InterCloud Systems: Form D, Other Stormy Issues Threaten This Non-Cloud Company

by Sonya Colberg, Senior Editor - 5/29/2015 11:16:15 AM

InterCloud Systems (ICLD) stock blew through low-hanging clouds on a recent small contract award and today’s announcement of an effort to improve clients’ experience.

But InterCloud is in such dire financial straits that top executives and directors just filed notice for the sale of $3 million in stock.

And that is just the most recent of numerous stormy issues promising to dissipate InterCloud’s stock and leave stockholders drenched without an umbrella in sight.  

Here are some bullish viewpoints for investors to consider. Meanwhile, below are the other top cloud-busters that make us hate this stock:

*Reality Check Number 1: New Form D Filing, Horrible Financials

InterCloud’s CEO, President, Chief Accounting Officer, Chief Financial Officer and three directors signed off this week on the newest stock offering of $3 million through Aegis Capital. Disclosed under Form D, the first date of sale of the stock occurred May 14.

This may be just the beginning of such efforts for InterCloud. The company’s net income plummeted 200 percent last quarter versus a year ago. So net income dropped from $10.4 million to $-10.3 million.

Indeed, the company’s income, EBITDA and other metrics fall well below competitors and the industry as a whole, as shown here.

The company’s history of incredibly bad earnings and earnings misses, sometimes over 1000 percent, is shown here and below:

 (Source: Yahoo Finance)

*Reality Check Number 2: History Of Loan Defaults; Massive Maturing, Related-Party Debt.

The company has been trying to dig itself out of its financial mess by taking on debt.

But it has historically failed there, too. Investors may see that it has failed to meet loan covenants and ultimately defaulted on a loan agreement, shown here.

Meanwhile, InterCloud has been forced to rely on loans from insiders. The CEO, a director and other major shareholders have floated a total of ~$7.75 million in loans just since December 2013. See the filing pages 112-114.

And this money was loaned to the company at rates as ridiculous as 18 percent interest.

Maturing related party debt is hitting InterCloud just about now, totaling over $20 million:

(Source: SEC filings)

*Reality Check Number 3 – Stock Promotion Complaint

Desperate companies take desperate measures.

Alleged stock promotions by stock promotion firms DreamTeamGroup and MissionIR have landed InterCloud and the CEO/Chairman in a class action lawsuit. The lawsuit alleges between Nov. 5, 2013 and March 17, 2014, investors deceived by untrue statements of material significance traded artificially inflated ICLD stock. The complaint is still pending.

Allegedly aggressive promotions apparently caught the SEC’s attention, too.

*Reality Check Number 4 – Market Manipulation Question

The Securities and Exchange Commission issued InterCloud a subpoena in May 2014 related to its investigation into market manipulation.

The investigation began with Galena Biopharma, which allegedly paid $50,000 to a subsidiary of The Dream Team Group to promote its stock.

Galena stock promotional efforts by Dream Team and MissionIR – firms the class action lawsuit says are associated with InterCloud – came to light through TheStreet.com and Seeking Alpha.

The issue heated up when a Seeking Alpha author alleged the Dream Team tried to hire him to write promotional articles about Galena and CytRX without disclosure, and alleged Dream Team folks promoted the stock under multiple aliases, including a hedge fund manager alias. Barron’s nicely explains the mess here.

Page 31 of InterCloud’s SEC filing suggests the company is just an innocent bystander who’s been asked for a witness statement.

But the investigation that previously specifically named Galena has now been renamed, “In The Matter of Certain Stock Promotions.” So it appears to be developing into a sweeping probe that could ultimately engulf InterCloud.

*Reality Check Number 5: Promotion Continues Today

InterCloud seems undaunted by those problems and even tries to justify its promotions this way:

“We may never obtain research coverage by securities and industry analysts.  If no securities or industry analysts commence coverage of our company, the market price for our common stock could decline.”

Indeed, the company gets little to no interest from big institutional investors, shown here.  And just one analyst shows any interest at all.

The company’s CEO followed the explanatory knee-slapper just weeks ago with this comment suggesting some folks just never learn:

“InterCloud’s growing backlog and sales pipeline certainly seems to contradict our stock’s performance.”

*Reality Check Number 6: History of Buying Non-Performers

Management’s excessive promotional efforts are rivaled only by its history of buying bad assets. Taken from InterCloud’s SEC filings, the chart below summarizes the losses resulting from 2014 acquisitions.

 

IPC

RentVM

VaultLogix

Acquisition Price

$21.15 m

$5.88 m

$36.80 m

Revenue

$22.85 m

$0.11 m

$  2.52 m

Income/Loss

 $-6.53 m

$- 1.29 m

$- 0.86 m

(Source: SEC filings)

And underperforming acquisitions continue to weigh heavily on InterCloud’s FY 2014.

A check of earlier acquisitions raised other question marks, including:

**The $15 million ADEX acquisition of 2012, for example, drove down revenue and cost the company $3.8 million in impairment expenses in FY 2014, though one would expect more efficiency since ADEX shares an office with ADEX Medical Staffing.

**InterCloud paid $4.5 million on Sept. 18, 2012 for Telnet Solutions on Rand Road in Des Plaines, Illinois. But Google map shows no building there.

(Source: Google maps)

*Reality Check Number 7: Riding “Cloud” Coattails, But No or Insignificant Cloud Revenue

InterCloud has glomed onto “the cloud” but the filings reveal virtually no cloud-based revenue.

The cloud got top billing in the telecommunications service providers April 8 shelf registration statement registering $100 million-worth of stock goes on and on about its “cloud-based service offerings.”

But … InterCloud’s filings disclose:

“During 2012 and 2011, the Company did not recognize any revenue from cloud-based services.”

“During 2013, we did not recognize any revenue from cloud-based services.”

“As of September 30, 2014, the amount of cloud-based revenue recognized on the unaudited condensed consolidated statement of operations has not been significant in relation to the Company’s other revenue within the cloud and managed services segment.”

Conclusion:

InterCloud’s filing this week is likely just the beginning of the probable dilutive capital issues bearing down on shareholders. This cash-poor company is dogged by excessive promotional allegations, consistently missed earnings, horrible earnings, historically bad acquisitions, and lack of cloud revenue - all adding up to a declining business.

The super-cell is building on InterCloud, lightning is striking and the tornado sirens are screaming. Make a run for the storm shelter before this rain-wrapped stock falls to its pre-promotional level of about $1.50.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in ICLD and stand to profit on any future declines in the stock price. 

Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to [email protected] or [email protected].

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