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’s management 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 ability to continue operations depends
on its ability to sustain and grow revenue and results of operations as well as its 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 three and nine months ended September 30, 2017, the Company generated gross
profits but was unable to achieve positive cash flow from operations. The Company’s management expects to meet its future
cash needs from the results of operations and, depending on the results of operations, the Company will likely need additional
equity or debt financing until the Company can achieve profitability and positive cash flows from operating activities, if ever.
During the three and
nine months ended September 30, 2017 and the year ended December 31, 2016, the Company suffered recurring losses from operations.
At September 30, 2017 and December 31, 2016, the Company had a stockholders’ deficit of $26,650 and $16,043, respectively.
At September 30, 2017, the Company had a working capital deficit of approximately $41,112, as compared to a working capital deficit
of approximately $39,413 at December 31, 2016. The decrease of $1,699 in the Company’s working capital from December 31,
2016 to September 30, 2017 was primarily the result of a decrease in accounts receivable of $5,911, a $963 decrease in cash, a
$976 increase in deferred revenue, a $1,077 increase in current derivative financial instruments based on changes in fair value,
and a $6,149 increase in the current portion of term loans. The decrease was offset by a $2,977 increase in loans receivable, a
$1,803 increase in other current assets, a $9,531 decrease in the current portion of notes payable to related parties, and a combined
decrease of $1,247 in accrued expenses and accounts payable.
Within the next 12 months,
the Company has obligations relating to the payment of indebtedness on term loans of $28,852 and an obligation to White Winston
in the amount of $675 arising out of the judgement entered by the District Court in New Jersey. The Company anticipates meeting
its cash obligations on indebtedness that is payable on or prior to November 30, 2018 from earnings from operations, the sale of
certain operating assets or businesses or 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’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. 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 certain operating assets or businesses, the sale of equity or debt securities and entering
into joint ventures with third parties. In July 2017, the Company elected to reduce related-party debt by converting such debt
into shares of the Company’s Series J preferred stock (refer to Note 11, Stockholders’ Deficit, and Note 13, Related
Parties, for further detail). Lastly, in October 2017, the Company elected to reduce certain term loan debt by converting such
debt into shares of the Company’s Series L preferred stock (refer to Note 16, Subsequent Events, for further detail). The
Company may elect to reduce additional third-party debt in the future by converting such debt into shares of the Company’s
common stock. The Company’s management believes that these actions will enable the Company to meet its liquidity requirements
through the next 12 months. 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 operating subsidiaries. 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.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
3.
DISPOSALS OF SUBSIDIARIES
On January 31, 2017,
the Company sold the Highwire division of ADEX. This division accounted for approximately $0 and $4,034 in revenues for the three
months ended September 30, 2017 and 2016, respectively, and approximately $365 and $8,605 in revenues for the nine months ended
September 30, 2017 and 2016, respectively. Under the terms of the sale, the Company received $4,000 in total proceeds and an additional
working capital adjustment of approximately $400 that was paid in October 2017. The Company used proceeds from the sale to make
payments on term loans (refer to Note 8, Term Loans, for further detail). In connection with the sale, the Company completed an
ASC 350-20 goodwill fair value assignment, which allocated $3,003 from the reporting unit to Highwire.
Per
ASC 350-20-40-7, when a portion of goodwill is allocated to a business to be disposed of, the goodwill remaining in the portion
of the reporting unit to be retained shall be tested for impairment in accordance with paragraphs 350-20-35-3A through 35-19 using
its adjusted carrying amount. As a result of the sale, the Company identified indicators of potential impairment of goodwill and
intangible assets.
Based
on the Company’s analysis, the Company recorded goodwill impairment for ADEX and SDNE of $2,885 and $261, respectively,
and intangible asset impairment for ADEX and SDNE of $637 and $160, respectively, in the unaudited condensed consolidated statement
of operations for the nine months ended September 30, 2017.
As
a result of the disposal of the Highwire division of ADEX, the Company recorded a gain on disposal of subsidiaries of $695 to
the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2017.
On April 25, 2017,
the Company sold 80.1% of the assets associated with its AWS Entities subsidiaries. The AWS Entities accounted for approximately
$0 and $2,372 in revenues for the three months ended September 30, 2017 and 2016, respectively, and approximately $2,738 and $9,144
in revenues for the nine months ended September 30, 2017 and 2016, respectively. The purchase price paid by buyer for the assets
included the assumption of certain liabilities and contracts associated with the AWS Entities, the issuance to the Company of a
one-year convertible promissory note in the principal amount of $2,000 (refer to Note 4, Loans Receivable, for further detail),
and a potential earn-out after six months in an amount equal to the lesser of (i) three times EBITDA of the AWS Entities for the
six-month period immediately following the closing and (ii) $1,500. In addition, the asset purchase agreement contains a working
capital adjustment. The Company has not yet finalized the numbers for the potential earn-out or working capital adjustment.
Based
on the Company’s analysis in accordance with ASC 350-20-40-7, the Company recorded goodwill impairment for TNS and RME of
$596 and $25, respectively, and intangible asset impairment for TNS and RME of $123 and $39, respectively, in the unaudited condensed
consolidated statement of operations for the nine months ended September 30, 2017, as a result of the sale of the AWS Entities.
As
a result of the disposal of the AWS Entities, the Company recorded a loss on disposal of subsidiaries of $6,051 to the unaudited
condensed consolidated statement of operations for the nine ended September 30, 2017.
On May 15, 2017, the Company
sold its SDNE subsidiary. SDNE accounted for approximately $0 and $1,538 in revenues for the three months ended September 30,
2017 and 2016, respectively, and approximately $1,671 and $2,898 in revenues for the nine months ended September 30, 2017 and
2016, respectively. Under the terms of the sale, the Company was to receive $1,400 in cash and a working capital adjustment of
$61 to be paid within 150 days of closing. The Company received cash proceeds of $1,411, with $50 being held in escrow as of September
30, 2017.
Based
on the Company’s analysis in accordance with ASC 350-20-40-7, the reporting units in the Company’s professional services
segment were not impaired as a result of the SDNE sale.
As
a result of the disposal of SDNE, the Company recorded a gain on disposal of subsidiaries of $585 to the unaudited condensed consolidated
statement of operations for the nine months ended September 30, 2017.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
The
Company completed the below pro forma data for the three months ended September 30, 2016 and the nine months ended September 30,
2017 and 2016 to reflect the impact of the sales described above on the Company’s financial results as though the transactions
occurred at the beginning of the reported periods:
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
|
|
|
Revenue
|
|
$
|
11,609
|
|
Income from continuing operations
|
|
|
1,856
|
|
Net income
|
|
|
1,856
|
|
Net income attributable to InterCloud Systems, Inc. common stockholders
|
|
|
1,900
|
|
Basic income (loss) per share attributable to InterCloud Systems, Inc. common stockholders:
|
|
|
0.21
|
|
Diluted income (loss) per share attributable to InterCloud Systems, Inc. common stockholders:
|
|
|
0.07
|
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
27,331
|
|
|
$
|
39,129
|
|
Loss from continuing operations
|
|
|
(18,922
|
)
|
|
|
(15,191
|
)
|
Net loss
|
|
|
(18,922
|
)
|
|
|
(14,726
|
)
|
Net loss attributable to InterCloud Systems, Inc. common stockholders
|
|
|
(18,756
|
)
|
|
|
(14,748
|
)
|
Loss per share attributable to InterCloud Systems, Inc. common stockholders, basic and diluted:
|
|
|
(0.11
|
)
|
|
|
(1.80
|
)
|
4.
LOANS RECEIVABLE
Loans
receivable as of September 30, 2017 and December 31, 2016 consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Loans to employees, net of reserves of $913 and $891, respectively, due December 2017
|
|
$
|
15
|
|
|
$
|
37
|
|
Loan to third party, due December 2017
|
|
$
|
569
|
|
|
$
|
345
|
|
Fair value of convertible loan receivable from Mantra, due April 2018
|
|
|
2,775
|
|
|
|
-
|
|
Loans receivable
|
|
$
|
3,359
|
|
|
$
|
382
|
|
Loans
to employees bear interest at rates between 2% and 3% per annum. As of September 30, 2017 and December 31, 2016, the value of
the collateral was below the value of the outstanding loans to employees. As a result, the Company recorded a reserve on the balance
of loans to employees of $913 and $891 as of September 30, 2017 and December 31, 2016, respectively. These employees are considered
related parties (refer to Note 13, Related Parties, for further detail).
During
the nine months ended September 30, 2017, the Company loaned an additional $224 to a third party.
On April 25, 2017, the
Company sold 80.1% of the assets associated with its AWS Entities subsidiaries (refer to Note 3, Disposals of Subsidiaries, for
further detail). In connection with the sale, the Company received from the buyer a one-year convertible promissory note in the
principal amount of $2,000. This note accrues interest at a rate of 8% per annum. The interest income associated with this loan
receivable during the three and nine months ended September 30, 2017 amounted to $40 and $69, respectively. This note is convertible
into shares of common stock of the buyer at a conversion price per share equal to 75% of the lowest VWAP during the fifteen (15)
trading days immediately prior to the conversion date.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
The Company evaluated
the convertible note’s settlement provisions and elected the fair value option afforded in ASC 825, Financial Instruments,
to value this instrument. Under such election, the loan receivable is measured initially and subsequently at fair value, with any
changes in the fair value of the instrument being recorded in the unaudited condensed consolidated financial statements as a change
in fair value of derivative instruments. The Company estimates the fair value of this instrument by first estimating the fair value
of the straight debt portion, excluding the embedded conversion option, using a discounted cash flow model. The Company then estimates
the fair value of the embedded conversion option using a Monte Carlo simulation. The sum of these two valuations is the fair value
of the loan receivable. On April 25, 2017, the Company used the discounted cash flow method to value the straight debt portion
of the convertible note and determined the fair value to be $1,057, and used a Monte Carlo simulation to value the settlement features
of the convertible note and determined the fair value to be $1,174. The total fair value of $2,231 was recorded in the unaudited
condensed consolidated balance sheet.
On September 30, 2017,
the Company used the discounted cash flow method to value the straight debt portion of the convertible note and determined the
fair value to be $1,403, and used a Monte Carlo simulation to value the settlement features of the convertible note and determined
the fair value to be $1,372. The total fair value of $2,775 was included in loans receivable on the unaudited condensed consolidated
balance sheet as of September 30, 2017. The Company recorded the change in fair value as a gain of $318 and $544 on the unaudited
condensed consolidated statement of operations for the three and nine months ended September 30, 2017, respectively.
The fair value of the
note receivable as of September 30, 2017 was calculated using the discounted cash flow method and a Monte Carlo simulation with
the following factors, assumptions and methodologies:
|
|
September 30,
2017
|
|
Principal amount and guaranteed interest
|
|
$
|
2,022
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
Conversion trigger price per share
|
|
|
None
|
|
Risk free rate
|
|
|
1.06
|
%
|
Life of conversion feature (in years)
|
|
|
0.57
|
|
Volatility
|
|
|
149
|
%
|
*
|
The
conversion price per share is equal to 75% of the lowest VWAP during the fifteen trading days immediately prior to the conversion
date.
|
5.
PROPERTY AND EQUIPMENT, NET
Property
and equipment as of September 30, 2017 and December 31, 2016 consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Vehicles
|
|
$
|
679
|
|
|
$
|
777
|
|
Computers and Office Equipment
|
|
|
635
|
|
|
|
966
|
|
Equipment
|
|
|
262
|
|
|
|
764
|
|
Software
|
|
|
-
|
|
|
|
176
|
|
Total
|
|
|
1,576
|
|
|
|
2,683
|
|
Less accumulated depreciation
|
|
|
(1,458
|
)
|
|
|
(2,150
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
118
|
|
|
$
|
533
|
|
Depreciation
expense for the three months ended September 30, 2017 and 2016 was $49 and $89, respectively. Depreciation expense for the nine
months ended September 30, 2017 and 2016 was $189 and $261, respectively.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
6.
GOODWILL AND INTANGIBLE ASSETS
Goodwill
The
following table summarizes the Company’s goodwill as of September 30, 2017 and December 31, 2016:
|
|
Applications and Infrastructure
|
|
|
Professional Services
|
|
|
Managed Services
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
$
|
6,906
|
|
|
$
|
10,081
|
|
|
$
|
6,381
|
|
|
$
|
23,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charge
|
|
|
(621
|
)
|
|
|
(3,146
|
)
|
|
|
-
|
|
|
|
(3,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal
|
|
|
(4,979
|
)
|
|
|
(4,016
|
)
|
|
|
(421
|
)
|
|
|
(9,416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2017
|
|
$
|
1,306
|
|
|
$
|
2,919
|
|
|
$
|
5,960
|
|
|
$
|
10,185
|
|
Intangible
Assets
The
following table summarizes the Company’s intangible assets as of September 30, 2017 and December 31, 2016:
|
|
|
|
September
30, 2017
|
|
|
|
Estimated
Useful Life
|
|
Beginning
Net Book Value
|
|
|
Additions
|
|
|
Amortization
|
|
|
Amortization
Writeoff
|
|
|
Impairment
Charge
|
|
|
Disposals
|
|
|
Ending
Net Book Value
|
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationship and lists
|
|
7-10 yrs
|
|
$
|
8,589
|
|
|
$
|
-
|
|
|
$
|
(743
|
)
|
|
$
|
1,579
|
|
|
$
|
(69
|
)
|
|
$
|
(3,774
|
)
|
|
$
|
5,582
|
|
|
$
|
(5,259
|
)
|
Non-compete agreements
|
|
2-3 yrs
|
|
|
248
|
|
|
|
-
|
|
|
|
(27
|
)
|
|
|
624
|
|
|
|
(160
|
)
|
|
|
(685
|
)
|
|
|
-
|
|
|
|
(1,224
|
)
|
URL’s
|
|
Indefinite
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
Trade names
|
|
1 Year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
(30
|
)
|
Trade names
|
|
Indefinite
|
|
|
3,178
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(725
|
)
|
|
|
(982
|
)
|
|
|
1,471
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
$
|
12,023
|
|
|
$
|
-
|
|
|
$
|
(770
|
)
|
|
$
|
2,222
|
|
|
$
|
(959
|
)
|
|
$
|
(5,463
|
)
|
|
$
|
7,053
|
|
|
$
|
(6,513
|
)
|
|
|
|
|
December 31,
2016
|
|
|
|
Estimated Useful Life
|
|
Beginning Net
Book Value
|
|
|
Additions
|
|
|
Amortization
|
|
|
Amortization
Writeoff
|
|
|
Impairment Charge
|
|
|
Disposals
|
|
|
Ending Net Book
Value
|
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationship
and lists
|
|
7-10 yrs
|
|
$
|
9,744
|
|
|
$
|
145
|
|
|
$
|
(1,308
|
)
|
|
$
|
8
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,589
|
|
|
$
|
(6,095
|
)
|
Non-compete agreements
|
|
2-3 yrs
|
|
|
154
|
|
|
|
498
|
|
|
|
(287
|
)
|
|
|
7
|
|
|
|
-
|
|
|
|
(124
|
)
|
|
|
248
|
|
|
|
(1,821
|
)
|
URL’s
|
|
Indefinite
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
Trade names
|
|
1 Year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(49
|
)
|
Trade names
|
|
Indefinite
|
|
|
3,178
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,178
|
|
|
|
-
|
|
Purchased Software
|
|
16 years
|
|
|
3,629
|
|
|
|
-
|
|
|
|
(170
|
)
|
|
|
-
|
|
|
|
(3,459
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
intangible assets
|
|
|
|
$
|
16,713
|
|
|
$
|
643
|
|
|
$
|
(1,765
|
)
|
|
$
|
15
|
|
|
$
|
(3,459
|
)
|
|
$
|
(124
|
)
|
|
$
|
12,023
|
|
|
$
|
(7,965
|
)
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Amortization
expense related to the identifiable intangible assets was $204 and $476 for the three months ended September 30, 2017 and 2016,
respectively. Amortization expense related to the identifiable intangible assets was $770 and $1,416 for the nine months ended
September 30, 2017 and 2016, respectively
7.
BANK DEBT
Bank
debt as of September 30, 2017 and December 31, 2016 consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Two lines of credit, monthly principal and interest, ranging from $0 to $1, average interest of 8.4%, guaranteed personally by former owners of subsidiary, maturing July 2018
|
|
$
|
103
|
|
|
$
|
121
|
|
Equipment finance agreement, monthly principal of $1, maturing February 2020
|
|
|
13
|
|
|
|
-
|
|
|
|
$
|
116
|
|
|
$
|
121
|
|
Less: Current portion of bank debt
|
|
|
(116
|
)
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion of bank debt
|
|
$
|
-
|
|
|
$
|
-
|
|
The
interest expense associated with the bank debt during the three months ended September 30, 2017 and 2016 amounted to $4 and $3,
respectively. The interest expense associated with the bank debt during the nine months ended September 30, 2017 and 2016 amounted
to $12 and $8, respectively. There are no financial covenants associated with the bank debt.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
8.
TERM LOANS
Term
loans as of September 30, 2017 and December 31, 2016 consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Former
owners of RM Leasing, unsecured, non-interest bearing, due on demand
|
|
$
|
2
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
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, matured in November 2016
|
|
|
-
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
8%
convertible promissory note, London Bay - VL Holding Company, LLC, unsecured, matured October 2017, due on demand
|
|
|
7,408
|
|
|
|
7,408
|
|
|
|
|
|
|
|
|
|
|
8%
convertible promissory note, WV VL Holding Corp., unsecured, matured October 2017, due on demand
|
|
|
7,003
|
|
|
|
7,003
|
|
|
|
|
|
|
|
|
|
|
8%
convertible promissory note, Tim Hannibal, unsecured, maturing October 2017
|
|
|
-
|
|
|
|
1,215
|
|
|
|
|
|
|
|
|
|
|
12%
senior convertible note, unsecured, Dominion Capital, matured in January 2017, net of debt discount of $29
|
|
|
-
|
|
|
|
1,170
|
|
|
|
|
|
|
|
|
|
|
12%
convertible note, Richard Smithline, unsecured, matured in January 2017, net of debt discount of $0 and $2, respectively
|
|
|
3
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
Senior
secured convertible debenture, JGB (Cayman) Waltham Ltd., bearing interest of 4.67%, maturing in May 2019, net of debt discount
of $980 and $3,136, respectively
|
|
|
2,611
|
|
|
|
1,900
|
|
|
|
|
|
|
|
|
|
|
Senior
secured convertible note, JGB (Cayman) Concord Ltd., bearing interest at 4.67%, maturing in May 2019, net of debt discount
of $0 and $1,668, respectively
|
|
|
11
|
|
|
|
2,080
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, JGB (Cayman) Waltham Ltd., bearing interest at 4.67%, maturing in May 2019, net of debt discount of $0 and $234,
respectively
|
|
|
414
|
|
|
|
358
|
|
|
|
|
|
|
|
|
|
|
6%
senior convertible term promissory note, unsecured, Dominion Capital. maturing January 31, 2018, net of debt discount of $7
|
|
|
63
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
12%
senior convertible note, unsecured, Dominion Capital, matured on November 4, 2017, due on demand, net of debt discount of
$2 and $65, respectively
|
|
|
148
|
|
|
|
475
|
|
|
|
|
|
|
|
|
|
|
Receivables
Purchase Agreement with Dominion Capital, net of debt discount of $44
|
|
|
-
|
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
Promissory
note issued to Trinity Hall, 3% interest, unsecured, maturing in January 2018
|
|
|
500
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
9.9%
convertible promissory note, RDW Capital LLC. July 14, 2017 Note, maturing on July 14, 2018, net of debt discount of $105
|
|
|
50
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
2.5%
convertible promissory note, RDW Capital LLC. July 18, 2017 Note, maturing on July 18, 2018, net of debt discount of $217
|
|
|
290
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
9.9%
convertible promissory note, RDW Capital LLC. September 27, 2017 Note, maturing on September 27, 2018, net of debt discount
of $122
|
|
|
33
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Promissory
notes issued to Forward Investments, LLC, between 2% and 10% interest, matured on July 1, 2016, unsecured
|
|
|
1,421
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Promissory
notes issued to Forward Investments, LLC, 3% interest, maturing on January 1, 2018, unsecured, net of debt discount of $457
|
|
|
2,285
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Promissory
notes issued to Forward Investments, LLC, 6.5% interest, matured on July 1, 2016, unsecured
|
|
|
390
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Former
owner of IPC, unsecured, 8% interest, matured on May 30, 2016, due on demand
|
|
|
5,755
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Former
owner of IPC, unsecured, 15% interest, due on demand
|
|
|
75
|
|
|
|
-
|
|
|
|
|
28,462
|
|
|
|
23,007
|
|
Less:
Current portion of term loans
|
|
|
(27,296
|
)
|
|
|
(21,147
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
term loans, net of debt discount
|
|
$
|
1,166
|
|
|
$
|
1,860
|
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
The
interest expense, including amortization of debt discounts, associated with the term loans payable during the three months ended
September 30, 2017 and 2016 amounted to $1,547 and $1,890, respectively. The interest expense, including amortization of debt
discounts, associated with the term loans payable during the nine months ended September 30, 2017 and 2016 amounted to $6,918
and $8,133, respectively.
With
the exception of the notes outstanding to RM Leasing, all term loans are subordinate to the JGB (Cayman) Waltham Ltd. and JGB
(Cayman) Concord Ltd. Notes, which are secured by all assets of the Company.
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) 252,173 shares of the Company’s common stock and (iii) $15,626 in unsecured convertible promissory
notes. The closing payments were subject to customary working capital adjustments.
The promissory notes
accrued interest at a rate of 8% per annum, and all principal and interest accrued under the promissory notes was payable on October
9, 2017. The promissory notes are convertible into shares of the Company’s common stock at a conversion price equal to $25.48
per share.
On July 18, 2017, the
holder of the promissory notes in the principal amount of $1,215 assigned the full outstanding amount of the note to a third party,
RDW Capital, LLC (“RDW”) (refer to the “Assignment of Tim Hannibal Note - RDW July 18, 2017 2.5% Convertible
Promissory Note” section of this note for further detail). The promissory notes were subsequently cancelled when exchanged
for new promissory notes of the Company.
Term
Loan – Dominion Capital LLC August 6, 2015 Senior Convertible Note
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 had a maturity date
of January 6, 2017. At the election of the investor, the note was convertible into shares of the Company’s common stock
at a conversion price equal to $8.00 per share, subject to adjustment as set forth in the agreement. The investor could have elected
to have the Company redeem the senior convertible note upon the occurrence of certain events, including the Company’s completion
of a $10,000 underwritten offering of the Company’s common stock. Refer to Note 9, Derivative Instruments, for further detail
on the derivative features associated with the August 6, 2015 convertible note.
The
August 6, 2015 senior convertible note matured on January 6, 2017 and was due on demand.
During the nine months
ended September 30, 2017, the investor who held the August 6, 2015 senior convertible note converted the remaining principal outstanding
of $1,199 into shares of the Company’s common stock (refer to Note 11, Stockholders’ Deficit, for further information).
As a result of these conversions, the Company recorded a loss on extinguishment of debt of $832 for the nine months ended September
30, 2017. During the nine months ended September 30, 2016, the investor who held the August 6, 2015 senior convertible note converted
$468 of principal into shares of the Company’s common stock. As a result of these conversions, the Company recorded a gain
on conversion of debt of $197 on the unaudited condensed consolidated statement of operations for the nine months ended September
30, 2016.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Term
Loan – Dominion Capital LLC September 15, 2016 Promissory Note and November 4, 2016 Exchange Agreement
On
September 15, 2016, the Company received cash proceeds of $500, from the sale of a term promissory note. The term promissory note
originally had a maturity date of November 4, 2016 and could have been paid in either cash or common stock at the option of the
lender. If common stock of the Company was used to make such payment, then the shares would have been delivered by the third business
day following the maturity date and would have equaled the total amount including principal and interest, at a conversion price
mutually agreed to by both parties at conversion. Interest at a rate of 12% per annum was to be accrued until the maturity day.
The Company was to pay a minimum of guaranteed interest of $30 and lender legal fees of $5 out of proceeds of the note. The note
could have been redeemed at any time prior to maturity at an amount equal to 110% of the outstanding principal amount plus any
accrued and unpaid interest on the note. The redemption premium (10%) could have been paid in cash or common stock at the option
of the Company. If the Company’s common stock was used to make such payment, then such shares would have been 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
November 4, 2016, the Company entered into an exchange agreement with the holder of the September 15, 2016 term promissory note.
The principal amount was increased by $40 to $540, which included a debt discount of $101, and the note became convertible into
shares of the Company’s common stock. The maturity date of the note was extended from November 4, 2016 to November 4, 2017.
Interest at a rate of 12% per annum is to be accrued until the maturity date. The new note has monthly amortization payments of
$86 that were scheduled to begin on May 4, 2017 and ending on the maturity date. These monthly amortization payments can be offset
by monthly conversions. The note is convertible at the lower of (i) $0.40, or (ii) 75% of the lowest VWAP day for the 15 days
prior to the conversion date. In accordance with ASC Topic 470-50, the Company recorded a loss on extinguishment of $146 in the
consolidated statement of operations for the year ended December 31, 2016. Refer to Note 9, Derivative Instruments, for further
detail on the derivative features associated with the November 4, 2016 convertible note.
During the nine months
ended September 30, 2017, the holder of the November 4, 2016 promissory note converted $390 of principal into shares of the Company’s
common stock (refer to Note 11, Stockholders’ Deficit, for further information). As a result of these conversions, the Company
recorded a loss on extinguishment of debt of $329 in the unaudited condensed consolidated statement of operations for the three
and nine months ended September 30, 2017.
The note matured on
November 4, 2017 and is now due on demand.
Dominion Capital LLC Receivables Purchase
Agreement
On December 30, 2016,
the Company entered into a receivables purchase agreement whereby the Company sold approximately $474 of receivables for a purchase
price in the amount of $430. The principal amount of the loan was $474, which included a debt discount of $44.
During the nine months
ended September 30, 2017, the Company received and remitted $474 of the receivables sold.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Term
Loan - Dominion Capital LLC January 31, 2017 Senior Convertible Promissory Note
On
January 31, 2017, the Company entered into a senior convertible promissory note with Dominion Capital, LLC in the original principal
amount of $70, with interest accruing at the rate of 6% per annum, which matures on January 31, 2018. The note is convertible
at the lower of (i) $0.40 or (ii) 80% of the lowest VWAP in the 15 trading days prior to the conversion date. Refer to Note 9,
Derivative Instruments, for further detail on the derivative features associated with the January 31, 2017 convertible note.
During
the nine months ended September 30, 2017, the holder of the January 31, 2017 promissory note did not convert any principal or
accrued interest into 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 matured on January 11, 2017. The note is convertible into shares of the Company’s common stock at
a conversion price equal to the lesser of $1.25 or 75% of the average daily VWAP for the five (5) trading days prior to the conversion
date. Refer to Note 9, Derivative Instruments, for further detail on the derivative features associated with the Richard Smithline
Senior Convertible Note.
Pursuant
to the Smithline senior convertible note, the Company was required to meet current public information requirements under Rule
144 of the Securities Act of 1933, which it had failed to do prior to June 30, 2016. Thus, on July 20, 2016, the Company agreed
to add $55 to the principal amount of the Smithline senior convertible note as of July 1, 2016 and the investor waived its right
to call an event of default under the note with respect to the Company’s failure to meet the public information requirement
for the period ending June 30, 2016. On September 1, 2016, the Company agreed to add $97 to the principal amount of the Smithline
senior convertible note as of the date of its last monthly amortization to compensate the investor for certain damages relating
to noncompliance with certain provisions of the senior convertible note. In accordance with ASC Topic 470-50, the Company recorded
a loss on extinguishment of debt of $167 during the year ended December 31, 2016.
During the nine months
ended September 30, 2017, the investor who holds the Smithline senior convertible note converted $360 of principal into shares
of the Company’s common stock (refer to Note 11, Stockholders’ Deficit, for further information). As a result of these
conversions, the Company recorded a loss on extinguishment of debt of $64 and $319 in the unaudited condensed consolidated statement
of operations for the three and nine months ended September 30, 2017, respectively. During the nine months ended September 30,
2016, the investor who holds the Smithline senior convertible note converted $372 of principal into shares of the Company’s
common stock.
Principal
of $3 and $363 remained outstanding as of September 30, 2017 and December 31, 2016, 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 had a maturity date of June 30, 2017, bore interest at 10% per annum,
and was convertible into shares of the Company’s common stock at a conversion price equal to $5.32 per share, subject to
adjustment as set forth in the debenture. The Company was required to 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 was an interest payment date on which the Company was required to pay to JGB Waltham a fixed
amount, which was 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 had 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 could have been 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 was guaranteed to by the Company and certain of its subsidiaries and was secured by all assets of the Company.
The total cash received by the Company as a result of this agreement was $3,730.
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.
In
connection with the execution of the Debenture Forbearance Agreement, the Company issued to JGB Waltham an amended and restated
senior secured convertible debenture (the “Amended and Restated Debenture”), which amended the original 10% senior
secured convertible debenture issued to JGB Waltham on December 29, 2015 by: (i) reducing the conversion price at which the original
debenture converts into shares of the Company’s common stock; 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) certain anti-dilution protections.
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 $3.20
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, 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.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
In
connection with the execution of the Debenture Forbearance Agreement, the Company issued to JGB Waltham a senior secured note
(the “2.7 Note”), dated May 17, 2016, in the principal amount of $2,745 that matures on May 31, 2019, bears interest
at 0.67% per annum and contains standard events of default.
The
Company accounted for the Debenture Forbearance Agreement in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50,
the Company extinguished the December 29, 2015 senior secured convertible debenture in the then-current principal amount of $6,100
and recorded a new senior secured convertible debenture at its new fair value of $3,529 on the consolidated balance sheet as of
May 17, 2016. As a result of the extinguishment, the Company recorded a loss on extinguishment of debt of $1,457 on the consolidated
statement of operations as of May 17, 2016. In addition, the Company re-valued the derivative features associated with the December
29, 2015 senior secured convertible debenture. Refer to Note 9, Derivative Instruments, for additional information on this transaction.
On
May 23, 2016, the Company entered into an amended agreement with JGB Concord, JGB Waltham, VaultLogix, and the Guarantors thereto
(the “Amended Agreement”) pursuant to which (i) JGB Concord permitted the Company to withdraw $172 from the Blocked
Account (as defined in the original debenture), and (ii) JGB Concord permitted the Company to withdraw $328 from the Deposit Account
(as defined in the original note) and, in exchange for the foregoing, (i) VaultLogix guaranteed the obligations of, and provide
security for, the Amended and Restated Debenture and the 2.7 Note, (ii) the Company’s subsidiaries guaranteed all indebtedness
due to JGB Concord under the Amended and Restated Note and 5.2 Note, and (iii) the Company and its subsidiaries pledged their
assets as 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
agreed 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”). In addition, the interest rates on the Amended and
Restated Note and the 5.2 Note were amended from 0.67% per annum to 1.67% per annum.
The
Company accounted for this Amended Agreement in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company
accounted for the Amended Agreement as a debt modification and adjusted the fair value of the associated derivative liabilities
to its fair value as of May 23, 2016. Refer to Note 9, Derivative Instruments, for additional information on this transaction.
On
June 23, 2016, the Company entered into an amendment agreement with JGB (Cayman) Concord Ltd. (“JGB Concord”) and
JGB Waltham pursuant to which, (i) JGB Waltham and JGB Concord released to the Company an aggregate of $1,500 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”) was amended to increase the Applicable Interest Rate (as defined in the original note)
by 3.0% effective on July 1, 2016; (ii) the December Debenture was amended to increase the annual rate of interest by 3.0% effective
on July 1, 2016; (iii) the JGB Concord senior secured convertible note (the “February Convertible Note”) was amended
to increase the Applicable Interest Rate (as defined in the original February Convertible Note) by 3.0%, effective on July 1,
2016; and (iv) the February Note was amended to increase the annual rate of interest by 3.0%, effective 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, was 4.67%. As additional consideration for the release of the funds, the Company issued 225,000 shares of the Company’s
common stock on June 23, 2016 to JGB Concord.
The
Company accounted for the June 23, 2016 amendment agreement in accordance with ASC Topic 470-50. In accordance with ASC Topic
470-50, the Company extinguished the May 17, 2016 Debenture Forbearance Agreement in the principal amount of $6,100 and recorded
on the balance sheet as of June 23, 2016 a new senior secured convertible debenture at its new fair value of $4,094. As a result
of the extinguishment, the Company recorded a loss on extinguishment of debt of $483 on the consolidated statement of operations
as of June 23, 2016. In addition, the Company re-valued the derivative features associated with the May 17, 2016 Debenture Forbearance
Agreement. Refer to Note 9, Derivative Instruments, for additional information on this transaction.
On
September 1, 2016, the Company entered into an Amendment Agreement with JGB Concord and JGB Waltham pursuant to which, JGB Waltham
and JGB Concord (i) waived certain covenant violations and defaults, (ii) agreed to a specified application of the Cash Collateral
(as defined in the Amendment Agreement) in partial satisfaction of the obligations owed under the December Debenture, the 2.7
Note, and the February Convertible Note, and in full satisfaction of the 5.2 Note, and (iii) certain provisions of the December
Debenture, the 2.7 Note, and the February Convertible Note be amended.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
The
Company also (i) issued warrants, with an expiration date of December 31, 2017, to purchase 250,000 shares of the Company’s
common stock at an exercise price of $0.04 per share, (ii) issued warrants, with an expiration date of December 31, 2017, to purchase
875,000 shares of common stock at an exercise price of $0.40 per share ((i) and (ii), the “JGB Warrants”). The Company
determined that the fair value of the JGB Warrants was $972, which was included in common stock warrants within the stockholders’
deficit section on the consolidated balance sheet as of December 31, 2016. As of March 31, 2017, these warrants were reclassified
to a liability account (refer to Note 9, Derivative Instruments, for further detail).
In
connection with the execution of the September 1, 2016 Amendment Agreement, the Company issued to JGB Waltham the Third Amended
and Restated Senior Secured Convertible Debenture (the “Amended and Restated Debenture”), in order to, among other
things, amend the December Debenture to (i) provide that the Company may prepay such debenture upon prior notice at a 10% premium,
(ii) modify the conversion price at which such debenture converts into common stock from a fixed price of $3.20 to the lowest
of (a) $0.8172 per share, (b) 80% of the average VWAPs (as defined in the Amended and Restated Debenture) for each of the five
consecutive trading days immediately prior to the applicable conversion, and (c) 85% of the VWAP (as defined in the Amended and
Restated Debenture) for the trading day immediately preceding the applicable conversion (the “Conversion Price”),
and (iii) eliminate three additional 7.5% payments due to JGB Waltham in 2017, 2018 and 2019, as per such debenture. Further,
in connection with the execution of the Amendment Agreement, the Company executed the Amended and Restated Senior Secured Note
(the “Amended and Restated 2.7 Note”), in order to, among other things, amend the 2.7 Note to provide that JGB Waltham
may convert such note into shares of common stock at the applicable Conversion Price at any time and from time to time. Refer
to Note 9, Derivative Instruments, for further detail on the Company’s accounting for the Amended and Restated 2.7 Note.
The
Company accounted for the September 1, 2016 amendment agreement in accordance with ASC Topic 470-50. Because of the extinguishment,
the Company recorded a loss on extinguishment of debt of $274 on the consolidated statement of operations as of September 1, 2016.
In addition, the Company re-valued the derivative features. Refer to Note 9, Derivative Instruments, for additional information
on this transaction.
On
February 28, 2017, the Company entered into a consent agreement with JGB Waltham and JGB Concord in order to, among other things,
(i) obtain the consent of JGB Waltham and JGB Concord to the Highwire Asset Purchase Agreement (“APA”); (ii) amend
the conversion price of the JGB Waltham Debenture, JGB Waltham 2.7 Note, and the JGB Concord Debenture to the lower of (a) $0.16
per share and (b) 80% of the lowest daily VWAP (as defined in the Debenture) for the 30 consecutive trading days immediately prior
to the applicable conversion; (iii) apply $3,625 of the purchase price received in connection with the APA to payments to JGB
Waltham and JGB Concord in respect of the convertible note, as more particularly set forth in the consent.
The
Company accounted for the amended conversion price in accordance with ASC Topic 470-50. Because of the extinguishment, the Company
recorded a loss on extinguishment of debt related to the JGB Waltham debenture and the JGB Waltham 2.7 Note of $389 and $35, respectively,
on the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2017. In addition, the
Company re-valued the derivative features (refer to Note 9, Derivative Instruments, for additional information on this transaction).
On
March 9, 2017, JGB Waltham, the Company, and a third-party investor effectuated a two-part exchange with respect to a portion
of the Amended and Restated Debenture in which JGB Waltham assigned a portion of its interest in the Amended and Restated Debenture
(the “Assigned Debt”) to MEF I, L.P. pursuant to an Assignment and Assumption Agreement, dated as of March 9, 2017.
Simultaneously therewith, the Company, entered into an Exchange Agreement, dated as of March 9, 2017 (the “Exchange Agreement”),
pursuant to which the Company issued to MEF I, L.P. a 4.67% Convertible Promissory Note, dated as of March 9, 2017, in the principal
amount of $550 (the “Exchange Note”) (refer to MEF I, L.P. section below for additional details).
The
Company accounted for the assignment of debt in accordance with ASC Topic 470-50. Because of the extinguishment, the Company recorded
a loss on extinguishment of debt of $676 on the unaudited condensed consolidated statement of operations for the nine months ended
September 30, 2017. In addition, the Company re-valued the derivative features (refer to Note 9, Derivative Instruments, for additional
information on this transaction).
During
the year ended December 31, 2016, the Company made cash payments for principal and interest on the JGB Waltham December Debenture
of $536 and $24, respectively. The cash paid for principal was from proceeds of the November 18, 2016 and December 30, 2016 Receivables
Purchase Agreements.
During
the nine months ended September 30, 2017, the Company made cash payments for principal and interest on the JGB Waltham December
Debenture of $493 and $185, respectively. Of the $185 of interest paid, $18 was from proceeds of the sale of the Company’s
Highwire division.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
During
the year ended December 31, 2016, the Company made cash payments for principal and interest on the JGB Waltham 2.7 Note of $2,000
and $25, respectively. The cash paid for principal was applied from the Company’s restricted cash balance
During
the nine months ended September 30, 2017, the Company made cash payments for principal and interest on the JGB Waltham 2.7 Note
of $178 and $16, respectively. Of the $16 of interest paid, $2 was from proceeds of the sale of the Company’s Highwire division.
During the nine months ended September 30, 2017, JGB Waltham converted $451 of principal and accrued interest
into shares of the Company’s common stock (refer to Note 11, Stockholders’ Deficit, for further information). As a
result of these conversions, the Company recorded a loss on extinguishment of debt of $606 to the unaudited condensed consolidated
statement of operations for the three and nine months ended September 30, 2017.
