Item 1. Financial Statements
PARETEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,377,556
|
|
|
$
|
6,051,709
|
|
Restricted cash
|
|
|
1,104,757
|
|
|
|
430,655
|
|
Accounts receivable, net of an allowance for doubtful accounts of $1,307,071 at June 30, 2019 and $1,021,179 at December 31, 2018, respectively
|
|
|
45,061,236
|
|
|
|
15,361,594
|
|
Notes receivable, current
|
|
|
1,024,025
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
3,385,842
|
|
|
|
2,083,950
|
|
Total current assets
|
|
|
53,953,416
|
|
|
|
23,927,908
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
956,810
|
|
|
|
45,336
|
|
|
|
|
|
|
|
|
|
|
RIGHT OF USE LEASE ASSETS
|
|
|
2,493,352
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NOTES RECEIVABLE, NON-CURRENT
|
|
|
2,819,200
|
|
|
|
1,082,436
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
4,896,503
|
|
|
|
4,553,250
|
|
|
|
|
|
|
|
|
|
|
INTANGIBLE ASSETS, NET
|
|
|
60,262,420
|
|
|
|
39,658,325
|
|
|
|
|
|
|
|
|
|
|
GOODWILL
|
|
|
121,486,562
|
|
|
|
91,773,911
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
246,868,263
|
|
|
$
|
161,041,166
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable and customer deposits
|
|
$
|
28,183,711
|
|
|
$
|
10,337,629
|
|
Net billings in excess of revenues
|
|
|
1,330,757
|
|
|
|
927,780
|
|
Accrued expenses and other payables
|
|
|
14,036,645
|
|
|
|
7,952,380
|
|
Promissory note
|
|
|
671,165
|
|
|
|
681,220
|
|
Lease liabilities, current
|
|
|
1,776,900
|
|
|
|
-
|
|
9% Unsecured subordinate convertible promissory note (net of debt discount and debt issuance costs)
|
|
|
-
|
|
|
|
106,967
|
|
Total current liabilities
|
|
|
45,999,178
|
|
|
|
20,005,976
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Senior secured debt, net
|
|
|
22,077,767
|
|
|
|
-
|
|
Lease liabilities, non-current
|
|
|
1,013,785
|
|
|
|
-
|
|
Other long term liabilities
|
|
|
63,853
|
|
|
|
212,703
|
|
Deferred tax liabilities
|
|
|
7,712,860
|
|
|
|
8,415,825
|
|
Related party loan
|
|
|
342,000
|
|
|
|
341,998
|
|
Total long term liabilities
|
|
|
31,210,265
|
|
|
|
8,970,526
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
77,209,443
|
|
|
|
28,976,502
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDER’S EQUITY
|
|
|
|
|
|
|
|
|
Preferred Stock $0.00001 par value, 50,000,000 shares authorized, none issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
|
|
|
-
|
|
|
|
-
|
|
Common Stock $0.00001 par value, 500,000,000 shares authorized, 111,652,349 issued and outstanding as of June 30, 2019 and 97,852,911 shares issued and outstanding as of December 31, 2018, respectively
|
|
|
494,803,176
|
|
|
|
450,990,827
|
|
Accumulated other comprehensive loss
|
|
|
(6,224,649
|
)
|
|
|
(6,300,780
|
)
|
Accumulated deficit
|
|
|
(318,919,707
|
)
|
|
|
(312,625,383
|
)
|
Total equity
|
|
|
169,658,820
|
|
|
|
132,064,664
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY
|
|
$
|
246,868,263
|
|
|
$
|
161,041,166
|
|
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
PARETEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME
(UNAUDITED)
|
|
Three months Ended June 30,
|
|
|
Six months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
REVENUES
|
|
$
|
34,148,396
|
|
|
$
|
6,003,180
|
|
|
$
|
57,188,310
|
|
|
$
|
10,115,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST AND OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service, excluding depreciation and amortization
|
|
|
15,293,244
|
|
|
|
1,779,882
|
|
|
|
25,361,468
|
|
|
|
2,974,405
|
|
Product development
|
|
|
3,242,145
|
|
|
|
753,931
|
|
|
|
5,816,189
|
|
|
|
1,480,776
|
|
Sales and marketing
|
|
|
2,769,065
|
|
|
|
652,442
|
|
|
|
5,709,747
|
|
|
|
1,341,440
|
|
General and administrative
|
|
|
9,033,690
|
|
|
|
2,214,070
|
|
|
|
15,896,619
|
|
|
|
4,510,922
|
|
Restructuring and acquisition charges
|
|
|
427,586
|
|
|
|
5,592
|
|
|
|
3,507,950
|
|
|
|
79,193
|
|
Depreciation and amortization
|
|
|
3,224,027
|
|
|
|
994,318
|
|
|
|
6,067,430
|
|
|
|
1,959,609
|
|
Total cost and operating expenses
|
|
|
33,989,757
|
|
|
|
6,400,235
|
|
|
|
62,359,403
|
|
|
|
12,346,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) FROM OPERATIONS
|
|
|
158,639
|
|
|
|
(397,055
|
)
|
|
|
(5,171,093)
|
|
|
|
(2,230,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME/ (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
149,298
|
|
|
|
43,193
|
|
|
|
250,844
|
|
|
|
85,865
|
|
Interest expense
|
|
|
(777,907)
|
|
|
|
(99,708
|
)
|
|
|
(1,326,767)
|
|
|
|
(163,467
|
)
|
Interest expense related to debt discount accretion and conversion feature
|
|
|
(199,224)
|
|
|
|
(30,272
|
)
|
|
|
(271,205)
|
|
|
|
(59,838
|
)
|
Changes in derivative liabilities
|
|
|
-
|
|
|
|
1,597,647
|
|
|
|
|
-
|
|
|
1,283,914
|
|
Other (expense)/income
|
|
|
(194,354)
|
|
|
|
567,710
|
|
|
|
(241,485)
|
|
|
|
637,255
|
|
Amortization of deferred financing costs
|
|
|
(101,664)
|
|
|
|
(6,209
|
)
|
|
|
(151,355)
|
|
|
|
(12,351
|
)
|
Total other (expense)/income
|
|
|
(1,123,851)
|
|
|
|
2,072,361
|
|
|
|
(1,739,968)
|
|
|
|
1,771,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS)/INCOME BEFORE INCOME TAX (BENEFIT)/EXPENSE
|
|
|
(965,212)
|
|
|
|
1,675,306
|
|
|
|
(6,911,061)
|
|
|
|
(459,217
|
)
|
Income tax (benefit)/expense
|
|
|
(449,403)
|
|
|
|
18,842
|
|
|
|
(616,737)
|
|
|
|
18,424
|
|
NET (LOSS)/INCOME
|
|
|
(515,809)
|
|
|
|
1,656,464
|
|
|
|
(6,294,324)
|
|
|
|
(477,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE (LOSS)/INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain/(loss)
|
|
|
435,935
|
|
|
|
(79,137)
|
|
|
|
76,131
|
|
|
|
25,266
|
|
COMPREHENSIVE (LOSS)/INCOME
|
|
$
|
(79,874)
|
|
|
$
|
1,577,327
|
|
|
$
|
(6,218,193)
|
|
|
$
|
(452,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income per common share and equivalents - basic
|
|
$
|
(0.00)
|
|
|
$
|
0.03
|
|
|
$
|
(0.06)
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income per common share and equivalents - diluted
|
|
$
|
(0.00)
|
|
|
$
|
0.03
|
|
|
$
|
(0.06)
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the period – basic
|
|
|
111,074,977
|
|
|
|
53,348,376
|
|
|
|
107,341,105
|
|
|
|
51,714,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the period – diluted
|
|
|
111,074,977
|
|
|
|
64,741,232
|
|
|
|
107,341,105
|
|
|
|
51,714,482
|
|
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
PARETEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDER’S EQUITY
(UNAUDITED)
|
|
|
|
|
Accumulated
other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
comprehensive
|
|
|
Accumulated
|
|
|
Stockholder’s
|
|
Description
|
|
Shares
|
|
|
Amount
|
|
|
Loss
|
|
|
Deficit
|
|
|
equity
|
|
Balance – January 1, 2018
|
|
|
46,617,093
|
|
|
$
|
321,271,437
|
|
|
$
|
(6,306,691
|
)
|
|
$
|
(299,543,213
|
)
|
|
$
|
15,421,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASC 606 transition adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
107,520
|
|
|
|
-
|
|
|
|
107,520
|
|
Warrant exercises
|
|
|
4,250,748
|
|
|
|
2,542,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,542,250
|
|
Stock-based compensation
|
|
|
178,553
|
|
|
|
1,052,567
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,052,567
|
|
Other comprehensive loss due to foreign exchange translation, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,118
|
)
|
|
|
-
|
|
|
|
(3,118
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,134,102
|
)
|
|
|
(2,134,102
|
)
|
Balance – March 31, 2018
|
|
|
51,046,394
|
|
|
|
324,866,254
|
|
|
|
(6,202,289
|
)
|
|
|
(301,677,315
|
)
|
|
|
