10-K 1 f10k2013_intercloudsystems.htm ANNUAL REPORT f10k2013_intercloudsystems.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

FORM 10-K
 
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

or

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission file number: 001-32034

InterCloud Systems, Inc.
(Exact name of registrant as specified in its charter)

Delaware
 
65-0963722
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
1030 Broad Street
Suite 102
Shrewsbury, NJ 07702
(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number:  (973) 630-5460
 
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value
 
The NASDAQ Stock Market LLC
Warrant to purchase Common Stock (expiring on November 4, 2018)  
The NASDAQ Stock Market LLC
 
Securities registered pursuant to Section 12(g) of the Act:
 
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨    No  x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes  ¨   No  x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No   ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x   No  ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer  o
(Do not check if a smaller reporting company)
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    ¨        No    x
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and ask price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $18,322,231 as of June 30, 2013, based on the $8.60 closing price per share of the Company’s common stock on such date.
 
The number of outstanding shares of the registrant’s common stock on March 25, 2014 was 10,760,784.
 
Documents Incorporated by Reference:  None.
 


 
 

 
 
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 2013

TABLE OF CONTENTS

   
PAGE
     
PART I    
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F-1

 
1

 
 
FORWARD-LOOKING STATEMENTS
 
The statements contained in this report with respect to our financial condition, results of operations and business that are not historical facts are “forward-looking statements”. Forward-looking statements can be identified by the use of forward-looking terminology, such as  ”anticipate”, “believe”, “expect”, “plan”, “intend”, “seek”, “estimate”, “project”, “could”, “may” or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties. Management wishes to caution the reader of the forward-looking statements that any such statements that are contained in this report reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors, including, but not limited to, economic, competitive, regulatory, technological, key employees, and general business factors affecting our operations, markets, growth, services, products, licenses and other factors, some of which are described in this report including in “Risk Factors” in Item 1A and some of which are discussed in our other filings with the Securities and Exchange Commission (the "SEC"). These forward-looking statements are only estimates or predictions. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of risks facing our company, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events.
 
These risk factors should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All written and oral forward looking statements made in connection with this report that are attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by applicable law or regulation.
 
Notwithstanding the above, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) expressly state that the safe harbor for forward-looking statements does not apply to companies that issue penny stock.  If we are ever considered to be an issuer of penny stock, the safe harbor for forward-looking statements may not apply to us at certain times.
 
Unless specifically set forth to the contrary, when used in this report the terms “we”, “us”, “our”, the “Company” and similar terms refer to InterCloud Systems, Inc., a Delaware corporation, and its wholly-owned subsidiaries, Tropical Communications, Inc., Rives-Monteiro Leasing, LLC, T N S, Inc., ADEX Corporation, ADEX Puerto Rico, LLC and ADEXCOMM Corporation, AW Solutions Inc. and AW Solutions Puerto, LLC, Integration Partners – NY Corporation, RentVM, Inc., and our 49%- owned subsidiary, Rives-Monteiro Engineering, LLC.
 
 
2

 
 

 
Overview
 
We are a single-source provider of end-to-end information technology (IT) and next-generation network solutions to the telecommunications service provider (carrier) and corporate enterprise markets through cloud platforms and professional services. We offer cloud and managed services, professional consulting and staffing services, and voice, data and optical solutions to assist our customers in meeting their changing technology demands. Our cloud solutions offer enterprise and service-provider customers the opportunity to adopt an operational expense model by outsourcing to us rather than the capital expense model that has dominated in recent decades in IT infrastructure management. Our telecommunications staffing group offers a broad range of solutions to enterprise and service provider customers, including application development teams, analytics, project management, program management, unified communications, network management and field support services on a short and long-term basis. Our specialty contracting division offers enterprise and service provider customers engineering, design, installation and maintenance services that support the build-out and operation of some of the most advanced small cell, WiFi and distributed antenna system (DAS) networks. We believe the migration of these complex networks from proprietary hardware-based solutions to software-defined networks (SDN) and cloud-based solutions provides our company a significant opportunity as we are one of only a few industry competitors that can span across both the legacy and next-generation networks that are actively being designed and deployed in the marketplace. We also believe we are in a position to assist our customers by offering competitive cloud and SDN solutions from a single source, while also maintaining our customers’ legacy hardware-based solutions.
 
 We provide the following categories of offerings to our customers:
 
 
Cloud and Managed Services.  Our cloud-based service offerings include platform as a service (PaaS), infrastructure as a service (IaaS), database as a service (DbaaS), and software as a service (SaaS). Our cloud services encompass public, private and hybrid cloud offerings within compute, network and storage. In addition, our easy-to-use, intuitive portal assists customers in migrating through an extensive app store and allows customers quickly to add or subtract applications and services. Our experience in system integration and solutions-centric services helps our customers quickly to integrate and adopt cloud-based services. In addition, our managed-services offerings include network management, 24x7x365 monitoring, security monitoring, storage and backup services.
 
 
Applications and Infrastructure/Specialty Contracting Services.  We provide an array of applications and services throughout North America and internationally, including unified communications, interactive voice response (IVR) and SIP-based call centers.  We also offer structured cabling and other field installations.  In addition, we design, engineer, install and maintain various types of WiFi and wide-area networks, distributed antenna systems (DAS), and small cell distribution networks for incumbent local exchange carriers (ILECs), telecommunications original equipment manufacturers (OEMs), cable broadband multiple system operators (MSOs) and enterprise customers. Our services and applications teams support the deployment of new networks and technologies, as well as expand and maintain existing networks.  We also design, install and maintain hardware solutions for the leading OEMs that support voice, data and optical networks.
 
 
Professional Services.  We provide consulting and professional staffing solutions to the service-provider and enterprise market in support of all facets of IT and next-generation networks, including project management, network implementation, network installation, network upgrades, rebuilds, maintenance and consulting services.  We leverage our international recruiting database, which includes more than 70,000 professionals, for the rapid deployment of our professional services.  On a weekly basis, we deploy hundreds of telecommunications professionals in support of our worldwide customers.  Our skilled recruiters assist telecommunications companies, cable broadband MSOs and enterprise clients throughout the project lifecycle of a network deployment and its maintenance.
 
 
3

 
 
Our Recent and Pending Acquisitions
 
We continue to grow and expand our service offerings and geographic reach through strategic acquisitions. Since January 1, 2013, we have completed the following acquisitions:
 
 
AW Solutions, Inc. In April 2013, we acquired AW Solutions, Inc. and AW Solutions Puerto Rico, LLC (collectively, “AW Solutions”), a professional, multi-service line, telecommunications infrastructure company that provides outsourced services to the wireless and wireline industry.  AW Solution’s services include network systems design, architectural and engineering services, program management and other technical services.  The acquisition of AW Solutions broadened our suite of services and added new customers to which we can cross-sell our other services.
 
 
Integration Partners-NY Corporation.  In January 2014, we acquired Integration Partners-NY Corporation (“IPC”), a full-service voice and data network engineering firm based in New York.  IPC serves both corporate enterprises and telecommunications service providers.  We believe the acquisition of IPC will support the cloud and managed services aspect of our business, as well as improve our systems integration and applications capabilities.
 
 
RentVM, Inc.   In February 2014, we acquired RentVM, Inc. (“RentVM”), a New Jersey- based provider of infrastructure-as-a-service technology to software developers and to healthcare, education, and other small and medium-sized businesses and enterprises to enable public and private (enterprise) Cloud environments.  RentVM expands our cloud and managed services capabilities by providing us a SDDC (Software Defined Data Center) platform to offer enterprise-grade cloud computing solutions.
 
We have also entered into definitive agreements for the following acquisitions:
 
 
Telco Professional Services Division.  In November 2012, we executed a definitive agreement to acquire the Telco Professional Services and Handset Testing business division (“Telco”) of Tekmark Global Solutions, LLC, a New Jersey limited liability company.  We plan to integrate this professional service and telecommunications staffing business with our ADEX subsidiary in order to expand our project staffing business and our access to skilled labor.

 
VaultLogix, LLC. In March 2014, we executed a definitive agreement to acquire VaultLogix, LLC and certain related entitles (“VaultLogix”), a leading provider of cloud backup services to nearly 10,000 businesses around the world.  VaultLogix safeguards a wide range of enterprise-class operating systems and applications through its unique combination of encryption, block-level data duplication and compression.  In addition, through its partner program, VaultLogix offers software branding, a robust partner portal and dedicated account management. We believe the acquisition of VaultLogix will broaden our suite of cloud service offerings by adding VaultLogix’s cloud backup services to our wide range of cloud services, including IaaS, virtual desktop, hosted exchange, disaster recovery in the cloud and file sharing, and will add new customers and resellers to which we can cross-sell our other services.
 
We intend to consummate the acquisition of VaultLogix during the second quarter of 2014, subject to our ability to finance all or a substantial portion of the purchase prices of such acquisitions through the sale of additional debt or equity securities.  There can be no assurance, however, that we will be able to obtain additional financing on terms that are acceptable to us, if at all. Our acquisition of Telco also is dependent on our ability to obtain satisfactory financing for such acquisition, and there can be no assurance that such financing will be available to us.
 
 
4

 
 
The following is a summary of the material terms of the purchase agreements for our pending acquisitions.
 
VaultLogix.  On March 19, 2014, we entered into an Interest Purchase Agreement (the “VaultLogix Agreement”) with VaultLogix and the holders of all of the outstanding membership interests in VaultLogix, as sellers, to acquire from the sellers all of the outstanding membership interests of VaultLogix and certain related entities for an aggregate purchase price of approximately $44 million.  On the closing of the acquisition, the purchase price will be paid to the sellers as follows:  (i) $17 million in cash, (ii) $11.5 million in shares of our common stock at a price of $16.50 per share and (iii) $15.5 million in our unsecured convertible promissory notes. The VaultLogix Agreement provides that if the closing price of our common stock 180 days after the closing date is less than $14.85 per share, then we will issue to the sellers additional shares of our common stock as downside protection; provided, however, we will not be required to issue additional shares at a value less than $12.50 per share.
   
The promissory notes we issue at closing will bear interest at the rate of 8% per annum, and all principal and interest accrued under such notes will be payable on the third anniversary of the closing date.  Such promissory notes will be convertible into shares of our common stock at a conversion price equal to 102% of the closing price of our common stock on the trading day immediately prior to the closing date.  A portion of the principal amount of such notes equal 20% of the principal amount on the closing date will not be convertible until the 15-month anniversary of the closing date.  On a date when (i) the shares of our common stock that are issuable upon conversion of such notes are freely tradable without restriction or volume limitations under Rule 144 under the Securities Act of 1933, and (ii) the average closing price of our common stock is 105% or higher of the conversion price of such notes, we will have the right to force the conversion of such notes into shares of our common stock at the then-applicable conversion price. In addition, if on or after the maturity date of such notes, (i) we are restricted or otherwise unable to pay in cash all outstanding amounts due under such notes, (ii) such notes have not otherwise been paid in full within ten business days following the maturity date, or (iii) we are not at such time entitled force the conversion of such notes into our common stock, then, in the event that both (i) and (iii) above apply, we, and in the event that both (ii) and (iii) above apply, the holders of such notes, will have the right to convert all outstanding amounts owing under such notes into shares of our common stock at a conversion price equal to the average closing price of our common stock on the three trading days immediately preceding the date of such conversion.
 
The VaultLogix Agreement contains customary representations, warranties, covenants and indemnification provisions. The closing remains subject to closing conditions, including the accuracy of representations and warranties of the parties in the VaultLogix Agreement and our ability to raise sufficient cash proceeds to consummate the acquisition.  The VaultLogix Agreement may be terminated at any time prior to closing (i) by mutual consent of the parties, (ii) by either party if the closing has not occurred by April 30, 2014, (iii) by either party if the other party has breached any of its representations, warranties or covenants or (iv) by either party if a court or governmental authority has issued a final order or ruling prohibiting the transaction.  Notwithstanding the foregoing, we will have the right to extend the  April 30, 2014 termination date to May 31, 2014 by paying the sellers a nonrefundable deposit of $500,000, which will be applied to the cash portion of the purchase price.  If on May 31, 2014, after such an extension of the termination date, we are unable to consummate the closing of the acquisition because we are unable to satisfy our conditions to closing, and the sellers have otherwise satisfied or are able to satisfy their conditions to closing, we will be required to pay the sellers a break-up fee in the amount of $500,000.
     
Mr. Mark Munro, our chairman and chief executive officer, was a member of the board of VaultLogix from March 2004 until February 2008, and was one of VaultLogix’s largest investors until that company was sold in February 2008.  All outstanding debt or equity obligations owed by VaultLogix to Mr. Munro were paid in December 2009.  Since December 2009, Mr. Munro has had no financial or other pecuniary interest in VaultLogix.

Mr. Daniel Sullivan, our chief financial officer, previously served as the chief financial officer of VaultLogix from January 2003 to July 2010.  Mr. Sullivan also currently serves as a director of Tier 1 Solutions, Inc. and is a minority shareholder of that company.  Tier 1 Solutions, Inc. owns 1% of the membership interests of VaultLogix.
 
Telco.  On November 19, 2012, we entered into an Asset Purchase Agreement (the “Tekmark Agreement”) to acquire all the property, assets and business of Telco from Tekmark Global Solutions, LLC.  Under the terms of the Tekmark Agreement, at the closing of the acquisition, we will pay the seller an aggregate amount in cash equal to the difference between (i) the product of 5.0 multiplied by the Estimated Closing EBITDA (as defined) of Telco for the 12-month period ending on the last day of the month prior to the closing date (the “Estimated Closing TTM EBITDA”), less (ii) $2,600,000.  In addition, we will issue to the seller a number of shares of common stock equal to the product of (i) the Estimated Closing TTM EBITDA, and (ii) the price of the common stock sold in this offering, rounded to the nearest whole share. We will also pay the seller additional cash compensation in an amount equal to the EBITDA (as defined) of Telco for the 12-month period beginning on the first day of the first calendar month commencing after the closing date (the “Initial Earnout Period”).
 
Following the closing, as additional consideration, we will make supplemental payments to the seller in cash for (i) the 12-month period beginning on the first day of the thirteenth calendar month commencing after the closing date (the “First Supplemental Earnout Period”) and (ii) the 12-month period beginning on the first day of the twenty-fifth calendar month commencing after the closing date (the “Second Supplemental Earnout Period”). The payment made for the First Supplemental Earnout Period will be an amount equal to the product of 2.0 multiplied by the positive difference, if any, between (a) the EBITDA of Telco for the First Supplemental Earnout Period, minus (b) the Closing TTM EBITDA (as defined). The payment made for the Second Supplemental Earnout Period will be an amount equal to the product of 2.0 multiplied by the positive difference, if any, between (y) the EBITDA of Telco for the Second Supplemental Earnout Period, minus (z) the Closing TTM EBITDA.
 
The Tekmark Agreement contains customary representations, warranties, covenants and indemnification provisions. The closing of the acquisition remains subject to closing conditions, including the accuracy of representations and warranties of the parties in the Tekmark Agreement and consummation of an equity or debt financing to secure sufficient funding for the transaction. Due to the passage of time since the Tekmark Agreement was signed, either we or Tekmark may terminate the Tekmark Agreement at any time prior to closing.
 
 
5

 
 
Our Industry
 
Advances in technology architectures have supported the rise of cloud computing, which enables the delivery of a wide variety of cloud-based services, such as platform as a service (PaaS), infrastructure as a service (IaaS), database as a service (DbaaS), and software as a service (SaaS). Today, mission-critical applications can be delivered reliably, securely and cost-effectively to our customers over the internet without the need to purchase supporting hardware, software or ongoing maintenance. The lower total cost of ownership, better functionality and flexibility of cloud applications represent a compelling alternative to traditional on-premise solutions. As a result, enterprises are increasingly adopting cloud services to rapidly deploy and integrate applications without building out their own expensive infrastructure and to minimize the growth of their own IT departments and create business agility by taking advantage of accelerated time-to-market dynamics.  Gartner, Inc. (Gartner) expects total cloud spending to increase from $132 billion worldwide in 2013 to $244 billion in 2017.
 
According to the U.S. National Institute of Standards and Technology (NIST), cloud computing is on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications and services) that can be rapidly provisioned and released with minimal management and effort and service provider interaction.  NIST has identified five essential characteristics of cloud computing:

 
·
on-demand service;
 
·
broad network access;
 
·
resource pooling;
 
·
rapid elasticity; and
 
·
measured service.

Cloud computing can generally be offered across the following four different deployment or service models:

 
·
Platform as a Service (PaaS) – allows users to develop their own web-based applications or to customize existing applications using one or more programming languages and development tools.

 
·
Infrastructure as a Service (IaaS) – allows customers to access the equipment and hardware needed to perform computing operations, including storage, processing and networking components.

 
·
Database as a Service (DbaaS) – consists of a service that is managed by a cloud operator (public or private) that supports applications, without the application team assuming responsibility for traditional database administration functions.  With a DBaaS, the application developers need not be database experts, nor should they have to hire a database administrator to maintain the database.

 
·
Software as a Service (SaaS) – consists of firms offering the capability to use software applications that are housed off of the user’s premises.  This software is differentiated from the traditional software programs that are resident on and used in stand-alone computing environments.

Generally, there are three deployment models through which cloud services are provided:

 
·
Private Clouds – exclusive to a single user.

 
·
Public or Community Clouds – available to the general public or shared by large, diverse groups of customers.

 
·
Hybrid Clouds – combined public and private elements in the same data center.

Cloud services enable the transition from Infrastructure 1.0 (mainframe computing to client-server computing) to Infrastructure 2.0.  Current trends, such as cloud computing, software defined networks (meta orchestration), big data analytics, mobile, and social networks, are increasingly defining IT infrastructure needs and spending.  Converged infrastructures, policy-based automation and other innovative technologies are providing the solutions enterprises will need to manage the exponential increase in the number of devices and data.  The increasing demand for cloud services is fueling the growth of our managed services offerings, which are specifically designed to accelerate the adoption of cloud services by our two primary customer segments: enterprise and service providers.
 
 
The increased movement by enterprise businesses of their information technology services, applications and infrastructure to a cloud-based architecture will cause market revenue in this segment to surge by a factor of three from 2011 to 2017, according to a recent January 2014  IHS Technology  report entitled “Cloud & Big Data Report - A Paradigm Shift in the ICT Industry 2013.”  According to that same report, global business spending for infrastructure and services related to the cloud will reach an estimated $174.2 billion this year, up 20% from $145.2 billion in 2013.  In a sign of the market’s strength, strong spending growth will continue during the next few years as enterprises race to come up with their own cloud-storage solutions.  By 2017, enterprise spending on the cloud will amount to a projected $235.1 billion.
 
 
6

 
 
The Cisco® Internet Business Solutions Group (IBSG) believes that there is a significant opportunity for service providers as well. Cisco projects a more than $60 billion direct mobile cloud service opportunity worldwide by 2016, with an additional cloud pull-through market of $335 billion.

Cloud spending is expected to rise across United States federal agencies as well.   A new report by IDC Government Insights (September 2013) projects a rise in cloud government spending after fiscal year 2014.  According to such report, Infrastructure as a service (Iaas) and private cloud in particular will lead government investment.  Federal private cloud services spending is expected to reach $1.7 billion in fiscal year 2014, reaching $7.7 billion by 2017.

Increased functionality and proliferation of data through the usage of smart phones, tablets and other mobile devices has resulted in the significant adoption of such devices within corporate enterprises. According to International Data Corporation (IDC), there were 1.4 billion mobile internet users worldwide in 2013, and there will be 2.3 billion in 2017.  According to Forrester Research, Inc. (2013 Mobility Workforce Adoption Trends) the number of  “anytime, anywhere information workers”- those who use three or more devices, work from multiple locations, and use many apps - has risen from 23% of the global workforce in 2011 to 29% in 2012.  According to Gartner, the number of tablets sold has grown at a compound annual growth rate of 97% between 2010 and 2014 worldwide, and is expected to surpass personal computers by annual number of units sold in 2016.

The rapid increase in data traffic, useage of wireless networks and evolution of services and technology are also driving telecommunications providers to undertake a number of initiatives to increase coverage, capacity and performance of their existing networks, including adding and upgrading cell sites nationwide.

To remain competitive and meet the rapidly-growing demand for state-of-the-art mobile data services, telecommunications and cable companies rely on outsourcing to provide a wide range of network and infrastructure services, as well as project staffing services, to help build out and maintain their networks.  OEMs supplying equipment to those telecommunications and cable service providers also frequently rely on outsourced solutions for project management and network deployment.  Demand for these “professional services”, whether utilizing a cloud platform or more traditional network solutions, is expected to continue to grow.  According to the Telecommunications Industry Association 2012 ICT Market Review, the wireless telecommunications and network infrastructure outsourcing market has grown 9.5% per year since 2004 and is expected to continue to grow at a 5.9% rate through 2014, becoming a $21.6 billion market in 2014.
 
Our Competitive Strengths
 
We are a single-source provider of end-to-end IT and next-generation network solutions to the telecommunications service provider (carrier) and corporate enterprise markets through cloud platforms and professional services. We believe our market advantages center around our cloud-based applications and services portfolio and positioning.  As a true infrastructure 2.0 provider, we add value by enabling applications and services while helping to contain costs.  Customers now demand a partner that can provide end-to-end IT solutions, that offers a solution that allows the customer to move IT expenditures from capital costs to operating costs, and that offers the customer greater elasticity and the ability to rapidly deploy enterprise applications.  We believe our strengths described below will enable us to continue to compete effectively and to take advantage of anticipated growth in our target markets:
 
 
Single-Source Provider of Cloud and Managed Services Applications and Infrastructure to Enterprise and Service Providers.
 
 
o
Customizable Cloud Integration Services: We offer a wide spectrum of flexible and customizable cloud solutions for our customers.  We differentiate our services by our ability to plan and customize a wide variety of cloud solutions for each customer.

 
o
Totally Secure Private and Hybrid Cloud Architectures: While many cloud companies only offer public cloud services, leaving great risks of security challenges within a network, our ability to customize private and hybrid cloud architecture, with multiple levels of security, mitigates these risks.

 
o
Licensed and Open Source SaaS Portfolio: Our software as a service (SaaS) business utilizes the top licensed software in the marketplace, including offerings from Microsoft, Hewlett Packard and Citrix.  In addition, we utilize open source platforms that our skilled applications team can customize to fit our customers’ requirements.
 
 
7

 
 
 
Established Customer Relationships
 
 
o
Vertical Market Compliance:  Our customer list includes relationships in many vertical markets, such as healthcare, finance and retail, which are specifically sensitive to industry compliance.  Proficiency with standards such as HIPAA, PCI and Ssae16 are essential.  In addition, our applications specialists support customer requirements for unified communication competencies, call center, interactive voice response (IVR) and video applications.

 
o
Service Provider Relationships:  We have established relationships with many leading wireless and wireline telecommunications providers, cable broadband MSOs, OEMs and others.  Our current customers include Ericsson Inc., Verizon Communications Inc., Alcatel-Lucent USA Inc., Century Link, Inc., AT&T Inc. and Hotwire Communications.

 
o
Long-Term Master Service Agreements:  We have over 30 master service agreements with service providers and OEMs.  Our relationships with our customers and existing master service agreements position us to continue to capture existing and emerging opportunities, both domestically and internationally.  We believe the barriers are extremely high for new entrants to obtain master service agreements with service providers and OEMs unless there are established relationships and a proven ability to execute.
 
