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ICLD > SEC Filings for ICLD > Form 8-K on 25-Mar-2013All Recent SEC Filings

Show all filings for INTERCLOUD SYSTEMS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 8-K for INTERCLOUD SYSTEMS, INC.


25-Mar-2013

Non-Reliance on Previous Financials, Audits or Interim Review


Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review.

On March 19, 2013, the board of directors of InterCloud Systems, Inc. (the "Company"), upon the recommendation of the Company's management, determined the Company's audited consolidated financial statements for the years ended December 31, 2011 and 2010 and the related reports of its independent public accounting firm, and the Company's unaudited consolidated financial statements for the quarters ended March 31, 2012, June 30, 2012 and September 30, 2012, should no longer be relied upon and must be restated due to the errors described herein. The proper application of the relevant accounting provisions requires reclassifications and adjustments to the Company's previously-issued consolidated balance sheets and consolidated statement of operations and Stockholders' Deficit.

1) The Company has performed an assessment of stock-based compensation issued to employees during the periods 2010 to 2012 to determine if the accounting previously applied was within the scope of Accounting Standards Codification Topic 718 (ASC 718), which was effective as of January 1, 2006. Under the fair value recognition provisions of ASC 718, stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, based on the terms of the awards. The Company concluded that the issuances of stock-based compensation are within the scope of ASC 718, although the provisions of ASC 718 were not properly applied. In January 2010, the Company issued 4,000,000 shares of common stock to one of its officers with a fair value of $2,400,000 for services rendered for the years 2010 to 2012. The compensation expense of $2,400,000 was previously recognized over the related employment contract, over a three-year service period, ($800,000 per year during each of 2011 and 2010, $150,000 in the interim period ended March 31, 2012, and $200,000 in each of the interim periods ended June 30, 2012 and September 30, 2012). The Company has determined that because the award did not contain any explicit or implicit performance or service condition, the fair value of the award should have been expensed upon its grant, which was in January 2010. As a result, salaries and wages were understated by $1,600,000 for the annual period ended December 31, 2010, overstated by $800,000 for the annual period ended December 31, 2011, overstated $150,000 for the interim period ending March 31, 2012 and overstated by $200,000 for each of the interim periods ended June 30, 2012 and September 30, 2012.

2) In August 2010, the Company entered into a Note and Warrant Purchase Agreement pursuant to which it sold warrants for the right to purchase up to 167,619 shares of the Company's common stock at $18.75 per share. The warrants were treated as detachable warrants under ASC 815, Broad Transactions - Derivatives and Hedging, in error and accounted for as a reduction in stockholders' equity in an amount equal to the fair value of the warrants. The Company has determined that the warrants should have been treated as a debt discount (reduction in notes payable balance instead of shareholder equity) and amortized over the term of the Note using the effective interest method. As a result, notes payable was overstated by $381,145 and additional paid in capital was understated by $381,145. The warrant included a derivative feature, which was not an equity contract, and its full value upon issuance should have been allocated to the loan proceeds as a debt discount. Additionally, the understatement of debt discount resulting from this misstatement should have been amortized over the term of the loan.

As a result, notes payable was overstated by $381,145 at December 31, 2010 and $228,465 at December 31, 2011. Additional paid-in-capital was understated by $381,145 as of September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011 and 2010. Interest expense was understated by $158,810 for the year ended December 31, 2010, and by $162,810 for the year ended December 31, 2011.


3) In December 2011, the Company entered into a Third Loan Modification Agreement with its lender UTA Capital LLC ("UTA"). As a result of this amendments the Company recorded an increase to its additional paid-in capital for a debt discount of $301,876 resulting from perceived amendments to the terms of the warrants issued to UTA when the Company entered into the modification of the loan agreement. However, the terms of the warrants were not amended, and the modification of the loan agreement only confirmed that the number of warrants outstanding should have increased pursuant to the anti-dilution provisions included in the initial terms of the warrants, as granted. The error also resulted in an overstatement of interest expense due to the amortization of debt of the discount during 2012 for $261,876 and $40,000 in 2011. The Company noted that it incorrectly calculated the fair value of the additional warrants issued and noted the impact of such miscalculation to the profit and loss statement was immaterial in 2012 and 2011.

