Get Off My Cloud: Fishy N.J. Company Stock Soars

Officers at InterCloud have colorful past

(Photo illustration by the New York Observer)

(Photo illustration by the New York Observer)

Long-time readers of The Observer surely miss the work of Christopher Byron and his Back of the Envelope column.

One of Byron’s specialties—for The Observer, Red Herring, Worth and others—has been to alert readers about companies of dubious merit with a penchant for issuing two things: press releases out the front door aimed at inflating penny stock valuations, and warrants out the back to those doing the inflating.

Well, we miss Lord Byron at Up & Down the Street, so we bring you a story that has everything Byron: a tiny corporate player with big pretensions, a stock price on the move, principals of, shall we say, curious backgrounds, and financial machinations that don’t make much sense to the gimlet eye.

Without further ado, allow us to introduce Red Bank, N.J.-based InterCloud Systems, a “global single-source provider of value-added services for both corporate enterprises and service providers”—in the cloud, that is. Do you understand that? Me neither. What if I told you that InterCloud installs cable? Would that be more clear? Because it does that too. But management of this company clearly wants us to be thinking of the “cloud” when we think of it (and the Internet, apparently—“Inter … Cloud.” Get it?).

It’s not the first time that Mark Munro, the chairman and CEO of InterCloud, has been involved with a company whose name took aim at the tech zeitgeist. The last one: BiznessOnline, a telecom services roll-up that Mr. Munro founded in 1998 and was pushed out of by its largest lender in 2002.

So why are we talking about InterCloud, which has a market capitalization of just $106 million and which has been issuing a flurry of press releases that are remarkably short on actual information? Because the stock is on a tear—it traded for less than $2.50 per share in November and topped $18.30 per share last week. If this thing is going to the moon—or simply to the clouds—you’d better get on board now. Right?

We’ll get back to all of this good news in a moment, but first let us establish a few things about the pedigree of those involved with this promising young company.

InterCloud issued stock in November in a public offering managed by Aegis Capital. Never heard of them? You’re not alone. Suffice it to say that a number of refugees from the now-defunct “emerging growth” shop Rodman & Renshaw landed at Aegis after R&R’s bankruptcy filing last year.

But why go with a relatively unknown underwriter when you’re the future? At this point, well-known investment banks will put their name on pretty much anything that seems like it will sell. Take, for example, the move toward cloud computing, which is, without question, a real trend. Why couldn’t InterCloud interest Goldman, Morgan Stanley or J.P. Morgan Chase in this deal? And why does no institution of note own any of its shares?

After poking through the bios of InterCloud’s management team, I must say that I found the résumé of one Lawrence Sands to be quite inspiring, at least in terms of the American capacity for reinvention. Mr. Sands used to be a practicing lawyer in New York, but he was disbarred in 2000 after getting busted dipping into an escrow account. 

At some point, Mr. Sands moved to Florida, where he has worked at two car dealerships (Lexus and BMW) and apparently, as recently as April of last year, as a securities lawyer. Funny thing that: a lawyer disbarred in New York practicing law in Florida. At least he has had the good sense to locate the offices of Lawrence M. Sands, Esq., out of the same building in Boca Raton where a lot of InterCloud mail gets sent.

While working at the Lexus dealership, Sands was named CEO of Paivis Corp., a publicly traded telecom services firm in late 2008. The company proceeded to dump tens of millions of shares on the market—at prices as low at $0.0003 per share. The SEC revoked the registration of the company’s shares in fall 2009. 

No matter, as Mr. Sands soon got busy with another company named Holdings Aviation, which he registered at the same address. Last year, Quasar Aerospace, which is run by one Joseph Canouse, founder of the notorious Atlanta penny stock operation J.P. Carey (and alumnus of an even more notorious one, Colorado’s Chatfield Dean), announced a deal to buy Holdings Aviation.

Stay with me here. Ludlow Research, a New York-based small-cap research firm, issued a report a year ago recommending investors buy InterCloud. While that has actually proven to be a good call at this point, Ludlow also “covers” such standouts as a Florida-based outfit named Stakool, on whose board sits one Joseph Canouse. But let’s get back to Mr. Sands, who actually kept that job at BMW for nine months after signing on to InterCloud as senior vice president in January 2010. This guy has been an officer at not one but two public companies and yet still somehow finds the time to sell cars? What can’t he do? 

(Pay rent, perhaps. A judgment for $300,000 was handed down in New York State Supreme Court in 1999, monies that Mr. Sands owed someone named Joseph Kelly of 30 West 21st Street, eighth floor. That’s the building Mr. Sands ran his legal business in New York City out of before he was disbarred.)

On that note, how well is InterCloud doing at whatever it actually does? The company’s latest 10Q showed $16 million in revenues and $5.5 million in gross profit. Not too shabby. Curiously, though, when they break out operating expenses on the income statement, there appears to be zero spending on research and development—this from a company on the cutting edge of cloud-based technology.

Flip from the income statement to the balance sheet, and you will find five different series of preferred shares. So no R&D, but lots of financial machinations. Meanwhile, the company is currently paying 15 percent annual interest on a promissory note, as well as interest ranging between 5.5 percent and 9.75 percent on five different lines of credit, despite earning an apparent $1.3 million in net income in its latest quarter. Why isn’t it paying off its credit lines with that cash?

(An attempt to reach InterCloud for comment 24 hours before the story went to print was not successful. But Mr. Sands read the article in print and wrote to me to defend his company, saying, “While many people may question our market valuation (mostly shorters); all valuations are subject to attack or question. But why did you find the need to not only attack our company but also attack individuals; obviously myself included? You attacked me being a disbarred attorney; yet I am a member in good standing with the  bar of the state of New Jersey. You attacked my  prior jobs and association; which have no bearing on the fundamentals and financials of InterCloud.”)

Of course, if you want to find some “independent” analysis of InterCloud beyond that of Ludlow, you won’t have to look far. Consider the almost-laughable arguments put forth by the authors of two recent posts about the company on the website Seeking Alpha in the last several weeks.

The first is by someone named John Mylant, the owner of a “self-developed option trading system” who is “well sought after by investors around the world.” Here’s one gem: “Even thought it is growing at 20 percent organically in the first nine months of 2013, the company expects to continue to grow.” Well, then, that’s all we need to know. (Or is it? I’m not even sure what the sentence means.) Mr. Mylant recommends you buy the stock, because he thinks it’s going to keep going up, and insists at the end of his dispatch that this feeling he has is “not mere speculation.”

Even better is a January post on the site by “Kingmaker,” who says his expertise is in researching and writing about micro- and small-cap biotechnology stocks. What’s that? InterCloud isn’t a biotech stock, you say? Well, what of it? It’s a stock, isn’t it? And Kingmaker lays out an airtight strategy to mitigate the associated risks.

If you were “initially planning” a $10,000 investment, Kingmaker suggests starting with $2,500. If the stock goes down, says Kingmaker, you can buy more, bringing your average purchase price down. But if it goes up, you can “either continue adding or just sit back and enjoy the gains.” In summary: Buy more if it goes down, and buy more if it goes up. This is way easier than I thought. Thank you, Kingmaker.

But let’s get back to what InterCloud does for a second. On Jan. 3, InterCloud announced $7 million in new professional services contracts. Assuming these are real—and why wouldn’t we?—that’s meaningful money. But what are they for? One of those contracts is described as “network engineering, project management and other senior technical classifications required to support a carrier’s network expansion.” When I was in college, I worked as a cable installer during two summers. And that sounds a lot like what we did. Perhaps, then, it should come as no surprise that in the six months ended June 13, 2013, 68 percent of the company’s revenues came from “telecommunications staffing services,” another 24 percent from “specialty contracting services” and a final 8 percent from “environmental remediation.”

So where’s the cloud computing? I have no idea. What I do know is that if you want to participate in the growth of cloud computing, you should take a gander at the likes of Equinix, RackSpace, Salesforce.com or even Amazon. The whole game in software-as-a-service is scalability, and that’s why you’d pay a rich multiple for a real player in the business. But should you pay it for a cable installer? Don’t get me wrong—somebody has to dig the ditches, and I wouldn’t hold it against InterCloud if it were that somebody. Just because someone has been disbarred doesn’t mean he doesn’t know how to use a shovel.