 
Global Professional Services

 
o
Engineering talents:  Our geographical reach and vast engineering talents enable our customers to take advantage of our end-to-end solutions and one-stop shopping.

 
o
Proven Ability to Recruit, Manage and Retain High-Quality Personnel:  Our ability to recruit, manage and retain skilled labor is a critical advantage in an industry in which a shortage of skilled labor is often a key limitation for our customers and competitors alike.  We own and operate an actively-maintained database of more than 70,000 telecom and IT personnel.  We also employ highly-skilled recruiters and utilize an electronic hiring process that we believe expedites deployment of personnel and reduces costs.   We believe this access to a skilled labor pool gives us a competitive edge over our competitors as we continue to expand.
 
 
Strong Senior Management Team with Proven Ability to Execute.  Our highly-experienced management team has deep industry knowledge and brings an average of over 25 years of individual experience across a broad range of disciplines.  We believe our senior management team is a key driver of our success and is well-positioned to execute our strategy.
 
Our Growth Strategy
 
Under the leadership of our senior management team, we intend to build our sales, marketing and operations groups to support our rapid growth while focusing on increasing operating margins.  While organic growth will be a main focus in driving our business forward, acquisitions will play a strategic role in augmenting existing product and service lines and cross-selling opportunities.  We are pursuing several strategies, including:
 
 
Expand Our Cloud-Based Service Offerings.  The IT and telecommunications industries have been undergoing a massive shift in recent years from proprietary hardware solutions to software-defined networking (SDN) and cloud-based solutions. This shift is being driven by many converging issues, including the ‘consumerization’ of IT, BYOD (bring your own device), meta orchestration of complex networks, video growth and the acceptance of open source network architecture.  We are building a company that can manage the existing network infrastructures of the largest domestic and international corporations and service providers while also delivering a broad range of enterprise-grade cloud solutions. We believe the ability to provide such services is a critical differentiator as we already have relationships with many potential customers by offering services through our two operating divisions -- specialty contracting services and professional telecommunications staffing solutions. Each of our two operationg divisions intends to continue to expand by offering additional cloud services, such as cloud management of WiFi and DAS networks, on a virtualized wireless controller running on our cloud rather than installed throughout a corporate network, allowing better controls and cost savings for clients. We expect to expand the services of our professional staffing division into services to support the roll-out of SDN and cloud solutions teams to both the service provider and enterprise markets.  The growth in these deployments is expected to create a new market for professional services as customers in those markets typically do not have next-generation network professionals on staff.  We expect this new services offering to be a significant growth opportunity through both of those multi-billion-dollar global markets. Industry experts project that cloud-based IT and telecom solutions will outpace traditional hardware sales by 2016, which supports our strategy and growth plans.
 
 
Grow Revenues and Market Share through Selective Acquisitions.  We plan to continue to acquire private companies that enhance our earnings and offer complementary services or expand our geographic reach.  We believe such acquisitions will help us to accelerate our revenue growth, leverage our existing strengths, and capture and retain more work in-house as a prime contractor for our clients, thereby contributing to our profitability.  We also believe that increased scale will enable us to bid and take on larger contracts.  We believe there are many potential acquisition candidates in the high-growth cloud computing space, the fragmented professional services markets, and in the applications and infrastructure arena.
 
 
Aggressively Expand Our Organic Growth Initiatives.  Our customers include many leading wireless and wireline telecommunications providers, cable broadband MSOs, OEMs and enterprise customers.  As we have expanded the breadth of our service offerings through both organic growth and selective acquisitions, we believe we have opportunities to expand revenues with our existing clients by marketing additional cloud and SDN service offerings to them, as well as by extending services to existing customers in new geographies.
 
 
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Expand Our Relationships with New Service Providers. We plan to expand new relationships with smaller cable broadband providers, competitive local exchange carriers (CLECs), integrated communication providers (IC’s), competitive access providers (CAPs), network access point providers (NAPs) and integrated communications providers (ICPs). We believe that the business model for the expansion of these relationships, leveraging our core strength and array of service solutions, will support our business model for organic growth.
 
 
Increase Operating Margins by Leveraging Operating Efficiencies.  We believe that by centralizing administrative functions, consolidating insurance coverage and eliminating redundancies across our newly-acquired businesses, we will be positioned to offer more integrated end-to-end solutions and improve operating margins.
 
Our Services
 
We provide cloud- and managed-service-based platforms, professional services, applications and infrastructure to both the telecommunications industry and corporate enterprises.  Our cloud-based and managed services and our engineering, design, construction, installation, maintenance and project staffing services support the build-out, maintenance, upgrade and operation of some of the most advanced fiber optic, Ethernet, copper, wireless and satellite networks.  Our breadth of services enables our customers to selectively augment existing services or to outsource entire projects or operational functions. We divide our service offerings into the following categories of services:
 
 
Cloud and Managed Services.  We provide integrated cloud-based solutions that allow organizations around the globe to migrate and integrate their applications into a public, private or hybrid cloud environment.  We combine engineering expertise with white glove service and support to maintain and support these complex global networks.  We provide traditional hardware solutions and applications, cloud-based solutions and professional staffing services, which work as a seamless extension of a telecommunications service provider or enterprise end user.
 
 
Applications and Infrastructure. We provide an array of applications and services, including unified communications, voice recognition and call centers, as well as structured cabling, field installations and other IT and telecom infrastructure solutions. Our design, engineering, installation and maintenance of various types of local and wide-area networks, DAS systems, and other broadband installation and maintenance services augment ILECs, telecommunications OEMs, cable broadband MSOs and large end-users. Our services and applications support the deployment of new networks and technologies, as well as expand and maintain existing networks. We also sell hardware and applications for the leading OEMs that support voice, data and optical networks.
 
 
Applications.  We apply our expertise in networking, converged communications, security, data center solutions and other technologies utilizing our skills in consulting, integration and managed services to create customized solutions for our enterprise customers.  We provide applications for managed data, converged services (single and multiple site), voice recognition, session initiation protocol (SIP trunking-Voice Over IP, streaming media and unified communication (UC)) collocation services and others. These applications can be serviced at our customers' premises or in our cloud solutions.
 
 
Wireless and Wireline Installation, Commission and Integration.  Our telecommunications staffing group offers a full-range of solutions to OEMs, wireless carriers and enterprise customers throughout the United States, including wiring and field installation of various types of local, small cell and  WiFi networks and DAS systems and outside plant work as it relates to those projects.  Our technicians construct, install, maintain and integrate wireless communications and data networks for some of the largest cellular broadband and digital providers in the United States.  Our projects include services to Verizon Communications and Ericsson in connection with their 4G/LTE network deployments throughout the United States.
 
 
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Turn-Key Communications Services. Our specialty contracting services group addresses the growing demand for broadband-based unified communications and structured cabling for WiFi and DAS projects. Our services include switch conditioning, switch re-grooming, cable splicing and grounding audits. Our premise wiring services include design, engineering, installation, integration, maintenance and repair of telecommunications networks for voice, video and data inside various corporate enterprises, as well as state and local government properties. We provide outside plant telecommunications services primarily under hourly and per-unit-basis contracts to local telephone companies. We also provide these services to U.S. corporations, long distance telephone companies, electric utility companies, local municipalities and cable broadband MSOs.
 
 
Disaster Recovery.  Our disaster recovery services provide emergency network restoration services to leading telecommunications carriers throughout the United States, including projects for Hurricane Sandy relief, Hurricane Katrina relief, Alabama Tornado relief and Southern California flood assistance.  Customers include AT&T, Verizon Wireless and Century Link/Quest.
 
 
Professional Services.  As a result of our acquisition of ADEX, we have a proprietary international recruiting database of more than 70,000 telecom and IT professionals, the majority of which are well-qualified engineering professionals and experienced project managers.  We believe our skilled recruiters, combined with an entirely electronic staffing process, reduce our overall expenses for any project because of our efficient recruiting and deployment techniques.  On a weekly basis, we deploy hundreds of telecommunications professionals in support of network infrastructure deployments worldwide.
 
Customers
 
Our customers include many Fortune 1000 enterprises, wireless and wireline service providers, cable broadband MSOs and telecommunications OEMs. Our current service provider and OEM customers include leading telecommunications companies, such as Ericsson, Inc., Verizon Communications, Sprint Nextel Corporation and AT&T.
 
Our top four customers, Ericsson, Inc., Crown Castle, NX Utilities and Uline, accounted for approximately 57% of our total revenues in the year ended December 31, 2013. Our top four customers, Nexlink, Ericsson, Inc., Verizon Communications and Ericsson Caribbean, accounted for approximately 59% of our total revenues in the year ended December 31, 2012.  Ericsson, Inc. and its affiliates, as an OEM provider for seven different carrier projects, accounted for approximately 41% and 33% of our total revenues in the years ended December 31, 2013 and 2012.  
 
A substantial portion of our revenue is derived from work performed under multi-year master service agreements and multi-year service contracts.  We have entered into master service agreements (“MSAs”) with numerous service providers and OEMs, and generally have multiple agreements with each of our customers.  MSAs are awarded primarily through a competitive bidding process based on the depth of our service offerings, experience and capacity. MSAs generally contain customer-specified service requirements, such as discrete pricing for individual tasks, but do not require our customers to purchase a minimum amount of services.  To the extent that such contracts specify exclusivity, there are often a number of exceptions, including the ability of the customer to issue work orders valued above a specified dollar amount to other service providers, perform work with the customer’s own employees and use other service providers.  Most of our MSAs may be cancelled by our customers upon minimum notice (typically 60 days), regardless of whether we are then in default.  In addition, many of these contracts permit cancellation of particular purchase orders or statements of work without any prior notice.  Our cloud-managed service offerings have multi-year agreements and provide the customers with service level commitments. This is one of the fastest growing portions of our business.
 
 
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Suppliers and Vendors
 
We have supply agreements with major technology vendors, such as Ericsson, Avaya, Aruba, Juniper, F5, Microsoft, Ciena, Citrix and Cisco Systems. However, for a majority of the professional services we perform, our customers supply the necessary materials.  We expect to continue to further develop our relationships with our technology vendors and to broaden our scope of work with each of our partners.  In many cases, our relationships with our partners have extended for over a decade, which we attribute to our commitment to excellence.  It is our objective to selectively expand our partnerships moving forward in order to expand our service offerings.
 
Competition
 
We provide cloud and managed services, professional services, and infrastructure and applications to the enterprise and service provider markets globally. Our markets are highly fragmented and the business is characterized by a large number of participants, including several large companies, as well as a significant number of small, privately-held, local competitors.
 
Our current and potential larger competitors include Amazon.com, Inc., Arrow Electronics, Inc., Black Box Corporation, CenturyLink Technology Solutions (formerly Savvis), Dimension Data, Dycom Industries, Inc., Goodman Networks, Inc., Hewlett Packard Company, Rackspace Hosting, Inc., SoftLayer Technologies, Inc., Tech Mahindra Limited, TeleTech Holdings, Inc. and Volt Information Sciences, Inc.  A significant portion of our services revenue is currently derived from MSAs and price is often an important factor in awarding such agreements.  Accordingly, our competitors may underbid us if they elect to price their services aggressively to procure such business.  Our competitors may also develop the expertise, experience and resources to provide services that are equal or superior in both price and quality to our services, and we may not be able to maintain or enhance our competitive position.  The principal competitive factors for our professional services include geographic presence, breadth of service offerings, technical skills, licensing price, quality of service and industry reputation.  We believe we compete favorably with our competitors on the basis of these factors.
 
Safety and Risk Management
 
We require our employees to participate in internal training and service programs from time to time relevant to their employment and to complete any training programs required by law.  We review accidents and claims from our operations, examine trends and implement changes in procedures to address safety issues.  Claims arising in our business generally include workers’ compensation claims, various general liability and damage claims, and claims related to vehicle accidents, including personal injury and property damage.  We insure against the risk of loss arising from our operations up to certain deductible limits in substantially all of the states in which we operate.  In addition, we retain risk of loss, up to certain limits, under our employee group health plan.  We evaluate our insurance requirements on an ongoing basis to help ensure we maintain adequate levels of coverage.
 
We carefully monitor claims and actively participate with our insurers in determining claims estimates and adjustments.  The estimated costs of claims are accrued as liabilities, and include estimates for claims incurred but not reported.  Due to fluctuations in our loss experience from year to year, insurance accruals have varied and can affect the consistency of our operating margins.  If we experience insurance claims in excess of our umbrella coverage limit, our business could be materially and adversely affected.
 
Employees
 
As of December 31, 2013, we had 346 full-time employees and eight part-time employees, of whom 47 were in administration and corporate management, seven were accounting personnel and 300 were technical and project managerial personnel.
 
In general, the number of our employees varies according to the level of our work in progress.  We maintain a core of technical and managerial personnel to supervise all projects and add employees as needed to complete specific projects.  Because we also provide project staffing, we are well-positioned to respond to changes in our staffing needs.
 
 
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Environmental Matters
 
A portion of the work we perform is associated with the underground networks of our customers.  As a result, we are potentially subject to material liabilities related to encountering underground objects that may cause the release of hazardous materials or substances.  We are subject to federal, state and local environmental laws and regulations, including those regarding the removal and remediation of hazardous substances and waste.  These laws and regulations can impose significant fines and criminal sanctions for violations. Costs associated with the discharge of hazardous substances may include clean-up costs and related damages or liabilities.  These costs could be significant and could adversely affect our results of operations and cash flows.
 
Regulation
 
Our operations are subject to various federal, state, local and international laws and regulations, including licensing, permitting and inspection requirements applicable to electricians and engineers; building codes; permitting and inspection requirements applicable to construction projects; regulations relating to worker safety and environmental protection; telecommunication regulations affecting our fiber optic licensing business; labor and employment laws; and laws governing advertising.
 
We believe that we have all the licenses required to conduct our operations.  Our failure to comply with applicable regulations could result in substantial fines or revocation of our operating licenses.
 
 
Investing in our securities involves a high degree of risk.  You should carefully consider the following risk factors and all other information contained in this report before purchasing our securities.  If any of the following risks occur, our business, financial condition, results of operations and prospects could be materially and adversely affected.  In that case, the market price of our common stock could decline, and you could lose some or all of your investment.
 
Risks Related to Our Business
 
A failure to successfully execute our strategy of acquiring other businesses to grow our company could adversely affect our business, financial condition, results of operations and prospects.
 
We intend to continue pursuing growth through the acquisition of companies or assets to expand our project skill-sets and capabilities, enlarge our geographic markets, add experienced management and increase critical mass to enable us to bid on larger contracts.  However, we may be unable to find suitable acquisition candidates or to complete acquisitions on favorable terms, if at all.  Moreover, any completed acquisition may not result in the intended benefits.  For example, while the historical financial and operating performance of an acquisition target are among the criteria we evaluate in determining which acquisition targets we will pursue, there can be no assurance that any business or assets we acquire will continue to perform in accordance with past practices or will achieve financial or operating results that are consistent with or exceed past results.  Any such failure could adversely affect our business, financial condition or results of operations.  In addition, any completed acquisition may not result in the intended benefits for other reasons and our acquisitions will involve a number of other risks, including:
 
 
We may have difficulty integrating the acquired companies;
 
 
Our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises;
 
 
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We may not realize the anticipated cost savings or other financial benefits we anticipated;
 
 
We may have difficulty applying our expertise in one market to another market;
 
 
We may have difficulty retaining or hiring key personnel, customers and suppliers to maintain expanded operations;
 
 
Our internal resources may not be adequate to support our operations as we expand, particularly if we are awarded a significant number of contracts in a short time period;
 
 
We may have difficulty retaining and obtaining required regulatory approvals, licenses and permits;
 
 
We may not be able to obtain additional equity or debt financing on terms acceptable to us or at all, and any such financing could result in dilution to our stockholders, impact our ability to service our debt within the scheduled repayment terms and include covenants or other restrictions that would impede our ability to manage our operations;
 
 
We may have failed to, or were unable to, discover liabilities of the acquired companies during the course of performing our due diligence; and
 
 
We may be required to record additional goodwill as a result of an acquisition, which will reduce our tangible net worth.
 
Any of these risks could prevent us from executing our acquisition growth strategy, which could adversely affect our business, financial condition, results of operations and prospects.
 
We may be unable to successfully integrate our recent and future acquisitions, which could adversely affect our business, financial condition, results of operations and prospects.
 
We recently acquired a number of companies, including AW Solutions in April 2013, IPC in January 2014 and RentVM in February 2014, and have entered into a definitive agreements for the acquisition of Telco and VaultLogix. The operation and management of recent acquisitions, or any of our future acquisitions, may adversely affect our existing income and operations or we may not be able to effectively manage any growth resulting from these transactions.  Before we acquired them, these companies operated independently of one another.  Until we establish centralized financial, management information and other administrative systems, we will rely on the separate systems of these companies, including their financial reporting systems.
 
Our success will depend, in part, on the extent to which we are able to merge these functions, eliminate the unnecessary duplication of other functions and otherwise integrate these companies (and any additional businesses with which we may combine in the future) into a cohesive, efficient enterprise.  This integration process may entail significant costs and delays could occur.  Our failure to integrate the operations of these companies successfully could adversely affect our business, financial condition, results of operations and prospects.  To the extent that any acquisition results in additional goodwill, it will reduce our tangible net worth, which might adversely affect our business, financial condition, results of operations and prospects, as well as our credit and bonding capacity.
 
We derive a significant portion of our revenue from master service agreements that may be cancelled by customers on short notice, or which we may be unable to renew on favorable terms or at all.
 
During each of the years ended December 31, 2013 and 2012, we derived approximately 65% and 60%, respectively, of our revenues from master service agreements and long-term contracts, none of which require our customers to purchase a minimum amount of services.  The majority of these contracts may be cancelled by our customers upon minimum notice (typically 60 days), regardless of whether or not we are in default.  In addition, many of these contracts permit cancellation of particular purchase orders or statements of work without any notice.
 
 
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These agreements typically do not require our customers to assign a specific amount of work to us until a purchase order or statement of work is signed.  Consequently, projected expenditures by customers are not assured until a definitive purchase order or statement of work is placed with us and the work is completed.  Furthermore, our customers generally require competitive bidding of these contracts.  As a result, we could be underbid by our competitors or required to lower the price charged under a contract being rebid.  The loss of work obtained through master service agreements and long-term contracts or the reduced profitability of such work could adversely affect our business or results of operations.
 
If we do not accurately estimate the overall costs when we bid on a contract that is awarded to us, we may achieve a lower than anticipated profit or incur a loss on the contract.
 
A significant portion of our revenues from our engineering and professional services offerings are derived from fixed unit price contracts that require us to perform the contract for a fixed unit price irrespective of our actual costs.  We bid for these contracts based on our estimates of overall costs, but cost overruns may cause us to incur losses.  The costs incurred and any net profit realized on such contracts can vary, sometimes substantially, from the original projections due to a variety of factors, including, but not limited to:
 
 
onsite conditions that differ from those assumed in the original bid;
 
 
delays in project starts or completion;
 
 
fluctuations in the cost of materials to perform under a contract;
 
 
contract modifications creating unanticipated costs not covered by change orders;
 
 
availability and skill level of workers in the geographic location of a project;
 
 
our suppliers’ or subcontractors’ failure to perform due to various reasons, including bankruptcy;
 
 
fraud or theft committed by our employees;
 
 
citations or fines issued by any governmental authority;
 
 
difficulties in obtaining required governmental permits or approvals or performance bonds;
 
 
changes in applicable laws and regulations; and
 
 
claims or demands from third parties alleging damages arising from our work or from the project of which our work is a part.
 
These factors may cause actual reduced profitability or losses on projects, which could adversely affect our business, financial condition, results of operations and prospects.
 
Our contracts may require us to perform extra or change order work, which can result in disputes and adversely affect our business, financial condition, results of operations and prospects.
 
Our contracts generally require us to perform extra or change order work as directed by the customer, even if the customer has not agreed in advance on the scope or price of the extra work to be performed.  This process may result in disputes over whether the work performed is beyond the scope of the work included in the original project plans and specifications or, if the customer agrees that the work performed qualifies as extra work, the price that the customer is willing to pay for the extra work.  Even when the customer agrees to pay for the extra work, we may be required to fund the cost of such work for a lengthy period of time until the change order is approved by the customer and we are paid by the customer.
 
 
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To the extent that actual recoveries with respect to change orders or amounts subject to contract disputes or claims are less than the estimates used in our financial statements, the amount of any shortfall will reduce our future revenues and profits, and this could adversely affect our reported working capital and results of operations.  In addition, any delay caused by the extra work may adversely impact the timely scheduling of other project work and our ability to meet specified contract milestone dates.
 
We derive a significant portion of our revenue from a few customers and the loss of one of these customers, or a reduction in their demand for our services, could adversely affect our business, financial condition, results of operations and prospects.
 
Our customer base is highly concentrated. Due to the size and nature of our contracts, one or a few customers have represented a substantial portion of our consolidated revenues and gross profits in any one year or over a period of several consecutive years. Ericsson Inc. and its affiliates accounted for approximately 41% of our total revenues in the year ended December 31, 2013 and 33% of our total revenues in the year ended December 31, 2012. Our top four customers, Ericsson, Inc., Crown Castle, NX Utilities and Uline, accounted for approximately 57% of our total revenues in the year ended December 31, 2013. Our top four customers, Ericsson, Inc., Nexlink, Verizon Communications and Ericsson Caribbean accounted for approximately 59% of our total revenues in the year ended December 31, 2012. Revenues under our contracts with significant customers may continue to vary from period to period depending on the timing or volume of work that those customers order or perform with their in-house service organizations. A limited number of customers may continue to comprise a substantial portion of our revenue for the foreseeable future. Because we do not maintain any reserves for payment defaults, a default or delay in payment on a significant scale could adversely affect our business, financial condition, results of operations and prospects. We could lose business from a significant customer for a variety of reasons, including:
 
 
the consolidation, merger or acquisition of an existing customer, resulting in a change in procurement strategies employed by the surviving entity that could reduce the amount of work we receive;
 
 
our performance on individual contracts or relationships with one or more significant customers are impaired due to another reason, which may cause us to lose future business with such customers and, as a result, our ability to generate income would be adversely impacted;
 
 
the strength of our professional reputation; and
 
 
key customers could slow or stop spending on initiatives related to projects we are performing for them due to increased difficulty in the credit markets as a result of the recent economic crisis or other reasons.
 
Since many of our customer contracts allow our customers to terminate the contract without cause, our customers may terminate their contracts with us at will, which could impair our business, financial condition, results of operations and prospects.
 
Our failure to adequately expand our direct sales force will impede our growth.

We will need to continue to expand and optimize our sales infrastructure in order to grow our customer base and our business. We plan to continue to expand our direct sales force, both domestically and internationally. Identifying and recruiting qualified personnel and training them requires significant time, expense and attention. Our business may be adversely affected if our efforts to expand and train our direct sales force do not generate a corresponding increase in revenue. If we are unable to hire, develop and retain talented sales personnel or if new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the intended benefits of this investment or increase our revenue.
 
 
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Our business is labor intensive and if we are unable to attract and retain key personnel and skilled labor, or if we encounter labor difficulties, our ability to bid for and successfully complete contracts may be negatively impacted.
 
