NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview
InterCloud
Systems, Inc. (the “Company”) was incorporated on November 22, 1999 under the laws of the state of Delaware and is
a provider of networking orchestration and automation for the Internet of things (IOT), software-defined networking (SDN) and
network function virtualization (NFV) environments to the telecommunications service provider (carrier) and corporate enterprise
markets. The Company’s managed services solutions offer enterprise and service-provider customers the opportunity to adopt
an operational expense model by outsourcing cloud deployment and management to the Company rather than the capital expense model
that has dominated in recent decades in IT infrastructure management. The Company also offers enterprise and service provider
customers specialty contracting services, including engineering, design, installation and maintenance services, that support the
build-out and operation of some of the most advanced small cell, Wi-Fi and distributed antenna system (DAS) networks.
Principles
of Consolidation and Accounting for Investments in Affiliate Companies
The
accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles
in the United States (“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries, which include Tropical Communications, Inc. (“Tropical”) (since August 2011 – sold in April 2017
in connection with the sale of the AWS Entities), Rives-Monteiro Leasing, LLC (“RM Leasing”) (since December 2011),
TNS, Inc. (“TNS”) (since September 2012), and AW Solutions, Inc. and AW Solutions Puerto Rico, LLC (collectively,
the “AWS Entities”) (since April 2013 – the AWS Entities were sold in April 2017. The results of operations
of the Company’s former subsidiaries, Integration Partners – NY Corporation (“IPC) (since January 2014 –
the assets were sold in November 2017), RentVM Inc. (“RentVM”) (since February 2014 – discontinued in November
2017 in connection with the sale of the assets of the IPC subsidiary), ADEX Corporation, ADEX Puerto Rico, LLC and Highwire (collectively,
“ADEX” or “ADEX Entities”) (since September 2012 – Highwire was sold in January 2017, and the ADEX
Entities were sold in February 2018 – refer to Note 4, Disposals of Subsidiaries, for further detail), and SDN Essentials,
LLC (“SDNE”) (since January 2016 – SDNE was sold in May 2017) have been included as discontinued operations
on the accompanying financial statements (refer to Note 16, Discontinued Operations, for further information). 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 all variable interest entities (“VIE”)
in which the Company is deemed to be the primary beneficiary.
The
unaudited condensed consolidated financial statements include the accounts of Rives-Montiero Engineering, LLC (“RM Engineering”)
(since December 2011), in which the Company owns an interest of 49%. The Company has the ability to exercise its call option to
acquire the remaining 51% of RM Engineering for a nominal amount and thus makes all significant decisions related to RM Engineering
even though it absorbs only 49% of the losses. Additionally, substantially all of the entity’s activities either involve
or are conducted on behalf of the entity by the 51% holder of RM Engineering.
In
June 2016, the Company made a loan to SDN Systems, LLC (“SDNS”). The loan is convertible into a 90% ownership stake
in SDNS. The Company is the primary source of capital for SDNS. The Company evaluated the investment in SDNS at both March 31,
2018 and December 31, 2017. At March 31, 2018 and December 31, 2017, the criteria for a VIE were met. As such, the operations
of SDNS have been included in the Company’s consolidated statement of accounts.
The unaudited condensed
consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion
of management, necessary for a fair presentation of such statements. These unaudited condensed consolidated financial statements
have been prepared in accordance with GAAP pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
Additionally, the results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results
that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction
with the Company’s audited consolidated financial statements for the year ended December 31, 2017 included in the Company’s
2017 Annual Report on Form 10-K, filed with the SEC on April 17, 2018.
Basis
of Presentation
The
unaudited condensed consolidated financial statements have been presented on a comparative basis. During the period from January
1, 2017 through March 31, 2018, the Company disposed of four subsidiaries, the results of which are included within discontinued
operations for the three months ended March 31, 2018 and 2017. The Company retrospectively updated the unaudited condensed consolidated
financial statements as of December 31, 2017 and for the three months ended March 31, 2017 to match the presentation on the unaudited
condensed consolidated financial statements as of and for the three months ended March 31, 2018.
Reverse
Stock Split
On
July 7, 2017, the Company filed a Certificate of Amendment of its Certificate of Incorporation that effected a one-for-four reverse
split of the Company’s issued and outstanding shares of common stock, par value $0.0001 per share, effective as of the open
of trading on July 12, 2017. The Company’s stockholders, at the 2016 Annual Meeting of Stockholders, had previously authorized
the Company’s Board of Directors to effect a reverse stock split within a range of ratios, including one-for-four, at any
time within one year following such Annual Meeting, as determined by the board.
On
February 22, 2018, the Company filed a Certificate of Amendment of its Certificate of Incorporation that effected a one-for-one
hundred reverse split of the Company’s issued and outstanding shares of common stock, par value $0.0001 per share, effective
as of the open of trading on February 23, 2018. The Company’s stockholders, by written consent dated December 5, 2017, had
previously authorized the Company’s Board of Directors to effect a reverse stock split within a range of ratios, including
one-for-one hundred, at any time within one year following the date of such written consent, as determined by the board.
All
common share, warrant, stock option, and per share information in the consolidated financial statements gives retroactive effect
to the one-for-four reverse stock split that was effected on July 12, 2017 and the one-for-one hundred reverse stock split that
was effected on February 23, 2018. There was no change to the number of authorized shares of common stock of the Company as a
result of the reverse stock split. The par value of the Company’s common stock was unchanged at $0.0001 per share post-split.
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.
Revenue
Recognition
The
contracts of TNS and RM Engineering provide that payment for the Company’s services may be based on either (i) direct labor
hours at fixed hourly rates or (ii) fixed-price contracts. The services provided under the contracts are generally provided within
one month. Occasionally, the services may be provided over a period of up to six months.
The
AWS Entities, which we sold in April 2017, generally recognized revenue using the percentage of completion method. Revenues and
fees under the contracts of these entities were recognized utilizing the units-of-delivery method, which used measures such as
task completion within an overall contract. The units-of-delivery approach is an output method used in situations where it is
more representative of progress on a contract than an input method, such as the efforts-expended approach. Provisions for estimated
losses on uncompleted contracts, if any, were made in the period in which such losses were determined. Changes in job performance
conditions and final contract settlements could have resulted in revisions to costs and income, which were recognized in the period
in which revisions were determined.
The
AWS Entities also generated revenue from service contracts with certain customers. These contracts were accounted for under the
proportional performance method. Under this method, revenue was recognized in proportion to the value provided to the customer
for each project as of each reporting date.
On May 28, 2014, the
FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”), to update the financial reporting
requirements for revenue recognition. Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue
arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.
The guidance is based on the principle that an entity should recognize revenue to depict the transfer of 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.
The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising
from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to
fulfill a contract. This guidance became effective for the Company beginning on January 1, 2018, and entities have the option of
using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The adopted this standard
using the modified retrospective approach on January 1, 2018.
In preparation for
adoption of the standard, the Company evaluated each of the five steps in Topic 606, which are as follows: 1) Identify the contract
with the customer; 2) Identify the performance obligations in the contract; 3) Determine the transaction price; 4) Allocate the
transaction price to the performance obligations; and 5) Recognize revenue when (or as) performance obligations are satisfied.
The Company’s
reported revenue was not affected in any period due to the adoption of ASC Topic 606 because: (1) the Company identified similar
performance obligations under Topic 606 as compared with deliverables and separate units of account previously identified; (2)
the Company has determined the transaction price to be consistent; and (3) the Company records revenue at the same point in time,
upon delivery of services, under both ASC Topic 605 and Topic 606, as applicable under the terms of the contract with the customer.
Additionally, the Company’s accounting for fulfillment costs or costs incurred to obtain a contract were not affected in
any period due to the adoption of Topic 606.
There are also certain
considerations related to accounting policies, business processes and internal control over financial reporting that are associated
with implementing Topic 606. The Company has evaluated its policies, processes, and control framework for revenue recognition,
and identified and implemented the changes needed in response to the new guidance.
Lastly, disclosure
requirements under the new guidance in Topic 606 have been significantly expanded in comparison to the disclosure requirements
under the current guidance, including disclosures related to disaggregation of revenue into appropriate categories, performance
obligations, the judgments made in revenue recognition determinations, adjustments to revenue which relate to activities from previous
quarters or years, any significant reversals of revenue, and costs to obtain or fulfill contracts.
Restricted Cash
As of March 31,
2018, the Company had $900 of restricted cash related to the Senior Secured Convertible Note with JGB (Cayman) Waltham Ltd. The
$900 in cash was received in connection with the sale of the ADEX Entities (refer to Note 4, Disposals of Subsidiaries, for further
detail).
Indefinite
Lived Intangible Assets
The
Company tests its 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 the Company’s segments; unanticipated competition; and slower
growth rates. Any adverse change in these factors could have a significant impact on the recoverability indefinite-lived intangible
assets and the Company’s consolidated financial results.
Commitments
and Contingencies
In
the normal course of business, the Company is subject to various contingencies. The Company records a contingency 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 Topic 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 Topic 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.
Breach
of Contract Action
In
July 2013, a complaint was filed against the Company in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County,
Florida titled The Farkas Group, Inc., The Atlas Group of Companies, LLC and Michael D. Farkas v. InterCloud Systems, Inc. (Case
No. 502013CA01133XXXMB) for breach of contract and unjust enrichment. In the complaint, the plaintiffs allege that the Company
has breached contractual agreements between the Company and plaintiffs pertaining to certain indebtedness amounting to approximately
$116 allegedly owed by the Company to the plaintiffs and the Company’s agreement to convert such indebtedness into shares
of the Company’s common stock. The plaintiff alleges that they are entitled to receive in the aggregate 5,426 shares of
the Company’s common stock or aggregate damages reflecting the trading value at the high price for the common stock. The
Company has asserted as a defense that such indebtedness, together with any right to convert such indebtedness into shares of
common stock, was cancelled pursuant to the terms of a Stock Purchase Agreement dated as of July 2, 2009 between the Company and
the plaintiffs. The Farkas Group was a control person of the Company during the period that it was a public “shell”
company and facilitated the transfer of control of the Company to its former chief executive officer, Gideon Taylor. This matter
is presently set on the court’s non-jury trial docket. The Company intends to continue to vigorously defend this lawsuit.
On
May 15, 2017, a complaint was filed against the Company in the Supreme Court of the State of New York, County of New York titled
Grant Thornton LLP v. InterCloud Systems, Inc
., Case No. 652619/2017, for breach of contract, quantum meruit and unjust
enrichment. In the complaint, the plaintiff alleges that the Company breached an agreement with the plaintiff by failing
to pay the fees of the plaintiff of approximately $769 and to reimburse the plaintiff for its related expenses for a proposed
audit of the Company’s financial statements for the year ended December 31, 2015. The Company intends to vigorously
defend this action, and has commenced a separate action against Grant Thornton LLP in the Supreme Court of the State of New York,
County of New York titled
InterCloud Systems, Inc. v. Grant Thornton LLP
, Case No. 65424/2017 for breach of contract and
fraudulent inducement relating to the engagement letter between the Company and Grant Thornton LLP and to recover the fees the
Company paid to Grant Thornton LLP, as well as other damages.
Securities
and Exchange Commission Subpoenas
On May 21, 2014, the
Company received a subpoena from the SEC that stated that the staff of the SEC was 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 was, or was 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 the Company’s 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 was 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 did not believe either it or any of its current or former officers or directors engaged in any activities that violated
applicable securities laws.
On April 2, 2018, the
Company received a notification from the SEC that it was closing the investigation and did not intend to recommend enforcement
action against the Company.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with ASC Topic 718,
Compensation-Stock Compensation
(“ASC
Topic 718”). Under the fair value recognition provisions of this topic, stock-based compensation cost is measured at the
grant date based on the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service
period, based on the terms of the awards.
The
Company applies ASC 505-50,
Equity Based Payments to Non-Employees
(“ASC Topic 505”), with respect to options
and warrants issued to non-employees which require the use of option valuation models to measure the fair value of the options
and warrants at the measurement date.
Net
Income (Loss) Per Share
The
Company follows ASC 260,
Earnings Per Share
, which requires presentation of basic and diluted earnings per share (“EPS”)
on the face of the income statement for all entities with complex capital structures, and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation.
In
the accompanying financial statements, basic loss per share is computed by dividing net loss by the weighted average number of
shares of common stock outstanding during the period.
Partial common shares
includable in the computation of fully-diluted per share results are not presented for the three months ended March 31, 2017 in
the unaudited condensed consolidated financial statements as their effect would be anti-dilutive.
The following sets forth the computation of diluted EPS for the three months ended March 31, 2018
|
|
|
Three months ended March 31, 2018
|
|
|
|
|
Net loss (Numerator)
|
|
|
Shares (Denominator)
|
|
|
Per Share Amount
|
|
|
Basic EPS
|
|
$
|
2,869
|
|
|
|
11,173,549
|
|
|
$
|
0.26
|
|
|
Change in fair value of derivative instruments
|
|
|
(3,398
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Loss on extinguishment of debt
|
|
|
(2,266
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Interest expense and debt discounts related to convertible
instruments
|
|
|
404
|
|
|
|
-
|
|
|
|
-
|
|
|
Dilutive shares related to convertible promissory
notes
|
|
|
-
|
|
|
|
127,735,252
|
|
|
|
-
|
|
|
Dilutive shares related to convertible preferred stock
|
|
|
-
|
|
|
|
87,436,185
|
|
|
|
-
|
|
|
Dilutive shares related to
warrants
|
|
|
-
|
|
|
|
4,634,622
|
|
|
|
-
|
|
|
Dilutive EPS
|
|
$
|
(2,391
|
)
|
|
|
230,979,608
|
|
|
$
|
(0.01
|
)
|
Diluted Earnings per Share (“Diluted EPS”) gives effect to all dilutive potential common shares
outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or contingent exercise of securities
that would have an anti-dilutive effect on losses. As a result, if there is a loss from continuing operations, Diluted EPS is computed
in the same manner as Basic EPS. As of March 31, 2018, the Company’s common stock equivalents included 64,867,725 shares
that could be converted based on certain convertible preferred stock, 33,339 shares related to outstanding warrants, and 417 shares
related to outstanding options that were not included in the calculation of earnings per share for the period then ended. As of
March 31, 2017, the Company’s common stock equivalents included 401,490 shares that could be converted based on outstanding
debt, 22,085 shares related to outstanding warrants, and 438 shares related to outstanding options that were not included in the
calculation of earnings per share for the period then ended. Such financial instruments may become dilutive and would then need
to be included in future calculations of Diluted EPS. Potential common shares includable in the computation of fully-diluted per
share results are not presented for the three months ended March 31, 2017 in the unaudited condensed consolidated financial statements
as their effect would be anti-dilutive.
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.
|
The
following section describes the valuation methodologies that the Company used to measure different financial instruments at fair
value.
Debt
The
fair value of the Company’s debt, which approximated the carrying value of the Company’s debt as of March 31, 2018
and December 31, 2017, was estimated at $11,863 and $12,034, respectively. Factors that the Company considered when estimating
the fair value of its debt included market conditions, liquidity levels in the private placement market, variability in pricing
from multiple lenders and term of the debt. The level of the debt would be considered as Level 2.
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 Monte Carlo simulation is
used to determine the fair value of derivatives for instruments with embedded conversion features.
Derivative Liabilities
The Company accounts
for derivative instruments in accordance with ASC Topic 815,
Derivatives and Hedging
(“ASC Topic 815”), and
all derivative instruments are reflected as either assets or liabilities at fair value on the consolidated balance sheets. The
Company uses estimates of fair value to value its derivative instruments. Fair value is defined as the price to sell an asset or
transfer a liability in an orderly transaction between able and willing market participants. In general, the Company’s policy
in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets,
where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments,
yield curves, volatilities, prepayment speeds, default rates and credit spreads, relying first on observable data from active markets.
Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair
value estimates. The values presented may not represent future fair values and may not be realizable. The Company categorizes its
fair value estimates in accordance with ASC 820, based on the hierarchical framework associated with the three levels or price
transparency utilized in measuring financial instruments at fair value as discussed above.
Additional
Disclosures Regarding Fair Value Measurements
The
carrying value of cash, accounts receivable, inventory, other assets, and accounts payable and accrued expenses approximate their
fair value due to the short-term maturity of those items.
Fair
Value of Derivatives
The
Company utilized 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.
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 Note 10, Derivative Instruments, for 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 March 31, 2018 and December 31, 2017 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)
|
|
|
|
|
March 31, 2018
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Current derivative features related to convertible debentures
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,672
|
|
|
Current derivative features related to warrant derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
132
|
|
|
Long-term derivative features related to convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
171
|
|
|
Long-term derivative features related to warrant derivatives
|
|
|
|
|
|
|
|
|
|
|
394
|
|
|
Long-term derivative features related to preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
14,887
|
|
|
Fair value of Series M preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
2,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,228
|
|
|
|
|
December 31, 2017
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Current derivative features related to convertible debentures
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,145
|
|
|
Current derivative features related to warrant derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
234
|
|
|
Long-term derivative features related to convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
661
|
|
|
Long-term derivative features related to preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
15,990
|
|
|
Fair value of Series M preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
3,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
23,051
|
|
The
changes in Level 3 financial instruments measured at fair value on a recurring basis for the three months ended March 31, 2018
were as follows:
|
|
|
Amount
|
|
|
Balance as of December 31, 2017
|
|
$
|
23,051
|
|
|
Change in fair value of derivative features related to convertible debentures
|
|
|
(910
|
)
|
|
Change in fair value of warrant derivatives
|
|
|
(1,506
|
)
|
|
Change in fair value of preferred stock derivatives
|
|
|
(1,103
|
)
|
|
Change in fair value of Series M preferred stock
|
|
|
(49
|
)
|
|
Fair value of derivative feature related to SCS LLC term loan
|
|
|
70
|
|
|
Fair value of derivative feature related to Pryor Cashman LLP warrant
|
|
|
1,798
|
|
|
Adjustment of derivative liability upon conversion of debt
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
Balance as of March 31, 2018
|
|
$
|
21,228
|
|
Treasury
Stock
The
Company records treasury stock at the cost to acquire it and includes treasury stock as a component of stockholders’ deficit.
2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
During the review
process with respect to the Company’s unaudited condensed consolidated financial statements for the three and six months
ended June 30, 2018, there were certain errors identified that affected the Company’s previously-issued financial statements,
as discussed below:
|
|
(1)
|
During
the review process with respect to the Company’s Quarterly Report on Form 10-Q for the three and six months month ended
June 30, 2018, the Company identified an error on the date of issuance (February 27, 2018) related to the fair value of a
derivative related to a note receivable issued with the sale of a subsidiary. This amount was recorded as a gain on change
in fair value of derivative in the first quarter; and as an increase in the fair value of the note receivable. However, when
the Company reviewed its second quarter results, it determined that the valuation performed in the first quarter was incorrect
and the values that were recorded needed to be updated. As a result of this error, the Company recorded entries which had
the following result on the Company’s financial statements as of and for the three months ended March 31, 2018:
|
|
|
●
|
On
the Company’s unaudited condensed consolidated statement of operations, a decrease in gain on change in fair value of
derivative of $1,816 for the three months ended March 31, 2018;
|
|
|
●
|
On
the Company’s unaudited condensed consolidated statement of operations, a decrease in gain on discontinued operations
of $336 the three months ended March 31, 2018;
|
|
|
●
|
On the Company’s
unaudited condensed consolidated balance sheet, a decrease in notes receivable of $2,152 for the quarter ended March 31, 2018.
|
|
|
(2)
|
During the review
process with respect to the Company’s Quarterly Report on Form 10-Q for the three and six month period ended June 30,
2018, the Company identified an error related to the fair value of a derivative related to a note receivable issued with the
sale of a subsidiary. The amount recorded on March 31, 2018 was recorded as a gain on change on fair value of derivative and
as an increase in the fair value of the note receivable. However, when the Company reviewed its second quarter results, it
determined that the valuation performed in the first quarter was incorrect and the values recorded needed to be updated. As
a result of this error, the Company recorded entries which had the following result on the Company’s financial statements
as of and for the three months ended March 31, 2018:
|
|
|
●
|
On
the Company’s unaudited condensed consolidated statement of operations, a decrease in gain on change in fair value of
derivative of $243 for the three months ended March 31, 2018;
|
|
|
●
|
On
the Company’s unaudited condensed consolidated balance sheet, a decrease in notes receivable of $243 for the quarter
ended March 31, 2018.
|
The following sets
forth the effects (in thousands) of the matters identified by the Company during the review process with respect to the Company’s
unaudited condensed consolidated financial statements for the three and six months ended June 30, 2018 on affected items within
the Company’s previously reported unaudited condensed consolidated balance sheet as of March 31, 2018:
|
|
|
March
31, 2018
|
|
|
|
|
As
Reported
|
|
|
|
|
As
Restated
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Notes receivable, net of reserves of
$0 and $924, respectively
|
|
|
8,708
|
|
(1) (2)
|
|
|
|
6,313
|
|
|
Total current assets
|
|
|
10,593
|
|
|
|
|
|
8,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
12,786
|
|
|
|
|
$
|
10,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’
DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
25,728
|
|
|
|
|
|
25,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
18,753
|
|
|
|
|
|
18,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
44,481
|
|
|
|
|
|
44,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporary equity
|
|
|
887
|
|
|
|
|
|
887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(188,055
|
)
|
(1) (2)
|
|
|
|
(190,450
|
)
|
|
Total InterCloud Systems,
Inc. stockholders’ deficit
|
|
|
(32,024
|
)
|
|
|
|
|
(34,419
|
)
|
|
Non-controlling interest
|
|
|
(558
|
)
|
|
|
|
|
(558
|
)
|
|
Total stockholders’ deficit
|
|
|
(32,582
|
)
|
|
|
|
|
(34,977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
12,786
|
|
|
|
|
$
|
10,391
|
|
The following table
sets forth the effects (in thousands) of the matters identified by the Company during the review process with respect to the Company’s
unaudited condensed consolidated financial statements for the three and six months ended June 30, 2018 on affected items within
the Company’s previously reported unaudited condensed consolidated statement of operations for the three months ended March
31, 2018:
|
|
|
For
the three months ended
|
|
|
|
|
March
31, 2018
|
|
|
|
|
As
Reported
|
|
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,765
|
|
|
|
|
$
|
4,765
|
|
|
Cost of revenue
|
|
|
2,983
|
|
|
|
|
|
2,983
|
|
|
Gross profit
|
|
|
1,782
|
|
|
|
|
|
1,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,623
|
|
|
|
|
|
1,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
159
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative instruments
|
|
|
6,302
|
|
(1) (2)
|
|
|
|
4,243
|
|
|
Total other income
|
|
|
4,830
|
|
|
|
|
|
2,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before income taxes
|
|
|
4,989
|
|
|
|
|
|
2,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit from income taxes
|
|
|
(164
|
)
|
|
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from
continuing operations
|
|
|
5,153
|
|
|
|
|
|
3,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on discontinued operations, net of
tax
|
|
|
102
|
|
(2)
|
|
|
|
(234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
5,255
|
|
|
|
|
|
2,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non-controlling interest
|
|
|
9
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to InterCloud Systems,
Inc. common stockholders
|
|
$
|
5,264
|
|
|
|
|
$
|
2,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss)
per share attributable to InterCloud Systems, Inc. common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
0.46
|
|
|
|
|
$
|
0.28
|
|
|
Net gain (loss) on discontinued operations, net
of taxes
|
|
$
|
0.01
|
|
|
|
|
$
|
(0.02
|
)
|
|
Net income per share
|
|
$
|
0.47
|
|
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss)
per share attributable to InterCloud Systems, Inc. common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
0.00
|
|
|
|
|
$
|
(0.01
|
)
|
|
Net loss on discontinued operations, net of taxes
|
|
$
|
0.00
|
|
|
|
|
$
|
(0.01
|
)
|
|
Net income (loss) per share
|
|
$
|
0.00
|
|
|
|
|
$
|
(0.01
|
)
|
3.
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’s management 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 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’s management believes that the Company will continue
to incur losses for the immediate future. For the three months ended March 31, 2018, the Company generated gross profits from
operations but was unable to achieve positive cash flow from operations. The Company’s management 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.
During the year
ended December 31, 2017, the Company suffered recurring losses from operations. At March 31, 2018 and December 31, 2017, the Company
had a stockholders’ deficit of $34,977 and $39,203, respectively. At March 31, 2018, the Company had a working capital deficit
of approximately $17,530, as compared to a working capital deficit of approximately $20,506 at December 31, 2017. The increase
of $2,976 in the Company’s working capital from December 31, 2017 to March 31, 2018 was primarily the result of an increase
in notes receivable, net of reserves, of $2,696, a decrease in the current liabilities of discontinued operations of $2,616, a
decrease in the current portion of term loans net of debt discount of $1,081, and a decrease in deferred revenue of $2,675. These
changes were partially offset by a decrease in the current assets of discontinued operations of $5,931.
On
or prior to May 31, 2019, the Company has obligations relating to the payment of indebtedness on term loans and notes to related
parties of $10,201 and $532, respectively. The Company anticipates meeting its cash obligations on indebtedness that is payable
on or prior to May 31, 2019 from earnings from operations, the sale of certain operating assets or businesses and from the proceeds
of additional indebtedness or equity raises. If the Company is not successful in obtaining additional financing when required,
the Company expects that it will be able to renegotiate and extend certain of its notes payable as required to enable it to meet
its remaining debt obligations as they become due, although there can be no assurance that the Company will be able to do so.
The
Company’s future capital requirements for its operations will depend on many factors, including the profitability of its
businesses, the number and cash requirements of other acquisition candidates that the Company pursues, and the costs of operations.
The Company’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 May 31, 2019. 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.
4
.
DISPOSALS OF SUBSIDIARIES
On
February 27, 2018, the Company sold the ADEX Entities for $3,000 in cash plus a one-year convertible promissory note in the aggregate
principal amount of $2,000 (refer to Note 5, Notes Receivable, for further detail). $2,500 in cash was received at closing, with
$500 to be retained by the buyer for 90 days, of which $250 has been received. $1,000 of the $2,500 in cash received at closing
was applied to the repayment of the Company’s indebtedness to JGB Concord, with an additional $900 in cash placed in an
escrow account controlled by JGB Concord, to be released to the Company if certain conditions are met.
As
a result of the sale, the operations of the ADEX Entities are included in discontinued operations as of March 31, 2018 and December
31, 2017, and for the periods ending March 31, 2018 and 2017 (refer to Note 15, Discontinued Operations, for further detail).
5. NOTES RECEIVABLE
Notes receivable
as of March 31, 2018 and December 31, 2017 consisted of the following:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Loans to employees, net of reserves of
$924, due December 2018
|
|
$
|
-
|
|
|
$
|
4
|
|
|
Fair value of convertible note receivable from Spectrum
Global Solutions, Inc., matured April 2018
|
|
$
|
3,718
|
|
|
$
|
3,613
|
|
|
Fair value of convertible note receivable from Spectrum
Global Solutions, Inc., due March 2019
|
|
$
|
1,793
|
|
|
$
|
-
|
|
|
Fair value of convertible note receivable from Spectrum
Global Solutions, Inc., due August 2019
|
|
$
|
802
|
|
|
$
|
-
|
|
|
Note receivable
|
|
$
|
6,313
|
|
|
$
|
3,617
|
|
Loans
to employees
Loans
to employees bore interest at rates between 2% and 3% per annum. As of December 31, 2017, the value of the collateral was below
the value of the outstanding loans to employees. As a result, the Company recorded a reserve of $924 on the balance of loans to
employees as of December 31, 2017. As of March 31, 2018, the balance in loans to employees was $0.
Spectrum
Global Solutions, Inc. (“Spectrum”) April 25, 2017 convertible note receivable
On
April 25, 2017, the Company sold 80.1% of the assets associated with its AWS Entities subsidiaries. In connection with the sale,
the Company received from Spectrum a one-year convertible promissory note in the principal amount of $2,000. This note accrues
interest at a rate of 8% per annum. The interest income associated with this loan receivable during the year ended December 31,
2017 amounted to $69. This note is convertible into shares of common stock of Spectrum at a conversion price per share equal to
75% of the lowest VWAP during the fifteen (15) trading days immediately prior to the conversion date.
The
Company evaluated the convertible note’s settlement provisions and elected the fair value option afforded in ASC 825, Financial
Instruments, to value this instrument. Under such election, the loan receivable is measured initially and subsequently at fair
value, with any changes in the fair value of the instrument being recorded in the consolidated financial statements as a change
in fair value of derivative instruments. The Company estimates the fair value of this instrument by first estimating the fair
value of the straight debt portion, excluding the embedded conversion option, using a discounted cash flow model. The Company
then estimates the fair value of the embedded conversion option using a Monte Carlo simulation. The sum of these two valuations
is the fair value of the loan receivable. On April 25, 2017, the Company used the discounted cash flow method to value the straight
debt portion of the convertible note and determined the fair value to be $1,057, and used a Monte Carlo simulation to value the
settlement features of the convertible note and determined the fair value to be $1,174. The total fair value of $2,231 was recorded
in the consolidated balance sheet.
On
December 22, 2017, the Company assigned $105 of the note receivable to RDW Capital LLC in exchange for cash of $100.
On
March 2, 2018, the Company assigned $105 of the note receivable to RDW Capital LLC in exchange for cash of $100.
On
March 9, 2018, the Company assigned $105 of the note receivable to RDW Capital LLC in exchange for cash of $100.
On
March 31, 2018 and December 31, 2017, the Company used the discounted cash flow method to value the straight debt portion of the
convertible note and determined the fair value to be $1,769 and $1,650, respectively, and used a Monte Carlo simulation to value
the settlement features of the convertible note and determined the fair value to be $1,949 and $1,963, respectively. The total
fair value of $3,718 and $3,613 was included in notes receivable on the unaudited condensed consolidated balance sheet as of March
31, 2018 and December 31, 2017, respectively. The Company recorded the change in fair value as a gain of $315 on the unaudited
condensed consolidated statement of operations for the three months ended March 31, 2018.
On
April 25, 2018 the note matured and is now due on demand.
The
fair value of the note receivable as of March 31, 2018 and December 31, 2017 was calculated using the discounted cash flow method
and a Monte Carlo simulation with the following factors, assumptions and methodologies:
|
|
|
March
31, 2018
|
|
|
December 31,
2017
|
|
|
Principal
amount and guaranteed interest
|
|
$
|
1,685
|
|
|
$
|
2,005
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
price per share
|
|
|
*
|
|
|
|
*
|
|
|
Conversion
trigger price per share
|
|
|
None
|
|
|
|
None
|
|
|
Risk
free rate
|
|
|
1.63
|
%
|
|
|
1.39
|
%
|
|
Life
of conversion feature (in years)
|
|
|
0.07
|
|
|
|
0.32
|
|
|
Volatility
|
|
|
333
|
%
|
|
|
272
|
%
|
|
*
|
The
conversion price per share is equal to 75% of the lowest VWAP during the fifteen trading days immediately prior to the conversion
date.
|
Spectrum
February 27, 2018 convertible note receivable
On
February 27, 2018, the Company sold the ADEX Entities for $3,000 in cash plus a one-year convertible promissory note in the aggregate
principal amount of $2,000. The convertible promissory note accrues interest at a rate of 6% per annum and is due on March 27,
2019. The note is convertible into shares of common stock of Spectrum at a conversion price per share equal to 75% of the lowest
VWAP during the fifteen (15) trading days immediately prior to the conversion date. The conversion price has a floor of $0.005
per share. The floor is removed in the event of a default.
The Company evaluated
the convertible note’s settlement provisions and elected the fair value option afforded in ASC 825, Financial Instruments,
to value this instrument. Under such election, the loan receivable is measured initially and subsequently at fair value, with
any changes in the fair value of the instrument being recorded in the consolidated financial statements as a change in fair value
of derivative instruments. The Company estimates the fair value of this instrument by first estimating the fair value of the straight
debt portion, excluding the embedded conversion option, using a discounted cash flow model. The Company then estimates the fair
value of the embedded conversion option using a Monte Carlo simulation. The sum of these two valuations is the fair value of the
loan receivable. On February 27, 2018, the Company used the discounted cash flow method to value the straight debt portion of
the convertible note and determined the fair value to be $1,361, and used a Monte Carlo simulation to value the settlement features
of the convertible note and determined the fair value to be $303. The total fair value of $1,664 was recorded in the consolidated
balance sheet.
On March 31, 2018,
the Company used the discounted cash flow method to value the straight debt portion of the convertible note and determined the
fair value to be $1,412, and used a Monte Carlo simulation to value the settlement features of the convertible note and determined
the fair value to be $381. The total fair value of $1,793 was included in notes receivable on the unaudited condensed consolidated
balance sheet as of March 31, 2018. The Company recorded the change in fair value as a gain of $129 on the unaudited condensed
consolidated statement of operations for the three months ended March 31, 2018.
The
fair value of the note receivable as of March 31, 2018 was calculated using the discounted cash flow method and a Monte Carlo
simulation with the following factors, assumptions and methodologies:
|
|
|
March 31,
2018
|
|
|
Principal amount and guaranteed interest
|
|
$
|
2,011
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
Risk free rate
|
|
|
2.09
|
%
|
|
Life of conversion feature (in years)
|
|
|
0.99
|
|
|
Volatility
|
|
|
221
|
%
|
|
*
|
The
conversion price per share is equal to 75% of the lowest VWAP during the fifteen trading days immediately prior to the conversion
date, with a floor of $0.005 per share.
|
Spectrum
February 16, 2018 convertible promissory note
On
February 16, 2018, the Company settled the potential earn-out with the buyer of the AWS Entities, Spectrum. The Company received
from Spectrum a convertible promissory note in the principal amount of $794. The convertible promissory note accrues interest
at a rate of 1% per annum and is due on August 16, 2019. The note is convertible into shares of common stock of Spectrum at a
conversion price per share equal to 80% of the lowest VWAP over the five (5) trading days immediately prior to, but not including,
the conversion date.
The
Company evaluated the convertible note’s settlement provisions and elected the fair value option afforded in ASC 825, Financial
Instruments, to value this instrument. Under such election, the loan receivable is measured initially and subsequently at fair
value, with any changes in the fair value of the instrument being recorded in the consolidated financial statements as a change
in fair value of derivative instruments. The Company estimates the fair value of this instrument by first estimating the fair
value of the straight debt portion, excluding the embedded conversion option, using a discounted cash flow model. The Company
then estimates the fair value of the embedded conversion option using a Monte Carlo simulation. The sum of these two valuations
is the fair value of the loan receivable. On February 16, 2018, the Company used the discounted cash flow method to value the
straight debt portion of the convertible note and determined the fair value to be $433, and used a Monte Carlo simulation to value
the settlement features of the convertible note and determined the fair value to be $348. The total fair value of $781 was recorded
in the consolidated balance sheet.
On
March 31, 2018, the Company used the discounted cash flow method to value the straight debt portion of the convertible note and
determined the fair value to be $455, and used a Monte Carlo simulation to value the settlement features of the convertible note
and determined the fair value to be $347. The total fair value of $802 was included in notes receivable on the unaudited condensed
consolidated balance sheet as of March 31, 2018. The Company recorded the change in fair value as a gain of $21 on the unaudited
condensed consolidated statement of operations for the three months ended March 31, 2018.
The
fair value of the working capital note receivable as of March 31, 2018 was calculated using the discounted cash flow method and
a Monte Carlo simulation with the following factors, assumptions and methodologies:
|
|
|
March
31, 2018
|
|
|
Principal
amount and guaranteed interest
|
|
$
|
795
|
|
|
|
|
|
|
|
|
Conversion
price per share
|
|
|
*
|
|
|
Conversion
trigger price per share
|
|
|
None
|
|
|
Risk
free rate
|
|
|
2.09
|
%
|
|
Life
of conversion feature (in years)
|
|
|
1.38
|
|
|
Volatility
|
|
|
209
|
%
|
|
*
|
The
conversion price per share is equal to 80% of the lowest VWAP during the five trading days immediately prior to the conversion
date.
|
6.
PROPERTY AND EQUIPMENT, NET
Property
and equipment as of March 31, 2018 and December 31, 2017 consisted of the following:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Vehicles
|
|
$
|
646
|
|
|
$
|
646
|
|
|
Computers and Office Equipment
|
|
|
93
|
|
|
|
93
|
|
|
Equipment
|
|
|
170
|
|
|
|
170
|
|
|
Total
|
|
|
909
|
|
|
|
909
|
|
|
Less accumulated depreciation
|
|
|
(878
|
)
|
|
|
(871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
31
|
|
|
$
|
38
|
|
Depreciation
expense for the three months ended March 31, 2018 and 2017 was $7 and $37, respectively.
