10-Q 1 f10q0315_intercloud.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015

 

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: 000-32037

 

INTERCLOUD SYSTEMS, INC.
(Name of registrant as specified in its charter)

 

DELAWARE   65-0963722
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

1030 BROAD STREET, SUITE 102,
SHREWSBURY, NJ
  07702
(Address of principal executive offices)   (Zip Code)

 

(732) 898-6308
(Registrant’s telephone number, including area code)

 

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 reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒     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  ☒    No  ☐

 

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐   No  ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 23,204,947 shares of common stock were issued and outstanding as of May 8, 2015.

 

 

 

 

 

TABLE OF CONTENTS

 

      Page No.
  PART I. - FINANCIAL INFORMATION    
       
Item 1. Unaudited Condensed Consolidated Financial Statements.   4
       
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.   43
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk.   47
       
Item 4. Controls and Procedures.   47
       
  PART II. - OTHER INFORMATION    
       
Item 1. Legal Proceedings.   48
       
Item 1A. Risk Factors.   48
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.   49
       
Item 3. Defaults Upon Senior Securities.   50
       
Item 4. Mine Safety Disclosures.   50
       
Item 5. Other Information.   50
       
Item 6. Exhibits.   50

 

2
 

 

FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements. Forward-looking statements include all statements that do not directly or exclusively relate to historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “forecasts,” “predicts,” “potential,” or the negative of those terms, and similar expressions and comparable terminology. These include, but are not limited to, statements relating to future events or our future financial and operating results, plans, objectives, expectations and intentions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not be achieved. Forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to known and unknown risks, uncertainties and other factors outside of our control that could cause our actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. Actual results may differ materially from those anticipated or implied in the forward-looking statements.

You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. You should also consider carefully the statements under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended December 31, 2014, filed on March 23, 2015, which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements. Such risks and uncertainties include:

  our ability to successfully execute our business strategies, including the acquisition of other businesses to grow our company and integration of recent and future acquisitions;

  changes in aggregate capital spending, cyclicality and other economic conditions, and domestic and international demand in the industries we serve;

  our ability to adopt and master new technologies and adjust certain fixed costs and expenses to adapt to our industry’s and customers’ evolving demands;

  our ability to adequately expand our sales force and attract and retain key personnel and skilled labor;

  shifts in geographic concentration of our customers, supplies and labor pools and seasonal fluctuations in demand for our services;

  our dependence on third-party subcontractors to perform some of the work on our contracts;

  our competitors developing the expertise, experience and resources to provide services that are equal or superior in both price and quality to our services;

  our ability to obtain additional financing in sufficient amounts or on acceptable terms when required;

  our material weaknesses in internal control over financial reporting and our ability to maintain effective controls over financial reporting in the future;

  our ability to comply with certain financial covenants of our debt obligations;

  the impact of new or changed laws, regulations or other industry standards that could adversely affect our ability to conduct our business; 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.

These risk factors also 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, you are cautioned not to place undue reliance on any forward-looking statements and you should carefully review this report in its entirety. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

 

Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. 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.

OTHER PERTINENT INFORMATION

 

Unless specifically set forth to the contrary, when used in this report the terms “we”, “our”, the “Company” and similar terms refer to InterCloud Systems, Inc., a Delaware corporation, and its consolidated subsidiaries.

The information that appears on our web site at www.InterCloudsys.com is not part of this report.

 

3
 

 

PART 1 - FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

INTERCLOUD SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

 

   March 31,   December 31, 
   2015   2014 
ASSETS        
Current Assets:        
Cash  $4,770   $5,470 
Accounts receivable, net of allowances of $1,299 and $1,545, respectively   13,931    19,421 
Inventory   1,287    1,031 
Deferred loan costs   244    1,278 
Loan receivable   400    300 
Other current assets   474    1,448 
Total current assets   21,106    28,948 
           
Property and equipment, net   2,372    2,210 
Goodwill   57,914    60,354 
Intangible assets, net   32,175    29,699 
Other assets   146    146 
Total assets  $113,713   $121,357 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current Liabilities:          
Accounts payable and accrued expenses  $14,000   $19,017 
Deferred revenue   3,058    3,601 
Income taxes payable   745    728 
Bank debt, current portion   208    252 
Notes, related parties   100    7,238 
Contingent consideration   2,873    2,725 
Derivative financial instruments   713    18 
Term loans, current portion, net of debt discount   7,642    8,387 
Total current liabilities   29,339    41,966 
           
Long-term Liabilities:          
Long-term deferred revenue   23    79 
Bank debt, net of current portion   40    53 
Notes, related parties, net of current portion   17,802    11,789 
Deferred income taxes   2,691    1,023 
Term loans, net of current portion and debt discount   25,917    26,993 
Long-term contingent consideration   -    823 
Derivative financial instruments   5,139    2,391 
Total long-term liabilities   51,612    43,151 
           
Total liabilities   80,951    85,117 
           
Commitments and Contingencies          
           
Stockholders' Equity:          
Common stock; $0.0001 par value; 500,000,000 shares authorized; 19,995,642 and 17,910,081 issued and outstanding as of March 31, 2015 and December 31, 2014, respectively   2    2 
Common stock warrants, no par   653    2 
Treasury stock, at cost - 850 and 850 shares, respectively   -    - 
Additional paid-in capital   98,783    92,745 
Accumulated deficit   (67,092)   (56,738)
Total InterCloud Systems, Inc. stockholders' equity   32,346    36,011 
Non-controlling interest   416    229 
Total stockholders' equity   32,762    36,240 
           
Total liabilities, non-controlling interest and stockholders’ equity  $113,713   $121,357 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4
 

 

INTERCLOUD SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

 

   For the three months ended 
   March 31, 
   2015   2014 
       (Revised) 
         
Service revenue  $17,089   $9,876 
Product revenue   3,904    4,199 
Total revenue   20,993    14,075 
Cost of revenue   13,618    10,141 
Gross profit   7,375    3,934 
           
Operating expenses:          
Depreciation and amortization   1,750    518 
Salaries and wages   5,709    3,560 
Selling, general and administrative   3,382    2,587 
Change in fair value of contingent consideration   (317)   - 
Total operating expenses   10,524    6,665 
           
Loss from operations   (3,149)   (2,731)
           
Other income (expenses):          
Change in fair value of derivative instruments   1,025    20,978 
Interest expense   (3,660)   (3,277)
Loss on conversion of debt   (17)   - 
Loss on extinguishment of debt   (1,207)   (5,740)
Loss on modification of debt   (2,991)   - 
Loss on debt discount   -    (2,385)
Other expense   (25)   - 
Total other income (expense)   (6,875)   9,576 
           
(Loss) income before provision for (benefit from) income taxes   (10,024)   6,845 
           
Provision for (benefit from) income taxes   143    (3,556)
           
Net (loss) income   (10,167)   10,401 
           
Net loss attributable to non-controlling interest   (187)   (53)
           
Net (loss) income attributable to InterCloud Systems, Inc. common stockholders  $(10,354)  $10,348 
           
Basic (loss) income per share attributable to InterCloud Systems, Inc. common stockholders  $(0.60)  $1.10 
           
Diluted loss per share attributable to InterCloud Systems, Inc. common stockholders  $(0.60)  $(0.96)
           
Basic weighted average common shares outstanding   17,203,434    9,449,622 
Diluted weighted average common shares outstanding   17,203,434    11,115,334 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5
 

 

INTERCLOUD SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

(UNAUDITED)

 

      Common Stock       Additional       Non-     
   Common Stock   Warrants   Treasury Stock   Paid-in   Accumulated   Controlling     
   Shares   $   Shares   $   Shares   $   Capital   Deficit   Interest   Total 
                                         
Ending balance, December 31, 2014   17,910,081   $2    190,609   $2    850   $-   $92,745   $(56,738)  $229   $36,240 
                                                   
Issuance of shares upon conversion of debt   42,553    -    -    -    -    -    117    -    -    117 
Issuance of shares to non-employees for services   147,586    -    -    -    -    -    374    -    -    374 
Issuance of shares to employees for services   216,000    -    -    -    -    -    880    -    -    880 
Issuance of shares upon extinguishment of debt   445,422    -    -    -    -    -    1,086    -    -    1,086 
Issuance of shares upon modification of debt   375,890    -    -    -    -    -    920    -    -    920 
Issuance of shares for settlement of interest   144,508    -    -    -    -    -    343    -    -    343 
Issuance of shares upon restructuring of debt   100,000    -    -    -    -    -    292    -    -    292 
Issuance of shares upon settlement of accounts payable   300,000    -    -    105    -    -    648    -    -    753 
Issuance of shares for payout of incentives earned   231,788    -    -    -    -    -    531    -    -    531 
Shares issued to third party   1,961    -    -    -    -    -    5    -    -    5 
Issuance of shares for contingent consideration   79,853    -    -    -    -    -    306    -    -    306 
Reclassification of options granted   -    -    -    -    -    -    536    -    -    536 
Reclassification of warrants   -    -    -    546    -    -    -    -    -    546 
Net loss   -    -    -    -    -    -    -    (10,354)   187    (10,167)
                                                   
Ending balance, March 31, 2015   19,995,642   $2    190,609   $653    850   $-   $98,783   $(67,092)  $416   $32,762 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

6
 

 

INTERCLOUD SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

   For the three months ended March 31, 
   2015   2014 
       (Revised) 
Cash flows from operating activities:        
Net (loss) income  $(10,167)  $10,401 
           
Adjustments to reconcile net (loss) income to net cash provided by (used in) operations:          
Depreciation and amortization   1,750    518 
Provision for bad debts   56    - 
Amortization of debt discount and deferred debt issuance costs   1,883    2,056 
Stock compensation for services   949    - 
Issuance of shares to non-employees for services   374    925 
Change in fair value of derivative instruments   (1,025)   (20,978)
Shares issued to third party   5    - 
Loss on fair value of conversion feature   -    2,385 
Deferred income taxes   106    (3,693)
Loss on conversion of debt   17    5,740 
Loss on extinguishment of debt   1,207    144 
Loss on modification of debt   2,991    - 
Loss on settlement of contingent consideration   53    - 
Change in fair value of contingent consideration   (370)   - 
Changes in operating assets and liabilities:          
Accounts receivable   5,434    1,354 
Inventory   (256)   (1,471)
Other assets   973    599 
Deferred revenue   (599)   368 
Accounts payable and accrued expenses   (1,871)   (1,624)
Total adjustments   11,677    (13,677)
Net cash provided by (used in) operating activities   1,510    (3,276)
           
Cash flows from investing activities:          
Purchases of equipment   (88)   (84)
Capitalization of software costs   (300)   - 
Issuance of notes receivable   (100)   - 
Cash paid for acquisitions, net of cash received   -    (12,115)
Net cash used in investing activities   (488)   (12,199)
           
Cash flows from financing activities:          
Settlement of contingent consideration   -    (1,779)
Repayments of loans to third-parties   -    183 
Repayments of bank borrowings   (57)   (50)
Repayments of notes and loans payable   (1,665)   (10,044)
Proceeds from notes and loans payable   -    9,582 
Proceeds from related party borrowings   -    3,000 
Repayment of related party borrowings   -    (3)
Exercise of public offering warrants   -    675 
Net cash (used in ) provided by financing activities  $(1,722)  $1,564 
           
Net decrease in cash  $(700)  $(13,911)
           
Cash, beginning of period   5,470    17,867 
           
Cash, end of period  $4,770   $3,956 
           
Supplemental disclosures of cash flow information:          
Cash paid for interest  $605   $726 
Cash paid for income taxes  $33   $13 
           
Non-cash investing and financing activities:          
Issuance of shares for settlement of warrants  $-   $900 
Issuance of shares pursuant to settlement of acquisition notes  $-   $814 
Issuance of shares pursuant to conversion of debt  $117   $15,893 
Issuance of shares pursuant to modification of debt  $920   $- 
Issuance of shares pursuant to extinguishment of debt  $1,086   $- 
Issuance of shares pursuant to restructuring of debt  $292   $- 
Issuance of shares pursuant to acquisitions  $-   $6,727 
Additional note payable issued as part of related party debt  modification  $1,728   $- 
Addition to debt discount  $4,146   $6,475 
Conversion of accrued interest to note payable  $390   $- 
Issuance of shares for Highwire earn out provisions  $306   $- 
Issuance of shares for settlement of interest  $343   $- 
Issuance of shares for settlement of accounts payable  $648   $- 
Issuance of warrants for settlement of accounts payable  $105   $- 
Issuance of shares in lieu of cash compensation  $531   $- 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

7
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

InterCloud Systems, Inc. (the “Company”) was incorporated on November 22, 1999 under the laws of the State of Delaware. Prior to December 31, 2009, the Company was a development-stage company and had limited activity. The Company began filing periodic reports with the Securities and Exchange Commission in November 2000. On October 31, 2013, the Company’s common stock and warrants were listed on The NASDAQ Capital Market under the symbols “ICLD” and “ICLDW,” respectively.

 

Since January 2014, the Company has completed the following material and immaterial acquisitions:

 

Integration Partners-NY Corporation.  In January 2014, the Company acquired Integration Partners-NY Corporation (“IPC”), a full-service voice and data network engineering firm based in New York.  IPC serves both corporate enterprises and telecommunications service providers.