Principal
of $3,590 and $5,034 related to the JGB Waltham December Debenture remained outstanding as of September 30, 2017 and December
31, 2016, respectively. Principal of $414 and $592 related to the JGB Waltham 2.7 Note remained outstanding as of September 30,
2017 and December 31, 2016, 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 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
note issued to JGB Concord had a maturity date of February 18, 2019, bore interest at 8.25% per annum, and was convertible into
shares of the Company’s common stock at a conversion price equal to the lowest of: (a) $8.00 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. Interest on the senior secured convertible note was 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 had 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 was secured by all assets of VaultLogix as well as a cash collateral blocked deposit account.
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 defaults 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.
In
connection with the execution of the Note Forbearance Agreement, the Company 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 note converts into shares of the Company’s common; 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) certain anti-dilution
protections.
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
$3.20 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, 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.
The
Company accounted for the Note Forbearance Agreement in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50,
the Company extinguished the February 17, 2016 senior secured convertible note in the principal amount of $11,601 and recorded
a new senior secured convertible debenture at its new fair value of $6,711 on the consolidated balance sheet as of May 17, 2016.
As a result of the extinguishment, the Company recorded a loss on extinguishment of debt of $2,772 on the consolidated statement
of operations as of May 17, 2016. In addition, the Company re-valued the derivative features associated with the February 17,
2016 senior secured convertible note. Refer to Note 9, Derivative Instruments, for additional information on this transaction.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
In
connection with the execution of the Note Forbearance Agreement, the Company issued to JGB Concord a senior secured note (the
“5.2 Note”), dated May 17, 2016, in the principal amount of $5,220 that matures on May 31, 2019, bears interest at
0.67% per annum, and contains standard events of default.
On
May 23, 2016, the Company entered into an amended agreement with JGB Concord, JGB Waltham, VaultLogix, and the Guarantors thereto
(the “Amended Agreement”) pursuant to which (i) JGB Concord permitted the Company to withdraw $172 from the Blocked
Account (as defined in the original debenture), and (ii) JGB Concord permitted the Company to withdraw $328 from the Deposit Account
(as defined in the original note) and, in exchange for the foregoing, (i) VaultLogix guaranteed the obligations of, and provide
security for, the Amended and Restated Debenture and the 2.7 Note, (ii) the Company’s subsidiaries guaranteed all indebtedness
due to JGB Concord under the Amended and Restated Note and 5.2 Note, and (iii) the Company and its subsidiaries pledged their
assets as 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
agreed 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”). In addition, the interest rates on the Amended and
Restated Note and the 5.2 Note were amended from 0.67% to 1.67%.
The
Company accounted for this Amended Agreement in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company
accounted for the Amended Agreement as a debt modification and adjusted the fair value of the associated derivative liabilities
to their fair value as of May 23, 2016. Refer to Note 9, Derivative Instruments, for additional information on this transaction.
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 released to the Company an aggregate of $1,500 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”) was amended
to increase the Applicable Interest Rate (as defined in the original note) by 3.0% to take effect on July 1, 2016; (ii) the December
Debenture was amended to increase 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”) was amended to increase 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 was amended
to increase 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, was 4.67%. As additional consideration
for the release of the funds, the Company issued 225,000 shares of the Company’s common stock on June 23, 2016 to JGB Concord,
and agreed to a make-whole provision whereby the Company will pay JGB Concord in cash the difference between $3.76 per share of
the Company’s common stock and the average volume weighted average price of the Company’s common stock sixty days
after the shares of the Company’s common stock are freely tradable. Refer to Note 9, Derivative Instruments, for further
detail on the Company’s accounting for the JGB Concord make-whole provision.
The
Company accounted for the June 23, 2016 amendment agreement in accordance with ASC Topic 470-50. In accordance with ASC Topic
470-50, the Company extinguished the May 17, 2016 Debenture Forbearance Note in the principal amount of $11,601 and recorded a
new senior secured convertible note at its new fair value of $7,786 on the consolidated balance sheet as of June 23, 2016. As
a result of the extinguishment, the Company recorded a loss on extinguishment of debt of $1,150 on the consolidated statement
of operations as of June 23, 2016. In addition, the Company re-valued the derivative features associated with the May 17, 2016
Debenture Forbearance Note. Refer to Note 9, Derivative Instruments, for additional information on this transaction.
In
connection with the execution of the September 1, 2016 Amendment Agreement, the Company executed the Second Amended and Restated
Senior Secured Convertible Note (the “Amended and Restated Convertible Note”), in order to, among other things, amend
the Convertible Note to (i) increase the interest rate payable thereon from 0.67% to 4.67%, (ii) provide that the Company may
prepay the Amended and Restated Convertible Note upon prior notice at a 10% premium, (iii) provide that the Holder Affiliate may
convert its interest in the Amended and Restated Convertible Note into shares of Common Stock at the applicable Conversion Price,
and (iv) eliminate three additional 7.5% payments due to the Holder Affiliate in 2017, 2018, and 2019, as per the Convertible
Note.
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 September 1, 2016 amendment agreement in accordance with ASC Topic 470-50. Because of the extinguishment,
the Company recorded a loss on extinguishment of debt of $1,187 on the consolidated statement of operations as of September 1,
2016. In addition, the Company re-valued the derivative features. Refer to Note 9, Derivative Instruments, for additional information
on this transaction.
On
February 28, 2017, the Company entered into a consent agreement with JGB Waltham and JGB Concord in order to, among other things,
(i) obtain the consent of JGB Waltham and JGB Concord to the Highwire Asset Purchase Agreement (“APA”); (ii) amend
the conversion price of the JGB Waltham Debenture, JGB Waltham 2.7 Note, and the JGB Concord Debenture to the lower of (a) $0.16
per share and (b) 80% of the lowest daily VWAP (as defined in the Debenture) for the thirty consecutive trading days immediately
prior to the applicable conversion; (iii) apply $3,625 of the purchase price received in connection with the APA to payments to
JGB Waltham and JGB Concord in respect of the convertible note, as more particularly set forth in the consent.
The
Company accounted for the amended conversion price in accordance with ASC Topic 470-50. Because of the extinguishment, the Company
recorded a loss on extinguishment of debt related to the JGB Concord debenture of $71 on the unaudited condensed consolidated
statement of operations for the nine months ended September 30, 2017. In addition, the Company re-valued the derivative features
(refer to Note 9, Derivative Instruments, for additional information on this transaction).
During
the year ended December 31, 2016, the Company made cash payments for principal and interest on the JGB Concord February Debenture
of $391 and $73, respectively. The cash paid for principal was from proceeds of the November 18, 2016 Receivables Purchase Agreement.
$31 of the cash paid for interest was from proceeds of the December 30, 2016 Receivables Purchase Agreement.
During
the nine months ended September 30, 2017, the Company made cash payments for principal and interest on the JGB Concord February
Debenture of $2,688 and $31, respectively. Proceeds from the sale of the Company’s Highwire division were used to pay principal
and interest of $2,526 and $12, respectively, along with an early payment penalty of $253.
During the nine months
ended September 30, 2017, JGB Concord converted $1,053 of principal and accrued interest into shares of the Company’s common
stock (refer to Note 11, Stockholders’ Deficit, for further information). As a result of these conversions, the Company
recorded a loss on extinguishment of debt of $401 and $1,279 to the unaudited condensed consolidated statement of operations for
the three and nine months ended September 30, 2017, respectively.
Principal
of $11 and $3,748 related to the JGB Concord February Debenture remained outstanding as of September 30, 2017 and December 31,
2016, respectively.
MEF
I, L.P. Exchange Note
On
March 9, 2017, JGB Waltham, the Company, and a third-party investor effectuated a two-part exchange with respect to a portion
of the Amended and Restated Debenture in which JGB Waltham assigned a portion of its interest in the Amended and Restated Debenture
(the “Assigned Debt”) to MEF I, L.P. pursuant to an Assignment and Assumption Agreement, dated as of March 9, 2017.
Simultaneously therewith, the Company entered into an Exchange Agreement, dated as of March 9, 2017 (the “Exchange Agreement”),
pursuant to which the Company issued to MEF I, L.P. a 4.67% convertible promissory note, dated as of March 9, 2017, in the aggregate
principal amount of $550 (the “Exchange Note”). The Exchange Note is convertible at the lower of (i) $0.16 or (ii)
80% of the lowest VWAP in the 30 trading days prior to the conversion date (refer to Note 9, Derivative Instruments, for further
detail on the derivative features associated with the Exchange Note).
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
During the nine months
ended September 30, 2017, the investor who held the Exchange Note converted $575 of principal and related interest into shares
of the Company’s common stock (refer to Note 11, Stockholders’ Deficit, for further information). As a result of these
conversions, the outstanding principal balance as of September 30, 2017 was $0. The Company recorded a loss on extinguishment of
debt of $150 to the unaudited condensed consolidated statement of operations for the three and nine months ended September 30,
2017.
Trinity
Hall Promissory Note
On
December 30, 2016, the Company issued to Trinity Hall a promissory note in the principal amount of $500, with interest accruing
at the rate of 3% per annum, which matures on January 1, 2018. This note was issued upon assignment to Trinity Hall of certain
related-party notes payable to Mark Munro (refer to Note 13, Related Parties, for further detail).
RDW
April 3, 2017 2.5 % Convertible Promissory Note
On
April 3, 2017, Scott Davis, a former officer of the Company assigned $100 of his promissory note in the original principal
amount of $250, reduced to $225 based on a $25 conversion into common stock, to RDW. As consideration for the assignment, RDW
paid Scott Davis $40. The note was convertible at a price of $8.88 and was due on demand. As of April 3, 2017, the
outstanding amount of principal and accrued interest for the note was $225 and $57, respectively. Subsequent to the
assignment of $100 principal amount of the note to RDW, the remainder of the note was forgiven. The original note was
included within notes payable, related parties on the unaudited condensed consolidated balance sheets. Per ASC 470-50-40-2,
debt extinguishment transactions between related parties are in essence a capital contribution from a related party. As a
result, rather than recording a gain or loss on extinguishment of debt, the Company recorded $182 to additional paid-in
capital on the unaudited condensed consolidated balance sheet as of June 30, 2017.
RDW subsequently exchanged
this original note for a new 2.5% convertible promissory note in the principal amount of $100 due April 3, 2018. The conversion
price of the new note was equal to 75% of the average of the five lowest VWAPS over the seven trading days prior to the date of
conversion (refer to Note 9, Derivative Instruments, for further detail on the derivative features associated with the RDW April
3, 2017 2.5% convertible note). The Company recorded a loss on extinguishment of debt of $14 for the nine months ended September
30, 2017, which includes all extinguishment accounting for the period in accordance with ASC Topic 470-50.
During the nine months
ended September 30, 2017, the investor who holds the April 3, 2017 2.5% promissory note converted $100 of principal into shares
of the Company’s common stock (refer to Note 11, Stockholders’ Deficit, for further information). As a result of these
conversions, the outstanding principal balance as of September 30, 2017 was $0. The Company recorded a gain on extinguishment of
debt of $34 to the unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2017.
RDW July 14, 2017 9.9% Convertible Promissory
Note
On July 14, 2017, the
Company issued a convertible promissory note to RDW in the principal amount of $155, that accrues interest at the rate of 9.9%
per annum, and matures on July 14, 2018. The note is convertible at the lower of (i) $0.04 or (ii) 75% of the lowest five VWAPS
over the seven trading days prior to the date of conversion (refer to Note 9, Derivative Instruments, for further detail on the
derivative features associated with the RDW July 14, 2017 9.9% convertible note).
During
the nine months ended September 30, 2017, the investor who holds the 9.9% promissory note did not convert any principal or accrued
interest into 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)
Assignment
of Tim Hannibal Note - RDW July 18, 2017 2.5% Convertible Promissory Note
On July 18, 2017, Tim
Hannibal assigned 100% of his 8% convertible promissory note in the original principal amount of $1,215, due October 9, 2017, to
RDW. This note was convertible into the Company’s common stock at a price of $25.48 per share. RDW then exchanged this original
note for a new 2.5% convertible promissory note in the principal amount of $1,215 that matures on July 18, 2018. The conversion
price of such note is equal to the lower of (i) $0.04 or (ii) 75% of the lowest five VWAPS over the seven trading days prior to
the date of conversion (refer to Note 9, Derivative Instruments, for further detail on the derivative features associated with
the RDW July 18, 2017 2.5% convertible note). In addition, Tim Hannibal forgave all outstanding interest relating to the original
note. The Company recorded a loss on extinguishment of debt of $297 on the unaudited condensed consolidated statement of operations
for the three and nine months ended September 30, 2017.
During the nine months
ended September 30, 2017, the investor who holds the July 18, 2017 2.5% promissory note converted $708 of principal into shares
of the Company’s common stock (refer to Note 11, Stockholders’ Deficit, for further information). As a result of these
conversions, the Company recorded a loss on extinguishment of debt of $177 to the unaudited condensed consolidated statement of
operations for the three and nine months ended September 30, 2017.
RDW September 27, 2017 9.9% Convertible
Promissory Note
On September 27, 2017,
the Company issued a convertible promissory note to RDW in the principal amount of $155, that bears interest at the rate of 9.9%
per annum, and matures on September 27, 2018. The note is convertible at the lower of (i) $0.04 or (ii) 75% of the lowest five
VWAPS over the twenty trading days prior to the date of conversion (refer to Note 9, Derivative Instruments, for further detail
on the derivative features associated with the RDW September 27, 2017 9.9% convertible note).
During
the nine months ended September 30, 2017, the investor who holds the 9.9% promissory note did not convert any principal or accrued
interest into shares of the Company’s common stock.
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:
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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. These notes matured on July 1, 2016;
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●
|
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. These notes matured on July 1, 2016; and
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|
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●
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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 $25.44 per share until the Convertible Debentures
were repaid in full and thereafter $9.40 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 $25.44 per share until the Convertible Debentures were repaid in full and thereafter
$9.40 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.
INTERCLOUD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
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 matured on July 1, 2016.
In conjunction with
the extension of the 2% and 10% convertible notes issued to Forward Investments, LLC, the Company recorded an additional $1,916
of debt discount at the date of the restructuring.
The Company has entered
into an agreement with Forward Investments, LLC permitting Forward Investments, LLC to convert its debt into the Company’s
common stock at a 5% discount to the daily market price. During the nine months ended September 30, 2017, Forward Investments,
LLC converted $4,776 aggregate principal amount of promissory notes into an aggregate of 145,266,738 shares of the Company’s
common stock. Refer to Note 11, Stockholders’ Deficit, for further information. As a result of these conversions, the Company
recorded a loss on extinguishment of debt of $206 and $459 for the three and nine months ended September 30, 2017, respectively.
During July 2017, the
Company determined that Forward Investments was not a related party and reclassified debt owed to Forward Investments from related
party debt to term loans. The effective date of the reclassification was January 1, 2017.
Convertible Promissory Note to Frank
Jadevaia, Former Owner of IPC
On January 1, 2014,
the Company acquired all of the outstanding capital stock of IPC. As part of the purchase price for the acquisition, the Company
issued a convertible promissory note to Frank Jadevaia, then President of the Company, in the original principal amount of $6,255.
The convertible promissory note accrues interest at the rate of 8% per annum, and all principal and interest accruing thereunder
was originally due and payable on December 31, 2014. At the election of Mr. Jadevaia, the convertible promissory note is convertible
into shares of the Company’s common stock at a conversion price of $67.96 per share (subject to equitable adjustments for
stock dividends, stock splits, recapitalizations and other similar events). The Company can elect to force the conversion of the
convertible promissory note if the Company’s common stock is trading at a price greater than or equal to $67.96 for ten consecutive
trading days. This note is subordinated until the Senior Secured Convertible Notes issued to the JGB entities are paid in full.
On December 31, 2014,
the Company and Mr. Jadevaia agreed to a modification of the convertible promissory note. The term of the convertible promissory
note was extended to May 30, 2016 and, in consideration for this modification, the Company issued to Mr. Jadevaia 25,000 shares
of common stock.
On May 19, 2015, Mr.
Jadevaia assigned $500 of principal related to the convertible promissory note and the assignees converted all $500 principal amount
of such note into 58,046 shares of the Company’s common stock with a fair value of $13.52 per common share.
On May 30, 2016, the
note matured and was due on demand.
On November 4, 2016,
Mr. Jadevaia resigned from his role as the Company’s President. During July 2017, the Company determined that Frank Jadevaia
was no longer a related party and reclassified his note from related party debt to term loans. The effective date of the reclassification
was January 1, 2017.
On October 12, 2017,
Mr. Jadevaia agreed to exchange $5,430 held in promissory notes into shares of the Company’s Series L preferred stock and
assigned promissory notes in the principal amount of $400 to RDW (refer to Note 16, Subsequent Events, for further detail).
Promissory Note to Former Owner of Tropical
In August 2011, in connection
with the Company’s acquisition of Tropical, the Company assumed a promissory note in the principal amount of $106. On April
25, 2017, the holder of the note forgave the remaining balance of principal and interest and cancelled the promissory note. As
of April 25, 2017, the note had accrued interest of $25. As a result of the cancellation of the note, the Company recognized a
gain on fair value of extinguishment of $131 in the unaudited condensed consolidated financial statements for the nine months ended
September 30, 2017.
INTERCLOUD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
9. DERIVATIVE INSTRUMENTS
The Company evaluates
and accounts for conversion options embedded in its convertible debt and freestanding instruments in accordance with ASC 815,
Accounting
for Derivative Instruments and Hedging Activities
(“ASC Topic 815”).
MidMarket Warrants
The Company issued warrants
to the lenders under the MidMarket Loan Agreement in 2012. These warrants were outstanding as of September 30, 2017 and December
31, 2016.
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 $20.00 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 58,559 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
was being amortized over the original life of the related loans. The amount of the derivative liability was computed by using the
Black-Scholes option pricing model, which is not materially different from a binomial lattice valuation methodology, to determine
the value of the warrants issued. In accordance with ASC Topic 480, the warrants are classified as liabilities because there is
a put feature that requires the Company to repurchase any shares of common stock issued upon exercise of the warrants. The derivative
liability associated with this debt is revalued each reporting period and the increase or decrease is recorded to the consolidated
statement of operations under the caption “change in fair value of derivative instruments.” At each reporting date,
the Company performs an analysis of the fair value of the warrants using the binomial lattice pricing model and adjusts the fair
value accordingly.
On September 17, 2016,
the fourth anniversary date of the warrants, the Company failed to meet the minimum adjusted earnings before interest, taxes, depreciation
and amortization provisions set forth within the original warrant agreement. As such, the expiration date of the warrants was extended
to September 17, 2018.
On September 30, 2017
and December 31, 2016, the Company used a binomial lattice pricing model to determine the fair value of the derivative liability
of the warrants on those dates, and determined the fair value was $0. The Company recorded the change in the fair value of the
derivative liability on the unaudited condensed consolidated statement of operations for the three months ended September 30, 2016
as a gain of $11. The Company recorded the change in the fair value of the derivative liability on the unaudited condensed consolidated
statement of operations for the nine months ended September 30, 2016 as a gain of $21.
