INTERCLOUD SYSTEMS, INC.

The Company performs its obligations under a contract with a customer by transferring products and services in exchange for consideration from the customer. Accounts receivable are recorded when the right to consideration becomes unconditional. The timing of the Company’s performance often differs from the timing of the customer’s payment, which results in the recognition of a contract asset or a contract liability. The Company recognizes a contract asset when the Company transfers products or services to a customer and the right to consideration is conditional on something other than the passage of time. The Company recognizes a contract liability when it has received consideration, or an amount of consideration is due from the customer and the Company has a future obligation to transfer products or services.

On July 3, 2018, the Company amended its Certificate of Designation for its Series M preferred stock (refer to Note 14, Preferred Stock, for further detail). Per the amended Certificate of Designation, the conversion price was changed to the greater of $0.01 or 105% of the average closing VWAP price for the 5 days immediately preceding the conversion date. In accordance with ASC Topic 470-50, the Company treated the amendment as a debt extinguishment. The Company used a Monte Carlo simulation to value the settlement features as of July 3, 2018. The Series M preferred stock was ascribed a value of $2,625. The Company recorded a loss on extinguishment of debt of $130 to the unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2018. Post amendment, the instrument is no longer predominantly an obligation to issue a variable number of shares for a fixed monetary amount and thus the instrument as a whole is no longer classified as a liability. However, due to the variable conversion feature, the Company cannot assert it would have sufficient authorized, but unissued shares to settle all future conversion requests and as such the embedded conversion option has been bifurcated and classified as a derivative liability and the host instrument is deemed to be conditionally redeemable, and, accordingly is classified as temporary equity in the unaudited condensed consolidated balance sheet as of September 30, 2018.

On July 3, 2018, the Company amended its Certificate of Designation for its Series M preferred stock. Per the amended Certificate of Designation, the conversion price was changed to the greater of $0.01 or 105% of the average closing VWAP price for the 5 days immediately preceding the conversion date. In accordance with ASC Topic 470-50, the Company treated the amendment as a debt extinguishment (refer to Note 9, Derivative Instruments, for detail on the extinguishment accounting related to the amendment). Post amendment, the instrument is no longer predominantly an obligation to issue a variable number of shares for a fixed monetary amount and thus the instrument as a whole is no longer classified as a liability. However, due to the variable conversion feature, the Company cannot assert it would have sufficient authorized, but unissued shares to settle all future conversion requests and as such the embedded conversion option has been bifurcated and classified as a derivative liability and the host instrument is deemed to be conditionally redeemable, and, accordingly is classified as temporary equity in the unaudited condensed consolidated balance sheet as of September 30, 2018. 

Grant Thornton LLP Settlement and Release Agreement

On October 16,, 2018, InterCloud Systems, Inc. (the “Company”) entered a Settlement Agreement and Release (the “Settlement Agreement”) with Grant Thornton LLP (“Grant Thornton”) with respect to a lawsuit the Company filed against Grant Thornton in the Supreme Court of the State of New York, County of New York, and a lawsuit Grant Thornton filed against the Company, also in in the Supreme Court of the State of New York, County of New York. In the Settlement Agreement, the parties agreed to dismiss with prejudice all claims each party had asserted against the other. Neither party made any admission of liability, wrongdoing, or responsibility.

During the nine months ended September 30, 2018, other income was $3.1 million, compared to other expense of $20.7 million during the same period of 2017. The increase in other income was primarily related to a decrease in interest expense, loss on extinguishment of debt, and loss on disposal of subsidiary of $6.2 million, $3.2 million, and $6.0 million, respectively. The decrease in interest expense primarily resulted from a decrease in overall outstanding debt as of the beginning of the nine months ended September 30, 2018 compared to the same period of 2017. The decrease in loss on extinguishment of debt primarily resulted from the gain related to the Series L preferred stock amendment made during the nine months ended September 30, 2018 The decrease in loss on disposal of subsidiary resulted from there being no disposals of continuing operations subsidiaries during the nine months ended September 30, 2018, while we disposed of the AWS Entities during the nine months ended September 30, 2017.