UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

 

OR

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM __________________ TO ______________________

 

COMMISSION FILE NUMBER: 000-32037

 

INTERCLOUD SYSTEMS, INC.
(Name of registrant as specified in its charter)

 

DELAWARE   65-0963722

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

1030 BROAD STREET, SUITE 102,
SHREWSBURY, NJ

  07702
(Address of principal executive offices)   (Zip Code)

 

(561) 988-1988
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 84,624,959 shares of common stock were issued and outstanding as of August 10, 2018. 

  

 

 

 

 

   

TABLE OF CONTENTS

  

      Page No.
     
  PART I. - FINANCIAL INFORMATION  
     
Item 1. Unaudited Condensed Consolidated Financial Statements. 1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 53
     
Item 3.  Quantitative and Qualitative Disclosures About Market Risk. 58
     
Item 4. Controls and Procedures. 58
     
  PART II. - OTHER INFORMATION  
     
Item 1. Legal Proceedings. 59
     
Item 1A. Risk Factors. 59
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 59
     
Item 3.  Defaults Upon Senior Securities. 60
     
Item 4. Mine Safety Disclosures. 60
     
Item 5. Other Information. 60
     
Item 6. Exhibits. 61

  

 i 

 

 

FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements. Forward-looking statements include all statements that do not directly or exclusively relate to historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “forecasts,” “predicts,” “potential,” or the negative of those terms, and similar expressions and comparable terminology. These include, but are not limited to, statements relating to future events or our future financial and operating results, plans, objectives, expectations and intentions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not be achieved. Forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to known and unknown risks, uncertainties and other factors outside of our control that could cause our actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. Actual results may differ materially from those anticipated or implied in the forward-looking statements.

 

You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. You should also consider carefully the statements under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on April 17, 2018, which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements. Such risks and uncertainties include:

 

  our ability to successfully execute our business strategies, including the acquisition of other businesses to grow our company and integration of future acquisitions;
     
  our ability to obtain additional financing in sufficient amounts or on acceptable terms when required;
     
  changes in aggregate capital spending, cyclicality and other economic conditions, and domestic and international demand in the industries we serve;
     
  our ability to adopt and master new technologies and adjust certain fixed costs and expenses to adapt to our industry’s and customers’ evolving demands;
     
  our ability to adequately expand our sales force and attract and retain key personnel and skilled labor;
     
  shifts in geographic concentration of our customers, supplies and labor pools and seasonal fluctuations in demand for our services;
     
  our dependence on third-party subcontractors to perform some of the work on our contracts;
     
  our competitors developing the expertise, experience and resources to provide services that are equal or superior in both price and quality to our services;
     
  our material weaknesses in internal control over financial reporting and our ability to maintain effective controls over financial reporting in the future;
     
  our ability to comply with certain financial covenants of our debt obligations;
     
  the impact of new or changed laws, regulations or other industry standards that could adversely affect our ability to conduct our business;
     
  changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural or man-made disasters;
     
  we may incur goodwill and intangible asset impairment charges, which could harm our profitability; and
     
  we have doubt about our ability to continue as a going concern.

  

 ii 

 

 

These risk factors also should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All written and oral forward looking statements made in connection with this report that are attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given these uncertainties, you are cautioned not to place undue reliance on any forward-looking statements and you should carefully review this report in its entirety. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

 

Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by applicable law or regulation.

 

OTHER PERTINENT INFORMATION

 

Unless specifically set forth to the contrary, when used in this report the terms “we”, “our”, the “Company” and similar terms refer to InterCloud Systems, Inc., a Delaware corporation, and its consolidated subsidiaries.

 

The information that appears on our web site at www.InterCloudsys.com is not part of this report.

   

 iii 

 

 PART 1 - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

INTERCLOUD SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

 

   June 30,   December 31, 
ASSETS  2018   2017 
   (Unaudited)     
Current Assets:        
Cash  $506   $376 
Accounts receivable, net of allowances of $11   186    647 
Notes receivable, net of reserves of $0 and $924, respectively   6,172    3,617 
Other current assets   1,138    2,724 
Current assets of discontinued operations   -    5,933 
Total current assets   8,002    13,297 
           
Property and equipment, net   80    38 
Restricted cash   900    - 
Customer lists, net   881    991 
Tradenames, net   314    314 
Cost method investment   -    340 
Other assets   8    108 
Non-current assets of discontinued operations   -    1,368 
Total assets  $10,185   $16,456 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
Current Liabilities:          
Accounts payable  $4,380   $4,524 
Accrued expenses   5,066    5,676 
Deferred revenue   914    3,209 
Income taxes payable   48    15 
Bank debt, current portion   154    114 
Notes payable, related parties   394    75 
Derivative financial instruments   2,811    3,379 
Term loans, current portion, net of debt discount   9,389    11,013 
Current liabilities of discontinued operations   3,300    5,798 
Total current liabilities   26,456    33,803 
           
Long-term Liabilities:          
Deferred income taxes   56    239 
Series M Preferred Stock; $0.0001 par value; 500 shares authorized; 340 and 386 issued and outstanding as of June 30, 2018 and December 31, 2017, respectively   2,613    3,021 
Term loans, net of current portion, net of debt discount   -    1,058 
Derivative financial instruments   15,318    16,651 
Total long-term liabilities   17,987    20,969 
           
Total Liabilities   44,443    54,772 
Commitments and Contingencies          
Series K Preferred Stock; $0.0001 par value; 3,000 shares authorized; 1,512 issued and outstanding as of June 30 2018 and December 31, 2017   735    735 
Series L Preferred Stock; $0.0001 par value; 1,000 shares authorized; 227 issued and outstanding as of June 30, 2018 and December 31, 2017   152    152 
Total temporary equity   887    887 
Stockholders’ Deficit:          
Series J Preferred Stock; $0.0001 par value; 1,000 shares authorized; 1,000 issued and outstanding as of June 30, 2018 and December 31, 2017   -    - 
Common stock; $0.0001 par value; 1,000,000,000 shares authorized; 40,877,026 and 9,338,286 issued and 40,876,688 and 9,337,948 outstanding as of June 30, 2018 and December 31, 2017, respectively   4    2 
Common stock warrants, no par   37    37 
Treasury stock, at cost - 338 shares as of June 30, 2018 and December 31, 2017   (2)   (2)
Additional paid-in capital   158,693    154,628 
Accumulated deficit   (193,327)   (193,319)
Total InterCloud Systems, Inc. stockholders’ deficit   (34,595)   (38,654)
Non-controlling interest   (550)   (549)
Total stockholders’ deficit   (35,145)   (39,203)
           
Total liabilities and stockholders’ deficit  $10,185   $16,456 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 1 

 

INTERCLOUD SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

 

   For the three months ended   For the six months ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
                 
Revenue  $1,457   $676   $6,222   $6,163 
Cost of revenue   965    490    3,948    4,504 
Gross profit   492    186    2,274    1,659 
                     
Operating expenses:                    
Depreciation and amortization   71    47    130    236 
Salaries and wages   834    1,248    1,563    2,920 
Selling, general and administrative   590    1,437    1,425    3,464 
Goodwill impairment charge   -    621    -    621 
Intangible asset impairment charge   -    162    -    162 
Total operating expenses   1,495    3,515    3,118    7,403 
                     
Loss from operations   (1,003)   (3,329)   (844)   (5,744)
                     
Other income (expenses):                    
Change in fair value of derivative instruments   (24)   (1,121)   4,219    (3,545)
Change in fair value of Series M preferred stock   122    -    171    - 
Interest expense   (506)   (1,283)   (929)   (5,557)
(Loss) gain on extinguishment of debt, net   (1,433)   117    (1,906)   (1,054)
Loss on disposal of subsidiary   -    (5,921)   -    (6,043)
Other expense   (14)   (206)   (639)   (122)
Total other (expense) income   (1,855)   (8,414)   916    (16,321)
                     
(Loss) income from continuing operations before income taxes   (2,858)   (11,743)   72    (22,065)
                     
Provision for (benefit from) income taxes   11    (119)   (153)   (358)
                     
Net (loss) income from continuing operations   (2,869)   (11,624)   225    (21,707)
                     
Loss on discontinued operations, net of tax   -    (454)   (234)   (4,610)
                     
Net loss   (2,869)   (12,078)   (9)   (26,317)
                     
Net (income) loss attributable to non-controlling interest   (8)   121    1    138 
                     
Net loss attributable to InterCloud Systems, Inc. common stockholders  $(2,877)  $(11,957)  $(8)  $(26,179)
                     
(Loss) income per share attributable to InterCloud Systems, Inc. common stockholders, basic and diluted:                    
Net (loss) income from continuing operations  $(0.13)  $(9.67)  $0.01   $(22.69)
Net loss on discontinued operations, net of taxes  $-   $(0.38)  $(0.01)  $(4.82)
Net loss per share  $(0.13)  $(10.04)  $(0.00)  $(27.51)
                     
Weighted average common shares outstanding, basic and diluted   22,235,340    1,202,614    16,668,699    956,760 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 2 

 

  

INTERCLOUD SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

(UNAUDITED)

 

   Common Stock   Common Stock Warrants   Series J Preferred Stock   Treasury Stock   Additional Paid-in   Accumulated   Non-Controlling     
   Shares   $   Shares   $   Shares   $   Shares   $   Capital   Deficit   Interest   Total 
                                                             
Ending balance, December 31, 2017   9,337,948   $2    33,977   $37    1,000   $-    338   $(2)  $154,628   $(193,319)  $(549)  $(39,203)
                                                             
Issuance of common stock to JGB (Cayman) Waltham Ltd.   2,557,999    -    -    -    -    -    -    -    490    -    -    490 
Issuance of common stock to RDW Capital, LLC   10,663,006    1    -    -    -    -    -    -    1,385    -    -    1,386 
Issuance of common stock to Dominion Capital, LLC   1,776,346    -    -    -    -    -    -    -    428    -    -    428 
Issuance of common stock to Forward Investments, LLC   10,139,398    1    -    -    -    -    -    -    1,172    -    -    1,173 
Issuance of common stock to Pryor Cashman LLP   1,320,000    -    -    -    -    -    -    -    123    -    -    123 
Issuance of common stock to Dealy Silberstein & Braverman, LLP   200,000    -    -    -    -    -    -    -    29    -    -    29 
Issuance of common stock to Sichenzia Ross Ference Kesner LLP   681,818    -    -    -    -    -    -    -    99    -    -    99 
Issuance of common stock to employees pursuant to the conversions of Series M preferred stock   4,207,794    -    -    -    -    -    -    -    236    -    -    236 
Stock compensation expense   -    -    -    -    -    -    -    -    103    -    -    103 
Cancellation of shares issued to former employees   (7,621)   -    -    -    -    -    -    -    -    -    -    - 
Net loss   -    -    -    -    -    -    -    -    -    (8)   (1)   (9)
                                                             
Ending balance, June 30, 2018   40,876,688   $4    33,977   $37    1,000   $-    338   $(2)  $158,693   $(193,327)  $(550)  $(35,145)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.  

 3 

 

 

INTERCLOUD SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

 

   For the six months ended 
   June 30, 
   2018   2017 
         
Cash flows from operating activities:          
Net loss  $(8)  $(26,317)
           
Adjustments to reconcile net loss to net cash used in operating activities:          
Loss on discontinued operations   234    4,610 
Depreciation and amortization   130    236 
Amortization of debt discount and deferred debt issuance costs   193    3,644 
Stock compensation for services   103    977 
Change in fair value of derivative instruments   (4,219)   3,545 
Deferred income taxes   (183)   (398)
Loss on extinguishment of debt   1,906    1,054 
Change in fair value of Series M preferred stock   (171)   - 
Loss on disposal of subsidiary   -    6,043 
Provision for bad debts   -    (10)
Issuance of shares to non-employees for services   -    12 
Goodwill impairment charge   -    621 
Intangible asset impairment charge   -    162 
Changes in operating assets and liabilities:          
Accounts receivable   2,167    595 
Other assets   243    (2,632)
Accounts payable and accrued expenses   11    2,621 
Income taxes   33    - 
Deferred revenue   (2,296)   1,964 
Net cash used in operating activities of continuing operations   (1,857)   (3,273)
Net cash (used in) provided by operating activities of discontinued operations   97    907 
Net cash used in operating activities   (1,760)   (2,366)
           
Cash flows from investing activities:          
Cash received from the sale of the ADEX Entities   1,850    - 
Restricted cash received from the sale of the ADEX Entities   900    - 
Proceeds from assignment of loan receivable   238    - 
Purchases of equipment   (62)   (24)
Issuance of notes receivable   -    63 
Cash proceeds from sale of Highwire   -    4,000 
Cash proceeds from sale of SDNE   -    422 
Restricted cash proceeds from sale of SDNE   -    1,000 
Net cash paid upon disposal of the AWS Entities   -    (105)
Net cash paid upon the disposal of Nottingham   -    (8)
Net cash provided by investing activities of continuing operations   2,926    5,348 
Net cash used in investing activities of discontinued operations   -    (5)
Net cash provided by investing activities   2,926    5,343 
           
Cash flows from financing activities:          
Proceeds from bank borrowings   45    - 
Repayments of bank borrowings   (5)   (4)
Repayment of term loans   (486)   (285)
Proceeds from related party loans   475    - 
Repayments of related party loans   (156)   - 
Term loan-related repayments from proceeds of sale of the ADEX Entities   (909)   - 
Proceeds from term loans   -    70 
Term loan-related repayments from proceeds of sale of Highwire   -    (3,625)
Repayments of receivables purchase agreements   -    (480)
Cancellations of shares issued for interest   -    (1)
Debt issuance costs on new term loans   -    (50)
Proceeds from bank borrowings   -    15 
Net cash used in financing activities   (1,036)   (4,360)
           
Net decrease in cash   130    (1,383)
           
Cash, beginning of period   376    1,790 
           
Cash, end of period  $506   $407 
           
Supplemental disclosures of cash flow information:          
Cash paid for interest  $57   $152 
Cash paid for income taxes  $1   $39 
           
Non-cash investing and financing activities:          
Issuance of shares pursuant to conversion of debt  $1,153   $5,247 
Addition to debt discount  $70   $1,826 
Conversion of accounts payable into term loan  $150   $- 
Issuance of shares of common stock pursuant to S-8 registration statement  $251   $- 
Issuance of shares of common stock pursuant to conversion of Series M preferred stock  $237   $- 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 4 

 

 

INTERCLOUD SYSTEMS, INC.

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 3, 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 15, 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 June 30, 2018 and December 31, 2017. At June 30, 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.

  

 5 

 

 

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 June 30, 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 June 30, 2018, the Company disposed of four subsidiaries, the results of which are included within discontinued operations for the six months ended June 30, 2018 and the three and six months ended June 30, 2017. The Company retrospectively updated the unaudited condensed consolidated financial statements as of December 31, 2017 and for the three and six months ended June 30, 2017 to match the presentation on the unaudited condensed consolidated financial statements as of and for the three and six months ended June 30, 2018.

 

Reverse Stock Splits

 

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 splits. 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.

  

 6 

 

 

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 the Company 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 Company 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.

  

 7 

 

 

Restricted Cash

 

As of June 30, 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 3, 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 was set on the court’s non-jury trial docket but was never set for trial. In June 2018, the parties agreed, with the court’s permission, that there are no factual issues in dispute and that this case may be decided on the filing of renewed summary judgment motions followed by a summary judgment hearing. In their renewed summary judgment motion, the plaintiffs alleged that their conversion rights are worth approximately $25 million. The final summary judgment hearing is scheduled on August 29, 2018. The Company intends to continue to vigorously defend this lawsuit.

 

 8 

 

 

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 (Loss) Income 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) income per share is computed by dividing net (loss) income 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 and six months ended June 30, 2018 and 2017 in the unaudited condensed consolidated financial statements as their effect would be anti-dilutive.

 

 9 

 

 

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 June 30, 2018, the Company’s common stock equivalents included 230,320,223 shares that could be converted based on outstanding debt, 447,511,711 shares that could be converted based on certain convertible preferred stock, 5,033,339 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 June 30, 2017, the Company’s common stock equivalents included 400,119 shares that could be converted based on outstanding debt, 82,710 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. 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 and six months ended June 30, 2018 and 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 June 30, 2018 and December 31, 2017, was estimated at $11,695 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.

   

 10 

 

 

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 Topic 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 outstanding 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 9, Derivative Instruments, for further discussion of the measurement of fair value of the derivatives and their underlying assumptions.

  

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The fair value of the Company’s financial instruments carried at fair value at June 30, 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)
 
   June 30, 2018 
Liabilities:            
Current derivative features related to convertible debentures  $   -   $-   $2,453 
Current derivative features related to warrant derivatives   -    -    358 
Long-term derivative features related to preferred stock   -    -    15,318 
Fair value of Series M preferred stock   -    -    2,613 
                
Total liabilities at fair value  $-   $-   $20,742 
                
    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 six months ended June 30, 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 
      
Change in fair value of derivative features related to convertible debentures   (199)
Change in fair value of warrant derivatives   (168)
Change in fair value of preferred stock derivatives   431 
Change in fair value of Series M preferred stock   (122)
Adjustment of derivative liability upon conversion of debt   (191)
Adjustment of Series M preferred stock liability upon conversion into common stock   (237)
      
Balance as of June 30, 2018  $20,742 

 

Treasury Stock

 

The Company records treasury stock at the cost to acquire it and includes treasury stock as a component of stockholders’ deficit.

  

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

 

The Company’s management believes that there is substantial doubt about the Company’s ability to continue as a going concern. The Company’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 and six months ended June 30, 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 three and six months ended June 30, 2018 and the year ended December 31, 2017, the Company suffered recurring losses from operations. At June 30, 2018 and December 31, 2017, the Company had a stockholders’ deficit of $34,145 and $39,203, respectively. At June 30, 2018, the Company had a working capital deficit of approximately $18,454, as compared to a working capital deficit of approximately $20,506 at December 31, 2017. The increase of $2,052 in the Company’s working capital from December 31, 2017 to June 30, 2018 was primarily the result of an increase in notes receivable, net of reserves, of $2,555, a decrease in the current liabilities of discontinued operations of $2,498, a decrease in the current portion of term loans net of debt discount of $1,624, and a decrease in deferred revenue of $2,295. These changes were partially offset by a decrease in the current assets of discontinued operations of $5,933.

 

On or prior to August 31, 2019, the Company has obligations relating to the payment of indebtedness on term loans and notes to related parties of $9,431 and $394, respectively. The Company anticipates meeting its cash obligations on indebtedness that is payable on or prior to August 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 August 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.

    

 13 

 

 

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

 

3. 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 4, 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 remaining $250 is now due on demand. $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 June 30, 2018 and December 31, 2017, and for the periods ending June 30, 2018 and 2017 (refer to Note 15, Discontinued Operations, for further detail).

 

4. NOTES RECEIVABLE 

 

Notes receivable as of June 30, 2018 and December 31, 2017 consisted of the following:

 

   June 30,   December 31, 
   2018   2017 
Loans to employees, net of reserves of $924, due December 2018  $-   $4 
Fair value of convertible loan receivable from Spectrum Global Solutions, Inc., matured April 2018  $3,319   $3,613 
Fair value of convertible loan receivable from Spectrum Global Solutions, Inc., due March 2019  $2,025   $- 
Fair value of convertible loan receivable from Spectrum Global Solutions, Inc., due August 2019  $828   $- 
Loans receivable  $6,172   $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 June 30, 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.

  

 14 

 

 

The Company evaluated the convertible note’s settlement provisions and elected the fair value option afforded in ASC Topic 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 June 8, 2018, the Company assigned $38 of the note receivable to RDW Capital LLC in exchange for cash of $35.

 

On June 30, 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 $1,818 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 $1,501 and $1,963, respectively. The total fair value of $3,319 and $3,613 was included in notes receivable on the unaudited condensed consolidated balance sheet as of June 30, 2018 and December 31, 2017, respectively. The Company recorded the change in fair value as a loss and gain of $361 and $226, respectively, on the unaudited condensed consolidated statement of operations for the three months ended June 30, 2018 and 2017. The Company recorded the change in fair value as a loss and gain of $47 and $226, respectively, on the unaudited condensed consolidated statement of operations for the six months ended June 30, 2018 and 2017.

 

On April 25, 2018 the note matured and is now due on demand.

   

The fair value of the note receivable as of June 30, 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:

 

   June 30,
2018
   December 31, 2017 
Principal amount and guaranteed interest  $1,646   $2,005 
           
Conversion price per share    *      *  
Conversion trigger price per share    None      None  
Risk free rate   1.93%   1.39%
Life of conversion feature (in years)   0.00    0.32 
Volatility   247%   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.

  

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The Company evaluated the convertible note’s settlement provisions and elected the fair value option afforded in ASC Topic 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 $1,793 was recorded in the consolidated balance sheet.

 

On June 30, 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 $1,567, and used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value to be $458. The total fair value of $2,025 was included in notes receivable on the unaudited condensed consolidated balance sheet as of June 30, 2018. The Company recorded the change in fair value as a gain of $232 and $361, respectively, on the unaudited condensed consolidated statement of operations for the three and six months ended June 30, 2018.

  

The fair value of the note receivable as of June 30, 2018 was calculated using the discounted cash flow method and a Monte Carlo simulation with the following factors, assumptions and methodologies:

 

   June 30,
2018
 
Principal amount and guaranteed interest  $2,040 
      
Conversion price per share    *  
Conversion trigger price per share    None  
Risk free rate   2.11%
Life of conversion feature (in years)   0.74 
Volatility   269%

 

 

* 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 Topic 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 June 30, 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 $508, and used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value to be $320. The total fair value of $828 was included in notes receivable on the unaudited condensed consolidated balance sheet as of June 30, 2018. The Company recorded the change in fair value as a gain of $26 and $34, respectively, on the unaudited condensed consolidated statement of operations for the three and six months ended June 30, 2018.

  

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The fair value of the working capital note receivable as of June 30, 2018 was calculated using the discounted cash flow method and a Monte Carlo simulation with the following factors, assumptions and methodologies:

 

   June 30,
2018
 
Principal amount and guaranteed interest  $797 
      
Conversion price per share    *  
Conversion trigger price per share    None  
Risk free rate   2.33%
Life of conversion feature (in years)   1.13 
Volatility   174%

 

 

* The conversion price per share is equal to 80% of the lowest VWAP during the five trading days immediately prior to the conversion date.

  

5. PROPERTY AND EQUIPMENT, NET

 

Property and equipment as of June 30, 2018 and December 31, 2017 consisted of the following: 

 

   June 30,   December 31, 
   2018   2017 
Vehicles  $708   $646 
Computers and Office Equipment   93    93 
Equipment   170    170 
Total   971    909 
Less accumulated depreciation   (891)   (871)
           
Property and equipment, net  $80   $38 

 

Depreciation expense for the three months ended June 30, 2018 and 2017 was $13 and $9, respectively. Depreciation expense for the six months ended June 30, 2018 and 2017 was $20 and $46, respectively. 

 

6. INTANGIBLE ASSETS

  

The following table summarizes the Company’s intangible assets as of June 30, 2018 and December 31, 2017:

 

      June 30, 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   $-   $(110)  $-   $-   $881   $(1,283)
Trade names  Indefinite   314    -    -    -    -    314    - 
                                             
Total intangible assets     $1,305   $-   $(110)  $-   $-   $1,195   $(1,283)

 

      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 $59 and $40 for the three months ended June 30, 2018 and 2017, respectively. Amortization expense related to the identifiable intangible assets was $110 and $190 for the six months ended June 30, 2018 and 2017, respectively

 

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7. BANK DEBT

 

Bank debt as of June 30, 2018 and December 31, 2017 consisted of the following:

 

   June 30,   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 2019  $148   $103 
Equipment finance agreement, monthly principal of $1, maturing February 2020   6    11 
   $154   $114 
Less: Current portion of bank debt   (154)   (114)
           
Long-term portion of bank debt  $-   $- 

   

The interest expense associated with the bank debt during the three months ended June 30, 2018 and 2017 amounted to $4 and $4, respectively. The interest expense associated with the bank debt during the six months ended June 30, 2018 and 2017 amounted to $10 and $7, respectively. There are no financial covenants associated with the bank debt. 

 

8. TERM LOANS

 

Term loans as of June 30, 2018 and December 31, 2017 consisted of the following:

 

   June 30,   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   1,589    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   -    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 $0 and $91, respectively   -    64 
           
9.9% convertible promissory note, RDW Capital LLC. October 12, 2017 Note, maturing on October 12, 2018   34    133 
           
9.9% convertible promissory note, RDW Capital LLC. December 8, 2017 Note, maturing on December 8, 2018   220    480 
           
Promissory notes issued to Forward Investments, LLC, between 2% and 10% interest, matured on July 1, 2016, unsecured   971    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 $43   107    - 
    9,389    12,071 
Less: Current portion of term loans   (9,389)   (11,013)
           
Long-term portion term loans, net of debt discount  $-   $1,058 

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The interest expense, including amortization of debt discounts, associated with the term loans payable during the three months ended June 30, 2018 and 2017 amounted to $491 and $1,244, respectively. The interest expense, including amortization of debt discounts, associated with the term loans payable during the six months ended June 30, 2018 and 2017 amounted to $908 and $5,370, 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 secured 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 14, 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 9, 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 six months ended June 30, 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 9, Derivative Instruments, for further detail on the derivative features associated with the amended note).

 

During the six months ended June 30, 2018, the investor who holds the amended note did not convert any principal or accrued interest into shares of the Company’s common stock.

  

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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 9, 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 year ended December 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 (refer to Note 11, Stockholders’ Deficit, for further information).

  

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 was payable 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%) was payable 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 9, Derivative Instruments, for further detail on the derivative features associated with the November 4, 2016 convertible note.

 

During the six months ended June 30, 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 11, Stockholders’ Deficit, for further information). As a result of these conversions, the balance of the note was $0 as of June 30, 2018. The Company recorded a loss on extinguishment of debt of $169 in the unaudited condensed consolidated statement of operations for the six months ended June 30, 2018. During the six months ended June 30, 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 9, Derivative, for further detail on the derivative features associated with the January 31, 2017 convertible note. Instruments

 

During the six months ended June 30, 2018, the holder of the January 31, 2017 promissory note converted $70 of principal into shares of the Company’s common stock (refer to Note 11, Stockholders’ Deficit, for further information). As a result of these conversions, the balance of the note was $0 as of June 30, 2018. The Company recorded a loss on extinguishment of debt of $144 and $182, respectively, in the unaudited condensed consolidated statement of operations for the three and six months ended June 30, 2018. During the six months ended June 30, 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.

  

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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 9, 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.

  

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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 9, 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 9, 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.

  

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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 9, 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 9, 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 9, 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 9, 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.

  

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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 9, 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 9, 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 six months ended June 30, 2018, the Company made cash payments for principal and interest on the JGB Waltham December Debenture of $1,207 and $48, 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 six months ended June 30, 2018, the Company made cash payments for principal and interest on the JGB Waltham 2.7 Note of $189 and $2, respectively.

 

During the six months ended June 30, 2018, JGB Waltham converted $296 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 $92 and $194, respectively, in the unaudited condensed consolidated statement of operations for the three and six months ended June 30, 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 $1,589 and $3,091 related to the JGB Waltham December Debenture remained outstanding as of June 30, 2018 and December 31, 2017, respectively. Principal of $105 and $294 related to the JGB Waltham 2.7 Note remained outstanding as of June 30, 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.

  

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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 9, 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%.

  

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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 9, 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 9, 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 9, 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 9, 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 9, Derivative Instruments, for additional information on this transaction).

  

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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 six months ended June 30, 2018, 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 June 30, 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 9, 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 13, 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.

  

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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 9, 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 9, Derivative Instruments, for further detail on the derivative features associated with the RDW July 14, 2017 9.9% convertible note).

 

During the six months ended June 30, 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 June 30, 2018 was $0. The Company recorded a loss on extinguishment of debt of $237 to the consolidated statement of operations for the six months ended June 30, 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 9, 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 bore interest at the rate of 9.9% per annum, and had an original maturity date of September 27, 2018. The note was 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 9, Derivative Instruments, for further detail on the derivative features associated with the RDW September 27, 2017 9.9% convertible note).

 

During the six months ended June 30, 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 June 30, 2018 was $0. The Company recorded a loss on extinguishment of debt of $179 to the consolidated statement of operations for the three and six months ended June 30, 2018. 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.

  

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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 9, Derivative Instruments, for further detail on the derivative features associated with the RDW October 12. 2017 9.9% convertible note).

 

During the six months ended June 30, 2018, the investor who holds the October 12, 2017 9.9% promissory note converted $100 of principal into shares of the Company’s common stock. The Company recorded a loss on extinguishment of debt of $56 to the consolidated statement of operations for the three and six months ended June 30, 2018. 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 9, Derivative Instruments, for further detail on the derivative features associated with the RDW December 8. 2017 9.9% convertible note).

 

During the six months ended June 30, 2018, the investor who holds the December 8, 2017 9.9% promissory note converted $260 of principal into shares of the Company’s common stock (refer to Note 11, Stockholders’ Deficit, for further information). As a result of these conversions, the Company recorded a loss on extinguishment of debt of $141 and $244, respectively, to the consolidated statement of operations for the three and six months ended June 30, 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.

  

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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.

  

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 six months ended June 30, 2018, Forward Investments, LLC converted $450 aggregate principal amount of promissory notes into shares of the Company’s common stock. As a result of these conversions, the Company recorded a loss on extinguishment of debt of $723 to the unaudited condensed consolidated statement of operations for the three and six months ended June 30, 2018. During the year ended December 31, 2017, Forward Investments, LLC converted $5,435 aggregate principal amount of promissory notes into 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.

  

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 to be 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.

  

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On October 12, 2017, Mr. Jadevaia exchanged $5,430 principal amount of 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 unaudited condensed consolidated financial statements for the three and six months ended June 30, 2017.

 

9. 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 a loan agreement in 2012. These warrants were outstanding as of June 30, 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 $1,600.00 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 586 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 June 30, 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 June 30, 2018 and December 31, 2017 was calculated using a binomial lattice pricing model with the following factors, assumptions and methodologies:

 

   June 30,
2018
   December 31,
2017
 
         
Fair value of Company’s common stock  $ 0.05   $ 0.27 
Volatility (closing prices of 3-4 comparable public companies, including the Company’s historical volatility)   255%   215%
Exercise price per share   $1,600.00 - $2,000.00     $1,600.00 - $2,000.00  
Estimated life   0.2 years    0.7 years 
Risk free interest rate (based on 1-year treasury rate)   1.93%   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.

  

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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 13, 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 June 30, 2018 and December 31, 2017, the fair value of the conversion feature of the Forward Investments, LLC loans was $294 and $348, respectively, which was included in derivative financial instrument at estimated fair value on the unaudited condensed consolidated balance sheets. The change in fair value of the Forward Investments, LLC derivative liabilities was recorded as a gain the unaudited condensed consolidated statement of operations of $30 and $54 for the three and six months ended June 30, 2018, respectively. 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 $4 and $281 for the three and six months ended June 30, 2017, respectively.

  

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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:

 

   June 30, 2018   December 31, 2017 
Principal and interest amount  $1,393   $617   $1,271   $2,464   $1,810   $582   $1,270   $ 2,438 
                                         
Conversion price per share    *      *      *      *      *      *      *      *  
Risk free rate   2.63%   2.63%   1.93%   1.93%   2.00%   2.00%   1.39%   1.39%
Life of conversion
feature (in years)
   3.5    3.5    0.3    0.0    4.0    4.0    0.3    0.0 
Volatility   167%   167%   354%   354%   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 Topic 815, Derivatives and Hedging and ASC Topic 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 8, Term Loans, for further detail), the fair value of the corresponding derivative liability was $0 as of June 30, 2017. The Company recorded a gain on fair value of derivative instruments of $176 on the unaudited condensed consolidated statement of operations for the six months ended June 30, 2017.

 

The fair value of the demand promissory note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:

 

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 8, 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 Topic 815, Derivatives and Hedging and ASC Topic 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 June 30, 2018. The Company recorded a gain of $59 on the unaudited condensed consolidated statement of operations for the six months ended June 30, 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 $151 on the unaudited condensed consolidated statement of operations for the three months ended June 30, 2017, and a loss of $474 on the unaudited condensed consolidated statement of operations for the six months ended June 30, 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.

   

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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 8, 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 Topic 815, Derivatives and Hedging and ASC Topic 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.

 

As a result of conversions, the balance outstanding on the promissory note was $0 as of June 30, 2018. The Company recorded a gain of $60 and $81, respectively, on the unaudited condensed consolidated statement of operations for the three and six months ended June 30, 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 $81. The Company recorded a loss of $24 on the unaudited condensed consolidated statement of operations for the three months ended June 30, 2017, and a loss of $29 on the unaudited condensed consolidated statement of operations for the six months ended June 30, 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  $74 
      
Conversion price per share    * 
Conversion trigger price per share    None 
Risk free rate   1.28%
Life of conversion feature (in years)   0.08 
Volatility   310%

 

 

*The conversion price per share was 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 Topic 815, Derivatives and Hedging and ASC Topic 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 8, 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 Topic 815, Derivatives and Hedging and ASC Topic 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. 

  

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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 8, 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 8, 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 8, 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 8, 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 six months ended June 30, 2017.

 

On March 9, 2017, JGB (Cayman) Waltham entered into an Assignment and Assumption agreement with MEF I, LP (refer to Note 8, 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 six months ended June 30, 2017. 

 

On June 30, 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 $867 and $1,820, respectively. The Company recorded the change in the fair value of the derivative liability for the three months ended June 30, 2018 and 2017 as a gain and loss of $158 and $123, respectively. The Company recorded the change in fair value of the derivative liability for the six months ended June 30, 2018 and 2017 as a gain and loss of $953 and $2,408, respectively, which includes 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:

 

   June 30,
2018
   December 31, 2017 
Principal amount and guaranteed interest  $1,607   $3,091 
           
Conversion price per share   *     * 
Conversion trigger price per share    None     None 
Risk free rate   2.33%   1.76%
Life of conversion feature (in years)   0.92    1.41 
Volatility   176%   201%

 

 

*The conversion price per share is equal to the lesser of $4.00 or 80% of VWAP on the conversion date.

 

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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 8, 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 8, 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 six months ended June 30, 2017.

 

On June 30, 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 $60 and $120, respectively. The Company recorded a loss and gain on fair value of derivative instruments of $5 and $55, respectively, for the three months ended June 30, 2018 and 2017. The Company recorded a gain and loss on fair value of derivative instruments of $60 and $124, respectively, for the six months ended June 30, 2018 and 2017, which includes 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:

 

   June 30,
2018
   December 31, 2017 
Principal amount and guaranteed interest  $117   $294 
           
Conversion price per share    *      *  
Conversion trigger price per share    None      None  
Risk free rate   1.93%   1.39%
Life of conversion feature (in years)   0.00    0.00 
Volatility   354%   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 8, 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 Topic 815, Derivatives and Hedging and ASC Topic 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 8, 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.

  

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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 8, 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 2,250 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 8, 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 8, 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 six months ended June 30, 2017.

 

On June 30, 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 $6 and $7, respectively. The Company recorded the change in fair value of derivative instruments for the three months ended June 30, 2018 and 2017 as a gain and loss of $1 and $7, respectively. The Company recorded the change in fair value of derivative instruments for the six months ended June 30, 2018 and 2017 as a gain of $1 and $238, respectively, which includes 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:

 

   June 30,
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   2.33%   1.76%
Life of conversion feature (in years)   0.92    1.41 
Volatility   176%   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.

  

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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 six months ended June 30, 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 $1,007 on the unaudited condensed consolidated statement of operations for the three months ended June 30, 2017. The Company recorded a loss of $1,334 on the unaudited condensed consolidated statement of operations for the six months ended June 30, 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 11, 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 $99 on the unaudited condensed consolidated statement of operations for the three months ended June 30, 2017. The Company recorded a loss of $119 on the unaudited condensed consolidated statement of operations for the six months ended June 30, 2017.

 

As a result of the conversion of the outstanding principal balance during the year ended December 31, 2017 (refer to Note 8, 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.

  

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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 June 30, 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 $24 for the three months ended June 30, 2017 on the unaudited condensed consolidated statement of operations. The Company recorded a gain on fair value of derivative instruments of $102 and $61, respectively, for the six months ended June 30, 2018 and 2017 on the unaudited condensed consolidated statement of operations.

 

On July 1, 2018, the expiration date was extended until September 30, 2018.

 

The fair value of the warrant derivative as of June 30, 2018 and December 31, 2017 was calculated using a binomial lattice pricing model with the following factors, assumptions and methodologies:

 

   June 30,
2018
   December 31, 2017 
Fair value of Company’s common stock  $0.05   $0.27 
Volatility   255%   201%
Exercise price   0.40    0.400 
Estimated life (in years)   0.25    0.25 
Risk free rate   1.93%   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 Topic 815, Derivatives and Hedging and ASC Topic 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 8, 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 Topic 815, Derivatives and Hedging and ASC Topic 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 six months ended June 30, 2018 (refer to Note 8, Term Loans, for further detail), the fair value of the corresponding derivative liability was $0 as of June 30, 2018. The Company recorded a gain on fair value of derivative instruments of $64 for the six months ended June 30, 2018, on the unaudited condensed consolidated statement of operations. 

  

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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 Topic 815, Derivatives and Hedging and ASC Topic 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.