16,986,651
|
|
ASC 606 transition adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
(107,520
|
)
|
|
|
|
|
|
|
(107,520
|
)
|
Warrant exercises
|
|
|
1,663,522
|
|
|
|
841,720
|
|
|
|
-
|
|
|
|
-
|
|
|
|
841,720
|
|
Shares issued in equity financing
|
|
|
2,453,400
|
|
|
|
5,467,100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,467,100
|
|
Stock-based compensation
|
|
|
447,970
|
|
|
|
697,448
|
|
|
|
-
|
|
|
|
-
|
|
|
|
697,448
|
|
Services settled by issuance of shares
|
|
|
44,829
|
|
|
|
86,778
|
|
|
|
-
|
|
|
|
-
|
|
|
|
86,778
|
|
Other comprehensive loss due to foreign exchange translation, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
28,384
|
|
|
|
-
|
|
|
|
28,384
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,656,464
|
|
|
|
1,656,464
|
|
Balance – June 30, 2018
|
|
|
55,656,115
|
|
|
$
|
331,959,299
|
|
|
$
|
(6,281,425
|
)
|
|
$
|
(300,020,851
|
)
|
|
$
|
25,657,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - January 1, 2019
|
|
|
97,852,911
|
|
|
$
|
450,990,827
|
|
|
$
|
(6,300,780
|
)
|
|
$
|
(312,625,383
|
)
|
|
$
|
132,064,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for acquisitions
|
|
|
9,865,412
|
|
|
|
29,253,287
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,253,287
|
|
Warrant exercises
|
|
|
501,606
|
|
|
|
647,447
|
|
|
|
-
|
|
|
|
-
|
|
|
|
647,447
|
|
Services settled by issuance of shares
|
|
|
420,514
|
|
|
|
1,522,636
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,522,636
|
|
Shares issued to be cancelled
|
|
|
37,014
|
|
|
|
64,775
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,775
|
|
Stock option exercises
|
|
|
68,083
|
|
|
|
69,567
|
|
|
|
-
|
|
|
|
-
|
|
|
|
69,567
|
|
Shares in transit
|
|
|
-
|
|
|
|
1,451,700
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,451,700
|
|
Stock-based compensation
|
|
|
594,475
|
|
|
|
3,713,614
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,713,614
|
|
Shares issued to senior secured lender
|
|
|
425,000
|
|
|
|
956,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
956,500
|
|
Other comprehensive loss due to foreign exchange rate translation, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
(359,804
|
)
|
|
|
-
|
|
|
|
(359,804
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,778,515
|
)
|
|
|
(5,778,515
|
)
|
Balance - March 31, 2019
|
|
|
109,765,015
|
|
|
$
|
488,670,353
|
|
|
$
|
(6,660,584
|
)
|
|
$
|
(318,403,898
|
)
|
|
$
|
163,605,871
|
|
Shares issued for acquisitions
|
|
|
1,105,000
|
|
|
|
1,692,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,692,000
|
|
Warrant exercises
|
|
|
356,738
|
|
|
|
737,993
|
|
|
|
-
|
|
|
|
-
|
|
|
|
737,993
|
|
Conversion of notes
|
|
|
84,220
|
|
|
|
147,385
|
|
|
|
-
|
|
|
|
-
|
|
|
|
147,385
|
|
Services settled by the issuance of shares
|
|
|
233,282
|
|
|
|
756,602
|
|
|
|
-
|
|
|
|
-
|
|
|
|
756,602
|
|
Stock option exercises
|
|
|
107,955
|
|
|
|
140,010
|
|
|
|
-
|
|
|
|
-
|
|
|
|
140,010
|
|
Shares issued to be cancelled
|
|
|
139
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
2,008,833
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,008,833
|
|
Shares issued to senior secured lender
|
|
|
-
|
|
|
|
650,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
650,000
|
|
Other comprehensive income due to foreign exchange rate translation, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
435,935
|
|
|
|
-
|
|
|
|
435,935
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(515,809
|
)
|
|
|
(515,809
|
)
|
Balance – June 30, 2019
|
|
|
111,652,349
|
|
|
$
|
494,803,176
|
|
|
$
|
(6,224,649
|
)
|
|
$
|
(318,919,707
|
)
|
|
$
|
169,658,820
|
|
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
PARETEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(UNAUDITED)
|
|
For the six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,294,324
|
)
|
|
$
|
(477,641
|
)
|
Adjustments to reconcile net loss to net cash (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,067,430
|
|
|
|
1,959,609
|
|
Provision for doubtful accounts
|
|
|
285,892
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
5,722,447
|
|
|
|
1,771,580
|
|
Change in fair value of warrant liability
|
|
|
-
|
|
|
|
(1,283,914
|
)
|
Amortization of deferred financing costs
|
|
|
151,355
|
|
|
|
12,351
|
|
Interest expense related to debt discount accretion and conversion feature
|
|
|
271,205
|
|
|
|
59,838
|
|
Payables settled by issuance of shares
|
|
|
2,279,238
|
|
|
|
86,778
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) in accounts receivable
|
|
|
(25,190,857
|
)
|
|
|
(1,851,046
|
)
|
Decrease/(Increase) in prepaid expenses, deposits and other assets
|
|
|
2,974,602
|
|
|
|
(351,046
|
)
|
Increase in accounts payable and customer deposits
|
|
|
6,936,552
|
|
|
|
606,393
|
|
(Decrease)/Increase in Net billings in excess of revenues and deferred revenue
|
|
|
(2,000,430
|
)
|
|
|
22,627
|
|
(Decrease) in accrued expenses and other payables
|
|
|
(1,644,320
|
)
|
|
|
(1,508,005
|
)
|
Net cash (used in) operating activities
|
|
|
(10,441,210
|
)
|
|
|
(952,476
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, and capitalized software
|
|
|
(1,650,013
|
)
|
|
|
(1,877,477
|
)
|
Issuance of notes receivable
|
|
|
(2,760,789
|
)
|
|
|
-
|
|
Business combinations, net of cash acquired
|
|
|
(1,562,636
|
)
|
|
|
-
|
|
Net cash (used in) investing activities
|
|
|
(5,973,438
|
)
|
|
|
(1,877,477
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Exercise of warrants and options
|
|
|
1,595,017
|
|
|
|
3,070,110
|
|
Increase in short terms loans
|
|
|
141,639
|
|
|
|
-
|
|
Proceeds from senior secured debt issued
|
|
|
25,000,000
|
|
|
|
-
|
|
Repayments on other long term loans
|
|
|
-
|
|
|
|
(32,682
|
)
|
Financing related fees
|
|
|
(623,555
|
)
|
|
|
(653,000
|
)
|
Gross proceeds from public offering
|
|
|
-
|
|
|
|
6,100,000
|
|
Principal repayment Senior Secured Loan
|
|
|
(11,669,963
|
)
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
14,443,138
|
|
|
|
8,484,428
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
(28,541
|
)
|
|
|
42,185
|
|
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND
RESTRICTED CASH
|
|
|
(2,000,051
|
)
|
|
|
5,696,660
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF THE PERIOD
|
|
|
6,482,364
|
|
|
|
13,737,675
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF THE PERIOD
|
|
$
|
4,482,313
|
|
|
$
|
19,434,335
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash (paid)/received during the period for interest, net
|
|
$
|
(840,562
|
)
|
|
$
|
43,193
|
|
Cash paid during the period for taxes
|
|
|
(56,201
|
)
|
|
|
-
|
|
NON-CASH FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Acquisitions paid for in common shares
|
|
|
(32,337,287
|
)
|
|
|
-
|
|
Conversions of convertible notes
|
|
|
(147,385
|
)
|
|
|
(1,911,380
|
)
|
Settlement of debt paid for in common shares
|
|
|
(2,279,238
|
)
|
|
|
-
|
|
Senior Secured Lender fees paid for in shares
|
|
|
(1,606,500
|
)
|
|
|
-
|
|
Amendment to warrants and convertible notes into common shares
|
|
|
-
|
|
|
|
313,733
|
|
The accompanying notes are an integral
part of the unaudited condensed consolidated financial statements.
PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Financial Condition
As reflected in the accompanying condensed
consolidated financial statements, Pareteum Corporation (“Pareteum,” the “Company,” “we,” “us,”
or “our”) (NASDAQ: TEUM) reported a net loss of $6,294,324 for the six months ended June 30, 2019, and had an accumulated
deficit of $318,919,707 as of June 30, 2019.