Our ability to attract and retain reliable, qualified personnel is a significant factor that enables us to successfully bid for and profitably complete our work.  Our future success depends on our ability to attract, hire and retain project managers, estimators, supervisors, foremen, equipment operators, engineers, linemen, laborers and other highly-skilled personnel.  Our ability to do so depends on a number of factors, such as general rates of employment, competitive demands for employees possessing the skills we need and the level of compensation required to hire and retain qualified employees.  We may also spend considerable resources training employees who may then be hired by our competitors, forcing us to spend additional funds to attract personnel to fill those positions.  Competition for employees is intense, and we could experience difficulty hiring and retaining the personnel necessary to support our business.  Our labor expenses may also increase as a result of a shortage in the supply of skilled personnel.  If we do not succeed in retaining our current employees and attracting, developing and retaining new highly-skilled employees, our reputation may be harmed and our future earnings may be negatively impacted.
 
If we are unable to attract and retain qualified executive officers and managers, we will be unable to operate efficiently, which could adversely affect our business, financial condition, results of operations and prospects.
 
We depend on the continued efforts and abilities of our executive officers, as well as the senior management of our subsidiaries, to establish and maintain our customer relationships and identify strategic opportunities.  The loss of any one of them could negatively affect our ability to execute our business strategy and adversely affect our business, financial condition, results of operations and prospects.  Competition for managerial talent with significant industry experience is high and we may lose access to executive officers for a variety of reasons, including more attractive compensation packages offered by our competitors.  Although we have entered into employment agreements with certain of our executive officers and certain other key employees, we cannot guarantee that any of them or other key management personnel will remain employed by us for any length of time.
 
Because we maintain a workforce based upon current and anticipated workloads, we may incur significant costs in adjusting our workforce demands, including addressing understaffing of contracts, if we do not receive future contract awards or if these awards are delayed.
 
Our estimates of future performance depend, in part, upon whether and when we will receive certain new contract awards.  Our estimates may be unreliable and can change from time to time.  In the case of larger projects, where timing is often uncertain, it is particularly difficult to project whether and when we will receive a contract award.  The uncertainty of contract award timing can present difficulties in matching workforce size with contractual needs.  If an expected contract award is delayed or not received, we could incur significant costs resulting from retaining more staff than is necessary.  Similarly, if we underestimate the workforce necessary for a contract, we may not perform at the level expected by the customer and harm our reputation with the customer.  Each of these may negatively impact our business, financial condition, results of operations and prospects.
 
Timing of the award and performance of new contracts could adversely affect our business, financial condition, results of operations and prospects.
 
It is generally very difficult to predict whether and when new contracts will be offered for tender because these contracts frequently involve a lengthy and complex design and bidding process, which is affected by a number of factors, such as market conditions, financing arrangements and governmental approvals.  Because of these factors, our results of operations and cash flows may fluctuate from quarter to quarter and year to year, and the fluctuation may be substantial.  Such delays, if they occur, could adversely affect our operating results for current and future periods until the affected contracts are completed.
 
Our operating results may fluctuate due to factors that are difficult to forecast and not within our control.
 
Our past operating results may not be accurate indicators of future performance, and you should not rely on such results to predict our future performance.  Our operating results have fluctuated significantly in the past, and could fluctuate in the future.  Factors that may contribute to fluctuations include:
 
 
changes in aggregate capital spending, cyclicality and other economic conditions, or domestic and international demand in the industries we serve;
 
 
our ability to effectively manage our working capital;
 
 
our ability to satisfy consumer demands in a timely and cost-effective manner;
 
 
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pricing and availability of labor and materials;
 
 
our inability to adjust certain fixed costs and expenses for changes in demand;
 
 
shifts in geographic concentration of customers, supplies and labor pools; and
 
 
seasonal fluctuations in demand and our revenue.
 
Unanticipated delays due to adverse weather conditions, global climate change and difficult work sites and environments may slow completion of our contracts, impair our customer relationships and adversely affect our business, financial condition, results of operations and prospects.
 
Because some of our work is performed outdoors, our business is impacted by extended periods of inclement weather and is subject to unpredictable weather conditions, which could become more frequent or severe if general climatic changes occur.  Generally, inclement weather is more likely to occur during the winter season, which falls during our second and third fiscal quarters.  Additionally, adverse weather conditions can result in project delays or cancellations, potentially causing us to incur additional unanticipated costs, reductions in revenues or the payment of liquidated damages.  In addition, some of our contracts require that we assume the risk that actual site conditions vary from those expected.  Significant periods of bad weather typically reduce profitability of affected contracts, both in the current period and during the future life of affected contracts, which can negatively affect our results of operations in current and future periods until the affected contracts are completed.
 
Some of our projects involve challenging engineering, procurement and construction phases that may occur over extended time periods, sometimes up to several years.  We may encounter difficulties in engineering, delays in designs or materials provided by the customer or a third party, equipment and material delivery delays, schedule changes, delays from customer failure to timely obtain rights-of-way, weather-related delays, delays by subcontractors in completing their portion of the project and other factors, some of which are beyond our control, but which may impact our ability to complete a project within the original delivery schedule.  In some cases, delays and additional costs may be substantial, and we may be required to cancel a project and/or compensate the customer for the delay.  We may not be able to recover any of these costs.  Any such delays, cancellations, defects, errors or other failures to meet customer expectations could result in damage claims substantially in excess of revenue associated with a project.  These factors could also negatively impact our reputation or relationships with our customers, which could adversely affect our ability to secure new contracts.
 
Environmental and other regulatory matters could adversely affect our ability to conduct our business and could require expenditures that could adversely affect our business, financial condition, results of operations and prospects.
 
Our operations are subject to laws and regulations relating to workplace safety and worker health that, among other things, regulate employee exposure to hazardous substances.  While immigration laws require us to take certain steps intended to confirm the legal status of our immigrant labor force, we may nonetheless unknowingly employ illegal immigrants.  Violations of laws and regulations could subject us to substantial fines and penalties, cleanup costs, third-party property damage or personal injury claims.  In addition, these laws and regulations have become, and enforcement practices and compliance standards are becoming, increasingly stringent.  Moreover, we cannot predict the nature, scope or effect of legislation or regulatory requirements that could be imposed, or how existing or future laws or regulations will be administered or interpreted, with respect to products or activities to which they have not been previously applied.  Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies, could require us to make substantial expenditures for, among other things, pollution control systems and other equipment that we do not currently possess, or the acquisition or modification of permits applicable to our activities.
 
 
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If we fail to maintain qualifications required by certain governmental entities, we could be prohibited from bidding on certain contracts.
 
If we do not maintain qualifications required by certain governmental entities, such as low voltage electrical licenses, we could be prohibited from bidding on certain governmental contracts.  A cancellation of an unfinished contract or our exclusion from the bidding process could cause our work crews to be idled for a significant period of time until other comparable work becomes available, which could adversely affect our business and results of operations.  The cancellation of significant contracts or our disqualification from bidding for new contracts could reduce our revenues and profits and adversely affect our business, financial condition, results of operations and prospects.
 
Fines, judgments and other consequences resulting from our failure to comply with regulations or adverse outcomes in litigation proceedings could adversely affect our business, financial condition, results of operations and prospects.
 
From time to time, we may be involved in lawsuits and regulatory actions, including class action lawsuits that are brought or threatened against us in the ordinary course of business.  These actions may seek, among other things, compensation for alleged personal injury, workers’ compensation, violations of the Fair Labor Standards Act and state wage and hour laws, employment discrimination, breach of contract, property damage, punitive damages, civil penalties, consequential damages or other losses, or injunctive or declaratory relief.  Any defects or errors, or failures to meet our customers’ expectations could result in large damage claims against us.  Claimants may seek large damage awards and, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such proceedings.  Any failure to properly estimate or manage cost, or delay in the completion of projects, could subject us to penalties.
 
The ultimate resolution of these matters through settlement, mediation or court judgment could have a material impact on our financial condition, results of operations and cash flows.  Regardless of the outcome of any litigation, these proceedings could result in substantial cost and may require us to devote substantial resources to defend ourselves.  When appropriate, we establish reserves for litigation and claims that we believe to be adequate in light of current information, legal advice and professional indemnity insurance coverage, and we adjust such reserves from time to time according to developments.  If our reserves are inadequate or insurance coverage proves to be inadequate or unavailable, our business, financial condition, results of operations and prospects may suffer.
 
We employ and assign personnel in the workplaces of other businesses, which subjects us to a variety of possible claims that could adversely affect our business, financial condition, results of operations and prospects.
 
We employ and assign personnel in the workplaces of other businesses.  The risks of these activities include possible claims relating to:
 
 
discrimination and harassment;
 
 
wrongful termination or denial of employment;
 
 
violations of employment rights related to employment screening or privacy issues;
 
 
classification of employees, including independent contractors;
 
 
employment of illegal aliens;
 
 
violations of wage and hour requirements;
 
 
retroactive entitlement to employee benefits; and
 
 
errors and omissions by our temporary employees.
 
Claims relating to any of the above could subject us to monetary fines or reputational damage, which could adversely affect our business, financial condition, results of operations and prospects.
 
 
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If we are required to reclassify independent contractors as employees, we may incur additional costs and taxes which could adversely affect our business, financial condition, results of operations and prospects.
 
We use a significant number of independent contractors in our operations for whom we do not pay or withhold any federal, state or provincial employment tax.  There are a number of different tests used in determining whether an individual is an employee or an independent contractor and such tests generally take into account multiple factors.  There can be no assurance that legislative, judicial or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would change, or at least challenge, the classification of our independent contractors.  Although we believe we have properly classified our independent contractors, the U.S. Internal Revenue Service or other U.S. federal or state authorities or similar authorities of a foreign government may determine that we have misclassified our independent contractors for employment tax or other purposes and, as a result, seek additional taxes from us or attempt to impose fines and penalties.  If we are required to pay employer taxes or pay backup withholding with respect to prior periods with respect to or on behalf of our independent contractors, our operating costs will increase, which could adversely impact our business, financial condition, results of operations and prospects.
 
Increases in the cost of fuel could adversely affect our business, financial condition, results of operations and prospects.
 
The price of fuel needed to run our vehicles and equipment is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by the OPEC and other oil and gas producers, war and unrest in oil producing countries, regional production patterns and environmental concerns.  Most of our contracts do not allow us to adjust our pricing.  Accordingly, any increase in fuel costs could adversely affect our business, financial condition, results of operations and prospects.
 
Our dependence on subcontractors and suppliers could increase our costs and impair our ability to complete contracts on a timely basis or at all.
 
We rely on third-party subcontractors to perform some of the work on our contracts.  We also rely on third-party suppliers to provide materials needed to perform our obligations under those contracts.  We generally do not bid on contracts unless we have the necessary subcontractors and suppliers committed for the anticipated scope of the contract and at prices that we have included in our bid.  Therefore, to the extent that we cannot engage subcontractors or suppliers, our ability to bid for contracts may be impaired.  In addition, if a subcontractor or third-party supplier is unable to deliver its goods or services according to the negotiated terms for any reason, we may suffer delays and be required to purchase the services from another source at a higher price.  We sometimes pay our subcontractors and suppliers before our customers pay us for the related services.  If customers fail to pay us and we choose, or are required, to pay our subcontractors for work performed or pay our suppliers for goods received, we could suffer an adverse effect on our business, financial condition, results of operations and prospects.
 
Our insurance coverage may be inadequate to cover all significant risk exposures.
 
We will be exposed to liabilities that are unique to the services we provide. While we intend to maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial costs resulting from risks and uncertainties of our business. It is also not possible to obtain insurance to protect against all operational risks and liabilities. The failure to obtain adequate insurance coverage on terms favorable to us, or at all, could have a material adverse effect on our business, financial condition, results of operations and prospects.
 
 
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Our operations are subject to hazards that may cause personal injury or property damage, thereby subjecting us to liabilities and possible losses, which may not be covered by insurance.
 
Our workers are subject to hazards associated with providing construction and related services on construction sites.  For example, some of the work we perform is underground.  If the field location maps supplied to us are not accurate, or if objects are present in the soil that are not indicated on the field location maps, our underground work could strike objects in the soil containing pollutants that could result in a rupture and discharge of pollutants.  In such a case, we may be liable for fines and damages.  These operating hazards can cause personal injury and loss of life, damage to or destruction of property, plant and equipment and environmental damage.  Even though we believe that the insurance coverage we maintain is in amounts and against the risks that we believe are consistent with industry practice, this insurance may not be adequate to cover all losses or liabilities that we may incur in our operations.  To the extent that we experience a material increase in the frequency or severity of accidents or workers’ compensation claims, or unfavorable developments on existing claims, our business, financial condition, results of operations and prospects could be adversely affected.
 
The Occupational Safety and Health Act of 1970, as amended, or OSHA, establishes certain employer responsibilities, including the maintenance of a workplace free of recognized hazards likely to cause death or serious injury, compliance with standards promulgated by the Occupational Health and Safety and Health Administration and various recordkeeping, disclosure and procedural requirements.  While we have invested, and will continue to invest, substantial resources in occupational health and safety programs, serious accidents or violations of OSHA rules may subject us to substantial penalties, civil litigation or criminal prosecution, which could adversely affect our business, financial condition, results of operations and prospects.
 
Defects in our specialty contracting services may give rise to claims against us, increase our expenses, or harm our reputation.
 
Our specialty contracting services are complex and our final work product may contain defects.  We have not historically accrued reserves for potential claims as they have been immaterial.  The costs associated with such claims, including any legal proceedings, could adversely affect our business, financial condition, results of operations and prospects.
 
Risks Related to Our Industry
 
Our industry is highly competitive, with a variety of larger companies with greater resources competing with us, and our failure to compete effectively could reduce the number of new contracts awarded to us or adversely affect our market share and harm our financial performance.
 
The contracts on which we bid are generally awarded through a competitive bid process, with awards generally being made to the lowest bidder, but sometimes based on other factors, such as shorter contract schedules or prior experience with the customer.  Within our markets, we compete with many national, regional, local and international service providers, including Arrow Electronics, Inc., Black Box Corporation, Dimension Data, plc, Dycom Industries, Inc., Goodman Networks, Inc., MasTec, Inc., TeleTech Holdings, Inc., Tech Mahindra, Ltd., Unisys Corporation, Unitek Global Services, Inc. and Volt Information Sciences, Inc.  Price is often the principal factor in determining which service provider is selected by our customers, especially on smaller, less complex projects.  As a result, any organization with adequate financial resources and access to technical expertise may become a competitor.  Smaller competitors are sometimes able to win bids for these projects based on price alone because of their lower costs and financial return requirements.  Additionally, our competitors may develop the expertise, experience and resources to provide services that are equal or superior in both price and quality to our services, and we may not be able to maintain or enhance our competitive position.  We also face competition from the in-house service organizations of our customers whose personnel perform some of the services that we provide.
 
Some of our competitors have already achieved greater market penetration than we have in the markets in which we compete, and some have greater financial and other resources than we do.  A number of national companies in our industry are larger than we are and, if they so desire, could establish a presence in our markets and compete with us for contracts.  As a result of this competition, we may need to accept lower contract margins in order to compete against competitors that have the ability to accept awards at lower prices or have a pre-existing relationship with a customer.  If we are unable to compete successfully in our markets, our business, financial condition, results of operations and prospects could be adversely affected.
 
 
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Many of the industries we serve are subject to consolidation and rapid technological and regulatory change, and our inability or failure to adjust to our customers’ changing needs could reduce demand for our services.
 
We derive, and anticipate that we will continue to derive, a substantial portion of our revenue from customers in the telecommunications and utilities industries.  The telecommunications and utilities industries are subject to rapid changes in technology and governmental regulation.  Changes in technology may reduce the demand for the services we provide.  For example, new or developing technologies could displace the wireline systems used for the transmission of voice, video and data, and improvements in existing technology may allow telecommunications providers to significantly improve their networks without physically upgrading them.  Alternatively, our customers could perform more tasks themselves, which would cause our business to suffer.  Additionally, the telecommunications and utilities industries have been characterized by a high level of consolidation that may result in the loss of one or more of our customers.  Our failure to rapidly adopt and master new technologies as they are developed in any of the industries we serve or the consolidation of one or more of our significant customers could adversely affect our business, financial condition, results of operations and prospects.
 
Further, many of our telecommunications customers are regulated by the Federal Communications Commission, or the FCC, and other international regulators.  The FCC and other regulators may interpret the application of their regulations in a manner that is different than the way such regulations are currently interpreted and may impose additional regulations, either of which could reduce demand for our services and adversely affect our business and results of operations.
 
Economic downturns could cause capital expenditures in the industries we serve to decrease, which may adversely affect our business, financial condition, results of operations and prospects.
 
The demand for our services has been, and will likely continue to be, cyclical in nature and vulnerable to general downturns in the United States economy.  The United States economy is still recovering from a recession, and growth in United States economic activity has remained slow.  It is uncertain when these conditions will significantly improve.  The wireless telecommunications industry and the staffing services industry are both particularly cyclical in nature and vulnerable to general downturns in the United States and international economies.  Our customers are affected by economic changes that decrease the need for or the profitability of their services.  This can result in a decrease in the demand for our services and potentially result in the delay or cancellation of projects by our customers.  Slow-downs in real estate, fluctuations in commodity prices and decreased demand by end-customers for services could affect our customers and their capital expenditure plans.  As a result, some of our customers may opt to defer or cancel pending projects.  A downturn in overall economic conditions also affects the priorities placed on various projects funded by governmental entities and federal, state and local spending levels.
 
In general, economic uncertainty makes it difficult to estimate our customers’ requirements for our services.  Our plan for growth depends on expanding our company both in the United States and internationally.  If economic factors in any of the regions in which we plan to expand are not favorable to the growth and development of the telecommunications industries in those countries, we may not be able to carry out our growth strategy, which could adversely affect our business, financial condition, results of operations and prospects.
 
Risks Related to Our Financial Results and Financing Plans
 
We have a history of losses and may continue to incur losses in the future.
 
We have a history of losses and may continue to incur losses in the future, which could negatively impact the trading value of our common stock.  We incurred losses from operations of $6.3 million and $2.8 million in the years ended December 31, 2013 and 2012, respectively.  We incurred a net loss attributable to common stockholders of $25.4 million and $2.1 million in the years ended December 31, 2013 and 2012, respectively.  We may continue to incur operating losses in future periods. These losses may increase and we may never achieve profitability for a variety of reasons, including increased competition, decreased growth in the unified communications industry and other factors described elsewhere in this “Risk Factors” section.  If we cannot achieve sustained profitability, our stockholders may lose all or a portion of their investment in our company.
 
 
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We have identified material weaknesses in our internal control over financial reporting, and we cannot assure you that additional material weaknesses or significant deficiencies will not occur in the future.  If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results or prevent fraud, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.
 
We have historically had a small internal accounting and finance staff with limited experience in public reporting. This lack of adequate accounting resources has resulted in the identification of material weaknesses in our internal controls over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. In connection with the audit of our financial statements for the year ended December 31, 2013, our management team identified material weaknesses relating to(i) our failure to effectively implement comprehensive entity-level internal controls, (ii) our lack of a sufficient complement of personnel with an appropriate level of knowledge and experience in the application of U.S. GAAP commensurate with our financial reporting requirements and, (iii) our lack of the quantity of resources necessary to implement an appropriate level of review controls to properly evaluate the completeness and accuracy of the transactions we enter into. We have taken steps, and plan to continue to take additional steps, to remediate these material weaknesses for the year ending December 31, 2014 to improve our financial reporting systems and implement new policies, procedures and controls. If we do not successfully remediate the material weaknesses described above, or if other material weaknesses or other deficiencies arise in the future, we may be unable to accurately report our financial results on a timely basis, which could cause our reported financial results to be materially misstated and require restatement which could result in the loss of investor confidence, delisting and/or cause the market price of our common stock to decline.
 
A  lawsuit filed against us in March 2014,  if decided in plaintiffs’ favor, may result in the payment of cash damages that could adversely affect our financial position and liquidity.

In March 2014, a purported class action suit was filed  in the United States District Court for the District of New Jersey against our company, our Chairman of the Board and Chief Executive Officer, Mark Munro, and certain other defendants alleging violations by the defendants (other than Mr. Munro) of Section 10(b) of the Exchange Act and other related provisions in connection with certain alleged courses of conduct that were intended to deceive the plaintiff and the investing public and to cause the members of the purported class to purchase shares of our common stock at artificially inflated prices based on untrue statements of a material fact or omissions to state material facts necessary to make the statements not misleading. The complaint also alleges that Mr. Munro and our company violated Section 20 of the Exchange Act as controlling persons of the other defendants. The complaint seeks unspecified damages, attorney and expert fees, and other unspecified litigation costs.  As of the date of this filing, we have not submitted our response to the complaint. We deny the allegations in the complaint and are proceeding to vigorously defend the suit. However, as the outcome of litigation is inherently uncertain, it is possible that the plaintiffs will prevail no matter how vigorously we defend ourselves, which could result in significant compensatory damages on the part of our company and Mr. Munro.  Any such adverse decision in such litigation could have a material adverse affect on our financial position and liquidity and on our business and results of operations.  In addition, regardless of outcome, litigation can have an adverse impact on us because of defense costs, diversion of management resources and other factors.
 
 
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Our substantial indebtedness could adversely affect our business, financial condition and results of operations and our ability to meet our payment obligations.
 
As of December 31, 2013, we had total indebtedness of approximately $38.3 million, consisting of $0.4 million of bank debt, $15.6 million of secured notes payable, $11.6 million of convertible debentures payable, $4.1 million of related-party indebtedness, $6.1 million of contingent consideration for our completed acquisitions, and $0.5 million of notes related to our acquisitions. Our substantial indebtedness could have important consequences to our stockholders. For example, it could:
 
 
increase our vulnerability to and limit our flexibility in planning for, or reacting to, changes in our business;
 
 
place us at a competitive disadvantage compared to our competitors that have less debt;
 
 
limit our ability to borrow additional funds, dispose of assets, pay dividends and make certain investments; and
 
 
make us more vulnerable to a general economic downturn than a company that is less leveraged.
 
A high level of indebtedness would increase the risk that we may default on our debt obligations.  Our ability to meet our debt obligations and to reduce our level of indebtedness will depend on our future performance.  General economic conditions and financial, business and other factors affect our operations and our future performance.  Many of these factors are beyond our control.  We may not be able to generate sufficient cash flows to pay the interest on our debt and future working capital, borrowings or equity financing may not be available to pay or refinance such debt.  Factors that will affect our ability to raise cash through an offering of our capital stock or a refinancing of our debt include financial market conditions, the value of our assets and our performance at the time we need capital.
 
We have in the past failed to comply with certain financial covenants of our loan documents and similar defaults in the future could adversely affect our financial condition and our ability to meet our payment obligations on our indebtedness.
 
On September 23, 2013, we entered into a revolving credit and security agreement dated as of September 20, 2013 (the “PNC Credit Agreement”) among our company, our subsidiaries, as guarantors, and PNC Bank, National Association (“PNC Bank”), as agent and a lender, that provided us a revolving credit facility in the principal amount of up to $10.0 million. As of December 31, 2013, we were not in compliance with certain covenants in the PNC Credit Agreement, including covenants relating to the minimum EBITDA requirement and the fixed charge coverage ratio. On April 4, 2014, we terminated the PNC Credit Agreement.  We have in the past also breached certain covenants under another loan agreement that had resulted in various events of default under such agreement, which events of default were either cured or waived by the lenders thereunder.
 
As of the date of this report, we are not in default of any of the covenants of our outstanding indebtedness.  However, any future breach of any of those covenants could result in defaults or events of default under such indebtedness, in which case, depending on the actions taken by the lenders thereunder or their successors or assignees, such lenders could elect to declare all amounts borrowed, together with accrued interest, to be due and payable. An event of default under such indebtedness could also create an event of default under our other debt agreements or securities. If following an event of default we are unable to repay the borrowings or interest then due under our loan agreements, the lenders could proceed against their collateral, if any, and if the indebtedness under any loan agreements or debt securities were to be accelerated, our assets may not be sufficient to repay such indebtedness in full.
 
 
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Actual results could differ from the estimates and assumptions that we use to prepare our financial statements.
 
To prepare financial statements in conformity with GAAP, management is required to make estimates and assumptions as of the date of the financial statements that affect the reported values of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities.  Areas requiring significant estimates by our management include:
 
 
contract costs and profits and application of percentage-of-completion accounting and revenue recognition of contract change order claims;
 
 
provisions for uncollectible receivables and customer claims and recoveries of costs from subcontractors, suppliers and others;
 
 
valuation of assets acquired and liabilities assumed in connection with business combinations; and
 
 
accruals for estimated liabilities, including litigation and insurance reserves.
 
At the time the estimates and assumptions are made, we believe they are accurate based on the information available.  However, our actual results could differ from, and could require adjustments to, those estimates.
 
Risks Related to Our Operating History and Results of Operations
 
Our limited operating history as an integrated company, recent acquisitions and the rapidly-changing telecommunications market may make it difficult for investors to evaluate our business, financial condition, results of operations and prospects, and also impairs our ability to accurately forecast our future performance.
 
Although we were incorporated in 1999, we were a development stage company with limited operations until our 2010 merger with Digital Comm, Inc.  We experienced rapid and significant expansion in the years ended December 31, 2013 and 2012 due to a series of strategic acquisitions.  We acquired three companies in 2012, one company in 2013 and two companies in the first quarter of 2014. We also plan to complete the acquisition of  VaultLogix in the second quarter of this year.
 
As a result of our recent acquisitions, our financial results are heavily influenced by the application of the acquisition method of accounting.  The acquisition method of accounting requires management to make assumptions regarding the assets purchased and liabilities assumed to determine their fair market value.  If our assumptions are incorrect, any resulting change or modification could adversely affect our financial conditions and/or results of operations.
 
Further, our limited operating history as an integrated company, combined with our short history operating as providers of staffing and cloud-based services, may not provide an adequate basis for investors to evaluate our business, financial condition, results of operations and prospects, and makes accurate financial forecasting difficult for us.  Because we operate in the rapidly-evolving IT and telecommunications markets and because our business is rapidly changing due to a series of acquisitions, we may have difficulty in engaging in effective business and financial planning.  It may also be difficult for us to evaluate trends that may affect our business and whether our expansion may be profitable.  Thus, any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more predictable market.
 
If we are unable to sustain our recent revenue growth rates, we may never achieve or sustain profitability.
 
We experienced significant growth in recent years, primarily due to our strategic acquisitions.  Our net revenue increased to $51.4 million in the year ended December 31, 2013 from $17.1 million in the year ended December 31, 2012.  In order to become profitable and maintain our profitability, we must, among other things, continue to increase our revenues.  We may be unable to sustain our recent revenue growth, particularly if we are unable to develop and market our specialty contracting and telecommunications staffing services, increase our sales to existing customers or develop new customers.  However, even if our revenues continue to grow, they may not be sufficient to exceed increases in our operating expenses or to enable us to achieve or sustain profitability.
 
 
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Our inability to obtain additional capital may prevent us from completing our acquisition strategy and successfully operating our business; however, additional financings may subject our existing stockholders to substantial dilution.
 
Until we can generate a sufficient amount of revenue, if ever, we expect to finance our anticipated future strategic acquisitions, including our acquisitions of Telco and VaultLogix, through public or private equity offerings or debt financings. Additional funds may not be available when we need them on terms that are acceptable to us, or at all.  If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more strategic acquisitions or business plans.  In addition, we could be forced to discontinue product development and reduce or forego attractive business opportunities.  To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution.  In addition, debt financing, if available, may involve restrictive covenants.  We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time.  Our access to the financial markets and the pricing and terms we receive in the financial markets could be adversely impacted by various factors, including changes in financial markets and interest rates.
 
Our forecasts regarding the sufficiency of our financial resources to support our current and planned operations are forward-looking statements and involve significant risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section.  We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.  Our future funding requirements will depend on many factors, including, but not limited to, the costs and timing of our future acquisitions.
 
We are an emerging growth company within the meaning of the Jumpstart Our Businesses Startups Act of 2012 and, as a result, have elected to comply with the reduced disclosure and other reporting requirements available to us as an EGC.
 
Because we qualify as an emerging growth company, or EGC, under the Jumpstart Our Businesses Startups Act of 2012, or JOBS Act, we have elected to comply with the reduced disclosure and other reporting requirements available to us as an EGC in connection with this report, and for a period of up to five years following our November 2013 offering of shares of common stock if we remain an EGC.  For example, with respect to this report, we have provided only two fiscal years of audited financial information and selected financial data and have provided scaled-down disclosure on executive compensation, such as not including a “Compensation Discussion and Analysis” in this report.  In addition, for as long as we remain an EGC, we are not subject to certain governance requirements, such as holding a “say-on-pay” and “say-on-golden-parachute” advisory votes, and we are not required to obtain an annual attestation report on our internal control over financial reporting from a registered public accounting firm pursuant to Section 404(b) of the Sarbanes-Oxley Act.  We may take advantage of these reporting exemptions until we are no longer an EGC.  We can be an EGC for a period of up to five years after our November 2013 equity offering, although we will cease to be an EGC earlier than that if our total annual gross revenues equal or exceed $1 billion in a fiscal year, if we issue more than $1 billion in non-convertible debt over a three-year period or if we become a “large accelerated filer” under Rule 12b-2 of the Exchange Act.
 
Accordingly, in this report you are not receiving the same level of disclosure as you would receive in an annual report on Form 10-K of a non-EGC issuer and, following this report, our stockholders will not receive the same level of disclosure that is afforded to stockholders of a non-EGC issuer.  It is also possible that investors will find our shares of common stock to be less attractive because we have elected to comply with the reduced disclosure and other reporting requirements available to us as an EGC, which could adversely affect the trading market for our shares of common stock and the prices at which our stockholders may be able to sell shares of our common stock.
 
 
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We exercise judgment in determining our provision for taxes in the United States and Puerto Rico that are subject to tax authority audit review that could result in additional tax liability and potential penalties that would negatively affect our net income.
 
The amounts we record in intercompany transactions for services, licenses, funding and other items affects our tax liabilities.  Our tax filings are subject to review or audit by the U.S. Internal Revenue Service and state, local and foreign taxing authorities.  We exercise judgment in determining our worldwide provision for income and other taxes and, in the ordinary course of our business, there may be transactions and calculations where the ultimate tax determination is uncertain.  Examinations of our tax returns could result in significant proposed adjustments and assessment of additional taxes that could adversely affect our tax provision and net income in the period or periods for which that determination is made.
 
Risks Related to our Common Stock
 
Our common stock price has fluctuated widely in recent years, and the trading price of our common stock is likely to continue to be volatile, which could result in substantial losses to investors and litigation.
 
In addition to changes to market prices based on our results of operations and the factors discussed elsewhere in this “Risk Factors” section, the market price of and trading volume for our common stock may change for a variety of other reasons, not necessarily related to our actual operating performance.  The capital markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies.  These broad market fluctuations may adversely affect the trading price of our common stock.  In addition, the average daily trading volume of the securities of small companies can be very low, which may contribute to future volatility.  Factors that could cause the market price of our common stock to fluctuate significantly include:
 
 
the results of operating and financial performance and prospects of other companies in our industry;
 
 
strategic actions by us or our competitors, such as acquisitions or restructurings;
 
 
announcements of innovations, increased service capabilities, new or terminated customers or new, amended or terminated contracts by our competitors;
 
 
the public’s reaction to our press releases, media coverage and other public announcements, and filings with the Securities and Exchange Commission;
 
 
market conditions for providers of services to telecommunications, utilities and cloud services customers;
 
 
lack of securities analyst coverage or speculation in the press or investment community about us or market opportunities in the telecommunications services and staffing industry;
 
 
changes in government policies in the United States and, as our international business increases, in other foreign countries;
 
 
changes in earnings estimates or recommendations by securities or research analysts who track our common stock or failure of our actual results of operations to meet those expectations;
 
 
market and industry perception of our success, or lack thereof, in pursuing our growth strategy;
 
 
changes in accounting standards, policies, guidance, interpretations or principles;
 
 
any lawsuit involving us, our services or our products;
 
 
arrival and departure of key personnel;
 
 
sales of common stock by us, our investors or members of our management team; and
 
 
changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural or man-made disasters.
 
Any of these factors, as well as broader market and industry factors, may result in large and sudden changes in the trading volume of our common stock and could seriously harm the market price of our common stock, regardless of our operating performance.  This may prevent stockholders from being able to sell their shares at or above the price they paid for shares of our common stock, if at all.  In addition, following periods of volatility in the market price of a company’s securities, stockholders often institute securities class action litigation against that company.  Our involvement in any class action suit or other legal proceeding could divert our senior management’s attention and could adversely affect our business, financial condition, results of operations and prospects.
 
 
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The sale or availability for sale of substantial amounts of our common stock could adversely affect the market price of our common stock.
 
Sales of substantial amounts of shares of our common stock, or the perception that these sales could occur, could adversely affect the market price of our common stock and could impair our future ability to raise capital through common stock offerings.  As of March 25, 2014, we had 10,760,784 shares of common stock issued and outstanding, of which 3,209,504 shares were designated by our transfer agent as restricted securities pursuant to Rule 144 promulgated by the SEC.  The sale of these shares into the open market may adversely affect the market price of our common stock.
 
In addition, at March 25, 2014, we also had outstanding $4,475,000 aggregate principal amount of convertible notes that are convertible into 703,616 shares of common stock and $10,626,000 aggregate principal amount of our 12% convertible debentures (the "Convertible Debentures") that also are convertible into shares of our common stock.  However, we cannot currently determine the total number of shares of our common stock that may be issued upon the conversion or repayment of the Convertible Debentures because the total number of shares and the conversion prices or the prices at which we can issue our common stock to pay down the principal of and interest on the Convertible Debentures depend on a number of factors, including the prices and nature of any equity securities we may issue in the future and the market prices of our common stock in the periods leading up to any particular amortization payment date on which we elect to make amortization payments on the Convertible Debentures in shares of our common stock.  See Note 8 to Notes to consolidated financial statements included in this report.  In the second quarter of this year, we intend to file with the SEC a registration statement under the Securities Act for the resale of up to 2,047,347 shares of our common stock that may be issuable upon the repayment or conversion of the Convertible Debentures and the 36,567 additional shares of our common stock that were issued to the purchasers of the Convertible Debentures at the time of their issuance.  As of March 25, 2014, there were also outstanding warrants to purchase an aggregate of 393,592 shares of our common stock at a weighted-average exercise price of $4.40 per share, all of which warrants were exercisable as of such date.  The conversion of a significant principal amount of our outstanding convertible debt securities into shares of our common stock, our repayment of a significant amount of principal, interest or other amounts payable under such debt securities in shares of our common stock or the exercise of outstanding warrants at prices below the market price of our common stock could adversely affect the market price of our common stock.  The market price of our common stock also may be adversely affected by our issuance of shares of our capital stock or convertible securities in connection with acquisitions, including our proposed acquisitions of VaultLogix ánd Telco, or in connection with other financing efforts.
 
Our amended and restated certificate of incorporation and amended and restated bylaws, and certain provisions of Delaware corporate law, as well as certain of our contracts, contain provisions that could delay or prevent a change in control even if the change in control would be beneficial to our stockholders.
 
Delaware law, as well as our amended and restated certificate of incorporation and amended and restated bylaws, contains anti-takeover provisions that could delay or prevent a change in control of our company, even if the change in control would be beneficial to our stockholders.  These provisions could lower the price that future investors might be willing to pay for shares of our common stock.  These anti-takeover provisions:
 
 
authorize our board of directors to create and issue, without stockholder approval, preferred stock, thereby increasing the number of outstanding shares, which can deter or prevent a takeover attempt;
 
 
prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
 
 
establish a three-tiered classified board of directors requiring that not all members of our board be elected at one time;
 
 
27

 
 
 
establish a supermajority requirement to amend our amended and restated bylaws and specified provisions of our amended and restated certificate of incorporation;
 
 
prohibit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;
 
 
establish limitations on the removal of directors;
 
 
empower our board of directors to fill any vacancy on our board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;
 
 
provide that our board of directors is expressly authorized to adopt, amend or repeal our bylaws;
 
 
provide that our directors will be elected by a plurality of the votes cast in the election of directors;
 
 
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by our stockholders at stockholder meetings;
 
 
eliminated the ability of our stockholders to call special meetings of stockholders and, after June 30, 2014, to act by written consent; and
 
 
provide that the Court of Chancery of the State of Delaware will be the exclusive forum for any derivative action, actions asserting a breach of fiduciary duty and certain other actions against us or any directors or executive officers.
 
Section 203 of the Delaware General Corporation Law, the terms of our stock incentive plans, the terms of our change in control agreements with our senior executives and other contractual provisions may also discourage, delay or prevent a change in control of our company.  Section 203 generally prohibits a Delaware corporation from engaging in a business combination with an interested stockholder for three years after the date the stockholder became an interested stockholder.  Our stock incentive plans include change-in-control provisions that allow us to grant options or stock purchase rights that may become vested immediately upon a change in control.  The terms of changes of control agreements with our senior executives and contractual restrictions with third parties may discourage a change in control of our company.  Our board of directors also has the power to adopt a stockholder rights plan that could delay or prevent a change in control of our company even if the change in control is generally beneficial to our stockholders.  These plans, sometimes called “poison pills,” are oftentimes criticized by institutional investors or their advisors and could affect our rating by such investors or advisors.  If our board of directors adopts such a plan, it might have the effect of reducing the price that new investors are willing to pay for shares of our common stock.
 
Together, these charter, statutory and contractual provisions could make the removal of our management and directors more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.  Furthermore, the existence of the foregoing provisions, as well as the significant common stock beneficially owned by our executive officers, key non-executive officer employees, and members of our board of directors, could limit the price that investors might be willing to pay in the future for shares of our common stock.  They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
 
We have never paid cash dividends and do not anticipate paying any cash dividends on our common stock.
 
We have never paid cash dividends and do not anticipate paying any cash dividends on our common stock in the foreseeable future.  We currently intend to retain any earnings to finance our operations and growth.  As a result, any short-term return on your investment will depend on the market price of our common stock, and only appreciation of the price of our common stock, which may never occur, will provide a return to stockholders.  The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including, but not limited to, factors such as our financial condition, results of operations, capital requirements, business conditions, and covenants under any applicable contractual arrangements. Investors seeking cash dividends should not invest in our common stock.
 
 
28

 
 
If equity research analysts do not publish research or reports about our business, or if they issue unfavorable commentary or downgrade our common stock, the market price of our common stock and warrants will likely decline.
 
The trading market for our common stock and warrants will rely in part on the research and reports that equity research analysts, over whom we have no control, publish about us and our business.  We may never obtain research coverage by securities and industry analysts.  If no securities or industry analysts commence coverage of our company, the market price for our common stock and warrants could decline.  In the event we obtain securities or industry analyst coverage, the market price of our common stock and warrants could decline if one or more equity analysts downgrade our common stock or if those analysts issue unfavorable commentary, even if it is inaccurate, or cease publishing reports about us or our business.
 
 
None.
 
 
Our principal executive offices are located in Shrewsbury, New Jersey in segregated offices comprising an aggregate of approximately 2,040 square feet. We are occupying our offices under a 36-month lease that expires in January 2017 and provides for monthly lease payments of $3,745 in the first year and increases of 2% per year thereafter.
 
 
29

 
 
Set forth below are the locations of the other properties leased by us, the businesses that use the properties, and the size of each such property.  All of such properties are used by our company or by one of our subsidiaries principally as office facilities to house their administrative, marketing, and engineering and professional services personnel.  We believe our facilities and equipment to be in good condition and reasonably suited and adequate for our current needs.
 
Location
 
Owned or Leased
 
User
 
Size (Sq Ft)
Tuscaloosa, AL
 
Leased (1)
 
Rives-Monteiro Engineering, LLC
 
5,000
Miami, FL
 
Leased (2)
 
Tropical Communications, Inc.
 
6,000
Temple Terrace, FL
 
Leased (3)
 
Adex Corporation
 
2,500
Alpharetta, GA
 
Leased (4)
 
Adex Corporation
 
9,000
Des Plaines, IL
 
Leased (5)
 
T N S, Inc.
 
1,500
Upland, CA
 
Leased (6)
 
Adex Corporation
 
2,047
Naperville, IL
 
Leased (7)
 
Adex Corporation
 
1,085
Alpharetta, GA
 
Licensed (8)
 
Adex Corporation
 
1,000
Longwood, FL
 
Leased (9)
 
AW Solutions
 
7,750
Puerto Rico
 
Leased (10)
 
AW Solutions
 
1,575
Del Ray Beach, FL
 
Leased (11)
 
Intercloud Systems, Inc
 
700
Parsippany, NJ  
Leased (12)
  Integration Partners – NY Corp.   3,070
 
_________________
 
(1)
This facility is leased pursuant to a month-to-month lease that provides for monthly rental payments of $1,500 for the lease term.
 
(2)
This facility is leased pursuant to a month-to-month lease that provides for aggregate rental payments of $1,792.25 per month for the lease term.
 
(3)
This facility is leased pursuant to a 38-month lease that expires in December 2015 and provides for aggregate rental payments of $3,645.83 per month for the lease term.
 
(4)
This facility is leased pursuant to a 36-month lease that expires in April 2014 and provides for aggregate rental payments of $8,440.00 per month for the first 12 months, $8,695.26 for the following 12 months and $8,956.12 for the final 12 months. We are currently negotiating an extension for this lease.
 
(5)
This facility is leased pursuant to a month-to-month lease that provides for monthly payments of $1,163.75 for the lease term.
 
(6)
This facility is leased pursuant to a month-to-month lease that provides for aggregate rental payments of $2,251.70 per month for the lease term.
 
(7)
This facility is leased pursuant to a two-year lease that expires in July 2014 and provides for aggregate rental payments of $1,627.50 per month for the first 12 months and $1,672.71 for the next 12 months.
 
(8)
This facility is licensed pursuant to a temporary license terminable by either party upon 30 days prior written notice and provides for aggregate payments of $200.00 per month.  ADEX is also required to reimburse the licensor for its pro rata share of all utilities.
 
(9)
This facility is leased pursuant to a three-year lease that expires in February 2015 and provides for monthly rental payments of $13,245 for the first year and for a 5% increase in the monthly rental payments in each of the second of third years.
 
(10)
This facility is leased under a two-year lease that expires on January 1, 2015 and provides for monthly payments of $1,500 for the first year and a 3% increase in the monthly rental payments in the second year.
 
(11)
This facility is leased pursuant to a 12-month lease that expires in July 2014 and provides for aggregate rental payments of $1,828.50 per month for the term of the lease.
 
(12)
This facility is leased pursuant to a 48-month lease that expires in October 2017 and provides for aggregate monthly rental payments of $4,855.
 
In March 2014, a complaint was filed in the United States District Court for the District of New Jersey against our company, our Chairman of the Board and Chief Executive Officer, Mark Munro, The DreamTeamGroup and MissionIR, as purported securities advertisers and investor relations firms, and John Mylant, a purported investor and investment advisor. The complaint was purportedly filed on behalf of a class of certain persons who purchased our common stock between November 5, 2013 and March 17, 2014. The complaint alleges violations by the defendants (other than Mark Munro) of Section 10(b) of the Exchange Act, and other related provisions in connection with certain alleged courses of conduct that were intended to deceive the plaintiff and the investing public and to cause the members of the purported class to purchase shares of our common stock at artificially inflated prices based on untrue statements of a material fact or omissions to state material facts necessary to make the statements not misleading. The complaint also alleges that Mr. Munro and our company violated Section 20 of the Exchange Act as controlling persons of the other defendants. The complaint seeks unspecified damages, attorney and expert fees, and other unspecified litigation costs.
 
We intend to dispute these claims and to defend this litigation vigorously.  However, due to the inherent uncertainties of litigation, the ultimate outcome of this litigation is uncertain. An unfavorable outcome in this litigation could materially and adversely affect our business, financial condition and results of operations.
 
Currently, there is no other material litigation pending against our company other than as disclosed in the paragraphs above. From time to time, we may become a party to litigation and subject to claims incident to the ordinary course of our business. Although the results of such litigation and claims in the ordinary course of business cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse effect on our business, results of operations or financial condition. Regardless of outcome, litigation can have an adverse impact on us because of defense costs, diversion of management resources and other factors.
 
 
Not Applicable.
 
 
30

 
 
 
 
Market Information
 
Our common stock began trading on the NASDAQ Capital Market on October 31, 2013 under the symbol “ICLD”.  Prior thereto, our common stock traded on the OTCQB Marketplace operated by the OTC Markets Group Inc. (the “OTCQB”). The following table sets forth the high and low closing sales prices of our common stock for the periods indicated.  Information for the period from October 31, 2013 to December 31, 2013 is the high and low closing sales prices of our common stock based upon reports of transactions on the NASDAQ Capital Market.  Information for all periods prior thereto is the high and low last sales prices of our common stock on the OTCQB based upon information provided by the OTC Markets Group, Inc.  All prices give effect to the one-for-125 reverse stock split of our common stock effected on January 14, 2013 and the one-for-four reverse stock split of our common stock effected on August 1, 2013.  Quotations reflect inter-dealer prices, without retail mark-up, mark-down commission, and may not represent actual transactions.
 
Fiscal Year Ended December 31, 2012
 
High
   
Low
 
First Quarter
 
$
7.90
   
$
2.05
 
Second Quarter
 
$
3.75
   
$
1.05
 
Third Quarter
 
$
10.00
   
$
1.95
 
Fourth Quarter
 
$
18.50
   
$
6.08
 
                 
Fiscal Year Ended December 31, 2013
               
First Quarter
 
$
36.00
   
$
8.00
 
Second Quarter
 
$
13.80
   
$
8.00
 
Third Quarter
 
$
12.50
   
$
6.00
 
Fourth Quarter
 
$
18.36
   
$
2.31
 
 
As of March 25, 2014, the closing sale price of our common stock, as reported by the NASDAQ Capital Market, was $7.98 per share.
 
Holders
 
At March 25, 2014, we had approximately 207 record holders of our common stock.  The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers or registered clearing agencies.
 
Transfer Agent and Registrar
 
We have appointed Corporate Stock Transfer, 3200 Cherry Creek Dr. South, Denver, CO 80209 to act as the transfer agent of our common stock.
 
Dividend Policy
 
We currently intend to retain future earnings, if any, for use in the operation of our business and to fund future growth.  We have never declared or paid cash dividends on our common stock and we do not intend to pay any cash dividends on our common stock for the foreseeable future.  The terms of our outstanding Convertible Debentures prohibit our payment of cash dividends.  Any future determination related to our dividend policy will be made at the discretion of our board of directors in light of conditions then-existing, including factors such as our results of operations, financial conditions and requirements, business conditions and covenants under any applicable contractual arrangements.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
The following table summarizes the number of shares of our common stock authorized for issuance under our equity compensation plans as of December 31, 2013.
 
 
 
(a)
   
(b)
   
(c)
 
Plan Category
 
Number of Securities to be Issued Upon Exercise of Outstanding Options
   
Weighted- Average Exercise Price of Outstanding Options
   
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column(a))
 
Equity compensation plans approved by security holders
    -       -       2,500,000  
Equity compensation plans not approved by security holders
    -       -       -  
Total
    -       -       2,500,000  

 
31

 

 
The following tables set forth selected consolidated financial data for our company for the years ended December 31, 2013 and 2012 that was derived from our audited consolidated financial statements included elsewhere in this report. The financial data set forth below should be read in conjunction with, and are qualified in their entirety by, reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our historical financial statements and related notes included elsewhere in this report.
 
Income Statement
 
   
For the years ended
 
   
December 31,
 
   
2013
   
2012
 
Statement of Operations Data:
           
             
Revenues
 
$
51,407,544
   
$
17,089,549
 
Gross profit
   
14,127,500
     
5,121,334
 
Operating expenses
   
20,468,268
     
7,929,791
 
Loss from operations
   
(6,340,768
)
   
(2,808,457
)
Total other expense
   
(19,074,751
)
   
(1,097,863
)
Loss from continuing operations before (benefit from) income taxes
   
(25,415,519
)
   
(3,906,320
)
(Benefit from) income taxes
   
(587,662
)
   
(2,646,523
)
Dividends on preferred stock
   
(1,084,314
)
   
(843,215
)
Net loss attributable to common stockholders
   
(25,438,418
)
   
(2,072,862
)
Net loss per share, basic and diluted
 
$
(7.85
)
 
$
(1.33
)
Basic and diluted weighted average shares outstanding
   
3,240,230
     
1,553,555
 
 
 
 
   
As of
 
   
December 31,
 
   
2013
   
2012
 
Balance Sheet Data:
           
             
Cash
  $ 17,866,532     $ 606,002  
Accounts receivable, net
    7,821,942       7,660,642  
Total current assets
    28,307,287       10,183,971  
Goodwill and intangible assets, net
    29,846,246       23,926,695  
Total assets
    60,690,056       43,316,264  
                 
Total current liabilities
    24,112,306       14,860,502  
Long-term liabilities
    38,254,057       15,159,644  
Redeemable common and preferred stock
    -       16,584,704  
Stockholders' (deficit)
    (1,676,307 )     (3,288,586 )

 
32

 

 
This management’s discussion and analysis of financial condition and results of operations contains certain statements that are forward-looking in nature relating to our business, future events or our future financial performance.  Prospective investors are cautioned that such statements involve risks and uncertainties and that actual events or results may differ materially from the statements made in such forward-looking statements.  In evaluating such statements, prospective investors should specifically consider the various factors identified in this report, including the matters set forth under Item 1A “Risk Factors,” which could cause actual results to differ from those indicated by such forward-looking statements.
 
Overview
 
We were incorporated in 1999, but functioned as a development stage company with limited activities through December 2009.  In January 2010, we acquired Digital Comm, Inc. (“Digital”), a provider of specialty contracting services primarily in the installation of fiber optic telephone cable.  Until September 2012, substantially all of our revenue came from our specialty contracting services.  In the years ended December 31, 2013 and 2012, primarily as a result of our acquisition of ADEX, approximately 35% and 38%, respectively, of our revenue was derived from specialty contracting services, with the remaining 65% and 62%, respectively, coming from our telecommunications staffing services.
 
In 2013, we evaluated our reporting segments and determined that we operate in two reportable segments, specialty contracting services and telecommunication staffing services.  The telecommunication staffing services segment is comprised of the Adex reporting unit and  provides contracted services to provide technical engineering and management solutions to large voice and data communications providers, as specified by their clients.  Specialty contracting services revenues are derived from contracted services to provide technical engineering services along with contracting services to commercial and governmental customers. Our operating divisions have been aggregated into the two reporting segments due to their similar economic characteristics, products, production methods and distribution methods. The specialty contracting service segment includes our AW Solutions, TNS, Tropical and RM Engineering reporting units.
 
Our revenue increased from $17.1 million for the year ended December 31, 2012 to $51.4 million for the year ended December 31, 2013.  Our net loss attributable to common stockholders increased from $2.1 million for the year ended December 31, 2012 to $25.4 million for the year ended December 31, 2013.  As of December 31, 2013, our stockholders' deficit was $1.7 million.  A significant portion of our services are performed under master service agreements and other arrangements with customers that extend for periods of one or more years.  We are currently party to numerous master service agreements, and typically have multiple agreements with each of our customers.  Master service agreements generally contain customer-specified service requirements, such as discrete pricing for individual tasks.  To the extent that such contracts specify exclusivity, there are often a number of exceptions, including the ability of the customer to issue work orders valued above a specified dollar amount to other service providers, perform work with the customer’s own employees and use other service providers when jointly placing facilities with another utility.  In most cases, a customer may terminate an agreement for convenience with written notice.  The remainder of our services are provided pursuant to contracts for specific projects.  Long-term contracts relate to specific projects with terms in excess of one year from the contract date.  Short-term contracts for specific projects are generally of three to four months in duration.
 
During 2013 and 2012, the majority of our revenue and expenses was generated by our acquired companies.  Of the $51.4 million in total revenues in the year ended December 31, 2013, $45.5 million was generated by the companies we acquired in 2012 and 2013. In 2012, $11.7 million of the total $17.1 million in revenues was generated by companies acquired in 2012.
 
Cost of revenues of the companies we acquired in the years ended December 31, 2012 and 2013 accounted for $34.2 million of our $37.3 million cost of revenues during the year ended December 31, 2013. In 2012, $8.7 million of the total $12.0 million in cost of revenues was incurred by the companies we acquired in 2012.
 
Gross profit generated by the companies we acquired in the years ended December 31, 2012 and 2013 accounted for $11.3 million of our $14.1 million gross profit during the year ended December 31, 2013. Gross profit generated by the companies we acquired in 2012 was $3.0 million of the total gross profit of $5.1 million in 2012.
 
Operating expenses, including salaries and wages and depreciation and amortization, for the companies we acquired in the years ended December 31, 2012 and 2013 accounted for $8.2 million of our $20.5 million of operating expenses during the year ended December 31, 2013. Operating expenses for the companies we acquired in 2012 was $1.9 million of the total $7.9 million of operating expenses during the year ended December 31, 2012.
 
The following table summarizes our revenues from multi-year master service agreements and other long-term contracts, as a percentage of contract revenues:
 
   
Year ended December 31,
 
   
2013
   
2012
 
Multi-year master service agreements and long-term contracts
    65 %       60 %

The percentage of revenue from long-term contracts varies between periods, depending on the mix of work performed under our contracts.
 
A significant portion of our revenue comes from several large customers.  The following table reflects the percentage of total revenue from those customers that contributed at least 10% to our total revenue in the years ended December 31, 2013 and 2012:
 
   
Year ended December 31,
 
   
2013
   
2012
 
Ericsson, Inc.
    41 %     33 %
Nexlink
    0 %     14 %
 
We are a single-source provider of end-to-end IT and next-generation network solutions to the telecommunications service provider (carrier) and corporate enterprise markets through cloud platforms and professional services. We believe our market advantages center around our cloud-based applications and services portfolio and positioning.  As a true infrastructure 2.0 provider, we add value by enabling applications and services while helping to contain costs.  Customers now demand a partner that can provide end-to-end IT solutions, that offers a solution that allows the customer to move IT expenditures from capital costs to operating costs, and that offers the customer greater elasticity and the ability to rapidly deploy enterprise applications.
 
Telecommunications providers and enterprise customers continue to seek and outsource solutions in order to reduce their investment in capital equipment, provide flexibility in workforce sizing and expand product offerings without large increases in incremental hiring. As a result, we believe there is significant opportunity to expand both our United States and international telecommunications solutions services and staffing services capabilities. As we continue to expand our presence in the marketplace, we will target those customers going through new network deployments and wireless service upgrades.
 
 
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We expect to continue to increase our gross margins by leveraging our single-source end-to-end network to efficiently provide a full spectrum of end-to-end IT and next-generation network solutions and staffing services to our customers. We believe our solutions and services offerings can alleviate some of the inefficiencies typically present in our industry, which result, in part, from the highly-fragmented nature of the telecommunications industry, limited access to skilled labor and the difficulty industry participants have in managing multiple specialty-service providers to address their needs. As a result, we believe we can provide superior service to our customers and eliminate certain redundancies and costs for them.  We believe our ability to address a wide range of end-to-end solutions, network infrastructure and project-staffing service needs of our telecommunications industry clients is a key competitive advantage. Our ability to offer diverse technical capabilities (including design, engineering, construction, deployment, and installation and integration services) allows customers to turn to a single source for those specific specialty services, as well as to entrust us with the execution of entire turn-key solutions.
 
As a result of our recent acquisitions, we have become a multi-faceted company with an international presence.  We believe this platform will allow us to leverage our corporate and other fixed costs and capture gross margin benefits.  Our platform is highly scalable.  We typically hire workers to staff projects on a project-by-project basis and our other operating expenses are primarily fixed.  Accordingly, we are generally able to deploy personnel to infrastructure projects in the United States and beyond without incremental increases in operating costs, allowing us to achieve greater margins. We believe this business model enables us to staff our business efficiently to meet changes in demand.
 
Finally, given the worldwide popularity of telecommunications and wireless products and services, we will selectively pursue international expansion, which we believe represents a compelling opportunity for additional long-term growth.
 
Our planned expansion will place increased demands on our operational, managerial, administrative and other resources.  Managing our growth effectively will require us to continue to enhance our operations management systems, financial and management controls and information systems and to hire, train and retain skilled telecommunications personnel.  The timing and amount of investments in our expansion could affect the comparability of our results of operations in future periods.
 
Our recent  and planned acquisitions have been and will be timed with additions to our management team of skilled professionals with deep industry knowledge and a strong track record of execution.  Our senior management team brings an average of over 25 years of individual experience across a broad range of disciplines. We believe our senior management team is a key driver of our success and is well-positioned to execute our strategy.
 
Factors Affecting Our Performance
 
Changes in Demand for Data Capacity and Reliability.
 
Advances in technology architectures have supported the rise of cloud computing, which enables the delivery of a wide variety of cloud-based services, such as platform as a service (PaaS), infrastructure as a service (IaaS), database as a service (DbaaS), and software as a service (SaaS). Today, mission-critical applications can be delivered reliably, securely and cost-effectively to our customers over the internet without the need to purchase supporting hardware, software or ongoing maintenance. The lower total cost of ownership, better functionality and flexibility of cloud applications represent a compelling alternative to traditional on-premise solutions. As a result, enterprises are increasingly adopting cloud services to rapidly deploy and integrate applications without building out their own expensive infrastructure and to minimize the growth of their own IT departments and create business agility by taking advantage of accelerated time-to-market dynamics.
 
The telecommunications industry has undergone and continues to undergo significant changes due to advances in technology, increased competition as telephone and cable companies converge, the growing consumer demand for enhanced and bundled services and increased governmental broadband stimulus funding.  As a result of these factors, the networks of our customers increasingly face demands for more capacity and greater reliability. Telecommunications providers continue to outsource a significant portion of their engineering, construction and maintenance requirements in order to reduce their investment in capital equipment, provide flexibility in workforce sizing, expand product offerings without large increases in incremental hiring and focus on those competencies they consider core to their business success. These factors drive customer demand for our services.
 
The proliferation of smart phones and other wireless data devices has driven demand for mobile broadband. This demand and other advances in technology have prompted wireless carriers to upgrade their networks.  Wireless carriers are actively increasing spending on their networks to respond to the explosion in wireless data traffic, upgrade network technologies to improve performance and efficiency and consolidate disparate technology platforms. These customer initiatives present long-term opportunities for us for the wireless services we provide. Further, the demand for mobile broadband has increased bandwidth requirements on the wired networks of our customers. As the demand for mobile broadband grows, the amount of cellular traffic that must be “backhauled” over customers’ fiber and coaxial networks increases and, as a result, carriers are accelerating the deployment of fiber optic cables to cellular sites.  These trends are increasing the demand for the types of services we provide.
 
 
34

 
 
Our Ability to Recruit, Manage and Retain High-Quality IT and Telecommunications Personnel.
 
The shortage of skilled labor in the telecommunications industry and the difficulties in recruiting and retaining skilled personnel can frequently limit the ability of specialty contractors to bid for and complete certain contracts.  In September 2012, we acquired ADEX, an IT and telecommunications staffing firm. Through ADEX, we manage a database of more than 70,000 IT and telecom personnel, which we use to locate and deploy skilled workers for projects.  We believe our access to a skilled labor pool gives us a competitive edge over our competitors as we continue to expand.  However, our ability to continue to take advantage of this labor pool will depend, in part, on our ability to successfully integrate ADEX into our business.
 
Our Ability to Integrate Our Acquired Businesses and Expand Internationally.
 
We completed six acquisitions since January 1, 2012 and plan to consummate additional acquisitions in the near term.  Our success will depend, in part, on our ability to successfully integrate these businesses into our global IT and telecommunications platform. In addition, we believe international expansion represents a compelling opportunity for additional growth over the long-term because of the worldwide need for IT and telecommunications infrastructure.  As of December 31, 2013, our operations in Puerto Rico have generated $4.1 million in revenue.  We plan to expand our global presence either through expanding our current operations or by acquiring subsidiaries with international platforms.
 
Our Ability to Expand and Diversify Our Customer Base.
 
Our customers for specialty contracting services consist of leading telephone, wireless, cable television and data companies.  Ericsson Inc. is our principal telecommunications staffing services customer.  Historically, our revenue has been significantly concentrated in a small number of customers.  Although we still operate at a net loss, our revenue in recent years has increased as we have acquired additional subsidiaries and diversified our customer base and revenue streams. The percentage of our revenue attributable to our top 10 customers, as well as key customers that contributed at least 10% of our revenue in at least one of the years specified in the following table, were as follows:
 
Customer:
 
Year ended December 31,
 
   
2013
   
2012
 
Top 10 customers, aggregate
    74 %       77 %
Customer:
               
Nexlink
    * %       14 %
Ericsson, Inc.
    41 %       33 %
_________________
 
* Represented less than 10% of total revenues during the period.
 
Business Unit Transitions.
 
In the year ended December 31, 2012, approximately 38% of our revenue came from our specialty contracting services, and the remaining 62% came from our telecommunications staffing services. In the year ended December 31, 2013, approximately 35% of our revenue came from specialty contracting services, and the remaining 65% come from our telecommunications staffing services. The acquisition of ADEX in 2012 enabled us to shift our business focus from exclusively providing specialty contracting services to also providing professional staffing services, which has expanded our customer base.
 
Since January 1, 2012, we have acquired six other companies, and each of these acquisitions has either enhanced certain of our existing business units or allowed us to gain market share in new lines of business. For example, our acquisition of T N S in September 2012 extended the geographic reach of our structured cabling and digital antenna system services.  Our acquisition of AW Solutions in April 2013 broadened our suite of services and added new customers to which we can cross-sell our other services.  Our acquisition of IPC in January 2014 improved our systems integration capabilities.  Our acquisition of RentVM in February 2014 expanded our cloud and managed services capabilities by providing us a software-defined data center (“SDDC”) platform to offer enterprise-grade cloud computing solutions.  Our proposed acquisition of VaultLogix will broaden our suite of cloud service offerings by adding VaultLogix's cloud backup services to our wide range of cloud offerings and will add new customers to which we can cross-sell our other services. Our proposed acquisition of Telco will further expand our professional staffing business and our access to skilled labor.
 
 
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We expect these acquisitions to facilitate geographic diversification that should protect against regional cyclicality.  We believe our diverse platform of services, capabilities, customers and geographies will enable us to grow as the market continues to evolve.
 
The table below summarizes the revenues for each of our reportable segments for the years ended December 31, 2013 and 2012.
 
   
Year ended December 31,
 
   
2013
   
2012
 
Revenue from:
           
Specialty contracting services
  $ 18,224,317     $ 6,513,763  
Telecommunications staffing services
  $ 33,183,227     $ 10,575,786  
As a percentage of total revenue:
               
Specialty contracting services
    35 %     38 %
Telecommunications staffing services
    65 %     62 %
 
Impact of Pending and Recently-Completed Acquisitions
 
We have grown significantly and expanded our service offerings and geographic reach through a series of strategic acquisitions.  Since January 1, 2012, we have completed six acquisitions.  We expect to regularly review opportunities, and periodically to engage in discussions, regarding possible additional acquisitions.  Our ability to sustain our growth and maintain our competitive position may be affected by our ability to identify, acquire and successfully integrate companies.
 
We intend to operate all of the companies we acquire in a decentralized model in which the management of the companies will remain responsible for daily operations while our senior management will utilize their deep industry expertise and strategic contacts to develop and implement growth strategies and leverage top-line and operating synergies among the companies, as well as provide overall general and administrative functions.
 
In November 2012, we executed a definitive agreement to acquire Telco, and in March 2014, we executed a definitive agreement to acquire VaultLogix. It is our intention is to complete the VaultLogix acquisition within 90 days of the date of this report, subject to our ability to raise the necessary cash proceeds to complete such acquisition. After the completion of the VaultLogix acquisition and reflecting the consolidation of the companies that we acquired in 2014 in our results of operations, we expect our revenues, cost of revenues and operating expenses will increase substantially.  Accordingly, our future results of operations may differ significantly from those described in this report. The impact of our 2014 acquisitions and our pending acquisition of  VaultLogix is not reflected in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section. We have not yet determined when we will consummate the acquisition of Telco, if at all. The Telco acquisition also is dependent on our ability to obtain satsifactory financing and there can be no assurance that such financing will be available to us.
 
General Economic Conditions.
 
Within the context of a slowly-growing economy and the current volatility in the credit and equity markets, we believe the latest trends and developments support our steady industry outlook. We will continue to closely monitor the effects that changes in economic and market conditions may have on our customers and our business and we will continue to manage those areas of the business we can control.
 
Components of Results of Operations
 
Revenue.
 
In the year ended December 31, 2012, we derived approximately 38% of our revenue from our specialty contracting services and approximately 62% of our revenue from our telecommunications staffing and training services.  In the year ended December 31, 2013, we derived approximately 35% of our revenue from our specialty contracting services and approximately 65% from our telecommunications staffing and training services.
 
 
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Cost of Revenues.
 
Cost of revenues includes all direct costs of providing services under our contracts, including costs for direct labor provided by employees, services by independent subcontractors, operation of capital equipment (excluding depreciation and amortization), direct materials, insurance claims and other direct costs. Cost of revenues in the year ended December 31, 2013 was 73% of revenues as compared to 70% of revenues in the year ended December 31, 2012, primarily due to lower margins in our telecommunications staffing business.  Cost of revenues in the telecommunications staffing business was 79% and 78% of revenues in the years ended December 31, 2013 and 2012, respectively. Cost of revenues as a percentage of revenues in the specialty contracting business was 60% and 57% of revenues in the years ended December 31, 2013 and 2012, respectively. We are trying to increase efficiency in the year ending December 31, 2014 and will focus our efforts on improving margins.
 
We retain the risk of loss, up to certain limits, for claims related to automobile liability, general liability, workers’ compensation, employee group health and location damages.  We are sometimes subject to claims for damages resulting from property and other damages arising in connection with our specialty contracting services.  A change in claims experience or actuarial assumptions related to these risks could materially affect our results of operations.
 
For a majority of the contract services we perform, our customers provide all required materials while we provide the necessary personnel, tools and equipment.  Materials supplied by our customers, for which the customer retains financial and performance risk, are not included in our revenue or costs of revenues.  We expect cost of revenues to continue to increase if we succeed in continuing to grow our revenue.
 
General and Administrative Costs.
 
General and administrative costs include all of our corporate costs, as well as costs of our subsidiaries’ management personnel and administrative overhead.  These costs primarily consist of employee compensation and related expenses, including legal, consulting and professional fees, information technology and development costs, provision for or recoveries of bad debt expense and other costs that are not directly related to performance of our services under customer contracts.  Our senior management, including the senior managers of our subsidiaries, perform substantially all of our sales and marketing functions as part of their management responsibilities and, accordingly, we have not incurred material sales and marketing expenses.  Information technology and development costs included in general and administrative expenses are primarily incurred to support and to enhance our operating efficiency.  We expect these expenses to continue to generally increase as we expand our operations, but expect that such expenses as a percentage of revenues will decrease if we succeed in increasing revenues.
 
Goodwill and Indefintite Lived Intangible Assets
 
Goodwill was generated through the acquisitions we made during 2011, 2012 and 2013.  As the total consideration we paid for our completed acquisitions exceeded the value of the net assets acquired, we recorded goodwill for each of the completed acquisitions (see Note 3. Acquisitions and Deconsolidation of Subsidiary).  At the date of acquisition, we performed a valuation to determine the value of the goodwill and intangible assets, along with the allocation of assets and liabilities acquired.  The goodwill is attributable to synergies and economies of scale provided to we by the acquired entity.

We perform our annual impairment test at the reportable segment level.  The two reporting segments are telecommunication staffing services and specialty contracting services.   Telecommunications staffing services is comprised of the ADEX entities, and specialty contracting services is comprised of TNS, Tropical, AW Solutions and RM Engineering.  The components within the specialty contracting reportable segment are each considered individual reporting units. These reporting units are aggregated to form one operating segment and reportable segment for financial reporting and for the evaluation of goodwill for impairment.  The telecommunications staffing reporting segment consists of one operating segment, which in turn consists of one reporting unit comprised of a single component.

We perform the impairment testing at least annually (at December 31) or at other times if we believe that it is more likely than not that there may be an impairment to the carrying value of its goodwill.  If it is more likely than not, that goodwill impairment exists, the second step of the goodwill impairment test should be performed to measure the amount of impairment loss, if any.

We consider the results of an income approach and a market approach in determining the fair value of the reportable segments.  We evaluated the forecasted revenue using a discounted cash flow model for each of the reporting segments. 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 segments.  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 units 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.  However, based on our assessment of these factors, we believe the increase in the risk of impairment to be relatively low as our relationships with key customers and personnel are in good standing and we are  unaware of any adverse legislation that may have a negative impact on us or our customers.  
 
Based on this review, we determined that there was no impairment as of December 31, 2013 and 2012, and as such, did not perform a step two analysis for impairment.
 
With regard to other long-lived assets and intangible assets with indefinite-lives, we follow a similar impairment assessment. We will assess the quantitative factors to determine if an impairment test of the indefinite-lived intangible asset is necessary. If the quantitative assessment reveals that it is more likely than not that the asset is impaired, a calculation of the asset’s fair value is made. Fair value is calculated using many factors, which include the future discounted cash flows as well as the estimated fair value of the asset in an arm’s-length transaction. As of December 31, 2013 and 2012, the results of our analysis indicated that no impairment existed.
 
