firms,
and John Mylant, a purported investor and investment advisor. The complaint was purportedly filed on behalf of a class of certain
persons who purchased the Company’s common stock between November 5, 2013 and March 17, 2014. The complaint alleged violations
by the defendants (other than Mark Munro) of Section 10(b) of the Exchange Act, and other related provisions in connection with
certain alleged courses of conduct that were intended to deceive the plaintiff and the investing public and to cause the members
of the purported class to purchase shares of the Company’s common stock at artificially inflated prices based on untrue
statements of a material fact or omissions to state material facts necessary to make the statements not misleading. The complaint
also alleged that Mr. Munro and the Company violated Section 20 of the Exchange Act as controlling persons of the other defendants.
The complaint seeks unspecified damages, attorney and expert fees, and other unspecified litigation costs.
On November 3, 2014,
the United States District Court for the District of New Jersey issued an order appointing Robbins Geller Rudman & Dowd LLP
as lead plaintiffs’ counsel and Cohn Lifland Pearlman Herrmann & Knopf LLP as liaison counsel for the pending actions.
The lead filed an amended complaint in January 2015 adding additional third-party defendants. The Company filed a motion to dismiss
the amended complaint in late January 2015 and the plaintiffs filed a second amended complaint in early March 2015. The Company
filed a motion to dismiss the second amended complaint on March 13, 2015. The Company’s motion to dismiss was denied by
the Court on October 29, 2015. The Court held a status conference on February 29, 2016, and entered a PreTrial Scheduling Order
on February 29, 2016. The parties are currently engaged in discovery.
Derivative Action
In January 2016, a derivative
compliant entitled
Michael E. Sloan, derivatively and on behalf of InterCloud Systems, Inc. v. Mark Munro, Mark F. Durfee,
Charles K. Miller, Neal Oristano, Daniel J. Sullivan, Roger M. Ponder, Lawrence M. Sands, Frank Jadevia, and Scott Davis, Defendants,
and InterCloud Systems, Inc., Nominal Defendant,
Case No. 11878 (DE Chancery)
was filed in the Delaware Chancery
Court. This action arises out of the same conduct at issue in the purported class action lawsuit. In the complaint, nominal plaintiff
alleges that the individual defendants breached their fiduciary duty as directors and officers, abused control, grossly mismanaged,
and unjustly enriched themselves by having knowingly hired a stock promotion firm that caused analyst reports to be disseminated
that falsely stated they were not paid for by such stock promotion firm and the Company, and were written on behalf of the Company
for the purpose of promoting the Company and driving up its stock price. Plaintiffs seek unspecified damages, amendments to the
Company’s articles of incorporation and by-laws, disgorgement from the individual defendants and costs and disbursements
in the action. The defendants agreed to accept service on March 21, 2016 and counsel are negotiating a schedule to answer, move
to dismiss or otherwise respond to the complaint.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
IPC-Related Litigation
The Company acquired
IPC in January 2014, and during 2014 advised the sellers of IPC that a post-closing financial audit of IPC’s historical
financial statements showed a discrepancy in the adjusted EBITDA of IPC as represented by the sellers. The Company made a claim
for such misrepresentation against a cash portion of the IPC purchase price that remains in escrow. In January 2015, a complaint
was filed in the United States District Court of the Southern District of New York against the Company, Mr. Munro and Daniel J.
Sullivan, the Company’s Chief Accounting Officer and former Chief Financial Officer. The complaint alleges, among other
claims, the Company’s breach of contract, breach of implied covenant of good faith and fair dealing and unjust enrichment
relating to the Company’s purported failure to pay certain post-closing purchase price payments to the sellers of IPC in
connection with the Company’s purchase of IPC in January 2014. The complaint also alleges that Messrs. Munro and Sullivan
intentionally interfered with such contractual obligations of the Company under the related stock purchase agreement between the
Company and the plaintiffs. The complaint seeks unspecified damages, attorney and expert fees and other unspecified litigation
costs. In addition, the complaint seeks specific performance of the enforcement of the terms of the purchase contract and the
Company’s payment of not less than $2.5 million.
On April 23, 2015, the
Company and the other defendants filed a motion to dismiss the principal substantive claims in the complaint with the exception
of the claim for breach of contract. On January 12, 2016, the court granted the Company’s motion to dismiss the claims for
breach of the covenant of good faith and fair dealing, for intentional breach, for estoppel and for declaratory relief, but denied
the Company’s motions to dismiss the claims for unjust enrichment and for tortious interference with contractual relations
against Messrs. Munro and Sullivan. On February 9, 2016, the Company filed its answer with respect to the remaining claims in
this action and counterclaims based on the individual plaintiffs’ breach of contract and misrepresentations in the purchase
agreement.
Securities and Exchange Commission Subpoenas
On May 21, 2014, the
Company received a subpoena from the Securities and Exchange Commission (the “SEC”) that stated that the staff of
the SEC is conducting an investigation
In the Matter of Galena Biopharma, Inc. File No. HO 12356 (now known as “In the
Matter of Certain Stock Promotions”)
and that the subpoena was issued to the Company as part of an investigation as
to whether certain investor relations firms and their clients engaged in market manipulation. The subpoena and accompanying letter
did not indicate whether the Company is, or is not, under investigation. Since May 2014, the Company provided testimony to the
SEC and produced documents in response to that subpoena and several additional subpoenas received from the SEC in connection with
that matter, including a subpoena issued on March 1, 2016 requesting information relating to a transaction involving our Series
H preferred shares in December 2013.
In connection with the
SEC investigation, in May 2015, the Company received information from the SEC that it is continuing an investigation of the Company
and certain of its current and former officers, consultants of the Company and others, of “possible violation[s]”
of Section 17(a) of the Securities Act and Sections 9(a) and 10(b) of the Exchange Act and the rules of the SEC thereunder in
the offer or sale of securities and certain other matters with respect to which the SEC claims it has information, including the
possible market manipulation of the Company’s securities dating back to January 2013. Based upon the Company’s internal
investigations, the Company does not believe either the Company or any of its current or former officers or directors engaged
in any activities that violated applicable securities laws. The Company intends to continue to work with the staff of the SEC
towards a resolution and to supplement the Company’s disclosure regarding the SEC’s investigation accordingly.
The Company is unaware
of the scope or timing of the SEC’s investigation. As a result, the Company does not know how the SEC investigation is proceeding,
when the investigation will be concluded, or what action, if any, might be taken in the future by the SEC or its staff as a result
of the matters that are the subject of its investigation. The Company is seeking to cooperate with the SEC in its investigation.
The Company intends
to dispute these claims and to defend these litigations vigorously. However, due to the inherent uncertainties of litigation,
the ultimate outcome of these litigations is uncertain. An unfavorable outcome in either litigation could materially and adversely
affect the Company's business, financial condition and results of operations.
Currently, there is
no material litigation pending against the Company other than as disclosed in the paragraphs above. From time to time, the Company
may become a party to litigation and subject to claims incident to the ordinary course of the Company's business. Although the
results of such litigation and claims in the ordinary course of business cannot be predicted with certainty, the Company believes
that the final outcome of such matters will not have a material adverse effect on the Company's business, results of operations
or financial condition. Regardless of outcome, litigation can have an adverse impact on the Company because of defense costs,
diversion of management resources and other factors.
As of September 30,
2015, no accruals for loss contingencies have been recorded as the outcomes of these cases are neither probable or reasonably
estimable.
The Company has obligations
contingent on the performance of its subsidiaries. These contingent obligations, payable to the former owners of the subsidiaries,
are based on metrics that contain escalation clauses. The Company believes that the amounts recorded within the liabilities section
of the consolidated balance sheets are indicative of fair value and are also considered the most likely payout of these obligations.
If conditions were to change, these liabilities could potentially impact the Company’s results of operations, financial
condition and future cash flows.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
Stock-Based
Compensation
The Company accounts for
stock-based compensation in accordance with ASC Topic 718,
Compensation-Stock Compensation
("ASC Topic 718").
Under the fair value recognition provisions of this topic, stock-based compensation cost is measured at the grant date based on
the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, based
on the terms of the awards. The Company adopted a formal performance incentive plan in December 2012 and updated the plan in 2015.
The shares issued under the 2012 Plan remain in effect as of September 30, 2015. The Company issued options prior to the adoption
of this plan, but the amount was not material. Historically, the Company has awarded stock grants to certain of its employees
and consultants that did not contain any performance or service conditions. Starting in January 2014, the Company has issued stock
grants with and without performance or service conditions. Compensation expense included in the Company’s unaudited condensed
consolidated statement of operations includes the fair value of the awards at the time of issuance. When common stock was issued,
it was valued at the trading price on the date of issuance and was expensed as it was issued. When common stock is forfeited,
the Company reverses any stock compensation expense and records the return of shares within treasury stock.
Net
Loss Per Share
The
Company follows ASC 260,
Earnings Per Share
, which requires presentation of basic and diluted earnings per share (“EPS”)
on the face of the income statement for all entities with complex capital structures, and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In the accompanying
financial statements, basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number
of shares of common stock outstanding during the period. Diluted EPS excluded all dilutive potential shares if their effect was
anti-dilutive.
The
following sets forth the computation of diluted EPS for the three and nine months ended September 30, 2014:
|
|
Three months ended September 30, 2014
|
|
|
Nine months ended September 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
(Revised)
|
|
|
|
Net loss (Numerator)
|
|
|
Shares (Denominator)
|
|
|
Per Share Amount
|
|
|
Net loss (Numerator)
|
|
|
Shares (Denominator)
|
|
|
Per Share Amount
|
|
Basic EPS
|
|
$
|
(8,642
|
)
|
|
|
13,313,973
|
|
|
$
|
(0.65
|
)
|
|
$
|
(8,259
|
)
|
|
|
11,554,715
|
|
|
$
|
(0.71
|
)
|
Change in fair value of derivative instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(21,590
|
)
|
|
|
-
|
|
|
|
-
|
|
Loss on conversion of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,103
|
|
|
|
-
|
|
|
|
-
|
|
Interest expense related to convertible instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,489
|
|
|
|
-
|
|
|
|
-
|
|
Dilutive shares related to warrants
|
|
|
-
|
|
|
|
62,566
|
|
|
|
-
|
|
|
|
-
|
|
|
|
215,223
|
|
|
|
-
|
|
Dilutive shares related to 12% Convertible Debentures convertible feature
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
592,258
|
|
|
|
-
|
|
Dilutive shares related to Forward Investments, LLC convertible feature
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,018,082
|
|
|
|
-
|
|
Dilutive shares related to 31 Group, LLC convertible feature
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
235,479
|
|
|
|
-
|
|
Dilutive shares related to convertible promissory note to former owner of Nottingham
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,936
|
|
|
|
-
|
|
Dilutive EPS
|
|
$
|
(8,642
|
)
|
|
|
13,376,539
|
|
|
$
|
(0.65
|
)
|
|
$
|
(19,257
|
)
|
|
|
13,653,693
|
|
|
$
|
(1.41
|
)
|
Basic net loss per share
is based on the weighted average number of common and common-equivalent shares outstanding. Potential common shares includable
in the computation of fully-diluted per share results are not presented for the three or nine months ended September 30, 2015,
respectively, in the unaudited condensed consolidated financial statements as their effect would be anti-dilutive.
Basic
loss per common share is computed based on the weighted average number of shares outstanding during the period. Diluted loss per
share is computed in a manner similar to the basic loss per share, except the weighted-average number of shares outstanding is
increased to include all common shares, including those with the potential to be issued by virtue of warrants, options, convertible
debt and other such convertible instruments. Diluted loss per share contemplates a complete conversion to common shares of all
convertible instruments only if they are dilutive in nature with regards to earnings per share.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
The
anti-dilutive shares of common stock outstanding for the three and nine months ended September 30, 2015 and 2014 were as follows:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
175,000
|
|
|
|
-
|
|
|
|
175,000
|
|
|
|
-
|
|
Warrants
|
|
|
1,025,000
|
|
|
|
283,870
|
|
|
|
1,025,000
|
|
|
|
-
|
|
Convertible notes
|
|
|
1,845,789
|
|
|
|
273,415
|
|
|
|
1,947,141
|
|
|
|
235,479
|
|
Convertible debenture
|
|
|
10,153,830
|
|
|
|
1,610,340
|
|
|
|
10,153,830
|
|
|
|
-
|
|
|
|
|
13,199,619
|
|
|
|
2,167,625
|
|
|
|
13,300,971
|
|
|
|
235,479
|
|
Fair
Value of Financial Instruments
ASC
Topic 820 "
Fair Value Measurements and Disclosures
" ("ASC Topic 820") provides a framework for measuring
fair value in accordance with generally accepted accounting principles.
ASC
Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that distinguishes
between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs)
and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in
the circumstances (unobservable inputs).
The
fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the
fair value hierarchy under ASC Topic 820 are described as follows:
|
●
|
Level
1 — Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement
date.
|
|
|
|
|
●
|
Level
2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical
or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset
or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
|
|
●
|
Level 3 —
Inputs that are unobservable for the asset or liability.
|
The
following section describes the valuation methodologies that the Company used to measure different financial instruments at fair
value.
Debt
The
fair value of the Company’s debt, which approximated the carrying value of the Company’s debt as of September 30,
2015 and December 31, 2014, was estimated at $56,883 and $57,921, respectively. Factors that the Company considered when estimating
the fair value of its debt included market conditions, liquidity levels in the private placement market, variability in pricing
from multiple lenders and term of the debt. The level of the debt would be considered as level 2.
Additional
Disclosures Regarding Fair Value Measurements
The
carrying value of cash, accounts receivable, inventory, other assets, and accounts payable approximate their fair value due to
the short-term maturity of those items.
Contingent
Consideration
The
fair value of the Company’s contingent consideration is based on the Company’s evaluation as to the probability and
amount of any earn-out that will be achieved based on expected future performance by the acquired entity. The Company utilizes
a third-party valuation firm to assist in the calculation of the contingent consideration at the acquisition date. The Company
evaluates the forecast of the acquired entity and the probability of earn-out provisions being achieved when it evaluates the
contingent consideration at initial acquisition date and at each subsequent reporting period. The fair value of contingent consideration
is measured at each reporting period and adjusted as necessary. The Company evaluates the terms in contingent consideration arrangements
provided to former owners of acquired companies who become employees of the Company to determine if such amounts are part of the
purchase price of the acquired entity or compensation.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
Fair
Value of Derivatives
The
Company has historically utilized a Black-Scholes option pricing model to determine the fair value of the derivative liability
related to the warrants and the put and effective price of future equity offerings of equity-linked financial instruments. During
the quarter ended September 30, 2015, the Company determined that it should utilize a binomial lattice pricing model to determine
the fair value of the derivative liability related to the warrants and the put and effective price of future equity offerings
of equity-linked financial instruments. The Company has evaluated its derivative instruments and determined that the value of
those derivative instruments, whether using a binomial lattice pricing model instead of a Black-Scholes pricing model, would be
immaterial on its historical unaudited condensed consolidated statements of operations for the three and nine months ended September
30 2015 and 2014, respectively.
Derivative
Warrant Liabilities
The
fair value of the derivative liabilities is classified as Level 3 within the Company’s fair value hierarchy. Please refer
to Footnote 9 for a further discussion of the measurement of fair value of the derivatives and their underlying assumptions.
Assets
and liabilities measured at fair value on a recurring basis at September 30, 2015 and December 31, 2014 consisted of:
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
(dollar amounts in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
September 30, 2015
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivatives
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
975
|
|
Long-term warrant derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
6,066
|
|
Contingent consideration
|
|
|
-
|
|
|
|
-
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Warrant derivatives
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
18
|
|
Long-term warrant derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
1,855
|
|
Contingent consideration
|
|
|
-
|
|
|
|
-
|
|
|
|
2,725
|
|
Long-term contingent consideration
|
|
|
-
|
|
|
|
-
|
|
|
|
823
|
|
Issuance of option shares
|
|
|
-
|
|
|
|
-
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,957
|
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
The
changes in Level 3 financial instruments measured at fair value on a recurring basis for the nine months ended September 30, 2015
were as follows:
(dollar amounts in thousands)
|
|
Amount
|
|
Balance as of December 31, 2014
|
|
$
|
5,957
|
|
|
|
|
|
|
Change in fair value of derivative
|
|
|
(1,025
|
)
|
Settlement of contingent consideration
|
|
|
(306
|
)
|
Change in fair value of contingent consideration
|
|
|
(370
|
)
|
Fair value of conversion feature on date of issuance
|
|
|
2,230
|
|
Fair value of net settlement of accounts payable
|
|
|
721
|
|
Adjustment of derivative liability upon extinguishment of debt
|
|
|
2,600
|
|
Reclassification of options to equity
|
|
|
(536
|
)
|
Reclassification of derivative warrants to equity
|
|
|
(546
|
)
|
Balance as of March 31, 2015
|
|
|
8,725
|
|
|
|
|
|
|
Settlement of contingent consideration
|
|
|
(1,001
|
)
|
Change in fair value of derivative
|
|
|
1,221
|
|
Adjustment of derivative liability pursuant to exchange agreement
|
|
|
23
|
|
Fair value of lender default premium derivative on date of issuance
|
|
|
22
|
|
Adjustment of net settlement of accounts payable derivative due to cancellation of shares and warrants
|
|
|
80
|
|
Payment of accounts payable related to net settlement of accounts payable derivative liability
|
|
|
(225
|
)
|
Fair value of net settlement of accounts payable
|
|
|
178
|
|
Balance as of June 30, 2015
|
|
|
9,023
|
|
|
|
|
|
|
Settlement of contingent consideration
|
|
|
(1,633
|
)
|
Change in fair value of derivative
|
|
|
(927
|
)
|
Adjustment of derivative liability upon extinguishment of debt
|
|
|
163
|
|
Fair value of lender default premium derivative on date of issuance
|
|
|
655
|
|
Balance as of September 30, 2015
|
|
$
|
7,281
|
|
Treasury
Stock
The
Company records treasury stock at the cost to acquire it and includes treasury stock as a component of stockholders’ equity.
Recent
Accounting Pronouncements
On February 18, 2015, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-02,
Amendments
to the Consolidation Analysis (“ASU 2015-02”)
. ASU 2015-02 provides an update affecting reporting entities that
are required to evaluate whether they should consolidate certain legal entities. This new guidance applies to all legal entities
to re-evaluate 1) whether limited partnerships and similar legal entities are VIE’s or voting interest entities, 2) eliminates
the presumption that a general partner should consolidate a limited partnership, 3) affect the consolidation analysis of reporting
entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and 4) provides
a scope exception from consolidation guidance for reporting entities with interest in legal entities that are required to comply
with or operate in accordance with rules similar to those for registered money market funds. ASU 2014-08 is effective in annual
or interim periods beginning after December 15, 2015. The Company does not expect the adoption of ASU 2015-02 to have a material
impact on the unaudited condensed consolidated financial statements.