4) On August 6, 2010, the Company issued warrants to purchase 167,619 shares of the Company's common stock at $18.75 per share to a lender. The warrants qualified as a derivative instrument and are therefore required to be recorded as a liability at fair value when issued and adjusted to current fair value on a quarterly basis in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. As, a result, the change in fair value of the derivative and the corresponding derivative liability were understated by $37,414 at December 31, 2011, $37,414 at March 31, 2012 and $37,414 at June 30, 2012.

5) The Company recorded certain consideration provided to lenders as deferred loan costs, which amounted to $53,848 at December 31, 2011. The Company reclassified the carrying value of the unamortized consideration to debt discount at December 31, 2011.

6) The Company properly recorded the compensation in 2011 to a former officer for $200,000 but incorrectly recorded the liability as additional paid in capital.

7) The Company did not properly allocate an amount to intangible assets for the acquisitions of Tropical Communications, Inc. ("Tropical") and Rives-Montiero Engineering LLC ("RM Engineering"), as of December 31, 2011, and on T N S, Inc. ("TNS") and ADEX Corporation ("ADEX"), as of September 17, 2012, until it had an independent party prepare a valuation report in 2013. Based on the results of the report, the Company corrected its original allocations and increased additional paid in capital, for the value of the stock issued by $69,226, increased acquisition notes payable by $141,607, decreased the impairment of goodwill by $437,000 and increased the carrying value of goodwill and other intangible assets by $509,381. The Company amortized the intangible assets with a useful life of two to ten years and recorded amortization expense of $39,314 in the third quarter of 2012, $15,922 in the second quarter of 2012, and $15,922 in the first quarter of 2012. Based on the results of the report, the Company recorded goodwill and intangible assets of $458,331 for Tropical, $51,050 for RM Engineering, $505,631 for TNS and $2,200,791 for ADEX. The Company also recorded the contingent consideration to be paid, which was $15,320 for Tropical, $127,385 for RM Engineering, $2,123,210 for ADEX and $259,550 for TNS.

8) On September 13, 2012, the Company sold 60% of the outstanding shares of common stock of Digital Comm, Inc. ("Digital") to the Company's former president and a former director. As consideration for the purchase, the former president issued to the Company a non-recourse promissory note in the principal amount of $125,000. The note is secured by the purchased shares.

At the date of disposition, the Company had a receivable from Digital of approximately $880,000. In the quarter ended September 30, 2012, the Company recorded a loss of $880,393 on the write-off of the receivable. The Company also recorded a note receivable from the former president in the amount of $125,000 and recorded its remaining investment in Digital in the amount of $83,333. The Company also recorded a contribution to additional paid in capital in the amount of $1,586,919 based on the disposition.

The Company subsequently reviewed the accounting for the transaction and concluded that it should write off the $125,000 promissory note from its former president, as it deemed it unlikely that he could repay the note. The Company also adjusted the negative investment carrying amount at the time of deconsolidation to zero, which resulted in a net gain of approximately $528,000. The Company does not attribute any value to its equity investment in Digital at December 31, 2012 based on Digital's historical recurring losses and expected future losses and Digital's liabilities far exceeding the value of their tangible and intangible assets at such date.


9) In September 2012, the Company entered into a Loan and Security Agreement with a lender to provide the Company term loans in the aggregate amount of $13,000,000. As part of the agreement, the Company issued to the lender warrants to purchase up to 3% of the Company's common stock on a fully-diluted basis. The Company has determined that the warrants should have been treated as a debt discount (reduction in notes payable balance instead of shareholder equity) and amortized over the term of the related note. The Company recorded the derivative value of the warrants issued to the lender on September 17, 2012 as a derivative liability in the amount of $360,738 and expensed the amount as a change in fair value of derivative instruments. The Company recomputed the amount of the derivative liability as $193,944 and recorded the amount as a debt discount.

10) In September 2012, the Company issued its former president 400 shares of Series D Preferred Stock with a fair value of $352,344 for services rendered during the quarter ended September 30, 2012, but did not record compensation expense for that amount in the quarter ended September 30, 2012. As a result, salaries and wages were understated $352,344 in the quarter ended September 30, 2012. No other periods were impacted by the error.

11) During the quarter ended September 30, 2012, the Company issued Series E Preferred Stock. The Company recorded the amount of subscriptions received as subscriptions for shares of Series E Preferred Stock, but subsequently, it was determined that some of the shares of Series E Preferred Stock should have been classified as Series B Preferred Stock. The Company also classified the Series E Preferred Stock as equity, and subsequently determined that, based on the redeemable feature of the Series E Preferred Stock, it should have been temporary equity.

12) The Company classified its Series D Preferred Stock as permanent equity and subsequently determined that based on the redeemable feature of the stock, that it should be classified as temporary equity. The Series D Preferred Stock was listed as $566 in the equity section of the balance sheet, but should have been recorded at the redemption value of $605,872 in the temporary equity section of the balance sheet at March 31, 2012, June 30, 2012 and September 30, 2012, and at $605,872 at December 31, 2011.

13) The Company recorded the Series A Preferred Stock as temporary equity with a value of $200,000. The Company evaluated the Series A Preferred Stock and determined that based on the par value of such stock, along with its low probability of being redeemed that it should be classified as permanent equity, with the amount listed at par value. This resulted in a change of $199,800 to the Series A Preferred Stock value.

14) During the quarters ended March 31, 2012 and June 30, 2012, the Company classified Series C Preferred Stock as permanent equity. Upon reviewing the redeemable features of such stock, the Company classified the value of the outstanding shares as temporary equity.

15) On February 14, 2011, the Company and UTA entered into a First Loan Extension and Modification Agreement (the "Modification Agreement") in connection with the Company's existing note payable, which had a balance of $775,000 at December 31, 2010. The Modification Agreement provided for an extension of the original maturity date of the note from August 6, 2011 to September 30, 2011. In exchange for consenting to the Modification Agreement, UTA was granted 10,257 shares of the Company's common stock, which had a fair value of $153,850 and was recorded as a debt discount. Additionally, as additional consideration for the Company's failure to satisfy a certain covenant in the loan agreement, UTA was granted 4,000 shares of the Company's common stock, which was recorded as a penalty paid to the lender and recorded as an expense. As of December 31, 2011, these two additional grants of shares had not been physically issued. However, such shares are reflected on the accompanying financial statements as if issued. This amendment was accounted for as an extinguishment and therefor the unamortized deferred loan costs of $53,848, debt discount from the original agreement of $504,648 and debt discount from this amendment of $153,850 were expensed.

The following are the previously-reported and as adjusted balances on the Company's consolidated balance sheet at September 30, 2012, June 30, 2012, March 31, 2012, and December 31, 2011 and 2010 and consolidated statements of operations for the periods ended September 30, 2012, June 30, 2012 and March 31,2012 and for the years ended December 31, 2011 and 2010, and the corresponding over/understatement on each appropriate financial caption for each error.


                                                 For The Three Months Ended
                                                       March 31, 2012
                                As Previously
Consolidated Statement of
Operations                        Reported          Adjustments                  As Restated
                                 (Unaudited)        (Unaudited)                  (Unaudited)
Operating expenses
Depreciation and
amortization                   $        14,208     $      15,522        7       $      29,730
Salaries and wages                     180,000          (150,000 )      1              30,000
Total operating expenses             1,072,245          (134,478 )                    937,767
Other income (expenses)
Interest expense                      (306,945 )         227,893        5             (79,052 )
Total other income (expense)          (279,296 )         227,893                      (51,403 )
Net loss                       $      (696,186 )   $     362,371                $    (333,815 )



                                                      As of March 31, 2012
                               As Previously
Consolidated Balance Sheet        Reported        Adjustments                         As Restated
                                (Unaudited)       (Unaudited)                         (Unaudited)
Current assets
Deferred loan costs            $       54,420     $    (54,420 )          5          $           -
  Total current assets                801,923          (54,420 )                           747,503
Intangible assets, net                717,236          493,859            7              1,211,095
Total assets                        2,139,980          439,439                           2,579,419
Current liabilities
Accounts payable                      447,724          200,000            6                647,724
Notes payable, acquisitions                 -          141,607            7                141,614
Total current liabilities           1,401,136          341,607                           1,742,743
Derivative liabilities                  1,923           37,414            4                 39,337
Total other liabilities             1,842,009           37,414                           1,879,423
Series C Preferred stock                    -          800,000           14                800,000
Series D Preferred stock                    -          605,872           12                605,872
Total temporary equity                318,839        1,405,872                           1,724,711
Stockholders' equity
(deficit)
Series C Preferred stock                    1               (1 )         14                      -
Series D Preferred Stock                  566             (566 )         12                      -
 Additional paid-in capital         8,768,447         (985,224 )        1,10             7,783,223
 Accumulated deficit              (10,317,112 )       (359,663 )     1,4,5,6,7,8       (10,676,775 )
Total stockholders' deficit        (1,421,554 )     (1,345,454 )                        (2,767,008 )
Total liabilities
non-controlling interest and
stockholders' deficit          $    2,139,980     $    439,439                       $   2,579,419