7.
INTANGIBLE ASSETS
Intangible
Assets
The
following table summarizes the Company’s intangible assets as of March 31, 2018 and December 31, 2017:
|
|
|
|
|
March 31, 2018
|
|
|
|
|
Estimated
Useful Life
|
|
Beginning Net
Book Value
|
|
|
Additions
|
|
|
Amortization
|
|
|
Impairment
Charge
|
|
|
Disposals
|
|
|
Ending Net
Book Value
|
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationship and lists
|
|
7-10 yrs
|
|
$
|
991
|
|
|
$
|
-
|
|
|
$
|
(51
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
940
|
|
|
$
|
(1,234
|
)
|
|
Trade names
|
|
Indefinite
|
|
|
314
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
314
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
$
|
1,305
|
|
|
$
|
-
|
|
|
$
|
(51
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,254
|
|
|
$
|
(1,234
|
)
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
Estimated
Useful Life
|
|
Beginning Net
Book Value
|
|
|
Additions
|
|
|
Amortization
|
|
|
Impairment
Charge
|
|
|
Disposals
|
|
|
Ending Net
Book Value
|
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationship and lists
|
|
7-10 yrs
|
|
$
|
3,238
|
|
|
$
|
-
|
|
|
$
|
(277
|
)
|
|
$
|
(69
|
)
|
|
$
|
(1,901
|
)
|
|
$
|
991
|
|
|
$
|
(1,183
|
)
|
|
URL’s
|
|
Indefinite
|
|
|
5
|
|
|
|
-
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Trade names
|
|
Indefinite
|
|
|
1,410
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(165
|
)
|
|
|
(931
|
)
|
|
|
314
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
$
|
4,653
|
|
|
$
|
-
|
|
|
$
|
(277
|
)
|
|
$
|
(239
|
)
|
|
$
|
(2,832
|
)
|
|
$
|
1,305
|
|
|
$
|
(1,183
|
)
|
Amortization
expense related to the identifiable intangible assets was $51 and $150 for the three months ended March 31, 2018 and 2017, respectively.
8
.
BANK DEBT
Bank
debt as of March 31, 2018 and December 31, 2017 consisted of the following:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Two lines of
credit, monthly principal and interest, ranging from $0 to $1, average interest of 14.2%, guaranteed personally
by principal shareholders of acquired companies, maturing July 2018
|
|
$
|
103
|
|
|
$
|
103
|
|
|
Equipment
finance agreement, monthly principal of $1, maturing February 2020
|
|
|
9
|
|
|
|
11
|
|
|
|
|
$
|
112
|
|
|
$
|
114
|
|
|
Less:
Current portion of bank debt
|
|
|
(112
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
portion of bank debt
|
|
$
|
-
|
|
|
$
|
-
|
|
The
interest expense associated with the bank debt during the three months ended March 31, 2018 and 2017 amounted to $6 and $3, respectively.
There are no financial covenants associated with the bank debt.
9.
TERM LOANS
Term
loans as of March 31, 2018 and December 31, 2017 consisted of the following:
|
|
|
March
31,
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Former
owners of RM Leasing, unsecured, non-interest bearing, due on demand
|
|
$
|
2
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
London
Bay - VL Holding Company, LLC convertible promissory note, unsecured, 0% and 8.8% interest, respectively, maturing in October
2018
|
|
|
1,403
|
|
|
|
1,403
|
|
|
|
|
|
|
|
|
|
|
|
|
WV
VL Holding Corp convertible promissory note, unsecured, 0% and 8.8% interest, respectively, maturing in October 2018
|
|
|
2,005
|
|
|
|
2,005
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured convertible debenture, JGB (Cayman) Waltham Ltd., bearing interest of 4.67%, maturing in May 2019
|
|
|
1,615
|
|
|
|
3,091
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured convertible note, JGB (Cayman) Concord Ltd., bearing interest at 4.67%, maturing in May 2019
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, JGB (Cayman) Waltham Ltd., bearing interest at 4.67%, maturing in May 2019
|
|
|
105
|
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
6%
senior convertible term promissory note, unsecured, Dominion Capital, matured on January 31, 2018, net of debt discount of
$0 and $1, respectively
|
|
|
50
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
12%
senior convertible note, unsecured, Dominion Capital, matured in November 2017
|
|
|
-
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
note issued to Trinity Hall, 3% interest, unsecured, matured in January 2018
|
|
|
500
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
9.9%
convertible promissory note, RDW Capital LLC. July 14, 2017 Note, maturing on July 14, 2018, net of debt discount of $0 and
$74, respectively
|
|
|
-
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
9.9%
convertible promissory note, RDW Capital LLC. September 27, 2017 Note, maturing on September 27, 2018, net of debt discount
of $61 and $91, respectively
|
|
|
94
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
9.9%
convertible promissory note, RDW Capital LLC. October 12, 2017 Note, maturing on October 12, 2018
|
|
|
133
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
9.9%
convertible promissory note, RDW Capital LLC. December 8, 2017 Note, maturing on December 8, 2018
|
|
|
330
|
|
|
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
notes issued to Forward Investments, LLC, between 2% and 10% interest, matured on July 1, 2016, unsecured
|
|
|
1,421
|
|
|
|
1,421
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
notes issued to Forward Investments, LLC, 3% interest, matured on January 1, 2018, unsecured
|
|
|
1,752
|
|
|
|
1,752
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
notes issued to Forward Investments, LLC, 6.5% interest, matured on July 1, 2016, unsecured
|
|
|
390
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
note to Tim Hannibal, 8% interest, matured on January 9, 2018, unsecured
|
|
|
300
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
note issued to SCS LLC, 12% interest, due on February 27, 2019, unsecured, net of debt discount of $60
|
|
|
90
|
|
|
|
-
|
|
|
|
|
|
10,201
|
|
|
|
12,071
|
|
|
Less:
Current portion of term loans
|
|
|
(9,932
|
)
|
|
|
(11,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
term loans, net of debt discount
|
|
$
|
269
|
|
|
$
|
1,058
|
|
The interest expense,
including amortization of debt discounts, associated with the term loans payable in the quarters ended March 31, 2018 and 2017
amounted to $417 and $3,579, respectively.
With the exception of the note outstanding to the former owner of RM Leasing, all term loans are subordinate
to the JGB (Cayman) Waltham Ltd. And JGB (Cayman) Concord Ltd. Notes, which are guaranteed by all assets of the Company.
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) 2,522 shares of the Company’s common stock and (iii) $15,626 in unsecured convertible promissory
notes. 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 was payable on October
9, 2017. The promissory notes were convertible into shares of the Company’s common stock at a conversion price equal to $2,548.00
per share.
On July 18, 2017, the
holder of the promissory note in the principal amount of $1,215 assigned the full outstanding amount of the note to a third party,
RDW Capital, LLC (“RDW”) (refer to the “Assignment of Tim Hannibal Note - RDW July 18, 2017 2.5% Convertible
Promissory Note” section of this note for further detail). The promissory note were subsequently cancelled when exchanged
for new promissory notes of the Company.
During November
2017, the holders of the promissory notes in the principal amounts of $7,408 and $7,003, respectively, converted $5,405 and $4,998
of principal, respectively, into shares of the Company’s Series K preferred stock (refer to Note 15, Preferred Stock, for
further detail). As a result of this conversion, the original notes were amended, with new principal amounts of $2,003 and $2,005,
respectively (refer to the “London Bay – VL Holding Company LLC November 17, 2017 Amendment” and “WV VL
Holding Corp November 17, 2017 Amendment” sections of this note for further detail).
London Bay – VL Holding Company
LLC November 17, 2017 Amendment
On November 17,
2017, the Company amended a convertible promissory note originally issued to London Bay – VL Holding Company LLC on October
9, 2014. The amendment extended the maturity date to October 9, 2018. The amended note is in the principal amount of $2,003 and
does not accrue interest. The note is convertible at 95% of the average of the three lowest prices during the 5 days preceding
conversion (refer to Note 10, Derivative Instruments, for further detail on the derivative features associated with the amended
note).
On December 8, 2017,
the holder of the amended note assigned $600 of principal to RDW Capital LLC (refer to the “RDW December 8, 2017 9.9% Convertible
Promissory Note” section of this note for further detail).
During the three months ended March 31, 2018, the investor who holds the amended note did not convert
any principal or accrued interest into shares of the Company’s common stock.
WV VL Holding Corp November 17, 2017
Amendment
On November 17,
2017, the Company amended a convertible promissory note originally issued to WV VL Holding Corp on October 9, 2014. The amendment
extended the maturity date to October 9, 2018. The amended note is in the principal amount of $2,005 and does not accrue interest.
The note is convertible at 95% of the average of the three lowest prices during the 5 days preceding conversion (refer to Note
10, Derivative Instruments, for further detail on the derivative features associated with the amended note).
During the three months ended March 31, 2018, the investor who holds the amended note did not convert
any principal or accrued interest into shares of the Company’s common stock.
Term Loan – Dominion Capital LLC
August 6, 2015 Senior Convertible Note
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 matured on January 6, 2017.
At the election of the investor, the note was convertible into shares of the Company’s common stock at a conversion price
equal to $800.00 per share, subject to adjustment as set forth in the agreement. The investor may have elected 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 10, Derivative Instruments, for further detail on the
derivative features associated with the August 6, 2015 convertible note.
The August 6, 2015
senior convertible note matured on January 6, 2017 and was due on demand.
During the three months
ended March 31, 2017, the investor who held the August 6, 2015 senior convertible note converted the remaining principal outstanding
of $1,199 into shares of the Company’s common stock.
Term Loan – Dominion Capital LLC
September 15, 2016 Promissory Note and November 4, 2016 Exchange Agreement
On September 15, 2016,
the Company received cash proceeds of $500, from the sale of a term promissory note. The term promissory note originally had a
maturity date of November 4, 2016 and can be paid in either cash or common stock at the option of the lender. Interest accrued
at the rate of 12% per annum. The note was redeemable at any time prior to maturity at an amount equal to 110% of the outstanding
principal amount plus any accrued and unpaid interest on the note. The redemption premium (10%) could be paid in cash or common
stock at the option of the Company.
On November 4,
2016, the Company entered into an exchange agreement with the holder of the September 15, 2016 term promissory note. The principal
amount was increased by $40 to $540, which included a debt discount of $101, and the note became convertible into shares of the
Company’s common stock. The maturity date of the note was extended from November 4, 2016 to November 4, 2017. Interest accrued
at the rate of 12% per annum. The amended note had monthly amortization payments of $86 beginning on May 4, 2017 and ending on
the maturity date. These monthly amortization payments could be offset by monthly conversions. The note was convertible at the
lower of (i) $4.00, or (ii) 75% of the lowest VWAP day for the 15 days prior to the conversion date. In accordance with ASC Topic
470-50, the Company recorded a loss on extinguishment of $146 in the consolidated statement of operations for the year ended December
31, 2016. Refer to Note 10, Derivative Instruments, for further detail on the derivative features associated with the November
4, 2016 convertible note.
The note matured on
November 4, 2017 and was due on demand.
During the three
months ended March 31, 2018, the holder of the November 4, 2016 promissory note converted $78 of principal and accrued interest
into shares of the Company’s common stock (refer to Note 12, Stockholders’ Deficit, for further information). As a
result of these conversions, the balance of the note was $0 as of March 31, 2018. The Company recorded a loss on extinguishment
of debt of $45 in the unaudited condensed consolidated statement of operations for the three months ended March 31, 2018. During
the three months ended March 31, 2017, the holder of the November 4, 2016 promissory note did not convert any principal or accrued
interest into shares of the Company’s common stock.
Term Loan - Dominion Capital LLC January
31, 2017 Senior Convertible Promissory Note
On January 31,
2017, the Company entered into a senior convertible promissory note with Dominion Capital, LLC in the original principal amount
of $70, with interest accruing at the rate of 6% per annum, which matures on January 31, 2018. The note is convertible at 70%
of the lowest VWAP in the 15 trading days prior to the conversion date. Refer to Note 10, Derivative Instruments, for further
detail on the derivative features associated with the January 31, 2017 convertible note.
During the three
months ended March 31, 2018, the holder of the January 31, 2017 promissory note converted $20 of principal into shares of the
Company’s common stock (refer to Note 12, Stockholders’ Deficit, for further information). As a result of these conversions,
the Company recorded a loss on extinguishment of debt of $17 in the unaudited condensed consolidated statement of operations for
the three months ended March 31, 2018. During the three months ended March 31, 2017, the holder of the January 31, 2017 promissory
note did not convert any principal or accrued interest into shares of the Company’s common stock.
Richard Smithline Senior 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 matured on January 11, 2017. The note was convertible into shares of the Company’s common stock
at a conversion price equal to the lesser of $125.00 or 75% of the average daily VWAP for the five (5) trading days prior to the
conversion date. Refer to Note 10, Derivative Instruments, for further detail on the derivative features associated with the Richard
Smithline Senior Convertible Note.
Pursuant to the Smithline
senior convertible note, the Company was required to meet current public information requirements under Rule 144 of the Securities
Act of 1933, which it had failed to do prior to June 30, 2016. Thus, on July 20, 2016, the Company agreed to add $55 to the principal
amount of the Smithline senior convertible note as of July 1, 2016 and the investor waived its right to call an event of default
under the note with respect to the Company’s failure to meet the public information requirement for the period ending June
30, 2016. On September 1, 2016, the Company agreed to add $97 to the principal amount of the Smithline senior convertible note
as of the date of its last monthly amortization to compensate the investor for certain damages relating to noncompliance with certain
provisions of the senior convertible note. In accordance with ASC Topic 470-50, the Company recorded a loss on extinguishment of
debt of $167 during the year ended December 31, 2016.
The Smithline senior
convertible note matured on January 11, 2017 and was due on demand.
During the year ended December 31, 2017, the investor who held the Smithline senior convertible note converted
the remaining principal outstanding of $363 into shares of the Company’s common stock.
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 Waltham”) whereby the
Company issued to JGB Waltham, for gross proceeds of $7,500, a $500 original issue discount senior secured convertible debenture
in the principal amount of $7,500. The debenture had a maturity date of June 30, 2017, bore interest at 10% per annum, and was
convertible into shares of the Company’s common stock at a conversion price equal to $532.00 per share, subject to adjustment
as set forth in the debenture. The Company was required to pay interest to JGB Waltham 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 was an interest payment date on which the Company was to pay to JGB Waltham a fixed amount, as additional interest under
the debenture an amount equal to $350 in cash, shares of the Company’s common stock or a combination thereof. Commencing
on February 29, 2016, JGB Waltham had 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 could have been made in cash or, at the Company’s
option and subject to satisfying certain equity conditions, in shares of the Company’s common stock. The debenture was guaranteed
by the Company and certain of its subsidiaries and was secured by all assets of the Company. The total cash received by the Company
as a result of this agreement was $3,730.
On May 17, 2016, the
Company entered into a Forbearance and Amendment Agreement (the “Debenture Forbearance Agreement”) with JGB Waltham
pursuant to which JGB Waltham 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.
In connection with
the execution of the Debenture Forbearance Agreement, the Company issued to JGB Waltham an amended and restated senior secured
convertible debenture (the “Amended and Restated Debenture”), which amended the original 10% senior secured convertible
debenture issued to JGB Waltham on December 29, 2015 by: (i) reducing the conversion price at which the original debenture converts
into shares of the Company’s common stock; 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) certain anti-dilution protections.
The Amended and Restated
Debenture was issued in the 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 $320.00 per share, subject
to equitable adjustments as set forth in the Amended and Restated Debenture. The Company shall pay interest to JGB Waltham 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 Waltham an
additional amount equal to 7.5% of the outstanding principal amount on the Amended and Restated Debenture on each of May 31, 2018
and May 31, 2019, subject to certain exceptions set forth in the Amended and Restated Debenture. JGB Waltham has 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 each calendar month, in cash. The Amended and Restated Debenture contains standard
events of default.
In connection with
the execution of the Debenture Forbearance Agreement, the Company issued to JGB Waltham a senior secured note (the “2.7 Note”),
dated May 17, 2016, in the principal amount of $2,745 that matures on May 31, 2019, bears interest at 0.67% per annum and contains
standard events of default.
The Company accounted
for the Debenture Forbearance Agreement in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company
extinguished the December 29, 2015 senior secured convertible debenture in the then-current principal amount of $6,100 and recorded
a new senior secured convertible debenture at its new fair value of $3,529 on the consolidated balance sheet as of May 17, 2016.
As a result of the extinguishment, the Company recorded a loss on extinguishment of debt of $1,457 on the consolidated statement
of operations as of May 17, 2016. In addition, the Company re-valued the derivative features associated with the December 29,
2015 senior secured convertible debenture. Refer to Note 10, Derivative Instruments, for additional information on this transaction.
On May 23, 2016, the
Company entered into an amended agreement with JGB Concord, JGB Waltham, VaultLogix, and the Guarantors thereto (the “Amended
Agreement”) pursuant to which (i) JGB Concord permitted the Company to withdraw $172 from the Blocked Account (as defined
in the original debenture), and (ii) JGB Concord permitted the Company to withdraw $328 from the Deposit Account (as defined in
the original note) and, in exchange for the foregoing, (i) VaultLogix guaranteed the obligations of, and provide security for,
the Amended and Restated Debenture and the 2.7 Note, (ii) the Company’s subsidiaries guaranteed all indebtedness due to JGB
Concord under the Amended and Restated Note and 5.2 Note, and (iii) the Company and its subsidiaries pledged their assets as security
for all obligations owed to JGB Concord 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 agreed 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”). In addition, the interest rates on the Amended and Restated Note and the
5.2 Note were amended from 0.67% per annum to 1.67% per annum.
The Company accounted
for this Amended Agreement in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company accounted for
the Amended Agreement as a debt modification and adjusted the fair value of the associated derivative liabilities to its fair
value as of May 23, 2016. Refer to Note 10, Derivative Instruments, for additional information on this transaction.
On June 23, 2016, the
Company entered into an amendment agreement with JGB Concord and JGB Waltham pursuant to which, (i) JGB Waltham and JGB Concord
released to the Company an aggregate of $1,500 from the Deposit Account (as defined in the original note). Upon the release of
the funds (i) the JGB Waltham senior secured convertible debenture (the “December Debenture”) was amended to increase
the Applicable Interest Rate (as defined in the original note) by 3.0% effective on July 1, 2016; (ii) the December Debenture was
amended to increase the annual rate of interest by 3.0% effective on July 1, 2016; (iii) the JGB Concord senior secured convertible
note (the “February Convertible Note”) was amended to increase the Applicable Interest Rate (as defined in the original
February Convertible Note) by 3.0%, effective on July 1, 2016; and (iv) the February Note was amended to increase the annual rate
of interest by 3.0%, effective on July 1, 2016. After giving effect to the foregoing annual rate of interest on each December Debenture
and February Convertible Note as of July 1, 2016, was 4.67%. As additional consideration for the release of the funds, the Company
issued 2,250 shares of the Company’s common stock on June 23, 2016 to JGB Concord.
The Company accounted
for the June 23, 2016 amendment agreement in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company
extinguished the May 17, 2016 Debenture Forbearance Agreement in the principal amount of $6,100 and recorded on the balance sheet
as of June 23, 2016 a new senior secured convertible debenture at its new fair value of $4,094. As a result of the extinguishment,
the Company recorded a loss on extinguishment of debt of $483 on the consolidated statement of operations as of June 23, 2016.
In addition, the Company re-valued the derivative features associated with the May 17, 2016 Debenture Forbearance Agreement. Refer
to Note 10, Derivative Instruments, for additional information on this transaction.
On September 1, 2016,
the Company entered into an Amendment Agreement with JGB Concord and JGB Waltham pursuant to which, JGB Waltham and JGB Concord
(i) waived certain covenant violations and defaults, (ii) agreed to a specified application of the Cash Collateral (as defined
in the Amendment Agreement) in partial satisfaction of the obligations owed under the December Debenture, the 2.7 Note, and the
February Convertible Note, and in full satisfaction of the 5.2 Note, and (iii) certain provisions of the December Debenture, the
2.7 Note, and the February Convertible Note be amended.
The Company also
(i) issued warrants, with an expiration date of December 31, 2017, to purchase 2,500 shares of the Company’s common stock
at an exercise price of $4.00 per share, (ii) issued warrants, with an expiration date of December 31, 2017, to purchase 8,750
shares of common stock at an exercise price of $40.00 per share ((i) and (ii), the “JGB Warrants”). The Company determined
that the fair value of the JGB Warrants was $972, which is included in common stock warrants within the stockholders’ deficit
section on the consolidated balance sheet as of December 31, 2016. As of March 31, 2017, these warrants were reclassified to a
liability account (refer to Note 10, Derivative Instruments, for further detail).
In connection with
the execution of the September 1, 2016 Amendment Agreement, the Company issued to JGB Waltham the Third Amended and Restated Senior
Secured Convertible Debenture (the “Amended and Restated Debenture”), in order to, among other things, amend the December
Debenture to (i) provide that the Company may prepay such debenture upon prior notice at a 10% premium, (ii) modify the conversion
price at which such debenture converts into common stock from a fixed price of $320.00 to the lowest of (a) $81.72 per share,
(b) 80% of the average VWAPs (as defined in the Amended and Restated Debenture) for each of the five consecutive trading days
immediately prior to the applicable conversion, and (c) 85% of the VWAP (as defined in the Amended and Restated Debenture) for
the trading day immediately preceding the applicable conversion (the “Conversion Price”), and (iii) eliminate three
additional 7.5% payments due to JGB Waltham in 2017, 2018 and 2019, as per such debenture. Further, in connection with the execution
of the Amendment Agreement, the Company executed the Amended and Restated Senior Secured Note (the “Amended and Restated
2.7 Note”), in order to, among other things, amend the 2.7 Note to provide that JGB Waltham may convert such note into shares
of common stock at the applicable Conversion Price at any time and from time to time. Refer to Note 10, Derivative Instruments,
for further detail on the Company’s accounting for the Amended and Restated 2.7 Note.
The Company accounted
for the September 1, 2016 amendment agreement in accordance with ASC Topic 470-50. Because of the extinguishment, the Company
recorded a loss on extinguishment of debt of $274 on the consolidated statement of operations as of September 1, 2016. In addition,
the Company re-valued the derivative features. Refer to Note 10, Derivative Instruments, for additional information on this transaction.
On February 28, 2017,
the Company entered into a consent agreement with JGB Waltham and JGB Concord in order to, among other things, (i) obtain the consent
of JGB Waltham and JGB Concord to the Highwire Asset Purchase Agreement (“APA”); (ii) amend the conversion price of
the JGB Waltham Debenture, JGB Waltham 2.7 Note, and the JGB Concord Debenture to the lower of (a) $16.00 per share and (b) 80%
of the lowest daily VWAP (as defined in the Debenture) for the 30 consecutive trading days immediately prior to the applicable
conversion; (iii) apply $3,625 of the purchase price received in connection with the APA to payments to JGB Waltham and JGB Concord
in respect of the convertible note, as more particularly set forth in the consent.
The Company accounted
for the amended conversion price in accordance with ASC Topic 470-50. Because of the extinguishment, the Company recorded a loss
on extinguishment of debt related to the JGB Waltham debenture and the JGB Waltham 2.7 Note of $389 and $35, respectively, on
the consolidated statement of operations for the year ended December 31, 2017. In addition, the Company re-valued the derivative
features (refer to Note 10, Derivative Instruments, for additional information on this transaction).
On March 9, 2017, JGB
Waltham, the Company, and a third-party investor effectuated a two-part exchange with respect to a portion of the Amended and Restated
Debenture in which JGB Waltham assigned a portion of its interest in the Amended and Restated Debenture (the “Assigned Debt”)
to MEF I, L.P. pursuant to an Assignment and Assumption Agreement, dated as of March 9, 2017. Simultaneously therewith, the Company,
entered into an Exchange Agreement, dated as of March 9, 2017 (the “Exchange Agreement”), pursuant to which the Company
issued to MEF I, L.P. a 4.67% Convertible Promissory Note, dated as of March 9, 2017, in the principal amount of $550 (the “Exchange
Note”) (refer to MEF I, L.P. section below for additional details).
The Company accounted
for the assignment of debt in accordance with ASC Topic 470-50. Because of the extinguishment, the Company recorded a loss on
extinguishment of debt of $676 on the consolidated statement of operations for the year ended December 31, 2017. In addition,
the Company re-valued the derivative features (refer to Note 10, Derivative Instruments, for additional information on this transaction).
During the year ended
December 31, 2017, the Company made cash payments for principal and interest on the JGB Waltham December Debenture of $932 and
$224, respectively. Of the $224 of interest paid, $18 was from proceeds of the sale of the Company’s Highwire division.
During the three months
ended March 31, 2018, the Company made cash payments for principal and interest on the JGB Waltham December Debenture of $1,207
and $35, respectively.
During the year ended
December 31, 2017, the Company made cash payments for principal and interest on the JGB Waltham 2.7 Note of $298 and $20, respectively.
Of the $20 of interest paid, $2 was from proceeds of the sale of the Company’s Highwire division.
During the three months
ended March 31, 2018, the Company made cash payments for principal and interest on the JGB Waltham 2.7 Note of $189 and $1, respectively.
During the three months
ended March 31, 2018, JGB Waltham converted $271 of principal and accrued interest into shares of the Company’s common stock.
As a result of these conversions, the Company recorded a loss on extinguishment of debt of $102 in the unaudited condensed consolidated
statement of operations for the three months ended March 31, 2018. During the year ended December 31, 2017, JGB Waltham converted
$511 of principal and accrued interest into shares of the Company’s common stock. As a result of these conversions, the Company
recorded a loss on extinguishment of debt of $636 in the consolidated statement of operations for the year ended December 31, 2017.
Principal of $1,615
and $3,091 related to the JGB Waltham December Debenture remained outstanding as of March 31, 2018 and December 31, 2017, respectively.
Principal of $105 and $294 related to the JGB Waltham 2.7 Note remained outstanding as of March 31, 2018 and December 31, 2017,
respectively.
JGB (Cayman) Concord Ltd. Senior Secured
Convertible Note
On February 17, 2016,
the Company entered into a securities exchange agreement with VaultLogix and JGB (Cayman) Concord Ltd. (“JGB Concord”),
whereby the Company exchanged the White Oak Global Advisors, LLC promissory note and subsequently assigned to JGB Concord a new
8.25% senior secured convertible note dated February 18, 2016 in the principal amount of $11,601. As a result of the assignment,
the obligations of the Company and VaultLogix to White Oak Global Advisors, LLC were satisfied.
The note issued to
JGB Concord had a maturity date of February 18, 2019, bore interest at 8.25% per annum, and was convertible into shares of the
Company’s common stock at a conversion price equal to the lowest of: (a) $800.00 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. Interest on the senior secured convertible note was due in arrears each calendar month
in cash, or, at the Company’s option and subject to stockholder approval, in shares of the Company’s common stock.
Commencing on the stockholder approval date, JGB Concord had the right, at its option, to convert the senior secured convertible
note, in whole or in part, into shares of the Company’s common stock, subject to certain beneficial ownership limitations.
The senior secured convertible note was secured by all assets of VaultLogix as well as a cash collateral blocked deposit account.
On May 17, 2016, the
Company entered into a forbearance and amendment agreement (the “Note Forbearance Agreement”) with VaultLogix and JGB
Concord, pursuant to which JGB Concord agreed to forbear action with respect to certain existing defaults 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.
In connection with
the execution of the Note Forbearance Agreement, the Company issued to JGB Concord an amended and restated senior secured convertible
note (the “Amended and Restated Note”) in order to amend the original note to JGB Concord by: (i) reducing the conversion
price at which the note converts into shares of the Company’s common; 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) certain anti-dilution protections.
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 $320.00 per share, subject
to equitable adjustments as set forth in the Amended and Restated Note. The Company and VaultLogix shall pay interest to JGB Concord
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 Concord
an additional amount equal to 7.5% of the outstanding principal amount on the Amended and Restated Note on each of May 31, 2018,
and May 31, 2019, subject to certain exceptions set forth in the Amended and Restated Note. JGB Concord has 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 each calendar month in cash. The Amended and Restated Note contains standard events of default.
The Company accounted
for the Note Forbearance Agreement in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company extinguished
the February 17, 2016 senior secured convertible note in the principal amount of $11,601 and recorded a new senior secured convertible
debenture at its new fair value of $6,711 on the consolidated balance sheet as of May 17, 2016. As a result of the extinguishment,
the Company recorded a loss on extinguishment of debt of $2,772 on the consolidated statement of operations as of May 17, 2016.
In addition, the Company re-valued the derivative features associated with the February 17, 2016 senior secured convertible note.
Refer to Note 10, Derivative Instruments, for additional information on this transaction.
In connection with
the execution of the Note Forbearance Agreement, the Company issued to JGB Concord a senior secured note (the “5.2 Note”),
dated May 17, 2016, in the principal amount of $5,220 that matures on May 31, 2019, bears interest at 0.67% per annum, and contains
standard events of default.
On May 23, 2016, the
Company entered into an amended agreement with JGB Concord, JGB Waltham, VaultLogix, and the Guarantors thereto (the “Amended
Agreement”) pursuant to which (i) JGB Concord permitted the Company to withdraw $172 from the Blocked Account (as defined
in the original debenture), and (ii) JGB Concord permitted the Company to withdraw $328 from the Deposit Account (as defined in
the original note) and, in exchange for the foregoing, (i) VaultLogix guaranteed the obligations of, and provide security for,
the Amended and Restated Debenture and the 2.7 Note, (ii) the Company’s subsidiaries guaranteed all indebtedness due to JGB
Concord under the Amended and Restated Note and 5.2 Note, and (iii) the Company and its subsidiaries pledged their assets as security
for all obligations owed to JGB Concord 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 agreed 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”). In addition, the interest rates on the Amended and Restated Note and the
5.2 Note were amended from 0.67% to 1.67%.
The Company accounted
for this Amended Agreement in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company accounted for
the Amended Agreement as a debt modification and adjusted the fair value of the associated derivative liabilities to its fair
value as of May 23, 2016. Refer to Note 10, Derivative Instruments, for additional information on this transaction.
On June 23, 2016,
the Company entered into an amendment agreement with JGB Concord and JGB Waltham pursuant to which, (i) JGB Waltham and JGB Concord
released to the Company an aggregate of $1,500 from the Deposit Account (as defined in the original note). Upon the release of
the funds (i) the JGB Waltham senior secured convertible debenture (the “December Debenture”) was amended to increase
the Applicable Interest Rate (as defined in the original note) by 3.0% to take effect on July 1, 2016; (ii) the December Debenture
was amended to increase the annual rate of interest by 3.0% to take effect on July 1, 2016; (iii) the JGB Concord senior secured
convertible note (the “February Convertible Note”) was amended to increase the Applicable Interest Rate (as defined
in the original February Convertible Note) by 3.0%, to take effect on July 1, 2016; and (iv) the February Note was amended to
increase the annual rate of interest by 3.0%, to take effect on July 1, 2016. After giving effect to the foregoing annual rate
of interest on each December Debenture and February Convertible Note as of July 1, 2016, was 4.67%. As additional consideration
for the release of the funds, the Company issued 2,250 shares of the Company’s common stock on June 23, 2016 to JGB Concord,
and agreed to a make-whole provision whereby the Company would pay JGB Concord in cash the difference between $376.00 per share
of the Company’s common stock and the average volume weighted average price of the Company’s common stock sixty days
after the shares of the Company’s common stock were freely tradable. Refer to Note 10, Derivative Instruments, for further
detail on the Company’s accounting for the JGB Concord make-whole provision.
The Company accounted
for the June 23, 2016 amendment agreement in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company
extinguished the May 17, 2016 Debenture Forbearance Note in the principal amount of $11,601 and recorded a new senior secured
convertible note at its new fair value of $7,786 on the consolidated balance sheet as of June 23, 2016. As a result of the extinguishment,
the Company recorded a loss on extinguishment of debt of $1,150 on the consolidated statement of operations as of June 23, 2016.
In addition, the Company re-valued the derivative features associated with the May 17, 2016 Debenture Forbearance Note. Refer
to Note 10, Derivative Instruments, for additional information on this transaction.
In connection with
the execution of the September 1, 2016 Amendment Agreement, the Company executed the Second Amended and Restated Senior Secured
Convertible Note (the “Amended and Restated Convertible Note”), in order to, among other things, amend the Convertible
Note to (i) increase the interest rate payable thereon from 0.67% to 4.67%, (ii) provide that the Company may prepay the Amended
and Restated Convertible Note upon prior notice at a 10% premium, (iii) provide that the Holder Affiliate may convert its interest
in the Amended and Restated Convertible Note into shares of Common Stock at the applicable Conversion Price, and (iv) eliminate
three additional 7.5% payments due to the Holder Affiliate in 2017, 2018, and 2019, as per the Convertible Note.
The Company accounted
for the September 1, 2016 amendment agreement in accordance with ASC Topic 470-50. Because of the extinguishment, the Company
recorded a loss on extinguishment of debt of $1,187 on the consolidated statement of operations as of September 1, 2016. In addition,
the Company re-valued the derivative features. Refer to Note 10, Derivative Instruments, for additional information on this transaction.
On February 28, 2017,
the Company entered into a consent agreement with JGB Waltham and JGB Concord in order to, among other things, (i) obtain the consent
of JGB Waltham and JGB Concord to the Highwire Asset Purchase Agreement (“APA”); (ii) amend the conversion price of
the JGB Waltham Debenture, JGB Waltham 2.7 Note, and the JGB Concord Debenture to the lower of (a) $16.00 per share and (b) 80%
of the lowest daily VWAP (as defined in the Debenture) for the thirty consecutive trading days immediately prior to the applicable
conversion; (iii) apply $3,625 of the purchase price received in connection with the APA to payments to JGB Waltham and JGB Concord
in respect of the convertible note, as more particularly set forth in the consent.
The Company accounted
for the amended conversion price in accordance with ASC Topic 470-50. Because of the extinguishment, the Company recorded a loss
on extinguishment of debt related to the JGB Concord debenture of $71 on the consolidated statement of operations for the year
ended December 31, 2017. In addition, the Company re-valued the derivative features (refer to Note 10, Derivative Instruments,
for additional information on this transaction).
During the year ended
December 31, 2017, the Company made cash payments for principal and interest on the JGB Concord February Debenture of $2,688 and
$31, respectively. Proceeds from the sale of the Company’s Highwire division were used to pay principal and interest of $2,526
and $12, respectively, along with an early payment penalty of $253.
During the three months
ended March 31, 2017, JGB Concord did not convert any principal or accrued interest into shares of the Company’s common stock.
During the year ended December 31, 2017, JGB Concord converted $1,053 of principal and accrued interest into shares of the Company’s
common stock. As a result of these conversions, the Company recorded a loss on extinguishment of debt of $1,279 to the consolidated
statement of operations for the year ended December 31, 2017.
Principal of $11 related
to the JGB Concord February Debenture remained outstanding as of March 31, 2018 and December 31, 2017.
Assignment and Assumption Agreement
– MEF I, L.P.
On March 9, 2017,
JGB Waltham, the Company, and a third-party investor effectuated a two-part exchange with respect to a portion of the Amended
and Restated Debenture in which JGB Waltham assigned a portion of its interest in the Amended and Restated Debenture (the “Assigned
Debt”) to MEF I, L.P. pursuant to an Assignment and Assumption Agreement, dated as of March 9, 2017. Simultaneously therewith,
the Company entered into an Exchange Agreement, dated as of March 9, 2017 (the “Exchange Agreement”), pursuant to
which the Company issued to MEF I, L.P. a 4.67% convertible promissory note, dated as of March 9, 2017, in the aggregate principal
amount of $550 (the “Exchange Note”). The Exchange Note was convertible at the lower of (i) $16.00 or (ii) 80% of
the lowest VWAP in the 30 trading days prior to the conversion date (refer to Note 10, Derivative Instruments, for further detail
on the derivative features associated with the Exchange Note).
During the year ended
December 31, 2017, the investor who held the Exchange Note converted $575 of principal and related interest into shares of the
Company’s common stock. As a result of these conversions, the outstanding principal balance as of December 31, 2017 was $0.
The Company recorded a loss on extinguishment of debt of $150 to the consolidated statement of operations for the year ended December
31, 2017.
Trinity Hall Promissory Note
On December 30,
2016, the Company issued to Trinity Hall a promissory note in the principal amount of $500, with interest accruing at the rate
of 3% per annum, which matured on January 1, 2018. This note was issued upon assignment to Trinity Hall of certain related party
notes payable to Mark Munro (refer to Note 14, Related Parties, for further detail).
RDW April 3, 2017 2.5 % Convertible
Promissory Note
On April 3, 2017, Scott
Davis, a former officer of the Company assigned $100 of his promissory note in the original principal amount of $250, reduced to
$225 based on a $25 conversion into common stock, to RDW. As consideration for the assignment, RDW paid Scott Davis $40. The note
was convertible at a price of $888.00 and was due on demand. As of April 3, 2017, the outstanding amount of principal and accrued
interest for the note was $225 and $57, respectively. Subsequent to the assignment of $100 principal amount of the note to RDW,
the remainder of the note was forgiven. The original note was included within notes payable, related parties on the consolidated
balance sheets. Per ASC 470-50-40-2, debt extinguishment transactions between related parties are in essence a capital contribution
from a related party. As a result, rather than recording a gain or loss on extinguishment of debt, the Company recorded $182 to
additional paid-in capital on the consolidated balance sheet.
RDW subsequently
exchanged this original note for a new 2.5% convertible promissory note in the principal amount of $100 due April 3, 2018. The
conversion price of the new note was equal to 75% of the average of the five lowest VWAPS over the seven trading days prior to
the date of conversion (refer to Note 10, Derivative Instruments, for further detail on the derivative features associated with
the RDW April 3, 2017 2.5% convertible note). The Company recorded a loss on extinguishment of debt of $14 for the year ended
December 31, 2017, which includes all extinguishment accounting for the period in accordance with ASC Topic 470-50.
During the year ended
December 31, 2017, the investor who held the April 3, 2017 2.5% promissory note converted $100 of principal into shares of the
Company’s common stock. As a result of these conversions, the outstanding principal balance as of December 31, 2017 was $0.
The Company recorded a gain on extinguishment of debt of $34 to the consolidated statement of operations for the year ended December
31, 2017.
RDW July 14, 2017 9.9% Convertible Promissory
Note
On July 14, 2017,
the Company issued a convertible promissory note to RDW in the principal amount of $155, which accrued interest at the rate of
9.9% per annum, and had a maturity date of July 14, 2018. The note was convertible at the lower of (i) $4.00 or (ii) 75% of the
lowest five VWAPS over the seven trading days prior to the date of conversion (refer to Note 10, Derivative Instruments, for further
detail on the derivative features associated with the RDW July 14, 2017 9.9% convertible note).
During the three months ended March 31, 2018, the investor who held the 9.9% promissory note converted
$155 of principal into shares of the Company’s common stock. As a result of these conversions, the outstanding principal
balance as of March 31, 2018 was $0. The Company recorded a loss on extinguishment of debt of $212 to the consolidated statement
of operations for the three months ended March 31, 2018. During the year ended December 31, 2017, the investor who held the 9.9%
promissory note did not convert any principal or accrued interest into shares of the Company’s common stock.
Assignment of Tim Hannibal Note - RDW
July 18, 2017 2.5% Convertible Promissory Note
On July 18, 2017,
Tim Hannibal assigned 100% of his 8% convertible promissory note in the original principal amount of $1,215, due October 9, 2017,
to RDW. This note was convertible into the Company’s common stock at a price of $2,548.00 per share. RDW then exchanged
this original note for a new 2.5% convertible promissory note in the principal amount of $1,215, which an original maturity date
of July 18, 2018. The conversion price of such note was equal to the lower of (i) $4.00 or (ii) 75% of the lowest five VWAPS over
the seven trading days prior to the date of conversion (refer to Note 10, Derivative Instruments, for further detail on the derivative
features associated with the RDW July 18, 2017 2.5% convertible note). In addition, Tim Hannibal forgave all outstanding interest
relating to the original note. The Company recorded a loss on extinguishment of debt of $297 on the consolidated statement of
operations for the year ended December 31, 2017.
During the year ended
December 31, 2017, the investor who held the July 18, 2017 2.5% promissory note converted $1,215 of principal into shares of the
Company’s common stock. As a result of these conversions, the Company recorded a loss on extinguishment of debt of $286 to
the consolidated statement of operations for the year ended December 31, 2017.
RDW September 27, 2017 9.9% Convertible
Promissory Note
On September 27,
2017, the Company issued a convertible promissory note to RDW in the principal amount of $155, which bears interest at the rate
of 9.9% per annum, and matures on September 27, 2018. The note is convertible at the lower of (i) $4.00 or (ii) 75% of the lowest
five VWAPS over the twenty trading days prior to the date of conversion (refer to Note 10, Derivative Instruments, for further
detail on the derivative features associated with the RDW September 27, 2017 9.9% convertible note).
During the three months
ended March 31, 2018, the investor who holds the 9.9% promissory note did not convert any principal or accrued interest into shares
of the Company’s common stock. During the year ended December 31, 2017, the investor who holds the 9.9% promissory note did
not convert any principal or accrued interest into shares of the Company’s common stock.
RDW October 12, 2017 9.9% Convertible
Promissory Note
On October 12,
2017, Frank Jadevaia, former owner of IPC, assigned $400 of his outstanding promissory notes to RDW. The new note is in the principal
amount of $400, bears interest at the rate of 9.9% per annum, and matures on September 27, 2018. The note is convertible at the
lower of (i) $4.00 or (ii) 75% of the lowest VWAP over the twenty trading days prior to the date of conversion (refer to Note
10, Derivative Instruments, for further detail on the derivative features associated with the RDW October 12. 2017 9.9% convertible
note).
During the year ended
December 31, 2017, the investor who holds the October 12, 2017 9.9% promissory note converted $267 of principal into shares of
the Company’s common stock. As a result of these conversions, the Company recorded a loss on extinguishment of debt of $114
to the consolidated statement of operations for the year ended December 31, 2017.
RDW December 8, 2017 9.9% Convertible
Promissory Note
On December 8,
2017, London Bay – VL Holding Company LLC assigned $600 of an outstanding promissory note to RDW. The new note is in the
principal amount of $600, bears interest at the rate of 9.9% per annum, and matures on December 8, 2018. The note is convertible
at the lower of (i) $4.00 or (ii) 65% of the lowest VWAP over the twenty trading days prior to the date of conversion (refer to
Note 10, Derivative Instruments, for further detail on the derivative features associated with the RDW December 8. 2017 9.9% convertible
note).
During the three
months ended March 31, 2018, the investor who holds the December 8, 2017 9.9% promissory note converted $150 of principal into
shares of the Company’s common stock (refer to Note 12, Stockholders’ Deficit, for further information). As a result
of these conversions, the Company recorded a loss on extinguishment of debt of $103 to the consolidated statement of operations
for the three months ended March 31, 2018. During the year ended December 31, 2017, the investor who holds the December 8,
2017 9.9% promissory note converted $120 of principal into shares of the Company’s common stock. As a result of these conversions,
the Company recorded a loss on extinguishment of debt of $203 to the consolidated statement of operations for the year ended December
31, 2017.
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. These notes matured on 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. These notes matured on July 1, 2016; and
|
|
|
|
|
|
|
●
|
notes issued to Forward Investments, LLC in the aggregate principal amount of $2,645 were converted from senior notes to junior notes, had the interest rate reduced from 18% to 3% per annum, had the maturity date extended by approximately three years to January 1, 2018, and originally were convertible at a conversion price of $2,544.00 per share until the Convertible Debentures were repaid in full and thereafter $940.00 per share, subject to further adjustment as set forth therein.
|
In connection with
such restructuring, Forward Investments, LLC agreed to lend to the Company an amount substantially similar to the accrued interest
the Company owed to Forward Investments, LLC on the restructured notes. In consideration for such restructuring and additional
payments made by Forward Investments, LLC to the Company, the Company issued to Forward Investments, LLC an additional convertible
note in the original principal amount of $1,730 with an interest rate of 3% per annum, which matured on January 1, 2018, and had
an initial conversion price of $2,544.00 per share until the Convertible Debentures were repaid in full and thereafter $940.00
per share, subject to further adjustment as set forth therein, and provided Forward Investments, LLC the option to lend the Company
an additional $8,000 in the form of convertible notes similar to the existing convertible notes of the Company issued to Forward
Investments, LLC. The convertible note was issued to Forward Investments, LLC as an incentive to restructure the above-mentioned
notes and resulted in the Company recording a loss on modification of debt of $1,508 on the unaudited condensed consolidated statement
of operations as of March 31, 2015.
As part of the restructuring,
Forward Investments, LLC agreed to convert $390 of accrued interest on the above-mentioned loans to a new note bearing interest
at the rate of 6.5% per annum that matured on July 1, 2016.
In conjunction with
the extension of the 2% and 10% convertible notes issued to Forward Investments, LLC, the Company recorded an additional $1,916
of debt discount at the date of the restructuring.
The Company has entered
into an agreement with Forward Investments, LLC permitting Forward Investments, LLC to convert its debt into the Company’s
common stock at a 5% discount to the daily market price. During the year ended December 31, 2017, Forward Investments, LLC converted
$5,435 aggregate principal amount of promissory notes into an aggregate of 2,900,103 shares of the Company’s common stock.
As a result of these conversions, the Company recorded a loss on extinguishment of debt of $530 to the consolidated statement of
operations for the year ended December 31, 2017.
During July 2017, the
Company determined that Forward Investments was not a related party and reclassified debt owed to Forward Investments from related
party debt to term loans. The effective date of the reclassification was January 1, 2017.
During the three months ended March 31, 2018, Forward Investments did not convert any principal or accrued
interest into shares of the Company’s common stock.
Convertible Promissory Note to Frank
Jadevaia, Former Owner of IPC
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, then President of the Company, in the original principal amount of $6,255.
The convertible promissory note accrued 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 was convertible
into shares of the Company’s common stock at a conversion price of $6,796.00 per share (subject to equitable adjustments
for stock dividends, stock splits, recapitalizations and other similar events). The Company could have elected to force the conversion
of the convertible promissory note if the Company’s common stock was trading at a price greater than or equal to $6,796.00
for ten consecutive trading days. This note was subordinated until the Senior Secured Convertible Notes issued to the JGB entities
are paid in full.
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 25,000 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 581 shares of the Company’s common stock with a fair value of $1,352.00 per common share.
On May 30, 2016, the
note matured and was due on demand.
On November 4, 2016,
Mr. Jadevaia resigned from his role as the Company’s President. During July 2017, the Company determined that Frank Jadevaia
was no longer a related party and reclassified his note from related party debt to term loans. The effective date of the reclassification
was January 1, 2017.
On October 12, 2017,
Mr. Jadevaia agreed to exchange $5,430 held in promissory notes into shares of the Company’s Series L preferred stock and
assigned promissory notes in the principal amount of $400 to RDW Capital LLC.
Promissory Note to Former Owner of Tropical
In August 2011, in
connection with the Company’s acquisition of Tropical, the Company assumed a promissory note in the principal amount of $106.
On April 25, 2017, the holder of the note forgave the remaining balance of principal and interest and cancelled the promissory
note. As of April 25, 2017, the note had accrued interest of $25. As a result of the cancellation of the note, the Company recognized
a gain on fair value of extinguishment of $131 in the consolidated financial statements for the year ended December 31, 2017.
Tim Hannibal 8% Promissory Note
On November 9, 2017,
the Company issued an unsecured promissory note to Tim Hannibal in the principal amount of $300, which bears interest at the rate
of 8% per annum, and matured on January 9, 2018.
SCS LLC February 27, 2018 Convertible
Promissory Note
On February 27,
2018, the Company issued a convertible promissory note to SCS, LLC. The note has a principal amount of $150, accrues interest
at the rate of 12% per annum, and is due on February 27, 2019. The note is convertible into shares of the Company’s common
stock at a conversion price per share equal to 80% of the average of the three (3) lowest VWAPs over the five (5) trading days
prior to the conversion date (refer to Note 10, Derivative Instruments, for further detail on the derivative features associated
with the SCS LLC February 27, 2018 convertible note).
10. DERIVATIVE INSTRUMENTS
The Company evaluates
and accounts for conversion options embedded in its convertible debt and freestanding instruments in accordance with ASC 815,
Accounting
for Derivative Instruments and Hedging Activities
(“ASC Topic 815”).
MidMarket Warrants
The Company issued
warrants to the lenders under the MidMarket Loan Agreement in 2012. These warrants were outstanding as of March 31, 2018 and December
31, 2017.
The terms of the warrants
issued in September 2012 originally provided, among other things, that the number of shares of common stock issuable upon exercise
of such warrants amounted to 11.5% of the Company’s fully-diluted outstanding common stock and common stock equivalents,
whether the common stock equivalents were fully vested and exercisable or not, and that the initial exercise price of such warrants
was $5.00 per share of common stock, subject to adjustment. Pursuant to an amendment to the loan agreement, on March 22, 2013,
the number of shares for which the warrants are exercisable was fixed at 234,233 shares. On September 17, 2012, when the warrants
were issued, the Company recorded a derivative liability in the amount of $194. The amount was recorded as a debt discount and
was being amortized over the original life of the related loans. The amount of the derivative liability was computed by using the
Black-Scholes option pricing model, which is not materially different from a binomial lattice valuation methodology, 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 binomial lattice pricing model and adjusts the fair
value accordingly.
On September 17, 2016,
the fourth anniversary date of the warrants, the Company failed to meet the minimum adjusted earnings before interest, taxes, depreciation
and amortization provisions set forth within the original warrant agreement. As such, the expiration date of the warrants was extended
to September 17, 2018.
On March 31, 2018 and
December 31, 2017, the Company used a binomial lattice pricing model to determine the fair value of the derivative liability of
the warrants on that date, and determined the fair value was $0.
The fair value of the
warrant derivative liability as of March 31, 2018 and December 31, 2017 was calculated using a binomial lattice pricing model with
the following factors, assumptions and methodologies:
|
|
|
March 31,
2018
|
|
December 31,
2017
|
|
|
|
|
|
|
|
Fair value of Company’s common stock
|
|
$0.09
|
|
$0.27
|
|
Volatility (closing prices of 3-4 comparable public companies, including the Company’s historical volatility)
|
|
187%
|
|
215%
|
|
Exercise price per share
|
|
$1,600.00 - $2,000.00
|
|
$1,600.00 - $2,000.00
|
|
Estimated life
|
|
0.5 years
|
|
0.7 years
|
|
Risk free interest rate (based on 1-year treasury rate)
|
|
1.95%
|
|
1.65%
|
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, were to mature on June 30, 2015 and originally were convertible into shares of the Company’s common
stock at an initial conversion price of $6.36 per share.
The fair value of the
embedded conversion feature at the date of issuance was $8,860. The Company recorded a debt discount of $6,475 and a loss on debt
discount of $2,385. The debt discount is being amortized over the life of the loans. The Company used a Monte Carlo simulation
on the date of issuance to determine the fair value of the embedded conversion feature.
On October 22, 2014,
the two convertible promissory notes 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 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 the two promissory notes in order to extend the maturity dates thereof,
reduce the seniority and reduce the interest rate accruing thereon (refer to Note 14, Related Parties, for further detail). The
Company accounted for this restructuring of the promissory notes as a debt modification under ASC Topic 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
were 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 $632.00 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.
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 $500.00 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 December 29, 2015,
the ratchet-down feature within the original agreement was triggered and the conversion price of the convertible notes was reset
to $312.00 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 March 31, 2018 and
December 31, 2017, the fair value of the conversion feature of the Forward Investments, LLC loans was $324 and $348, respectively,
which was included in derivative financial instrument at estimated fair value on the unaudited condensed consolidated balance sheets.
The change in the fair value of the Forward Investments, LLC derivative liabilities was recorded as a gain in the unaudited condensed
consolidated statements of operations of $24 and $1277 for the three months ended March 31, 2018 and 2017, 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:
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
Principal and interest amount
|
|
$
|
1,826
|
|
|
$
|
599
|
|
|
$
|
1,271
|
|
|
$
|
2,451
|
|
|
$
|
1,810
|
|
|
$
|
582
|
|
|
$
|
1,270
|
|
|
$
|
2,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
Risk free rate
|
|
|
2.39
|
%
|
|
|
2.39
|
%
|
|
|
1.73
|
%
|
|
|
1.73
|
%
|
|
|
2.00
|
%
|
|
|
2.00
|
%
|
|
|
1.39
|
%
|
|
|
1.39
|
%
|
|
Life of conversion feature (in years)
|
|
|
3.8
|
|
|
|
3.8
|
|
|
|
0.3
|
|
|
|
0.0
|
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
0.3
|
|
|
|
0.0
|
|
|
Volatility
|
|
|
151
|
%
|
|
|
151
|
%
|
|
|
304
|
%
|
|
|
304
|
%
|
|
|
142
|
%
|
|
|
142
|
%
|
|
|
195
|
%
|
|
|
195
|
%
|
|
*
|
The conversion price per share is equal to the lesser of $7.80 or 95% of VWAP on the conversion date.
|
Dominion Capital LLC 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 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 matured 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 sheets as a debt discount and related derivative liability. The debt
discounts were being amortized over the life of the loan.
On December 31,
2016, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible note and determined
the fair value to be $176. As a result of the conversion of the outstanding principal balance (refer to Note 9, Term Loans, for
further detail), the fair value of the corresponding derivative liability was $0 as of March 31, 2017. The Company recorded a
gain on fair value of derivative instruments of $176 on the unaudited condensed consolidated statement of operations for the three
months ended March 31, 2017.
Dominion Capital LLC November 4, 2016
Exchange Agreement – Senior Convertible Debt Features
On November 4,
2016, the Company entered into an exchange agreement with the holder of the September 15, 2016 term promissory note. The principal
amount was increased by $40, and the note became convertible into shares of the Company’s common stock. The note was convertible
at the lower of (i) $40.00, or (ii) 75% of the lowest VWAP day for the 15 days prior to the conversion date (for additional detail
refer to Note 9, Term Loans). 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 4, 2016, the
Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $242 related to the conversion
feature and recorded this item on the consolidated balance sheets as a derivative liability.
As a result of conversions,
the balance outstanding on the promissory note was $0 as of March 31, 2018. The Company recorded a gain of $59 on the unaudited
condensed consolidated statement of operations for the three months ended March 31, 2018. On December 31, 2017, the Company used
a Monte Carlo simulation to value the settlement features of the senior convertible note and determined the fair value to be $59.
The Company recorded a loss of $323 on the unaudited condensed consolidated statement of operations for the three months ended
March 31, 2017.
The fair value of the
senior convertible note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors,
assumptions and methodologies:
|
|
|
December 31,
2017
|
|
|
Principal amount and guaranteed interest
|
|
$
|
75
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
Risk free rate
|
|
|
1.39
|
%
|
|
Life of conversion feature (in years)
|
|
|
0.25
|
|
|
Volatility
|
|
|
195
|
%
|
|
*
|
The conversion price per share was equal to the lesser of $10.00 or 75% of average daily VWAP for the fifteen trading days prior to the conversion date.
|
Dominion Capital LLC January 31, 2017
– Senior Convertible Debt Features
On January 31,
2017, the Company entered into a senior convertible promissory note with Dominion Capital, LLC in the original principal amount
of $70, with interest accruing at the rate of 6% per annum, which matures on January 31, 2018. The note is convertible at the
lower of (i) $40.00 or (ii) 80% of the lowest VWAP in the 15 trading days prior to the conversion date. (for additional detail
refer to Note 9, Term Loans). 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 January 31, 2017, the
Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $38 related to the conversion
feature and recorded this item on the consolidated balance sheets as a derivative liability.
On March 31, 2018 and
December 31, 2017, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible noted and
determined the fair value to be $60 and $81, respectively. The Company recorded the change in the fair value of the derivative
liability for the three months ended March 31, 2018 and 2017 as a gain and loss in the unaudited condensed consolidated statements
of operations of $21 and $24, respectively.
The fair value of the
senior convertible note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors,
assumptions and methodologies:
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
Principal amount and guaranteed interest
|
|
$
|
57
|
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
|
|
*
|
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
|
None
|
|
|
Risk free rate
|
|
|
1.73
|
%
|
|
|
1.28
|
%
|
|
Life of conversion feature (in years)
|
|
|
0.00
|
|
|
|
0.08
|
|
|
Volatility
|
|
|
304
|
%
|
|
|
310
|
%
|
|
*
|
The conversion price per share is equal to 70% of average daily VWAP for the fifteen trading days prior to the conversion date.
|
Smithline Senior Convertible Note Embedded
Features
On August 6, 2015,
the Company issued to 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 July 20, 2016
and September 1, 2016, principal of $55 and $97, respectively, was added to the Smithline senior convertible note (refer to Note
9, Term Loans, for additional detail).
The Smithline senior
convertible note matured on January 11, 2017 and was due on demand.
The Company recorded
the change in the fair value of the derivative liability for the three months ended March 31, 2017 as a loss in the unaudited condensed
consolidated statements of operations of $24.
During the year ended
December 31, 2017, Smithline converted the outstanding principal balance into shares of the Company’s common stock.
JGB (Cayman) Waltham Ltd. Senior Secured
Convertible Debenture Features
On December 29, 2015,
the Company entered into a securities purchase agreement with JGB Waltham whereby the Company issued to JGB Waltham, for gross
proceeds of $7,500, a 10% original issue discount senior secured convertible debenture in the aggregate principal amount of $7,500.
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 29, 2015, the Company used a Monte Carlo
simulation to value the settlement features and ascribed a value of $1,479 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 were amortized over the life of the loan.
On May 17, 2016,
the Company entered into the Debenture Forbearance Agreement with JGB Waltham pursuant to which JGB Waltham agreed to forbear
action with respect to certain existing defaults in accordance with the terms of the Debenture Forbearance Agreement (Refer to
Note 9, Term Loans, for further details). The Company evaluated the Debenture Forbearance Agreement and accounted for the transaction
as a debt extinguishment in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo
simulation to revalue the settlement features associated with the Debenture Forbearance Agreement. The Company recorded the change
in the settlement features as a loss to change in fair value of derivative instruments of $1,154 to its consolidated statement
of operations on May 17, 2016.
On May 23, 2016, the
Company entered into the Amended Agreement with JGB Concord, JGB Waltham, VaultLogix, and the Guarantors. The Company accounted
for this Amended Agreement in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company accounted for
the Amended Agreement as a debt modification and utilized a Monte Carlo simulation to determine the fair value of the settlement
features. The Company recorded a loss on the fair value of the settlement features to change in fair value of derivative instruments
of $41 on the consolidated statement of operations as of May 23, 2016.
On June 23, 2016,
the Company entered into an amended agreement with JGB Concord and JGB Waltham (refer to Note 9, Term Loans, for further detail).
The Company accounted for the amended agreement as a debt extinguishment in accordance with ASC Topic 470-50. In accordance with
ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement features associated with the Amended Agreement.
The Company recorded the change in the settlement features as a loss to change in fair value of derivative instruments of $486
to its consolidated statement of operations on June 23, 2016.
On September 1,
2016, the Company entered into an amended agreement with JGB Concord and JGB Waltham (refer to Note 9, Term Loans, for further
detail). The Company accounted for the amended agreement in regards to the December Debenture as a debt modification in accordance
with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement
features associated with the Amended Agreement. The Company recorded the change in the settlement features as a gain to change
in fair value of derivative instruments of $1,552 to its consolidated statement of operations on September 1, 2016.
On February 28,
2017, the Company entered into a consent agreement with JGB Concord and JGB Waltham (refer to Note 9, Term Loans, for further
detail). The Company accounted for the amended agreement in regards to the JGB Waltham debenture as a debt extinguishment in accordance
with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement
features associated with the agreement. The Company recorded the change in the settlement features as a loss to change in fair
value of derivative instruments of $1,752 to its unaudited condensed consolidated statement of operations for the three months
ended March 31, 2017.
On March 9, 2017,
JGB (Cayman) Waltham entered into an Assignment and Assumption agreement with MEF I, LP (refer to Note 9, Term Loans, for further
detail). The Company accounted for the assumption agreement in regards to the JGB Waltham debenture as a debt extinguishment in
accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the
settlement features associated with the agreement. The Company recorded the change in the settlement features as a loss to change
in fair value of derivative instruments of $349 to its unaudited condensed consolidated statement of operations for the three
months ended March 31, 2017.
On March 31, 2018
and December 31, 2017, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible notes
issued to JGB Waltham and determined the fair value to be $1,025 and $1,820, respectively. The Company recorded the change in
the fair value of the derivative liability for the three months ended March 31, 2018 and 2017 as a gain and loss of $795 and $2,285,
respectively, which included all extinguishment accounting for the periods in accordance with ASC Topic 470-50. These changes
were recorded in the unaudited condensed consolidated statements of operations.
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:
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
Principal amount and guaranteed interest
|
|
$
|
1,621
|
|
|
$
|
3,091
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
|
|
*
|
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
|
None
|
|
|
Risk free rate
|
|
|
2.09
|
%
|
|
|
1.76
|
%
|
|
Life of conversion feature (in years)
|
|
|
1.17
|
|
|
|
1.41
|
|
|
Volatility
|
|
|
228
|
%
|
|
|
201
|
%
|
|
*
|
The conversion price per share is equal to the lesser of $4.00 or 80% of VWAP on the conversion date.
|
JGB (Cayman) Waltham Ltd. 2.7 Note Convertible
Debenture Features
On September 1,
2016, the Company entered into an amended agreement with JGB Concord and JGB Waltham (refer to Note 9, Term Loans, for further
detail). The Company accounted for the amended agreement in regards to the 2.7 Note as a debt extinguishment in accordance with
ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement features
associated with the Amended Agreement and determined that the fair value of the features was $1,200 as of September 1, 2016 and
recorded these items on the consolidated balance sheets as a derivative liability. The debt discounts were amortized over the
life of the loan.
On February 28,
2017, the Company entered into a consent agreement with JGB Concord and JGB Waltham (refer to Note 9, Term Loans, for further
detail). The Company accounted for the amended agreement in regards to the JGB Waltham 2.7 Note as a debt extinguishment in accordance
with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement
features associated with the agreement. The Company recorded the change in the settlement features as a loss to change in fair
value of derivative instruments of $141 to its unaudited condensed consolidated statement of operations for the three months ended
March 31, 2017.
On March 31, 2018 and December 31, 2017, the Company used a Monte Carlo simulation to value the settlement
feature of the 2.7 Note and determined the fair value to be $55 and $120, respectively. The Company recorded a gain and loss on
fair value of derivative instruments of $65 and $179, respectively, for the three months ended March 31, 2018 and 2017, which included
all extinguishment accounting for the periods in accordance with ASC Topic 470-50. These changes were recorded on the unaudited
condensed consolidated statement of operations.
The fair value of the
JGB Waltham derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors, assumptions
and methodologies:
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
Principal amount and guaranteed interest
|
|
$
|
116
|
|
|
$
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
|
|
*
|
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
|
None
|
|
|
Risk free rate
|
|
|
1.73
|
%
|
|
|
1.39
|
%
|
|
Life of conversion feature (in years)
|
|
|
0.00
|
|
|
|
0.00
|
|
|
Volatility
|
|
|
304
|
%
|
|
|
195
|
%
|
|
*
|
The conversion price per share is equal to the lesser of $4.00 or 80% of VWAP on the conversion date.
|
JGB (Cayman) Concord Ltd. Senior Secured
Convertible Note
On February 17,
2016, the Company entered into a securities exchange agreement by and among the Company, VaultLogix, and JGB Concord, 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 (refer to Note 9, Term Loans,
for further details).
The Company evaluated
the senior secured convertible note’s settlement provisions and determined that the 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 February 18, 2016, the Company used a Monte Carlo simulation to
value the settlement features and ascribed a value of $1,350 related to the conversion feature and fundamental transaction clauses
and recorded these items on the consolidated balance sheets as a derivative liability. The debt discounts are being amortized over
the life of the loan.
On May 17, 2016,
the Company entered into the Note Forbearance Agreement with JGB Concord pursuant to which JGB Concord agreed to forbear action
with respect to certain existing defaults in accordance with the terms of the Note Forbearance Agreement (Refer to Note 9, Term
Loans, for further details). The Company evaluated the Note Forbearance Agreement and accounted for the transaction as a debt
extinguishment in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation
to revalue the settlement features associated with the Note Forbearance Agreement. The Company recorded the change in the settlement
features as a loss to change in fair value of derivative instruments of $2,196 to its consolidated statement of operations on
May 17, 2016.
On May 23, 2016, the
Company entered into the Amended Agreement with JGB Concord, JGB Waltham, VaultLogix, and the Guarantors. The Company accounted
for this Amended Agreement in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company accounted for
the Amended Agreement as a debt modification and utilized a Monte Carlo simulation to determine the fair value of the settlement
features. The Company recorded a loss on the fair value of the settlement features to change in fair value of derivative instruments
of $79 on the consolidated statement of operations as of May 23, 2016.
On June 23, 2016,
the Company entered into an amended agreement with JGB Concord and JGB Waltham (refer to Note 9, Term Loans, for further detail).
The Company accounted for the amended agreement as a debt extinguishment in accordance with ASC Topic 470-50. In accordance with
ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement features associated with the Amended Agreement
to determine the fair value. The Company recorded the change in the settlement features as a loss to change in fair value of derivative
instruments of $924 to its consolidated statement of operations on June 23, 2016.
As part of the June
23, 2016 amended agreement with JGB Concord, the Company issued 900,000 shares of the Company’s common stock on June 23,
2016 to JGB Concord, which included a make-whole provision whereby the Company would pay JGB Concord in cash the difference between
$376.00 per share of the Company’s common stock and the average volume weighted average price per share of the Company’s
common stock sixty days after shares of the Company’s common stock are freely tradable. The Company accounted for the make-whole
provision within the June 23, 2016 amendment agreement as a derivative liability and utilized a binomial lattice model to ascribe
a value of $280, which was recorded as a derivative liability on the Company’s consolidated balance sheet and as a loss on
extinguishment of debt on the Company’s consolidated statement of operations on June 23, 2016.
On September 1,
2016, the Company entered into an amended agreement with JGB Concord and JGB Waltham (refer to Note 9, Term Loans, for further
detail). The Company accounted for the amended agreement as a debt extinguishment in accordance with ASC Topic 470-50. In accordance
with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement features associated with the Amended
Agreement. The Company recorded the change in the settlement features as a gain to change in fair value of derivative instruments
of $1,308 to its consolidated statement of operations on September 1, 2016.
On February 28,
2017, the Company entered into a consent agreement with JGB Concord and JGB Waltham (refer to Note 9, Term Loans, for further
detail). The Company accounted for the amended agreement in regards to the JGB Concord Debenture as a debt extinguishment in accordance
with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement
features associated with the agreement. The Company recorded the change in the settlement features as a gain to change in fair
value of derivative instruments of $2 to its unaudited condensed consolidated statement of operations for the three months ended
March 31, 2017.
On March 31, 2018 and December 31, 2017, the Company used a Monte Carlo simulation to value the settlement
features of the senior secured convertible notes and determined the fair value to be $7 and $7, respectively. The Company recorded
the change in fair value of derivative instruments for the three months ended March 31, 2017 and as a gain of $245, respectively,
which included all extinguishment accounting for the periods in accordance with ASC Topic 470-50. These changes were recorded in
the unaudited condensed consolidated statement of operations.
The fair value of the
JGB (Cayman) Concord Ltd. derivative at the measurement date was calculated using the Monte Carlo simulation with the following
factors, assumptions and methodologies:
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
Principal amount and guaranteed interest
|
|
$
|
11
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
|
|
*
|
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
|
None
|
|
|
Risk free rate
|
|
|
2.09
|
%
|
|
|
1.76
|
%
|
|
Life of conversion feature (in years)
|
|
|
1.17
|
|
|
|
1.41
|
|
|
Volatility
|
|
|
228
|
%
|
|
|
201
|
%
|
|
*
|
The conversion price per share is equal to the lesser of $4.00 or 80% of VWAP on the conversion date.
|
JGB Concord Make-Whole Provision
On December 31, 2016,
the Company used a binomial lattice model to value the make-whole provision and determined the fair value to be $819. Proceeds
from the January 31, 2017 sale of the Company’s Highwire subsidiary were used to pay the remaining balance of the make-whole
provision. On February 28, 2017, the Company used a binomial lattice model to value the make-whole provision and determined the
fair value to be $814.
During the year ended
December 31, 2017, the Company paid the balance owed for the make-whole provision.
The Company recorded
a gain on fair value of derivative instruments of $5 for the three months ended March 31, 2017 on the unaudited condensed consolidated
statement of operations.
February 28, 2017 JGB Waltham Warrant
On February 28, 2017, the Company entered into a securities exchange agreement with JGB Waltham whereby
the Company issued a warrant giving JGB Waltham the right to purchase from the Company shares of common stock for an aggregate
purchase price of up to $1,000. The warrant had an original expiration date of November 28, 2018 and contained a cashless exercise
feature. The warrants had an exercise price of $16.00 until May 29, 2017 and the lower of (a) $16.00 and (b) 80% of the lowest
VWAP of the Company’s common stock for the prior 30 days thereafter. On February 28, 2017, the Company used a binomial lattice
calculation to value the warrants. The Company ascribed a value of $65 related to the warrants and recorded this item on the consolidated
balance sheets as a derivative liability.
The Company recorded
a loss of $328 on the unaudited condensed consolidated statement of operations for the three months ended March 31, 2017.
During the year ended December 31, 2017, JGB Waltham exercised
the warrant in full for an aggregate purchase price of $1,000.
MEF I, L.P. Assignment and Assumption Agreement
On March 9, 2017,
the Company entered into a convertible promissory note with MEF I, L.P. pursuant to an assignment and assumption agreement (refer
to Note 9, Term Loans, for additional detail on the assignment). The note is convertible at the lower of (i) $16.00 or (ii) 80%
of the lowest VWAP in the 30 trading days prior to the conversion date. The Company evaluated the 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 March 9, 2017, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of
$250 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.
The Company recorded
a loss of $20 on the unaudited condensed consolidated statement of operations for the three months ended March 31, 2017.
As a result of the conversion of the
outstanding principal balance during the year ended December 31, 2017 (refer to Note 9, Term Loans, for further detail), the fair
value of the corresponding derivative liability was $0 as of December 31, 2017.
SRFF Warrant and Derivative
On September 8, 2016,
the Company issued a warrant to purchase up to a total of 6,250 shares of common stock at any time on or prior to April 1, 2017.
The exercise price of the warrant is $0.40. The warrant was issued in consideration for the outstanding accounts payable to the
holder of the warrant. Based on the agreement, the proceeds from the eventual sale of the common stock based on the exercise of
all or a portion of the warrant will be applied towards unpaid invoices for services previously rendered to the Company. The Company
determined that the fair value of the warrants was $460, which was included in common stock warrants within the stockholders’
deficit section on the consolidated balance sheet as of December 31, 2016.
During the three months
ended December 31, 2016, the warrant value became less than the accounts payable owed. As a result, a derivative had to be recorded
on the consolidated balance sheet as of December 31, 2016 in accordance with ASC 480.
As of March 31, 2017,
the Company did not have sufficient authorized shares for the remaining equity warrants to qualify as equity. Per ASC 815-40-35-9,
the Company reclassified these warrants to a derivative liability at their fair value as of March 31, 2017. Based on a warrant
to purchase up to a total of 2,500,000 shares of common stock and an underlying price of $0.03 per share, the Company recorded
these warrants at fair value of $75 on the unaudited condensed consolidated balance sheet as of March 31, 2017.
On March 31, 2018 and
December 31, 2017, the Company used a binomial lattice model to value the warrant derivative and determined the fair value to be
$132 and $234, respectively. The Company recorded a gain on fair value of derivative instruments of $102 and $37 for the three
months ended March 31, 2018 and 2017, respectively, on the unaudited condensed consolidated statement of operations.
On March 31, 2018,
the expiration date was extended until June 30, 2018.
The fair value of the
warrant derivative as of March 31, 2018 and December 31, 2017 was calculated using a binomial lattice pricing model with the following
factors, assumptions and methodologies:
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
Fair value of Company’s common stock
|
|
$
|
0.09
|
|
|
$
|
0.27
|
|
|
Volatility
|
|
|
198
|
%
|
|
|
201
|
%
|
|
Exercise price
|
|
|
0.40
|
|
|
|
0.400
|
|
|
Estimated life (in years)
|
|
|
0.25
|
|
|
|
0.25
|
|
|
Risk free interest rate
|
|
|
1.73
|
%
|
|
|
1.39
|
%
|
RDW April 3, 2017 2.5% Convertible Promissory Note
On April 3, 2017, Scott
Davis assigned 100% of his promissory note in the original principal amount of $250, reduced to $225 based on a $25 conversion
into common stock, to RDW. This note was convertible at a price of $888.00 per share and was due on demand. As consideration for
the assignment RDW paid Scott Davis $40. RDW then exchanged this original note for a new 2.5% convertible promissory note in the
principal amount of $100 due April 3, 2018. This conversion price of the new note is equal to 75% of the average of the five lowest
VWAPS over the seven trading days prior to the date of conversion. The Company evaluated the 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
April 25, 2017, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $39
related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.
As a result of
the conversion of the outstanding principal balance during the year ended December 31, 2017 (refer to Note 9, Term Loans, for
further detail), the fair value of the corresponding derivative liability was $0 as of December 31, 2017.
RDW July 14, 2017 9.9% Convertible Promissory
Note
On July 14, 2017, the Company issued a convertible promissory note to RDW in the principal amount of $155,
which bore interest at the rate of 9.9% per annum, and had an original maturity date of July 14, 2018. The note was convertible
at the lower of (i) $4.00 or (ii) 75% of the average of the lowest five VWAPS over the seven trading days prior to the date of
conversion. The Company evaluated the 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 July 14, 2017, the Company used a Monte Carlo simulation
to value the settlement features. The Company ascribed a value of $126 related to the conversion feature and recorded this item
on the consolidated balance sheets as a derivative liability.
As a result of
the conversion of the outstanding principal balance during the three months ended March 31, 2018 (refer to Note 9, Term Loans,
for further detail), the fair value of the corresponding derivative liability was $0 as of March 31, 2018. The Company recorded
a gain on fair value of derivative instruments of $64 for the three months ended March 31, 2018, on the unaudited condensed consolidated
statement of operations.
The fair value of the
convertible note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors,
assumptions and methodologies:
|
|
|
December 31,
2017
|
|
|
Principal amount and guaranteed interest
|
|
$
|
162
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
Risk free rate
|
|
|
1.53
|
%
|
|
Life of conversion feature (in years)
|
|
|
0.53
|
|
|
Volatility
|
|
|
198
|
%
|
|
*
|
The conversion price per share was equal to the lesser of $4.00 or 75% of the average of the lowest 5 prices during the 7 days preceding the conversion date.
|
Assignment of Tim Hannibal Note - RDW July 18, 2017 2.5%
Convertible Promissory Note
On July 18, 2017, Tim Hannibal assigned 100% of his 8% convertible promissory note in the original principal
amount of $1,215, due October 9, 2017, to RDW. This note was convertible into the Company’s common stock at a price of $2,548.00
per share. RDW then exchanged this original note for a new 2.5% convertible promissory note in the principal amount of $1,215 due
July 18, 2018. The conversion price of the new note was equal to the lower of (i) $4.00 or (ii) 75% of the average of the lowest
five VWAPS over the seven trading days prior to the date of conversion. The Company evaluated the 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
July 18, 2017, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $911
related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.
During the year
ended December 31, 2017, the holder of the July 18, 2017 convertible promissory note converted the outstanding principal balance
into shares of the Company’s common stock (refer to Note 9, Term Loans, for further detail). As a result of the conversions,
the fair value of the derivative liability was $0 at December 31, 2017.
RDW September 27, 2017 9.9% Convertible
Promissory Note
On September 27, 2017,
the Company entered into a convertible promissory note with RDW in the principal amount of $155, which bears interest at the rate
of 9.9% per annum, and matures on September 27, 2018. The note is convertible at the lower of (i) $4.00 or (ii) 75% of the average
of the lowest five VWAPS over the twenty trading days prior to the date of conversion. The Company evaluated the 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 September 27, 2017, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed
a value of $122 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.
On March 31, 2018 and
December 31, 2017, the Company used a Monte Carlo simulation to value the settlement features of the convertible note and determined
the fair value to be $131 and $108, respectively. The Company recorded a loss on fair value of derivative instruments of $23 for
the three months ended March 31, 2018 on the unaudited condensed consolidated statement of operations.
The fair value of the
convertible note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors,
assumptions and methodologies:
|
|
|
December 31,
2017
|
|
|
Principal amount and guaranteed interest
|
|
$
|
163
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
Risk free rate
|
|
|
1.95
|
%
|
|
Life of conversion feature (in years)
|
|
|
0.49
|
|
|
Volatility
|
|
|
255
|
%
|
|
*
|
The conversion price per share is equal to the lesser of $4.00 or 75% of the average of the lowest 5 prices during the 20 days preceding the conversion date.
|
RDW October 12, 2017 9.9% Convertible
Promissory Note
On October 12, 2017,
Frank Jadevaia, former owner of IPC, assigned $400 of his outstanding promissory notes to RDW. The new note is in the principal
amount of $400, bears interest at the rate of 9.9% per annum, and matures on September 27, 2018. The note is convertible at the
lower of (i) $4.00 or (ii) 75% of the lowest VWAP over the twenty trading days prior to the date of conversion. The Company evaluated
the 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 October 12, 2017, the Company used a Monte Carlo simulation to value the settlement
features. The Company ascribed a value of $374 related to the conversion feature and recorded this item on the consolidated balance
sheets as a derivative liability.
On March 31, 2018 and
December 31, 2017, the Company used a Monte Carlo simulation to value the settlement features of the convertible note and determined
the fair value to be $147 and $121, respectively. The Company recorded a loss on fair value of derivative instruments of $26 for
the three months ended March 31, 2018 on the unaudited condensed consolidated statement of operations.
The fair value of the
convertible note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors,
assumptions and methodologies:
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
Principal amount and guaranteed interest
|
|
$
|
137
|
|
|
$
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
|
|
*
|
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
|
None
|
|
|
Risk free rate
|
|
|
1.93
|
%
|
|
|
1.73
|
%
|
|
Life of conversion feature (in years)
|
|
|
0.53
|
|
|
|
0.78
|
|
|
Volatility
|
|
|
255
|
%
|
|
|
191
|
%
|
|
*
|
The conversion price per share is equal to the lesser of $4.00 or 75% of the lowest VWAP over the twenty trading days prior to the date of conversion
|
RDW December 8, 2017 9.9% Convertible
Promissory Note
On December 8, 2017,
London Bay – VL Holding Company LLC assigned $600 of an outstanding promissory note to RDW. The new note is in the principal
amount of $600, bears interest at the rate of 9.9% per annum, and matures on December 8, 2018. The note is convertible at the lower
of (i) $4.00 or (ii) 65% of the lowest VWAP over the twenty trading days prior to the date of conversion. The Company evaluated
the 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 8, 2017, the Company used a Monte Carlo simulation to value the settlement
features. The Company ascribed a value of $600 related to the conversion feature and recorded this item on the consolidated balance
sheets as a derivative liability.
On March 31, 2018 and
December 31, 2017, the Company used a Monte Carlo simulation to value the settlement features of the convertible note and determined
the fair value to be $475 and $617, respectively. The Company recorded a gain on fair value of derivative instruments of $142 for
the three months ended March 31, 2018 on the unaudited condensed consolidated statement of operations.
The fair value of the
convertible note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors,
assumptions and methodologies:
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
Principal amount and guaranteed interest
|
|
$
|
342
|
|
|
$
|
484
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
|
|
*
|
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
|
None
|
|
|
Risk free rate
|
|
|
1.93
|
%
|
|
|
1.76
|
%
|
|
Life of conversion feature (in years)
|
|
|
0.69
|
|
|
|
0.94
|
|
|
Volatility
|
|
|
255
|
%
|
|
|
225
|
%
|
|
*
|
The conversion price per share is equal to the lesser of $4.00 or 65% of the lowest VWAP over the twenty trading days prior to the date of conversion
|
London Bay – VL Holding Company LLC November 17, 2017
Amendment
On November 17, 2017,
the Company amended a convertible promissory note originally issued to London Bay – VL Holding Company LLC on October 9,
2014. The amendment extended the maturity date to October 9, 2018. The amended note is in the principal amount of $2,003 and does
not accrue interest. The note is convertible at 95% of the average of the three lowest prices during the 5 days preceding conversion.
The Company evaluated the 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 17, 2017, the Company used a Monte Carlo simulation
to value the settlement features. The Company ascribed a value of $282 related to the conversion feature and recorded this item
on the consolidated balance sheets as a derivative liability.
On March 31, 2018 and
December 31, 2017, the Company used a Monte Carlo simulation to value the settlement features of the convertible note and determined
the fair value to be $227 and $190, respectively. The Company recorded a loss on fair value of derivative instruments of $37 for
the three months ended March 31, 2018 on the unaudited condensed consolidated statement of operations.
The fair value of the
convertible note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors,
assumptions and methodologies:
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
Principal amount and guaranteed interest
|
|
$
|
1,454
|
|
|
$
|
1,426
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
|
|
*
|
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
|
None
|
|
|
Risk free rate
|
|
|
1.93
|
%
|
|
|
1.76
|
%
|
|
Life of conversion feature (in years)
|
|
|
0.53
|
|
|
|
0.77
|
|
|
Volatility
|
|
|
255
|
%
|
|
|
204
|
%
|
|
*
|
The conversion price per share is equal to 95% of the average of the three lowest prices during the 5 days preceding conversion
|
WV VL Holding Corp November 17, 2017
Amendment
On November 17, 2017,
the Company amended a convertible promissory note originally issued to WV VL Holding Corp on October 9, 2014. The amendment extended
the maturity date to October 9, 2018. The amended note is in the principal amount of $2,005 and does not accrue interest. The note
is convertible at 95% of the average of the three lowest prices during the 5 days preceding conversion. The Company evaluated the
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 17, 2017, the Company used a Monte Carlo simulation to value the settlement
features. The Company ascribed a value of $282 related to the conversion feature and recorded this item on the consolidated balance
sheets as a derivative liability.
On March 31, 2018 and
December 31, 2017, the Company used a Monte Carlo simulation to value the settlement features of the convertible note and determined
the fair value to be $323 and $271, respectively. The Company recorded a loss on fair value of derivative instruments of $52 for
the three months ended March 31, 2018 on the unaudited condensed consolidated statement of operations.
The fair value of the
convertible note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors,
assumptions and methodologies:
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
Principal amount and guaranteed interest
|
|
$
|
2,068
|
|
|
$
|
2,028
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
|
|
*
|
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
|
None
|
|
|
Risk free rate
|
|
|
1.93
|
%
|
|
|
1.76
|
%
|
|
Life of conversion feature (in years)
|
|
|
0.53
|
|
|
|
0.77
|
|
|
Volatility
|
|
|
255
|
%
|
|
|
204
|
%
|
|
*
|
The conversion price per share is equal to 95% of the average of the three lowest prices during the 5 days preceding conversion
|
SCS LLC February 27, 2018 Convertible
Promissory Note
On February 27, 2018,
the Company issued a convertible promissory note to SCS, LLC. The note has a principal amount of $150, accrues interest at the
rate of 12% per annum, and is due on February 27, 2019. The note is convertible into shares of the Company’s common stock
at a conversion price per share equal to 80% of the average of the three (3) lowest VWAPs over the five (5) trading days prior
to the conversion date. The Company evaluated the 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 February 27, 2018, the Company used a
Monte Carlo simulation to value the settlement features. The Company ascribed a value of $70 related to the conversion feature
and recorded this item on the consolidated balance sheets as a derivative liability.
On March 31, 2018,
the Company used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value
to be $69. The Company recorded a gain on fair value of derivative instruments of $1 for the three months ended March 31, 2018
on the unaudited condensed consolidated statement of operations.
The fair value
of the convertible note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors,
assumptions and methodologies:
|
|
|
March 31,
2018
|
|
|
Principal amount and guaranteed interest
|
|
$
|
151
|
|
|
|
|
|
|
|
|
Conversion price per share
|
|
|
*
|
|
|
Conversion trigger price per share
|
|
|
None
|
|
|
Risk free rate
|
|
|
2.09
|
%
|
|
Life of conversion feature (in years)
|
|
|
0.91
|
|
|
Volatility
|
|
|
228
|
%
|
|
*
|
The conversion price per share is equal to 80% of the average of the three lowest prices during the 5 days preceding conversion
|
Pryor Cashman LLP Warrant
On February 23, 2018,
the Company issued a warrant to purchase up to 5,000,000 shares of its common stock to Pryor Cashman LLP. The warrant expirers
on May 23, 2019 and is exercisable at a per share price of the lower of (i) $0.075 and (ii) 25% of the closing price of the Company’s
common stock on the trading day immediately preceding the date of exercise. The Company evaluated the warrant’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
February 23, 2018, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of
$1,798 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.
On March 31, 2018,
the Company used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value
to be $394. The Company recorded a gain on fair value of derivative instruments of $1,404 for the three months ended March 31,
2018 on the unaudited condensed consolidated statement of operations.
The fair value of the
convertible note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors,
assumptions and methodologies:
|
|
|
March 31,
2018
|
|
|
Fair value of Company’s common stock
|
|
$
|
0.09
|
|
|
Volatility
|
|
|
201
|
%
|
|
Exercise price
|
|
|
0.0225
|
|
|
Estimated life (in years)
|
|
|
1.15
|
|
|
Risk free interest rate
|
|
|
2.12
|
%
|
Series K, L, and M Preferred Stock Embedded
Conversion Features
On October 12,
2017, the Company issued 227 shares of the Company’s Series L preferred stock pursuant to an exchange of promissory notes
(refer to Note 15, Preferred Stock, for further detail). The Series L preferred stock is convertible into common stock of the
Company at 105% of the weighted average trading price for the five days prior to conversion
On November 10,
2017, the Company issued 1,512 shares of the Company’s Series K preferred stock pursuant to an exchange of promissory notes
(refer to Note 15, Preferred Stock, for further detail). The Series K preferred stock is convertible into common stock of the
Company at the lower of $3.00 or 95% of the weighted average trading price for the five days prior to conversion.
On December 1,
2017, the Company issued 386 shares of the Company’s Series M preferred stock pursuant to an exchange of warrants (refer
to Note 15, Preferred Stock, for further detail). The Series M preferred stock is convertible into common stock of the Company
at 105% of the weighted average trading price for the five days prior to conversion. In accordance with ASC 480,
Distinguishing
Liabilities from Equity
, the Company has classified the Series M preferred stock as a liability.
The Company evaluated
the embedded conversion features of the Series K and L preferred stock and concluded that they needed to be bifurcated. The Series
M preferred stock was also recorded at its fair value. At the issuance dates, the Company used a Monte Carlo simulation to value
the settlement features. The Company ascribed values of $15,748 and $1,664 related to the conversion features of the Series K and
L preferred stock, respectively, and recorded these items on the consolidated balance sheets as a derivative liability. The
Series M preferred stock was ascribed a value of $3,015 and recorded as a liability.
On March 31, 2018,
the Company used a Monte Carlo simulation to value the settlement features of the Series K, L, and M preferred stock and determined
the fair values to be $13,162, $1,725, and $2,972, respectively. On December 31, 2017, the Company used a Monte Carlo simulation
to value the settlement features of the Series K, L, and M preferred stock and determined the fair values to be $14,247, $1,743,
and $3,021, respectively. The Company recorded a gain on fair value of derivative instruments of $1,085 for the three months ended
March 31, 2018 on the unaudited condensed consolidated statement of operations for the settlement features of the Series K preferred
stock. The Company recorded a gain on fair value of derivative instruments of $18 for the three months ended March 31, 2018 on
the unaudited condensed consolidated statement of operations for the settlement features of the Series L preferred stock. The Company
also recorded a gain on fair value of the Series M preferred stock liability of $49 for the three months ended March 31, 2018 on
the unaudited condensed consolidated statement of operations.
The fair value of the
embedded conversion features of the Series K and L preferred stock, as well as the fair value of the Series M preferred stock,
at the measurement date was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:
|
|
|
Series K Preferred Stock
|
|
|
Series L Preferred Stock
|
|
|
Series M Preferred Stock
|
|
|
Series K Preferred Stock
|
|
|
Series L Preferred Stock
|
|
|
Series M Preferred Stock
|
|
|
|
|
March 31,
2018
|
|
|
March 31,
2018
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
December 31,
2017
|
|
|
December 31,
2017
|
|
|
Fair value of Company’s common stock
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
|
$
|
0.27
|
|
|
$
|
0.27
|
|
|
$
|
0.27
|
|
|
Volatility
|
|
|
166
|
%
|
|
|
167
|
%
|
|
|
166
|
%
|
|
|
160
|
%
|
|
|
160
|
%
|
|
|
159
|
%
|
|
Exercise price
|
|
|
3.00
|
|
|
|
3.00
|
|
|
|
3.00
|
|
|
|
3.00
|
|
|
|
3.00
|
|
|
|
3.00
|
|
|
Estimated life
|
|
|
4.62
|
|
|
|
4.54
|
|
|
|
4.67
|
|
|
|
4.86
|
|
|
|
4.78
|
|
|
|
4.92
|
|
|
Risk free interest rate (based on 1-year treasury rate)
|
|
|
2.56
|
%
|
|
|
2.56
|
%
|
|
|
2.56
|
%
|
|
|
2.20
|
%
|
|
|
2.20
|
%
|
|
|
2.26
|
%
|
11. INCOME TAXES
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 percent over the lowest percentage of the shares of such corporation
owned, directly or indirectly, by such 5-percent shareholders at any time over the preceding three years. In the event such ownership
change occurs, the annual limitation may result in the expiration of the net operating losses prior to full utilization. The Company
has completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes
since the Company became a “loss corporation” under the Code. As disclosed, the Company has taken these limitations
into account in determining its available NOL’s.
During 2012 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 Internal Revenue
Service (IRS) has completed its examination of the Company’s 2013 Federal Corporation Income tax Return. The Company has
agreed to certain adjustments proposed by the IRS and is appealing others. Separately, the IRS has questioned the Company’s
classification of certain individuals as independent contractors rather than employees. The Company estimates its potential liability
to be $165 but the liability, if any, upon final disposition of these matters is uncertain.
The Company’s 2016 U.S. corporation income tax return is currently under examination.
12. STOCKHOLDERS’ DEFICIT
Common Stock:
Issuance of shares pursuant to JGB Waltham
senior secured convertible debenture
During January 2018,
the Company issued an aggregate of 154,489 shares of common stock to JGB Waltham pursuant to conversion of $30 principal amount
related to the outstanding February 2016 senior secured convertible debenture. The shares were issued at an average of $0.19 per
share, per the terms of the note payable.
During February 2018,
the Company issued an aggregate of 298,470 shares of common stock to JGB Waltham pursuant to conversion of $50 principal amount
related to the outstanding February 2016 senior secured convertible debenture. The shares were issued at an average of $0.17 per
share, per the terms of the note payable.
During March 2018,
the Company issued an aggregate of 1,619,132 shares of common stock to JGB Waltham pursuant to conversion of $190 principal amount
related to the outstanding February 2016 senior secured convertible debenture. The shares were issued at an average of $0.12 per
share, per the terms of the note payable.
Issuance of shares pursuant to RDW December
8, 2017 convertible promissory note
During January 2018,
the Company issued an aggregate of 321,429 shares of its common stock to RDW upon the conversion of $45 principal amount of a note
outstanding. The shares were issued at an average of $0.14 per share, per the terms of the note payable.
During March 2018,
the Company issued an aggregate of 1,189,723 shares of its common stock to RDW upon the conversion of $105 principal amount of
a note outstanding. The shares were issued at an average of $0.09 per share, per the terms of the note payable.
Issuance of shares pursuant to RDW July
14, 2017 convertible promissory note
During February 2018,
the Company issued an aggregate of 428,572 shares of its common stock to RDW upon the conversion of $55 principal amount of a note
outstanding. The shares were issued at an average of $0.13 per share, per the terms of the note payable.
During March 2018,
the Company issued an aggregate of 1,063,829 shares of its common stock to RDW upon the conversion of $100 principal amount of
a note outstanding. The shares were issued at an average of $0.09 per share, per the terms of the note payable.
Issuance of shares pursuant to Dominion
Capital LLC November 4, 2016 promissory note
During February 2018,
the Company issued an aggregate of 131,150 shares of common stock to Dominion Capital LLC upon the conversion of $28 of principal
and accrued interest of a note outstanding. The shares were issued at an average of $0.21 per share, per the terms of the notes
payable.
During March 2018,
the Company issued an aggregate of 367,324 shares of common stock to Dominion Capital LLC upon the conversion of $50 of principal
and accrued interest of a note outstanding. The shares were issued at an average of $0.14 per share, per the terms of the notes
payable.
Issuance of shares pursuant to Dominion
January 31, 2017 convertible promissory note
During March 2018,
the Company issued an aggregate of 317,932 shares of its common stock to Dominion Capital LLC upon the conversion of $20 of principal
and accrued interest of a note outstanding. The shares were issued at an average of $0.09 per share, per the terms of the note
payable.
Issuance of shares pursuant to Form
S-8 registration statement
During March 2018,
the Company issued an aggregate of 100,000 shares of its common stock to Pryor Cashman LLP in satisfaction of fees owed totaling
$16. The shares were issues at $0.16 per share.
During March 2018,
the Company issued an aggregate of 200,000 shares of its common stock to Dealy Silberstein & Braverman, LLP in satisfaction
of fees owed totaling $30. The shares were issued at $0.15 per share.
During March 2018,
the Company issued an aggregate of 681,818 shares of its common stock to Sichenzia Ross Ference Kesner LLP in satisfaction of fees
owed totaling $102. The shares were issued at $0.15 per share.
13. STOCK-BASED COMPENSATION
Restricted Stock
The following table
summarizes the Company’s restricted stock activity during the three months ended March 31, 2018:
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Outstanding at January 1, 2018
|
|
|
16,858
|
|
|
$
|
169.00
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at March 31, 2018
|
|
|
16,858
|
|
|
$
|
169.00
|
|
For the three months
ended March 31, 2018 and 2017, the Company incurred $0 and $13, respectively, in stock compensation expense from the issuance of
common stock to employees and consultants.
The Company recorded
an additional $70 and $487 in stock compensation expense on shares subject to vesting terms in previous periods during the quarters
ended March 31, 2018 and 2017, respectively.
Options
There were no options
granted during the three months ended March 31, 2018 or 2017.
The following table
summarizes the Company’s stock option activity and related information for the three months ended March 31, 2018:
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Shares Underlying Options
|
|
|
Exercise Price
|
|
|
Remaining Contractual Term (in years)
|
|
|
Aggregate Intrinsic Value (in thousands)
|
|
|
Outstanding at January 1, 2018
|
|
|
417
|
|
|
$
|
1,488.00
|
|
|
|
4.29
|
|
|
$
|
-
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited and expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at March 31, 2018
|
|
|
417
|
|
|
$
|
1,488.00
|
|
|
|
4.04
|
|
|
$
|
-
|
|
|
Exercisable at March 31, 2018
|
|
|
417
|
|
|
$
|
1,488.00
|
|
|
|
4.04
|
|
|
$
|
-
|
|
The aggregate intrinsic
value for outstanding options is calculated as the difference between the exercise price of the underlying awards and the quoted
price of the Company’s common stock as of March 31, 2018 and December 31, 2017 of $0.09 and $0.27, respectively.
14. RELATED PARTIES
At March 31, 2018 and
December 31, 2017, the Company had outstanding the following loans due to related parties:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Receivables purchase agreement with Pascack Road, LLC, due on demand
|
|
$
|
266
|
|
|
$
|
75
|
|
|
Receivables purchase agreement with 1112 Third Avenue Corp, due on demand
|
|
|
266
|
|
|
|
-
|
|
|
|
|
|
532
|
|
|
|
75
|
|
|
Less: current portion of debt
|
|
|
(532
|
)
|
|
|
(75
|
)
|
|
Long-term portion of notes payable, related parties
|
|
$
|
-
|
|
|
$
|
-
|
|
The interest expense,
including amortization of debt discounts, associated with the related-party notes payable in the three months ended March 31, 2018
and 2017 was $0 and $656, respectively.
All notes payable to related parties are
subordinate to the JGB (Cayman) Waltham Ltd. and JGB (Cayman) Concord Ltd. term loan notes.
Related Party Promissory Notes to Mark
Munro, CamaPlan FBO Mark Munro IRA, 1112 Third Avenue Corp, and Pascack Road, LLC
On July 25, 2017,
Mark Munro, CEO, and Mark Durfee, Board Member, exchanged their outstanding related party debt for the Company’s Series
J preferred stock with special voting rights. Mark Munro converted principal and interest of $1,709 and $195, respectively. Mark
Durfee converted principal and interest of $2,550 and $464, respectively. As a result of the exchange, Mark Munro and Mark Durfee
received 387 and 613 shares, respectively, of the Company’s Series J preferred stock (Refer to Note 15, Preferred Stock,
for further detail).
Convertible Promissory Note to Scott
Davis, Former Owner of Nottingham
On July 1, 2014, the
Company issued an unsecured $250 convertible promissory note to Scott Davis, who was a related party. The note bore interest at
the rate of 8% per annum, originally matured on January 1, 2015 and was convertible into shares of the Company’s common stock
at an initial conversion price of $2,636.00. 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 $888.00 per share of the Company’s common stock and, in consideration
for this modification, the Company issued to Mr. Davis 56 shares of common stock with a fair value of $864.00 per share.
On May 31, 2015, Mr.
Davis converted $25 of principal amount of the note into 29 shares of common stock, with a fair value of $1,412.00 per share and
the Company recorded a loss on debt conversion of $13 on the consolidated statement of operations.
On May 30, 2016, the
note matured and was due on demand.
On April 3, 2017,
Scott Davis assigned the full outstanding principal amount of the note to a third party (refer to Note 9, Term Loans, for additional
detail).
Related Party Promissory Note to Pascack
Road, LLC
On December 28, 2017,
Pascack Road, LLC advanced $75 to the Company in return for a promissory note. The note did not accrue interest and was due on
demand.
On January 3, 2018,
the Company entered into a receivables purchase agreement whereby the Company sold $275 of receivables to Pascack Road, LLC in
exchange for $200 in cash and the conversion of the $75 promissory note outstanding. The sale was unconditional, irrevocable, and
without recourse to the Company.
During the three months
ended March 31, 2018, the Company received and remitted $9 of the receivables sold.
1112 Third Avenue Corp Receivables Purchase
Agreement – January 3, 2018
On January 3, 2018,
the Company entered into a receivables purchase agreement whereby the Company sold $275 of receivables to 1112 Third Avenue Corp
in exchange for $275 in cash. The sale was unconditional, irrevocable, and without recourse to the Company.
During the three months
ended March 31, 2018, the Company received and remitted $9 of the receivables sold.
Loans to Employees
During the year ended
December 31, 2016, the Company issued loans to employees totaling $928. As of December 31, 2017, the Company had outstanding loans
to four employees with total principal of $928. These loans are collateralized by shares of the Company’s common stock held
by the employees. As of December 31, 2017, the value of the collateral was below the principal value. As a result, the Company
recorded a reserve for the balance of $924 on the consolidated balance sheet as of December 31, 2017. As of March 31, 2018, the
balance in loans to employees was $0.
15. PREFERRED STOCK
Designation of Series J Preferred
Stock
On July 20, 2017, the
Board of Directors designated 1,000 shares of the Company’s authorized preferred stock, with a par value of $0.0001 per share,
as Series J preferred stock. The Series J preferred stock has a stated value of $4,916 per share, is not redeemable and, except
as otherwise required by law, shall be voted together with the Company’s common stock and any other series of preferred stock
then outstanding, and not as a separate class, at any meeting of the stockholders of the Company upon any matter upon which the
holders of common stock have the right to vote, except that the aggregate voting power of the Series J preferred stock shall be
equal to 51% of the total voting power of the Company. The holders of Series J preferred stock also have a liquidation preference
in the amount of $4,916 per share that is senior to the distributions, if any, to be paid to the holders of common stock.
Designation of Series K Preferred Stock
On November 10, 2017,
the Board of Directors designated 3,000 shares of the Company’s authorized preferred stock, with a par value of $0.0001 per
share, as Series K preferred stock. The Series K preferred stock has a stated value of $10,000 per share. The Series K preferred
stock is convertible into common stock of the Company at the lower of $3.00 or 95% of the weighted average trading price for the
five days prior to conversion. The Series K preferred stock has a liquidation preference equal to $10,000 per share. There are
no dividends on the Series K preferred stock. 1,512 shares of the Series K preferred stock were issued and outstanding as of March
31, 2018 and December 31, 2017.
Designation of Series L Preferred Stock
On October 12, 2017,
the Board of Directors designated 1,000 shares of the Company’s authorized preferred stock, with a par value of $0.0001 per
share, as Series L preferred stock. The Series L preferred stock has a stated value of $10,000 per share. The Series L preferred
stock is convertible into common stock of the Company at 105% of the weighted average trading price for the five days prior to
conversion. The Series L preferred stock has a liquidation preference equal to $10,000 per share. There are no dividends on the
Series L preferred stock. 227 shares of the Series L preferred stock were issued and outstanding as of March 31, 2018 and December
31, 2017.
Designation of Series M Preferred Stock
On December 1, 2017,
the Board of Directors designated 500 shares of the Company’s authorized preferred stock, with a par value of $0.0001 per
share, as Series M preferred stock. The Series M preferred stock has a stated value of $10,000 per share. The Series M preferred
stock is convertible into common stock of the Company at 105% of the weighted average trading price for the five days prior to
conversion. The Series M preferred stock has a liquidation preference equal to $10,000 per share. There are no dividends on the
Series M preferred stock. 386 shares of the Series M preferred stock were issued and outstanding as of March 31, 2018 and December
31, 2017.
Exchange of related party debt for preferred
stock
On July 25, 2017,
Mark Munro, CEO, and Mark Durfee, Board Member, exchanged their outstanding related party debt for the Company’s Series
J preferred stock with special voting rights. Mark Munro converted principal and interest of $1,709 and $195, respectively. Mark
Durfee converted principal and interest of $2,550 and $464, respectively. As a result of the exchange, Mark Munro and Mark Durfee
received 387 and 613 shares, respectively, of the Company’s Series J preferred stock (Refer to Note 14, Related Parties,
for further detail). The fair value of the Series J Preferred Stock on date of issuance was $1,753. The difference between the
fair value of the preferred stock and the debt converted was included in additional paid in capital.
Exchange of term loan Debt and Employee
Warrants for Preferred Stock
On October 12, 2017,
a note holder agreed to exchange $5,430 held in promissory notes into 227 shares of the Company’s Series L preferred stock.
On November 10, 2017,
two note holders converted $15,128 of principal and accrued interest into 1,512 shares of the Company’s Series K preferred
stock
On December 1, 2017,
two employees exchanged warrants to purchase 382,300 shares of the Company’s common stock for 386 shares of the Company’s
Series M preferred stock.
Temporary Equity
The Company evaluated
and concluded that it’s Series K and L Preferred Stock did not meet the criteria in ASC 480-10 and thus were not considered
liabilities. The Company evaluated and concluded that the embedded conversion feature in Preferred Series K and L and determined
that the embedded conversion feature needs to be bifurcated (refer to Note 10, Derivative Instruments, for further information
regarding the embedded conversions features of the Series K and L preferred stock). In accordance with ASR 268 these equity securities
are required to be classified outside of permanent equity since they are redeemable for cash. These shares are not currently redeemable
and are not probable of being redeemed and thus have been recorded based on their fair value at the time of issuance. If
redemption becomes probable, or the shares will become redeemable, they will be recorded to redemption value.
16. DISCONTINUED OPERATIONS
On January 31, 2017,
the Company sold the Highwire division of ADEX. Under the terms of the sale, the Company received $4,000 in total proceeds and
an additional working capital adjustment of approximately $400 that was paid in October 2017. The results of operations of Highwire
have been included on the unaudited condensed consolidated statement of operations within the line item labelled loss on discontinued
operations, net of tax for the three months ended March 31, 2017.
Effective April 1,
2017, the Company returned its interest in Nottingham, a former VIE of the Company. The assets and liabilities of Nottingham have
been included within the consolidated balance sheets as current assets and long term assets and current liabilities of discontinued
operations as of December 31, 2017. The results of operations of Nottingham have been included within the line-item labelled loss
on discontinued operations, net of tax within the unaudited condensed consolidated statement of operations for the three months
ended March 31, 2017.
On May 15, 2017, the
Company sold its SDNE subsidiary. Under the terms of the sale, the Company was to receive $1,400 in cash and a working capital
adjustment of $61 to be paid within 150 days of closing. The Company received cash proceeds of $1,411. The results of operations
of SDNE have been included within the line-item labelled loss on discontinued operations, net of tax within the unaudited condensed
consolidated statement of operations for the three months ended March 31, 2017.
On November 6, 2017,
the Company consummated the disposal of certain assets and liabilities of its former wholly-owned subsidiary, IPC. The assets and
liabilities of IPC have been included within the unaudited condensed consolidates balance sheet as current and long term assets
and current liabilities of discontinued operations as of March 31, 2018. The assets and liabilities of IPC have been included within
the consolidated balance sheet as current assets and long term assets and current liabilities of discontinued operations as of
December 31, 2017. The results of operations of IPC have been included within the line-item labelled loss on discontinued operations,
net of tax within the unaudited condensed consolidated statement of operations for the three months ended March 31, 2017.
On February 27,
2018, the Company sold the ADEX Entities for $3,000 in cash plus a one-year convertible promissory note in the aggregate principal
amount of $2,000 (refer to Note 5, Notes Receivable, for further detail). $2,500 in cash was received at closing, with $500 to
be retained by the buyer for 90 days, of which $250 has been received. The assets and liabilities of the ADEX Entities have been
included within the consolidated balance sheet as current assets and long term assets and current liabilities of discontinued
operations as of December 31, 2017. The results of operations of the ADEX Entities have been included within the line-item labelled
loss on discontinued operations, net of tax within the unaudited condensed consolidated statement of operations for the three
months ended March 31, 2018 and 2017.
The following table
shows the balance sheets of the Company’s discontinued operations as of March 31, 2018 and December 31, 2017.
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
305
|
|
|
Accounts receivable, net of allowances
|
|
|
2
|
|
|
|
5,628
|
|
|
Current assets of discontinued operations
|
|
$
|
2
|
|
|
$
|
5,933
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Assets:
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
-
|
|
|
$
|
6
|
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
1,354
|
|
|
Other assets
|
|
|
-
|
|
|
|
8
|
|
|
Long-term assets of discontinued operations
|
|
$
|
-
|
|
|
$
|
1,368
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accrued trade payables
|
|
$
|
2,847
|
|
|
$
|
3,138
|
|
|
Accrued expenses
|
|
|
335
|
|
|
|
2,660
|
|
|
Current liabilities of discontinued operations
|
|
$
|
3,182
|
|
|
$
|
5,798
|
|
The following table
shows the statements of operations of the Company’s discontinued operations for the three months ended March 31, 2018 and
2017.
|
|
|
For the three months ended
March 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,565
|
|
|
$
|
8,463
|
|
|
Cost of revenue
|
|
|
3,153
|
|
|
|
6,569
|
|
|
Gross profit
|
|
|
412
|
|
|
|
1,894
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
33
|
|
|
|
254
|
|
|
Salaries and wages
|
|
|
261
|
|
|
|
1,603
|
|
|
Selling, general and administrative
|
|
|
124
|
|
|
|
944
|
|
|
Goodwill impairment charge
|
|
|
-
|
|
|
|
3,146
|
|
|
Intangible asset impairment charge
|
|
|
-
|
|
|
|
797
|
|
|
Total operating expenses
|
|
|
418
|
|
|
|
6,744
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss from operations
|
|
|
(6
|
)
|
|
|
(4,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
-
|
|
|
|
(1
|
)
|
|
(Loss) gain on disposal of subsidiary
|
|
|
(228
|
)
|
|
|
695
|
|
|
Total other (expense) income
|
|
|
(228
|
)
|
|
|
694
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss on discontinued operations
|
|
|
(234
|
)
|
|
|
(4,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on discontinued operations, net of tax
|
|
$
|
(234
|
)
|
|
$
|
(4,156
|
)
|
17. SUBSEQUENT EVENTS
RDW September 27, 2017 Promissory
Note Conversions
During April 2018,
the Company issued an aggregate of 463,822 shares of its common stock to RDW upon the conversion of $20 of principal of a note
outstanding.
During May 2018, the
Company issued an aggregate of 480,769 shares of its common stock to RDW upon the conversion of $25 of principal of a note outstanding.
RDW December 8, 2017 Promissory Note
Conversions
During April 2018,
the Company issued an aggregate of 1,000,000 shares of its common stock to RDW upon the conversion of $50 of principal of a note
outstanding.
Dominion January 31, 2017 Promissory
Note Conversions
During April 2018,
the Company issued an aggregate of 445,226 shares of its common stock to Dominion Capital LLC upon the conversion of $26 of principal
and accrued interest of a note outstanding.