 

RentVM, Inc.   In February 2014, the Company acquired RentVM, Inc. (“RentVM”), a New Jersey-based provider of infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS) and software-as-a-service (SaaS) technology to SMB, enterprise, and carrier customers across all major verticals. Iaas, Paas and Saas allow customers to run their applications on RentVM equipment without the customer purchasing capital equipment in a private, public, or hybrid cloud environment. RentVM expands the Company’s managed services capabilities by providing a software-defined data center (SDDC) platform to offer enterprise-grade cloud computing solutions.

 

Highwire Broadview Technologies, Inc. On April 1, 2014, the Company’s subsidiary, ADEX Corporation, acquired the assets of Broadview Technologies, Inc., DBA High Wire Networks (“High Wire”), a telecommunications infrastructure engineering firm based in Alabama.

 

Nottingham Enterprises LLC. In July 2014, the Company purchased a 40% interest of Nottingham Enterprises LLC (“Nottingham”), a reseller of telecommunications hardware.

 

VaultLogix, LLC. In October 2014, the Company acquired VaultLogix, LLC and certain related entities (“VaultLogix”), a leading provider of cloud backup services to nearly 10,000 businesses around the world.  VaultLogix safeguards a wide range of enterprise-class operating systems and applications through its unique combination of encryption, block-level data duplication and compression.  In addition, through its partner program, VaultLogix offers software branding, a robust partner portal and dedicated account management.

 

PCS Holding LLC. On December 1, 2014, the Company’s subsidiary, VaultLogix, purchased the assets of Axim Cloud (“Axim”). Axim sells Amazon web services, including cloud storage services.

 

Logical Link. On December 1, 2014, the Company’s subsidiary, AW Solutions LLC, acquired the assets of FRJ, LLC, DBA Logical Link, an Outside Plant (OSP) engineering company that specializes in field design and drafting of Wireline, Fiber & DAS deployments. Logical Link also performs construction and installation through subcontractors. 

 

8
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

Business Combinations

 

The Company accounts for its business combinations under the provisions of Accounting Standards Codification ("ASC") Topic 805-10, Business Combinations ("ASC 805-10"), which requires that the purchase method of accounting be used for all business combinations. Assets acquired and liabilities assumed, including non-controlling interests, are recorded at the date of acquisition at their respective fair values.  ASC 805-10 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination.  Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred.  If the business combination provides for contingent consideration, the Company records the contingent consideration at fair value at the acquisition date and any changes in fair value after the acquisition date are accounted for as measurement-period adjustments if they pertain to additional information about facts and circumstances that existed at the acquisition date and that the Company obtained during the measurement period.  Changes in fair value of contingent consideration resulting from events after the acquisition date, such as earn-outs, are recognized as follows: 1) if the contingent consideration is classified as equity, the contingent consideration is not re-measured and its subsequent settlement is accounted for within equity, or 2) if the contingent consideration is classified as a liability, the changes in fair value are recognized in earnings.

 

The estimated fair value of net assets acquired, including the allocation of the fair value to identifiable assets and liabilities, was determined using Level 3 inputs in the fair value hierarchy (see Fair Value of Financial Instruments in Note 2). The estimated fair value of the net assets acquired was determined using the income approach to valuation based on the discounted cash flow method.  Under this method, expected future cash flows of the business on a stand-alone basis are discounted back to a present value.  The estimated fair value of identifiable intangible assets, consisting of customer relationships, the trade names and non-compete agreements acquired, also were determined using an income approach to valuation based on excess cash flow, relief of royalty and discounted cash flow methods.

 

The discounted cash flow valuation method requires the use of assumptions, the most significant of which include: future revenue growth, future earnings before interest, taxes, depreciation and amortization, estimated synergies to be achieved by a market participant as a result of the business combination, marginal tax rate, terminal value growth rate, weighted average cost of capital and discount rate.

 

The excess earnings method used to value customer relationships requires the use of assumptions, the most significant of which include: the remaining useful life, expected revenue, survivor curve, earnings before interest and tax margins, marginal tax rate, contributory asset charges, discount rate and tax amortization benefit.

 

The most significant assumptions under the relief of royalty method used to value trade names and developed technology include: estimated remaining useful life, expected revenue, royalty rate, tax rate, discount rate and tax amortization benefit.  The discounted cash flow method used to value non-compete agreements includes assumptions such as: expected revenue, term of the non-compete agreements, probability and ability to compete, operating margin, tax rate and discount rate.  Management has developed these assumptions on the basis of historical knowledge of the business and projected financial information of the Company.  These assumptions may vary based on future events, perceptions of different market participants and other factors outside the control of management, and such variations may be significant to estimated values. 

 

 The most significant assumptions under the relief of royalty method used to value trade names include: estimated remaining useful life, expected revenue, royalty rate, tax rate, discount rate and tax amortization benefit. The discounted cash flow method used to value non-compete agreements includes assumptions such as: expected revenue, term of the non-compete agreements, probability and ability to compete, operating margin, tax rate and discount rate. Management, with the assistance of a third-party valuation specialist, has developed these assumptions on the basis of historical knowledge of the business and projected financial information of the Company. These assumptions may vary based on future events, perceptions of different market participants and other factors outside the control of management, and such variations may be significant to estimated values.

  

Liquidity

 

During the three months ended March 31, 2015 and the year ended December 31, 2014, the Company suffered recurring losses from operations. At March 31, 2015 and December 31, 2014, the Company had stockholders’ equity of $32,762 and $36,240, respectively. The increase of $4,785 in the Company’s working capital from December 31, 2014 to March 31, 2015 was primarily the result of the restructuring of approximately $9,370 of related party notes payable and settlement of $5,017 in accounts payable and accrued expenses. This increase in working capital was partially offset by $320 in amortization of deferred loan costs, $1,563 in amortization of debt discounts, and $974 in amortization of prepaid expenses. 

 

9
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

On or prior to March 31, 2016, the Company has obligations relating to the payment of indebtedness as follows:

 

$4,000 related to term loans due June 1, 2015 and June 24, 2015;
   
$1,164 related to convertible debentures that are payable in cash or common stock in monthly installments through June 2015;
   
$2,000 related to term loans that are payable in quarterly installments through March 2016;
   
$1,000 related to a term loan due May 16, 2015;
   
$208 related to current payments due on bank loans; and

 

$100 related to a promissory note held by a related party that is due on demand.

 

The Company anticipates meeting its cash obligations on indebtedness that is payable on or prior to March 31, 2016 from earnings from operations, including, in particular, the operations of VaultLogix, which was acquired in October 2014, and possibly from the proceeds of additional indebtedness or equity raises. If the Company is not successful in obtaining additional financing when required, the Company expects that it will be able to renegotiate and extend certain of its notes payable as required to enable it to meet its remaining debt obligations as they become due, although there can be no assurance that the Company will be able to do so.

 

The Company’s future capital requirements for its operations will depend on many factors, including the profitability of its businesses, the number and cash requirements of other acquisition candidates that the Company pursues, and the costs of operations. The Company has been investing in sales personnel in anticipation of increasing revenue opportunities in the cloud and managed services segments of its business, which contributed to the losses from operations.  The Company’s management has taken several actions to ensure that it will have sufficient liquidity to meet its obligations, including the reduction of certain general and administrative expenses, consulting expenses and other professional services fees. During the quarter ended March 31, 2015, the Company restructured the terms of certain related-party promissory notes and term loans which extended the maturity dates and reduced the interest rate accruing on such notes and loans. Additionally, if the Company’s actual revenues are less than forecasted, the Company anticipates implementing headcount reductions to a level that more appropriately matches then-current revenue and expense levels. The Company is evaluating other measures to further improve its liquidity, including, the sale of equity or debt securities and entering into joint ventures with third parties.  Lastly, the Company may elect to reduce certain related-party and third-party debt by converting such debt into common shares. On March 20, 2015, the Company entered into a sale of accounts and security agreement with a financial institution to establish a sale of accounts facility. The transaction is subject to certain customary closing conditions. Currently, those conditions have not been met. The Company’s management believes that these actions will enable the Company to meet its liquidity requirements through March 31, 2016.  There is no assurance that the Company will be successful in any capital-raising efforts that it may undertake to fund operations during 2015.

 

The Company plans to generate positive cash flow from its recently-completed acquisitions to address some of the liquidity concerns.   However, to execute the Company’s business plan, service existing indebtedness and implement its business strategy, the Company anticipates that it will need to obtain additional financing from time to time and may choose to raise additional funds through public or private equity or debt financings, a bank line of credit, borrowings from affiliates or other arrangements.  The Company cannot be sure that any additional funding, if needed, will be available on terms favorable to the Company or at all.  Furthermore, any additional capital raised through the sale of equity or equity-linked securities may dilute the Company’s current stockholders’ ownership and could also result in a decrease in the market price of the Company’s common stock.  The terms of any securities issued by the Company in future capital transactions may be more favorable to new investors and may include the issuance of warrants or other derivative securities, which may have a further dilutive effect.   The Company also may be required to recognize non-cash expenses in connection with certain securities it issues, such as convertible notes and warrants, which may adversely impact the Company’s financial condition. Furthermore, any debt financing, if available, may subject the Company to restrictive covenants and significant interest costs. There can be no assurance that the Company will be able to raise additional capital, when needed, to continue operations in their current form.

  

10
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

Principles of Consolidation and Accounting for Investments in Affiliate Companies

 

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States.  The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, which include Tropical Communications, Inc. (“Tropical”) (since August 2011), Rives-Monteiro Leasing, LLC (“RM Leasing”) (since December 2011), ADEX Corporation, ADEX Puerto Rico, LLC and HighWire (collectively, “ADEX” or “ADEX entities”) (since September 2012), TNS, Inc. (“TNS”) (since September 2012), AW Solutions, Inc. (“AWS”) and AW Solutions Puerto Rico, LLC (“AWS Puerto Rico”) (collectively, the “AWS Entities”) (since April 2013), IPC (since January 2014), RentVM (since February 2014), and VaultLogix (since October 2014). All significant inter-company accounts and transactions have been eliminated in consolidation.

 

The Company consolidates all entities in which it has a controlling voting interest and a variable interest in a variable interest entity (“VIE”) in which the Company is deemed to be the primary beneficiary.

 

The unaudited condensed consolidated financial statements include the accounts of Rives-Montiero Engineering, LLC ("RM Engineering") (since December 2011), in which the Company owns an interest of 49%.  The Company has the ability to exercise its call option to acquire the remaining 51% of RM Engineering for a nominal amount and thus makes all significant decisions related to RM Engineering even though it absorbs only 49% of the losses. Additionally, substantially all of the entity’s activities either involve or are conducted on behalf of the entity by the 51% holder of RM Engineering.

  

The unaudited condensed consolidated financial statements include the accounts of Nottingham Enterprises LLC (“Nottingham”) (since July 2014), in which the Company owns an interest of 40%. Nottingham is a VIE because it meets the following criteria: (i) the entity has insufficient equity to finance its activities without additional subordinated financial support from other parties and the 60% owner guarantees its debt, (ii) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the legal entity, and (iii) substantially all of the legal entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. The Company has the ability to exercise its call option to acquire the remaining 60% of Nottingham for a nominal amount and thus makes all significant decisions related to Nottingham even though it absorbs only 40% of the losses. Additionally, substantially all of the entity’s activities either involve or are conducted on behalf of the entity by the 60% holder of Nottingham.

 

The unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of such statements. These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Additionally, the results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2014 included in the Company’s 2014 Annual Report on Form 10-K, filed with the SEC on March 23, 2015.

 

Segment Information

 

As of December 31, 2014, the Company operated in four operating segments - as an applications and infrastructure provider, as a professional services provider, as a cloud services provider and as a managed services provider. The applications and infrastructure segment provides engineering and professional consulting services and voice, data and optical solutions. The engineering, design, installation and maintenance services of the applications and infrastructure segment support the build-out and operation of enterprise, fiber optic, Ethernet and wireless networks. The professional services segment provides outsourced services to the wireless and wireline industry and information technology industry. The cloud services segment provides cloud computing and storage services to customers. The managed services segment provides hardware and software products to customers and provides maintenance and support for those products. As of December 31, 2014, the Company had concluded that it had three reportable segments, the applications and infrastructure operating segment and the professional services operating segment were considered individual reporting segments, while the cloud services and managed services operating segments were aggregated into one reportable segment.

 

11
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

During the quarter ended March 31, 2015, the Company re-evaluated its cloud services and managed services reportable segment. The Company concluded that, due to the material nature of the cloud services operating activities and the difference in margins between the managed services and cloud services operating segments, the cloud services segment should be presented separately within the unaudited condensed consolidated financial statements. As such, the Company concluded that it had four reportable segments as of March 31, 2015: applications and infrastructure, professional services, managed services, and cloud services.

 

The Company’s reporting units have been aggregated into one of four operating segments due to their similar economic characteristics, products, or production and distribution methods. The first operating segment is applications and infrastructure, which is comprised of the components TNS, the AWS Entities, Tropical and RM Engineering.  The Company’s second operating segment is professional services, which consists of the ADEX entities. The Company’s third operating segment is managed services services, which consists of the IPC and RentVM components and the fourth operating segment is cloud services, which consists of the VaultLogix component.

 

Revenue Recognition

 

The Company’s revenues are generated from their four reportable segments: applications and infrastructure, professional services, managed services, and cloud services.  The Company recognizes revenue on arrangements in accordance with ASC Topic 605-10, “Revenue Recognition”. The Company recognizes revenue only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the resulting receivable is reasonably assured.

