Item 1. Consolidated Financial Statements
PARETEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,409,077
|
|
|
$
|
931,189
|
|
Restricted cash
|
|
|
669,730
|
|
|
|
564,018
|
|
Accounts receivable, net of an allowance for doubtful accounts of $92,979 at March 31, 2017 and $88,528 at December 31, 2016
|
|
|
616,688
|
|
|
|
614,670
|
|
Prepaid expenses and other current assets
|
|
|
1,162,226
|
|
|
|
1,084,994
|
|
Total current assets
|
|
|
3,857,721
|
|
|
|
3,194,871
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
130,865
|
|
|
|
129,037
|
|
|
|
|
|
|
|
|
|
|
NOTE RECEIVABLE
|
|
|
1,019,240
|
|
|
|
1,012,603
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
8,093,252
|
|
|
|
8,708,778
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
13,101,078
|
|
|
$
|
13,045,289
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable and customer deposits
|
|
|
2,679,588
|
|
|
|
2,316,768
|
|
Obligations under capital leases (current portion)
|
|
|
-
|
|
|
|
10,813
|
|
Deferred revenue
|
|
|
180,027
|
|
|
|
-
|
|
Net billings in excess of revenues
|
|
|
872,616
|
|
|
|
951,791
|
|
Accrued expenses and other payables
|
|
|
5,589,262
|
|
|
|
6,013,620
|
|
Senior Secured Loan - Short Term
|
|
|
3,250,000
|
|
|
|
4,000,000
|
|
Total current liabilities
|
|
|
12,571,493
|
|
|
|
13,292,992
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
-
|
|
|
|
4,265,829
|
|
Other long term liabilities
|
|
|
180,868
|
|
|
|
192,980
|
|
Unsecured Convertible Promissory Note (net of Debt Discount and Debt Issuance)
|
|
|
61,514
|
|
|
|
821,048
|
|
Senior Secured Loan - Long Term (net of Debt Discount, and Debt Issuance)
|
|
|
3,494,287
|
|
|
|
3,715,662
|
|
Non-current portion of net billings in excess of revenues
|
|
|
30,202
|
|
|
|
121,309
|
|
Total long term liabilities
|
|
|
3,766,871
|
|
|
|
9,116,828
|
|
Total liabilities
|
|
|
16,338,364
|
|
|
|
22,409,820
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (See Notes)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Preferred Stock $0.00001 par value, 50,000,000 shares authorized, 58 and 249 issued and outstanding as of March 31, 2017 and December 31, 2016, respectively
|
|
|
384,503
|
|
|
|
2,143,196
|
|
Common Stock $0.00001 par value, 500,000,000 shares authorized, 12,759,149 and 8,376,267 issued and outstanding as of March 31, 2017 and December 31, 2016, respectively
|
|
|
289,865,307
|
|
|
|
280,653,362
|
|
Accumulated other comprehensive loss
|
|
|
(5,113,722
|
)
|
|
|
(5,086,902
|
)
|
Accumulated deficit
|
|
|
(288,373,374
|
)
|
|
|
(287,080,234
|
)
|
Pareteum Corporation stockholders’ deficit
|
|
|
(3,237,286
|
)
|
|
|
(9,370,578
|
)
|
|
|
|
|
|
|
|
|
|
NON-CONTROLLING INTEREST
|
|
|
-
|
|
|
|
6,047
|
|
Total stockholders’ deficit
|
|
|
(3,237,286
|
)
|
|
|
(9,364,531
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
$
|
13,101,078
|
|
|
$
|
13,045,289
|
|
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
PARETEUM CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE
LOSS
(UNAUDITED)
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
REVENUES
|
|
$
|
2,794,943
|
|
|
$
|
3,273,546
|
|
|
|
|
|
|
|
|
|
|
COST AND OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Cost of service (excluding depreciation and amortization)
|
|
|
841,903
|
|
|
|
1,125,700
|
|
Product development
|
|
|
284,694
|
|
|
|
1,290,001
|
|
Sales and marketing
|
|
|
319,487
|
|
|
|
541,941
|
|
General and administrative
|
|
|
2,365,388
|
|
|
|
2,855,919
|
|
Restructuring charges
|
|
|
129,229
|
|
|
|
637,777
|
|
Depreciation and amortization of fixed and intangibles assets
|
|
|
843,783
|
|
|
|
1,097,604
|
|
Total cost and operating expenses
|
|
|
4,784,484
|
|
|
|
7,548,942
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(1,989,541
|
)
|
|
|
(4,275,396
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
39,136
|
|
|
|
25,936
|
|
Interest expense
|
|
|
(517,143
|
)
|
|
|
(306,299
|
)
|
Interest expense related to debt discount and conversion feature
|
|
|
(1,049,236
|
)
|
|
|
(351,799
|
)
|
Amortization of deferred financing costs
|
|
|
(196,113
|
)
|
|
|
(136,929
|
)
|
Changes in derivative liabilities
|
|
|
1,920,881
|
|
|
|
518,986
|
|
Gain on Extinguishment of Debt
|
|
|
463,345
|
|
|
|
-
|
|
Other income, net
|
|
|
36,818
|
|
|
|
221,640
|
|
Total other income (expense)
|
|
|
697,688
|
|
|
|
(28,465
|
)
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE PROVISION FOR INCOME TAXES
|
|
|
(1,291,853
|
)
|
|
|
(4,303,861
|
)
|
Provision for income taxes
|
|
|
1,287
|
|
|
|
9,929
|
|
NET LOSS
|
|
|
(1,293,140
|
)
|
|
|
(4,313,790
|
)
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
Foreign currency translation (loss) gain
|
|
|
(26,820
|
)
|
|
|
341,214
|
|
COMPREHENSIVE LOSS
|
|
$
|
(1,319,960
|
)
|
|
$
|
(3,972,576
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share and equivalents - basic
|
|
$
|
(0.14
|
)
|
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share and equivalents - diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the period - basic
|
|
|
9,322,228
|
|
|
|
6,515,719
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the period - diluted
|
|
|
9,322,228
|
|
|
|
6,515,719
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements
PARETEUM CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(UNAUDITED)
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,293,140
|
)
|
|
$
|
(4,313,790
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
843,783
|
|
|
|
1,097,604
|
|
Provision for doubtful accounts
|
|
|
4,451
|
|
|
|
-
|
|
Stock based compensation
|
|
|
818,286
|
|
|
|
944,024
|
|
Change in fair value of warrant liability
|
|
|
(1,920,881
|
)
|
|
|
(518,986
|
)
|
Amortization of deferred financing costs
|
|
|
196,113
|
|
|
|
136,929
|
|
Interest expense relating to debt discount and conversion feature
|
|
|
1,049,236
|
|
|
|
351,799
|
|
Other income and (expense), net
|
|
|
(36,818
|
)
|
|
|
(221,640
|
)
|
(Gain) on Extinguishment of Debt
|
|
|
(463,345
|
)
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable
|
|
|
4,343
|
|
|
|
35,624
|
|
(Increase) decrease in prepaid expenses, deposits and other assets
|
|
|
(209,030
|
)
|
|
|
63,095
|
|
Increase in accounts payable and customer deposits
|
|
|
370,494
|
|
|
|
571,047
|
|
Decrease in Net billings in excess of revenues and deferred revenue
|
|
|
(6,755
|
)
|
|
|
(136,050
|
)
|
(Decrease) increase in accrued expenses and other payables
|
|
|
(594,793
|
)
|
|
|
78,570
|
|
Net cash used in operating activities
|
|
|
(1,238,056
|
)
|
|
|
(1,911,774
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(30,924
|
)
|
|
|
(765,955
|
)
|
Advance Purchase Payment on “Assets held for Sale”
|
|
|
-
|
|
|
|
450,000
|
|
Net cash used in investing activities
|
|
|
(30,924
|
)
|
|
|
(315,955
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Financing receivable
|
|
|
-
|
|
|
|
355,000
|
|
Equity and Debt issuance costs paid
|
|
|
-
|
|
|
|
(360,249
|
)
|
Principal payment on 2014 10% + libor 3rd Part Loan
|
|
|
-
|
|
|
|
(85,000
|
)
|
Proceeds from 9% Unsecured Subordinated Convertible Promissory Note
|
|
|
-
|
|
|
|
2,273,000
|
|
Financing related fees
|
|
|
(368,726
|
)
|
|
|
-
|
|
Gross Proceeds from public offering
|
|
|
3,500,000
|
|
|
|
-
|
|
Principal repayment Senior Secured Loan
|
|
|
(1,500,000
|
)
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
1,631,274
|
|
|
|
2,182,751
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
221,306
|
|
|
|
85,339
|
|
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
583,600
|
|
|
|
40,361
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF THE PERIOD
|
|
|
1,495,207
|
|
|
|
615,401
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF THE PERIOD
|
|
$
|
2,078,807
|
|
|
$
|
655,762
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
319,328
|
|
|
$
|
233,864
|
|
Cash paid during the period for income taxes
|
|
|
-
|
|
|
|
-
|
|
Conversions of notes include accelerated amortization
|
|
$
|
801,549
|
|
|
$
|
-
|
|
Amendments to warrants and convertible notes
|
|
$
|
2,344,948
|
|
|
$
|
-
|
|
Conversions of convertible notes
|
|
$
|
774,424
|
|
|
$
|
-
|
|
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
UNAUDITED
Note 1. Financial Condition
As reflected in the accompanying consolidated
financial statements, the Company reported net (loss) of $(1,293,140) for the period ended March 31, 2017 and had an accumulated
deficit of $(288,373,374) as of March 31, 2017.
The Company’s financial statements
through March 31, 2017 were materially impacted by several events:
|
·
|
The restructuring of Atalaya debt on March
6, 2017 and May 1, 2017;
|
|
·
|
a 25-1 reverse stock split;
|
|
·
|
the conversion of derivative debt; and
|
Atalaya Debt Restructuring
On March 6, 2017, Elephant Talk Europe
Holding B.V., an entity organized under the laws of the Netherlands (the “Borrower”), a wholly owned subsidiary of
Pareteum Corporation (the “Company”), as Borrower, the Company, Pareteum North America Corp., a Delaware corporation,
Corbin Mezzanine Fund I, L.P. (“Lender”) and Atalaya Administrative LLC, a New York limited liability company, as administrative
agent and collateral agent for the Lender, entered into an Agreement (the “Agreement”) to amend certain terms of the
credit agreement among the parties, dated November 17, 2014, as has been amended from time to time (as so amended, the “Amended
and Restated Agreement”). On March 31, 2017, the relevant parties entered into the formal amendment to the Amended and Restated
Agreement (the “Amendment”). Capitalized terms used herein but not otherwise defined shall have the meaning as set
forth in the Amended and Restated Credit Agreement.
Pursuant to the Amendment, (i) the Maturity
Date was extended to December 31, 2018; (ii) the amortization schedule was amended as follows: Q1-2017: $1,500,000; Q2-2017: $1,500,000;
Q3-2017: $500,000; Q4-2017: $500,000; Q1-2018: $750,000; Q2-2018: $750,000; Q3-2018: $750,000; and (iii) inserting a new definition
of “2017 Equity Offering.” Additionally, the two warrants previously issued to the Lender (the “Corbin Warrant”)
and ACM Carry-I LLC (the “ACM Warrant” and, together with the Corbin Warrant, the “Warrants”) were amended
and treated as a modification to (a) increase the aggregate amount of shares of common stock underlying the Corbin Warrant to 1,229,100
and increase the aggregate amount of shares of common stock underlying the ACM Warrant to 216,900; (b) adjust the exercise price
of the Warrants to $1.305 per share; and (c) remove the anti-dilution sections (Sections 9(d) and 9(h)) of the Warrants.
On May 2, 2017, Elephant Talk Europe Holding
B.V., an entity organized under the laws of the Netherlands (the “Borrower”), a wholly owned subsidiary of Pareteum
Corporation (the “Company”), as Borrower, the Company, Pareteum North America Corp., a Delaware corporation, Corbin
Mezzanine Fund I, L.P. (“Lender”) and Atalaya Administrative LLC (“Atalaya”), a New York limited liability
company, as administrative agent and collateral agent for the Lender, executed a Term Sheet (the “Term Sheet”) to amend
certain terms of that credit agreement among the parties, as amended via the Amended & Restated Credit Agreement dated December
27, 2016, and further amended on March 6, 2017.
Under the terms of the executed Term Sheet,
the parties have agreed, among other items, to reduce the quarterly principal amortization payment amounts and confirmed the maturity
date of December 31, 2018. Further, the parties agreed on a revised repayment schedule, which reduces the principal repayments
to $250,000 for the second and third quarters of 2017 and $500,000 for the fourth quarter of 2017. The quarterly principal repayments
for 2018 have also been materially reduced from $750,000 per quarter to $500,000 per quarter with a final payment due by December
31, 2018. Additionally, the parties also agreed that the two warrants previously issued under prior amendments will be revised
to (a) adjust the exercise price to the lesser of $1.305 per share or a 15% discount to the average of the past five days closing
price of the Company’s common stock and (b) increase the aggregate amount of shares of common stock underlying the Warrants
by 613,805 shares or such number as required to bring the Lender and Atalaya’s fully diluted percentage ownership of the
Company’s outstanding equity to 11.65%, calculated as of April 28, 2017.
Reverse Stock Split
We received a deficiency letter from the
NYSE MKT on December 6, 2016, indicating that our securities had been selling for a low price per share for a substantial period
of time and, pursuant to Section 1003(f)(v) of the NYSE MKT Company Guide (the “Company Guide”), our continued listing
on the NYSE MKT was predicated on our effecting a reverse split and other requirements or otherwise demonstrating sustained price
improvement. This notice was in addition to a prior notice we received from NYSE MKT on May 26, 2016, as previously disclosed on
a Current Report on Form 8-K we filed on June 2, 2016. The NYSE MKT indicated that we had an additional six months, or until June
6, 2017, to gain compliance with Section 1003(f)(v) of the Company Guide.
On February 27, 2017, we completed a 1-for-25
reverse split of our issued and outstanding common stock.
Conversion of Unsecured Convertible
Promissory Note and Modification of Derivative Securities
On March 30, 2017, Pareteum Corporation
(the “Company”) entered into an agreement (the “Agreement”) with Saffelberg Investments NV (the “Holder”)
pursuant to which the Company and the Holder amended the terms of, redeemed or effected conversion, as the case may be, of certain
convertible promissory notes (the “Note(s)”) and warrants (the “Warrant(s)”) previously issued by the Company
to the Holder.
Pursuant to the Agreement, the Company
and the Holder agreed to modify certain terms of the Notes whereby (i) the principal amount of one Note, in the initial amount
of $723,900, will be increased by ten percent (10%) and subsequently converted into 530,860 shares of common stock, par value $0.00001
per share (the “Common Stock”), of the Company and (ii) the Company will immediately repay in cash another Note in
the principal amount of $350,000, plus interest of $59,304. As of May 15, 2017, the principal and accrued interest remain unpaid.
Conversion of Preferred Shares
On March 7, 2017, Pareteum Corporation
(the “Company”) received conversion notices from holders of an aggregate of $1,150,000, or 115 shares, of the Company’s
Series A Convertible Preferred Stock and Series A-1 Convertible Preferred Stock (the “Preferred Shares”). The Preferred
Shares have been converted into shares of common stock, $0.00001 par value per share, of the Company at $1.305 (a 13% discount
to the public offering) and shall become effective upon the filing by the Company of a prospectus supplement disclosing the terms
of an offering. Additionally, holders will be granted warrants to purchase 50% additional shares to what they received upon conversion.
The exercise price will be $1.87.
Joseph Gunnar & Co., LLC - Public
Offering
On March 10, 2017, Pareteum Corporation
(the “Company”) entered into an underwriting agreement (the “Underwriting Agreement”) with Joseph Gunnar
& Co., LLC (the “Underwriter”), relating to the issuance and sale of 2,333,334 shares of the Company’s common
stock, par value $0.00001 per share (the “Common Stock”), at a price to the public of $1.50 per share together with
five-year warrants to purchase an aggregate of 1,166,667 shares of Common Stock at an exercise price of $1.87. The Underwriter
agreed to purchase the shares from the Company pursuant to the Underwriting Agreement at a price of $1.3949 per share. The gross
proceeds to the Company from the offering were approximately $3.5 million, before deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company. The offering closed on March 15, 2017. In addition, under the terms of
the Underwriting Agreement, the Company has granted the Underwriter a 45-day option to purchase up to (i) up to 350,000 additional
shares of Common Stock (the “Option Shares”) at a purchase price of $1.3949 per one Option Share, taking into account
the Underwriter’s discount, and/or (ii) warrants to purchase up to 175,000 additional shares of Common Stock (the “Option
Warrants”). The Underwriter partially exercised their over-allotment option on 109,133 Option Warrants.
Based on our current expectations with
respect to our revenue and expenses, we expect that our current level of cash and cash equivalents could be sufficient to meet
our liquidity needs for the next twelve months. If our revenues do not grow as expected and if we are not able to manage expenses
sufficiently, including required payments pursuant to the terms of the senior secured debt, we may be required to obtain additional
equity or debt financing. Although we have previously been able to attract financing as needed, such financing may not continue
to be available at all, or if available, on reasonable terms as required. Further, the terms of such financing may be dilutive
to existing shareholders or otherwise on terms not favorable to us or existing shareholders. If we are unable to secure additional
financing, as circumstances require, or do not succeed in meeting our sales objectives, we may be required to change or significantly
reduce our operations or ultimately may not be able to continue our operations. As a result of our historical net losses and cash
flow deficits, and net capital deficiency, these conditions raise substantial doubt as to the Company’s ability to continue
as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible effects
on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
Note 2. Description of Business, Basis of Presentation
and Use of Estimates
Business overview
Pareteum has developed a Communications
Cloud Services Platform, providing (i) Mobility, (ii) Messaging and (iii) Security services and applications, with a Single-Sign-On,
API and software development suite.
The Pareteum platform hosts integrated
IT/Back Office and Core Network functionality for mobile network operators, and for enterprises implement and leverage mobile communications
solutions on a fully outsourced SaaS, PaaS and/or IaaS basis: made available either as an on-premise solution or as a fully hosted
service in the Cloud depending on the needs of our customers. Pareteum also delivers an Operational Support System (“OSS”)
for channel partners, with Application Program Interfaces (“APIs”) for integration with third party systems, workflows
for complex application orchestration, customer support with branded portals and plug-ins for a multitude of other applications.
These features facilitate and improve the ability of our channel partners to provide support and to drive sales.
Basis of Presentation of Interim Periods
The interim condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim
financial information and with the instructions to Securities and Exchange Commission, or SEC, Form 10-Q and Article 10 of SEC
Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore,
these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for
the year ended December 31, 2016, included in our 2016 Annual Report on Form 10-K filed with the SEC on March 29, 2017, referred
to as our 2016 Annual Report.
The interim condensed consolidated financial
statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion
of management, are necessary to present fairly our results of operations and financial position for the interim periods. The results
of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for future
quarters or the full year.
For a complete summary of our significant
accounting policies, please refer to Note 2, “Business and Summary of Significant Accounting Policies,” of our 2016
Annual Report. There have been no material changes to our significant accounting policies during the three months ended March 31,
2017.
Use of Estimates
The preparation of the accompanying consolidated
financial statements conforms with accounting principles generally accepted in the U.S. and requires management to make certain
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company
bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities. Significant areas
of estimates include revenue recognition, valuation of goodwill and other intangible assets, bad debt allowance, valuation of financial
instruments, useful lives of long lived assets and share-based compensation. Actual results may differ from these estimates under
different assumptions or conditions.
Recently Issued Accounting Standards
In November 2016, the FASB issued Accounting
Standards Update 2016-18, “Statement of Cashflows – Restricted Cash a consensus of the FASB Emerging Issues Task Force”.
This standard requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of
cash flows under a retrospective transition approach. The guidance will become effective for fiscal years beginning after December
15, 2017 and interim periods within those fiscal years. The Company has adopted ASU 2016-18.
Note 3. Supplemental Financial Information
The following tables present details of our condensed consolidated
financial statements:
Prepaid expenses and other current assets
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Prepaid expenses
|
|
$
|
521,795
|
|
|
$
|
492,549
|
|
VAT
|
|
|
640,431
|
|
|
|
592,445
|
|
|
|
$
|
1,162,226
|
|
|
$
|
1,084,994
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
March 31,
|
|
|
|
December 31,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
Furniture & fixtures
|
|
$
|
157,547
|
|
|
$
|
155,197
|
|
Computer, communications and network equipment
|
|
|
19,600,778
|
|
|
|
19,079,117
|
|
Software
|
|
|
3,260,637
|
|
|
|
3,209,318
|
|
Automobiles
|
|
|
12,081
|
|
|
|
11,897
|
|
Construction in progress
|
|
|
799,009
|
|
|
|
786,897
|
|
Acc. Depreciation Property & Equipment
|
|
|
(15,736,800
|
)
|
|
|
(14,533,648
|
)
|
|
|
$
|
8,093,252
|
|
|
$
|
8,708,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other payables
|
|
|
March 31,
|
|
|
|
December 31,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
Accrued Selling, General & Administrative expenses
|
|
$
|
4,533,350
|
|
|
$
|
4,955,959
|
|
Accrued cost of service
|
|
|
373,048
|
|
|
|
394,496
|
|
Accrued taxes (including VAT)
|
|
|
104,107
|
|
|
|
127,434
|
|
Accrued interest payable
|
|
|
139,232
|
|
|
|
132,632
|
|
Other accrued expenses
|
|
|
439,525
|
|
|
|
403,099
|
|
|
|
$
|
5,589,262
|
|
|
$
|
6,013,620
|
|
|
|
|
|
|
|
|
|
|
Breakdown of the Unsecured Convertible Promissory
Notes (net of debt discounts)
|
|
Outstanding
March 31, 2017
|
|
|
Closing(s)
during
2017
|
|
|
Regular
Amortizations
(during
2017)
|
|
|
Conversions
(during
2017)
including
accelerated
amortization
|
|
|
December
31, 2016
|
|
9% Unsecured Convertible Note (Private Offering Q4- 2015 – Q1-2016
|
|
$
|
(61,514
|
)
|
|
$
|
-
|
|
|
$
|
(22,699
|
)
|
|
$
|
281,914
|
|
|
$
|
(320,729
|
)
|
9% Saffelberg Note (Unsecured Convertible)
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,316
|
)
|
|
|
519,635
|
|
|
|
(500,319
|
)
|
|
|
$
|
(61,514
|
)
|
|
$
|
-
|
|
|
$
|
(42,015
|
)
|
|
$
|
801,549
|
|
|
$
|
(821,048
|
)
|
Fair Market Value Warrants &
Conversion Feature
|
|
FMV as of
March
31, 2017
|
|
|
Additional
closings
during
2017
|
|
|
Agreement
Amendments/
Conversions
|
|
|
Mark to
market
adjustment
Ytd-2017
|
|
|
FMV as
of
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9% Saffelberg Note (Unsecured Convertible)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(400,631)
|
|
|
$
|
(37,817)
|
|
|
$
|
438,448
|
|
FMV Conversion Feature
|
|
|
-
|
|
|
|
-
|
|
|
|
(400,631
|
)
|
|
|
(37,817)
|
|
|
|
438,448
|
|
Lender Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,610,060
|
)
|
|
|
(1,752,223)
|
|
|
|
3,362,283
|
|
9% Saffelberg Note Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
(70,826)
|
|
|
|
(117,388)
|
|
|
|
188,214
|
|
7% Agent Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
(121,200)
|
|
|
|
-
|
|
|
|
121,200
|
|
8% Agent Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
(142,231)
|
|
|
|
(13,453)
|
|
|
|
155,684
|
|
FMV Warrant Liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,944,317
|
)
|
|
|
(1,883,064)
|
|
|
|
3,827,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,344,948
|
)
|
|
$
|
(1,920,881
|
)
|
|
$
|
4,265,829
|
|
Change in Fair Value of Conversion Feature
During the first quarter of 2017, the Company
negotiated with all parties having a derivative instrument with conversion feature to eliminate any condition responsible for the
need of derivative accounting. This resulted in the calculation of the fair value as per the agreement date of the elimination
of such feature and the subsequent accounting for the allocation of the remaining liability value towards extinguishment of debt
and change in fair value of the conversion feature.
Number of underlying shares for
Warrants & Conversion Feature
|
|
Outstanding March 31, 2017
|
|
|
Additional Closings during 2017
|
|
|
Agreement Amendments / Interest effects
|
|
|
Exercises / Conversions
|
|
|
Outstanding December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9% Convertible Note - Investors
|
|
|
61,116
|
|
|
|
-
|
|
|
|
92,013
|
|
|
|
(243,564
|
)
|
|
|
212,667
|
|
9% Convertible Note - Other Investor
|
|
|
-
|
|
|
|
-
|
|
|
|
396,181
|
|
|
|
(530,860
|
)
|
|
|
134,679
|
|
Underlying shares relating to outstanding Conversion Features
|
|
|
61,116
|
|
|
|
-
|
|
|
|
488,194
|
|
|
|
(774,424
|
)
|
|
|
347,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13%+Eurodollar Senior Secured
|
|
|
1,446,000
|
|
|
|
-
|
|
|
|
172,982
|
|
|
|
-
|
|
|
|
1,273,018
|
|
2017 Registered Public Offering
|
|
|
1,166,667
|
|
|
|
1,166,667
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Investor Management Services
|
|
|
710,000
|
|
|
|
710,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
9% Convertible Note Warrants
|
|
|
520,373
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
520,373
|
|
2013 Convertible Notes
|
|
|
180,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
180,000
|
|
Other 9% Convertible Note Warrants
|
|
|
106,172
|
|
|
|
-
|
|
|
|
9,652
|
|
|
|
-
|
|
|
|
96,520
|
|
2017 Registered Public Offering Agent Warrants
|
|
|
641,667
|
|
|
|
641,667
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
9% Convertible Note 7% Agent Warrants
|
|
|
66,229
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66,229
|
|
Preferred Share Conversion Warrants
|
|
|
475,096
|
|
|
|
-
|
|
|
|
475,096
|
|
|
|
-
|
|
|
|
-
|
|
Preferred Share issuance 8% Agent Warrants
|
|
|
38,827
|
|
|
|
-
|
|
|
|
(29,618
|
)
|
|
|
-
|
|
|
|
68,445
|
|
Underlying shares relating to outstanding Warrants
|
|
|
5,351,031
|
|
|
|
2,518,334
|
|
|
|
628,112
|
|
|
|
-
|
|
|
|
2,204,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,412,147
|
|
|
|
2,518,334
|
|
|
|
1,116,306
|
|
|
|
(774,424
|
)
|
|
|
2,551,931
|
|
2016 13% + Eurodollar Senior Secured Credit Agreement
|
|
|
|
|
|
|
(Refinancing of 2014 10% + Eurodollar Loan) (Maturing December 2018,
including provisional extensions)
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
2016 13% + Eurodollar Senior Secured Credit Agreement (principal)
|
|
$
|
8,581,836
|
|
|
$
|
10,081,836
|
|
Debt Discount - 10% Warrants & Free Warrant shares
|
|
|
(314,891
|
)
|
|
|
(422,202
|
)
|
Debt Discount – 2017 Warrants for Corbin & Atalaya
|
|
|
(58,997
|
)
|
|
|
-
|
|
Debt Discount - Original Issue Discount
|
|
|
(4,913
|
)
|
|
|
(6,596
|
)
|
Deferred Financing Costs
|
|
|
(122,820
|
)
|
|
|
(164,731
|
)
|
Debt Discount - Repayment Premium
|
|
|
(1,335,928
|
)
|
|
|
(1,772,645
|
)
|
|
|
$
|
6,744,287
|
|
|
$
|
7,715,662
|
|
Change in Fair Value of Warrant Liabilities
During the first quarter of 2017, the Company
negotiated with all parties having a derivative warrant to eliminate any condition (mainly caused by anti-dilution protection conditions)
responsible for the need of the subsequent derivative accounting. This resulted in the calculation of the fair value as per the
agreement date of the elimination of such condition and the subsequent accounting for the allocation of the remaining liability
value towards change in fair value of the warrant liability.
Note 4. Fair Value Measurements
In accordance with Accounting Standards
Update 820, Fair Value Measurement (“ASC 820”), the Company defines fair value as the price that would be received
from selling an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants
at the measurement date. ASC 820 establishes a fair value hierarchy for inputs used in measuring fair value that maximizes the
use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when
available.
Observable inputs are those that market
participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company.
Unobservable inputs reflect the Company’s assumptions about the inputs that market participants would use in pricing the
asset or liability developed based on the best information available in the circumstances.
The fair value hierarchy is categorized
into three levels based on the inputs as follows:
Level 1
– Quoted prices are
available in active markets for identical assets or liabilities as of the reported date.
Level 2
– Pricing inputs are
other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature
of these financial instruments include cash instruments for which quoted prices are available but are traded less frequently, derivative
instruments whose fair values have been derived using a model where inputs to the model are directly observable in the market and
instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level 3
– Instruments that
have little to no pricing observability as of the reported date. These financial instruments are measured using management’s
best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
The degree of judgment exercised by the
Company in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure
fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the
fair value hierarchy within which the fair value measurement falls in its entirety is determined by the lowest level input that
is significant to the fair value measurement.
The following table summarizes fair value
measurements by level as of December 31, 2016 for and the Company’s liabilities measured at fair value on a recurring basis:
|
|
December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion feature
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
438,448
|
|
|
$
|
438,448
|
|
Warrant Liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
3,827,381
|
|
|
|
3,827,381
|
|
Total Derivatives Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,265,829
|
|
|
$
|
4,265,829
|
|
The Company used
the Monte Carlo valuation model to determine the value of the outstanding warrants and conversion feature from the “Offering”.
Since the Monte Carlo valuation model requires special software and expertise to model the assumptions to be used, the Company
hired a third party valuation expert.
Note 5.
Stockholders’ Equity
(A) Common Stock
The Company is presently authorized to
issue 500,000,000 shares common stock. The Company had 12,759,149 shares of common stock issued and outstanding as of March 31,
2017, an increase of 4,382,882 shares from December 31, 2016, largely due to the shares issued in connection with the public offering
described above, which closed on March 15, 2017. As per March 31, 2017 the Company has 867,992 shares pending to be issued of which
530,860 are relating to the conversion of the Unsecured Convertible Promissory Note (see Note 1) and various other non-cash compensation
from previous quarters.
Reconciliation with Stock Transfer Agent Records:
The shares issued and outstanding as of
March 31, 2017 and December 31, 2016 according to the Company’s stock transfer agent’s records were 12,768,985 and
8,386,103, respectively. The difference in number of issued shares recognized by the Company of 12,759,149 amounts to 9,836 and
it is the result of the exclusion of the 9,356 unreturned shares from ‘cancelled’ acquisitions (pre-2006) and 480 treasury
shares issued under the former employee benefits plan.
(B) Preferred Stock
The Company’s Certificate of Incorporation
authorizes the issuance of 50,000,000 shares of Preferred Stock, $0.00001 par value per share. 58 shares of Preferred Stock are
issued and outstanding as of March 31, 2017 compared to 249 shares of Preferred Stock outstanding as of December 31, 2016, a decrease
of 191 shares.. Under the Company’s Certificate of Incorporation, the Board of Directors has the power, without further action
by the holders of the Common Stock, subject to the rules of the NYSE MKT LLC, to designate the relative rights and preferences
of the Preferred Stock, and issue the Preferred Stock in such one or more series as designated by the Board of Directors. The designation
of rights and preferences could include preferences as to liquidation, redemption and conversion rights, voting rights, dividends
or other preferences, any of which may be dilutive of the interest of the holders of the Common Stock or the Preferred Stock of
any other series. The issuance of Preferred Stock may have the effect of delaying or preventing a change in control of the Company
without further stockholder action and may adversely affect the rights and powers, including voting rights, of the holders of Common
Stock. In certain circumstances, the issuance of Preferred Stock could depress the market price of the Common Stock.
On March 7, 2017, the Company received
conversion notices from holders of an aggregate of $1,950,000, or 195 shares of the Company’s Series A Convertible Preferred
Stock and Series A-1 Convertible Preferred Stock (the “Preferred Shares”). The Preferred Shares converted into shares
of common stock, $0.00001 par value per share, of the Company at a 13% discount to a public offering and became effective upon
the filing by the Company of a prospectus supplement disclosing the terms of an offering. The closing of the public offering took
place March 15, 2017 and the public offering price was set at $1.50, therefore the discounted conversion price for the preferred
shareholders was calculated at $1.305. The number of shares of common stock issued was approximately 1,463,601.
For the three month period ended March
31, 2017, the Company did not issue any additional shares of Preferred Stock, and 58 shares of Preferred Stock are outstanding.
(C) Warrants
Throughout the years, the Company has
issued warrants with varying terms and conditions related to multiple financing rounds, acquisitions and other transactions. The
number of warrants outstanding at March 31, 2017 (unaudited) and December 31, 2016 have been recorded and classified as equity
is 5,351,031and 2,204,651 respectively. As of March 31, 2017 and December 31, 2016, the Company has recorded 0 and 1,504,278,
in the balance sheet for the liability warrants issued in connection with the various offerings in previous and current year.
The Weighted Average Exercise Price for the currently outstanding warrants in the table below is $1.67. The table below summarizes
the warrants outstanding as of March 31, 2017 and as of December 31, 2016:
Outstanding Warrants
|
|
Exercise/
Conversion
price(s) (range)
|
|
Expiring
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Equity Warrants - Fundraising
|
|
$1.305 - $5.375
|
|
|
2017 - 2023
|
|
|
|
5,351,031
|
|
|
|
700,373
|
|
Liability Warrants - Fundraising
|
|
$3.25 - $11.25
|
|
|
2019 - 2021
|
|
|
|
-
|
|
|
|
1,504,278
|
|
|
|
|
|
|
|
|
|
|
5,351,031
|
|
|
|
2,204,651
|
|
Note 6. Amended and Restated
2008 Long Term Incentive Compensation Plan
Amended and Restated 2008 Long-Term Incentive Compensation
Plan
Total Authorized under the plan
|
|
|
2,240,000
|
|
Shares issued in prior years
|
|
|
621,261
|
|
Shares issued during 2017
|
|
|
296,414
|
|
Options exercised during 2017
|
|
|
-
|
|
Outstanding options
|
|
|
1,179,520
|
|
Available for grant at March 31, 2017:
|
|
|
142,805
|
|
During the first quarter of 2017, the Company
issued 282,142 freely tradable shares to various members of staff, contractors, directors and officers under the 2008 Plan, either
for non-cash awards or in conjunction with their willingness to receive all or part of their cash compensation for the fourth quarter
of 2016 in shares. Additionally, 14,272 restricted shares were issued to former directors or officers of the Company.
Stock option activity is set forth below:
Options:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
Outstanding as of December 31, 2016
|
|
|
1,040,211
|
|
|
$
|
13.35
|
|
Granted in 2017
|
|
|
199,700
|
|
|
$
|
2.16
|
|
Forfeitures (Pre-vesting)
|
|
|
(609
|
)
|
|
$
|
20.46
|
|
Expirations (Post-vesting)
|
|
|
(59,782
|
)
|
|
$
|
33.21
|
|
Outstanding as of March 31, 2017
|
|
|
1,179,520
|
|
|
$
|
10.45
|
|
At March 31, 2017, the unrecognized expense
portion of stock-based awards granted to employees under the 2008 Plan was $1,332,127, compared to $1,651,460 for the same period
in 2016, under the provisions of ASC 718. The future expensing takes place proportionally to the vesting associated with each stock-award,
adjusted for cancellations, forfeitures and returns. If there are any modifications or cancellations of the underlying unvested
awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.
Note 7. Income taxes
Income Taxes
The following table presents details of the net provision for
income taxes:
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net Provision for income taxes
|
|
$
|
1,287
|
|
|
$
|
9,929
|
|
|
|
|
|
|
|
|
|
|
As a result of our cumulative tax losses
in the U.S. and certain foreign jurisdictions, and the full utilization of our loss carryback opportunities, we have concluded
that a full valuation allowance should be recorded in such jurisdictions. In certain other foreign jurisdictions where we do not
have cumulative losses, we had net deferred tax liabilities.
Note 8. Significant Customer and Geographical Information
Sales to our significant customers, as a percentage of net revenue
were as follows:
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
|
2017
|
|
|
2016
|
|
Two largest customers
|
|
|
97.0
|
%
|
|
|
86.1
|
%
|
|
|
|
|
|
|
|
|
|
The geographical distribution of our revenue, as a percentage
of revenue, was as follows:
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
|
2017
|
|
|
2016
|
|
Europe
|
|
|
97.1
|
%
|
|
|
91.4
|
%
|
All other (non-European) countries
|
|
|
2.9
|
|
|
|
8.6
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Note 9. Subsequent Events
On May 2, 2017, Elephant Talk Europe Holding
B.V., an entity organized under the laws of the Netherlands (the “Borrower”), a wholly owned subsidiary of Pareteum
Corporation (the “Company”), as Borrower, the Company, Pareteum North America Corp., a Delaware corporation, Corbin
Mezzanine Fund I, L.P. (“Lender”) and Atalaya Administrative LLC (“Atalaya”), a New York limited liability
company, as administrative agent and collateral agent for the Lender, executed a Term Sheet (the “Term Sheet”) to amend
certain terms of that credit agreement among the parties, as amended via the Amended & Restated Credit Agreement dated December
27, 2016, and further amended on March 6, 2017.
Under the terms of the executed Term Sheet,
the parties have agreed, among other items, to reduce the quarterly principal amortization payment amounts and confirmed the maturity
date of December 31, 2018. Further, the parties agreed on a revised repayment schedule, which reduces the principal repayments
to $250,000 for the second and third quarters of 2017 and $500,000 for the fourth quarter of 2017. The quarterly principal repayments
for 2018 have also been materially reduced from $750,000 per quarter to $500,000 per quarter with a final payment due by December
31, 2018. Additionally, the parties also agreed that the two warrants previously issued under prior amendments will be revised
to (a) adjust the exercise price to the lesser of $1.305 per share or a 15% discount to the average of the past five days closing
price of the Company’s common stock and (b) increase the aggregate amount of shares of common stock underlying the Warrants
by 613,805 shares or such number as required to bring the Lender and Atalaya’s fully diluted percentage ownership of the
Company’s outstanding equity to 11.65%, calculated as of April 28, 2017.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Any forward looking statements made
herein are based on current expectations of the Company, involve a number of risks and uncertainties and should not be considered
as guarantees of future performance. The factors that could cause actual results to differ materially include: interruptions or
cancellation of existing contracts, inability to integrate acquisitions, impact of competitive products and pricing, product demand
and market acceptance risks, the presence of competitors with greater financial resources than the Company, product development
and commercialization risks, changes in governmental regulations, and changing economic conditions in developing countries and
an inability to arrange additional debt or equity financing.
Overview
Pareteum has developed
a
Communications Cloud Services Platform
, providing (i) Mobility, (ii) Messaging and (iii) Security services and applications,
with a Single-Sign-On, API and software development suite:
Our solution has
proven itself globally against much larger competitors and is installed in multiple companies in diverse countries around the world
ranging from small service providers to one of the world’s largest telecoms companies, Vodafone, based in Europe. We had
more than 1,100,000 active subscribers on our platforms as of December 31, 2016.
The market and
our customers tell us that they need to find ways to reduce cost, they want to find ways to increase their revenues, and they want
to scale and grow their business, and all consider Cloud capabilities as a vital means to achieve these goals. As we’ve listened
to our customers and understood the business goals that they have, we believe Pareteum is well placed to help them achieve these
goals, drive value for customers, and ultimately value for our own business.
We have designed
a solution that solves these problems. Each of these
three platforms - mobility, messaging and security
- can be marketed
and deployed independently, or they can be delivered as a single, integrated Cloud Service Platform, as illustrated in the figure
above.
The Pareteum platform
hosts integrated IT/Back Office and Core Network functionality for mobile network operators, and for enterprises implement and
leverage mobile communications solutions on a fully outsourced SaaS, PaaS and/or IaaS basis: made available either as an on-premise
solution or as a fully hosted service in the Cloud depending on the needs of our customers. Pareteum also delivers an Operational
Support System (“OSS”) for channel partners, with Application Program Interfaces (“APIs”) for integration
with third party systems, workflows for complex application orchestration, customer support with branded portals and plug-ins for
a multitude of other applications. These features facilitate and improve the ability of our channel partners to provide support
and to drive sales.
Our integrated
(or modular) Cloud Platform solution includes, more specifically, functionality such as service design and control, Intelligent
Networking, subscriber provisioning, messaging, switching, real-time dynamic rating and pre- or post-paid charging and billing,
call center and customer care support, reporting, self-care web portal environments, change management in active systems, SIM Management,
(Data) Session Control Management, Voucher Management, Mobile Marketing systems, (Mobile) Payment Systems, Real Time Credit Checking
Systems, Interactive Voice Response Systems, Voicemail Systems, Trouble Ticketing Systems, Device Management Systems, Mass Customer
Migrations, life cycle management, database hardware and software, large scale real-time processing, and integrating, provisioning,
all the while managing and maintaining specific core network components.
The following discussion and analysis of
our financial condition and results of operations should be read in conjunction with our financial statements and notes thereto
and the other financial information included elsewhere in this report.
The Company’s financial statements
through March 31, 2017 were materially impacted by several events:
|
·
|
The restructuring of Atalaya debt on March
6, 2017 and May 1, 2017;
|
|
·
|
a 25-1 reverse stock split;
|
|
·
|
the conversion of derivative debt; and
|
Atalaya Debt Restructuring
As previously reported in the Company’s
Form 8-K dated March 7, 2017, on March 6, 2017, Elephant Talk Europe Holding B.V., an entity organized under the laws of the Netherlands
(the “Borrower”), a wholly owned subsidiary of Pareteum Corporation (the “Company”), as Borrower, the Company,
Pareteum North America Corp., a Delaware corporation, Elephant Talk Group International B.V., an entity organized under the laws
of the Netherlands, Corbin Mezzanine Fund I, L.P. (“Lender”) and Atalaya Administrative LLC, a New York limited liability
company, as administrative agent and collateral agent for the Lender, entered into a Letter Agreement (the “Agreement”)
to amend certain terms of the credit agreement among the parties, dated November 17, 2014, as amended via that certain Amended
and Restated Agreement between the parties dated December 27, 2016. (the “Amended and Restated Agreement”). On March
31, 2017, the relevant parties entered into the formal amendment to the Amended and Restated Agreement (the “Amendment”).
Capitalized terms used herein but not otherwise defined shall have the meaning as set forth in the Amended and Restated Credit
Agreement.
Pursuant to the Amendment, (i) the Maturity
Date was extended to December 31, 2018; (ii) the amortization schedule was amended as follows: Q1-2017: $1,500,000; Q2-2017: $1,500,000;
Q3-2017: $500,000; Q4-2017: $500,000; Q1-2018: $750,000; Q2-2018: $750,000; Q3-2018: $750,000; and (iii) inserting a new definition
of “2017 Equity Offering.” Additionally, the two warrants previously issued to the Lender (the “Corbin Warrant”)
and ACM Carry-I LLC (the “ACM Warrant” and, together with the Corbin Warrant, the “Warrants”) were amended
to (a) increase the aggregate amount of shares of common stock underlying the Corbin Warrant to 1,229,100 and increase the aggregate
amount of shares of common stock underlying the ACM Warrant to 216,900; (b) adjust the exercise price of the Warrants to $1.305
per share; and (c) remove the anti-dilution sections (Sections 9(d) and 9(h)) of the Warrants.
On May 2, 2017, Elephant Talk Europe Holding
B.V., an entity organized under the laws of the Netherlands (the “Borrower”), a wholly owned subsidiary of Pareteum
Corporation (the “Company”), as Borrower, the Company, Pareteum North America Corp., a Delaware corporation, Corbin
Mezzanine Fund I, L.P. (“Lender”) and Atalaya Administrative LLC (“Atalaya”), a New York limited liability
company, as administrative agent and collateral agent for the Lender, executed a Term Sheet (the “Term Sheet”) to amend
certain terms of that credit agreement among the parties, as amended via the Amended & Restated Credit Agreement dated December
27, 2016, and as further amended on March 6, 2017.
Under the terms of
the executed term sheet, the parties have agreed, among other items, to reduce the quarterly principal amortization payment amounts
and confirmed the maturity date of December 31, 2018. Further, the parties agreed on a revised repayment schedule, which reduces
the principal repayments to $250,000 for the second and third quarters of 2017 and $500,000 for the fourth quarter of 2017. The
quarterly principal repayments for 2018 have also been materially reduced from $750,000 per quarter to $500,000 per quarter with
a final payment due by December 31, 2018. Additionally, the parties also agreed that the two warrants previously issued under prior
amendments will be revised to (a) adjust the exercise price to the lesser of $1.305 per share or a 15% discount to the average
of the past five days closing price of the Company’s common stock and (b) increase the aggregate amount of shares of common
stock underlying the Warrants by 613,805 shares or such number as required to bring the Lender and Atalaya’s fully diluted
percentage ownership of the Company’s outstanding equity to 11.65%, calculated as of April 28, 2017. Other specific terms relating to the amendment will be incorporated into a definitive agreement between
the parties.
Reverse Stock Split
We received a deficiency letter from the
NYSE MKT on December 6, 2016, indicating that our securities had been selling for a low price per share for a substantial period
of time and, pursuant to Section 1003(f)(v) of the NYSE MKT Company Guide (the “Company Guide”), our continued listing
on the NYSE MKT was predicated on our effecting a reverse split or otherwise demonstrating sustained price improvement. This notice
was in addition to a prior notice we received from NYSE MKT on May 26, 2016, as previously disclosed on a Current Report on Form
8-K we filed on June 2, 2016. The NYSE MKT indicated that we had an additional six months, or until June 6, 2017, to gain compliance
with Section 1003(f)(v) of the Company Guide.
On February 27, 2017, we completed a 1-for-25
reverse split of our issued and outstanding common stock. Although we believe we have regained compliance with Section 1003(f)(v)
of the Company Guide, there can be no assurance that our common stock will continue to satisfy this rule.
Conversion of Convertible Preferred
Stock
On March 7, 2017, the Company received
conversion notices from holders of an aggregate of $1,950,000, or 195 shares of the Company’s Series A Convertible Preferred
Stock and Series A-1 Convertible Preferred Stock (the “Preferred Shares”). The Preferred Shares converted into shares
of common stock, $0.00001 par value per share, of the Company at a 13% discount to a public offering and became effective upon
the filing by the Company of a prospectus supplement disclosing the terms of an offering. The closing of the public offering took
place March 15, 2017 and the public offering price was set at $1.50, therefore the discounted conversion price for the preferred
shareholders was calculated at $1.305. The number of shares of common stock issued was approximately 1,463,601.
Conversion on Unsecured Convertible
Promissory Note and Modification of Derivative Securities
On March 30, 2017, Pareteum Corporation
(the “Company”) entered into an agreement (the “Agreement”) with Saffelberg Investments NV (the “Holder”)
pursuant to which the Company and the Holder amended the terms of, redeemed or effected conversion, as the case may be, of certain
convertible promissory notes (the “Note(s)”) and warrants (the “Warrant(s)”) previously issued by the Company
to the Holder.
Pursuant to the Agreement, the Company
and the Holder agreed to modify certain terms of the Notes whereby (i) the principal amount of one Note, in the initial amount
of $723,900, will be increased by ten percent (10%) and subsequently converted into 530,860 shares of common stock, par value $0.00001
per share (the “Common Stock”), of the Company and (ii) the Company will immediately repay in cash another Note in
the principal amount of $350,000, plus interest of $59,304.
Conversion of Preferred Shares
On March 7, 2017, Pareteum Corporation
(the “Company”) received conversion notices from holders of an aggregate of $1,150,000, or 115 shares, of the Company’s
Series A Convertible Preferred Stock and Series A-1 Convertible Preferred Stock (the “Preferred Shares”). The Preferred
Shares have been converted into shares of common stock, $0.00001 par value per share, of the Company at $1.305 (a 13% discount
to the public offering) and shall become effective upon the filing by the Company of a prospectus supplement disclosing the terms
of an offering. Additionally, holders will be granted warrants to purchase 50% additional shares to what they received upon conversion.
The exercise price will be $1.87.
Joseph Gunnar & Co., LLC - Public
Offering
On March 10, 2017, Pareteum Corporation
(the “Company”) entered into an underwriting agreement (the “Underwriting Agreement”) with Joseph Gunnar
& Co., LLC (the “Underwriter”), relating to the issuance and sale of 2,333,334 shares of the Company’s common
stock, par value $0.00001 per share (the “Common Stock”), at a price to the public of $1.50 per share together with
five-year warrants to purchase an aggregate of 1,166,667 shares of Common Stock at an exercise price of $1.87. The Underwriter
agreed to purchase the shares from the Company pursuant to the Underwriting Agreement at a price of $1.3949 per share. The gross
proceeds to the Company from the offering were expected to be approximately $3.5 million, before deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company. Upon execution, the final proceeds were $3,150,171. The
offering closed on March 15, 2017. In addition, under the terms of the Underwriting Agreement, the Company has granted the Underwriter
a 45-day option to purchase up to (i) up to 350,000 additional shares of Common Stock (the “Option Shares”) at a purchase
price of $1.3949 per one Option Share, taking into account the Underwriter’s discount, and/or (ii) warrants to purchase
up to 175,000 additional shares of Common Stock (the “Option Warrants”). The Underwriter partially exercised their
over-allotment option on 109,133 Option Warrants.
Critical Accounting Policies and Estimates
The preparation of financial statements
in accordance with U.S. generally accepted accounting principles, or GAAP, requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue
and expenses in the reporting period. We regularly evaluate our estimates and assumptions related to revenue recognition, rebates,
allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, stock-based compensation
expense, long-lived asset valuations, strategic investments, deferred income tax asset valuation allowances, uncertain tax positions,
tax contingencies, self-insurance, restructuring costs, litigation and other loss contingencies. We base our estimates and assumptions
on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue,
costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially
and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our
future results of operations will be affected. For a description of our critical accounting policies and estimates, please refer
to the “Critical Accounting Policies and Estimates” section in Part II, Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” of our 2016 Annual Report. There have been no material changes
in any of our critical accounting policies and estimates during the three months ended March 31, 2017.
Comparison of three months ended
March 31, 2017 and March 31, 2016.
Revenue
Revenue for the three months ended March
31, 2017, was $2,794,943, a $478,603 or 15% decrease compared to $3,273,546 for the comparable three months in 2016. A negative
EUR vs. USD currency impact of $120,003 accounted for 25% of the variance. The remaining $358,600 decrease in revenue was attributable
to the loss of sales due to the sale of a previous subsidiary (Validsoft) of $96,366 and a minor decrease in the Company’s
other mobile revenue.
|
|
Three months ended
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Variance
|
|
Revenues
|
|
$
|
2,794,943
|
|
|
$
|
3,273,546
|
|
|
$
|
(478,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Service
Cost of service includes origination, termination,
network and billing charges from telecommunications operators, costs of telecommunications service providers, network costs, data
center costs, facility cost of hosting network and equipment and cost in providing resale arrangements with long distance service
providers, cost of leasing transmission facilities, international gateway switches for voice, data transmission services, and the
cost of professional services of staff directly related to the generation of revenues, consisting primarily of employee-related
costs associated with these services, including share-based compensation and the cost of subcontractors. Cost of service excludes
depreciation and amortization.
|
|
Three months ended
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Variance
|
|
Revenues
|
|
$
|
2,794,943
|
|
|
$
|
3,273,546
|
|
|
$
|
(478,603
|
)
|
Cost of service (excluding depreciation and amortization)
|
|
|
841,903
|
|
|
|
1,125,700
|
|
|
|
(283,797
|
)
|
Margin (excluding depreciation and amortization)
|
|
$
|
1,953,040
|
|
|
$
|
2,147,846
|
|
|
$
|
(194,806
|
)
|
Cost of service for the three-month period
ended March 31, 2017 was $841,903, a decrease of $283,797 or 25%, compared to $1,125,700 for the three-month period in 2016. The
decrease in cost of service was the result of reductions in a combination of cash and non-cash stock based employee compensation
($57,394) and decreases in the cost of mobile bundled service business and network ($226,403). The higher EUR vs. USD exchange
rate in 2017 positively impacted the variance in Cost of Service versus 2016 by $43,703.
Product Development
Product Development costs consist primarily
of salaries and related expenses, including share-based expenses, of employees involved in the development of the Company’s
services, which are expensed as incurred. Costs such as database architecture, and Pareteum BOSS & IN platform development
and testing are included in this function.
Costs incurred during the application development
stage of internal-use software projects, such as those used in the Company’s operations, are capitalized in accordance with
the accounting guidance for costs of computer software developed for internal use. Capitalized costs are amortized on a straight-line
basis. When assigning useful lives to internal-use software, the Company considers the effects of obsolescence, competition, technology,
and other economic factors. Because of the ongoing restructuring measures, that also impacted the development department, the Company
decided to suspend project capitalization during the last half year of 2016 and the first quarter of 2017. During the three-month
period ended March 31, 2017 and 2016, the Company capitalized $0 and $492,997, respectively.
Product development costs for the three-month
periods ended March 31, 2017 and 2016 were $284,694 and $1,290,001, respectively, a decrease of $1,005,307 or 78%. The decrease
for the three-month period was the net result of expensed development costs of $492,997 in conjunction with the reduction in management
and personnel expenses and non-cash stock based employee compensation of $1,498,304 in 2017 compared to 2016. The higher EUR vs.
USD exchange rate in 2017 positively impacted the variance in Product development costs versus 2016 by $34,378.
Sales and Marketing
Sales and Marketing expenses consist primarily
of salaries and related expenses, including share-based expenses, for our sales and marketing staff, including commissions, payments
to partners and marketing programs. Marketing programs consist of advertising, events, corporate communications and brand building.
Sales and marketing expenses for the three-month
periods ended March 31, 2017 and 2016 were $319,487 and $541,941 respectively, a decrease of $222,454 or 41%. The decrease was
caused by reduced management and personnel expenses and non-cash stock based employee compensation of $192,852 and a decrease of
$29,602 in marketing program costs. In addition, the EUR vs. USD exchange rate positively impacted the variance in Sales and marketing
expenses by $23,621.
General and Administrative
General and administrative expenses are
our largest cost and consist primarily of overhead related salaries and expenses, including share-based compensation, for non-employee
directors, finance and accounting, legal, internal audit and human resources personnel, legal costs, professional fees and other
corporate expenses.
General and administrative expenses for
the three-month period ended March 31, 2017 and 2016 were $2,365,388 and $2,855,919, respectively, a decrease of $490,531 or 17%.
The decrease was caused by reduced management and personnel expenses and non-cash stock based employee compensation of $42,419
and a decrease of 448,112 in other General and administrative expenses. The EUR vs. USD exchange rate positively impacted the
variance in General and administrative expenses by $59,058.
Restructuring charges
Restructuring charges for the three months
ended March 31, 2017 and 2016 were $129,229 and $637,777, a decrease of $508,548 or 80%. The substantial three phase restructuring
plan (the “Plan”) was completed in the third quarter of 2016. The Plan which commenced in the fourth quarter of 2015
was designed to align actual expenses and investments with current revenues as well as introduce new executive management.
Share-based compensation
Share-based compensation is comprised of:
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·
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the expensing of the options granted under the 2008 Plan to staff and management;
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·
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the expensing of the shares issued under the 2006 and 2008 Plans to contractors, directors and executive officers in lieu of cash compensation;
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·
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the expensing of restricted shares issued for consultancy services.
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For the three-month period ended March
31, 2017 and 2016, we recognized share-based compensation expense of $818,286 and $944,024, respectively, a decrease of $125,738
or 13%.
In the following table, we show the allocation of share-based
compensation according to functions in the Consolidated Statement of Comprehensive Loss:
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March 31,
2017
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|
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March 31,
2016
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|
Cost of service (excluding depreciation and amortization)
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$
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7,257
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|
|
$
|
71,441
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|
Product Development
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|
|
16,340
|
|
|
|
329,570
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|
Sales and Marketing
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|
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37,717
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|
|
|
87,281
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|
General and Administrative
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|
|
756,972
|
|
|
|
455,732
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Total
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$
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818,286
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|
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$
|
944,024
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Depreciation and Amortization
Depreciation and amortization expenses
for the three-month period ended March 31, 2017 was $843,783, a decrease of $253,821 or 23%, compared to $1,097,604 for the same
period in 2016. This decrease is primarily the result of the impairment for assets held and used in 2016 and the termination of
the depreciation and amortization of the assets of ValidSoft.
Interest Income and Expense
Interest income for the three-month periods
ended March 31, 2017 and 2016, was $39,136 and $25,936, respectively, an increase of $13,200 or 51%. Interest income mainly consists
of interest accrued for the $1.0 million ValidSoft Promissory Note and interest charged to customers for extended payment terms.
Interest expense for the three-month periods
ended March 31, 2017 and 2016, was $517,143 and $306,299, respectively, an increase of $210,844 or 69%. Higher levels of interest
expense were the result of the increased outstanding Senior Secured Loan due to loan amendments during 2016 and the Unsecured Debt
which started in mid 2016.
Interest Expense Related to Debt
Discount Accretion
For the three months ended March 31, 2017
and 2016, interest expenses related to debt discount accretion were $1,049,236 and $351,799, respectively an increase of $697,437
or 198%. This increase is mainly related to the accelerated amortization as a result of conversions into equity of the 9% Unsecured
Subordinated Convertible Promissory Note and the principal repayment of $1.5 million of the outstanding Senior Secured Loan.
Amortization of Deferred Financing
Costs
Amortization of Deferred Financing Costs
for the three-month periods ended March 31, 2017 and 2016 was $196,113 and $136,929, respectively, an increase of $59,184 or 43%.
Changes in derivative liabilities
Changes in derivative liabilities for the
three-month period ended March 31, 2017 was a gain of $1,920,881, an increase of $1,401,895 or 270%, compared to $518,986 for the
same period in 2016.
Change in Fair Value of Conversion Feature
During the first quarter of 2017, the Company
negotiated with all parties having a derivative instrument with conversion feature to eliminate any condition responsible for the
need of derivative accounting. This resulted in the calculation of the fair value as per the agreement date of the elimination
of such feature and the subsequent accounting for the allocation of the remaining liability value towards extinguishment of debt
and change in fair value of the conversion feature.
Change in Fair Value of Warrant Liabilities
During the first quarter of 2017, the Company
negotiated with all parties having a derivative warrant to eliminate any condition (mainly caused by anti-dilution protection conditions)
responsible for the need of the subsequent derivative accounting. This resulted in the calculation of the fair value as per the
agreement date of the elimination of such condition and the subsequent accounting for the allocation of the remaining liability
value towards change in fair value of the warrant liability.
The fair market value of the more complex
conversion feature and warrant liability was determined by a third-party valuation expert using a Monte-Carlo Simulation model.
Gain on extinguishment of debt
Gain on extinguishment of debt for the
three-month periods ended March 31, 2017 and 2016 were $463,345 and $0, respectively. The gain in 2017 is the result of the conversions
of the 9% Unsecured Subordinated Convertible Promissory Notes which were executed in the first quarter.
Other Income, net
Other income & (expense) for the three-month
period ended March 31, 2017 is an income of $36,818 and represents the unrealized exchange rate gain mainly related to the Senior
Secured Loan against the primary functional currency (EURO) of the company.
Provision (Benefit) Income taxes
Income tax provision for the three-month
period ended March 31, 2017 was $1,287, compared to an income tax provision of $9,929 for the same period in 2016.
Net Loss
Net loss for the three-month period ended
March 31, 2017, was $1,293,140, a decrease of $3,020,650 or 70%, compared to the loss of $4,313,790 for the same period in 2016.
The decrease in Net Loss was primarily caused by the restructuring measures, executed in 2016, that significantly lowered cost
and operating expenses.
Other Comprehensive (Loss) Income
We record foreign currency translation
gains and losses as other comprehensive income or loss, which amounted to a loss of $26,820 and a gain of 341,214 for the three-month
periods ended March 31, 2017 and 2016, respectively. This change is primarily attributable to the translation effect resulting
from the fluctuations in the USD/Euro exchange rates.
Liquidity and Capital Resources
As reflected in the accompanying consolidated
financial statements, the Company reported net (loss) of $(1,293,140) for the period ended March 31, 2017 and had an accumulated
deficit of $(288,373,374) as of March 31, 2017. Additional capital could be raised during 2017 to cover working capital deficiencies.
The cash balance including restricted cash
of the Company at March 31, 2017 was $2,078,807.
Although we have previously been able to
attract financing as needed, such financing may not continue to be available at all, or if available, may not be on reasonable
terms. Further, the terms of such financing may be dilutive to existing shareholders or otherwise on terms not favorable to us
or existing shareholders. If we are unable to secure additional financing, as circumstances require, or if we do not succeed in
meeting our sales objectives, we may be required to change or significantly reduce our operations or ultimately may not be
able to continue our operations. As a result of our historical net losses and cash flow deficits, and net capital deficiency, these
conditions raise substantial doubt as to the Company’s ability to continue as a going concern.
Operating activities
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|
March 31,
2017
|
|
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March 31,
2016
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|
|
|
|
|
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Net loss
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|
$
|
(1,293,140
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)
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|
$
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(4,313,790
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)
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Adjustments to reconcile net loss to net cash used in operating activities:
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|
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490,825
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|
|
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1,789,730
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|
|
|
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(802,315
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)
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|
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(2,524,060
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)
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Changes in operating assets and liabilities:
|
|
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(435,741
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)
|
|
|
612,286
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Net cash used in operating activities
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|
$
|
1,238,056
|
|
|
$
|
(1,911,774
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)
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Net cash used in operating activities for
the period ended March 31, 2017 was impacted by the increase of prepaid expenses, deposits and other assets of $209,030, decrease
in accrued expenses and other payables of $594,793 partly offset by increased account payable and customer deposits of $370,494.
As a result of the above, cash used in
operating activities was $1,238,056 for the three months ended March 31, 2017 compared to net cash used in operating activities
of $1,911,774 for the three months ended March 31, 2016.
Investing activities
Net cash used in investing activities for
the three months ended March 31, 2017 was $30,924, a decrease of $285,031, or 90% compared to $315,955 in the same period in 2016.
This change is mainly the result of the decrease in the purchases of property and equipment of $765,955 and the $450,000 of advance
purchase payment on “Assets held for Sale” during the first quarter of 2016.
Financing activities
Net cash provided by financing activities
for the three months ended March 31, 2017 and 2016 was $1,631,274 and $2,182,751, respectively, a decrease of $ 551,477.
Effect of exchange rates on cash and
cash equivalents
Effect of exchange rates on cash and cash
equivalents for the three-month period ended March 31, 2017 was $221,306, compared to $85,339 for the same period in 2016.
As a result of the above activities, for
the three months ended March 31, 2017, we had cash, cash equivalents and restricted cash of $2,078,807, a net increase in cash
and cash equivalents of $583,600 since December 31, 2016.
Off- Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
that have or are reasonably likely to have either a current or future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors,
nor we have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special
purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes.