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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
ý
Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2020
o Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
001-35360
(Commission file No.)

TEUM-20200630_G1.JPG

PARETEUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-4557538
(State or other jurisdiction of
incorporation or organization) 		(I.R.S. employer identification no.)
1185 Avenue of the Americas, 2nd Floor, New York, NY 10036
(Address of principal executive offices) (Zip Code)
(646) 975-0400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act: 
Common Stock, $0.00001 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ¨    No  ý
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ¨    No  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer
¨
Accelerated filer
ý
Non-Accelerated filer
¨
Smaller reporting company
ý
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  ý
As of July 23, 2021, there were 141,778,392 shares of the Company’s common stock outstanding.

PARETEUM CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
For the Period Ended June 30, 2020
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39

2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PARETEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
3
(In thousands, except share and par values)
June 30,
2020
December 31,
2019
(As Revised)
ASSETS
Current assets:
Cash and cash equivalents $ 3,336  $ 4,447 
Restricted cash 10,685  1,455 
Accounts receivable, net of an allowance for doubtful accounts of $1,933 and $1,546 as of June 30, 2020 and December 31, 2019, respectively
10,104  8,307 
Notes receivable, net 503  512 
Prepaid expenses and other current assets 3,082  4,453 
Total current assets 27,710  19,174 
Right-of-use assets, net 984  2,241 
Property, equipment, and software development, net 5,898  6,262 
Intangible assets, net 14,135  15,500 
Goodwill 10,111  10,099 
Other assets 669  752 
TOTAL ASSETS $ 59,507  $ 54,028 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and customer deposits $ 32,602  $ 30,374 
Net billings in excess of revenues 2,451  2,529 
Accrued expenses and other payables 12,692  13,616 
Promissory notes 968  993 
Current portion of lease liabilities 592  2,422 
Derivative liability 831  — 
8% Series C Redeemable Preferred Stock, net
14,502  4,798 
Total current liabilities 64,638  54,732 
Senior Convertible Note, net 5,622  — 
Lease liabilities, net of current portion 496  415 
Related party loan 420  420 
Paycheck Protection Plan loan 1,372  — 
Warrant liability 7,944  — 
Other liabilities —  23 
TOTAL LIABILITIES 80,492  55,590 
Commitments and contingencies
Stockholders’ deficit:
Preferred stock, $0.00001 par value: 49,995,966 shares authorized, 175.53 and 105.33 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively
—  — 
Common stock and additional paid-in capital, $0.00001 par value: 500,000,000 shares authorized, 140,325,114 and 139,060,180 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively
551,543  547,948 
Accumulated other comprehensive loss (9,748) (10,017)
Accumulated deficit (562,780) (539,493)
TOTAL STOCKHOLDERS’ DEFICIT
(20,985) (1,562)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
$ 59,507  $ 54,028 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4
PARETEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended June 30, Six Months Ended June 30,
(In thousands, except share and per share values) 2020 2019 2020 2019
(As Revised) (As Revised)
Revenue $ 16,105  $ 16,876  $ 36,160  $ 29,945 
Costs and operating expenses:
Cost of revenue, excluding depreciation and amortization 11,883  12,644  26,328  20,690 
Product development 2,394  3,625  5,385  6,177 
Sales and marketing 1,453  3,095  3,375  6,032 
General and administrative 7,519  8,367  14,567  16,299 
Acquisition costs —  124  —  3,432 
Depreciation and amortization 2,753  3,064  5,398  5,743 
Total cost and operating expenses 26,002  30,919  55,053  58,373 
Operating loss (9,897) (14,043) (18,893) (28,428)
Nonoperating expenses, net 3,951  944  4,476  2,560 
Loss before income taxes (13,848) (14,987) (23,369) (30,988)
Income tax expense (benefit) 15  (197) (82) (364)
Net loss $ (13,863) $ (14,790) $ (23,287) $ (30,624)
Loss per common share:
Net loss per share - basic and diluted $ (0.10) $ (0.13) $ (0.17) $ (0.29)
Weighted average shares outstanding during the period – basic and diluted 138,806,212 111,074,977 138,531,827 107,341,105
Net loss $ (13,863) $ (14,790) $ (23,287) $ (30,624)
Other comprehensive income (loss):
Foreign currency translation gain (loss) 269  1,831  269  (1,319)
Comprehensive loss $ (13,594) $ (12,959) $ (23,018) $ (31,943)
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
PARETEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 2020 2019
(As Revised) (As Revised) (As Revised)
Common stock and additional paid-in capital
Balance, beginning of period $ 550,996  $ 491,901  $ 547,948  $ 453,995 
Shares issued for acquisition of iPass —  —  —  28,610 
Shares issued for acquisition of Devicescape —  1,692  —  1,692 
Warrant exercises —  705  —  1,385 
Shares issued for conversion of note —  —  —  147 
Share-based compensation 547  2,715  2,942  7,744 
Fortress warrants issued in iPass acquisition —  —  —  803 
Shares issued in connection with debt facility —  —  —  1,607 
Shares issued for settlement of accounts payable/debt —  1,867  —  2,827 
Shares issued for exercised stock options —  140  —  210 
Warrants issued for settlement of debt —  —  653  — 
Balance, end of period 551,543  499,020  551,543  499,020 
Accumulated other comprehensive loss
Balance, beginning of period (10,017) (9,866) (10,017) (6,716)
Foreign currency translation gain (loss), net of tax 269  1,831  269  (1,319)
Balance, end of period (9,748) (8,035) (9,748) (8,035)
Accumulated deficit
Balance, beginning of period (548,917) (332,980) (539,493) (317,146)
Net loss (13,863) (14,790) (23,287) (30,624)
Balance, end of period (562,780) (347,770) (562,780) (347,770)
Total stockholders’ equity (deficit) $ (20,985) $ 143,215  $ (20,985) $ 143,215 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
6
PARETEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
(In thousands) 2020 2019
(As Revised)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (23,287) $ (30,624)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 5,398  5,743 
Provision for doubtful accounts 491  72 
Share-based compensation 2,942  7,744 
Change in fair value of the derivative and warrant liabilities 734  — 
Amortization of deferred financing costs 267  151 
Interest expense related to debt discount accretion and conversion feature 3,487  271 
Shares issued for services —  1,353 
Warrants issued for settlement of debt 653  — 
Loss on extinguishment of debt —  1,000 
Deferred tax —  (522)
Gain on settlement of rental agreement (469) — 
Changes in operating assets and liabilities:
Accounts receivable, net (354) (895)
Prepaid expenses and other current assets 1,890  1,365 
Accounts payable and customer deposits 2,232  7,846 
Net billings in excess of revenues (458) (436)
Accrued expenses and other payables (2,261) (2,739)
Net cash used in operating activities (8,735) (9,671)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment, and software development (3,685) (2,643)
Acquisition of iPass, net of cash acquired —  860 
Investment in notes receivable —  (2,700)
Acquisition of assets from Devicescape —  (2,137)
Net cash used in investing activities (3,685) (6,620)
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of warrants and options —  1,595 
Proceeds from issuance of loans 14,000  24,178 
Proceeds from issuance of Paycheck Protection Program loans 1,372  — 
Repayment of loans (28) (10,989)
Financing related fees (797) (867)
Proceeds from issuance of Redeemable Preferred Stock 6,044  — 
Net cash provided by financing activities 20,591  13,917 
Effect of exchange rate changes on cash, cash equivalents and restricted cash (52) (6)
Increase (decrease) in cash, cash equivalents and restricted cash 8,119  (2,380)
Cash, cash equivalents and restricted cash, beginning of period 5,902  6,483 
Cash, cash equivalents and restricted cash, end of period $ 14,021  $ 4,103 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
7
PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Business and Operations
Pareteum Corporation, a Delaware corporation (“Pareteum”), along with its wholly owned and majority-owned subsidiaries (the “Company,” “we,” “us,” or “our”) is an experienced provider of communications platform as a service (“CPaaS”) solutions. The Company empowers enterprises, communications service providers, early-stage innovators, developers, Internet of things (“IoT”), and telecommunications infrastructure providers with the freedom and control to create, deliver and scale innovative communications experiences. Our CPaaS solutions connect people and devices around the world using secure, ubiquitous, and highly scalable solutions to deliver data, voice, video, SMS/text messaging, media, and content enablement.
We have developed mobility, messaging, connectivity and security services and applications. Our platform hosts integrated information technology/back office and core network functionality for mobile network operators and other enterprises, which allows our customers to implement and leverage mobile communications solutions on a fully outsourced software as a service (“SaaS”), platform as a service (“PaaS”), and/or infrastructure as a service (“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.
We deliver an operational support system (“OSS”) for channel partners, with application program interfaces 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.
Artilium plc (“Artilium”), a wholly owned subsidiary of Pareteum since October 2018, is a software development company active in the enterprise communications and core telecommunications markets delivering software solutions, which layer over disparate fixed, mobile, and intellectual property networks to enable the deployment of converged communication services and applications. iPass, Inc. (“iPass”), another wholly owned subsidiary of Pareteum since February 2019, is a cloud-based service provider of global mobile connectivity, offering Wi-Fi access on any mobile device through its SaaS platform.
Pareteum is quoted on the OTC Markets Group Inc.'s Pink Open Market and traded under the symbol “TEUM.”
Liquidity
As reflected in the accompanying unaudited condensed consolidated financial statements, the Company reported net losses of $23.3 million and $222.3 million for the six months ended June 30, 2020 and the year ended December 31, 2019, respectively. The 2019 net loss included goodwill and intangible asset impairment of $156.8 million. As of June 30, 2020, the Company had an accumulated deficit of $562.8 million and cash balances available for operations of $3.3 million.
On December 10, 2019, the Company’s Board of Directors designated 255 shares of preferred stock to be 8.0% Series C Redeemable Preferred Stock (the “Redeemable Preferred Stock”) with a stated value of $100,000 per share. On various dates from December 24, 2019 through August 18, 2020, the Company issued 217.67 shares of Redeemable Preferred Stock in private placement transactions exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), with a stated value of $21.8 million for an aggregate purchase price of $13.9 million, from which the Company received net proceeds of $13.1 million after deducting legal fees of $0.8 million.
In May 2020, Pareteum received a $0.6 million Paycheck Protection Program (“PPP”) loan (the “Pareteum PPP Loan” and iPass received an $0.8 million PPP loan (the “iPass PPP Loan” and together with the Pareteum PPP Loan, the "PPP Loans”) under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The PPP Loans provide for a balloon payment of the outstanding principal balance at maturity, which is two years from the funding date, and bear interest at 1.0%, however, under the CARES Act, all or a portion of the PPP Loans may be forgiven. In December 2020, the Pareteum PPP Loan was fully forgiven and in June 2021, the iPass PPP Loan was fully forgiven.
On June 8, 2020, the Company issued a $17.5 million Senior Secured Convertible Note (the “Senior Convertible Note”) for $14.0 million, of which $10.0 million was maintained in one or more blocked accounts. The terms of the Senior Convertible Note and related documents require the Company to meet certain specified conditions and covenants to release the proceeds in the blocked accounts, some of which have not been satisfied. In July 2020, $3.0 million was released when the Company received additional funding through the sale of Redeemable Preferred Stock. On December 1, 2020, December 23, 2020, February 1, 2021, and March 1, 2021, we entered into various agreements (the “Forbearance Agreements”), under which: (i) we admitted that we were in default of several obligations under the Senior Convertible Note and related agreements, (ii) the lender acknowledged such defaults and agreed not to exercise any right or remedy under the Senior Convertible Note or the related securities purchase agreement, warrant or security documents, including its right to accelerate the aggregate amount outstanding under the Senior Convertible Note, until the earlier of March 31, 2021 and the date of any new event of default or initiation of any action by the Company to invalidate any of the representations and warranties made in the Forbearance Agreements. As a result of the defaults, the interest rate paid on the principal outstanding under the Senior Convertible Note increased to 18.0% per annum. On December 23, 2020, $1.0 million was released to the Company from the blocked account and on April 8, 2021, the remaining $6.0 million in the blocked account was removed by the lender in partial satisfaction of the Senior Convertible Note.
8
PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On May 24, 2021, the Company entered into a new forbearance agreement (the “New Forbearance Agreement”) with the holder of the Senior Convertible Note under which (i) the Company again admitted it was in default as to several obligations under the Senior Convertible Note and related agreements, and (ii) the lender acknowledged such defaults and agreed not to exercise any right or remedy under the Senior Convertible Note or the related securities purchase agreement, warrant or security documents, including its right to accelerate the aggregate amount outstanding under the Senior Convertible Note, until the earlier of May 31, 2021 or any later date to which such date may be extended (the “Outside Date”), and the date of any new event of default or initiation of any action by the Company to invalidate any of the representations and warranties made in the New Forbearance Agreement. The Outside Date automatically extends for successive two-week periods unless on or before the then-applicable Outside Date the lender provides notice that the Outside Date is not being extended.
As partial consideration for its agreement not to exercise any right or remedy under the Senior Convertible Note and related documents, the lender and the Company agreed to make certain changes to the documents. In this regard, the parties agreed to amend the “Event of Default Acceleration Amount” definition in the Senior Convertible Note so that the amount due and payable by the Company on account of an event of default would be an amount in cash equal to 125% of the then-outstanding principal and accrued and unpaid interest under the Senior Convertible Note. This represents an increase from 120% of the then-outstanding principal and accrued and unpaid interest, and removes the market-price-based alternative for such acceleration amount.
Additionally, the parties also agreed that the principal amount outstanding under the Senior Convertible Note would be increased by certain paid-in-kind amounts in full satisfaction of the Company’s obligation to make payments of interest to the lender on each of April 1, 2021 and May 1, 2021, which amounts were not paid by the Company in cash or common stock. In consideration of the lender’s agreement to enter into the New Forbearance Agreement and agree to the amendments to the Senior Convertible Note, the Company agreed to pay the lender a fee in the amount of $1.5 million. Accordingly, following these increases in the principal amount payable, but applying against the outstanding principal and such fee the $6.0 million previously maintained in certain blocked account against that was foreclosed upon by the lender, the total amount of principal outstanding under the Senior Convertible Note as of the date of the New Forbearance Agreement was approximately $13.5 million.
On February 22, 2021, the Company issued a $2.4 million Senior Second Lien Secured Convertible Note due April 1, 2025 (the “Junior Convertible Note”) to an institutional investor for $2.0 million.
On April 29, 2021, the Company entered into a securities purchase agreement, dated as of April 13, 2021, with two initial investors and other investors as may become party thereto from time to time (collectively, the “Junior Convertible Note Purchasers”) providing for the issuance and sale by the Company of up to $6.0 million aggregate principal amount of Junior Convertible Notes and warrants (the “April 2021 Warrants”) to purchase up to 5,000,000 shares of its common stock. The Junior Convertible Notes and accompanying April 2021 Warrants may be sold from time to time to one or more Junior Convertible Note Purchasers under the terms of the purchase agreement. On April 29, 2021, the Company closed on the initial sale of Junior Convertible Notes in the aggregate principal amount of $1.8 million and April 2021 Warrants to purchase 1,490,000 shares of common stock under the purchase agreement for an aggregate purchase price of $1.5 million.
On June 19, 2021, the Company entered the Second Omnibus Agreement, dated as of June 18, 2021 (the "Omnibus Agreement"), with holders of the previously outstanding Junior Convertible Notes, and sold $17.3 million aggregate principal of Junior Convertible Notes for $5.0 million in cash and the surrender of 91.38 shares of Redeemable Preferred Stock. In connection with the sale of these Junior Convertible Notes, the Company issued a warrant for the purchase of 5,000,000 shares of its common stock at an exercise price of $0.37 per share.
Because of the limited nature of the relief provided under the New Forbearance Agreement, which does not lower the amounts payable in principal or interest, the Company believes that it will not have sufficient resources to fund its operations and meet the obligations specified in the Senior Convertible Note or to fund its operations for the next twelve months following the filing of this Quarterly Report on Form 10-Q (the “Report”). The Company’s software platforms require ongoing funding to continue the current development and operational plans and the Company has a history of net losses. The Company will continue to expend substantial resources for the foreseeable future in connection with the continued development of its software platforms. These expenditures will include costs associated with research and development activity, corporate administration, business development, and marketing and selling of the Company’s services. In addition, other unanticipated costs may arise. The Company believes that additional capital will be required to fund its operations and provide growth capital to meet the obligations under the Senior Convertible Note, the Junior Convertible Note, and the Redeemable Preferred Stock. Accordingly, the Company will have to raise additional capital in one or more debt and/or equity offerings and continue to work with its lenders to cure the defaults. However, there can be no assurance that the Company will be successful in raising the necessary capital or that any such offering will be available to the Company on terms acceptable to the Company, or at all. If the Company is unable to raise additional capital and with acceptable terms, this would have a material adverse effect on the Company. Furthermore, the recent decline in the market price of the Company’s common stock, coupled with the stock’s delisting from the Nasdaq Stock Market, could make it more difficult to sell equity or equity-related securities in the future at a time and price that the Company deems appropriate. The factors discussed above raise substantial doubt as to the Company’s ability to continue as a going concern within one year after the date that these financial statements are issued.
9
PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revision of Previously Issued Financial Statements
In finalizing the financial reporting close process for the year ended December 31, 2020, the Company identified certain immaterial errors impacting prior reporting periods beginning as of and for the three months ended December 31, 2018. Specifically, the Company identified that it incorrectly translated the foreign currency impact on goodwill and intangible assets related to an acquisition completed in the fourth quarter of 2018.
The Company assessed the materiality of this correction to the prior period financial statements in accordance with Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) 99, Materiality, and SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, and Accounting Standards Codification (“ASC”) 250, Presentation of Financial Statements (“ASC 250”). In accordance with ASC 250, the Company’s consolidated financial statements have been revised from the amounts previously reported to correct these immaterial errors as shown in the tables below and are reflected throughout the financial statements and related notes, as applicable.
The cumulative effect of adjustments required to correct the immaterial errors in the consolidated financial statements as of December 31, 2018 and 2019, and March 31, 2019 are reflected in the revised goodwill, intangible assets, net, accumulated other comprehensive loss, and accumulated deficit balances as of December 31, 2018 and 2019, and March 31, 2019 as follows:
As of December 31, 2018
(In thousands) As Reported Adjustment As Revised
Goodwill $ 101,375  $ (947) $ 100,428 
Intangible assets, net 39,658  (394) 39,264 
Accumulated other comprehensive loss (5,389) (1,327) (6,716)
Accumulated deficit (317,132) (14) (317,146)

As of March 31, 2019
(In thousands) As Reported Adjustment As Revised
Goodwill $ 139,195  $ (3,147) $ 136,048 
Intangible assets, net 49,240  (1,200) 48,040 
Accumulated other comprehensive loss (5,486) (4,380) (9,866)
Accumulated deficit (333,013) 33  (332,980)
As of December 31, 2019
(In thousands) As Reported Adjustment As Revised
Accumulated other comprehensive loss $ (5,608) $ (4,409) $ (10,017)
Accumulated deficit (543,902) 4,409  (539,493)
The consolidated statements of operations for the three and six months ended June 30, 2019 have been revised as follows:
Three Months Ended June 30, 2019
(In thousands) As Reported Adjustment As Revised
Depreciation and amortization $ 3,105  $ (41) $ 3,064 
Operating loss (14,084) 41  (14,043)
Net loss (14,831) 41  (14,790)
Foreign currency translation loss (21) 1,852  1,831 
Comprehensive loss (14,852) 1,893  (12,959)
10
PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 2019
(In thousands) As Reported Adjustment As Revised
Depreciation and amortization $ 5,831  $ (88) $ 5,743 
Operating loss (28,516) 88  (28,428)
Net loss (30,712) 88  (30,624)
Foreign currency translation loss (118) (1,201) (1,319)
Comprehensive loss (30,830) (1,113) (31,943)

Note 2. Financial Statement Presentation and Recent Accounting Updates
The accompanying unaudited condensed consolidated financial statements comprise the accounts of Pareteum and its wholly owned and majority owned subsidiaries, and 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 Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and account balances have been eliminated in consolidation. The Company evaluates subsequent events through the date of filing this Report with the Securities and Exchange Commission (“SEC”). Operating results for the six months ended June 30, 2020 may not necessarily be indicative of the results that may be expected for the full year ending December 31, 2020. These interim period unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2019, which are included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 12, 2021 (the “2019 Annual Report”).
For a complete summary of our significant accounting policies, please refer to Note 1. Business and Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements in Part I, Item 8 of our 2019 Annual Report.
Use of Estimates
The preparation of the accompanying condensed 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. Actual results may differ from these estimates under different assumptions or conditions and those differences could be material.
Reclassifications
Certain reclassifications have been made to the prior period condensed consolidated financial statements to conform to the current period presentation. Such reclassifications had no impact on net loss or net cash flows.
Accounting Standards Adopted in the Current Year
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The guidance can be applied either prospectively to all implementation costs incurred after the date of adoption or retrospectively. The Company adopted this standard on January 1, 2020 on a prospective basis. The adoption of ASU 2018-15 did not have a material impact on the Company’s financial condition, results of operations, cash flows, and financial statement disclosures.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU-2017-04”), which simplifies the accounting for goodwill impairment testing by eliminating Step 2 from the goodwill impairment test. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, versus determining an implied fair value in Step 2 to measure the impairment loss. ASU 2017-04 is effective for annual periods beginning after December 15, 2019. The Company adopted this standard on January 1, 2020. The adoption of ASU 2017-04 did not have a material impact on the Company’s consolidated financial position, results of operations and cash flows.
11
PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements for fair value measurements. ASU 2018-13 adds, modifies, and removes previous disclosure requirements. Eliminated disclosures include items such as removing disclosures for the valuation process for Level 3 measurements, the policy for timing of transfers between levels of the fair value hierarchy, and changes in unrealized gains and losses included in earnings for recurring Level 3 measurements held at the reporting period. The guidance is effective for interim and annual periods beginning after December 15, 2019. The Company adopted ASU 2018-13 on January 1, 2020 and it had no material impact on the disclosures in the consolidated financial statements.
In November 2019, the FASB issued ASU 2019-08, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements – Share-Based Consideration Payable to a Customer (“ASU 2019-08”). Under this new guidance, share-based payment awards issued to a customer are recorded as a reduction of the transaction price in revenue with an amount measured under the grant-date fair value of the award. Changes in the measurement of the share-based payments after the grant date that are due to the form of the consideration are not included in the transaction price and are recorded elsewhere in the income statement. The award is measured and classified under ASC 718, Stock Compensation, for its entire term, unless the award is modified after it vests and the grantee is no longer a customer. ASU 2019-08 is effective in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU 2019-08 on January 1, 2020, which did not have a material impact on the Company’s financial condition, results of operations, and cash flows.
Recent Accounting Standards Updates Issued - Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which requires measurement and recognition of expected versus incurred credit losses for financial assets held. ASU 2016-13 is effective for the Company’s annual and interim reporting periods beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides optional guidance for a limited period of time to ease the burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. This would apply to companies meeting certain criteria that have contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022 and may be applied to contract modifications made and hedging relationships entered into from the beginning of an interim period that includes or is subsequent to March 12, 2020. The Company does not believe the adoption of ASU 2020-04 will have a material impact on its consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature, and (2) convertible instruments with a beneficial conversion feature. Upon adoption, a convertible debt instrument will be accounted for as a single liability at amortized cost unless (a) the convertible instrument contains features that require bifurcation as a derivative under ASC 815, Derivatives and Hedging (“ASC 815"), or (b) the convertible debt instrument was issued at a substantial premium. These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules. ASU 2020-06 also requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. ASU 2020-06 is effective for public entities, excluding smaller reporting companies, in fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. For public business entities that meet the definition of a smaller reporting company, the amendments in ASU 2020-06 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company meets the definition of a smaller reporting company and is currently evaluating the impact of adoption of ASU 2020-06 on its consolidated financial statements.
In December 2020, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for the Company beginning in fiscal 2021. The Company is currently evaluating the impact of adoption of ASU 2019-12 on its consolidated financial statements.
12
PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Balance Sheet Information
The following tables present details of our unaudited condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019:
(In thousands) June 30,
2020 		December 31, 2019
Notes receivable, net
ValidSoft $ 503  $ 512 
Yonder Media Mobile —  3,355 
Notes receivable 503  3,867 
Current portion of notes receivable 503  3,867 
Reserve against current portion of notes receivable —  (3,355)
Notes receivable, net $ 503  $ 512 
The ValidSoft note bears interest at 5.0% annually and, pursuant to an amendment, matured on March 31, 2021. On April 6, 2021, the Company entered into an agreement with ValidSoft to accept $0.3 million as payment in full, which was received in the second quarter of 2021.
The Company extended a $0.5 million promissory note receivable to Yonder Media Mobile (“Yonder Media”) in 2018, bearing interest at 6.0% annually and maturing on May 26, 2020. In the first quarter of 2019, the Company extended three additional promissory notes receivable to Yonder Media aggregating $2.7 million with interest rates of 12.0% annually, with all principal and interest due on the maturity dates, which ranged from July 2020 to August 2020.
In July 2019, the Company and Yonder Media became involved in a legal dispute and the Company recorded a reserve of $3.4 million, representing the principal and accrued interest outstanding under the promissory notes as of June 30, 2019. In July 2020, the Company settled all the principal amounts due under the promissory notes by conversion of the amounts outstanding into shares of Yonder Media.
(In thousands) June 30,
2020 		December 31, 2019
Prepaid expenses and other current assets
Prepaid insurance and legal fees $ 463  $ 762 
Prepaid software license and support 791  890 
Prepaid corporate taxes 184  214 
Prepaid expenses-other 708  714 
Valued added tax 543  591 
Other receivables 67  451 
Other assets 326  831 
Prepaid expenses and other current assets $ 3,082  $ 4,453 

13
PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands) June 30,
2020 		December 31, 2019
Property, equipment, and software development, net
Furniture and fixtures $ 171  $ 171 
Computer, communications, and network equipment 17,535  17,450 
Construction in progress 105 —
Software 4,159  4,150 
Automobiles 13  13 
Leasehold improvements 25 131
Software development 11,777  8,552 
Property, equipment, and software development, at cost 33,785  30,467 
Accumulated depreciation and amortization (27,887) (24,205)
Property, equipment, and software development, net $ 5,898  $ 6,262 
For the six months ended June 30, 2020 and 2019 expenditures for property, equipment, and software development were $3.7 million and $2.6 million, respectively; and depreciation and amortization recognized on property, equipment, and software development was $4.0 million and $2.2 million, respectively.
As of June 30, 2020
(In thousands) Gross Carrying Amount Accumulated Amortization Accumulated Impairment Foreign Currency Translation Adjustments Intangible Assets, Net
Intangible assets, net
Developed technology $ 26,829  $ (5,301) $ (14,651) $ (622) $ 6,255 
Consumer relationships 25,300  (3,190) (14,434) (512) 7,164 
Trade names 3,544  (969) (1,757) (102) 716 
Total $ 55,673  $ (9,460) $ (30,842) $ (1,236) $ 14,135 
As of December 31, 2019 (As Revised)
(In thousands) Gross Carrying Amount Accumulated Amortization Accumulated Impairment Foreign Currency Translation Adjustments Intangible Assets, Net
Intangible assets, net
Developed technology $ 26,829  $ (4,800) $ (14,651) $ (623) $ 6,755 
Consumer relationships 25,300  (2,409) (14,434) (511) 7,946 
Trade names 3,544  (885) (1,757) (103) 799 
Total $ 55,673  $ (8,094) $ (30,842) $ (1,237) $ 15,500 
Amortization of intangible assets in the six months ended June 30, 2020 and 2019 was $1.4 million and $3.5 million, respectively.
The following table provides the estimated future amortization expense related to intangible assets held as of June 30, 2020:
14
PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
2020 (excluding the six months ended June 30, 2020)
$ 1,138 
2021 2,765 
2022 2,715 
2023 2,715 
2024 2,715 
Thereafter 2,087 
Total $ 14,135 

(In thousands)
Goodwill
Balance, December 31, 2018 (As Revised) $ 100,428 
Business combinations 37,821 
Impairment (125,923)
Foreign currency translation adjustment (2,227)
Balance, December 31, 2019 (As Revised) 10,099 
Foreign currency translation adjustment 12 
Balance, June 30, 2020 $ 10,111 

(In thousands) June 30,
2020 		December 31, 2019
Accrued expenses and other payables
Accrued selling, general and administrative expenses $ 2,692  $ 2,720 
Accrued salary and bonus 398  2,005 
Accrued employee benefits 852  564 
Accrued cost of service 970  627 
Accrued taxes (including VAT) 3,290  2,637 
Accrued interest payable 142  53 
Accrued customer credit 2,018  3,393 
Other accrued expenses 2,330  1,617 
Accrued expenses and other payables $ 12,692  $ 13,616 
Note 4. Lease Commitments
The Company leases property under operating leases with varying expiration dates between 2021 and 2025. The Company also leases equipment and automobiles under operating leases with expiration dates between 2022 and 2025. The Company determines if an arrangement is a lease at inception. The Company presents operating leases in right-of-use assets and lease liabilities, while finance leases are presented in property, equipment, and software development, net, and lease liabilities in the unaudited condensed consolidated balance sheets.
The following table presents information related to leases as of June 30, 2020 and December 31, 2019:
15
PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands) June 30, 2020 December 31, 2019
Assets:
Operating leases
Right-of-use assets, net(1)
$ 984  $ 2,241 
Finance leases
Property, equipment, and software development, net(2)
118  133 
Total leased assets $ 1,102  $ 2,374 
Liabilities:
Current:
Operating leases Current portion of lease liabilities $ 545  $ 2,376 
Finance leases Current portion of lease liabilities 47  46 
Current portion of lease liabilities 592  2,422 
Noncurrent:
Operating leases Lease liabilities, net of current portion 438  333 
Finance leases Lease liabilities, net of current portion 58  82 
Lease liabilities, net of current portion 496  415 
Total lease liabilities $ 1,088  $ 2,837 
(1) Right-of-use assets are recorded net of accumulated amortization of $1.1 million and $2.0 million as of June 30, 2020 and December 31, 2019, respectively.
(2) Finance lease assets are recorded net of accumulated depreciation of $24 thousand and $9 thousand as of June 30, 2020 and December 31, 2019, respectively.
The following table presents maturities of lease liabilities as of June 30, 2020:
(In thousands) Operating Leases Finance Leases
2020 (excluding the six months ended June 30, 2020)
$ 58  $ 25 
2021 505  51 
2022 220  34 
2023 207  — 
2024 134  — 
Thereafter 24  — 
Total lease payments 1,148  110 
Imputed interest (165) (5)
Total lease liabilities 983  105 
Current portion of lease liabilities 545  47 
Lease liabilities, net of current portion $ 438  $ 58 
Note 5. Debt
Senior Convertible Note
On June 8, 2020, the Company issued a $17.5 million Senior Convertible Note due April 1, 2025 to High Trail Investments SA LLC (“High Trail”) for $14.0 million (the “Proceeds”). The Company received $4.0 million of the Proceeds for working capital and the remaining $10.0 million was deposited into a blocked bank account based on the terms of a Control Agreement, and incurred approximately $0.5 million of legal fees. Under the terms of the Control Agreement, the Company can access the funds from the blocked account as follows:
•$3.0 million when the Company received $4.0 million in additional financing. The Company received the additional financing in July 2020 and the funds were released to the Company to be used for working capital purposes; and
•On or prior to October 31, 2020, $7.0 million when the Company met certain specified conditions (the “Specified Conditions”) as of any date and on each of the 20 previous trading days prior to such date as defined in the Senior Convertible Note; and
◦The Company can issue shares of its common stock upon conversion that are not subject to restrictions on resale;
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
◦Upon conversion, High Trail will not beneficially own in excess of 4.99% of the Company’s outstanding common stock;
◦At all times, the Company will have sufficient authorized and unissued shares of its common stock available for the issuance of common stock upon conversion of the outstanding principal amount of the Senior Convertible Note plus accrued interest;
◦The daily dollar trading volume of the Company’s common stock for at least 17 of the prior 20 trading days is not less than $0.8 million (as reported on Bloomberg);
◦The Company has obtained the requisite stockholder approval required by the Nasdaq Capital Market for the issuance of the shares of its common stock upon conversion;
◦The average daily volume-weighted average price per share of the Company’s common stock is not less than $0.85; and
◦There are no defaults or events of default that have occurred or are continuing.
The Senior Convertible Note contains customary events of default, as well as events of default if the Company fails to use reasonable efforts to obtain the approval of its stockholders for the issuance of the shares issuable upon conversion by October 31, 2020, the Company’s common stock ceases to be traded on the Nasdaq Capital Market, or the Company fails to restate its financial statements for the year ended December 31, 2018 and the quarters ended March 31, 2019 and June 30, 2019, in each case, prior to October 31, 2020 or fails to timely file its subsequent quarterly reports on Form 10-Q or its subsequent annual reports on Form 10-K with the SEC in the manner and within the time periods required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result of, among other things, the Company’s common stock no longer being traded on the Nasdaq Stock Market, the Company failing to restate its financial statements for the year ended December 31, 2018 and the quarters ended March 31, 2019 and June 30, 2019, in each case, prior to October 31, 2020, and its failure to timely file its subsequent quarterly reports on Form 10-Q or its subsequent annual reports on Form 10-K with the SEC in the manner and within the time periods required by the Exchange Act, the Company is currently in default.
The Senior Convertible Note is convertible into shares of the Company’s common stock, including any portion constituting an optional redemption payment amount, at High Trail's election. The conversion rate is equal to 1,666.667 shares of the Company’s common stock for every $1,000 of Senior Convertible Note principal outstanding, or $0.60 per share.
The Senior Convertible Note is secured by a first lien on substantially all of the assets of the Company and substantially all of the assets of its material domestic subsidiaries and the assets of Pareteum Europe BV, a subsidiary organized in the Netherlands. In addition, the Senior Convertible Note contains customary affirmative and negative covenants, including restrictions on indebtedness, equity securities, liens, dividends, distributions, acquisitions, investments, sale or transfer of assets, transactions with affiliates and maintenance of certain financial ratios.
See Note 11. Subsequent Events for additional information about the Senior Convertible Note, including events of default.
Derivative Liability
The Senior Convertible Note contains embedded features that are required to be bifurcated and recorded at fair value and then remeasured separately at each reporting date with the changes in fair value recognized in other income (expense), net in the Company’s condensed consolidated statements of operations and comprehensive loss under ASC 815. These embedded features include conversion features that allow for a change in the conversion rate in connection with certain equity issuances, payments based on a fundamental change feature, and payments based on certain events of defaults.
The Company estimated the fair values of the embedded derivatives using a Monte Carlo simulation, which utilizes inputs including the Company’s common stock price, probability assumptions, its historical volatility, risk-free rate, and time to maturity. The estimated fair values are a Level 3 measurement as defined by ASC 820, Fair Value Measurement, as they are based on significant inputs not observable in the market.
The following table presents the fair value of the derivative liability as of the issuance date of the Senior Convertible Note and June 30, 2020:
(In thousands) June 8, 2020 Fair Value Adjustment June 30, 2020
Conversion features $ 153  $ —  $ 153 
Optional acceleration upon default 588  54  642 
Fundamental change 44  (8) 36 
Derivative liability $ 785  $ 46  $ 831 
The initial fair value of the embedded derivatives was recorded as a debt discount in the condensed consolidated balance sheet as a direct deduction from the face amount of the Senior Convertible Note, and is being amortized using the straight-line method as the
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redemption amounts are not fixed and, in addition, are contingent upon High Trail exercising the redemption amounts through April 1, 2025. The amortization of the initial fair value of the embedded derivatives is recorded to interest expense.
For the three and six months ended June 30, 2020, the Company recognized other expense of $46 thousand for the change in the estimated fair value of the derivative liability on the issuance date of the Senior Convertible Note and June 30, 2020.
Warrant Liability
In connection with issuance of the Senior Convertible Note, the Company granted High Trail a warrant to purchase 15,000,000 shares of its common stock at an exercise price of $0.58 per share expiring on June 8, 2025. The warrant is not indexed to the Company’s own stock and is classified as a liability and is subsequently measured at fair value with the changes in fair value recognized in other income (expense), net in the Company’s condensed consolidated statements of operations and comprehensive loss in accordance with ASC 815.
The fair value of the warrant at June 8, 2020, the issuance date of the warrant, and as of June 30, 2020 were estimated using the Black-Scholes option pricing model using the assumptions described below. At each date, the Company’s stock price and the exercise price of the warrant, the expected volatility based on the Company’s historical volatility over the remaining contractual term of the warrant and the risk-free interest rate, which was based on the U.S. Treasury yield curve over the remaining contractual term of the warrant.
The following table presents the fair value of the warrant liability and assumptions used in the Black-Scholes option pricing model used as of the issuance date of the Senior Convertible Note and June 30, 2020:
(Dollars in thousands) June 8, 2020 Fair Value Adjustment June 30, 2020
Assumptions:
Expected volatility 128.21  % 128.94  %
Risk-free rate 0.45  % 0.29  %
Remaining contractual term (year) 5.00 4.94
Expected dividend yield 0.00  % 0.00  %
Warrant liability $ 7,256  $ 688  $ 7,944 
The initial fair value of the warrant liability was recorded as a debt discount in the unaudited condensed consolidated balance sheet as a direct deduction from the face amount of the Senior Convertible Note, and is being amortized using the straight-line method through April 1, 2025 as interest expense.
For the three and six months ended June 30, 2020, the Company recognized other expense of $0.7 million for the change in the estimated fair value of the warrant liability on the issuance date of the Senior Convertible Note and June 30, 2020.
As of June 30, 2020, the net carrying amount of the Senior Convertible Note is as follows:
(In thousands) June 30, 2020
Principal $ 17,500
Unamortized debt discount and debt issuance costs (3,925)
Unamortized High Trail warrant (7,177)
Unamortized embedded derivatives (776)
Senior Convertible Note, net $ 5,622
The following table presents the components of noncash interest expense relating to the Senior Convertible Note for the three and six months ended June 30, 2020:
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(In thousands) Three and Six Months Ended June 30, 2020
Amortization of debt discount $ 38
Amortization of debt issuance costs 5
Amortization of the High Trail warrant 79
Amortization of the embedded derivatives 9
Noncash interest expense, Senior Convertible Note $ 131
Series C Redeemable Preferred Stock
During the six months ended June 30, 2020, the Company issued 70.2 shares of Redeemable Preferred Stock with a stated value of $7.0 million for gross proceeds of $6.0 million. The Company received net proceeds of $5.7 million after deducting transaction costs of $0.3 million. The Redeemable Preferred Stock requires mandatory redemption one year after the issuance date, together with an 8.0% dividend and a 12.5% premium on the stated value. As of June 30, 2020 and December 31, 2019 there were 175.53 and 105.33 shares of Redeemable Preferred Stock outstanding, respectively, with redemption dates ranging from December 24, 2020 to June 30, 2021.
The following table presents the components of the Redeemable Preferred Stock as of June 30, 2020 and December 31, 2019:
(In thousands) June 30,
2020 		December 31, 2019
Stated value $ 17,253  $ 10,533 
Unamortized debt discount (4,231) (5,776)
Accretion of redemption premium 904  25 
Accrued dividends 576  16 
Redeemable Preferred Stock, net $ 14,502  $ 4,798 
The components of financing expense related to the Redeemable Preferred Stock were as follows for the three and six months ended June 30, 2020:
(In thousands) Three Months Ended
June 30, 2020 		Six Months Ended
June 30, 2020
Amortization of debt discount $ 1,548  $ 2,742 
Accretion of redemption premium 493  879 
Accrual of dividends 308  555 
Noncash interest expense, Redeemable Preferred Stock $ 2,349  $ 4,176 
By their terms, the Redeemable Preferred Stock is not convertible into other securities of the Company. See Note 11. Subsequent Events for additional information about the Redeemable Preferred Stock.
Promissory Notes
The promissory notes are comprised of six bank notes secured by Artilium with varying original maturity dates ranging between 6 and 24 months with an average interest rate of 2.0%. The notes are not convertible. As of June 30, 2020 and December 31, 2019, the outstanding balance on the promissory notes was $1.0 million and $1.0 million, respectively.
Related Party Loan
The Company has a loan payable to Comsystems, a company owned by Gerard Derenbos. Prior to the Artilium acquisition, Mr. Derenbos held approximately 15% of the total outstanding common shares of Artilium, and was an Artilium board member. As of June 30, 2020 and December 31, 2019, the outstanding balance was $0.4 million and $0.4 million, respectively. The loan bears interest at 8.0% and matures on December 31, 2021. All principal and interest are due on the maturity date.
Paycheck Protection Program Loans
On May 4, 2020, Pareteum received a $0.6 million PPP loan and on May 8, 2020, iPass received an $0.8 million PPP loan under the CARES Act. The PPP Loans are administered by the U.S. Small Business Administration, mature two years from the funding date, and bear interest at 1.0%.
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PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the terms of the CARES Act, the Company applied for and received forgiveness of the PPP Loans. See Note 11. Subsequent Events for additional information about the PPP Loans.
Note 6. Stockholders’ Equity (Deficit)
Preferred Stock
The Company is authorized to issue up to 49,995,966 shares of preferred stock. As of June 30, 2020 and December 31, 2019, there were 175.53 and 105.33 shares issued and outstanding, respectively. The outstanding shares of preferred stock as of June 30, 2020 and December 31, 2019 are classified as debt. See Note 5. Debt and Note 11. Subsequent Events for additional information about the Redeemable Preferred Stock.
Common Stock
The Company is authorized to issue up to 500,000,000 shares of common stock. As of June 30, 2020 and December 31, 2019, the issued and outstanding shares were 140,325,114 and 139,060,180, respectively.
The following table presents common stock activity for the six months ended June 30, 2020 and 2019:
Six Months Ended June 30,
2020 2019
Common stock outstanding, beginning of period 139,060,180  98,292,530 
Shares issued for acquisition of iPass —  9,865,412 
Shares issued for acquisition of Devicescape —  400,000 
Warrant exercises —  858,344 
Shares issued for conversion of note —  84,220 
Shares issued in connection with debt facility —  425,000 
Shares issued for settlement of accounts payable/debt —  786,246 
Shares issued for exercised stock options —  176,177 
Vesting of restricted and common stock awards 1,264,934  1,506,420 
Common stock outstanding, end of period 140,325,114  112,394,349 
Warrants
The Company has issued warrants with varying terms and conditions related to multiple financing rounds, acquisitions and other transactions. The following table summarizes warrant activity for the six months ended June 30, 2020 and the year ended December 31, 2019:
Six Months Ended
June 30, 2020 		Year Ended
December 31, 2019
Warrants outstanding, beginning of period 38,111,211  3,789,482 
Issued 17,000,000  39,199,998 
Exercised —  (4,818,269)
Expired (610,000) (60,000)
Warrants outstanding, end of period 54,501,211  38,111,211 
As of June 30, 2020 and December 31, 2019, 39,501,211 and 38,111,211 of the outstanding warrants have been recorded and classified as equity. Exercise prices for the outstanding warrants range from $0.37 to $5.38; the weighted average exercise price for the outstanding warrants as of June 30, 2020 is $1.66; and the outstanding warrants expire from 2020 to 2026. See Note 5. Debt for additional information about the outstanding warrants classified as liabilities.
Note 7. Income Taxes
The following table presents details of income tax expense (benefit):
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PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 2020 2019
Income tax expense (benefit) $ 15  $ (197) $ (82) $ (364)
Our effective tax rates were (0.1)% and 1.3% for the three months ended June 30, 2020 and 2019, respectively, and 0.4% and 1.2% for the six months ended June 30, 2020 and 2019, respectively. Our effective tax rates were lower than the U.S. federal statutory rate primarily due to earnings in foreign jurisdictions.
The Company had no uncertain tax positions as of June 30, 2020 and December 31, 2019.
Note 8. Supplemental Cash Flow Information
The following table provides supplemental cash flow information for the six months ended June 30, 2020 and 2019:
Six Months Ended June 30,
(In thousands) 2020 2019
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash received during the period for interest $ 8  $ 87 
Cash paid during the period for interest 3  1,023 
Cash paid during the period for income taxes 29  10 
Operating cash outflows from operating leases 360  1,656 
Operating cash outflows from finance leases (interest) 3  2 
Financing cash outflows from finance leases 25  17 
NONCASH FINANCING ACTIVITIES:
Shares issued in business combinations —  28,610 
Shares issued for asset purchase —  1,692 
Conversion of notes, including converted accumulated interest —  147 
Right-of-use lease assets and financing 259  — 
Warrants issued for settlement agreement 653  — 
Note 9. Segment and Geographic Information
Segment Information
Segment information is prepared on the same basis that our chief operating decision-makers (“CODMs”), who are our interim chief executive officer and interim chief financial officer, evaluate financial results, make key operating decisions, and for which discrete financial information is available. As of June 30, 2020, the Company has aggregated its three operating segments, which have similar economic characteristics and all provide their customers with communication connectivity services achieved through sales and marketing channels across all three operating segments through their CPaaS, into one reportable segment—Communication Connectivity Services. The measure of profitability our CODMs use to evaluate financial results for our reportable segment is operating income (loss).
The following table presents disaggregated revenues from external customers derived from Communication Connectivity Services for the three and six months ended June 30, 2020 and 2019:
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 2020 2019
Monthly service $ 15,823  $ 16,738  $ 35,742  $ 29,598 
Installation and software development 282  138  418  347 
Total revenue $ 16,105  $ 16,876  $ 36,160  $ 29,945 
Geographic Information
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information about our consolidated revenues for the three and six months ended June 30, 2020 and 2019, based on customer location:
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 2020 2019
International $ 10,711  $ 11,342  $ 21,988  $ 21,597 
United States 5,394  5,534  14,172  8,348 
Total revenue $ 16,105  $ 16,876  $ 36,160  $ 29,945 
Note 10. Commitments and Contingencies
Commitments
The Company has entered into certain off–balance sheet commitments that require the future purchase of goods or services (“unconditional purchase obligations”). The Company entered into the Strategic Connectivity Agreement (the “Connectivity Agreement”) with Hutchison 3G UK Limited (“3UK”) on July 23, 2019. Under the Connectivity Agreement, the Company is obligated to pay 3UK $0.6 million dollars (the “Implementation Fee”) for the implementation of a mobile virtual network operator ("MVNO" and specifically, the “3UK MVNO”), and for monthly services provided, based on usage, after the 3UK MVNO is launched, which management anticipates to be in the third quarter of 2021. On February 19, 2021, the Company and 3UK amended the Connectivity Agreement to eliminate some of the invoicing functionality of the 3UK MVNO, which will reduce the Implementation Fee to $0.4 million. The Implementation Fee is payable upon the satisfactory completion of certain agreed upon milestones. As of June 30, 2020, none of those milestones had been achieved, however, as of the date of this Report, two of the four milestones had been achieved.
Concurrent with the execution of the Connectivity Agreement, the Company entered into the Agreement for the Sale and Purchase of Credit Voucher (the “Credit Voucher Agreement”) with PCCW Global Limited (“PCCW”) under which the Company is obligated to purchase a credit voucher for $28.1 million. The credit voucher will be used to offset certain monthly service charges incurred under the Connectivity Agreement. As of June 30, 2020, $0.1 million of the purchase price has been paid and $0.4 million of the purchase price has been recorded in accrued expenses and other payables in the condensed consolidated balance sheet. The remaining $27.6 million unconditional purchase obligation is due and payable following the launch date of the 3UK MVNO, whereafter the Company is required to remit the amount of the credit voucher used to offset monthly charges incurred under the Connectivity Agreement to PCCW each quarter.
Should the aggregate of the monthly charges offset with the credit voucher from the Connectivity Agreement launch date through June 30, 2022 be less than $7.3 million, the Company is obligated to remit a make-up payment (the “2022 Make-up Payment”) for the difference between $7.3 million and the aggregate monthly charges offset with the credit voucher. Should the aggregate of the monthly charges offset with the credit voucher from the Connectivity Agreement launch date through June 30, 2023, plus any 2022 Make-up Payment, if applicable, be less than $12.9 million, the Company is obligated to remit a make-up payment (the “2023 Make-up Payment”) for the difference between $12.9 million and the aggregate monthly charges offset with the credit voucher, plus any 2022 Make-up Payment. Should the aggregate of the monthly charges offset with the credit voucher from the Connectivity Agreement launch date through June 30, 2024, plus any 2022 Make-up Payment and any 2023 Make-up Payment, if applicable, be less than $19.7 million, the Company is obligated to remit a make-up payment (the “2024 Make-up Payment”) for the difference between $19.7 million and the aggregate monthly charges offset with the credit voucher, plus the 2022 Make-up Payment and the 2023 Make-up Payment. Should the aggregate of the monthly charges offset with the credit voucher from the Connectivity Agreement launch date through June 30, 2025, plus any 2022 Make-up Payment and any 2023 Make-up Payment and any 2024 Make-up Payment, if applicable, be less than $27.6 million, the Company is obligated to remit a final make-up payment for the difference between $27.6 million and the aggregate monthly charges offset with the credit voucher, plus any 2022 Make-up Payment and any 2023 Make-up Payment and any 2024 Make-up Payment.
The following table presents the minimum amounts due under the Company’s unconditional purchase obligations as of June 30, 2020:
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands) Connectivity Agreement Credit Voucher Agreement Total
2020 (excluding the six months ended June 30, 2020)
$ 112  $ —  $ 112 
2021 281  —  281 
2022 —  —  — 
2023 —  7,311  7,311 
2024 —  5,624  5,624 
Thereafter —  14,622  14,622 
Total $ 393  $ 27,557  $ 27,950 
The following table presents management’s estimate of the timing of amounts due under the Company’s unconditional purchase obligations as of June 30, 2020:
(In thousands) Connectivity Agreement Credit Voucher Agreement Total
2020 (excluding the six months ended June 30, 2020)
$ 112  $ —  $ 112 
2021 281  —  281 
2022 —  307  307 
2023 —  8,242  8,242 
2024 —  6,734  6,734 
Thereafter —  12,274  12,274 
Total $ 393  $ 27,557  $ 27,950 
Legal Proceedings
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully resolved. The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts above management’s expectations, the Company’s financial condition and operating results for that period could be materially adversely affected.
The following actions were initiated or settled on or before June 30, 2020:
Ellenoff Grossman & Schole LLP. On May 5, 2017, the Company’s former legal counsel, Ellenoff Grossman & Schole LLP, commenced litigation proceedings in New York alleging breach of contract and claiming $0.8 million in unpaid legal fees for January 2015 through November 2016. On June 29, 2017, the parties entered into a settlement agreement for the full $0.8 million with agreed-upon monthly installment payments through August 31, 2019. As of June 30, 2020, the amount outstanding on the settlement agreement is $0.1 million.
SEC Investigation. In August 2019 and February 2020, the SEC issued subpoenas requiring the Company to produce certain documents related to, among other things, the Company’s recognition of revenue, practices with certain customers, and internal accounting controls. The SEC staff has also interviewed and taken testimony from individuals previously employed by the Company in connection with the investigation. The Company is cooperating with the SEC staff in the SEC investigation and discussions with the SEC staff regarding a potential resolution of the investigation with respect to the Company are ongoing.
Sabby Volatility Warrant Master Fund, Ltd. v. Pareteum Corp., et al., No. 19-cv-10460 (S.D.N.Y.) (the “Section 11 Action”), is an action brought under Section 11 of the Securities Act by an investor, Sabby Volatility Master Fund, Ltd. (“Plaintiff Sabby”), against the Company, Robert H. Turner, Edward O’Donnell, Denis McCarthy, Victor Bozzo, Robert Lippert, Yves Van Sante, and Luis Jimenez Tunon (collectively, the “Defendants”), filed on November 11, 2019. Plaintiff Sabby alleges that the Defendants caused the Company to issue false or misleading statements in a Registration Statement filed with the SEC. Plaintiff Sabby claims that as a result of the alleged misconduct, the Defendants are liable for violations of Section 11 of the Securities Act, breaches of a securities purchase agreement (the “SPA”) entered into between Plaintiff Sabby and Pareteum, and contractual indemnification allegedly owed to Plaintiff Sabby under the SPA. Plaintiff Sabby seeks monetary damages and/or rescission of the SPA, and indemnification by Pareteum for any losses resulting from its alleged breach of the SPA, including costs and expenses incurred in connection with the Section 11 Action.
Artilium Africa, LLC et al. v. Artilium, PLC et al.; ICDR Case No. 01-19-0003-1680 and Artilium Africa, LLC and Tristar Africa Telecom, LLC v. Pareteum Corporation are related matters arising out of the same dispute. The former matter is an arbitration filed with the International Center for Dispute Resolution (“ICDR”) on October 1, 2019 alleging that Artilium Group Limited, a subsidiary of Pareteum Corporation formerly known as Artilium PLC (“Artilium”), breached an Operating Agreement relating to a joint venture
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
called Artilium Africa formed by Artilium Green Globe Services LLC and Tristar Africa Telecom, LLC (“Tristar” and together with Artilium, the “Delaware Plaintiffs”) to provide mobile data, cloud, and telecommunications services throughout Africa. The Claimants in the ICDR arbitration are seeking $30.0 million. The latter matter is a civil case filed on October 10, 2019 in the Delaware District Court. The Delaware Plaintiffs allege that Pareteum tortuously interfered with Tristar’s contract with Artilium in order to enter into the same type of agreement with Artilium. The Plaintiffs are seeking $0.2 million in damages. On December 17, 2020, the Delaware District Court stayed the action and compelled the Delaware Plaintiffs to pursue their claims against Pareteum in the ICDR arbitration.
In re Pareteum Securities Litigation is the consolidation of various putative class actions that were filed in the United States District Court for the Southern District of New York. The cases were assigned to Judge Alvin Hellerstein, who consolidated the actions on January 10, 2020 and named the Pareteum Shareholder Investor Group as the Lead Plaintiff. The Lead Plaintiff is asserting claims on behalf of purported purchasers and/or acquirers of Company securities between December 14, 2017 and October 21, 2019. The defendants are the Company, Robert H. Turner, Edward O’Donnell, Victor Bozzo, Denis McCarthy, Dawson James Securities Inc., and Squar Milner LLP (“Defendants”). The Lead Plaintiff alleges that Defendants caused the Company to issue certain materially false or misleading statements in SEC filings and other public pronouncements in violation of Sections 10(b) and 20(a) of the Exchange Act, and Sections 11, 12 and 15 of the Securities Act. The Lead Plaintiff seeks to recover compensatory damages with interest for itself and the other class members for all damages sustained as a result of Defendants’ alleged wrongdoing and reasonable costs and attorney’s fees incurred in the case.
Miller ex rel. Pareteum Corporation v. Victor Bozzo, et al. was filed on February 28, 2020 in the Supreme Court for the State of New York, New York County. It is a stockholder derivative suit brought by Plaintiff William Miller (“Plaintiff Miller”), derivatively on behalf of Pareteum, the Nominal Defendant, against certain officers and directors of Pareteum, including Victor Bozzo, Laura Thomas, Yves van Sante, Luis Jimenez-Tunon, Robert Lippert, Robert H. Turner, Edward O’Donnell, and Denis McCarthy (the “Individual Defendants”). Plaintiff Miller alleges that the Individual Defendants caused the Company to issue false or misleading statements in SEC filings and other public pronouncements in violation of certain federal securities regulations. Plaintiff Miller alleges that as a result of their misconduct, the Individual Defendants are liable for violations of Section 14(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. Plaintiff Miller seeks a judgment awarding Pareteum damages with interest sustained as a result of the Individual Defendants’ alleged misconduct, directing the Individual Defendants to take certain measures to reform and improve Pareteum’s corporate governance and internal procedures, awarding Pareteum restitution from the Individual Defendants, and awarding Plaintiff Miller all costs and expenses incurred in pursuing the claims.
In re Pareteum Corporation Stockholder Derivative Litigation (the “Delaware Derivative Action”) is a consolidated action that was originally filed in the United States District Court for the District of Delaware (the “Delaware District Court”) and joins several related derivative actions (the “Related Suits”). On April 3, 2020, the Delaware District Court consolidated the Related Suits brought by stockholders Edward Hayes, Juanita Silvera, and Brad Linton (“Plaintiffs”), derivatively on behalf of Pareteum, the Nominal Defendant, against certain officers and directors of Pareteum, including Robert H. Turner, Edward O’Donnell, Denis McCarthy, Laura Thomas, Victor Bozzo, Luis Jimenez-Tunon, Robert Lippert, Rob Mumby and Yves Van Sante (the “Individual Defendants”). Plaintiffs in the related actions have alleged that the Individual Defendants caused Pareteum to issue false or misleading statements in SEC filings and other public pronouncements in violation of certain federal securities regulations. Plaintiffs allege that as a result of the Individual Defendants’ misconduct, they are liable for violations of Section 14(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, and gross mismanagement. Plaintiffs seek a judgment (1) declaring that the Individual Defendants breached their fiduciary duties and/or aided and abetted the breach of their fiduciary duties; (2) awarding Pareteum damages sustained as a result of the Individual Defendants’ breaches of fiduciary duty and violations of federal securities laws; (3) ordering that the Individual Defendants disgorge any performance-based compensation that was received during, or as a result of, the Individual Defendants’ breaches of fiduciary duty; (4) directing the Individual Defendants to take certain measures to reform and improve Pareteum’s corporate governance and internal procedures; (5) granting appropriate equitable or injunctive relief to remedy the Individual Defendants’ breaches of fiduciary duties and other violations of laws; (6) awarding Pareteum restitution from the Individual Defendants; and (7) awarding Plaintiffs all costs and expenses incurred in the Related Suits and Delaware Derivative Action. On July 22, 2020, this action was transferred to the United States District Court for the Southern District of New York.
Zhang ex rel. Pareteum Corporation v. Robert H. Turner, et al. was filed on May 26, 2020 in the Supreme Court for the State of New York, New York County. It is a stockholder derivative suit brought by Plaintiff Wei Zhang (“Plaintiff Zhang”), derivatively on behalf of Pareteum, the Nominal Defendant, against certain officers and directors of Pareteum, including Robert H. Turner, Edward O’Donnell, Denis McCarthy, Victor Bozzo, Rob Mumby, Luis Jimenez-Tunon, Robert Lippert, Laura Thomas, and Yves van Sante (the “Individual Defendants”). Plaintiff Zhang alleges that the Individual Defendants caused the Company to issue false or misleading statements in SEC filings and other public pronouncements in violation of certain federal securities regulations. Plaintiff Zhang alleges that as a result of their misconduct, the Individual Defendants are liable for violations of Section 14(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. Plaintiff Zhang seeks a judgment awarding Pareteum damages with interest sustained as a result of the Individual Defendants’ alleged misconduct, directing the Individual Defendants to take certain measures to reform and improve Pareteum’s corporate governance and internal procedures,
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PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
awarding Pareteum restitution from the Individual Defendants, and awarding Plaintiff Zhang all costs and expenses incurred in pursuing this claim.
Douglas Loskot v. Pareteum Corporation, et al., is a putative class action pending in the Superior Court of California, County of San Mateo. It was filed on May 29, 2020 on behalf of all former stockholders of iPass Inc. who received shares of the Company’s common stock pursuant to a February 12, 2019 Offer to Exchange. The defendants are the Company, Robert H. Turner, Edward O’Donnell, Victor Bozzo, Yves van Sante, Robert Lippert and Luis Jimenez-Tunon. The complaint alleges that the defendants caused the Company to issue materially false or misleading statements in SEC filings submitted in connection with the Offer to Exchange in violation of Sections 11 and 15 of the Securities Act.
The following actions were initiated after June 30, 2020:
Shaw ex. rel. Pareteum Corporation v. Luis Jimenez-Tunon, et al. was filed on July 10, 2020 in the Supreme Court for the State of New York, New York County. It is a stockholder derivative suit brought by Plaintiff Michael Shaw (“Plaintiff Shaw”), derivatively on behalf of Pareteum, the Nominal Defendant, against certain officers and directors of Pareteum, including Luis Jimenez-Tunon, Robert Lippert, Yves Van Sante, Robert H. Turner, Edward O’Donnell, Denis McCarthy, Victor Bozzo, and Laura Thomas (the “Individual Defendants”). Plaintiff Shaw alleges that the Individual Defendants caused the Company to issue false or misleading statements in SEC filings and other public pronouncements in violation of certain federal securities regulations. Plaintiff Shaw alleges that as a result of their misconduct, the Individual Defendants are liable for violations of Section 14(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. Plaintiff Shaw seeks a judgment awarding Pareteum damages sustained as a result of the Individual Defendants’ alleged misconduct, directing the Individual Defendants to take certain measures to reform and improve Pareteum’s corporate governance and internal procedures, and awarding Plaintiff Shaw all costs and expenses incurred in pursuing this claim.
Gregory Lackey, derivatively on behalf of Pareteum Corp. v. Robert “Hal” Turner, et al., No. 1:21-mc-00070, is a shareholder derivative suit that was filed on January 25, 2021 in the United States District Court for the Southern District of New York. Plaintiff Gregory Lackey (“Plaintiff Lackey”) is a purported stockholder suing on behalf of Pareteum and alleging that certain officers and directors of Pareteum, including Robert H. Turner, Edward O’Donnell, Denis McCarthy, Victor Bozzo, Luis Jimenez-Tunon, Robert Lippert, Rob Mumby, Laura Thomas and Yves Van Sante (the “Individual Defendants”) caused Pareteum to issue false or misleading statements in SEC filings and other public pronouncements in violation of certain federal securities statutes and regulations. Plaintiff Lackey alleges that as a result of their misconduct, the Individual Defendants are liable for contribution and indemnification under Section 21D of the Exchange Act, breach of fiduciary duty, and unjust enrichment. Plaintiff Lackey seeks a judgment (1) awarding Pareteum damages sustained as a result of the Individual Defendants’ breaches of fiduciary duty; (2) directing the Individual Defendants to take certain measures to reform and improve Pareteum’s corporate governance and internal procedures; (3) awarding Pareteum restitution from the Individual Defendants and disgorgement of all profits obtained by the Individual Defendants; and (4) awarding Plaintiff Lackey all costs and expenses incurred in the action.
Reuben Harmon, derivatively on behalf of Pareteum Corp. v. Robert H. Turner, et al. is a stockholder derivative lawsuit that was filed in the Supreme Court for the State of New York, New York County on January 27, 2021 by Reuben Harmon (“Plaintiff Harmon”). This case was brought derivatively on behalf of Pareteum, the Nominal Defendant, against certain current and former officers and directors of the Company, including Robert H. Turner, Edward O’Donnell, Denis McCarthy, Victor Bozzo, Rob Mumby, Luis Jimenez-Tunon, Robert Lippert, Laura Thomas and Yves Van Sante (the “Individual Defendants”). Plaintiff Harmon alleges that the Individual Defendants caused Pareteum to issue false or misleading statements in SEC filings and other public pronouncements in violation of certain federal securities statutes and regulations. Plaintiff Harmon alleges that as a result of their misconduct, the Individual Defendants are liable for breaches of their fiduciary duties as directors and/or officers of Pareteum, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. Plaintiff Harmon seeks a judgment awarding Pareteum damages with interest sustained as a result of the Individual Defendants’ alleged misconduct, directing the Individual Defendants to take certain measures to reform and improve Pareteum’s corporate governance and internal procedures, awarding Pareteum restitution from the Individual Defendants, and awarding Plaintiff Harmon all costs and expenses incurred in pursing the claim.
Deutsche Telekom A.G. (“DTAG”) is both a supplier to, and customer of, the Company’s subsidiary, iPass. DTAG has initiated a lawsuit in Germany in the amount of approximately $0.8 million for non-payment for supply of services to iPass and/or insufficient delivery of services to DTAG. iPass has reasonable grounds to set-off a significant proportion of the claimed sums and otherwise dispute the claims. iPass intends to vigorously defend and/or set-off the DTAG claim.
Stephen Brown v. Elephant Talk North America Corporation and Elephant Talk Communications Corp., Case No. 5:18-cv-902-R in the Western District of Oklahoma. A former consultant, Steve Brown (“Plaintiff Brown”) brought a lawsuit against Pareteum and its subsidiary claiming approximately five years’ unpaid consulting fees in an amount equal to $0.8 million. The Company believes some or all of his claims are time-barred and/or frivolous. The Company’s position is that Plaintiff Brown was dismissed for cause in 2013/14, and intends to defend itself in this matter vigorously.
Unclaimed Property Compliance
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company has received notices from several states stating that they have appointed an agent to conduct an examination of the books and records of the Company to determine whether it has complied with state unclaimed property laws. In addition to seeking the turnover of unclaimed property subject to escheat laws, the states may seek interest, penalties, costs of examinations, and other relief. If the potential loss from any payment claim is considered probable and the amount or the range of the loss can be estimated, the Company accrues a liability for the estimated loss. To date, the Company is not able to estimate the possible payment, if any, due to the early state of this matter.
Note 11. Subsequent Events
The Company has evaluated subsequent events through the date of the filing of this Report and determined that there have been no events that have occurred that would require adjustments to our disclosures in the consolidated financial statements except for the transactions described below.
Senior Convertible Note
On November 30, 2020, the Company and High Trail entered into the Forbearance Agreement. Under the terms of the Forbearance Agreement, High Trail agreed to forebear from exercising certain rights and remedies. High Trail agreed that it would not, directly or indirectly, exercise any right or remedy under any transaction document or take any other enforcement action in respect of the occurrence and continuance of any existing event of default (as explained above), or encourage any other person to take or initiate any such enforcement action or other action through the forbearance termination date as defined as: (a) December 31, 2020 (subsequently extended through March 31, 2021); (b) the occurrence of any event of default (other than an existing event of default); and (c) the initiation of any action by the Company or any other person to invalidate or limit the enforceability of any of the acknowledgments set forth in the Forbearance Agreement.
As a condition of the Forbearance Agreement, the Company and High Trail agreed that if the Company elects the option to pay either the optional redemption payment or the stated interest in shares of its common stock, the Market Stock Payment Price was amended to remove the floor price of $0.10, such that the price would be: an amount equal to 85% of the lowest daily volume-weighted average price per share of the Company’s common stock during the 10 trading days immediately prior to such interest payment date or optional redemption stock payment date.
In addition, the event of default conversion price was changed to the lesser of (A) the conversion price that would be in effect immediately after the close of business on the conversion date for such conversion as defined in the Senior Convertible Note, and (B) 75% of the lowest daily volume-weighted average price per share of the Company’s common stock during the 30 consecutive trading days ending on, and including, such conversion date (or, if such conversion date is not a trading day, the immediately preceding trading day).
On December 23, 2020, High Trail agreed to release to the Company for working capital purposes $1.0 million of the $7.0 million that was required to be held in the blocked bank account under the terms of a Control Agreement until the Specified Conditions were met by October 31, 2020 even though the Specified Conditions were not met. In consideration for High Trail agreeing to release the $1.0 million, the Company increased the initial conversion rate to 2,702.702 from 1,666.667 shares of common stock per $1,000 principal amount of the Senior Convertible Note, which resulted in a decrease to the conversion price per share to $0.37 from $0.60.
Subsequently, High Trail agreed to extend the forbearance termination date to March 31, 2021. On April 8, 2021, High Trail provided notice to the Company that it was causing $6.0 million of the purchase price maintained in the blocked account to be transferred to High Trail in partial satisfaction of the amounts outstanding under the Senior Convertible Note.
On May 24, 2021, the Company entered into the New Forbearance Agreement with the holder of the Senior Convertible Note under which (i) the Company again admitted it was in default under several obligations under the Senior Convertible Note and related agreements, and (ii) the lender acknowledged such defaults and agreed not to exercise any right or remedy under the Senior Convertible Note or the related securities purchase agreement, warrant or security documents, including its right to accelerate the aggregate amount outstanding under the Senior Convertible Note, until the Outside Date, as the same may be extended from time to time under the terms of the New Forbearance Agreement.
As partial consideration for its agreement not to exercise any right or remedy under the Senior Convertible Note and related documents, the lender and the Company agreed to make certain changes to the documents. In this regard, the parties agreed to amend the “Event of Default Acceleration Amount” definition in the Senior Convertible Note so that the amount due and payable by the Company on account of an event of default would be an amount in cash equal to 125% of the then-outstanding principal and accrued and unpaid interest under the Senior Convertible Note. This represents an increase from 120% of the then-outstanding principal and accrued and unpaid interest, and removes the market-price-based alternative for such acceleration amount.
Additionally, the parties also agreed that the principal amount outstanding under the Senior Convertible Note would be increased by certain paid-in-kind amounts in full satisfaction of the Company’s obligation to make payments of interest to the lender on each of April 1, 2021 and May 1, 2021, which amounts were not paid by the Company in cash or Common Stock. In consideration of the lender’s agreement to enter into the New Forbearance Agreement and agree to the amendments to the Senior Convertible Note, the
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PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Company agreed to pay the lender a fee in the amount of $1.5 million. Accordingly, following these increases in the principal amount payable, but applying against the outstanding principal and such fee the $6.0 million previously maintained in certain blocked account against that was foreclosed upon by the lender, the total amount of principal outstanding under the Senior Convertible Note as of the date of the New Forbearance Agreement was approximately $13.5 million.
On June 19, 2021, the Company entered into an amendment to the Senior Convertible Note under which the Company will increase the number of shares of common stock reserved for issuance upon conversion of the Senior Convertible Notes, such that the Company is required to reserve the greater of i) 230,000,000 shares or ii) the quotient obtained by dividing (A) 200% of the principal amount outstanding, plus all accrued and unpaid interest by (B) 85% of the recent trading price of the Company's common stock.
Junior Convertible Notes
On February 22, 2021, the Company issued the $2.4 million Junior Convertible Note due April 1, 2025 for $2.0 million. The Junior Convertible Note is a senior, secured obligation of the Company, but ranks junior to the Secured Convertible Note. Interest is payable monthly beginning April 1, 2021 at a rate of 8.0% per annum. The Junior Convertible Note is secured by a second lien on substantially all of the Company's assets and substantially all of the assets of its material domestic subsidiaries. Interest may be paid, at the election of the Company, in cash or in shares of common stock of the Company; provided, that, so long as the Senior Convertible Note remains outstanding, such payments may only be made in shares. The number of shares of common stock to be issued to pay interest in shares of the Company’s common stock is determined by the application of a formula in which the amount of the interest due is divided by 85% of the lowest volume weighted-average price of the Company’s common stock on the principal market for the Company’s common stock over the 10 days preceding the date of such payment.
Subject to an intercreditor agreement with the holder of the Senior Convertible Note, the Company may elect to redeem all or a portion of the then-outstanding principal amount outstanding under the Junior Convertible Note. The holder of such Junior Convertible Note or the Company may also elect for the Company to redeem the Junior Convertible Note at a 20% premium if the Company undergoes a fundamental change. The Junior Convertible Note is convertible into the Company's common stock, in part or in whole, from time to time, at the election of the Purchaser. The conversion rate is equal to 1,666.667 shares of the Company’s common stock for each $1,000 of principal amount of the Junior Convertible Note, or $0.60 per share. The conversion rate is subject to customary anti-dilution adjustments in the event the Company issues stock dividends or effects a split or reverse split of the Company’s common stock.
In connection with the Junior Convertible Note, certain Series B warrants previously issued to this institutional investor for the purchase of up to 258,523 shares of common stock at an exercise price of $1.84 per share were cancelled; such warrants had been issued on September 24, 2019 in connection with the financing described in Note 6. Stockholders' Equity, and the Company granted a warrant to purchase 2,750,000 shares of its common stock to the purchaser at an exercise price of $0.40 per share expiring on February 22, 2026. The warrants are exercisable any time after February 22, 2021.
On April 29, 2021, the Company entered into a securities purchase agreement, dated as of April 13, 2021 (the “Junior Convertible Notes Securities Purchase Agreement”), with two initial investors and other investors as may become party thereto from time to time (a “Note Purchaser” and collectively, the “Note Purchasers”) providing for the issuance and sale by the Company of up to $6.0 million aggregate principal amount of additional Junior Convertible Notes and warrants (the “Warrants”) to purchase up to 5,000,000 shares of its common stock at an exercise price of $0.40. Under the Junior Convertible Notes Securities Purchase Agreement, a Note Purchaser will be issued Warrants equal to 83.33333333% of the principal amount of Junior Convertible Notes acquired. The additional Junior Convertible Notes and accompanying Warrants may be sold from time to time to one or more Note Purchasers under the terms of the Junior Convertible Notes Securities Purchase Agreement. On April 29, 2021, the Company closed on the sale of additional Junior Convertible Notes in the aggregate principal amount of approximately $1.8 million and Warrants to purchase 1,490,000 shares of common stock under the Junior Convertible Notes Securities Purchase Agreement for an aggregate purchase price of $1.5 million.
On June 19, 2021, the Company entered into the Omnibus Agreement, with holders of its previously outstanding Junior Convertible Notes; issued three new Junior Convertible Notes with an aggregate principal amount of $17.3 million for a purchase price of $5.0 million in cash and the surrender of 91.38 shares of Redeemable Preferred Stock; and issued a new warrant to one of the Junior Convertible Note purchasers for the purchase of 5,000,000 shares of the Company's common stock at an exercise price of $0.37 per share.
The Omnibus Agreement amended the Junior Convertible Notes Securities Purchase Agreement and previously outstanding Junior Convertible Notes and, among other changes:
•Increased the aggregate principal amount of Junior Convertible Notes issuable under the Junior Convertible Notes Securities Purchase Agreement from $6.0 million to $24.0 million (plus the accrued in-kind interest that is subsequently added to the principal amount outstanding from time to time);
•Increased the aggregate number of shares issuable upon the exercise of warrants to purchase common stock issuable under the Junior Convertible Notes Securities Purchase Agreement from 5,000,000 shares to 11,625,000 shares;
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PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
•Added additional negative covenants that restrict the Company from selling any additional securities under the Junior Convertible Notes Securities Purchase Agreement to any new investors and from redeeming all or any portion of any Junior Convertible Notes unless the holders receive the stated premium;
•Changed the conversion rate from 1,666.667 shares of common stock per $1,000 in principal amount of Junior Convertible Notes converted to 2,702.702 shares of common stock per $1,000 in principal converted;
•Provides for accrued interest to be paid in-kind by adding such amounts to the outstanding principal balance, rather than paying such amounts in cash or the issuance of shares of common stock;
•Revised the interest rate to 18% until the first interest payment date following the date on which the Company has filed all required periodic reports under the Exchange Act; and
•Added a provision that at the request of holders of a majority of the outstanding Junior Convertible Notes and warrants issued under the Junior Convertible Notes Securities Purchase Agreement, the maturity date will be extended to October 1, 2027 from October 1, 2025.
8% Series C Redeemable Preferred Stock
On various dates from July 21, 2020 through August 18, 2020, the Company issued 42.14 shares Redeemable Preferred Stock with a stated value of $4.2 million for an aggregate purchase price of $2.8 million, from which the Company received net proceeds of $2.9 million after deducting legal fees of $0.1 million. By their terms, those shares are not convertible into other securities of the Company. However, on various dates from July 17, 2020 through October 1, 2020, the Company entered into exchange agreements with the holders of those 42.14 shares, which allows either the Company or the holders to exchange such shares of Redeemable Preferred Stock for shares of the Company's common stock, with the exchange ratio determined by a formula set forth in such exchange agreements. In connection with the Company’s entry into the Omnibus Agreement, the holders of 91.38 shares of Redeemable Preferred Stock surrendered such shares to the Company as consideration for new Junior Convertible Notes.
Warrant Extension
On April 24, 2021, the Company effected a waiver of the expiration date of its then remaining outstanding Series B Warrants to purchase an aggregate of 11,105,113 shares of the Company’s common stock. The Company had originally issued the Series B Warrants on September 24, 2019 for the purchase of up to 11,363,636 shares of the Company’s common stock at an exercise price of $1.84 per share through March 24, 2021. On February 22, 2021, Series B Warrants to purchase an aggregate 258,523 shares of common stock were cancelled in connection with the February 22, 2021 issuance of Junior Convertible Notes described above. On March 22, 2021 and then on April 24, 2021, the Company extended the expiration dates of the remaining outstanding Series B Warrants to purchase an aggregate of 11,105,113 shares of the Company’s common stock that had the effect of extending the expiration date through June 30, 2021. The Series B Warrants subsequently expired on June 30, 2021.
PPP Loans
In May 2020, Pareteum received a $0.6 million PPP loan and iPass received an $0.8 million PPP loan under the CARES Act. In the fourth quarter of 2020, the Company was notified that the Pareteum PPP Loan was entirely forgiven, and in June of 2021, that the iPass PPP Loan was entirely forgiven.
Delisting of the Company’s Common Stock
On November 5, 2020, the Company notified the Nasdaq Hearings Panel (the “Hearings Panel”) that it would not be able to file this Report, its amended Annual Report on Form 10-K/A for the year ended December 31, 2018, its Annual Report on Form 10-K for the year ended December 31, 2019 or its Quarterly Reports on Form 10-Q for the periods ended March 31, 2020 and June 30, 2020 by November 9, 2020, the date by which the Hearings Panel had required the Company to make such filings in order for the Company’s common stock to remain listed on the Nasdaq Stock Market. In response to the Company’s notice to Hearings Panel that it would not satisfy the conditions to the exception to the listing requirements granted, Hearings Panel notified the Company by letter dated November 10, 2020 that the Company’s common stock would be delisted, and trading of its common stock on the Nasdaq Stock Market was suspended effective at the open of business on November 12, 2020. After the trading of the Company’s common stock was suspended by Nasdaq, prices for the Company’s common stock began to be quoted on the OTC Markets Group Inc.’s Pink Open Market.
Asset Disposition
In August 2020, the Company entered into an asset transfer agreement and a software license agreement with a data communications provider (the “Asset Purchaser”), pursuant to which the Asset Purchaser agreed to purchase certain property and equipment and a software license related to a Mobile Virtual Network Enabler solution for total cash consideration of $12.3 million. The Asset Purchaser paid $4.7 million in August 2020 and the remainder in December 2020 upon the completion of the transfer to the Asset Purchaser. The Company recorded a gain on sale of assets of $10.8 million for the difference between the consideration received and the carrying value of the property and equipment and the software license.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Report, including, without limitation, matters discussed in the section of this Report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”), should be read in conjunction with the unaudited condensed consolidated financial statements, related notes, and other detailed information included in Part I, Item 1 of this Report, with our audited consolidated financial statements, related notes thereto, and other detailed information included in Part II, Item 8 of our 2019 Annual Report, and “Risk Factors” included in Part I, Item 1A of our 2019 Annual Report and our Annual Report on Form 10-K for the period ended December 31, 2020 filed with the SEC on June 14, 2021 (the “2020 Annual Report”). This Report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Exchange Act. With the exception of historical matters, the matters discussed in this Report are forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Forward-looking statements are generally identified by words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “plan,” “project,” “should,” “will,” “would” and other similar expressions. In addition, any statements that refer to expectations or other characterizations of future events or circumstances are forward-looking statements. The statements that contain these or similar words should be read carefully because these statements discuss our future expectations, contain projections of our future results of operations or of our financial position, or state other “forward-looking” information. However, our actual results may differ materially from those contained in, or implied by, these forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to:
•risks and uncertainties associated with the integration of the assets and operations we have acquired and may acquire in the future;
•our possible inability to generate additional funds that will be necessary to expand our operations;
•the substantial doubt about our ability to continue as a going concern expressed in the most recent report on our audited financial statements;
•our potential lack of revenue growth;
•the length of our sales cycle;
•pending investigations by the SEC and other lawsuits;
•the outbreak and impact of the COVID-19 pandemic on the global economy and our business;
•our potential inability to add new products and services that will be necessary to generate increased sales;
•our potential inability to develop and successfully market platforms or services or our inability to obtain adequate funding to implement or develop our business;
•our ability to successfully remediate the material weaknesses in our internal control over financial reporting disclosed in this report within the time periods and in the manner currently anticipated;
•the effectiveness of our internal control over financial reporting, including the identification of additional control deficiencies;
•risks related to restrictions and covenants in our convertible debt facility that may adversely affect our business;
•risks related to our current noncompliance with certain terms under our convertible debt facility;
•our potential loss of key personnel and our ability to find qualified personnel;
•international, national, regional and local economic political changes, political risks, and risks related to global tariffs and import/export regulations;
•fluctuations in foreign currency exchange rates;
•our potential inability to use and protect our intellectual property;
•risks related to our continued investment in research and development, product defects or software errors, or cybersecurity threats;
•general economic and market conditions;
•regulatory risks and the potential consequences of noncompliance with applicable laws and regulations;
•increases in operating expenses associated with the growth of our operations;
•risks related to our capital stock, including the potentially dilutive effect of issuing additional shares and the fact that shares eligible for future sale may adversely affect the market for our common stock;
•the possibility of telecommunications rate changes and technological changes;
•disruptions in our networks and infrastructure;
•the potential for increased competition and risks related to competing with major competitors who are larger than we are;
•our positioning in the marketplace as a smaller provider;
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•risks resulting from the restatement of our financial statements for the year ended December 31, 2018, the interim periods contained therein and the interim periods ended March 31, 2019 and June 30, 2019; and
•those risks listed in the sections of this Report titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and those risks listed in the section of our 2020 Annual Report titled “Risk Factors.”
The foregoing does not represent an exhaustive list of risks, new risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. All forward-looking statements included in this Report are based on information available to us on the date of this Report. Except to the extent required by applicable laws or rules, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this Report.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Pareteum Corporation (OTC: TEUM) is a rapidly growing cloud software communications platform company with a mission - to Connect Every Person and Every(Thing) ™.
Millions of people and devices are connected around the world using Pareteum’s global cloud software communications platform, enhancing their mobile experience. Pareteum’s goal is to unleash the power of applications and mobile services, which we believe will bring secure, ubiquitous, scalable, and seamlessly available voice, video, SMS/text messaging, and data services to our customers, making worldwide communications services easily and economically accessible to everyone. By harnessing the value of our cloud communications platform, Pareteum serves enterprises, communications service providers, early-stage innovators, developers, IoT, and telecommunications infrastructure providers.
With estimates of up to 30 billion devices to be managed and connected according to ABI Research, a market research firm that specializes in global connectivity and emerging technology, the total available market is vast. Service providers, brand marketing companies, and enterprise and IoT providers use Pareteum’s cloud communication services and turnkey solutions featuring relevant content, applications, and connectivity worldwide. Pareteum integrates a variety of disparate communications methods and services and offers them to customers and application developers, allowing communications to become a value-added service. We believe that this is a major strategic goal for many industries, from legacy telecommunications providers to the disruptive technology and data enterprises of today and the future.
The vast majority of our platform is comprised of our internally-developed software and intellectual property, which provides our customers with flexibility in how they use our products and allows us to be market driven going forward. We have been granted more than 70 patents related to techniques and processes that support our cloud software and communications platform solutions. Our platform services partners (whose technologies are integrated into our cloud) include: Hewlett Packard Enterprise, IBM, AT&T, Amazon Web Services, Sonus, Veniam, Oracle, Microsoft, NetNumber, Affirmed Networks and other world-class technology providers.
Pareteum is a mission-focused company that seeks to empower “Every Person and Every(Thing)” to be globally connected, hence our slogan – ANY DEVICE, ANY NETWORK, ANYWHERE™. The Pareteum cloud communications platform targets large and growing sectors from IoT, mobile virtual network operators, enablers and aggregators, Smart Cities, and application developer markets - each in need of mobile platforms, management, and connectivity. These sectors need CPaaS, which Pareteum delivers.
As of October 1, 2018, the Company includes Artilium plc, which operates as a wholly owned subsidiary of the Company. Artilium is a software development company active in the enterprise communications and core telecommunications markets delivering software solutions that layer over disparate fixed, mobile and IP networks to enable the deployment of converged communication services and application technology providers. As of February 12, 2019, the Company includes iPass, Inc., which operates as a wholly owned subsidiary of the Company. iPass is a cloud-based service provider of global mobile connectivity, offering Wi-Fi access on any mobile device through its SaaS platform.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto and the other financial information included elsewhere in this Report.
Critical Accounting Policies and Estimates
Our accounting and reporting policies conform to GAAP and are fundamental to understanding our unaudited condensed consolidated financial statements and this MD&A. Several of our policies are critical as they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and affect the reported amount of assets, liabilities, revenues and costs included in the unaudited condensed consolidated financial statements. Circumstances and events that differ significantly from those
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underlying our estimates, assumptions and judgments could cause the actual amounts reported to differ significantly from these estimates.
On an ongoing basis, we evaluate the estimates and assumptions used in these policies based on historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable under the circumstances; however, actual results may differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities as of future balance sheet dates and our results of operations in future reporting periods.
Management has reevaluated the Company's critical accounting policies and the following areas represent its critical accounting policies as of June 30, 2020, and are described below:
•Revenue recognition and net billing in excess of revenues;
•Allowance for doubtful accounts;
•Income taxes;
•Share-based compensation;
•Warrant and embedded derivative liabilities;
•Business combinations;
•Goodwill and intangible assets impairment; and
•Contingent losses.
None of the Company's critical accounting policies have changed in the three months ended June 30, 2020. For a detailed discussion of these critical accounting policies, please refer to the “Critical Accounting Policies” in MD&A, Part I, Item 7 of the in the 2019 Annual Report and Part I, Item 2 of the quarterly report on Form 10-Q for the period ending March 31, 2020.
Results of Operations
Comparison of the three months ended June 30, 2020 and 2019
Revenue
Revenue represents amounts earned from our mobile and CPaaS 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 requested by our customers.
Revenue for the three months ended June 30, 2020 and 2019 were $16.1 million and $16.9 million, respectively. The $0.8 million, or 4.6%, decrease is primarily due to a decline in connectivity services impacted by the COVID-19 pandemic and its travel restrictions, partially offset by growth in mobility services.
Cost of Revenue
Cost of revenue includes origination, termination, network and billing charges from telecommunications operators, costs of telecommunications service providers, network costs, data center costs, facility costs of hosting network and equipment, costs in providing resale arrangements with long distance service providers, costs of leasing transmission facilities, international gateway switches for voice, and 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 costs of subcontractors and share-based compensation. Cost of revenue excludes depreciation and amortization.
Cost of revenue for the three months ended June 30, 2020 and 2019 was $11.9 million and $12.6 million, respectively. The $0.7 million, or 6.0%, decrease is primarily due to lower revenues.
Product Development
Product development costs consist primarily of salaries and related expenses, including share-based compensation, of employees involved in the development of the Company’s services, which are expensed as incurred. Costs such as database architecture and Pareteum business operating system and intelligent network platform development and testing are also included in this function.
Product development costs for the three months ended June 30, 2020 and 2019 were $2.4 million and $3.6 million, respectively. The $1.2 million, or 34.0%, decrease is primarily due to decreases in personnel and related costs as a result of the COVID-19 pandemic.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and related expenses of our sales and marketing staff, including commissions, payments to partners, marketing programs, and share-based compensation. Marketing programs consist of advertising, events, corporate communications, and brand building.
Sales and marketing expenses for the three months ended June 30, 2020 and 2019 were $1.5 million and $3.1 million, respectively. The $1.6 million, or 53.1%, decrease is primarily due to lower personnel costs from headcount reductions and reduced marketing activities due to the COVID-19 pandemic.
General and Administrative
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General and administrative expenses consist primarily of overhead-related salaries and expenses, including share-based compensation, for nonemployee 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 months ended June 30, 2020 and 2019 were $7.5 million and $8.4 million, respectively. The $0.9 million, or 10.1%, decrease is primarily due to reductions in personnel costs, consulting and legal fees, and facility costs.
Acquisition Costs
Acquisition costs represent incremental costs incurred in acquisitions.
Acquisition costs for the three months ended June 30, 2020 and 2019 were zero and $0.1 million, respectively. The $0.1 million decrease is primarily due to acquisition costs related to the 2019 iPass acquisition.
Depreciation and Amortization
Depreciation and amortization expense includes depreciation and amortization of property, equipment, and software development, and amortization of intangible assets.
Depreciation and amortization expense for the three months ended June 30, 2020 and 2019 was $2.8 million and $3.1 million, respectively. The $0.3 million, or 10.2%, decrease is primarily due to lower amortization of intangible assets, partially offset by higher depreciation of property, equipment, and software development. Depreciation and amortization of property, equipment, and software development for the three months ended June 30, 2020 and 2019 was $2.1 million and $1.1 million, respectively, and amortization of intangible assets for the three months ended June 30, 2020 and 2019 was $0.7 million and $2.0 million, respectively. The decrease in intangible asset amortization is due to the intangible asset impairment recognized in the fourth quarter of 2019.
Nonoperating Expenses, Net
The following table provides details of nonoperating expenses and income for the three months ended June 30, 2020 and 2019:
Three Months Ended June 30,
(In thousands) 2020 2019
Nonoperating expense (income), net
Interest expense, net $ 2,583  $ 929 
Change in fair value of derivative liability 46  — 
Change in fair value of warrant liability 688  — 
Other expense, net 634  15 
Total nonoperating expense, net $ 3,951  $ 944 
Interest Expense, Net
Interest expense, net for the three months ended June 30, 2020 and 2019 was $2.6 million and $0.9 million, respectively. The $1.7 million increase is primarily due to higher indebtedness and higher amortization of deferred financing costs, debt discounts, and conversion features. Noncash interest expense in the three months ended June 30, 2020 and 2019 was $2.2 million and $0.3 million, respectively.
Change in Fair Value of Derivative and Warrant Liabilities
The aggregate change in the fair value of the derivative and warrant liabilities for the three months ended June 30, 2020 was $0.7 million. The change is primarily driven by the decrease in the price of our common stock.
Other Expense, Net
Other expense, net for the three months ended June 30, 2020 was $0.6 million and is primarily related to currency transaction losses. Other expense, net for the three months ended June 30, 2019 was not material.
Income Tax Expense (Benefit)
At the end of each reporting period, we estimate our annual effective consolidated income tax rate. The estimate used for the period ended June 30, 2020 may change in subsequent periods. Income tax expense (benefit) for the three months ended June 30, 2020 and 2019 was a benefit of approximately zero and a $0.2 million benefit, respectively.
Other Comprehensive Income
We record foreign currency translation gains and losses related to the translation adjustments of accounts denominated in foreign currencies, primarily the Euro, as other comprehensive income or loss, which for the three months ended June 30, 2020 and 2019 were gains of $0.3 million and $1.8 million, respectively.
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Comparison of the six months ended June 30, 2020 and 2019
Revenue
Revenues for the six months ended June 30, 2020 and 2019 were $36.2 million and $29.9 million, respectively. The $6.3 million, or 20.8%, increase is primarily due to strong volume growth, including from new customers, partially offset by a decrease in connectivity services impacted by the COVID-19 pandemic and its travel restrictions.
Cost of Revenue
Cost of revenue for the six months ended June 30, 2020 and 2019 was $26.3 million and $20.7 million, respectively. The $5.6 million, or 27.2%, increase is primarily due to the increase in revenue.
Product Development
Product development costs for the six months ended June 30, 2020 and 2019 were $5.4 million and $6.2 million, respectively. The $0.8 million, or 12.8%, decrease is primarily due to a decrease in personnel and related costs in 2020 associated with the COVID-19 pandemic, partially offset by reduced capitalizable costs and increased share-based compensation expenses.
Sales and Marketing
Sales and marketing expenses for the six months ended June 30, 2020 and 2019 were $3.4 million and $6.0 million, respectively. The $2.6 million, or 44.0%, decrease is primarily due to a reduction in personnel costs due to headcount reductions, and decreases in marketing events and travel expenses due to Covid-19.
General and Administrative
General and administrative expenses for the six months ended June 30, 2020 and 2019 were $14.6 million and $16.3 million, respectively. The $1.7 million, or 10.6%, decrease is primarily due to lower share-based compensation expense and reduced travel expenses related to Covid-19, partially offset by increases in consulting and legal fees associated with the restatement of our financial statements.
Acquisition Costs
Acquisition costs for the six months ended June 30, 2020 and 2019 were zero and $3.4 million, respectively. The $3.4 million decrease is due to the costs associated with the 2019 acquisition of iPass.
Depreciation and Amortization
Depreciation and amortization expense for the six months ended June 30, 2020 and 2019 was $5.4 million and $5.7 million, respectively. The $0.3 million, or 6.0%, decrease is primarily due to lower amortization of intangible assets, partially offset by higher depreciation of property, equipment, and software development. Depreciation and amortization of property, equipment, and software development for the six months ended June 30, 2020 and 2019 was $4.0 million and $2.2 million, respectively, and amortization of intangible assets for the six months ended June 30, 2020 and 2019 was $1.4 million and $3.5 million, respectively. The decrease in intangible asset amortization is due to the intangible asset impairment recognized in the fourth quarter of 2019.
Nonoperating Expense, Net
The following table provides details of nonoperating expenses and income for the six months ended June 30, 2020 and 2019:
Six Months Ended June 30,
(In thousands) 2020 2019
Nonoperating expense (income), net
Interest expense, net 4,411  1,498 
Change in fair value of derivative liability 46  — 
Change in fair value of warrant liability 688  — 
Loss on extinguishment of debt —  1,000 
Other expense (income), net (669) 62 
Total nonoperating expense, net $ 4,476  $ 2,560 
Interest Expense, Net
Interest expense, net for the six months ended June 30, 2020 and 2019 was $4.4 million and $1.5 million, respectively. The $2.9 million increase is primarily due to higher amortization of deferred financing costs and debt discounts. Noncash interest expense in the six months ended June 30, 2020 and 2019 was $3.8 million and $0.4 million, respectively.
Change in Fair Value of Derivative and Warrant Liabilities
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The aggregate change in the fair value of the derivative and warrant liabilities for the six months ended June 30, 2020 $0.7 million. The change is primarily driven by the decrease in the price of our common stock.
Loss on Extinguishment of Debt
In February 2019, we prepaid, in full, the loans payable to Fortress Credit Corp. assumed in the iPass acquisition and recognized a $1.0 million loss on extinguishment of debt from a prepayment penalty.
Other Expense (Income), net
Other income, net for the six months ended June 30, 2020 was $0.7 million and is primarily related to iPass accounts payable that were forgiven. Other expense, net for the six months ended June 30, 2019 was $0.1 million and is primarily related to foreign currency transaction losses.
Income Tax Benefit
Income tax benefit for the six months ended June 30, 2020 and 2019 was $0.1 million and $0.4 million, respectively.
Other Comprehensive Income (Loss)
We record foreign currency translation gains and losses related to the translation adjustments of accounts denominated in foreign currencies, primarily the Euro, as other comprehensive income or loss, which for the six months ended June 30, 2020 and 2019 were gains of $0.3 million and losses of $1.3 million, respectively.
Liquidity and Capital Resources
Our primary capital needs are for working capital obligations, capital expenditures, and other general corporate purposes. We assess liquidity in terms of our ability to generate cash to fund our operating activities. Factors that could materially impact our liquidity include cash flows generated from operating activities, and our ability to attract long-term capital with satisfactory terms, whether through debt or equity offerings.
Since June 30, 2020, we received net proceeds of $15.4 million as a result of the following debt offerings:
•Redeemable Preferred Stock – Net proceeds of $2.9 million from July 2020 to August 2020
•Senior Convertible Note – Net proceeds of $3.0 million in July 2020 and $1.0 million in December 2020
•Junior Convertible Notes – Net proceeds of $2.0 million in February 2021, $1.5 million in April 2021, and $5.0 million in June 2021
As reflected in the accompanying condensed consolidated financial statements, we reported a net loss of $23.3 million for the six months ended June 30, 2020, and had an accumulated deficit of $562.8 million as of June 30, 2020. As reflected in our 2019 Annual Report, we reported a net loss of $222.3 million for the year ended December 31, 2019, which included a $156.8 million noncash goodwill and intangible asset impairment charge. As of June 30, 2020, our cash balances, including $10.7 million of restricted cash, were $14.0 million.
We believe that we will not have sufficient resources to fund our operations and meet our obligations for the twelve months following the filing of this Report. Our software platforms require ongoing funding to continue the current development and operational plans and we will continue to expend substantial resources for the foreseeable future in connection with the continued development of our software platforms. These expenditures will include costs associated with research and development activity, corporate administration, business development, and marketing and selling of our services. In addition, other unanticipated costs may arise.
As a result, we believe that additional capital will be required to fund our operations and provide growth capital to meet our obligations. Accordingly, we will have to raise additional capital in one or more debt and/or equity offerings. There can be no assurance, however, that we will be successful in raising the necessary capital or that any such offering will be available to us on terms acceptable to us, or at all. If we are unable to raise additional capital that may be needed, this would have a material adverse effect on the Company. Furthermore, the recent decline in the market price of our common stock, coupled with the stock’s delisting from the Nasdaq Stock Market, could make it more difficult to sell equity or equity-related securities in the future at a time and price that we deem appropriate. The factors discussed above raise substantial doubt as to our ability to continue as a going concern within one year after the date that this Report is issued.
Cash Flows
The following table summarizes net cash provided by (used in) operating, investing, and financing activities for the six months ended June 30, 2020 and 2019:
Six Months Ended June 30,
(In thousands) 2020 2019
Net cash used in operating activities $ (8,735) $ (9,671)
Net cash used in investing activities (3,685) (6,620)
Net cash provided by financing activities 20,591  13,917 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash (52) (6)
Increase (decrease) in cash, cash equivalents, and restricted cash $ 8,119  $ (2,380)
Cash flows from operating activities
Cash used in operating activities was $8.7 million for the six months ended June 30, 2020, which was the result of a net loss of $23.3 million for the period, adjusted for noncash transactions, including depreciation and amortization of $5.4 million; provision for doubtful accounts of $0.5 million; share-based compensation of $2.9 million; change in the fair value of the derivative and warrant liabilities of the $0.7 million; amortization of deferred financing costs and debt discount accretion of $3.8 million; warrants issued for settlement agreement of $0.7 million; partially offset by a $0.5 million gain on settlement of rental agreement; and $1.0 million of cash provided by changes in operating assets and liabilities.
Cash used in operating activities was $9.7 million for the six months ended June 30, 2019, which was the result of a net loss of $30.6 million for the period, adjusted for noncash transactions, including depreciation and amortization of $5.7 million; provision for doubtful accounts of $0.1 million; share-based compensation of $7.7 million; the amortization of deferred financing costs and debt discount accretion of $0.4 million; shares issued for services of $1.4 million; and loss on extinguishment of debt $1.0 million; partially offset by deferred taxes of $0.5 million; and $5.1 million of cash provided by changes in operating assets and liabilities.
Cash flows from investing activities
Cash used in investing activities was $3.7 million and $6.6 million for the six months ended June 30, 2020 and 2019, respectively. Cash used in 2020 is related to purchases of property, equipment, and software development. Cash used in 2019 is primarily related to purchases of property, equipment, and software development of $2.6 million; investment in notes receivable of $2.7 million; and funds used in the acquisition of assets totaling $2.1 million.
Cash flows from financing activities
Cash provided by financing activities was $20.6 million for the six months ended June 30, 2020, primarily from the issuance of $14.0 million of indebtedness under the Senior Convertible Notes; the issuance of $6.0 million of Redeemable Preferred Stock; proceeds of $1.4 million from the PPP Loans; partially offset by the payment of $0.8 million of financing related fees.
Cash provided by financing activities was $13.9 million for the six months ended June 30, 2019, primarily from $1.6 million related to the exercise of warrants and options and $24.2 million from the issuance of indebtedness; partially offset by the repayment of $11.0 million of loans and $0.9 million of financing related fees.
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
Effect of exchange rates on cash, cash equivalents, and restricted cash for the six months ended June 30, 2020 was a loss of $0.1 million, compared to an immaterial loss for the six months ended June 30, 2019.
Indebtedness
As of June 30, 2020, the Company's total indebtedness, excluding lease liabilities, was $39.7 million, which was comprised of the stated value plus the full premium of Redeemable Preferred Stock of $19.4 million, the principal balance of the Senior Convertible Note of $17.5 million, PPP Loans of $1.4 million, promissory notes of $1.0 million, and a related party loan of $0.4 million.
Off-Balance Sheet Arrangements
The Company has entered into certain off–balance sheet unconditional purchase obligations. The Company entered into the Connectivity Agreement with 3UK on July 23, 2019. Under the Connectivity Agreement, the Company is obligated to pay 3UK $0.6 million dollars for the implementation of the 3UK MVNO, and for monthly services provided, based on usage, after the 3UK MVNO is launched, which management anticipates to be in the third quarter of 2021. On February 19, 2021, the Company and 3UK amended the Connectivity Agreement to eliminate some of the invoicing functionality of the 3UK MVNO, which reduces the Implementation Fee to $0.4 million. The Implementation Fee is payable upon the satisfactory completion of certain agreed upon milestones. As of June 30, 2020, none of those milestones had been achieved, however, as of the date of this Report, two of the four milestones had been achieved.
Concurrent with the execution of the Connectivity Agreement, the Company entered into the Credit Voucher Agreement with PCCW under which the Company is obligated to purchase a credit voucher for $28.1 million. The credit voucher will be used to offset certain monthly service charges incurred under the Connectivity Agreement. As of June 30, 2020, $0.4 million of the purchase price has been recorded in accrued expenses and other current liabilities in the condensed consolidated balance sheet. The remaining $27.6 million
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unconditional purchase obligation is due and payable following the launch date of the 3UK MVNO, whereafter the Company is required to remit the amount of the credit voucher used to offset monthly charges incurred under the Connectivity Agreement to PCCW each quarter.
See Note 10. Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report for additional information about these off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are a “smaller reporting company” as defined by Regulation S-K and, as such, are not required to provide the information contained in this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of June 30, 2020, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial and accounting officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act. Based on the evaluation, the Company’s principal executive officer and principal financial and accounting officer have concluded that, in light of the previously disclosed material weaknesses described below, the Company’s disclosure controls and procedures were not effective as of June 30, 2020.
Changes in Internal Control Over Financial Reporting
We previously identified and disclosed in our 2019 Annual Report material weaknesses related to:
•Inadequate and ineffective management assessment of internal control over financial reporting, including insufficient experienced resources to complete the documentation of internal control assessment;
•Ineffective design, implementation and monitoring of information technology general controls pertaining to the Company’s change management process;
•Entity-level controls were not effective due to certain executive management “tone at the top” issues which contributed to an ineffective control environment and to deficiencies aggregating to material weaknesses;
•The Company not having sufficient accounting and finance department resources to effectively assess risk and design, operate and oversee effective internal controls over financial reporting, which contributed to the failure in the effectiveness and adequate identification of certain controls including:
◦application of appropriate revenue recognition standards;
◦proper accounting of share-based compensation;
◦appropriate settlement of payables via issuance of shares;
◦complete and appropriate application of foreign currency translations;
◦identification and accounting of operating leases in accordance with ASC 842, Leases; and
◦method of accounting for acquisitions and business combinations.
The Company has taken and will continue to take significant and comprehensive remedial actions to begin to remediate the material weaknesses in internal control over financial reporting. Remediation actions already implemented include (i) a thorough review and documentation of all processes involved in our financial reporting to ensure that there is segregation of duties, and (ii) access security and documented review processes in place that happen at appropriate intervals throughout the year that covers all elements of the Company’s financial reporting. This includes, but is not limited to, testing samples and documenting that testing has occurred with the results of the findings being reported to senior management and that they occur at appropriate intervals and continuously making improvements to our processes as necessary.
To address ineffective design, implementation and monitoring of information technology general controls pertaining to the Company’s change management process, the Company has (i) removed all live access to all developers, internal and external, that previously enabled them to make coding changes directly in our reporting system; (ii) continued to monitor and document all changes made in our reporting system and added additional layers of documented review of these changes; (iii) instituted monitoring controls and sample testing on our reporting system to ensure the documented policies are being followed and the results of these tests are being reported to senior management at regular appropriate intervals; and (iv) enhanced our quarterly reporting on the remediation measures to the Audit Committee of the Board of Directors. Management believes the Company has taken significant steps towards the remediation of the identified material weaknesses, as of June 30, 2020.
To address inadequate and ineffective management assessment of internal control over financial reporting, we are also continuing to develop additional remediation steps to address this material weakness.
We are committed to maintaining a strong internal control environment and believe that these remediation actions will represent significant improvements in our controls. However, the identified material weaknesses described above will not be considered remediated until controls have been designed and/or controls are in operation for a sufficient period of time for our management to conclude that the material weaknesses have been remediated. Additional remediation measures may be required, which may require
35
additional implementation time. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting.
Additionally, to ensure the Company maintains a strong internal control environment and to remediate the additional material weakness in internal controls over financial reporting identified in this Report, the Company: (v) has ceased the employment of personnel responsible for the revenue restatement and oversight of accounting and finance operations; (vi) is designing and implementing enhancements to internal controls over financial reporting including those related to sales processing, revenue recognition and equity accounting; (vii) has implemented a periodic review of financial reports and month-over-month balances with the purpose of identifying and investigating fluctuations and discrepancies in key accounts and transactions; (viii) will provide training to its finance and sales staff and key personnel on the appropriate guidelines to account for revenue in the telecom industry and emphasizing the importance of adherence to policies and procedures; (ix) is implementing a new application to manage equity; and (x) engaged outside resources and hired in-house controls personnel to monitor and assess internal controls over financial reporting.
We believe that these actions will remediate the material weaknesses. While we have taken measures to strengthen our internal controls related to these additional material weaknesses, we have not fully completed our assessment. The material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
As our management continues to evaluate and work to improve our disclosure controls and procedures and internal control over financial reporting, we may determine to take additional measures to address these deficiencies or determine to modify certain of the remediation measures described above.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As of the date of the filing of this Report, Pareteum and its subsidiaries are currently defendants in various legal actions and asserted claims arising in the normal course of business. We anticipate that we will become involved in new litigation matters from time to time in the future. We will incur legal and related costs concerning litigation and may, from time to time, determine to settle some or all of the cases, regardless of the assessment of our legal position. The amount of legal defense costs and settlements in any period will depend on many factors, including the status of cases, the number of cases that are in trial or about to be brought to trial, and the opposing parties’ aggressiveness in pursuing their cases and their perception of their legal position. For information concerning material litigation actions and proceedings against the Company, see Note 10. Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report, which is incorporated herein by reference.
Item 1A. Risk Factors
In addition to the other information set forth in this Report, you should carefully consider the Risk Factors included in Part I, Item 1A. — “Risk Factors” of our 2019 Annual Report; and in our 2020 Annual Report. These risk factors could materially impact our business, financial condition and/or operating results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely impact our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Other than as set forth below or as previously disclosed in our filings with the SEC, we did not sell any equity securities during the three months ended June 30, 2020 in transactions that were not registered under the Securities Act. The issuance of securities in the transactions described below were each exempt from registration under Section 4(a)(2) of the Securities Act and/or Rule 506 promulgated thereunder.
Item 3. Defaults upon Senior Securities.
As previously disclosed, upon its entry into each of the Forbearance Agreement on November 30, 2020 (as subsequently amended) and the New Forbearance Agreement on May 24, 2021, the Company admitted that it was in default of several obligations under the Senior Convertible Note and the related securities purchase agreement, including as a result of:
a.the Company’s failure to have caused either (i) the conversion or exchange of all shares of the Redeemable Preferred Stock into shares of the common stock or (ii) the extension of any mandatory redemption date, final maturity date or other applicable repurchase obligation with respect to such Redeemable Preferred Stock by the October 1, 2020 deadline required under the Senior Convertible Note;
b.the Company’s failure to have obtained the approval of its stockholders of the issuance of the shares of common stock underlying the Senior Convertible Note and the related warrant by October 31, 2020, as required by the Senior Convertible Note and the related securities purchase agreement;
c.the Company’s failure to have timely filed all reports required to be filed with the SEC pursuant to the Exchange Act, as required by the Senior Convertible Note and the related securities purchase agreement;
d.the suspension from trading and failure of the common stock to be listed for trading on an eligible national securities exchange for a period of three consecutive trading days, as prohibited by the Senior Convertible Note;
e.the Company’s failure to have filed restated financial statements with the SEC for (A) the fiscal year ended December 31, 2018, (B) the quarter ended March 31, 2019 and (C) the quarter ended June 30, 2019, in each case on or prior to the October 31, 2020 deadline under the Senior Convertible Note;
f.the Company’s failure to have provided notice of the above and other events of default under the Senior Convertible Note and the related warrant and securities purchase agreement; and
g.the Company’s failure to have maintained the minimum liquidity required by the Senior Convertible Note since the lender’s foreclosure on $6.0 million previously maintained in a blocked account.
In addition, the Company had not made required payments of interest under the Senior Convertible Note of (i) $0.3 million on April 1, 2021 or (ii) $0.2 million on May 1, 2021. Under the New Forbearance Agreement, the lender acknowledged such defaults and agreed not to exercise any right or remedy under the Senior Convertible Note or the related securities purchase agreement, warrant or security documents, including its right to accelerate the aggregate amount outstanding under the Senior Convertible Note, until the Outside Date, as the same is extended from time to time under the terms of the New Forbearance Agreement.
Additionally, the parties also agreed that the principal amount outstanding under the Senior Convertible Note would be increased by certain paid-in-kind amounts in full satisfaction of the Company’s obligation to make payments of interest to the lender on each of April 1, 2021 and May 1, 2021, which amounts were not paid by the Company in cash or common stock. In consideration of the lender’s agreement to enter into the New Forbearance Agreement and agree to certain amendments to the Senior Convertible Note, the
37
Company agreed to pay the lender a fee in the amount of $1.5 million. Accordingly, following these increases in the principal amount payable, but applying against the outstanding principal and such fee the $6.0 million previously maintained in certain blocked accounts against that was foreclosed upon by the lender, the total amount of principal outstanding under the Senior Convertible Note as of the date of the New Forbearance Agreement was approximately $13.5 million. As of the date of this Report, the total amount of principal outstanding under the Senior Convertible Note is approximately $13.8 million.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
(a)Exhibits
10.1
Senior Secured Convertible Note, dated June 8, 2020, made by Pareteum Corporation (incorporated by reference Exhibit 10.1 to Form 8-K filed on June 9, 2020)
10.2*
Securities Purchase Agreement, dated June 8, 2020, between Pareteum Corporation and HT Investments SA, LLC (incorporated by reference Exhibit 10.2 to Form 8-K filed on June 9, 2020)
10.3
Warrant to Purchase Common Stock, dated June 8, 2020, issued by Pareteum Corporation (incorporated by reference Exhibit 10.3 to Form 8-K filed on June 9, 2020)
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

* Exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be supplementally provided to the SEC upon request.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PARETEUM CORPORATION
Date: July 28, 2021 By /s/ Bart Weijermars
Bart Weijermars
Interim Chief Executive Officer
(Principal Executive Officer)
Date: July 28, 2021 By /s/ Laura Thomas
Laura Thomas
Interim Chief Financial Officer
(Principal Financial and Accounting Officer)

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Pareteum (NASDAQ:TEUM)
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