 
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We review finite-lived intangible assets for impairment whenever an event occurs or circumstances change that indicates that the carrying amount of such assets may not be fully recoverable.  Recoverability is determined based on an estimate of undiscounted future cash flows resulting from the use of an asset and its eventual disposition.  An impairment loss is measured by comparing the fair value of the asset to its carrying value.  If we determine the fair value of an asset is less than the carrying value, an impairment loss is incurred.  Impairment losses, if any, are reflected in operating income or loss in the consolidated statements of operations during the period incurred.
 
Fair Value of Embedded Derivatives.
 
We used the Black-Scholes option-pricing model to determine the fair value of the derivative liability related to the warrants and the put and effective price of future equity offerings of equity-linked financial instruments. We derived the fair value of warrants using the common stock price, the exercise price of the warrants, risk-free interest rate, the historical volatility, and our dividend yield. We do not have sufficient historical data to use our historical volatility; therefore the expected volatility is based on the historical volatility of comparable companies. We developed scenarios to take into account estimated probabilities of future outcomes. The fair value of the warrant liabilities is classified as Level 3 within our fair value hierarchy.
 
On August 6, 2010, we issued to UTA Capital LLC warrants to purchase 16% of our common stock on a fully-diluted basis, which were exercisable at $75.00 per share and provided for cashless exercise.  Such warrants were cancelled in September 2012 in consideration of the issuance of 53,775 shares of our common stock.   The relative fair value of such warrants was calculated using the Black-Scholes Option pricing model.  This amount, totaling approximately $872,311, was recorded as a derivative liability and debt discount and charged to interest expense over the life of the related promissory note. The warrants issued to UTA Capital LLC did not meet the criteria to be classified as equity in accordance with ASC 815-40-15-7D and were classified as derivative liabilities at fair value and marked to market because they were not indexed to our stock as the settlement amount was not fixed due to the variability of the number of shares issuable pursuant to such warrants.  The derivative liability associated with this debt was revalued each reporting period and the increase or decrease was recorded to our consolidated statement of operations under the caption “change in fair value of derivative instruments.”
 
On February 14, 2011, we entered into an extension and modification agreement with UTA Capital LLC in connection with our outstanding note payable to UTA Capital LLC, which had a balance of $775,000 at December 31, 2010.  The modification agreement provided for an extension of the original maturity date of the note from August 6, 2011 to September 30, 2011. In exchange for consenting to the modification agreement, UTA Capital LLC was issued 10,257 shares of our common stock, which had a fair value of $153,850 and was recorded as a debt discount. Additionally, as additional consideration for our failure to satisfy a certain covenant in the agreement, UTA Capital LLC was issued 4,000 shares of our common stock, which shares were recorded as a penalty paid to the lender and recorded as an expense. These shares were issued in 2012.
 
Pursuant to a Loan and Security Agreement dated as of September 17, 2012, as amended, among our company, our subsidiaries, as guarantors, the lenders party thereto and MidMarket Capital Partners, LLC, as agent, or the "MidMarket Loan Agreement,"  on September 17, 2012, we issued warrants to the lenders to purchase an aggregate of 1,105,920 shares of common stock based on the fully-diluted shares outstanding at that time.  The warrants were amended on November 13, 2012 in connection with the first amendment to the MidMarket Loan Agreement to increase the aggregate number of shares issuable upon exercise of such warrants to 1,501,882 shares based on the fully-diluted shares outstanding at that time. Pursuant to the second amendment to the MidMarket Loan Agreement dated March 22, 2013, the aggregate number of shares of common stock issuable upon exercise of such warrants was set at 187,386 shares. Pursuant to the anti-dilution provisions of such warrants, upon the completion of the public offering of our common stock in November 2013, the number of shares of common stock issuable upon exercise of such warrants was reset to 234,233 shares. The warrants have an exercise price of $4.00 per share, subject to adjustment as set forth in the warrants, and will expire on September 17, 2014 provided certain Financial metrics have been met or on later dates until such financial metrics are met.  The warrants have anti-dilution rights in connection with the exercise price. For financial reporting purposes, we have determined that the fair value of the anti-dilution rights is immaterial.  If we issue stock, warrants or options at a price below the $4.00 per share exercise price, the price of the warrants resets to the lower price.  As of December 31, 2013, the lenders had not exercised the warrants. These warrants meet the criteria in ASC 480 to be classified as liabilities because there is a put feature pursuant to which we have an obligation to repurchase such warrants. The derivative liability associated with this debt will be revalued each reporting period and the increase or decrease in value will be recorded to the consolidated statement of operations under the caption “change in fair value of derivative instruments.”
 
 
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On September 17, 2012, when the warrants were issued, we recorded a derivative liability in the amount of $193,944.  The amount was recorded as a debt discount and is being amortized over the life of the loan.  The amount of the derivative liability was computed by using the Black-Scholes Option pricing model to determine the value of the warrants issued. At December 31, 2013 and 2012, the remaining debt discount was $143,843 and $182,631, respectively.
 
The fair value of the MidMarket warrant derivative at each measurement date was calculated using the Black-Scholes option pricing model with the following factors, assumptions and methodologies:
 
   
December 31,
     
December 31,
 
   
2013
      2012  
               
Fair value of our common stock
  $ 18.36     $ 0.68755-10.00  
                 
Volatility
    80 %     56.78-112 %
                 
Exercise price
  $ 4.00 to $5.00     $ .95 to $500.00  
                 
Estimated life
 
8.5 months
      1.75 years  
                 
Risk free interest rate (based on 1 year treasury rate)
    0.11 %     0.0266-0.12 %
 
We issued warrants to ICG USA, LLC and Venture Champion Asia Limited in connection with loans we received from those entities in April, August and October 2013. On April 30, 2013, August 28, 2013 and October 30, 2013, the dates on which the warrants were issued, we recorded derivative liabilities in the amount of $140,000, $35,000 and $19,000, respectively.  Those amounts were recorded as a debt discount and are being amortized over the life of the related loans.  The amount of the derivative liability was computed by using the binomial method to determine the value of the warrants issued.  In applying the binomial method, we evaluated possible scenarios for the price of our common stock and other factors that would impact the anti-dilution provisions of the warrants.
 
In December 2013, we entered into a securities purchase agreement with various institutional investors pursuant to which we issued to such investors the Convertible Debentures in the original aggregate principal amount of $11,625,000 and an aggregate of 36,567 shares of our common stock for an aggregate purchase amount of $11,625,002. The Convertible Debentures mature on June 13, 2015 and bear interest at the rate of 12% per annum and are payable in accordance with an amortization schedule.
 
The Convertible Debentures are convertible into shares of our common stock at the election of the holder thereof at a conversion price equal to the lesser of (i) $6.36, or (ii) 85% of the price per share of our common stock in the first underwritten public offering we complete of not less than $10 million of our equity securities (a “Qualified Offering”).  The conversion price is subject to customary anti-dilution provisions. On the date of issuance of the Convertible Debentures, we recorded a derivative liability in the amount of $6,620,000 in connection with the embedded features of the Convertible Debentures, which was recorded as a debt discount and is being amortized over the life of the Convertible Debentures. The amount of the derivative liability was calculated using the binomial method.
 
The fair value of the embedded derivatives of the Convertible Debentures at the measurement date was calculated using a Monte Carlo model using the following factors, assumptions and methodologies:
 
   
December 31,
2013
 
Conversion price   $ 6.36  
Conversion trigger price   $ 15.90  
Risk free rate     0.3 %
Life of conversion feature (in years)     1.5  
Volatility     60
 
The fair value of the embedded derivatives of the Convertible Debenture at December 31, 2013 was calculated using a Monte Carlo model using the same factors, assumptions and methodologies as at the initial measurement date, with the exception of the life of the conversion feature which was changed to 1.45 years.
 
The aggregate fair value of our derivative liabilities as of December 31, 2013 and 2012 amounted to $19.9 million and $33,593, respectively.
 
 
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Income Taxes.
 
In the year ended December 31, 2013, we booked a provision for state and local income taxes due of $90,459.  Certain states do not recognize net operating loss carryforwards, and we have operations in some of those states.  The provision for state and local income taxes was offset by an increase in deferred tax liabilities of $1,982,147.  This tax benefit was a result of our acquisition of ADEX and T N S in 2012, which resulted in a deferred tax liability based on the value of the intangible assets acquired.  This benefit was offset by the fact that ADEX and T N S were cash-basis taxpayers when they were acquired and were converted to accrual-basis taxpayers upon acquisition, which resulted in an increase in liability.  As of December 31, 2013 and 2012, we had net operating loss carryforwards (NOLs) of $4.3 million and $2.1 million, respectively, which will be available to reduce future taxable income and expense through 2030.  Utilization of the net operating loss and credit carryforwards is subject to an annual limitation due to the ownership percentage change limitations provided by Section 382 of the Internal Revenue Code of 1986 and similar state provisions.  The annual limitation may result in the expiration of the net operating loss carryforwards before utilization.  We have adjusted our deferred tax asset to record the expected impact of the limitations.
 
Credit Risk.
 
We are subject to concentrations of credit risk relating primarily to our cash and equivalents, accounts receivable, other receivables and costs and estimated earnings in excess of billings.  Cash and equivalents primarily include balances on deposit in banks.  We maintain substantially all of our cash and equivalents at financial institutions we believe to be of high credit quality.  To date, we have not experienced any loss or lack of access to cash in our operating accounts.
 
We grant credit under normal payment terms, generally without collateral, to our customers.  These customers primarily consist of telephone companies, cable broadband MSOs and electric and gas utilities.  With respect to a portion of the services provided to these customers, we have certain statutory lien rights that may, in certain circumstances, enhance our collection efforts.  Adverse changes in overall business and economic factors may impact our customers and increase potential credit risks.  These risks may be heightened as a result of economic uncertainty and market volatility. In the past, some of our customers have experienced significant financial difficulties and, likewise, some may experience financial difficulties in the future.  These difficulties expose us to increased risks related to the collectability of amounts due for services performed.  We believe that none of our significant customers were experiencing financial difficulties that would materially impact the collectability of our trade accounts receivable as of December 31, 2013.
 
Contingent Consideration.
 
We recognize the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree or assets of the acquiree in a business combination.  The contingent consideration is classified as either a liability or equity in accordance with ASC 480-10 (“Accounting for certain financial instruments with characteristics of both liabilities and equity”).  If classified as a liability, the liability is remeasured to fair value at each subsequent reporting date until the contingency is resolved.  Increases in fair value are recorded as losses on our consolidated statement of operations, while decreases are recorded as gains.  If classified as equity, contingent consideration is not remeasured and subsequent settlement is accounted for within equity.
 
Litigation and Contingencies.
 
Litigation and contingencies are reflected in our consolidated financial statements based on management’s assessment of the expected outcome of such litigation or expected resolution of such contingency.  An accrual is made when the loss of such contingency is probable and reasonably estimable. If the final outcome of such litigation and contingencies differs significantly from our current expectations, such outcome could result in a charge to earnings.
 
 
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Results of Operations
 
The following table shows our results of operations for the year indicated.  The historical results presented below are not necessarily indicative off the results that may be expected for any future period.
 
   
Year ended December 31,
 
   
2013
   
2012
 
Statement of Operations Data:
           
             
Revenues
  $ 51,407,544     $ 17,089,549  
                 
Cost of revenue
    37,280,044       11,968,215  
Gross profit
    14,127,500       5,121,334  
                 
Operating expenses:
               
Depreciation and amortization
    1,120,404       345,566  
Salaries and wages
    8,341,011       3,802,158  
General and administrative
    7,875,723       3,782,067  
Change in fair value and loss on contingent consideration
    3,131,130       -  
Total operating expenses
    20,468,268       7,929,791  
                 
Loss from operations
    (6,340,768 )     (2,808,457 )
                 
Total other expense
    (19,074,751 )     (1,097,863 )
Loss from continuing operations before (benefit from) income taxes
    (25,415,519 )     (3,906,320 )
                 
Benefit from income taxes
    (587,662     (2,646,523 )
                 
Net loss from continuing operations
    (24,827,857 )     (1,259,797 )
                 
Income from discontinued operations including gain on sale of subsidiary, net of tax
    549,922       46,598  
                 
Net loss
    (24,277,935 )     (1,213,199 )
                 
Net loss attributable to non-controlling interest
    76,169       16,448  
                 
Net loss attributable to InterCloud Systems, Inc.
    (24,354,104 )     (1,229,647 )
                 
Less dividends on Series C, D, E, F and H Preferred Stock
    (1,084,314 )     (843,215 )
                 
Net loss attributable to InterCloud Systems, Inc. common stockholders
  $ (25,438,418 )   $ (2,072,862 )
 
Year ended December 31, 2013 compared to year ended December 31, 2012
 
Revenue.
 
   
Year ended December 31,
   
Change
 
   
2013
   
2012
   
Dollars
   
Percentage
 
Specialty contracting services
  $ 18,224,317     $ 6,513,763     $ 11,710,554       180 %
Telecommunication staffing services
    33,183,227       10,575,786       22,607,441       214 %
Total
  $ 51,407,544     $ 17,089,549     $ 34,317,995       201 %
 
Total revenue for the year ended December 31, 2013 was $51.4 million, which represented an increase of $34.3 million, or 201%, compared to total revenue of $17.1 million for the year ended December 31, 2012.  The increase in total revenue during this period was attributed to revenue generated by our acquired companies.  For the year ended December 31, 2012, 38% of our revenue was derived from our specialty contracting services and 62% of our revenue was derived from our telecommunications staffing services.  For the year ended December 31, 2013, 35% of our revenue was derived from our specialty contracting services and 65% of our revenue was derived from our telecommunications staffing services.
 
In the years ended December 31, 2013 and 2012, $45.5 million and $11.7 million, respectively, of our revenues were generated by the companies we acquired. During the years ended December 31, 2013 and 2012, all of the revenue in the telecommunication staffing services segment came from the companies we acquired in 2012, while revenues in the specialty contracting services segment from the companies we acquired in 2012 and 2013 amounted to $12.3 million and $1.0 million in the years ended December 31, 2013 and 2012, respectively.
 
 
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Cost of revenue and gross margin.
 
   
Year ended December 31,
   
Change
 
Specialty contracting services
 
2013
   
2012
   
Dollars
   
Percentage
 
Cost of revenue
  $ 10,970,680     $ 3,727,588     $ 7,243,092       194 %
Gross margin
  $ 7,253,637     $ 2,784,764     $ 4,468,873       160 %
Gross profit percentage
    40 %     43 %                
                                 
Telecommunication staffing services
                               
Cost of revenue
  $ 26,309,364     $ 8,240,627     $ 18,068,737       219 %
Gross margin
  $ 6,873,864     $ 2,336,570     $ 4,537,294       194 %
Gross profit percentage
    21 %     22 %                
                                 
Total
                               
Cost of revenue
  $ 37,280,044     $ 11,968,215     $ 25,311,829       211 %
Gross margin
  $ 14,127,501     $ 5,121,334     $ 9,006,167       176 %
Gross profit percentage
    27 %     30 %                
 
Our cost of revenue increased $25.3 million from $12.0 million for the year ended December 31, 2012 to $37.3 million for the year ended December 31, 2013.  This increase was primarily due to the acquisitions completed in the years ended December 31, 2013 and 2012.   For the year ended December 31, 2012, we had a revenue mix of 38% specialty contracting services as compared to telecommunications staffing services of 62%.  For the year ended December 31, 2013, we had a revenue mix of 35% specialty contracting services as compared to telecommunications staffing services of 65%.
 
Our gross profit percentage was 27% for the year ended December 31, 2013 compared to 30% for the year ended December 31, 2012.  The decrease in gross margin was primarily a result of the increase in revenues in our telecommunications staffing services segment. The gross profit on our telecommunications staffing services segment were only 21%, which decreased the overall gross profit. It is expected that as the telecommunications staffing services portion of our total revenue increases, our overall gross profit percentage will continue to decline, while the gross profit dollars will increase. We expect to continue to see lower gross margins until such time as we generate a greater amount of revenue from services that generate higher margins than our telecommunications staffing services segment.
 
General and Administrative.
 
   
Year ended December 31,
   
Change
 
   
2013
   
2012
   
Dollars
   
Percentage
 
General and administrative
  $ 7,875,723     $ 3,782,067     $ 4,093,656       108 %
Percentage of revenue
    15 %     22 %                
 
Our general and administrative expenses increased $4.1 million, from $3.8 million for the year ended December 31, 2012 to $7.9 million for the year ended December 31, 2013.  General and administrative expenses related to our specialty contracting segment increased by $0.4 million, or 34%, during the year ended December 31, 2013.  General and administrative expenses relating to our telecommunications staffing segment increased by $1.5 million, or 318%, during the year ended December 31, 2013.  General and administrative expenses incurred on behalf of our corporate center increased by $2.2 million, or 108%, during the year ended December 31, 2013.

The increases were primarily as a result of increased overhead expenses resulting from the acquisitions we completed in the years ended December 31, 2013 and 2012.  General and administrative expenses decreased to 15% of revenues in the year ended December 31, 2013, from 22% in the year ended December 31, 2012. This decrease in percentage was a result of the increased revenues, which did not cause a corresponding increase in general and administrative expenses.
 
Salaries and Wages.
 
 
Year ended December 31,
 
Change
 
 
2013
 
2012
 
Dollars
 
Percentage
 
Salaries and wages
  $ 8,341,011     $ 3,802,158     $ 4,538,853       119 %
Percentage of revenue
    16 %     22 %                
 
Our salaries and wages increased $4.5 million from $3.8 million for the year ended December 31, 2012 to $8.3 million for the year ended December 31, 2013.  Salaries and wages expenses related to our specialty contracting segment increased by $0.4 million, or 20%, during the year ended December 31, 2013.  Salaries and wages expenses relating to our telecommunications staffing segment increased by $2.5 million, or 277%, during the year ended December 31, 2013.  Salaries and wages expenses incurred on behalf of our corporate center increased by $1.6 million, or 171%, during the year ended December 31, 2013.

The increases were primarily a result of an increase in the amount of stock compensation issued in 2013, as compared to 2012.  Stock compensation increased from $0.8 million in the year ended December 31, 2012 to $3.4 million in the year ended December 31, 2013.  The increase also results from an increase in the amount of employees during 2013 due to the acquisitions in late 2012 and in 2013.
 
Depreciation and Amortization.
 
   
Year ended December 31,
   
Change
 
   
2013
   
2012
   
Dollars
   
Percentage
 
Depreciation and amortization
  $ 1,120,404     $ 345,566     $ 774,838       224 %
Percentage of revenue
    2 %     2 %                

Depreciation and amortization expenses increased by approximately $0.8 million to $1.1 million in the year ended December 31, 2013, as compared to $0.3 million in the year ended December 31, 2012. Depreciation and amortization expenses related to our specialty contracting segment increased by $0.5 million, or 239%, during the year ended December 31, 2013.  Our depreciation and amortization expenses relating to our telecommunications staffing segment increased by $0.2 million, or 200%, during the year ended December 31, 2013.  Depreciation and amortization expenses incurred on behalf of our corporate center increased by $0.1 million, or 97%, during the year ended December 31, 2013.  

The increases were a result of the acquisitions completed in 2013 and 2012.
 
 
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Changes in Fair Value of Derivative Liabilities.
 
The aggregate fair value of derivative liabilities as of December 31, 2013 and December 31, 2012 amounted to approximately $19.9 million and $0.03 million, respectively.
 
As a result of the change in the fair value of our derivative instruments, we recorded a loss of $14.2 million and a gain of $0.2 million in the years ended December 31, 2013 and 2012, respectively. The loss in the year ended December 31, 2013 was primarily a result of the increases in the fair value of our common stock, which increased the fair value of the derivative instruments.
 
Net Gain on Deconsolidation of Subsidiary.
 
During 2012, we sold 60% of the outstanding shares of common stock of Digital Comm, Inc. ("Digital").  In connection with such sale, we recognized a gain on deconsolidation of $0.5 million, based on the negative investment carrying amount.  We made additional investments in Digital of approximately $0.2 million during 2012, at which time we wrote off the remaining balance of our investment in Digital. The result for the year was a net gain of $0.5 million on the deconsolidation of Digital.
 
Net gain on Discontinued Operations.
 
During 2013, we sold our 100% membership interest in Environmental Remediation and Financial Services, LLC. In connection with such sale, we recognized a gain on discontinued operations of $0.2 million.
 
Interest Expense.
 
   
Year ended December 31,
   
Change
 
   
2013
   
2012
   
Dollars
   
Percentage
 
Interest expense
  $ 5,574,228     $ 1,699,746     $ 3,874,482       228 %
 
Interest expense increased $3.9 million from $1.7 million in the year ended December 31, 2012 to $5.6 million for the year ended December 31, 2013, primarily due to increases in our outstanding debt obligations.   Included in interest expense is the amortization of debt discount and deferred loan costs.  In the year ended December 31, 2013, amortization was $1.4 million compared to $0.4 million for the year ended December 31, 2012.
 
Net Loss Attributable to our Common Stockholders.
 
Net loss attributable to our common stockholders was $25.4 million for the year ended December 31, 2013, as compared to $2.1 million for the year ended December 31, 2012.
 
Operating Income (Loss).
 
   
Year ended December 31,
   
Change
 
   
2013
   
2012
   
Dollars
   
Percentage
 
Specialty contracting services
  $ 2,427,369     $ (699,459 )   $ 3,126,828       447 %
Telecommunication staffing services
    1,069,808       820,375       249,433       30 %
Corporate
    (9,837,945 )     (2,929,373 )     (6,908,572 )     236 %
Total
  $ (6,340,768 )   $ (2,808,457 )   $ (3,532,311 )     126 %
 
Operating loss increased $3.5 million from $2.8 million in the year ended December 31, 2012 to $6.3 million for the year ended December 31, 2013, primarily due to increases in our stock compensation expense, professional service changes and costs attributable to being a public company.
 
Liquidity, Capital Resources and Cash Flows
 
We have satisfied our capital and liquidity needs primarily through sales of equity securities, debt offerings and bank borrowings. As of December 31, 2013, we had cash of $17.9 million, which was exclusively denominated in U.S. dollars and consisted of bank deposits.  As of December 31, 2013, none of our cash was held by foreign subsidiaries.
 
Indebtedness.
 
MidMarket Loan Agreement. On September 17, 2012, we entered into the MidMarket Loan Agreement, pursuant to which the lenders thereunder provided us with senior secured first lien term loans in an aggregate principal amount of $13,000,000.  We used a portion of the proceeds of such loans to finance our recent acquisitions, to repay certain outstanding indebtedness and to pay related fees, costs and expenses. On November 13, 2012, we entered into a first amendment to the MidMarket Loan Agreement, pursuant to which the lenders provided us with additional senior secured first lien term loans in an aggregate principal amount of $2,000,000 and made certain other amendments to the MidMarket Loan Agreement. At December 31, 2013 and 2012, loans in the principal amount of $13.9 million and $15.0 million, respectively, were outstanding under the MidMarket Loan Agreement. In March 2014, the lenders under the MidMarket Loan Agreement assigned the loans under such agreement to certain institutional investors that subsequently converted the principal amount of such loans into an aggregate of 1,180,361 shares of our common stock at a conversion price of $10.50 per share. However, if 85% of the volume weighted average price of our common stock on April 14, 2014 is less than $10.50, we are obligated to issue to such institutional investors additional shares of common stock so that the average conversion price of the loans under the MidMarket Loan Agreement is such lower price. At the time of such conversion, all accrued interest on such loans was paid in full in cash.
 