 

The applications and infrastructure segment revenues are derived from contracted services to provide technical engineering services along with contracting services to commercial and governmental customers. The contracts of TNS, Tropical and RM Engineering provide that payment for the Company’s services may be based on either direct labor hours at fixed hourly rates or fixed-price contracts. The services provided under the contracts are generally provided within one month. Occasionally, the services may be provided over a period of up to six months.

 

The AWS Entities recognize revenue using the percentage of completion method.   Revenues and fees on these contracts are recognized 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. Provisions for estimated losses on uncompleted contracts, if any, are made in the period in which such losses are determined. Changes in job performance conditions and final contract settlements may result in revisions to costs and income, which are recognized in the period in which revisions are determined.

 

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

 

The revenues of the Company’s professional services segment, which is comprised of the ADEX subsidiaries, are derived from contracted services to provide technical engineering and management solutions to large voice and data communications providers, as specified by their clients. The contracts provide that payments made for the Company’s services may be based on either direct labor hours at fixed hourly rates or fixed-price contracts. The services provided under these contracts are generally provided within one month. Occasionally, the services may be provided over a period of up to four months. If it is anticipated that the services will span a period exceeding one month, depending on the contract terms, the Company will provide either progress billing at least once a month or upon completion of the clients’ specifications. The aggregate amount of unbilled work-in-progress recognized as revenues was insignificant at March 31, 2015 and 2014, respectively.

 

12
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

ADEX’s HighWire division generates revenue through its telecommunications engineering group, which contracts with telecommunications infrastructure manufacturers to install the manufacturer’s products for end users. The Highwire division recognizes revenue using the proportional performance method. Under the proportional performance method, the Company recognizes revenue when a project within a contract is completed. Management judgments and estimates must be made and used in connection with revenue recognized using the proportional performance method. If management made different judgments and estimates, then the amount and timing of revenue for any period could differ materially from the reported revenue.

 

The Company’s TNS and IPC subsidiaries, as well as ADEX’s HighWire division, sometimes requires customers to provide a deposit prior to beginning work on a project. When this occurs, the deposit is recorded as deferred revenue and is recognized in revenue when the work is complete.

 

The Company’s IPC subsidiary, which is included in the Company’s managed services segment, is a value-added reseller whose revenues are generated from the resale of voice, video and data networking hardware and software contracted services for design, implementation and maintenance services for voice, video, and data networking infrastructure. IPC’s customers are higher education organizations, governmental agencies and commercial customers. IPC also provides maintenance and support and professional services.

 

For multiple-element arrangements, IPC recognizes revenue in accordance with ASC 605-25, “Arrangements with Multiple Deliverables”. The Company allocates revenue for such arrangements based on the relative selling prices of the elements applying the following hierarchy: first vendor specific objective evidence (“VSOE”), then third-party evidence (“TPE”) of selling price if VSOE is not available, and finally the Company’s estimate of the selling price if neither VSOE nor TPE is available. VSOE exists when the Company sells the deliverables separately and represents the actual price charged by the Company for each deliverable. Estimated selling price reflects the Company’s best estimate of what the selling prices of each deliverable would be if it were sold regularly on a stand-alone basis taking into consideration the cost structure of the Company’s business, technical skill required, customer location and other market conditions. Each element that has stand-alone value is accounted for as a separate unit of accounting. Revenue allocated to each unit of accounting is recognized when the service is provided or the product is delivered.

 

The Company’s VaultLogix subsidiary, which is included in the Company’s cloud services segment, provides on-line data backup services to its customers. Revenue for these customers is deferred until the services are performed.  

 

Deferred Loan Costs

 

Deferred loan costs are capitalized and amortized to interest expense using the effective interest method over the terms of the related debt agreements. The amount of amortization of deferred loan costs, which was recorded as interest expense, in the three months ended March 31, 2015 and 2014 was $320 and $1,830, respectively. 

 

Inventory

 

The inventory balance at March 31, 2015 and December 31, 2014 related to the Company’s IPC subsidiary. IPC purchases inventory for resale to customers and records it at lower of cost or market until sold. Inventory consisted of networking equipment that was purchased and not delivered to customers as of March 31, 2015.  

 

Goodwill and Indefinite Lived Intangible Assets

 

Goodwill was generated through the acquisitions made by the Company.  As the total consideration paid exceeded the value of the net assets acquired, the Company recorded goodwill for each of the completed acquisitions.  At the date of acquisition, the Company performed a valuation to determine the value of the intangible assets, along with the allocation of assets and liabilities acquired.  The goodwill is attributable to synergies and economies of scale provided to the Company by the acquired entity. 

 

13
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited) 

 

The Company tests its goodwill and indefinite-lived intangible assets for impairment at least annually (as of December 31) and whenever events or circumstances change that indicate impairment may have occurred.  A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in the Company’s expected future cash flows; a sustained, significant decline in the Company’s stock price and market capitalization; a significant adverse change in legal factors or in the business climate of its segments; unanticipated competition; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of goodwill, the indefinite-lived intangible assets and the Company’s consolidated financial results.

 

Goodwill has been assigned to the reporting unit to which the value relates. The Company aggregates its reporting units and tests its goodwill for impairment at the operating segment level.  Ten of the Company's fourteen reporting units have goodwill. The Company tests goodwill by estimating the fair value of the reporting unit using a Discounted Cash Flow (“DCF”) model. The key assumptions used in the DCF model to determine the highest and best use of estimated future cash flows include revenue growth rates and profit margins based on internal forecasts, terminal value and an estimate of a market participant's weighted-average cost of capital used to discount future cash flows to their present value.

 

As of March 31, 2015 and 2014, the Company did not identify any indicators of impairment and as such, did not perform additional analysis.

 

The Company tested the indefinite-lived intangible assets using a Relief From Royalty Method (“RFRM”) under the Income Approach in conjunction with a Market Approach Method. While the Company uses 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 the Company's reporting units. The Company can provide no assurances that, if such conditions occur, they will not trigger impairments of goodwill and other intangible assets in future periods within all segments.

 

With regard to other long-lived assets and intangible assets with indefinite-lives, the Company follows a similar impairment assessment. The Company 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 March 31, 2015 and 2014, the Company did not identify any indicators of impairment and as such, did not perform additional analysis.

 

Commitments and Contingencies

 

In May 2015, the Company received information from the SEC that they are continuing an investigation of the Company and certain of its current and former officers, consultants of the Company and others, of “possible violation[s]” of Section 17(a) of the Securities Act and Sections 9(a) and 10(b) of the Exchange Act and the rules of the SEC thereunder in the offer or sale of securities and certain other matters with respect to which the SEC claims it has information, including the possible market manipulation of the Company’s securities dating back to January 2013.  Based upon the Company’s internal investigations, the Company does not believe either our Company or any of its current or former officers or directors engaged in any activities that violated applicable securities laws. The Company intends to continue to work with the staff of the SEC towards a resolution and to supplement its disclosure regarding the SEC’s investigation accordingly.

 

The Company is unaware of the scope or timing of the SEC’s investigation. As a result, the Company does not know how the SEC investigation is proceeding, when the investigation will be concluded, or what action, if any, might be taken in the future by the SEC or its staff as a result of the matters that are the subject of its investigation. The Company is seeking to cooperate with the SEC in its investigation. 

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation-Stock Compensation ("ASC Topic 718").  Under the fair value recognition provisions of this topic, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, based on the terms of the awards.  The Company adopted a formal stock option plan in December 2012.  The Company issued options prior to the adoption of this plan, but the amount was not material.  Historically, the Company has awarded stock grants to certain of its employees and consultants that did not contain any performance or service conditions.  Compensation expense included in the Company’s unaudited condensed consolidated statement of operations includes the fair value of the awards at the time of issuance. When common stock was issued, it was valued at the trading price on the date of issuance and was expensed as it was issued. The Company granted to employees an aggregate of 363,586 shares of common stock in the three months ended March 31, 2015, of which 179,000 shares were subject to a three-year vesting term, 25,000 shares were subject to six-month vesting, and 159,586 shares had no vesting terms. The Company recorded compensation expense of $450 related to these issuances on the unaudited condensed consolidated statement of operations for the three months ended March 31, 2015. During the quarter ended March 31, 2015, the Company accelerated vesting for 29,000 shares of common stock issued to certain employees and recorded compensation expense of $82 on the unaudited condensed consolidated statement of operations.

 

14
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

Net Income (Loss) Per Share

 

The Company follows ASC 260, Earnings Per Share, which requires presentation of basic and diluted earnings per share (“EPS”) on the face of the income statement for all entities with complex capital structures, and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In the accompanying financial statements, basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS excluded all dilutive potential shares if their effect was anti-dilutive.

  

The following sets forth the computation of diluted EPS for the three months ended March 31, 2015 and 2014, respectively:

 

   Three months ended March 31, 2015   Three months ended March 31, 2014 
               (Revised) 
   Net loss (Numerator)   Shares (Denominator)   Per Share Amount   Net income (loss) (Numerator)   Shares (Denominator)   Per Share Amount 
Basic EPS  $(10,354)  $17,203,434   $(0.60)  $10,348   $9,449,622   $1.10 
Change in fair value of derivative instruments   -    -    -    (20,978)   -    - 
Dilutive shares related to warrants   -    -    -    -    164,412    - 
Dilutive shares related to 12% Convertible Debentures convertible feature   -    -    -    -    965,742    - 
Dilutive shares related to Forward Investments, LLC convertible feature   -    -    -    -    535,558    - 
Dilutive EPS  $(10,354)   17,203,434   $(0.60)  $(10,630)   11,115,334   $(0.96)

  

Basic net loss per share is based on the weighted average number of common and common-equivalent shares outstanding. Potential common shares includable in the computation of fully-diluted per share results are not presented for the years ended March 31, 2015 and 2014, respectively, in the unaudited condensed consolidated financial statements as their effect would be anti-dilutive. 

   

Basic loss per common share is computed based on the weighted average number of shares outstanding during the period. Diluted loss per share is computed in a manner similar to the basic loss per share, except the weighted-average number of shares outstanding is increased to include all common shares, including those with the potential to be issued by virtue of warrants, options, convertible debt and other such convertible instruments. Diluted loss per share contemplates a complete conversion to common shares of all convertible instruments only if they are dilutive in nature with regards to earnings per share.

 

The anti-dilutive shares of common stock outstanding for the three months ended March 31, 2015 and 2014 were as follows:

 

   March 31, 
   2015   2014 
       (Revised) 
Warrants   1,491,795    - 
Options   175,000    - 
Convertible notes   4,631,081    368,150 
Convertible debenture   193,056    - 
    6,490,932    368,150 

 

Fair Value of Financial Instruments

 

ASC Topic 820 "Fair Value Measurements and Disclosures" ("ASC Topic 820") provides a framework for measuring fair value in accordance with generally accepted accounting principles.

 

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).

 

15
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC Topic 820 are described as follows:

 

 

Level 1— Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.

 

 

Level 2— Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

  Level 3— Inputs that are unobservable for the asset or liability.

 

The following section describes the valuation methodologies that the Company used to measure different financial instruments at fair value.

  

Debt

 

The fair value of the Company’s debt, which approximated the carrying value of the Company’s debt as of March 31, 2015 and December 31, 2014, was estimated at $58,217 and $57,921, respectively. Factors that the Company considered when estimating the fair value of its debt included market conditions, liquidity levels in the private placement market, variability in pricing from multiple lenders and term of the debt. The level of the debt would be considered as level 2.

 

Additional Disclosures Regarding Fair Value Measurements

 

The carrying value of cash, accounts receivable, inventory, other assets, and accounts payable approximate their fair value due to the short-term maturity of those items.

 

Contingent Consideration

 

The fair value of the Company’s contingent consideration is based on the Company’s evaluation as to the probability and amount of any earn-out that will be achieved based on expected future performance by the acquired entity. The Company utilizes a third-party valuation firm to assist in the calculation of the contingent consideration at the acquisition date. The Company evaluates the forecast of the acquired entity and the probability of earn-out provisions being achieved when it evaluates the contingent consideration at initial acquisition date and at each subsequent reporting period. The fair value of contingent consideration is measured at each reporting period and adjusted as necessary. The Company evaluates the terms in contingent consideration arrangements provided to former owners of acquired companies who become employees of the Company to determine if such amounts are part of the purchase price of the acquired entity or compensation.

 

Derivative Warrant Liabilities

 

The fair value of the derivative liabilities is classified as Level 3 within the Company’s fair value hierarchy. Please refer to Footnote 7 for a further discussion of the measurement of fair value of the derivatives and their underlying assumptions.

 

16
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

Assets and liabilities measured at fair value on a recurring basis at March 31, 2015 and December 31, 2014 consisted of:

 

   Fair Value Measurements at Reporting Date Using 
   Quoted Prices in Active Markets for   Significant Other   Significant 
   Identical    Observable   Unobservable 
   Assets   Inputs   Inputs 
   (Level 1)   (Level 2)   (Level 3) 
             
   March 31, 2015 
Liabilities:               
Warrant derivatives  $-   $-   $713 
Long-term warrant derivatives   -    -    5,139 
Contingent consideration   -    -    2,873 
                
Total liabilities at fair value  $-   $-   $8,725 
                
   December 31, 2014 
Liabilities:            
Warrant derivatives  $-   $-   $18 
Long-term warrant derivatives   -    -    1,855 
Contingent consideration   -    -    2,725 
Long-term contingent consideration   -    -    823 
Issuance of option shares   -    -    536 
                
Total liabilities at fair value  $-   $-   $5,957 

 

The changes in Level 3 financial instruments measured at fair value on a recurring basis for the three months ended March 31, 2015 were as follows:

 

   Amount 
Balance as of December 31, 2014  $5,957 
      
Change in fair value of derivative   (1,025)
Settlement of contingent consideration   (306)
Change in fair value of contingent consideration   (370)
Fair value of conversion feature on date of issuance   2,230 
Fair value of net settlement of accounts payable   721 
Adjustment of derivative liability upon extinguishment of debt   2,600 
Reclassification of options to equity   (536)
Reclassification of derivative warrants to equity   (546)
Balance as of March 31, 2015  $8,725 

 

Recent Accounting Pronouncements

 

On February 18, 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 provides an update affecting reporting entities that are required to evaluate whether they should consolidate certain legal entities. This new guidance applies to all legal entities to re-evaluate 1) whether limited partnerships and similar legal entities are VIE’s or voting interest entities, 2) eliminates the presumption that a general partner should consolidate a limited partnership, 3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and 4) provides a scope exception from consolidation guidance for reporting entities with interest in legal entities that are required to comply with or operate in accordance with rules similar to those for registered money market funds. ASU 2014-08 is effective in annual or interim periods beginning after December 15, 2015. The Company does not expect the adoption of ASU 2015-02 to have a material impact on the unaudited condensed consolidated financial statements.

 

17
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 revises previous guidance to require that debt issuance costs be reported in the unaudited condensed consolidated financial statements as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts. Prior to the amendments, debt issuance costs were presented as a deferred charge (i.e. an asset) on the unaudited condensed consolidated financial statements. This new guidance is effective for the annual period ending after December 15, 2015, and for annual periods and interim periods thereafter. The amendments must be applied retrospectively. The requirements of ASU 2015-03 are not expected to have a significant impact on the unaudited condensed consolidated financial statements.

 

Reclassifications

 

Certain 2014 activities and balances were reclassified to conform to classifications used in the current period.

 

2. ACQUISITIONS

 

Acquisition of IPC

 

On January 2, 2014, the Company acquired IPC, a full-service voice and data network engineering firm based in New York.  IPC serves both corporate enterprises and telecommunications service providers.  The purchase consideration for IPC was $21,153, which was paid with $13,451 in cash, common stock valued at $1,447, and a convertible note in the principal amount of $6,255, which was equal to the net working capital of IPC on the date of acquisition. Refer to Note 11 for further detail on the convertible note. The Company used the fair value of the common stock issued. As the total consideration paid by the Company for IPC exceeded the net assets acquired, the Company recorded approximately $15,131 of goodwill. The goodwill is attributable to synergies and economies of scale related to operating expenses provided to the Company. The goodwill is not tax deductible. The amount of acquisition-related costs for the acquisition of IPC was $118, which amount was recorded on the Company’s unaudited condensed consolidated statement of operations as general and administrative expenses as of March 31, 2014.

 

The original deferred tax liability that was recorded in the first quarter of 2014 should have resulted in the reduction of the Company’s valuation allowance.  The reduction in the valuation allowance was not recorded by the Company at that time.  In the fourth quarter of 2014, the Company updated the allocation of purchase price to the assets and liabilities acquired and determined that a portion of its valuation allowance was no longer required and recorded a tax benefit of $3,195.  The Company has reflected this adjustment within the line item “benefit from income taxes” on the unaudited condensed consolidated statement of operations as of March 31, 2014.

 

Acquisition of RentVM

 

On February 3, 2014, the Company acquired RentVM, a New Jersey-based provider of infrastructure-as-a-service technology to software developers and to healthcare, education, and other small and medium-sized businesses and enterprises to enable public and private (enterprise) Cloud environments.  The purchase consideration for RentVM was $5,880, which was paid with common stock valued at $5,280 and conversion of a pre-existing note, in the principal amount of $600 which was used to complete the acquisition. As the total consideration paid by the Company for RentVM exceeded the net assets acquired, the Company recorded approximately $2,851 of goodwill. The goodwill is attributable to synergies and economies of scale provided to the Company. The goodwill is not tax deductible. The Company acquired in-process research and development related to RentVM’s cloud products, which was under development by RentVM at the time of acquisition, to which the Company ascribed a value of $4,000. The Company recorded a deferred tax liability of $1,560 relate to the acquired in-process research and development intangible asset. The Company will begin amortizing the in-process research and development at the time at which the product is available for general release to customers. The amount of acquisition-related costs for the acquisition of RentVM was $5, which amount was recorded on the Company’s unaudited condensed consolidated statement of operations as general and administrative expenses as of March 31, 2014. 

 

18
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

Acquisition of VaultLogix

 

Effective as of October 9, 2014, the Company consummated the acquisition of all of the outstanding membership interests of VaultLogix and its affiliated entities for an aggregate purchase price of $36,796. The purchase price for the acquisition was payable to the sellers as follows: (i) $16,385 in cash, (ii) 1,008,690 shares of the Company’s common stock and (iii) $15,627 in unsecured convertible promissory notes, as further described in Footnote 6. The closing payments are subject to customary working capital adjustments. As the total consideration paid by the Company for VaultLogix exceeded the net assets acquired, the Company recorded approximately $20,427 of goodwill and $13,400 of intangible assets. The Company is in the process of completing a valuation of the acquisition to determine the value of the intangible assets and goodwill. Once the valuation is completed, the Company will make any adjustments as necessary.

 

Effective as of December 31, 2014, VaultLogix completed the purchase of the assets of Axim. In consideration for the acquisition, at the closing the Company made a payment of $1,500 in shares of common stock and recorded contingent consideration of $1,872. Based on the purchase consideration and assets acquired, the Company recorded the following intangible assets: customer list of $100 and non-compete of $302. Goodwill of $2,922 was also recorded in connection with the purchase. The Company is in the process of completing a valuation of the acquisition to determine the value of the intangible assets and goodwill. Once the valuation is completed, the Company will make any adjustments as necessary.

 

The final purchase consideration for the 2014 acquisition of RentVM was calculated as follows:

 

   RentVM 
Common stock, fair value  $5,280 
Note converted to stock   600 
Total consideration  $5,880 

 

The final purchase consideration was allocated to the assets acquired and liabilities assumed as follows:

 

   RentVM 
Current assets  $104 
Goodwill   2,851 
Intangible assets:     
In-process research and development   4,000 
Customer list / relationships   150 
Trade names   40 
Non-compete   88 
Property and equipment   372 
Other assets   4 
Current liabilities   (169)
Deferred tax liability   (1,560)
Total allocation of purchase consideration  $5,880 

 

Unaudited pro forma results of operations data of the Company as if the acquisitions of IPC, RentVM and VaultLogix had occurred as of January 1, 2014 are as follows:

 

   Pro Forma Results 
   (Unaudited) 
   For the three months ended March 31, 
   2014 
Revenue  $17,002 
      
Net income  $9,743 
      
Basic income per share  $0.91 
      
Diluted loss per share  $(0.93)

 

Pro forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred at January 1, 2014 and is not intended to be a projection of future results.   

 

19
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

  

3. PROPERTY AND EQUIPMENT, NET

 

Property and equipment as of March 31, 2015 and December 31, 2014 consisted of the following: 

 

   March 31,   December 31, 
   2015   2014 
Vehicles  $761   $761 
Computers and office equipment   858    638 
Equipment   4,553    4,713 
Software   2,354    2,025 
Total   8,526    8,137 
Less accumulated depreciation   (6,154)   (5,927)
           
Property and equipment, net  $2,372   $2,210 

 

Depreciation expense for the three months ended March 31, 2015 and 2014 was $227 and $52, respectively.

 

4. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

The following table sets forth the changes in the Company's goodwill during the three-month period ended March 31, 2015 resulting from the acquisitions by the Company of its operating segments.

 

The following table summarizes the Company’s goodwill as of March 31, 2015 and December 31, 2014:

 

   Applications and Infrastructure   Professional Services   Managed Services   Cloud Services   Total 
Balance at December 31, 2014  $6,906   $9,257   $44,191   $-   $60,354 
                          
Reclassification of Operating Segments   -    -    (23,349)   23,349    - 
                          
Purchase price allocation adjustment   -    -    (2,440)   -    (2,440)
                          
Balance at March 31, 2015  $6,906   $9,257   $18,402   $23,349   $57,914 

 

Intangible Assets

 

The following table summarizes the Company’s intangible assets as of March 31, 2015 and December 31, 2014:

 

       March 31, 2015   December 31, 2014 
   Estimated   Gross               Gross             
   Useful   Carrying       Accumulated   Net Book   Carrying   Accumulated   Impairment   Net Book 
   Life   Amount   Additions   Amortization   Value   Amount   Amortization   Charge   Value 
Customer relationships    7-10 years    $23,051   $-   $(3,835)  $19,216   $24,270   $(2,891)  $(1,219)  $20,160 
Non-compete agreements    2-3 years     3,523    -    (1,324)   2,199    3,523    (1,055)   -    2,468 
Internally developed software    3 years     3,200    -    (508)   2,692    3,200    (241)   -    2,959 
In-process research and development       -    4,000    -    4,000    -    -    -    - 
URL's    Indefinite     8    -    -    8    10    -    (2)   8 
Tradenames   1 year    959    -    (77)   882    959    (33)   -    926 
Tradenames    Indefinite     3,178    -    -    3,178    4,349    -    (1,171)   3,178 
                                              
Total intangible assets       $33,919   $4,000   $(5,744)  $32,175   $36,311   $(4,220)  $(2,392)  $29,699 

  

Amortization expense related to the acquired intangible assets was $1,523 and $466 for the three months ended March 31, 2015 and 2014, respectively.

 

20
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

5. BANK DEBT

 

Bank debt as of March 31, 2015 and December 31, 2014 consisted of the following:

 

   March 31,   December 31, 
   2015   2014 
One installment note, monthly principal and interest of $1, interest 9.05%, secured by vehicles, maturing July 2016  $7   $9 
           
Five lines of credit, monthly principal and interest, interest ranging from $0 to $1, interest ranging from 5.5% to 9.75%, guaranteed personally by principal shareholders of acquired companies, maturing between July 2015 and February 2020   241    296 
    248    305 
Less: Current portion of bank debt   (208)   (252)
           
Long-term portion of bank debt  $40   $53 

 

The interest expense associated with the bank debt during the three months ended March 31, 2015 and 2014 amounted to $4 and $21, respectively. There are no financial covenants associated with the bank debt.

 

6. TERM LOANS

 

Term loans as of March 31, 2015 and December 31, 2014 consisted of the following:

 

   March 31,   December 31, 
   2015   2014 
Former owners of RM Leasing, unsecured, non-interest bearing, due on demand  $3   $3 
           
Promissory note with company under common ownership by former owner of Tropical, 9.75% interest, monthly payments of interest of only $1, unsecured and personally guaranteed by officer, due November 2016   106    106 
           
Promissory notes, unsecured, maturing in July 2015   30    30 
           
12% convertible note payable, net of debt discount of $210 and $421, respectively   954    1,910 
           
Term loan, White Oak Global Advisors, LLC, maturing in October 2017, net of debt discount of $684   12,077    13,261 
           
8% convertible promissory note, London Bay - VL Holding Company, LLC, unsecured, maturing October 2017   7,408    7,408 
           
8% convertible promissory note, WV VL Holding Corp., unsecured, maturing October 2017   7,003    7,003 
           
8% convertible promissory note, Tim Hannibal, unsecured, maturing October 2017   1,215    1,215 
           
Promissory note, unsecured, maturing in November 2015   1,000    1,000 
           
Bridge loan agreement, secured, maturing June 2015, net of debt discount of $237 and $555, respectively   3,763    3,444 
           
    33,559    35,380 
Less: Current portion of term loans   (7,642)   (8,387)
           
Long-term portion term loans, net of debt discount  $25,917   $26,993 

  

21
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

Term Loan - White Oak Global Advisors

 

On October 9, 2014, the Company’s wholly-owned subsidiary, VaultLogix, entered into a loan and security agreement with the lenders party thereto, White Oak Global Advisors, LLC, as Administrative Agent, Data Protection Services, L.L.C. (“DPS”), U.S. Data Security Acquisition, LLC (“USDSA”) and U.S. Data Security Corporation (“USDSC”) as guarantors, pursuant to which, VaultLogix received a term loan in an aggregate principal amount of $13,261. Interest on the term loan accrues at a rate per annum equal to the sum of (a) the greater of (i) the LIBOR Index Rate, as adjusted as of each Libor Index Adjustment Date and (ii) 1.00% per annum; plus (b) 1100 basis points per annum. The LIBOR Index Rate was 0.7 and 0.6044 as of March 31, 2015 and December 31, 2014, respectively. However, this did not exceed the 12% stated rate as defined in item (ii) above.

 

The proceeds of the term loan were used to finance the Company’s acquisition of VaultLogix, DPS and USDSA, to repay certain outstanding indebtedness (including all indebtedness owed by VaultLogix to Hercules Technology II, L.P.) and to pay fees, costs and expenses.

 

In connection with the term loan, the Company entered into (i) a continuing guaranty in favor of the administrative agent, (ii) a pledge agreement, and (iii) a security agreement, pursuant to which the obligations of the Company in respect of the term loan are secured by a security interest in substantially all of the assets of VaultLogix, subject to certain customary exceptions.

 

The term loan is subject to certain affirmative and negative covenants which are due at the end of each fiscal quarter. The Company is in compliance with all covenants as of March 31, 2015 and December 31, 2014.

 

Principal of $12,761 and $13,261 remained outstanding as of March 31, 2015 and December 31, 2014, respectively.

 

Term Loan – 8% Convertible Promissory Notes

 

Effective as of October 9, 2014, the Company consummated the acquisition of all of the outstanding membership interests of VaultLogix and its affiliated entities for an aggregate purchase price of $36,796. The purchase price for the acquisition was payable to the sellers as follows: (i) $16,385 in cash, (ii) 1,008,690 shares of the Company’s common stock and (iii) $15,627 in unsecured convertible promissory notes, as further described below. The closing payments are subject to customary working capital adjustments.

 

22
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

The promissory notes accrue interest at a rate of 8% per annum, and all principal and interest accrued under the promissory notes is payable on October 9, 2017. The promissory notes are convertible into shares of the Company’s common stock at a conversion price equal to $6.37 per share. A portion of the principal amount of the promissory notes equal to twenty percent of the principal amount on the closing date will not be convertible until January 9, 2016.

 

On a date when (i) the shares are freely tradeable without restriction or volume limitations under Rule 144, and (ii) the average closing price of the Company’s common stock is 105% or higher of the conversion price on the three (3) trading days immediately prior to such date, the Company may deliver notice to the holders of the promissory notes electing to convert some or all of the outstanding amounts owed under the promissory notes into common stock at the applicable conversion price. Additionally, if on or after the maturity date, (i) the Company is restricted or otherwise unable to pay in cash all outstanding amounts under the promissory notes, (ii) the promissory notes have not otherwise been paid in full within ten business days following the maturity date, or (iii) the Company is not at such time entitled to effect a forced conversion, then, in the event that both (i) and (iii) above apply, the Company, and in the event that both (ii) and (iii) above apply, the holders of the promissory notes, shall have the right to convert all outstanding amounts owing under the promissory notes into shares of the Company’s common stock at a conversion price equal to the average closing price of the Company’s common stock on the three trading days immediately preceding the date of such conversion.

 

As of April 7, 2015, the Company had not forced any conversions.

 

12% Convertible Debentures

 

In December 2013, the Company entered into a securities purchase agreement with various institutional investors pursuant to which the Company issued to such investors convertible debentures in the original aggregate principal amount of $11,625 (the "Convertible Debentures") and an aggregate of 36,567 shares of its common stock for an aggregate purchase amount of $11,625. 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, with monthly payments that began on July 13, 2014 and end on the final maturity date of June 13, 2015.  At the Company’s 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 the Company’s common stock at a price per share equal to the lesser of (i) the Conversion Price (as defined below) and (ii) 75% of the average of the VWAP (the daily volume weighted average price) of the Company’s common stock for the five-trading-day period ending on, and including, the trading day immediately preceding the trading day that is five days prior to the applicable monthly amortization date.

 

The Convertible Debentures are convertible into shares of the Company’s common stock at the election of the holder thereof at a conversion price (the “Conversion Price”) equal to the lesser of (i) $6.36, or (ii) 85% of the price per share of the Company’s common stock in the first underwritten public offering of not less than $10,000 of the Company’s equity securities (a “Qualified Offering”).  The Conversion Price is subject to customary anti-dilution provisions.  Notwithstanding the foregoing, the Convertible Debenture of 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 the Company’s common stock after such conversion.

 

The Company may redeem a Convertible Debenture, in whole or in part, for cash at a redemption price (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 the Convertible Debenture through the one year anniversary of the issuance date. Upon the occurrence of a Qualified Offering 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 Debenture for a redemption price equal to the Qualified Offering Amount (as defined below), and (ii) the Company has the option to force the redemption of a portion of a holder’s Convertible Debenture in an amount equal to or less than the Qualified Offering Amount.  The “Qualified Offering Payment” 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 of the Qualified Offering 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 purchase agreement.

 

23
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited) 

 

The Company could have elected to force the holder of a Convertible Debentures to convert all, but not less than all, amounts outstanding under the Convertible Debenture into shares of the Company’s common stock at the applicable Conversion Price; provided, that the Company could only have elected such forced conversion if certain conditions were met, including the condition that the Company’s common stock was 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 of shares per day. As the conditions were not met, the Company did not force any conversions.

 

Upon the occurrence of an event of default (as defined in the Convertible Debentures), the outstanding principal amount of the Convertible Debentures, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the holder’s election, immediately due and payable in cash at the Mandatory Default Amount.  The “Mandatory Default Amount” means the sum of (a) the greater of (i) the outstanding principal amount of the Convertible Debenture, divided by the Conversion Price on the date the Mandatory Default Amount is either (A) demanded (if demand or notice is required to create an event of default) or otherwise due or (B) paid in full, whichever has a lower Conversion Price, multiplied by the VWAP of the Company’s common stock on the date the Mandatory Default Amount is either (x) demanded or otherwise due or (y) paid in full, whichever has a higher VWAP, or (ii) 115% of the outstanding principal amount of the Convertible Debenture, plus 100% of accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of the 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 shall 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 shall become convertible into shares of the Company’s common stock at the lesser of (i) the Conversion Price, and (ii) 70% of the average VWAP of the Company’s common stock for the five trading days in the preceding twenty trading days that have the lowest VWAP during such period.

 

The Company recorded a debt discount in the amount of $382 in connection with the 36,567 shares of the Company's common stock issued pursuant to the purchase agreement, which amount is being amortized over the life of the Convertible Debentures. The Company also recorded a debt discount and a related derivative liability in the amount of $6,620 in connection with the embedded features of the Convertible Debentures, which amount is being amortized over the life of the Convertible Debentures. Refer to Note 7 Derivative Instruments for further detail on the derivative liability. Principal of $1,164 and $2,331 remained outstanding as of March 31, 2015 and December 31, 2014, respectively.

 

Demand Promissory Note

 

The Company entered into a securities purchase agreement with an investor whereby the Company issued to the investor a demand promissory note, dated November 17, 2014, in the original principal amount of $1,000, with interest accruing at the rate of 12% per annum. The note matures on the earlier of: (x) November 10, 2015 or (y) upon demand by the investor, which such demand may be made any time 150 days following the issuance of the Note upon 30 days’ written notice to the Company; provided, that $60 of interest is guaranteed by the Company regardless of when the note is repaid. The Company may redeem the note at any time prior to the maturity date for an amount equal to (i) 100% of the outstanding principal amount, plus (ii) a redemption premium equal to an additional 10% of the outstanding principal amount, plus (iii) any accrued and unpaid interest on the note. The redemption premium can be paid in cash or common stock at the option of the Company. If common stock of the Company is used to pay the redemption premium, then such shares shall be delivered by the third business day following the maturity date, or date of demand, as applicable, at a mutually agreed upon conversion price by both parties. The holder has demanded repayment of the demand promissory note by May 16, 2015.

 

Aegis Capital Corp. served as the placement agent in connection with this private placement and, in exchange for its services, earned a placement agent fee equal to 3.5% of the proceeds from the private placement. The total fee of $86 was recorded within additional paid in capital on the consolidated balance sheet as of December 31, 2014.

 

24
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

31 Group Convertible Note

 

In July 2014, the Company issued to 31 Group, LLC a convertible note in the aggregate original principal amount of $1,500, convertible at $6.37 per share, with a term of one year and an interest rate of 12% per annum, and a three-year warrant to purchase up to 58,870 shares of common stock at an exercise price of $7.25 per share.

 

On December 31, 2014, the Company entered into a Bridge Financing Agreement with GPB Life Science Holdings, LLC of which a portion of the proceeds were used to repay the convertible note of the 31 Group, LLC. Refer to the Bridge Financing - GPB Life Science Holdings, LLC section of this note for further detail.

 

Refer to Note 7 Derivative Instruments for further detail on the warrants issued in conjunction with the 31 Group convertible note.

 

Bridge Financing - GPB Life Science Holdings, LLC

 

The Company entered into a bridge financing agreement, effective as of December 3, 2014, with GPB Life Science Holdings, LLC, whereby the Company issued to the investor for gross proceeds of $2,375 (i) a senior secured note, dated December 3, 2014, in the aggregate principal amount of $2,500 with interest accruing at the rate of 12% per annum and (ii) a four-year warrant, dated December 3, 2014, exercisable for up to 250,000 shares of the Company’s common stock at an exercise price of $5.00 per share, subject to adjustment as set forth therein. The note matures upon the earlier of: June 1, 2015 or (y) the date of a Major Transaction (as defined in the purchase agreement). In addition, upon maturity of the note, the Company must pay the investor additional interest in cash, which interest accrues over the term of the Note at the rate of 4% per annum. The note is secured by (i) a first priority security interest in and to all Accounts Receivable (as defined in the purchase agreement) of the Company and its subsidiaries, except those of VaultLogix, and (ii) a first priority security interest and lien on all Collateral (as defined in the purchase agreement) of the Company and its subsidiaries, which lien and security interest will only go into effect at such time as White Oak Global Advisors, LLC (“White Oak”) releases (or is deemed to have released pursuant to the applicable documents between it and the Company), its liens and security interest on any collateral of the Company and the Company’s obligation to grant, pledge or otherwise assign a lien in favor of White Oak is terminated (pursuant to the applicable documents between White Oak and the Company).

 

Principal of $4,000 remained outstanding as of March 31, 2015 and December 31, 2014, respectively.

 

Refer to Note 7 Derivative Instruments for further detail on the warrants issued as part of the bridge financing agreement.

  

7. DERIVATIVE INSTRUMENTS

 

The Company evaluates and accounts for conversion options embedded in its convertible debt and freestanding instruments in accordance with ASC 815, Accounting for Derivative Instruments and Hedging Activities (“ASC Topic 815”).

 

MidMarket Warrants

 

In connection with a loan agreement, the Company issued warrants to the lenders in September 2012. These warrants were outstanding at March 31, 2015 and December 31, 2014.

 

The terms of the warrants issued in September 2012 originally provided, among other things, that the number of shares of common stock issuable upon exercise of such warrants amounted to 11.5% of the Company’s fully-diluted outstanding common stock and common stock equivalents, whether the common stock equivalents were fully vested and exercisable or not, and that the initial exercise price of such warrants was $5.00 per share of common stock, subject to adjustment. Pursuant to an amendment to the loan agreement, on March 22, 2013, the number of shares for which the warrants are exercisable was fixed at 234,233 shares.  On September 17, 2012, when the warrants were issued, the Company recorded a derivative liability in the amount of $194. The amount was recorded as a debt discount and is being amortized over the original life of the related loans. The amount of the derivative liability was computed by using the Black-Scholes pricing model to determine the value of the warrants issued.

 

25
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited) 

 

As of September 17, 2014, the second anniversary date of the warrants, the Company failed to comply with the Minimum Adjusted EBITDA provisions set forth within the original warrant agreement. As such, the expiration date of the warrants was extended to September 17, 2015.

 

On March 31, 2015 and December 31, 2014, the Company used the Black Scholes pricing method to determine the fair value of the derivative liability of the warrants on those dates, and determined the fair value was $105 and $212, respectively.  The Company recorded the change in the fair value of the derivative liability for the three months ended March 31, 2015 and 2014 as a gain of $107 and $2,200, respectively.

 

The fair value of the warrant derivative liability at each measurement date was calculated using the Black-Scholes option pricing model with the following factors, assumptions and methodologies:

 

   March 31,   December 31, 
   2015   2014 
         
Fair value of Company’s common stock  $2.20   $2.92 
Volatility (closing prices of 3-4 comparable public companies, including the Company’s historical volatility)   80%   80%
Exercise price  $4.00 - $5.00    $4.00 - $5.00 
Estimated life   1.5 years    1.7 years 
Risk free interest rate (based on average of 1 and 2 year treasury rates)   0.41%   0.46%

 

As of March 12, 2014, the lenders under the loan agreement assigned their loans to 31 Group LLC and Dominion Capital LLC and such assignees agreed to convert the outstanding principal amount of the loans into shares of the Company’s common stock at a conversion price of $10.50 per share. In connection with that agreement, the Company agreed that if 85% of the volume weighted average price of the Company’s common stock on April 14, 2014 was less than $10.50, the Company would issue an additional number of shares of the Company’s common stock such that the average conversion price of the loans was such lower price.

 

On April 15, 2014, the Company entered into an amendment to that agreement, due to the decline in the trading price of the Company’s common stock, pursuant to which the Company amended the provision requiring it to issue additional shares of common stock by issuing (i) 363,853 shares of common stock and warrants to purchase 100,000 shares of common stock to Dominion Capital LLC, and (ii) 401,996 shares of common stock and warrants to purchase 125,000 shares of common stock to 31 Group LLC.   The warrants are exercisable at a price of $7.25 per share for a three-year period, provided that if the shares of common stock underlying the warrants are registered under the Securities Act, the exercise period of the warrants will be reduced to two years. On April 15, 2014, the day the warrants were issued, the Company recorded a derivative liability in the amount of $416. The amount was recorded as a loss on extinguishment of debt on the unaudited condensed consolidated statement of operations. The amount of the derivative liability was computed by using the Black-Scholes pricing model to determine the value of the warrants issued.

 

On March 31, 2015 and December 31, 2014, the Company used the Black Scholes pricing method to determine the fair value of the derivative liability relating to the April 2014 warrants on that date, and determined the fair value was $22 and $74, respectively.  The Company recorded the change in the fair value of the derivative liability for the three months ended March 31, 2015 as a gain of $52.

 

The fair value of the April 2014 warrants derivative at March 31, 2015 was calculated using the Black-Scholes option pricing model with the following factors, assumptions and methodologies:

 

   March 31,   December 31, 
   2015   2014 
         
Fair value of Company’s common stock  $2.20   $2.92 
Volatility (closing prices of 3-4 comparable public companies, including the Company’s historical volatility)   80%   80%
Exercise price  $7.25   $7.25 
Estimated life   1 year    1.3 years 
Risk free interest rate (based on 1-year treasury rate)   0.26%   0.46%

   

12% Convertible Debentures Convertible Feature

 

The Company recorded a debt discount in the amount of $382 in connection with the 36,567 shares of the Company’s common stock issued pursuant to the purchase agreement, which amount is being amortized over the life of the Convertible Debentures. The Company also recorded a debt discount in the amount of $6,620, which amount is being amortized over the life of the Convertible Debentures.  The Company used a Monte Carlo simulation on the date of issuance to determine the fair value of the embedded conversion feature.  The Company recorded interest expense of $210 related to the amortization of the debt discount for the three months ended March 31, 2015, respectively. 

 

Due to the conversion of $7,008 aggregate principal amount of Convertible Debentures in first half of 2014, the Company adjusted the balance of the derivative liability related to the embedded conversion feature of the Convertible Debentures in the amount of $2,510. Upon conversion, the principle amount of the debt and equity-linked derivative liability were removed at their respective carrying amounts, after a final adjustment of the embedded derivatives to fair value of $943 and the shares of common stock were issued at their then-current fair value. On December 31, 2014, the Company used a Monte Carlo simulation to determine the fair value of the embedded conversion feature of the Convertible Debenture and, on that date, determined the fair value of the embedded conversion feature to be $180.

 

26
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited) 

 

On March 31, 2015, the Company used a Monte Carlo simulation to determine the fair value of the embedded conversion feature of the Convertible Debentures and, on that date, determined the fair value of the embedded conversion feature to be de minimis. The Company recorded the change in fair value of the derivative liability as a gain in the unaudited condensed consolidated statement of operations of $180.

 

The fair value of the embedded conversion feature of the Convertible Debentures at March 31, 2015 was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:

 

   March 31,   December 31, 
   2015   2014 
         
Principal amount  $1,165   $2,331 
Conversion price  $6.36   $6.36 
Conversion trigger price  $7.00   $7.00 
Risk free interest rate (based on 3 month treasury rate)   0.03%   0.12%
Life of conversion feature (in years)   0.20    0.45 
Volatility   65%   55%

  

Forward Investments, LLC Convertible Feature

 

On February 4, 2014 and March 28, 2014, Forward Investments, LLC made convertible loans to the Company for working capital purposes in the amounts of $1,800 and $1,200, respectively.  Such loans are evidenced by convertible promissory notes that bear interest at the rate of 2% and 10% per annum, mature on June 30, 2015 and are convertible into shares of the Company’s common stock at an initial conversion price of $6.36 per share.  

 

The fair value of the embedded conversion feature at the date of issuance was $8,860.  The Company recorded a debt discount of $6,475 and a loss on debt discount of $2,385.  The debt discount is being amortized over the life of the loans. The Company used a Monte Carlo simulation on the date of issuance to determine the fair value of the embedded conversion feature.

 

On October 22, 2014, the two convertible loan agreements were modified to reduce the initial conversion price of $6.36 to $3.93, subject to the 12% debentures not being outstanding. As a result, the Company used a Monte Carlo simulation to determine the fair value on the date of modification. The fair value of the conversion feature of the Forward Investments, LLC loan on the date of modification was $910.

 

On March 4, 2015, the Company and Forward Investments, LLC restructured certain promissory notes in order to extend the maturity dates thereof, reduce the seniority and reduce the interest rate accruing thereon (refer to Note 11 for further detail). The fair value of the embedded conversion feature on the date of restructuring was $1,915, which was recorded as a debt discount on the unaudited condensed consolidated balance sheet. In addition, the Company recorded a derivative liability of $2,600 on the unaudited condensed consolidated balance sheet and a loss on modification of debt of $685 on the unaudited condensed consolidated statement of operations related to the embedded conversion feature.

 

In conjunction with the issuance of the 6.5% and 3% convertible notes issued on March 4, 2015, the Company recorded an additional derivative liability as a debt discount in the amount of $260 and $1,970, respectively, on the date of the issuance of the notes.

 

The debt discounts are being amortized over the life of the loans. The Company used a Monte Carlo simulation on the date of issuance to determine the fair value of the embedded conversion features.

 

On March 31, 2015 and December 31, 2014, the fair value of the conversion features of the Forward Investments, LLC loans was $4,990 and $800, respectively, which is included in derivative financial instrument at estimated fair value on the unaudited condensed consolidated balance sheets.  The Company recorded the change in the fair value of the derivative liability on March 31, 2015 as a gain on change in fair value of derivative instruments in the unaudited condensed consolidated statements of operations of $640.

 

27
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

The fair value of the Forward Investments, LLC derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:

 

      December 31, 
   March 31, 2015   2014 
                     
Principal amount  $3,650   $390   $2,825   $4,373   $2,825 
                          
Conversion price before July 31, 2015  $6.36   $6.36   $6.36   $6.36   $6.36 
Conversion price after July 31, 2015  $2.35   $2.35   $2.35   $2.35   $3.93 
Conversion trigger price before July 31, 2015  $15.90   $15.90   $15.90   $15.90   $7.63 
Conversion trigger price after July 31, 2015  $5.88   $5.88   $5.88   $5.88   $4.72 
Risk free interest rate (based on 6 and 7-year treasury rate)   1.67%   1.67%   0.34%   0.81%   0.12%
Life of conversion feature (in years)   6.76    6.76    1.25    2.76    0.5 
Volatility   55%   55%   50%   55%   50%

 

31 Group Promissory Note Warrants

 

On July 1, 2014, the Company issued 58,870 warrants associated with its issuance to 31 Group LLC of convertible promissory notes. Upon issuance, the Company recorded a derivative liability and a related debt discount in the amount of $184. The debt discount was being amortized over the original life of the convertible promissory notes and was completely amortized as a result of the payoff of the 31 Group debt.

 

On March 31, 2015 and December 31, 2014, the Company used the Black-Scholes option pricing model to determine the fair value of the warrants and derived an implied fair value of $22 and $43, respectively, which is included in derivative financial instruments at estimated fair value on the unaudited condensed consolidated balance sheets.  The Company recorded the change in the fair value of the derivative liability on March 31, 2015 as a gain in the unaudited condensed consolidated statements of operations of $21.

 

The fair value of the 31 Group warrant derivative at the measurement date was calculated using the Black-Scholes option pricing model with the following factors, assumptions and methodologies:

 

   March 31,   December 31, 
   2015   2014 
         
Fair value of Company’s common stock  $2.20   $2.92 
Volatility (closing prices of 3-4 comparable public companies, including the Company’s historical volatility)   80%   80%
Exercise price  $7.25   $7.25 
Estimated life   2.25 years    2.5 years 
Risk free interest rate (based on average of 2 and 3-year treasury rates)   0.73%   0.89%

 

28
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

31 Group, LLC October Warrants

 

Pursuant to the securities purchase agreement entered into with 31 Group LLC dated October 8, 2014, the Company issued a warrant, initially exercisable for up to 300,000 shares of common stock at an exercise price of $5.00 per share. The warrant expires on the date that is the earlier of (i) the later of (x) the fifteenth (15th) Trading Day after the date a registration statement registering all of the shares of the Company’s common stock underlying the warrants is declared effective by the SEC and (y) December 31, 2014, and (ii) such earlier date as set forth in a written agreement of the Company and 31 Group LLC; provided, that any such date shall be extended as set forth in the warrant. On October 8, 2014, when the warrant was issued, the Company recorded a derivative liability in the amount of $90. The amount of the derivative liability was computed by using the Black-Scholes pricing model to determine the value of the warrants issued.

 

On March 31, 2015 and December 31, 2014, the Company used the Black-Scholes option pricing method to determine the fair value of the warrants and derived an implied fair value of $3 and $18, respectively, which is included in derivative financial instruments at estimated fair value on the unaudited condensed consolidated balance sheets.  The Company recorded the change in the fair value of the derivative liability on March 31, 2015 as a gain in the unaudited condensed consolidated statements of operations of $15.

 

The fair value of the 31 Group securities purchase agreement warrants derivative at the measurement date was calculated using the Black-Scholes option pricing model with the following factors, assumptions and methodologies:

 

   March 31,   December 31, 
   2015   2014 
         
Fair value of Company’s common stock  $2.20   $2.92 
Volatility (closing prices of 3-4 comparable public companies, including the Company’s historical volatility)   80%   80%
Exercise price  $5.00   $5.00 
Estimated life   3 months    3 months 
Risk free interest rate (based on 3 month treasury rate)   0.04%   0.04%

 

Bridge Financing Agreement Warrants

 

On December 3, 2014, the Company entered into a bridge financing agreement with GPB Life Science Holdings LLC, a third-party lender. Pursuant to the agreement, the Company issued a warrant entitling the lender to purchase 250,000 shares of common stock. The warrant is exercisable at a fixed price of $5.00 and expires 180 days from the original issue date. On December 1, 2014, when the warrant was issued, the Company recorded a derivative liability in the amount of $421. The amount was recorded as a debt discount and is being amortized over the original life of the related loan. On December 31, 2014, the Company used the Black-Scholes option pricing model to determine the fair value of the warrants and derived an implied fair value of $340 which is included in derivative financial instruments at estimated fair value on the unaudited condensed consolidated balance sheets.  

 

29
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

On December 24, 2014, the Company entered into a second bridge financing agreement with GPB Life Science Holdings LLC. Pursuant to the second agreement, the Company issued a warrant entitling the lender to purchase 150,000 shares of common stock. The warrant is exercisable at a fixed price of $5.00 and expires 180 days from the original issue date. On December 24, 2014, when the warrant was issued, the Company recorded a derivative liability in the amount of $215. The amount was recorded as a debt discount and is being amortized over the original life of the related loan. The amount of the derivative liability was computed by using the Black-Scholes pricing model to determine the value of the warrants issued. On December 31, 2014, the Company used the Black-Scholes option pricing method to determine the fair value of the warrants and derived an implied fair value of $206 which is included in derivative financial instruments at estimated fair value on the unaudited condensed consolidated balance sheets.  

 

During the quarter ended March 31, 2015, the Company re-evaluated the GPB Life Science Holdings LLC warrants issued on December 3, 2014 and December 24, 2014 and reclassified the warrants to additional paid-in capital within the unaudited condensed consolidated balance sheet.

  

Option Shares

 

On October 15, 2014, the Company granted to an employee pursuant to the InterCloud Systems, Inc. 2012 Performance Incentive Plan an option to purchase 150,000 shares of common stock at an exercise price of $3.72 per share. The option vested immediately and expires on the tenth anniversary of the grant dated. The amount of the liability was computed by using the Black-Scholes pricing model and the fair value of the option liability recorded in the consolidated balance sheet at December 31, 2014 is $474.

 

On October 15, 2014, the Company granted to an employee pursuant to the InterCloud Systems, Inc. 2012 Performance Incentive Plan an option to purchase 25,000 shares of common stock at an exercise price of $3.72 per share. The option vests over three years with 33 1/3 percent vesting on the first anniversary of the grant date and on each of the next two anniversaries of the grant date. This option expires on the fifth anniversary of the grant date. The amount of the liability was computed by using the Black-Scholes pricing model and the fair value of the option liability recorded in the consolidated balance sheet at December 31, 2014 is $62.

 

During the quarter ended March 31, 2015, the Company re-evaluated the options issued on October 15, 2014 and reclassified the options to additional paid-in capital within the unaudited condensed consolidated balance sheet.

 

Net Settlement of Accounts Payable

 

On March 25, 2015, the Company issued 300,000 shares of common stock and a warrant to purchase 80,000 shares of common stock to a third-party vendor to settle various accounts payable. The shares of common stock were issued with a six month restrictive legend and as such, the fair value of the accounts payable to be paid with the common stock has not yet been determined. The Company recorded the common stock at a fair value of $648 and the warrant with a fair value of $106, which reduced the accounts payable to the third party in the amount of $1,475. The Company recorded a derivative liability of $721 at the time the shares were issued. The Company used a Black-Scholes pricing model to determine the fair value of the warrant on the date it was issued.

 

During the quarter ended March 31, 2015, the Company revalued the accounts payable derivative and recorded a gain of $10 on the unaudited condensed consolidated statement of operations.

 

The fair value of the accounts payable derivative at the measurement date was calculated using the Black-Scholes option pricing model with the following factors, assumptions and methodologies:

 

   March 31, 
   2015 
     
Fair value of Company’s common stock  $2.20 
Volatility (closing prices of 3-4 comparable public companies, including the Company’s historical volatility)   80%
Exercise price  $3.00 
Estimated life   4.96 years 
Risk free interest rate (based on average of 5-year treasury rate)   1.41%

 

30
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

8. INCOME TAXES

 

As of March 31, 2015 and December 31, 2014, the Company had federal net operating loss carry forwards (“NOL’s”) of approximately $50,169 and $44,715, respectively, and state NOL’s of approximately $35,785 and $32,889, respectively, that will be available to reduce future taxable income, if any. These NOL’s begin to expire in 2025. In addition, as of March 31, 2015 and December 31, 2014, the Company had federal tax credit carry forwards of $815 and $791, respectively, available to reduce future taxes. These credits begin to expire in 2022. 

