2.
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 the Company’s ability to continue
operations depends on the ability to sustain and grow revenue and results of operations as well as the Company’s 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 March 31, 2016, the Company
generated gross profits from operations but failed 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 three months ended March 31, 2016 and the year ended December 31, 2015, the Company suffered recurring losses from operations.
At March 31, 2016 and December 31, 2015, the Company had a stockholders’ deficit of $4,733 and $4,200, respectively. The
decrease of $4,409 in the Company’s working capital from December 31, 2015 to March 31, 2016 was primarily the result of
decreases in accounts receivable of $3,395, $1,376 increase in accrued expenses and $7,815 increase in current derivative financial
instruments based on changes in fair value. The decrease was offset by $5,149 increase in cash and $2,677 increase in other current
assets.
On
or prior to March 31, 2017, the Company has obligations relating to the payment of indebtedness as follows:
|
●
|
$6,865
relating to promissory notes held by related parties that mature prior to March 31, 2017;
|
|
●
|
$5,755
relating to a promissory note held by a related party that matures prior to March 31, 2017;
|
|
●
|
$2,548
relating to senior secured convertible term loans that mature prior to March 31, 2017;
|
|
●
|
$439
relating to current maturities of a convertible note that mature prior to March 31, 2017;
|
|
●
|
$225
relating to a promissory note held by a related party that matures prior to March 31, 2017;
|
|
●
|
$106
relating to a promissory note held by a former owner of Tropical that matures prior to March 31, 2017; and
|
|
●
|
$75
relating 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 March 31, 2017 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 three months ended March 31, 2016,
the Company exchanged certain term loans in connection with the disposal of certain assets for additional funding. 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 March 31, 2017. 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.
3.
PROPERTY AND EQUIPMENT, NET
Property
and equipment as of March 31, 2016 and December 31, 2015 consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Vehicles
|
|
$
|
785
|
|
|
$
|
777
|
|
Computers and office equipment
|
|
|
928
|
|
|
|
905
|
|
Equipment
|
|
|
691
|
|
|
|
605
|
|
Software
|
|
|
171
|
|
|
|
171
|
|
Total
|
|
|
2,575
|
|
|
|
2,458
|
|
Less accumulated depreciation
|
|
|
(1,885
|
)
|
|
|
(1,799
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
690
|
|
|
$
|
659
|
|
Depreciation expense for
the three months ended March 31, 2016 and 2015 was $86 and $96, respectively.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
4.
GOODWILL AND INTANGIBLE ASSETS
Goodwill
The
following table summarizes the Company’s goodwill as of March 31, 2016 and December 31, 2015
|
|
Applications and Infrastructure
|
|
|
Professional Services
|
|
|
Managed Services
|
|
|
Cloud Services
|
|
|
Total
|
|
Balance at December 31, 2015
|
|
$
|
6,906
|
|
|
$
|
9,257
|
|
|
$
|
7,495
|
|
|
$
|
917
|
|
|
$
|
24,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
-
|
|
|
|
823
|
|
|
|
-
|
|
|
|
-
|
|
|
|
823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2016
|
|
$
|
6,906
|
|
|
$
|
10,080
|
|
|
$
|
7,495
|
|
|
$
|
917
|
|
|
$
|
25,398
|
|
Intangible
Assets
The
following table summarizes the Company’s intangible assets as of March 31, 2016 and December 31, 2015:
|
|
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Estimated
Useful
|
|
|
Gross
Carrying
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Impairment
|
|
|
Net Book
|
|
|
|
Life
|
|
|
Amount
|
|
|
Additions
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Reclassification
|
|
|
Charge
|
|
|
Value
|
|
Customer relationship and lists
|
|
|
7-10 yrs.
|
|
|
$
|
14,551
|
|
|
$
|
145
|
|
|
$
|
(5,135
|
)
|
|
$
|
9,561
|
|
|
$
|
14,551
|
|
|
$
|
(4,807
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,744
|
|
Non-compete agreements
|
|
|
2-3 yrs.
|
|
|
|
2,024
|
|
|
|
361
|
|
|
|
(1,811
|
)
|
|
|
574
|
|
|
|
2,723
|
|
|
|
(1,711
|
)
|
|
|
-
|
|
|
|
(699
|
)
|
|
|
313
|
|
Purchased software
|
|
|
16 years
|
|
|
|
4,000
|
|
|
|
-
|
|
|
|
(427
|
)
|
|
|
3,573
|
|
|
|
-
|
|
|
|
(371
|
)
|
|
|
4,000
|
|
|
|
-
|
|
|
|
3,629
|
|
In-process research and development
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,000
|
|
|
|
-
|
|
|
|
(4,000
|
)
|
|
|
-
|
|
|
|
-
|
|
URL's
|
|
|
Indefinite
|
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
Tradenames
|
|
|
1 year
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
59
|
|
|
|
(49
|
)
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
-
|
|
Tradenames
|
|
|
Indefinite
|
|
|
|
3,178
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,178
|
|
|
|
3,178
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,178
|
|
Total intangible assets
|
|
|
|
|
|
$
|
23,761
|
|
|
$
|
506
|
|
|
$
|
(7,373
|
)
|
|
$
|
16,894
|
|
|
$
|
24,519
|
|
|
$
|
(6,938
|
)
|
|
$
|
-
|
|
|
$
|
(709
|
)
|
|
$
|
16,872
|
|
Amortization expense related
to the identifiable intangible assets was $483 and $962 for the three months ended March 31, 2016 and 2015, respectively.
5.
BANK DEBT
Bank
debt as of March 31, 2016 and December 31, 2015 consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Installment note, monthly principal and interest of $1, interest 9.05%, secured by vehicle, maturing July 2016
|
|
$
|
1
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
Four lines of credit, monthly principal and interest, ranging from $0 to $1, interest ranging from 5.5% to 9.75%, guaranteed personally by principal shareholders of acquired companies, maturing July 2016
|
|
|
126
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
Current portion of bank debt
|
|
$
|
127
|
|
|
$
|
131
|
|
The interest expense associated
with the bank debt during the three months ended March 31, 2016 and 2015 amounted to $2 and $3, 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)
6.
TERM LOANS
Term
loans as of March 31, 2016 and December 31, 2015 consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Former owners of RM Leasing, unsecured, non-interest bearing, due on demand
|
|
$
|
3
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
Promissory note with company under common ownership by former owner of Tropical, 9.75% interest, monthly payments of interest only of $1, unsecured and personally guaranteed by officer, due November 2016
|
|
|
106
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
Term loan, White Oak Global Advisors, LLC, originally maturing in February 2019 and paid during February of 2016, interest of 12% with 2% paid-in-kind interest, net of debt discount $366
|
|
|
-
|
|
|
|
10,938
|
|
|
|
|
|
|
|
|
|
|
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, 12% interest, unsecured, maturing in May 2016, net of debt discount of $1 and $9, respectively
|
|
|
150
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
12% senior convertible note, unsecured, maturing in January 2017, net of debt discount of $325 and $507, respectively
|
|
|
1,546
|
|
|
|
1,599
|
|
|
|
|
|
|
|
|
|
|
12% senior convertible note, unsecured, maturing in November 2016, net of debt discount of $108 and $173, respectively
|
|
|
417
|
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
12% senior convertible note tranche 1, unsecured, matured in January 2016, net of debt discount of $15
|
|
|
-
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
12% senior convertible note tranche 2, unsecured, matured in February 2016, net of debt discount of $80
|
|
|
-
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
12% senior convertible note tranche 3, unsecured, matured in March 2016, net of debt discount of $55
|
|
|
-
|
|
|
|
445
|
|
|
|
|
|
|
|
|
|
|
10% senior secured convertible debenture, JGB (Cayman) Waltham Ltd., maturing in June 2017, net of debt discount of $3,474 and $4,179, respectively
|
|
|
3,326
|
|
|
|
3,321
|
|
|
|
|
|
|
|
|
|
|
12% convertible note, Richard Smithline, unsecured, maturing in January 2017, net of debt discount of $68 and $107, respectively
|
|
|
371
|
|
|
|
419
|
|
|
|
|
|
|
|
|
|
|
8.5% senior secured convertible note, JGB (Cayman) Concord Ltd., maturing February 2019, net of debt discount of $1,319
|
|
|
10,282
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,827
|
|
|
|
34,045
|
|
Less: Current portion of term loans
|
|
|
(4,015
|
)
|
|
|
(3,787
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion term loans, net of debt discount
|
|
$
|
27,812
|
|
|
$
|
30,258
|
|
The interest expense,
including amortization of debt discounts, associated with the term loans payable in the quarters ended March 31, 2016 and 2015
amounted to $3,798 and $1,658, respectively.
Promissory
Notes to the Mark Munro 1996 Charitable Remainder UniTrust
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.
On
February 25, 2015, the Company restructured the terms of certain related-party notes and the Mark Munro 1996 Charitable Remainder
UniTrust 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 the 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 the Mark Munro 1996 Charitable Remainder UniTrust in the aggregate principal
amount of $175 had the interest rates reduced from 12% to 3% per annum and the maturity
dates extended from March 31, 2016 to January 1, 2018.
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
In
consideration for such restructuring, the Company issued to the Mark Munro 1996 Charitable Remainder UniTrust 89,900 shares of
common stock which resulted in a loss on extinguishment of debt of $220 in the unaudited condensed consolidated statement of operations
for the three months ended March 31, 2015.
During
June 2015, the Mark Munro 1996 Charitable Remainder UniTrust converted $25 of principal amount of notes payable and related accrued
interest into 8,306 shares of the Company’s common stock.
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.
Revolving
Line of Credit
On
July 3, 2014, the Company obtained an unsecured $3,000 interim revolving line of credit from the Mark Munro 1996 Charitable Remainder
UniTrust to provide working capital as well as cash to make the Company’s upcoming amortization payments pursuant to the
Company’s Convertible Debentures. The line bore interest at the rate of 1.5% per month on funds drawn and matured on March
31, 2016.
As
of March 31, 2016 and December 31, 2015, there was no amount outstanding under the related party revolving line of credit.
Term
Loan - White Oak Global Advisors, LLC
On
October 9, 2014, the Company’s former wholly-owned subsidiary, VaultLogix, entered into a loan and security agreement with
the lenders party thereto, White Oak Global Advisors, LLC, as Administrative Agent, DPS, 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 defined),
as adjusted as of each Libor Index Adjustment Date (as defined) and (ii) 1.00% per annum; plus (b) 1100 basis points per annum.
The LIBOR Index Rate was 1.0896 as of December 31, 2015; 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.
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 December 31, 2015.
Principal
of $11,305 remained outstanding as of December 31, 2015.
On February 17, 2016, the Company
entered into a securities exchange agreement whereby the Company and VaultLogix exchanged the White Oak Global Advisors term loan
and assigned the term loan to JGB (Cayman) Concord Ltd. Refer to the JGB (Cayman) Concord Ltd. Senior Secured Convertible Note
section of this note for further explanation. As a result of this assignment, the Company and VaultLogix’s obligations to
White Oak Global Advisors, LLC has been satisfied as of March 31, 2016. The Company recorded a $843 loss on extinguishment
of debt in the unaudited condensed consolidated statement of operations for the three months ended March 31, 2016.
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.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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 March 31, 2016, the Company had not forced any conversions.
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.
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 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 7 Derivative Instruments for further detail on the derivative
features associated with the August 6, 2015 convertible note.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
On November 12, 2015, the Company
entered into a securities purchase agreement with the 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 began amortizing in twelve bi-weekly
installments beginning on May 12, 2016. 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”).
|
During
the quarter ended March 31, 2016, 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.
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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.
|
Principal of $2,547 and
$4,471 on the notes remained outstanding as of March 31, 2016 and December 31, 2015, respectively.
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 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”) released
(or was 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 was terminated (pursuant to the applicable documents between White Oak and the Company). Refer to Note 7
Derivative Instruments for further detail on the warrant to purchase 250,000 shares of common stock.
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. 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. Refer to Note 7 Derivative Instruments for further detail on the warrant
to purchase 150,000 shares of common stock.
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.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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 on the balance sheet and a related loss on debt extinguishment of $847
on the consolidated 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 consolidated balance sheet 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. Refer to Note 7 Derivative Instruments for further detail on the reduction of the conversion price,
amendment and restatement of the warrants.
The
Company accounted for Amendment No. 2 in accordance with ASC 470-50. In accordance with ASC Topic 470-50, the Company modified
the May 15, 2015 Amendment No. 1 bridge financing senior secured convertible note in the amount $6,020. In conjunction with this
transaction, the Company modified the terms of the equity warrants to reduce the conversion price from $3.75 to $2.00 per share
of the Company’s common stock. Refer to Note 7 Derivative Instruments for further detail on the reduction of the conversion
price of the warrants.
On
November 12, 2015, the Company entered into an exchange agreement with the investor (as noted above in the
Promissory Notes
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:
|
●
|
$500
exchanged on November 13, 2015 which matured on January 28, 2016 (Tranche 1),
|
|
|
|
|
●
|
$500
exchanged on November 27, 2015 which matured on February 19, 2016 (Tranche 2), and
|
|
|
|
|
●
|
$500
exchanged on December 11, 2015 which matured on March 4, 2016 (Tranche 3).
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
The
Company accounted for the exchange in accordance with ASC 470-50. In accordance with ASC Topic 470-50, the Company extinguished
each tranche exchanged and recorded a new note to the investor. For Tranche 1, the Company fair valued the investors’ conversion
features and removed the existing debt discount on Tranche 1 and recorded a loss on extinguishment of $8 on the consolidated statement
of operations as of November 13, 2015. For Tranche 2, the Company fair valued the investors’ conversion features and removed
the existing debt discount on Tranche 2 and recorded a loss on debt extinguishment of $92 on the consolidated statement of operations
as of November 27, 2015. For Tranche 3, the Company fair valued the investors’ conversion features and removed the existing
debt discount on Tranche 3.
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 proceeds 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) the Company agreed that,
if the closing price per share of the Company’s common stock 90 days after December 29, 2015 was less than the remaining
balance conversion price, as adjusted, then the Company would 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 agreed to 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 agreed to 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 released all of its remaining security interest in the assets of 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 assets of the Company (refer to Note 9 Stockholders’ Deficit for additional detail).
The
Company accounted for the payment of $2,300 principal amount outstanding (as noted in item (i) above) to GPB Life Science Holdings,
LLC in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company extinguished $2,300 of the note payable
to GPB Life Science Holdings, LLC, removed the existing derivative liability related to the maturity date feature of $31, reduced
the beneficial conversion feature of $139 which was recorded in additional paid in capital, reduced accrued interest on the notes
of $199, paid $25 in legal fees, and paid interest of $419. In addition, the Company amended the warrants attached to the GPB
Life Science Holdings, LLC convertible debentures (refer to Note 7 Derivative Instruments for additional detail).
On December 29, 2015, GPB Life
Science Holdings, LLC converted $1,500 of principal amount outstanding into 1,918,649 shares of the Company’s common stock.
Richard Smithline Senior 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 7 Derivative Instruments for further
detail on the derivative features associated with the Richard Smithline Senior Convertible Note.
Principal
of $439 and $526 remained outstanding as of March 31, 2016 and December 31, 2015, respectively.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
JGB
(Cayman) Waltham Ltd. Senior Secured Convertible Debenture
On December 29, 2015, the Company
entered into a securities purchase agreement with JGB (Cayman) Waltham Ltd. (“JGB Waltham”) whereby the Company issued
to JGB Waltham, for gross proceeds of $7,500, a $500 original issue discount senior secured convertible debenture in the 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 Waltham 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 Waltham 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 Waltham 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 satisfying certain 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.
Principal
of $6,800 and $7,500 remained outstanding as of March 31, 2016 and December 31, 2015, respectively.
JGB
(Cayman) Concord Ltd. Senior Secured Convertible Note
On February 17, 2016, the Company
entered into a securities exchange agreement by and among the Company, VaultLogix, and JGB (Cayman) Concord Ltd. (“JGB Concord”),
whereby the Company exchanged the White Oak Global Advisors, LLC promissory note and subsequently assigned to JGB Concord a new
8.25% senior secured convertible note dated February 18, 2016 in the principal amount of $11,601. As a result of the assignment,
the obligations of the Company and VaultLogix to White Oak Global Advisors, LLC were 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.
Interest on the senior secured
convertible note is due in arrears each calendar month in cash, or, at the Company’s option and subject to stockholder approval,
in shares of the Company’s common stock. Commencing on the stockholder approval date, JGB Concord shall have the right,
at its option, to convert the senior secured convertible note, in whole or in part, into shares of the Company’s common
stock, subject to certain beneficial ownership limitations. The senior secured convertible note is secured by all assets of VaultLogix
as well as a cash collateral blocked deposit account.
Prior to the nine-month anniversary
date of the senior secured convertible note, the Company may not prepay all or any portion of the senior secured convertible note
without prior written consent of JGB Concord. At any time from time to time after the nine-month anniversary of the date of the
senior secured convertible note, the Company may prepay, upon ten trading days’ notice, for cash in an amount equal to the
sum of 100% of the principal amount of the senior secured convertible note plus accrued but unpaid interest thereon. JGB Concord
shall have the ability, upon twenty trading days’ notice, to require redemption of the senior secured convertible note in
cash: (i) commencing on August 1, 2017, (ii) in the event that 15,000,000 shares of the Company’s common stock has already
been issued pursuant to the senior secured convertible note, or (iii) in the event that any of the equity conditions (as defined
in the senior secured convertible note), at any time after July 31, 2016, are not or cease to be satisfied for any reason for
three consecutive trading days. In addition, the Company has restricted 105% of the proceeds received based on certain terms of
the agreement.
Principal
of $11,601 remained outstanding as of March 31, 2016.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
7.
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
The
Company issued warrants to the lenders under the MidMarket Loan Agreement in 2012. These warrants were outstanding as of March
31, 2016 and December 31, 2015.
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 earnings before interest, taxes, depreciation
and amortization (“EBITDA”) provisions set forth within the original warrant agreement. As such, the expiration date
of the warrants was extended to September 17, 2017.
On
March 31, 2016 and December 31, 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 $34 and $21, respectively. The Company recorded the
change in the fair value of the derivative liability for the three months ended March 31, 2016 and 2015 as a (loss) of $(13) and
gain of $107, respectively.
The
fair value of the warrant derivative liability as of March 31, 2016 and December 31, 2015 was calculated using a binomial lattice
pricing model with the following factors, assumptions and methodologies:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Fair value of Company’s common stock
|
|
$
|
0.95
|
|
|
$
|
1.00
|
|
Volatility (for March 31, 2016, based on the Company's historical volatility; for December 31, 2015, based on the closing prices of 3-4 comparable public companies)
|
|
|
105
|
%
|
|
|
80
|
%
|
Exercise price
|
|
$
|
4.00 - $5.00
|
|
|
$
|
4.00 - $5.00
|
|
Estimated life
|
|
|
1.47 years
|
|
|
|
1.7 years
|
|
Risk free interest rate (based on 1-year treasury rate)
|
|
|
0.66
|
%
|
|
|
0.86
|
%
|
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.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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
March 31, 2016 and December 31, 2015, the Company used a binomial lattice pricing model 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. The Company recorded
the change in the fair value of the derivative liability for the three months ended March 31, 2016 and 2015 as a gain of zero
and $52, respectively.
The
fair value of the April 15, 2014 warrants derivative at March 31, 2016 and December 31, 2015 was calculated using a binomial lattice
pricing model with the following factors, assumptions and methodologies:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Fair value of Company’s common stock
|
|
$
|
0.95
|
|
|
$
|
1.00
|
|
Volatility (for March 31, 2016, based on the Company's historical volatility; for December 31, 2015, based on the closing prices of 3-4 comparable public companies)
|
|
|
105
|
%
|
|
|
80
|
%
|
Exercise price
|
|
$
|
7.25
|
|
|
$
|
7.25
|
|
Estimated life
|
|
|
0.5 months
|
|
|
|
3.5 months
|
|
Risk free interest rate (based on 1-year treasury rate)
|
|
|
0.18
|
%
|
|
|
0.33
|
%
|
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 $210 related to the amortization of the debt discount for the three months ended
March 31, 2015.
During
the quarter ended March 30, 2015, the Company used a Monte Carlo simulation to determine the fair value of the embedded conversion
feature of the Convertible Debentures and determined the fair value of the embedded conversion feature to be de minimis. The Company
recorded the change in fair value of the derivative liability as a gain in the unaudited condensed consolidated statement of operations
of $180 for the three months ended March 31, 2015.
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.
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.
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. The Company recorded the
change in the fair value of the derivative liability as a loss on fair value of derivative instruments of $310.
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 11, Related Parties, for further
detail). The Company accounted for this restructuring of the promissory notes as a debt modification under ASC 470-50. As part
of the modification, the Company analyzed the embedded conversion feature and recorded a loss on fair value of derivative instruments
of $2,600 on the unaudited condensed consolidated statement of operations.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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 did not change and as such, no change in fair value of derivative instruments was recorded
on the unaudited condensed consolidated statement of operations.
On
October 26, 2015, the ratchet-down feature within the original agreement was triggered and the conversion price of the convertible
notes was reset to $1.25 per share of the Company’s common stock. Prior to the triggering of the ratchet-down feature, the
Company revalued the derivative and recorded a gain on fair value of derivative liabilities of $120 on the consolidated statement
of operations. The Company then reduced the existing derivative liability related to the reset provision and recorded the change
of $2,310 in the derivative liability value as a loss on change in fair value of derivative instruments on the consolidated statement
of operations. On the date of the transaction, the fair value of the Forward Investments convertible notes conversion feature
was $7,640, which was the value of the derivative liability as of October 26, 2015.
On
December 29, 2015, the ratchet-down feature within the original agreement was triggered and the conversion price of the convertible
notes was reset to $0.78 per share of the Company’s common stock. Prior to the triggering of the ratchet-down feature, the
Company revalued the derivative and recorded a gain on fair value of derivative liabilities of $3,380 on the consolidated statement
of operations. The Company then reduced the existing derivative liability related to the reset provision and recorded the change
of $4,140 in the derivative liability value as a loss on change in fair value of derivative instruments on the consolidated statement
of operations. On the date of the transaction, the fair value of the Forward Investments convertible notes conversion feature
was $8,400, which was the value of the derivative liability as of December 29, 2015.
On
March 31, 2016 and December 31, 2015 the fair value of the conversion feature of the Forward Investments, LLC loans was $11,542
and $13,534, respectively, which is included in derivative financial instrument at estimated fair value on the consolidated balance
sheets. The change in the fair value of the Forward Investments, LLC derivative liabilities was recorded as a gain in the unaudited
condensed consolidated statements of operations of $1,992 and $640 as of March 31, 2016 and 2015, respectively.
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:
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal amount
|
|
$
|
3,650
|
|
|
$
|
390
|
|
|
$
|
2,825
|
|
|
$
|
4,373
|
|
Conversion trigger price per share
|
|
$
|
0.78
|
|
|
$
|
0.78
|
|
|
$
|
0.78
|
|
|
$
|
0.78
|
|
Risk free rate
|
|
|
1.34
|
%
|
|
|
1.34
|
%
|
|
|
0.21
|
%
|
|
|
0.70
|
%
|
Life of conversion feature (in years)
|
|
|
5.8
|
|
|
|
5.8
|
|
|
|
0.3
|
|
|
|
1.8
|
|
Volatility
|
|
|
105
|
%
|
|
|
105
|
%
|
|
|
105
|
%
|
|
|
105
|
%
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal amount
|
|
$
|
3,650
|
|
|
$
|
390
|
|
|
$
|
2,825
|
|
|
$
|
4,373
|
|
Conversion trigger price per share
|
|
$
|
0.78
|
|
|
$
|
0.78
|
|
|
$
|
0.78
|
|
|
$
|
0.78
|
|
Risk free rate
|
|
|
1.93
|
%
|
|
|
1.93
|
%
|
|
|
0.49
|
%
|
|
|
1.06
|
%
|
Life of conversion feature (in years)
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
0.5
|
|
|
|
2.0
|
|
Volatility
|
|
|
105
|
%
|
|
|
105
|
%
|
|
|
105
|
%
|
|
|
105
|
%
|
August
6, 2015 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.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
On March 31, 2016 and December
31, 2015, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible note and determined
the fair value to be $78 and $339, respectively. The Company recorded a gain on fair value of derivative instruments of $261 on
the unaudited condensed consolidated statement of operations for the three months ended March 31, 2016.
The
fair value of the demand promissory note derivative at the measurement date was calculated using the Monte Carlo simulation with
the following factors, assumptions and methodologies:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Principal amount
|
|
$
|
1,784
|
|
|
$
|
2,105
|
|
Conversion price per share
|
|
$
|
1.25
|
|
|
$
|
1.25
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
|
None
|
|
Risk free rate
|
|
|
0.53
|
%
|
|
|
0.69
|
%
|
Life of conversion feature (in years)
|
|
|
0.85
|
|
|
|
1.10
|
|
Volatility
|
|
|
105
|
%
|
|
|
105
|
%
|
November
12, 2015 Demand Promissory Note – Senior Convertible Note Embedded Features
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 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 November 12, 2015, the Company used a Monte Carlo simulation to value the settlement features
and ascribed a value of $149 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
March 31, 2016 and December 31, 2015, the Company used a Monte Carlo simulation to value the settlement features of the senior
convertible note and determined the fair value to be $95 and $155, and recorded a gain on fair value of derivative instruments
of $60 on the unaudited condensed consolidated statement of operations for the three months ended March 31, 2016.
The
fair value of the demand promissory note derivative at the measurement date was calculated using the Monte Carlo simulation with
the following factors, assumptions and methodologies:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Principal amount
|
|
$
|
525
|
|
|
$
|
525
|
|
Conversion price per share
|
|
$
|
1.75
|
|
|
$
|
1.75
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
|
None
|
|
Risk free rate
|
|
|
0.44
|
%
|
|
|
0.61
|
%
|
Life of conversion feature (in years)
|
|
|
0.62
|
|
|
|
0.87
|
|
Volatility
|
|
|
105
|
%
|
|
|
105
|
%
|
November
12, 2015 Exchange Agreement Tranches – Senior Convertible Note Embedded Features
On
November 12, 2015, the Company entered into an exchange agreement with an 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 issued in three tranches of $500 for a total principal amount of $1,500.
The notes have a term of one year, bear interest at 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.
On
November 13, 2015, the Company issued to the investor the first tranche of senior secured notes in the principal amount of $500.
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 November 13, 2015, the Company used a
Monte Carlo simulation to value the settlement features and ascribed a value of $164 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.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
On
November 27, 2015, the Company issued to the investor the second tranche of senior secured notes in the principal amount of $500.
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 November 27, 2015, the Company used a
Monte Carlo simulation to value the settlement features and ascribed a value of $205 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
December 11, 2015, the Company issued to the investor the third tranche of senior secured notes in the principal amount of $500.
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 December 11, 2015, the Company used a
Monte Carlo simulation to value the settlement features and ascribed a value of $109 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 December 31, 2015,
the Company used a Monte Carlo simulation to value the settlement features of the three tranches of senior convertible notes and
determined the fair value to be $57 related to tranche one, $78 related to tranche two, and $118 related to tranche three. The
Company recorded the change in the fair value of the derivative liability for the three months ended March 31, 2016 as a gain
in the unaudited condensed consolidated statements of operations of $252; as the three tranches of senior convertible notes were
converted into shares of the Company’s common stock during the three months ended March 31, 2016.
The
fair value of the senor convertible note derivative at the measurement date was calculated using the Monte Carlo simulation with
the following factors, assumptions and methodologies:
|
|
December 31, 2015
|
|
Principal amount
|
|
$
|
250
|
|
|
$
|
333
|
|
|
$
|
500
|
|
Conversion price per share
|
|
$
|
1.25
|
|
|
$
|
1.25
|
|
|
$
|
1.25
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Risk free rate
|
|
|
0.14
|
%
|
|
|
0.14
|
%
|
|
|
0.15
|
%
|
Life of conversion feature (in years)
|
|
|
0.08
|
|
|
|
0.12
|
|
|
|
0.16
|
|
Volatility
|
|
|
105
|
%
|
|
|
105
|
%
|
|
|
105
|
%
|
31
Group, LLC April 2015 Warrants
In April 2015, the Company exchanged
two warrants previously issued to 31 Group, LLC on 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.
On
March 31, 2016 and December 31, 2015, the Company used a binomial lattice pricing model to determine the fair value of the warrants
and derived an implied fair value of $5 and $2, 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 months ended March 31, 2016 as a loss in the unaudited condensed consolidated statements of operations
of $3.
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 31 Group, LLC April 2015 exchange agreement warrants derivative as of March 31, 2016 and December 31, 2015 was
calculated using a binomial lattice pricing model with the following factors, assumptions and methodologies:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
April 15,
|
|
|
July 1,
|
|
|
April 15,
|
|
|
July 1,
|
|
|
|
2014
|
|
|
2014
|
|
|
2014
|
|
|
2014
|
|
|
|
Warrant
|
|
|
Warrant
|
|
|
Warrant
|
|
|
Warrant
|
|
Fair value of Company's common stock
|
|
$
|
0.95
|
|
|
$
|
0.95
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
Volatility (for March 31, 2016, based on the Company's historical volatility; for December 31, 2015, based on the closing prices of 3-4 comparable public companies)
|
|
|
105
|
%
|
|
|
105
|
%
|
|
|
80
|
%
|
|
|
80
|
%
|
Exercise price per share
|
|
$
|
5.00
|
|
|
$
|
5.00
|
|
|
$
|
5.00
|
|
|
$
|
5.00
|
|
Estimated life
|
|
|
0.5 months
|
|
|
|
1.25 years
|
|
|
|
3.5 months
|
|
|
|
1.5 years
|
|
Risk free interest rate (based on 1-year treasury rate)
|
|
|
0.18
|
%
|
|
|
0.66
|
%
|
|
|
0.33
|
%
|
|
|
0.86
|
%
|
Bridge
Financing Agreement Warrants
On December 29, 2015, the Company
entered into an agreement with the JGB (Cayman) Waltham Ltd. whereby the Company issued to JGB (Cayman) Waltham Ltd. a senior
secured convertible debenture (as noted in Note 6 Term Loans) and, among other things, a portion of the JGB (Cayman) Waltham Ltd.
proceeds were used to repay the GPB Life Science Holdings, LLC bridge notes. On this date, the Company evaluated the payoff of
the GPB Life Science Holdings, LLC bridge notes and determined that the repayment of the bridge notes qualified for debt extinguishment
accounting under ASC-470-50,
Debt – Modifications and Extinguishments
(“ASC-470-50”). In accordance
with ASC-470-50, the Company evaluated the tranche warrants and revalued the warrants at the $1.75 conversion price and determined
that the fair value of the warrants was $258, which is included in common stock warrants within the stockholders’ deficit
section on the condensed consolidated balance sheet as of December 31, 2015.
Bridge
Financing Amendment No. 2 Feature
On December 29, 2015, the Company
entered into an agreement with the JGB (Cayman) Waltham Ltd. whereby the Company issued to JGB (Cayman) Waltham Ltd. a senior
secured convertible debenture (as noted in Note 6 Term Loans) and, among other things, a portion of the JGB (Cayman) Waltham Ltd.
proceeds were used to repay the GPB Life Science Holdings, LLC bridge notes. On this date, the Company evaluated the payoff of
the GPB Life Science Holdings, LLC bridge notes and determined that the repayment of the bridge notes qualified for debt extinguishment
accounting under ASC-470-50,
Debt – Modifications and Extinguishments
(“ASC-470-50”). In accordance with
ASC-470-50, the Company evaluated the maturity date feature prior to the payoff transaction and determined that the feature had
a fair value of $31 as of December 31, 2015. In conjunction with the payoff, the Company re-evaluated the maturity date feature
and determined that the derivative was extinguished along with the related bridge financing debt.
Richard Smithline Senior Convertible Note Embedded
Features
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
March 31, 2016 and December 31, 2015, the Company used a Monte Carlo simulation to value the settlement features of the senior
convertible noted and determined the fair value to be $18 and $85, respectively. The Company recorded the change in the fair value
of the derivative liability for the three months ended March 31, 2016 as a gain in the unaudited condensed consolidated statements
of operations of $67.
The
fair value of the Smithline derivative at the measurement date was calculated using the Monte Carlo simulation with the following
factors, assumptions and methodologies:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Principal amount
|
|
$
|
526
|
|
|
$
|
526
|
|
Conversion price per share
|
|
$
|
1.25
|
|
|
$
|
1.25
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
|
None
|
|
Risk free rate
|
|
|
0.53
|
%
|
|
|
0.69
|
%
|
Life of conversion feature (in years)
|
|
|
0.85
|
|
|
|
1.10
|
|
Volatility
|
|
|
105
|
%
|
|
|
105
|
%
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
JGB
(Cayman) Waltham Ltd. Senior Secured Convertible Debenture Features
On December 29, 2015, the Company
entered into a securities purchase agreement with JGB (Cayman) Waltham Ltd. whereby the Company issued to JGB Waltham, for gross
proceeds of $7,500, a 10% 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 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 December 29, 2015, the Company used a Monte Carlo simulation to
value the settlement features and ascribed a value of $1,479 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
March 31, 2016 and December 31, 2015, the Company used a Monte Carlo simulation to value the settlement features of the senior
convertible noted and determined the fair value to be $2,200 and $3,150, respectively. The Company recorded the change in the
fair value of the derivative liability for the three months ended March 31, 2016 as a gain in the unaudited condensed consolidated
statements of operations of $950.
The
fair value of the JGB (Cayman) Waltham Ltd. derivative at the measurement date was calculated using the Monte Carlo simulation
with the following factors, assumptions and methodologies:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Principal amount
|
|
$
|
6,800
|
|
|
$
|
7,500
|
|
Conversion price per share
|
|
$
|
1.33
|
|
|
$
|
1.33
|
|
Conversion trigger price per share
|
|
$
|
4.00
|
|
|
$
|
4.00
|
|
Risk free rate
|
|
|
0.63
|
%
|
|
|
0.86
|
%
|
Life of conversion feature (in years)
|
|
|
1.25
|
|
|
|
1.50
|
|
Volatility
|
|
|
105
|
%
|
|
|
105
|
%
|
JGB
(Cayman) Concord Ltd. Senior Secured Convertible Note
On
February 17, 2016, the Company entered into a securities exchange agreement by and among the Company, VaultLogix, and JGB (Cayman)
Concord Ltd., 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.
The 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 evaluated the senior
secured convertible note’s settlement provisions and determined that the 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 February 18, 2016, the Company used a Monte Carlo simulation to
value the settlement features and ascribed a value of $1,350 related to the conversion feature and fundamental transaction clauses
and recorded these items on the unaudited condensed consolidated balance sheets as a derivative liability. The debt discounts
are being amortized over the life of the loan.
On March 31, 2016, the
Company used a Monte Carlo simulation to value the settlement features of the senior secured convertible notes and determined
the fair value to be $2,030 and recorded a loss on fair value of derivative instruments of $680 on the unaudited condensed consolidated
statement of operations for the three months ended March 31, 2016.
The
fair value of the JGB (Cayman) Concord Ltd. derivative at the measurement date was calculated using the Monte Carlo simulation
with the following factors, assumptions and methodologies:
|
|
March 31,
2016
|
|
|
|
|
|
Principal amount
|
|
$
|
11,601
|
|
Conversion price per share
|
|
$
|
2.00
|
|
Conversion trigger price per share
|
|
|
None
|
|
Risk free rate
|
|
|
0.45
|
%
|
Life of conversion feature (in years)
|
|
|
0.64
|
|
Volatility
|
|
|
105
|
%
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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.
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.
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 six-month restrictive legend
and as such, the fair value of the accounts payable to be paid with the common stock has not yet been determined. The Company
recorded the common stock at a fair value of $648 and the warrant with a fair value of $106, which reduced 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.
During
the quarter ended March 31, 2015, the Company revalued the accounts payable derivative and recorded a gain of $10 on the unaudited
condensed consolidated statement of operations.
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.
Beginning
on October 9, 2015 and continuing through November 12, 2015, the third-party began exercising the warrants to purchase shares
of the Company’s common stock. During this time, the third-party exercised all of the 425,000 warrants issued on April 1,
2015 to purchase 287,001 shares of the Company’s common stock. The third-party applied the proceeds from the warrant exercise
to reduce outstanding accounts payable of $452. The Company recorded a reduction in accounts payable of $452, a reduction in the
derivative balance of $743, and recorded a loss on fair value of derivative of $30. As of November 12, 2015, there are no remaining
warrants issued for settlement of accounts payable or any related derivative liabilities.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
8.
INCOME TAXES
As of March 31, 2016 and December
31, 2015, the Company had federal net operating loss carry forwards (“NOL’s”) of approximately $87,954 and $64,489,
respectively, and state NOL’s of approximately $83,158 and $60,617, respectively, that will be available to reduce future
taxable income, if any. These NOL’s begin to expire in 2025. In addition, as of March 31, 2016 and December 31, 2015, the
Company had federal tax credit carry forwards of $694 and $690, 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 percent 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 recognized $1,193 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.
9.
STOCKHOLDERS’ DEFICIT
Common
Stock:
Issuance
of shares of common stock to third parties for services and non-employees
During
February 2016, the Company issued 180,852 shares of its common stock to consultants in exchange for consulting services relating
to corporate matters. The shares were valued at fair value at $0.52 per share and were immediately vested. The Company recorded
$9 to salaries and wages expense as $85 was accrued as of December 31, 2015.
During March 2016, the Company issued
90,909 shares of its common stock to consultants in exchange for consulting services relating to corporate matters. The shares
were valued at fair value at $0.68 per share and were immediately vested. The Company recorded $62 to salaries and wages expense.
Issuance
of shares pursuant to promissory notes
In
January 2016, the Company issued an aggregate of 466,669 shares of common stock to a third-party lender in satisfaction of notes
payable aggregating $583. The shares were issued at $1.25, per the terms of the notes payable.
In February 2016, the Company issued
an aggregate of 649,098 shares of common stock to a third-party lender in satisfaction of notes payable and accrued interest aggregating
$590. The shares were issued at $1.25, per the terms of the notes payable.
In March 2016, the Company issued
an aggregate of 402,520 shares of common stock to a third-party lender in satisfaction of notes payable aggregating $289. The shares
were issued at $1.25, per the terms of the notes payable.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Issuance
of shares pursuant to Smithline Senior Convertible Note
In
February 2016, the Company issued an aggregate of 199,573 shares of common stock to a third-party lender in satisfaction of notes
payable and accrued interest aggregating $75. The shares were issued at $0.38, per the terms of the note payable.
In
March 2016, the Company issued an aggregate of 105,835 shares of common stock to a third-party lender in satisfaction of notes
payable aggregating $49. The shares were issued at $0.46, per the terms of the note payable.
Issuance
of shares pursuant to Bridge Financing Provision
In
January 2016, the Company issued an aggregate of 500,000 shares of common stock to a third-party lender in satisfaction of notes
payable aggregating $320. The shares were valued at fair value at $0.64 per share.
Issuance
of shares pursuant to acquisition of assets of SDN Essentials, LLC
In
January 2016, the Company issued 1,000,000 shares of common stock valued at $1.00 per share in connection with the acquisition
of assets of SDN. In addition to the aforementioned shares, the Company paid $50 in cash and an earn out provision of $515, subject
to SDN meeting certain revenue targets. The Company will also issue a pool of 50,000 shares of the Company’s common stock
which will be allocated among all employees of SDN.
Purchase
of Treasury Shares
During
March 2016, the Company repurchased 1,961 shares from an employee who terminated employment for $1. The shares were valued at
fair value at $0.54 per share. The Company then repurchased 141,322 shares at par value of $0.0001 per share from twenty employees
who terminated employment.
10.
STOCK-BASED COMPENSATION
Restricted
Stock
The
following table summarizes the Company’s restricted stock activity during the three months ended March 31, 2016:
|
|
Number of Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
Outstanding at January 1, 2016
|
|
|
2,023,116
|
|
|
$
|
3.50
|
|
Vested
|
|
|
(44,666
|
)
|
|
$
|
2.68
|
|
Forfeited/Cancelled
|
|
|
(141,322
|
)
|
|
$
|
2.93
|
|
Outstanding at March 31, 2016
|
|
|
1,837,128
|
|
|
$
|
3.57
|
|
For the three months
ended March 31, 2016 and 2015, the Company incurred $71 and $474, respectively, in stock compensation expense from the issuance
of common stock to employees and consultants.
The
Company recorded an additional $677 and $849 in stock compensation expense on shares subject to vesting terms in previous periods
during the quarters ended March 31, 2016 and 2015, respectively.
Issuance
of shares of common stock to employee for incentive earned
During
March 2016, the Company issued an aggregate of 73,519 shares to an employee in settlement of incentives earned. The shares were
valued at fair value at $0.68 per share. The Company had accrued for $50 of the expense in 2015.
Options
There were no options granted during
the three months ended March 31, 2016 or 2015.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
The
following table summarizes the Company’s stock option activity and related information for the three months ended March
31, 2016:
|
|
Weighted Average
|
|
|
|
Shares Underlying Options
|
|
|
Exercise Price
|
|
|
Remaining Contractual Term
(in years)
|
|
|
Aggregate Intrinsic Value
(in thousands)
|
|
Outstanding at January 1, 2016
|
|
|
175,000
|
|
|
$
|
3.72
|
|
|
|
6.29
|
|
|
$
|
476
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited and expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2016
|
|
|
175,000
|
|
|
$
|
3.72
|
|
|
|
6.04
|
|
|
$
|
485
|
|
Exercisable at March 31, 2016
|
|
|
158,333
|
|
|
$
|
3.72
|
|
|
|
6.05
|
|
|
$
|
439
|
|
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 March 31, 2016 and December 31, 2015 of $0.95 and $1.00,
respectively.
11.
RELATED PARTIES
At
March 31, 2016 and December 31, 2015, the Company had outstanding the following loans due to related parties:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Promissory note issued to CamaPlan FBO Mark Munro IRA, 3% interest, maturing on January 1, 2018, unsecured, net of debt discount of $64 and $72, respectively
|
|
$
|
533
|
|
|
$
|
525
|
|
Promissory note issued to 1112 Third Avenue Corp, 3% interest, maturing on January 1, 2018, unsecured, net of debt discount of $61 and $68, respectively
|
|
|
314
|
|
|
|
307
|
|
Promissory note issued to Mark Munro, 3% interest, maturing on January 1, 2018, unsecured, net of debt discount of $103 and $116, respectively
|
|
|
1,234
|
|
|
|
1,221
|
|
Promissory note issued to Pasack Road, LLC, 3% interest, maturing on January 1, 2018, unsecured, net of debt discount of $254 and $286, respectively
|
|
|
2,396
|
|
|
|
2,364
|
|
Promissory notes issued to Forward Investments, LLC, between 2% and 10% interest, maturing on July 1, 2016, unsecured, net of debt discount of $443 and $749, respectively
|
|
|
6,032
|
|
|
|
5,727
|
|
Promissory notes issued to Forward Investments, LLC, 3% interest, maturing on January 1, 2018, unsecured, net of debt discount of $1,377 and $1,528, respectively
|
|
|
2,996
|
|
|
|
2,844
|
|
Promissory notes issued to Forward Investments, LLC, 6.5% interest, maturing on July 1, 2016, unsecured, net of debt discount of $93 and $147, respectively
|
|
|
297
|
|
|
|
243
|
|
Former owner of IPC, unsecured, 8% interest, due May 30, 2016
|
|
|
5,755
|
|
|
|
5,755
|
|
Former owner of IPC, unsecured, 15% interest, due on demand
|
|
|
75
|
|
|
|
75
|
|
Former owner of Nottingham, unsecured, 8% interest, maturing on May 30, 2016
|
|
|
225
|
|
|
|
225
|
|
|
|
|
19,857
|
|
|
|
19,286
|
|
Less: current portion of debt
|
|
|
(11,410
|
)
|
|
|
(11,103
|
)
|
Long-term portion of notes payable, related parties
|
|
$
|
8,447
|
|
|
$
|
8,183
|
|
The interest expense,
including amortization of debt discounts, associated with the related-party notes payable in the three months ended March 31,
2016 and 2015 was $902 and $1,661, respectively.
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, CamaPlan 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 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 unregistered common stock, the CamaPlan
FBO Mark Munro IRA 39,690 shares of unregistered common stock, 1112 Third Avenue Corp. 87,500 shares of unregistered common stock,
the Mark Munro 1996 Charitable Remainder UniTrust 27,500 shares of unregistered common stock and Pascack Road, LLC 157,500 shares
of unregistered common stock. The Company recorded a loss on modification of debt of $798 on the unaudited condensed consolidated
statement of operations as of March 31, 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 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 unregistered common stock, the CamaPlan
FBO Mark Munro IRA 41,600 shares of unregistered common stock, the Mark Munro 1996 Charitable Remainder UniTrust 62,400 shares
of unregistered common stock and Pascack Road, LLC 223,600 shares of unregistered 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.
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 as of March 31, 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.
Revolving
Line of Credit
On
July 3, 2014, the Company obtained an unsecured $3,000 interim revolving line of credit from the Mark Munro 1996 Charitable Remainder
UniTrust to provide working capital as well as cash to make the Company’s upcoming amortization payments pursuant to the
Company’s Convertible Debentures. The line bore interest at the rate of 1.5% per month on funds drawn and matured on March
31, 2016.
As
of March 31, 2016 and December 31, 2015, there was no amount outstanding under the related party revolving line of credit.
12.
SEGMENTS
The Company operates in 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 TNS, the AWS Entities, Tropical,
RM Leasing, and RM Engineering. The professional services operating segment is an aggregation of the operations of the ADEX Entities
and SDN. The managed services operating segment is comprised of the operations of IPC, RentVM and Nottingham. The cloud services
operating segment is comprised of the operations of Axim.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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. The Company’s former VaultLogix subsidiary, which was included in the Company’s cloud services segment,
were reclassified as “discontinued operations” to conform to classifications used in the current period related to
the sale of VaultLogix and its subsidiaries.
Segment
information relating to the Company’s results of continuing operations was as follows:
Revenue by Segment
|
|
Three months ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
(Revised)
|
|
Applications and infrastructure
|
|
$
|
5,235
|
|
|
$
|
4,730
|
|
Professional services
|
|
|
6,520
|
|
|
|
6,864
|
|
Managed services
|
|
|
5,874
|
|
|
|
6,644
|
|
Cloud services
|
|
|
162
|
|
|
|
181
|
|
Total
|
|
$
|
17,791
|
|
|
$
|
18,419
|
|
Gross Profit
|
|
Three months ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
(Revised)
|
|
Applications and infrastructure
|
|
$
|
726
|
|
|
$
|
1,197
|
|
Professional services
|
|
|
1,453
|
|
|
|
1,453
|
|
Managed services
|
|
|
2,235
|
|
|
|
2,417
|
|
Cloud services
|
|
|
137
|
|
|
|
141
|
|
Total
|
|
$
|
4,551
|
|
|
$
|
5,208
|
|
Operating Income (Loss) by Segment
|
|
Three months ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
(Revised)
|
|
Applications and infrastructure
|
|
$
|
(453
|
)
|
|
$
|
(121
|
)
|
Professional services
|
|
|
(126
|
)
|
|
|
(83
|
)
|
Managed services
|
|
|
154
|
|
|
|
(380
|
)
|
Cloud services
|
|
|
79
|
|
|
|
27
|
|
Corporate
|
|
|
(3,115
|
)
|
|
|
(2,908
|
)
|
Total
|
|
$
|
(3,461
|
)
|
|
$
|
(3,465
|
)
|
Interest Expense
|
|
Three months ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
(Revised)
|
|
Applications and infrastructure
|
|
$
|
4
|
|
|
$
|
8
|
|
Professional services
|
|
|
-
|
|
|
|
-
|
|
Managed services
|
|
|
2
|
|
|
|
-
|
|
Cloud services
|
|
|
-
|
|
|
|
-
|
|
Corporate
|
|
|
4,709
|
|
|
|
3,141
|
|
Total
|
|
$
|
4,715
|
|
|
$
|
3,149
|
|
Total Assets by Segment
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Applications and infrastructure
|
|
$
|
19,204
|
|
|
$
|
19,593
|
|
Professional services
|
|
|
20,407
|
|
|
|
18,449
|
|
Managed services
|
|
|
24,042
|
|
|
|
24,718
|
|
Cloud services
|
|
|
15,231
|
|
|
|
3,840
|
|
Corporate
|
|
|
9,769
|
|
|
|
4,956
|
|
Assets of discontinued operations
|
|
|
-
|
|
|
|
20,675
|
|
Total
|
|
$
|
88,653
|
|
|
$
|
92,231
|
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Goodwill
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Applications and infrastructure
|
|
$
|
6,906
|
|
|
$
|
6,906
|
|
Professional services
|
|
|
10,081
|
|
|
|
9,257
|
|
Managed services
|
|
|
7,496
|
|
|
|
7,495
|
|
Cloud services
|
|
|
915
|
|
|
|
917
|
|
Total
|
|
$
|
25,398
|
|
|
$
|
24,575
|
|
Revenues by Segment by Geographic Region
|
|
Three months ended March 31, 2016
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
Applications and infrastructure
|
|
$
|
5,044
|
|
|
$
|
191
|
|
|
$
|
5,235
|
|
Professional services
|
|
|
6,488
|
|
|
|
32
|
|
|
|
6,520
|
|
Managed services
|
|
|
5,874
|
|
|
|
-
|
|
|
|
5,874
|
|
Cloud services
|
|
|
162
|
|
|
|
-
|
|
|
|
162
|
|
Total
|
|
$
|
17,568
|
|
|
$
|
223
|
|
|
$
|
17,791
|
|
Revenues by Segment by Geographic
Region
|
|
Three months ended March 31, 2015
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
|
(Revised)
|
|
Applications and infrastructure
|
|
$
|
4,317
|
|
|
$
|
413
|
|
|
$
|
4,730
|
|
Professional services
|
|
|
6,816
|
|
|
|
48
|
|
|
|
6,864
|
|
Managed services
|
|
|
6,644
|
|
|
|
-
|
|
|
|
6,644
|
|
Cloud services
|
|
|
7
|
|
|
|
174
|
|
|
|
181
|
|
Total
|
|
$
|
17,784
|
|
|
$
|
635
|
|
|
$
|
18,419
|
|
Gross Profit by Segment by Region
|
|
Three months ended March 31, 2016
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
Applications and infrastructure
|
|
$
|
683
|
|
|
$
|
43
|
|
|
$
|
726
|
|
Professional services
|
|
|
1,447
|
|
|
|
6
|
|
|
|
1,453
|
|
Managed services
|
|
|
2,235
|
|
|
|
-
|
|
|
|
2,235
|
|
Cloud services
|
|
|
137
|
|
|
|
-
|
|
|
|
137
|
|
Total
|
|
$
|
4,502
|
|
|
$
|
49
|
|
|
$
|
4,551
|
|
Gross Profit by Segment by Region
|
|
Three months ended March 31, 2015
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
|
(Revised)
|
|
Applications and infrastructure
|
|
$
|
1,143
|
|
|
$
|
54
|
|
|
$
|
1,197
|
|
Professional services
|
|
|
1,438
|
|
|
|
15
|
|
|
|
1,453
|
|
Managed services
|
|
|
2,417
|
|
|
|
-
|
|
|
|
2,417
|
|
Cloud services
|
|
|
(3
|
)
|
|
|
144
|
|
|
|
141
|
|
Total
|
|
$
|
4,995
|
|
|
$
|
213
|
|
|
$
|
5,208
|
|
Operating (Loss) Income by Segment
by Region
|
|
Three months ended March 31, 2016
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
Applications and infrastructure
|
|
$
|
(475
|
)
|
|
$
|
22
|
|
|
$
|
(453
|
)
|
Professional services
|
|
|
(128
|
)
|
|
|
2
|
|
|
|
(126
|
)
|
Managed services
|
|
|
154
|
|
|
|
-
|
|
|
|
154
|
|
Cloud services
|
|
|
79
|
|
|
|
-
|
|
|
|
79
|
|
Corporate
|
|
|
(3,115
|
)
|
|
|
-
|
|
|
|
(3,115
|
)
|
Total
|
|
$
|
(3,485
|
)
|
|
$
|
24
|
|
|
$
|
(3,461
|
)
|
Operating (Loss) Income by Segment
by Region
|
|
Three months ended March 31, 2015
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
|
(Revised)
|
|
Applications and infrastructure
|
|
$
|
(129
|
)
|
|
$
|
8
|
|
|
$
|
(121
|
)
|
Professional services
|
|
|
(96
|
)
|
|
|
13
|
|
|
|
(83
|
)
|
Managed services
|
|
|
(380
|
)
|
|
|
-
|
|
|
|
(380
|
)
|
Cloud services
|
|
|
(119
|
)
|
|
|
146
|
|
|
|
27
|
|
Corporate
|
|
|
(2,908
|
)
|
|
|
-
|
|
|
|
(2,908
|
)
|
Total
|
|
$
|
(3,632
|
)
|
|
$
|
167
|
|
|
$
|
(3,465
|
)
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
13.
DISCONTINUED OPERATIONS
On February 17, 2016, the Company
consummated the sale of certain assets of its former wholly-owned subsidiaries VaultLogix, Data Protection Services, L.L.C. (“DPS”)
and U.S. Data Security Acquisition, LLC (“USDA”) (collectively, “Sellers”), for an aggregate purchase
price of $24 (the “Sale”). The Sale was effected pursuant to the terms of an Asset Purchase Agreement, dated as of
February 17, 2016 (the “Asset Purchase Agreement”), by and among the Company, Sellers and KeepItSafe, Inc., a Delaware
corporation (“Buyer”). The cash purchase price the Buyer paid for the Assets was $24,000, which was payable to Sellers
as follows: (i) $22,000 paid to the Company on the Closing Date (as defined in the Asset Purchase Agreement) and (ii) $2,000 deposited
by Buyer in an escrow account to secure the performance of Sellers’ and the Company’s obligations, including any potential
indemnification claims, under the Asset Purchase Agreement, to be released twelve months after the Closing Date. The closing payments
are subject to customary working capital adjustments.
The assets of VaultLogix and its
subsidiaries, DPS and USDA, have been included within the unaudited condensed consolidated balance sheet as non-current assets
of discontinued operations as of December 31, 2015. The results of operations of VaultLogix and its subsidiaries, DPS and USDA,
have been included within the line-item labelled net income (loss) on discontinued operations, net of tax within the consolidated
statement of operations for the three months ended March 31, 2016 and 2015. The Company recorded a gain on the disposal of these
assets of $2,638 for the three months ended March 31, 2016.
The
following tables show the major classes of the Company’s discontinued operations as of December 31, 2015 and for the three
months ended March 31, 2016 and 2015.
|
|
December 31,
|
|
|
|
2015
|
|
Long-term assets:
|
|
|
|
Property and equipment, net
|
|
$
|
1,245
|
|
Goodwill
|
|
|
9,212
|
|
Intangible assets, net
|
|
|
10,218
|
|
Long-term assets of discontinued operations
|
|
$
|
20,675
|
|
|
|
For
the three months ended
|
|
|
|
March
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,216
|
|
|
$
|
2,574
|
|
Cost
of revenue
|
|
|
234
|
|
|
|
409
|
|
Gross
profit
|
|
|
982
|
|
|
|
2,165
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
426
|
|
|
|
692
|
|
Salaries
and wages
|
|
|
844
|
|
|
|
655
|
|
Selling,
general and administrative
|
|
|
493
|
|
|
|
503
|
|
Total
operating expenses
|
|
|
1,763
|
|
|
|
1,850
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
(781
|
)
|
|
|
315
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(243
|
)
|
|
|
(511
|
)
|
Other
expense
|
|
|
(30
|
)
|
|
|
(13
|
)
|
Gain
on disposal
|
|
|
2,638
|
|
|
|
-
|
|
Total
other income (expense)
|
|
|
2,365
|
|
|
|
(524
|
)
|
|
|
|
|
|
|
|
|
|
Net
income (loss) on discontinued operations
|
|
$
|
1,584
|
|
|
$
|
(209
|
)
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
14.
SUBSEQUENT EVENTS
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. The Company filed the applicable Annual Report on Form 10-K
with the SEC on June 17, 2016.
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 had until June 17, 2016 to submit a plan to regain
compliance with the Nasdaq’s continued listing requirement.
The Company submitted a plan to
the Nasdaq on June 17, 2016 stating that the Company would file its Form 10-K on June 17, 2016 and the Form 10-Q for the quarter
ended March 31, 2016 by June 30, 2016.
On June 27, 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 5550(b)(1) for continued listing because the Company had not met certain equity requirements as of December
31, 2015.
The notice provides that the Company
has 45 calendar days to submit a plan to regain compliance.
JGB Waltham First Forbearance and Amendment Agreement
On May 17, 2016, the Company entered
into a Forbearance and Amendment Agreement (the “Debenture Forbearance Agreement”) with JGB Waltham pursuant to which
JGB Waltham 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 to JGB Waltham 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 to JGB Waltham 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 Waltham’s conversion rights under the Original Debenture.
The Amended and Restated Debenture
was issued in the 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 Waltham 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 Waltham 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. JGB Waltham has 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 each 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 to JGB Waltham a 0.67% senior secured note (the “2.7
Note”), dated May 17, 2016, in the principal amount of $2,745 to JGB Waltham. 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.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
JGB Concord 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 Concord, pursuant
to which JGB Concord 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 to JGB Concord an amended and restated senior secured convertible
note (the “Amended and Restated Note”) in order to amend the original note to JGB Concord 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 Note; 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 Concord’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 Concord 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 Concord 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. JGB Concord has 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 each 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 to JGB Concord a 0.67% senior secured note (the “5.2 Note”),
dated May 17, 2016, in the principal amount of $5,220 to JGB Concord. 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 Concord, White Oak Global Advisors, LLC, VaultLogix, and the Guarantors thereto (the “Amended
Agreement”) pursuant to which, the Company requested that (i) JGB Concord cause $172 to be withdrawn from the Blocked Account
(as defined in the original debenture) and made available to the Company, and (ii) JGB Concord 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 Concord 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 Concord 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”).
Amendment Agreement
On June 23, 2016, the Company entered
into an amendment agreement with JGB Concord and JGB Waltham pursuant to which, (i) JGB Waltham, and JGB Concord agreed to release
an aggregate of $1,500 to be withdrawn from the Deposit Account (as defined in the original note). Upon the release of the funds
(i) the JGB Waltham senior secured convertible debenture (the “December Debenture”) shall be amended by increase the
Applicable Interest Rate (as defined in the original note) by 3.0% to take effect on July 1, 0216; (ii) the December Debenture
shall be amended by increasing the annual rate of interest by 3.0% to take effect on July 1, 2016; (iii) the JGB Concord senior
secured convertible note (the “February Convertible Note”) shall be amended by increasing the Applicable Interest
Rate (as defined in the original February Convertible Note) by 3.0%, to take effect on July 1, 2016; and (iv) the February Note
shall be amended by increasing the annual rate of interest by 3.0%, to take effect on July 1, 2016. After giving effect to the
foregoing annual rate of interest on each December Debenture and February Convertible Note as of July 1, 2016, shall be 4.67%.
As additional consideration for the release of the funds, the Company issued 900,000 shares of the Company’s common stock
on June 23, 2016 to JGB Concord.
Item
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our
financial condition and results of operations for the three months ended March 31, 2016 and 2015 should be read in conjunction
with our unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in
this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from
those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under Item
1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended December 31, 2015, as filed on June 17, 2016 with
the Securities and Exchange Commission. We use words such as “anticipate,” “estimate,” “plan,”
“project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,”
“may,” “will,” “should,” “could,” and similar expressions to identify forward-looking
statements. See the information under the caption “Forward Looking Statements” on page 1 of this report.
Unless
expressed otherwise, all dollar amounts other than per share amounts are expressed in thousands.
Overview
We
operate in four reportable segments: applications and infrastructure, professional services, managed services, and cloud services.
The applications and infrastructure operating segment is an aggregation of the component operations of RM Leasing, TNS and the
AWS Entities. On January 1, 2015, we merged the operations of Tropical into the operations of AWS. The professional services operating
segment is an aggregation of the operations of the ADEX Entities and SDN. The managed services operating segment is primarily
comprised of the operations of IPC. On January 1, 2015, we merged the operations of RentVM with the operations of IPC. The cloud
services operating segment is comprised of the operations of Axim.
On
February 17, 2016, we sold certain assets of our formally-owned VaultLogix and subsidiaries reporting unit, which was included
in our cloud services segment. The operations of VaultLogix and its subsidiaries have been excluded from the comparative tables
noted below.
Results
of Continuing Operations – Three months ended March 31, 2016 and 2015
Revenues:
|
|
Three months ended
March 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percentage
|
|
Applications and infrastructure
|
|
$
|
5,235
|
|
|
$
|
4,730
|
|
|
$
|
505
|
|
|
|
11
|
%
|
Professional services
|
|
|
6,520
|
|
|
|
6,864
|
|
|
|
(344
|
)
|
|
|
-5
|
%
|
Managed services
|
|
|
5,874
|
|
|
|
6,644
|
|
|
|
(770
|
)
|
|
|
-12
|
%
|
Cloud services
|
|
|
162
|
|
|
|
181
|
|
|
|
(19
|
)
|
|
|
-10
|
%
|
Total
|
|
$
|
17,791
|
|
|
$
|
18,419
|
|
|
$
|
(628
|
)
|
|
|
-3
|
%
|
Revenues for the three-month period
ended March 31, 2016 decreased by $0.6 million, or 3%, to $17.8 million, as compared to $18.4 million for the corresponding period
in 2015. The decrease in revenues resulted primarily from a decrease in revenues from one customer within our professional services
segment and lower maintenance revenues within our managed services segment. Also during the quarter, the revenue decreases in our
professional services and managed services segments were offset in part by the increase in our revenues of the applications and
infrastructure segment. The increase in the applications and infrastructure segment resulted from increased revenues from one large
customer.
During
the three-month period ended March 31, 2016, 37% of our revenue was derived from our professional services segment, 33% from our
managed services segment, 29% from our applications and infrastructure segment and 1% from our cloud services segment. During
the three-month period ended March 31, 2015, 37% of our revenue was derived from our professional services segment, 36% from our
managed services segment, 26% from our applications and infrastructure segment and 1% from our cloud services segment. Revenues
from our cloud segment and the revenue from our managed services segment tends to be recurring in nature. Such recurring revenue
was $6.0 million and $6.8 million for the three months ended March 31, 2016 and 2015, respectively.
Cost
of revenue and gross margin:
|
|
Three months ended
March 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percentage
|
|
Applications and infrastructure
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
4,509
|
|
|
$
|
3,533
|
|
|
$
|
976
|
|
|
|
28
|
%
|
Gross profit
|
|
$
|
726
|
|
|
$
|
1,197
|
|
|
$
|
(471
|
)
|
|
|
-39
|
%
|
Gross profit percentage
|
|
|
14
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
5,067
|
|
|
$
|
5,411
|
|
|
$
|
(344
|
)
|
|
|
-6
|
%
|
Gross profit
|
|
$
|
1,453
|
|
|
$
|
1,453
|
|
|
$
|
-
|
|
|
|
0
|
%
|
Gross profit percentage
|
|
|
22
|
%
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
3,639
|
|
|
$
|
4,227
|
|
|
$
|
(588
|
)
|
|
|
-14
|
%
|
Gross profit
|
|
$
|
2,235
|
|
|
$
|
2,417
|
|
|
$
|
(182
|
)
|
|
|
-8
|
%
|
Gross profit percentage
|
|
|
38
|
%
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cloud services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
25
|
|
|
$
|
40
|
|
|
$
|
(15
|
)
|
|
|
-38
|
%
|
Gross profit
|
|
$
|
137
|
|
|
$
|
141
|
|
|
$
|
(4
|
)
|
|
|
-3
|
%
|
Gross profit percentage
|
|
|
85
|
%
|
|
|
78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
13,240
|
|
|
$
|
13,211
|
|
|
$
|
29
|
|
|
|
0
|
%
|
Gross profit
|
|
$
|
4,551
|
|
|
$
|
5,208
|
|
|
$
|
(657
|
)
|
|
|
-13
|
%
|
Gross profit percentage
|
|
|
26
|
%
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
Cost of revenue for the three-month
periods ended March 2016 and 2015 primarily consisted of direct labor provided by employees, services provided by subcontractors,
direct material and other related costs. For a majority of the contract services we perform, our customers provide all necessary
materials and we provide the personnel, tools and equipment necessary to perform installation and maintenance services. The increase
in cost of revenue of $0.03 million, or -%, for the three-month period ended March 31, 2016 was primarily attributable increase
in cost of revenue in our applications and infrastructure segment. The increase in cost of revenue from our applications and infrastructure
segment was due to costs associated with the increase in revenue from a large customer. The increase in cost of revenue within
our applications and infrastructure segment was offset by lower costs of revenue within our professional services and managed services
segments. Costs of revenue as a percentage of revenues was 74% for the three-month period ended March 31, 2016, as compared to
72% for the same period in 2015.
Our gross profit percentage was
26% for the three-month period ended March 31, 2016, as compared to 28% for the comparable period in 2015. The overall decrease
in gross profit percentage was primarily due to lower margins realized on jobs within our applications and infrastructure segment.
Salaries
and wages:
|
|
Three months ended
March 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percentage
|
|
Applications and infrastructure
|
|
$
|
443
|
|
|
$
|
506
|
|
|
$
|
(63
|
)
|
|
|
-12
|
%
|
Percentage of total revenue
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional services
|
|
$
|
1,110
|
|
|
$
|
1,049
|
|
|
$
|
61
|
|
|
|
6
|
%
|
Percentage of total revenue
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed services
|
|
$
|
1,150
|
|
|
$
|
1,837
|
|
|
$
|
(687
|
)
|
|
|
-37
|
%
|
Percentage of total revenue
|
|
|
6
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cloud services
|
|
$
|
-
|
|
|
$
|
13
|
|
|
$
|
(13
|
)
|
|
|
-100
|
%
|
Percentage of total revenue
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$
|
1,403
|
|
|
$
|
1,649
|
|
|
$
|
(246
|
)
|
|
|
-15
|
%
|
Percentage of total revenue
|
|
|
8
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,106
|
|
|
$
|
5,054
|
|
|
$
|
(948
|
)
|
|
|
-19
|
%
|
Percentage of total revenue
|
|
|
23
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
For the three-month period ended
March 31, 2016, salaries and wages decreased $1.0 million to $4.1 million as compared to approximately $5.1 million for the same
period in 2015. The decrease resulted primarily from a decrease in salaries and wages in our managed services and corporate segments.
The decrease in the managed services segment resulted from the transfer of certain employees from our managed services segment
to our corporate segment. The decrease in the corporate segment resulted from a decrease in stock compensation expense. This decrease
was offset by increased salary and wages expense in our professional services segment. Salaries and wages were 23% of revenue in
the three-month period ended March 31, 2016, as compared to 27% for the same period in 2015. Our salaries and wages will not increase
proportionally to the increase in our revenue.
General
and Administrative:
|
|
Three months
ended March 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percentage
|
|
Applications and infrastructure
|
|
$
|
525
|
|
|
$
|
511
|
|
|
$
|
14
|
|
|
|
3
|
%
|
Percentage of total revenue
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional services
|
|
$
|
434
|
|
|
$
|
416
|
|
|
$
|
18
|
|
|
|
4
|
%
|
Percentage of total revenue
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed services
|
|
$
|
629
|
|
|
$
|
275
|
|
|
$
|
354
|
|
|
|
129
|
%
|
Percentage of total revenue
|
|
|
4
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cloud services
|
|
$
|
44
|
|
|
$
|
51
|
|
|
$
|
(7
|
)
|
|
|
-14
|
%
|
Percentage of total revenue
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$
|
1,705
|
|
|
$
|
1,625
|
|
|
$
|
80
|
|
|
|
5
|
%
|
Percentage of total revenue
|
|
|
10
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,337
|
|
|
$
|
2,878
|
|
|
$
|
459
|
|
|
|
16
|
%
|
Percentage of total revenue
|
|
|
19
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
General and administrative costs
include all of our corporate costs, as well as the costs of our subsidiaries’ management personnel and administrative overhead.
These costs consist of office rental, legal, consulting and professional fees, travel costs and other costs that are not directly
related to the performance of our services under customer contracts. General and administrative expenses increased approximately
$0.4 million, or 16%, to $3.3 million in the three-month period ended March 31, 2016, as compared to $2.9 million in the comparable
period of 2015. The increase was primarily a result of increases in the managed services and corporate segments. The increase
in the managed services segment resulted from a decrease in reimbursements from a vendor. General and administrative expenses
increased to 19% of revenues in the three-month period ended March 31, 2016, from 16% in the comparable period in 2015.
Interest
Expense:
Interest
expense for the three-month period ended March 31, 2016 and 2015 was $4.7 million and $3.1 million, respectively. The increase
in interest expense primarily resulted from debt incurred during December 31, 2015 and February 2016.
Net
Loss Attributable to our Common Stockholders.
Net loss attributable to our common
stockholders was $4.3 million for three-month period ended March 31, 2016, as compared to net loss attributable to common stockholders
of $10.4 million for the three months ended March 31, 2015. The decrease in net loss was primarily due to a decrease in debt extinguishment
and modification losses totaling $3.4 million. Additionally, non-cash gains related to our derivative instruments increased by
$1.9 million.
Liquidity
and Capital Resources
We believe that our available cash
balance as of the date of this filing will not be sufficient to fund our anticipated level of operations for at least the next
twelve months. The Independent Registered Public Accounting Firms’ Report issued in connection with our audited financial
statements for the year ended December 31, 2015 stated that there is “substantial doubt about the Company’s ability
to continue as a going concern”. Management believes that our ability to continue our operations depends on our ability to
sustain and grow revenue and results of operations as well as our ability to access capital markets when necessary to accomplish
our strategic objectives. Management believes that we will continue to incur losses for the immediate future. For the quarter ended
March 31, 2016, we have generated gross profits from operations but were unable to achieve positive cash flow from operations.
We expect to finance our cash needs from our operations and, depending on results of operations, we may need additional equity
or debt financing until we can achieve profitability and positive cash flows from operating activities, if ever.
At March 31, 2016, we had a working
capital deficit of $15.8 million, as compared to a working capital deficit of $11.4 million at December 31, 2015.
We anticipate meeting our cash obligations
on our indebtedness that is payable on or prior to March 31, 2017 from our cash flows from operations. Additionally, during February
2016, we sold the assets of our wholly owned subsidiary, VaultLogix, for $24 million plus a working capital adjustment, which is
held in an escrow account, of approximately $2 million.
Our future capital requirements
for our operations will depend on many factors, including the profitability of our businesses, the number and cash requirements
of other acquisition candidates that we pursue, and the costs of our operations. We have been investing in sales personnel in
anticipation of increasing revenue opportunities in the cloud services and managed services segments of our business, which has
contributed to our losses from operations. Our management has taken several actions to ensure that we will have sufficient liquidity
to meet our obligations through March 31, 2017, including the reduction of certain general and administrative expenses, consulting
expenses and other professional services fees. Additionally, if our actual revenues are less than forecasted, we anticipate implementing
headcount reductions to a level that more appropriately matches then-current revenue and expense levels. We also are evaluating
other measures to further improve our liquidity, including, the sale of equity or debt securities and entering into joint ventures
with third parties. Lastly, we may elect to reduce certain related-party and third-party debt by converting such debt into common
shares. We are currently in discussions with a third party on a credit facility to enhance our liquidity position. Our management
believes that these actions will enable us to meet our liquidity requirements through March 31, 2017. There is no assurance that
we will be successful in any capital-raising efforts that we may undertake to fund operations during 2016.
We
plan to generate positive cash flow from our subsidiaries. However, to execute our business plan, service our existing indebtedness
and implement our business strategy, we may 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.
We cannot be sure that any additional funding, if needed, will be available on terms favorable to us or at all. Furthermore, any
additional capital raised through the sale of equity or equity-linked securities may dilute our current stockholders’ ownership
in us and could also result in a decrease in the market price of our common stock. The terms of those securities issued by us
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. We also may be required to recognize non-cash expenses in connection with
certain securities we issue, such as convertible notes and warrants, which may adversely impact our financial condition. Furthermore,
any debt financing, if available, may subject us to restrictive covenants and significant interest costs. There can be no assurance
that we will be able to raise additional capital, when needed, to continue operations in their current form.
We
had capital expenditures of $0.02 million and $0.09 million for the three-month periods ended March 31, 2016 and 2015, respectively.
We expect our capital expenditures for the 12 months ending March 31, 2017 to be consistent with our prior spending. These capital
expenditures will be primarily utilized for equipment needed to generate revenue and for office equipment. We expect to fund such
capital expenditures out of our working capital.
The
following summary of our cash flows for the periods indicated has been derived from our historical consolidated financial statements,
which are included elsewhere in this report: