Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
¨
No
x
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s)), and
(2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check
mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
¨
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
¨
No
x
The aggregate
market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and ask price of such common equity, as of the last business day of the registrant’s
most recently completed second fiscal quarter: $45,202,168 as of June 30, 2015,
based on the $2.66 closing price per share of the Company’s common stock on such date.
The number of
outstanding shares of the registrant’s common stock on June 13, 2016 was 32,648,441.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1.
|
DESCRIPTION
OF BUSINESS
|
InterCloud
Systems, Inc. (the “Company”) was incorporated on November 22, 1999 under the laws of the State of Delaware. The Company
provides networking orchestration and automation for software-defined networking (“SDN”) and network function virtualization
(“NFV”) cloud environments to telecommunication service providers and corporate enterprise markets. 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 also completed the following material and other acquisitions:
|
●
|
Integration
Partners-NY Corporation.
In January 2014, the Company acquired Integration Partners-NY Corporation (“IPC”),
a full-service voice and data network engineering firm based in New York. IPC serves both corporate enterprises 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 small to medium sized businesses, enterprise and carrier
customers across all major verticals. IaaS, PaaS and SaaS allow customers to run their application on RentVM equipment without
the customer purchasing capital equipment. In a private, public, or hybrid cloud environment. RentVM expands the Company’s
cloud and 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. On February 19, 2016, the Company sold
VaultLogix and certain related entities to a third-party (see Note 20 Discontinued Operations).
|
|
●
|
PCS
Holding LLC.
On December 1, 2014, the Company’s subsidiary, VaultLogix, executed an agreement with PCS Holding LLC
to purchase 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, Inc. (“AWS”), 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.
|
2.
|
GOING CONCERN UNCERTAINTY, FINANCIAL CONDITION AND MANAGEMENT’S PLANS
|
The Company believes that
there is substantial doubt about the Company’s ability to continue as a going concern. The Company believes that its available
cash balance as of the date of this filing will not be sufficient to fund its anticipated level of operations for at least the
next 12 months. The Company believes that its ability to continue operations depends on its ability to sustain and grow revenue
and results of operations as well as its ability to access capital markets when necessary to accomplish the Company’s strategic
objectives. The Company believes that the Company will continue to incur losses for the immediate future. For the year ended December
31, 2015, the Company generated gross profits from operations but was unable to achieve positive cash flow from operations. The
Company expects to finance future cash needs from the results of operations and, depending on the results of operations, the Company
may need additional equity or debt financing until the Company can achieve profitability and positive cash flows from operating
activities, if ever.
At December 31, 2015, the
Company had a working capital deficit of approximately $11,397, as compared to a working capital deficit of approximately $13,018
at December 31, 2014. The increase of $1,621 in the Company’s working capital from December 31, 2014 to December 31, 2015
was primarily the result of a reduction in term loans due within the next 12 months.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On or prior to December
31, 2016, the Company has obligations relating to the payment of indebtedness as follows:
|
●
|
$6,865 relating to promissory notes held by related parties that mature prior to December 31, 2016;
|
|
|
|
|
●
|
$5,755 relating to a promissory note held by a related party that matures prior to December 31, 2016;
|
|
|
|
|
●
|
$4,058 related to senior convertible term loans that mature prior to December 2016;
|
|
|
|
|
●
|
$423 relating to current maturities of a convertible note that matures prior to December 31, 2016;
|
|
|
|
|
●
|
$225 relating to a promissory note held by a related party that matures prior to December 31, 2016;
|
|
|
|
|
●
|
$106 relating to a promissory note held by the former owner of Tropical that matures prior to December 31, 2016; and
|
|
|
|
|
●
|
$75 relating 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 December 31, 2016 from earnings from operations. Additionally,
during February 2016, the Company sold its wholly-owned subsidiary, VaultLogix, for $24,000 plus a working capital adjustment,
which is included in an escrow account, of approximately $2,000.
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 services and managed services segments
of its business, which has 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 through December 31, 2016, including the reduction of
certain general and administrative expenses, consulting expenses and other professional services fees. Additionally, if the Company’s
actual revenues are less than forecasted, the Company anticipates implementing headcount reductions to a level that more appropriately
matches then-current revenue and expense levels. The Company is evaluating other measures to further improve its liquidity, including
the sale of equity or debt securities and entering into joint ventures with third parties. Lastly, the Company may elect to reduce
certain related-party and third party debt by converting such debt into common shares. The Company is currently in discussion with
a third party on a credit facility to enhance its liquidity position. The Company’s management believes that these actions
will enable the Company to meet its liquidity requirements through December 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 2016.
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 those 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 operating results and financial condition. Furthermore, any debt financing,
if available, may subject the Company to restrictive covenants and significant interest costs. There can be no assurance that the
Company will be able to raise additional capital, when needed, to continue operations in their current form.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
PRINCIPLES
OF CONSOLIDATION AND ACCOUNTING FOR INVESTMENT IN AFFILIATE COMPANIES
The accompanying consolidated
financial statements have been prepared in accordance with generally accepted accounting principles in the United States. The 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. and AW Solutions Puerto Rico, LLC (collectively,
the “AWS Entities”) (since April 2013), IPC (since January 2014), and RentVM (since February 2014). The results of
operations of the Company’s VaultLogix (since October 2014) subsidiary have been included as discontinued operations on the
accompanying financial statements (see Note 20, Discontinued Operations and Note 21, Subsequent Events). All significant intercompany
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
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
consolidation of RM Engineering resulted in increases of $1,033 in assets and $222 in liabilities in the Company’s consolidated
balance sheet and $3,854 in revenue and $222 in net income in the consolidated statement of operations as of and for the year
ended December 31, 2015.
The
consolidation of RM Engineering resulted in increases of $1,038 in assets and $450 in liabilities in the Company’s consolidated
balance sheet and $3,122 in revenue and $33 in net loss in the consolidated statement of operations as of and for the year ended
December 31, 2014.
The
consolidated financial statements include the accounts of Nottingham (since April 2014), in which the Company owns an interest
of 40%. 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
consolidation of Nottingham resulted in increases of $428 in assets and $27 in liabilities in the Company’s consolidated
balance sheet and $2 in revenue and $18 in net loss in the consolidated statement of operations as of and for the year ended December
31, 2015.
The
consolidation of Nottingham resulted in increases of $423 in assets and $5 in liabilities in the Company’s consolidated
balance sheet and no revenues and $11 in net loss in the consolidated statement of operations as of and for the year ended December
31, 2014.
On
December 17, 2015, the Company acquired a 13.7% ownership interest in NGNWare, LLC (“NGNWare”) for $800. The Company
does not hold a controlling financial interest but has the ability to exercise significant influence over the operating and financial
policies of NGNWare. As such, the Company accounts for the investment in NGNWare under the equity method of accounting.
The
investment in NGNWare resulted in increases of $800 in assets on the Company’s consolidated balance sheet and no earnings
on the Company’s consolidated statement of operations for the year ended December 31, 2015.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
USE
OF ESTIMATES
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenue and expense during the reporting period. Changes in estimates and assumptions are
reflected in reported results in the period in which they become known. Use of estimates includes the following: 1) valuation
of derivative instruments, 2) allowance for doubtful accounts, 3) estimated useful lives of property, equipment and intangible
assets, 4) valuation of contingent consideration, 5) revenue recognition, 6) estimates related to the recovery of deferred tax
assets, 7) valuation of intangible assets, 8) goodwill impairment, 9) recoverability of indefinite lived intangible assets, 10)
estimates in connection with the allocation of the purchase price allocations, and 11) stock based compensation valuation. Actual
results could differ from estimates.
SEGMENT
INFORMATION
As
of December 31, 2014, the Company operated in four operating segments - as an applications and infrastructure provider, as a professional
services provider, as a cloud services provider and as a managed services provider. The applications and infrastructure segment
provides engineering and professional consulting services and voice, data and optical solutions. The engineering, design, installation
and maintenance services of the applications and infrastructure segment support the build-out and operation of enterprise, fiber
optic, Ethernet and wireless networks. The professional services segment provides outsourced services to the wireless and wireline
industry and information technology industry. The cloud services segment provides cloud computing and storage services to customers.
The managed services segment provides hardware and software products to customers and provides maintenance and support for those
products. As of December 31, 2014, the Company had concluded that it had three reportable segments, the applications and infrastructure
operating segment and the professional services operating segment were considered individual reporting segments, while the cloud
services and managed services operating segments were aggregated into one reportable segment.
During
the year ended December 31, 2015, the Company re-evaluated its cloud services and managed services reportable segment. The Company
concluded that, due to the differences in the cloud services operating activities and the gross margins achieved within the managed
services and cloud services operating segments, the cloud services segment should be presented separately within the consolidated
financial statements. As such, the Company concluded that it had four reportable segments as of December 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, which consists
of the IPC and RentVM components and the fourth operating segment is cloud services, which consists of the Axim component. The
operating segments mentioned above constitute reporting segments.
Refer
to Note 19. Segment Information for a detailed discussion on the change in reporting segments.
CASH
Cash
consists of checking accounts and money market accounts. The Company considers all highly-liquid investments purchased with a
maturity of three months or less at the time of purchase to be cash.
ACCOUNTS
RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade
accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews a customer’s credit
history before extending credit. The Company maintains an allowance for doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. Estimates of uncollectible amounts are reviewed each period, and changes
are recorded in the period in which they become known. Management analyzes the collectability of accounts receivable each period.
This review considers the aging of account balances, historical bad debt experience, changes in customer creditworthiness, current
economic trends, customer payment activity and other relevant factors. Should any of these factors change, the estimate made by
management may also change. Allowance for doubtful accounts was $1,342 and $1,545 at December 31, 2015 and 2014, respectively.
INVENTORY
The inventory balance at
December 31, 2015 and 2014 is related to the Company’s IPC subsidiary. IPC purchases inventory for resale to customers and
records it at the lower of cost or market until sold. As inventory relates to specific customer orders, the Company determines
the cost of the inventory using the specific identification method. Inventory consisted of networking equipment for which title
had not passed to customers as of December 31, 2015 and 2014.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 9). 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.
GOODWILL
AND INDEFINTITE 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 (see Note 5.
Acquisitions
and Disposals of Subsidiaries).
During
the fourth quarter of 2015, the Company changed the date of its annual impairment test from December 31 to October 1. The change
was made to more closely align the impairment testing date with the Company’s long-range planning and forecasting process.
The Company believes the change in its annual impairment testing date did not delay, accelerate, or avoid an impairment charge.
The Company has determined that this change in accounting principle is preferable under the circumstances and does
not result in adjustments to the Company’s financial statements when applied retrospectively.
The
Company tests its goodwill and indefinite-lived intangible assets for impairment at least annually (as of October 1) 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. 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.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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. The key assumptions used in the RFRM model include revenue growth rates,
the terminal value and the assumed discount rate. The Market Approach Method uses one or more methods that compare the Company
to similar businesses, business ownership interest and securities that have been sold. Certain elements of the Market Approach
Method are incorporated in the RFRM. 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.
During
2014, indicators of potential impairment of goodwill and indefinite-lived intangible assets were identified by management in the
professional services segment. The Company's management then determined that the ADEX reporting unit assets were impaired and
recognized an impairment loss of $1,369 related to goodwill and $2,392 related to intangible assets as the carrying value of the
ADEX reporting unit was in excess of its fair value. If ADEX’s projected long-term sales growth rate, profit margins or
terminal rate continue to change, or the assumed weighted-average cost of capital is considerably higher, future testing may indicate
additional impairment in this reporting unit and, as a result, the remaining assets may also be impaired. See Note 7, Goodwill
and Intangible Assets for further information.
During
2015, indicators of potential impairment of goodwill and indefinite-lived intangible assets were identified by management in the
managed services segment. The Company's management then determined that the IPC reporting unit assets were impaired and recognized
an impairment loss of $10,907 related to goodwill and $675 related to intangible assets as the carrying value of the IPC reporting
unit was in excess of its fair value. If IPC’s projected long-term sales growth rate, profit margins or terminal rate continue
to change, or the assumed weighted-average cost of capital is considerably higher, future testing may indicate additional impairment
in this reporting unit and, as a result, the remaining assets may also be impaired. See Note 7, Goodwill and Intangible Assets
for further information.
During
2015, indicators of potential impairment of goodwill and indefinite-lived intangible assets were identified by management in the
cloud services segment. The Company's management then determined that the Axim operating segment assets were impaired and recognized
an impairment loss of $2,005 related to goodwill and $34 related to intangible assets as the carrying value of the Axim reporting
unit was in excess of its fair value. If Axim’s projected long-term sales growth rate, profit margins or terminal rate continue
to change, or the assumed weighted-average cost of capital is considerably higher, future testing may indicate additional impairment
in this reporting unit and, as a result, the remaining assets may also be impaired. See Note 7, Goodwill and Intangible Assets
for further information.
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.
During December 2015, the
Company entered into a letter of intent with a third-party to sell VaultLogix and its two subsidiaries, which were included in
the cloud services segment. The agreement was executed in February 2016. The Company’s management assessed the carrying
amounts of VaultLogix and its subsidiaries assets and liabilities as compared to the selling price and determined that an impairment
existed as of December 31, 2015. The Company recognized an impairment loss of $11,215 related to goodwill and $430 related to
intangible assets, which is included in loss on discontinued operations on the consolidated statement of operations as of December
31, 2015, as the carrying value of the VaultLogix business unit was in excess of the amount for which it was sold in an arm’s-length
transaction.
REVENUE RECOGNITION
The
Company’s revenues are generated from its four reportable segments: applications and infrastructure, professional services,
and 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.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The AWS Entities generally
recognize revenue using the percentage of completion method. Revenues and fees on these contracts were recognized utilizing the
efforts-expended method, which used measures such as task duration and completion. The efforts-expended approach is an input method
used in situations where it is more representative of progress on a contract than the cost-to-cost or the labor-hours methods.
Provisions for estimated losses on uncompleted contracts, if any, are made in the period in which such losses are determined. Changes
in job performance conditions and final contract settlements may result in revisions to costs and income, which are recognized
in the period in which revisions are determined.
The AWS Entities also generate
revenue from service contracts with certain customers. These contracts are accounted for under the proportional performance method.
Under this method, revenue is recognized in proportion to the value provided to the customer for each project as of each reporting
date.
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 December 31, 2015 and 2014.
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. Highwire recognizes revenue using the proportional performance
method. Under the proportional performance method, the Company recognizes revenue when a project within a contract is completed.
Management judgments and estimates must be made and used in connection with revenue recognized using the proportional performance
method. If management made different judgments and estimates, then the amount and timing of revenue for any period could differ
materially from the reported revenue.
The
Company’s TNS and IPC subsidiaries, as well as ADEX’s HighWire division, sometimes requires customers to provide a
deposit prior to beginning work on a project. When this occurs, the deposit is recorded as deferred revenue and is recognized
in revenue when the work is complete.
The Company’s IPC
subsidiary, which is included in the Company’s managed services segment, is a value-added reseller whose revenues are generated
from the resale of voice, video and data networking hardware and software contracted services for design, implementation and maintenance
services for voice, video, and data networking infrastructure. IPC’s customers are higher education organizations, governmental
agencies and commercial customers. IPC also provides maintenance and support and professional services. For certain maintenance
contracts, IPC assumes responsibility for fulfilling the support to customers and recognizes the associated revenue either on a
ratable basis over the life of the contract or, if a customer purchases a time and materials maintenance program, as maintenance
is provided to the customer. Revenue for the sale of third-party maintenance contracts is recognized net of the related cost
of revenue. In a maintenance contract, all services are provided by IPC’s third-party providers and as a result, the
Company concluded that IPC is acting as an agent and recognize revenue on a net basis at the date of sale with revenue being equal
to the gross margin on the transaction. As IPC is under no obligation to perform additional services, revenue is recognized
at the time of sale as opposed to over the life of the maintenance agreement.
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 standalone 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 standalone 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 former VaultLogix subsidiary, which was included in the Company’s cloud services segment, provided on-line
data backup services to its customers. VaultLogix recognized revenue in accordance with ASC Topic 605-10. Certain customers paid
for its services in advance of services being performed. Revenue for these customers was deferred until the services were performed.
LONG-LIVED
ASSETS, INCLUDING DEFINITE-LIVED INTANGIBLE ASSETS
Long-lived
assets, other than goodwill and other indefinite-lived intangibles, are evaluated for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future
cash flows derived from such assets.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Definite-lived
intangible assets primarily consist of non-compete agreements and customer relationships. For long-lived assets used in operations,
impairment losses are only recorded if the asset's carrying amount is not recoverable through its undiscounted, probability-weighted
future cash flows. The Company measures the impairment loss based on the difference between the carrying amount and the estimated
fair value. When an impairment exists, the related assets are written down to fair value.
PROPERTY
AND EQUIPMENT
Property
and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful lives. Useful lives are:
3-7 years for vehicles; 5-7 years for equipment; 16 years for developed software; and 3 years for computers and office equipment.
Maintenance and repairs are expensed as incurred and major improvements are capitalized. When assets are sold or retired, the
cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in other income.
DEFERRED
LOAN COSTS
Deferred
loan costs are capitalized as debt discounts 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 years ended December 31, 2015 and 2014 was $443 and $1,371, respectively. As a result of the conversion of a portion of the
Company’s convertible debentures and a term loan at various dates during 2014, the Company recorded $722 of accelerated
amortization of the deferred loan costs related to that debt for the year ended December 31, 2014.
CONCENTRATIONS OF
RISK
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and trade receivables.
The Company maintains its cash balances with high-credit-quality financial institutions. Deposits held with banks may exceed the
amount of insurance provided on such deposits. These deposits may be withdrawn upon demand and therefore bear minimal risk. The
Company limits the amount of credit exposure through diversification and management regularly monitors the composition of its
investment portfolio.
The
Company provides credit to customers on an uncollateralized basis after evaluating client creditworthiness. The Company’s
largest customer, Ericsson, Inc. and its affiliates, accounted for 14% and 17% of consolidated revenues for the years ended December
31, 2015 and 2014, respectively. In addition, amounts due from this customer represented 9% and 7% of trade accounts receivable
as of December 31, 2015 and 2014, respectively. A significant reduction in business from this significant customer or its failure
to pay outstanding trade accounts receivable could have a material adverse effect on the Company’s results of operations
and financial condition.
The
Company’s customers in its applications and infrastructure and professional services segments are located within the United
States of America and Puerto Rico. Revenues generated within the United States of America accounted for approximately 99% and
96% of consolidated revenues for the years ended December 31, 2015 and 2014, respectively. Revenues generated from foreign sources
accounted for approximately 1% and 4% of consolidated revenues for the years ended December 31, 2015 and 2014, respectively.
COMMITMENTS
AND CONTINGENCIES
In
the normal course of business, the Company is subject to various contingencies. The Company records any contingencies in the consolidated
financial statements when it is probable that a liability will be incurred and the amount of the loss is reasonably estimable,
or otherwise disclosed, in accordance with ASC Topic 450,
Contingencies
("ASC 450"). Significant judgment is
required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In the event
the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company
believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate
and in compliance with ASC 450. To the extent there is a reasonable possibility that the losses could exceed the amounts already
accrued, the Company will, when applicable, adjust the accrual in the period in which the determination is made, disclose an estimate
of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as
a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.
Purported
Class Action Suit
In
March 2014, a complaint entitled
In re InterCloud Systems Sec. Litigation,
Case No. 3:14-cv-01982 (D.N.J.)
was
filed in the United States District Court for the District of New Jersey against the Company, the Company’s Chairman of
the Board and Chief Executive Officer, Mark Munro, The DreamTeamGroup and MissionIR, as purported securities advertisers and investor
relations firms, and John Mylant, a purported investor and investment advisor. The complaint was purportedly filed on behalf of
a class of certain persons who purchased the Company’s common stock between November 5, 2013 and March 17, 2014. The complaint
alleged violations by the defendants (other than Mark Munro) of Section 10(b) of the Exchange Act, and other related provisions
in connection with certain alleged courses of conduct that were intended to deceive the plaintiff and the investing public and
to cause the members of the purported class to purchase shares of the Company’s common stock at artificially inflated prices
based on untrue statements of a material fact or omissions to state material facts necessary to make the statements not misleading.
The complaint also alleged that Mr. Munro and the Company violated Section 20 of the Exchange Act as controlling persons of the
other defendants. The complaint seeks unspecified damages, attorney and expert fees, and other unspecified litigation costs.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On
November 3, 2014, the United States District Court for the District of New Jersey issued an order appointing Robbins Geller
Rudman & Dowd LLP as lead plaintiffs’ counsel and Cohn Lifland Pearlman Herrmann & Knopf LLP as liaison counsel
for the pending actions. The lead filed an amended complaint in January 2015 adding additional third-party defendants. The
Company filed a motion to dismiss the amended complaint in late January 2015 and the plaintiffs filed a second amended
complaint in early March 2015. The Company filed a motion to dismiss the second amended complaint on March 13, 2015. The
Company’s motion to dismiss was denied by the Court on October 29, 2015. The Court held a status conference on February
29, 2016, and entered a PreTrial Scheduling Order on February 29, 2016. The parties are currently engaged in
discovery.
Derivative
Action
In
January 2016, a derivative compliant entitled
Michael E. Sloan, derivatively and on behalf of InterCloud Systems, Inc. v.
Mark Munro, Mark F. Durfee, Charles K. Miller, Neal Oristano, Daniel J. Sullivan, Roger M. Ponder, Lawrence M. Sands, Frank Jadevia,
and Scott Davis, Defendants, and InterCloud Systems, Inc., Nominal Defendant,
Case No. 11878 (DE Chancery)
was
filed in the Delaware Chancery Court. This action arises out of the same conduct at issue in the purported class action lawsuit.
In the complaint, nominal plaintiff alleges that the individual defendants breached their fiduciary duty as directors and officers,
abused control, grossly mismanaged, and unjustly enriched themselves by having knowingly hired a stock promotion firm that caused
analyst reports to be disseminated that falsely stated they were not paid for by such stock promotion firm and the Company, and
were written on behalf of the Company for the purpose of promoting the Company and driving up its stock price. Plaintiffs seek
unspecified damages, amendments to the Company’s articles of incorporation and by-laws, disgorgement from the individual
defendants and costs and disbursements in the action. The defendants agreed to accept service on March 21, 2016 and counsel are
negotiating a schedule to answer, move to dismiss or otherwise respond to the complaint.
IPC-Related
Litigation
The
Company acquired IPC in January 2014, and during 2014 advised the sellers of IPC that a post-closing financial audit of IPC’s
historical financial statements showed a discrepancy in the adjusted EBITDA of IPC as represented by the sellers. The Company
made a claim for such misrepresentation against a cash portion of the IPC purchase price that remains in escrow. In January 2015,
a complaint was filed in the United States District Court of the Southern District of New York against the Company, Mr. Munro
and Daniel J. Sullivan, the Company’s Chief Accounting Officer and former Chief Financial Officer. The complaint alleges,
among other claims, the Company’s breach of contract, breach of implied covenant of good faith and fair dealing and unjust
enrichment relating to the Company’s purported failure to pay certain post-closing purchase price payments to the sellers
of IPC in connection with the Company’s purchase of IPC in January 2014. The complaint also alleges that Messrs. Munro and
Sullivan intentionally interfered with such contractual obligations of the Company under the related stock purchase agreement
between the Company and the plaintiffs. The complaint seeks unspecified damages, attorney and expert fees and other unspecified
litigation costs. In addition, the complaint seeks specific performance of the enforcement of the terms of the purchase contract
and the Company’s payment of not less than $2.5 million.
On
April 23, 2015, the Company and the other defendants filed a motion to dismiss the principal substantive claims in the complaint
with the exception of the claim for breach of contract. On January 12, 2016, the court granted the Company’s motion to dismiss
the claims for breach of the covenant of good faith and fair dealing, for intentional breach, for estoppel and for declaratory
relief, but denied the Company’s motions to dismiss the claims for unjust enrichment and for tortious interference with
contractual relations against Messrs. Munro and Sullivan. On February 9, 2016, the Company filed its answer with respect to the
remaining claims in this action and counterclaims based on the individual plaintiffs’ breach of contract and misrepresentations
in the purchase agreement.
Securities and Exchange Commission
Subpoenas
On May 21, 2014,
the Company received a subpoena from the Securities and Exchange Commission (the “SEC”) that stated that the staff
of the SEC is conducting an investigation
In the Matter of Galena Biopharma, Inc. File No. HO 12356 (now known as “In
the Matter of Certain Stock Promotions”)
and that the subpoena was issued to the Company as part of an investigation
as to whether certain investor relations firms and their clients engaged in market manipulation. The subpoena and accompanying
letter did not indicate whether the Company is, or is not, under investigation. Since May 2014, the Company provided testimony
to the SEC and produced documents in response to that subpoena and several additional subpoenas received from the SEC in connection
with that matter, including a subpoena issued on March 1, 2016 requesting information relating to a transaction involving our Series
H preferred shares in December 2013.
In connection with
the SEC investigation, in May 2015, the Company received information from the SEC that it is continuing an investigation of the
Company and certain of its current and former officers, consultants of the Company and others, of “possible violation[s]”
of Section 17(a) of the Securities Act and Sections 9(a) and 10(b) of the Exchange Act and the rules of the SEC thereunder in the
offer or sale of securities and certain other matters with respect to which the SEC claims it has information, including the possible
market manipulation of the Company’s securities dating back to January 2013. Based upon the Company’s internal investigations,
the Company does not believe either the Company or any of its current or former officers or directors engaged in any activities
that violated applicable securities laws. The Company intends to continue to work with the staff of the SEC towards a resolution
and to supplement the Company’s disclosure regarding the SEC’s investigation accordingly.
The Company is unaware
of the scope or timing of the SEC’s investigation. As a result, the Company does not know how the SEC investigation is proceeding,
when the investigation will be concluded, or what action, if any, might be taken in the future by the SEC or its staff as a result
of the matters that are the subject of its investigation. The Company is seeking to cooperate with the SEC in its investigation.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
Company intends to dispute these claims and to defend these litigations vigorously. However, due to the inherent uncertainties
of litigation, the ultimate outcome of these litigations is uncertain. An unfavorable outcome in either litigation could materially
and adversely affect the Company's business, financial condition and results of operations.
Currently,
there is no material litigation pending against the Company other than as disclosed in the paragraphs above. From time to time,
the Company may become a party to litigation and subject to claims incident to the ordinary course of the Company's business.
Although the results of such litigation and claims in the ordinary course of business cannot be predicted with certainty, the
Company believes that the final outcome of such matters will not have a material adverse effect on the Company's business, results
of operations or financial condition. Regardless of outcome, litigation can have an adverse impact on the Company because of defense
costs, diversion of management resources and other factors.
As of December 31, 2015,
no accruals for loss contingencies have been recorded as the outcomes of these cases are neither probable or reasonably estimable.
The
Company has obligations contingent on the performance of its subsidiaries. These contingent obligations, payable to the former
owners of the subsidiaries, are based on metrics that contain escalation clauses. The Company believes that the amounts recorded
within the liabilities section of the consolidated balance sheets are indicative of fair value and are also considered the most
likely payout of these obligations. If conditions were to change, these liabilities could potentially impact the Company’s
results of operations, financial condition and future cash flows.
DISTINGUISHMENT
OF LIABILITIES FROM EQUITY
The
Company relies on the guidance provided by ASC Topic 480,
Distinguishing Liabilities from Equity
, to classify certain redeemable
and/or convertible instruments. The Company first determines whether a financial instrument should be classified as a liability.
The Company will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial
instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a
variable number of its equity shares.
Once
the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the
financial instrument should be presented between the liability section and the equity section of the balance sheet (“temporary
equity”). The Company will determine temporary equity classification if the redemption of the financial instrument is outside
the control of the Company (i.e. at the option of the holder). Otherwise, the Company accounts for the financial instrument as
permanent equity.
Initial
Measurement
The
Company records its financial instruments classified as liability, temporary equity or permanent equity at issuance at the fair
value, or cash received.
Subsequent
Measurement - Financial instruments classified as liabilities
The
Company records the fair value of its financial instruments classified as liabilities at each subsequent measurement date. The
changes in fair value of its financial instruments classified as liabilities are recorded as other expense/income. The Company
has historically utilized a Black-Scholes option pricing model to determine the fair value of the derivative liability related
to the warrants and the put and effective price of future equity offerings of equity-linked financial instruments. During the
quarter ended September 30, 2015, the Company determined that it should utilize a binomial lattice pricing model to determine
the fair value of the derivative liability related to the warrants and the put and effective price of future equity offerings
of equity-linked financial instruments. The Company has evaluated its derivative instruments and determined that the value of
those derivative instruments, whether using a binomial lattice pricing model instead of a Black-Scholes pricing model, would be
immaterial on its historical consolidated statements of operations for the years ended December 31, 2015 and 2014, respectively.
The Monte Carlo simulation is used to determine the fair value of derivatives for instruments with embedded conversion features.
Prior to December 29, 2015, the Company did not have sufficient historical data to use its historical volatility;
therefore the Company used a volatility based on the historical volatility of comparable companies. Beginning on December 29, 2015,
the Company began using its historical volatility as the Company determined that, based on the Company’s trading history
of two years, there was sufficient data available to begin using its historical volatility
.
INCOME
TAXES
The
Company accounts for income taxes under the asset and liability method. This approach requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the
tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Valuation allowances are established to reduce deferred tax assets when management estimates, based on
available objective evidence, that it is more likely than not that the benefit will not be realized for the deferred tax assets.
The Company, and its subsidiaries, conduct business, and file income, franchise or net worth tax returns, in thirty nine (39)
states and the Commonwealth of Puerto Rico. The Company determines its filing obligations in a jurisdiction in accordance with
existing statutory and case law.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Significant
management judgment is required in determining the provision for income taxes, and in particular, any valuation allowance recorded
against the Company’s deferred tax assets. Deferred tax assets are regularly reviewed for recoverability. The Company currently
has significant deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences, which
should reduce taxable income in future periods. The realization of these assets is dependent on generating future taxable income.
The
Company follows the guidance set forth within ASC Topic 740,
Income Taxes
(“ASC Topic 740”) which prescribes
a two-step process for the financial statement recognition and measurement of income tax positions taken or expected to be taken
in an income tax return. The first step evaluates an income tax position in order to determine whether it is more likely than
not that the position will be sustained upon examination, based on the technical merits of the position. The second step measures
the benefit to be recognized in the financial statements for those income tax positions that meet the more likely than not recognition
threshold. ASC Topic 740 also provides guidance on de-recognition, classification, recognition and classification of interest
and penalties, accounting in interim periods, disclosure and transition. Penalties and interest, if incurred, would be recorded
as a component of current income tax expense. As of December 31, 2015, and 2014, the Company has no accrued interest or penalties
related to uncertain tax positions. The Company believes that any uncertain tax positions would not have a material impact on
its results of operations.
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.
NET
LOSS PER SHARE
The
Company follows ASC 260,
Earnings Per Share
, which requires presentation of basic and diluted earnings per share (“EPS”)
on the face of the income statement for all entities with complex capital structures, and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In the accompanying
financial statements, basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number
of shares of common stock outstanding during the period. Diluted EPS excluded all dilutive potential shares if their effect was
anti-dilutive.
The
following sets forth the computation of diluted EPS for the year ended December 31, 2014:
|
|
For
the Year ended December 31, 2014
|
|
|
|
Net
loss (Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per
Share Amount
|
|
Basic EPS
|
|
$
|
(18,795
|
)
|
|
|
12,619,885
|
|
|
$
|
(1.49
|
)
|
Change in fair value
of derivative instruments
|
|
|
(25,212
|
)
|
|
|
-
|
|
|
|
-
|
|
Dilutive shares
related to warrants
|
|
|
-
|
|
|
|
286,310
|
|
|
|
-
|
|
Dilutive shares
related to 12% Convertible Debentures convertible feature
|
|
|
-
|
|
|
|
27,206
|
|
|
|
-
|
|
Dilutive
shares related to Forward Investments, LLC convertible feature
|
|
|
-
|
|
|
|
71,330
|
|
|
|
-
|
|
Dilutive EPS
|
|
$
|
(44,007
|
)
|
|
|
13,004,731
|
|
|
$
|
(3.38
|
)
|
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 in the consolidated financial statements
for the year ended December 31, 2015 as their effect would be anti-dilutive.
Basic
loss per common share is computed based on the weighted average number of shares outstanding during the period. Diluted loss per
share is computed in a manner similar to the basic loss per share, except the weighted-average number of shares outstanding is
increased to include all common shares, including those with the potential to be issued by virtue of warrants, options, convertible
debt and other such convertible instruments. Diluted loss per share contemplates a complete conversion to common shares of all
convertible instruments only if they are dilutive in nature with regards to earnings per share.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
anti-dilutive shares of common stock outstanding for years ended December 31, 2015 and 2014 were as follows:
|
|
December
31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
(Revised)
|
|
Convertible debentures
|
|
|
14,408,041
|
|
|
|
-
|
|
Warrants
|
|
|
600,000
|
|
|
|
283,870
|
|
Convertible Notes
|
|
|
8,500,125
|
|
|
|
397,602
|
|
|
|
|
23,508,166
|
|
|
|
681,472
|
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
ASC
Topic 820 "
Fair Value Measurements and Disclosures
" ("ASC Topic 820") provides a framework for measuring
fair value in accordance with generally accepted accounting principles.
ASC
Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that distinguishes
between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs)
and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in
the circumstances (unobservable inputs).
The
fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the
fair value hierarchy under ASC Topic 820 are described as follows:
|
●
|
Level
1- Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.
|
|
|
|
|
●
|
Level
2- Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for
identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable
for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation
or other means.
|
|
|
|
|
●
|
Level
3- Inputs that are unobservable for the asset or liability.
|
TREASURY
STOCK
The Company records treasury
stock at the cost to acquire it and includes treasury stock as a component of stockholders’ (deficit) equity.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
RECENT
ACCOUNTING PRONOUNCEMENTS
In
April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-08,
Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity
(“ASU 2014-08”).
ASU 2014-08 provides a narrower definition of discontinued operations than under existing U.S. GAAP. ASU 2014-08 requires that
only a disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has,
or will have, a major effect on the reporting entity’s operations and financial results should be reported in the financial
statements as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and disclosures
of discontinued operations. ASU 2014-08 is effective prospectively for disposals (or classifications as held for disposal) of
components of an entity that occur in annual or interim periods beginning after December 15, 2014. The Company has elected to
adopt the requirements of ASU 2014-08 and the results of such adoption are presented within these consolidated financial statements.
On
May 28, 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), which is
effective for public entities for annual reporting periods beginning after December 15, 2016. The new revenue recognition standard
provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 shall be applied retrospectively
to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating
the impact of the pending adoption of ASU 2014-09 on the consolidated financial statements and has not yet determined the method
by which the Company will adopt the standard in 2017.
In
August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements-Going Concern-Disclosures of Uncertainties
about an entity’s Ability to Continue as a Going Concern
(“ASU 2014-15”). ASU 2014-15 provides new guidance
related to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to
continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards
and to provide related footnote disclosures. This new guidance is effective for the annual period ending after December 15, 2016,
and for annual periods and interim periods thereafter. The requirements of ASU 2014-15 are not expected to have a significant
impact on the consolidated financial statements.
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 consolidated financial statements.
In
April 2015, the FASB issued ASU No. 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 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 consolidated financial statements.
This new guidance is effective for the annual period ending after December 15, 2015, and for annual periods and interim periods
thereafter. The amendments must be applied retrospectively. The Company early adopted the provisions of ASU 2015-03 during the
year ended December 31, 2015. Refer to Note 4 Change in Accounting Principle for the effect of adopting ASU 2015-03 on the consolidated
balance sheet as of December 31, 2014.
In
September 2015, the FASB issued ASU No. 2015-16,
Simplifying the Accounting for Measurement-Period Adjustments
(“ASU
2015-16”). When effective, ASU 2015-16 will require that an acquirer recognize adjustments to provisional amounts that are
identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments
in this update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes
in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated
as if the accounting had been completed at the acquisition date. This new guidance is effective for the annual period ending after
December 15, 2015, including interim periods within that fiscal year. The requirements of ASU 2015-16 are not expected to have
a significant impact on the consolidated financial statements.
In
November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740) – Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17”), which is effective for public entities for annual reporting periods beginning after December
17, 2016. ASU 2015-17 simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets
be classified as non-current in the statement of financial position. The Company has elected to early adopt the requirements of
ASU 2015-17 and the results of such adoption are presented within these consolidated financial statements.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”), which is effective for
public entities for annual reporting periods beginning after December 15, 2018. Under ASU 2016-02, lessees will be required to
recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) a lease liability,
which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and 2) a right-of-use
asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease
term. The Company is currently evaluating the effects of ASU 2016-02 on its consolidated financial statements.
In
March 2016, the FASB issued ASU No. 2016-06,
Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments
(“ASU 2016-06”), which is effective for public entities for annual reporting periods beginning after December
15, 2016. ASU 2016-06 clarifies what steps are required when assessing whether the economic characteristics and risks of call
(put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the
criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity
does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates
or credit risks. The Company is currently evaluating the effects of ASU 2016-06 on its consolidated financial statements.
In
March 2016, the FASB issued ASU No. 2016-07,
Investments – Equity Method and Joint Ventures (Topic 323): Simplifying
the Transition to the Equity Method of Accounting
(“ASU 2016-07”), which is effective for public entities for
annual reporting periods beginning after December 15, 2016. ASU 2016-07 eliminates the requirement that when an investment qualifies
for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor
must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity
method had been in effect during all previous periods that the investment had been held. ASU 2016-07 requires that the equity
method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s
previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity
method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment
is required. The Company is currently evaluating the effects of ASU 2016-06 on its consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(“ASU 2016-08”). The amendments are intended to improve the operability and understandability of the implementation
guidance on principal versus agent considerations by amending certain existing illustrative examples and adding additional illustrative
examples to assist in the application of the guidance. The effective date and transition requirements for the amendments are the
same as the effective date and transition requirements in Topic 606: The guidance is effective for the Company beginning January
1, 2018, although early adoption is permitted beginning January 1, 2017. The Company is currently evaluating the effects of ASU
2016-08 on its consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting
, (“ASU 2016-09”) which simplifies several aspects of the accounting for share-based payment
transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification
on the statement of cash flows. The guidance is effective for the Company beginning January 1, 2017, although early adoption
is permitted. The Company is currently evaluating the effects of ASU 2016-09 on its consolidated financial statements.
In
April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing
(“ASU 2016-10”). The amendments in ASU 2016-10 clarify the following two aspects of Topic 606: (a)
identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle
of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective
date and transition requirements in Topic 606: The guidance is effective for the Company beginning January 1, 2018, although early
adoption is permitted beginning January 1, 2017. The Company is currently evaluating the effects of ASU 2016-10 on its consolidated
financial statements.
In
May 2016, the FASB issued ASU 2016-11,
Revenue
Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates
2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting
(“ASU 2016-11”). The amendments
in ASU 2016-11
rescinds the certain SEC Staff Observer comments that are codified in Topic
605, Revenue Recognition, and Topic 932, Extractive Activities—Oil and Gas, effective upon adoption of Topic 606. Specifically,
registrants should not rely on the following SEC Staff Observer comments upon adoption of Topic 606: (a) Revenue and Expense Recognition
for Freight Services in Process (b) Accounting for Shipping and Handling Fees and Costs, (c) Accounting for Consideration Given
by a Vendor to a Customer (including Reseller of the Vendor’s Products) (d) Accounting for Gas-Balancing Arrangements (that
is, use of the “entitlements method”). In addition, as a result of the amendments in Update 2014-16, the SEC staff
is rescinding its SEC Staff Announcement, “Determining the Nature of a Host Contract Related to a Hybrid Instrument Issued
in the Form of a Share under Topic 815,” effective concurrently with Update 2014-16. The Company is currently evaluating
the effects of ASU 2016-11 on its consolidated financial statements.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In
May 2016, the FASB issued ASU 2016-12,
Revenue
from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
(“ASU 2016-12”).
The amendments in ASU 2016-12
provide clarifying guidance in certain narrow areas and add
some practical expedients. Specifically, the amendments in this update (1) clarify the objective of the collectability criterion
in step 1, and provides additional clarification for when to recognize revenue for a contract that fails step 1, (2) permit an
entity, as an accounting policy election, to exclude amounts collected from customers for all sales (and other similar) taxes
from the transaction price (3) specify that the measurement date for noncash consideration is contract inception, and clarifies
that the variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration,
(4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before
the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining
the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations, (5) clarifies
that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized
under legacy GAAP before the date of initial application. Further, accounting for elements of a contract that do not affect revenue
under legacy GAAP are irrelevant to the assessment of whether a contract is complete. In addition, the amendments permit an entity
to apply the modified retrospective transition method either to all contracts or only to contracts that are not completed contracts,
and (6) clarifies that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not
required to disclose the effect of the accounting change for the period of adoption. However, an entity is still required to disclose
the effect of the changes on any prior periods retrospectively adjusted. The effective date and transition requirements for the
amendments are the same as the effective date and transition requirements in Topic 606: The guidance is effective for the Company
beginning January 1, 2018, although early adoption is permitted beginning January 1, 2017. The Company is currently evaluating
the effects of ASU 2016-12 on its consolidated financial statements.
RECLASSIFICATIONS
Certain
2014 activities and balances were reclassified as “discontinued operations” to conform to classifications used in
the current period related to the sale of VaultLogix and its subsidiaries.
In
addition, the following balances were reclassified to conform to the current presentation:
|
●
|
On the consolidated balance sheets – measurement period adjustments related to the in-process research and development associated with the RentVM acquisition. For further detail, refer to Note 5 Acquisitions and Disposals of Subsidiaries;
|
|
|
|
|
●
|
On the consolidated balance sheets – the Company adopted the provisions of ASU 2015-03. Refer to Note 4 Change in Accounting Principle, for the effect of the early adoption on the consolidated balance sheet as of December 31, 2014;
|
|
|
|
|
●
|
On the consolidated statement of cash flows – the statement of cash flows was revised to present the effect of the measurement period adjustments noted above on the Company’s cash flows as of December 31, 2014.
|
4.
|
CHANGE
IN ACCOUNTING PRINCIPLE
|
As
noted in Note 3 Summary of Significant Accounting Policies, the Company early adopted the provisions of ASU 2015-03 and has retroactively
restated its consolidated balance sheet for the year ended December 31, 2014. During the year ended December 31, 2014, the Company
had accounted for deferred loan costs associated with its term loans due to White Oak Global Advisors, LLC, the 12% convertible
notes payable, GPB Life Science Holdings, LLC, and the promissory note holders as current assets within the Company’s consolidated
balance sheet.
The
following table is a summary of the effect of the adjustments on the consolidated balance sheet as of December 31, 2014:
|
|
December
31, 2014
|
|
|
|
As
previously Filed
|
|
|
Adjustments
|
|
|
Revised
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Deferred loan costs
|
|
$
|
1,278
|
|
|
$
|
(1,278
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loans, current portion, net of
debt discount
|
|
$
|
8,387
|
|
|
$
|
(1,278
|
)
|
|
$
|
7,109
|
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5.
|
ACQUISITIONS
AND DISPOSALS OF SUBSIDIARIES
|
Acquisition
of IPC
On
January 1, 2014, the Company acquired all of the outstanding capital stock of IPC. The purchase price for the acquisition was
paid as follows:
|
●
|
an
aggregate of $12,510 was paid to two sellers;
|
|
|
|
|
●
|
a
convertible promissory note was issued to Mr. Jadevaia in the original principal amount of $6,255 (the “Jadevaia Note”);
|
|
|
|
|
●
|
45,676
shares of the Company’s common stock was issued to Mr. Jadevaia or his designee(s);
|
|
|
|
|
●
|
5,886
shares of the Company’s common stock was issued to each of Messrs. Nahabedian and Graf or their respective designee(s);
and
|
|
|
|
|
●
|
$941
and 47,080 shares of the Company’s common stock was placed in escrow to secure the sellers’ indemnification and
certain other obligations under the purchase agreement.
|
As
additional earn-out consideration, the Company was to pay an amount equal to (i) the product of 0.6 multiplied by the EBITDA of
IPC for the 12-month period beginning on January 1, 2014 (the “Forward EBITDA”), plus (ii) in the event that the Forward
EBITDA exceeded the closing trailing-twelve-month EBITDA by 5.0% or more, an amount equal to 2.0 multiplied by this difference,
which amount was to be payable in cash or, at the Company's election, shares of the Company’s common stock. This amount
was to be recorded as compensation in the period in which it was earned, as Mr. Jadevaia became the President of the Company upon
completion of this transaction. For the year ended December 31, 2014, no contingent consideration was earned.
The
Jadevaia 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 Jadevaia 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 Jadevaia 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 Jadevaia Note. The maturity date of the note was extended to May 30,
2016 and, in consideration for this modification, the Company issued to Mr. Jadevaia 100,000 shares of common stock. At the time
of modification, the Company recorded the stock payable as a current liability and related expense to loss on debt extinguishment
in the amount of $292 on the consolidated statement of operations. The note remains outstanding as of June 17, 2016.
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 the conversion of a pre-existing note in the principal amount of $600, which was used to complete the acquisition.
As the total consideration paid by the Company for RentVM exceeded the net assets acquired, the Company recorded approximately
$2,851 of goodwill. The goodwill is attributable to synergies and economies of scale provided to the Company. The goodwill is
not tax deductible. The Company acquired in-process research and development related to RentVM’s cloud products, that were
under development by RentVM at the time of acquisition, to which the Company ascribed a value of $4,000. The Company recorded
a deferred tax liability of $1,560 related to the acquired in-process research and development intangible asset. During the three
months ended June 30, 2015, the Company began amortizing the in-process research and development as the product is now available
for general release to customers. In conjunction with the accounting associated with the RentVM acquisition, the Company recorded
a net deferred tax liability related to the book and tax basis difference of the underlying RentVM intangible asset. The net deferred
tax liability will serve as reversible temporary difference that will give rise to future taxable income and, accordingly, serve
as a source of income that permits the recognition of certain existing deferred tax assets of the Company. As a result, the Company
released the valuation allowance associated with the $1,560 deferred tax liability and recorded this adjustment as a benefit from
income taxes during the three months ended June 30, 2015. The Company finalized all purchase price allocation adjustments related
to the acquisition of RentVM as of March 31, 2015.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Up
to and including the 90th calendar day following the closing date of the acquisition, the Company had the option to purchase from
the sellers, on a pro rata basis, for an aggregate option purchase price of $1,000 in cash, a number of shares of the Company’s
common stock equal to the quotient of $1,000 divided by $14.62, which was the closing price of the Company’s common stock
on the trading day immediately preceding the date of the purchase agreement. The Company did not exercise this option.
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) $16,365 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 were subject to customary working capital adjustments.
The
promissory notes accrued interest at a rate of 8% per annum, and all principal and interest accrued under the promissory notes
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.
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. Refer to Note 11 Term Loans for additional detail.
During December 2015, the
Company accepted an offer to sell its interests in VaultLogix and its affiliated entities, Data Protection Services, L.L.C. (“DPS”)
and U.S. Data Security Acquisition, LLC (“USDSA”), to a third-party. Refer to Note 20 Discontinued Operations and Note
21 Subsequent Events for further information.
Effective
as of December 1, 2014, VaultLogix completed the purchase of Axim Cloud assets. 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 finalized all purchase price allocations
related to the acquisition of Axim’s assets as of December 31, 2015. Based on the final analysis, the Company determined
that no adjustments were necessary to the Axim purchase price allocations previously disclosed within its December 31, 2014 Form
10-K.
The
purchase consideration for the 2014 acquisitions of IPC, RentVM and VaultLogix were calculated as follows:
|
|
IPC
|
|
|
RentVM
|
|
|
VaultLogix
|
|
Cash
|
|
$
|
13,451
|
|
|
$
|
-
|
|
|
$
|
15,365
|
|
Cash paid as a deposit
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
Common Stock, fair value
|
|
|
1,447
|
|
|
|
5,280
|
|
|
|
3,934
|
|
Contingent consideration
|
|
|
-
|
|
|
|
-
|
|
|
|
870
|
|
Convertible note
|
|
|
6,255
|
|
|
|
-
|
|
|
|
15,627
|
|
Note converted
to stock
|
|
|
-
|
|
|
|
600
|
|
|
|
-
|
|
Total consideration
|
|
$
|
21,153
|
|
|
$
|
5,880
|
|
|
$
|
36,796
|
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
purchase consideration was allocated to the assets acquired and liabilities assumed as follows:
|
|
IPC
|
|
|
RentVM
|
|
|
VaultLogix
|
|
Current assets
|
|
$
|
6,171
|
|
|
$
|
104
|
|
|
$
|
1,920
|
|
Goodwill
|
|
|
15,131
|
|
|
|
2,851
|
|
|
|
20,427
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
|
|
-
|
|
|
|
4,000
|
|
|
|
-
|
|
Customer list / relationships
|
|
|
6,328
|
|
|
|
150
|
|
|
|
8,500
|
|
Trade names
|
|
|
478
|
|
|
|
40
|
|
|
|
900
|
|
Technology
|
|
|
-
|
|
|
|
-
|
|
|
|
3,200
|
|
Non-compete
|
|
|
1,602
|
|
|
|
88
|
|
|
|
800
|
|
Property and equipment
|
|
|
22
|
|
|
|
372
|
|
|
|
1,547
|
|
Other assets
|
|
|
56
|
|
|
|
4
|
|
|
|
-
|
|
Current liabilities
|
|
|
(4,570
|
)
|
|
|
(169
|
)
|
|
|
(498
|
)
|
Deferred revenue, current portion
|
|
|
(586
|
)
|
|
|
-
|
|
|
|
-
|
|
Deferred revenue, net of current portion
|
|
|
(284
|
)
|
|
|
-
|
|
|
|
-
|
|
Deferred taxes
|
|
|
(3,195
|
)
|
|
|
(1,560
|
)
|
|
|
-
|
|
Total allocation
of purchase consideration
|
|
$
|
21,153
|
|
|
$
|
5,880
|
|
|
$
|
36,796
|
|
IPC
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.
RentVM
During 2014, the Company
did not record a deferred tax liability as the purchase accounting was not completed. When the Company completed the purchase
accounting during the first quarter of 2015, the Company recorded a deferred tax liability of $1,560.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
amount of revenues and loss of the acquired companies since the acquisition date included in the Company's consolidated statements
of operations are as follows:
2014
Acquisitions
|
|
IPC
|
|
|
RentVM
|
|
Revenues
|
|
$
|
22,852
|
|
|
$
|
108
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
$
|
(6,532
|
)
|
|
$
|
(1,286
|
)
|
Due
to the sale of certain assets of the Company’s former VaultLogix subsidiary in February 2016, and its classification as
discontinued operations on the Company’s consolidated statement of operations as of December 31, 2015, the results of operations
of VaultLogix are not reflected within this table.
NOTES
PAYABLE - CONTINGENT CONSIDERATION
The
Company has issued contingent consideration in connection with the acquisitions the Company completed during the years ended December
31, 2014, 2013 and 2012. The following describes the contingent consideration arrangements.
ADEX:
As additional consideration, the Company agreed to pay the ADEX sellers an amount of cash equal to the product of 0.75 (the
“Multiplier”) multiplied by the adjusted EBITDA of the ADEX Entities for the twelve months beginning October 1, 2012,
(the “Forward EBITDA”). If the Forward EBITDA was less than $2,731, the Multiplier was to be adjusted to 0.50, and
if the Forward EBITDA was greater than $3,431, the Multiplier was to be adjusted to 1.0. The Company also agreed to pay the ADEX
sellers an amount of cash equal to the amount, if any, by which the Forward EBITDA was greater than $3,081. In connection with
these obligations, the Company reserved 2,000 shares of Series G Preferred Stock. These shares were redeemable in the event the
Company defaulted on its obligation to make the required payments. The shares of Series G Preferred were to be automatically cancelled
if required payments were made in cash by the Company. The Company valued the amount of contingent consideration likely to be
paid at $2,123 as of the date of acquisition. On December 31, 2013, the Company recorded a gain on the change in contingent consideration
of $345 based on an agreement reached between the Company and the former owners of ADEX that the amount of contingent consideration
to be paid was $1,779. The $1,779 was recorded as a contingent consideration payable on the Company's consolidated balance sheet
as of December 31, 2013. During the year ended December 31, 2014, contingent consideration of $1,779 related to the ADEX acquisition
was settled in cash.
AWS
Entities
: As additional consideration, the Company agreed to pay the AWS seller certain earn-out payments based on the first
and second anniversary EBITDA of the AWS Entities.
First
Anniversary
: Following the first anniversary of the closing date, the Company calculated the EBITDA of the AWS Entities for
the twelve-month period beginning on the closing date and ending on the first anniversary of the closing date. The Company was
required to make an earn-out payment to the sellers based on such EBITDA as follows: (i) if such EBITDA was less than $2,000 no
payment was required; (ii) if such EBITDA was equal to or greater than $2,000 and less than or equal to $3,000 then the First
EBITDA Adjustment was to be equal to such EBITDA and was to be paid by the Company to the sellers in cash; (iii) if such EBITDA
was greater than $3,000 and less than or equal to $4,000, then the First EBITDA Adjustment was to be equal to 1.5x such EBITDA
and was to be paid by the Company to the sellers in cash; (iv) if such EBITDA was greater than $4,000 and less than or equal to
$5,000, then the First EBITDA Adjustment was to be equal to 2.0x such EBITDA, of which 50% was to be paid by the Company to the
sellers in cash and 50% was to be paid by the issuance to the sellers of unregistered shares of common stock at a price per share
equal to the closing price of the common stock on the first anniversary of the closing date; or (v) if such EBITDA was greater
than $5,000, then the First EBITDA Adjustment was to be equal to 2.25x such EBITDA, of which 50% was to be paid by the Company
to the sellers in cash and 50% was to be paid by the issuance to the sellers of unregistered shares of common stock at a price
per share equal to the closing price of the common stock on the first anniversary of the closing date.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Second
Anniversary:
Following the second anniversary of the closing date, the Company calculated the EBITDA of the AWS Entities for
the twelve-month period beginning on the first anniversary of the closing date and ending on the second anniversary of the closing
date. The Company was required to make an earn-out payment to the sellers based on such EBITDA as follows: (i) if such EBITDA
was less than or equal to the First Anniversary EBITDA, then no payment was required; (ii) if such EBITDA exceeds the First Anniversary
EBITDA (the “EBITDA Growth Amount”) by an amount less than $1,000, such EBITDA Adjustment was to be equal to 2.0x
the EBITDA Growth Amount and was to be paid by Company to the sellers in cash; (iii) if the EBITDA Growth Amount was equal to
or greater than $1,000 and less than $3,000, then such EBITDA Adjustment was to be equal to 2.25x the EBITDA Growth Amount, of
which 88.88% was to be paid by Company to the sellers in cash and 11.12% was to be paid by the issuance to the sellers of unregistered
shares of common stock at a price per share equal to the closing price of the common stock on the second anniversary of the closing
date; or (iv) if the EBITDA Growth Amount was equal to or greater than $3,000, then such EBITDA Adjustment was to be equal to
2.5x the EBITDA Growth Amount, of which 80% was to be paid by Company to the sellers in cash and 20% was to be paid by the issuance
to the sellers of unregistered shares of common stock at a price per share equal to the closing price of the common stock on the
second anniversary of the closing date.
During
the year ended December 31, 2014, contingent consideration of $1,763 related to the AWS acquisition was settled by issuing common
shares with a fair market value of $2,545. As of December 31, 2014, the Company determined that, based on the results of AWS since
the date of acquisition, AWS would not meet all EBITDA adjustment amounts and, as a result, the fair value of the contingent consideration
was adjusted to $500. The Company recorded this adjustment as a gain on fair value of contingent consideration of $2,087 in its
consolidated statement of operations. During the year ended December 31, 2015, the Company issued 252,525 shares of common stock,
with a fair value of $500, to the former owners of AWS for the final payment of contingent consideration owed per the purchase
agreement, which was recorded within stock compensation expense on the consolidated statement of operations.
VaultLogix:
As additional consideration, the Company agreed to provide the VaultLogix sellers certain price protection. If the closing
price per share of the Company’s common stock 180 days after the closing was less than 90% of $16.50, as adjusted for any
stock splits, dividends, recapitalizations, or similar transactions, then the Company was required to issue additional shares
of common stock. Additionally, the adjusted closing price for purposes of the calculation could not be less than $12.50 per share.
As such, the price protection of $870 was recorded as a liability on the Company’s balance sheet. During the year ending
December 31, 2015, the Company issued 223,031 shares of common stock, with a fair value of $651, to the former owners of VaultLogix
for the final payment of contingent consideration owed per the purchase agreement.
On
December 1, 2014, VaultLogix acquired the assets of Axim. As part of this acquisition, the Company agreed to (1) an additional
payment equal to 2X the EBITDA increase for the twelve months beginning on January 1, 2015 and concluding March 31, 2015 and (2)
an additional payment equal to 2.5X the EBITDA increase over the first year EBITDA calculated as of the March 31, 2015 for the
period beginning on April 1, 2015 and concluding on March 31, 2016. The Company determined the fair value of the contingent consideration
to be $1,873 at the date of acquisition, which also approximated the value of the contingent consideration as of December 31,
2014. During the year ended December 31, 2015, the Company determined that, based on the results of the third-party entity since
the date of acquisition, the third-party would not meet all EBITDA adjustment amounts and, as a result, the fair value of the
contingent consideration was adjusted to zero. The Company recorded this adjustment as a gain on fair value of contingent consideration
of $1,873 on its consolidated statement of operations as of December 31, 2015.
6.
|
PROPERTY
AND EQUIPMENT, NET
|
At
December 31, 2015 and 2014, property and equipment consisted of the following:
|
|
December
31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
(Revised)
|
|
Vehicles
|
|
$
|
777
|
|
|
$
|
761
|
|
Computers and Office Equipment
|
|
|
905
|
|
|
|
561
|
|
Equipment
|
|
|
605
|
|
|
|
885
|
|
Software
|
|
|
171
|
|
|
|
171
|
|
Total
|
|
|
2,458
|
|
|
|
2,378
|
|
Less accumulated
depreciation
|
|
|
(1,799
|
)
|
|
|
(1,571
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment,
net
|
|
$
|
659
|
|
|
$
|
807
|
|
Depreciation
expense for the years ended December 31, 2015 and 2014 was $352 and $359, respectively.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7.
|
GOODWILL
AND INTANGIBLE ASSETS
|
Goodwill
The
following table sets forth the changes in the Company's goodwill during the years ended December 31, 2015 and 2014 resulting from
the above-described acquisitions by the Company of its operating segments.
|
|
Applications
and Infrastructure
|
|
|
Professional
Services
|
|
|
Managed
Services
|
|
|
Cloud
Services
|
|
|
Total
|
|
Balance
December 31, 2013
|
|
$
|
6,596
|
|
|
$
|
10,474
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
310
|
|
|
|
152
|
|
|
|
20,842
|
|
|
|
2,922
|
|
|
|
24,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
price allocation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,440
|
)
|
|
|
-
|
|
|
|
(2,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
charge
|
|
|
-
|
|
|
|
(1,369
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December
31, 2014
|
|
$
|
6,906
|
|
|
$
|
9,257
|
|
|
$
|
18,402
|
|
|
$
|
2,922
|
|
|
$
|
37,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
Charge
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,907
|
)
|
|
|
(2,005
|
)
|
|
|
(12,912
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December
31, 2015
|
|
$
|
6,906
|
|
|
$
|
9,257
|
|
|
$
|
7,495
|
|
|
$
|
917
|
|
|
$
|
24,575
|
|
Intangible
Assets
The
following table summarizes the Company’s intangible assets as of December 31, 2015 and 2014:
|
|
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
|
|
Estimated
Useful Life
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Reclassification
|
|
|
Impairment
Charge
|
|
|
Net
Book Value
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Impairment
Charge
|
|
|
Revaluation
Period Adjustment
|
|
|
Net
Book Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationship and lists
|
|
7-10
yrs
|
|
$
|
14,551
|
|
|
$
|
(4,807
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,744
|
|
|
$
|
15,770
|
|
|
$
|
(2,699
|
)
|
|
$
|
(1,219
|
)
|
|
$
|
-
|
|
|
$
|
11,852
|
|
Non-compete
agreements
|
|
2-3 yrs
|
|
|
2,723
|
|
|
|
(1,711
|
)
|
|
|
-
|
|
|
|
(699
|
)
|
|
|
313
|
|
|
|
2,723
|
|
|
|
(1,010
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,713
|
|
Purchased
software
|
|
16 years
|
|
|
-
|
|
|
|
(371
|
)
|
|
|
4,000
|
|
|
|
-
|
|
|
|
3,629
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
In-process
research and development
|
|
|
|
|
4,000
|
|
|
|
-
|
|
|
|
(4,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,000
|
|
|
|
4,000
|
|
URL's
|
|
Indefinite
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
10
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
8
|
|
Trade
names
|
|
1 Year
|
|
|
59
|
|
|
|
(49
|
)
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
59
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
55
|
|
Trade
names
|
|
Indefinite
|
|
|
3,178
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,178
|
|
|
|
4,349
|
|
|
|
-
|
|
|
|
(1,171
|
)
|
|
|
-
|
|
|
|
3,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
intangible assets
|
|
|
|
$
|
24,519
|
|
|
$
|
(6,938
|
)
|
|
$
|
-
|
|
|
$
|
(709
|
)
|
|
$
|
16,872
|
|
|
$
|
22,911
|
|
|
$
|
(3,713
|
)
|
|
$
|
(2,392
|
)
|
|
$
|
4,000
|
|
|
$
|
20,806
|
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
During
the second quarter of 2014, the Company began experiencing declines in revenues within the professional services operating segment
due to delays in work from a significant customer. The delays continued into the third quarter of 2014 when it became apparent
that anticipated revenue and profitability trends within the Company’s professional services operating segment were not
being achieved to the extent forecasted. The Company updated the forecast for the professional services segment, of which ADEX
is a reporting unit, based on the most recent financial results and best estimates of future operations. The updated forecast
reflected slower growth in revenues and lower margins for the professional services segment due to lower demand from customers.
As
of September 30, 2014, the Company performed the two-step goodwill and indefinite lived impairment process and determined that
the professional services operating segment failed both tests. Based on the testing performed, the Company recorded a non-cash
impairment charge of $3,761 related to the professional services reporting segment, of which $2,392 related to intangible assets
and $1,369 related to goodwill.
During
the third quarter of 2015, the Company noted a trend whereby actual revenues and margins were not in line with forecasted revenues
and margins within the managed services segment. The Company updated the forecast for the managed services segment, of which IPC
comprises a majority of the reporting unit, based on the most recent financial results and best estimates of future operations.
The updated forecast reflects slower growth in revenues and lower margins for the managed services segment due to lower demand
from customers.
As
of October 1, 2015, the Company performed the two-step goodwill and indefinite lived impairment process and determined that the
managed services operating segment failed both tests. Based on the testing performed, the Company recorded a non-cash impairment
charge of $11,582 related to the managed services reporting segment, of which $675 related to intangible assets and $10,907 related
to goodwill.
During
the first quarter of 2016, the Company disposed of its VaultLogix, DPS and USDSA subsidiaries. As a result of this disposal, the
Company performed a two-step goodwill and indefinite lived impairment process as of December 31, 2015 on its cloud services segment.
The Company determined that the remaining reporting unit within this segment, the Company’s Axim subsidiary, forecasted
revenues and margins would change based on the sale of VaultLogix, DPS and USDSA. The Company updated the forecast for the cloud
services segment based on the most recent financial results and best estimates of future operations. The updated forecast reflects
slower growth in revenues and lower margins for the cloud services segment due to lower demand from customers.
As
of December 31, 2015, the Company performed the two-step goodwill and indefinite lived impairment process and determined that
the cloud services operating segment failed both tests. Based on the testing performed, the Company recorded a non-cash impairment
charge of $2,039 related to the cloud services reporting segment, of which $34 related to intangible assets and $2,005 related
to goodwill.
The
Company uses the straight-line method to determine the amortization expense for its definite lived intangible assets. Amortization
expense related to the purchased intangible assets was $3,225 and $2,993 for the years ended December 31, 2015 and 2014, respectively.
The
estimated future amortization expense for the next five years and thereafter is as follows:
Year ending December 31,
|
|
|
|
2016
|
|
$
|
1,593
|
|
2017
|
|
|
1,544
|
|
2018
|
|
|
1,540
|
|
2019
|
|
|
1,485
|
|
2020
|
|
|
1,465
|
|
Thereafter
|
|
|
6,059
|
|
Total
|
|
$
|
13,686
|
|
As
of December 31, 2015 and 2014, accrued expenses consisted of the following:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
(Revised)
|
|
Accrued interest
|
|
$
|
4,245
|
|
|
$
|
2,831
|
|
Accrued trade payables
|
|
|
3,868
|
|
|
|
2,769
|
|
Accrued compensation
|
|
|
2,679
|
|
|
|
3,624
|
|
|
|
$
|
10,792
|
|
|
$
|
9,224
|
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9.
|
FAIR
VALUE MEASUREMENTS
|
Certain
assets and liabilities of the Company are required to be recorded at fair value either on a recurring or non-recurring basis.
Fair value is determined based on the price that would be received for an asset or paid to transfer a liability in an orderly
transaction based on market participants. The following section describes the valuation methodologies that the Company used to
measure, for disclosure purposes, its 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 December 31, 2015 and
December 31, 2014 was estimated at $58,613 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 debt. The level of the debt would be considered as Level 2.
Contingent
Consideration
The
fair value of the Company’s contingent consideration is classified as Level 3 and 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.
Additional
Disclosures Regarding Fair Value Measurements
The
carrying value of cash, accounts receivable and accounts payable approximate their fair value due to the short-term maturity of
those items.
Derivative
Warrant Liabilities and Convertible Features
The
fair value of the derivative liabilities is classified as Level 3 within the Company’s fair value hierarchy. Please refer
to Footnote 12 Derivative Instruments for a further discussion of the measurement of fair value of the derivatives and their underlying
assumptions.
The
fair value of the Company’s financial instruments carried at fair value at December 31, 2015 and 2014 were as follows:
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant
Other Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
|
|
December
31, 2015
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Derivative
features related to convertible debentures
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
408
|
|
Long-term
warrant derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
Long-term
derivative features related to convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
17,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17,538
|
|
|
|
|
|
|
|
December
31, 2014
|
|
Liabilities:
|
|
|
|
|
(Revised)
|
|
|
|
|
Warrant
derivatives
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
18
|
|
Derivative
features related to convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
980
|
|
Long-term
warrant derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
875
|
|
Contingent
consideration
|
|
|
-
|
|
|
|
-
|
|
|
|
2,725
|
|
Long-term
contingent consideration
|
|
|
-
|
|
|
|
-
|
|
|
|
823
|
|
Issuance
of option shares
|
|
|
-
|
|
|
|
-
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,957
|
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
following table provides a summary of changes in fair value of the Company’s Level 3 financial instruments for the years
ended December 31, 2015 and 2014.
|
|
Amount
|
|
Balance as of January 1, 2014
|
|
$
|
26,007
|
|
|
|
|
|
|
Change in fair value of warrant derivative
|
|
|
(3,891
|
)
|
Change in fair value of derivative features related to convertible debentures
|
|
|
(21,881
|
)
|
Warrant derivatives fair value and fair value of conversion feature on date of issuance
|
|
|
10,003
|
|
Change in fair value of contingent consideration
|
|
|
(1,782
|
)
|
Settlement of Series E warrants
|
|
|
(900
|
)
|
Fair value of option shares on date of issuance
|
|
|
536
|
|
Settlement of contingent consideration
|
|
|
(3,542
|
)
|
Fair value of long-term consideration recorded at date of acquisition
|
|
|
1,696
|
|
Fair value of contingent consideration recorded at date of acquisition
|
|
|
1,046
|
|
Adjustment of derivative liability upon conversion of debt
|
|
|
(1,829
|
)
|
Reclassification of 31 Group debt discount
|
|
|
184
|
|
Revaluation of warrants for related-party debt
|
|
|
310
|
|
Balance December 31, 2014
|
|
|
5,957
|
|
|
|
|
|
|
Change in fair value of warrant derivative
|
|
|
(348
|
)
|
Change in fair value of derivative features related to convertible debentures
|
|
|
9,748
|
|
Settlement of contingent consideration
|
|
|
(1,307
|
)
|
Change in fair value of contingent consideration
|
|
|
(2,243
|
)
|
Fair value of conversion feature on date of issuance
|
|
|
4,727
|
|
Fair value of net settlement of accounts payable
|
|
|
721
|
|
Reclassification of options to equity
|
|
|
(536
|
)
|
Reclassification of derivative warrants to equity
|
|
|
(546
|
)
|
Adjustment of derivative liability pursuant to exchange agreement
|
|
|
23
|
|
Fair value of lender default premium derivative on date of issuance
|
|
|
724
|
|
Adjustment of net settlement of accounts payable derivative due to cancellation of shares and warrants
|
|
|
80
|
|
Payment of accounts payable related to net settlement of accounts payable derivative liability
|
|
|
(225
|
)
|
Fair value of net settlement of accounts payable
|
|
|
(594
|
)
|
Adjustment of derivative liability upon extinguishment of debt
|
|
|
109
|
|
Fair value of derivative features related to Promissory Note tranche 1
|
|
|
164
|
|
Fair value of derivative features related to Promissory Note tranche 2
|
|
|
205
|
|
Fair value of derivative features related to Promissory Note tranche 3
|
|
|
109
|
|
Fair value of derivative features related to Promissory Note
|
|
|
148
|
|
Fair value of option to pay in stock
|
|
|
622
|
|
|
|
|
|
|
Balance December 31, 2015
|
|
$
|
17,538
|
|
As
of December 31, 2015 and 2014, bank debt consisted of the following:
|
|
December
31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
(Revised)
|
|
Installment note, monthly
principal and interest of $1, interest 9.05%, secured by vehicles, maturing July 2016
|
|
$
|
3
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
Five lines of
credit, monthly principal and interest, ranging from $0 to $1, interest ranging from 5.5% to 9.75%, guaranteed personally
by principal shareholders of acquired companies, maturing July 2016
|
|
|
128
|
|
|
|
296
|
|
|
|
|
131
|
|
|
|
305
|
|
Less: Current
portion of bank debt
|
|
|
(131
|
)
|
|
|
(252
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
of bank debt
|
|
$
|
-
|
|
|
$
|
53
|
|
At
December 31, 2015 and 2014, there were no covenants related to the bank debt.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
interest expense associated with the bank debt during the years ended December 31, 2015 and 2014 amounted to $11 and $30, respectively.
The weighted average interest rate on bank debt during the years ended December 31, 2015 and 2014 was 8.4% and 9.9%, respectively.
At
December 31, 2015 and 2014, term loans consisted of the following:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
(Revised)
|
|
Former owners of RM Leasing, unsecured, non-interest bearing, due on demand
|
|
$
|
3
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
Promissory note with company under common ownership by former owner of Tropical, 9.75% interest, monthly payments of interest only of $1, unsecured and personally guaranteed by officer, due November 2016
|
|
|
106
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
Promissory notes, 12% interest, unsecured, matured in July 2015
|
|
|
-
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
12% convertible note payable, net of debt discount of $485, matured in June 2015
|
|
|
-
|
|
|
|
1,846
|
|
|
|
|
|
|
|
|
|
|
Promissory note issued to Mark Munro 1996 Remainder UniTrust, 3% interest, converted to shares in July 2015, unsecured
|
|
|
-
|
|
|
|
575
|
|
|
|
|
|
|
|
|
|
|
Term loan, White Oak Global Advisors, LLC, maturing in October 2017, interest of 12% with 2% paid-in-kind interest, net of debt discount of $366 and $745, respectively (refer to Note 20 Subsequent Events for an additional explanation on the extension of the term loan to February 2019)
|
|
|
10,938
|
|
|
|
12,516
|
|
|
|
|
|
|
|
|
|
|
8% convertible promissory note, London Bay - VL Holding Company, LLC, unsecured, maturing October 2017
|
|
|
7,408
|
|
|
|
7,408
|
|
|
|
|
|
|
|
|
|
|
8% convertible promissory note, WV VL Holding Corp., unsecured, maturing October 2017
|
|
|
7,003
|
|
|
|
7,003
|
|
|
|
|
|
|
|
|
|
|
8% convertible promissory note, Tim Hannibal, unsecured, maturing October 2017
|
|
|
1,215
|
|
|
|
1,215
|
|
|
|
|
|
|
|
|
|
|
Promissory note, 12% interest, unsecured, net of debt discount of $44, was to mature in November 2015
|
|
|
-
|
|
|
|
956
|
|
|
|
|
|
|
|
|
|
|
Promissory note, 12% interest, unsecured, maturing in May 2016, net of debt discount of $9
|
|
|
748
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
12% senior convertible note, unsecured, maturing in January 2017, net of debt discount of $507
|
|
|
1,599
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
12% senior convertible note, unsecured, maturing in November 2016, net of debt discount of $173
|
|
|
352
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
12% senior convertible note tranche 1, unsecured, maturing in January 2016, net of debt discount of $15
|
|
|
235
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
12% senior convertible note tranche 2, unsecured, maturing in February 2016, net of debt discount of $80
|
|
|
253
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
12% senior convertible note tranche 3, unsecured, maturing in March 2016, net of debt discount of $55
|
|
|
445
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Bridge loan agreement, 12% interest, unsecured, net of debt discount of $981, matured in June 2015
|
|
|
-
|
|
|
|
3,019
|
|
|
|
|
|
|
|
|
|
|
10% senior secured convertible debenture, maturing in June 2017, net of debt discount of $4,179
|
|
|
3,321
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
12% convertible note, unsecured, maturing in January 2017, net of debt discount of $107
|
|
|
419
|
|
|
|
-
|
|
|
|
|
34,045
|
|
|
|
34,677
|
|
Less: Current portion of term loans
|
|
|
(3,787
|
)
|
|
|
(7,109
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion term loans, net of debt discount
|
|
$
|
30,258
|
|
|
$
|
27,568
|
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Future
annual principal payments are as follows:
Year
ending December 31,
|
|
|
|
2016
|
|
$
|
4,589
|
|
2017
|
|
|
23,643
|
|
2018
|
|
|
-
|
|
2019
|
|
|
11,305
|
|
Total
principal payments
|
|
$
|
39,537
|
|
The
interest expense, including amortization of debt discounts, associated with the term loans payable in the years ended December
31, 2015 and 2014 amounted to $5,230 and $7,313, respectively.
PNC
Bank Revolving Credit Facility
On
September 23, 2013, the Company entered into a revolving credit and security agreement dated as of September 20, 2013 (the "PNC
Credit Agreement"), with PNC Bank, as agent and a lender, and each of the Company’s subsidiaries, as borrowers or guarantors.
The PNC Credit Agreement provided the Company a revolving credit facility in the principal amount of up to $10,000, subject to
a borrowing base (as further described below), that was secured by substantially all of the Company’s assets and the assets
of the Company’s subsidiaries, including a pledge of the equity interests of the Company’s subsidiaries pursuant to
a pledge agreement. The maturity date of the revolving credit facility was June 17, 2014.
The
PNC Credit Agreement contained customary events of default and covenants, including, but not limited to, financial covenants requiring
a minimum fixed charge coverage ratio and minimum earnings before interest, taxes, depreciation and amortization (EBITDA). In
connection with the Company’s acquisition of IPC, the Company was required to have availability under the PNC loan of $3,000.
In order to satisfy this requirement, the Company prepaid the loan in the amount of $108.
The
Company terminated the PNC Credit Agreement on April 4, 2014. In connection with the early termination of the PNC Credit Agreement,
the Company paid to PNC Bank an early termination fee of approximately $300 which was recorded as interest expense on the consolidated
statement of operations for the year ended December 31, 2014.
Promissory
Notes to the Mark Munro 1996 Charitable Remainder UniTrust
On
January 1, 2014, the outstanding principal amount of the loans from a related party, MMD Genesis LLC, was restructured and, in
lieu thereof, the Company issued a note to the Mark Munro 1996 Charitable Remainder UniTrust in the principal amount of $275 that
bore interest at the rate of 12% per annum and was to mature on March 31, 2016.
On
May 7, 2014, the Company issued a promissory note to the Mark Munro 1996 Charitable Remainder UniTrust in the principal amount
of $300 that bore interest at the rate of 18% per annum and was to mature on March 31, 2016.
On
February 10, 2015, the Mark Munro 1996 Charitable Remainder UniTrust converted $100 principal amount of its January 1, 2014 note
into 42,553 shares of the Company’s common stock. Refer to Note 16, Stockholders’ Equity, for further detail.
On
February 25, 2015, the Company restructured the terms of certain related-party notes (refer to Note 18, Related Parties, for further
detail) and the Mark Munro 1996 Charitable Remainder UniTrust in order to extend the maturity dates thereof and to reduce the
interest rate accruing thereon. The following notes were restructured as follows:
|
●
|
notes
issued to the Mark Munro 1996 Charitable Remainder UniTrust in the aggregate principal
amount of $300 had the interest rates reduced from 18% to 3% per annum and the maturity
dates extended from March 31, 2016 to January 1, 2018; and
|
|
●
|
notes
issued to the Mark Munro 1996 Charitable Remainder UniTrust in the aggregate principal
amount of $175 had the interest rates reduced from 12% to 3% per annum and the maturity
dates extended from March 31, 2016 to January 1, 2018.
|
In
consideration for such restructuring, the Company issued to the Mark Munro 1996 Charitable Remainder UniTrust 89,900 shares of
common stock which resulted in a loss on extinguishment of debt of $220 on the consolidated statement of operations.
During
June 2015, the Mark Munro 1996 Charitable Remainder UniTrust converted $25 of principal amount of notes payable and related accrued
interest into 8,306 shares of the Company’s common stock. Refer to Note 16, Stockholders’ Equity, for further detail.
On
July 21, 2015, the Mark Munro 1996 Charitable Remainder UniTrust converted the remaining $450 principal amount and related accrued
interest of $5 of its promissory note into 219,820 shares of the Company’s common stock. Refer to Note 16, Stockholders’
Equity, for further detail.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revolving
Line of Credit
On
July 3, 2014, the Company obtained an unsecured $3,000 interim revolving line of credit from the Mark Munro 1996 Charitable Remainder
UniTrust to provide working capital as well as cash to make the Company’s upcoming amortization payments pursuant to the
Company’s Convertible Debentures. The line has a maturity date of March 31, 2016, and bears interest at the rate of 1.5%
per month on funds drawn.
As
of December 31, 2015 and 2014, there was no amount outstanding under the related party revolving line of credit.
Term
Loan - MidMarket Capital
On
September 17, 2012, the Company entered into a Loan and Security Agreement with the lenders referred to therein, MidMarket Capital
Partners, LLC, as agent for the lenders (the “Agent”), and certain subsidiaries of the Company as guarantors (the
“MidMarket Loan Agreement”). Pursuant to the MidMarket Loan Agreement, on September 17, 2012 and November 13, 2012,
the lenders thereunder provided the Company senior secured first lien term loans in an aggregate amount of $15,000 (the “MidMarket
Loans”). Interest on the MidMarket Loans accrued at the rate of 12% per annum.
The
MidMarket Loans were to mature on September 17, 2017, provided that if the Company failed to raise by March 14, 2014 at least
$20,000 in connection with a public offering of voting equity securities of the Company, the MidMarket Loans were to mature on
June 17, 2014. If the Company did not complete an acquisition of an additional operating business within 90 days of September
17, 2012, the Company was required to repay $750 of the MidMarket Loans. The Company completed the acquisition of ERFS on December
17, 2012, which satisfied this covenant.
In
connection with the MidMarket Loans, deferred loan costs of $1,800 were recorded. These costs were being amortized over the life
of the loan using the effective interest method.
Subject
to certain exceptions, all obligations of the Company under the MidMarket Loans were unconditionally guaranteed by each of the
Company’s domestic subsidiaries. In addition, the obligation of the Company and the subsidiary guarantors in respect of
the MidMarket Loans was secured by a first priority security interest in substantially all of the assets of the Company and the
subsidiary guarantors, subject to certain customary exceptions.
Pursuant
to the MidMarket Loan Agreement, the Company issued warrants to the lenders, which entitle the lenders to purchase a number of
shares of common stock equal to 10% of the fully-diluted shares of the common stock of the Company on the date on which the warrants
first became exercisable, which was December 6, 2012. Refer to Note 12 Derivative Instruments for further detail on the MidMarket
Loan Agreement Warrants.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Pursuant
to Assignment and Assumption Agreements, each dated as of March 12, 2014, the lenders under the MidMarket Loan Agreement assigned
the MidMarket Loans to 31 Group LLC and Dominion Capital LLC (the “Assignees”). Pursuant to an Exchange Agreement,
dated as of March 12, 2014, among the parties to the MidMarket Loan Agreement and the Assignees (the “Exchange Agreement”),
the Assignees agreed to convert the outstanding principal amount of the MidMarket Loans into shares of the Company’s common
stock at a conversion price of $10.50 per share. Pursuant to the Exchange Agreement, in full satisfaction of the MidMarket Loans,
the Company (i) issued an aggregate of 1,180,361 shares of common stock, of which it has issued 561,197 and 519,164 shares of
its common stock to Dominion Capital LLC and 31 Group LLC, respectively, and (ii) paid an aggregate of $277 in cash to the Assignees
in respect of accrued but unpaid interest under the MidMarket Loans. The Exchange Agreement provided, however, 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 MidMarket
Loans was such lower price.
On
April 15, 2014, the Company entered into an amendment to the Exchange 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
issued pursuant to the amendment 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 of 1933, as amended, the exercise period of the
warrants will be reduced to two years.
On
April 18, 2014, the Company amended the agreement to provide for the issuance of additional consideration to the Assignees in
lieu of the issuance of additional shares to satisfy such adjustment requirement. On the date of the elimination of debt, the
fair value of the Company’s common stock was $11.87, resulting in the total fair value of shares issued of $14,011. On that
date, the principal amount of debt outstanding was $12,025, resulting in a loss on extinguishment of debt of $1,986. As a result
of the extinguishment of the MidMarket Loans, the Company also recorded a loss on extinguishment of debt of $2,504 as a result
of accelerated amortization of deferred financing costs and debt discounts. Please refer to Footnote 12 Derivative Instruments
for further explanation.
On
December 31, 2014, the Company used the Black Scholes pricing method to determine the fair value of the derivative liability of
the warrants on that date and, on December 31, 2015, a binomial pricing model to determine the fair value of the derivative liability
of the warrants on that date. Please refer to Footnote 12 Derivative Instruments for further explanation.
Interest
expense on the MidMarket Loan was $291 for the year ended December 31, 2014.
Term
Loan - White Oak Global Advisors
On
October 9, 2014, the Company’s former wholly-owned subsidiary, VaultLogix, entered into a loan and security agreement with
the lenders party thereto, White Oak Global Advisors, LLC, as Administrative Agent, DPS, USDSA and U.S. Data Security Corporation
(“USDSC”) as guarantors, pursuant to which, VaultLogix received a term loan in an aggregate principal amount of $13,261.
Interest on the term loan accrues at a rate per annum equal to the sum of (a) the greater of (i) the LIBOR Index Rate (as defined),
as adjusted as of each Libor Index Adjustment Date (as defined) and (ii) 1.00% per annum; plus (b) 1100 basis points per annum.
The LIBOR Index Rate was 1.0896 and 0.6044 as of December 31, 2015 and 2014, respectively; however this did not exceed the 12%
stated rate as defined in item (ii) above.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 Agent, (ii) a pledge agreement,
and (iii) a security agreement, pursuant to which the obligations of the Company in respect of the Term Loan are secured by a
security interest in substantially all of the assets of VaultLogix, subject to certain customary exceptions.
The
term loan is subject to certain affirmative and negative covenants that are tested at the end of each fiscal quarter. The Company
was in compliance with all covenants as of December 31, 2015 and 2014.
Principal
of $11,305 and $13,261 remained outstanding as of December 31, 2015 and 2014, respectively. On February 17, 2016, the Company
entered into a securities exchange agreement whereby the obligations to White Oak Global Advisors, LLC have been satisfied. Refer
to Note 21, Subsequent Events, for further detail.
Term
Loan – 8% Convertible Promissory Notes
Effective
as of October 9, 2014, the Company consummated the acquisition of all of the outstanding membership interests of VaultLogix and
its affiliated entities for an aggregate purchase price of $36,796. The purchase price for the acquisition was payable to the
sellers as follows: (i) $16,385 in cash, (ii) 1,008,690 shares of the Company’s common stock and (iii) $15,627 in unsecured
convertible promissory notes, as further described below. The closing payments are subject to customary working capital adjustments.
The
promissory notes accrue interest at a rate of 8% per annum, and all principal and interest accrued under the promissory notes
is payable on October 9, 2017. The promissory notes are convertible into shares of the Company’s common stock at a conversion
price equal to $6.37 per share.
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 December 31, 2015, the Company had not forced any conversions.
ICG
Term Loan
During
April 2013, the Company entered into a purchase agreement (the "ICG Purchase Agreement") with ICG USA, LLC (“ICG”)
pursuant to which the Company agreed to sell and ICG agreed to purchase, unsecured, convertible promissory notes in the aggregate
principal amount of $1,725 for an aggregate purchase price of $1,500, at up to two separate closings. Pursuant to such agreement,
on April 30, 2013, the Company issued to ICG a promissory note in the principal amount of $863 for a purchase price of $750, with
the difference between the purchase price and the principal amount of the note representing an up-front interest payment in lieu
of any additional interest on such note. This note was to mature on the tenth trading day following the earlier of (i) the closing
by the Company of a public offering of equity securities resulting in gross proceeds of at least $20,000 or (ii) any capital raise
by the Company of at least $3 million. On November 5, 2013, the Company completed a capital raise of greater than $3,000 and,
as a result, the note was no longer convertible into shares of the Company’s common stock.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Pursuant
to the ICG Purchase Agreement, in August 2013, the Company issued to ICG a promissory note in the principal amount of $288 for
a purchase price of $250, with the difference between the purchase price and the principal amount of the note representing an
up-front interest payment in lieu of any additional interest on such note. This note was to mature on the thirtieth trading day
following the earlier of the closing of any capital raise by the Company of at least $3,000 or October 26, 2013. On November 5,
2013, the Company completed a capital raise of greater than $3,000, and the note was no longer convertible into shares of the
Company’s common stock.
Pursuant
to the ICG Purchase Agreement, in October 2013, the Company issued to an affiliate of ICG a promissory note in the principal amount
of $575 for a purchase price of $500, with the difference between the purchase price and the principal amount of the note representing
an up-front interest payment in lieu of any additional interest on the such note. This note matured in January 2014. At the time
of this issuance, the outstanding notes held by ICG were assigned by ICG to such affiliate of ICG and the maturity date of such
notes was extended to January 2014.
In
March 2014, the Company and ICG agreed to convert the remaining unpaid principal amount of the three notes into common stock.
Pursuant
to the ICG Purchase Agreement, in connection with the issuance of the notes, ICG was also issued two warrants to purchase a number
of common shares equal to fifty percent (50%) of the number of shares into which the note may be converted on the date of issuance
of the note. Refer to Note 12 Derivative Instruments for further information on the ICG warrants.
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 matured on June 13, 2015 and bore interest at the rate of 12% per annum and were payable in accordance with an amortization
schedule, with monthly payments that began on July 13, 2014 and ended 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
were payable by the issuance of shares of the Company’s common stock at a price per share equal to the lesser of (i) the
Conversion Price (as defined below) and (ii) 75% of the average of the VWAP (the daily volume weighted average price) of the Company’s
common stock for the five-trading-day period ending on, and including, the trading day immediately preceding the trading day that
is five days prior to the applicable monthly amortization date.
The
Convertible Debentures were convertible into shares of the Company’s common stock at the election of the holder thereof
at a conversion price (the “Conversion Price”) equal to the lesser of (i) $6.36, or (ii) 85% of the price per share
of the Company’s common stock in the first underwritten public offering of not less than $10,000 of the Company’s
equity securities (a “Qualified Offering”). The Conversion Price was subject to customary anti-dilution provisions.
Notwithstanding the foregoing, the Convertible Debenture of a particular holder was not convertible if such conversion would have
resulted in such holder owning more than 4.99% of the issued and outstanding shares of the Company’s common stock after
such conversion.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
Company recorded a debt discount in the amount of $382 in connection with the 36,567 shares of the Company's common stock issued
pursuant to the purchase agreement, which amount was amortized over the life of the Convertible Debentures. The Company also recorded
a debt discount and a related derivative liability in the amount of $6,620 in connection with the embedded features of the Convertible
Debentures, which amount was amortized over the life of the Convertible Debentures. Refer to Note 12 Derivative Instruments for
further detail on the derivative liability.
Gross
principal of $2,331 remained outstanding as of December 31, 2014. During June 2015, the Company issued shares of common stock
for the required amortization payments of the Convertible Debentures. The final amortization payment was made in shares of common
stock in June 2015, which repaid the final amount due under the Convertible Debentures. The Company then amortized the remaining
debt discount and deferred loan costs of $84 related to the convertible feature to interest expense on the consolidated statement
of operations as of December 31, 2015.
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 matured on the earlier of: (x) November 10, 2015 or (y) upon demand by the investor, which such demand could be made
any time 150 days following the issuance of the note upon 30 days’ written notice to the Company; provided, that $60 of
interest was guaranteed by the Company regardless of when the note was repaid. The Company could have redeemed the note at any
time prior to the maturity date for an amount equal to (i) 100% of the outstanding principal amount, plus (ii) a redemption premium
equal to an additional 10% of the outstanding principal amount, plus (iii) any accrued and unpaid interest on the note. The redemption
premium could be paid in cash or common stock at the option of the Company. The holder demanded repayment of the demand promissory
note by May 16, 2015 and such note was converted on May 14, 2015 into 348,164 shares of the Company’s common stock. The
Company recorded the conversion as a loss on conversion of debt of $264 on the consolidated statement of operations during the
year ended December 31, 2015.
On May 14, 2015, the Company
entered into a securities purchase agreement with the investor whereby the Company issued a term promissory note in the original
principal amount of $1,000, with interest accruing at the rate of 12% per annum. The note matured at the earlier of: (x) May 14,
2016 or (y) upon demand by the investor, which such demand be made any time 170 days following the issuance of the note upon 10
days’ written notice to the Company; provided, that $60 of interest was guaranteed by the Company regardless of when the
note was repaid. The Company could have redeemed the note at any time prior to the maturity date for an amount equal to (i) 100%
of the outstanding principal amount, plus (ii) an additional 10% of the outstanding principal amount (the “Redemption Premium”),
plus (iii) any accrued and unpaid interest on the note. The Redemption Premium could have been paid in cash or common stock at
the option of the Company. If common stock of the Company was used to pay the Redemption Premium, then such shares had to 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.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On August 6, 2015, the
Company amended the May 14, 2015 term promissory note to increase the principal amount of the note to $1,060 and modify the terms
of the promissory note to allow for the investor to convert the note into shares of the Company’s common stock. The term
promissory note was amended and is now convertible into shares of the Company’s common stock at the election of the investor
at a conversion price equal to $2.00 per share, subject to certain adjustments.
On
August 6, 2015, the Company entered into a senior convertible note agreement with the investor whereby the Company issued a promissory
note in the original principal amount of $2,105, with interest accruing at the rate of 12% per annum, which matures on January
6, 2017. At the election of the investor, the note is convertible into shares of the Company’s common stock at a conversion
price equal to $2.00 per share, subject to adjustment as set forth in the agreement. The investor may elect to have the Company
redeem the senior convertible note upon the occurrence of certain events, including the Company’s completion of a $10,000
underwritten offering of the Company’s common stock. Refer to Note 12 Derivative Instruments for further detail on the derivative
features associated with the August 6, 2015 convertible note.
On
November 12, 2015, the Company entered into a securities purchase agreement with the investor whereby the Company issued a senior
convertible note, for cash proceeds of $500, in the original principal amount of $525. The note has a term of one year, bears
interest at the rate of 12% per annum and, at the election of the investor, the note is convertible into shares of the Company’s
common stock at a conversion price equal to $1.75 per share, subject to adjustment as set forth in the note. The note shall amortize
in twelve bi-weekly installments beginning on the six month anniversary of the note’s issuance. Amortization payments may
be made, at the Company’s option, either in (i) cash, in which case the Company would also have to issue to the investor
a number of shares of the Company’s common stock equal to 5% of such amortization payment or (ii) subject to the Company
satisfying certain equity conditions, shares of the Company’s common stock, pursuant to the amortization conversion rate,
which is equal to the lower of (x) $1.75 and (y) a 25% discount to lowest volume weighted average price of the Company’s
common stock in the prior three trading days.
On
November 12, 2015, the Company entered into an exchange agreement with the investor whereby the Company exchanged a portion of
the senior secured note originally issued by the Company to GPB Life Science Holdings, LLC on December 3, 2014 and subsequently
assigned to the investor, for new senior convertible notes, in three tranches of $500 for a total principal amount of $1,500.
The notes have a term of one year, bear interest at the rate of 12% per annum, and are convertible into shares of the Company’s
common stock at a conversion price equal to $1.25 per share, subject to adjustment as set forth in the notes. Starting on the
first week anniversary of the issuance of the new senior convertible notes and continuing thereafter, the investor shall on a
bi-weekly basis redeem one-sixth of the face amount of the senior convertible notes and guaranteed interest. The redemptions may
be made, at the Company’s option, either in (i) cash, in which case the Company would also have to issue to the investor
a number of shares of the Company’s common stock equal to 5% of such redemption payment or (ii) subject to the Company satisfying
certain equity conditions, shares of the Company’s common stock, pursuant to the redemption conversion rate, which is equal
to the lower of (x) $1.25 and (y) a 25% discount to lowest volume weighted average price of the Company’s common stock in
the prior three trading days.
The
Company issued the three tranches of new senior convertible notes on the following dates:
|
●
|
$500
issued on November 13, 2015 which matured on January 28, 2016 (“Tranche 1”),
|
|
|
|
|
●
|
$500
issued on November 27, 2015 which matured on February 19, 2016 (“Tranche 2”) and
|
|
|
|
|
●
|
$500
issued on December 11, 2015 which matured on March 4, 2016 (“Tranche 3”).
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
following table summarizes the issuances, exchanges and amortization payments made related to the promissory notes from January
1, 2014 through December 31, 2015:
Date
of Issuance
|
|
November 17,
2014
|
|
|
May 14,
2015
|
|
|
August
6, 2015
|
|
|
November 12,
2015
|
|
|
November 13,
2015
|
|
|
November 27,
2015
|
|
|
December 11,
2015
|
|
|
Total
Principal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
Amount
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
$
|
2,105
|
|
|
$
|
525
|
|
|
$
|
500
|
|
|
$
|
500
|
|
|
$
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 17,
2014 - Issuance
|
|
$
|
1,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
balance at December 31, 2014
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
14, 2015 - Conversion to common stock
|
|
|
(1,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,000
|
)
|
May 14, 2015
- Issuance
|
|
|
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
August 6, 2015
- Amendment
|
|
|
-
|
|
|
|
60
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60
|
|
August 6, 2015
- Issuance
|
|
|
-
|
|
|
|
-
|
|
|
|
2,105
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,105
|
|
November 12,
2015 - Issuance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
525
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
525
|
|
November
13, 2015 - Exchange of GPB Life Science Holdings, LLC note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500
|
|
November 20,
2015 - Amortization payment
|
|
|
-
|
|
|
|
(151
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(151
|
)
|
November 23,
2015 - Amortization payment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(83
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(83
|
)
|
November
27, 2015 - Exchange of GPB Life Science Holdings, LLC note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500
|
|
|
|
-
|
|
|
|
500
|
|
December 1,
2015 - Amortization payment
|
|
|
-
|
|
|
|
(151
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(151
|
)
|
December 7,
2015 - Amortization payment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(83
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(83
|
)
|
December
11, 2015 - Exchange of GPB Life Science Holdings, LLC note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500
|
|
|
|
500
|
|
December 14,
2015 - Amortization payment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(83
|
)
|
|
|
-
|
|
|
|
(83
|
)
|
December 21,
2015 - Amortization payment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(83
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(83
|
)
|
December 28,
2015 - Amortization payment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(83
|
)
|
|
|
-
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
balance at December 31, 2015
|
|
$
|
-
|
|
|
$
|
758
|
|
|
$
|
2,105
|
|
|
$
|
525
|
|
|
$
|
251
|
|
|
$
|
334
|
|
|
$
|
500
|
|
|
$
|
4,473
|
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
amortization payments noted within the table above were paid in shares of the Company’s common stock. Further detail on
the amortization payments can be found within Footnote 16, Stockholder’s Equity.
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. The maturity date of the convertible note could have been
extended at the option of the holder through the date that is 20 business days after the consummation of a fundamental transaction
(as defined in the convertible note agreement) in the event that a fundamental transaction was publicly announced or a fundamental
transaction notice (as defined in the convertible note agreement) was delivered prior to the maturity date. As the Company did
not repay the convertible note in full on or prior to the 45th day after the date the convertible note was issued, 31 Group, LLC
was granted a security interest in all assets of the Company in September 2014.
The
Company was entitled to redeem the Convertible Note, in whole or in part, for cash at a redemption price equal to 107% of the
then-outstanding principal amount of the Convertible Note plus all accrued and unpaid interest. 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
December 31, 2014, the Company entered into a Bridge Financing Agreement with GPB Life Science Holdings, LLC of which the proceeds
were used to repay the remaining $1,500 principal balance on the convertible note payable to the 31 Group, LLC. Refer to the Bridge
Financing - GPB Life Science Holdings, LLC section of this note for further detail.
Refer
to Note 12 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 matured upon the earlier of: June 1, 2015 or (y) the date of a Major Transaction
(as defined in the purchase agreement). In addition, upon maturity of the note, the Company was required to pay the investor additional
interest in cash, which interest was to accrue over the term of the note at the rate of 4% per annum. The note was secured by
(i) a first priority security interest in and to all Accounts Receivable (as defined in the purchase agreement) of the Company
and its subsidiaries, except those of VaultLogix, and (ii) a first priority security interest and lien on all Collateral (as defined
in the purchase agreement) of the Company and its subsidiaries, which lien and security interest was to go into effect at such
time as White Oak Global Advisors, LLC (“White Oak”) released (or was deemed to have released pursuant to the applicable
documents between it and the Company), its liens and security interest on any collateral of the Company and the Company’s
obligation to grant, pledge or otherwise assign a lien in favor of White Oak was terminated (pursuant to the applicable documents
between White Oak and the Company). Refer to Note 12 Derivative Instruments for further detail on the warrant to purchase 250,000
shares of common stock.
On
December 31, 2014, pursuant to the bridge financing agreement, the Company issued to the investor an additional note in the principal
amount of $1,500 for a purchase price of $1,425 with interest accruing at the rate of 12% per annum. The Company used the proceeds
of this additional financing to repay the convertible note payable to 31 Group, LLC. Pursuant to the second agreement, the Company
issued a warrant entitling the lender to purchase 150,000 shares of common stock. The warrant is exercisable at a fixed price
of $5.00 and expires 180 days from the original issue date. Refer to Note 12 Derivative Instruments for further detail on the
warrant to purchase 150,000 shares of common stock.
On
May 15, 2015, the Company and GPB Life Science Holdings, LLC entered into a securities purchase agreement and Amendment No. 1
to the bridge financing agreement whereby the Company (i) issued and sold to the investor a senior secured convertible note in
the principal amount of $2,000, having substantially the same terms and conditions as the outstanding notes, (ii) issued to the
investor a four-year warrant, exercisable for up to 200,000 shares of the Company’s common stock, with an exercise price
of $3.75, subject to adjustment as set forth therein, (iii) issued to the investor a four-year warrant, exercisable for up to
50,000 shares of the common stock, with an exercise price of $3.93, subject to adjustment as set forth therein, (iv) amended the
exercise price of the outstanding warrants held by the investor to $3.75, subject to adjustment as set forth in such warrants,
(v) extended the maturity date of the outstanding notes held by such investor, such that the maturity date of all three notes,
subject to certain exceptions as provided in the Agreement, is May 15, 2016, (vi) amended the outstanding notes held by such investor
to make them convertible into shares of the Company’s common stock at an exercise price of $3.75 per share, and (vii) added
the same amortization provision to the outstanding notes held by such investor as is in the new note requiring the Company to
make three amortization payments to the investor of $1,125 each on each of September 1, 2015, December 1, 2015 and March 1, 2016,
so that each of the three notes receives its pro-rata portion of each $1,250 amortization payment. In addition, the Company and
the investor have agreed that all or any portion of the $6,000 aggregate principal amount of the Notes may, by mutual agreement
of the Company and the investor, be paid by the Company at any time and from time to time by the issuance to the investor of no
more than 1,600,000 shares of the Company’s common stock.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In
conjunction with Amendment No. 1 to the bridge financing agreement, the Company incurred legal and placement fees of $209 and
recorded this amount as a debt discount that will be amortized to interest expense on the consolidated statement of operations.
The Company accounted for
Amendment No. 1 to the bridge financing agreement in accordance with ASC 470-50,
Debt – Modifications and Extinguishments
(“ASC Topic 470-50”). In accordance with ASC Topic 470-50, the Company extinguished the December 3, 2014 and December
31, 2014 bridge financing senior secured convertible notes in the amounts of $2,500 and $1,500, respectively, and recorded a new
bridge financing senior secured convertible note in the amount of $6,020 on the balance sheet as of May 15, 2015. The fair value
of the Amendment No. 1 senior secured convertible note was $6,020, which was an amount in excess of the face value of the $6,000
senior secured convertible note and as such, the Company recorded the fair value of the lender’s conversion feature of the
note of $1,023 to additional paid-in capital on the balance sheet and a related loss on debt extinguishment of $847 on the consolidated
statement of operations. In addition, the Company used a Monte-Carlo simulation to fair-value the lender’s default premium
option and recorded a derivative liability of $22 to debt discount on the consolidated balance sheet as of May 15, 2015.
On
August 12, 2015, the Company and GPB Life Science Holdings, LLC entered into Amendment No. 2 to the original bridge financing
agreement, dated December 3, 2014, whereby the Company and GPB Life Science Holdings, LLC agreed to (i) reduce the conversion
price of the notes from $3.75 to $2.00 per common share, (ii) amend and restate the prior warrants and additional warrants to
reduce the exercise price from $3.75 to $2.00 per warrant share, (iii) increase the number of amortization payment dates and reduce
the amortization payments to $563, and (iv) permit the Company to make the amortization payments in shares of the Company common
stock converted from any of the prior notes or the new notes. The conversion price for the shares of the Company’s common
stock used to make an amortization payment shall be the lesser of (i) $2.00 and (ii) 75% of the average of the volume weighted
average price for the five consecutive trading days ending on, and including, the trading day immediately preceding the date of
the amortization payment. Refer to Note 12 Derivative Instruments for further detail on the reduction of the conversion price,
amendment and restatement of the warrants.
The
Company accounted for Amendment No. 2 in accordance with ASC 470-50. In accordance with ASC Topic 470-50, the Company modified
the May 15, 2015 Amendment No. 1 bridge financing senior secured convertible note in the amount $6,020. In conjunction with this
transaction, the Company modified the terms of the equity warrants to reduce the conversion price from $3.75 to $2.00 per share
of the Company’s common stock. Refer to Note 12 Derivative Instruments for further detail on the reduction of the conversion
price of the warrants.
On
November 12, 2015, the Company entered into an exchange agreement with the investor (as noted above in the
Promissory Notes
section of this footnote) whereby the Company exchanged a portion of the senior secured note originally issued by the Company
to GPB Life Science Holdings, LLC on December 3, 2014 and subsequently assigned to the investor, for new senior convertible notes,
in three tranches of $500 for a total principal amount of $1,500.
GPB
Life Science Holdings, LLC exchanged the following senior secured notes to the investor in the following three tranches:
|
●
|
$500
exchanged on November 13, 2015 which matured on January 28, 2016 (Tranche 1),
|
|
|
|
|
●
|
$500
exchanged on November 27, 2015 which matured on February 19, 2016 (Tranche 2), and
|
|
|
|
|
●
|
$500
exchanged on December 11, 2015 which matured on March 4, 2016 (Tranche 3).
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company accounted for
the exchange in accordance with ASC 470-50. In accordance with ASC Topic 470-50, the Company extinguished each tranche exchanged
and recorded a new note to the investor. For Tranche 1, the Company fair valued the investors’ conversion features and removed
the existing debt discount on Tranche 1 and recorded a loss on extinguishment of $8 on the consolidated statement of operations
as of November 13, 2015. For Tranche 2, the Company fair valued the investors’ conversion features and removed the existing
debt discount on Tranche 2 and recorded a gain on debt extinguishment of $92 on the consolidated statement of operations as of
November 27, 2015. For Tranche 3, the Company fair valued the investors’ conversion features and removed the existing debt
discount on Tranche 3 and recorded a gain on debt extinguishment of $237 on the consolidated statement of operations as of December
11, 2015.
On
December 29, 2015, the Company entered into a conversion agreement with GPB Life Science Holdings, LLC pursuant to which, among
other things, (i) the Company used $2,300 of the JGB (Cayman) Waltham Ltd. senior secured convertible debentures (as described
later within this footnote) to reduce the total amount owed by the Company to GPB Life Science Holdings, LLC to $1,500, (ii) if
the closing price per share of the Company’s common stock 90 days after December 29, 2015 is less than the remaining balance
conversion price, as adjusted, then the Company shall issue to GPB Life Science Holdings, LLC additional unregistered shares of
the Company’s common stock in an aggregate amount equal to the amount set forth in the conversion agreement, (iii) GPB Life
Science Holdings, LLC and the Company will convert the remaining balance of $1,500 into shares of the Company’s common stock
at a conversion price per share equal to 75% multiplied by the lower of (x) the average volume weighted average price per share
of the Company’s common stock for the five prior trading days and (y) the one day volume weighted price for a share of the
Company’s common stock on December 29, 2015, (iv) GPB Life Science Holdings, LLC will reduce the exercise price of those
certain outstanding warrants originally issued by the Company on May 14, 2015 to $1.75, and (v) GPB Life Science Holdings, LLC
will release all of its remaining security interest in the Company. On January 22, 2016, the Company issued 500,000 shares of
common stock in full settlement of this provision and GPB Life Science Holdings, LLC released its remaining security interest
in the Company.
The
Company accounted for the payment of $2,300 principal amount outstanding (as noted in item (i) above) to GPB Life Science Holdings,
LLC in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company extinguished $2,300 of the note payable
to GPB Life Science Holdings, LLC, removed the existing derivative liability related to the maturity date feature of $31, reduced
the beneficial conversion feature of $139 which was recorded in additional paid in capital, reduced accrued interest on the notes
of $199, paid $25 in legal fees, and paid interest of $419. In addition, the Company amended the warrants attached to the GPB
Life Science Holdings, LLC convertible debentures (refer to Note 12 Derivative Instruments for additional detail). The Company
recorded a gain on debt extinguishment of $131 on the consolidated statement of operations as of December 29, 2015.
On
December 29, 2015 GPB Life Science Holdings, LLC converted $1,500 of principal amount outstanding (as noted in item (iii) above).
Refer to Note 16 Stockholders’ Equity for additional detail on this transaction.
The
following table summarizes the issuances, amendments, conversions, assignments, and cash payments made related to the GPB Life
Science Holdings, LLC bridge financing notes from January 1, 2014 through December 31, 2015:
|
|
Principal Amount
|
|
|
Fair Value
|
|
|
|
of
Notes
|
|
|
of
Notes
|
|
|
|
|
|
|
|
|
December 3, 2014 - Issuance
|
|
$
|
2,500
|
|
|
$
|
2,500
|
|
December 31, 2014 - Issuance
|
|
|
1,500
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
Principal balance at December 31,
2014
|
|
|
4,000
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
May 15, 2015 - Extinguishment of the December 3, 2014 and December
31, 2014 issuances
|
|
|
(4,000
|
)
|
|
|
(4,000
|
)
|
May 15, 2015 - Amendment No. 1
|
|
|
6,000
|
|
|
|
6,020
|
|
October 26, 2015 - Conversion into shares
of the Company's common stock
|
|
|
(200
|
)
|
|
|
(200
|
)
|
November 3, 2015 - Conversion into shares
of the Company's common stock
|
|
|
(200
|
)
|
|
|
(200
|
)
|
November 13, 2015 - Extinguishment per exchange of $500 Tranche
1 to investor
|
|
|
(500
|
)
|
|
|
(505
|
)
|
November 13, 2015 - Conversion into
shares of the Company's common stock
|
|
|
(200
|
)
|
|
|
(200
|
)
|
November 25, 2015 - Conversion into
shares of the Company's common stock
|
|
|
(100
|
)
|
|
|
(100
|
)
|
November 27, 2015 - Extinguishment per exchange of $500 Tranche
2 to investor
|
|
|
(500
|
)
|
|
|
(473
|
)
|
December 11, 2015 - Extinguishment per exchange of $500 Tranche
3 to investor
|
|
|
(500
|
)
|
|
|
(537
|
)
|
December 29, 2015 - Repayment of principal in cash
|
|
|
(2,300
|
)
|
|
|
(2,305
|
)
|
December 29, 2015 - Conversion into
shares of the Company's common stock
|
|
|
(1,500
|
)
|
|
|
(1,500
|
)
|
|
|
|
|
|
|
|
|
|
Principal balance at December 31,
2015
|
|
$
|
-
|
|
|
$
|
-
|
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Smithline
Convertible Note
On
August 6, 2015, the Company issued to Richard Smithline a senior convertible note in the principal amount of $526, with interest
accruing at the rate of 12% per annum, which matures on January 11, 2017. The note is convertible into shares of the Company’s
common stock at a conversion price equal to $2.00 per share, subject to adjustment as set forth in the agreement. Refer to Note
12 Derivative Instruments for further detail on the derivative features associated with the Richard Smithline convertible note.
Principal
of $526 remained outstanding as of December 31, 2015.
JGB
(Cayman) Waltham Ltd. Senior Secured Convertible Debenture
On
December 29, 2015, the Company entered into a securities purchase agreement with JGB (Cayman) Waltham Ltd. (“JGB”)
whereby the Company issued to JGB, for gross proceeds of $7,500, a $500 original issue discount senior secured convertible debenture
in the aggregate principal amount of $7,500. The debenture has a maturity date of June 30, 2017, bears interest at 10% per annum,
and is convertible into shares of the Company’s common stock at a conversion price equal to $1.33 per share, subject to
adjustment as set forth in the debenture. The Company shall pay interest to JGB on the aggregate unconverted and then outstanding
principal amount of the debenture in arrears each calendar month and on the maturity date in cash, or, at the Company’s
option and subject to the Company satisfying certain equity conditions, in shares of the Company’s common stock. In addition,
December 29, 2016 shall be an interest payment date on which the Company shall pay to JGB a fixed amount, which shall be additional
interest under the debenture, equal to $350 in cash, shares of the Company’s common stock or a combination thereof. Commencing
on February 29, 2016, JGB shall have the right, at its option, to require the Company to redeem up to $350 of the outstanding
principal amount of the debenture per calendar month, which redemption may be made in cash or, at the Company’s option and
subject to certain satisfying equity conditions, in shares of the Company’s common stock. The debenture is guaranteed to
by the Company and certain of its subsidiaries and is secured by all assets of the Company. The total cash received by the Company
as a result of this agreement was $3,730.
The
Company used a portion of the proceeds from the debenture to pay $2,300 remaining under the Bridge Financing – GPB Life
Science Holdings, LLC senior secured convertible debt.
Principal
of $7,500 remained outstanding as of December 31, 2015.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12.
|
DERIVATIVE
INSTRUMENTS
|
The
Company evaluates and accounts for derivatives conversion options embedded in its convertible and freestanding instruments in
accordance with ASC Topic 815,
Accounting for Derivative Instruments and Hedging Activities
("ASC Topic 815").
MidMarket
Warrants
The
Company issued warrants to the lenders under the MidMarket Loan Agreement in 2012. These warrants were outstanding at December
31, 2015 and 2014.
The
terms of the warrants issued pursuant to the MidMarket Loan Agreement in 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 MidMarket 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 MidMarket
Loans. The amount of the derivative liability was computed by using the Black-Scholes option pricing model to determine the value
of the warrants issued. In accordance with ASC Topic 480, the warrants are classified as liabilities because there is a put feature
that requires the Company to repurchase any shares of common stock issued upon exercise of the warrants. The derivative liability
associated with this debt is revalued each reporting period and the increase or decrease is recorded to the consolidated statement
of operations under the caption “change in fair value of derivative instruments.” At each reporting date, the Company
performs an analysis of the fair value of the warrants using the Black-Scholes pricing model and adjusts the fair value accordingly.
On
December 31, 2015, the Company used a binomial pricing model and on December 31, 2014, the Company used the Black-Scholes pricing
method to determine the fair value of the warrants on those dates and determined the fair value was $21 and $212, respectively.
The Company recorded the change in the fair value of the derivative liability as a gain in fair value of derivative liability
for the years ended December 31, 2015 and 2014 of $191 and $3,168, respectively.
On
September 17, 2015, the third anniversary date of the warrants, the Company failed to comply with the Minimum Adjusted EBITDA
provisions set forth within the original warrant agreement. As such, the expiration date of the warrants was extended to September
17, 2017. As a result of this extension, the Company revalued the warrants and recorded a gain of $41 within loss on fair value
of derivative instruments within the Company’s statement of operations.
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 the Exchange 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. The amount of the derivative liability was computed by using the Black-Scholes pricing
model to determine the fair value of the warrants issued.
On
April 7, 2015, the Company entered into an Exchange Agreement (“31 Exchange Agreement”) with 31 Group LLC, whereby
the Company exchanged the April 15, 2014 warrants for a new warrant. Please refer to the
31 Group, LLC April 2015 Warrants
section of this footnote for further detail on the new warrant.
On
December 31, 2015, the Company used a binomial lattice pricing model and, as of December 31, 2014, the Black-Scholes pricing method,
to determine the fair value of the derivative liability relating to the April 15, 2014 warrants on that date, and determined the
fair value was nominal and $74, respectively. The Company recorded the change in the fair value of the derivative liability for
the years ended December 31, 2015 and 2014 as a gain of $41 and $342, respectively, on the consolidated statement of operations.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
fair value of the April 15, 2014 31 Group LLC warrants derivative at December 31, 2015 was calculated using a binomial lattice
pricing model and, as of December 31, 2014, the Black-Scholes option pricing model, with the following factors, assumptions and
methodologies:
|
|
Year
Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
(Revised)
|
|
|
|
|
|
|
|
|
Fair
value of Company’s common stock
|
|
$
|
1.00
|
|
|
$
|
2.92
|
|
Volatility
(closing prices of 3-4 comparable public companies, including the Company’s historical volatility)
|
|
|
80
|
%
|
|
|
80
|
%
|
Exercise
price per share
|
|
$
|
4.00
- $5.00
|
|
|
$
|
4.00
- $5.00
|
|
Estimated
life
|
|
|
1.7
years
|
|
|
|
1.7
years
|
|
Risk
free interest rate (based on 1-year treasury rate)
|
|
|
0.86
|
%
|
|
|
0.46
|
%
|
The
fair value of the April 15, 2014 Dominion Capital, LLC warrants derivative at the measurement date was calculated using the Black-Scholes
option pricing model with the following factors, assumptions and methodologies:
|
|
Year
Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
(Revised)
|
|
|
|
|
|
|
|
|
Fair
value of Company’s common stock
|
|
$
|
1.00
|
|
|
$
|
2.92
|
|
Volatility
(closing prices of 3-4 comparable public companies, including the Company’s historical volatility)
|
|
|
80
|
%
|
|
|
80
|
%
|
Exercise
price per share
|
|
$
|
7.25
|
|
|
$
|
7.25
|
|
Estimated
life
|
|
|
3.5
months
|
|
|
|
1.3
years
|
|
Risk
free interest rate (based on 1-year treasury rate)
|
|
|
0.33
|
%
|
|
|
0.46
|
%
|
Series
E Warrants
The
Company issued warrants associated with the issuance of its Series E Preferred Stock in 2012 and 2013.
The
terms of the warrants issued to the holders of Series E Preferred Stock provided that, among other things, the number of shares
of common stock issuable upon exercise of such warrants amounted to 4.99% of the Company’s fully-diluted outstanding common
shares and common share equivalents, whether the common share equivalents were fully vested and exercisable or not, and that the
exercise price of such warrants was $500 per share of common stock, subject to adjustment.
The
warrants provided for variability involving the effective amount of common share equivalents issued in future equity offerings
of equity-linked financial instruments. Additionally, the warrants did not contain an exercise contingency. Accordingly, the settlement
of the warrants would not have equaled the difference between the fair value of a fixed number of shares of the Company’s
common stock and a fixed stock price. Accordingly, such warrants were not indexed to the Company’s stock price. The Company
accounted for such variability associated with its warrants as derivative liabilities.
In
December 2013, the Company agreed with the former holders of the Company’s Series E Preferred Stock to issue a fixed number
of shares of common stock to satisfy these warrants. The Company obtained approval and agreement of such stockholders at December
31, 2013; however, the shares of common stock were not issued until January 2014, which resulted in a liability of $978, based
on a Black-Scholes calculation, as of December 31, 2013. The Company recorded a gain on the derivative liability of $78 related
to the issuance of shares in January 2014 that was recorded in the consolidated statement of operations in change in fair value
of derivative instruments.
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 was amortized over the life of the Convertible Debentures. The Company
also recorded a debt discount in the amount of $6,620, which amount was amortized over the life of the Convertible Debentures.
The Company used a Monte Carlo simulation on the date of issuance to determine the fair value of the embedded conversion feature.
The Company recorded interest expense of $421 and $3,236 related to the amortization of the debt discount for the year ended December
31, 2015 and 2014, respectively.
Due
to the conversion of $7,008 aggregate principal amount of Convertible Debentures during the first three quarters 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, with the difference recorded as a loss on extinguishment of the
two separate liabilities in the amount of $569.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On
December 31, 2014, the Company used a Monte Carlo simulation to determine the fair value of the embedded conversion feature of
the Convertible Debentures and, on that date, determined the fair value of the embedded conversion feature to be $180. The Company
recorded the change in the fair value of the derivative liability as a gain in the consolidated statements of operations of $15,063.
The
fair value of the embedded conversion feature of the Convertible Debentures at December 31, 2014 was calculated using the Monte
Carlo simulation with the following factors, assumptions and methodologies:
|
|
December 31,
2014
|
|
|
|
(Revised)
|
|
Principal
amount
|
|
$
|
2,331
|
|
Conversion
price per share
|
|
$
|
6.36
|
|
Conversion
trigger price per share
|
|
$
|
7.00
|
|
Risk
free rate
|
|
|
0.12
|
%
|
Life
of conversion feature (in years)
|
|
|
0.45
|
|
Volatility
|
|
|
55
|
%
|
During
the quarter ended March 30, 2015, the Company used a Monte Carlo simulation to determine the fair value of the embedded conversion
feature of the Convertible Debentures and determined the fair value of the embedded conversion feature to be de minimis. The Company
recorded the change in fair value of the derivative liability as a gain in the condensed consolidated statement of operations
of $180 for the year ended December 31, 2015.
During
June 2015, the Company issued shares of common stock for the required amortization payments of the Convertible Debentures. The
final amortization payment was made in shares of common stock in June 2015 which repaid the final amount due under the Convertible
Debentures. The Company then amortized the remaining debt discount and deferred loan costs of $84 related to the convertible feature
to interest expense on the consolidated statement of operations during the year ended December 31, 2015.
Forward
Investments, LLC Convertible Feature
On
February 4, 2014 and March 28, 2014, Forward Investments, LLC made convertible loans to the Company for working capital purposes
in the amounts of $1,800 and $1,200, respectively. Such loans are evidenced by convertible promissory notes that bear interest
at the rate of 2% and 10% per annum, 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, which was recorded as a derivative liability
on the consolidated balance sheet. The Company recorded a debt discount of $6,475 and a loss on debt discount of $2,385. The debt
discount is being amortized over the life of the loans. The Company used a Monte Carlo simulation on the date of issuance to determine
the fair value of the embedded conversion feature.
On
October 22, 2014, the two convertible loan agreements were modified to reduce the initial conversion price of $6.36 to $3.93.
As a result, the Company used a Monte Carlo simulation to determine the fair value on the date of modification. The fair value
of the conversion feature of the Forward Investments, LLC loan on the date of modification was $910. The Company recorded the
change in the fair value of the derivative liability as a loss on fair value of derivative instruments of $310.
On
March 4, 2015, the Company and Forward Investments, LLC restructured certain promissory notes in order to extend the maturity
dates thereof, reduce the seniority and reduce the interest rate accruing thereon (refer to Note 18, Related Parties, for further
detail). The Company accounted for this restructuring of the promissory notes as a debt modification under ASC 470-50. As part
of the modification, the Company analyzed the embedded conversion feature and recorded a loss on fair value of derivative instruments
of $2,600 on the consolidated statement of operations.
In
conjunction with the issuance of the 6.5% and 3% convertible notes issued on March 4, 2015, the Company recorded an additional
derivative liability as a debt discount in the amount of $260 and $1,970, respectively, on the date of the issuance of the notes.
The
debt discounts are being amortized over the life of the loans. The Company used a Monte Carlo simulation on the date of issuance
to determine the fair value of the embedded conversion features.
On
August 3, 2015, the Company and Forward Investments, LLC agreed to reset the conversion price of the convertible notes to $1.58
per share of the Company’s common stock. As a result, the Company used a Monte Carlo simulation to determine the fair value
of the conversion features on the date of the agreement. On the date of the transaction, the fair value of the Forward Investments
convertible notes conversion feature did not change and as such, no change in fair value of derivative instruments was recorded
on the consolidated statement of operations.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On
October 26, 2015, the ratchet-down feature within the original agreement was triggered and the conversion price of the convertible
notes was reset to $1.25 per share of the Company’s common stock. Prior to the triggering of the ratchet-down feature, the
Company revalued the derivative and recorded a gain on fair value of derivative liabilities of $120 on the consolidated statement
of operations. The Company then reduced the existing derivative liability related to the reset provision and recorded the change
of $2,310 in the derivative liability value as a loss on change in fair value of derivative instruments on the consolidated statement
of operations. On the date of the transaction, the fair value of the Forward Investments convertible notes conversion feature
was $7,640, which was the value of the derivative liability as of October 26, 2015.
On
December 29, 2015, the ratchet-down feature within the original agreement was triggered and the conversion price of the convertible
notes was reset to $0.78 per share of the Company’s common stock. Prior to the triggering of the ratchet-down feature, the
Company revalued the derivative and recorded a gain on fair value of derivative liabilities of $3,380 on the consolidated statement
of operations. The Company then reduced the existing derivative liability related to the reset provision and recorded the change
of $4,140 in the derivative liability value as a loss on change in fair value of derivative instruments on the consolidated statement
of operations. On the date of the transaction, the fair value of the Forward Investments convertible notes conversion feature
was $8,400, which was the value of the derivative liability as of December 29, 2015.
On December 31, 2015 and
2014 the fair value of the conversion feature of the Forward Investments, LLC loans was $13,534 and $800, respectively, which is
included in derivative financial instrument at estimated fair value on the consolidated balance sheets. The year-to-date change
in the fair value of the Forward Investments, LLC derivative liabilities was recorded as a loss in the consolidated statements
of operations of $10,504 and a gain in the consolidated statements of operations of $8,370 as of December 31, 2015 and 2014, respectively.
The
fair value of the Forward Investments, LLC derivative at the measurement date was calculated using the Monte Carlo simulation
with the following factors, assumptions and methodologies:
|
|
December 31,
2015
|
|
|
December 31, 2014
|
|
|
|
|
|
|
(Revised)
|
|
Principal amount
|
|
$
|
3,650
|
|
|
$
|
390
|
|
|
$
|
2,825
|
|
|
$
|
4,373
|
|
|
$
|
6,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion price per share before July 31, 2015
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
$
|
6.36
|
|
Conversion price per share after July 31, 2015
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
$
|
3.93
|
|
Conversion price per share after December 31, 2015
|
|
$
|
0.78
|
|
|
$
|
0.78
|
|
|
$
|
0.78
|
|
|
$
|
0.78
|
|
|
|
None
|
|
Conversion trigger price per share before July 31, 2015
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
$
|
7.63
|
|
Conversion trigger price per share after July 31, 2015
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
$
|
4.72
|
|
Risk free rate
|
|
|
1.93
|
%
|
|
|
1.93
|
%
|
|
|
0.49
|
%
|
|
|
1.06
|
%
|
|
|
0.12
|
%
|
Life of conversion feature (in years)
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
0.5
|
|
|
|
2.0
|
|
|
|
0.5
|
|
Volatility
|
|
|
105
|
%
|
|
|
105
|
%
|
|
|
105
|
%
|
|
|
105
|
%
|
|
|
50
|
%
|
August
6, 2015 Demand Promissory Note – Senior Convertible Note Embedded Features
On
August 6, 2015, the Company entered into a senior convertible note agreement with an investor whereby the Company issued a promissory
note in the original principal amount of $2,105, with interest accruing at the rate of 12% per annum, which matures on January
6, 2017. The Company evaluated the senior convertible note’s settlement provisions and determined that the voluntary conversion
feature and fundamental transaction clauses met the criteria to be classified as embedded derivatives as set forth in ASC 815,
Derivatives and Hedging
and ASC 480,
Distinguishing Liabilities from Equity
. On August 6, 2015, the Company used
a Monte Carlo simulation to value the settlement features and ascribed a value of $524 related to the voluntary conversion feature
and fundamental transaction clauses and recorded these items on the consolidated balance sheet as a debt discount and related
derivative liability. The debt discounts are being amortized over the life of the loan.
On
December 31, 2015, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible notes
and determined the fair value to be $339 and recorded a gain on fair value of derivative instruments of $185 on the consolidated
statement of operations for the year ended December 31, 2015.
The
fair value of the demand promissory note derivative at the measurement date was calculated using the Monte Carlo simulation with
the following factors, assumptions and methodologies:
|
|
December 31, 2015
|
|
Principal amount
|
|
$
|
2,105
|
|
|
|
|
|
|
Conversion price per share
|
|
$
|
1.25
|
|
Conversion trigger price per share
|
|
|
None
|
|
Risk free rate
|
|
|
0.69
|
%
|
Life of conversion feature (in years)
|
|
|
1.10
|
|
Volatility
|
|
|
105
|
%
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
November
12, 2015 Demand Promissory Note – Senior Convertible Note Embedded Features
On
November 12, 2015, the Company entered into a securities purchase agreement with an investor whereby the Company issued a senior
convertible note, for cash proceeds of $500, in the original principal amount of $525. The Company evaluated the senior convertible
note’s settlement provisions and determined that the voluntary conversion feature and fundamental transaction clauses met
the criteria to be classified as embedded derivatives as set forth in ASC 815,
Derivatives and Hedging
and ASC 480,
Distinguishing
Liabilities from Equity
. On November 12, 2015, the Company used a Monte Carlo simulation to value the settlement features
and ascribed a value of $149 related to the voluntary conversion feature and fundamental transaction clauses and recorded these
items on the unaudited condensed consolidated balance sheets as a debt discount and related derivative liability. The debt discounts
are being amortized over the life of the loan.
On December 31, 2015, the
Company used a Monte Carlo simulation to value the settlement features of the senior convertible notes and determined the fair
value to be $155 and recorded a loss on fair value of derivative instruments of $6 on the consolidated statement of operations
for the year ended December 31, 2015.
The
fair value of the demand promissory note derivative at the measurement date was calculated using the Monte Carlo simulation with
the following factors, assumptions and methodologies:
|
|
December 31, 2015
|
|
Principal amount
|
|
$
|
525
|
|
|
|
|
|
|
Conversion price per share
|
|
$
|
1.75
|
|
Conversion trigger price per share
|
|
|
None
|
|
Risk free rate
|
|
|
0.61
|
%
|
Life of conversion feature (in years)
|
|
|
0.87
|
|
Volatility
|
|
|
105
|
%
|
November
12, 2015 Exchange Agreement Tranches – Senior Convertible Note Embedded Features
On
November 12, 2015, the Company entered into an exchange agreement with an investor whereby the Company exchanged a portion of
the senior secured note originally issued by the Company to GPB Life Science Holdings, LLC on December 3, 2014 and subsequently
assigned to the investor, for new senior convertible notes issued in three tranches of $500 for a total principal amount of $1,500.
The notes have a term of one year, bear interest at 12% per annum, and are convertible into shares of the Company’s common
stock at a conversion price equal to $1.25 per share, subject to adjustment as set forth in the notes.
On
November 13, 2015, the Company issued to the investor the first tranche of senior secured notes in the principal amount of $500.
The Company evaluated the senior convertible note’s settlement provisions and determined that the voluntary conversion feature
and fundamental transaction clauses met the criteria to be classified as embedded derivatives as set forth in ASC 815,
Derivatives
and Hedging
and ASC 480,
Distinguishing Liabilities from Equity
. On November 13, 2015, the Company used a Monte Carlo
simulation to value the settlement features and ascribed a value of $164 related to the voluntary conversion feature and fundamental
transaction clauses and recorded these items on the unaudited condensed consolidated balance sheets as a debt discount and related
derivative liability. The debt discounts are being amortized over the life of the loan.
On
November 27, 2015, the Company issued to the investor the second tranche of senior secured notes in the principal amount of $500.
The Company evaluated the senior convertible note’s settlement provisions and determined that the voluntary conversion feature
and fundamental transaction clauses met the criteria to be classified as embedded derivatives as set forth in ASC 815,
Derivatives
and Hedging
and ASC 480,
Distinguishing Liabilities from Equity
. On November 27, 2015, the Company used a Monte Carlo
simulation to value the settlement features and ascribed a value of $205 related to the voluntary conversion feature and fundamental
transaction clauses and recorded these items on the unaudited condensed consolidated balance sheets as a debt discount and related
derivative liability. The debt discounts are being amortized over the life of the loan.
On
December 11, 2015, the Company issued to the investor the third tranche of senior secured notes in the principal amount of $500.
The Company evaluated the senior convertible note’s settlement provisions and determined that the voluntary conversion feature
and fundamental transaction clauses met the criteria to be classified as embedded derivatives as set forth in ASC 815,
Derivatives
and Hedging
and ASC 480,
Distinguishing Liabilities from Equity
. On December 11, 2015, the Company used a Monte Carlo
simulation to value the settlement features and ascribed a value of $109 related to the voluntary conversion feature and fundamental
transaction clauses and recorded these items on the unaudited condensed consolidated balance sheets as a debt discount and related
derivative liability. The debt discounts are being amortized over the life of the loan.
On December 31, 2015, the
Company used a Monte Carlo simulation to value the settlement features of the three tranches of senior convertible notes and determined
the fair value to be $57 related to tranche one, $78 related to tranche two, and $118 related to tranche three. The Company recorded
gains on fair value of derivative instruments of $107 related to tranche one and $127 related to tranche two, and a loss on fair
value of derivative instruments of $9 related to tranche three on the consolidated statement of operations for the year ended December
31, 2015.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
|
|
December 31, 2015
|
|
Principal amount
|
|
$
|
250
|
|
|
$
|
333
|
|
|
$
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
$
|
1.25
|
|
|
$
|
1.25
|
|
|
$
|
1.25
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Risk free rate
|
|
|
0.14
|
%
|
|
|
0.14
|
%
|
|
|
0.15
|
%
|
Life of conversion feature (in years)
|
|
|
0.08
|
|
|
|
0.12
|
|
|
|
0.16
|
|
Volatility
|
|
|
105
|
%
|
|
|
105
|
%
|
|
|
105
|
%
|
31
Group Promissory Note Warrants
On
July 1, 2014, the Company issued 58,870 warrants associated with its issuance to 31 Group LLC of convertible promissory notes.
Upon issuance, the Company recorded a derivative liability and a related debt discount in the amount of $184. The debt discount
was being amortized over the original life of the convertible promissory notes and was completely amortized as a result of the
payoff of the 31 Group debt. On December 31, 2014, the Company used the Black-Scholes option pricing model to determine the fair
value of the warrants and derived an implied fair value of $43, which is included in derivative financial instruments at estimated
fair value on the consolidated balance sheets. The Company recorded the change in the fair value of the derivative liability as
a gain in the consolidated statements of operations of $141.
The
fair value of the 31 Group Promissory Note warrant derivative at the measurement date was calculated using the Black-Scholes option
pricing model with the following factors, assumptions and methodologies:
|
|
Year
Ended December 31,
|
|
|
|
2014
|
|
|
|
(Revised)
|
|
|
|
|
|
Fair
value of Company’s common stock
|
|
$
|
2.92
|
|
Volatility
(closing prices of 3-4 comparable public companies, including the Company’s historical volatility)
|
|
|
80
|
%
|
Exercise
price per share
|
|
$
|
7.25
|
|
Estimated
life
|
|
|
2.5
years
|
|
Risk
free interest rate (based on 1-year treasury rate)
|
|
|
0.89
|
%
|
On
April 7, 2015, the Company entered into an Exchange Agreement with 31 Group LLC, whereby the Company exchanged the July 1, 2014
warrants for a new warrant. Please refer to the
31 Group, LLC April 2015 Warrants
section of this footnote for further
detail on the new warrant.
31
Group, LLC October Warrants
Pursuant
to the securities purchase agreement entered into with 31 Group LLC dated October 8, 2014, the Company issued a warrant, exercisable
for up to 300,000 shares of common stock at an exercise price of $5.00 per share. The warrant expires on the date that is the
earlier of (i) the later of (x) the fifteenth (15
th
) Trading Day after the date a registration statement registering
all of the shares of the Company’s common stock underlying the warrants is declared effective by the SEC and (y) December
31, 2014, and (ii) such earlier date as set forth in a written agreement of the Company and 31 Group LLC; provided, that any such
date shall be extended as set forth in the warrant. On October 8, 2014, when the warrant was issued, the Company recorded a derivative
liability in the amount of $90. The amount of the derivative liability was computed by using the Black-Scholes pricing model 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 $18, which is included in derivative financial instruments
at estimated fair value on the consolidated balance sheets. The Company recorded the change in the fair value of the derivative
liability as a gain in the consolidated statements of operations of $71.
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:
|
|
Year
Ended December 31,
|
|
|
|
2014
|
|
|
|
(Revised)
|
|
|
|
|
|
Fair
value of Company’s common stock
|
|
$
|
2.92
|
|
Volatility
(closing prices of 3-4 comparable public companies, including the Company’s historical volatility)
|
|
|
80
|
%
|
Exercise
price per share
|
|
$
|
5.00
|
|
Estimated
life
|
|
|
3
months
|
|
Risk
free interest rate (based on 1-year treasury rate)
|
|
|
0.04
|
%
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On
April 7, 2015, the Company entered into an Exchange Agreement with 31 Group LLC, whereby the Company exchanged the warrant previously
issued to 31 Group LLC on October 8, 2014 for 1,146,977 shares of the Company’s common stock issued at $1.66 per share.
The Company recorded the issuance of shares as a loss on exchange of shares of $1,904 on the consolidated statement of operations
as of the transaction date. Please refer to the
31 Group, LLC April 2015 Warrants
section of this footnote for further
detail on the exchange agreement.
31
Group, LLC April 2015 Warrants
In
April 2015, the Company exchanged two warrants previously issued to 31 Group LLC on April 15, 2014 and July 1, 2014 for two new
warrants, each of which is identical to the previous warrants issued, except that the exercise price of such new warrants is $5.00
per share, subject to the adjustments noted within the 31 Exchange Agreement. Pursuant to the 31 Exchange Agreement, on July 1,
2015, the Company was obligated to pay 31 Group LLC a cash make-whole amount equal to the greater of (a) zero (0) and (b) the
difference of (i) $5,175 less (ii) the product of (x) the Exchange Share Amount (as defined in the 31 Exchange Agreement) and
(y) the quotient of (A) the sum of each of the 30 lowest daily volume weighted average prices of the Company’s common stock
during the period commencing on, and including, April 8, 2015 and ending on, and including, June 30, 2015, divided by (B) 30.
As part of the 31 Exchange Agreement, the registration rights agreement previously entered into between the Company and 31 Group
LLC in October 2014 was terminated.
On
April 7, 2015, the Company used the Black-Scholes pricing method, which is not materially different from a binomial lattice valuation
methodology, to determine the fair value of the derivative liability of the warrants on those dates, and determined the fair value
was $15 and $11, respectively.
On
May 14, 2015, the Company and 31 Group, LLC entered into an amended agreement whereby the Company issued 100,000 shares of unregistered
common stock of the Company to 31 Group, LLC in exchange for the termination of any obligation of the Company to pay the make-whole
payment, as described in the 31 Group Exchange Agreement. The Company recorded a loss on exchange of shares of $353 in the consolidated
statement of operations during the year ended December 31, 2015.
On
December 31, 2015, the Company used a binomial lattice pricing model to determine the fair value of the warrants and derived an
implied fair value of zero and $2, respectively, which is included in derivative financial instruments at estimated fair value
on the consolidated balance sheets. The Company recorded the change in the fair value of the derivative liability for the year
ended December 31, 2015 as a gain in the consolidated statements of operations of $48 and $31, respectively.
The
fair value of the 31 Group, LLC April 2015 exchange agreement warrants derivative as of December 31, 2015 was calculated using
a binomial lattice pricing model and, as of December 31, 2014, the Black-Scholes option pricing model with the following factors,
assumptions and methodologies:
|
|
Year
Ended
December 31, 2015
|
|
|
|
April
15,
2014
|
|
|
July
1,
2014
|
|
|
|
Warrant
|
|
|
Warrant
|
|
Fair
value of Company’s common stock
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
Volatility
(closing prices of 3-4 comparable public companies, including the Company’s historical volatility)
|
|
|
80
|
%
|
|
|
80
|
%
|
Exercise
price per share
|
|
$
|
5.00
|
|
|
$
|
5.00
|
|
Estimated
life
|
|
|
3.5
months
|
|
|
|
1.5
years
|
|
Risk
free interest rate (based on 1-year treasury rate)
|
|
|
0.33
|
%
|
|
|
0.86
|
%
|
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 “GPB-1
warrant”). The GPB-1 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 GPB-1 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 GPB-1 warrants and derived an implied
fair value of $340, which is included in derivative financial instruments at estimated fair value on the consolidated balance
sheets. The Company recorded the change in the fair value of the derivative liability as a gain consolidated statements of operations
of $81.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 “GPB-2
warrant”). The GPB-2 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 GPB-2 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 GPB-2 warrants issued. On December
31, 2014, the Company used the Black-Scholes option pricing method to determine the fair value of the GPB-2 warrants and derived
an implied fair value of $206, which is included in derivative financial instruments at estimated fair value on the consolidated
balance sheets. The Company recorded the change in the fair value of the derivative liability as a gain in the consolidated statements
of operations of $9.
The
fair value of the GPB Life Science Holdings LLC warrants derivative at the measurement date was calculated using the Black-Scholes
option pricing model with the following factors, assumptions and methodologies:
|
|
Year
Ended
December 31, 2014
|
|
Instrument
|
|
December
3, 2014
Warrant
|
|
|
December 24,
2014
Warrant
|
|
Fair
value of Company’s common stock
|
|
$
|
2.92
|
|
|
$
|
2.92
|
|
Volatility
(closing prices of 3-4 comparable public companies, including the Company’s historical volatility)
|
|
|
80
|
%
|
|
|
80
|
%
|
Exercise
price per share
|
|
$
|
5.00
|
|
|
$
|
5.00
|
|
Estimated
life
|
|
|
3.9
years
|
|
|
|
4.0
years
|
|
Risk
free interest rate (based on 1-year treasury rate)
|
|
|
1.38
|
%
|
|
|
1.38
|
%
|
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 consolidated balance sheet.
On
May 15, 2015, the Company entered into Amendment No. 1 to the bridge financing agreement with GPB Life Science Holdings LLC. Pursuant
to such amendment, the Company issued to the investor a new four-year warrant (the “GPB-3 warrant”), exercisable for
up to 200,000 shares of the Company’s common stock, with an exercise price of $3.75 per share, subject to adjustment as
set forth in such amendment; and a new four-year warrant (the “GPB-4 warrant”), exercisable for up to 50,000 shares
of the Company’s common stock, with an exercise price of $3.93 per share, subject to adjustment as set forth in such amendment,
and amended the exercise price of the prior warrants to $3.75 per share (as discussed in the next paragraph), subject to adjustment
as set forth in such amendment. The Company evaluated the GPB-3 warrants and GPB-4 warrants issued in connection with such amendment
and recorded the amount as a loss on debt extinguishment of $504 on the consolidated statement of operations as of May 15, 2015.
The Company evaluated the warrants and determined that the warrants could be classified as a component of stockholders’
equity and as such, recorded the warrants within the common stock warrants line-item on the consolidated balance sheet as of May
15, 2015.
On
May 15, 2015, the Company amended the GPB-1 warrants and GPB-2 warrants to reduce the exercise price from $5.00 per share to $3.75
per share of the Company’s common stock and to increase the term from 180 days to four years from the original issuance
date of the warrants. Prior to such amendment, the Company utilized a Black-Scholes pricing model, which approximates a binomial
lattice valuation methodology, to revalue the warrants to the then-current fair value and recorded a gain on debt extinguishment
of $546 within the consolidated statement of operations on May 15, 2015. In connection with such amendment, the Company revalued
the two existing warrants to reflect the new $3.75 exercise price and recorded a related loss on debt extinguishment of $771 on
the consolidated statement of operations on May 15, 2015.
On September 14, 2015, the
Company and GPB Life Science Holdings LLC agreed to revise Amendment No. 2 to the bridge financing agreement, which was originally
entered into by the Company on August 12, 2015, as described in Note 11 Term Loans, to amend and restate the prior notes and the
new note to reduce the conversion price of the prior note and the new note from $3.75 per share of the Company’s common stock
to $2.00 per share, amend and restate the GPB-1 warrants, GPB-2 warrants, and GPB-3 warrants to reduce the exercise price of the
warrants from $3.75 per warrant share to $2.00 per warrant share, increase the number of amortization payment dates and decrease
the amortization payment, and to permit the Company to make amortization payments in shares converted from any of the prior notes
or the new note. The conversion price for the conversion shares used to make an amortization payment shall be the lesser of $2.00
per share of the Company’s common stock or 75% of the average volume weighted average price for the five consecutive trading
days ending on, and including, the trading day immediately preceding the date of the amortization payment. As part of Amendment
No. 2, the GPB-4 warrants were cancelled.
In
connection with such amendment, the Company revalued the GPB-1 warrants, GPB-2 warrants and GPB-3 warrants using a binomial lattice
model and determined the fair value to be $616. The Company recorded a related gain on modification of warrants of $660 on the
consolidated statement of operations on September 14, 2015.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On December 29, 2015, the
Company entered into a conversion agreement with GPB Life Science Holdings, LLC pursuant to which, among other things, the Company
agreed to reduce the exercise price of the GPB-1 warrants, GPB-2 warrants and GPB-3 warrants from $2.00 per share to $1.75 per
share (refer to the
Bridge Financing - GPB Life Science Holdings, LLC
section of Note 11, Term Loans for additional information).
Prior to the conversion agreement, the Company utilized a binomial lattice valuation methodology to revalue the warrants to the
then-current fair value and recorded a loss on debt extinguishment of $358 within the consolidated statement of operations on December
29, 2015.
On
December 29, 2015, the Company entered into an agreement with the JGB (Cayman) Waltham Ltd. whereby the Company issued to JGB
(Cayman) Waltham Ltd. a senior secured convertible debenture (as noted in Note 11 Term Loans) and, among other things, a portion
of the JGB (Cayman) Waltham Ltd. proceeds were used to repay the GPB Life Science Holdings, LLC bridge notes. On this date, the
Company evaluated the payoff of the GPB Life Science Holdings, LLC bridge notes and determined that the repayment of the bridge
notes qualified for debt extinguishment accounting under ASC-470-50,
Debt – Modifications and Extinguishments
(“ASC-470-50”).
In accordance with ASC-470-50, the Company evaluated the GPB-1 warrants, GPB-2 warrants and GPB-3 warrants and revalued the warrants
at the $1.75 conversion price and determined that the fair value of the warrants was $258, which is included in common stock warrants
within the stockholders’ equity section on the consolidated balance sheet.
Bridge
Financing Amendment No. 2 Feature
On
September 14, 2015, as noted in Note 11, Term Loans, the Company evaluated Amendment No. 2 to the bridge financing agreement and
determined that the embedded maturity date feature met the classification of an embedded derivative instrument. The Company used
a Monte Carlo simulation on the date of issuance to record the fair value of the maturity date feature and ascribed a value of
$75, which was recorded as a debt discount and related derivative liability on the consolidated balance sheet.
On
December 29, 2015, the Company entered into an agreement with the JGB (Cayman) Waltham Ltd. whereby the Company issued to JGB
(Cayman) Waltham Ltd. a senior secured convertible debenture (as noted in Note 11 Term Loans) and, among other things, a portion
of the JGB (Cayman) Waltham Ltd. proceeds were used to repay the GPB Life Science Holdings, LLC bridge notes. On this date, the
Company evaluated the payoff of the GPB Life Science Holdings, LLC bridge notes and determined that the repayment of the bridge
notes qualified for debt extinguishment accounting under ASC-470-50,
Debt – Modifications and Extinguishments
(“ASC-470-50”).
In accordance with ASC-470-50, the Company evaluated the maturity date feature prior to the payoff transaction and determined
that the feature had a fair value of $31, which the Company recorded the change in fair value of $44 as a gain on change in fair
value of derivative instruments on the consolidated statement of operations. In conjunction with the payoff, the Company re-evaluated
the maturity date feature and determined that the derivative was extinguished along with the related bridge financing debt. As
such, the Company recorded a gain of $31 within loss on extinguishment of debt on the consolidated statement of operations as
of December 29, 2015.
Smithline
Convertible Note
On
August 6, 2015, the Company issued to Richard Smithline a senior convertible note in the principal amount of $526, with interest
accruing at the rate of 12% per annum, which matures on January 11, 2017. The Company evaluated the senior convertible note’s
settlement provisions and determined that the voluntary conversion feature and fundamental transaction clauses met the criteria
to be classified as embedded derivatives as set forth in ASC 815,
Derivatives and Hedging
and ASC 480,
Distinguishing
Liabilities from Equity
. On August 6, 2015, the Company used a Monte Carlo simulation to value the settlement features and
ascribed a value of $131 related to the voluntary conversion feature and fundamental transaction clauses and recorded these items
on the consolidated balance sheets as a debt discount and related derivative liability. The debt discounts are being amortized
over the life of the loan.
On
December 31, 2015, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible notes
and determined the fair value to be $85 and recorded a gain on fair value of derivative instruments of $46 on the consolidated
statement of operations for the year ended December 31, 2015.
The
fair value of the Richard Smithline derivative at the measurement date was calculated using the Monte Carlo simulation with the
following factors, assumptions and methodologies:
|
|
December 31, 2015
|
|
Principal amount
|
|
$
|
526
|
|
|
|
|
|
|
Conversion price per share
|
|
$
|
1.25
|
|
Conversion trigger price per share
|
|
|
None
|
|
Risk free rate
|
|
|
0.69
|
%
|
Life of conversion feature (in years)
|
|
|
1.10
|
|
Volatility
|
|
|
105
|
%
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JGB
(Cayman) Waltham Ltd. Senior Secured Convertible Debenture Features
On
December 29, 2015, the Company entered into a securities purchase agreement with JGB (Cayman) Waltham Ltd. whereby the Company
issued to JGB, for gross proceeds of $7,500, a 10% original issue discount senior secured convertible debenture in the aggregate
principal amount of $7,500. The debenture has a maturity date of June 30, 2017, bears interest at 10% per annum, and is convertible
into shares of the Company’s common stock at a conversion price equal to $1.33 per share, subject to adjustment as set forth
in the debenture. The Company evaluated the senior convertible note’s settlement provisions and determined that the voluntary
conversion feature and fundamental transaction clauses met the criteria to be classified as embedded derivatives as set forth
in ASC 815,
Derivatives and Hedging
and ASC 480,
Distinguishing Liabilities from Equity
. On December 29, 2015, the
Company used a Monte Carlo simulation to value the settlement features and ascribed a value of $3,219 related to the voluntary
conversion feature and fundamental transaction clauses and recorded these items on the consolidated balance sheets as a debt discount
and related derivative liability. The debt discounts are being amortized over the life of the loan.
On
December 31, 2015, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible notes
and determined the fair value to be $3,150 and recorded a gain on fair value of derivative instruments of $69 on the consolidated
statement of operations for the year ended December 31, 2015.
The
fair value of the JGB (Cayman) Waltham Ltd. derivative at the measurement date was calculated using the Monte Carlo simulation
with the following factors, assumptions and methodologies:
|
|
December 31, 2015
|
|
Principal amount
|
|
$
|
7,500
|
|
|
|
|
|
|
Conversion price per share
|
|
$
|
1.33
|
|
Conversion trigger price per share
|
|
$
|
4.00
|
|
Risk free rate
|
|
|
0.86
|
%
|
Life of conversion feature (in years)
|
|
|
1.50
|
|
Volatility
|
|
|
105
|
%
|
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 on 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 on 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 consolidated balance sheet.
Net
Settlement of Accounts Payable
On
March 25, 2015, the Company issued 300,000 shares of common stock and a warrant to purchase 80,000 shares of common stock to a
third-party vendor to settle various accounts payable. The shares of common stock were issued with a restrictive legend and as
such, the amount of the accounts payable to be paid with the common stock has not yet been determined. The amount of accounts
payable to be paid will be determined at the time the service provider sells the restricted common stock. The Company recorded
the common stock at a fair value of $648 and the warrant with a fair value of $106, which would reduce the accounts payable to
the third party in the amount of $1,475. The Company recorded a derivative liability of $721 at the time the shares were issued.
The Company used a Black-Scholes pricing model to determine the fair value of the warrant on the date it was issued.
On
April 1, 2015, the Company cancelled the warrants to purchase 80,000 shares of common stock issued to the third party and the
third party returned the 300,000 shares of common stock previously issued on March 25, 2015 to treasury stock. The Company then
issued a new one-year warrant for 425,000 shares of common stock with an exercise price of $0.55 per share. The Company recorded
the warrant with a fair value of $674, which reduced the accounts payable to the third party in the amount of $1,417. The Company
recorded a derivative liability of $743 at the time the warrants were issued. The derivative liability relates to the difference
between the accounts payable due to the third party and the fair value of the warrants on April 1, 2015. The Company used a Black-Scholes
pricing model, which is not materially different from a binomial lattice valuation methodology, to determine the fair value of
the warrant on the date it was issued.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Beginning
on October 9, 2015 and continuing through November 12, 2015, the third-party began exercising the warrants to purchase shares
of the Company’s common stock. During this time, the third-party exercised all of the 425,000 warrants issued on April 1,
2015 to purchase 287,001 shares of the Company’s common stock. The third-party applied the proceeds from the warrant exercise
to reduce outstanding accounts payable of $452. The Company recorded a reduction in accounts payable of $452, a reduction in the
derivative balance of $743, and recorded a loss on fair value of derivative of $30. As of November 12, 2015, there are no remaining
warrants issued for settlement of accounts payable or any related derivative liabilities.
The
Company’s pre-tax loss consists of the following:
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
(Revised)
|
|
Domestic
|
|
$
|
(53,657
|
)
|
|
$
|
(22,116
|
)
|
Foreign
|
|
|
(87
|
)
|
|
|
958
|
|
Pre-tax Loss
|
|
$
|
(53,744
|
)
|
|
$
|
(21,158
|
)
|
The
benefit from income taxes for the years ended December 31, 2015 and 2014 was as follows:
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
(Revised)
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
99
|
|
|
|
51
|
|
Foreign
|
|
|
103
|
|
|
|
473
|
|
Total current
|
|
$
|
202
|
|
|
$
|
524
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,348
|
)
|
|
$
|
(3,425
|
)
|
State
|
|
|
(199
|
)
|
|
|
(396
|
)
|
Total deferred
|
|
|
(1,547
|
)
|
|
|
(3,821
|
)
|
Total benefit from income taxes
|
|
$
|
(1,345
|
)
|
|
$
|
(3,297
|
)
|
The
Company’s income taxes were calculated on the basis of $198 of foreign net income.
The
Company’s effective tax rate for the years ended December 31, 2015 and 2014 differed from the U.S. federal statutory rate
as follows:
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
(Revised)
|
|
|
|
|
%
|
|
|
|
%
|
|
Federal tax benefit at statutory rate
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
Permanent differences
|
|
|
14.9
|
|
|
|
(29.6
|
)
|
State tax benefit, net of Federal benefits
|
|
|
(1.9
|
)
|
|
|
(6.7
|
)
|
Other
|
|
|
1.1
|
|
|
|
(1.6
|
)
|
Effect of foreign income taxed in rates other than the U.S. Federal statutory rate
|
|
|
0.2
|
|
|
|
2.2
|
|
Net change in valuation allowance
|
|
|
17.4
|
|
|
|
56.3
|
|
Foreign tax credits
|
|
|
(0.2
|
)
|
|
|
(2.2
|
)
|
Benefit
|
|
|
(2.5
|
)
|
|
|
(15.6
|
)
|
The
Company has not provided for United States federal income and foreign withholding taxes on any undistributed earnings from non-United
States operations because such earnings are intended to be reinvested indefinitely outside of the United States. If these earnings
were distributed, foreign tax credits may become available under current law to reduce or eliminate the resulting United States
income tax liability. As of December 31, 2015, there is $599 in cumulative foreign earnings upon which United States income taxes
have not been provided.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
tax effects of temporary differences and carryforwards that gave rise to significant portions of the deferred tax assets and liabilities
were as follows:
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
(Revised)
|
|
Net operating loss carry forwards
|
|
$
|
24,558
|
|
|
|
16,344
|
|
Depreciation
|
|
|
120
|
|
|
|
57
|
|
Accruals and reserves
|
|
|
572
|
|
|
|
465
|
|
Credits
|
|
|
690
|
|
|
|
791
|
|
Stock-based compensation
|
|
|
1,935
|
|
|
|
656
|
|
Total assets
|
|
|
27,875
|
|
|
|
18,313
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
-
|
|
|
|
-
|
|
Section 481 adjustment
|
|
|
-
|
|
|
|
(449
|
)
|
Intangible assets
|
|
|
(3,459
|
)
|
|
|
(4,473
|
)
|
Total liabilities
|
|
|
(3,459
|
)
|
|
|
(4,922
|
)
|
Less: Valuation allowance
|
|
|
(25,325
|
)
|
|
|
(15,974
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(909
|
)
|
|
$
|
(2,583
|
)
|
As of December 31, 2015
and 2014, the Company had federal net operating loss carryforwards (“NOL’s”) of approximately $64,489 and $43,980,
respectively, and state NOL’s of approximately $60,617 and $32,250, respectively, that will be available to reduce future
taxable income, if any. These NOL’s begin to expire in 2025. In addition, as of December 31, 2015 and 2014, the Company
had federal tax credit carryforwards of $690 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. Following its Initial Public Offering (IPO), the Company conducted an analysis of whether an ownership
change had occurred. As disclosed the Company has taken these limitations into account in determining its available NOL’s.
The
Company has not completed a study to assess whether another ownership change has occurred or whether there have been multiple
ownership changes since the Company’s IPO. The Company has and will continue to evaluate alternative analyses permitted
under Section 382 and IRS notices to determine whether or not any ownership changes have occurred and may occur (and if so, when
they occurred) that would result in limitations on its net operating losses (“NOLs”) or certain other tax attributes.
The
Company performs an analysis each year to determine whether the expected future income will more likely than not be sufficient
to realize the deferred tax assets. The Company's recent operating results and projections of future income weighed heavily in
the Company's overall assessment. Prior to 2012, there were no provisions (or benefits) for income taxes because the Company had
sustained cumulative losses since the commencement of operations.
During
2014, in conjunction with the accounting associated with the acquisitions as described in Note 5, Acquisitions and Disposals of
Subsidiaries, the Company recorded a net deferred tax liability related to the book and tax basis difference of the underlying
assets acquired. The net deferred tax liability served as reversible temporary differences that would give rise to future taxable
income and, accordingly, would serve as a source of income that permits the recognition of certain existing deferred tax assets
of the Company. During the fourth quarter of 2014, management determined that it is more likely than not that a portion of its
valuation allowance was no longer required due to the deferred tax liabilities recorded resulting from these acquisitions. As
a result of the release of the valuation allowance, the Company recorded a tax benefit of $3,693 in the consolidated statement
of operations for the year ended December 31, 2014 offset by certain current taxes of $524, resulting in a net tax benefit of
$3,169.
During
the first quarter of 2015, in conjunction with the accounting associated with the acquisition of IPC, as described in Note 5,
Acquisitions and Disposals of Subsidiaries, the Company recorded a net deferred tax liability related to the book and tax basis
difference of the intangibles acquired. The net deferred tax liability served as reversible temporary difference that will give
rise to future taxable income and, accordingly, would serve as a source of income that permits the recognition of certain existing
deferred tax assets of the Company. During the first quarter of 2015, management determined that it is more likely than not that
a portion of its valuation allowance was no longer required due to the deferred tax liabilities recorded resulting from these
acquisitions. As a result of the release of the valuation allowance, the Company recorded a tax benefit of $1,560 in the consolidated
statement of operations for the year ended December 31, 2015 offset by certain current taxes and deferred taxes of $215, resulting
in a net tax benefit of $1,345.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
During 2012, the Company
acquired ownership of three entities that had historically used the cash method of accounting for tax purposes. Section 446 of
the Internal Revenue Code of 1986, as amended, requires that the Company prepare its tax returns using the accrual method of accounting.
As a result of this change from cash to accrual accounting for income tax purposes, the Company recognized $4,772 of income from
2012 through 2015. No further income recognition is required. During 2012 and 2013, the Company acquired 100% of a Puerto Rican
limited liability company, thereby subjecting the Company to Puerto Rico income taxes on any Puerto Rico-sourced taxable income.
Such taxes paid are considered foreign taxes that may be credited against federal income taxes payable in future years.
The
Company applies the standard relating to accounting (ASC 740-10) for uncertainty in income taxes, which prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. The Company is required to recognize in the financial statements the impact of a tax position, if
that position is more likely than not of being sustained on audit, based on the technical merits of the position. There were no
significant unrecognized tax benefits recorded as of December 31, 2015, and there was no change to the unrecognized tax benefits
during 2015 and 2014.
The
Company does not have any tax positions for which it is reasonably possible the total amount of gross unrecognized tax benefits
will increase or decrease through December 31, 2016. The unrecognized tax benefits may increase or change during the next year
for items that arise in the ordinary course of business.
The
Company’s continuing practice is to recognize interest and/or penalties related to income tax matters as a component of
income tax expense. As of December 31, 2015 and 2014, there was no accrued interest and penalties related to uncertain tax positions.
The Company is subject to
U.S. federal income taxes and to income taxes in various states in the United States. Tax regulations within each jurisdiction
are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. Due to the
Company's net operating loss carryforwards, all years remain open to examination by the major domestic taxing jurisdictions to
which the Company is subject. In addition, all of the net operating loss and credit carryforwards that may be used in future years
are still subject to adjustment. The Company’s 2013 U.S. corporation income tax return is currently under examination. The
Internal Revenue Service has questioned the Company’s classification of certain individuals as independent contractors rather
than employees, and the year of income tax reporting of restricted stock issuances. The Company estimates its potential liability
to be $500 but the liability, if any, upon final disposition of these matters is uncertain.
14.
|
CONCENTRATIONS
OF CREDIT RISK
|
Financial
instruments that potentially subject the Company to concentration of credit risk consist of cash in financial institutions. The
Company maintains deposits in federally-insured financial institutions. Cash held with financial institutions may exceed the amount
of insurance provided on such deposits; however, management believes the Company is not exposed to significant credit risk due
to the financial position of the financial institutions in which those deposits are held.
The
Company grants credit under normal payment terms, generally without collateral, to its customers. These customers primarily consist
of telephone companies, cable television multiple system operators and electric and gas utilities. With respect to a portion of
the services provided to these customers, the Company has certain statutory lien rights that may in certain circumstances enhance
the Company’s collection efforts. Adverse changes in overall business and economic factors may impact the Company’s
customers and increase credit risks. These risks may be heightened as a result of the current economic developments and market
volatility. In the past, some of the Company’s customers have experienced significant financial difficulties and likewise,
some may experience financial difficulties in the future. These difficulties expose the Company to increased risks related to
the collectability of amounts due for services performed. The Company believes that none of its significant customers were experiencing
financial difficulties that would impact the collectability of the Company’s trade accounts receivable as of December 31,
2015 and 2014.
As
of, and for the years ended, December 31, 2015 and 2014, concentrations of significant customers within the professional services
segment were as follows:
2015
|
|
Accounts
Receivable
|
|
|
Revenues
|
|
Ericsson,
Inc.
|
|
|
9
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
2014
|
|
Accounts
Receivable
|
|
|
Revenues
|
|
Ericsson,
Inc.
|
|
|
7
|
%
|
|
|
17
|
%
|
Geographic
Concentration Risk
Substantially
all of the Company’s customers are located within the United States and Puerto Rico.
15.
|
COMMITMENTS
AND CONTINGENCIES
|
The
Company leases certain of its properties under leases that expire on various dates through 2019. Some of these agreements include
escalation clauses and provide for renewal options ranging from one to five years.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Rent
expense incurred under the Company’s operating leases amounted to $997 and $771 during the years ended December 31, 2015
and 2014, respectively.
The
future minimum obligation during each year through 2020 under the leases with non-cancelable terms in excess of one year is as
follows:
Years
Ending December 31,
|
|
Future
Minimum Lease Payments
|
|
|
|
|
|
2016
|
|
$
|
278
|
|
2017
|
|
|
180
|
|
2018
|
|
|
122
|
|
2019
|
|
|
116
|
|
2020
|
|
|
57
|
|
Total
|
|
$
|
753
|
|
Common
Stock:
Public
Offering
On
November 5, 2013, the Company completed an offering of its common stock in which the Company sold 1,250,000 shares of common stock
at a price of $4.00 per share. In connection with the offering, 625,000 warrants to purchase 625,000 shares of common stock were
also sold at $0.01 per warrant. The net proceeds to the Company from the offering after underwriting discounts and expenses was
$4,550. Of the 625,000 warrants sold, 111,095 were exercised as of December 31, 2015.
Basis
for determining fair value of shares issued
The
Company determines the value at which to record common stock issued in connection with acquisitions, debt conversions and settlements,
loan modifications and employee and non-employee compensation arrangements, using the market price of the common stock on the
date of issuance.
Issuance
of shares of common stock to third parties for services and non-employees
During
February 2014, the Company issued 7,500 shares of its common stock to a consultant in exchange for consulting services relating
to corporate matters. The shares were valued at fair value at $13.41 per share and were immediately vested. The Company recorded
$101 to salaries and wages expense.
During
March 2014, the Company issued 69,458 shares of its common stock to a consultant in exchange for consulting services relating
to corporate matters. The shares were valued at fair value at $11.87 per share and were immediately vested. The Company recorded
$82 to salaries and wages expense.
During
April 2014, the Company issued 9,677 shares of its common stock to consultants in exchange for consulting services relating to
corporate matters. The shares were valued at fair value at $5.04 or $5.99 per share and were immediately vested. The Company recorded
$50 to salaries and wages expense.
During
July 2014, the Company issued 7,500 shares of its common stock to consultants in exchange for consulting services relating to
corporate matters. The shares were valued at fair value at $5.43 per share and were immediately vested. The Company recorded $41
to salaries and wages expense.
During
August 2014, the Company issued 40,241 shares of its common stock to non-employees for services rendered. The shares were valued
at fair value at $4.89 per share and were immediately vested. The Company recorded $197 to salaries and wages expense.
During
November 2014, the Company issued 12,000 shares of its common stock to non-employees for services rendered. The shares were valued
at fair value at $3.15 per share and were immediately vested. The Company recorded $38 to salaries and wages expense.
During
January, February and March 2015, the Company issued an aggregate of 147,586 shares of its common stock to non-employees for services
rendered. The shares were valued between $2.16 and $2.87 per share and were immediately vested. The Company recorded $374 to salaries
and wages expense.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
During
April 2015, the Company issued an aggregate of 30,000 shares of common stock to non-employees for services rendered. These shares
were valued at $1.98 per share and were immediately vested. The Company recorded $59 to salaries and wages expense.
Issuance
of shares of common stock pursuant to conversion of related-party debt
During
May 2015, the Company issued 243,443 shares of its common stock to related parties pursuant to the conversion of $540 principal
amount of notes payable and related accrued interest. The shares were issued at $3.38 per share, for a total fair value of $823
and resulted in a loss of debt conversion of $283.
Issuance
of shares pursuant to convertible notes payable
During
April and May 2015, the Company issued 1,262,803 shares of its common stock to a third party pursuant to the conversion of $1,000
principal amount of notes payable and $68 of related accrued interest. The shares were issued between $1.66 and $3.53 per share,
for a total fair value of $2,289 that was recorded as a loss on exchange of shares.
On
May 14, 2015, the Company issued 348,164 shares of its common stock to a third party pursuant to the conversion of $1,000 principal
amount of notes payable and $68 of related accrued interest and accelerated the remaining deferred loan costs associated with
the principal converted. The shares were issued at $3.74 per share, for a total fair value of $1,302 and resulted in a loss of
debt conversion of $264. Prepaid loan costs of $30 were accelerated and recorded as a loss on conversion of debt as of June 30,
2015.
Issuance
of shares of common stock pursuant to extinguishment of the MidMarket Term Loan
During
March 2014, the Company issued 1,080,361 shares of its common stock to a third-party lender pursuant to the extinguishment of
notes payable aggregating $12,025. The shares were issued with a fair value of $11.87 per share, for a total fair value of $12,824,
which resulted in a loss on extinguishment of debt of $799.
During
April 2014, the Company issued 100,000 shares of its common stock to a third-party lender pursuant to the extinguishment of notes
payable aggregating $1,187. The shares were issued with a fair value of $11.87 per share, for a total fair value of $1,187.
During
April 2014, the Company issued 401,996 and 363,853 shares of its common stock to two third-party lenders pursuant to the extinguishment
of notes payable aggregating $4,097. The shares were issued with a fair value of $5.35 per share, for a total fair value of $4,097,
which was recorded as loss on extinguishment of debt on the consolidated statement of operations.
Issuance
of shares of common stock pursuant to conversion of the 12% Convertible Debentures
During
February 2014, the Company issued 176,100 shares of its common stock to a third-party lender pursuant to the conversion of notes
payable aggregating $1,000 and accrued interest of $120. The shares were issued at $6.36 per share, the conversion price of the
notes payable, for a total value of $2,218.
During
March 2014, the Company issued 35,220 shares of its common stock to a third-party lender pursuant to the conversion of notes payable
aggregating $200 and accrued interest of $24. The shares were issued at $6.36 per share, the conversion price of the notes payable,
for a total value of $224.
During
June 2014, the Company issued an aggregate of 290,565 shares of its common stock to three third-party lenders pursuant to the
conversion of notes payable aggregating $1,650 and accrued interest of $99. The shares were issued at $6.92 per share, the conversion
price of the notes payable, for a total value of $2,011.
During
June 2014, the Company issued 35,220 shares of its common stock to a third-party lender pursuant to the conversion of notes payable
aggregating $200 and accrued interest of $12. The shares were issued at $6.78 per share, the conversion price of the notes payable,
for a total value of $239.
During
June 2014, the Company issued 17,610 shares of its common stock to a third-party lender pursuant to the conversion of notes payable
aggregating $100 and accrued interest of $6. The shares were issued at $6.65 per share, the conversion price of the notes payable,
for a total value of $117.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
During
June 2014, the Company issued an aggregate of 128,303 shares of its common stock to two third-party lenders pursuant to the conversion
of notes payable aggregating $702 and accrued interest of $75. The shares were issued at $6.67 per share, the conversion price
of the notes payable, for a total value of $856.
During
June 2014, the Company issued an aggregate of 20,755 shares of its common stock to two third-party lenders pursuant to the conversion
of notes payable aggregating $92 and accrued interest of $35. The shares were issued at $6.97 per share, the conversion price
of the notes payable, for a total value of $145.
During
June 2014, the Company issued an aggregate of 89,649 shares of its common stock to five third-party lenders pursuant to the conversion
of notes payable aggregating $461 and accrued interest of $84. The shares were issued at $6.59 per share, the conversion price
of the notes payable, for a total value of $591.
During
July 2014, the Company issued an aggregate of 44,025 shares of its common stock to seven third-party lenders pursuant to the conversion
of notes payable aggregating $250 and accrued interest of $17. The shares were issued at $6.22 per share, the conversion price
of the notes payable, for a total value of $274.
During
July 2014, the Company issued an aggregate of 36,164 shares of its common stock to seven third-party lenders pursuant to the conversion
of notes payable aggregating $200 and accrued interest of $14. The shares were issued at $6.25 per share, the conversion price
of the notes payable, for a total value of $226.
During
July 2014, the Company issued an aggregate of 23,585 shares of its common stock to seven third-party lenders pursuant to the conversion
of notes payable aggregating $132 and accrued interest of $9. The shares were issued at $5.99 per share, the conversion price
of the notes payable, for a total value of $141.
During
July 2014, the Company issued an aggregate of 12,561 shares of its common stock to seven third-party lenders pursuant to the conversion
of notes payable aggregating $42 and accrued interest of $3. The shares were issued at $6.17 per share, the conversion price of
the notes payable, for a total value of $78.
During
July 2014, the Company issued an aggregate of 146,083 shares of its common stock to two third-party lenders pursuant to the conversion
of notes payable aggregating $833 and accrued interest of $61. The shares were issued at $5.66 per share, the conversion price
of the notes payable, for a total value of $827.
During
July 2014, the Company issued an aggregate of 189,990 shares of its common stock to seven third-party lenders pursuant to the
conversion of notes payable aggregating $1,146 and accrued interest of $63. The shares were issued at $5.54 per share, the conversion
price of the notes payable, for a total value of $1,052.
During
April, May and June 2015, the Company issued 621,831 shares of its common stock to third parties for the amortization of the Convertible
Debentures. The shares were issued between $1.85 and $4.15 per share, for a total fair value of $527 that was recorded as a loss
on debt conversion.
During
May 2015, the Company issued 16,801 shares of its common stock to third parties for the amortization of the Convertible Debentures.
The shares were issued between $3.74 and $4.15 per share, for a total fair value of $67 and resulted in a loss of debt conversion
of $25.
Issuance
of shares of common stock pursuant to conversion of the bridge financing agreement
During
October 2015, GPB Life Science Holdings, LLC converted $200 of outstanding principal at a conversion price of $1.29 per share
of common stock into 154,715 shares of common stock.
During
November 2015, GPB Life Science Holdings, LLC converted $500 of outstanding principal at conversion prices between $1.60 and $1.42
per share of common stock into 412,222 shares of the Company’s common stock.
Issuance
of shares of common stock pursuant to conversion of Mark Munro 1996 Charitable Remainder UniTrust
During
February 2015, the Company issued 42,553 shares of its common stock to the Mark Munro 1996 Charitable Remainder UniTrust pursuant
to the conversion of $100 principal amount of notes payable. The shares were issued at $2.76 per share, for a total fair value
of $117 and resulted in a loss of debt conversion of $17.
During
June 2015, the Company issued 8,306 shares of its common stock to the Mark Munro 1996 Charitable Remainder UniTrust pursuant to
the conversion of $25 principal amount of notes payable and related accrued interest. The shares were issued at $2.55 per share,
for a total fair value of $21 and resulted in a gain on debt conversion of $4.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
During
July 2015, the Company issued 219,820 shares of its common stock to the Mark Munro 1996
Charitable Remainder UniTrust pursuant to the conversion of $450 principal amount of
notes payable and related accrued interest. The shares were issued at $2.23 per share,
for a total fair value of $490 and resulted in a loss on debt conversion of $35.
Issuance
of shares of common stock upon settlement of the bridge financing agreement
On
December 29, 2015, the Company entered into a conversion agreement with GPB Life Science Holdings, LLC (refer to Note 11, Term
Loans) pursuant to which, among other things, GPB Life Science Holdings, LLC converted the remaining $1,500 principal balance
into 1,918,649 shares of the Company’s common stock.
Issuance
of shares of common stock upon redemption of debt
During
November 2015, the holders of promissory notes converted $141 of outstanding principal at conversion prices between $1.37 and
$1.31 per share into 187,810 shares of the Company’s common stock.
During
December 2015, the holders of promissory notes converted $485 of outstanding principal at conversion prices between $1.37 and
$1.00 per share into 387,811 shares of the Company’s common stock.
Issuance
of shares to satisfy obligations pursuant to warrants
During
January 2014, the Company issued an aggregate of 53,259 shares of common stock to the holders of the Series E warrants in exchange
for such warrants. The common stock was valued at $16.90 per share. The total value of the shares issued was $900.
On
various dates during the quarter ending March 31, 2014, the Company issued an aggregate of 111,095 shares of common stock with
a fair value of $555 related to the exercise of warrants issued in a public offering.
Issuance
of shares pursuant to promissory notes
In
March 2014, the Company issued an aggregate of 216,876 shares of common stock with an average fair value of $7.95 per share, to
a third-party lender in satisfaction of notes payable aggregating $1,725. The shares were issued at $1,725, per the terms of the
notes payable.
Issuance
of shares pursuant to initial investment in non-controlling interest
During
April 2014, the Company issued 25,000 shares of common stock to an officer in consideration of an acquisition of a 40% ownership
interest in Nottingham Enterprises. The shares were issued with a fair value at $5.99 per share.
Issuance
of shares for payment of related-party interest
During
June 2014, the Company issued an aggregate of 8,934 shares of common stock to four related parties for payment of accrued interest
aggregating to $53. The shares were issued at $5.97 per share.
During
July 2014, the Company issued an aggregate of 101,440 shares of common stock to seven related parties for payment of accrued interest
aggregating to $551. The shares were issued at $5.43 per share.
During
November 2014, the Company issued an aggregate of 17,478 shares of common stock to four related parties for payment of accrued
interest aggregating to $58. The shares were issued at $3.15 per share.
During
January and March 2015, the Company issued an aggregate of 144,508 shares of 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 completed acquisition
During
January 2014, the Company issued 57,448 shares of common stock, valued at $16.99 per share, pursuant to its completed acquisition
of IPC. These shares were valued at $976.
During
January 2014, the Company issued 47,080 shares of common stock, in escrow, valued at $10.00 per share, pursuant to its completed
acquisition of IPC. These shares were valued at $471.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
During
February 2014, the Company issued 400,000 shares of common stock, valued at $13.20 per
share, pursuant to its completed acquisition of RentVM. These shares were valued at $5,280.
During
April 2014, the Company issued 91,241 shares of common stock, valued at $5.99 per share, pursuant to its completed acquisition
of the assets from a non-affiliated entity. These shares were valued at $546.
During
October 2014, the Company issued 1,008,690 shares of common stock, valued at $3.90 per share, pursuant to its completed acquisition
of VaultLogix. These shares were valued at $3,934.
During
December 2014, the Company issued 443,524 shares of common stock, valued at $3.36 per share, pursuant to VaultLogix’s acquisition
of certain assets from a non-affiliated entity. These shares were valued at $1,490.
During
December 2014, the Company issued 234,159 shares of common stock, valued at $2.92 per share, pursuant to AWS’s acquisition
of certain assets from a non-affiliated entity. These shares were valued at $684.
Issuance
of shares pursuant to completed business combination
During
January 2014, the Company issued 50,861 shares of common stock, valued at $16.00 per share, in connection with promissory notes
issued to AWS. The total value of the stock issued was $814. The Company agreed with the note holders to convert the debt into
shares of common stock at a price less than market price, which resulted in a loss due to the settlement of a working capital
note payable that was recorded in the consolidated statement of operations as loss on extinguishment of debt of $306.
Issuance
of shares pursuant to AWS earn out
During
August 2014, the Company issued 490,445 shares issued to the former owners of AWS in settlement of the earn-out provision included
in the purchase agreement. The shares were issued at $5.19 per share, which was the conversion price of the notes payable, for
a total value of $2,624 and a related loss in contingent consideration of $860 was recorded in the consolidated statements of
operations for the year ended December 31, 2014. In addition the Company recorded a gain of $79 which is recorded within loss
on extinguishment of debt in the consolidated statements of operations for the year ended December 31, 2014.
Issuance
of shares pursuant to earn out of AWS asset purchase
During
November 2014, the Company issued 16,896 shares of common stock for the future contingent consideration owed to the owners of
an AWS asset purchase. The shares were issued at $3.15 per share and were valued at $53.
Issuance
of shares upon Settlement of debt
During
November 2014, the Company issued 125,000 shares of common stock to related parties for the cancellation of debt. The shares were
issued between $3.13 per share and $3.15 per share and were valued at $393.
Issuance
of shares pursuant to private placement
During
October 2014, the Company completed two private placements of its common stock in which the Company sold 868,838 shares of common
stock at a price of $5.00 per share. The cash proceeds received by the Company in connection with the private placements was $4,284
less transaction fees for a total value of $4,073.
During
August 2015, the Company completed two private placements of debt securities and issued to two lenders an aggregate of 25,000
shares of its common stock, at a price of $2.01 and $1.94 per share of common stock, for a fair value of $50. The shares of common
stock were recorded as a debt discount on the consolidated balance sheet as of December 31, 2015.
Issuance
of shares of common stock pursuant to extinguishment of debt
On
March 3, 2015, the Company issued an aggregate of 500,700 shares of its common stock to five related-party lenders pursuant to
the extinguishment of notes payable. The shares were issued with a fair value of $2.45 per share, for a total fair value of $1,227,
which was recorded as loss on extinguishment of debt on the 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 consolidated statement of operations.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Issuance
of shares of common stock pursuant to modification of debt
On
March 3, 2015, the Company issued an aggregate of 298,390 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 $731, which was recorded as a debt discount on the consolidated balance sheet as of December 31, 2015.
Issuance
of shares pursuant to incentives earned
During
March 2015, the Company issued an aggregate of 128,205 shares to employees in settlement of incentives earned. The shares were
issued at $2.16 per share.
Issuance
of shares upon restructuring of debt
During
January 2015, the Company issued 100,000 shares of common stock to a related party for the restructuring of notes payable. The
shares were issued at $2.92 per share and were valued at $292.
Issuance
of shares upon settlement of accounts payable
During
March 2015, the Company issued 300,000 shares of common stock to a third party for settlement of accounts payable. The shares
were issued at $2.16 per share and were valued at $648. On April 1, 2015, the 300,000 shares of common stock were cancelled and
returned to the Company in the form of treasury stock.
Issuance
of shares upon conversion of warrants
During
October 2015, the Company issued 192,096 shares of common stock to a third party upon the exercise of warrants at exercise prices
of between $1.81 and $1.54 per share for a total fair value of $324.
During
November 2015, the Company issued 94,905 shares of common stock to a third party upon the exercise of warrants at exercise prices
of between $1.63 and $1.42 per share for a total fair value of $144.
Issuance
of shares pursuant to the payment of contingent consideration
During
January 2015, the Company issued 79,853 shares of common stock to the former owner of HighWire for the payment of contingent consideration
owed per the purchase agreement. The shares were issued at $3.83 per share for a fair value of $306.
During
April 2015, the Company issued 252,525 shares of common stock to the former owners of AWS for the payment of contingent consideration
owed per the purchase agreement. The shares were issued at $1.98 per share for a fair value of $500.
During
June 2015, the Company issued 223,031 shares of common stock to the former owners of VaultLogix for the payment of contingent
consideration owed per the purchase agreement. The shares were issued at $2.92 per share for a fair value of $651.
Issuance
of shares to third party
During
January 2015, the Company issued 1,961 shares of common stock to the Ian Gist Cancer Research Fund. The shares were issued at
$2.53 per share for a fair value of $5.
Purchase
of Treasury Shares
During
December 2014, the Company repurchased 850 shares from two employees who terminated employment for a nominal amount of cash.
During
April, May and June 2015, the Company repurchased 112,995 shares at par value of $0.0001 per share, from ten employees who terminated
employment. A service provider also returned 300,000 shares issued to a service provider originally issued for the settlement
of accounts payable.
During
September 2015, the Company repurchased 14,910 shares at par value of $0.0001 per share from ten employees who terminated employment.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
17.
|
STOCK-BASED
COMPENSATION
|
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 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 an aggregate of 1,791,979 shares
in 2014, of which 1,189,987 shares were subject to a 3-year vesting term, 185,000 shares were subject to 1-year vesting, and 416,992
shares had no vesting terms. The Company granted an aggregate of 3,258,539 shares in 2015, of which 1,366,531 shares were subject
to a 3-year vesting term, 25,000 shares were subject to 6-month vesting, and 1,867,008 shares had no vesting terms.
2012
PERFORMANCE INCENTIVE PLAN, EMPLOYEE STOCK PURCHASE PLAN, AND 2015 PERFORMANCE INCENTIVE PLAN
On November 16, 2012, the
Company adopted its 2012 Equity Incentive Plan (the "Equity Incentive Plan") and its Employee Stock Purchase Plan (the
"Stock Purchase Plan"). Both plans were established to attract, motivate, retain and reward selected employees and other
eligible persons. For the Equity Incentive Plan, employees, officers, directors and consultants who provide services to the Company
or one of the Company’s subsidiaries may be selected to receive awards. A total of 2,325,000 shares of the Company’s
common stock was authorized for issuance with respect to awards granted under the Equity Incentive Plan. During the year ended
December 31, 2014, an aggregate of 1,957,353 shares were granted under the Equity Incentive Plan, and at December 31, 2014, 1,101,396
shares authorized under the Equity Incentive Plan remained available for award purposes. On January 1, 2015, pursuant to the terms
of the Equity Incentive Plan, an additional 500,000 shares of the Company’s common stock were made available for issuance
under the Equity Incentive Plan. From the inception of the Equity Incentive Plan through the year ended December 31, 2015, an aggregate
of 3,058,749 shares were granted under the Equity Incentive Plan. In connection with the Company’s adoption of the Company’s
2015 Performance Incentive Plan, which is discussed below, the Company agreed that no additional grants of awards will be made
under the Equity Incentive Plan.
The
Stock Purchase Plan is designed to allow the Company’s eligible employees and the eligible employees of the Company’s
participating subsidiaries to purchase shares of the Company’s common stock, at semi-annual intervals, with their accumulated
payroll deductions. A total of 500,000 shares of the Company’s common stock was initially available for issuance under the
Stock Purchase Plan. The share limit will automatically increase on the first trading day in January of each year (commencing
with January 2014) by an amount equal to lesser of (i) 1% of the total number of outstanding shares of the Company’s common
stock on the last trading day in December in the prior year, (ii) 500,000 shares, or (iii) such lesser number as determined by
the Company’s board of directors. As of December 31, 2015 and 2014, no shares had been purchased under the Stock Purchase
Plan and, at December 31, 2015, 500,000 shares were authorized for issuance under the Stock Purchase Plan.
On June 26, 2015, the Company
adopted, and on September 21, 2015, the Company’s stockholders approved, the Company’s 2015 Performance Incentive Plan
(the “Performance Incentive Plan”). The plan was established to provide a means through the grant of awards to attract,
motivate, retain, and reward selected employees and other eligible persons. For the Performance Incentive Plan, employees, officers,
directors and consultants who provide services to the Company or one of the Company’s subsidiaries may be selected to receive
awards. A total of 2,000,000 shares of the Company’s common stock is authorized for issuance with respect to awards granted
under the Performance Incentive Plan. In addition, the share reserve under the Performance Incentive Plan will be increased to
include shares subject to outstanding awards under the Equity Incentive Plan that are forfeited, cancelled or otherwise settled
under the Equity Incentive Plan without the issuance of shares of common stock. The number of authorized shares under the Performance
Incentive Plan will automatically increase on the first trading day in January of each year (commencing with January 2016) by an
amount equal to lesser of (i) 7.5% of the total number of outstanding shares of the Company’s common stock on the last trading
day in December in the prior year, and (ii) such lesser number as determined by the Company’s board of directors. Any shares
subject to awards that are not paid, delivered or exercised before they expire or are canceled or terminated, or fail to vest,
as well as shares used to pay the purchase or exercise price of awards or related tax withholding obligations, will become available
for other award grants under the Performance Incentive Plan. During the year ended December 31, 2015, 964,629 shares were granted
under the Performance Incentive Plan, and at December 31, 2015, 1,035,371 shares authorized under the Performance Incentive Plan
remained available for award purposes.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Restricted
Stock
The
following table summarizes the Company’s restricted stock unit activity for the years ended December 31, 2015 and 2014.
|
|
|
|
|
Weighted
Average
|
|
|
|
Number
of
|
|
|
Grant
Date
|
|
|
|
Shares
|
|
|
Fair
Value
|
|
Outstanding at December 31, 2013
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
1,374,837
|
|
|
$
|
5.67
|
|
Vested
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited/Cancelled
|
|
|
(850
|
)
|
|
$
|
5.13
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding at December 31, 2014
|
|
|
1,373,987
|
|
|
$
|
5.67
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,391,531
|
|
|
$
|
2.31
|
|
Vested
|
|
|
(614,497
|
)
|
|
$
|
5.41
|
|
Forfeited/Cancelled
|
|
|
(127,905
|
)
|
|
$
|
4.62
|
|
Exercised
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
2,023,116
|
|
|
$
|
3.50
|
|
For
the years ended December 31, 2015 and 2014, the Company incurred $4,901 and $4,165, respectively, in stock compensation expense
from the issuance of common stock to employees and consultants. In the fourth quarter of 2014, the Company recorded additional
compensation expense of $158 related to second quarter 2014 share issuances and $600 related to the third quarter 2014 share issuances.
Issuance
of shares of common stock to employees, directors, and officers
During
April, May and June 2014, the Company issued an aggregate of 1,105,597 shares of its common stock to various employees and directors
for services rendered. The shares were valued between $5.04 to $5.99 per share. The Company recorded $1,963 to stock compensation
expense.
During
July and August 2014, the Company issued an aggregate of 524,551 shares of its common stock to various employees and directors
for services rendered. The shares were valued between $4.89 to $5.43 per share. The Company recorded $954 to stock compensation
expense.
During
November 2014, the Company issued an aggregate of 15,455 shares of its common stock to various employees and directors for services
rendered. The shares were valued at $3.15 per share. The Company recorded $34 to stock compensation expense.
During
January and February 2015, the Company issued an aggregate of 216,000 shares of its common stock to various employees for services
rendered. The shares were valued between $2.53 and $2.87 per share. The Company recorded $30 to salaries and wages expense.
During
January and March 2015, the Company issued an aggregate of 103,583 shares to employees for services rendered. The shares were
issued at $2.16 per share. The Company had accrued for $86 of the expense in 2014 and recognized an additional $70 as stock compensation
expense during the three months ended March 31, 2015.
During
April and June 2015, the Company issued an aggregate of 2,864,953 shares of its common stock to various employees for services
rendered. The shares were valued between $1.98 and $2.92. The Company recorded $4,367 to salaries and wages expense related to
shares issued with no vesting terms.
The
Company recorded an additional $3,746 and $1,742 in stock compensation expense on shares subject to vesting terms in previous
periods during the years ended December 31, 2015 and 2014, respectively.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
following table summarizes the amount of stock compensation expense to be recognized for vesting shares.
Years
Ending December 31,
|
|
Future
Stock Compensation Expense
|
|
|
|
|
|
2016
|
|
$
|
2,946
|
|
2017
|
|
|
1,788
|
|
2018
|
|
|
353
|
|
Total
|
|
$
|
5,087
|
|
Options
The
fair values of stock option grants during the year ended December 31, 2014 was calculated on the date of the grant using the Black-Scholes
option pricing model. There were no options granted during the year ended December 31, 2015. Compensation expense is recognized
over the period of service, generally the vesting period (see Note 3 Summary of Significant Accounting Policies). During the year
ended December 31, 2014, 175,000 options were granted by the Company. The following assumptions were used in the Black-Scholes
options pricing model to estimate the fair value of stock options for the years ended December 31, 2015 and 2014:
|
|
Year
Ended
December 31, 2015
|
|
Fair value of Company’s
common stock
|
|
$
|
3.72
|
|
|
$
|
3.72
|
|
Volatility (closing prices of 3-4 comparable
public companies, including the Company’s historical volatility)
|
|
|
80
|
%
|
|
|
80
|
%
|
Exercise price
|
|
$
|
3.72
|
|
|
$
|
3.72
|
|
Estimated life
|
|
|
9
years
|
|
|
|
4
years
|
|
Risk free interest rate (based on 1-year
treasury rate)
|
|
|
2.15
|
%
|
|
|
1.37
|
%
|
|
|
Year
Ended
December 31, 2014
|
|
|
|
(Revised)
|
|
Fair value of Company’s
common stock
|
|
$
|
3.72
|
|
|
$
|
3.72
|
|
Volatility (closing prices of 3-4 comparable
public companies, including the Company’s historical volatility)
|
|
|
80
|
%
|
|
|
80
|
%
|
Exercise price
|
|
$
|
3.72
|
|
|
$
|
3.72
|
|
Estimated life
|
|
|
10
years
|
|
|
|
5
years
|
|
Risk free interest rate (based on 1-year
treasury rate)
|
|
|
2.15
|
%
|
|
|
1.37
|
%
|
The
following table summarizes the Company’s stock option activity and related information for the years ended December 31,
2015 and 2014.
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Remaining
Contractual
|
|
|
Aggregate
Intrinsic
|
|
|
|
Underlying
Options
|
|
|
Exercise
Price
|
|
|
Term
(in years)
|
|
|
Value
(in thousands)
|
|
Outstanding
at January 1, 2014
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
175,000
|
|
|
$
|
3.72
|
|
|
|
7.29
|
|
|
$
|
-
|
|
Forfeited
and expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding
at December 31, 2014
|
|
|
175,000
|
|
|
$
|
3.72
|
|
|
|
7.29
|
|
|
$
|
140
|
|
Exercisable
at December 31, 2014
|
|
|
150,000
|
|
|
$
|
3.72
|
|
|
|
9.79
|
|
|
$
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited
and expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding
at December 31, 2015
|
|
|
175,000
|
|
|
$
|
3.72
|
|
|
|
6.29
|
|
|
$
|
476
|
|
Exercisable
at December 31, 2015
|
|
|
158,333
|
|
|
$
|
3.72
|
|
|
|
8.80
|
|
|
$
|
431
|
|
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 December 31, 2015 and 2014 was $1.00 and $2.92, respectively.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
At
December 31, 2015 and 2014, the Company had outstanding the following notes payable to related parties:
|
|
December
31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
(Revised)
|
|
|
|
|
|
|
|
|
Promissory
note issued to CamaPlan FBO Mark Munro IRA, 3% interest, maturing on January 1, 2018, unsecured, net of debt discount of $72
and $0, respectively
|
|
$
|
525
|
|
|
$
|
597
|
|
Promissory
note issued to 1112 Third Avenue Corp, 3% interest, maturing on January 1, 2018, unsecured, net of debt discount of $68 and
$0, respectively
|
|
|
307
|
|
|
|
375
|
|
Promissory
note issued to Mark Munro, 3% interest, maturing on January 1, 2018, unsecured, net of debt discount of $116 and $0, respectively
|
|
|
1,221
|
|
|
|
1,337
|
|
Promissory
note issued to Pasack Road, LLC, 3% interest, maturing on January 1, 2018, unsecured, net of debt discount of $286 and $0,
respectively
|
|
|
2,364
|
|
|
|
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 $749 and $2,232, respectively
|
|
|
5,727
|
|
|
|
4,243
|
|
Promissory
notes issued to Forward Investments, LLC, 3% interest, maturing on January 1, 2018, unsecured, net of debt discount of $1,528
and $0, respectively
|
|
|
2,844
|
|
|
|
2,645
|
|
Promissory
notes issued to Forward Investments, LLC, 6.5% interest, maturing on July 1, 2016, unsecured, net of debt discount of $147
|
|
|
243
|
|
|
|
-
|
|
Former
owner of IPC, unsecured, 8% interest, due May 30, 2016
|
|
|
5,755
|
|
|
|
6,255
|
|
Former
owner of IPC, unsecured, 15% interest, due on demand
|
|
|
75
|
|
|
|
100
|
|
Former
owner of Nottingham, unsecured, 8% interest, maturing on May 30, 2016
|
|
|
225
|
|
|
|
250
|
|
|
|
|
19,286
|
|
|
|
18,452
|
|
Less:
current portion of debt
|
|
|
(11,103
|
)
|
|
|
(7,238
|
)
|
Long-term portion
of notes payable, related parties
|
|
$
|
8,183
|
|
|
$
|
11,214
|
|
Future
maturities of related party debt are as follows:
Year ending December 31,
|
|
|
|
2016
|
|
$
|
12,921
|
|
2017
|
|
|
-
|
|
2018
|
|
|
9,332
|
|
Total principal
payments
|
|
$
|
22,253
|
|
The
interest expense, including amortization of debt discounts, associated with the related-party notes payable in the years ended
December 31, 2015 and 2014 amounted to $4,121 and $6,000, respectively.
Related
Party Promissory Note Payable
On
July 5, 2011, the Company entered into a definitive master funding agreement with MMD Genesis LLC (“MMD Genesis”),
a company the three principals of which are the Company’s Chairman of the Board and Chief Executive Officer, Mark Munro,
one of the Company’s directors, Mark F. Durfee, and Douglas Shooker, the principal of Forward Investments LLC, the beneficial
owner of more than 5% of the Company’s common stock. Pursuant to the master funding agreement, MMD Genesis has made loans
to the Company from time to time to fund certain of the Company’s working capital requirements and a portion of the cash
purchase prices of the Company’s business acquisitions. All such loans originally bore interest at the rate of 2.5% per
month and matured on June 30, 2014.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On
January 1, 2014, the outstanding principal amount of the loans from MMD Genesis 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 CamaPlan FBO Mark Munro IRA in the principal amount of $347 that bore interest at the rate of 12% per annum
and was to mature on March 31, 2016;
|
|
|
|
|
●
|
a
note issued to 1112 Third Avenue Corp., a company controlled by Mark Munro, in the principal amount of $375 that bore interest
at the rate of 12% per annum and was to mature on March 31, 2016;
|
|
|
|
|
●
|
a
note issued to Mark Munro in the principal amount of $737 that bore interest at the rate of 12% per annum and was to mature
on March 31, 2016;
|
|
|
|
|
●
|
a
note issued to Pascack Road, LLC, a company controlled by Mark Durfee, in the principal amount of $1,575 that bore interest
at the rate of 12% per annum and was to mature on March 31, 2016;
|
|
|
|
|
●
|
a
note issued to Forward Investments, LLC in the principal amount of $650 that bears interest at the rate of 10% per annum,
was to mature on June 30, 2015 and was originally convertible into shares of the Company’s common stock at an initial
conversion price of $6.36 per share; and
|
|
●
|
a
note issued to Forward Investments, LLC in the principal amount of $2,825 that bore interest at the rate of 2% per annum,
was to mature on June 30, 2015 and was convertible into shares of the Company’s common stock at an initial conversion
price of $6.36 per share, and reflects certain penalties and consulting fees of $1,000 which were incurred and outstanding
as of December 31, 2013.
|
On
February 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.
On
February 25, 2015 and March 2, 2015, such notes were restructured. Refer to the restructuring paragraphs later within this footnote
for further details.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Related
Party Promissory Notes to CamaPlan FBO Mark Munro IRA
On
July 8, 2014, the Company issued a promissory note to the CamaPlan FBO Mark Munro IRA in the principal amount of $200 that bore
interest at the rate of 18% per annum and was to mature on March 31, 2016. This note was restructured as part of the February
25, 2015 promissory note restructuring agreement. Refer to the restructuring paragraphs noted within this footnote for further
details.
Related
Party Promissory Notes to Mark Munro
On
September 2, 2014, the Company issued a promissory note to Mark Munro in the principal amount of $100 that bore interest at the
rate of 18% per annum and was to mature on March 31, 2016.
On
September 9, 2014, the Company issued a promissory note to Mark Munro in the principal amount of $150 that bore interest at the
rate of 18% per annum and was to mature on March 31, 2016.
On
September 24, 2014, the Company issued a promissory note to Mark Munro in the principal amount of $250 that bore interest at the
rate of 18% per annum and was to mature on March 31, 2016.
These
notes were restructured as part of the February 25, 2015 promissory note restructuring agreement. Refer to the restructuring paragraphs
later within this footnote for further details.
Related
Party Promissory Notes to Pascack Road, LLC
On
June 20, 2014, the Company issued a promissory note to Pascack Road, LLC in the principal amount of $300 that bore interest at
the rate of 18% per annum and was to mature on March 31, 2016.
On
July 11, 2014, the Company issued a promissory note to Pascack Road, LLC in the principal amount of $200 that bore interest at
the rate of 18% per annum and was to mature on March 31, 2016.
On
September 2, 2014, the Company issued a promissory note to Pascack Road, LLC in the principal amount of $100 that bore interest
at the rate of 18% per annum and was to mature on March 31, 2016.
On
September 8, 2014, the Company issued a promissory note to Pascack Road, LLC in the principal amount of $150 that bore interest
at the rate of 18% per annum and was to mature on March 31, 2016.
On
September 29, 2014, the Company issued a promissory note to Pascack Road, LLC in the principal amount of $575 that bore interest
at the rate of 18% per annum and was to mature on March 31, 2016.
