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ICLD > SEC Filings for ICLD > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for INTERCLOUD SYSTEMS, INC.

Form 10-Q for INTERCLOUD SYSTEMS, INC.


14-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations for the three and six months ended June 30, 2014 and 2013 should be read in conjunction with the unaudited consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed on April 8, 2014 with the Securities and Exchange Commission. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions to identify forward-looking statements.

Unless expressed otherwise, all dollar amounts other than per share amounts are expressed in thousands.

Overview

In 2013, we evaluated our reporting segments and determined that we operate in two reportable segments, specialty contracting services and telecommunication staffing services. The telecommunication staffing services segment is comprised of the ADEX reporting unit and provides contracted services to provide technical engineering and management solutions to large voice and data communications providers, as specified by their clients. Specialty contracting services revenues are derived from contracted services to provide technical engineering services along with contracting services to commercial and governmental customers. The specialty contracting service segment includes our AWS, T N S, Tropical and RM Engineering reporting units.

In January 2014, we acquired the operations of IPC. This acquisition allowed us to gain entry into the telecommunications hardware and software resale sector as well as expanding our services by adding a hardware and software maintenance division.

In February 2014, we acquired the operations of RentVM. This acquisition allowed us to gain entry into the cloud computing sector and expanded the range of products and services that we provide to our customers.

Due to the nature of the IPC and RentVM businesses, we determined that these subsidiaries should be classified as their own reportable segment - cloud and managed services.

With the acquisitions of IPC and RentVM, we re-evaluated all of our operating subsidiaries and determined that the IPC and divisions should be aggregated into one of three reporting segments based on their economic characteristics, products, production methods and distribution methods. The results of operations of IPC and RentVM are categorized within the cloud and managed services segment.

We also re-evaluated our previously-reported segments and determined that our specialty contracting services segment would be presented as the applications and infrastructure segment. We also re-evaluated our telecommunication staffing services segment (ADEX) and determined that it would be presented as the professional services segment. Based on the results of our second quarter of fiscal 2014, we have started to experience a decline in revenues due to a delay in work from a significant customer in our ADEX operating unit in our professional services segment. We will continue to monitor the activities of this operating unit to determine if a triggering event for goodwill impairment occurs.

Due to the addition of the cloud and managed services segment in 2014, certain comparative percentages mentioned below in our Results of Operations for the three and six months ending June 30, 2014 may not be meaningful (N/M).

Results of Operations - Three months ending June 30, 2014 and 2013

Revenues:



                                     Three months ended
                                          June 30,                     Change
(dollar amounts in thousands)        2014          2013       Dollars      Percentage
Applications and infrastructure   $   4,596     $  4,334     $    262            6 %
Professional services                 5,367        8,979       (3,612 )        (40 )%
Cloud and managed services            7,875            -        7,875          N/M
Total                             $  17,838     $ 13,313     $  4,525           34 %

Revenues for the three-month period ended June 30, 2014 increased by $4,525, or 34%, to $17,838, as compared to $13,313 for the corresponding period in 2013. The increases in revenues resulted primarily from our acquisitions included in our cloud and managed services segment. Professional services revenue declined in the three months ended June 30, 2014 compared to the same period in 2013, as a significant customer delayed some of the work to be performed by our company. During the three-month period ended June 30, 2013, all of our revenue was derived from our applications and infrastructure and our professional services, while for the three-month period ended June 30, 2014, 26% of our revenues were derived from our applications and infrastructure segment, 30% were derived from our professional services segment and 44% were derived from our cloud and managed services segment.

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Cost of revenue and gross margin:

                                     Three months ended
(dollar amounts in thousands)             June 30,                     Change
Applications and infrastructure       2014         2013       Dollars      Percentage
Cost of revenue                   $    2,727     $ 2,390     $    337           14 %
Gross profit                      $    1,869     $ 1,944     $    (75 )         (4 )%
Gross profit percentage                   41 %        45 %

Professional services
Cost of revenue                   $    4,237     $ 7,149     $ (2,912 )        (41 )%
Gross profit                      $    1,130     $ 1,830     $   (700 )        (38 )%
Gross profit percentage                   21 %        20 %

Cloud and managed services
Cost of revenue                   $    5,204     $     -     $  5,204          N/M
Gross profit                      $    2,671     $     -     $  2,671          N/M
Gross profit percentage                   34 %         0 %

Total
Cost of revenue                   $   12,168     $ 9,539     $  2,629           28 %
Gross profit                      $    5,670     $ 3,774     $  1,896           50 %
Gross profit percentage                   32 %        28 %

Cost of revenue for the three-month periods ended June 2014 and 2013 primarily consisted of direct labor provided by employees, services provided by subcontractors, direct material and other related costs. For a majority of the contract services we perform, our customers provide all necessary materials and we provide the personnel, tools and equipment necessary to perform installation and maintenance services. Cost of revenue increased by $2,629, or 28%, for the three-month period ended June 30, 2014 and was attributable to our acquisitions in January 2014 and February 2014, as well as lower cost of revenues related to our professional services segment. Costs of revenue as a percentage of revenues were 68% for the three-month period ended June 30, 2014, as compared to 72% for the same period in 2013.

Our gross profit percentage was 32% for the three-month period ended June 30, 2014, as compared to 28% for the comparable period in 2013. The overall increase in gross profit percentage was due to additional margin provided by our recent acquisitions, which was partially offset by declining margins within our applications and infrastructure segment.

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Salaries and wages:

                                     Three months ended
                                          June 30,                    Change
(dollar amounts in thousands)         2014         2013       Dollars     Percentage
Applications and infrastructure   $     588      $   807     $  (219 )          (27 )%
Percentage of total revenue               3 %          6 %

Professional services             $     848      $   787     $    61              8 %
Percentage of total revenue               5 %          6 %

Cloud and managed services        $   1,519      $     -     $ 1,519            N/M
Percentage of total revenue               9 %          0 %

Corporate                         $   1,135      $    11     $ 1,124          10218 %
Percentage of total revenue               6 %          0 %

Total                             $   4,090      $ 1,605     $ 2,485            155 %
Percentage of total revenue              23 %         12 %

For the three-month period ended June 30, 2014, salaries and wages increased $2,485, to $4,090 as compared to approximately $1,605 for the same period in 2013. The increase primarily was due to the acquisitions we completed in 2014, which accounted for $1,519 of the $2,485 of expense. Salaries and wages increased in corporate expenses for the three months ended June 30, 2014 compared to the same period in 2013, primarily as a result of stock-based compensation of $1,076 in 2014. Salaries and wages were 23% of revenue in the three-month period ended June 30, 2014, as compared to 12% for the same period in 2013. Our salaries and wages will not increase proportionally to the increase in our revenue.

General and Administrative:



                                     Three months ended
                                          June 30,                    Change
(dollar amounts in thousands)         2014         2013       Dollars     Percentage
Applications and infrastructure   $     495      $   274     $   221           81 %
Percentage of total revenue               3 %          2 %

Professional services             $     221      $   408     $  (187 )        (46 )%
Percentage of total revenue               1 %          3 %

Cloud and managed services        $     620      $     -     $   620          N/M
Percentage of total revenue               3 %          0 %

Corporate                         $   1,709      $   820     $   889          108 %
Percentage of total revenue              10 %          6 %

Total                             $   3,045      $ 1,502     $ 1,543          103 %
Percentage of total revenue              17 %         11 %

General and administrative costs include all of our corporate costs, as well as the costs of our subsidiaries' management personnel and administrative overhead. These costs consist of office rental, legal, consulting and professional fees, travel costs and other costs that are not directly related to the performance of our services under customer contracts. General and administrative expenses increased $1,543, or 103%, to $3,045 in the three-month period ended June 30, 2014, as compared to $1,502 in the comparable period of 2013. The increase was primarily the result of acquisition-related costs, as well as an increase in overhead expenses relating to the acquisitions we completed in 2014. General and administrative expenses increased to 17% of revenues in the three-month period ended June 30, 2014, from 11% in the comparable period in 2013.

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Interest Expense:

Interest expense for the three-month periods ended June 30, 2014 and 2013 was $3,358 and $754, respectively. The charges incurred in the 2014 period primarily related to interest expense of $139 related to the related-party loans, $2,672 of amortization of debt discounts and $147 related to interest and loan costs related to the 12% debentures. In the 2013 period, the majority of interest charges were related to the MidMarket debt.

Net Loss Attributable to our Common Stockholders.

Net loss attributable to our common stockholders was $9,965 for three-month period ended June 30, 2014, as compared to net loss attributable to common stockholders of $1,314 for the three months ended June 30, 2013. The increase in the loss attributable to common shareholders was due to increased operating expenses of $4,649 related to the acquisition of IPC and stock compensation expense, increases in interest expense of $2,604 due to additional debt financing and losses incurred on converting and extinguishing debt of $5,886 related to the MidMarket loan and 12% debentures. These changes were offset by increases of gross profit of $1,896 and gains on derivative liabilities of $2,723.

Results of Operations - Six months ending June 30, 2014 and 2013

Revenues:



                                     Six months ended
                                         June 30,                     Change
(dollar amounts in thousands)        2014         2013       Dollars      Percentage
Applications and infrastructure   $  8,472     $  6,363     $  2,109           33 %
Professional services               10,310       18,192       (7,882 )        (43 )%
Cloud and managed services          13,131            -       13,131          N/M
Total                             $ 31,913     $ 24,555     $  7,358           30 %

Revenues for the six-month period ended June 30, 2014 increased by $7,358, or 30%, to $31,913, as compared to $24,555 for the corresponding period in 2013. The increases in revenues resulted primarily from our acquisitions included in our cloud and managed services segment. Professional services revenue declined from the six months ended June 30, 2014 compared to the same period in 2013, as a significant customer delayed some of the work to be performed by our company. During the six-month period ended June 30, 2013, all of our revenue was derived from our applications and infrastructure and our professional services, while for the six-month period ended June 30, 2014, 27% of our revenues were derived from our applications and infrastructure segment, 32% were derived from our professional services segment and 41% were derived from our cloud and managed services segment.

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Cost of revenue and gross margin:

                                     Six months ended
(dollar amounts in thousands)            June 30,                     Change
Applications and infrastructure      2014         2013       Dollars      Percentage
Cost of revenue                   $  4,930     $  3,312     $  1,618           49 %
Gross profit                      $  3,541     $  3,051     $    490           16 %
Gross profit percentage                 42 %         48 %

Professional services
Cost of revenue                   $  8,223     $ 14,454     $ (6,231 )        (43 )%
Gross profit                      $  2,088     $  3,738     $ (1,650 )        (44 )%
Gross profit percentage                 20 %         21 %

Cloud and managed services
Cost of revenue                   $  9,156     $      -     $  9,156          N/M
Gross profit                      $  3,975     $      -     $  3,975          N/M
Gross profit percentage                 30 %          0 %

Total
Cost of revenue                   $ 22,309     $ 17,766     $  4,543           26 %
Gross profit                      $  9,604     $  6,789     $  2,815           41 %
Gross profit percentage                 30 %         28 %

Cost of revenue for the six-month periods ended June 2014 and 2013 primarily consisted of direct labor provided by employees, services provided by subcontractors, direct material and other related costs. As discussed above, a majority of the contract services we perform, our customers provide all necessary materials and we provide the personnel, tools and equipment necessary to perform installation and maintenance services. Cost of revenue increased by $4,543, or 26%, for the six-month period ended June 30, 2014, to $22,309, as compared to $17,766 for the same period in 2013. The increase in cost of revenue was attributable to our acquisitions in April 2013, January 2014 and February 2014, as well as lower cost of revenues related to our professional services segment. Costs of revenue as a percentage of revenues were 70% for the six-month period ended June 30, 2014, as compared to 72% for the same period in 2013.

Our gross profit percentage was 30% for the six-month period ended June 30, 2014, as compared to 28% for the comparable period in 2013. The overall increase in gross profit percentage is due to additional margin provided by our recent acquisitions, which was partially offset by declining margins within our applications and infrastructure segment.

-38-

Salaries and wages:

                                     Six months ended
                                         June 30,                   Change
(dollar amounts in thousands)        2014        2013       Dollars     Percentage
Applications and infrastructure   $  1,053     $ 1,337     $  (284 )        (21 )%
Percentage of total revenue              3 %         5 %

Professional services             $  1,787     $ 1,676     $   111            7 %
Percentage of total revenue              6 %         7 %

Cloud and managed services        $  3,492     $     -     $ 3,492          N/M
Percentage of total revenue             11 %         0 %

Corporate                         $  1,318     $   179     $ 1,139          636 %
Percentage of total revenue              4 %         1 %

Total                             $  7,650     $ 3,192     $ 4,458          140 %
Percentage of total revenue             24 %        13 %

For the six-month period ended June 30, 2014, salaries and wages increased $4,458, to $7,650 as compared to approximately $3,192 for the same period in 2013. The increase primarily was due to the acquisitions we completed in 2013 and 2014, which accounted for $3,492 of the $4,458 of expense. Salaries and wages increased in corporate expenses for the six months ended June 30, 2014 compared to the same period in 2013, primarily as a result of stock-based compensation of $1,259 in 2014. Salaries and wages were 24% of revenue in the six-month period ended June 30, 2014, as compared to 13% for the same period in 2013. Our salaries and wages will not increase proportionally to the increase in our revenue.

General and Administrative:



                                     Six months ended
                                         June 30,                   Change
(dollar amounts in thousands)        2014        2013       Dollars     Percentage
Applications and infrastructure   $    921     $   525     $   396           75 %
Percentage of total revenue              3 %         2 %

Professional services             $    618     $   824     $  (206 )        (25 )%
Percentage of total revenue              2 %         3 %

Cloud and managed services        $    911     $     -     $   911          N/M
Percentage of total revenue              3 %         0 %

Corporate                         $  3,182     $ 1,204     $ 1,978          164 %
Percentage of total revenue             10 %         5 %

Total                             $  5,632     $ 2,553     $ 3,079          121 %
Percentage of total revenue             18 %        10 %

General and administrative costs include all of our corporate costs, as well as the costs of our subsidiaries' management personnel and administrative overhead. These costs consist of office rental, legal, consulting and professional fees, travel costs and other costs that are not directly related to the performance of our services under customer contracts. General and administrative expenses increased $3,079, or 121%, to $5,632 in the six-month period ended June 30, 2014, as compared to $2,553 in the comparable period of 2013. The increase was primarily the result of acquisition-related costs, as well as an increase in overhead expenses relating to the acquisitions we completed in 2014. General and administrative expenses increased to 18% of revenues in the six-month period ended June 30, 2014, from 10% in the comparable period in 2013.

-39-

Interest Expense:

Interest expense for the six-month periods ended June 30, 2014 and 2013 was $6,634 and $2,048, respectively. The charges incurred in the 2014 period primarily related to interest expense of $1,104 related to the related-party loans and 12% debentures, $3,780 of amortization of debt discounts and $923 related to interest and loan costs related to the 12% debentures and PNC Bank revolving credit facility. In the 2013 period, the majority of interest charges were related to the MidMarket debt.

Net Loss Attributable to our Common Stockholders.

Net loss attributable to our common stockholders was $3,310 for six-month period ended June 30, 2014, as compared to net loss attributable to common stockholders of $2,365 for the six months ended June 30, 2013. The increase in the loss attributable to common shareholders was due to increased operating expenses of $8,602 related to the acquisition of IPC and stock compensation expense, increases in interest expense of $4,586 due to additional debt financing, losses incurred on converting and extinguishing debt of $11,627 related to the MidMarket loan and 12% debentures, and $2,385 due to losses on conversion of the Forward Investments debt. These changes were offset by increases in gross profit of $2,815 and gains on derivative liabilities of $23,686.

Liquidity and Capital Resources

At June 30, 2014, we had a working capital deficit of $14,328, as compared to working capital of $4,197 at December 31, 2013.

We plan to generate cash flow to address liquidity concerns through three potential sources. The first potential source is operating cash flow from our subsidiaries. During 2014, we expect to generate positive cash flow from the AWS entities for the full fiscal year following our acquisitions of the AWS entities in April 2013. In addition, we completed our acquisition of IPC in January 2014. We expect that IPC will contribute positively to our consolidated cash flows from operations after it is integrated into our business. The second potential source of generating cash is for us to secure a new receivables loan facility from lenders. We recently terminated our receivables loan facility with PNC Bank and incurred a charge of approximately $300, in connection with such termination. We expect to replace that loan facility with a new receivables loan facility in the third quarter of 2014. Finally, the third potential source of generating cash flow is through future equity or debt financings in the capital markets.

We had capital expenditures of $127 and $31 for the three-month periods ended June 30, 2014 and 2013, respectively, and $211 and $45 for the six-month periods June 30, 2014 and 2013, respectively. We expect our capital expenditures for the 12 months ending June 30, 2015 to be consistent with our prior spending. These capital expenditures will be primarily utilized for equipment needed to generate revenue and for office equipment. We expect to fund such capital expenditures out of our working capital.

The following summary of our cash flows for the periods indicated has been derived from our historical consolidated financial statements, which are included elsewhere in this report:

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