In April 2015, the FASB issued
ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”)
. ASU 2015-03 revises previous
guidance to require that debt issuance costs be reported in the unaudited condensed consolidated financial statements as a direct
deduction from the face amount of the related liability, consistent with the presentation of debt discounts. Prior to the amendments,
debt issuance costs were presented as a deferred charge (i.e. an asset) on the unaudited condensed consolidated financial statements.
This new guidance is effective for the annual period ending after December 15, 2015, and for annual periods and interim periods
thereafter. The amendments must be applied retrospectively. The Company early adopted the provisions of ASU 2015-03 during the
year ended December 31, 2015. Refer to Note 3 Change in Accounting Principle for the effect of adopting ASU 2015-03 on the unaudited
condensed consolidated balance sheet as of December 31, 2014.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
On May 28, 2014, the FASB
issued ASU No. 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), which is effective for public
entities for annual reporting periods beginning after December 15, 2016. On July 9, 2015, the FASB voted to defer the effective
date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date. Early adoption of ASU
2014-09 is permitted but not before the original effective date (annual periods beginning after December 15, 2016). When effective,
ASU 2014-09 will use either of the following transition methods: (i) a full retrospective approach reflecting the application
of the standard in each prior reporting period with the option to elect certain practical expedients; or (ii) a retrospective
approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional
footnote disclosures). The Company is currently evaluating the impact of the Company’s pending adoption of ASU 2014-09 on
the unaudited condensed consolidated financial statements and have not yet determined the method by which the Company will adopt
the standard.
In
September 2015, the FASB issued ASU 2015-16,
Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”)
.
When effective, ASU 2015-16 will require that an acquirer recognize adjustments to provisional amounts that are identified during
the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this update require
that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation,
amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting
had been completed at the acquisition date. This new guidance is effective for the annual period ending after December 15, 2015,
including interim periods within that fiscal year. The requirements of ASU 2015-16 are not expected to have a significant impact
on the unaudited condensed consolidated financial statements.
Reclassifications
Certain 2014 activities
and balances were reclassified to conform to classifications used in the current period. The reclassified balances relate to:
|
·
|
On
the unaudited condensed consolidated balance sheets – adoption of ASU 2015-03.
Refer to Note 3 Change In Accounting Principle for further detail.
|
|
·
|
On
the unaudited condensed consolidated balance sheets - remeasurement period adjustments
related to the in-process research and development associated with the RentVM acquisition.
For further detail, refer to Note 4 Acquisitions;
|
|
·
|
On
the unaudited condensed consolidated balance sheets - remeasurement period adjustments
related to the income tax effect of the in-process research and development associated
with the RentVM acquisition. For further detail, refer to Note 4 Acquisitions;
|
|
·
|
On the unaudited condensed consolidated
balance sheets - reclassification of $575 principal amount of the Mark Munro 1996 Charitable Remainder UniTrust from term loans
to notes - related-party;
|
|
·
|
On the unaudited condensed consolidated
statement of operations – as noted within the Company’s December 31, 2014 Form 10-K, during the fourth quarter of 2014,
the Company updated its allocation of the purchase price of IPC and RentVM to the assets and liabilities acquired and determined
that a portion of its valuation allowance was no longer required. The Company has reflected this adjustment as if the transaction
occurred at the time of acquisition;
|
|
·
|
On the condensed consolidated statement
of cash flows – the statement of cash flows was revised to present the effect of the transactions noted above on the Company’s cash flows as of September
30, 2014.
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL
STATEMENTS
During the course of
the audit of the Company’s financial statements for the year ended December 31, 2015, there were certain errors identified
that affected the Company’s previously-issued financial statements, as discussed below:
|
(1)
|
During
the audit process with respect to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2015, the Company identified an error related to a customer
payment received in the second quarter of 2015. This amount was properly recorded as
deferred revenue in the second quarter; however, the revenue and cost of revenue associated
with that transaction were not properly recognized during the third quarter of 2015.
As a result of these errors, the Company recorded entries which had the following result
on the Company’s financial statements as of September 30, 2015:
|
|
●
|
On
the Company’s unaudited condensed consolidated statement of operations, an increase in product revenues of $734 for
the three and nine months ended September 30, 2015;
|
|
●
|
On
the Company’s unaudited condensed consolidated statement of operations, a decrease in cost of sales of $184 for the
three and nine months ended September 30, 2015;
|
|
●
|
On
the Company’s unaudited condensed consolidated balance sheet, a decrease in accrued expenses of $184 for the quarter
ended September 30, 2015;
|
|
●
|
On
the Company’s unaudited condensed consolidated balance sheet, a decrease in deferred revenues of $734 for the quarter
ended September 30, 2105.
|
|
(2)
|
During
the audit process with respect to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2015, the Company identified an error related to the cost
of inventory items sold during the third quarter of 2015. As a result of these errors,
the Company recorded entries which had the following result on the Company’s financial
statements as of September 30, 2015:
|
|
|
|
|
·
|
On
the Company’s unaudited condensed consolidated statement of operations, an increase
in cost of revenue of $891 for the three and nine months ended September 30, 2015;
|
|
·
|
On
the Company’s unaudited condensed consolidated balance sheet, a decrease in inventory
of $891 for the quarter ended September 30, 2015.
|
|
|
|
|
(3)
|
The
Company reversed certain activity recorded using the percentage of completion method
of accounting within the books and records of the Company’s AWS and AWS Puerto
Rico subsidiaries. As a result of these errors, the Company recorded entries which had
the following result on the Company’s financial statements as of September 30,
2015:
|
|
·
|
On
the Company’s unaudited condensed consolidated statement of operations, a decrease
in service revenues of $823 for the three and nine months ended September 30, 2015;
|
|
·
|
On
the Company’s unaudited condensed consolidated statement of operations, a decrease
in cost of revenue of $576 for the three and nine months ended September 30, 2015;
|
|
·
|
On
the Company’s unaudited condensed consolidated balance sheet, a decrease in accounts
receivable of $823 for the quarter ended September 30, 2015;
|
|
·
|
On
the Company’s unaudited condensed consolidated balance sheet, an increase in other
current assets of $576 for the quarter ended September 30, 2015.
|
|
(4)
|
Determined
that maintenance pass-through revenue within the Company’s IPC subsidiary was presented on the gross amount billed to
customers. Based on the year-end audit, the revenue associated with pass-through maintenance contracts associated with
these customers should have been presented on the net amount retained. An entry was recorded related to this audit finding
during the third quarter of 2015.
|
|
●
|
On
the Company’s unaudited condensed consolidated statement of operations, a decrease in service revenues and cost of revenue
of $1,376 for the three and nine months ended September 30, 2015.
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
The following table
sets forth the effects (in thousands) of the matters identified by the Company during the third quarter of 2015 on affected items
within the Company’s previously reported unaudited condensed consolidated statement of operations for the three months and
nine months ended September 30, 2015:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30, 2015
|
|
|
September 30, 2015
|
|
|
|
As Reported
|
|
|
|
|
|
As Restated
|
|
|
As Reported
|
|
|
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
19,375
|
|
|
|
(3),
(4)
|
|
|
$
|
17,176
|
|
|
$
|
54,583
|
|
|
|
(3),
(4)
|
|
|
$
|
52,384
|
|
Product revenue
|
|
|
2,300
|
|
|
|
(1)
|
|
|
|
3,034
|
|
|
|
10,331
|
|
|
|
(1)
|
|
|
|
11,065
|
|
Total revenue
|
|
|
21,675
|
|
|
|
|
|
|
|
20,210
|
|
|
|
64,914
|
|
|
|
|
|
|
|
63,449
|
|
Cost of revenue
|
|
|
14,476
|
|
|
|
(1),
(2), (3), (4)
|
|
|
|
13,231
|
|
|
|
43,703
|
|
|
|
(1),
(2), (3), (4)
|
|
|
|
42,458
|
|
Gross profit
|
|
|
7,199
|
|
|
|
|
|
|
|
6,979
|
|
|
|
21,211
|
|
|
|
|
|
|
|
20,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,401
|
)
|
|
|
|
|
|
|
(1,621
|
)
|
|
|
(11,339
|
)
|
|
|
|
|
|
|
(11,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations before provision for (benefit
from) income taxes
|
|
|
(2,451
|
)
|
|
|
|
|
|
|
(2,671
|
)
|
|
|
(28,355
|
)
|
|
|
|
|
|
|
(28,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from operations
|
|
|
(2,671
|
)
|
|
|
|
|
|
|
(2,891
|
)
|
|
|
(27,351
|
)
|
|
|
|
|
|
|
(27,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to InterCloud
Systems, Inc. common stockholders
|
|
$
|
(2,654
|
)
|
|
|
|
|
|
$
|
(2,874
|
)
|
|
$
|
(27,485
|
)
|
|
|
|
|
|
$
|
(27,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share attributable
to InterCloud Systems, Inc. common stockholders
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
$
|
(0.12
|
)
|
|
$
|
(1.33
|
)
|
|
|
|
|
|
$
|
(1.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share attributable
to InterCloud Systems, Inc. common stockholders
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
$
|
(0.12
|
)
|
|
$
|
(1.33
|
)
|
|
|
|
|
|
$
|
(1.35
|
)
|
The following table sets forth the effects
(in thousands) of the matters identified by the Company during the third quarter of 2015 on affected items within the Company’s
previously reported unaudited condensed consolidated balance sheet for the nine months ended September 30, 2015:
|
|
September 30, 2015
|
|
|
|
As Reported
|
|
|
|
|
|
As Restated
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowances of $1,321 and $1,545, respectively
|
|
$
|
18,275
|
|
|
|
(3)
|
|
|
$
|
17,452
|
|
Inventories
|
|
|
2,745
|
|
|
|
(2)
|
|
|
|
1,854
|
|
Other current assets
|
|
|
331
|
|
|
|
(3)
|
|
|
|
907
|
|
Total current assets
|
|
|
26,211
|
|
|
|
|
|
|
|
25,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
116,046
|
|
|
|
|
|
|
$
|
114,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
18,066
|
|
|
|
(1)
|
|
|
$
|
17,882
|
|
Deferred revenue
|
|
|
4,330
|
|
|
|
(1)
|
|
|
|
3,596
|
|
Total current liabilities
|
|
|
48,346
|
|
|
|
|
|
|
|
47,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
85,852
|
|
|
|
|
|
|
|
84,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(84,223
|
)
|
|
|
|
|
|
|
(84,443
|
)
|
Total InterCloud Systems, Inc. stockholders' equity
|
|
|
29,831
|
|
|
|
|
|
|
|
29,611
|
|
Total stockholders' equity
|
|
|
30,194
|
|
|
|
|
|
|
|
29,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, non-controlling interest and stockholders’
equity
|
|
$
|
116,046
|
|
|
|
|
|
|
$
|
114,908
|
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
3. CHANGE IN ACCOUNTING PRINCIPLE
As noted in Note 1 Summary
of Significant Accounting Policies, the Company early adopted the provisions of ASU 2015-03 and has retroactively restated its
consolidated balance sheet for the year ended December 31, 2014. During the year ended December 31, 2014, the Company had accounted
for deferred loan costs associated with its term loans due to White Oak Global Advisors, LLC, the 12% convertible notes payable,
GPB Life Science Holdings, LLC, and the promissory note holders as current assets within the Company’s consolidated balance
sheet.
The following table
is a summary of the effect of the adjustments on the consolidated balance sheet as of December 31, 2014:
|
|
December 31, 2014
|
|
|
|
As previously Filed
|
|
|
Adjustments
|
|
|
Revised
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Deferred loan costs
|
|
$
|
1,278
|
|
|
$
|
(1,278
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loans, current portion, net of debt discount
|
|
$
|
8,387
|
|
|
$
|
(1,278
|
)
|
|
$
|
7,109
|
|
4.
ACQUISITIONS
Acquisition
of IPC (Revised)
On January 2, 2014,
the Company acquired IPC, a full-service voice and data network engineering firm based in New York. IPC serves both corporate
enterprises and telecommunications service providers. The purchase consideration for IPC was $21,153, which was paid with $13,451
in cash, common stock valued at $1,447, and a convertible note in the principal amount of $6,255, which was equal to the net working
capital of IPC on the date of acquisition. Refer to Note 13 for further detail on the convertible note. The Company used the fair
value of the common stock issued. As the total consideration paid by the Company for IPC exceeded the net assets acquired, the
Company recorded approximately $15,131 of goodwill. The goodwill is attributable to synergies and economies of scale related to
operating expenses provided to the Company. The goodwill is not tax deductible. The amount of acquisition-related costs for the
acquisition of IPC was $118, which amount was recorded on the Company’s unaudited condensed consolidated statement of operations
as general and administrative expenses for the nine months ended September 30, 2014. The Company finalized all purchase price
allocation adjustments related to the acquisition of IPC as of December 31, 2014.
The original deferred
tax liability that was recorded in the first quarter of 2014 should have resulted in the reduction of the Company’s valuation
allowance. The reduction in the valuation allowance was not recorded by the Company at that time. In the fourth quarter of 2014,
the Company finalized the allocation of purchase price to the assets and liabilities acquired and determined that a portion of
its valuation allowance was no longer required and recorded a tax benefit of $3,195. The Company has reflected this adjustment
within the line item “benefit from income taxes” on the unaudited condensed consolidated statement of operations for
the nine months ended September 30, 2014.
Acquisition
of RentVM (Revised)
On February 3, 2014, the
Company acquired RentVM, a New Jersey-based provider of infrastructure-as-a-service technology to software developers and to healthcare,
education, and other small and medium-sized businesses and enterprises to enable public and private (enterprise) Cloud environments.
The purchase consideration for RentVM was $5,880, which was paid with common stock valued at $5,280 and the conversion of a pre-existing
note in the principal amount of $600, which was used to complete the acquisition. As the total consideration paid by the Company
for RentVM exceeded the net assets acquired, the Company recorded approximately $2,851 of goodwill. The goodwill is attributable
to synergies and economies of scale provided to the Company. The goodwill is not tax deductible. The Company acquired in-process
research and development related to RentVM’s cloud products, that were under development by RentVM at the time of acquisition,
to which the Company ascribed a value of $4,000. The Company recorded a deferred tax liability of $1,560 related to the acquired
in-process research and development intangible asset. During the three months ended June 30, 2015, the Company began amortizing
the in-process research and development as the product is now available for general release to customers. In conjunction with
the accounting associated with the RentVM acquisition, the Company recorded a net deferred tax liability related to the book and
tax basis difference of the underlying RentVM intangible asset. The net deferred tax liability will serve as reversible temporary
difference that will give rise to future taxable income and, accordingly, serve as a source of income that permits the recognition
of certain existing deferred tax assets of the Company. As a result, the Company released the valuation allowance associated with
the $1,560 deferred tax liability and recorded this adjustment as a benefit from income taxes during the three months ended June
30, 2015. The Company finalized all purchase price allocation adjustments related to the acquisition of RentVM as of March 31,
2015.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
The final purchase
consideration for the 2014 acquisition of RentVM was calculated as follows:
(dollar amounts in thousands)
|
|
RentVM
|
|
Common stock, fair value
|
|
$
|
5,280
|
|
Note converted to stock
|
|
|
600
|
|
Total consideration
|
|
$
|
5,880
|
|
The final purchase consideration was
allocated to the assets acquired and liabilities assumed as follows:
(dollar amounts in thousands)
|
|
RentVM
|
|
|
|
(Revised)
|
|
|
|
|
|
Current assets
|
|
$
|
104
|
|
Goodwill
|
|
|
2,851
|
|
Intangible assets:
|
|
|
|
|
In-process research and development
|
|
|
4,000
|
|
Customer list / relationships
|
|
|
150
|
|
Trade names
|
|
|
40
|
|
Non-compete
|
|
|
88
|
|
Property and equipment
|
|
|
372
|
|
Other assets
|
|
|
4
|
|
Current liabilities
|
|
|
(169
|
)
|
Deferred tax liability
|
|
|
(1,560
|
)
|
Total allocation of purchase consideration
|
|
$
|
5,880
|
|
Acquisition
of VaultLogix
Effective as of October
9, 2014, the Company consummated the acquisition of all of the outstanding membership interests of VaultLogix and its affiliated
entities for an aggregate purchase price of $36,796. The purchase price for the acquisition was payable to the sellers as follows:
(i) $16,385 in cash, (ii) 1,008,690 shares of the Company’s common stock and (iii) $15,627 in unsecured convertible promissory
notes, as further described in Footnote 8. The closing payments are subject to customary working capital adjustments. As the total
consideration paid by the Company for VaultLogix exceeded the net assets acquired, the Company recorded approximately $20,427
of goodwill and $13,400 of intangible assets. The goodwill is attributable to synergies and economies of scale related to operating
expenses provided to the Company. The goodwill is not tax deductible. The Company finalized all purchase price allocations related
to the acquisition of VaultLogix as of September 30, 2015. Based on the final analysis, the Company determined that no adjustments
were necessary to the VaultLogix purchase price allocations previously disclosed within its December 31, 2014 Form 10-K.
Effective as of December
31, 2014, VaultLogix completed the purchase of the assets of Axim. In consideration for the acquisition, at the closing the Company
made a payment of $1,500 in shares of common stock and recorded contingent consideration of $1,872. Based on the purchase consideration
and assets acquired, the Company recorded the following intangible assets: customer list of $100 and non-compete of $302. Goodwill
of $2,922 was also recorded in connection with the purchase. The goodwill is attributable to synergies and economies of scale
related to operating expenses provided to the Company. The goodwill is not tax deductible.
Unaudited pro forma results
of operations data of the Company as if the material acquisitions of IPC, RentVM and VaultLogix had occurred as of January 1,
2014 are as follows:
|
|
Pro Forma Results
|
|
|
|
(Unaudited)
|
|
|
|
For the three months ended September 30,
|
|
(dollar amounts in thousands)
|
|
2014
|
|
Revenue
|
|
$
|
23,221
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,774
|
)
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(0.81
|
)
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(0.96
|
)
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
|
|
Pro Forma Results
|
|
|
|
(Unaudited)
|
|
|
|
For the nine months ended September 30,
|
|
(dollar amounts in thousands)
|
|
2014
|
|
Revenue
|
|
$
|
60,789
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,370
|
)
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(0.98
|
)
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(2.52
|
)
|
Pro
forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred at
January 1, 2014 and is not intended to be a projection of future results.
5.
PROPERTY AND EQUIPMENT, NET
Property
and equipment as of September 30, 2015 and December 31, 2014 consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
(dollar amounts in thousands)
|
|
2015
|
|
|
2014
|
|
Vehicles
|
|
$
|
777
|
|
|
$
|
761
|
|
Computers and office equipment
|
|
|
870
|
|
|
|
638
|
|
Equipment
|
|
|
4,731
|
|
|
|
4,713
|
|
Software
|
|
|
2,735
|
|
|
|
2,025
|
|
Total
|
|
|
9,113
|
|
|
|
8,137
|
|
Less accumulated depreciation
|
|
|
(6,638
|
)
|
|
|
(5,927
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
2,475
|
|
|
$
|
2,210
|
|
Depreciation
expense for the three months ended September 30, 2015 and 2014 was $253 and $85, respectively. Depreciation expense for the nine
months ended September 30, 2015 and 2014 was $720 and $229, respectively.