These
notes were restructured as part of the February 25, 2015 promissory note restructuring agreement. Refer to the restructuring paragraphs
later within this footnote for further details.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Related
Party Promissory Notes to Forward Investments, LLC
On
June 19, 2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $500 that bore interest
at the rate of 18% per annum and was to mature on June 30, 2015.
On
July 11, 2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $200 that bore interest
at the rate of 18% per annum and was to mature on June 30, 2015.
On
August 12, 2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $600 that bore interest
at the rate of 18% per annum and was to mature on June 30, 2015.
On
September 2, 2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $100 that bore
interest at the rate of 18% per annum and was to mature on June 30, 2015.
On
September 8, 2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $150 that bore
interest at the rate of 18% per annum and was to mature on June 30, 2015.
On
September 26, 2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $250 that bore
interest at the rate of 18% per annum and was to mature on June 30, 2015.
On
September 29, 2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $395 that bore
interest at the rate of 18% per annum and was to mature on June 30, 2015.
On
October 24, 2014, the Company issued a promissory note to Forward Investments, LLC in the principal amount of $400 that bore interest
at the rate of 18% per annum and was to mature on June 30, 2015.
These
notes were restructured as part of the March 4, 2015 Forward Investments, LLC note restructuring agreement. Refer to the restructuring
paragraphs later within this footnote for further details.
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., 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; and
|
|
|
|
|
●
|
notes
issued to Pascack Road, LLC in the aggregate principal amount of $1,575 had the interest rate reduced from 12% to 3% per annum
and the maturity dates extended from March 31, 2016 to January 1, 2018.
|
In
consideration for such restructuring, the Company issued to Mark Munro 63,700 shares of common stock, the CamaPlan FBO Mark Munro
IRA 39,690 shares of common stock, 1112 Third Avenue Corp. 37,500 shares of common stock, and Pascack Road, LLC 157,500 shares
of common stock. The Company recorded a debt discount of $731 in the consolidated balance sheet during the year ended December
31, 2015 related to the consideration given to the debt holders.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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., and Pascack Road, LLC in order to extend the maturity dates thereof
and to reduce the interest rate accruing thereon. The following notes were restructured as follows:
|
●
|
notes
issued to Mark Munro in the aggregate principal amount of $700 had the interest rates reduced from 18% to 3% per annum and
the maturity dates extended from March 31, 2016 to January 1, 2018;
|
|
|
|
|
●
|
notes
issued to CamaPlan FBO Mark Munro IRA in the aggregate principal amount of $200 had the interest rates reduced from 12% to
3% per annum and the maturity dates extended from March 31, 2016 to January 1, 2018;
|
|
|
|
|
●
|
notes
issued to Pascack Road, LLC in the aggregate principal amount of $1,075 had the interest rate reduced from 18% to 3% per annum
and the maturity dates extended from March 31, 2016 to January 1, 2018.
|
In
consideration for such restructuring, the Company issued to Mark Munro 95,600 shares of common stock, the CamaPlan FBO Mark Munro
IRA 41,600 shares of common stock, Pascack Road, LLC 223,600 shares of common stock, and 1112 Third Ave. Corp. 50,000 shares of
common stock. The Company recorded a loss on extinguishment of debt of $1,006 on the consolidated statement of operations for
the year ended December 31, 2015 related to the consideration given to the debt holders.
Forward
Investments Working Capital Loan
On
February 4, 2014 and March 28, 2014, Forward Investments, LLC made loans to the Company for working capital purposes in the amounts
of $1,800 and $1,200, respectively. Such loans are evidenced by promissory notes that 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 12 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 bear interest at the rate of 2% per annum, had the
maturity date extended from June 30, 2015 to July 1, 2016; and
|
|
|
|
|
●
|
notes
issued to Forward Investments, LLC, which were issued during June 2014 through October
2014, 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, and had the maturity
date extended by approximately three years to January 1, 2018. On March 4, 2015, as part
of the restructuring agreement, the notes became convertible at a conversion price of
$6.36 per share until the Convertible Debentures were repaid in full and thereafter $2.35
per share, subject to further adjustment as set forth therein.
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In
connection with such restructuring, Forward Investments, LLC agreed to lend to the Company an amount substantially similar to
the accrued interest the Company owed to Forward Investments, LLC on the restructured notes. In consideration for such restructuring
and additional payments made by Forward Investments, LLC to the Company, the Company issued to Forward Investments, LLC an additional
convertible note in the original principal amount of $1,730 with an interest rate of 3% per annum, a maturity date of January
1, 2018, and an initial conversion price of $6.36 per share until the Convertible Debentures were repaid in full and thereafter
$2.35 per share, subject to further adjustment as set forth therein, and provided Forward Investments, LLC the option to lend
the Company an additional $8,000 in the form of convertible notes similar to the existing convertible notes of the Company issued
to Forward Investments, LLC. The convertible note was issued to Forward Investments, LLC as an incentive to restructure the above-mentioned
notes and resulted in the Company recording a loss on extinguishment of debt of $1,508 on the consolidated statement of operations
during the year ended December 31, 2015.
As
part of the restructuring, Forward Investments, LLC agreed to convert $390 of accrued interest on the above-mentioned loans to
a new note bearing interest at the rate of 6.5% per annum that matures on July 1, 2016.
In
conjunction with the extension of the 2% and 10% convertible notes, the Company recorded a loss on change in fair value of derivative
instruments of $2,600 at the date of the restructuring. Refer to Note 12, Derivative Instruments, for detail on the loss on change
in fair value of derivative instruments related to the restructuring.
Convertible
Promissory Note to Frank Jadevaia
On
January 1, 2014, the Company acquired all of the outstanding capital stock of IPC. As part of the purchase price for the acquisition,
the Company issued a convertible promissory note to Frank Jadevaia, the current President of the Company, in the original principal
amount of $6,255. The convertible promissory note accrues interest at the rate of 8% per annum, and all principal and interest
accruing thereunder was originally due and payable on December 31, 2014. At the election of Mr. Jadevaia, the convertible promissory
note is convertible into shares of the Company's common stock at a conversion price of $16.99 per share (subject to equitable
adjustments for stock dividends, stock splits, recapitalizations and other similar events). The Company can elect to force the
conversion of the convertible promissory note if the Company’s common stock is trading at a price greater than or equal
to $16.99 for ten consecutive trading days.
On
December 31, 2014, the Company and Mr. Jadevaia agreed to a modification of the convertible promissory note. The term of the convertible
promissory note was extended to May 30, 2016 and, in consideration for this modification, the Company issued to Mr. Jadevaia 100,000
shares of common stock.
On
May 19, 2015, Mr. Jadevaia assigned $500 of principal related to the convertible promissory note and the assignees converted all
$500 principal amount of such note into 232,182 shares of the Company’s common stock with a fair value of $3.38 per common
share. Refer to Note 16, Stockholders’ Equity, for further detail on this transaction.
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, matures 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, the initial conversion price was amended to $2.22 per share of the Company’s common stock and,
in consideration for this modification, the Company issued to Mr. Davis 22,222 shares of common stock with a fair value of $2.16
per share.
On
May 31, 2015, Mr. Davis converted $25 of principal amount due into 11,261 shares of common stock, with a fair value of $3.53 per
share and recorded a loss on debt conversion of $13 on the consolidated statement of operations.
Payments
to Owners of NGNWare
The
Company is a minority owner of 13.7% of NGNWare, LLC. During 2015, the Company paid the owners of 86.3% of NGNWare a salary of
$14, and paid health insurance premiums on their behalf of $5. The owners of NGNWare could not procure health insurance on their
own, so the Company added them to its health insurance plan. The amounts paid for salary and health insurance were included in
the amount the Company invested in NGNWare.
The
Company has acquired three material companies since January 1, 2014. With each acquisition, the Company evaluated the newly-acquired
company’s sources of revenues and costs of revenues. Due to continued expansion, the Company evaluated its recent acquisitions
and their impact upon the existing segment structure. As of December 31, 2014, the Company operated within four operating segments
that were aggregated into three reportable segments. During the year ended December 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 consolidated financial statements. As of December 31, 2015, the Company
determined that it has four reportable segments: applications and infrastructure, professional services, managed services, and
cloud services.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 Axim.
In
addition to the operating segments, the Company has determined that certain costs related to the general operations of the Company
cannot be reasonably allocated to each individual segment. These costs are not part of the factors that the chief operating decision
maker uses to calculate gross margin. As such, the Company has chosen to present those costs within a general “Corporate”
line item for presentation purposes. The tables below reflect the segment information as if the managed services and cloud services
segment were separate as of December 31, 2014.
Segment
information relating to the Company's results of continuing operations was as follows:
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
(Revised)
|
|
Revenue by Segment
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
21,263
|
|
|
$
|
21,957
|
|
Professional services
|
|
|
26,655
|
|
|
|
28,811
|
|
Managed services
|
|
|
26,190
|
|
|
|
22,943
|
|
Cloud services
|
|
|
809
|
|
|
|
40
|
|
Total
|
|
$
|
74,917
|
|
|
$
|
73,751
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
6,384
|
|
|
$
|
7,506
|
|
Professional services
|
|
|
5,651
|
|
|
|
6,859
|
|
Managed services
|
|
|
8,209
|
|
|
|
3,675
|
|
Cloud services
|
|
|
603
|
|
|
|
2
|
|
Total
|
|
$
|
20,847
|
|
|
$
|
18,042
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) by Segment
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
1,092
|
|
|
$
|
2,178
|
|
Professional services
|
|
|
765
|
|
|
|
(3,192
|
)
|
Managed services
|
|
|
(13,992
|
)
|
|
|
(7,828
|
)
|
Cloud services
|
|
|
(1,864
|
)
|
|
|
(30
|
)
|
Corporate
|
|
|
(13,811
|
)
|
|
|
(9,645
|
)
|
Total
|
|
$
|
(27,810
|
)
|
|
$
|
(18,517
|
)
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
(22
|
)
|
|
$
|
(58
|
)
|
Professional services
|
|
|
-
|
|
|
|
(1
|
)
|
Managed services
|
|
|
(20
|
)
|
|
|
(1
|
)
|
Corporate
|
|
|
(9,355
|
)
|
|
|
(13,102
|
)
|
Total
|
|
$
|
(9,397
|
)
|
|
$
|
(13,162
|
)
|
|
|
|
|
|
|
|
|
|
Total Assets by Segment
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
19,593
|
|
|
$
|
19,517
|
|
Professional services
|
|
|
18,449
|
|
|
|
19,526
|
|
Managed services
|
|
|
24,718
|
|
|
|
39,912
|
|
Cloud services
|
|
|
3,840
|
|
|
|
6,161
|
|
Corporate
|
|
|
4,956
|
|
|
|
1,800
|
|
Assets of discontinued operations
|
|
|
20,675
|
|
|
|
34,723
|
|
Total
|
|
$
|
92,231
|
|
|
$
|
121,639
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
6,906
|
|
|
$
|
6,906
|
|
Professional services
|
|
|
9,257
|
|
|
|
9,257
|
|
Managed services
|
|
|
7,495
|
|
|
|
18,402
|
|
Cloud services
|
|
|
917
|
|
|
|
2,922
|
|
Total
|
|
$
|
24,575
|
|
|
$
|
37,487
|
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
|
|
Year Ended December 31, 2015
|
|
|
|
|
Domestic
|
|
|
|
Foreign
|
|
|
|
Total
|
|
Revenues by Segment by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
20,271
|
|
|
$
|
992
|
|
|
$
|
21,263
|
|
Professional services
|
|
|
26,535
|
|
|
|
120
|
|
|
|
26,655
|
|
Managed services
|
|
|
26,190
|
|
|
|
-
|
|
|
|
26,190
|
|
Cloud services
|
|
|
809
|
|
|
|
-
|
|
|
|
809
|
|
Total
|
|
$
|
73,805
|
|
|
$
|
1,112
|
|
|
$
|
74,917
|
|
|
|
|
Year Ended December 31, 2014
|
|
|
|
|
Domestic
|
|
|
|
Foreign
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
(Revised)
|
|
|
|
|
|
Revenues by Segment by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
18,975
|
|
|
$
|
2,982
|
|
|
$
|
21,957
|
|
Professional services
|
|
|
28,597
|
|
|
|
214
|
|
|
|
28,811
|
|
Managed services
|
|
|
22,943
|
|
|
|
-
|
|
|
|
22,943
|
|
Cloud services
|
|
|
40
|
|
|
|
-
|
|
|
|
40
|
|
Total
|
|
$
|
70,555
|
|
|
$
|
3,196
|
|
|
$
|
73,751
|
|
|
|
|
Year Ended December 31, 2015
|
|
|
|
|
Domestic
|
|
|
|
Foreign
|
|
|
|
Total
|
|
Operating Income (Loss) by Segment by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
1,082
|
|
|
$
|
10
|
|
|
$
|
1,092
|
|
Professional services
|
|
|
799
|
|
|
|
(34
|
)
|
|
|
765
|
|
Managed services
|
|
|
(13,992
|
)
|
|
|
-
|
|
|
|
(13,992
|
)
|
Cloud services
|
|
|
(1,864
|
)
|
|
|
-
|
|
|
|
(1,864
|
)
|
Corporate
|
|
|
(13,811
|
)
|
|
|
-
|
|
|
|
(13,811
|
)
|
Total
|
|
$
|
(27,786
|
)
|
|
$
|
(24
|
)
|
|
$
|
(27,810
|
)
|
|
|
|
Year Ended December 31, 2014
|
|
|
|
|
Domestic
|
|
|
|
Foreign
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
(Revised)
|
|
|
|
|
|
Operating Income (Loss) by Segment by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
1,018
|
|
|
$
|
1,160
|
|
|
$
|
2,178
|
|
Professional services
|
|
|
(3,235
|
)
|
|
|
43
|
|
|
|
(3,192
|
)
|
Managed services
|
|
|
(7,828
|
)
|
|
|
-
|
|
|
|
(7,828
|
)
|
Cloud services
|
|
|
(30
|
)
|
|
|
-
|
|
|
|
(30
|
)
|
Corporate
|
|
|
(9,645
|
)
|
|
|
-
|
|
|
|
(9,645
|
)
|
Total
|
|
$
|
(19,720
|
)
|
|
$
|
1,203
|
|
|
$
|
(18,517
|
)
|
|
|
|
Year Ended December 31, 2015
|
|
|
|
|
Domestic
|
|
|
|
Foreign
|
|
|
|
Total
|
|
Gross Profit by Segment by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
6,218
|
|
|
$
|
166
|
|
|
$
|
6,384
|
|
Professional services
|
|
|
5,621
|
|
|
|
30
|
|
|
|
5,651
|
|
Managed services
|
|
|
8,209
|
|
|
|
-
|
|
|
|
8,209
|
|
Cloud services
|
|
|
603
|
|
|
|
-
|
|
|
|
603
|
|
Total
|
|
$
|
20,651
|
|
|
$
|
196
|
|
|
$
|
20,847
|
|
|
|
|
Year Ended December 31, 2014
|
|
|
|
|
Domestic
|
|
|
|
Foreign
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
(Revised)
|
|
|
|
|
|
Gross Profit by Segment by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications and infrastructure
|
|
$
|
6,151
|
|
|
$
|
1,355
|
|
|
$
|
7,506
|
|
Professional services
|
|
|
6,803
|
|
|
|
56
|
|
|
|
6,859
|
|
Managed services
|
|
|
3,675
|
|
|
|
-
|
|
|
|
3,675
|
|
Cloud services
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
Total
|
|
$
|
16,631
|
|
|
$
|
1,411
|
|
|
$
|
18,042
|
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
For the year ended December
31, 2015, revenues from the largest customer of the applications and infrastructure, professional services, managed services and
cloud services segments was $6,072, $10,847, $3,613, and $406, respectively, which represented 8%, 14%, 4%, and 1%, respectively,
of the Company’s consolidated revenue.
For
the year ended December 31, 2014, revenues from the largest customer of the applications and infrastructure, professional services,
managed services, and cloud services segments was $5,001, $12,357, $2,786, and $24, respectively, which represented 7%, 17%, 4%
0%, respectively, of the Company’s consolidated revenue.
20.
|
DISCONTINUED
OPERATIONS
|
During
December 2015, the Company’s management entered into a letter of intent to sell certain assets of VaultLogix and its subsidiaries,
DPS and USDA, which all three subsidiaries were included in the Company’s cloud services segment. On February 17, 2016,
the Company completed its disposal of VaultLogix and its subsidiaries, DPS and USDA, for $24,000 in cash (refer to Note 21, Subsequent
Events, for further detail). The assets and liabilities of VaultLogix and its subsidiaries, DPS and USDA, have been included within
the consolidated balance sheet as long-term assets of discontinued operations for the years ending December 31, 2015 and 2014.
The results of operations of VaultLogix and its subsidiaries, DPS and USDA, have been included within the line-item labelled loss
on discontinued operations within the consolidated statement of operations for the years ended December 31, 2015 and 2014.
The
following table shows the major classes of the Company’s discontinued operations as of December 31, 2015 and 2014.
|
|
December
31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
(Revised)
|
|
Long-term Assets:
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
1,245
|
|
|
$
|
1,403
|
|
Goodwill
|
|
|
9,212
|
|
|
|
20,427
|
|
Intangible
assets, net
|
|
|
10,218
|
|
|
|
12,893
|
|
Long-term assets
of discontinued operations
|
|
$
|
20,675
|
|
|
$
|
34,723
|
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
|
|
For
the year ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
(Revised)
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,908
|
|
|
$
|
2,477
|
|
Cost of revenue
|
|
|
1,690
|
|
|
|
414
|
|
Gross profit
|
|
|
8,218
|
|
|
|
2,063
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
2,771
|
|
|
|
788
|
|
Salaries and wages
|
|
|
3,262
|
|
|
|
831
|
|
Selling, general
and administrative
|
|
|
1,774
|
|
|
|
572
|
|
Goodwill impairment
charge
|
|
|
11,214
|
|
|
|
-
|
|
Intangible
asset impairment charge
|
|
|
430
|
|
|
|
-
|
|
Total operating
expenses
|
|
|
19,451
|
|
|
|
2,191
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss from operations
|
|
|
(11,233
|
)
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
2,105
|
|
|
|
697
|
|
Other
expense
|
|
|
50
|
|
|
|
4
|
|
Total other expense
|
|
|
2,155
|
|
|
|
701
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss on discontinued operations
|
|
|
(13,388
|
)
|
|
|
(829
|
)
|
|
|
|
|
|
|
|
|
|
(Benefit from) provision for income
taxes
|
|
|
(128
|
)
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
Loss on discontinued
operations, net of tax
|
|
$
|
(13,260
|
)
|
|
$
|
(957
|
)
|
Promissory
Note Conversions
Subsequent
to December 31, 2015, the investor who holds the promissory note tranches issued on November 13, 2015, November 27, 2015, and
December 11, 2015 converted the debt into shares of the Company’s common stock. Below is a summary of the transactions:
Tranche
1:
|
●
|
During
January 2016, the investor converted $167 principal amount of debt into 133,334 shares of the Company’s common stock.
|
|
|
|
|
●
|
On
February 3, 2016, the investor converted the remaining $83 principal amount of debt into 66,667 shares of the Company’s
common stock. Tranche 1 of the Promissory Note debt was fully amortized as of this date.
|
Tranche
2:
|
●
|
During
January 2016, the investor converted $167 principal amount of debt into 133,334 shares of the Company’s common stock.
|
|
|
|
|
●
|
During
February 2016, the investor converted $167 principal amount of debt into 133,334 shares of the Company’s common stock.
Tranche 2 of the Promissory Note debt was fully amortized as of February 22, 2016.
|
Tranche
3:
|
●
|
During
January 2016, the investor converted $250 principal amount of debt into 200,001 shares of the Company’s common stock.
|
|
|
|
|
●
|
During
February 2016, the investor converted $167 principal amount of debt into 133,334 shares of the Company’s common stock.
|
|
●
|
On
March 2, 2016, the investor converted the remaining $83 principal amount into 66,667 shares of the Company’s common
stock.
|
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Acquisition
of Assets of SDN Essentials, LLC
On
January 1, 2016, the Company acquired the assets of SDN Essentials, LLC (“SDN”) for $50 in cash, 1,000,000 shares
of the Company’s common stock valued at $1.00 per share, and an earn out provision of $515, subject to SDN meeting certain
revenue targets. In addition, the Company will issue a pool of 50,000 shares of the Company’s common stock which will be
allocated among all employees of SDN.
Asset
Purchase Agreement
On
February 17, 2016, the Company consummated the sale of certain assets of VaultLogix and its subsidiaries, DPS and USDA, to KeepItSafe,
Inc. for an aggregate purchase price of $24,000. Of the $24,000 purchase price, $22,000 was paid to the Company at closing and
$2,000 is being held in escrow, to be released twelve months after the closing date of the sale.
Securities
Exchange Agreement
On
February 17, 2016, the Company entered into a securities exchange agreement with VaultLogix and the lender party thereto whereby
the Company exchanged the White Oak Global Advisors, LLC promissory note and subsequently assigned to the lender party a new 8.25%
senior secured convertible note dated February 18, 2016 in the aggregate principal amount of $11,601. As a result of the assignment,
the Company and VaultLogix’s obligations to White Oak Global Advisors, LLC have been satisfied.
The
new note has a maturity date of February 18, 2019, bears interest at 8.25% per annum, and is convertible into shares of the Company’s
common stock at a conversion price equal to the lowest of: (a) $2.00 per share, (b) 80% of the average of the volume weighted
average prices for each of the five consecutive trading days immediately prior to the applicable conversion date, and (c) 85%
of the volume weighted average price for the trading day immediately preceding the applicable conversion date, subject to adjustment
as set forth in the note. The Company has the option to pay interest in either cash or shares of the Company’s common stock.
Notice
from the Listing Qualifications Department of The Nasdaq Stock Market
On
April 18, 2016, the Company received a written notice from the Listing Qualifications Department of the Nasdaq Stock Market (“Nasdaq”)
indicating that the Company was not in compliance with Nasdaq Listing Rule 5250(c)(1) for continued listing because the Company
had not yet filed its Annual Report on Form 10-K for the period ended December 31, 2015.
On May 24, 2016, the Company
received a written notice from the Listing Qualifications Department of the Nasdaq indicating that the Company was not in compliance
with Nasdaq Listing Rule 5250(c)(1) for continued listing because the Company had not yet filed its Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 2016.
The notice provides that
the Company has until June 17, 2016 to submit a plan to regain compliance with Nasdaq’s continued listing requirements.
JGB First Forbearance and Amendment Agreement
On May 17, 2016, the Company
entered into a Forbearance and Amendment Agreement (the “Debenture Forbearance Agreement”) with JGB pursuant to which
JGB agreed to forbear action with respect to certain existing defaults in accordance with the terms of the Debenture Forbearance
Agreement. The defaults, which were not monetary in nature, related to the Company’s inability to timely file its annual
report on form 10-K for the fiscal year ended December 31, 2015.
Amended and Restated
Senior Secured Convertible Note
In connection with the execution
of the Debenture Forbearance Agreement, the Company executed and issued a second amended and restated senior secured convertible
debenture (the “Amended and Restated Debenture”) in order to amend the original 10% senior secured convertible debenture
(the “Original Debenture”) issued on December 29, 2015 by: (i) reducing the conversion price at which the Amended and
Restated Debenture converts into shares of the Company’s common stock to $0.80 per share, subject to equitable adjustments
as set forth in the Amended and Restated Debenture; and (ii) eliminating the provisions that provided for (A) the issuance of common
stock at a discount to the market price of the common stock and (B) anti-dilution protection with respect to JGB’s conversion
rights under the Original Debenture.
INTERCLOUD
SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Amended and Restated
Debenture was issued in the aggregate principal amount of $7,500, has a maturity date of May 31, 2019, bears interest at 0.67%
per annum, and is convertible into shares of the Company’s common stock at a fixed conversion price equal to $0.80 per share,
subject to equitable adjustments as set forth in the Amended and Restated Debenture. The Company shall pay interest to JGB on the
aggregate unconverted and then outstanding principal amount of the Amended and Restated Debenture, payable monthly in arrears as
of the last trading day of each calendar month and on May 31, 2019, in cash. In addition, the Company shall pay JGB an additional
amount equal to 7.5% of the outstanding principal amount on the Amended and Restated Debenture on each of May 31, 2017; May 31,
2018; and May 31, 2019, subject to certain exceptions set forth in the Amended and Restated Debenture. Commencing on May 17, 2016,
JGB shall have the right, at its option, to require the Company to redeem up to $169 of the outstanding principal amount of the
Amended and Restated Debenture plus the then accrued and unpaid interest thereon per calendar month in cash. The Amended and Restated
Debenture contains standard events of default.
Senior Secured Note
In connection with the execution
of the Debenture Forbearance Agreement, the Company executed and issued a 0.67% senior secured note (the “2.7 Note”),
dated May 17, 2016, in the aggregate principal amount of $2,745 to JGB. The 2.7 Note has a maturity date of May 31, 2019, bears
interest at 0.67% per annum, and contains standard events of default.
JGB Second Forbearance and Amendment Agreement
On May 17, 2016, the
Company entered into a forbearance and amendment agreement (the “Note Forbearance Agreement”) with VaultLogix and JGB,
pursuant to which JGB agreed to forbear action with respect to certain existing default in accordance with the terms of the Note
Forbearance Agreement. The defaults, which were not monetary in nature, related to the Company’s inability to timely file
its annual report on form 10-K for the fiscal year ended December 31, 2015.
Amended and Restated
Senior Secured Convertible Note
In connection with the execution
of the Note Forbearance Agreement, the Company executed and issued an amended and restated senior secured convertible note (the
“Amended and Restated Note”) in order to amend the original note by: (i) reducing the conversion price at which the
Amended and Restated Note converts into shares of the Company’s common stock at $0.80 per share, subject to equitable adjustments
as set forth in the Amended and Restated Debenture; and (ii) eliminating provisions that provided for (A) the issuance of common
stock at a discount to the market price of the common stock and (B) anti-dilution protection with respect to JGB’s conversion
rights under the original note.
The Amended and Restated
Note was issued in the aggregate principal amount of $11,601, has a maturity date of May 31, 2019, bears interest at 0.67% per
annum, and is convertible into shares of the Company’s common stock at a fixed conversion price of $0.80 per share, subject
to equitable adjustments as set forth in the Amended and Restated Note. The Company and VaultLogix shall pay interest to JGB on
the aggregate unconverted and then outstanding principal amount of the Amended and Restated Note, payable monthly in arrears as
of the last trading day of each calendar month and on May 31, 2019, in cash. In addition, the Company shall pay to JGB an additional
amount equal to 7.5% of the outstanding principal amount on the Amended and Restated Note on each of May 31, 2017; May 31, 2018;
and May 31, 2019, subject to certain exceptions set forth in the Amended and Restated Note. Commencing on May 17, 2016, JGB shall
have the right, at its option, to require the Company to redeem up to $322 of the outstanding principal amount of the Amended and
Restated Note plus the then accrued and unpaid interest thereon per calendar month in cash. The Amended and Restated Note contains
standard events of default.
Senior Secured Note
In connection with the execution
of the Note Forbearance Agreement, the Company executed and issued a 0.67% senior secured note (the “5.2 Note”), dated
May 17, 2016, in the aggregate principal amount of $5,220 to JGB. The 5.2 Note has a maturity date of May 31, 2019, bears interest
at 0.67% per annum, and contains standard events of default.
Amended Agreement
On May 23, 2016 the Company entered into an amended agreement with JGB, White Oak Global Advisors, LLC, VaultLogix,
and the Guarantors thereto (the “Amended Agreement”) pursuant to which, the Company requested that (i) JGB cause $172
to be withdrawn from the Blocked Account (as defined in the original debenture) and made available to the Company, and (ii) JGB
cause $328 to be withdrawn from the Deposit Account (as defined in the original note) and made available to the Company and VaultLogix
and, in exchange for the foregoing (i) VaultLogix will guarantee the obligations of, and provide security for, the Amended and
Restated Debenture and the 2.7 Note, (ii) the Guarantors (as defined in the Amendment Agreement) will guaranty all indebtedness
due to JGB under the Amended and Restated Note and 5.2 Note, and (iii) the Company and each Guarantor will provide security for
all obligations owed to JGB under the Amended and Restated Note and the 5.2 Note in accordance with the terms of an Additional
Debtor Joinder, dated May 23, 2016, pursuant to which the Company and each additional party thereto agrees to be bound by the terms
of that certain Security Agreement, dated as of February 18, 2016, made by VaultLogix in favor of the secured party thereto (the
“February Security Agreement”).
F-78