The fair value of the
warrant derivative liability as of September 30, 2017 and December 31, 2016 was calculated using a binomial lattice pricing model
with the following factors, assumptions and methodologies:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Fair value of Company’s common stock
|
|
$
|
0.01
|
|
|
$
|
0.12
|
|
Volatility (closing prices of 3-4 comparable public companies, including the Company’s historical volatility)
|
|
|
184
|
%
|
|
|
120
|
%
|
Exercise price per share
|
|
|
$4.00 - $5.00
|
|
|
|
$4.00 - $5.00
|
|
Estimated life
|
|
|
.96 years
|
|
|
|
1.7 years
|
|
Risk free interest rate (based on 1-year treasury rate)
|
|
|
1.31
|
%
|
|
|
0.12
|
%
|
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 originally were convertible into shares of the Company’s common
stock at an initial conversion price of $25.44 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 promissory notes were modified to reduce the initial conversion price of $25.44 to $15.72. As a result, the
Company used a Monte Carlo simulation to determine the fair value on the date of modification. The Company recorded the change
in the fair value of the derivative liability as a loss on fair value of derivative instruments of $310.
INTERCLOUD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
On March 4, 2015, the
Company and Forward Investments, LLC restructured the two promissory notes in order to extend the maturity dates thereof, reduce
the seniority and reduce the interest rate accruing thereon (refer to Note 13, Related Parties, for further detail). The Company
accounted for this restructuring of the promissory notes as a debt modification under ASC Topic 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
consolidated statement of operations.
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 $6.32 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 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 $5.00 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 December 29, 2015,
the ratchet-down feature within the original agreement was triggered and the conversion price of the convertible notes was reset
to $3.12 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 September 30, 2017
and December 31, 2016, the fair value of the conversion feature of the Forward Investments, LLC loans was $385 and $791, respectively,
which was included in derivative financial instrument at estimated fair value on the unaudited condensed consolidated balance sheets.
The change in fair value of the Forward Investments, LLC derivative liabilities was recorded as a gain the unaudited condensed
consolidated statement of operations of $125 and $406 for the three and nine months ended September 30, 2017, respectively. 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 $6,909 and $13,057 for the three and nine months ended September 30, 2016, 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:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Principal
amount and accrued interest
|
|
$
|
1,777
|
|
|
$
|
562
|
|
|
$
|
1,231
|
|
|
$
|
3,081
|
|
|
$
|
3,210
|
|
|
$
|
390
|
|
|
$
|
1,025
|
|
|
$
|
4,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
price per share
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
$
|
3.12
|
|
|
$
|
3.12
|
|
|
$
|
3.12
|
|
|
$
|
3.12
|
|
Risk
free rate
|
|
|
1.92
|
%
|
|
|
1.92
|
%
|
|
|
1.06
|
%
|
|
|
1.06
|
%
|
|
|
1.93
|
%
|
|
|
1.93
|
%
|
|
|
0.51
|
%
|
|
|
0.85
|
%
|
Life
of conversion feature (in years)
|
|
|
4.25
|
|
|
|
4.25
|
|
|
|
0.25
|
|
|
|
0.25
|
|
|
|
5.0
|
|
|
|
5.0
|
|
|
|
0.3
|
|
|
|
1.0
|
|
Volatility
|
|
|
160
|
%
|
|
|
160
|
%
|
|
|
200
|
%
|
|
|
200
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
135
|
%
|
|
|
120
|
%
|
*
The conversion price per share is equal to the lesser of $0.78 or 95% of VWAP on the conversion date.
Dominion Capital LLC 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 matured 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 consolidated balance sheets as a debt discount and related derivative liability. The debt
discounts were 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 December 31, 2016,
the Company used a Monte Carlo simulation to value the settlement features of the senior convertible note and determined the fair
value to be $176. As a result of the conversion of the outstanding principal balance (refer to Note 8, Term Loans, for further
detail), the fair value of the corresponding derivative liability was $0 as of September 30, 2017. The Company recorded a gain
on fair value of derivative instruments of $176 on the unaudited condensed consolidated statement of operations for the nine months
ended September 30, 2017. The Company recorded a loss of $89 on the unaudited condensed consolidated statement of operations for
the three ended September 30, 2016, and a gain of $250 for the nine months ended September 30, 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:
|
|
December 31,
2016
|
|
Principal amount
|
|
$
|
1,198
|
|
|
|
|
|
|
Conversion price per share
|
|
$
|
5.00
|
|
Conversion trigger price per share
|
|
|
None
|
|
Risk free rate
|
|
|
0.44
|
%
|
Life of conversion feature (in years)
|
|
|
0.10
|
|
Volatility
|
|
|
135
|
%
|
Dominion Capital LLC November 4, 2016
Exchange Agreement – Senior Convertible Debt Features
On November 4, 2016,
the Company entered into an exchange agreement with the holder of the September 15, 2016 term promissory note. The principal amount
was increased by $40, and the note became convertible into shares of the Company’s common stock. The note is convertible
at the lower of (i) $0.40, or (ii) 75% of the lowest VWAP day for the 15 days prior to the conversion date (for additional detail
refer to Note 8, Term Loans). 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 4, 2016, the
Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $242 related to the conversion
feature and recorded this item on the consolidated balance sheets as a derivative liability.
On September 30, 2017
and December 31, 2016, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible note
and determined the fair value to be $79 and $78, respectively. The Company recorded a gain of $473 on the unaudited condensed consolidated
statement of operations for the three months ended September 30, 2017, and a loss of $1 on the unaudited condensed consolidated
statement of operations for the nine months ended September 30, 2017.
The fair value of the
senior convertible note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors,
assumptions and methodologies:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Principal amount and guaranteed interest
|
|
$
|
154
|
|
|
$
|
605
|
|
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
|
$
|
0.40
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
|
None
|
|
Risk free rate
|
|
|
0.96
|
%
|
|
|
0.76
|
%
|
Life of conversion feature (in years)
|
|
|
0.10
|
|
|
|
0.80
|
|
Volatility
|
|
|
82
|
%
|
|
|
120
|
%
|
*
The conversion price per share is equal to the lesser of $0.10 or 75% of average daily VWAP for the fifteen trading days prior
to the conversion date.
Dominion Capital LLC January 31, 2017
– Senior Convertible Debt Features
On January 31, 2017,
the Company entered into a senior convertible promissory note with Dominion Capital, LLC in the original principal amount of $70,
with interest accruing at the rate of 6% per annum, which matures on January 31, 2018. The note is convertible at the lower of
(i) $0.40 or (ii) 75% of the lowest VWAP in the 15 trading days prior to the conversion date (for additional detail refer to Note
8, Term Loans). 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 January 31, 2017, the Company used a Monte
Carlo simulation to value the settlement features. The Company ascribed a value of $38 related to the conversion feature and recorded
this item on the consolidated balance sheets as a derivative liability.
INTERCLOUD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
On September 30, 2017,
the Company used a Monte Carlo simulation to value the settlement features of the senior convertible note and determined the fair
value to be $64. The Company recorded a gain of $3 on the unaudited condensed consolidated statement of operations for the three
months ended September 30, 2017, and a loss of $26 on the unaudited condensed consolidated statement of operations for the nine
months ended September 30, 2017.
The fair value of the
senior convertible note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors,
assumptions and methodologies:
|
|
September 30, 2017
|
|
Principal amount and guaranteed interest
|
|
$
|
80
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
Conversion trigger price per share
|
|
|
None
|
|
Risk free rate
|
|
|
1.06
|
%
|
Life of conversion feature (in years)
|
|
|
0.34
|
|
Volatility
|
|
|
201
|
%
|
*
The conversion price per share is equal to 75% of average daily VWAP for the fifteen trading days prior to the conversion date.
Smithline Senior Convertible Note Embedded
Features
On August 6, 2015, the
Company issued to 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 consolidated balance sheets
as a debt discount and related derivative liability. The debt discounts are being amortized over the life of the loan.
On July 20, 2016 and
September 1, 2016, principal of $55 and $97, respectively, was added to the Smithline senior convertible note (refer to Note 8,
Term Loans, for additional detail).
On September 30, 2017
and December 31, 2016, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible noted
and determined the fair value to be $7 and $0, respectively. The Company recorded the change in the fair value of the derivative
liability for the three months ended September 30, 2017 and 2016 as a gain of $43 and $0, respectively. The Company recorded the
change in fair value of the derivative liability for the nine months ended September 30, 2017 and 2016 as a loss and gain of $7
and $85, respectively.
The fair value of the
Smithline derivative at September 30, 2017 was calculated using the Monte Carlo simulation with the following factors, assumptions
and methodologies:
|
|
September 30, 2017
|
|
Principal amount and accrued interest
|
|
$
|
19
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
Conversion trigger price per share
|
|
|
None
|
|
Risk free rate
|
|
|
1.06
|
%
|
Life of conversion feature (in years)
|
|
|
0.25
|
|
Volatility
|
|
|
200
|
%
|
*
The conversion price per share is equal to the lesser of $1.25 or 75% of average daily VWAP for the five trading days prior to
the conversion date.
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 Waltham 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 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 consolidated balance sheets as a debt discount and related derivative liability.
The debt discounts are being amortized over the life of the loan.
On May 17, 2016, the
Company entered into 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 (Refer to Note 8,
Term Loans, for further details). The Company evaluated the Debenture Forbearance Agreement and accounted for the transaction as
a debt extinguishment in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo
simulation to revalue the settlement features associated with the Debenture Forbearance Agreement. The Company recorded the change
in the settlement features as a loss to change in fair value of derivative instruments of $1,154 to its consolidated statement
of operations on May 17, 2016.
On May 23, 2016, the
Company entered into the Amended Agreement with JGB Concord, JGB Waltham, VaultLogix, and the Guarantors. The Company accounted
for this Amended Agreement in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company accounted for
the Amended Agreement as a debt modification and utilized a Monte Carlo simulation to determine the fair value of the settlement
features. The Company recorded a loss on the fair value of the settlement features to change in fair value of derivative instruments
of $41 on the consolidated statement of operations as of May 23, 2016.
On June 23, 2016, the
Company entered into an amended agreement with JGB Concord and JGB Waltham (refer to Note 8, Term Loans, for further detail). The
Company accounted for the amended agreement as a debt extinguishment in accordance with ASC Topic 470-50. In accordance with ASC
Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement features associated with the Amended Agreement.
The Company recorded the change in the settlement features as a loss to change in fair value of derivative instruments of $486
to its consolidated statement of operations on June 23, 2016.
On September 1, 2016,
the Company entered into an amended agreement with JGB Concord and JGB Waltham (refer to Note 8, Term Loans, for further detail).
The Company accounted for the amended agreement in regards to the December Debenture as a debt modification in accordance with
ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement features
associated with the Amended Agreement. The Company recorded the change in the settlement features as a gain to change in fair value
of derivative instruments of $1,552 to its consolidated statement of operations on September 1, 2016.
On February 28, 2017,
the Company entered into a consent agreement with JGB Concord and JGB Waltham (refer to Note 8, Term Loans, for further detail).
The Company accounted for the amended agreement in regards to the JGB Waltham debenture as a debt extinguishment in accordance
with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement
features associated with the agreement. The Company recorded the change in the settlement features as a loss to change in fair
value of derivative instruments of $1,752 to its unaudited condensed consolidated statement of operations for the nine months ended
September 30, 2017.
On March 9, 2017, JGB
(Cayman) Waltham entered into an Assignment and Assumption agreement with MEF I, LP (refer to Note 8, Term Loans, for further detail).
The Company accounted for the assumption agreement in regards to the JGB Waltham debenture as a debt extinguishment in accordance
with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement
features associated with the agreement. The Company recorded the change in the settlement features as a loss to change in fair
value of derivative instruments of $349 to its unaudited condensed consolidated statement of operations for the nine months ended
September 30, 2017.
On September 30, 2017
and December 31, 2016, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible notes
issued to JGB Waltham and determined the fair value to be $2,467 and $533, respectively. The Company recorded the change in the
fair value of the derivative liability for the three months ended September 30, 2017 and 2016 as a gain of $474 and $2,281, respectively.
The Company recorded the change in fair value of the derivative liability for the nine months ended September 30, 2017 and 2016
as a loss and gain of $1,934 and $2,428, respectively, which includes all extinguishment accounting for the periods in accordance
with ASC Topic 470-50. These changes were recorded in the unaudited condensed consolidated statements of operations.
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
JGB (Cayman) Waltham Ltd. derivative at the measurement date was calculated using the Monte Carlo simulation with the following
factors, assumptions and methodologies:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Principal amount
|
|
$
|
3,591
|
|
|
$
|
5,034
|
|
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
|
$
|
0.80
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
$
|
8.00
|
|
Risk free rate
|
|
|
1.47
|
%
|
|
|
1.31
|
%
|
Life of conversion feature (in years)
|
|
|
1.67
|
|
|
|
2.41
|
|
Volatility
|
|
|
179
|
%
|
|
|
100
|
%
|
*
The conversion price per share is equal to the lesser of $0.04 or 80% of VWAP on the conversion date.
JGB (Cayman) Waltham Ltd. 2.7 Note Convertible
Debenture Features
On September 1, 2016,
the Company entered into an amended agreement with JGB Concord and JGB Waltham (refer to Note 8, Term Loans, for further detail).
The Company accounted for the amended agreement in regards to the 2.7 Note as a debt extinguishment in accordance with ASC Topic
470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement features associated
with the Amended Agreement and determined that the fair value of the features was $1,200 as of September 1, 2016 and recorded these
items on the consolidated balance sheets as a derivative liability. The debt discounts are being amortized over the life of the
loan.
On February 28, 2017,
the Company entered into a consent agreement with JGB Concord and JGB Waltham (refer to Note 8, Term Loans, for further detail).
The Company accounted for the amended agreement in regards to the JGB Waltham 2.7 Note as a debt extinguishment in accordance with
ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement features
associated with the agreement. The Company recorded the change in the settlement features as a loss to change in fair value of
derivative instruments of $141 to its unaudited condensed consolidated statement of operations for the nine months ended September
30, 2017.
On September 30, 2017
and December 31, 2016, the Company used a Monte Carlo simulation to value the settlement feature of the 2.7 Note and determined
the fair value to be $201 and $119, respectively. The Company recorded a gain on fair value of derivative instruments of $42 and
$500 for the three months ended September 30, 2017 and 2016, respectively. The Company recorded a loss and a gain on fair value
of derivative instruments of $82 and $500 for the nine months ended September 30, 2017 and 2016, respectively, which includes all
extinguishment accounting for the periods in accordance with ASC Topic 470-50. These changes were recorded on the unaudited condensed
consolidated statement of operations.
The fair value of the
JGB Waltham derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors, assumptions
and methodologies:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Principal amount
|
|
$
|
414
|
|
|
$
|
593
|
|
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
|
$
|
0.80
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
$
|
8.00
|
|
Risk free rate
|
|
|
1.06
|
%
|
|
|
0.62
|
%
|
Life of conversion feature (in years)
|
|
|
0.25
|
|
|
|
0.58
|
|
Volatility
|
|
|
200
|
%
|
|
|
130
|
%
|
* The conversion price per share is equal
to the lesser of $0.04 or 80% of VWAP on the conversion date.
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 Concord, 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 (refer to Note 8, Term Loans, for further
details).
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 consolidated balance sheets as a 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 May 17, 2016, the
Company entered into the Note Forbearance Agreement with JGB Concord pursuant to which JGB Concord agreed to forbear action with
respect to certain existing defaults in accordance with the terms of the Note Forbearance Agreement (Refer to Note 8, Term Loans,
for further details). The Company evaluated the Note Forbearance Agreement and accounted for the transaction as a debt extinguishment
in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue
the settlement features associated with the Note Forbearance Agreement. The Company recorded the change in the settlement features
as a loss to change in fair value of derivative instruments of $2,196 to its consolidated statement of operations on May 17, 2016.
On May 23, 2016, the
Company entered into the Amended Agreement with JGB Concord, JGB Waltham, VaultLogix, and the Guarantors. The Company accounted
for this Amended Agreement in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company accounted for
the Amended Agreement as a debt modification and utilized a Monte Carlo simulation to determine the fair value of the settlement
features. The Company recorded a loss on the fair value of the settlement features to change in fair value of derivative instruments
of $79 on the consolidated statement of operations as of May 23, 2016.
On June 23, 2016, the
Company entered into an amended agreement with JGB Concord and JGB Waltham (refer to Note 8, Term Loans, for further detail). The
Company accounted for the amended agreement as a debt extinguishment in accordance with ASC Topic 470-50. In accordance with ASC
Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement features associated with the Amended Agreement
to determine the fair value. The Company recorded the change in the settlement features as a loss to change in fair value of derivative
instruments of $924 to its consolidated statement of operations on June 23, 2016.
As part of the June
23, 2016 amended agreement with JGB Concord, the Company issued 225,000 shares of the Company’s common stock on June 23,
2016 to JGB Concord (Refer to Note 11, Stockholders’ Deficit, for further detail), and agreed to a make-whole provision whereby
the Company will pay JGB Concord in cash the difference between $3.76 per share of the Company’s common stock and the average
volume weighted average price per share of the Company’s common stock sixty days after shares of the Company’s common
stock are freely tradable. The Company accounted for the make-whole provision within the June 23, 2016 amendment agreement as a
derivative liability and utilized a binomial lattice model to ascribe a value of $280, which was recorded as a derivative liability
on the Company’s consolidated balance sheet and as a loss on extinguishment of debt on the Company’s consolidated statement
of operations on June 23, 2016.
On September 1, 2016,
the Company entered into an amended agreement with JGB Concord and JGB Waltham (refer to Note 8, Term Loans, for further detail).
The Company accounted for the amended agreement as a debt extinguishment in accordance with ASC Topic 470-50. In accordance with
ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement features associated with the Amended Agreement.
The Company recorded the change in the settlement features as a gain to change in fair value of derivative instruments of $1,308
to its consolidated statement of operations on September 1, 2016.
On February 28, 2017,
the Company entered into a consent agreement with JGB Concord and JGB Waltham (refer to Note 8, Term Loans, for further detail).
The Company accounted for the amended agreement in regards to the JGB Concord Debenture as a debt extinguishment in accordance
with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement
features associated with the agreement. The Company recorded the change in the settlement features as a gain to change in fair
value of derivative instruments of $2 to its unaudited condensed consolidated statement of operations for the nine months ended
September 30, 2017.
On September 30, 2017
and December 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 $7 and $397, respectively. The Company recorded the change in fair value of derivative
instruments for the three months ended September 30, 2017 and 2016 as a gain of $152 and 1,919, respectively. The Company recorded
the change in fair value of derivative instruments for the nine months ended September 30, 2017 and 2016 as a gain and loss of
$390 and $288, respectively, which includes all extinguishment accounting for the periods in accordance with ASC Topic 470-50.
These changes were recorded in the unaudited condensed consolidated statement of operations.
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:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Principal amount
|
|
$
|
11
|
|
|
$
|
3,749
|
|
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
|
$
|
0.80
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
$
|
8.00
|
|
Risk free rate
|
|
|
1.47
|
%
|
|
|
1.31
|
%
|
Life of conversion feature (in years)
|
|
|
1.67
|
|
|
|
2.41
|
|
Volatility
|
|
|
179
|
%
|
|
|
100
|
%
|
*
The conversion price per share is equal to the lesser of $0.04 or 80% of VWAP on the conversion date.
INTERCLOUD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
JGB Concord Make-Whole Provision
On December 31,
2016, the Company used a binomial lattice model to value the make-whole provision and determined the fair value to be $819. Proceeds
from the January 31, 2017 sale of the Company’s Highwire subsidiary were used to pay the remaining balance of the make-whole
provision. On February 28, 2017, the Company used a binomial lattice model to value the make-whole provision and determined the
fair value to be $814. The Company recorded a gain on fair value of derivative instruments of $5 for the nine months ended September
30, 2017 on the unaudited condensed consolidated statement of operations.
The fair value
of the JGB Concord make-whole provision at the measurement date was calculated using a binomial lattice model with the following
factors, assumptions and methodologies:
|
|
December 31,
2016
|
|
Fair value of Company’s common stock
|
|
$
|
0.12
|
|
Volatility
|
|
|
120
|
%
|
Exercise price
|
|
|
3.76
|
|
Estimated life
|
|
|
0.15
|
|
Risk free interest rate (based on 1-year treasury rate)
|
|
|
0.48
|
%
|
February 28, 2017 JGB Waltham Warrant
On February 28,
2017, the Company entered into a securities exchange agreement with JGB Waltham whereby the Company issued a warrant giving JGB
Waltham the right to purchase from the Company shares of common stock for an aggregate purchase price of up to $1,000. The warrant
expires on November 28, 2018 and contains a cashless exercise feature. The warrants have an exercise price of $0.16 until May
29, 2017 and the lower of (a) $0.16 and (b) 80% of the lowest VWAP of our common stock for the prior 30 days thereafter. On February
28, 2017, the Company used a binomial lattice calculation to value the warrants. The Company ascribed a value of $65 related to
the warrants and recorded this item on the consolidated balance sheets as a derivative liability.
During the three
months ended September 30, 2017, JGB Waltham exercised $500 of the available $1,000.
On September 30,
2017, the Company used a binomial lattice calculation to value the warrants and determined the fair value to be $498. The Company
recorded a gain of $401 on the unaudited condensed consolidated statement of operations for the three months ended September 30,
2017. The Company recorded a loss of $933 on the unaudited condensed consolidated statement of operations for the nine months
ended September 30, 2017.
The fair value
of the warrants at the measurement date was calculated using a binomial lattice calculation with the following factors, assumptions
and methodologies:
|
|
September 30, 2017
|
|
Fair value of Company's common stock
|
|
$
|
0.01
|
|
Volatility
|
|
|
215
|
%
|
Exercise price
|
|
|
0.16
|
|
Estimated life
|
|
|
1.16
|
|
Risk free interest rate (based on 1-year treasury rate)
|
|
|
1.31
|
%
|
*
The conversion price per share is equal to the lesser of $0.16 or 80% of lowest VWAP 30 days prior to the conversion date.
MEF I, L.P. Assignment and Assumption Agreement
On March 9, 2017,
the Company entered into a convertible promissory note with MEF I, L.P. pursuant to an assignment and assumption agreement (refer
to Note 8, Term Loans, for additional detail on the assignment). The note is convertible at the lower of (i) $0.16 or (ii) 80%
of the lowest VWAP in the 30 trading days prior to the conversion date. The Company evaluated the 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 March 9, 2017, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of
$250 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability. The
Company recorded a debt discount of $50 and debt issuance costs of $50, which are being amortized over the life of the loan.
As a result of
the conversion of the outstanding principal balance during the three months ended September 30, 2017 (refer to Note 8, Term Loans,
for further detail), the fair value of the corresponding derivative liability was $0 as of September 30, 2017. The Company recorded
a gain of $369 on the unaudited condensed consolidated statement of operations for the three months ended September 30, 2017.
The Company recorded a gain of $250 on the unaudited condensed consolidated statement of operations for the nine months ended
September 30, 2017.
INTERCLOUD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
SRFF Warrant and Derivative
On September 8, 2016,
the Company issued a warrant to purchase up to a total of 625,000 shares of common stock at any time on or prior to April 1, 2017.
The exercise price of the warrant is $0.004. The warrant was issued in consideration for the outstanding accounts payable to the
holder of the warrant. Based on the agreement, the proceeds from the eventual sale of the common stock based on the exercise of
all or a portion of the warrant will be applied towards unpaid invoices for services previously rendered to the Company. The Company
determined that the fair value of the warrants was $460, which was included in common stock warrants within the stockholders’
deficit section on the consolidated balance sheet as of December 31, 2016.
During the three months
ended December 31, 2016, the warrant value became less than the accounts payable owed. As a result, a derivative had to be recorded
on the consolidated balance sheet as of December 31, 2016 in accordance with ASC 480.
As of September 30,
2017, the Company did not have sufficient authorized shares for the remaining equity warrants to qualify as equity. Per ASC 815-40-35-9,
the Company reclassified these warrants to a derivative liability at their fair value as of March 31, 2017. Based on a warrant
to purchase up to a total of 625,000 shares of common stock and an underlying price of $0.12 per share, the Company recorded these
warrants at fair value of $75 on the unaudited condensed consolidated balance sheet as of March 31, 2017.
On September 30, 2017
and December 31, 2016, the Company used a binomial lattice model to value the warrant derivative and determined the fair value
to be $219 and $152, respectively. The Company recorded a loss on fair value of derivative instruments of $54 for the three months
ended September 30, 2017 on the unaudited condensed consolidated statement of operations. The Company recorded a gain on fair value
of derivative instruments of $7 for the nine months ended September 30, 2017 on the unaudited condensed consolidated statement
of operations.
On September 30, 2017,
the expiration date was extended until December 31, 2017.
The fair value of the
warrant derivative as of September 30, 2017 and December 31, 2016 was calculated using a binomial lattice pricing model with the
following factors, assumptions and methodologies:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Fair value of Company’s common stock
|
|
$
|
0.01
|
|
|
$
|
0.12
|
|
Volatility
|
|
|
213
|
%
|
|
|
120
|
%
|
Exercise price
|
|
|
0.004
|
|
|
|
0.004
|
|
Estimated life
|
|
|
0.25
|
|
|
|
0.25
|
|
Risk free interest rate (based on 1-year treasury rate)
|
|
|
1.06
|
%
|
|
|
0.57
|
%
|
INTERCLOUD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
Reclassification
of Equity Warrants
As
of March 31, 2017, the Company did not have sufficient authorized shares for the existing equity warrants to qualify as equity.
Per ASC 815-40-35-9, the Company reclassified these warrants to derivative liabilities at their fair value as of March 31, 2017.
These warrants are outstanding to GPB Life Science Holdings, LLC, 8760 Enterprises, Inc., and the JGB entities.
The
Company determined the fair value of these warrants as of March 31, 2017 to be as follows:
|
●
|
De
minimis for GPB Warrant-1, GPB Warrant-2, and GPB Warrant-3;
|
|
|
|
|
●
|
$2
for the 8760 Enterprises, Inc. warrant; and
|
|
|
|
|
●
|
$33
for the JGB warrant.
|
On
June 27, 2017, the 8760 Enterprises, Inc. warrant was cancelled. The Company used a binomial lattice pricing model to value the
settlement features of this equity warrant as of June 27, 2017 and determined the fair value to be $0. The Company recorded the
change in fair value in the unaudited condensed consolidated statement of operations as a gain of $2.
On
July 12, 2017, as a result of the one-for-four reverse split of the Company’s common stock, the Company had sufficient authorized
shares for the existing equity warrants to qualify as equity. The Company reclassified these warrants to equity at their fair
value as of July 12, 2017.
The
Company determined the fair value of these warrants as of July 12, 2017 to be as follows:
On
June 30, 2017, the Company used a binomial lattice pricing model to value the settlement features of the remaining equity warrants
and determined the fair value to be as follows:
|
●
|
De
minimis for GPB Warrant-1, GPB Warrant-2, and GPB Warrant-3;
|
|
|
|
|
●
|
$7
for the JGB warrant.
|
The
Company recorded the change in fair value of the JGB Warrant in the unaudited condensed consolidated statement of operations as
a gain of $23 and $26 for the three and nine months ended September 30, 2017, respectively.
The
fair value of these warrants as of July 12, 2017 was calculated using a binomial lattice pricing model with the following factors,
assumptions and methodologies:
|
|
GPB Warrant-1
|
|
|
GPB Warrant-2
|
|
|
GPB Warrant-3
|
|
|
JGB Exchange Warrants
|
|
|
|
July 12,
2017
|
|
|
July 12,
2017
|
|
|
July 12,
2017
|
|
|
July 12,
2017
|
|
|
July 12,
2017
|
|
Fair value of Company's common stock
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
Volatility
|
|
|
141
|
%
|
|
|
141
|
%
|
|
|
141
|
%
|
|
|
210
|
%
|
|
|
210
|
%
|
Exercise price
|
|
|
7.00
|
|
|
|
7.00
|
|
|
|
7.00
|
|
|
|
0.04
|
|
|
|
0.40
|
|
Estimated life
|
|
|
1.39
|
|
|
|
1.45
|
|
|
|
1.84
|
|
|
|
0.47
|
|
|
|
0.47
|
|
Risk free interest rate (based on 1-year treasury rate)
|
|
|
1.28
|
%
|
|
|
1.28
|
%
|
|
|
1.28
|
%
|
|
|
1.13
|
%
|
|
|
1.13
|
%
|
INTERCLOUD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
RDW April 3, 2017 2.5% Convertible Promissory Note
On April 3, 2017, Scott
Davis assigned 100% of his promissory note in the original principal amount of $250, reduced to $225 based on a $25 conversion
into common stock, to RDW. This note was convertible at a price of $8.88 and was due on demand. As consideration for the assignment
RDW paid Scott Davis $40. RDW then exchanged this original note for a new 2.5% convertible promissory note in the principal amount
of $100 due April 3, 2018. This conversion price of the new note is equal to 75% of the average of the five lowest VWAPS over the
seven trading days prior to the date of conversion. The Company evaluated the 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 April 25,
2017, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $39 related to
the conversion feature and recorded this item on the unaudited condensed consolidated balance sheets as a derivative liability.
As a result of the conversion
of the outstanding principal balance during the three months ended September 30, 2017 (refer to Note 8, Term Loans, for further
detail), the fair value of the corresponding derivative liability was $0 as of September 30, 2017. The Company recorded a gain
of $39 on the unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2017.
RDW July 14, 2017 9.9% Convertible Promissory
Note
On July 14, 2017, the
Company entered into a convertible promissory note with RDW in the principal amount of $155, that bears interest at the rate of
9.9% per annum, and matures on July 14, 2018. The note is convertible at the lower of (i) $0.04 or (ii) 75% of the average of the
lowest five VWAPS over the seven trading days prior to the date of conversion. The Company evaluated the 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 July 14, 2017, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed
a value of $126 related to the conversion feature and recorded this item on the unaudited condensed consolidated balance sheets
as a derivative liability.
On September 30, 2017,
the Company used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value
to be $73. The Company recorded a gain on fair value of derivative instruments of $53 for the three and nine months ended September
30, 2017 on the unaudited condensed consolidated statement of operations.
The fair value of the
convertible note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors,
assumptions and methodologies:
|
|
September 30,
2017
|
|
Principal amount and guaranteed interest
|
|
$
|
156
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
Conversion trigger price per share
|
|
|
None
|
|
Risk free rate
|
|
|
1.31
|
%
|
Life of conversion feature (in years)
|
|
|
0.79
|
|
Volatility
|
|
|
236
|
%
|
* The conversion price per share is equal to the lesser of $0.04 or 75% of the average of the lowest 5
VWAPs during the 7 trading days preceding the conversion date.
Assignment of Tim Hannibal Note - RDW
July 18, 2017 2.5% Convertible Promissory Note
On July 18, 2017, Tim
Hannibal assigned 100% of his 8% convertible promissory note in the original principal amount of $1,215, due October 9, 2017, to
RDW. This note was convertible into the Company’s common stock at a price of $25.48 per share. RDW then exchanged this original
note for a new 2.5% convertible promissory note in the principal amount of $1,215 due July 18, 2018. The conversion price of the
new note is equal to the lower of (i) $0.04 or (ii) 75% of the average of the lowest five VWAPS over the seven trading days prior
to the date of conversion. The Company evaluated the 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 July 18, 2017, the Company used a Monte
Carlo simulation to value the settlement features. The Company ascribed a value of $911 related to the conversion feature and recorded
this item on the unaudited condensed consolidated balance sheets as a derivative liability.
On September 30, 2017,
the Company used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value
to be $232. The Company recorded a gain on fair value of derivative instruments of $679 for the three and nine months ended September
30, 2017 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)
The fair value of the
convertible note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors,
assumptions and methodologies:
|
|
September 30, 2017
|
|
Principal amount and guaranteed interest
|
|
$
|
508
|
|
|
|
|
|
|
Conversion price per share
|
|
*
|
0.12
|
|
Conversion trigger price per share
|
|
|
None
|
|
Risk free rate
|
|
|
1.31
|
%
|
Life of conversion feature (in years)
|
|
|
0.80
|
|
Volatility
|
|
|
236
|
%
|
* The conversion price per share is equal to the lesser of $0.04 or 75% of the average of the lowest 5
VWAPs during the 7 trading days preceding the conversion date.
RDW September 27, 2017 9.9% Convertible
Promissory Note
On September 27, 2017,
the Company entered into a convertible promissory note with RDW in the principal amount of $155, which bears interest at the rate
of 9.9% per annum, and matures on September 27, 2018. The note is convertible at the lower of (i) $0.04 or (ii) 75% of the average
of the lowest five VWAPS over the twenty trading days prior to the date of conversion. The Company evaluated the 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 September 27, 2017, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed
a value of $122 related to the conversion feature and recorded this item on the unaudited condensed consolidated balance sheets
as a derivative liability.
On September 30, 2017,
the Company used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value
to be $122. The Company did not record a gain or loss on fair value of derivative instruments for the three months or nine months
ended September 30, 2017 on the unaudited condensed consolidated statement of operations.
The fair value of the convertible note
derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors, assumptions and
methodologies:
|
|
September 30, 2017
|
|
Principal amount and guaranteed interest
|
|
$
|
155
|
|
|
|
|
|
|
Conversion price per share
|
|
*
|
0.12
|
|
Conversion trigger price per share
|
|
|
None
|
|
Risk free rate
|
|
|
1.31
|
%
|
Life of conversion feature (in years)
|
|
|
0.99
|
|
Volatility
|
|
|
215
|
%
|
* The conversion price per share is equal to the lesser of $0.04 or 75% of the average of the lowest 5
prices during the 20 trading days preceding the conversion date.
10. INCOME TAXES
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.
INTERCLOUD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
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 Internal Revenue
Service (IRS) has completed its examination of the Company’s 2013 Federal corporate income tax return. The Company has agreed
to certain adjustments proposed by the IRS and is appealing others. Separately, the IRS has questioned the Company’s classification
of certain individuals as independent contractors rather than employees. The Company estimates its potential liability to be $125
but the liability, if any, upon final disposition of these matters is uncertain.
11. STOCKHOLDERS’ DEFICIT
Series J Preferred Stock:
Designation of Series J preferred stock
On July 20, 2017, the
Board of Directors designated 1,000 shares of the Company’s authorized preferred stock, with a par value of $0.0001 per share,
as Series J preferred stock. The Series J preferred stock has a stated value of $4,916 per share, is not redeemable and, except
as otherwise required by law, shall be voted together with the Company’s common stock and any other series of preferred stock
then outstanding, and not as a separate class, at any meeting of the stockholders of the Company upon any matter upon which the
holders of common stock have the right to vote, except that the aggregate voting power of the Series J preferred stock shall be
equal to 51% of the total voting power of the Company. The holders of Series J preferred stock also have a liquidation preference
in the amount of $4,916 per share that is senior to the distributions, if any, to be paid to the holders of common stock.
Exchange of related party debt for preferred
stock
On July 25, 2017, Mark
Munro, CEO, and Mark Durfee, Board Member, exchanged their outstanding related party debt for the Company’s Series J preferred
stock with special voting rights. Mark Munro converted principal and interest of $1,709 and $195, respectively. Mark Durfee converted
principal and interest of $2,550 and $464, respectively. As a result of the exchange, Mark Munro and Mark Durfee received 387 and
613 shares, respectively, of the Company’s Series J preferred stock (Refer to Note 13, Related Parties, for further detail).
The fair value of the Series J Preferred Stock on date of issuance was $1,753. The difference between the fair value of the preferred
stock and the debt converted was included in additional paid in capital.
Common Stock:
Purchase of treasury shares
During January 2017,
the Company repurchased 81,668 shares of its common stock at par value of $0.0001 per share from employees who terminated employment.
During April 2017,
the Company repurchased 10,384 shares of its common stock at par value of $0.0001 per share from employees who terminated employment.
Cancellation of shares
During March 2017,
1,694,373 shares of the Company’s common stock issued to Dominion Capital LLC during 2016 were cancelled.
During September 2017,
306,868 shares of the Company’s common stock issued to former employees were cancelled.
Issuance of shares of common stock to
non-employees for services
During January 2017,
the Company issued 125,000 shares of its common stock to an investor relations firm for services provided to the Company. The shares
were valued at fair value at $0.10 per share and were immediately vested. The Company recorded $12 to salaries and wages expense
on the unaudited condensed consolidated statement of operations for the three months ended March 31, 2017.
Issuance of shares of common stock to
employees and directors for services
During January 2017,
the Company issued 1,300,000 shares of its common stock to employees and directors for services performed. The shares were valued
at fair value of $0.07 per share and vest on varying schedules through January 26, 2020. The Company recorded $1 to salaries and
wages expense on the unaudited condensed consolidated statement of operations for the three months ended March 31, 2017.
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 Dominion
Capital LLC August 6, 2015 promissory note
During January 2017,
the Company issued an aggregate of 5,627,593 shares of common stock to Dominion Capital LLC upon the conversion of $333 of principal
and accrued interest of a note outstanding. The shares were issued at $0.06 per share, per the terms of the notes payable.
During February 2017,
the Company issued an aggregate of 6,750,181 shares of common stock to Dominion Capital LLC upon the conversion of $357 of principal
and accrued interest of a note outstanding. The shares were issued at $0.05 per share, per the terms of the notes payable.
During March 2017, the
Company issued an aggregate of 13,332,254 shares of common stock to Dominion Capital LLC upon the conversion of $528 of principal
and accrued interest of a note outstanding. The shares were issued at $0.04 per share, per the terms of the notes payable.
Issuance of shares pursuant to Dominion
Capital LLC November 4, 2016 promissory note
During July 2017, the
Company issued an aggregate of 17,811,834 shares of common stock to Dominion Capital LLC upon the conversion of $509 of principal
and accrued interest of a note outstanding. The shares were issued at an average of $0.03 per share, per the terms of the notes
payable.
Issuance of shares pursuant to Forward
Investments, LLC promissory notes
During January 2017,
the Company issued 7,848,973 shares of its common stock to Forward Investments, LLC upon conversion of $582 principal amount of
promissory notes outstanding. The shares were issued at $0.07 per share, per the terms of the notes payable.
During February 2017,
the Company issued 11,881,352 shares of its common stock to Forward Investments, LLC upon conversion of $867 principal amount of
promissory notes outstanding. The shares were issued at $0.07 per share, per the terms of the notes payable.
During March 2017, the
Company issued 20,759,848 shares of its common stock to Forward Investments, LLC upon conversion of $1,365 principal amount of
promissory notes outstanding. The shares were issued at $0.07 per share, per the terms of the notes payable.
During July 2017, the
Company issued 44,641,199 shares of its common stock to Forward Investments, LLC upon conversion of $1,172 principal amount of
promissory notes outstanding. The shares were issued at an average of $0.026 per share, per the terms of the notes payable.
During August 2017,
the Company issued 60,135,366 shares of its common stock to Forward Investments, LLC upon conversion of $790 principal amount of
promissory notes outstanding. The shares were issued at an average of $0.013 per share, per the terms of the notes payable.
Issuance of shares pursuant to JGB Concord
senior secured convertible debenture
During January 2017,
the Company issued 4,286,262 shares of common stock to JGB Concord pursuant to conversion of $290 principal amount and $1 of accrued
interest related to the outstanding February 2016 senior secured convertible debenture. The shares were issued at $0.07 per share,
per the terms of the note payable.
During February 2017,
the Company issued 779,634 shares of common stock to JGB Concord pursuant to conversion of $45 principal amount and $1 of accrued
interest related to the outstanding February 2016 senior secured convertible debenture. The shares were issued at $0.06 per share,
per the terms of the note payable.
During March 2017, the
Company issued 16,366,216 shares of common stock to JGB Concord pursuant to conversion of $615 principal amount and $1 of accrued
interest related to the outstanding February 2016 senior secured convertible debenture. The shares were issued at $0.04 per share,
per the terms of the note payable.
During July 2017, the
Company issued 10,655,548 shares of common stock to JGB Concord pursuant to conversion of $100 principal amount related to the
outstanding February 2016 senior secured convertible debenture. The shares were issued at an average of $0.005 per share, per
the terms of the note 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 JGB Waltham
senior secured convertible debenture
During July 2017, the
Company issued 37,343,753 shares of common stock to JGB Waltham pursuant to conversion of $350 principal amount and $1 of accrued
interest related to the outstanding February 2016 senior secured convertible debenture. The shares were issued at an average
of $0.009 per share, per the terms of the note payable.
During August 2017,
the Company issued 10,642,438 shares of common stock to JGB Waltham pursuant to conversion of $100 principal amount related to
the outstanding February 2016 senior secured convertible debenture. The shares were issued at an average of $0.009 per share,
per the terms of the note payable.
Issuance of shares pursuant to Smithline
senior convertible promissory note
During February 2017,
the Company issued 457,615 shares of its common stock to Smithline upon the conversion of $23 of principal of a note outstanding.
The shares were issued at $0.05 per share, per the terms of the note payable.
During March 2017, the
Company issued 5,395,111 shares of its common stock to Smithline upon the conversion of $223 of principal of a note outstanding.
The shares were issued at $0.04 per share, per the terms of the note payable.
During August 2017,
the Company issued 4,941,466 shares of its common stock to Smithline upon the conversion of $117 of principal amount and $18 of
accrued interest of a note outstanding. The shares were issued at an average of $0.027 per share, per the terms of the note
payable.
Issuance of shares pursuant to MEF I,
L.P. convertible promissory note
During March 2017, the
Company issued 500,000 shares of its common stock to MEF I, L.P. upon the conversion of $18 principal amount and $1 of accrued
interest of a note outstanding. The shares were issued at $0.04 per share, per the terms of the note payable.
During July 2017, the
Company issued 20,614,455 shares of its common stock to MEF I, L.P. upon the conversion of $441 principal amount and $20 of accrued
interest of a note outstanding. The shares were issued at an average of $0.022 per share, per the terms of the note payable.
During August 2017,
the Company issued 6,578,421 shares of its common stock to MEF I, L.P. upon the conversion of $91 principal amount and $4 of accrued
interest of a note outstanding. The shares were issued at an average of $0.015 per share, per the terms of the note payable.
Issuance of shares pursuant to RDW April
3, 2017 convertible promissory note
During July 2017, the
Company issued 1,745,186 shares of its common stock to RDW upon the conversion of $100 principal amount of a note outstanding.
The shares were issued at an average of $0.057 per share, per the terms of the note payable.
Issuance of shares pursuant to RDW July
18, 2017 convertible promissory note
During July 2017, the
Company issued 12,547,039 shares of its common stock to RDW upon the conversion of $253 principal amount of a note outstanding.
The shares were issued at an average of $0.02 per share, per the terms of the note payable.
During August 2017,
the Company issued 29,793,261 shares of its common stock to RDW upon the conversion of $355 principal amount of a note outstanding.
The shares were issued at an average of $0.012 per share, per the terms of the note payable.
During September 2017,
the Company issued 12,345,679 shares of its common stock to RDW upon the conversion of $100 principal amount of a note outstanding.
The shares were issued at $0.008 per share, per the terms of the note 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 JGB Waltham
warrant exercises
During August 2017,
the Company issued 6,226,054 shares of its common stock to JGB Waltham upon the cashless exercise of $250 of an outstanding warrant.
The shares were issued at an exercise price of $0.009 per share.
During September 2017,
the Company issued 7,616,488 shares of its common stock to JGB Waltham upon the cashless exercise of $250 of an outstanding warrant.
The shares were issued at an exercise price of $0.009 per share.
Issuance of shares due to rounding differences
resulting from reverse stock split
During July 2017, the
Company issued 126 additional shares based on rounding differences resulting from the one-for-four reverse stock split which was
effective as of the open of trading on July 12, 2017.
12. STOCK-BASED COMPENSATION
Restricted Stock
The following table
summarizes the Company’s restricted stock activity during the nine months ended September 30, 2017:
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Outstanding at January 1, 2017
|
|
|
722,097
|
|
|
$
|
6.56
|
|
Granted
|
|
|
1,300,000
|
|
|
|
0.07
|
|
Vested
|
|
|
(229,542
|
)
|
|
|
2.37
|
|
Forfeited/Cancelled
|
|
|
(81,980
|
)
|
|
|
3.70
|
|
Outstanding at March 31, 2017
|
|
|
1,710,575
|
|
|
$
|
2.33
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(371,928
|
)
|
|
|
15.73
|
|
Forfeited/Cancelled
|
|
|
(10,384
|
)
|
|
|
9.56
|
|
Outstanding at June 30, 2017
|
|
|
1,328,263
|
|
|
$
|
1.13
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(364,321
|
)
|
|
|
1.50
|
|
Forfeited/Cancelled
|
|
|
(222,109
|
)
|
|
|
7.11
|
|
Outstanding at September 31, 2017
|
|
|
741,833
|
|
|
$
|
1.23
|
|
INTERCLOUD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
For the three months
ended September 30, 2017 and 2016, the Company did not incur stock compensation expense from the issuance of common stock to employees
and consultants. For the nine months ended September 30, 2017 and 2016, the Company incurred $13 and $71, respectively, in stock
compensation expense from the issuance of common stock to employees and consultants.
The Company recorded
an additional $104 and $1,051 in stock compensation expense on shares subject to vesting terms in previous periods during the
three months ended September 30, 2017 and 2016, respectively. The Company recorded an additional $1,081 and 2,359 in stock compensation
expense on shares subject to vesting terms in previous periods during the nine months ended September 30, 2017 and 2016, respectively.
Warrants
For the three
and nine months ended September 30, 2017, the Company incurred stock compensation expense of $747 from the issuance of warrants
to employees and consultants.
Options
There were no options
granted during the nine months ended September 30, 2017 or 2016.
The following table
summarizes the Company’s stock option activity and related information for the nine months ended September 30, 2017:
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Remaining
Contractual
|
|
|
Aggregate
Intrinsic
|
|
|
|
Underlying
|
|
|
Exercise
|
|
|
Term
|
|
|
Value
|
|
|
|
Options
|
|
|
Price
|
|
|
(in
years)
|
|
|
(in
thousands)
|
|
Outstanding at January 1, 2017
|
|
|
43,750
|
|
|
$
|
14.88
|
|
|
|
5.29
|
|
|
$
|
646
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited and expired
|
|
|
(2,083
|
)
|
|
|
14.88
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2017
|
|
|
41,667
|
|
|
$
|
14.88
|
|
|
|
4.54
|
|
|
$
|
-
|
|
Exercisable at September 30, 2017
|
|
|
41,667
|
|
|
$
|
14.88
|
|
|
|
4.54
|
|
|
$
|
-
|
|
The aggregate intrinsic
value for outstanding options is calculated as the difference between the exercise price of the underlying awards and the quoted
price of the Company’s common stock as of September 30, 2017 and December 31, 2016 of $0.01 and $0.12, respectively.
13. RELATED PARTIES
At September 30,
2017 and December 31, 2016, the Company had outstanding the following loans due to related parties:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Promissory note issued to CamaPlan FBO Mark Munro IRA, 3% interest, maturing on January 1, 2018, unsecured, net of debt discount of $38
|
|
$
|
-
|
|
|
$
|
658
|
|
Promissory note issued to 1112 Third Avenue Corp, 3% interest, maturing on January 1, 2018, unsecured, net of debt discount of $36
|
|
|
-
|
|
|
|
339
|
|
Promissory note issued to Mark Munro, 3% interest, maturing on January 1, 2018, unsecured, net of debt discount of $62
|
|
|
-
|
|
|
|
575
|
|
Promissory note issued to Pascack Road, LLC, 3% interest, maturing on January 1, 2018, unsecured, net of debt discount of $152
|
|
|
-
|
|
|
|
2,398
|
|
Promissory notes issued to Forward Investments, LLC, between 2% and 10% interest, matured on July 1, 2016, unsecured
|
|
|
-
|
|
|
|
4,235
|
|
Promissory notes issued to Forward Investments, LLC, 3% interest, maturing on January 1, 2018, unsecured, net of debt discount of $860
|
|
|
-
|
|
|
|
3,513
|
|
Promissory notes issued to Forward Investments, LLC, 6.5% interest, matured on July 1, 2016, unsecured
|
|
|
-
|
|
|
|
390
|
|
Former owner of IPC, unsecured, 8% interest, matured on May 30, 2016, due on demand
|
|
|
-
|
|
|
|
5,755
|
|
Former owner of IPC, unsecured, 15% interest, due on demand
|
|
|
-
|
|
|
|
75
|
|
Former owner of Nottingham, unsecured, 8% interest, matured on May 30, 2016
|
|
|
-
|
|
|
|
225
|
|
|
|
|
-
|
|
|
|
18,163
|
|
Less: current portion of debt
|
|
|
-
|
|
|
|
(9,531
|
)
|
Long-term portion of notes payable, related parties
|
|
$
|
-
|
|
|
$
|
8,632
|
|
INTERCLOUD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
The interest expense,
including amortization of debt discounts, associated with the related-party notes payable in the three months ended September 30,
2017 and 2016 was $157 and $922, respectively. The interest expense, including amortization of debt discounts, associated
with the related-party notes payable in the nine months ended September 30, 2017 and 2016 was $369 and $2,770, respectively.
All notes payable to
related parties were subordinate to the JGB (Cayman) Waltham Ltd. and JGB (Cayman) Concord Ltd. term loan notes as of December
31, 2016.
Related Party Promissory Notes to Mark
Munro, CamaPlan FBO Mark Munro IRA, 1112 Third Avenue Corp, and Pascack Road, LLC
On July 25, 2017, Mark
Munro, CEO, and Mark Durfee, Board Member, exchanged their outstanding related party debt for the Company’s Series J preferred
stock with special voting rights. Mark Munro converted principal and interest of $1,709 and $195, respectively. Mark Durfee converted
principal and interest of $2,550 and $464, respectively. As a result of the exchange, Mark Munro and Mark Durfee received 387
and 613 shares, respectively, of the Company’s Series J preferred stock (Refer to Note 11, Stockholders’ Deficit,
for further detail).
Convertible Promissory Note to Scott
Davis, Former Owner of Nottingham
On July 1, 2014, the
Company issued an unsecured $250 convertible promissory note to Scott Davis, who was a related party. The note bore interest at
the rate of 8% per annum, originally matured on January 1, 2015 and was convertible into shares of the Company’s common stock
at an initial conversion price of $26.36. The Company evaluated the convertible feature and determined that the value was de minimis
and as such, the Company did not bifurcate the convertible feature.
On March 25, 2015, the
Company and Mr. Davis agreed to a modification of the convertible promissory note. The term of the note was extended to May 30,
2016, the initial conversion price was amended to $8.88 per share of the Company’s common stock and, in consideration for
this modification, the Company issued to Mr. Davis 5,556 shares of common stock with a fair value of $8.64 per share.
On May 31, 2015, Mr.
Davis converted $25 of principal amount of the note into 2,816 shares of common stock, with a fair value of $14.12 per share and
the Company recorded a loss on debt conversion of $13 on the consolidated statement of operations.
On May 30, 2016, the
note matured and was due on demand.
On April 3, 2017,
Scott Davis assigned the full outstanding principal amount of the note to a third party (refer to Note 8, Term Loans,
for additional detail).
Loans to Employees
During the year ended
December 31, 2016, the Company issued loans to four employees totaling $928. As of September 30, 2017 and December 31, 2016, the
Company had outstanding loans to these employees with total principal of $928. These loans are collateralized by shares of the
Company’s common stock held by the employees. As of September 30, 2017 and December 31, 2016, the value of the collateral
was below the principal value. As a result, the Company recorded a reserve for the balance of $913 and $891 on the unaudited condensed
consolidated balance sheet as of September 30, 2017 and December 31, 2016, respectively (refer to Note 4, Loans Receivable, for
further detail).
14. SEGMENTS
The Company operates
in three reportable segments: applications and infrastructure, professional services, and managed 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 (sold
by the Company in April 2017), Tropical, RM Leasing, and RM Engineering. The professional services operating segment is an aggregation
of the operations of the ADEX Entities and SDNE (sold by the Company in May 2017). The managed services operating segment is primarily
comprised of the operations of IPC (the Company began the process of discontinuing the business in November 2017).
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.
INTERCLOUD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
Segment information
relating to the Company’s results of continuing operations was as follows:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
3,169
|
|
|
$
|
4,186
|
|
|
$
|
9,250
|
|
|
$
|
16,018
|
|
Professional services
|
|
|
4,851
|
|
|
|
10,064
|
|
|
|
15,996
|
|
|
|
28,409
|
|
Managed services
|
|
|
2,014
|
|
|
|
5,303
|
|
|
|
6,859
|
|
|
|
15,349
|
|
Total
|
|
$
|
10,034
|
|
|
$
|
19,553
|
|
|
$
|
32,105
|
|
|
$
|
59,776
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
1,216
|
|
|
$
|
930
|
|
|
$
|
2,875
|
|
|
$
|
2,783
|
|
Professional services
|
|
|
758
|
|
|
|
3,340
|
|
|
|
2,874
|
|
|
|
7,715
|
|
Managed services
|
|
|
782
|
|
|
|
1,343
|
|
|
|
2,002
|
|
|
|
4,748
|
|
Total
|
|
$
|
2,756
|
|
|
$
|
5,613
|
|
|
$
|
7,751
|
|
|
$
|
15,246
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
697
|
|
|
$
|
(435
|
)
|
|
$
|
(188
|
)
|
|
$
|
(1,086
|
)
|
Professional services
|
|
|
(46
|
)
|
|
|
809
|
|
|
|
(4,432
|
)
|
|
|
1,666
|
|
Managed services
|
|
|
(31
|
)
|
|
|
(572
|
)
|
|
|
(1,073
|
)
|
|
|
(1,616
|
)
|
Corporate
|
|
|
(1,815
|
)
|
|
|
(3,599
|
)
|
|
|
(6,671
|
)
|
|
|
(10,620
|
)
|
Total
|
|
$
|
(1,195
|
)
|
|
$
|
(3,797
|
)
|
|
$
|
(12,364
|
)
|
|
$
|
(11,656
|
)
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
15
|
|
|
$
|
12
|
|
Professional services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Managed services
|
|
|
-
|
|
|
|
16
|
|
|
|
1
|
|
|
|
29
|
|
Corporate
|
|
|
1,791
|
|
|
|
2,813
|
|
|
|
7,337
|
|
|
|
10,925
|
|
Total
|
|
$
|
1,795
|
|
|
$
|
2,833
|
|
|
$
|
7,353
|
|
|
$
|
10,966
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization Expense by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
43
|
|
|
$
|
308
|
|
|
$
|
269
|
|
|
$
|
642
|
|
Professional services
|
|
|
52
|
|
|
|
40
|
|
|
|
216
|
|
|
|
385
|
|
Managed services
|
|
|
153
|
|
|
|
212
|
|
|
|
460
|
|
|
|
633
|
|
Corporate
|
|
|
5
|
|
|
|
5
|
|
|
|
14
|
|
|
|
17
|
|
Total
|
|
$
|
253
|
|
|
$
|
565
|
|
|
$
|
959
|
|
|
$
|
1,677
|
|
INTERCLOUD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Total Assets by Segment
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
5,690
|
|
|
$
|
16,177
|
|
Professional services
|
|
|
10,079
|
|
|
|
21,334
|
|
Managed services
|
|
|
12,231
|
|
|
|
15,820
|
|
Corporate
|
|
|
6,520
|
|
|
|
1,238
|
|
Total
|
|
$
|
34,520
|
|
|
$
|
54,569
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Goodwill by Segment
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
1,306
|
|
|
$
|
6,906
|
|
Professional services
|
|
|
2,919
|
|
|
|
10,081
|
|
Managed services
|
|
|
5,960
|
|
|
|
6,381
|
|
Total
|
|
$
|
10,185
|
|
|
$
|
23,368
|
|
|
|
Three months ended
September 30, 2017
|
|
|
Nine months ended
September 30, 2017
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
Revenues by Segment by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
3,169
|
|
|
$
|
-
|
|
|
$
|
3,169
|
|
|
$
|
8,819
|
|
|
$
|
431
|
|
|
$
|
9,250
|
|
Professional services
|
|
|
4,789
|
|
|
|
62
|
|
|
|
4,851
|
|
|
|
15,868
|
|
|
|
128
|
|
|
|
15,996
|
|
Managed services
|
|
|
2,014
|
|
|
|
-
|
|
|
|
2,014
|
|
|
|
6,859
|
|
|
|
-
|
|
|
|
6,859
|
|
Total
|
|
$
|
9,972
|
|
|
$
|
62
|
|
|
$
|
10,034
|
|
|
$
|
31,546
|
|
|
$
|
559
|
|
|
$
|
32,105
|
|
|
|
Three months ended
September 30, 2016
|
|
|
Nine months ended
September 30, 2016
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
Revenues by Segment by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
3,982
|
|
|
$
|
204
|
|
|
$
|
4,186
|
|
|
$
|
15,452
|
|
|
$
|
566
|
|
|
$
|
16,018
|
|
Professional services
|
|
|
9,999
|
|
|
|
65
|
|
|
|
10,064
|
|
|
|
28,216
|
|
|
|
193
|
|
|
|
28,409
|
|
Managed services
|
|
|
5,303
|
|
|
|
-
|
|
|
|
5,303
|
|
|
|
15,349
|
|
|
|
-
|
|
|
|
15,349
|
|
Total
|
|
$
|
19,284
|
|
|
$
|
269
|
|
|
$
|
19,553
|
|
|
$
|
59,017
|
|
|
$
|
759
|
|
|
$
|
59,776
|
|
INTERCLOUD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
|
|
Three months ended
September 30, 2017
|
|
|
Nine months ended
September 30, 2017
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
Gross Profit by Segment by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
1,216
|
|
|
$
|
-
|
|
|
$
|
1,216
|
|
|
$
|
2,683
|
|
|
$
|
192
|
|
|
$
|
2,875
|
|
Professional services
|
|
|
736
|
|
|
|
22
|
|
|
|
758
|
|
|
|
2,880
|
|
|
|
(6
|
)
|
|
|
2,874
|
|
Managed services
|
|
|
782
|
|
|
|
-
|
|
|
|
782
|
|
|
|
2,002
|
|
|
|
-
|
|
|
|
2,002
|
|
Total
|
|
$
|
2,734
|
|
|
$
|
22
|
|
|
$
|
2,756
|
|
|
$
|
7,565
|
|
|
$
|
186
|
|
|
$
|
7,751
|
|
|
|
Three months ended
September 30, 2016
|
|
|
Nine months ended
September 30, 2016
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
Gross Profit by Segment by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
1,217
|
|
|
$
|
(287
|
)
|
|
$
|
930
|
|
|
$
|
2,708
|
|
|
$
|
75
|
|
|
$
|
2,783
|
|
Professional services
|
|
|
3,484
|
|
|
|
(144
|
)
|
|
|
3,340
|
|
|
|
7,731
|
|
|
|
(16
|
)
|
|
|
7,715
|
|
Managed services
|
|
|
1,343
|
|
|
|
-
|
|
|
|
1,343
|
|
|
|
4,748
|
|
|
|
-
|
|
|
|
4,748
|
|
Total
|
|
$
|
6,044
|
|
|
$
|
(431
|
)
|
|
$
|
5,613
|
|
|
$
|
15,187
|
|
|
$
|
59
|
|
|
$
|
15,246
|
|
|
|
Three months ended
September 30, 2017
|
|
|
Nine months ended
September 30, 2017
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
Operating Income (Loss) by Segment by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
697
|
|
|
$
|
-
|
|
|
$
|
697
|
|
|
$
|
(345
|
)
|
|
$
|
157
|
|
|
$
|
(188
|
)
|
Professional services
|
|
|
(66
|
)
|
|
|
20
|
|
|
|
(46
|
)
|
|
|
(4,429
|
)
|
|
|
(3
|
)
|
|
|
(4,432
|
)
|
Managed services
|
|
|
(31
|
)
|
|
|
-
|
|
|
|
(31
|
)
|
|
|
(1,073
|
)
|
|
|
-
|
|
|
|
(1,073
|
)
|
Corporate
|
|
|
(1,815
|
)
|
|
|
-
|
|
|
|
(1,815
|
)
|
|
|
(6,671
|
)
|
|
|
-
|
|
|
|
(6,671
|
)
|
Total
|
|
$
|
(1,215
|
)
|
|
$
|
20
|
|
|
$
|
(1,195
|
)
|
|
$
|
(12,518
|
)
|
|
$
|
154
|
|
|
$
|
(12,364
|
)
|
|
|
Three months ended
September 30, 2016
|
|
|
Nine months ended
September 30, 2016
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
Operating Income (Loss) by Segment by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
(456
|
)
|
|
$
|
21
|
|
|
$
|
(435
|
)
|
|
$
|
(1,084
|
)
|
|
$
|
(2
|
)
|
|
$
|
(1,086
|
)
|
Professional services
|
|
|
846
|
|
|
|
(37
|
)
|
|
|
809
|
|
|
|
1,691
|
|
|
|
(25
|
)
|
|
|
1,666
|
|
Managed services
|
|
|
(572
|
)
|
|
|
-
|
|
|
|
(572
|
)
|
|
|
(1,616
|
)
|
|
|
-
|
|
|
|
(1,616
|
)
|
Corporate
|
|
|
(3,599
|
)
|
|
|
-
|
|
|
|
(3,599
|
)
|
|
|
(10,620
|
)
|
|
|
-
|
|
|
|
(10,620
|
)
|
Total
|
|
$
|
(3,781
|
)
|
|
$
|
(16
|
)
|
|
$
|
(3,797
|
)
|
|
$
|
(11,629
|
)
|
|
$
|
(27
|
)
|
|
$
|
(11,656
|
)
|
INTERCLOUD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
15. DISCONTINUED OPERATIONS
On February 17, 2016,
the Company consummated the sale of certain assets of its former wholly-owned subsidiary, VaultLogix, and its subsidiaries, pursuant
to the terms of an asset purchase agreement, dated as of February 17, 2016 among the Company, VaultLogix and its subsidiaries and
KeepItSafe, Inc., a Delaware corporation. The cash purchase price paid to the Company for the assets was $24,000, which was paid
to the Company as follows: (i) $22,000 paid in cash on the closing date and (ii) $2,000 deposited in an escrow account to secure
the performance of the obligations of the Company and VaultLogix, including any potential indemnification claims, under the asset
purchase agreement, to be released on February 17, 2017. The closing payments were subject to customary working capital adjustments.
On November 4, 2016, the Company, VaultLogix and its subsidiaries and KeepItSafe, Inc, executed a settlement agreement, whereby
for certain consideration, the Company received $150 of the escrow and KeepItSafe Inc. received $1,850. The settlement agreement
released all claims among the parties and eliminated any obligations subsequent to that date.
The results of operations
of VaultLogix and its subsidiaries have been included within the line-item labelled gain on discontinued operations, net of tax
within the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2016. The Company recorded
a gain on the disposal of these assets of $2,637 for the nine months ended September 30, 2016.
On April 29, 2016, the
Company consummated the disposal of certain assets of its former wholly-owned subsidiary, Axim, for the following future consideration:
in the event that the purchaser of Axim undertakes a sale or disposition of assets related to Axim, the purchaser of Axim shall
pay to the Company an amount equal to the lesser of (i) 50% of the gross proceeds of such sale or disposition or (ii) $1,500.
The results of operations
of Axim have been included within the line-item labelled net gain on discontinued operations, net of tax within the unaudited condensed
consolidated statement of operations for the nine months ended September 30, 2016.
The following table
shows the statement of operations of the Company’s discontinued operations for the nine months ended September 30, 2016.
|
|
For the nine months ended
|
|
|
|
September 30,
2016
|
|
|
|
|
|
Revenues
|
|
$
|
1,377
|
|
Cost of revenue
|
|
|
274
|
|
Gross profit
|
|
|
1,103
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
Depreciation and amortization
|
|
|
439
|
|
Salaries and wages
|
|
|
844
|
|
Selling, general and administrative
|
|
|
528
|
|
Total operating expenses
|
|
|
1,811
|
|
|
|
|
|
|
Loss from operations
|
|
|
(708
|
)
|
|
|
|
|
|
Other (income) expenses:
|
|
|
|
|
Interest expense
|
|
|
(243
|
)
|
Other expense
|
|
|
(158
|
)
|
Loss (gain) on disposal
|
|
|
1,574
|
|
Total other (income) expense
|
|
|
1,173
|
|
|
|
|
|
|
Net (loss) income on discontinued operations
|
|
$
|
465
|
|
INTERCLOUD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
16. SUBSEQUENT EVENTS
Equity Line Financing Agreement
On October 4, 2017,
the Company entered into an equity line financing agreement (the “Investment Agreement”) with an institutional investor
(the “Investor”). Under the Investment Agreement, and subject to certain restrictions and conditions, the Company in
its discretion may put to the Investor, and, assuming the satisfaction of certain conditions, the Investor is obligated to purchase
from the Company, the lower of (i) up to 200,000,000 shares of duly authorized, validly issued, fully paid and nonassessable shares
of common stock and (ii) up to $5,000 of duly authorized, validly issued, fully paid and nonassessable shares of common stock (the
“Maximum Commitment Amount”) over a period of thirty (30) months from the effective date of the Investment Agreement
(the “Commitment Period”).
During the Commitment
Period, the Company shall issue and sell to the Investor, and the Investor shall purchase from the Company, the shares of common
stock in respect of each put. The maximum number of shares of common stock that Company is entitled to put to the Investor in any
one put notice is the lower of (i) up to $200 of shares of common stock and (ii) 200% multiplied by the average of the daily trading
volume for ten (10) trading days immediately preceding the date of delivery of the applicable put notice. The purchase price with
respect to any put shall be set at eighty seven and one half percent (87.5%) multiplied by the lowest daily volume weighted average
price (VWAP) of the common stock during the five (5) trading days immediately preceding the date of delivery of the applicable
put notice. The issuance and sale of shares of common stock to the Investor pursuant to any put shall occur on the applicable closing
date provided that all of the conditions precedent set forth in the Investment Agreement shall have been fulfilled on or prior
to such closing date. On each closing date, the Investor’s Maximum Commitment Amount automatically shall be reduced by the
aggregate purchase price from the previous put on a dollar-for-dollar basis, by the total number of shares of common stock issued
by the Company on such closing date or in connection therewith.
Pursuant to the terms
of a registration rights agreement (the “Registration Rights Agreement”) dated October 4, 2017, the Company filed with
the SEC a registration statement on Form S-1 (the “Registration Statement”) relating to the resale by the Investor
of the shares of common stock underlying the Investment Agreement (the “Registrable Securities”).
White Winston Select Asset Funds, LLC
Judgment
On October 11, 2017,
the U.S. District Court for the District of New Jersey (the “District Court”) entered a judgment in favor of White
Winston Select Asset Funds, LLC (“White Winston”) against the Company in the amount of $675. White Winston previously
sought a break-up fee of $500 and attorney fees and costs allegedly due in connection with a contemplated but ultimately unsuccessful
financing transaction. The Company filed a motion to dismiss, which was granted in its entirety by the District Court. White Winston
subsequently appealed, and the United States Court of Appeals for the Third Circuit ultimately reversed. After considering the
parties cross-motions for summary judgment, the District Court ruled in White Winston’s favor and rendered the judgment above.
The Company is in settlement discussions with White Winston, while it also weighs exercising its rights to appeal.
Designation of Series L Preferred Stock
On October 12, 2017,
the Board of Directors designated 1,000 shares of the Company’s authorized preferred stock, with a par value of $0.0001 per
share, as Series L preferred stock. The Series L preferred stock shall have an original issue price of $10,000 per share, is not
redeemable and shall have no voting rights. The holders of Series L preferred stock have a liquidation preference in the amount
of $10,000 per share that is senior to the distributions, if any, to be paid to the holders of common stock. Holders of Series
L preferred stock have the right to convert their shares, based on the original issue price of $10,000 per share, into shares of
the Company’s common stock at 105% of the closing price of the Company’s common stock on the highest VWAP price for
the five (5) days immediately preceding the conversion date,
INTERCLOUD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
Assumption of Notes Payable
On October 12, 2017,
Frank Jadevaia, the Company’s former President, assigned $400 principal amount of outstanding promissory notes to RDW. RDW
then exchanged this tranche for a new 9.9% convertible promissory note in the principal amount of $400, due on October 12, 2018.
The conversion price per share in effect on any conversion date shall be equal to the lesser of i) $0.04 and ii) 75% of the lowest
VWAP over the twenty (20) trading days prior to the date of conversion.
Exchange of Term Loan Debt for Restricted
Equity
On October 12, 2017,
Frank Jadevaia, the Company’s former President, exchanged his remaining outstanding promissory notes for shares of the Company’s
Series L preferred stock with special liquidation preferences and conversion rights, as discussed above. Mr. Jadevaia exchanged
principal and accrued interest of $5,430 and $1,815, respectively. As a result of the exchange, Mr. Jadevaia received 227 of the
Company’s Series L preferred stock, at an original issue price of $10,000 per share.
Purchase Agreement
In November 2017 the Company
determined it was in its best interest to discontinue certain aspects of the IPC business. On November 6, 2017, the Company began
that process to discontinue the business and entered into an agreement with Edge Communications Solutions LLC ( “Edge”)
pursuant to which the Company assigned certain of the assets and liabilities related to its IPC subsidiary. Assets assigned to
Edge consisted of certain accounts receivable totaling approximately $434, prepaid labor and prepaid expenses totaling approximately
$53, and net fixed assets totaling approximately $66. Liabilities assigned to Edge consisted of progress billings and deferred
revenue totaling approximately $236 and accounts payable totaling approximately $278. Edge also assumed certain open maintenance
contracts. As consideration for the agreement, the Company received a working capital adjustment of $500 in cash on November 6,
2017. IPC has maintained all of its reseller agreements.
In connection with the
agreement, on November 6, 2017, the Company signed a Transition Services Agreement with Edge, whereby the Company will provide
transition services and continue to operate the IPC subsidiary with Edge until December 31, 2017, unless sooner terminated by
mutual agreement of the parties or upon 30 days prior written notice.
Dominion November 4, 2017 Exchange Agreement
Conversions
During October 2017, the Company issued
an aggregate of 6,369,048 shares of its common stock to Dominion Capital LLC upon the conversion of $27 of principal and accrued
interest of a note outstanding.
From November 1 through November 9, 2017,
the Company issued an aggregate of 4,943,041 shares of its common stock to Dominion Capital LLC upon the conversion of $67 of principal
and accrued interest of a note outstanding.
Forward Investments, LLC Promissory
Note Conversions
During October 2017, the Company issued
an aggregate of 47,495,801 shares of its common stock to Forward Investments, LLC upon the conversion of $300 of principal of a
note outstanding.
From November 1 through November 9, 2017,
the Company issued an aggregate of 29,247,349 shares of its common stock to Forward Investments, LLC upon the conversion of $136
of principal of a note outstanding.
RDW October 12, 2017 9.9% Convertible
Promissory Note Conversions
During October 2017, the Company issued
an aggregate of 28,932,178 shares of its common stock to RDW upon the conversion of $117 of principal of a note outstanding.
From November 1 through November 9, 2017,
the Company issued an aggregate of 33,447,051 shares of its common stock to RDW upon the conversion of $133 of principal of a note
outstanding.
RDW July 18, 2017 2.5% Convertible Promissory
Note Conversions
During October 2017, the Company issued
an aggregate of 12,983,903 shares of its common stock to RDW upon the conversion of $103 of principal of a note outstanding.
Smithline Senior Convertible Note Debt
Conversions
During October 2017, the Company issued
an aggregate of 2,579,105 shares of its common stock to Smithline upon the conversion of $22 of principal and accrued interest
of a note outstanding.
JGB Waltham Warrant Exercises
During October 2017,
the Company issued 17,255,194 shares of its common stock to JGB Waltham upon the cashless exercise of an aggregate of $500 of an
outstanding warrant. The shares were issued at an average exercise price of $0.006 per share. These exercises represented the full
outstanding amount of the warrant as of September 30, 2017.
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 and nine months ended September 30, 2017
and 2016 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, 2016, as filed on March 13, 2017 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 three
reportable segments: applications and infrastructure, professional services and managed services. 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 (which we sold in April 2017), Tropical, RM Leasing
and RM Engineering. The professional services operating segment is an aggregation of the operations of the ADEX Entities and SDNE
(which we sold in May 2017). The managed services operating segment is comprised of the operations of IPC (which we began the process
of discontinuing in November 2017).
On
February 17, 2016, we sold certain assets of our formally-owned VaultLogix and subsidiaries reporting unit, which was included
in our former cloud services segment. On April 29, 2016, we sold certain assets of our former wholly-owned subsidiary, Axim. On
January 31, 2017, we sold the Highwire division of ADEX. The operations of VaultLogix and its subsidiaries and Axim have been
excluded from the comparative tables noted below.
Results
of Continuing Operations – Three months ended September 30, 2017 and 2016
Revenues:
|
|
Three
months ended
|
|
|
|
|
|
|
September
30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percentage
|
|
Applications
and infrastructure
|
|
$
|
3,169
|
|
|
$
|
4,186
|
|
|
$
|
(1,017
|
)
|
|
|
-24
|
%
|
Professional services
|
|
|
4,851
|
|
|
|
10,064
|
|
|
|
(5,213
|
)
|
|
|
-52
|
%
|
Managed
services
|
|
|
2,014
|
|
|
|
5,303
|
|
|
|
(3,289
|
)
|
|
|
-62
|
%
|
Total
|
|
$
|
10,034
|
|
|
$
|
19,553
|
|
|
$
|
(9,519
|
)
|
|
|
-49
|
%
|
Revenues for the three-month
period ended September 30, 2017 decreased approximately $9.6 million, or 49%, to $10.0 million, as compared to $19.6 million for
the corresponding period in 2016. The decrease in revenues resulted primarily from a decrease in revenues from our managed services
and professional services segments. Hardware sales in our managed services segment declined in the third quarter of 2017 compared
to 2016. In addition, subsidiaries disposed of during the nine months ended September 30, 2017 did not account for revenues during
the three months ended September 30, 2017. These subsidiaries accounted for $7.7 million of revenues during the three months ended
September 30, 2016.
During
the three-month period ended September 30, 2017, 48% of our revenue was derived from our professional services segment, 20% from
our managed services segment and 32% from our applications and infrastructure segment. During the three-month period ended September
30, 2016, 52% of our revenue was derived from our professional services segment, 27% from our managed services segment and 21%
from our applications and infrastructure segment. Revenues from our managed services segment tends to be recurring in nature.
Cost
of revenue and gross margin:
|
|
Three months ended
September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percentage
|
|
Applications and infrastructure
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
1,953
|
|
|
$
|
3,256
|
|
|
$
|
(1,303
|
)
|
|
|
-40
|
%
|
Gross margin
|
|
$
|
1,216
|
|
|
$
|
930
|
|
|
$
|
286
|
|
|
|
31
|
%
|
Gross profit percentage
|
|
|
38
|
%
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
4,093
|
|
|
$
|
6,724
|
|
|
$
|
(2,631
|
)
|
|
|
-39
|
%
|
Gross margin
|
|
$
|
758
|
|
|
$
|
3,340
|
|
|
$
|
(2,582
|
)
|
|
|
-77
|
%
|
Gross profit percentage
|
|
|
16
|
%
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
1,232
|
|
|
$
|
3,960
|
|
|
$
|
(2,728
|
)
|
|
|
-69
|
%
|
Gross margin
|
|
$
|
782
|
|
|
$
|
1,343
|
|
|
$
|
(561
|
)
|
|
|
-42
|
%
|
Gross profit percentage
|
|
|
39
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
7,278
|
|
|
$
|
13,940
|
|
|
$
|
(6,662
|
)
|
|
|
-48
|
%
|
Gross margin
|
|
$
|
2,756
|
|
|
$
|
5,613
|
|
|
$
|
(2,857
|
)
|
|
|
-51
|
%
|
Gross profit percentage
|
|
|
27
|
%
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
Cost of revenue for
the three-month periods ended September 30, 2017 and 2016 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 decrease in cost of revenue of $6.7 million, or 48%, for the three-month period ended September 30, 2017 as compared to the
2016 period was primarily attributable to the decrease in cost of revenue in our managed services and professional services segments
as described above. Costs of revenue as a percentage of revenues was 73% for the three-month period ended September 30, 2017, as
compared to 71% for the same period in 2016.
Our gross profit percentage
was 27% for the three-month period ended September 30, 2017, as compared to 29% for the comparable period in 2016. The overall
decrease in gross profit percentage was primarily due to a higher percentage of revenue in this period coming from our professional
services segment, due to utilizing more subcontractor labor which has historically lower margins.
Salaries
and wages:
|
|
Three months ended
September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percentage
|
|
Applications and infrastructure
|
|
$
|
264
|
|
|
$
|
597
|
|
|
$
|
(333
|
)
|
|
|
-56
|
%
|
Percentage of total revenue
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional services
|
|
$
|
448
|
|
|
$
|
1,669
|
|
|
$
|
(1,221
|
)
|
|
|
-73
|
%
|
Percentage of total revenue
|
|
|
4
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed services
|
|
$
|
375
|
|
|
$
|
1,142
|
|
|
$
|
(767
|
)
|
|
|
-67
|
%
|
Percentage of total revenue
|
|
|
4
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$
|
1,271
|
|
|
$
|
1,680
|
|
|
$
|
(409
|
)
|
|
|
-24
|
%
|
Percentage of total revenue
|
|
|
13
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,358
|
|
|
$
|
5,088
|
|
|
$
|
(2,730
|
)
|
|
|
-54
|
%
|
Percentage of total revenue
|
|
|
24
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
For
the three-month period ended September 30, 2017, salaries and wages decreased $2.7 million to $2.4 million as compared to approximately
$5.1 million for the same period in 2016. The decrease resulted primarily from a decrease in salaries and wages in our professional
services and managed services segments as we focused on reducing salaries and wages and SG&A costs. Salaries and wages were
24% and 26% of revenue in the three-month period ended September 30, 2017 and 2016, respectively. Additionally, subsidiaries disposed
of during the nine months ended September 30, 2017 did not account for salaries and wages during the three months ended September
30, 2017. These subsidiaries accounted for $1.4 million for the three months ended September 30, 2016.