6.
GOODWILL AND INTANGIBLE ASSETS
Goodwill
The
following table sets forth the changes in the Company's goodwill during the nine-month period ended September 30, 2015 resulting
from the acquisitions by the Company of its operating segments.
(dollar amounts in thousands)
|
|
Applications and Infrastructure
|
|
|
Professional Services
|
|
|
Managed Services
|
|
|
Cloud Services
|
|
|
Total
|
|
Balance at December 31, 2014
|
|
$
|
6,906
|
|
|
$
|
9,257
|
|
|
$
|
44,191
|
|
|
$
|
-
|
|
|
$
|
60,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price allocation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,440
|
)
|
|
|
-
|
|
|
|
(2,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of operating segments
|
|
|
-
|
|
|
|
-
|
|
|
|
(23,349
|
)
|
|
|
23,349
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2014 (revised)
|
|
|
6,906
|
|
|
|
9,257
|
|
|
|
18,402
|
|
|
|
23,349
|
|
|
|
57,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2015
|
|
$
|
6,906
|
|
|
$
|
9,257
|
|
|
$
|
18,402
|
|
|
$
|
23,349
|
|
|
$
|
57,914
|
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
Intangible
Assets
The
following table summarizes the Company’s intangible assets as of September 30, 2015 and December 31, 2014:
|
|
September 30, 2015
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Revised)
|
|
(dollar
|
|
Estimated
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Revaluation
|
|
|
|
|
amounts in
|
|
Useful
|
|
Carrying
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Impairment
|
|
|
Period
|
|
|
Net Book
|
|
thousands)
|
|
Life
|
|
Amount
|
|
|
Reclassification
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Charge
|
|
|
Adjustment
|
|
|
Value
|
|
Customer relationships
|
|
7-10 yrs
|
|
$
|
23,053
|
|
|
$
|
-
|
|
|
$
|
(5,191
|
)
|
|
$
|
17,862
|
|
|
$
|
24,270
|
|
|
$
|
(2,891
|
)
|
|
$
|
(1,219
|
)
|
|
$
|
-
|
|
|
$
|
20,160
|
|
Non-compete agreements
|
|
2-3 yrs
|
|
|
3,523
|
|
|
|
-
|
|
|
|
(1,840
|
)
|
|
|
1,683
|
|
|
|
3,523
|
|
|
|
(1,055
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
2,468
|
|
Internally developed software
|
|
3 years
|
|
|
3,200
|
|
|
|
-
|
|
|
|
(1,041
|
)
|
|
|
2,159
|
|
|
|
3,200
|
|
|
|
(241
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
2,959
|
|
Purchased software
|
|
5 years
|
|
|
-
|
|
|
|
4,000
|
|
|
|
(333
|
)
|
|
|
3,667
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
In-process research and development
|
|
|
|
|
4,000
|
|
|
|
(4,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,000
|
|
|
|
4,000
|
|
URL's
|
|
Indefinite
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
10
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
8
|
|
Tradenames
|
|
1 year
|
|
|
959
|
|
|
|
-
|
|
|
|
(171
|
)
|
|
|
788
|
|
|
|
959
|
|
|
|
(33
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
926
|
|
Tradenames
|
|
Indefinite
|
|
|
3,178
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,178
|
|
|
|
4,349
|
|
|
|
-
|
|
|
|
(1,171
|
)
|
|
|
-
|
|
|
|
3,178
|
|
Total intangible assets
|
|
|
|
$
|
37,921
|
|
|
$
|
-
|
|
|
$
|
(8,576
|
)
|
|
$
|
29,345
|
|
|
$
|
36,311
|
|
|
$
|
(4,220
|
)
|
|
$
|
(2,392
|
)
|
|
$
|
4,000
|
|
|
$
|
33,699
|
|
Amortization
expense related to the acquired intangible assets was $1,450 and $499 for the three months ended September 30, 2015 and 2014,
respectively. Amortization expense related to the acquired intangible assets was $4,356 and $1,742 for the nine months ended September
30, 2015 and 2014, respectively.
7.
BANK DEBT
Bank
debt as of September 30, 2015 and December 31, 2014 consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
(dollar amounts in thousands)
|
|
2015
|
|
|
2014
|
|
One installment note, monthly principal and interest of $1, interest 9.05%, secured by vehicles, maturing July 2016
|
|
$
|
4
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
Five lines of credit, monthly principal and interest, interest ranging from $0 to $1, interest ranging from 5.5% to 9.75%, guaranteed personally by principal shareholders of acquired companies, maturing June 2016
|
|
|
130
|
|
|
|
296
|
|
|
|
|
134
|
|
|
|
305
|
|
Less: Current portion of bank debt
|
|
|
(134
|
)
|
|
|
(252
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion of bank debt
|
|
$
|
-
|
|
|
$
|
53
|
|
The
interest expense associated with the bank debt during the three months ended September 30, 2015 and 2014 amounted to $2 and $13,
respectively. The interest expense associated with the bank debt during the nine months ended September 30, 2015 and 2014 amounted
to $9 and $45, respectively. There are no financial covenants associated with the bank debt.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
8. TERM
LOANS
Term
loans as of September 30, 2015 and December 31, 2014 consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Former owners of RM Leasing, unsecured, non-interest bearing, due on demand
|
|
$
|
3
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
Promissory note with company owned by former owner of Tropical, 9.75% interest, monthly payments of interest of only $1, unsecured and personally guaranteed by former owner of Tropical, due November 2016
|
|
|
106
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
Promissory notes, unsecured, maturing in July 2015
|
|
|
-
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
12% convertible note payable, net of debt discount of $485, matured in June 2015
|
|
|
-
|
|
|
|
1,846
|
|
|
|
|
|
|
|
|
|
|
Term loan, White Oak Global Advisors, LLC, maturing in October 2017, net of debt discount of $439 and $745, respectively
|
|
|
11,525
|
|
|
|
12,516
|
|
|
|
|
|
|
|
|
|
|
8% convertible promissory note, London Bay - VL Holding Company, LLC, unsecured, maturing October 2017
|
|
|
7,408
|
|
|
|
7,408
|
|
|
|
|
|
|
|
|
|
|
8% convertible promissory note, WV VL Holding Corp., unsecured, maturing October 2017
|
|
|
7,003
|
|
|
|
7,003
|
|
|
|
|
|
|
|
|
|
|
8% convertible promissory note, Tim Hannibal, unsecured, maturing October 2017
|
|
|
1,215
|
|
|
|
1,215
|
|
|
|
|
|
|
|
|
|
|
Promissory note, unsecured, maturing in May 2016, net of debt discount of $21 and $44, respectively
|
|
|
1,039
|
|
|
|
956
|
|
|
|
|
|
|
|
|
|
|
Bridge loan agreement, secured, maturing May 2016, net of debt discount of $73 and $981, respectively
|
|
|
6,009
|
|
|
|
3,019
|
|
|
|
|
|
|
|
|
|
|
Promissory note, unsecured, maturing in February 2017, net of debt discount of $588 and $0, respectively
|
|
|
1,427
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
12% convertible note, unsecured, maturing in January 2017, net of debt discount of $120 and $0, respectively
|
|
|
384
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,119
|
|
|
|
34,102
|
|
Less: Current portion of term loans
|
|
|
(9,440
|
)
|
|
|
(7,109
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion term loans, net of debt discount
|
|
$
|
26,679
|
|
|
$
|
26,993
|
|
Term
Loan - White Oak Global Advisors
On
October 9, 2014, the Company’s wholly-owned subsidiary, VaultLogix, entered into a loan and security agreement with the
lenders party thereto, White Oak Global Advisors, LLC, as Administrative Agent, Data Protection Services, L.L.C. (“DPS”),
U.S. Data Security Acquisition, LLC (“USDSA”) and U.S. Data Security Corporation (“USDSC”) as guarantors,
pursuant to which VaultLogix received a term loan in an aggregate principal amount of $13,261. Interest on the term loan accrues
at a rate per annum equal to the sum of (a) the greater of (i) the LIBOR Index Rate, as adjusted as of each Libor Index Adjustment
Date and (ii) 1.00% per annum; plus (b) 1,100 basis points per annum. The LIBOR Index Rate was 0.8527 and 0.6044 as of September
30, 2015 and December 31, 2014, respectively. However, this did not exceed the 12% stated rate as defined in item (ii) above.
The
proceeds of the term loan were used to finance the Company’s acquisition of VaultLogix, DPS and USDSA, to repay certain
outstanding indebtedness (including all indebtedness owed by VaultLogix to Hercules Technology II, L.P.) and to pay fees, costs
and expenses.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
In
connection with the term loan, the Company entered into (i) a continuing guaranty in favor of the administrative agent, (ii) a
pledge agreement, and (iii) a security agreement, pursuant to which the obligations of the Company in respect of the term loan
are secured by a security interest in substantially all of the assets of VaultLogix, subject to certain customary exceptions.
The term loan is subject
to certain affirmative and negative covenants that are tested at the end of each fiscal quarter. The Company was in compliance
with all covenants as of September 30, 2015 and December 31, 2014.
Principal
of $11,964 and $13,261 remained outstanding as of September 30, 2015 and December 31, 2014, respectively.
Term
Loan – 8% Convertible Promissory Notes
Effective
as of October 9, 2014, the Company consummated the acquisition of all of the outstanding membership interests of VaultLogix and
its affiliated entities for an aggregate purchase price of $36,796. The purchase price for the acquisition was payable to the
sellers as follows: (i) $16,385 in cash, (ii) 1,008,690 shares of the Company’s common stock and (iii) $15,627 in unsecured
convertible promissory notes, as further described below. The closing payments are subject to customary working capital adjustments.
The
promissory notes accrue interest at a rate of 8% per annum, and all principal and interest accrued under the promissory notes
is payable on October 9, 2017. The promissory notes are convertible into shares of the Company’s common stock at a conversion
price equal to $6.37 per share. A portion of the principal amount of the promissory notes equal to 20% of the principal amount
on the closing date will not be convertible until January 9, 2016.
On
a date when (i) the shares are freely tradeable without restriction or volume limitations under Rule 144, and (ii) the average
closing price of the Company’s common stock is 105% or higher of the conversion price on the three (3) trading days immediately
prior to such date, the Company may deliver notice to the holders of the promissory notes electing to convert some or all of the
outstanding amounts owed under the promissory notes into common stock at the applicable conversion price. Additionally, if on
or after the maturity date, (i) the Company is restricted or otherwise unable to pay in cash all outstanding amounts under the
promissory notes, (ii) the promissory notes have not otherwise been paid in full within ten business days following the maturity
date, or (iii) the Company is not at such time entitled to effect a forced conversion, then, in the event that both (i) and (iii)
above apply, the Company, and in the event that both (ii) and (iii) above apply, the holders of the promissory notes, shall have
the right to convert all outstanding amounts owing under the promissory notes into shares of the Company’s common stock
at a conversion price equal to the average closing price of the Company’s common stock on the three trading days immediately
preceding the date of such conversion.
As
of September 30, 2015, the Company had not forced any conversions.
12% Convertible
Debentures
In December 2013, the
Company entered into a securities purchase agreement with various institutional investors pursuant to which the Company issued
to such investors convertible debentures in the original aggregate principal amount of $11,625 (the "Convertible Debentures")
and an aggregate of 36,567 shares of its common stock for an aggregate purchase amount of $11,626. The Convertible Debentures
matured on June 13, 2015 and bore interest at the rate of 12% per annum. At the Company’s election, subject to compliance
with certain terms and conditions in the purchase agreement, the monthly amortization payments were payable by the issuance of
shares of the Company’s common stock at a price per share equal to the lesser of (i) the Conversion Price (as defined below)
and (ii) 75% of the average of the VWAP (the daily volume weighted average price) of the Company’s common stock for the
five-trading-day period ending on, and including, the trading day immediately preceding the trading day that is five days prior
to the applicable monthly amortization date.
The
Convertible Debentures were convertible into shares of the Company’s common stock at the election of the holder thereof
at a conversion price (the “Conversion Price”) equal to the lesser of (i) $6.36, or (ii) 85% of the price per share
of the Company’s common stock in the first underwritten public offering of not less than $10,000 of the Company’s
equity securities (a “Qualified Offering”). The Conversion Price was subject to customary anti-dilution provisions.
Notwithstanding the foregoing, the Convertible Debentures of a particular holder were not convertible if such conversion would
result in such holder owning more than 4.99% of the issued and outstanding shares of the Company’s common stock after such
conversion.
The
Company recorded a debt discount in the amount of $382 in connection with the 36,567 shares of the Company's common stock issued
pursuant to the purchase agreement, which amount was amortized over the life of the Convertible Debentures. The Company also recorded
a debt discount and a related derivative liability in the amount of $6,620 in connection with the embedded features of the Convertible
Debentures, which amount was amortized over the life of the Convertible Debentures. Refer to Note 9 Derivative Instruments for
further detail on the derivative liability.
Gross
principal of $2,331 remained outstanding as of December 31, 2014. During the three months ended June 30, 2015, the Company issued
shares of common stock for the required amortization payments of the Convertible Debentures. The final amortization payment was
made in shares of common stock in June 2015, which repaid the final amount due under the Convertible Debentures. The Company then
amortized the remaining debt discount and deferred loan costs of $84 related to the convertible feature to interest expense on
the unaudited condensed consolidated statement of operations during the three months ended June 30, 2015.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
Promissory Notes
The Company entered into
a securities purchase agreement with an investor whereby the Company issued to the investor a demand promissory note, dated November
17, 2014, in the original principal amount of $1,000, with interest accruing at the rate of 12% per annum. The note matured on
the earlier of: (x) November 10, 2015 or (y) upon demand by the investor, which such demand could be made any time 150 days following
the issuance of the note upon 30 days’ written notice to the Company; provided, that $60 of interest was guaranteed by the
Company regardless of when the note was repaid. The Company could have redeemed the note at any time prior to the maturity date
for an amount equal to (i) 100% of the outstanding principal amount, plus (ii) a redemption premium equal to an additional 10%
of the outstanding principal amount, plus (iii) any accrued and unpaid interest on the note. The redemption premium could be paid
in cash or common stock at the option of the Company. The holder demanded repayment of the demand promissory note by May 16, 2015
and such note was converted on May 14, 2015 into 384,164 shares of the Company’s common stock. The Company recorded the
conversion as a loss on conversion of debt of $264 on the unaudited condensed consolidated statement of operations during the
nine months ended September 30, 2015.
On
May 14, 2015, the Company entered into a securities purchase agreement with the investor whereby the Company issued a term promissory
note in the original principal amount of $1,000, with interest accruing at the rate of 12% per annum. The note matures at the
earlier of: (x) May 14, 2016 or (y) upon demand by the investor, which such demand may be made any time 170 days following the
issuance of the note upon 10 days’ written notice to the Company; provided, that $60 of interest is guaranteed by the Company
regardless of when the note is repaid. The Company may redeem the note at any time prior to the maturity date for an amount equal
to (i) 100% of the outstanding principal amount, plus (ii) an additional 10% of the outstanding principal amount (the “Redemption
Premium”), plus (iii) any accrued and unpaid interest on the note. The Redemption Premium can be paid in cash or common
stock at the option of the Company. If common stock of the Company is used to pay the Redemption Premium, then such shares shall
be delivered by the third business day following the maturity date, or date of demand, as applicable, at a mutually agreed upon
conversion price by both parties.
On August 6, 2015, the
Company amended the May 14, 2015 term promissory note to increase the principal amount of the note to $1,060 and modify the terms
of the promissory note to allow for the investor to convert the note into shares of the Company’s common stock. The term
promissory note is now convertible into shares of the Company’s common stock at the election of the investor at a conversion
price equal to $2.00 per share, subject to certain adjustments.
On August 6,
2015, the Company entered into a senior convertible note agreement with the investor whereby the Company issued a promissory note
in the original principal amount of $2,105, with interest accruing at the rate of 12% per annum, which matures on January 6, 2017.
At the election of the investor, the note is convertible into shares of the Company’s common stock at a conversion price
equal to $2.00 per share, subject to adjustment as set forth in the agreement. The investor may elect to have the Company redeem
the senior convertible note upon the occurrence of certain events, including the Company’s completion of a $10,000 underwritten
offering of the Company’s common stock. Refer to Note 9 Derivative Instruments for further detail on the derivative features
associated with the August 6, 2015 convertible note.
Principal of $3,165 on
both notes remained outstanding as of September 30, 2015.
31
Group Convertible Note
In
July 2014, the Company issued to 31 Group, LLC a convertible note in the aggregate original principal amount of $1,500, convertible
at $6.37 per share, with a term of one year and an interest rate of 12% per annum, and a three-year warrant to purchase up to
58,870 shares of common stock at an exercise price of $7.25 per share.
On
December 31, 2014, the Company entered into a Bridge Financing Agreement with GPB Life Science Holdings, LLC of which a portion
of the proceeds were used to repay the convertible note of the 31 Group, LLC. Refer to the Bridge Financing - GPB Life Science
Holdings, LLC section of this note for further detail.
Refer to Note 9 Derivative
Instruments for further detail on the warrants issued in conjunction with the 31 Group Convertible Note.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
Bridge
Financing - GPB Life Science Holdings, LLC
The Company entered
into a bridge financing agreement, effective as of December 3, 2014, with GPB Life Science Holdings, LLC, whereby the Company issued
to the investor for gross proceeds of $2,375 (i) a senior secured note, dated December 3, 2014, in the aggregate principal amount
of $2,500 with interest accruing at the rate of 12% per annum and (ii) a four-year warrant, dated December 3, 2014, exercisable
for up to 250,000 shares of the Company’s common stock at an exercise price of $5.00 per share, subject to adjustment as
set forth therein. The note matured upon the earlier of: June 1, 2015 or (y) the date of a Major Transaction (as defined in the
purchase agreement). In addition, upon maturity of the note, the Company was required to pay the investor additional interest in
cash, which interest was to accrue over the term of the note at the rate of 4% per annum. The note was secured by (i) a first priority
security interest in and to all Accounts Receivable (as defined in the purchase agreement) of the Company and its subsidiaries,
except those of VaultLogix, and (ii) a first priority security interest and lien on all Collateral (as defined in the purchase
agreement) of the Company and its subsidiaries, which lien and security interest was to go into effect at such time as White Oak
Global Advisors, LLC (“White Oak”) releases (or is deemed to have released pursuant to the applicable documents between
it and the Company), its liens and security interest on any collateral of the Company and the Company’s obligation to grant,
pledge or otherwise assign a lien in favor of White Oak is terminated (pursuant to the applicable documents between White Oak and
the Company).
On December 31,
2014, pursuant to the bridge financing agreement, the Company issued to the investor an additional note in the principal amount
of $1,500 for a purchase price of $1,425 with interest accruing at the rate of 12% per annum. The Company used the proceeds of
this additional financing to repay the convertible note payable to 31 Group, LLC.
On May 15, 2015,
the Company and GPB Life Science Holdings, LLC entered into a securities purchase agreement and Amendment No. 1 to the bridge financing
agreement whereby the Company (i) issued and sold to the investor a senior secured convertible note in the principal amount of
$2,000, having substantially the same terms and conditions as the outstanding notes, (ii) issued to the investor a four-year warrant,
exercisable for up to 200,000 shares of the Company’s common stock, with an exercise price of $3.75, subject to adjustment
as set forth therein, (iii) issued to the investor a four-year warrant, exercisable for up to 50,000 shares of the common stock,
with an exercise price of $3.93, subject to adjustment as set forth therein, (iv) amended the exercise price of the outstanding
warrants held by the investor to $3.75, subject to adjustment as set forth in such warrants, (v) extended the maturity date of
the outstanding notes held by such investor, such that the maturity date of all three notes, subject to certain exceptions as provided
in the Agreement, is May 15, 2016, (vi) amended the outstanding notes held by such investor to make them convertible into shares
of the Company’s common stock at an exercise price of $3.75 per share, and (vii) added the same amortization provision to
the outstanding notes held by such investor as is in the new note requiring the Company to make three amortization payments to
the investor of $1,125 each on each of September 1, 2015, December 1, 2015 and March 1, 2016, so that each of the three notes receives
its pro-rata portion of each $1,250 amortization payment. In addition, the Company and the investor have agreed that all or any
portion of the $6,000 aggregate principal amount of the Notes may, by mutual agreement of the Company and the investor, be paid
by the Company at any time and from time to time by the issuance to the investor of no more than 1,600,000 shares of the Company’s
common stock.
In conjunction with
Amendment No. 1 to the bridge financing agreement, the Company incurred legal and placement fees of $209 and recorded this amount
as a debt discount that will be amortized to interest expense on the unaudited condensed consolidated statement of operations.
The Company accounted
for Amendment No. 1 to the bridge financing agreement in accordance with ASC 470-50,
Debt – Modifications and Extinguishments
(“ASC Topic 470-50”). In accordance with ASC Topic 470-50, the Company extinguished the December 3, 2014 and December
31, 2014 bridge financing senior secured convertible notes in the amounts of $2,500 and $1,500, respectively, and recorded a new
bridge financing senior secured convertible note in the amount of $6,020 on the balance sheet as of May 15, 2015. The fair value
of the Amendment No. 1 senior secured convertible note was $6,020, which was an amount in excess of the face value of the $6,000
senior secured convertible note and as such, the Company recorded the fair value of the lender’s conversion feature of the
note of $827 to additional paid-in capital in the balance sheet and a related loss on debt extinguishment of $847 on the statement
of operations. In addition, the Company used a Monte-Carlo simulation to fair-value the lender’s default premium option and
recorded a derivative liability of $22 to debt discount on the statement of operations as of May 15, 2015.
On
August 12, 2015, the Company and GPB Life Science Holdings, LLC entered into Amendment No. 2 to the original bridge financing
agreement, dated December 3, 2014, whereby the Company and GPB Life Science Holdings, LLC agreed to (i) reduce the conversion
price of the notes from $3.75 to $2.00 per common share, (ii) amend and restate the prior warrants and additional warrants to
reduce the exercise price from $3.75 to $2.00 per warrant share, (iii) increase the number of amortization payment dates and reduce
the amortization payments to $563, and (iv) permit the Company to make the amortization payments in shares of the Company common
stock converted from any of the prior notes or the new notes. The conversion price for the shares of the Company’s common
stock used to make an amortization payment shall be the lesser of (i) $2.00 and (ii) 75% of the average of the volume weighted
average price for the five consecutive trading days ending on, and including, the trading day immediately preceding the date of
the amortization payment.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
The Company accounted
for Amendment No. 2 in accordance with ASC 470-50,
Debt – Modifications and Extinguishments
(“ASC Topic 470-50”).
In accordance with ASC Topic 470-50, the Company extinguished the May 15, 2015 Amendment No. 1 bridge financing senior secured
convertible note in the amount $6,020, and recorded a new bridge financing senior secured convertible note in the amount of $6,082
on the unaudited condensed consolidated balance sheet as of August 12, 2015. The fair value of the Amendment No. 2 senior secured
convertible note was $6,082, which was an amount in excess of the face value of the $6,000 senior secured convertible note and
as such, the Company recorded the fair value of the lender’s conversion feature of the note of $653 to additional paid-in
capital on the balance sheet and a related loss on debt extinguishment of $115 on the statement of operations. In addition, the
Company wrote-off the lender’s default premium option of $22, which was included in the $115 loss on debt extinguishment
noted above, and used a Monte-Carlo simulation to fair-value the lender’s maturity date feature, noted in Amendment No. 2,
and recorded a derivative liability of $75 to debt discount on the statement of operations as of August 12, 2015.
Principal of $6,082
and $4,000 remained outstanding under the respective agreements as of September 30, 2015 and December 31, 2014, respectively.
Refer
to Note 9, Derivative Instruments, for further detail on the warrants issued as part of the original bridge financing agreement,
Amendment No. 1 and Amendment No. 2.
Smithline
Convertible Note
On
August 6, 2015, the Company issued to Richard Smithline a senior convertible note in the principal amount of $526, with interest
accruing at the rate of 12% per annum, which matures on January 11, 2017. The note is convertible into shares of the Company’s
common stock at a conversion price equal to $2.00 per share, subject to adjustment as set forth in the agreement. Refer to Note
9 Derivative Instruments for further detail on the derivative features associated with the Richard Smithline convertible note.
Principal
of $526 remained outstanding as of September 30, 2015.
9
.
DERIVATIVE INSTRUMENTS
The
Company evaluates and accounts for conversion options embedded in its convertible debt and freestanding instruments in accordance
with ASC 815,
Accounting for Derivative Instruments and Hedging Activities
(“ASC Topic 815”).
MidMarket
Warrants
In
connection with a loan agreement, the Company issued warrants to the lenders in September 2012. These warrants were outstanding
at September 30, 2015 and December 31, 2014.
The
terms of the warrants issued in September 2012 originally provided, among other things, that the number of shares of common stock
issuable upon exercise of such warrants amounted to 11.5% of the Company’s fully-diluted outstanding common stock and common
stock equivalents, whether the common stock equivalents were fully vested and exercisable or not, and that the initial exercise
price of such warrants was $5.00 per share of common stock, subject to adjustment. Pursuant to an amendment to the loan agreement,
on March 22, 2013, the number of shares for which the warrants are exercisable was fixed at 234,233 shares. On September 17, 2012,
when the warrants were issued, the Company recorded a derivative liability in the amount of $194. The amount was recorded as a
debt discount and is being amortized over the original life of the related loans. The amount of the derivative liability was computed
by using the Black-Scholes pricing model, which is not materially different from a binomial lattice valuation methodology, to
determine the value of the warrants issued.
On September 17, 2015,
the third anniversary date of the warrants, the Company failed to comply with the Minimum Adjusted EBITDA provisions set forth
within the original warrant agreement. As such, the expiration date of the warrants was extended to September 17, 2017.
On
September 30, 2015, the Company used a binomial lattice pricing model to determine the fair value of the derivative liability of
the warrants on that date, and determined the fair value was $95. On December 31, 2014, the Company used a Black-Scholes pricing
model to determine the fair value of the derivative liability of the warrants as of that date, and determined the fair value was
$212. The Company recorded the change in the fair value of the derivative liability for the three months ended September 30, 2015
and 2014 as a gain of $41 and $253, respectively, and a gain of $117 and $3,007 for the nine months ended September 30, 2015 and
2014, respectively.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
The
fair value of the warrant derivative liability as of September 30, 2015 was calculated using a binomial lattice pricing model
and, as of December 31, 2014, a Black-Scholes option pricing model with the following factors, assumptions and methodologies:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Fair value of Company’s
common stock
|
|
$
|
1.78
|
|
|
$
|
2.92
|
|
Volatility
(closing prices of 3-4 comparable public companies, including the Company’s historical volatility)
|
|
|
80
|
%
|
|
|
80
|
%
|
Exercise price
|
|
$
|
4.00
- $5.00
|
|
|
$
|
4.00
- $5.00
|
|
Estimated life
|
|
|
2.0
years
|
|
|
|
1.7
years
|
|
Risk free interest rate (based on 1-year
treasury rate)
|
|
|
0.49
|
%
|
|
|
0.46
|
%
|
As
of March 12, 2014, the lenders under the loan agreement assigned their loans to 31 Group LLC and Dominion Capital LLC and such
assignees agreed to convert the outstanding principal amount of the loans into shares of the Company’s common stock at a
conversion price of $10.50 per share. In connection with that agreement, the Company agreed that if 85% of the volume weighted
average price of the Company’s common stock on April 14, 2014 was less than $10.50, the Company would issue an additional
number of shares of the Company’s common stock such that the average conversion price of the loans was such lower price.
On
April 15, 2014, the Company entered into an amendment to that agreement, due to the decline in the trading price of the Company’s
common stock, pursuant to which the Company amended the provision requiring it to issue additional shares of common stock by issuing
(i) 363,853 shares of common stock and warrants to purchase 100,000 shares of common stock to Dominion Capital LLC, and (ii) 401,996
shares of common stock and warrants to purchase 125,000 shares of common stock to 31 Group LLC. The warrants are exercisable at
a price of $7.25 per share for a three-year period, provided that if the shares of common stock underlying the warrants are registered
under the Securities Act, the exercise period of the warrants will be reduced to two years. On April 15, 2014, the day the warrants
were issued, the Company recorded a derivative liability in the amount of $416. The amount was recorded as a loss on extinguishment
of debt on the unaudited condensed consolidated statement of operations. The amount of the derivative liability was computed by
using the Black-Scholes pricing model, which is not materially different from a binomial lattice valuation methodology, to determine
the value of the warrants issued.
On
April 7, 2015, the Company entered into an Exchange Agreement (“31 Exchange Agreement”) with 31 Group LLC, whereby
the Company exchanged the April 15, 2014 warrants for a new warrant. Please refer to the
31 Group, LLC April 2015 Warrants
section of this footnote for further detail on the new warrant.
On
September 30, 2015, the Company used a binomial lattice pricing model and, as of December 31, 2014, the Black-Scholes pricing
method, to determine the fair value of the derivative liability relating to the April 15, 2014 warrants on that date, and determined
the fair value was nominal and $74, respectively. The Company recorded the change in the fair value of the derivative liability
for the three months ended September 30, 2015 and 2014 as a gain of $11 and $315, respectively, and a gain of $10 and $165 for
the nine months ended September 30, 2015 and 2014, respectively.
The
fair value of the April 15, 2014 warrants derivative at September 30, 2015 was calculated using a binomial lattice pricing model
and, as of December 31, 2014, the Black-Scholes option pricing model, with the following factors, assumptions and methodologies:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Fair value of Company’s common stock
|
|
$
|
1.78
|
|
|
$
|
2.92
|
|
Volatility (closing prices of 3-4 comparable public companies, including the Company’s
historical volatility)
|
|
|
80
|
%
|
|
|
80
|
%
|
Exercise price
|
|
$
|
7.25
|
|
|
$
|
7.25
|
|
Estimated life
|
|
|
.5 years
|
|
|
|
1.3 years
|
|
Risk free interest rate (based on 1-year treasury rate)
|
|
|
0.21
|
%
|
|
|
0.46
|
%
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
12%
Convertible Debentures Convertible Feature
The
Company recorded a debt discount in the amount of $382 in connection with the 36,567 shares of the Company’s common stock
issued to the original purchasers of the Convertible Debentures, which amount was amortized over the life of the Convertible Debentures.
The Company also recorded a debt discount in the amount of $6,620, which amount was amortized over the life of the Convertible
Debentures. The Company used a Monte Carlo simulation on the date of issuance to determine the fair value of the embedded conversion
feature. The Company recorded interest expense of $889 related to the amortization of the debt discount for the three months ended
September 30, 2014, and $421 and $2,671 related to the amortization of the debt discount for the nine months ended September 30,
2015 and 2014, respectively.
Due
to the conversion of $7,008 aggregate principal amount of Convertible Debentures in first half of 2014, the Company adjusted the
balance of the derivative liability related to the embedded conversion feature of the Convertible Debentures in the amount of
$2,510. Upon conversion, the principle amount of the debt and equity-linked derivative liability were removed at their respective
carrying amounts, after a final adjustment of the embedded derivatives to fair value of $943 and the shares of common stock were
issued at their then-current fair value. On December 31, 2014, the Company used a Monte Carlo simulation to determine the fair
value of the embedded conversion feature of the Convertible Debentures and, on that date, determined the fair value of the embedded
conversion feature to be $180.
During June 2015, the
Company issued shares of common stock for the required amortization payments of the Convertible Debentures. The final amortization
payment was made in shares of common stock in June 2015 which repaid the final amount due under the Convertible Debentures. The
Company then amortized the remaining debt discount and deferred loan costs of $84 related to the convertible feature to interest
expense on the unaudited condensed consolidated statement of operations during the nine months ended September 30, 2015.
Forward
Investments, LLC Convertible Feature
On
February 4, 2014 and March 28, 2014, Forward Investments, LLC made convertible loans to the Company for working capital purposes
in the amounts of $1,800 and $1,200, respectively. Such loans are evidenced by convertible promissory notes that bear interest
at the rate of 2% and 10% per annum, were to mature on June 30, 2015 and are convertible into shares of the Company’s common
stock at an initial conversion price of $6.36 per share.
The
fair value of the embedded conversion feature at the date of issuance was $8,860. The Company recorded a debt discount of $6,475
and a loss on debt discount of $2,385. The debt discount is being amortized over the life of the loans. The Company used a Monte
Carlo simulation on the date of issuance to determine the fair value of the embedded conversion feature.
On
October 22, 2014, the two convertible loan agreements were modified to reduce the initial conversion price of $6.36 to $3.93,
subject to the 12% debentures not being outstanding. As a result, the Company used a Monte Carlo simulation to determine the fair
value on the date of modification. The fair value of the conversion feature of the Forward Investments, LLC loan on the date of
modification was $910.
On
March 4, 2015, the Company and Forward Investments, LLC restructured certain promissory notes in order to extend the maturity
dates thereof, reduce the seniority and reduce the interest rate accruing thereon (refer to Note 13 for further detail). The fair
value of the embedded conversion feature on the date of restructuring was $1,915, which was recorded as a debt discount on the
unaudited condensed consolidated balance sheet. In addition, the Company recorded a derivative liability of $2,600 on the unaudited
condensed consolidated balance sheet and a loss on modification of debt of $685 on the unaudited condensed consolidated statement
of operations related to the embedded conversion feature.
In
conjunction with the issuance of the 6.5% and 3% convertible notes issued on March 4, 2015, the Company recorded an additional
derivative liability as a debt discount in the amount of $260 and $1,970, respectively, on the date of the issuance of the notes.
The
debt discounts are being amortized over the life of the loans. The Company used a Monte Carlo simulation on the date of issuance
to determine the fair value of the embedded conversion features.
On August 3, 2015, the
Company and Forward Investments, LLC agreed to reset the conversion price of the convertible notes to $1.58 per share of the Company’s
common stock. As a result, the Company used a Monte Carlo simulation to determine the fair value of the conversion features on
the date of the agreement. On the date of the transaction, the fair value of the Forward Investments convertible notes conversion
feature was $6,500, which was recorded as a debt discount and derivative liability on the unaudited condensed consolidated balance
sheet.
On
September 30, 2015 and December 31, 2014, the fair value of the conversion features of the Forward Investments, LLC loans was
$5,450 and $800, respectively, which is included in derivative financial instrument at estimated fair value on the unaudited condensed
consolidated balance sheets. The Company recorded the change in the fair value of the derivative liability for the three months
ended September 30, 2015 and 2014 as a gain of $1,050 and $900, respectively, and a gain of $290 and $8,260, for the nine months
ended September 30, 2015 and 2014, respectively.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
The
fair value of the Forward Investments, LLC derivative at the measurement date was calculated using the Monte Carlo simulation
with the following factors, assumptions and methodologies:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal amount
|
|
$
|
3,650
|
|
|
$
|
390
|
|
|
$
|
2,825
|
|
|
$
|
4,373
|
|
|
$
|
2,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion price before July 31, 2015
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6.36
|
|
Conversion price after July 31, 2015
|
|
$
|
1.58
|
|
|
$
|
1.58
|
|
|
$
|
1.58
|
|
|
$
|
1.58
|
|
|
$
|
3.93
|
|
Conversion trigger price before July 31, 2015
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7.63
|
|
Conversion trigger price after July 31, 2015
|
|
$
|
3.95
|
|
|
$
|
3.95
|
|
|
$
|
3.95
|
|
|
$
|
3.95
|
|
|
$
|
4.72
|
|
Risk free interest rate (based on 6 and 7-year treasury rate)
|
|
|
1.61
|
%
|
|
|
1.61
|
%
|
|
|
0.21
|
%
|
|
|
0.71
|
%
|
|
|
0.12
|
%
|
Life of conversion feature (in years)
|
|
|
6.26
|
|
|
|
6.26
|
|
|
|
0.75
|
|
|
|
2.26
|
|
|
|
0.5
|
|
Volatility
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
45
|
%
|
|
|
50
|
%
|
|
|
50
|
%
|
Demand
Promissory Note – Senior Convertible Note Embedded Features
On
August 6, 2015, the Company entered into a senior convertible note agreement with the investor whereby the Company issued a promissory
note in the original principal amount of $2,105, with interest accruing at the rate of 12% per annum, which matures on January
6, 2017. The Company evaluated the senior convertible note’s settlement provisions and determined that the voluntary conversion
feature and fundamental transaction clauses met the criteria to be classified as embedded derivatives as set forth in ASC 815,
Derivatives and Hedging
and ASC 480,
Distinguishing Liabilities from Equity
. On August 6, 2015, the Company used
a Monte Carlo simulation to value the settlement features and ascribed a value of $524 related to the voluntary conversion feature
and fundamental transaction clauses and recorded these items on the unaudited condensed consolidated balance sheets as a debt
discount and related derivative liability. The debt discounts are being amortized over the life of the loan.
On
September 30, 2015, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible notes
and determined the fair value to be $406 and recorded a gain on fair value of derivative instruments of $118 on the unaudited
condensed consolidated statement of operations for the three and nine months ended September 30, 2015.
31
Group Promissory Note Warrants
On July 1, 2014, the Company
issued 58,870 warrants associated with its issuance to 31 Group LLC of convertible promissory notes. Upon issuance, the Company
recorded a derivative liability and a related debt discount in the amount of $184. The debt discount was being amortized over
the original life of the convertible promissory notes and was completely amortized as a result of the payoff of the 31 Group debt
on December 31, 2014.
On
April 7, 2015, the Company entered into an Exchange Agreement with 31 Group LLC, whereby the Company exchanged the July 1, 2014
warrants for a new warrant. Please refer to the
31 Group, LLC April 2015 Warrants
section of this footnote for further
detail on the new warrant.
31
Group, LLC October 2014 Warrants
Pursuant
to the securities purchase agreement entered into with 31 Group LLC dated October 8, 2014, the Company issued a warrant, initially
exercisable for up to 300,000 shares of common stock at an exercise price of $5.00 per share. The warrant expires on the date
that is the earlier of (i) the later of (x) the fifteenth (15
th
) Trading Day after the date a registration statement
registering all of the shares of the Company’s common stock underlying the warrants is declared effective by the SEC and
(y) December 31, 2014, and (ii) such earlier date as set forth in a written agreement of the Company and 31 Group LLC; provided,
that any such date shall be extended as set forth in the warrant. On October 8, 2014, when the warrant was issued, the Company
recorded a derivative liability in the amount of $90. The amount of the derivative liability was computed by using the Black-Scholes
pricing model, which is not materially different from a binomial lattice valuation methodology, to determine the value of the
warrants issued.
On
April 7, 2015, the Company entered into an Exchange Agreement with 31 Group LLC, whereby the Company exchanged the warrant previously
issued to 31 Group LLC on October 8, 2014 for 1,146,977 shares of the Company’s common stock. Please refer to the
31
Group, LLC April 2015 Warrants
section of this footnote for further detail on the exchange agreement.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
31
Group, LLC April 2015 Warrants
In
April 2015, the Company exchanged two warrants previously issued to 31 Group LLC of April 15, 2014 and July 1, 2014 for two new
warrants, each of which is identical to the previous warrants issued, except that the exercise price of such new warrants is $5.00
per share, subject to adjustments noted within the 31 Exchange Agreement. Pursuant to the 31 Exchange Agreement, on July 1, 2015,
the Company was obligated to pay 31 Group LLC a cash make-whole amount equal to the greater of (a) zero (0) and (b) the difference
of (i) $5,175 less (ii) the product of (x) the Exchange Share Amount (as defined in the 31 Exchange Agreement) and (y) the quotient
of (A) the sum of each of the 30 lowest daily volume weighted average prices of the Company’s common stock during the period
commencing on, and including, April 8, 2015 and ending on, and including, June 30, 2015, divided by (B) 30. As part of the 31
Exchange Agreement, the registration rights agreement previously entered into between the Company and 31 Group LLC in October
2014 was terminated.
On
the date of issuance, the Company used the Black-Scholes pricing method, which is not materially different from a binomial lattice
valuation methodology, to determine the fair value of the derivative liability of the warrants on those dates, and determined
the fair value was $15 and $11, respectively.
On
May 14, 2015, the Company and 31 Group, LLC entered into an amended agreement whereby the Company issued 100,000 shares of unregistered
common stock of the Company to 31 Group, LLC in exchange for the termination of any obligation of the Company to pay the make-whole
payment, as described in the 31 Group Exchange Agreement. The Company recorded a loss on exchange of shares of $353 in the unaudited
condensed consolidated statement of operations during the three months ended June 30, 2015.
On
September 30, 2015, the Company used a binomial lattice pricing model to determine the fair value of the warrants and derived
an implied fair value of $2 and $14, respectively, which is included in derivative financial instruments at estimated fair value
on the unaudited condensed consolidated balance sheets. The Company recorded the change in the fair value of the derivative liability
for the three and nine months ended September 30, 2015 as a gain in the unaudited condensed consolidated statements of operations
of $10 and $29, respectively.
The
fair value of the 31 Group, LLC April 2015 exchange agreement warrants derivative as of September 30, 2015 was calculated using
a binomial lattice pricing model and, as of December 31, 2014, the Black-Scholes option pricing model with the following factors,
assumptions and methodologies:
|
|
September 30, 2015
|
|
|
|
April 15,
2014
warrant
|
|
|
July 1,
2014
warrant
|
|
Fair value of Company’s common stock
|
|
$
|
1.78
|
|
|
$
|
1.78
|
|
Volatility (closing prices of 3-4 comparable public companies, including the Company’s historical volatility)
|
|
|
80
|
%
|
|
|
80
|
%
|
Exercise price
|
|
|
5.00
|
|
|
|
5.00
|
|
Estimated life
|
|
|
6.5 months
|
|
|
|
1.75 years
|
|
Risk free interest rate (based on 6 month and 2-year treasury rate, respectively)
|
|
|
0.21
|
%
|
|
|
0.49
|
%
|
Bridge
Financing Agreement Warrants
On
December 3, 2014, the Company entered into a bridge financing agreement with GPB Life Science Holdings LLC, a third-party lender.
Pursuant to the agreement, the Company issued a warrant entitling the lender to purchase 250,000 shares of common stock. The warrant
is exercisable at a fixed price of $5.00 and expires 180 days from the original issue date. On December 1, 2014, when the warrant
was issued, the Company recorded a derivative liability in the amount of $421. The amount was recorded as a debt discount and
is being amortized over the original life of the related loan. On December 31, 2014, the Company used the Black-Scholes option
pricing model, which is not materially different from a binomial lattice valuation methodology, to determine the fair value of
the warrants and derived an implied fair value of $340 which is included in derivative financial instruments at estimated fair
value on the unaudited condensed consolidated balance sheets.
On
December 24, 2014, the Company entered into a second bridge financing agreement with GPB Life Science Holdings LLC. Pursuant to
the second agreement, the Company issued a warrant entitling the lender to purchase 150,000 shares of common stock. The warrant
is exercisable at a fixed price of $5.00 and expires 180 days from the original issue date. On December 24, 2014, when the warrant
was issued, the Company recorded a derivative liability in the amount of $215. The amount was recorded as a debt discount and
is being amortized over the original life of the related loan. The amount of the derivative liability was computed by using the
Black-Scholes pricing model, which is not materially different from a binomial lattice valuation methodology, to determine the
value of the warrants issued. On December 31, 2014, the Company used the Black-Scholes option pricing method to determine the
fair value of the warrants and derived an implied fair value of $206 which is included in derivative financial instruments at
estimated fair value on the unaudited condensed consolidated balance sheets.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
During
the quarter ended March 31, 2015, the Company re-evaluated the GPB Life Science Holdings LLC warrants issued on December 3, 2014
and December 24, 2014 and reclassified the warrants to additional paid-in capital within the unaudited condensed consolidated
balance sheet.
On May 15, 2015,
the Company entered into Amendment No. 1 to the bridge financing agreement with GPB Life Science Holdings LLC. Pursuant to such
amendment, the Company issued to the investor a new four-year warrant, exercisable for up to 200,000 shares of the Company’s
common stock, with an exercise price of $3.75 per share, subject to adjustment as set forth in such amendment; and a new four-year
warrant, exercisable for up to 50,000 shares of the Company’s common stock, with an exercise price of $3.93, subject to
adjustment as set forth in such amendment, and amended the exercise price of the prior warrants to $3.75 per share, subject to
adjustment set forth in such amendment.
Prior to such amendment,
the Company utilized a Black-Scholes pricing model, which approximates a binomial lattice valuation methodology, to revalue the
warrants to the then-current fair value and recorded a gain on debt extinguishment of $546 within the unaudited condensed consolidated
statement of operations on May 15, 2015. In connection with such amendment, the Company revalued the two existing warrants to reflect
the new $3.75 exercise price and recorded a related loss on debt extinguishment of $771 on the unaudited condensed consolidated
statement of operations on May 15, 2015.
The Company evaluated
the new warrants issued in connection with such amendment and recorded the amount as a debt discount of $504 on the unaudited condensed
consolidated balance sheet as of May 15, 2015. The Company evaluated the warrants and determined that the warrants could be classified
as a component of stockholders’ equity and as such, recorded the warrants within the common stock warrants line-item on the
unaudited condensed consolidated balance sheet as of May 15, 2015.
On September
14, 2015, the Company and GPB Life Science Holdings LLC agreed to revise Amendment No. 2 to the bridge financing agreement, as
described in Note 8 Term Loans, to amend and restate the prior notes and the new note to reduce the conversion price of the prior
note and the new note from $3.75 per share of the Company’s common stock to $2.00 per share, amend and restate the prior
warrants and the additional warrant to reduce the exercise price of the prior warrants and additional warrant from $3.75 per warrant
share to $2.00 per warrant share, increase the number of amortization payment dates and decrease the amortization payment, and
to permit the Company to make amortization payments in shares converted from any of the prior notes or the new note. The conversion
price for the conversion shares used to make an amortization payment shall be the lesser of $2.00 per share of the Company’s
common stock or 75% of the average volume weighted average price for the five consecutive trading days ending on, and including,
the trading day immediately preceding the date of the amortization payment.
Prior to such amendment,
the Company utilized a binomial lattice valuation methodology to revalue the warrants to the then-current fair value and recorded
a gain on debt extinguishment of $764 within the unaudited condensed consolidated statement of operations on September 14, 2015.
In connection with such amendment, the Company revalued the four existing warrants to reflect the new $2.00 exercise price and
recorded a related loss on debt extinguishment of $128 on the unaudited condensed consolidated statement of operations on September
14, 2015.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
Bridge
Financing Amendment No. 2 Feature
As noted in Note 8,
Term Loans, the Company evaluated Amendment No. 2 to the bridge financing agreement and determined that the embedded maturity
date feature met the classification of an embedded derivative instrument. The Company used a Monte Carlo simulation on the date
of issuance to record the fair value of the maturity date feature and ascribed a value of $75, which was recorded as a debt discount
and related derivative liability on the unaudited condensed consolidated balance sheet.
On
September 30, 2015, the Company used a Monte-Carlo simulation to assess the fair value of the maturity date feature and determined
that there was no change in fair value for the three and nine months ended September 30, 2015.
Smithline
Convertible Note
On
August 6, 2015, the Company issued to Richard Smithline a senior convertible note in the principal amount of $526, with interest
accruing at the rate of 12% per annum, which matures on January 11, 2017. The Company evaluated the senior convertible note’s
settlement provisions and determined that the voluntary conversion feature and fundamental transaction clauses met the criteria
to be classified as embedded derivatives as set forth in ASC 815,
Derivatives and Hedging
and ASC 480,
Distinguishing
Liabilities from Equity
. On August 6, 2015, the Company used a Monte Carlo simulation to value the settlement features and
ascribed a value of $131 related to the voluntary conversion feature and fundamental transaction clauses and recorded these items
on the unaudited condensed consolidated balance sheets as a debt discount and related derivative liability. The debt discounts
are being amortized over the life of the loan.
On
September 30, 2015, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible notes
and determined the fair value to be $101 and recorded a gain on fair value of derivative instruments of $30 on the unaudited condensed
consolidated statement of operations for the three and nine months ended September 30, 2015.
Option
Shares
On October 15, 2014, the
Company granted to an employee pursuant to the InterCloud Systems, Inc. 2012 Performance Incentive Plan an option to purchase
150,000 shares of common stock at an exercise price of $3.72 per share. The option vested immediately and expires on the tenth
anniversary of the grant date. The amount of the liability was computed by using the Black-Scholes pricing model and the fair
value of the option liability recorded in the consolidated balance sheet at December 31, 2014 was $474.
On
October 15, 2014, the Company granted to an employee pursuant to the InterCloud Systems, Inc. 2012 Performance Incentive Plan
an option to purchase 25,000 shares of common stock at an exercise price of $3.72 per share. The option vests over three years
with 33 1/3 percent vesting on the first anniversary of the grant date and on each of the next two anniversaries of the grant
date. This option expires on the fifth anniversary of the grant date. The amount of the liability was computed by using the Black-Scholes
pricing model, which is not materially different from a binomial lattice valuation methodology, and the fair value of the option
liability recorded in the consolidated balance sheet at December 31, 2014 was $62.
During
the quarter ended March 31, 2015, the Company re-evaluated the options issued on October 15, 2014 and reclassified the options
to additional paid-in capital within the unaudited condensed consolidated balance sheet.
Net
Settlement of Accounts Payable
On March 25, 2015,
the Company issued 300,000 shares of common stock and a warrant to purchase 80,000 shares of common stock to a third-party vendor
to settle various accounts payable. The shares of common stock were issued with a restrictive legend and as such, the amount of
the accounts payable to be paid with the common stock has not yet been determined. The amount of accounts payable to be paid will
be determined at the time the service provider sells the restricted common stock. The Company recorded the common stock at a fair
value of $648 and the warrant with a fair value of $106, which would reduce the accounts payable to the third party in the amount
of $1,475. The Company recorded a derivative liability of $721 at the time the shares were issued. The Company used a Black-Scholes
pricing model to determine the fair value of the warrant on the date it was issued.
On April 1, 2015,
the Company cancelled the warrants to purchase 80,000 shares of common stock issued to the third party and the third party returned
the 300,000 shares of common stock previously issued on March 25, 2015 to treasury stock. The Company then issued a new one-year
warrant for 425,000 shares of common stock with an exercise price of $0.55 per share. The Company recorded the warrant with a fair
value of $674, which reduced the accounts payable to the third party in the amount of $1,417. The Company recorded a derivative
liability of $743 at the time the warrants were issued. The derivative liability relates to the difference between the accounts
payable due to the third party and the fair value of the warrants on April 1, 2015. The Company used a Black-Scholes pricing model,
which is not materially different from a binomial lattice valuation methodology, to determine the fair value of the warrant on
the date it was issued.
On
September 30, 2015, the Company used a binomial lattice pricing model to determine the fair value of the warrant and recorded
a loss on fair value of derivative instruments of $379 and $179 for the three and nine months ended September 30, 2015, respectively.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
10
.
INCOME TAXES
As
of September 30, 2015 and December 31, 2014, the Company had federal net operating loss carry forwards (“NOL’s”)
of approximately $62,049 and $44,715, respectively, and state NOL’s of approximately $49,226 and $32,889, respectively,
that will be available to reduce future taxable income, if any. These NOL’s begin to expire in 2025. In addition, as of
September 30, 2015 and December 31, 2014, the Company had federal tax credit carry forwards of $887 and $791, respectively, available
to reduce future taxes. These credits begin to expire in 2022.
Sections
382 and 383 of the Internal Revenue Code of 1986, as amended, provide for annual limitations on the utilization of net operating
loss and credit carryforwards if the Company were to undergo an ownership change, as defined in Section 382 of the Code. In general,
an ownership change occurs whenever the percentage of the shares of a corporation owned, directly or indirectly, by 5-percent
shareholders, as defined in Section 382 of the Code, increases by more than 50 percentage points over the lowest percentage of
the shares of such corporation owned, directly or indirectly, by such 5-percent shareholders at any time over the preceding three
years. In the event such ownership change occurs, the annual limitation may result in the expiration of the net operating losses
prior to full utilization. The Company has completed a study to assess whether an ownership change has occurred or whether there
have been multiple ownership changes since the Company became a “loss corporation” under the Code. As disclosed the
Company has taken these limitations into account in determining its available NOL’s.
During
2012, the Company acquired ownership of three entities that had historically used the cash method of accounting for tax purposes.
Section 446 of the Internal Revenue Code of 1986, as amended, requires that the Company prepare its tax returns using the accrual
method of accounting. As a result of this change from cash to accrual accounting for income tax purposes, the Company will recognize
$298 of income during 2015.
During
2012 and 2013, the Company acquired 100% of a Puerto Rican limited liability company, thereby subjecting the Company to Puerto
Rico income taxes on any Puerto Rico-sourced taxable income. Such taxes paid are considered foreign taxes that may be credited
against federal income taxes payable in future years.
The Company’s
2013 U.S. corporation income tax return is currently under examination. The Internal Revenue Service has questioned the Company’s
classification of certain individuals as independent contractors rather than employees, and the year of income tax reporting of
restricted stock issuances. The Company estimates its potential liability to be $500 but the liability, if any, upon final disposition
of these matters is uncertain.
11
.
CAPITAL STOCK
Issuance
of shares of common stock to non-employees for services rendered
During
January, February and March 2015, the Company issued an aggregate of 147,586 shares of its common stock to non-employees for services
rendered. The shares were valued between $2.16 and $2.87 per share and were immediately vested. The Company recorded $374 to salaries
and wages expense.
During
April 2015, the Company issued an aggregate of 30,000 shares of common stock to non-employees for services rendered. These shares
were valued at $1.98 per share and were immediately vested. The Company recorded $59 to salaries and wages expense.
Issuance
of shares of common stock pursuant to conversion of related-party debt
During February
2015, the Company issued 42,553 shares of its common stock to a related party pursuant to the conversion of $100 principal amount
of notes payable. The shares were issued at $2.76 per share, for a total fair value of $117 and a loss of debt conversion of $17.
During May and June
2015, the Company issued 251,749 shares of its common stock to related parties pursuant to the conversion of $565 principal amount
of notes payable and related accrued interest. The shares were issued between $2.55 and $3.38 per share, for a total fair value
of $844 and resulted in a loss of debt conversion of $279.
During July 2015,
the Company issued 219,820 shares of its common stock to a related party pursuant to the conversion of $450 principal amount of
notes payable and related accrued interest. The shares were issued at $2.23 per share, for a total fair value of $490 and resulted
in a loss on debt conversion of $35.
Issuance
of shares of common stock pursuant to conversion of debt
During April and May 2015,
the Company issued 1,262,803 shares of its common stock to a third party pursuant to the conversion of $1,000 principal amount
of notes payable and $68 of related accrued interest. The shares were issued between $1.66 and $3.53 per share, for a total fair
value of $2,289 that was recorded as a loss on exchange of shares.
During
April, May and June 2015, the Company issued 621,831 shares of its common stock to third parties for the amortization of the Convertible
Debentures. The shares were issued between $1.85 and $4.15 per share, for a total fair value of $527 that was recorded as a loss
on debt conversion.
During May 2015, the Company
issued 16,801 shares of its common stock to third parties for the amortization of the Convertible Debentures. The shares were
issued between $3.74 and $4.15 per share, for a total fair value of $67 and a loss of debt conversion of $25.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
On May 14, 2015, the Company
issued 348,164 shares of its common stock to a third party pursuant to the conversion of $1,000 principal amount of notes payable
and $68 of related accrued interest and accelerated the remaining deferred loan costs associated with the principal converted.
The shares were issued at $3.74 per share, for a total fair value of $1,302 and a loss of debt conversion of $264. Prepaid loan
costs of $30 were accelerated and recorded as a loss on conversion of debt as of June 30, 2015.
Issuance
of shares of common stock pursuant to extinguishment of debt
On
March 3, 2015, the Company issued an aggregate of 423,200 shares of its common stock to five related-party lenders pursuant to
the extinguishment of notes payable. The shares were issued with a fair value of $2.45 per share, for a total fair value of $1,038,
which was recorded as loss on extinguishment of debt on the unaudited condensed consolidated statement of operations.
On
March 25, 2015, the Company issued 22,222 shares of its common stock to a related party lender pursuant to the restructuring of
notes payable. The shares were issued at a fair value of $2.16 per share, for a total fair value of $48, which was recorded as
a loss on extinguishment of debt on the unaudited condensed consolidated statement of operations.
Issuance
of shares of common stock pursuant to modification of debt
On
March 3, 2015, the Company issued an aggregate of 375,890 shares of its common stock to five related-party lenders pursuant to
the restructuring of various notes payable. The shares were issued with a fair value of $2.45 per share, for a total fair value
of $920, which was recorded as loss on modification of debt on the unaudited condensed consolidated statement of operations.
Issuance
of shares of common stock pursuant to private placement
During August 2015, the
Company completed two private placements of debt securities and issued to two lenders an aggregate of 25,000 shares of its common
stock, at a price of $2.01 and $1.94 per share of common stock, for a fair value of $50. The shares of common stock were recorded
as a debt discount on the unaudited condensed consolidated balance sheet as of September 30, 2015.
Issuance
of shares for payment of related-party interest
During
January and March 2015, the Company issued an aggregate of 144,508 shares of its common stock to eight related parties for payment
of accrued interest aggregating to $343. The shares were issued at $2.53 and $2.16 per share in January and March, respectively.
Issuance
of shares pursuant to incentives earned
During
March 2015, the Company issued an aggregate of 128,205 shares to employees in settlement of incentives earned. The shares were
issued at $2.16 per share.
Issuance
of shares upon restructuring of debt
During
January 2015, the Company issued 100,000 shares of common stock to a related party for the restructuring of notes payable. The
shares were issued at $2.92 per share and were valued at $292.
Issuance
of shares upon settlement of accounts payable
During March 2015, the
Company issued 300,000 shares of common stock to a third party for settlement of accounts payable. The shares were issued at $2.16
per share and were valued at $648. On April 1, 2015, the 300,000 shares of common stock were cancelled and returned to the Company
in the form of treasury stock.
Issuance
of shares pursuant to the payment of contingent consideration
During
January 2015, the Company issued 79,853 shares of common stock to the former owner of HighWire for the payment of contingent consideration
owed per the purchase agreement. The shares were issued at $3.83 per share for a fair value of $306.
During
April 2015, the Company issued 252,525 shares of common stock to the former owners of AWS for the payment of contingent consideration
owed per the purchase agreement. The shares were issued at $1.98 per share for a fair value of $500.
During
June 2015, the Company issued 223,031 shares of common stock to the former owners of VaultLogix for the payment of contingent
consideration owed per the purchase agreement. The shares were issued at $2.92 per share for a fair value of $651.
Issuance
of shares to third party
During
January 2015, the Company issued 1,961 shares of common stock to the Ian Gist Cancer Research Fund. The shares were issued at
$2.53 per share for a fair value of $5.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
Purchase
of Treasury Shares
During
April, May and June 2015, the Company repurchased 112,995 shares at par value of $0.0001 per share, from ten employees who terminated
employment. A service provider also returned 300,000 shares issued to a service provider originally issued for the settlement
of accounts payable.
During
September 2015, the Company repurchased 14,910 shares at par value of $0.0001 per share from ten employees who terminated employment.
12.
STOCK-BASED COMPENSATION
Restricted
Stock
The
following table summarizes the Company’s restricted stock activity during the nine months ended September 30, 2015:
|
|
Number of Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
Aggregate Intrinsic Value
|
|
|
Weighted Average Remaining Contractual Life (In Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding unvested shares at January 1, 2015
|
|
|
1,373,987
|
|
|
$
|
5.67
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
1,391,531
|
|
|
|
2.31
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(612,830
|
)
|
|
|
5.41
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
(127,905
|
)
|
|
|
4.62
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding unvested shares at September 30, 2015
|
|
|
2,024,783
|
|
|
$
|
3.50
|
|
|
$
|
7,087
|
|
|
|
1.26
|
|
The Company granted to
employees and consultants an aggregate of 3,362,121 shares of common stock in the nine months ended September 30, 2015, of which
1,366,531 shares were subject to a three-year vesting term, 25,000 shares were subject to six-month vesting, and 1,867,008 shares
that vested immediately. The Company recorded compensation expense of $885 and $5,956, respectively, related to these issuances
on the unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2015. During
the nine months ended September 30, 2015, the Company accelerated vesting for 34,174 shares of common stock issued to certain
employees and recorded compensation expense of $100 on the unaudited condensed consolidated statement of operations.
For
the three-month period ended September 30, 2015 and 2014, the Company incurred $885 and $557 in stock compensation expense from
the issuance of common stock to employees and consultants. For the nine month period ended September 30, 2015 and 2014, the Company
incurred $7,368 and $1,816, respectively, in stock compensation expense from the issuance of common stock to employees and consultants.
Issuance
of shares of common stock to employees, directors, and officers
During
January and February 2015, the Company issued an aggregate of 216,000 shares of its common stock to various employees for services
rendered. The shares were valued between $2.53 and $2.87 per share. The Company recorded $30 to salaries and wages expense. An
additional $849 in stock compensation expense was recognized during the three months ended March 31, 2015 on shares subject to
vesting terms in previous periods.
During
January and March 2015, the Company issued an aggregate of 103,582 shares to employees for services rendered. The shares were
issued at $2.16 per share. The Company had accrued for $86 of the expense in 2014 and recognized an additional $70 as stock compensation
expense during the three months ended March 31, 2015.
During
April and June 2015, the Company issued an aggregate of 2,864,953 shares of its common stock to various employees for services
rendered. The shares were valued between $1.98 and $2.92. The Company recorded $4,367 to salaries and wages expense related to
shares issued with no vesting terms. An additional $733 in stock compensation expense was recognized in the three months ended
June 30, 2015 on shares subject to vesting terms in previous periods.
During the three
months ended September 30, 2015, the Company recorded an additional $885 in stock compensation expense related to shares subject
to vesting terms issued in previous periods.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
Options
There
were no options granted during the nine months ended September 30, 2015 and 2014, respectively.
The
following table summarizes the Company’s stock option activity and related information for the nine months ended September
30, 2015:
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Underlying
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic Value
|
|
|
|
Options
|
|
|
Price
|
|
|
Term (in years)
|
|
|
(in thousands)
|
|
Outstanding at January 1, 2015
|
|
|
175,000
|
|
|
$
|
3.72
|
|
|
|
7.29
|
|
|
$
|
140
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited and expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2015
|
|
|
175,000
|
|
|
$
|
3.72
|
|
|
|
6.55
|
|
|
$
|
340
|
|
Exercisable at September 30, 2015
|
|
|
150,000
|
|
|
$
|
3.72
|
|
|
|
9.05
|
|
|
$
|
291
|
|
The
aggregate intrinsic value for outstanding options is calculated as the difference between the exercise price of the underlying
awards and the quoted price of the Company’s common stock as of September 30, 2015 and December 31, 2014 of $1.78 and $2.92,
respectively.
13.
RELATED PARTIES
At September 30, 2015
and December 31, 2014, the Company had outstanding the following loans due to related parties:
|
|
September 30,
|
|
|
December 31,
|
|
(dollar amounts in thousands)
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Promissory note issued to CamaPlan FBO Mark Munro IRA, 3% interest, maturing on January 1, 2018, unsecured
|
|
$
|
597
|
|
|
$
|
597
|
|
Promissory note issued to Mark Munro 1996 Remainder UniTrust, 3% interest, maturing on January 1, 2018, unsecured
|
|
|
-
|
|
|
|
575
|
|
Promissory note issued to 1112 Third Avenue Corp, 3% interest, maturing on January 1, 2018, unsecured
|
|
|
375
|
|
|
|
375
|
|
Promissory note issued to Mark Munro, 3% interest, maturing on January 1, 2018, unsecured
|
|
|
1,337
|
|
|
|
1,337
|
|
Promissory note issued to Pascack Road, LLC, 3% interest, maturing on January 1, 2018, unsecured
|
|
|
2,650
|
|
|
|
2,650
|
|
Promissory notes issued to Forward Investments, LLC, between 2% and 10% interest, maturing on July 1, 2016, unsecured, net of debt discount of $2,557 and $2,232, respectively
|
|
|
3,918
|
|
|
|
4,243
|
|
Promissory notes issued to Forward Investments, LLC, 3% interest, maturing on January 1, 2018, unsecured, net of debt discount of $1,657 and $0, respectively
|
|
|
2,716
|
|
|
|
2,645
|
|
Promissory notes issued to Forward Investments, LLC, 6.5% interest, maturing on July 1, 2016, unsecured, net of debt discount of $190 and $0, respectively
|
|
|
200
|
|
|
|
-
|
|
Former owner of IPC, unsecured, 8% interest, due May 30, 2016
|
|
|
5,755
|
|
|
|
6,255
|
|
Former owner of IPC, unsecured, 15% interest, due on demand
|
|
|
75
|
|
|
|
100
|
|
Former owner of Nottingham, unsecured, 8% interest, maturing on May 30, 2016
|
|
|
225
|
|
|
|
250
|
|
|
|
|
17,848
|
|
|
|
19,027
|
|
Less: current portion of debt
|
|
|
(14,539
|
)
|
|
|
(7,238
|
)
|
Long-term portion of notes payable, related parties
|
|
$
|
3,309
|
|
|
$
|
11,789
|
|
The
interest expense associated with the related-party notes payable in the three months ended September 30, 2015 and 2014 was $405
and $185, respectively, and for the nine months ended September 30, 2015 and 2014 was $1,511 and $603, respectively.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
Related
Party Promissory Note Payable Restructuring
On
January 1, 2014, the outstanding principal amount of the loans from MMD Genesis LLC, a company in which Mark Munro, the Company’s
Chairman of the Board and Chief Executive Officer, and Mark Durfee, a director of the Company, are principals, in the amount of
$3,925, and accrued interest thereon in the amount of $964, was restructured and, in lieu thereof, the Company issued to the principals
of MMD Genesis LLC or their designees the following notes:
|
●
|
a note issued to Mark Munro 1996 Charitable Remainder UniTrust in the principal amount of $275 that bore interest at the rate of 12% per annum and was to mature on March 31, 2016;
|
|
●
|
a note issued to CamaPlan FBO Mark Munro IRA in the principal amount of $347 that bore interest at the rate of 12% per annum and was to mature on March 31, 2016;
|
|
●
|
a note issued to 1112 Third Avenue Corp., a company controlled by Mark Munro, in the principal amount of $375 that bore interest at the rate of 12% per annum and was to mature on March 31, 2016;
|
|
●
|
a note issued to Mark Munro in the principal amount of $737 that bore interest at the rate of 12% per annum and was to mature on March 31, 2016;
|
|
●
|
a note issued to Pascack Road, LLC, a company controlled by Mark Durfee, in the principal amount of $1,575 that bore interest at the rate of 12% per annum and was to mature on March 31, 2016;
|
|
●
|
a note issued to Forward Investments, LLC, the beneficial owner of more than 10% of the Company’s common stock, in the principal amount of $650 that bears interest at the rate of 10% per annum, was to mature on June 30, 2015 and originally was convertible into shares of the Company’s common stock at an initial conversion price of $6.36 per share; and
|
|
●
|
a note issued to Forward Investments, LLC in the principal amount of $2,825 that bore interest at the rate of 2% per annum, was to mature on June 30, 2015 and was convertible into shares of the Company’s common stock at an initial conversion price of $6.36 per share, and reflects certain penalties and consulting fees of $1,000 which were incurred and outstanding as of December 31, 2013.
|
On February 25, 2015 and
March 2, 2015, such notes were restructured. Refer to the restructuring paragraphs later within this footnote for further details.
Promissory
Notes to the Mark Munro 1996 Charitable Remainder UniTrust
On May 7, 2014,
the Company issued a promissory note to the Mark Munro 1996 Charitable Remainder UniTrust in the principal amount of $300 that
bore interest at the rate of 18% per annum and was to mature on March 31, 2016.
On February
10, 2015, the Mark Munro 1996 Charitable Remainder UniTrust converted $100 principal amount of its January 1, 2014 note into 42,553
shares of the Company’s common stock. Refer to Note 11 for further detail.
This note was restructured
as part of the February 25, 2015 promissory note restructuring agreement. Refer to the restructuring paragraphs later within this
footnote for further details.
On July 21,
2015, the Mark Munro 1996 Charitable Remainder UniTrust converted the remaining $450 principal amount and related accrued interest
of $5 of its promissory note into 219,820 shares of the Company’s common stock. Refer to Note 11 for further detail.
Related
Party Promissory Notes to CamaPlan FBO Mark Munro IRA
On July 8, 2014, the Company
issued a promissory note to the CamaPlan FBO Mark Munro IRA in the principal amount of $200 that bore interest at the rate of
18% per annum and was to mature on March 31, 2016. This note was restructured as part of the February 25, 2015 promissory note
restructuring agreement. Refer to the restructuring paragraphs noted within this footnote for further details.
Related
Party Promissory Notes to Mark Munro
On September 2,
2014, the Company issued a promissory note to Mark Munro in the principal amount of $100 that bore interest at the rate of 18%
per annum and was to mature on March 31, 2016.
On September 9,
2014, the Company issued a promissory note to Mark Munro in the principal amount of $150 that bore interest at the rate of 18%
per annum and was to mature on March 31, 2016.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
On September 24,
2014, the Company issued a promissory note to Mark Munro in the principal amount of $250 that bore interest at the rate of 18%
per annum and was to mature on March 31, 2016.
These notes were
restructured as part of the February 25, 2015 promissory note restructuring agreement. Refer to the restructuring paragraphs later
within this footnote for further details.
Related
Party Promissory Notes to Pascack Road, LLC
On June 20, 2014,
the Company issued a promissory note to Pascack Road, LLC in the principal amount of $300 that bore interest at the rate of 18%
per annum and was to mature on March 31, 2016.
On July 11, 2014,
the Company issued a promissory note to Pascack Road, LLC in the principal amount of $200 that bore interest at the rate of 18%
per annum and was to mature on March 31, 2016.
On September 2,
2014, the Company issued a promissory note to Pascack Road, LLC in the principal amount of $100 that bore interest at the rate
of 18% per annum and was to mature on March 31, 2016.
On September 8,
2014, the Company issued a promissory note to Pascack Road, LLC in the principal amount of $150 that bore interest at the rate
of 18% per annum and was to mature on March 31, 2016.
On September 29,
2014, the Company issued a promissory note to Pascack Road, LLC in the principal amount of $575 that bore interest at the rate
of 18% per annum and was to mature on March 31, 2016.
These notes were
restructured as part of the February 25, 2015 promissory note restructuring agreement. Refer to the restructuring paragraphs later
within this footnote for further details.
Related
Party Promissory Notes to Forward Investments, LLC
On June 19, 2014,
the Company issued a promissory note to Forward Investments, LLC in the principal amount of $500 that bore interest at the rate
of 18% per annum and was to mature on June 30, 2015.
On July 11, 2014,
the Company issued a promissory note to Forward Investments, LLC in the principal amount of $200 that bore interest at the rate
of 18% per annum and was to mature on June 30, 2015.
On August 12, 2014,
the Company issued a promissory note to Forward Investments, LLC in the principal amount of $600 that bore interest at the rate
of 18% per annum and was to mature on June 30, 2015.
On September 2,
2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $100 that bore interest at the
rate of 18% per annum and was to mature on June 30, 2015.
On September 8,
2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $150 that bore interest at the
rate of 18% per annum and was to mature on June 30, 2015.
On September 26,
2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $250 that bore interest at the
rate of 18% per annum and was to mature on June 30, 2015.
On September 29,
2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $395 that bore interest at the
rate of 18% per annum and was to mature on June 30, 2015.
On October 24, 2014,
the Company issued a promissory note to Forward Investments, LLC in the principal amount of $400 that bore interest at the rate
of 18% per annum and was to mature on June 30, 2015.
These notes were
restructured as part of the March 4, 2015 Forward Investments, LLC note restructuring agreement. Refer to the restructuring paragraphs
later within this footnote for further details.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
Restructuring
of Related Party Promissory Notes Issued in 2014
On
February 25, 2015, the Company restructured the terms of certain related-party promissory notes and term loans issued to Mark
Munro, Cama Plan FBO Mark Munro IRA, 1112 Third Ave. Corp., the Mark Munro 1996 Charitable Remainder Trust and Pascack Road, LLC
in order to extend the maturity dates thereof and to reduce the interest rate accruing thereon. The following notes were restructured
as follows:
|
●
|
notes
issued to Mark Munro in the aggregate principal amount of $637 had the interest rates reduced from 12% to 3% per annum and
the maturity dates extended from March 31, 2016 to January 1, 2018;
|
|
|
|
|
●
|
notes
issued to CamaPlan FBO Mark Munro IRA in the aggregate principal amount of $397 had the interest rates reduced from 12% to
3% per annum and the maturity dates extended from March 31, 2016 to January 1, 2018;
|
|
|
|
|
●
|
a
note issued to 1112 Third Avenue Corp. in the principal amount of $375 had the interest rate reduced from 12% to 3% per annum
and the maturity date extended from March 31, 2016 to January 1, 2018;
|
|
|
|
|
●
|
notes
issued to Mark Munro 1996 Charitable Remainder UniTrust in the aggregate principal amount of $275 had the interest rates reduced
from 12% to 3% per annum and the maturity dates extended from March 31, 2016 to January 1, 2018; and
|
|
|
|
|
●
|
notes
issued to Pascack Road, LLC in the aggregate principal amount of $1,575 had the interest rate reduced from 12% to 3% per annum
and the maturity dates extended from March 31, 2016 to January 1, 2018.
|
In consideration for such
restructuring, the Company issued to Mark Munro 63,700 shares of common stock, the CamaPlan FBO Mark Munro IRA 39,690 shares of
common stock, 1112 Third Avenue Corp. 87,500 shares of common stock, the Mark Munro 1996 Charitable Remainder UniTrust 27,500
shares of common stock and Pascack Road, LLC 157,500 shares of common stock. The Company recorded a loss on modification of debt
of $798 in the unaudited condensed consolidated statement of operations during the nine months ended September 30, 2015 related
to the consideration given to the debt holders.
Restructuring
of Related Party Promissory Notes Issued in 2014
On February 25,
2015, the Company restructured the terms of certain related-party promissory notes and term loans issued to Mark Munro, Cama Plan
FBO Mark Munro IRA, 1112 Third Ave. Corp., the Mark Munro 1996 Charitable Remainder Trust and Pascack Road, LLC in order to extend
the maturity dates thereof and to reduce the interest rate accruing thereon. The following notes were restructured as follows:
|
●
|
notes
issued to Mark Munro in the aggregate principal amount of $700 had the interest rates reduced from 18% to 3% per annum and
the maturity dates extended from March 31, 2016 to January 1, 2018;
|
|
|
|
|
●
|
notes
issued to CamaPlan FBO Mark Munro IRA in the aggregate principal amount of $200 had the interest rates reduced from 12% to
3% per annum and the maturity dates extended from March 31, 2016 to January 1, 2018;
|
|
|
|
|
●
|
notes
issued to Mark Munro 1996 Charitable Remainder UniTrust in the aggregate principal amount of $300 had the interest rates reduced
from 18% to 3% per annum and the maturity dates extended from March 31, 2016 to January 1, 2018; and
|
|
|
|
|
●
|
notes
issued to Pascack Road, LLC in the aggregate principal amount of $1,075 had the interest rate reduced from 18% to 3% per annum
and the maturity dates extended from March 31, 2016 to January 1, 2018.
|
In
consideration for such restructuring, the Company issued to Mark Munro 95,600 shares of common stock, the CamaPlan FBO Mark Munro
IRA 41,600 shares of common stock, the Mark Munro 1996 Charitable Remainder UniTrust 62,400 shares of common stock and Pascack
Road, LLC 223,600 shares of common stock. The Company recorded a loss on extinguishment of debt of $1,159 on the unaudited condensed
consolidated statement of operations as of March 31, 2015 related to the consideration given to the debt holders.
Forward
Investments Working Capital Loan
On February 4, 2014 and
March 28, 2014, Forward Investments, LLC made loans to the Company for working capital purposes in the amounts of $1,800 and $1,200,
respectively. Such loans are evidenced by promissory notes that originally bore interest at the rate of 10% per annum, were to
mature on June 30, 2015 and originally were convertible into shares of the Company’s common stock at an initial conversion
price of $6.36 per share.
Due
to the embedded conversion feature of the Forward Investments, LLC loans, the Company deemed this feature to be a derivative and
recorded a debt discount in the amount of $8,860, which is being amortized over the life of the loans using the effective interest
method. Refer to Note 9 Derivative Instruments for further detail on the Forward Investments derivative.
These
working capital loans were restructured as part of the March 4, 2015 Forward Investments, LLC note restructuring agreement. Refer
to the restructuring paragraphs noted later within this footnote.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
Restructuring
of Forward Investments, LLC Promissory Notes and Working Capital Loan
On
March 4, 2015, the Company restructured the terms of certain promissory notes issued by it to a related party investor, Forward
Investments, LLC, in order to extend the maturity dates thereof, reduce the seniority and reduce the interest rate accruing thereon.
The following notes were restructured as follows:
|
●
|
notes
issued to Forward Investments, LLC in the aggregate principal amount of $3,650 that bear interest at the rate of 10% per annum,
had the maturity date extended from June 30, 2015 to July 1, 2016;
|
|
●
|
notes
issued to Forward Investments, LLC in the principal amount of $2,825 that bear interest at the rate of 2% per annum, had the
maturity date extended from June 30, 2015 to July 1, 2016; and
|
|
|
|
|
●
|
notes
issued to Forward Investments, LLC in the aggregate principal amount of $2,645 were converted from senior notes to junior
notes, had the interest rate reduced from 18% to 3% per annum, had the maturity date extended by approximately three years
to January 1, 2018, and originally were convertible at a conversion price of $6.36 per share until the Convertible Debentures
were repaid in full and thereafter $2.35 per share, subject to further adjustment as set forth therein.
|
In connection with
such restructuring, Forward Investments, LLC agreed to lend to the Company an amount substantially similar to the accrued interest
the Company owed to Forward Investments, LLC on the restructured notes. In consideration for such restructuring and additional
payments made by Forward Investments, LLC to the Company, the Company issued to Forward Investments, LLC an additional convertible
note in the original principal amount of $1,730 with an interest rate of 3% per annum, a maturity date of January 1, 2018, and
an initial conversion price of $6.36 per share until the Convertible Debentures were repaid in full and thereafter $2.35 per share,
subject to further adjustment as set forth therein, and provided Forward Investments, LLC the option to lend the Company an additional
$8,000 in the form of convertible notes similar to the existing convertible notes of the Company issued to Forward Investments,
LLC. The convertible note was issued to Forward Investments, LLC as an incentive to restructure the above-mentioned notes and resulted
in the Company recording a loss on modification of debt of $1,508 on the unaudited condensed consolidated statement of operations
during the nine months ended September 30, 2015.
As part of the restructuring,
Forward Investments, LLC agreed to convert $390 of accrued interest on the above-mentioned loans to a new note bearing interest
at the rate of 6.5% per annum that matures on July 1, 2016.
In
conjunction with the extension of the 2% and 10% convertible notes, the Company recorded an additional $1,916 of debt discount
at the date of the restructuring. Refer to Note 9 for detail on the additional debt discount related to the restructuring.
Revolving
Line of Credit
On July 3, 2014, the Company
obtained an unsecured $3,000 interim revolving line of credit from MMD Genesis LLC, the Mark Munro 1996 Charitable Remainder UniTrust,
CamaPlan FBO Mark Munro IRA, Mark Munro, Pascack Road, LLC, and Forward Investments, LLC, all of which are related parties, to
provide working capital and repay certain indebtedness. The line has a maturity date of March 31, 2016, and bears interest at
the rate of 1.5% per month on funds drawn.
As
of September 30, 2015, there was no amount outstanding under the related-party revolving line of credit.
Convertible
Promissory Note to Frank Jadevaia
On January 1, 2014,
the Company acquired all of the outstanding capital stock of IPC. As part of the purchase price for the acquisition, the Company
issued a convertible promissory note to Frank Jadevaia, the current President of the Company, in the original principal amount
of $6,255. The convertible promissory note accrues interest at the rate of 8% per annum, and all principal and interest accruing
thereunder was originally due and payable on December 31, 2014. At the election of Mr. Jadevaia, the convertible promissory note
is convertible into shares of the Company's common stock at a conversion price of $16.99 per share (subject to equitable adjustments
for stock dividends, stock splits, recapitalizations and other similar events). The Company can elect to force the conversion of
the convertible promissory note if the Company’s common stock is trading at a price greater than or equal to $16.99 for ten
consecutive trading days.
On December 31,
2014, the Company and Mr. Jadevaia agreed to a modification of the convertible promissory note. The term of the convertible promissory
note was extended to May 30, 2016 and, in consideration for this modification, the Company issued to Mr. Jadevaia 100,000 shares
of common stock.
On May 19, 2015,
Mr. Jadevaia assigned $500 of principal related to the convertible promissory note and the assignees converted all $500 principal
amount of such note into 232,182 shares of the Company’s common stock with a fair value of $3.38 per common share. Refer
to Note 11, Capital Stock, for further detail on this transaction.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
Convertible
Promissory Note to Scott Davis
On
July 1, 2014, the Company issued an unsecured convertible promissory note in the principal amount of $250 to Scott Davis, who
is a related party. The note bears interest at the rate of 8% per annum, originally matured on January 1, 2015 and is convertible
into shares of the Company’s common stock at an initial conversion price of $6.59. The note is currently outstanding and
payable on demand. The Company evaluated the convertible feature and determined that the value was de minimis and as such, the
Company did not bifurcate the convertible feature.
On March 25, 2015,
the Company and Mr. Davis agreed to a modification of the convertible promissory note. The term of the note was extended to May
30, 2016 and, in consideration for this modification, the Company issued to Mr. Davis 22,222 shares of common stock with a fair
value of $2.16 per share.
On May 31, 2015,
Mr. Davis converted $25 of principal amount due into 11,261 shares of common stock, with a fair value of $3.53 per share and recorded
a loss on debt conversion of $13 on the unaudited condensed consolidated statement of operations.
14.
SEGMENTS
The Company has acquired
three material companies since January 1, 2014. With each acquisition, the Company evaluated the newly-acquired company’s
sources of revenues and costs of revenues. Due to continued expansion, the Company evaluated its recent acquisitions and their
impact upon the existing segment structure. As of December 31, 2014, the Company operated within four operating segments that
were aggregated into three reportable segments. During the three months ended March 31, 2015, the Company determined that its
activities within the cloud services operating segment were of a material nature to the Company as a whole and had different margins
than the other components of the managed services segment. As such, the Company determined that the cloud services and managed
services segments should be presented separately within the unaudited condensed consolidated financial statements. As of September
30, 2015, the Company determined that it has four reportable segments: applications and infrastructure, professional services,
managed services, and cloud services.
The
Company identified its operating segments based on the services provided by its various operations and the financial information
used by its chief operating decision maker to make decisions regarding the allocation of resources to and the financial performance
of the operating segments. The reporting segments represent an aggregation of individual operating segments with similar economic
characteristics. The applications and infrastructure operating segment is an aggregation of the component operations of Tropical,
RM Leasing, T N S and the AWS Entities. The professional services operating segment is an aggregation of the operations of the
ADEX Entities. The managed services operating segment is primarily comprised of the operations of IPC and RentVM. The cloud services
operating segment is comprised of the operations of VaultLogix.
In
addition to the operating segments, the Company has determined that certain costs related to the general operations of the Company
cannot be reasonably allocated to each individual segment. These costs are not part of the factors that the chief operating decision
maker uses to calculate gross margin. As such, the Company has chosen to present those costs within a general “Corporate”
line item for presentation purposes.
Segment
information relating to the Company’s results of continuing operations was as follows:
(dollar amounts in thousands)
|
|
Three months ended September
30,
|
|
|
Nine months ended
September
30,
|
|
Revenues
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
|
|
(Restated)
|
|
|
|
(Revised)
|
|
|
|
(Restated)
|
|
|
|
(Revised)
|
|
Applications and infrastructure
|
|
$
|
5,597
|
|
|
$
|
7,188
|
|
|
$
|
15,088
|
|
|
$
|
15,660
|
|
Professional services
|
|
|
6,475
|
|
|
|
10,389
|
|
|
|
19,649
|
|
|
|
20,699
|
|
Managed services
|
|
|
5,547
|
|
|
|
2,971
|
|
|
|
20,679
|
|
|
|
16,102
|
|
Cloud services
|
|
|
2,591
|
|
|
|
-
|
|
|
|
8,033
|
|
|
|
-
|
|
Total
|
|
$
|
20,210
|
|
|
$
|
20,548
|
|
|
$
|
63,449
|
|
|
$
|
52,461
|
|
Operating Loss by Segment
|
|
Three months ended
September
30,
|
|
|
Nine months ended
September
30,
|
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
|
(Restated)
|
|
|
(Revised)
|
|
|
(Restated)
|
|
|
(Revised)
|
|
Applications and infrastructure
|
|
$
|
79
|
|
|
$
|
605
|
|
|
$
|
327
|
|
|
$
|
1,739
|
|
Professional services
|
|
|
170
|
|
|
|
(2,765
|
)
|
|
|
71
|
|
|
|
(3,281
|
)
|
Managed services
|
|
|
(142
|
)
|
|
|
(2,630
|
)
|
|
|
(1,214
|
)
|
|
|
(3,812
|
)
|
Cloud services
|
|
|
27
|
|
|
|
-
|
|
|
|
808
|
|
|
|
-
|
|
Corporate
|
|
|
(1,755
|
)
|
|
|
(2,803
|
)
|
|
|
(11,551
|
)
|
|
|
(7,305
|
)
|
Total
|
|
$
|
(1,621
|
)
|
|
$
|
(7,593
|
)
|
|
$
|
(11,559
|
)
|
|
$
|
(12,659
|
)
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
Gross Profit
|
|
Three months ended
September
30,
|
|
|
Nine months ended
September
30,
|
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
|
(Restated)
|
|
|
(Revised)
|
|
|
(Restated)
|
|
|
(Revised)
|
|
Applications and infrastructure
|
|
$
|
1,416
|
|
|
$
|
2,070
|
|
|
$
|
4,072
|
|
|
$
|
5,612
|
|
Professional services
|
|
|
1,450
|
|
|
|
3,173
|
|
|
|
4,139
|
|
|
|
5,260
|
|
Managed services
|
|
|
1,998
|
|
|
|
190
|
|
|
|
6,115
|
|
|
|
4,165
|
|
Cloud services
|
|
|
2,115
|
|
|
|
-
|
|
|
|
6,665
|
|
|
|
-
|
|
Total
|
|
$
|
6,979
|
|
|
$
|
5,433
|
|
|
$
|
20,991
|
|
|
$
|
15,037
|
|
Interest Expense
|
|
Three months ended
September
30,
|
|
|
Nine months ended
September
30,
|
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
Applications and infrastructure
|
|
$
|
4
|
|
|
$
|
14
|
|
|
$
|
19
|
|
|
$
|
49
|
|
Professional services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Cloud services
|
|
|
506
|
|
|
|
-
|
|
|
|
1,622
|
|
|
|
-
|
|
Corporate
|
|
|
2,050
|
|
|
|
2,741
|
|
|
|
6,990
|
|
|
|
9,338
|
|
Total
|
|
$
|
2,560
|
|
|
$
|
2,755
|
|
|
$
|
8,631
|
|
|
$
|
9,388
|
|
Total
Assets by Segment
|
|
September 30,
2015
|
|
|
December 31,
2014
|
|
|
|
|
(Restated)
|
|
|
|
(Revised)
|
|
Applications
and infrastructure
|
|
$
|
19,324
|
|
|
$
|
19,517
|
|
Professional
services
|
|
|
18,056
|
|
|
|
19,526
|
|
Managed
services
|
|
|
36,781
|
|
|
|
39,912
|
|
Cloud
services
|
|
|
38,969
|
|
|
|
41,628
|
|
Corporate
|
|
|
1,778
|
|
|
|
1,056
|
|
Total
|
|
$
|
114,908
|
|
|
$
|
121,639
|
|
|
|
September 30, 2015
|
|
|
December 31, 2014
|
|
Goodwill
|
|
|
|
|
(Revised)
|
|
Applications and infrastructure
|
|
$
|
6,906
|
|
|
$
|
6,906
|
|
Professional services
|
|
|
9,257
|
|
|
|
9,257
|
|
Managed services
|
|
|
18,402
|
|
|
|
18,402
|
|
Cloud services
|
|
|
23,349
|
|
|
|
23,349
|
|
Total
|
|
$
|
57,914
|
|
|
$
|
57,914
|
|
Revenues by Segment by Geographic Region
|
|
Three months ended
September 30, 2015
|
|
|
Nine months ended
September 30, 2015
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
Applications and infrastructure
|
|
$
|
5,368
|
|
|
$
|
229
|
|
|
$
|
5,597
|
|
|
$
|
14,221
|
|
|
$
|
867
|
|
|
$
|
15,088
|
|
Professional services
|
|
|
6,451
|
|
|
|
24
|
|
|
|
6,475
|
|
|
|
19,553
|
|
|
|
96
|
|
|
|
19,649
|
|
Managed services
|
|
|
5,547
|
|
|
|
-
|
|
|
|
5,547
|
|
|
|
20,679
|
|
|
|
-
|
|
|
|
20,679
|
|
Cloud services
|
|
|
2,420
|
|
|
|
171
|
|
|
|
2,591
|
|
|
|
7,557
|
|
|
|
476
|
|
|
|
8,033
|
|
Total
|
|
$
|
19,786
|
|
|
$
|
424
|
|
|
$
|
20,210
|
|
|
$
|
62,010
|
|
|
$
|
1,439
|
|
|
$
|
63,449
|
|
Revenues by Segment by Geographic Regio
n
|
|
Three months ended
September
30, 2014
|
|
|
Nine months ended
September
30, 2014
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
Applications and infrastructure
|
|
$
|
6,421
|
|
|
$
|
767
|
|
|
$
|
7,188
|
|
|
$
|
13,255
|
|
|
$
|
2,405
|
|
|
$
|
15,660
|
|
Professional services
|
|
|
10,330
|
|
|
|
59
|
|
|
|
10,389
|
|
|
|
20,542
|
|
|
|
157
|
|
|
|
20,699
|
|
Cloud and managed services
|
|
|
2,971
|
|
|
|
-
|
|
|
|
2,971
|
|
|
|
16,102
|
|
|
|
|
|
|
|
16,102
|
|
Total
|
|
$
|
19,722
|
|
|
$
|
826
|
|
|
$
|
20,548
|
|
|
$
|
49,899
|
|
|
$
|
2,562
|
|
|
$
|
52,461
|
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
Gross Profit by Segment by Region
|
|
Three months ended
September
30, 2015
|
|
|
Nine months ended
September
30, 2015
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
Applications and infrastructure
|
|
$
|
1,349
|
|
|
$
|
67
|
|
|
$
|
1,416
|
|
|
$
|
3,874
|
|
|
$
|
198
|
|
|
$
|
4,072
|
|
Professional services
|
|
|
1,445
|
|
|
|
5
|
|
|
|
1,450
|
|
|
|
4,114
|
|
|
|
25
|
|
|
|
4,139
|
|
Managed services
|
|
|
1,998
|
|
|
|
-
|
|
|
|
1,998
|
|
|
|
6,115
|
|
|
|
-
|
|
|
|
6,115
|
|
Cloud services
|
|
|
1,973
|
|
|
|
142
|
|
|
|
2,115
|
|
|
|
6,270
|
|
|
|
395
|
|
|
|
6,665
|
|
Total
|
|
$
|
6,765
|
|
|
$
|
214
|
|
|
$
|
6,979
|
|
|
$
|
20,373
|
|
|
$
|
618
|
|
|
$
|
20,991
|
|
Gross Profit by Segment by Region
|
|
Three months ended
September
30, 2014
|
|
|
Nine months ended
September
30, 2014
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
Applications and infrastructure
|
|
$
|
1,767
|
|
|
$
|
303
|
|
|
$
|
2,070
|
|
|
$
|
4,421
|
|
|
$
|
1,191
|
|
|
$
|
5,612
|
|
Professional services
|
|
|
3,157
|
|
|
|
16
|
|
|
|
3,173
|
|
|
|
5,221
|
|
|
|
39
|
|
|
|
5,260
|
|
Cloud and managed services
|
|
|
190
|
|
|
|
-
|
|
|
|
190
|
|
|
|
4,165
|
|
|
|
-
|
|
|
|
4,165
|
|
Total
|
|
$
|
5,114
|
|
|
$
|
319
|
|
|
$
|
5,433
|
|
|
$
|
13,807
|
|
|
$
|
1,230
|
|
|
$
|
15,037
|
|
Operating (Loss) Income by Segment by Region
|
|
Three months ended
September
30, 2015
|
|
|
Nine months ended
September
30, 2015
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
Applications and infrastructure
|
|
$
|
43
|
|
|
$
|
36
|
|
|
$
|
79
|
|
|
$
|
242
|
|
|
$
|
85
|
|
|
$
|
327
|
|
Professional services
|
|
|
193
|
|
|
|
(23
|
)
|
|
|
170
|
|
|
|
119
|
|
|
|
(48
|
)
|
|
|
71
|
|
Managed services
|
|
|
(142
|
)
|
|
|
-
|
|
|
|
(142
|
)
|
|
|
(1,214
|
)
|
|
|
-
|
|
|
|
(1,214
|
)
|
Cloud services
|
|
|
(115
|
)
|
|
|
142
|
|
|
|
27
|
|
|
|
413
|
|
|
|
395
|
|
|
|
808
|
|
Corporate
|
|
|
(1,755
|
)
|
|
|
-
|
|
|
|
(1,755
|
)
|
|
|
(11,551
|
)
|
|
|
-
|
|
|
|
(11,551
|
)
|
Total
|
|
$
|
(1,776
|
)
|
|
$
|
155
|
|
|
$
|
(1,621
|
)
|
|
$
|
(11,991
|
)
|
|
$
|
432
|
|
|
$
|
(11,559
|
)
|
Operating (Loss) Income by Segment by Region
|
|
Three months ended
September
30, 2014
|
|
|
Nine months ended
September
30, 2014
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
Applications and infrastructure
|
|
$
|
351
|
|
|
$
|
254
|
|
|
$
|
605
|
|
|
$
|
703
|
|
|
$
|
1,036
|
|
|
$
|
1,739
|
|
Professional services
|
|
|
(2,778
|
)
|
|
|
13
|
|
|
|
(2,765
|
)
|
|
|
(3,310
|
)
|
|
|
29
|
|
|
|
(3,281
|
)
|
Cloud and managed services
|
|
|
(2,630
|
)
|
|
|
-
|
|
|
|
(2,630
|
)
|
|
|
(3,812
|
)
|
|
|
-
|
|
|
|
(3,812
|
)
|
Corporate
|
|
|
(2,803
|
)
|
|
|
-
|
|
|
|
(2,803
|
)
|
|
|
(7,305
|
)
|
|
|
-
|
|
|
|
(7,305
|
)
|
Total
|
|
$
|
(7,860
|
)
|
|
$
|
267
|
|
|
$
|
(7,593
|
)
|
|
$
|
(13,724
|
)
|
|
$
|
1,065
|
|
|
$
|
(12,659
|
)
|
15. SUBSEQUENT EVENTS
Promissory Note and Subsequent Conversions
On November 12, 2015, the Company
entered into a securities purchase agreement with an investor whereby the Company issued a senior convertible note, for cash proceeds
of $500, in the original principal amount of $525. The note has a term of one year, bears interest at the rate of 12% per annum
and, at the election of the investor, the note is convertible into shares of the Company’s common stock at a conversion
price equal to $1.75 per share, subject to adjustment as set forth in the note. The note shall amortize in twelve bi-weekly installments
beginning on the six month anniversary of the note’s issuance. Amortization payments may be made, at the Company’s
option, either in (i) cash, in which case the Company would also have to issue to the investor a number of shares of the Company’s
common stock equal to 5% of such amortization payment or (ii) subject to the Company satisfying certain equity conditions, shares
of the Company’s common stock, pursuant to the amortization conversion rate, which is equal to the lower of (x) $1.75 and
(y) a 25% discount to lowest volume weighted average price of the Company’s common stock in the prior three trading days.
On November 12, 2015, the Company
entered into an exchange agreement with the investor whereby the Company exchanged a portion of the senior secured note originally
issued by the Company to GPB Life Science Holdings, LLC on December 3, 2014 and subsequently assigned to the investor, for new
senior convertible notes, in three tranches of $500 for a total principal amount of $1,500. The notes have a term of one year,
bear interest at the rate of 12% per annum, and are convertible into shares of the Company’s common stock at a conversion
price equal to $1.25 per share, subject to adjustment as set forth in the notes. Starting on the first week anniversary of the
issuance of the new senior convertible notes and continuing thereafter, the investor shall on a bi-weekly basis redeem one-sixth
of the face amount of the senior convertible notes and guaranteed interest. The redemptions may be made, at the Company’s
option, either in (i) cash, in which case the Company would also have to issue to the investor a number of shares of the Company’s
common stock equal to 5% of such redemption payment or (ii) subject to the Company satisfying certain equity conditions, shares
of the Company’s common stock, pursuant to the redemption conversion rate, which is equal to the lower of (x) $1.25 and
(y) a 25% discount to lowest volume weighted average price of the Company’s common stock in the prior three trading days.
The Company issued the three
tranches of new senior convertible notes on the following dates:
|
●
|
$500
issued on November 13, 2015 which matured on January 28, 2016 (“Tranche 1”),
|
|
|
|
|
●
|
$500
issued on November 27, 2015 which matured on February 19, 2016 (“Tranche 2”) and
|
|
|
|
|
●
|
$500
issued on December 11, 2015 which matured on March 4, 2016 (“Tranche 3”).
|
Subsequent to December 31,
2015, the investor who holds the promissory note tranches issued on November 13, 2015, November 27, 2015, and December 11, 2015
converted the debt into shares of the Company’s common stock. Below is a summary of the transactions:
Tranche 1:
|
●
|
During
January 2016, the investor converted $167 principal amount of debt into 133,334 shares of the Company’s common stock.
|
|
|
|
|
●
|
On
February 3, 2016, the investor converted the remaining $83 principal amount of debt into 66,667 shares of the Company’s
common stock. Tranche 1 of the Promissory Note debt was fully amortized as of this date.
|
Tranche 2:
|
●
|
During
January 2016, the investor converted $167 principal amount of debt into 133,334 shares of the Company’s common stock.
|
|
|
|
|
●
|
During
February 2016, the investor converted $167 principal amount of debt into 133,334 shares of the Company’s common stock.
Tranche 2 of the Promissory Note debt was fully amortized as of February 22, 2016.
|
Tranche 3:
|
●
|
During
January 2016, the investor converted $250 principal amount of debt into 200,001 shares of the Company’s common stock.
|
|
|
|
|
●
|
During
February 2016, the investor converted $167 principal amount of debt into 133,334 shares of the Company’s common stock.
|
|
●
|
On
March 2, 2016, the investor converted the remaining $83 principal amount into 66,667 shares of the Company’s common
stock.
|
Bridge Financing – GPB Life Science Holdings,
LLC
On November 12, 2015, the Company
entered into an exchange agreement with the investor (as noted above in the
Promissory Note and Subsequent Conversions
section
of this footnote) whereby the Company exchanged a portion of the senior secured note originally issued by the Company to GPB Life
Science Holdings, LLC on December 3, 2014 and subsequently assigned to the investor, for new senior convertible notes, in three
tranches of $500 for a total principal amount of $1,500.
GPB Life Science Holdings,
LLC exchanged the following senior secured notes to the investor in the following three tranches:
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$500
exchanged on November 13, 2015 which matured on January 28, 2016 (Tranche 1),
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$500
exchanged on November 27, 2015 which matured on February 19, 2016 (Tranche 2), and
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$500
exchanged on December 11, 2015 which matured on March 4, 2016 (Tranche 3).
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On December 29, 2015, the Company
entered into a conversion agreement with GPB Life Science Holdings, LLC pursuant to which, among other things, (i) the Company
used $2,300 of the JGB (Cayman) Waltham Ltd. senior secured convertible debentures (as described later within this footnote) to
reduce the total amount owed by the Company to GPB Life Science Holdings, LLC to $1,500, (ii) if the closing price per share of
the Company’s common stock 90 days after December 29, 2015 is less than the remaining balance conversion price, as adjusted,
then the Company shall issue to GPB Life Science Holdings, LLC additional unregistered shares of the Company’s common stock
in an aggregate amount equal to the amount set forth in the conversion agreement, (iii) GPB Life Science Holdings, LLC and the
Company will convert the remaining balance of $1,500 into shares of the Company’s common stock at a conversion price per
share equal to 75% multiplied by the lower of (x) the average volume weighted average price per share of the Company’s common
stock for the five prior trading days and (y) the one day volume weighted price for a share of the Company’s common stock
on December 29, 2015, (iv) GPB Life Science Holdings, LLC will reduce the exercise price of those certain outstanding warrants
originally issued by the Company on May 14, 2015 to $1.75, and (v) GPB Life Science Holdings, LLC will release all of its remaining
security interest in the Company. On January 22, 2016, the Company issued 500,000 shares of common stock in full settlement of
this provision and GPB Life Science Holdings, LLC released its remaining security interest in the Company.
On December 29, 2015 GPB Life
Science Holdings, LLC converted $1,500 of principal amount outstanding (as noted in item (iii) above). Refer to Note 16 Stockholders’
Equity for additional detail on this transaction.
Investment in NGNWare, LLC
On December 17, 2015, the Company
acquired a 13.7% ownership interest in NGNWare, LLC (“NGNWare”) for $800.
Senior Secured Convertible Debenture
On December 29, 2015, the Company
entered into a securities purchase agreement with JGB (Cayman) Waltham Ltd. (“JGB”) whereby the Company issued to
JGB, for gross proceeds of $7,500, a $500 original issue discount senior secured convertible debenture in the aggregate principal
amount of $7,500. The debenture has a maturity date of June 30, 2017, bears interest at 10% per annum, and is convertible into
shares of the Company’s common stock at a conversion price equal to $1.33 per share, subject to adjustment as set forth
in the debenture. The Company shall pay interest to JGB on the aggregate unconverted and then outstanding principal amount of
the debenture in arrears each calendar month and on the maturity date in cash, or, at the Company’s option and subject to
the Company satisfying certain equity conditions, in shares of the Company’s common stock. In addition, December 29, 2016
shall be an interest payment date on which the Company shall pay to JGB a fixed amount, which shall be additional interest under
the debenture, equal to $350 in cash, shares of the Company’s common stock or a combination thereof. Commencing on February
29, 2016, JGB shall have the right, at its option, to require the Company to redeem up to $350 of the outstanding principal amount
of the debenture per calendar month, which redemption may be made in cash or, at the Company’s option and subject to certain
satisfying equity conditions, in shares of the Company’s common stock. The debenture is guaranteed to by the Company and
certain of its subsidiaries and is secured by all assets of the Company. The total cash received by the Company as a result of
this agreement was $3,730.
The Company used a portion
of the proceeds from the debenture to pay $2,300 remaining under the Bridge Financing – GPB Life Science Holdings, LLC senior
secured convertible debt.
Acquisition of Assets of SDN Essentials, LLC
On January 1, 2016, the Company
acquired the assets of SDN Essentials, LLC (“SDN”) for $50 in cash, 1,000,000 shares of the Company’s common
stock valued at $1.00 per share, and an earn out provision of $515, subject to SDN meeting certain revenue targets. In addition,
the Company will issue a pool of 50,000 shares of the Company’s common stock which will be allocated among all employees
of SDN.
Asset Purchase Agreement
On February 17, 2016, the Company
consummated the sale of certain assets of VaultLogix and its subsidiaries, DPS and USDA, to KeepItSafe, Inc. for an aggregate
purchase price of $24,000. Of the $24,000 purchase price, $22,000 was paid to the Company at closing and $2,000 is being held
in escrow, to be released twelve months after the closing date of the sale.
Securities Exchange Agreement
On February 17, 2016, the Company
entered into a securities exchange agreement with VaultLogix and the lender party thereto whereby the Company exchanged the White
Oak Global Advisors, LLC promissory note and subsequently assigned to the lender party a new 8.25% senior secured convertible
note dated February 18, 2016 in the aggregate principal amount of $11,601. As a result of the assignment, the Company and VaultLogix’s
obligations to White Oak Global Advisors, LLC have been satisfied.
The new note has a maturity
date of February 18, 2019, bears interest at 8.25% per annum, and is convertible into shares of the Company’s common stock
at a conversion price equal to the lowest of: (a) $2.00 per share, (b) 80% of the average of the volume weighted average prices
for each of the five consecutive trading days immediately prior to the applicable conversion date, and (c) 85% of the volume weighted
average price for the trading day immediately preceding the applicable conversion date, subject to adjustment as set forth in
the note. The Company has the option to pay interest in either cash or shares of the Company’s common stock.
Notice from the Listing Qualifications Department
of The Nasdaq Stock Market
On April 18, 2016, the Company
received a written notice from the Listing Qualifications Department of the Nasdaq Stock Market (“Nasdaq”) indicating
that the Company was not in compliance with Nasdaq Listing Rule 5250(c)(1) for continued listing because the Company had not yet
filed its Annual Report on Form 10-K for the period ended December 31, 2015.
On May 24, 2016, the Company
received a written notice from the Listing Qualifications Department of the Nasdaq indicating that the Company was not in compliance
with Nasdaq Listing Rule 5250(c)(1) for continued listing because the Company had not yet filed its Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 2016.
The notice provides that the
Company has until June 17, 2016 to submit a plan to regain compliance with Nasdaq’s continued listing requirements.
JGB First Forbearance and Amendment Agreement
On May 17, 2016, the Company
entered into a Forbearance and Amendment Agreement (the “Debenture Forbearance Agreement”) with JGB pursuant to which
JGB agreed to forbear action with respect to certain existing defaults in accordance with the terms of the Debenture Forbearance
Agreement. The defaults, which were not monetary in nature, related to the Company’s inability to timely file its annual
report on form 10-K for the fiscal year ended December 31, 2015.
Amended and Restated Senior
Secured Convertible Note
In connection with the execution
of the Debenture Forbearance Agreement, the Company executed and issued a second amended and restated senior secured convertible
debenture (the “Amended and Restated Debenture”) in order to amend the original 10% senior secured convertible debenture
(the “Original Debenture”) issued on December 29, 2015 by: (i) reducing the conversion price at which the Amended
and Restated Debenture converts into shares of the Company’s common stock to $0.80 per share, subject to equitable adjustments
as set forth in the Amended and Restated Debenture; and (ii) eliminating the provisions that provided for (A) the issuance of
common stock at a discount to the market price of the common stock and (B) anti-dilution protection with respect to JGB’s
conversion rights under the Original Debenture.
The Amended and Restated Debenture
was issued in the aggregate principal amount of $7,500, has a maturity date of May 31, 2019, bears interest at 0.67% per annum,
and is convertible into shares of the Company’s common stock at a fixed conversion price equal to $0.80 per share, subject
to equitable adjustments as set forth in the Amended and Restated Debenture. The Company shall pay interest to JGB on the aggregate
unconverted and then outstanding principal amount of the Amended and Restated Debenture, payable monthly in arrears as of the
last trading day of each calendar month and on May 31, 2019, in cash. In addition, the Company shall pay JGB an additional amount
equal to 7.5% of the outstanding principal amount on the Amended and Restated Debenture on each of May 31, 2017; May 31, 2018;
and May 31, 2019, subject to certain exceptions set forth in the Amended and Restated Debenture. Commencing on May 17, 2016, JGB
shall have the right, at its option, to require the Company to redeem up to $169 of the outstanding principal amount of the Amended
and Restated Debenture plus the then accrued and unpaid interest thereon per calendar month in cash. The Amended and Restated
Debenture contains standard events of default.
Senior Secured Note
In connection with the execution
of the Debenture Forbearance Agreement, the Company executed and issued a 0.67% senior secured note (the “2.7 Note”),
dated May 17, 2016, in the aggregate principal amount of $2,745 to JGB. The 2.7 Note has a maturity date of May 31, 2019, bears
interest at 0.67% per annum, and contains standard events of default.
JGB Second Forbearance and Amendment Agreement
On May 17, 2016, the Company
entered into a forbearance and amendment agreement (the “Note Forbearance Agreement”) with VaultLogix and JGB, pursuant
to which JGB agreed to forbear action with respect to certain existing default in accordance with the terms of the Note Forbearance
Agreement. The defaults, which were not monetary in nature, related to the Company’s inability to timely file its annual
report on form 10-K for the fiscal year ended December 31, 2015.
Amended and Restated Senior
Secured Convertible Note
In connection with the execution
of the Note Forbearance Agreement, the Company executed and issued an amended and restated senior secured convertible note (the
“Amended and Restated Note”) in order to amend the original note by: (i) reducing the conversion price at which the
Amended and Restated Note converts into shares of the Company’s common stock at $0.80 per share, subject to equitable adjustments
as set forth in the Amended and Restated Debenture; and (ii) eliminating provisions that provided for (A) the issuance of common
stock at a discount to the market price of the common stock and (B) anti-dilution protection with respect to JGB’s conversion
rights under the original note.
The Amended and Restated Note
was issued in the aggregate principal amount of $11,601, has a maturity date of May 31, 2019, bears interest at 0.67% per annum,
and is convertible into shares of the Company’s common stock at a fixed conversion price of $0.80 per share, subject to
equitable adjustments as set forth in the Amended and Restated Note. The Company and VaultLogix shall pay interest to JGB on the
aggregate unconverted and then outstanding principal amount of the Amended and Restated Note, payable monthly in arrears as of
the last trading day of each calendar month and on May 31, 2019, in cash. In addition, the Company shall pay to JGB an additional
amount equal to 7.5% of the outstanding principal amount on the Amended and Restated Note on each of May 31, 2017; May 31, 2018;
and May 31, 2019, subject to certain exceptions set forth in the Amended and Restated Note. Commencing on May 17, 2016, JGB shall
have the right, at its option, to require the Company to redeem up to $322 of the outstanding principal amount of the Amended
and Restated Note plus the then accrued and unpaid interest thereon per calendar month in cash. The Amended and Restated Note
contains standard events of default.
Senior Secured Note
In connection with the execution
of the Note Forbearance Agreement, the Company executed and issued a 0.67% senior secured note (the “5.2 Note”), dated
May 17, 2016, in the aggregate principal amount of $5,220 to JGB. The 5.2 Note has a maturity date of May 31, 2019, bears interest
at 0.67% per annum, and contains standard events of default.
Amended Agreement
On May 23, 2016 the Company
entered into an amended agreement with JGB, White Oak Global Advisors, LLC, VaultLogix, and the Guarantors thereto (the “Amended
Agreement”) pursuant to which, the Company requested that (i) JGB cause $172 to be withdrawn from the Blocked Account (as
defined in the original debenture) and made available to the Company, and (ii) JGB cause $328 to be withdrawn from the Deposit
Account (as defined in the original note) and made available to the Company and VaultLogix and, in exchange for the foregoing
(i) VaultLogix will guarantee the obligations of, and provide security for, the Amended and Restated Debenture and the 2.7 Note,
(ii) the Guarantors (as defined in the Amendment Agreement) will guaranty all indebtedness due to JGB under the Amended and Restated
Note and 5.2 Note, and (iii) the Company and each Guarantor will provide security for all obligations owed to JGB under the Amended
and Restated Note and the 5.2 Note in accordance with the terms of an Additional Debtor Joinder, dated May 23, 2016, pursuant
to which the Company and each additional party thereto agrees to be bound by the terms of that certain Security Agreement, dated
as of February 18, 2016, made by VaultLogix in favor of the secured party thereto (the “February Security Agreement”).