Note 2. Description of Business, Basis of Presentation
and Use of Estimates
Business overview
Pareteum has developed a Communications
Cloud Services Platform, providing (i) Mobility, (ii) Messaging, and (iii) Security services and applications, with a Single-Sign-On,
API and software development suite. The Pareteum platform hosts integrated IT/Back Office and Core Network functionality for mobile
network operators, and for enterprises implement and leverage mobile communications solutions on a fully outsourced SaaS, PaaS
and/or IaaS basis: made available either as an on-premise solution or as a fully hosted service in the Cloud depending on the needs
of our customers. Pareteum also delivers an Operational Support System (“OSS”) for channel partners, with Application
Program Interfaces (“APIs”) for integration with third party systems, workflows for complex application orchestration,
customer support with branded portals and plug-ins for a multitude of other applications. These features facilitate and improve
the ability of our channel partners to provide support and to drive sales.
Basis of Presentation of Interim Periods
The unaudited interim condensed consolidated
financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America
(“GAAP,”) for interim financial information and in accordance with the instructions to Securities and Exchange Commission
(“SEC”), Form 10-Q and Article 8 of SEC Regulation S-X. They do not include all the information and footnotes required
by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited
consolidated financial statements and notes thereto for the year ended December 31, 2018, included in our 2018 Annual Report on
Form 10-K filed with the SEC on March 18, 2019, referred to as our 2018 Annual Report.
The interim condensed consolidated financial
statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion
of management, are necessary to present fairly our results of operations and financial position for the interim periods. The results
of operations for the three and six month periods ended June 30, 2019, are not necessarily indicative of the results to be expected
for future quarters or the full year. All intercompany transactions and account balances have been eliminated in consolidation.
As of June 30, 2019, the Company’s subsidiaries are:
|
·
|
its wholly owned subsidiary Pareteum North America Corp. with its wholly owned subsidiary, Pareteum
UK Ltd.;
|
|
·
|
its wholly owned subsidiary Pareteum Asia PTE. Ltd.;
|
|
·
|
its wholly owned subsidiary TBR Inc. (special purpose vehicle for iPass acquisition);
|
|
·
|
its wholly-owned subsidiary Pareteum Europe B.V. (fka Elephant Talk Europe Holding B.V.) and its
wholly owned subsidiaries, Elephant Talk Mobile Services B.V., Elephant Talk PRS Netherlands BV, Elephant Talk Deutschland GmbH
(dormant), Elephant Talk Middle East & Africa (Holding) W.L.L., Elephant Talk Luxembourg SA (dormant), Guangzhou Elephant Talk
Information Technology Limited (dormant), Elephant Talk Communications Italy S.R.L. (dormant), Elephant Talk Business Services
W.L.L., Elephant Talk Middle East & Africa (Holding) Jordan L.L.C. (dormant).;
|
|
·
|
its wholly owned Elephant Talk Communications Holding AG and its wholly owned subsidiaries Pareteum
Spain SLU and ETC Carrier Services GmbH.;
|
|
·
|
Pareteum Europe B.V. majority-owned subsidiaries Elephant Talk Bahrain W.L.L. (99%), ET de Mexico
S.A.P.I. de C.V. (99.998%), ET-UTS NV; (51%) and LLC Pareteum (Russia) (50%) Elephant Talk;
|
|
·
|
Elephant Talk Telecomunicação do Brasil LTDA, is owned 90% by Pareteum Europe B.V.
and 10% by Elephant Talk Communication Holding AG;
|
|
·
|
its wholly-owned subsidiary Elephant Talk Limited (“ETL”) and its wholly owned ET Guangdong
Ltd. And its majority owned (50.54%) subsidiary Elephant Talk Middle East & Africa FZ-LLC.;
|
|
·
|
Asesores Profesionales ETAK S. de RL. De C.V. is owned 99% by Pareteum Europe B.V.;
|
|
·
|
its wholly owned subsidiary Artilium Group Ltd. And its wholly owned subsidiaries, Artilium UK
Ltd., Artilium Trustee Company Limited, Artilium BV, Pareteum NV, Interactive Digital Media GMBH and United Telecom NV, and United
Telecom NV’s wholly-owned subsidiary, ELLO Mobile BVVA;
|
|
·
|
its wholly owned subsidiary iPass, Inc. and its wholly owned subsidiaries iPass (U.K.) Limited,
iPass France SAS, iPass Deutschland GmbH, iPass Holdings Pty Ltd., iPass Asia Pte Ltd., iPass Japan, Inc., iPass India Private
Limited, iPass Ltd., GoRemote Internet Communications, Inc., GoRemote International Corporation, Axcelerant, Inc., Worldwide Axcelerant
Group, Mobile Automation, Inc. and Safe3W, Inc.; and
|
|
·
|
its wholly-owned subsidiary Devicescape Holdings, Inc.
|
For a complete summary of our significant
accounting policies, please refer to Note 1, “Business and Summary of Significant Accounting Policies,” in Item 8 of
our 2018 Annual Report.
Use of Estimates
The preparation of the accompanying consolidated
financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities and intangible assets acquired in our acquisitions
of Artilium, iPass and Devicescape. Significant estimates include the bad debt allowance, revenue recognition, impairment of long-lived
assets, valuation of financial instruments, useful lives of long-lived assets and share-based compensation. Actual results may
differ from these estimates under different assumptions or conditions and those differences could be material.
Reclassification
Certain reclassifications have been made
to the Company’s consolidated financial statements for the prior period to conform to the current period presentation. Such
reclassifications had no impact on net loss or net cash flows.
Note 3. Business Combinations
On November 12, 2018, the Company entered
into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Purchaser, and iPass. Pursuant
to the Merger Agreement, Purchaser, a wholly-owned subsidiary of the Company, commenced the offer for the “iPass Shares for
the “Transaction Consideration, upon the terms and subject to the conditions set forth in the Prospectus/Offer to Exchange
dated December 4, 2018 (together with any amendments and supplements thereto, the “Offer to Exchange”), and the related
Letter of Transmittal. The Offer and withdrawal rights expired at 5:00 p.m. New York City time on February 12, 2019, and promptly
following such time Purchaser accepted for payment and promptly paid for all validly tendered iPass Shares in accordance with the
terms of the Offer. The Company acquired 100% of the voting shares of iPass.
On February 12, 2019, following acceptance
and payment for the validly tendered iPass Shares and pursuant to the terms and conditions of the Merger Agreement, the Company
completed its acquisition of iPass from the stockholders of iPass when Purchaser merged with and into iPass, with iPass surviving
as a wholly owned subsidiary of the Company (the “Merger”). The Merger was governed by Section 251(h) of the Delaware
General Corporation Law, as amended (the “DGCL”) with no stockholder vote required to consummate the Merger. At the
effective time of the Merger, each iPass Share outstanding was converted into the right to receive the Transaction Consideration.
The iPass Shares are no longer listed on the Nasdaq Capital Market.
As part of the acquisition, the Company
issued 9,865,412 common shares to shareholders and 705,000 shares were granted to employees.
The allocation of the purchase price was
as follows (in thousands):
Purchase consideration:
|
|
|
|
|
Shares issued to shareholders
|
|
$
|
29,253
|
|
Shares issued to employees
|
|
|
1,401
|
|
Total purchase consideration
|
|
$
|
30,654
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price allocation:
|
|
|
|
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
284
|
|
Accounts receivable, net
|
|
|
4,344
|
|
Property, plant and equipment, net
|
|
|
1,092
|
|
Other assets
|
|
|
4,863
|
|
Intangible assets
|
|
|
22,700
|
|
Total assets
|
|
|
33,283
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
|
|
11,321
|
|
Deferred revenue
|
|
|
1,701
|
|
Loans outstanding
|
|
|
10,989
|
|
Other liabilities
|
|
|
6,743
|
|
Total liabilities
|
|
|
30,754
|
|
Estimated fair value of net assets acquired
|
|
|
2,529
|
|
Goodwill
|
|
$
|
28,125
|
|
The period ended June 30,
2019, consolidated financial statements included iPass and its subsidiaries from the closing date of February 12, 2019,
through June 30, 2019.
The allocation of the purchase price for
iPass’s intangible assets were as follows (in thousands):
|
|
Estimated
Fair
Value
|
|
|
Useful
Life
(Years)
|
|
Developed Technology
|
|
$
|
5,500
|
|
|
|
8
|
|
Customer relationships
|
|
|
15,500
|
|
|
|
11
|
|
Tradename
|
|
|
1,700
|
|
|
|
3
|
|
Intangible assets
|
|
$
|
22,700
|
|
|
|
|
|
On April 22, 2019, the Company, together
with Devicescape Holdings, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (the “Holdco” and
together with the Company, the “Buyer”) entered into an asset purchase agreement (the “Purchase Agreement”)
with Devicescape Software, Inc., a California corporation (“Devicescape”), whereby the Buyer acquired substantially
all of the assets of Devicescape and assumed certain liabilities of Devicescape, such that Holdco shall continue as a surviving
subsidiary of the Company holding all assets and assuming those certain liabilities of Devicescape (the “Devicescape Purchase”).