                                                 For The Three Months Ended
                                                       June 30, 2012
                                As Previously
Consolidated Statement of
Operations                         Reported          Adjustment                  As Restated
                                 (Unaudited)        (Unaudited)                  (Unaudited)
Operating expenses
 Depreciation and
amortization                   $         25,002     $     15,522        7       $      40,524
 Stock compensation                     200,000         (200,000 )      1                   -
Total operating expenses                882,462         (184,478 )                    697,984
Other income (expenses)
 Interest expense                      (287,120 )         24,191        5            (262,929 )
Total other income (expense)           (287,607 )         24,191                     (263,416 )
Net loss                       $       (743,082 )   $    208,669                $    (534,413 )



                                                  For The Six Months Ended
                                                       June 30, 2012
                                 As Previously
 Consolidated Statement of
 Operations                        Reported          Adjustment                 As Restated
                                  (Unaudited)       (Unaudited)                 (Unaudited)
 Operating expenses
  Depreciation and
 amortization                   $        39,210     $     31,044        7       $     70,254
  Stock compensation                    380,000         (350,000 )      1             30,000
 Total operating expenses             1,954,708         (318,956 )                 1,635,752
 Other income (expenses)
  Interest expense                     (594,064 )        252,084        5           (341,980 )
 Total other income (expense)          (571,953 )        252,084                    (319,869 )
 Net loss                       $    (1,439,268 )   $    571,040                $   (868,228 )



                                                               As of June 30, 2012
                               As Previously
Consolidated Balance Sheet        Reported         Adjustment                       As Restated
                                (Unaudited)       (Unaudited)                       (Unaudited)
Current assets
Deferred loan costs            $       30,229     $    (30,229 )         5         $           -
Total current assets                  703,343          (30,229 )                         673,114
Intangible assets, net                717,236          478,337           7             1,195,573
Total assets                        2,122,107          448,108                         2,570,215
Current liabilities
Accounts payable                      653,687          200,000           6               853,687
Notes payable, acquisitions                 -          141,607           7               141,607
Total current liabilities           2,877,016          341,607                         3,218,623
Derivative liabilities                  1,013           37,414           4                38,427
Total other liabilities               512,766           37,414                           550,180
Series C Preferred stock                             1,150,000          14             1,150,000
Series D Preferred stock                               605,872          12               605,872
Total temporary equity                326,750        1,755,872                         2,082,622
Stockholders' equity
(deficit)
Series C Preferred stock                    1               (1 )        14                     -
Series D Preferred Stock                  566             (566 )        12                     -
 Additional paid-in capital         9,355,272       (1,535,224 )       2,12            7,820,048
 Accumulated deficit              (11,082,070 )       (150,994 )     1,4,5,6,7       (11,233,064 )
Total stockholders' deficit        (1,594,425 )     (1,686,785 )                      (3,281,210 )
Total
liabilities non-controlling
interest and stockholders'
deficit                        $    2,122,107     $    448,108                     $   2,570,215


                                                 For The Three Months Ended
                                                     September 30, 2012
                                 As Previously
 Consolidated Statement of
 Operations                        Reported          Adjustment                 As Restated
                                  (Unaudited)       (Unaudited)                 (Unaudited)
 Operating expenses
  Depreciation and
 amortization                   $        41,434     $     39,314        7       $     80,748
  Stock compensation                    223,998          152,344        1            376,342
 Total operating expenses               882,462          191,658                   1,074,120
 Other income (expenses)
 unrealized loss on fair
 value of derivative                   (360,868 )        360,738        9               (130 )
 Gain (loss) from
 deconsolidation of Digital            (880,393 )      1,462,429        8            582,036
 Total other income (expense)        (2,017,975 )      1,823,167                    (194,808 )
 Net loss                       $    (2,479,246 )   $  1,631,509                $   (847,737 )



                                                 For The Nine Months Ended
                                                     September 30, 2012
                                 As Previously
 Consolidated Statement of
 Operations                        Reported          Adjustment                 As Restated
                                  (Unaudited)       (Unaudited)                 (Unaudited)
 Operating expenses
  Depreciation and
 amortization                   $        80,644     $     70,358        7       $    151,002
  Stock compensation                    603,998         (197,656 )      1            406,342
 Total operating expenses             3,653,187         (127,298 )                 3,525,889
 Other income (expenses)
 unrealized loss on fair
 value of derivative                   (360,738 )        360,738        9                  -
 Gain (loss) from
 deconsolidation of Digital            (880,393 )      1,462,429        8            582,036
  Interest expense                   (1,370,738 )        252,084        5         (1,118,654 )
 Total other income (expense)        (2,589,888 )      2,075,251                    (514,637 )
 Net loss                       $    (3,918,474 )   $  2,202,549                $ (1,715,925 )



                                                    As of September 30, 2012
                               As Previously
Consolidated Balance Sheet        Reported         Adjustment                         As Restated
                                (Unaudited)       (Unaudited)                         (Unaudited)
Current assets
Deferred loan costs            $    1,823,465     $ (1,529,830 )          5          $     293,635
Total current assets                9,779,553       (1,529,830 )                         8,249,723
Goodwill and Intangible
assets, net                        15,731,611        3,013,825            7             18,745,436
Note receivable - related
party                                 125,000         (125,000 )                                 -
Investment in Digital                  83,333          (83,333 )                                 -
Deferred loan costs, net of
current portion                             -        1,499,601            7              1,499,601
Total assets                       26,177,676        2,775,263                          28,952,939
Current liabilities
Accounts payable                    1,250,170          200,000            6              1,450,170
Notes payable, acquisitions                 -        2,522,465            7              2,522,465
Total current liabilities           6,322,473        2,722,465                           9,044,938
Term loan, net of current
portion, net of debt
discount                           12,350,000         (193,944 )                        12,156,056
Derivative liabilities                361,881         (129,380 )          4                232,501
Total other liabilities            12,962,324         (129,380 )                        12,832,944
Series A Preferred Stock              200,000         (200,000 )         13                      -
Series B Preferred Stock              384,063          958,216           11              1,342,279
Series D Preferred stock                             1,491,690           12              1,491,690
Series E Preferred stock                             2,225,000           11              2,225,000
Series F Preferred stock            4,150,000                -                           4,150,000
Total temporary equity              6,734,063        4,474,906                          11,208,969
Stockholders' equity
(deficit)
Series A Preferred Stock                    -              200           13                    200
Series D Preferred Stock                  566             (566 )         12                      -
Series E Preferred stock                    4               (4 )         11                      -
 Additional paid-in capital        13,664,000       (7,151,459 )      1,8,10,11          6,512,541
 Accumulated deficit              (13,599,948 )      2,859,101       1,4,5,6,7,8       (10,740,847 )
Total stockholders' deficit           158,816       (4,292,728 )                        (4,133,912 )
Total liabilities,
non-controlling interest and
stockholders' equity
(deficit)                      $   26,177,676     $  2,775,263                       $  28,952,939


                                                  As of December 31, 2010
                                 As Previously
 Consolidated Balance Sheet        Reported          Adjustment                 As Restated
 Current liabilities
 Term loans, current portion    $       509,268     $   (222,335 )      2       $    286,933
 Total current liabilities            1,368,030         (222,335 )                 1,145,695
 Stockholders' equity
 (deficit)
 Additional paid-in capital             581,800        1,991,657       1,2         2,573,457
 Accumulated deficit                 (2,219,483 )     (1,758,810 )     1,2        (3,978,293 )
 Total Intercloud Systems,
 Inc. stockholders' deficit          (1,627,086 )        222,335                  (1,404,751 )
 Total stockholders' deficit         (1,627,086 )        222,335                  (1,404,751 )
. . .
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