 

Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, provide for annual limitations on the utilization of net operating loss and credit carryforwards if the Company were to undergo an ownership change, as defined in Section 382 of the Code. In general, an ownership change occurs whenever the percentage of the shares of a corporation owned, directly or indirectly, by 5-percent shareholders, as defined in Section 382 of the Code, increases by more than 50 percentage points over the lowest percentage of the shares of such corporation owned, directly or indirectly, by such 5-percent shareholders at any time over the preceding three years. In the event such ownership change occurs, the annual limitation may result in the expiration of the net operating losses prior to full utilization. The Company has completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company became a “loss corporation” under the Code. As disclosed the Company has taken these limitations into account in determining its available NOL’s.

 

During 2012, the Company acquired ownership of three entities that had historically used the cash method of accounting for tax purposes. Section 446 of the Internal Revenue Code of 1986, as amended, requires that the Company prepare its tax returns using the accrual method of accounting. As a result of this change from cash to accrual accounting for income tax purposes, the Company will recognize $1,193 of income during 2015.

 

During 2012 and 2013, the Company acquired 100% of a Puerto Rican limited liability company, thereby subjecting the Company to Puerto Rico income taxes on any Puerto Rico-sourced taxable income. Such taxes paid are considered foreign taxes that may be credited against federal income taxes payable in future years.

  

9. CAPITAL STOCK

 

Issuance of shares of common stock to third parties for services and non-employees

 

During January, February and March 2015, the Company issued an aggregate of 147,586 shares of its common stock to non-employees. The shares were valued between $2.16 and $2.87 per share and were immediately vested.  The Company recorded $374 to salaries and wages expense.

 

Issuance of shares of common stock to employees, directors, and officers

 

During January and February 2015, the Company issued an aggregate of 216,000 shares of its common stock to various employees and directors for services rendered. The shares were valued between $2.53 and $2.87.  The Company recorded $30 to salaries and wages expense. An additional $849 in stock compensation expense was recognized in the current period on vested shares issued in previous periods.

 

Issuance of shares of common stock pursuant to conversion of debt

 

During February 2015, the Company issued 42,553 shares of its common stock to a related party pursuant to the conversion of $100 notes payable principal. The shares were issued at $2.76 per share, for a total value of $117 and a loss of debt conversion of $17.

 

Issuance of shares of common stock pursuant to extinguishment of debt

 

On March 3, 2015, the Company issued an aggregate of 423,200 shares of its common stock to five related party lenders pursuant to the restructuring of notes payable. The shares were issued with a fair value of $2.45 per share, for a total fair value of $1,038, which was recorded as loss on extinguishment of debt on the unaudited condensed consolidated statement of operations. 

 

On March 25, 2015, the Company issued 22,222 shares of its common stock to a related party lender pursuant to the restructuring of notes payable. The shares were issued at a fair value of $2.16 per share, for a total fair value of $48, which was recorded as a loss on extinguishment of debt on the unaudited condensed consolidated statement of operations.

 

31
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

Issuance of shares of common stock pursuant to modification of debt

 

On March 3, 2015, the Company issued an aggregate of 375,890 shares of its common stock to five related party lenders pursuant to the restructuring of various notes payable. The shares were issued with a fair value of $2.45 per share, for a total fair value of $920, which was recorded as loss on modification of debt on the unaudited condensed consolidated statement of operations.

 

Issuance of shares for payment of related-party interest

 

During January and March 2015, the Company issued an aggregate of 144,508 shares of its common stock to eight related parties for payment of accrued interest aggregating to $343. The shares were issued at $2.53 and $2.16 per share in January and March, respectively.

 

Issuance of shares pursuant to incentives earned

 

During January 2015 and March 2015, the Company issued an aggregate of 231,788 shares to employees in settlement of incentives earned. The shares were issued between $2.16 and $2.53 per share. The Company recorded an additional $70 in stock compensation expense related to the issuance of these common shares.

 

Issuance of shares upon restructuring of debt

 

During January 2015, the Company issued 100,000 shares of common stock to a related party for the restructuring of notes payable. The shares were issued at $2.92 per share and were valued at $292.

 

Issuance of shares upon settlement of accounts payable

 

During March 2015, the Company issued 300,000 shares of common stock to a third party for settlement of accounts payable. The shares were issued at $2.16 per share and were valued at $648.

 

Issuance of shares pursuant to the payment of contingent consideration

 

During January 2015, the Company issued 79,853 shares of common stock to HighWire for the payment of contingent consideration owed per the purchase agreement. The shares were issued at $3.83 per share for a fair value of $306.

 

Issuance of shares to third party

 

During January 2015, the Company issued 1,961 shares of common stock to the Ian Gist Cancer Research Fund. The shares were issued at $2.53 per share and were valued at $5.

  

10. STOCK-BASED COMPENSATION

 

Restricted Stock

 

The following table summarizes the Company’s restricted stock unit activity during the three months ended March 31, 2015:

 

   Number of Shares   Weighted
Average
Grant Date
Fair Value
 
         
Outstanding at January 1, 2015   1,373,987   $5.67 
Granted   216,000    2.67 
Vested   (29,000)   5.19 
Forfeited/Cancelled   -    - 
Outstanding at March 31, 2015   1,560,987   $5.26 

 

For the three month period ended March 31, 2015, the Company incurred $1,323, in stock compensation expense from the issuance of common stock to employees and consultants compared to $183 in the same period of 2014.

 

32
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

Options

 

There were no options granted during the three months ended March 31, 2015.

 

The following table summarizes the Company’s stock option activity and related information for the three months ended March 31, 2015:

 

       Weighted Average     
   Shares       Remaining Contractual   Aggregate Intrinsic 
   Underlying   Exercise   Term   Value 
   Options   Price   (in years)   (in thousands) 
Outstanding at January 1, 2015   175,000   $3.72    7.29   $140 
Granted   -    -    -    - 
Forfeited and expired   -    -    -    - 
Exercised   -    -    -    - 
Outstanding at March 31, 2015   175,000   $3.72    7.05   $266 
Exercisable at March 31, 2015   150,000   $3.72    9.55   $228 

 

The aggregate intrinsic value for outstanding options is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock as of March 31, 2015 and December 31, 2014 of $2.20 and $2.92, respectively.

 

11. RELATED PARTIES

 

At March 31, 2015 and December 31, 2014, the Company had outstanding the following loans from related parties:

 

   March 31,   December 31, 
   2015   2014 
         
Promissory note issued to CamaPlan FBO Mark Munro IRA, 3% interest, maturing on January 1, 2018, unsecured  $597   $597 
Promissory note issued to Mark Munro 1996 Remainder UniTrust, 3% interest, maturing on January 1, 2018, unsecured   475    575 
Promissory note issued to 1112 Third Avenue Corp, 3% interest, maturing on January 1, 2018, unsecured   375    375 
Promissory note issued to Mark Munro, 3% interest, maturing on January 1, 2018, unsecured   1,337    1,337 
Promissory note issued to Pascack Road, LLC, 3% interest, maturing on January 1, 2018, unsecured   2,650    2,650 
Promissory notes issued to Forward Investments, LLC, between 2% and 10% interest, maturing on July 1, 2016, unsecured, net of debt discount of $3,211 and $2,232, respectively   3,264    4,243 
Promissory notes issued to Forward Investments, LLC, 3% interest, maturing on January 1, 2018, unsecured, net of debt discount of $1,919   2,455    2,645 
Promissory notes issued to Forward Investments, LLC, 6.5% interest, maturing on July 1, 2016, unsecured, net of debt discount of $246   144    - 
Former owner of IPC, unsecured, 8% interest, due May 30, 2016   6,255    6,255 
Former owner of IPC, unsecured, 15% interest, due on demand   100    100 
Former owner of Nottingham, unsecured, 8% interest, maturing on May 30, 2016   250    250 
    17,902    19,027 
Less: current portion of debt   (100)   (7,238)
Long-term portion of notes payable, related parties  $17,802   $11,789 

 

The interest expense associated with the related-party notes payable in the three months ended March 31, 2015 and 2014 was $506 and $279, respectively. 

 

33
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited) 

 

Related Party Promissory Note Payable Restructuring

  

On January 1, 2014, the outstanding principal amount of the loans from MMD Genesis LLC, a company in which Mark Munro, the Company’s Chairman of the Board and Chief Executive Officer, and Mark Durfee, a director of the Company, are principals, in the amount of $3,925, and accrued interest thereon in the amount of $964, was restructured and, in lieu thereof, the Company issued to the principals of MMD Genesis LLC or their designees the following notes:

 

  a note issued to Mark Munro 1996 Charitable Remainder UniTrust in the principal amount of $275 that 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 $347 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 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 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 that bears interest at the rate of 12% per annum and matures on March 31, 2016;

 

  a note issued to Forward Investments, LLC, the beneficial owner of more than 10% of the Company’s common stock, in the principal amount of $650 that bears interest at the rate of 10% per annum, matures on June 30, 2015 and is convertible into shares of the Company’s common stock at an initial conversion price of $6.36 per share; and

 

  a note issued to Forward Investments, LLC in the principal amount of $2,825 that bears interest at the rate of 2% per annum, matures on June 30, 2015 and is convertible into shares of the Company’s common stock at an initial conversion price of $6.36 per share, and reflects certain penalties and consulting fees of $1,000 which were incurred and outstanding as of December 31, 2013.

 

On February 25, 2015 and March 2, 2015, certain of the aforementioned notes were restructured. Refer to the restructuring paragraphs noted later within this footnote for further details.

 

Promissory Notes to the Mark Munro 1996 Charitable Remainder UniTrust

 

On May 7, 2014, the Company issued a promissory note to the Mark Munro 1996 Charitable Remainder UniTrust in the principal amount of $300 that bears interest at the rate of 18% per annum and matures on March 31, 2016.

 

On February 10, 2015, the Mark Munro 1996 Charitable Remainder UniTrust converted $100 of the January 1, 2014 notes into 42,553 shares of the Company’s common stock. Refer to Note 9 for further detail.

 

This note was restructured as part of the February 25, 2015 promissory note restructuring agreement. Refer to the restructuring paragraphs noted later within this footnote for further details.

 

Related Party Promissory Notes to CamaPlan FBO Mark Munro IRA

 

On July 8, 2014, the Company issued a promissory note to the CamaPlan FBO Mark Munro IRA in the principal amount of $200 that bears interest at the rate of 18% per annum and matures on March 31, 2016. This note was restructured as part of the February 25, 2015 promissory note restructuring agreement. Refer to the restructuring paragraphs noted later within this footnote for further details.

 

Related Party Promissory Notes to Mark Munro

 

On September 2, 2014, the Company issued a promissory note to Mark Munro in the principal amount of $100 that bears interest at the rate of 18% per annum and matures on March 31, 2016.

 

On September 9, 2014, the Company issued a promissory note to Mark Munro in the principal amount of $150 that bears interest at the rate of 18% per annum and matures on March 31, 2016.

 

On September 24, 2014, the Company issued a promissory note to Mark Munro in the principal amount of $250 that bears interest at the rate of 18% per annum and matures on March 31, 2016.

 

These notes were restructured as part of the February 25, 2015 promissory note restructuring agreement. Refer to the restructuring paragraphs noted later within this footnote for further details.

 

34
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

Related Party Promissory Notes to Pascack Road, LLC

 

On June 20, 2014, the Company issued a promissory note to Pascack Road, LLC in the principal amount of $300 that bears interest at the rate of 18% per annum and matures on March 31, 2016.

 

On July 11, 2014, the Company issued a promissory note to Pascack Road, LLC in the principal amount of $200 that bears interest at the rate of 18% per annum and matures on March 31, 2016.

 

On September 2, 2014, the Company issued a promissory note to Pascack Road, LLC in the principal amount of $100 that bears interest at the rate of 18% per annum and matures on March 31, 2016.

 

On September 8, 2014, the Company issued a promissory note to Pascack Road, LLC in the principal amount of $150 that bears interest at the rate of 18% per annum and matures on March 31, 2016.

 

On September 29, 2014, the Company issued a promissory note to Pascack Road, LLC in the principal amount of $575 that bears interest at the rate of 18% per annum and matures on March 31, 2016.

 

These notes were restructured as part of the February 25, 2015 promissory note restructuring agreement. Refer to the restructuring paragraphs noted later within this footnote for further details.

 

Related Party Promissory Notes to Forward Investments, LLC

 

On June 19, 2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $500 that bears interest at the rate of 18% per annum and matures on June 30, 2015.

 

On July 11, 2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $200 that bears interest at the rate of 18% per annum and matures on June 30, 2015.

  

On August 12, 2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $600 that bears interest at the rate of 18% per annum and matures on June 30, 2015.

 

On September 2, 2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $100 that bears interest at the rate of 18% per annum and matures on June 30, 2015.

 

On September 8, 2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $150 that bears interest at the rate of 18% per annum and matures on June 30, 2015.

 

On September 26, 2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $250 that bears interest at the rate of 18% per annum and matures on June 30, 2015.

 

On September 29, 2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $395 that bears interest at the rate of 18% per annum and matures on June 30, 2015.

 

On October 24, 2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $400 that bears interest at the rate of 18% per annum and matures on June 30, 2015.

 

These notes were restructured as part of the March 4, 2015 Forward Investments, LLC note restructuring agreement. Refer to the restructuring paragraphs noted later within this footnote for further details.

 

35
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

Restructuring of Related Party Promissory Notes Issued in 2013

 

On February 25, 2015, the Company restructured the terms of certain related-party promissory notes and term loans issued to Mark Munro, Cama Plan FBO Mark Munro IRA, 1112 Third Ave. Corp., the Mark Munro 1996 Charitable Remainder Trust and Pascack Road, LLC in order to extend the maturity dates thereof and to reduce the interest rate accruing thereon. The following notes were restructured as follows:

 

  notes issued to Mark Munro in the aggregate principal amount of $637 had the interest rates reduced from 12% to 3% per annum and the maturity dates extended from March 31, 2016 to January 1, 2018;
     
  notes issued to CamaPlan FBO Mark Munro IRA in the aggregate principal amount of $397 had the interest rates reduced from 12% to 3% per annum and the maturity dates extended from March 31, 2016 to January 1, 2018;
     
  a note issued to 1112 Third Avenue Corp. in the principal amount of $375 had the interest rate reduced from 12% to 3% per annum and the maturity date extended from March 31, 2016 to January 1, 2018;
     
  notes issued to Mark Munro 1996 Charitable Remainder UniTrust in the aggregate principal amount of $275 had the interest rates reduced from 12% to 3% per annum and the maturity dates extended from March 31, 2016 to January 1, 2018; and
     
  notes issued to Pascack Road, LLC in the aggregate principal amount of $1,575 had the interest rate reduced from 12% to 3% per annum and the maturity dates extended from March 31, 2016 to January 1, 2018.

 

In consideration for such restructuring, the Company issued to Mark Munro 63,700 shares of unregistered common stock, the CamaPlan FBO Mark Munro IRA 39,690 shares of unregistered common stock, 1112 Third Avenue Corp. 87,500 shares of unregistered common stock, the Mark Munro 1996 Charitable Remainder UniTrust 27,500 shares of unregistered common stock and Pascack Road, LLC 157,500 shares of unregistered common stock. The Company recorded a loss on modification of debt of $798 on the unaudited condensed consolidated statement of operations as of March 31, 2015 related to the consideration given to the debt holders.

 

Restructuring of Related Party Promissory Notes Issued in 2014

 

On February 25, 2015, the Company restructured the terms of certain related-party promissory notes and term loans issued to Mark Munro, Cama Plan FBO Mark Munro IRA, 1112 Third Ave. Corp., the Mark Munro 1996 Charitable Remainder Trust and Pascack Road, LLC in order to extend the maturity dates thereof and to reduce the interest rate accruing thereon. The following notes were restructured as follows:

 

  notes issued to Mark Munro in the aggregate principal amount of $700 had the interest rates reduced from 18% to 3% per annum and the maturity dates extended from March 31, 2016 to January 1, 2018;
     
  notes issued to CamaPlan FBO Mark Munro IRA in the aggregate principal amount of $200 had the interest rates reduced from 12% to 3% per annum and the maturity dates extended from March 31, 2016 to January 1, 2018;
     
  notes issued to Mark Munro 1996 Charitable Remainder UniTrust in the aggregate principal amount of $300 had the interest rates reduced from 18% to 3% per annum and the maturity dates extended from March 31, 2016 to January 1, 2018; and
     
  notes issued to Pascack Road, LLC in the aggregate principal amount of $1,075 had the interest rate reduced from 18% to 3% per annum and the maturity dates extended from March 31, 2016 to January 1, 2018.

 

In consideration for such restructuring, the Company issued to Mark Munro 95,600 shares of unregistered common stock, the CamaPlan FBO Mark Munro IRA 41,600 shares of unregistered common stock, the Mark Munro 1996 Charitable Remainder UniTrust 62,400 shares of unregistered common stock and Pascack Road, LLC 223,600 shares of unregistered common stock. The Company recorded a loss on extinguishment of debt of $1,159 on the unaudited condensed consolidated statement of operations as of March 31, 2015 related to the consideration given to the debt holders.

 

36
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

Forward Investments Working Capital Loan

 

On February 4, 2014 and March 28, 2014, Forward Investments, LLC made loans to the Company for working capital purposes in the amounts of $1,800 and $1,200, respectively.  Such loans are evidenced by promissory notes that bear interest at the rate of 10% per annum, mature on June 30, 2015 and are convertible into shares of the Company’s common stock at an initial conversion price of $6.36 per share.

  

Due to the embedded conversion feature of the Forward Investments, LLC loans, the Company deemed this feature to be a derivative and recorded a debt discount in the amount of $8,860, which is being amortized over the life of the loans using the effective interest method. Refer to Note 7 Derivative Instruments for further detail on the Forward Investments derivative.

 

These working capital loans were restructured as part of the March 4, 2015 Forward Investments, LLC note restructuring agreement. Refer to the restructuring paragraphs noted later within this footnote.

 

Restructuring of Forward Investments, LLC Promissory Notes and Working Capital Loan

 

On March 4, 2015, the Company restructured the terms of certain promissory notes issued by it to a related party investor, Forward Investments, LLC, in order to extend the maturity dates thereof, reduce the seniority and reduce the interest rate accruing thereon. The following notes were restructured as follows:

 

  notes issued to Forward Investments, LLC in the aggregate principal amount of $3,650 that bear interest at the rate of 10% per annum, had the maturity date extended from June 30, 2015, to July 1, 2016;

 

  notes issued to Forward Investments, LLC in the principal amount of $2,825 that bears interest at the rate of 2% per annum, had the maturity date extended from June 30, 2015, to July 1, 2016; and
     
  notes issued to Forward Investments, LLC in the aggregate principal amount of $2,645 were converted from senior notes to junior notes, had the interest rate reduced from 18% to 3% per annum, had the maturity date extended by approximately three years to January 1, 2018, and are convertible at an initial conversion price of $6.36 per share until the Convertible Debentures are repaid in full and thereafter $2.35 per share, subject to further adjustment as set forth therein.

 

In connection with such restructuring, Forward Investments, LLC agreed to lend to the Company an amount substantially similar to the accrued interest the Company owed to Forward Investments, LLC on the restructured notes. In consideration for such restructuring and additional payments made by Forward Investments, LLC to the Company, the Company issued to Forward Investments, LLC an additional convertible note equal to $1,730 with an interest rate of 3% per annum, a maturity date of January 1, 2018, and an initial conversion price of $6.36 per share until the Convertible Debentures are repaid in full and thereafter $2.35 per share, subject to further adjustment as set forth therein, and provided Forward Investments, LLC the option to lend the Company an additional $8,000 in the form of convertible notes similar to the existing convertible notes of the Company issued to Forward Investments, LLC. The convertible note was issued to Forward Investments, LLC as an incentive to restructure the above-mentioned notes and resulted in the Company recording a loss on modification of debt of $1,508 on the unaudited condensed consolidated statement of operations as of March 31, 2015.

 

As part of the restructuring, Forward Investments, LLC agreed to convert $390 of accrued interest on the above-mentioned loans to a new note bearing interest at 6.5%, which matures on July 1, 2016.

 

In conjunction with the extension of the 2% and 10% convertible notes, the Company recorded an additional $1,916 of debt discount at the date of the restructuring. Refer to Note 7 for detail on the additional debt discount related to the restructuring.

 

37
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

Revolving Line of Credit

 

On July 3, 2014, the Company obtained an unsecured $3,000 interim revolving line of credit from MMD Genesis LLC, the Mark Munro 1996 Charitable Remainder UniTrust, CamaPlan FBO Mark Munro IRA, Mark Munro, Pascack Road, LLC, and Forward Investments, LLC, all of which are related parties, to provide working capital as well as cash to make the Company’s upcoming amortization payments pursuant to the Company’s Convertible Debentures.  The line has a maturity date of March 31, 2016, and bears interest at the rate of 1.5% per month on funds drawn.

 

As of March 31, 2015, there was no amount outstanding under the related party revolving line of credit.

 

Convertible Promissory Note to Frank Jadevaia

 

On January 1, 2014, the Company acquired all of the outstanding capital stock of IPC. As part of the purchase price for the acquisition, the Company issued a convertible promissory note to Frank Jadevaia, the current President of the Company, in the original principal amount of $6,255. The convertible promissory note accrues interest at the rate of 8% per annum, and all principal and interest accruing thereunder was due and payable on December 31, 2014.  At the election of Mr. Jadevaia, the convertible promissory note is convertible into shares of the Company's common stock at a conversion price of $16.99 per share (subject to equitable adjustments for stock dividends, stock splits, recapitalizations and other similar events).  The Company can elect to force the conversion of the convertible promissory note if the Company’s common stock is trading at a price greater than or equal to $16.99 for ten consecutive trading days.

 

On December 31, 2014, the Company and Mr. Jadevaia agreed to a modification of the convertible promissory note. The terms of the convertible promissory note were extended to May 30, 2016 and, in consideration for this modification, the Company issued to Mr. Jadevaia 100,000 shares of common stock.

 

Convertible Promissory Note to Scott Davis

 

On July 1, 2014, the Company issued an unsecured $250 convertible promissory note to Scott Davis, who is a related party. The note bears interest at the rate of 8% per annum, originally matured on January 1, 2015 and is convertible into shares of the Company’s common stock at an initial conversion price of $6.59. The note is currently outstanding and payable on demand. The Company evaluated the convertible feature and determined that the value was de minimis and as such, the Company did not bifurcate the convertible feature. 

 

On March 25, 2015, the Company and Mr. Davis agreed to a modification of the convertible promissory note. The term of the note was extended to May 30, 2016 and, in consideration for this modification, the Company issued to Mr. Davis 22,222 shares of common stock.

 

38
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

12. SEGMENTS 

 

The Company has acquired three material companies since January 1, 2014.  With each acquisition, the Company evaluated the newly-acquired company’s sources of revenues and costs of revenues.   Due to continued expansion, the Company evaluated its recent acquisitions and their impact upon the existing segment structure. As of December 31, 2014, the Company operated within four operating segments which were aggregated into three reportable segments. During the quarter ended March 31, 2015, the Company determined that its activities within the cloud services operating segment were of a material nature to the Company as a whole and had different margins than the other components of the managed services segment. As such, the Company determined that the cloud services and managed services segments should be presented separately within the unaudited condensed consolidated financial statements. As of March 31, 2015, the Company determined that it has four reportable segments: applications and infrastructure, professional services, managed services, and cloud services.

 

The Company identified its operating segments based on the services provided by its various operations and the financial information used by its chief operating decision maker to make decisions regarding the allocation of resources to and the financial performance of the operating segments.  The reporting segments represent an aggregation of individual operating segments with similar economic characteristics.  The applications and infrastructure operating segment is an aggregation of the component operations of Tropical, RM Leasing, T N S and the AWS Entities.  The professional services operating segment is an aggregation of the operations of the ADEX Entities. The managed services operating segment is primarily comprised of the operations of IPC and RentVM. The cloud services operating segment is comprised of the operations of VaultLogix.

 

In addition to the operating segments, the Company has determined that certain costs related to the general operations of the Company cannot be reasonably allocated to each individual segment. These costs are not part of the factors that the chief operating decision maker uses to calculate gross margin.  As such, the Company has chosen to present those costs within a general “Corporate” line item for presentation purposes.

 

Segment information relating to the Company’s results of continuing operations was as follows:  

  

   Three months ended
March 31,
 
Revenues  2015   2014 
Applications and infrastructure  $4,730   $3,876 
Professional services   6,864    4,943 
Managed services   6,644    5,256 
Cloud services   2,755    - 
Total  $20,993   $14,075 

 

Gross Profit   Three months ended
March 31,
 
   2015   2014 
Applications and infrastructure  $1,197   $1,673 
Professional services   1,453    957 
Managed services   2,418    1,304 
Cloud services   2,307    - 
Total  $7,375   $3,934 

39
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

  

Operating Income (Loss) by Segment  Three months ended March 31, 
   2015   2014 
Applications and infrastructure  $(121)  $577 
Professional services   (83)   (476)
Managed services   (380)   (1,175)
Cloud services   343    - 
Corporate   (2,908)   (1,657)
Total  $(3,149)  $(2,731)

 

Interest Expense  Three months ended
March 31,
 
   2015   2014 
Applications and infrastructure  $8   $20 
Professional services   -    1 
Managed services   -    - 
Cloud services   511    - 
Corporate   3,141    3,256 
Total  $3,660   $3,277 

 

Total Assets by Segment    
     
   March 31, 2015   December 31, 2014 
       (Revised) 
Applications and infrastructure  $18,871   $19,517 
Professional services   18,419    19,526 
Managed services   34,041    38,352 
Cloud services   40,765    41,628 
Corporate   1,617    2,334 
Total  $113,713   $121,357 

 

Goodwill    
     
   March 31, 2015   December 31,
2014
 
       (Revised) 
Applications and infrastructure  $6,906   $6,906 
Professional services   9,257    9,257 
Managed services   18,402    20,842 
Cloud services   23,349    23,349 
Total  $57,914   $60,354 

 

Revenues by Segment by Geographic Region  Three months ended
March 31, 2015
 
   Domestic   Foreign   Total 
Applications and infrastructure  $4,317   $413   $4,730 
Professional services   6,816    48    6,864 
Managed services   6,644    -    6,644 
Cloud services   2,581    174    2,755 
Total  $20,358   $635   $20,993 

 

40
 

 

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

Revenues by Segment by Geographic Region  Three months ended
March 31, 2014
 
   Domestic   Foreign   Total 
Applications and infrastructure  $3,085   $791   $3,876 
Professional services