In connection with the Devicescape Purchase, and pursuant to the terms and subject to the conditions set forth in the Purchase
Agreement, the Company paid cash consideration of $2,000,000 and issued to the stockholders of Devicescape an aggregate of 400,000
shares of the Company’s common stock at a value of $1,692,000 based on our closing price on April 22, 2019, of $4.23 per
share.
The allocation of the purchase price was
as follows (in thousands):
Purchase consideration:
|
|
|
|
|
Cash consideration
|
|
$
|
2,000
|
|
Shares issued to shareholders
|
|
|
1,692
|
|
Total purchase consideration
|
|
$
|
3,692
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price allocation:
|
|
|
|
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
153
|
|
Accounts receivable, net
|
|
|
451
|
|
Intangible assets
|
|
|
1,588
|
|
Total assets
|
|
|
2,192
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts payable & other liabilities
|
|
|
88
|
|
Total liabilities
|
|
|
88
|
|
Estimated fair value of net assets acquired
|
|
|
2,104
|
|
Goodwill
|
|
$
|
1,588
|
|
The June 30, 2019, consolidated financial
statements included Devicescape and its subsidiaries from April 22, 2019, the acquisition date, through June 30, 2019 .
The allocation of the purchase price for
Devicescape’s intangible assets were as follows (in thousands):
|
|
Estimated
|
|
|
Useful
|
|
|
|
Fair
|
|
|
Life
|
|
|
|
Value
|
|
|
(Years)
|
|
Developed Technology
|
|
$
|
1,588
|
|
|
|
8
|
|
Intangible assets
|
|
$
|
1,588
|
|
|
|
|
|
Note 4. Balance Sheet Information
The following tables present details of our unaudited condensed
consolidated financial statements:
Prepaid expenses and other current assets
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Prepaid expenses
|
|
$
|
2,960,148
|
|
|
$
|
1,659,783
|
|
VAT
|
|
|
425,694
|
|
|
|
424,167
|
|
|
|
$
|
3,385,842
|
|
|
$
|
2,083,950
|
|
Property and equipment, net
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Furniture and fixtures
|
|
$
|
561,858
|
|
|
$
|
139,857
|
|
Computer, communications and network equipment
|
|
|
17,341,035
|
|
|
|
17,520,435
|
|
Software
|
|
|
4,911,585
|
|
|
|
4,716,816
|
|
Automobiles
|
|
|
324,534
|
|
|
|
10,744
|
|
Software development
|
|
|
3,589,731
|
|
|
|
1,656,739
|
|
Accumulated depreciation and amortization
|
|
|
(21,832,240
|
)
|
|
|
(19,491,341
|
)
|
|
|
$
|
4,896,503
|
|
|
$
|
4,553,250
|
|
Intangible Assets, net
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Developed technology
|
|
$
|
27,687,821
|
|
|
$
|
20,600,000
|
|
Consumer relationships
|
|
|
32,300,000
|
|
|
|
16,800,000
|
|
Tradename
|
|
|
5,100,000
|
|
|
|
3,400,000
|
|
Accumulated amortization
|
|
|
(4,825,401
|
)
|
|
|
(1,141,675
|
)
|
|
|
$
|
60,262,420
|
|
|
$
|
39,658,325
|
|
Accrued expenses and other payables
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Accrued selling, general and administrative expenses
|
|
$
|
3,987,888
|
|
|
$
|
2,396,941
|
|
Accrued restructuring & acquisition related costs
|
|
|
972,714
|
|
|
|
1,885,194
|
|
Accrued cost of service
|
|
|
5,765,483
|
|
|
|
1,070,099
|
|
Accrued taxes (including VAT)
|
|
|
2,980,801
|
|
|
|
2,283,999
|
|
Accrued interest payable
|
|
|
184,415
|
|
|
|
67,613
|
|
Other accrued expenses
|
|
|
145,344
|
|
|
|
248,534
|
|
|
|
$
|
14,036,645
|
|
|
$
|
7,952,380
|
|
9% Unsecured Subordinated Convertible Promissory Note
(Matured between December 2018 and June 2019)
|
|
Outstanding
June 30,
2019
|
|
|
Regular
Amortizations
(during 2019)
|
|
|
Conversions
(during
2019)
including
accelerated
amortization
|
|
|
10% Early
Repayment
Short Term
|
|
|
Outstanding
December 31,
2018
|
|
Convertible Note Principal Amount
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
105,000
|
|
|
$
|
10,500
|
|
|
$
|
(115,500
|
)
|
Debt Discounts & Financing Costs
|
|
|
-
|
|
|
|
(8,533
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
8,533
|
|
Total 9% Unsecured Note
|
|
$
|
-
|
|
|
$
|
(8,533
|
)
|
|
$
|
105,000
|
|
|
$
|
10,500
|
|
|
$
|
(106,967
|
)
|
During the six months ended June 30, 2019,
the conversion feature was exercised at a price of $1.75 per share, and a total of 84,220 shares were exercised.
Outstanding numbers of Dilutive Securities
The outstanding number of dilutive securities
for the six months ended June 30, 2019, can be seen below:
Number of underlying shares for
Warrants & Conversion Features
|
|
Outstanding
June 30, 2019
|
|
|
Agreement
Amendments
|
|
|
Conversions
|
|
|
Outstanding
December 31, 2018
|
|
Fortress - iPass Loan Repayment Warrant
|
|
|
325,000
|
|
|
|
325,000
|
|
|
|
-
|
|
|
|
-
|
|
2017 Registered Public Offering
|
|
|
110,912
|
|
|
|
-
|
|
|
|
(359,058
|
)
|
|
|
469,970
|
|
Investor Management Services
|
|
|
610,000
|
|
|
|
-
|
|
|
|
(100,000
|
)
|
|
|
710,000
|
|
9% Convertible Note Warrants
|
|
|
492,506
|
|
|
|
-
|
|
|
|
(27,867
|
)
|
|
|
520,373
|
|
2013 Convertible Notes
|
|
|
60,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,000
|
|
Other 9% Convertible Note Warrants
|
|
|
96,520
|
|
|
|
-
|
|
|
|
-
|
|
|
|
96,520
|
|
2017 Registered Public Offering Agent Warrants
|
|
|
21,500
|
|
|
|
-
|
|
|
|
(40,834
|
)
|
|
|
62,334
|
|
9% Convertible Note 7% Agent Warrants
|
|
|
66,230
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66,230
|
|
Nov-2017 Underwriter Agreement Agent Warrants
|
|
|
704,831
|
|
|
|
-
|
|
|
|
(205,756
|
)
|
|
|
910,587
|
|
Oct-2017 Shelf Take Down Agent Warrants
|
|
|
843
|
|
|
|
-
|
|
|
|
-
|
|
|
|
843
|
|
May-2018 Public Offering Agent Warrants
|
|
|
6,700
|
|
|
|
-
|
|
|
|
(115,300
|
)
|
|
|
122,000
|
|
Preferred Share Conversion Warrants
|
|
|
639,844
|
|
|
|
-
|
|
|
|
(91,954
|
)
|
|
|
731,798
|
|
Preferred Share issuance 8% Agent Warrants
|
|
|
38,827
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,827
|
|
Total Outstanding Warrants
|
|
|
3,173,713
|
|
|
|
325,000
|
|
|
|
(940,769
|
)
|
|
|
3,789,482
|
|
Cash and Restricted Cash
The following table provides a reconciliation
of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to that sum to the total
amounts shown in the Condensed Consolidated Statements of Cash Flows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
3,377,556
|
|
|
$
|
6,051,709
|
|
Restricted Cash
|
|
|
1,104,757
|
|
|
|
430,655
|
|
Total cash, cash equivalents and restricted cash reported in the Condensed Consolidated Statement of Cash Flows
|
|
$
|
4,482,313
|
|
|
$
|
6,482,364
|
|
Notes Receivable
At June 30, 2019, and December 31,
2018, the Company had non-current notes receivable of $2,819,200 and $1,082,436, respectively, and the current portion
amounted to $1,024,025 and $0 respectively.
The third quarter 2016 sale of ValidSoft
for the price of $3,000,000 was completed and the Company received $2,000,000 in cash and a $1,000,000 promissory note, with an
interest rate of 5% per annum. The maturity date of the note is September 30, 2019. At June 30, 2019, and December 31, 2018, the
remaining outstanding principal amounts were $488,191 and $576,769, respectively.
On November 26, 2018, the Company executed
a senior secured promissory note for $500,000 from Yonder Media Mobile (an unrelated entity), with interest accruing at a
simple rate of 6% per annum with a maturity date of May 26, 2020. On January 9, 2019, February 12, 2019 and February 28, 2019,
the Company issued additional notes of $500,000, $200,000, and $2,000,000, respectively (the “2019 Notes”). The 2019
Notes each bear an interest rate of 12% per annum and mature 18 months following the issuance date. All principal and interest
are due on the maturity date. At June 30, 2019 and December 31, 2018, the remaining outstanding principal amounts were $3,355,034
and $505,667, respectively.
Related Party Loan
As of June 30, 2019 and December 31, 2018,
there remained an outstanding related party loan to Comsys, a wholly-owned subsidiary of Artilium BV, from Comsystems (a company
owned by Gerard Derenbos). Prior to the acquisition by Pareteum, Gerard Derenbos was a shareholder of Artilium PLC, with approximately
15% of the total shares of Artilium PLC, and a board member of Artilium PLC.
The total outstanding balance as of June
30, 2019 and December 31, 2018 was $342,000 and $341,998, respectively. The loan carries an 8% interest rate and a maturity date
of December 31, 2021. All principal and interest are due on the maturity date.
Note 5. Equity
(A) Common Stock
The Company is presently authorized
to issue 500,000,000 shares of common stock. The Company had 111,652,349 shares of common stock issued and outstanding as of
June 30, 2019, an increase of 13,799,438 shares from December 31, 2018, were largely due to the iPass and Devicescape
acquisitions (10,970,412), warrant exercises (858,344), shares issued to Senior Secured lender (425,000), and services
settled by issuance of shares (653,796).
(B) Warrants
Throughout the years, the Company has issued
warrants with varying terms and conditions related to multiple financing rounds, acquisitions and other transactions. The number
of warrants outstanding at June 30, 2019 and December 31, 2018, have been recorded and classified as equity is 3,173,713 and 3,789,482,
respectively. The weighted average exercise price for the currently outstanding warrants in the table below is $2.21. The table
below summarizes the warrants outstanding as of June 30, 2019 and as of December 31, 2018:
Outstanding Warrants
|
|
Exercise/
Conversion
price(s)
(range)
|
|
Expiring
|
|
June 30,
2019
|
|
|
December 31, 2018
|
|
Equity Warrants – Fundraising
|
|
$1.05 - $5.375
|
|
2019 - 2026
|
|
|
3,173,713
|
|
|
|
3,789,482
|
|
|
|
|
|
|
|
|
3,173,713
|
|
|
|
3,789,482
|
|
Note 6. Amended and Restated 2008 Long Term Incentive
Compensation Plan, 2017 Long-Term Incentive Compensation Plan and 2018 Long Term Incentive Compensation Plan, As Amended
The Company maintains the following Long Term Incentive Compensation
Plans (collectively, the “Plans”):
|
·
|
Amended and Restated 2008 Long-Term Incentive Compensation Plan (“2008 Plan”)
|
|
·
|
2017 Long-Term Incentive Compensation Plan (“2017 Plan”)
|
|
·
|
2018 Long-Term Incentive Compensation Plan (“2018 Plan”)
|
On October 10, 2018, the Company filed
an S-8 to register the remaining 8,000,000 shares of common stock of the 2018 Plan which was previously ratified by our stockholders
on September 12, 2018 at our annual meeting of stockholders. This incentive plan provides for awards of up to 8,000,000 shares
of common stock, in the form of options, restricted stock awards, stock appreciation rights (“SAR’s”), performance
units and performance bonuses to eligible employees and the grant of nonqualified stock options, restricted stock awards, SAR’s
and performance units to consultants and eligible directors.
Pursuant to the terms of the 2018 Plan,
as amended, the number of shares available under the plan shall increase on the first day of each fiscal year in an amount equal
to the lesser of (i) 15% of the total number of shares of common stock outstanding as of December 31
st
of the preceding
fiscal year or (ii) such number of shares of common stock determined by the Board of Directors (the “Evergreen Increase”).
As a result of the 2019 Evergreen Increase, the number of shares available under the 2018 Plan increased by 7,500,000 shares, such
number determined by the Board of Directors being the lesser of (i) and (ii) as described herein (the “2018 Plan Increase”).
The 2018 Plan Increase took effect upon the filing of the Registration Statement on Form S-8 on June 28, 2019.
Under the provisions of ASC 718, expensing
takes place proportionally to the vesting associated with each stock-award, adjusted for cancellations, forfeitures and returns.
If there are any modifications or cancellations of the underlying unvested awards, we may be required to accelerate, increase or
cancel any remaining unearned stock-based compensation expense.
As of June 30, 2019, the following shares were authorized under
the Plans:
Reconciliation of registered and available shares
and/or options as of June 30, 2019:
|
|
|
|
Total
|
|
|
|
|
|
|
|
Approved by the Shareholders (annually 15% of outstanding shares)
|
|
|
|
|
|
|
|
|
|
|
|
Registered 2008 (S-8 dated July 11, 2008)
|
|
2008 Plan
|
|
|
200,000
|
|
Registered 2011 (S-8 dated October 6, 2011)
|
|
2008 Plan
|
|
|
720,000
|
|
Registered 2017 (S-8 dated June 14, 2017)
|
|
2017 Plan
|
|
|
3,500,000
|
|
Registered 2018 (S-8 dated April 13, 2018)
|
|
2017 Plan
|
|
|
3,000,000
|
|
Registered 2018 (S-8 dated October 10, 2018)
|
|
2018 Plan
|
|
|
8,000,000
|
|
Registered 2018 (S-8 dated June 28, 2019)
|
|
2018 Plan
|
|
|
7,500,000
|
|
|
|
2019 Activities
|
|
|
|
|
Shares (issued to):
|
|
|
|
|
|
|
Consultants
|
|
|
177,744
|
|
|
|
1,011,165
|
|
Directors, Officers and staff
|
|
|
797,789
|
|
|
|
5,064,305
|
|
Options exercised
|
|
|
176,038
|
|
|
|
330,542
|
|
Total Shares issued:
|
|
|
|
|
|
|
6,406,012
|
|
|
|
|
|
|
|
|
|
|
Available for issuance at June 30, 2019 (under the S- 8 registration statements)
|
|
|
|
|
|
|
16,513,988
|
|
|
|
|
|
|
|
|
|
|
Outstanding rights (movements):
|
|
|
|
|
|
|
|
|
Options
|
|
|
5,082,211
|
|
|
|
8,746,023
|
|
Time Conditioned Share Awards / Other Awards
|
|
|
84,723
|
|
|
|
1,641,355
|
|
Available for grant at June 30, 2019:
|
|
|
|
|
|
|
6,126,610
|
|
The Company’s stockholders also approved an additional
920,000 shares and 400,000 shares under the 2008 Plan on December 17, 2013 and September 12, 2014, respectively. These approved
shares have not been registered on Form S-8 as of June 30, 2019.
The following table summarizes the activities that occurred
during the three months ended June 30, 2019:
Options:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Initial Fair
Market Value
(Outstanding
Options)
|
|
Outstanding as of March 31, 2019
|
|
|
8,981,608
|
|
|
$
|
2.26
|
|
|
$
|
11,465,952
|
|
Granted in 2019
|
|
|
207,703
|
|
|
|
2.29
|
|
|
|
424,055
|
|
Exercised (with delivery of shares)
|
|
|
(107,955
|
)
|
|
|
1.30
|
|
|
|
(91,008
|
)
|
Forfeitures (Pre-vesting)
|
|
|
(335,333
|
)
|
|
|
2.28
|
|
|
|
(721,969
|
)
|
Outstanding as of June 30, 2019
|
|
|
8,746,023
|
|
|
$
|
2.21
|
|
|
$
|
11,077,030
|
|
The following table summarizes the activity that occurred during
the six month period ended June 30, 2019:
Options:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Initial Fair Market Value (Outstanding Options)
|
|
Outstanding as of December 31, 2018
|
|
|
3,663,812
|
|
|
$
|
2.26
|
|
|
$
|
4,962,798
|
|
Granted in 2019
|
|
|
5,440,103
|
|
|
|
2.18
|
|
|
|
6,661,232
|
|
Exercised (with delivery of shares)
|
|
|
(176,038
|
)
|
|
|
1.19
|
|
|
|
(127,518
|
)
|
Forfeitures (Pre-vesting)
|
|
|
(158,552
|
)
|
|
|
2.20
|
|
|
|
(226,849
|
)
|
Expirations (Post-vesting)
|
|
|
(23,302
|
)
|
|
|
8.32
|
|
|
|
(192,633
|
)
|
Outstanding as of June 30, 2019
|
|
|
8,746,023
|
|
|
$
|
2.21
|
|
|
$
|
11,077,030
|
|
Stock-based compensation expense totaled $5,722,447 and $1,771,580
for the six months ended June 30, 2019 and 2018, respectively. Stock-based compensation expense totaled $2,008,833 and $697,448
for the three months ended June 30, 2019 and 2018, respectively. At June 30, 2019, there was $6,280,777 of unrecognized expense
for share-based awards granted under the Plans.
Note 7. Income taxes
The following table presents details of income tax (benefit)/expense:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Income tax (benefit)/expense
|
|
$
|
(449,403
|
)
|
|
$
|
18,842
|
|
|
$
|
(616,737
|
)
|
|
$
|
18,424
|
|
As a result of our cumulative tax
losses in the U.S. and certain foreign jurisdictions, and the full utilization of our loss carryback opportunities, we have
concluded that a full valuation allowance should be recorded in such jurisdictions. In certain other foreign jurisdictions
where we do not have cumulative losses, we had net deferred tax liabilities based upon an expected annual tax rate.
Note 8. Significant Customers and Geographical Information
During the three months ended June
30, 2019 and 2018, 19.7% and 75% of revenue, respectively, were made from two customers. For the three months ended June 30,
2019 and 2018, our largest customer represented 11.2% and 53.4% of revenues, respectively. Our second largest customer
represented 8.5% and 21.6% of revenues for the three months ended June 30, 2019 and 2018, respectively.
During the six months ended June 30, 2019 and 2018, 20.4%
and 79.3% of revenues, respectively, were made from two customers. For the six months ended June 30, 2019 and 2018, our largest
customer represented 12.5% and 63.5% of revenues, respectively. Our second largest customer represented 7.9% and 15.8% of
revenues for the six months ended June 30, 2019 and 2018, respectively.
The geographical distribution of our revenue, as a percentage
of revenues, was as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Europe
|
|
|
52.7
|
%
|
|
|
59.4
|
%
|
|
|
57.7
|
%
|
|
|
76.8
|
%
|
All other (non-European) countries
|
|
|
47.3
|
%
|
|
|
40.6
|
%
|
|
|
42.3
|
%
|
|
|
23.2
|
%
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Note 9. Revenues
Our revenues represent amounts earned for
our mobile and security solutions. Our solutions take many forms, but our revenues generally consist of fixed and/or variable charges
for services delivered monthly under a combined services and SaaS model. We also offer discrete (one-time) services for implementation
and for development of specific functionality to properly service our customers.
The following table presents our revenues
disaggregated by revenue source:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Monthly service
|
|
$
|
31,627,289
|
|
|
$
|
4,277,289
|
|
|
$
|
53,237,189
|
|
|
$
|
7,772,831
|
|
Installation and software development
|
|
|
2,521,107
|
|
|
|
1,725,891
|
|
|
|
3,951,121
|
|
|
|
2,342,919
|
|
Total revenues
|
|
$
|
34,148,396
|
|
|
$
|
6,003,180
|
|
|
$
|
57,188,310
|
|
|
$
|
10,115,750
|
|
Monthly services revenues are generally
recognized over time and amounted to $31,627,289 and $53,237,189 for the three and six months ended June 30, 2019, respectively.
Installation and software development revenues are recognized over time and amounted to $2,521,107 and $3,951,121 over for the
three and six months ended June 30, 2019, respectively.
The following table presents our revenues
disaggregated by geography, based on the billing addresses of our customers:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Europe
|
|
$
|
17,978,271
|
|
|
$
|
3,563,089
|
|
|
$
|
33,015,300
|
|
|
$
|
7,772,831
|
|
Other geographic areas
|
|
|
16,170,125
|
|
|
|
2,440,091
|
|
|
|
24,173,010
|
|
|
|
2,342,919
|
|
Total revenues
|
|
$
|
34,148,396
|
|
|
$
|
6,003,180
|
|
|
$
|
57,188,310
|
|
|
$
|
10,115,750
|
|
Monthly Service Revenues
The Company’s performance obligations
in a monthly SaaS and service offerings are simultaneously received and consumed by the customer and therefore, are generally recognized
over time. For recognition purposes, we do not unbundle such services into separate performance obligations as their pattern of
transfer does not differ. The Company typically bills its customer at the end of each month. The fees charged may include a combination
of fixed and variable charges with the variable charges tied to the number of subscribers or some other measure of volume. Although
the consideration may be variable, the volumes are easily estimable at the time of billing, with “true-up” adjustments
occurring in the subsequent month. As such adjustments have not historically been material, no amounts of variable consideration
are subject to constraint.
Installation and Software Development
Revenues
The Company’s other revenues consist
generally of installation and development projects.
Installation represents the activities
necessary for a customer to obtain access and connectivity to the Company’s monthly SaaS and service offerings. While installation
may require separate phases, it represents one performance obligation within the context of the contract.
Development consists of programming and
other services to add new, additional or customized functionality to a customer’s existing service offerings. Each development
activity is typically its own performance obligation.
Revenue is recognized over time if the
installation and development activities create an asset that has no alternative use for which the Company is entitled to receive
payment for performance completed to date. If not, then revenue is not recognized until the applicable performance obligation is
satisfied.
Arrangements with Multiple Performance
Obligations
The Company’s contracts with customers
may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation
based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices
charged to customers.
Net Billings in Excess of Revenues
The Company records net billings in excess
of revenues when payments are made or due in advance of our performance, including amounts which are refundable.
Payment terms vary by the type and location
of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For
certain products or services and customer types, payment is required before the products or services are delivered to the customer.
Contract Assets
Given the nature of the Company’s services and contracts,
it has no contract assets.
Note 10. Credit Agreement
On February 26, 2019, Pareteum Corporation
and certain of its subsidiaries entered into a credit agreement (the “Credit Agreement”) with Post Road Administrative
Finance, LLC and its affiliate Post Road Special Opportunity Fund I LLP (collectively, “Post Road”). Pursuant to the
Credit Agreement, Post Road will provide the Company with a secured loan of up to $50,000,000 (the “Loan”), with an
initial loan of $25,000,000 funded on February 26, 2019, and additional amounts in $5,000,000 increments as requested by the Company
before the 18-month anniversary of the initial funding date. No additional loan shall be funded until the later of delivery of
certain third-party consents (the “Consents”), the filing of Pareteum’s Quarterly Report on Form 10-Q for the
first quarter of 2019, or June 1, 2019. All amounts owed under the Credit Agreement shall be due on February 26, 2022.
The unpaid principal amount of the Loan
shall bear interest from the relevant funding dates at a rate per year of Libor plus 8.5% in effect from time to time, provided
however, that upon an event of default or if certain of the Consents are not delivered prior to May 1, 2019 or June 1, 2019, as
applicable, the unpaid principal amount of the Loan shall bear interest from the relevant funding dates at a rate per year of Libor
plus 11.5% in effect from time to time until the Consents are delivered. The interest shall be due and payable monthly in cash
in arrears, provided, however, that the Company may elect to pay any or all of the interest in the form of Payment-in-Kind (“PIK”)
interest due and payable at maturity at a maximum percentage per year equal to (a) through and including the first anniversary
of the initial funding date, 3%, (b) after the first anniversary of the initial funding date through and including the second anniversary
of the initial funding date, 2%, and (c) after the second anniversary of the initial funding date, 1%.
Permitted use of proceeds for the initial
$25,000,000 of the Loan include approximately $11,700,000 for payment in full of outstanding secured debt owed to Fortress Credit
Corp. (together with its affiliates, “Fortress”) incurred in connection with the Company’s previously disclosed
acquisition of iPass Inc. (“iPass”) on February 12, 2019, as well as remaining amounts for permitted acquisitions and
investments, for general working capital purposes and paid $623,555 in transaction fees related to the Loan. Proceeds are to be
used for permitted acquisitions and to fund growth capital expenditures and other growth initiatives.
The Loan is subject to prepayment upon
the receipt of proceeds outside the ordinary course of business in excess of $1,000,000 and the Company must pay a commitment fee
of 1% per year for an unfunded commitment. The initial $25,000,000 loan is reduced by an original issue discount of (i) 0.75% of
$25,000,000 and (ii) 1.25% of $50,000,000, and any additional amounts borrowed will be reduced by an original issue discount of
0.75% of the funded amounts.
