PARETEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,699,061
|
|
|
$
|
6,051,709
|
|
Restricted cash
|
|
|
704,779
|
|
|
|
430,655
|
|
Accounts receivable, net of an allowance for doubtful accounts of $1,307,071 at March 31, 2019 and $1,021,179 at December 31, 2018
|
|
|
28,644,699
|
|
|
|
15,361,594
|
|
Prepaid expenses and other current assets
|
|
|
3,633,668
|
|
|
|
2,083,950
|
|
Total current assets
|
|
|
43,682,207
|
|
|
|
23,927,908
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
575,790
|
|
|
|
45,336
|
|
|
|
|
|
|
|
|
|
|
RIGHT OF USE LEASE ASSETS
|
|
|
3,136,015
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NOTE RECEIVABLE
|
|
|
3,763,103
|
|
|
|
1,082,436
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
5,184,312
|
|
|
|
4,553,250
|
|
|
|
|
|
|
|
|
|
|
INTANGIBLE ASSETS, NET
|
|
|
60,706,494
|
|
|
|
39,658,325
|
|
|
|
|
|
|
|
|
|
|
GOODWILL
|
|
|
119,898,741
|
|
|
|
91,773,911
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
236,946,662
|
|
|
$
|
161,041,166
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable and customer deposits
|
|
$
|
25,079,940
|
|
|
$
|
10,337,629
|
|
Net billings in excess of revenues
|
|
|
1,615,976
|
|
|
|
927,780
|
|
Accrued expenses and other payables
|
|
|
12,566,851
|
|
|
|
7,952,380
|
|
Promissory note
|
|
|
516,205
|
|
|
|
681,220
|
|
9% Unsecured subordinate convertible promissory note (net of debt discount
and debt issuance costs)
|
|
|
-
|
|
|
|
106,967
|
|
Total current liabilities
|
|
|
39,778,972
|
|
|
|
20,005,976
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Senior secured debt
|
|
|
21,806,879
|
|
|
|
-
|
|
Lease liabilities
|
|
|
3,141,842
|
|
|
|
-
|
|
Other long term liabilities
|
|
|
80,491
|
|
|
|
212,703
|
|
Deferred tax liabilities
|
|
|
8,190,607
|
|
|
|
8,415,825
|
|
Related party loan
|
|
|
342,000
|
|
|
|
341,998
|
|
Total long term liabilities
|
|
|
33,561,819
|
|
|
|
8,970,526
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
73,340,791
|
|
|
|
28,976,502
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (See Notes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Preferred Stock $0.00001 par value, 50,000,000 shares authorized, 0 issued and outstanding as of March 31, 2019 and December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
Common Stock $0.00001 par value, 500,000,000 shares authorized, 109,765,015 issued and outstanding as of March 31, 2019 and 97,852,911 shares issued and outstanding as of December 31, 2018
|
|
|
488,670,353
|
|
|
|
450,990,827
|
|
Accumulated other comprehensive loss
|
|
|
(6,660,584
|
)
|
|
|
(6,300,780
|
)
|
Accumulated deficit
|
|
|
(318,403,898
|
)
|
|
|
(312,625,383
|
)
|
Pareteum Corporation stockholders’ equity
|
|
|
163,605,871
|
|
|
|
132,064,664
|
|
|
|
|
|
|
|
|
|
|
NON-CONTROLLING INTEREST
|
|
|
-
|
|
|
|
-
|
|
Total stockholders’ equity
|
|
|
163,605,871
|
|
|
|
132,064,664
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
236,946,662
|
|
|
$
|
161,041,166
|
|
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
PARETEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
(UNAUDITED)
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
REVENUES
|
|
$
|
23,039,913
|
|
|
$
|
4,112,570
|
|
|
|
|
|
|
|
|
|
|
COST AND OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Cost of service (excluding depreciation and amortization)
|
|
|
10,068,283
|
|
|
|
1,194,523
|
|
Product development
|
|
|
2,198,324
|
|
|
|
726,845
|
|
Sales and marketing
|
|
|
2,564,912
|
|
|
|
688,998
|
|
General and administrative
|
|
|
7,614,359
|
|
|
|
2,296,852
|
|
Restructuring and acquisition charges
|
|
|
3,080,364
|
|
|
|
73,600
|
|
Depreciation and amortization of fixed and intangibles assets
|
|
|
2,843,403
|
|
|
|
965,290
|
|
Total cost and operating expenses
|
|
|
28,369,645
|
|
|
|
5,946,108
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(5,329,732
|
)
|
|
|
(1,833,538
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
101,545
|
|
|
|
42,672
|
|
Interest expense
|
|
|
(548,860
|
)
|
|
|
(63,758
|
)
|
Interest expense related to debt discount and conversion feature
|
|
|
(71,981
|
)
|
|
|
(29,566
|
)
|
Amortization of deferred financing costs
|
|
|
(49,691
|
)
|
|
|
(6,142
|
)
|
Changes in derivative liabilities
|
|
|
-
|
|
|
|
(313,733
|
)
|
Other (expense) income, net
|
|
|
(47,130
|
)
|
|
|
69,546
|
|
Total other expense
|
|
|
(616,117
|
)
|
|
|
(300,981
|
)
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE PROVISION FOR INCOME TAXES
|
|
|
(5,945,849
|
)
|
|
|
(2,134,519
|
)
|
Income tax benefit
|
|
|
(167,334
|
)
|
|
|
(418
|
)
|
NET LOSS
|
|
|
(5,778,515
|
)
|
|
|
(2,134,101
|
)
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
Foreign currency translation (loss) gain
|
|
|
(359,804
|
)
|
|
|
104,402
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE LOSS
|
|
$
|
(6,138,319
|
)
|
|
$
|
(2,029,699
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share and equivalents – basic
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share and equivalents – diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the period – basic
|
|
|
103,565,745
|
|
|
|
50,062,434
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the period – diluted
|
|
|
103,565,745
|
|
|
|
50,062,434
|
|
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements
PARETEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
|
|
|
|
|
Accumulated
other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
comprehensive
|
|
|
Accumulated
|
|
|
stockholders
|
|
Description
|
|
Shares
|
|
|
Amount
|
|
|
loss
|
|
|
deficit
|
|
|
equity
|
|
Balance – January 1, 2018
|
|
|
46,617,093
|
|
|
$
|
321,271,437
|
|
|
$
|
(6,306,691
|
)
|
|
$
|
(299,543,213
|
)
|
|
$
|
15,421,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for warrant exercises
|
|
|
4,250,748
|
|
|
|
2,542,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,542,250
|
|
Stock awards issued to management
|
|
|
100,000
|
|
|
|
283,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
283,000
|
|
Shares issued to consultants
|
|
|
78,553
|
|
|
|
81,997
|
|
|
|
-
|
|
|
|
-
|
|
|
|
81,997
|
|
Shares in transit
|
|
|
-
|
|
|
|
526,749
|
|
|
|
-
|
|
|
|
-
|
|
|
|
526,749
|
|
Amortization of stock options expense
|
|
|
-
|
|
|
|
160,821
|
|
|
|
-
|
|
|
|
-
|
|
|
|
160,821
|
|
Accumulated adjustment for accounting change
|
|
|
-
|
|
|
|
-
|
|
|
|
107,520
|
|
|
|
-
|
|
|
|
107,520
|
|
Other comprehensive loss due to foreign exchange rate translation net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,118
|
)
|
|
|
-
|
|
|
|
(3,118
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,134,101
|
)
|
|
|
(2,134,101
|
)
|
Balance - March 31, 2018
|
|
|
51,046,394
|
|
|
$
|
324,866,254
|
|
|
$
|
(6,202,289
|
)
|
|
$
|
(301,677,314
|
)
|
|
$
|
16,986,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - January 1, 2019
|
|
|
97,852,911
|
|
|
$
|
450,990,827
|
|
|
$
|
(6,300,780
|
)
|
|
$
|
(312,625,383
|
)
|
|
$
|
132,064,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for acquisitions
|
|
|
9,865,412
|
|
|
|
29,253,287
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,253,287
|
|
Warrant exercises
|
|
|
501,606
|
|
|
|
647,447
|
|
|
|
-
|
|
|
|
-
|
|
|
|
647,447
|
|
Services settled by issuance of shares
|
|
|
420,514
|
|
|
|
1,522,636
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,522,636
|
|
Shares issued to be cancelled
|
|
|
37,014
|
|
|
|
64,775
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,775
|
|
Exercises of stock options
|
|
|
68,083
|
|
|
|
69,567
|
|
|
|
-
|
|
|
|
-
|
|
|
|
69,567
|
|
Shares in transit
|
|
|
-
|
|
|
|
1,451,700
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,451,700
|
|
Stock based compensation expense
|
|
|
594,475
|
|
|
|
3,713,614
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,713,614
|
|
Shares issued to senior secured lender
|
|
|
425,000
|
|
|
|
956,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
956,500
|
|
Other comprehensive loss due to foreign exchange rate translation net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
(359,804
|
)
|
|
|
-
|
|
|
|
(359,804
|
)
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,778,515
|
)
|
|
|
(5,778,515
|
)
|
Balance – March 31, 2019
|
|
|
109,765,015
|
|
|
$
|
488,670,353
|
|
|
$
|
(6,660,584
|
)
|
|
$
|
(318,403,898
|
)
|
|
$
|
163,605,871
|
|
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)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,778,515
|
)
|
|
$
|
(2,134,101
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,843,403
|
|
|
|
965,290
|
|
Provision for doubtful accounts
|
|
|
285,892
|
|
|
|
-
|
|
Stock based compensation
|
|
|
3,713,614
|
|
|
|
1,077,625
|
|
Change in fair value of warrant liability
|
|
|
-
|
|
|
|
313,733
|
|
Amortization of deferred financing costs
|
|
|
49,690
|
|
|
|
6,142
|
|
Interest expense relating to debt discount and conversion feature
|
|
|
71,981
|
|
|
|
29,566
|
|
Services settled by issuance of shares
|
|
|
1,522,636
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable
|
|
|
(9,225,001
|
)
|
|
|
110,684
|
|
Decrease (increase) in prepaid expenses and other assets
|
|
|
2,816,290
|
|
|
|
(319,733
|
)
|
Increase in accounts payable and customer deposits
|
|
|
3,421,002
|
|
|
|
307,619
|
|
(Decrease) increase in Net billings in excess of revenues
|
|
|
(1,237,464
|
)
|
|
|
54,885
|
|
(Decrease) in accrued expenses and other payables
|
|
|
(3,097,473
|
)
|
|
|
(383,139
|
)
|
Net cash (used in) provided by operating activities
|
|
|
(4,613,945
|
)
|
|
|
28,571
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(765,370
|
)
|
|
|
(433,749
|
)
|
Business combinations, net of cash acquired
|
|
|
(284,023
|
)
|
|
|
-
|
|
Investment in notes receivable
|
|
|
(2,700,000
|
)
|
|
|
-
|
|
Net cash (used in) investing activities
|
|
|
(3,749,393
|
)
|
|
|
(433,749
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Exercise of warrants and options
|
|
|
717,014
|
|
|
|
2,489,329
|
|
Repayments on other long term loans
|
|
|
-
|
|
|
|
(17,105
|
)
|
Increase in short term loans
|
|
|
287,566
|
|
|
|
52,813
|
|
Financing related fees
|
|
|
(894,443
|
)
|
|
|
-
|
|
Proceeds from senior secured debt issued
|
|
|
25,000,000
|
|
|
|
-
|
|
Principal repayment Senior Secured Loan
|
|
|
(11,669,963
|
)
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
13,440,174
|
|
|
|
2,525,037
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
(155,360
|
)
|
|
|
131,111
|
|
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
4,921,476
|
|
|
|
2,250,970
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF THE PERIOD
|
|
|
6,482,364
|
|
|
|
13,737,675
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF THE PERIOD
|
|
$
|
11,403,840
|
|
|
$
|
15,988,645
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
(33,057
|
)
|
|
$
|
(4,937
|
)
|
Cash received during the period for interest
|
|
$
|
41,606
|
|
|
$
|
-
|
|
Cash paid for income taxes
|
|
$
|
(5,570
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
NON-CASH FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Shares issued for acquisitions
|
|
$
|
(30,654,194
|
)
|
|
|
-
|
|
Shares issued for conversions of notes and interest
|
|
$
|
(147,385
|
)
|
|
$
|
-
|
|
Shares issued for settlement of debt
|
|
$
|
(544,793
|
)
|
|
$
|
-
|
|
Shares issued to Senior Secured Lender
|
|
$
|
(1,606,500
|
)
|
|
$
|
-
|
|
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 condensed
consolidated financial statements, Pareteum Corporation (“Pareteum,” the “Company,” “we,” “us,”
or “our”) (NASDAQ: TEUM) reported a loss of $5,778,515 for the period ended March 31, 2019 and had an accumulated deficit
of $318,403,898 as of March 31, 2019.
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.
On February 12, 2019, we completed our
previously announced acquisition of all of the issued and to be issued and outstanding shares of iPass, Inc., a Delaware corporation
(“iPass” and the acquisition of iPass, the “iPass Acquisition”). iPass is a cloud-based service provider
of global mobile connectivity, offering Wi-Fi access on any mobile device through its SaaS platform and is now a wholly-owned subsidiary
of the Company. See Note 3 to the Unaudited Condensed Consolidated Financial Statements.
Basis of Presentation of Interim Periods
The interim condensed consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP,”)
for interim financial information and in accordance with the instructions to Securities and Exchange Commission (“SEC”),
Form 10-Q and Article 8 of SEC Regulation S-X. They do not include all 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, 2018, included in our 2018 Annual Report on Form 10-K filed with the
SEC on March 18, 2019, referred to as our 2018 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, 2019, are not necessarily indicative of the results to be expected for future
quarters or the full year. All intercompany transactions and account balances have been eliminated in consolidation. As of March
31, 2019, the Company’s subsidiaries are:
|
·
|
its wholly owned subsidiary Pareteum North America Corp. with its wholly owned subsidiary, Pareteum
UK Ltd.;
|
|
·
|
its wholly owned subsidiary Pareteum Asia PTE. Ltd.;
|
|
·
|
its wholly owned subsidiary TBR Inc. (special purpose vehicle for iPass acquisition);
|
|
·
|
its wholly-owned subsidiary Pareteum Europe B.V. (fka Elephant Talk Europe Holding B.V.) and its
wholly owned subsidiaries, Elephant Talk Mobile Services B.V., Elephant Talk PRS Netherlands BV, Elephant Talk Deutschland GmbH
(dormant), Elephant Talk Middle East & Africa (Holding) W.L.L., Elephant Talk Luxembourg SA (dormant), Guangzhou Elephant Talk
Information Technology Limited (dormant), Elephant Talk Communications Italy S.R.L. (dormant), Elephant Talk Business Services
W.L.L., Elephant Talk Middle East & Africa (Holding) Jordan L.L.C. (dormant).;
|
|
·
|
its wholly owned Elephant Talk Communications Holding AG and its wholly owned subsidiaries Pareteum
Spain SLU and ETC Carrier Services GmbH.;
|
|
·
|
Pareteum Europe B.V. majority-owned subsidiaries Elephant Talk Bahrain W.L.L. (99%), ET de Mexico
S.A.P.I. de C.V. (99.998%), ET-UTS NV; (51%) and LLC Pareteum (Russia) (50%) Elephant Talk;
|
|
·
|
Elephant Talk Telecomunicação do Brasil LTDA, is owned 90% by Pareteum Europe B.V.
and 10% by Elephant Talk Communication Holding AG;
|
|
·
|
its wholly-owned subsidiary Elephant Talk Limited (“ETL”) and its wholly owned ET Guangdong
Ltd. And its majority owned (50.54%) subsidiary Elephant Talk Middle East & Africa FZ-LLC.;
|
|
·
|
Asesores Profesionales ETAK S. de RL. De C.V. is owned 99% by Pareteum Europe B.V.;
|
|
·
|
its wholly owned subsidiary Artilium Group Ltd. And its wholly owned subsidiaries, Artilium NV,
Speak UP BVBA, Ello Mobile BVBA, Artilium UK Ltd., Comsys Telecom & Media BV, Portalis BV, Comsys Connect GmbH, United Telecom
N.V., Talking Sense BVBA, Wbase Comm. V, Artilium Trustee Company Limited, Comsys Connect BV, Livecom International BV, Comsys
Connect AG and United Telecom BV; and
|
|
·
|
its wholly owned subsidiary iPass, Inc. and its wholly owned subsidiaries iPass (U.K.) Limited,
iPass France SAS, iPass Deutschland GmbH, iPass Holdings Pty Ltd., iPass Asia Pte Ltd., iPass Japan, Inc., iPass India Private
Limited, iPass Ltd., GoRemote Internet Communications, Inc., GoRemote International Corporation, Axcelerant, Inc., Worldwide Axcelerant
Group, Mobile Automation, Inc. and Safe3W, Inc.
|
For a complete summary of our significant
accounting policies, please refer to Note 1, “Business and Summary of Significant Accounting Policies,” in Item 8 of
our 2018 Annual Report.
Use of Estimates
The preparation of the accompanying consolidated
financial statements in conformity with GAAP 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 and intangible assets acquired in our acquisitions
of Artilium and iPass. Significant estimates include the bad debt allowance, revenue recognition, impairment of long-lived assets,
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 and those differences could be material.
Reclassification
Certain reclassifications have been made
to the Company’s consolidated financial statements for the prior years to conform to the current year presentation. Such
reclassifications had no impact on net loss or net cash flows.
Leases
We determine if an arrangement is a lease at inception. Operating
leases are included in operating lease right-of-use (“ROU”) assets and lease liabilities in our condensed consolidated
balance sheets. As of adoption of ASC 842 and as of March 31, 2019, the Company was not party to finance lease arrangements.
ROU assets represent our right to use an
underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.
Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over
the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information
available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable.
The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include
options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease
payments is recognized on a straight-line basis over the lease term.
Under the available practical expedient, we account for the
lease and non-lease components as a single lease component.
Recently Adopted Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07,
Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
. ASU 2018-07 expands
the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 became
effective for the Company on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s
consolidated financial statements.
In July 2017, the FASB issued ASU No. 2017-11,
Earnings per
Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815)
(“ASU
2017-11”). ASU 2017-11 consists of two parts. The amendments in Part I of this update change the classification analysis
of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain
financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity
classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing
disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded
conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down
round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings
per share (“EPS”) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered.
That effect is treated as a dividend and as a reduction of income available to common stockholders in basic EPS. Convertible instruments
with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial
conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in
Topic 260). The amendments in Part II of this update re-characterize the indefinite deferral of certain provisions of Topic 480
that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting
effect. For public business entities, the amendments in Part I of this update are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption
in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of
the beginning of the fiscal year that includes that interim period. The amendments in Part II of this update do not require any
transition guidance because those amendments do not have an accounting effect. ASU 2017-11 became effective for the Company
on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial
statements.
In February 2016, the FASB issued
ASU 2016-02,
Leases
(“ASU 2016-02”). This new standard establishes a right-of-use (ROU) model that
requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12
months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense
recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. Early adoption is permitted. In July 2018, the FASB issued ASU No. 2018-11 which
provides an alternative transition method that allows entities to apply the new leases standard at the adoption date and
recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company
has adopted the requirements of ASU 2016-02 on January 1, 2019, using the modified retrospective method. The Company took
advantage of the practical expedient options, which allows an entity not to reassess whether any existing or expired
contracts contain leases. Upon adoption of this standard on January 1, 2019, the Company recorded right of use assets and
corresponding lease liabilities of $1.2 million. As of March 31, 2019, there was an increase in assets and liabilities to
$3.1 million due to the recognition of the required right-of-use asset and corresponding liabilities for all lease
obligations that are currently classified as operating leases, including those we acquired in our purchase of iPass. The
standard did not have a material impact on our consolidated income statements. We elected to apply the practical expedient
related to land easements, as well as the package of practical expedients permitted under the transition guidance in the new
standard, which allowed us to carryforward our historical lease classification.
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-04,
Intangibles, Goodwill and Other (Topic 350) “Simplifying the Test for Goodwill Impairment
.” ASU 2017-04 eliminates
the two-step process that required identification of potential impairment and a separate measure of the actual impairment. Goodwill
impairment charges, if any, would be determined by the difference between a reporting unit’s carrying value and its fair
value (impairment loss is limited to the carrying value). This standard is effective for annual or any interim goodwill impairment
tests beginning after December 15, 2019. The Company is currently evaluating the impact of this guidance on its consolidated financial
statements.
Note 3. Business Combinations
On November 12, 2018, the Company entered
into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Purchaser, and iPass. Pursuant
to the Merger Agreement, Purchaser, a wholly-owned subsidiary of the Company, commenced the offer for the “iPass Shares
for the “Transaction Consideration, upon the terms and subject to the conditions set forth in the Prospectus/Offer to Exchange
dated December 4, 2018 (together with any amendments and supplements thereto, the “Offer to Exchange”), and the related
Letter of Transmittal. The Offer and withdrawal rights expired at 5:00 p.m. New York City time on February 12, 2019, and promptly
following such time Purchaser accepted for payment and promptly paid for all validly tendered iPass Shares in accordance with
the terms of the Offer. The Company acquired 100% of the voting shares of iPass.
On February 12, 2019, following acceptance
and payment for the validly tendered iPass Shares and pursuant to the terms and conditions of the Merger Agreement, the Company
completed its acquisition of iPass from the stockholders of iPass when Purchaser merged with and into iPass, with iPass surviving
as a wholly owned subsidiary of the Company (the “Merger”). The Merger was governed by Section 251(h) of the Delaware
General Corporation Law, as amended (the “DGCL”) with no stockholder vote required to consummate the Merger. At the
effective time of the Merger, each iPass Share outstanding was converted into the right to receive the Transaction Consideration.
The iPass Shares are no longer listed on the Nasdaq Capital Market.
As part of the acquisition, the Company
issued 9,865,412 common shares to shareholders and 705,000 shares were granted to employees.
The allocation of the purchase price was
as follows (in thousands):
Purchase consideration:
|
|
|
|
Shares issued to shareholders
|
|
$
|
29,253
|
|
Shares issued to employees
|
|
|
1,401
|
|
Total purchase consideration
|
|
$
|
30,654
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price allocation:
|
|
|
|
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
284
|
|
Accounts receivable, net
|
|
|
4,344
|
|
Property, plant and equipment, net
|
|
|
1,092
|
|
Other assets
|
|
|
4,863
|
|
Intangible assets
|
|
|
22,700
|
|
Total assets
|
|
|
33,283
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
|
|
11,321
|
|
Deferred revenue
|
|
|
1,701
|
|
Loans outstanding
|
|
|
10,989
|
|
Other liabilities
|
|
|
6,743
|
|
Total liabilities
|
|
|
30,754
|
|
Estimated fair value of net assets acquired
|
|
|
2,529
|
|
Goodwill
|
|
$
|
28,125
|
|
The period ended March 31, 2019, consolidated
financial statements included iPass and its subsidiaries from the closing date of February 12, 2019, acquisition date through March
31, 2019.
The allocation of the purchase price for
iPass’s intangible assets were as follows (in thousands):
|
|
Estimated
Fair
Value
|
|
|
Useful
Life
(Years)
|
|
Developed Technology
|
|
$
|
5,500
|
|
|
|
8
|
|
Customer relationships
|
|
|
15,500
|
|
|
|
11
|
|
Tradename
|
|
|
1,700
|
|
|
|
3
|
|
Intangible assets
|
|
$
|
22,700
|
|
|
|
|
|
Note 4. Balance Sheet Information
The following tables present details of our unaudited condensed
consolidated financial statements:
Prepaid expenses and other current assets
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Prepaid expenses
|
|
$
|
3,136,043
|
|
|
$
|
1,659,783
|
|
VAT
|
|
|
497,625
|
|
|
|
424,167
|
|
|
|
$
|
3,633,668
|
|
|
$
|
2,083,950
|
|
Property and equipment, net
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Furniture and fixtures
|
|
$
|
566,726
|
|
|
$
|
139,857
|
|
Computer, communications and network equipment
|
|
|
17,212,807
|
|
|
|
17,520,435
|
|
Software
|
|
|
4,836,881
|
|
|
|
4,716,816
|
|
Automobiles
|
|
|
324,534
|
|
|
|
10,744
|
|
Software development
|
|
|
2,816,237
|
|
|
|
1,656,739
|
|
Subtotal
|
|
|
25,757,185
|
|
|
|
24,044,591
|
|
Accumulated depreciation and amortization
|
|
|
(20,572,873
|
)
|
|
|
(19,491,341
|
)
|
|
|
$
|
5,184,312
|
|
|
$
|
4,553,250
|
|
Intangible Assets, net
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Developed technology
|
|
$
|
26,100,000
|
|
|
$
|
20,600,000
|
|
Consumer relationships
|
|
|
32,300,000
|
|
|
|
16,800,000
|
|
Tradename
|
|
|
5,100,000
|
|
|
|
3,400,000
|
|
Accumulated amortization
|
|
|
(2,793,506
|
)
|
|
|
(1,141,675
|
)
|
|
|
$
|
60,706,494
|
|
|
$
|
39,658,325
|
|
Accrued expenses and other payables
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Accrued selling, general and administrative expenses
|
|
$
|
3,851,308
|
|
|
$
|
2,396,941
|
|
Accrued restructuring & acquisition related costs
|
|
|
2,685,291
|
|
|
|
1,885,194
|
|
Accrued cost of service
|
|
|
2,552,964
|
|
|
|
1,070,099
|
|
Accrued taxes (including VAT)
|
|
|
2,698,297
|
|
|
|
2,283,999
|
|
Accrued interest payable
|
|
|
334,868
|
|
|
|
67,613
|
|
Other accrued expenses
|
|
|
444,123
|
|
|
|
248,534
|
|
|
|
$
|
12,566,851
|
|
|
$
|
7,952,380
|
|
9% Unsecured Subordinated Convertible Promissory Note
(Maturing between December 2018 and March 2019)
|
|
Outstanding
March 31,
2019
|
|
|
Regular
Amortizations
(during 2019)
|
|
|
Conversions
(during
2019)
including
accelerated
amortization
|
|
|
10% Early
Repayment
Short Term
|
|
|
Outstanding
December 31,
2018
|
|
Convertible Note Principal Amount
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
105,000
|
|
|
$
|
10,500
|
|
|
$
|
(115,500
|
)
|
Debt Discounts & Financing Costs
|
|
|
-
|
|
|
|
(8,533
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
8,533
|
|
Total 9% Unsecured Note
|
|
$
|
-
|
|
|
$
|
(8,533
|
)
|
|
$
|
105,000
|
|
|
$
|
10,500
|
|
|
$
|
(106,967
|
)
|
During the three months ended March 31,
2019, the conversion feature was exercised at a price of $1.75 per share, and a total of 84,220 shares were exercised.
Outstanding numbers of Dilutive Securities
The outstanding number of dilutive securities
for the first quarter of 2019 can be seen below:
Number of underlying shares for
Warrants & Conversion Features
|
|
Outstanding
March 31, 2019
|
|
|
Agreement
Amendments /
Interest effects
|
|
|
Conversions
|
|
|
Outstanding
December 31, 2018
|
|
Fortress - iPass Loan Repayment Warrant
|
|
|
325,000
|
|
|
|
325,000
|
|
|
|
-
|
|
|
|
-
|
|
2017 Registered Public Offering
|
|
|
110,912
|
|
|
|
-
|
|
|
|
(359,058
|
)
|
|
|
469,970
|
|
Investor Management Services
|
|
|
710,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
710,000
|
|
9% Convertible Note Warrants
|
|
|
501,306
|
|
|
|
-
|
|
|
|
(19,067
|
)
|
|
|
520,373
|
|
2013 Convertible Notes
|
|
|
60,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,000
|
|
Other 9% Convertible Note Warrants
|
|
|
96,520
|
|
|
|
-
|
|
|
|
-
|
|
|
|
96,520
|
|
2017 Registered Public Offering Agent Warrants
|
|
|
39,000
|
|
|
|
-
|
|
|
|
(23,334
|
)
|
|
|
62,334
|
|
9% Convertible Note 7% Agent Warrants
|
|
|
66,230
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66,230
|
|
Nov-2017 Underwriter Agreement Investor Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Nov-2017 Underwriter Agreement Agent Warrants
|
|
|
821,677
|
|
|
|
-
|
|
|
|
(88,910
|
)
|
|
|
910,587
|
|
Oct-2017 Shelf Take Down Agent Warrants
|
|
|
843
|
|
|
|
-
|
|
|
|
-
|
|
|
|
843
|
|
May-2018 Public Offering Agent Warrants
|
|
|
66,660
|
|
|
|
-
|
|
|
|
(55,340
|
)
|
|
|
122,000
|
|
Preferred Share Conversion Warrants
|
|
|
731,798
|
|
|
|
-
|
|
|
|
-
|
|
|
|
731,798
|
|
Preferred Share issuance 8% Agent Warrants
|
|
|
38,827
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,827
|
|
Total Outstanding Warrants
|
|
|
3,568,773
|
|
|
|
325,000
|
|
|
|
(545,709
|
)
|
|
|
3,789,482
|
|
Cash and Restricted Cash
The following table provides a reconciliation
of cash, cash equivalents and restricted cash reported within the condensed Consolidated Balance Sheets to that sum to the total
amounts shown in the Condensed Consolidated Statements of Cash Flows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
10,699,061
|
|
|
$
|
6,051,709
|
|
Restricted Cash
|
|
|
704,779
|
|
|
|
430,655
|
|
Total cash, cash equivalents and restricted cash reported in the Statement of Cash Flows
|
|
$
|
11,403,840
|
|
|
$
|
6,482,364
|
|
Notes Receivable
At March 31, 2019 and December 31, 2018,
the Company had notes receivable of $3,763,103 and $1,082,436, respectively.
The third quarter 2016 sale of ValidSoft
for the price of $3,000,000 was completed and the Company received $2,000,000 in cash and a $1,000,000 promissory note, with an
interest rate of 5% per annum. The maturity date of the note is September 30, 2019. At March 31, 2019 and December 31, 2018, the
remaining outstanding principal amounts were $505,136 and $576,769, respectively.
On November 26, 2018, the Company executed
a senior secured promissory note for $500,000 from Yonder Media Mobile (an unrelated entity), with interest accruing at a
simple rate of 6% per annum with a maturity date of May 26, 2020. On January 9, 2019, February 12, 2019 and February 28, 2019,
the Company issued additional notes of $500,000, $200,000, and $2,000,000, respectively (the “2019 Notes”). The 2019
Notes each bear an interest rate of 12% per annum and mature 18 months following the issuance date. All principal and interest
are due on the maturity date. At March 31, 2019 and December 31, 2018, the remaining outstanding principal amounts were $3,257,967
and $505,667, respectively.
Note 5.
Stockholders’ Equity
(A) Common Stock
The Company is presently
authorized to issue 500,000,000 shares common stock. The Company had 109,765,015 shares of common stock issued and
outstanding as of March 31, 2019, an increase of 11,912,104 shares from December 31, 2018, due to the iPass acquisition
(9,865,412), warrant exercises (501,606), shares issued to Senior Secured lender (425,000), services settled by issuance of
shares (420,514), stock based compensation expense (594,475) shares issued for exercised employee stock options (68,083) and
shares issued to be cancelled (37,014).
(B) Warrants
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, 2019, (unaudited) and December 31, 2018 have been recorded and classified as equity is 3,568,773 and 3,789,482, respectively.
The Weighted Average Exercise Price for the currently outstanding warrants in the table below is $2.43. The table below summarizes
the warrants outstanding as of March 31, 2019, and as of December 31, 2018:
Outstanding Warrants
|
|
Exercise/
Conversion
price(s) (range)
|
|
Expiring
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Equity Warrants – Fundraising
|
|
$1.05 - $5.375
|
|
2019 – 2026
|
|
|
3,568,773
|
|
|
|
3,789,482
|
|
Note 6. Amended and Restated 2008 Long Term Incentive
Compensation Plan, 2017 Long-Term Incentive Compensation Plan and 2018 Long-Term Incentive Compensation Plan
Amended and Restated 2008 Long-Term Incentive Compensation
Plan (“2008 Plan”)
Total authorized under the plan
|
|
|
2,240,000
|
|
|
|
|
|
Shares issued in prior years
|
|
|
(1,114,824
|
)
|
|
|
|
|
Outstanding options
|
|
|
(194,268
|
)
|
|
|
|
|
Available for grant at March 31, 2019 (Registered and Unregistered)
|
|
|
930,908
|
|
|
|
|
|
During the first quarter of 2018 and 2019,
no shares were issued, or options granted under the 2008 Plan.
Stock option activity is set forth below
for the 2008 Plan:
Options:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding as of December 31, 2018
|
|
|
203,266
|
|
|
$
|
10.74
|
|
Expirations
|
|
|
(8,998
|
)
|
|
|
19.83
|
|
Outstanding as of March 31, 2019
|
|
|
194,268
|
|
|
$
|
6.51
|
|
At March 31, 2019 and December 31, 2018,
the unrecognized expense portion of share-based awards granted to employees under the 2008 Plan was $0.
2017 Long-Term Incentive Compensation Plan (“2017 Plan”)
Total authorized under the plan (Shareholders)
|
|
|
6,500,000
|
|
|
|
|
|
Total registered under the plan (S-8 dated June 14, 2017 and April 13, 2018)
|
|
|
6,500,000
|
|
|
|
|
|
Shares issued under the plan in prior years
|
|
|
(3,207,700
|
)
|
|
|
|
|
Outstanding options
|
|
|
(3,317,940
|
)
|
|
|
|
|
Available for grant at March 31, 2019 (Registered & Unregistered)
|
|
|
(25,640
|
)
|
|
|
|
|
During the first quarter of 2018 and 2019,
no shares were issued and no options were granted under the 2017 Plan.
Stock option activity is set forth below for the 2017 Plan:
Options:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding as of December 31, 2018
|
|
|
3,460,546
|
|
|
$
|
1.81
|
|
Exercised in 2019
|
|
|
(68,083
|
)
|
|
|
1.02
|
|
Forfeitures
|
|
|
(60,358
|
)
|
|
|
2.61
|
|
Expirations
|
|
|
(14,165
|
)
|
|
|
1.00
|
|
Outstanding as of March 31, 2019
|
|
|
3,317,940
|
|
|
$
|
1.81
|
|
At March 31, 2019, the unrecognized expense
portion of stock-based awards granted to employees under the 2017 Plan was $1,943,390 as compared to $2,448,790 at December 31,
2018.
Under the provisions of ASC 718, 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.
2018 Long-Term Incentive Compensation
Plan (“2018 Plan”)
On October 10, 2018, the Company filed
an S-8 to register the remaining 8,000,000 shares of common stock of the 2018 Long Term Incentive Compensation Plan which was previously
ratified by our stockholders on September 12, 2017 at our annual meeting. This incentive plan provides for awards of up to 8,000,000
shares of common stock, in the form of options, restricted stock awards, stock appreciation rights (“SAR’s”),
performance units and performance bonuses to eligible employees and the grant of nonqualified stock options, restricted stock awards,
SAR’s and performance units to consultants and eligible directors.
During 2018, 1,000,000 shares of common
stock were issued to an officer under the 2018 Plan. This is included in the accompanying condensed consolidated statement of
changes in stockholders’ equity under stock awards issued to management.
2018 Long-Term Incentive Compensation Plan
Total authorized under the plan (Shareholders)
|
|
|
8,000,000
|
|
Total registered under the plan (S-8 dated October 10, 2018)
|
|
|
8,000,000
|
|
Shares issued under the plan
|
|
|
(1,669,371
|
)
|
Reserved for Time-conditioned share awards
|
|
|
(1,579,175
|
)
|
Outstanding Options
|
|
|
(5,469,400
|
)
|
Available for grant at March 31, 2019 (Registered & Unregistered)
|
|
|
(717,946
|
)
|
Pursuant to the terms of the 2018 Long-Term
Incentive Plan, the number of shares available under the plan shall increase on the first day of each fiscal year by 15% of the
aggregate maximum number of shares available under the plan (the “Evergreen Increase”). As a result of the 2019 Evergreen
Increase, the number of shares available under the 2018 Long-Term Incentive Plan shall increase by 1,200,000 shares (the “2018
Plan Increase”). The 2018 Plan Increase shall take effect upon the filing of an effective Registration Statement on Form
S-8 with the SEC. The Company intends to file a Registration Statement on Form S-8 reflecting the 2018 Plan Increase promptly following
the filing of the report.
Stock option activity is set forth below for the 2018 Plan:
Options:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding as of December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
Granted in 2019
|
|
|
5,519,400
|
|
|
|
1.74
|
|
Forfeitures
|
|
|
(50,000
|
)
|
|
|
1.72
|
|
Outstanding as of March 31, 2019
|
|
|
5,469,400
|
|
|
$
|
1.73
|
|
At March 31, 2019, the unrecognized expense
portion of stock-based awards granted to employees under the 2018 Plan was $6,287,766.
Note 7. Income taxes
The following table presents details of the net provision for
income taxes:
|
|
Three
months ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Income tax benefit
|
|
$
|
(167,334
|
)
|
|
$
|
(418
|
)
|
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
During the three month period ended March 31, 2019 and 2018,
34.7% and 85.5%, respectively, were made to two customers. For the three months ended March 31, 2019 and 2018, our largest customer
represented 20.1% and 78.5% of revenues, respectively. Our second largest customer represented 14.6% and 7.0% of revenues for
the three months ended March 31, 2019 and 2018, respectively.
The geographical distribution of our revenue, as a percentage
of revenues, was as follows:
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Europe
|
|
|
65.3
|
%
|
|
|
82.5
|
%
|
All other (non-European) countries
|
|
|
34.7
|
%
|
|
|
17.5
|
|
|
|
|
100.00
|
%
|
|
|
100.0
|
%
|
Note 9. Revenues
Revenue Recognition
Our revenues represent amounts earned for
our mobile and security solutions. Our solutions take many forms but our revenue generally consists of fixed and/or variable charges
for services delivered monthly under a combined services and SaaS model. We also offer discrete (one-time) services for implementation
and for development of specific functionality to properly service our customers.
The following table presents our revenues
disaggregated by revenue source:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Monthly service
|
|
$
|
21,609,900
|
|
|
$
|
3,291,882
|
|
Installation and software development
|
|
|
1,430,013
|
|
|
|
820,688
|
|
Total revenues
|
|
$
|
23,039,913
|
|
|
$
|
4,112,570
|
|
Monthly services revenues are generally
recognized over time and amounted to $21,609,900 for the period ended March 31, 2019. Installation and software development revenues
are recognized over time and amounted to $1,430,013 over for the period ended March 31, 2019.
The following table presents our revenues
disaggregated by geography, based on the billing addresses of our customers
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Europe
|
|
$
|
15,037,029
|
|
|
$
|
3,391,882
|
|
Other geographic areas
|
|
|
8,002,884
|
|
|
|
720,688
|
|
Total revenues
|
|
$
|
23,039,913
|
|
|
$
|
4,112,570
|
|
Monthly Service Revenues
The Company’s performance obligations
in a monthly SaaS and service offerings are simultaneously received and consumed by the customer and therefore, are generally
recognized over time. For recognition purposes, we do not unbundle such services into separate performance obligations as their
pattern of transfer does not differ. The Company typically bills its customer at the end of each month. The fees charged may include
a combination of fixed and variable charges with the variable charges tied to the number of subscribers or some other measure
of volume. Although the consideration may be variable, the volumes are easily estimable at the time of billing, with “true-up”
adjustments occurring in the subsequent month. As such adjustments have not historically been material, no amounts of variable
consideration are subject to constraint.
Installation and Software Development
Revenues
The Company’s other revenues consist
generally of installation and development projects.
Installation represents the activities
necessary for a customer to obtain access and connectivity to the Company’s monthly SaaS and service offerings. While installation
may require separate phases, it represents one performance obligation within the context of the contract.
Development consists of programming and
other services to add new, additional or customized functionality to a customer’s existing service offerings. Each development
activity is typically its own performance obligation.
Revenue is recognized over time if the
installation and development activities create an asset that has no alternative use for which the Company is entitled to receive
payment for performance completed to date. If not, then revenue is not recognized until the applicable performance obligation is
satisfied.
Arrangements with Multiple Performance
Obligations
The Company’s contracts with customers
may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation
based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices
charged to customers.
Net Billings in Excess of Revenues
The Company records net billings in excess
of revenues when payments are made or due in advance of our performance, including amounts which are refundable.
Payment terms vary by the type and location
of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For
certain products or services and customer types, payment is required before the products or services are delivered to the customer.
Contract Assets
Given the nature of the Company’s
services and contracts, it has no contract assets.
Note 10. Credit Agreement
On February 26, 2019, Pareteum Corporation
and certain of its subsidiaries entered into a credit agreement (the “Credit Agreement”) with Post Road Administrative
Finance, LLC and its affiliate Post Road Special Opportunity Fund I LLP (collectively, “Post Road”). Pursuant to the
Credit Agreement, Post Road will provide the Company with a secured loan of up to $50,000,000 (the “Loan”), with an
initial loan of $25,000,000 funded on February 26, 2019, and additional amounts in $5,000,000 increments as requested by the Company
before the 18-month anniversary of the initial funding date. No additional loan shall be funded until the later of delivery of
certain third-party consents (the “Consents”), the filing of Pareteum’s Quarterly Report on Form 10-Q for the
first quarter of 2019, or June 1, 2019. All amounts owed under the Credit Agreement shall be due on February 26, 2022.
The unpaid principal amount of the Loan
shall bear interest from the relevant funding dates at a rate per year of 8.5% plus Libor in effect from time to time, provided
however, that upon an event of default or if certain of the Consents are not delivered prior to May 1, 2019 or June 1, 2019, as
applicable, the unpaid principal amount of the Loan shall bear interest from the relevant funding dates at a rate per year of 11.5%
plus Libor in effect from time to time until the Consents are delivered. The interest shall be due and payable monthly in cash
in arrears, provided, however, that the Company may elect to pay any or all of the interest in the form of Payment-in-Kind (“PIK”)
interest due and payable at maturity at a maximum percentage per year equal to (a) through and including the first anniversary
of the initial funding date, 3%, (b) after the first anniversary of the initial funding date through and including the second anniversary
of the initial funding date, 2%, and (c) after the second anniversary of the initial funding date, 1%.
Permitted use of proceeds for the initial
$25,000,000 of the Loan include approximately $11,000,000 for payment in full of outstanding secured debt owed to Fortress Credit
Corp. (together with its affiliates, “Fortress”) incurred in connection with the Company’s previously disclosed
acquisition of iPass Inc. (“iPass”) on February 12, 2019, as well as remaining amounts for permitted acquisitions and
investments, for general working capital purposes and to pay approximately $895,000 in transaction fees related to the Loan. Proceeds,
if any, are to be used for permitted acquisitions and to fund growth capital expenditures and other growth initiatives.
The Loan is subject to prepayment upon
the receipt of proceeds outside the ordinary course of business in excess of $1,000,000 and the Company must pay a commitment fee
of 1% per year for an unfunded commitment. The initial $25,000,000 loan is reduced by an original issue discount of (i) 0.75% of
$25,000,000 and (ii) 1.25% of $50,000,000, and any additional amounts borrowed will be reduced by an original issue discount of
0.75% of the funded amounts.
The Company’s obligations under the
Credit Agreement are secured by a first-priority security interest in all the assets of the Company and guaranteed by certain subsidiaries
of the Company. The Credit Agreement contains customary representations, warranties and indemnification provisions. The Credit
Agreement also contains affirmative and negative covenants with respect to operation of the business and properties of the Company
as well as financial performance, including requirements to maintain a minimum of $2,000,000 of unrestricted cash, certain maximum
total leverage ratios, a debt to asset ratio, maximum churn rate and minimum adjusted EBITDA. The Credit Agreement further provides
customary events of default and cure periods for certain specified events of default, and in the event of uncured default, the
acceleration of the maturity date, an increase in the applicable interest rate with respect to amounts outstanding under the Loan
and payment of additional fees.
On February 26, 2019, concurrently with
entering into the Credit Agreement, the existing loan and security agreement by and among iPass, iPass IP LLC and Fortress (the
“Existing iPass Loan”) terminated. Credit facilities under the Existing iPass Loan included a term loan A facility
and a term loan B facility maturing on February 27, 2019.
On February 26, 2019, pursuant to the terms
of the Credit Agreement, the Company issued to Post Road 425,000 shares of common stock at $1,606,500 and will issue an additional
200,000 shares of common stock upon the next subsequent funding, if any, under the Loan.
As of March 31, 2019, and December 31,
2018, the Company had outstanding senior secured debt of $21,806,879 and $0, respectively. The weighted average debt outstanding
was for the three months ended March 31, 2019 was $9,444,444. For the three months ended March 31, 2019, the Company recorded interest
expense of $335,136 related to the Loan. The Company recorded $1,655,112 in deferred financing costs and other fees as a reduction
of the outstanding loan balance through March 31, 2019. Of this amount, $49,691 was amortized in the first quarter ended March
31, 2019. The remaining capacity under the Loan was $25,000,000 at March 31, 2019.
At March 31, 2019, the Company was in compliance
with all covenants required by the Loan.
Note 11. Commitments and Contingencies
We have operating leases for our office
space. Our leases have remaining lease terms of less than one year to 6 years, some of which include options to indefinitely extend
the leases monthly. For our month to month leases, we determined the number of renewal periods we are reasonably certain to exercise
and include these periods in our right of use asset and lease liability calculations. Lease expense was $482,548 and $132,463 for
the three months ended March 31, 2019 and 2018, respectively, and is included in general and administrative expense in the condensed
consolidated statement of comprehensive loss.
Operating Leases:
|
|
March 31, 2019
|
|
|
|
-
|
|
Operating lease right-of-use assets
|
|
$
|
3,136,015
|
|
Operating lease liabilities
|
|
$
|
3,141,842
|
|
|
|
|
|
|
Weighted average remaining lease term
|
|
|
|
|
Operating leases
|
|
|
2.2 years
|
|
|
|
|
|
|
Weighted average remaining discount rate
|
|
|
|
|
Operating leases
|
|
|
2.5
|
%
|
The following represents maturities of operating lease liabilities
as of March 31, 2019:
Remainder of 2019
|
|
$
|
1,463,299
|
|
2020
|
|
|
1,716,284
|
|
2021
|
|
|
119,059
|
|
2022
|
|
|
62,387
|
|
2023
|
|
|
62,387
|
|
Thereafter
|
|
|
98,779
|
|
Total lease payments
|
|
$
|
3,522,195
|
|
Less: imputed interest
|
|
|
(380,353
|
)
|
Total
|
|
$
|
3,141,842
|
|
Note 12. Subsequent Events
On April 22, 2019, the Company, together
with Devicescape Holdings, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (the “Holdco” and
together with the Company, the “Buyer”) entered into an asset purchase agreement (the “Purchase Agreement”)
with Devicescape Software, Inc., a California corporation (“Devicescape”), whereby the Buyer acquired substantially
all of the assets of Devicescape and assumed certain liabilities of Devicescape, such that Holdco shall continue as a surviving
subsidiary of the Company holding all assets and assuming those certain liabilities of Devicescape (the “Devicescape Purchase”).
The Devicescape Purchase was previously announced by the Company in a press release dated May 8, 2019. In connection with the Devicescape
Purchase, and pursuant to the terms and subject to the conditions set forth in the Purchase Agreement, the Company paid cash consideration
of $1,500,000 and issued to the stockholders of Devicescape an aggregate of 400,000 shares of the Company’s common stock
at a value of $1,692,000 based on our closing price on April 22, 2019, of $4.23 per share.