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InterCloud System, Inc (NASDAQ:ICLD)

Q4 2013 Earnings Conference Call

April 8, 2014 10:00 ET

Executives

Jon Cunningham - IR

Mark Munro - Chairman & CEO

Analysts

Thomas Pfister - RedChip Companies

Jim Pappalardo - GSS Capital

Andrew Tressler - Liberty Partners Financial

Hal Berry - Graham Partners

Operator

Good morning ladies and gentlemen and thank you for standing by and welcome to the InterCloud Systems, Inc Fourth Quarter Fiscal 2013 Earnings Conference Call. (Operator Instructions). And at this time I would like to turn the call over to Jon Cunningham. Please go ahead, sir.

Jon Cunningham

Thank you Craig. Thank you everyone for joining us for InterCloud Systems fiscal year 2013 earnings conference call. On the call today we have Chairman and CEO, Mark Munro and CFO, Dan Sullivan.

Before we go underway I would like to ask everyone to take note of the Safe Harbor paragraph that appeared at the end of today’s new release detailing InterCloud’s fiscal year 2013 financial results. This paragraph states that any forward-looking statements that we make speak only as of the date made. Our subject to inherent risks and uncertainties including those described in the Company’s most recently filed report on form 10-K and should not be unduly relied upon.

Except as otherwise required by Federal Securities Laws, we disclaim any obligation or undertaking to publically release any updates or revisions to any forward-looking statement contained herein or elsewhere to reflect any change in our expectations with regards to any changes in events, conditions or circumstances on which such statement is based.

It's now my pleasure to introduce InterCloud’s Chairman and CEO, Mark Munro. Mark, please go ahead.

Mark Munro

Thank you Jon. Good morning everyone. Before I turn the call over to Dan Sullivan, our CFO to review fourth quarter and year-end 2013 results I wanted to take some time to review some of our accomplishments in the fourth quarter and throughout 2013.

We closed our stock listing [ph] and $5 million equity raise in October of 2013. The warrants that were issued in the raise were mostly all redeemed in 2013 and raised approximately 3 million of additional equity for the company. In Q4 the company reduced it's liabilities by approximately $12 million and we simplified our capital structure with the elimination of preferred stock.

The goal of the company is to continue to pay down any long term, short term debt obligations in order to position InterCloud, to utilize it's cash flow to expand it's sales organization and focus on organic growth.

Now I want to take some time to discuss our strategy and goals for 2014 and beyond. InterCloud is a cloud service provider or as we also call it a platform as a service provider. Our goal has been to acquire certain capabilities and assets to enable InterCloud to offer a full suite of private, public and hybrid cloud solutions while also being able to offer our customers continued support of their legacy IT and telecom networks to a broad solutions offering and a global professional services organization.

We have accomplished this and today we can offer a wide array of traditional like or legacy IT solutions for our clients through our specialty contracting group and also through our global professional services organization to both the enterprise and service provider markets.

It has been our belief all long that having these core competencies and offering a full suite of cloud services gives us an advantage in the market as this transition from legacy networks for the next generation networks will take place over the next few years and offer consistent growth opportunities to a company like InterCloud.

InterCloud has its own open source cloud platform and we have clouds back at it's core. This is a critical and important point as our team has taken the approach that our cloud platform can support any and all virtualized compute, network and storage components. This is the ultimate design and that it is totally flexible, redundant, elastic, nimble and customizable for our larger and demanding clients.

This open architecture along with our white glove service is what ultimately differentiates InterCloud in the marketplace.

Today our platform is running in four data centers in the United States. These were strategically chosen for the access to 100s of carriers available to our platform within 20 feet of our cages. [ph]. This allows us to offer seamless transition to our client as they keep their broadband carriers in place and reduce the risk associated with changing carriers at the same time as migrating. They are important applications to the cloud.

We have access to over 600 carriers in our data centers and this clearly was done by design. Our goal is to migrate our customers complex application, fund our legacy networks to the cloud as the opportunity arises. The early stage cloud applications tend to be test development in Greenfield applications but do not have any former legacy network changes to manage.

Our customers run dozens to 100s of applications in their complex IT environment, this is why the transition to cloud and managed services will be a sustainable growth curve as projected by most all IT consulting firms around the world.

Our suite of cloud offerings include email and collaboration, backup and disaster recovery, security, web apps, business apps and mobility. Our professional services group will be able to support our clients globally both onsite and offsite. This is yet another key component of our InterCloud strategic advantages.

In recent articles we have been described as ditch diggers and cable pullers. This is a completely misleading statement and needs to be addressed. WiFi and DAS systems design, installation and maintenance is an important part of our future business and structured cabling and the installation of these networks is a key component of that growth.

A large national and global customers we support all have corporate wireless network demands in order to offer their customers and employees a competitive wireless user experience. The explosion of handheld devices, iPads, and bring your own device has forced this issue for our IT departments in the integration of all such devices into our IT strategy.

InterCloud’s management understood this segment of the market and made a commitment to expansion of this revenue opportunity in WiFi and DAS system design, install and maintenance.

In a traditional corporate WiFi or DAS network, network controllers are installed throughout the customer’s footprint. The InterCloud team has begun testing a cloud based wireless, network controller environment which will allow our clients to lower their deployment cost and have more flexible management tools by utilizing our cloud solution to this major corporate and carrier initiative.

This high growth area is what caused InterCloud’s team to acquire and build the engineering, cable installation and maintenance group within the company. This group represents less than 10% of our pro forma revenues for 2013 and our management team sees this as a critical component in our strategy. Structured cabling is just a small part of the overall WiFi and DAS opportunities that we see in the future but also a necessity for cost control and customer satisfaction by us managing the entire installation and maintenance process for all sales that we make in-house.

At this point I want to turn it over to Dan Sullivan, our CFO to review the financials.

Dan Sullivan

Thank you Mark. I’m going to provide some highlights of our reported financial results. The full data is contained in our 10-K. Revenue for the year-ended December 31, 2013 increased by 34.3 million by 201% to 51.4 million compared to 17 million for the year ended December 31, 2012.

Gross margins for the year ended December 31, 2013 was 14.1 million compared to 5.1 million for fiscal 2012. These revenues begins with 2013, do not include any pro forma revenues from the company’s recent acquisitions of IPC and RentVM and a pro forma considering these acquisitions that were completed in the first quarter of 2014 our pro forma adjusted EBITDA for 2013 was 6.9 million.

Revenue for the fourth quarter of 2013 increased by approximately 600,000 or 5.4% to 11.8 million as compared to 11.2 million for the fourth quarter of 2012.

This fourth quarter 2013 revenue also excludes any revenues associated with the company’s recent acquisitions of IPC and RentVM.

Net loss for the fourth quarter of 2013 was 23.4 million, or a loss 4.72 basic earnings per share and 3.24 diluted earnings per share compared to a net loss of 0.4 million or $0.91 per share in the fourth quarter of 2012.

The fourth quarter of 2013 net loss included non-cash or non-recurring items such as a 13.7 million loss in non-cash charges related to derivative liabilities, 2.3 million in non-cash charges arising from the change in fair value contingent consideration, 2.4 million in stock based compensation and 1.8 million in non-recurring consulting fees which totaled 20.2 million.

The increase in a derivative liabilities and the fair value contingent consideration is simply tied to the increase in our stock price during the fourth quarter and it's not related to the operations of the company.

Now I will turn the call back to Mark.

Mark Munro

Thank you Dan. Now I’m going to report on some of our recent developments. In early 2014 we closed on IPC New York. IPC New York add several key components to the success of InterCloud. First and foremost the Co-Founder Frank Jadevaia of IPC New York is now InterCloud’s President and obviously he joins our management team. Frank has a tremendously successful career in enterprise and service provider markets spanning back to the days of the PCs, the local area and wide area networks, the IP networks and now cloud and software defined networks.

In addition to management IPC New York brings a well-trained enterprise and service provider focus sales organization that will sell our cloud managed services solution set. With RentVM acquisition in February brought in a cloud an FTN based orchestration system that allows customers on demand provisioning through -- of cloud assets through a hierarchy system supported by enterprise level security and offering clients a streamline process to virtualize existing infrastructure and integrate cloud solutions and speed up their time to market.

Most recently we announced the definitive purchase agreement with VaultLogix, a cloud backup and storage as a service business. As our clients moved their applications to our cloud a natural byproduct is a need for storage, replication and data restore capabilities.

VaultLogix brings InterCloud intellectual property as it has it's own software and unique capabilities like deduplication and common file elimination that will continue to further our differentiation from other platform as a service providers that do not have these special value added features in the storage side of their business. VaultLogix has 99% recurring revenue streams, 80% gross margins and 40% net margins.

This is a perfect example of InterCloud’s go forward business model and in addition to VaultLogix -- in addition VaultLogix has over 500 channel partners selling their solutions that will now be able to offer InterCloud suite of services.

Lastly our expectation is at the VaultLogix sales team will also offer our suite of cloud services to their over 2000 plus customers through their direct sales payment [ph]. Moving forward our team will continue to look for these types of cloud companies to integrate as we build out our portfolio of services and build scale in those product sets. In 2014 management will be focused on continued growth of our direct and indirect sales organizations. In recent months we have begun hiring very successful sales executives to our company in major markets in the U.S.

These markets include New York City, Philadelphia, Atlanta, Miami, Dallas, Chicago, LA and Boston. In closing our management team is committed to our short, long term goals by building industry leading cloud and managed services business in the enterprise and service provider markets.

At this point I will now open the call up to questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question does come from line of Thomas Pfister with RedChip Companies.

Thomas Pfister - RedChip Companies

My first question is just related to the quarterly revenue here in the fourth quarter. If I look at the numbers correctly the revenue in this quarter is I believe near the lowest point of the year. So can you just go over maybe why -- what the reason for that is and then also just looking on a going forward basis, how do you some of the acquisitions like IPC New York and RentVM and VaultLogix, how did those add to revenue here on a quarterly basis going forward?

Dan Sullivan

Sure. Fourth quarter revenue was obviously up from 2012 about 600,000. Basically you had the last two weeks of December, we pretty much lost weeks in our business, it was one of those odd holiday months where you had two Wednesday holidays I believe and we lost pretty much half to most of December and most of our major enterprising carrier customers pretty much shutdown in the latter half of December. So we didn’t have quite the same typical year-end push that some of them do put on when that doesn’t fall that way at the end of the month but that definitely affected our fourth quarter numbers.

In terms of how the acquisition affect that, for the most part somewhat cyclical with an IPC and a lot more steady with RentVM it's just 100% recurring revenue. But we believe that they will add stability and they will add continued growth opportunities for us moving throughout 2014.

Thomas Pfister - RedChip Companies

And then my next question is just to dig into some of the operating expenses here a bit. So you had some non-recurring consulting fees in the fourth quarter and also obviously some stock based compensation. So just thinking about the operating expenses going forward should we be expecting any like non-recurring consulting fees or any non-recurring fees from any acquisitions you made here maybe like the first or second quarter of 2014 and then just on stock based comp is that something that we should expect to see maybe in the fourth quarter every year?

Mark Munro

I can’t say that we will always see stock based comp like that every year. We really had two years with some key executives in our team that worked. If you look at the payroll you will see that in 2013 I think our CFO made a 120,000 I made 88,000 in cash pay, he made a 120 in cash pay. Roger Ponder, our COO same kind of number about 85,000 or so and these guys really put a lot of effort for about two years, a year and half to two years for very, very little compensation and it was an opportunity for us to compensate them for all their hard work to helping us get to where we’re today which is about an $80 million business.

So it was an opportunity for us to give them some thanks for that and give them stock based comp which is obviously a motivator and didn’t hurt our cash flow at all. Two, I think if you look the massive number was the derivative liability change and that was really because of the change in our stock price from the early in the quarter to the end of the quarter we closed at 18.50 or so.

So I don’t expect that obviously that’s something that can change moving forward as your stock price fluctuates from beginning to end of a quarter both up or down but I don’t think we expect to see some of the consulting fees related to the transactions we did in Q4 around the convertible debenture and the acquisition which we also closed in January 1st of IPC and the other things we’re working on.

No you shouldn’t see the consulting piece continue on that nature but you could see some stock based comp in fourth quarter of 2014 as well. I can’t give any comment whether it would be related or close to that number or less or more or anything like that at this point though.

Thomas Pfister - RedChip Companies

And then my next question, I’m not sure how much you could say about this but with regards to the closing of the RentVM and VaultLogix acquisitions, assuming that when those close, should we expect what sort of mix should we expect the acquisition price to be on like a cash or common stock or debt basis?

Mark Munro

Well RentVM is already done so that’s done and then done. The VaultLogix deal was disclosed -- you’re looking at three components for that deal. You’re looking at stock at approximately 16.50 a share, you’re looking at a convertible note that will -- that the price of that conversion or the voluntary conversion gets -- its about somewhere between a 102% and 107% of the closing price when we do that when we actually do that deal and our cash component of approximately 17 million.

Thomas Pfister - RedChip Companies

And then another question regarding acquisitions again. Do you think with regards to your cloud solutions, is there anything else that you’re looking to add to this through an acquisition or anything in particular that you think that you need or do you think that your current solution is maybe ready to go as is?

Mark Munro

It's ready to go as is. What we’re going to do though is be opportunistic and look for helping us build scale in certain segments in certain product that within the cloud that we want and we are already looking for that and talking to some people but I can’t comment any further than that. Look, it's clear that it's somewhat of a land grab over the next 24 months to 3 years and we want to make sure -- once you have these customers you own them right? It's a recurring revenue model and it's one of the things where you don’t -- you certainly don’t want to miss out on that opportunity we believe. So we’re going to be opportunistic and aggressive at the same time while building out our own organic revenue growth.

Thomas Pfister - RedChip Companies

And then just one last question for me and I will hop back in the queue. So I saw with the VaultLogix, you mentioned earlier that they are bringing a lot of, I think over 500 channel partners that you can sell your solution to? Just with regards to your overall sales strategy, is some of the channel partners something that you’ve done a lot of before or was it mostly direct sales or how should we view maybe your sales strategy going forward?

Mark Munro

Our go to market sales strategy is definitely two pronged approach, direct sales and indirect. Both myself, our President and our VP of sales all have experience in building channel, running channels, whereas Frank our President, Frank Jadevaia, and Scott Davis, have both had direct experience at places like Nortel Networks, running very large channel division. So we understand the value of it. You can’t be everywhere in this market and there are 100s and 100s or 1000s even of value added resellers, systems integrators out there that don’t have their own cloud solutions and a product set like we offer.

And we know through meetings and conversations already that we have exactly what these people are looking for, for what they want to sell in the future from cloud. So it's definitely going to be a white label environment. We’re going to sell in direct and VaultLogix would actually probably save us two years’ worth of work in building a channel of that scale, in a channel that already knows how to sell these types of products and services and we believe definitely speeds up our time to market with our indirect channel, lowers our cost, lowers our risk and we believe expands our growth opportunity there, tremendously.

Operator

(Operator Instructions). And our next question does come from the line of Jim Pappalardo with GSS Capital.

Jim Pappalardo - GSS Capital

Could you give me or us a little additional color on this derivative liability, the construct of that? You were saying -- qualify that?

Dan Sullivan

Yes. We have a few derivatives. When we issued our debts in 2012 and in early 2013 the debt had some warrants and each quarter we marked those market and the stock price goes up, the warrants become worth more and we get a charge for that and then in December when we did this convertible debentures, the convertible feature of those is also a derivative and as the stock price increased for those that positively attracts the earnings.

Jim Pappalardo - GSS Capital

And what is the quantity of the derivatives? Do you have on your book at this time?

Dan Sullivan

The book value? Or the quantity?

Jim Pappalardo - GSS Capital

Right. The quantity, well what can I expect going forward? Could I expect that the stock ramped again, do I expect to see the same type of write-down?

Mark Munro

Potentially yes.

Jim Pappalardo - GSS Capital

So there are contracts tied to the convertible debenture and then warrants, do you know how many warrants are outstanding there on under those stock price [ph]?

Dan Sullivan

200,000.

Mark Munro

Yes about 200,000 warrants. Those were worth $5 a share.

Operator

And our next question does come from the line of (indiscernible).

Unidentified Analyst

Can you give us a pro forma number? I’m having a hard time with all the acquisitions that you’ve made where the pro forma number for 2013 would be on revenue?

Mark Munro

It's right about 80 million.

Unidentified Analyst

And that includes VaultLogix?

Mark Munro

No. That’s just a definitive purchase agreement we have not closed on VaultLogix.

Unidentified Analyst

And so where would it be if that closes?

Mark Munro

About 92 million.

Unidentified Analyst

92 million, what would be the pro forma EBITDA number?

Mark Munro

Pro forma EBITDA would be about 11.6 million.

Unidentified Analyst

11.6 million including VaultLogix?

Mark Munro

Correct.

Unidentified Analyst

Now any reasons you believe given the equity component of that deal that there maybe a need to restructure that or are you still confident that that’s going to close?

Mark Munro

No they are not going to restructure that, you mean you’re talking about the 16.50 a share?

Unidentified Analyst

Exactly. I know there is some ratchet down provision that allowed them to reset it and maybe $12 or whatever I forgot the exact number.

Mark Munro

I think the bottom actually runs in the 14s. The lowest it can go but no there is no issues there. I know the sellers, I know both private equity groups. If you noticed in the disclosure of that acquisition in the past obviously I was involved in VaultLogix. I know the company very well. I know the two private equity groups well and they believe in our strategy and they believe in the long term value of the business and it's combination and that’s why they are standing behind it.

Unidentified Analyst

Got it. Okay, so you’re looking at about 11.5 million and what do you think is a reasonable -- I mean you haven't out any numbers for guidance or growth but what is your target for the combined business going forth? I know there are lot of synergy potentials but what is -- do you’ve a target, a broad target out there?

Mark Munro

I don’t think it's in the early stages or a two year old business. I don’t think I should begin trying to give guidance at this point yet. I think as we mature and move forward I think we will get to a point where I can do that but I think right now I’m better off just continuing to execute quarter in and quarter out and we will build this business.

Operator

And our next question does come from the line of Andrew Tressler with Liberty Partners Financial.

Andrew Tressler - Liberty Partners Financial

Wonder if you can share a little light on the paid promotion allegations that have been surrounding the company here for few weeks and your recent hire of Former SEC employee to combat those and will this take off the bottom line in any significant matter going forward?

Mark Munro

I would love to be able to comment but based on advisor/counsel for the company I’m not allowed to make any public comments associated with it other than obviously we’re going to vigorously defend ourselves. I did do the press release that you saw we did as a company and we’re going to stand behind that. I don’t think I can, I really can’t I would love to but I can’t comment any further. I’m sorry about that.

Operator

(Operator Instructions). And our next question does come from the line of Hal Berry with Graham Partners.

Hal Berry - Graham Partners

Quick clarification if you don’t mind on the press release. The 11.2 million that you reported in Q4 of 2012, that does not include any contribution from AW Solutions, is that correct?

Mark Munro

That’s correct.

Hal Berry - Graham Partners

So layering that in, it looks like -- did the business shrink on an organic basis year-over-year? What was the contribution of AW Solutions in this current quarter you just reported?

Mark Munro

If you look at the entire year we grew organically at about including AWS year-over-year including them in 2012, we grew at about 11% - 11.1% organically in 2013. So we did not shrink.

Hal Berry - Graham Partners

I’m talking about the fourth quarter.

Mark Munro

Fourth quarter I mentioned that earlier, we’re off a bit in the second half of December. We did not get the pull through revenues we normally get from our major customers in the latter half of December and that definitely caused that to have a bit of a slowdown over previous fourth quarter results.

Hal Berry - Graham Partners

And then just given the some of the restructuring you have done with preferreds. I guess the 10k will be coming out shortly. But can you give us a sense for kind of a current snapshot of the balance sheet just where you sit from a share count, fully diluted, where the cash stands, where the debt stands and then we can get in there.

Dan Sullivan

All the preferred stock is done, there is presently about 11 million shares outstanding fully diluted. It's about 12 - 12.5, cash balance is strong. We retired the mid-market debt in March and the only significant debt now is with the debentures from December.

Mark Munro

We have made incredible strides obviously in our balance sheet from the fall.

Operator

And at this time there are no further questions. I would now like to turn the call back over to Mark Munro for any closing comments.

Mark Munro

I just want to thank everybody for participating in our conference call. Thank you for your time and look forward to speaking to you again. Thank you.

Operator

Ladies and gentlemen that will conclude the conference for today. We do thank you for your participation. You may now disconnect your lines at this time.

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