 
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Pursuant to the MidMarket Loan Agreement, we issued to the lenders warrants to purchase 187,386 shares of common stock at an initial exercise price of $5.00 per share, subject to adjustment as set forth in the warrants, on or before September 17, 2014, subject to extension if certain of our financial statements have not been delivered to the holders of such warrants in a timely manner showing that certain financial thresholds have been met. Upon the completion of a public offering of our common stock in November 2013, the number of shares of common stock issuable upon exercise of such warrants was increased to 234,233 shares and the exercise price of such warrants was reduced to $4.00 per share.
 
PNC Bank Revolving Credit Facility. On September 20, 2013, we entered into the PNC Credit Agreement with PNC Bank, as agent and a lender, and each of our subsidiaries, as borrowers or guarantors. The PNC Credit Agreement provided us a revolving credit facility in the principal amount of up to $10,000,000, subject to certain borrowing base and other restrictions, that was secured by substantially all of our assets and the assets of our subsidiaries, including a pledge of the equity interests of our subsidiaries pursuant to a pledge agreement. The maturity date of the revolving credit facility was June 17, 2014, subject to certain extensions.
 
Interest on advances under the revolving credit facility was payable in arrears on the first day of each month with respect to Domestic Rate Loans (as defined in the PNC Credit Agreement) and at the end of each interest period, with respect to LIBOR Rate Loans (as defined in the PNC Credit Agreement). Interest charges were computed on the greater of (x) $5,000,000 or (y) the actual principal amount of advances outstanding during the month at a rate per annum equal to, (i) in the case of Domestic Rate Loans, an interest rate per annum equal to the sum of the Alternate Base Rate (as defined in the PNC Credit Agreement) plus 0.50% per annum, or (ii) in the case of LIBOR Rate Loans, the LIBOR rate plus 2.75% per annum.  Prior to each advance, we had the option of making such advance a Domestic Rate Loan or a LIBOR Rate Loan.
 
The loans were subject to a borrowing base equal to the sum of (a) 88% of our eligible accounts receivable, plus (b) the lesser of (i) 65% of our Eligible Milestone Receivables (as defined in the PNC Credit Agreement) and (ii) $500,000, minus (c) the aggregate maximum undrawn amount of all outstanding letters of credit under the revolving credit facility, and minus (d) $2,500,000 (prior to the release of the availability block).  Initially, the borrowing base was reduced by a $2,500,000 availability block that could have been be eliminated on September 30, 2014 if we were to meet certain financial conditions and were not in default under the revolving credit facility.
 
As of December 31, 2013, we had borrowing availability under the PNC Credit Agreement of $1.5 million, and had a prepaid loan balance of $0.1 million. However, as of December 31, 2013, we were not in compliance with all of the covenants of the PNC Credit Agreement. We terminated the PNC Credit Agreement on April 4, 2014 and, pursuant to the terms of the PNC Credit Agreement, we incurred a termination charge of approximately $300,000 in connection with such termination.
 
 
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12% Convertible Debentures.  On December 13, 2013, we entered into a securities purchase agreement with certain institutional investors pursuant to which we issued to such investors the Convertible Debentures in an original aggregate principal amount of $11,625,000 and an aggregate of 36,567 shares of our common stock. In connection with the issuance of the Convertible Debentures, we paid a fee to Aegis Capital of $989,000, resulting in net proceeds to us of $10,636,002.
 
The Convertible Debentures bear interest at the rate of 12% per annum, and are payable in accordance with an amortization schedule, with monthly payments beginning on July 13, 2014 and ending on the final maturity date of June 13, 2015. At our election, subject to compliance with certain terms and conditions in the purchase agreement, the monthly amortization payments may be paid by the issuance of shares of our common stock at a price per share equal to the lesser of (i) the conversion price of the Convertible Debentures at that time and (ii) 75% of the average of the daily volume weighted average price, or VWAP, of our common stock for the five-trading-day period ending on, and including, the trading day immediately preceding the trading day that is five days prior to the applicable monthly amortization date.
 
The Convertible Debentures are convertible into shares of our common stock at the election of the holder thereof at a conversion price equal to the lesser of (i) $6.36, or (ii) 85% of the price per share of our common stock in our next underwritten public offering of not less than $10 million of our equity securities, subject in each case to customary anti-dilution provisions. Notwithstanding the foregoing, the Convertible Debentures held a particular holder will not be convertible if such conversion would result in such holder owning more than 4.99% of the issued and outstanding shares of our common stock after such conversion.  Beginning on June 13, 2014, we may elect to force the holder of a Convertible Debenture to convert all, but not less than all, amounts outstanding under such Convertible Debenture into shares of our common stock at the applicable conversion price; provided, that we may only elect such forced conversion if certain conditions are met, including the condition that our common stock has been trading at 150% or higher of the applicable conversion price for 30 consecutive trading days with an average daily trading volume of not less than $1,000,000 of shares per day.
 
We may redeem a Convertible Debenture, in whole or in part, for cash at a redemption price, or the Redemption Amount, equal to 115% of the outstanding principal amount of the Convertible Debenture, plus all accrued and unpaid interest, plus an amount equal to the interest that would have accrued on such Convertible Debenture through December 13, 2014. If we complete an underwritten public offering of at least $10 million of our equity securities while the Convertible Debentures remain outstanding, (i) each holder of a Convertible Debenture has the option to force the redemption of a portion of such holder’s Convertible Debentures for a redemption price equal to the Qualified Offering Amount (as defined below), and (ii) we have the option to force the redemption of each  holder’s Convertible Debentures in an amount equal to or less than the Qualified Offering Amount. The “Qualified Offering Amount means, with respect to each Convertible Debenture, an amount equal to the lesser of (i) 50% of the Redemption Amount and (ii) (a) 50% of the gross proceeds we receive in such public offering of equity securities multiplied by (b)(x) the Redemption Amount of such Convertible Debenture, divided by (y) the Redemption Amount of all Convertible Debentures issued pursuant to the Convertible Debenture purchase agreement.
 
 
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Upon the acceleration of a Convertible Debenture following an event of default, as defined in the Convertible Debentures, the Mandatory Default Amount (as defined below) of such Convertible Debenture shall become due and payable in cash. The “Mandatory Default Amount” means the sum of (a) the greater of (i) the outstanding principal amount of such Convertible Debenture, plus all accrued and unpaid interest thereon, plus all interest that would have been earned thereon through December 13, 2014 if such interest has not yet accrued, divided by the lower of (A) the conversion price of the Convertible Debentures on the date the Mandatory Default Amount is demanded (if demand or notice is required to create an event of default) or otherwise due or (B) the conversion price of the Convertible Debentures on the date the Mandatory Default Amount is paid in full, multiplied by the higher of (x) the VWAP of our common stock on the date the Mandatory Default Amount is demanded or otherwise due or (y) the VWAP of our common stock on the date the Mandatory Default Amount is paid in full, or (ii) 115% of the outstanding principal amount of the Debenture, plus 100% of accrued and unpaid interest hereon, plus all interest that would have been earned through December 13, 2014 if such interest has not yet accrued, and (b) all other amounts, costs, expenses and liquidated damages due in respect of such Convertible Debenture. After the occurrence of an event of default that results in the acceleration of the Convertible Debentures, the interest rate on the Convertible Debentures will accrue at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted under applicable law. Additionally, upon the occurrence of an event of default, at the holder’s election each Convertible Debenture will become convertible into shares of our common stock at the lesser of (i) the conversion price of the Convertible Debentures, and (ii) 70% of the average VWAP of our common stock for the five trading days in the preceding twenty trading days that have the lowest VWAP during such period.
 
Related Party Promissory Notes. On July 5, 2011, we entered into a definitive master funding agreement with MMD Genesis LLC (“MMD Genesis”), a company the three principals of  which are our Chairman of the Board and Chief Executive Officer, Mark Munro, one of our directors, Mark F. Durfee, and Douglas Shooker, the principal of Forward Investments LLC, the beneficial owner of more than 5% of our common stock.  Pursuant to the master funding agreement, MMD Genesis made loans to us from time to time to fund certain of our working capital requirements and a portion of the cash purchase prices of our business acquisitions. All such loans originally bore interest at the rate of 2.5% per month and matured on June 30, 2014.  At December 31, 2013 and 2012, outstanding loans from MMD Genesis in the aggregate principal amount of $3,925,000 and $350,000, respectively, were outstanding.
 
On January 1, 2014, the outstanding principal amount of the loans from MMD Genesis in the amount of $3,925,000, and accrued interest thereon in the amount of $963,746, was restructured and, in lieu thereof, we issued to the principals of MMD Genesis LLC or their designees the following notes:
 
 
· 
a note issued to Mark Munro 1996 Charitable Remainder UniTrust in the principal amount of $275,000 that bears interest at the rate of 12% per annum and matures on March 31, 2016;
     
 
· 
a note issued to CamaPlan FBO Mark Munro IRA in the principal amount of $346,904 that bears interest at the rate of 12% per annum and matures on March 31, 2016;
     
 
· 
a note issued to 1112 Third Avenue Corp., a company controlled by Mark Munro, in the principal amount of $375,000 that bears interest at the rate of 12% per annum and matures on March 31, 2016;
     
 
· 
a note issued to Mark Munro in the principal amount of $737,000 that bears interest at the rate of 12% per annum and matures on March 31, 2016;
     
 
· 
a note issued to Pascack Road, LLC, a company controlled by Mark Durfee, in the principal amount of $1,575,000 that bears interest at the rate of 12% per annum and matures on March 31, 2016;
     
 
· 
a note issued to Forward Investments, LLC in the principal amount of $650,000 that bears interest at the rate of 10% per annum, matures on June 30, 2015 and is convertible into shares of our common stock at an initial conversion price of $6.36 per share; and
     
 
·
a note issued to Forward Investments, LLC in the principal amount of $2,825,000 that bears interest at the rate of 2% per annum, matures on June 30, 2015 and is convertible into shares of our common stock at an initial conversion price of $6.36 per share.

On February 4, 2014 and March 28, 2014, Forward Investments, LLC made loans to us for working capital purposes in the amounts of $1.8 million and $1.2 million, respectively.  Such loans are evidenced by promissory notes that bear interest at the rate of 10% per annum, mature on June 30, 2015 and are convertible into shares of our common stock at an initial conversion price of $6.36 per share.
 
ICG Convertible Promissory Notes.  On April 26, 2013, we entered into a purchase agreement, or the ICG Purchase Agreement, with ICG USA, LLC, or ICG, pursuant to which we agreed to sell, and ICG agreed to purchase, unsecured convertible promissory notes, or the ICG Notes, in the aggregate principal amount of up to $1,725,000, for an aggregate purchase price of up to $1,500,000, at up to three separate closings, with each such closing subject to customary closing conditions.
 
We received aggregate proceeds under the ICG Purchase Agreement of $1,500,000, with the difference between the amount of proceeds we received and the aggregate principal amount of the ICG Notes we issued representing an up-front interest payment, with no additional interest being owed on the ICG Notes. On April 30, 2013, at the first closing of the sale of ICG Notes under the ICG Purchase Agreement, we issued to ICG an ICG Note in the principal amount of $862,500 for a purchase price of $750,000, representing an up-front interest charge of $112,500. On August 28, 2013, at the second closing of the sale of ICG Notes under the ICG Purchase Agreement, we issued to ICG an ICG Note in the principal amount of $287,500 for a purchase price of $250,000, representing an up-front interest charge of $37,500. On October 30, 2013, at the third closing of the sale of ICG Notes under the ICG Purchase Agreement, we issued to ICG an ICG Note in the principal amount of $575,000 for a purchase price of $500,000, representing an up-front interest charge of $75,000.
 
The initial ICG Note in the principal amount of $862,500 matured on the earlier of (i) the six-month anniversary of the original date of issuance of such ICG Note, or (ii) ten trading days after the consummation of any capital raise resulting in gross proceeds of at least $3,000,000. The ICG Note in the principal amount of $287,500 matured on the earlier of (i) the six-month anniversary of the original date of issuance of such ICG Note, or (ii) 90 trading days of after the consummation of any public offering resulting in gross proceeds of at least $3,000,000. If, however, we did not complete a capital raise by the six-month anniversary of the original date of issuance of either such ICG Note, then ICG could have elected to be repaid the principal amount of such ICG Note by either (a) receiving 25% of our future monthly cash flows until such time as all principal due under such ICG Note has been repaid and/or (b) converting the unpaid principal amount of such ICG Note into shares of our common stock.  If, following such six-month period, ICG made such election to convert, the outstanding principle balance of the ICG Notes was convertible into shares of common stock at a price per share equal to 80% of the lesser of (i) the average of the closing bid prices of the common stock for each of the ten trading days preceding the date of conversation or (ii) the closing bid price of our common stock on the date of conversion, but in no event less than $11.60 per share.
 
 
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At December 31, 2013, the aggregate outstanding principal amount of the three ICG Notes was $1,725,000. On March 4, 2014, the entire principal amount of the three ICG Notes was converted into 161,215 shares of our common stock.
 
Pursuant to the ICG Purchase Agreement, in connection with the issuance of each ICG Note, we also issued to ICG two-year warrants, or the ICG Warrants, to purchase a number of shares of common stock equal to fifty percent (50%) of the number of shares into which the related ICG Note may be converted on the date of issuance of such ICG Note.  The ICG Warrants were exercisable at an exercise price of 4.80 per share. In November 2013, ICG exercised all of the warrants on a cashless basis and received 138,396 shares of common stock.
 
At the initial closing under the ICG Purchase Agreement, we paid to Aegis Capital Corp., the representative of the underwriters in our November 2013 equity offering, a placement agent fee in the amount of $69,000 for its services as placement agent for the securities sold at such closing. At the second closing under the ICG Purchase Agreement, we paid to Aegis Capital Corp. a placement agent fee in the amount of $23,000 for its services as placement agent for the securities sold at such closing. At the third closing under the ICG Purchase Agreement, we paid to Aegis Capital Corp. a placement agent fee of $34,750 for its services as placement agent for the securities sold at such closing.
 
Wellington Promissory Note. On September 17, 2012, we entered into a promissory note, or the Wellington Note, with Wellington Shields & Co. LLC, or Wellington, as evidence of the fees we owed to Wellington for services rendered relating to the MidMarket Loan Agreement.  The Wellington Note was for a term of 35 days with interest in arrears from September 17, 2012 at the lowest applicable federal rate of interest. As of December 31, 2012, $95,000 of principal plus accrued interest remained outstanding on the Wellington Note and we were in default due to our failure to pay such amounts in full.  The Wellington Note was paid in full in May 2013.
 
Note and Warrant Purchase Agreement with UTA Capital LLC.  On August 6, 2010, we secured a working capital loan from UTA Capital LLC, with Digital Comm as the borrower.  In connection with such loan, we issued to UTA Capital, LLC warrants initially to purchase 41,905 shares of our common stock with an exercise price of $75.00 per share.  The warrants were exchanged for 52,190 shares of common stock on September 6, 2012.  We paid off the remaining outstanding balance of this loan in September 2012.
 
Obligations Under Purchase Agreements for Recent Acquisitions
 
In connection with the acquisitions of our subsidiaries, we entered into purchase agreements pursuant to which we agreed to certain on-going financial and other obligations.  The following is a summary of the material terms of the purchase agreements for our recent and pending acquisitions for which we have on-going financial obligations.
 
T N S, Inc.  On September 17, 2012, we entered into a Stock Purchase Agreement (the “T N S Agreement”) with the stockholders of T N S pursuant to which we acquired all the outstanding capital stock of T N S for the following consideration paid or issued by us at the closing: (i) cash in the amount of $700,000, (ii) 4,150 shares of our Series F Preferred Stock, of which 575 shares are contingent and are subject to cancellation in whole or in part if T N S does not meet certain operating results for the year ending September 30, 2013, and (iii) 10,000 shares of our common stock.
 
In addition, in the T N S Agreement, we agreed that, upon completion of this offering, we will issue to the sellers an aggregate number of shares of common stock equal to (i) $200,000 divided by (ii) the offering price per share of our common stock in this offering. We have valued such obligation at $259,550 as of the acquisition date and recorded such amount as a liability as of such date.
 
As additional consideration, we agreed to pay the sellers an amount equal to 20% of T N S’s adjusted EBITDA in excess of $1,275,000 for each of the three 12-month periods immediately following the closing date.  During such 36-month period, we agreed to operate T N S in the ordinary course with the commercially-reasonable objective of maximizing the amount payable to the sellers with respect to such three 12-month periods. Finally, in the event the adjusted EBITDA of T N S for the 12-month period beginning October 1, 2012 is greater or less than $1,250,000, we also agreed to issue or cancel, as appropriate, shares of Series F Preferred Stock based on an agreed-upon formula.  We valued the contingent consideration likely to be paid at $557,933 as of the date of the acquisition.
 
In the T N S Agreement, we granted the sellers the right to put to us the shares of common stock issued at the closing for $50.00 per share, beginning 18 months after the closing and continuing for 60 days thereafter. In addition, the holders of the Series F Preferred Stock could demand that an aggregate of 3,000 shares of Series F Preferred Stock be redeemed beginning on November 27, 2012 at a redemption price of $1,000 per share, with the redemption to occur within 20 days of such request.  The holders could have also requested that an additional 575 shares of Series F Preferred Stock be redeemed beginning on September 17, 2013 and that any additional shares of Series F Preferred Stock be redeemed beginning on September 17, 2014.

On December 21, 2013 we entered into agreement with TNS sellers to satisfy all our outstanding obligations related to the TNS agreement. Based on the terms of that agreement we settled all our remaining obligations to the TNS sellers by converting the 1,150 shares of  Series F Preferred Stock owned by such sellers, along with the settlement of the common shares with a put option, issued additional shares to settle contingent consideration and the shares to be issued in connection with our public offering which aggregated to 466,702 shares of our common stock. At the time of settlement, there was no contingent consideration outstanding. The shares issued to settle the contingent consideration arrangement resulted in a loss of $2.2 million.
 
 
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Rives-Monteiro Engineering LLC and Rives-Monteiro Leasing, LLC.  On November 15, 2011, we entered into, and on December 14, 2011 we amended, a Stock Purchase Agreement (the “Rives-Monteiro Agreement”) with the two members of RM Engineering and RM Leasing (collectively Rives-Monteiro) pursuant to which we acquired 49% of the membership interests of RM Engineering, were granted the right to purchase the remaining 51% of RM Engineering for $1.00 and acquired all of the membership interests of RM Leasing for the following consideration: (i) a cash payment in the amount of $300,000, of which $100,000 was paid on December 29, 2011, the date of consummation of the acquisitions, $100,000 was payable on or before March 29, 2012, and $100,000 was payable on or before June 29, 2012, (ii) 15,000 shares of common stock, (iii) the assumption of indebtedness in the aggregate amount of $211,455, (iv) an amount equal to 50% of the net income of RM Engineering during the 18-month period following date of acquisition of RM Engineering, and (v) warrants to purchase up to 1,000 additional shares of common stock at a price equal to the lower of a 25% discount to the market price of the common stock on the date of exercise or $150.00 per share, for each $500,000 of EBITDA earned by RM Engineering during the 24-month period following the date of acquisition of RM Engineering.  The cash payments in the aggregate amount of $200,000 were not paid when due in March and June 2012, and the parties have agreed that such payments will be made on or prior to the closing of this offering. We valued the contingent consideration likely to be paid at $126,287 as of December 31, 2012. As of March 31, 2013, we determined, based upon the operating results of RM Engineering since the date of acquisition, that the fair value of this contingent consideration should be adjusted to $0 and no contingent consideration will be earned.
 
AW Solutions. On April 3, 2013, we entered into a Purchase Agreement (the “AWS Agreement”) with AW Solutions Inc., AW Solutions Puerto Rico, LLC and each of the equity owners of such companies pursuant to which we acquired all of the outstanding capital stock of AW Solutions Inc. and the membership interests of AW Solutions Puerto Rico, LLC for an aggregate purchase price of $8,760,097, subject to certain customary working capital adjustments.
 
At the closing of the acquisition on April 15, 2013, we made a cash payment to the sellers in the amount of $475,000 (the “Closing Date Cash Payment”), and made a cash payment in the amount of $25,000 to an escrow agent to be held in escrow in accordance with the terms of an escrow agreement. We also issued promissory notes (the “AW Notes”) to each of the sellers in the aggregate principal amount of $2,107,804. The AW Notes bear interest at the rate of 0.22% per annum and are payable within five business days of the earlier of (i) the date of consummation of this offering or (ii) September 30, 2013. On the maturity date of the AW Notes, 5% of the then-outstanding principal balance of the AW Notes will be delivered by us to the escrow agent to be held in escrow. The AW Notes are secured by a lien on the accounts receivable of AW Solutions as of the closing date pursuant to a security agreement among the sellers, AW Solutions and our company.  If we default on the AW Notes, the sellers may exercise their lien on the accounts receivable of AW Solutions. As additional consideration for the purchase of AW Solutions, we issued to the sellers an aggregate of 203,735 shares of our common stock. Any amounts remaining held in escrow by the escrow agent not subject to any claims shall be released to the sellers nine months after the closing date.
 
The AWS Agreement provides for certain earn-out payments to the Sellers based on the first and second anniversary EBITDA of AW Solutions. Following the first anniversary of the closing date, we will calculate the EBITDA of AW Solutions for the twelve-month period beginning on the closing date and ending on the first anniversary of the closing date (the “First Anniversary EBITDA”), which will be subject to review by the sellers in accordance with the AWS Agreement. If required, we will make an earn-out payment to the Sellers based on the First Anniversary EBITDA as follows (the “First EBITDA Adjustment”):
 
 
(i)
if the First Anniversary EBITDA is less than $2,000,000, the First EBITDA Adjustment will be zero;
 
 
(ii)
if the First Anniversary EBITDA is equal to or greater than $2,000,000 and less than or equal to $3,000,000, then the First EBITDA Adjustment will be equal to the First Anniversary EBITDA and will be paid by us to the sellers in cash;
 
 
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(iii)
if the First Anniversary EBITDA is greater than $3,000,000 and less than or equal to $4,000,000, then the First EBITDA Adjustment will be equal to 1.5 times the First Anniversary EBITDA and will be paid by us to the sellers in cash;
 
 
(iv)
if the First Anniversary EBITDA is greater than $4,000,000 and less than or equal to $5,000,000, then the First EBITDA Adjustment will be equal to 2.0 times the First Anniversary EBITDA, of which 50% will be paid by us to the sellers in cash and 50% will be paid by the issuance to the sellers of unregistered shares of common stock at a price per share equal to the closing price of the common stock on the first anniversary of the closing date; or
 
 
(v)
if the First Anniversary EBITDA is greater than $5,000,000, then the First EBITDA Adjustment will be equal to 2.25 times the First Anniversary EBITDA, of which 50% will be paid by us to the sellers in cash and 50% will be paid by the issuance to the sellers of unregistered shares of common stock at a price per share equal to the closing price of the common stock on the first anniversary of the closing date.
 
Following the second anniversary of the closing date, we will calculate the EBITDA of AW Solutions for the twelve-month period beginning on the first anniversary of the closing date and ending on the second anniversary of the closing date (the “Second Anniversary EBITDA”), which will be subject to review by the sellers in accordance with the AWS Agreement. We will make an earn-out payment to the sellers based on the Second Anniversary EBITDA as follows (the “Second EBITDA Adjustment”):
 
 
(i)
if the Second Anniversary EBITDA is less than or equal to the First Anniversary EBITDA, then the Second EBITDA Adjustment will be zero;
 
 
(ii)
if the Second Anniversary EBITDA exceeds the First Anniversary EBITDA (the “EBITDA Growth Amount”) by an amount less than $1,000,000, the Second EBITDA Adjustment will be equal to 2.0 times the EBITDA Growth Amount and will be paid us to the sellers in cash;
 
 
(iii)
if the EBITDA Growth Amount is equal to or greater than $1,000,000 and less than $3,000,000, then the Second EBITDA Adjustment will be equal to 2.25 times the EBITDA Growth Amount, of which 88.88% will be paid by us to the sellers in cash and 11.12% will be paid by the issuance to the sellers of unregistered shares of common stock at a price per share equal to the closing price of the common stock on the second anniversary of the closing date; or
 
 
(iv)
if the EBITDA Growth Amount is equal to or greater than $3,000,00, then the Second EBITDA Adjustment will be equal to 2.5 times the EBITDA Growth Amount, of which 80% will be paid by us to the sellers in cash and 20% will be paid by the issuance to the sellers of unregistered shares of common stock at a price per share equal to the closing price of the common stock on second anniversary of the closing date.
 
On December 31, 2013, we evaluated the amount of contingent consideration to be paid and increased the amount by $1.7 million to $4.4 million.
 
RentVM.  On February 3, 2014, we entered into a Stock Purchase Agreement (the “RentVM Agreement”) with RentVM and the stockholders of RentVM pursuant to which we acquired all the outstanding capital stock of RentVM.  In consideration for such shares of capital stock, at closing we issued 400,000 shares of our common stock, of which (i) an aggregate of 331,601 of the shares were issued to the sellers and (ii) 68,399 of the shares were placed in escrow (the “Escrow Shares”).  The Escrow Shares secure, among other things, the sellers’ indemnification obligations under the RentVM Agreement.  Notwithstanding the foregoing, provided no claim for indemnity has been made, or if a claim has been made and there are sufficient Escrow Shares remaining to satisfy such claim, the sellers may request a release of up to 25% of the remaining Escrow Shares to cover personal tax liabilities associated with the acquisition.
 
Up to and including the 90th calendar day following the closing date of the acquisition, we have the option to purchase from the sellers, on a pro rata basis, for an aggregate option purchase price of $1,000,000 in cash, a number of shares of our common stock equal to the quotient of $1,000,000 divided by $14.62 (the closing price of our common stock on the trading day immediately preceding the date of the RentVM Agreement).
 
Integration Partners – NY Corporation.  Effective as of January 1, 2014, we consummated the acquisition of all of the outstanding capital stock of IPC, pursuant to the terms of a Stock Purchase Agreement, dated as of December 12, 2013 and amended on January 1, 2014 (the “IPC Agreement”), by and among IPC, the sole stockholders of IPC and our company. The purchase price for the acquisition was paid as follows:
 
 
an aggregate of $12,509,747 was paid to owners of IPC;
 
 
a convertible promissory note was issued to an owner of IPC in the original principal amount of $6,254,873;

 
45,676 shares of our common stock will be issued to an owner of IPC or his designee(s);
 
 
5,886 shares of our common stock will be issued to certain owners of IPC or their respective designee(s); and
 
 
$941,594 and 47,080 shares of our common stock was placed in escrow to secure the sellers’ indemnification and certain other obligations under the IPC Agreement.
 
 
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As additional earn-out consideration, pursuant to the terms of the IPC Agreement, we will pay to a former owner of IPC an amount equal to (i) the product of 0.6 multiplied by the EBITDA of IPC for the 12-month period beginning on January 1, 2014 (the “Forward EBITDA”), plus (ii) in the event that the Forward EBITDA exceeds the closing trailing-twelve-month EBITDA by 5.0% or more, an amount equal to 2.0 multiplied by this difference, which amount will be payable in cash, or at our election, shares of our common stock. We will record any contingent consideration paid as compensation expense in the period earned.
 
The promissory note we issued at closing accrues interest at the rate of 8% per annum, and all principal and interest accruing thereunder is due and payable on December 31, 2014.  At the election of the holder of such promissory note, such promissory note is convertible into shares of our common stock at a conversion price of $16.99 per share (subject to equitable adjustments for stock dividends, stock splits, recapitalizations and other similar events).  Beginning on July 1, 2014, if our common stock is trading at a price of greater than or equal to $16.99 for ten consecutive trading days, we may elect to force the conversion of such promissory note.
 
Proceeds from Equity Issuances.
 
In the years ended December 31, 2013 and 2012, we raised net proceeds of $5.8 million and $6.9 million, respectively, through public and private sales of equity securities.
 
Accounts Receivable
 
We had gross accounts receivable at December 31, 2013 and 2012 of $8.6 million and $8.2 million, respectively. Accounts receivable at December 31, 2012 was significant relative to the annual revenues for the year ended December 31, 2012 for the following reasons:
 
 
We acquired ERFS on December 17, 2012. The revenue we recorded for ERFS for the year ended December 31 2012 was $146,036, while the accounts receivable for ERFS included in our consolidated accounts receivable at December 31, 2012 was $821,357.
 
 
We acquired T N S on September 17, 2012. The revenue that was included for T N S from September 17, 2012 through December 31, 2012 was $1,042,367, while the amount of accounts receivable included in our consolidated accounts receivable on December 31, 2012 was $558,849.
 
 
We acquired the ADEX entities on September 17, 2012. The revenue that was included for the ADEX entities from September 17, 2012 through December 31, 2012 was $10,577,197, while the amount of accounts receivable included in our consolidated accounts receivable on December 31, 2012 was $6,758,439.
 
Our days sales outstanding calculated on an annual basis was not meaningful at December 31, 2012 because we had owned the companies noted above only for a short period. Our days sales outstanding as of December 31, 2013 was 61 days, which we believe is more representative of what should be expected going forward.
 
Working Capital
 
At December 31, 2013, we had working capital of approximately $4.2 million, as compared to a working capital deficit of approximately $4.7 million at December 31, 2012.  The increase of $8.9 million in our working capital from December 31, 2012 to December 31, 2013 was primarily the result of an increase in cash of approximately $17.3 million resulting primarily from the proceeds of our sale of $11.6 million aggregate principal amount of the Convertible Debentures and $2.0 million of additional debt securities in December 2013.  The increase in current assets was offset, in part, by the increase in current liabilites at December 31, 2013 that was due primarily to an increase in  accounts payable and accrued expenses of $5.2 million.  The increase in accounts payable was primarily the result of increased legal and accounting fees and expenses of approximately $1.0 million, a significant portion of which related to services provided for our public offering of equity securities in the fourth quarter of 2013, accrued interest of $1.7 million and accrued dividends on preferred stock of $0.5 million.

The increase in our working capital at December 31, 2013 was attributable, in part, to our requirement for a cash payment of approximately $12.5 million in connection with our acquisition of IPC on January 1, 2014.  Giving effect to such cash payment on January 1, 2014 and to the increase in our working capital in the amount of approximately $0.8 million due to our consolidation  of the working capital of IPC as of such date, on a pro forma basis we would have had a working capital deficit of approximately $7.6 million at December 31, 2013.  We raised $11.6 million through the issuance of the Convertible Debentures, and an additional $2.0 million through the sale of debt securities, in December 2013. The proceeds of such financings were used for the cash portion of the purchase price of IPC.
 
 
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On or prior to December 31, 2014, we have obligations relating to the payment of indebtedness as follows:
 
 
$3,925,000 with respect to our note payable to MMD Genesis, which is due in June 2014;

  
approximately $259,000 with respect to the bank line of credit of RM Engineering, which is due in July 2014;

  
an amount payable to the sellers of AW Solutions in May 2014, which will be calculated based upon the EBITDA of AW Solutions and for which we have recorded a contingent liability for contingent consideration in the amount of approximately $2.6 million ;

  
$5.3 million payable to the holders of the Convertible Debentures, which is payable in six monthly installments commencing in July 2014; and

  
$6.3 million payable to a seller of IPC in respect of a convertible promissory note that matures on December 31, 2014.
 
We anticipate meeting our cash obligations on our indebtedness that is payable on or prior to December 31, 2014 from earnings from operations, including in particular the operations of ADEX, T N S, AW Solutions and IPC, each of which we recently acquired, and possibly from the proceeds of additional indebtedness and equity raises.  We anticipate meeting our cash obligations in connection with our acquisitions of VaultLogix and Telco from the sale of additional debt or equity securities. There can be no assurance, however, that we will be able to obtain any additional financing on terms that are acceptable to us, if at all.
 
We anticipate that our earnings from operations and a portion of the proceeds from the additional financings discussed above will be sufficient to fund our debt repayment obligations.  If we are not successful in obtaining additional financing, we expect that we will be able to renegotiate and extend certain of our notes payable as required to enable us to meet our debt obligations as they become due, although there can be no assurance we will be able to do so. 
 
 
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Cash Flows.
 
The following summary of our cash flows for the periods indicated has been derived from our historical consolidated financial statements, which are included elsewhere in this report:
 
Summary of Cash Flows
           
             
 
Year ended December 31,
 
 
2013
 
2012
 
Net cash provided by (used in) operations
  $ 2,792,934     $ (2,975,942 )
Net cash used in investing activities
    (233,377 )     (13,735,393 )
Net cash provided by financing activities
    15,053,126       17,269,028  
 
Net cash used in operating activities.  

We have historically experienced cash deficits from operations as we continued to expand our business and sought to establish economies of scale.  Our largest uses of cash for operating activities are for general and administrative expenses.  Our primary source of cash flow from operating activities is cash receipts from customers.  Our cash flow from operations will continue to be affected principally by the extent to which we grow our revenues and increase our headcount.
 
 Net cash provided by operating activities for the year ended December 31, 2013 of $2.8 million was primarily attributable to a net loss of $24.3 million offset by increases in the fair value of our derivative liability and our accounts payable and accrued expenses of $14.2 million and $6.3 million, respectively.

Net cash used in operating activities for the year ended December 31, 2012 of $3.0 million was primarily attributable to a net loss of $1.2 million and an increase in net accounts receivable of $1.4 million primarily due to revenue growth for the year ended December 31, 2012, which was offset in part by an increase in accounts payable and accrued expenses of $2.1 million.

Net cash used in investing activities.
 
Net cash used in investing activities for the years ended December 31, 2013 and 2012 was $1.2 million and $13.7 million, respectively, consisting primarily of cash used for acquisitions and purchases of capital equipment.

Net cash provided by financing activities.
 
Net cash provided by financing activities for the year ended December 31, 2013 was $15.1 million, which resulted primarily from the proceeds of $17.1 million we received from the sale of the Convertible Debentures and other borrowings, the public offering of our common stock which generated $2.8 million, net of issuance costs, and the proceeds of $0.8 million we received from the sale of preferred stock, offset in part by repayments of notes and loans payable of $3.0 million, increase in deferred loan costs of $1.8 million and the redemption of outstanding preferred stock of $3.0 million.

Net cash provided by financing activities for the year ended December 31, 2012 was $17.3 million, which resulted primarily from the proceeds from the loans under the MidMarket Loan Agreement and the sale of preferred shares.  
 
Rental Obligations.
 
We and our operating subsidiaries have real property leases as described in this report under Item 2. – Properties. These leases expire on various dates through 2017.
 
The future minimum obligation during each year through 2017 under the leases with non-cancelable terms in excess of one year is as follows:
 
Years Ended December 31,
 
Future Minimum
 
   
Lease Payments
 
2014
  $ 449,567  
2015
    219,705  
2016
    112,641  
2017
    66,710  
Total
  $ 848,623  
 
 
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Capital expenditures
 
We had capital expenditures of $124,273 and $89,258 for the years ended December 31, 2013 and 2012, respectively.  We expect our capital expenditures for the 12 months ending December 31, 2014 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.
 
Off-balance sheet arrangements
 
During the years ended December 31, 2013 and 2012, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
 
Contingencies
 
We are involved in claims and legal proceedings arising from the ordinary course of our business.  We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and the amount can be reasonably estimated.  If these estimates and assumptions change or prove to be incorrect, it could have a material impact on our financial statements.
 
Critical accounting policies and estimates
 
The discussion and analysis of our financial condition and results of operations are based on our historical and pro forma consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires management to make certain estimates and assumptions that affect the amounts reported therein and accompanying notes.  On an ongoing basis, we evaluate these estimates and assumptions, including those related to recognition of revenue for costs and estimated earnings in excess of billings, the fair value of reporting units for goodwill impairment analysis, the assessment of impairment of intangibles and other long-lived assets, income taxes, asset lives used in computing depreciation and amortization, allowance for doubtful accounts, stock-based compensation expense for performance-based stock awards derivatives, contingent consideration and accruals for contingencies, including legal matters.  These estimates and assumptions require the use of judgment as to the likelihood of various future outcomes and as a result, actual results could differ materially from these estimates.
 
We have identified the accounting policies below as critical to the accounting for our business operations and the understanding of our results of operations because they involve making significant judgments and estimates that are used in the preparation of our historical and pro forma consolidated financial statements.  The impact of these policies affects our reported and expected financial results and are discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  We have discussed the development, selection and application of our critical accounting policies with the Audit Committee of our board of directors, and the Audit Committee has reviewed the disclosure relating to our critical accounting policies in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
 Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed below, are also important to understanding our historical consolidated financial statements.  The notes to our consolidated financial statements in this report contain additional information related to our accounting policies, including the critical accounting policies described herein, and should be read in conjunction with this discussion.
 
 
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Emerging Growth Company.
 
 On April 5, 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was signed into law.  The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies.  As an “emerging growth company,” we may delay adoption of new or revised accounting standards applicable to public companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period for complying with such new or revised accounting standards.  We have elected not to take advantage of the benefits of this extended transition period.  As a result, our financial statements will be comparable to those of companies that comply with such new or revised accounting standards.  Upon issuance of new or revised accounting standards that apply to our financial statements, we will disclose the date on which we will adopt the recently-issued accounting guidelines.
 
REVENUE RECOGNITION
 
Our revenues are generated from two reportable segments, specialty contracting services and telecommunication staffing services.  We recognize revenue only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the resulting receivable is reasonably assured.
 
The specialty contracting services segment is comprised of  TNS, Tropical, AW Solutions and RM Engineering. Specialty contracting services revenues are derived from contracted services to provide technical engineering services along with contracting services to commercial and governmental customers. The contracts of TNS, Tropical and RM Engineering provide that payment for our services may be based on either 1) direct labor hours at fixed hourly rates or 2) fixed-price contracts. The services provided under the contracts are generally provided within a month. Occasionally, the services may be provided over a period of up to six months.
 
AW Solutions recognizes revenue using the percentage of completion method.   Revenues and fees on these contracts are recognized specifically utilizing the efforts-expended method, which uses measures such as task duration and completion. The efforts-expended approach is an input method used in situations where it is more representative of progress on a contract than the cost-to-cost or the labor-hours methods. We use labor hours as the basis for the percentage of completion calculation, which is measured principally by the percentage of labor hours incurred to date for each contract to the estimated total labor hours for each contract at completion. Provisions for estimated losses on uncompleted contracts, if any, are made in the period in which such losses are determined. Changes in job performance conditions and final contract settlements may result in revisions to costs and income, which are recognized in the period revisions are determined.

AW Solutions also generates revenue from service contracts with certain customers. These contracts are accounted for under the proportional performance method. Under this method, revenue is recognized in proportion to the value provided to the customer for each project as of each reporting date.

The revenues of the telecommunication staffing service segment, which is comprised of the ADEX subsidiaries, are derived from contracted services to provide technical engineering and management solutions to large voice and data communications providers, as specified by their clients. The contracts provide that payments made for our services may be based on either 1) direct labor hours at fixed hourly rates or 2) fixed-price contracts. The services provided under the contracts are generally provided within a month. Occasionally, the services may be provided over a period of up to four months. If it is anticipated that the services will span a period exceeding one month, depending on the contract terms, we will provide either progress billing at least once a month or upon completion of the clients' specifications. The aggregate amount of unbilled work-in-progress recognized as revenues was insignificant at December 31, 2013 and 2012.
 
We sometimes require customers to provide a deposit prior to beginning work on a project. When this occurs, the deposit is recorded as deferred revenue and is recognized in revenue when the work is complete.
 
During 2013 and 2012, we did not recognize any revenue from cloud-based services.
 
Allowances for Doubtful Accounts.
 
We maintain an allowance for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments.  Management analyzes the collectability of accounts receivable balances each period.  This analysis considers the aging of account balances, historical bad debt experience, changes in customer creditworthiness, current economic trends, customer payment activity and other relevant factors.  Should any of these factors change, the estimate made by management may also change, which could affect the level of our future provision for doubtful accounts.  We recognize an increase in the allowance for doubtful accounts when it is probable that a receivable is not collectable and the loss can be reasonably estimated. Any increase in the allowance account has a corresponding negative effect on our results of operations.  We believe that none of our significant customers were experiencing financial difficulties that would materially impact our trade accounts receivable or allowance for doubtful accounts as of December 31, 2013 and 2012.
 
Goodwill and Intangible Assets.
 
 As of December 31, 2013 and 2012, we had goodwill in the amount of $17.1 million and $14.8 million, respectively.  We did not recognize any goodwill impairment during the years ended December 31, 2013 or 2012.
 
 
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We account for goodwill in accordance with Financial Accounting Standards Board (FASB) ASC Topic 350, Intangibles-Goodwill and Other (ASC Topic 350).  Our reporting units and related indefinite-lived intangible assets are tested annually during the fourth fiscal quarter of each year in accordance with ASC Topic 350 in order to determine whether their carrying value exceeds their fair value.  In addition, they are tested on an interim basis if an event occurs or circumstances change between annual tests that would more likely than not reduce their fair value below carrying value.  If we determine the fair value of goodwill or other indefinite-lived intangible assets is less than their carrying value as a result of the tests, an impairment loss is recognized. Impairment losses, if any, are reflected in operating income or loss in the consolidated statements of operations during the period incurred.
 
 In accordance with ASC Topic 360, Impairment or Disposal of Long-Lived Assets, we review finite-lived intangible assets for impairment whenever an event occurs or circumstances change which indicates that the carrying amount of such assets may not be fully recoverable.  Recoverability is determined based on an estimate of undiscounted future cash flows resulting from the use of an asset and its eventual disposition. An impairment loss is measured by comparing the fair value of the asset to its carrying value.  If we determine the fair value of an asset is less than the carrying value, an impairment loss is incurred.  Impairment losses, if any, are reflected in operating income or loss in the consolidated statements of operations during the period incurred.
 
 We use judgment in assessing if goodwill and intangible assets are impaired.  Estimates of fair value are based on our projection of revenues, operating costs, and cash flows taking into consideration historical and anticipated future results, general economic and market conditions, as well as the impact of planned business or operational strategies.  To measure fair value, we employ a combination of present value techniques which reflect market factors.  Changes in our judgments and projections could result in significantly different estimates of fair value potentially resulting in additional impairments of goodwill and other intangible assets.
 
Our goodwill resides in multiple reporting units that are aggregated into our two reporting segments for our goodwill impairment testing. One reporting segment is composed of our telecommunications staffing services, which is comprised of the ADEX entities.  The other reporting segment, specialty contracting services, is an aggregation of our TNS, Tropical, RM Engineering and AW Solutions reporting units.  The profitability of individual reporting units may suffer periodically from downturns in customer demand and other factors resulting from the cyclical nature of our business, the high level of competition existing within our industry, the concentration of our revenues from a limited number of customers, and the level of overall economic activity.  During times of slowing economic conditions, our customers may reduce capital expenditures and defer or cancel pending projects.  Individual reporting units may be relatively more impacted by these factors than us as a whole. As a result, demand for the services of one or more of our reporting units could decline resulting in an impairment of goodwill or intangible assets in one of our reporting segments.
 
Certain of our business units also have other intangible assets, including customer relationships, trade names and non-compete agreements.  As of December 31, 2013 and 2012, we believed the carrying amounts of these intangible assets were recoverable.  However, if adverse events were to occur or circumstances were to change indicating that the carrying amount of such assets may not be fully recoverable, the assets would be reviewed for impairment and the assets could be impaired.
 
Stock-Based Compensation.
 
Our stock-based award programs are intended to attract, retain and reward employees, officers, directors and consultants, and to align stockholder and employee interests.  We granted stock-based awards to individuals in both 2013 and 2012.  Our policy going forward will be to issue awards under our 2012 Employee Incentive Plan and Employee Stock Purchase Plan.
 
Compensation expense for stock-based awards is based on the fair value of the awards at the measurement date and is included in operating expenses.  The fair value of stock option grants is estimated on the date of grant using the Black-Scholes option pricing model based on certain assumptions including: expected volatility based on the historical price of our stock over the expected life of the option, the risk-free rate of return based on the United States treasury yield curve in effect at the time of the grant for the expected term of the option, the expected life based on the period of time the options are expected to be outstanding using historical data to estimate option exercise and employee termination; and dividend yield based on history and expectation of dividend payments. Stock options generally vest ratably over a three-year period and are exercisable over a period up to ten years.
 
The fair value of restricted stock is estimated on the date of grant and is generally equal to the closing price of our common stock on that date. The price of our common stock price has varied greatly during the years ended December 31, 2013 and 2012.  Some of the factors that influenced the market price of our stock during these periods include:
 
 
the closing of four acquisitions (ADEX, T N S, ERFS and AW Solutions in 2012 and 2013);
 
 
increasing indebtedness to fund such acquisitions;
 
 
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the entering into of a definitive agreement to acquire IPC and Telco;
 
 
the approval and eventual effectuation of a 1-for-125 reverse stock split in January 2013 and a one-for-four reverse stock split in August 2013, which caused uncertainty and volatility; and
 
 
our stock being very thinly traded prior to the listing of our common stock on the Nasdaq Capital Market in October 2013, resulting in large fluctuations.
 
The total amount of stock-based compensation expense ultimately is based on the number of awards that actually vest and fluctuates as a result of performance criteria, as well as the vesting period of all stock-based awards.  Accordingly, the amount of compensation expense recognized during any fiscal year may not be representative of future stock-based compensation expense.  In accordance with ASC Topic 718, Compensation – Stock Compensation (ASC Topic 718), compensation costs for performance-based awards are recognized over the requisite service period if it is probable that the performance goal will be satisfied.  We use our best judgment to determine probability of achieving the performance goals in each reporting period and recognize compensation costs based on the number of shares that are expected to vest.
 
The following tables summarize our stock-based compensation for the years ended December 31, 2013 and 2012.
 
Year Ended December 31, 2013
 
 
Date
 
Shares of
Common Stock
 
 
Closing Stock
Price
on Grant Date
 
Fair Value
Per Share
 
Fair Value
of Instrument
Granted
 
2/6/2013   5,000   $ 2.88   $ 2.88   $ 14,400