Selling,
General and Administrative:
|
|
Three months ended
September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percentage
|
|
Applications and infrastructure
|
|
$
|
210
|
|
|
$
|
527
|
|
|
$
|
(317
|
)
|
|
|
-60
|
%
|
Percentage of total revenue
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional services
|
|
$
|
305
|
|
|
$
|
522
|
|
|
$
|
(217
|
)
|
|
|
-42
|
%
|
Percentage of total revenue
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed services
|
|
$
|
286
|
|
|
$
|
795
|
|
|
$
|
(509
|
)
|
|
|
-64
|
%
|
Percentage of total revenue
|
|
|
3
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$
|
539
|
|
|
$
|
1,913
|
|
|
$
|
(1,374
|
)
|
|
|
-72
|
%
|
Percentage of total revenue
|
|
|
5
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,340
|
|
|
$
|
3,757
|
|
|
$
|
(2,417
|
)
|
|
|
-64
|
%
|
Percentage of total revenue
|
|
|
13
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
Selling, 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. Selling, general and administrative
expenses decreased approximately $2.5 million, or 64%, to $1.3 million in the three-month period ended September 30, 2017, as compared
to $3.8 million in the comparable period of 2016. The decrease was a result of decreases in all operating and corporate segments
as we focused on reducing salaries and wages and SG&A costs. Selling, general and administrative expenses decreased to 13%
of revenues in the three-month period ended September 30, 2017, from 19% in the comparable period in 2016 as discussed above. Additionally,
subsidiaries disposed of during the nine months ended September 30, 2017 did not account for selling, general and administrative
expenses during the three months ended September 30, 2017. These subsidiaries accounted for $0.6 million for the three months ended
September 30, 2016.
Interest
Expense:
Interest expense for
the three-month periods ended September 30, 2017 and 2016 was $1.8 million and $2.8 million, respectively. The decrease in interest
expense primarily resulted from a decrease in overall outstanding debt as of the beginning of the three months ended September
30, 2017 compared to the same period of 2016. This was primarily due to the significant amount of debt that has been converted
into the shares of our common stock during the past twelve months. Additionally, we have sold certain subsidiaries during the nine
months ended September 30, 2017 and have used that cash to reduce debt.
Net Loss Attributable to our Common
Stockholders.
Net loss attributable
to our common stockholders was $5.5 million for three-month period ended September 30, 2017, as compared to net income attributable
to common stockholders of $2.1 million for the three months ended September 30, 2016. The increase in net loss was primarily due
to a decrease in the gain from the change in derivatives of $8.0 million, an increase in the loss on extinguishment of debt of
$2.8 million, and a decrease in gross profit of $2.9 million due to the sale of certain operating subsidiaries during 2017. Additionally,
offsetting these declines, there were decreases in salaries and wages and selling, general and administrative expenses of $5.1
million and a decrease in interest expense of $1.2 million.
Goodwill
and Intangible Asset Impairment
We
consider the results of an income approach and a market approach in determining the fair value of the reportable units. We evaluated
the forecasted revenue using a discounted cash flow model for each of the reporting units. We also noted no unusual cost factors
that would impact operations based on the nature of the working capital requirements of the components comprising the reportable
units. Current operating results, including any losses, are evaluated by us in the assessment of goodwill and other intangible
assets. The estimates and assumptions used in assessing the fair value of the reporting units and the valuation of the underlying
assets and liabilities are inherently subject to significant uncertainties. Key assumptions used in the income approach in evaluating
goodwill are forecasts for each of the reporting unit revenue growth rates along with forecasted discounted free cash flows for
each reporting unit, aggregated into each reporting segment. For the market approach, we used the guideline public company method,
under which the fair value of a business is estimated by comparing the subject company to similar companies with publicly-traded
ownership interests. From these “guideline” companies, valuation multiples are derived and then applied to the appropriate
operating statistics of the subject company to arrive at indications of value.
While
we use available information to prepare estimates and to perform impairment evaluations, actual results could differ significantly
from these estimates or related projections, resulting in impairment related to recorded goodwill balances. Additionally, adverse
conditions in the economy and future volatility in the equity and credit markets could impact the valuation of our reporting units.
We can provide no assurances that, if such conditions occur, they will not trigger impairments of goodwill and other intangible
assets in future periods.
Events
that could cause the risk for impairment to increase are the loss of a major customer or group of customers, the loss of key personnel
and changes to current legislation that may impact our industry or its customers’ industries.
During
the three months ended September 30, 2017 and 2016, there were no indicators of goodwill and intangible asset impairment.
Results
of Continuing Operations – Nine months ended September 30, 2017 and 2016
Revenues:
|
|
Nine months ended
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percentage
|
|
Applications and infrastructure
|
|
$
|
9,250
|
|
|
$
|
16,018
|
|
|
$
|
(6,768
|
)
|
|
|
-42
|
%
|
Professional services
|
|
|
15,996
|
|
|
|
28,409
|
|
|
|
(12,413
|
)
|
|
|
-44
|
%
|
Managed services
|
|
|
6,859
|
|
|
|
15,349
|
|
|
|
(8,490
|
)
|
|
|
-55
|
%
|
Total
|
|
$
|
32,105
|
|
|
$
|
59,776
|
|
|
$
|
(27,671
|
)
|
|
|
-46
|
%
|
Revenues for the
nine-month period ended September 30, 2017 decreased $27.7 million, or 46%, to $32.1 million, as compared to $59.8 million
for the corresponding period in 2016. The decrease in revenues resulted primarily from subsidiaries which were disposed of
during the nine months ended September 30, 2017. These disposed of subsidiaries accounted for $4.8 million in revenues during
the nine months ended September 30, 2017, compared to $19.7 million for the same period in 2016. Additionally, revenues
declined from our managed services segment due to slower than forecasted results. Hardware sales in our managed services
segment declined in the nine months ended September 30, 2017 compared to 2016. Lastly, the decrease in our applications
and infrastructure segment was due to the timing of certain projects. TNS recognizes revenue under the completed contract
method, and certain large projects were not yet complete as of September 30, 2017. As a result, no revenue was recognized on
these projects during the nine months ended September 30, 2017.
During
the nine-month period ended September 30, 2017, 50% of our revenue was derived from our professional services segment, 21% from
our managed services segment and 29% from our applications and infrastructure segment. During the nine-month period ended September
30, 2016, 47% of our revenue was derived from our professional services segment, 26% from our managed services segment and 27%
from our applications and infrastructure segment. Revenues from our managed services segment tends to be recurring in nature.
Cost
of revenue and gross margin:
|
|
Nine months ended
September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percentage
|
|
Applications and infrastructure
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
6,375
|
|
|
$
|
13,235
|
|
|
$
|
(6,860
|
)
|
|
|
-52
|
%
|
Gross margin
|
|
$
|
2,875
|
|
|
$
|
2,783
|
|
|
$
|
92
|
|
|
|
3
|
%
|
Gross profit percentage
|
|
|
31
|
%
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
13,122
|
|
|
$
|
20,694
|
|
|
$
|
(7,572
|
)
|
|
|
-37
|
%
|
Gross margin
|
|
$
|
2,874
|
|
|
$
|
7,715
|
|
|
$
|
(4,841
|
)
|
|
|
-63
|
%
|
Gross profit percentage
|
|
|
18
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
4,857
|
|
|
$
|
10,601
|
|
|
$
|
(5,744
|
)
|
|
|
-54
|
%
|
Gross margin
|
|
$
|
2,002
|
|
|
$
|
4,748
|
|
|
$
|
(2,746
|
)
|
|
|
-58
|
%
|
Gross profit percentage
|
|
|
29
|
%
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
24,354
|
|
|
$
|
44,530
|
|
|
$
|
(20,176
|
)
|
|
|
-45
|
%
|
Gross margin
|
|
$
|
7,751
|
|
|
$
|
15,246
|
|
|
$
|
(7,495
|
)
|
|
|
-49
|
%
|
Gross profit percentage
|
|
|
24
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
Cost of revenue for
the nine-month periods ended September 30, 2017 and 2016 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 decrease in cost of revenue of $20.2 million, or 45%, for the nine-month period ended September 30, 2017 as compared to the
2016 period was primarily attributable to the decrease in revenue as described above. Costs of revenue as a percentage of revenues
was 76% for the nine-month period ended September 30, 2017, as compared to 74% for the same period in 2016.
Our
gross profit percentage was 24% for the nine-month period ended September 30, 2017, as compared to 26% for the comparable period
in 2016. The overall decrease in gross profit percentage was primarily due a higher percentage of revenue in this period coming
from our professional services segment, which has historically lower margins than our other two segments.
Salaries
and wages:
|
|
Nine months ended
September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percentage
|
|
Applications and infrastructure
|
|
$
|
1,167
|
|
|
$
|
1,523
|
|
|
$
|
(356
|
)
|
|
|
-23
|
%
|
Percentage of total revenue
|
|
|
4
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional services
|
|
$
|
2,090
|
|
|
$
|
4,103
|
|
|
$
|
(2,013
|
)
|
|
|
-49
|
%
|
Percentage of total revenue
|
|
|
7
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed services
|
|
$
|
1,416
|
|
|
$
|
3,414
|
|
|
$
|
(1,998
|
)
|
|
|
-59
|
%
|
Percentage of total revenue
|
|
|
4
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$
|
3,289
|
|
|
$
|
4,359
|
|
|
$
|
(1,070
|
)
|
|
|
-25
|
%
|
Percentage of total revenue
|
|
|
10
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,962
|
|
|
$
|
13,399
|
|
|
$
|
(5,437
|
)
|
|
|
-41
|
%
|
Percentage of total revenue
|
|
|
25
|
%
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
For
the nine-month period ended September 30, 2017, salaries and wages decreased $5.4 million to $8.0 million as compared to approximately
$13.4 million for the same period in 2016. The decrease resulted primarily from a decrease in salaries and wages in our professional
services, managed services and corporate segments as we focused on reducing salaries and wages and SG&A costs. Salaries and
wages were 25% and 22% of revenue in the nine-month period ended September 30, 2017 and 2016, respectively. Additionally,
subsidiaries disposed during the nine months ended September 30, 2017 accounted for $0.9 million in salaries and wages during
the nine months ended September 30, 2017, compared to $1.8 million for the same period in 2016.
Selling,
General and Administrative:
|
|
Nine months ended
September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percentage
|
|
Applications and infrastructure
|
|
$
|
845
|
|
|
$
|
1,703
|
|
|
$
|
(858
|
)
|
|
|
-50
|
%
|
Percentage of total revenue
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional services
|
|
$
|
1,055
|
|
|
$
|
1,561
|
|
|
$
|
(506
|
)
|
|
|
-32
|
%
|
Percentage of total revenue
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed services
|
|
$
|
1,200
|
|
|
$
|
2,319
|
|
|
$
|
(1,119
|
)
|
|
|
-48
|
%
|
Percentage of total revenue
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$
|
3,368
|
|
|
$
|
6,243
|
|
|
$
|
(2,875
|
)
|
|
|
-46
|
%
|
Percentage of total revenue
|
|
|
10
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,468
|
|
|
$
|
11,826
|
|
|
$
|
(5,358
|
)
|
|
|
-45
|
%
|
Percentage of total revenue
|
|
|
20
|
%
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
Selling, 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. Selling, general and administrative
expenses decreased approximately $5.3 million, or 45%, to $6.5 million in the nine-month period ended September 30, 2017, as compared
to $11.8 million in the comparable period of 2016. The decrease was a result of decreases in the applications and infrastructure,
managed services and corporate segments as we focused on reducing salaries and wages and SG&A costs. Selling, general and administrative
expenses as a percentage of revenues was 20% for nine months ended September 30, 2017 and 2016. Additionally, subsidiaries disposed
of during the nine months ended September 30, 2017 accounted for $0.5 million in SG&A expense during the nine months ended
September 30, 2017, compared to $1.0 million for the same period in 2016.
Interest
Expense:
Interest expense for
the nine-month periods ended September 30, 2017 and 2016 was $7.4 million and $11.0 million, respectively. The decrease in interest
expense primarily resulted from a decrease in overall outstanding debt as of the beginning of the nine months ended September 30,
2017 compared to the same period of 2016. This was primarily due to the significant amount of debt that has been converted into
the shares of our common stock during the past twelve months. Additionally, we have sold certain subsidiaries during the nine months
ended September 30, 2017 and have used that cash to reduce debt.
Net Loss Attributable to our Common
Stockholders.
Net loss attributable
to our common stockholders was $31.7 million for nine-month period ended September 30, 2017, as compared to net loss attributable
to common stockholders of $15.7 million for the nine months ended September 30, 2016. The increase in net loss was primarily due
to a decrease in the gain from the change in derivatives of $16.3 million, a decrease in gross profit of $7.5 million primarily
due to the sale of certain operating subsidiaries during 2017 and an increase in the loss on disposal of subsidiary of $5.2 million.
Additionally, offsetting these declines, there were decreases in salaries and wages and selling, general and administrative expenses
of $10.8 million, a decrease in interest expense of $3.6 million and a decrease in the loss on extinguishment of debt of $4.0 million.
Goodwill
and Intangible Asset Impairment
We
consider the results of an income approach and a market approach in determining the fair value of the reportable units. We evaluated
the forecasted revenue using a discounted cash flow model for each of the reporting units. We also noted no unusual cost factors
that would impact operations based on the nature of the working capital requirements of the components comprising the reportable
units. Current operating results, including any losses, are evaluated by us in the assessment of goodwill and other intangible
assets. The estimates and assumptions used in assessing the fair value of the reporting units and the valuation of the underlying
assets and liabilities are inherently subject to significant uncertainties. Key assumptions used in the income approach in evaluating
goodwill are forecasts for each of the reporting unit revenue growth rates along with forecasted discounted free cash flows for
each reporting unit, aggregated into each reporting segment. For the market approach, we used the guideline public company method,
under which the fair value of a business is estimated by comparing the subject company to similar companies with publicly-traded
ownership interests. From these “guideline” companies, valuation multiples are derived and then applied to the appropriate
operating statistics of the subject company to arrive at indications of value.
While
we use available information to prepare estimates and to perform impairment evaluations, actual results could differ significantly
from these estimates or related projections, resulting in impairment related to recorded goodwill balances. Additionally, adverse
conditions in the economy and future volatility in the equity and credit markets could impact the valuation of our reporting units.
We can provide no assurances that, if such conditions occur, they will not trigger impairments of goodwill and other intangible
assets in future periods.
Events
that could cause the risk for impairment to increase are the loss of a major customer or group of customers, the loss of key personnel
and changes to current legislation that may impact our industry or its customers’ industries.
During
the first nine months of 2016, we evaluated the results of the reporting units included in our professional services segments
and determined that these reporting units were not impaired.
During
the nine months ended September 30, 2017, we sold our Highwire division. Management analyzed the reporting unit which included
Highwire for impairment in accordance with ASC 350 Topic 350,
Intangibles – Goodwill and Other
, which requires that
the goodwill remaining in the portion of the reporting unit to be retained shall be tested for impairment in accordance with paragraphs
350-20-35-3A through 35-19 using its adjusted carrying amount. In conjunction with testing for goodwill impairment, we also tested
for intangible asset impairment. Based on our analysis, we recorded goodwill impairment for ADEX and SDNE of $2,885 and $261,
respectively, and intangible asset impairment for ADEX and SDNE of $637 and $160, respectively, in the unaudited condensed consolidated
statement of operations for the nine months ended September 30, 2017.
During
the nine months ended September 30, 2017, we sold our SDNE division. Management analyzed the reporting unit which included SDNE
for impairment in accordance with ASC 350 Topic 350,
Intangibles – Goodwill and Other
, which requires that the goodwill
remaining in the portion of the reporting unit to be retained shall be tested for impairment in accordance with paragraphs 350-20-35-3A
through 35-19 using its adjusted carrying amount. In conjunction with testing for goodwill impairment, we also tested for intangible
asset impairment. Based on our analysis, the reporting units in our professional services segment were not impaired.
During
the nine months ended September 30, 2017, we sold our AWS Entities. Management analyzed the reporting unit which included the
AWS Entities for impairment in accordance with ASC 350 Topic 350,
Intangibles – Goodwill and Other
, which requires
that the goodwill remaining in the portion of the reporting unit to be retained shall be tested for impairment in accordance with
paragraphs 350-20-35-3A through 35-19 using its adjusted carrying amount. In conjunction with testing for goodwill impairment,
we also tested for intangible asset impairment. Based on our analysis, we recorded goodwill impairment for TNS and RME of $596
and $25, respectively, and intangible asset impairment for TNS and RME of $123 and $39, respectively, in the unaudited condensed
consolidated statement of operations for the nine months ended September 30, 2017.
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 12 months, and as a result there is substantial doubt about our 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 three and nine months ended September
30, 2017, we generated gross profits from operations, but we incurred negative cash flow from operations. We expect to finance
our cash needs from the results of 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 September 30, 2017,
we had a working capital deficit of $41.1 million, as compared to a working capital deficit of $39.4 million at December 31, 2016.
Within
the next 12 months, we have obligations relating to the payment of indebtedness on term loans of $28.9 million.
We anticipate meeting
our cash obligations on our indebtedness that is payable within the next 12 months from the results of operations and, depending
on results of operations, we may need additional equity or debt financing. Additionally, during January 2017, we sold the Highwire
division of our ADEX subsidiary for a $4 million cash payment plus a working capital adjustment, which was paid to us in October
2017, of approximately $0.4 million. $2.5 million of the net proceeds from the sale of our Highwire division was applied to the
repayment of our indebtedness to JGB (Cayman) Concord Ltd. Additionally, on April 25, 2017, we sold 80.1% of certain assets in
the AWS Entities for a $2.0 million convertible note, a potential earn out of 3X EBITDA for the first six months after closing,
cash of $0.1 million and a working capital adjustment of $1.2 million payable 60 days after the closing. We expect to convert the
note into freely tradable common shares of the purchaser six months after the closing. We have not yet finalized the numbers for
the potential earn-out or the working capital adjustment. On May 17, 2017, we sold SDNE for $1.4 million in cash. Most of
that cash was subsequently used to pay down debt. On October 11, 2017, a judgement was entered against us in the amount of $0.7
million. We are currently in settlement discussions, while we also weigh exercising our rights to appeal. Lastly, On November 6,
2017, we assigned certain assets and liabilities of IPC for a $0.5 million working capital adjustment, paid in cash on the date
of the assignment.
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. Our management has
taken several actions to ensure that we will have sufficient liquidity to meet our obligations through the next 12 months, including
the reduction of certain general and administrative expenses, consulting expenses and other professional services fees, and the
sale of certain of our operating subsidiaries. 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. In July 2017, we elected to reduce related-party debt by converting such debt into shares of our Series J
preferred stock. In October 2017, we elected to reduce certain third-party debt by converting such debt into shares of our preferred
stock. We may elect to reduce additional third-party debt in the future by converting such debt into shares of our common stock
or preferred stock. 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 the next 12 months. There
is no assurance that we will be successful in any capital-raising efforts that we may undertake to fund operations during the
next twelve months.
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 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.
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 and $0.02 million for the three-month periods ended September 30, 2017 and 2016,
respectively. We had capital expenditures of $0.03 million and $0.1 million for the nine-month periods ended September 30,
2017 and 2016, respectively. We expect our capital expenditures for the next 12 months 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.
As
of September 30, 2017, we had cash of $0.8 million, which was exclusively denominated in U.S. dollars and consisted of bank deposits.
The
following summary of our cash flows for the periods indicated has been derived from our unaudited condensed consolidated financial
statements, which are included elsewhere in this report: