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ICLD > SEC Filings for ICLD > Form 10-Q on 9-Nov-2016All Recent SEC Filings

Show all filings for INTERCLOUD SYSTEMS, INC.

Form 10-Q for INTERCLOUD SYSTEMS, INC.


9-Nov-2016

Quarterly Report


2. GOING CONCERN UNCERTAINTY, FINANCIAL CONDITION AND MANAGEMENT'S PLANS

The Company's management 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's management believes the Company's ability to continue operations depends on its ability to sustain and grow revenue and results of operations as well as the Company's ability to access capital markets when necessary to accomplish the Company's strategic objectives. The Company's management believes that the Company will continue to incur losses for the immediate future. For the three and nine months ended September 30, 2016, the Company generated gross profits from operations but failed to achieve positive cash flow from operations. The Company expects to finance future cash needs from the results of operations and the sale of certain operating assets or businesses. 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.

During the three and nine months ended September 30, 2016 and the year ended December 31, 2015, the Company suffered recurring losses from operations. At September 30, 2016 and December 31, 2015, the Company had a total stockholders' deficit of $8,413 and $4,200, respectively. The decrease of $8,498 in the Company's working capital from December 31, 2015 to September 30, 2016 was primarily the result of an increase in accounts payable and accrued expenses of $5,648 (including non-cash activity) and an increase in the current portion of term loans (net of debt discounts) of $2,826. In addition, certain of the Company's derivative instruments in the amount of $1,287 are now due to mature by September 30, 2017, whereas only $408 of these derivative instruments were current as of December 31, 2015.

On or prior to September 30, 2017, the Company has obligations relating to the payment of indebtedness as follows:

? $5,403 relating to promissory notes held by related parties that mature on July 1, 2017;

? $5,755 relating to a promissory note held by a related party that matured on May 30, 2016 and is due on demand;

? $2,020 relating to term loans - senior convertible notes with current portions payable through January 2017;

? $306 relating to current maturities of a convertible note that matures in November 2016;

? $363 relating to current maturities of a convertible note that matures in January 2017;

? $225 relating to a promissory note held by a related party that matured on May 30, 2016 and is due on demand;

? $106 relating to a promissory note held by a former owner of Tropical that matures in November 2016;

? $75 relating to a promissory note held by a related party that is due on demand; and

? $349 relating to the settlement of IPC-Related Litigation discussed in

Part II, Item 1, Legal Proceedings

The Company anticipates meeting its cash obligations on indebtedness that is payable on or prior to September 30, 2017 from earnings from operations, the sale of certain operating assets or businesses and possibly from the proceeds of additional indebtedness or equity raises. If the Company is not successful in obtaining additional financing when required, the Company expects that it will be able to renegotiate and extend certain of its notes payable as required to enable it to meet its remaining debt obligations as they become due, although there can be no assurance that the Company will be able to do so.

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(UNAUDITED)

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 managed services segments of its business, which contributed to the losses from operations. The Company's management has taken several actions to ensure that it will have sufficient liquidity to meet its obligations, including the reduction of certain general and administrative expenses, consulting expenses and other professional services fees. 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 certain operating assets or businesses, 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's management believes that these actions will enable the Company to meet its liquidity requirements through September 30, 2017. There is no assurance that the Company will be successful in any capital-raising efforts that it may undertake to fund operations over the next 12 months.

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

3. LOANS RECEIVABLE



Loans receivable as of September 30, 2016 and December 31, 2015 consisted of the
following:



                                                                   September 30,      December 31,
                                                                       2016               2015
Loans to NGNWare                                                  $           507     $         100
Loans to employees, due between December 2016 and December 2017               928               300
Loans receivable                                                  $         1,435     $         400

4. PROPERTY AND EQUIPMENT, NET



Property and equipment as of September 30, 2016 and December 31, 2015 consisted
of the following:



                                           September 30,       December 31,
                                               2016                2015
         Vehicles                         $           785     $          777
         Computers and office equipment               955                905
         Equipment                                    764                605
         Software                                     176                171
         Total                                      2,680              2,458
         Less accumulated depreciation             (2,060 )           (1,799 )

         Property and equipment, net      $           620     $          659

Depreciation expense for the three months ended September 30, 2016 and 2015 was $89 and $87, respectively. Depreciation expense for the nine months ended September 30, 2016 and 2015 was $261 and $275, respectively.

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(UNAUDITED)

5. GOODWILL AND INTANGIBLE ASSETS



Goodwill



The following table summarizes the Company's goodwill as of September 30, 2016
and December 31, 2015



                                             Applications and        Professional         Managed
                                              Infrastructure           Services          Services         Total
Balance at December 31, 2015                $             6,906     $         9,257     $     7,495     $  23,658

Acquisition                                                 566                 823               -         1,389

Balance at September 30, 2016               $             7,472     $        10,080     $     7,495     $  25,047

Intangible Assets



The following table summarizes the Company's intangible assets as of September
30, 2016 and December 31, 2015:



                                                                             September 30, 2016                                                            December 31, 2015
                                       Estimated          Gross                                                              Gross
                                         Useful         Carrying                         Accumulated       Net Book        Carrying        Accumulated                             Impairment       Net Book
                                          Life           Amount         Additions       Amortization         Value          Amount        Amortization       Reclassification        Charge           Value
Customer relationship and lists         7-10 yrs.      $    14,451     $        220     $      (5,681 )   $     8,990     $    14,451     $      (4,707 )   $                -     $         -     $     9,744
Non-compete agreements                   2-3 yrs.            1,756              498            (1,871 )           383           2,455            (1,602 )                    -            (699 )           154
Purchased software                       16 years            4,000                -              (541 )         3,459               -              (371 )                4,000               -           3,629
In-process research and development                              -                -                 -               -           4,000                 -                 (4,000 )             -               -
URL's                                   Indefinite               8                -                 -               8               8                 -                      -               -               8
Tradenames                                1 year                 -                -                 -               -              59               (49 )                    -             (10 )             -
Tradenames                              Indefinite           3,178               49                 -           3,227           3,178                 -                      -               -           3,178
Total intangible assets                                $    23,393     $        767     $      (8,093 )   $    16,067     $    24,151     $      (6,729 )   $                -     $      (709 )   $    16,713

Amortization expense related to the identifiable intangible assets was $476 and $838 for the three months ended September 30, 2016 and 2015, respectively. Amortization expense related to the identifiable intangible assets was $1,416 and $2,522 for the nine months ended September 30, 2016 and 2015, respectively.

6. BANK DEBT



Bank debt as of September 30, 2016 and December 31, 2015 consisted of the
following:



                                                                September 30,      December 31,
                                                                    2016               2015
Installment note, monthly principal and interest of $1,
interest 9.05%, secured by vehicle, maturing July 2016         $             -     $           3

Four 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                                              123               128

Current portion of bank debt                                   $           123     $         131

The interest expense associated with the bank debt during the three months ended September 30, 2016 and 2015 amounted to $3 and $2, respectively. The interest expense associated with the bank debt during the nine months ended September 30, 2016 and 2015 amounted to $8 and $9, respectively. There are no financial covenants associated with the bank debt.

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(UNAUDITED)

7. TERM LOANS



Term loans as of September 30, 2016 and December 31, 2015 consisted of the
following:



                                                                September 30,       December 31,
                                                                    2016                2015
Former owners of RM Leasing, unsecured, non-interest
bearing, due on demand                                         $             3     $            3

Promissory note with company under common ownership by
former owner of Tropical, 9.75% interest, monthly payments
of interest of $1, unsecured and personally guaranteed by
officer, due November 2016                                                 106                106

Term loan, White Oak Global Advisors, LLC, originally
maturing in February 2019 and paid during February 2016,
interest of 12% with 2% paid-in-kind interest, net of debt
discount $366                                                                -             10,938

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, matured in May
2016, net of debt discount of $9                                             -                748

12% senior convertible note, unsecured, maturing in January
2017, net of debt discount of $89 and $507, respectively                 1,432              1,599

12% senior convertible note, unsecured, maturing in November
2016, net of debt discount of $5 and $173, respectively                    301                352

12% senior convertible note tranche 1, unsecured, matured in
January 2016, net of debt discount of $15                                    -                235

12% senior convertible note tranche 2, unsecured, matured in
February 2016, net of debt discount of $80                                   -                253

12% senior convertible note tranche 3, unsecured, matured in
March 2016, net of debt discount of $55                                      -                445

12% convertible note, Smithline, unsecured, maturing in
January 2017, net of debt discount of $10 and $107,
respectively                                                               353                419

Senior secured convertible debenture, JGB (Cayman) Waltham
Ltd., bearing interest of 4.67%, maturing in May 2019, net
of debt discount of $3,247 and $4,179, respectively                      2,383              3,321

Senior secured convertible note, JGB (Cayman) Concord Ltd.,
bearing interest at 4.67%, maturing in May 2019, net of debt
discount of $1,653                                                       3,063                  -

Senior secured note, JGB (Cayman) Waltham Ltd., bearing
interest at 4.67%, maturing in May 2019, net of debt
discount of $1,382                                                       1,210                  -

12% convertible term promissory note, unsecured, payable on
demand, net of debt discount of $5                                         495                  -

                                                                        24,972             34,045
Less: Current portion of term loans                                     (6,613 )           (3,787 )

Long-term portion term loans, net of debt discount             $        18,359     $       30,258

The interest expense, including amortization of debt discounts, associated with the term loans outstanding during the three months ended September 30, 2016 and 2015 amounted to $1,890 and $974, respectively. The interest expense, including amortization of debt discounts, associated with the term loans outstanding during the nine months ended September 30, 2016 and 2015 amounted to $8,133 and 3,395, respectively.

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(UNAUDITED)

Term Loan - White Oak Global Advisors, LLC

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, Data Protection Services, LLC ("DPS"), U.S. Data Security Acquisition, LLC ("USDSA") and U.S. Data Security Corporation ("USDSC") as guarantors, pursuant to which, VaultLogix received a term loan in an aggregate principal amount of $13,261. Interest on the term loan accrued 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 as of December 31, 2015; however, this did not exceed the 12% stated rate as defined in item (ii) above.

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

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

The term loan was subject to certain affirmative and negative covenants that were tested at the end of each fiscal quarter. The Company was in compliance with all covenants as of December 31, 2015.

Principal of $11,304 remained outstanding as of December 31, 2015.

On February 17, 2016, the Company entered into a securities exchange agreement whereby the Company and VaultLogix exchanged the White Oak Global Advisors term loan and assigned the term loan to JGB (Cayman) Concord Ltd. Refer to the JGB (Cayman) Concord Ltd. Senior Secured Convertible Note section of this note for further explanation. As a result of this assignment, the Company and VaultLogix's obligations to White Oak Global Advisors, LLC was satisfied as of March 31, 2016. The Company recorded a $843 loss on extinguishment of debt in the unaudited condensed consolidated statement of operations for the three months ended March 31, 2016.

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 were 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. A portion of the principal amount of the promissory notes equal to 20% of the principal amount on the closing date were not convertible until January 9, 2016.

On a date when (i) the shares issuable upon conversion of the promissory note 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 September 30, 2016, the Company had not forced any conversions.

INTERCLOUD SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(UNAUDITED)

Term Loan - 12% 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 after 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.

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 matures at the earlier of: (x) May 14, 2016 or (y) upon demand by the investor, which such demand may be made any time after 170 days following the issuance of the note upon 10 days' written notice to the Company; provided, that $60 of interest is guaranteed by the Company regardless of when the note is repaid. The Company may redeem the note at any time prior to the maturity date for an amount equal to (i) 100% of the outstanding principal amount, plus (ii) an additional 10% of the outstanding principal amount (the "Redemption Premium"), plus (iii) any accrued and unpaid interest on the note. The Redemption Premium can be paid in cash or common stock at the option of the Company. If common stock of the Company is used to pay the Redemption Premium, then such shares shall be delivered by the third business day following the maturity date, or date of demand, as applicable, at a mutually agreed upon conversion price by both parties.

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 is 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.

During March 2016, the Company paid $151 in cash related to the principal amount of note outstanding related to the 12% promissory note.

During the nine months ended September 30, 2016, the investor who holds the 12% promissory note converted $606 of principal and accrued interest into shares of the Company's common stock. Refer to Note 10, Stockholders' Deficit, for further information.

Term Loan - 12% Senior Convertible Notes

On August 6, 2015, the Company entered 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 8, Derivative Instruments, for further detail on the derivative features associated with the August 6, 2015 senior convertible note.

During April 2016, the Company paid $117 in cash related to the principal amount of the outstanding note related to the August 6, 2015 senior convertible note.

During the nine months ended September 30, 2016, the investor who holds the August 6, 2015 senior convertible note converted $468 of principal and accrued interest into shares of the Company's common stock. Refer to Note 10, Stockholders' Deficit, for further information.

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 note has a term of one year, bears interest at the rate of 12% per annum and, at the election of . . .

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