The Company’s obligations under the
Credit Agreement are secured by a first-priority security interest in all the assets of the Company and guaranteed by certain subsidiaries
of the Company. The Credit Agreement contains customary representations, warranties and indemnification provisions. The Credit
Agreement also contains affirmative and negative covenants with respect to operation of the business and properties of the Company
as well as financial performance, including requirements to maintain a minimum of $2,000,000 of unrestricted cash, certain maximum
total leverage ratios, a debt to asset ratio, maximum churn rate and minimum adjusted EBITDA. The Credit Agreement further provides
customary events of default and cure periods for certain specified events of default, and in the event of uncured default, the
acceleration of the maturity date, an increase in the applicable interest rate with respect to amounts outstanding under the Loan
and payment of additional fees.
On February 26, 2019, concurrently with
entering into the Credit Agreement, the existing loan and security agreement by and among iPass, iPass IP LLC and Fortress (the
“Existing iPass Loan”) terminated. Credit facilities under the Existing iPass Loan included a term loan A facility
and a term loan B facility maturing on February 27, 2019.
On February 26, 2019, pursuant to the terms
of the Credit Agreement, the Company issued to Post Road 425,000 shares of common stock at $1,606,500 and will issue an additional
200,000 shares of common stock upon the next subsequent funding, if any, under the Loan.
As of June 30, 2019, and December 31, 2018,
the Company had outstanding senior secured debt of $22,077,767 and $0, respectively. For the three and six months ended June 30,
2019, the Company recorded interest expense of $747,245 and $1,054,120, respectively, related to the Loan. The interest rate at
June 30, 2019 was 11%. The Company recorded $1,655,112 in deferred financing costs and other fees as a reduction of the outstanding
loan balance through June 30, 2019. A total of $101,664 and $151,355 was amortized during the three and six months ended June 30,
2019. The remaining capacity under the Loan was $25,000,000 at June 30, 2019.
As of June 30, 2019, the Company was in compliance with all
covenants required by the Loan.
Note 11. Commitments and Contingencies
Lease Commitments
We have operating leases for our office
space. Our leases have remaining lease terms of less than one year to 6 years, some of which include options to indefinitely extend
the leases monthly. For our month to month leases, we determined the number of renewal periods we are reasonably certain to exercise
and include these periods in our right of use asset and lease liability calculations. Lease expense was $487,850 and $970,398 for
the three and six months ended June 30, 2019, respectively, and is included in general and administrative expense in the condensed
consolidated statement of comprehensive loss. Lease expense was $39,393 and $81,506 for the three and six months ended June 30,
2018.
Operating Leases:
|
|
June 30, 2019
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
2,493,352
|
|
Operating lease liabilities
|
|
$
|
2,790,685
|
|
|
|
|
|
|
Weighted average remaining lease term
|
|
|
|
|
Operating leases
|
|
|
1.9 years
|
|
|
|
|
|
|
Incremental borrowing rate
|
|
|
|
|
Operating leases
|
|
|
8.8
|
%
|
The following represents maturities of operating lease liabilities
as of June 30, 2019:
Remainder of 2019
|
|
$
|
975,453
|
|
2020
|
|
|
1,716,284
|
|
2021
|
|
|
119,059
|
|
2022
|
|
|
62,387
|
|
2023
|
|
|
62,387
|
|
Thereafter
|
|
|
98,779
|
|
Total lease payments
|
|
$
|
3,034,349
|
|
Less: imputed interest
|
|
|
(243,664
|
)
|
Lease liabilities, current
|
|
|
1,776,900
|
|
Lease liabilities, non-current
|
|
|
1,013,785
|
|
Total
|
|
$
|
2,790,685
|
|
Legal Proceedings
Ellenoff Grossman & Schole LLP, claimed legal fees.
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 $817,822 in unpaid legal fees for January 2015 through November 2016. On June 29, 2017, the parties entered into a settlement
agreement for the full $817,822 with agreed-upon monthly installment payments through August 31, 2019. As of June 30, 2019, this
transaction is reflected in the financial statements.
The Company is involved in various claims
and lawsuits incidental to our business. In the opinion of management, the ultimate resolution of such claims and lawsuits
will not have a material effect on our financial position, liquidity, or results of operations.
Note 12. Subsequent Events
None.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Statements
Any forward looking statements made
herein are based on current expectations of the Company, involve a number of risks and uncertainties and should not be considered
as guarantees of future performance. The factors that could cause actual results to differ materially include: interruptions or
cancellation of existing contracts, inability to integrate acquisitions, impact of competitive products and pricing, product demand
and market acceptance risks, the presence of competitors with greater financial resources than the Company, product development
and commercialization risks, changes in governmental regulations, and changing economic conditions in developing countries and
an inability to arrange additional debt or equity financing.
Overview
Pareteum Corporation (Nasdaq: TEUM) is
a 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
unleashes the power of applications and mobile services, bringing 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. Pareteum envisions
a new mobile communications experience imagining what will be and delivering now.
With estimates of up to 30 billion devices
to be managed and connected the total available market is astoundingly large. Service Providers, Brand Marketing Companies, Enterprise
and Internet of Things providers use Pareteum to energize their growth and profitability through cloud communication services and
complete turnkey solutions featuring relevant content, applications, and connectivity worldwide. To achieve this, Pareteum has
developed, and added through its acquisition of Artilium and iPass, patent pending software platforms which are connected to 59
mobile networks in 80 counties using multiple different communications channels including mobile telephony, data, SMS, VOIP, OTT
services – all over the world. Pareteum integrates all these disparate communications methods and services and brings them
to life for customers and application developers, allowing communications to become value-added. This is a major strategic target
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 self-developed software and intellectual property, which provides our customers with a great deal of flexibility in
how they use our products now and in the future and allows us to be market driven in our future. We have approximately 40
patents granted in relation to techniques and processes which support our cloud software and communications platform solutions.
Our platform services partners (technologies integrated into our cloud) include: HPE, IBM, Sonus, Oracle, Microsoft, NetNumber,
Affirmed and other world class companies. As of October 1, 2018, the Company now 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 which 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
now 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 condensed consolidated financial statements
and notes thereto and the other financial information included elsewhere in this report.
Critical Accounting Policies and Estimates
The preparation of financial statements
in accordance with accounting principles generally accepted in the United States of America, or GAAP, requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported
amounts of net revenue and expenses in the reporting period. We regularly evaluate our estimates and assumptions related to revenue
recognition, rebates, allowances for doubtful accounts, sales returns and allowances, warranty reserves, stock-based compensation
expense, intangible assets acquired in connection with our business combinations, long-lived asset valuations, strategic investments,
deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, self-insurance, restructuring costs,
litigation and other loss contingencies. We base our estimates and assumptions on current facts, historical experience and various
other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent
from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent
there are material differences between our estimates and the actual results, our future results of operations will be affected.
For a description of our critical accounting policies and estimates, please refer to the “Critical Accounting Policies and
Estimates” section in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” of our 2018 Annual Report. There have been no material changes in any of our critical accounting policies
and estimates during the six months ended June 30, 2019.
Comparison of three months ended
June 30, 2019 and June 30, 2018
Revenues
Revenues for the three months ended June
30, 2019, were $34,148,396, a $28,145,216 or 469% increase compared to $6,003,180 for the comparable three months in 2018. Our deployments
with existing customers continue to grow, new implementations are generating new revenues and new cloud based revenues were all
factors in our revenue growth. Additionally, the three months ended June 30, 2019, includes revenues of $5,241,919 and $7,359,579
from our acquisitions of Artilium and iPass, respectively. The three months ended June 30, 2018, included no such corresponding
revenues as these transactions were consummated in the fourth quarter of 2018 and first quarter of 2019, respectively.
|
|
Three months ended June 30,
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Revenues
|
|
$
|
34,148,396
|
|
|
$
|
6,003,180
|
|
|
$
|
28,145,216
|
|
Cost of Service, excluding depreciation
and amortization
Cost of service includes origination, termination,
network and billing charges from telecommunications operators, costs of telecommunications service providers, network costs, data
center costs, facility cost of hosting network and equipment and cost in providing resale arrangements with long distance service
providers, cost of leasing transmission facilities, international gateway switches for voice, data transmission services, and the
cost of professional services of staff directly related to the generation of revenues, consisting primarily of employee-related
costs associated with these services, including share-based compensation and the cost of subcontractors. Cost of service excludes
depreciation and amortization.
|
|
Three months ended June 30,
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Revenues
|
|
$
|
34,148,396
|
|
|
$
|
6,003,180
|
|
|
$
|
28,145,216
|
|
Cost of service (excluding depreciation and amortization)
|
|
|
15,293,244
|
|
|
|
1,779,882
|
|
|
|
13,513,362
|
|
Margin (excluding depreciation and amortization)
|
|
$
|
18,855,152
|
|
|
$
|
4,223,298
|
|
|
$
|
14,631,854
|
|
Cost of service for the three months ended
June 30, 2019, was $15,293,244, an increase of $13,513,362 or 759%, compared to $1,779,882 for the comparable three months in 2018.
Cost of service for the three months ended June 30, 2019, includes costs for Artilium and iPass of $3,038,017 and $6,398,593, respectively
due to their acquisitions. The remainder of the increase in cost of service is in line with the overall increase in revenue, which
generates a corresponding increase in implementation costs for new clients.
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 network and
intelligent network platform development and testing are also included in this function.
Product development costs for the three
months ended June 30, 2019 and 2018, were $3,242,145 and $753,931, respectively, an increase of $2,488,214 or 330%. The increase
in product development is due to acquisitions made by the company totaling $1,348,448. The remaining increases was due to continued
development costs for legacy product lines.
Sales and Marketing
Sales and Marketing expenses consist primarily
of salaries and related expenses, including share-based compensation, for our sales and marketing staff, including commissions,
payments to partners and marketing programs. Marketing programs consist of advertising, events, corporate communications and brand
building.
Sales and marketing expenses for the three
months ended June 30, 2019 and 2018, were $2,769,065 and $652,442, respectively, an increase of $2,116,623 or 324%. Of this increase,
$1,307,654 is attributable to the inclusion of iPass in the three month results. The remaining increase is the result of allocating
additional resources to our growing business.
General and Administrative
General and administrative expenses are
our largest cost and consist primarily of overhead related salaries and expenses, including share-based compensation, for non-employee
directors, finance and accounting, legal, internal audit and human resources personnel, legal costs, professional fees and other
corporate expenses.
General and administrative expenses for
the three months ended June 30, 2019 and 2018, were $9,033,690 and $2,214,070, respectively, an increase of $6,819,620 or 308%.
This is largely the result of the inclusion of expenses totaling $2,505,129 and $1,087,345 for Artilium and iPass, respectively.
The remaining increase is primarily the result of higher stock based compensation expense and increased travel, legal, accounting,
and marketing costs.
Restructuring and Acquisition Charges
Restructuring and acquisition charges for the three months ended June 30, 2019 and 2018, were $427,586
and $5,592, an increase of $421,994 or 7,546%, as a result of costs related to the iPass acquisition and the Devicescape asset
acquisition.
Stock-based compensation
Stock-based compensation is comprised of:
|
·
|
the expensing of the options granted under the 2008, 2017 and 2018 Plans to staff and management;
|
|
·
|
the expensing of the shares issued under the 2008, 2017 and 2018 Plans to contractors, directors and executive officers in lieu of cash compensation; and
|
|
·
|
the expensing of restricted shares issued for consultancy services under the 2018 Plan.
|
For the three months ended June 30, 2019
and 2018, we recognized stock-based compensation expense of $2,008,833 and $697,448, respectively, an increase of $1,311,385 or
188%.
In the following table, we show the allocation
of stock-based compensation according to functions in the Condensed Consolidated Statements of Comprehensive Loss:
|
|
Three months ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cost of service (excluding depreciation and amortization)
|
|
$
|
-
|
|
|
$
|
(13,122
|
)
|
Product development
|
|
|
128,336
|
|
|
|
(25,845
|
)
|
Sales and marketing
|
|
|
227,426
|
|
|
|
(39,430
|
)
|
General and administrative
|
|
|
1,653,071
|
|
|
|
775,845
|
|
Total
|
|
$
|
2,008,833
|
|
|
$
|
697,448
|
|
Depreciation and Amortization
Depreciation and amortization expenses
for the three months ended June 30, 2019, was $3,224,027, an increase of $2,229,709 or 224%, compared to $994,318 for the three
months ended June 30, 2018. This was primarily due to amortization of intangible assets totaling $2,031,895 resulting from the
Artilium, iPass and Devicescape acquisitions that took place on October 1, 2018, February 12, 2019, and April 22, 2019, respectively.
Interest Income and Expense
Interest income for the three-months ended
June 30, 2019 and 2018, was $149,298 and $43,193, respectively, an increase of $106,105 or 246%. Interest income mainly consists
of interest earned on promissory notes issued to ValidSoft and Yonder Media.
Interest expense for the three-months ended
June 30, 2019 and 2018, was $777,907 and $99,708, respectively, an increase of $678,199 or 680%. Interest expense increased mainly
as the result of the Post Road Loan entered into in February 2019.
Interest Expense Related to Debt
Discount and Conversion Feature
For the three months ended June 30, 2019
and 2018, interest expense related to debt discount accretion were $199,224 and $30,272, respectively, an increase of $168,952
or 558%. This increase is mainly the result of the Post Road Loan entered into in February 2019.
Changes in derivative liabilities
Changes in derivative liabilities for the
three months ended June 30, 2019, was $0, a decrease of $1,597,647 or 100%, compared to a gain of $1,597,647 for the same period
in 2018. This decrease is due to the elimination of the derivative liability in 2018.
Other Income, net
Other (expense)/income for the three months
ended June 30, 2019 and 2018 was ($194,354) and $567,710, respectively, a decrease of $762,064. The other expense arises from
foreign currency transaction losses incurred by iPass in the second quarter of 2019.
Amortization of Deferred Financing
Costs
Amortization of deferred financing costs
for the three months ended June 30, 2019 and 2018, was $101,644 and $6,209, respectively, an increase of $95,435 or 1,537%. This
increase is mainly the result of the Post Road Loan entered into in February 2019.
Income tax (benefit)/expense
Income tax benefit for the three months
ended June 30, 2019, was $449,403, compared to an income tax expense of $18,842 for the same period in 2018. The tax provision
was calculated based upon an expected annual tax rate.
Net Income (Loss)
Net loss for the three months ended June
30, 2019, was $515,809, an increase of $2,172,273 or 131%, compared to income of $1,656,464 for the same period in 2018. The increase
in net loss was primarily due to lower margins at our newly acquired subsidiaries Artilium and iPass.
Other Comprehensive Income/(Loss)
We recorded foreign currency translation
gains and losses as other comprehensive income or loss, which amounted to a gain of $435,935 and a loss of $79,137 for the three
months ended June 30, 2019 and 2018, respectively. This change is primarily attributable to the translation effect resulting from
the fluctuations in the USD/Euro exchange rates.
Comparison of six months ended June
30, 2019 and June 30, 2018
Revenues
Revenues for the six months ended June
30, 2019, were $57,188,310 a $47,072,560 or 465% increase compared to $10,115,750 for the comparable six months in 2018. Our deployments
with existing customers continue to grow, new implementations are generating new revenues and new cloud based revenues were all
factors in our revenue growth. Additionally, the six months ended June 30, 2019, revenues include Artilium revenues of $10,389,771.
It also includes iPass revenues of $11,085,817 for the period from February 12, 2019, the date of its acquisition, through June
30, 2019. The remainder of the increase is due to growth in the Company’s existing business lines.
|
|
Six months ended June 30,
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Revenues
|
|
$
|
57,188,310
|
|
|
$
|
10,115,750
|
|
|
$
|
47,072,560
|
|
Cost of Service
Cost of service includes origination, termination,
network and billing charges from telecommunications operators, costs of telecommunications service providers, network costs, data
center costs, facility cost of hosting network and equipment and cost in providing resale arrangements with long distance service
providers, cost of leasing transmission facilities, international gateway switches for voice, data transmission services, and the
cost of professional services of staff directly related to the generation of revenues, consisting primarily of employee-related
costs associated with these services, including share-based compensation and the cost of subcontractors. Cost of service excludes
depreciation and amortization.
|
|
Six months ended June 30,
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Revenues
|
|
$
|
57,188,310
|
|
|
$
|
10,115,750
|
|
|
$
|
47,072,560
|
|
Cost of service (excluding depreciation and amortization)
|
|
|
25,361,468
|
|
|
|
2,974,405
|
|
|
|
22,387,063
|
|
Margin (excluding depreciation and amortization)
|
|
$
|
31,826,842
|
|
|
$
|
7,141,345
|
|
|
$
|
24,685,497
|
|
Cost of service for the six months ended
June 30, 2019, was $25,361,468, an increase of $22,387,063 or 753%, compared to $2,974,405 for the comparable six month period
in 2018. This 753% increase in cost of service is in line with our increase in revenue, as margins and additional costs associated
from implementations for new clients have stayed relatively constant. This includes Artilium cost of service of $6,029,427 for
the six months ended June 30, 2019, and iPass cost of service of $9,603,882 for the period from February 12, 2019 through June
30, 2019. Comparable costs were not reflected in the six months ended June 30, 2018, because these subsidiaries were acquired in
subsequent periods. The remaining increase in costs of service is due to the overall growth in the business.
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 network and
intelligent network platform development and testing are also included in this function.
Product development costs for the six months
ended June 30, 2019 and 2018, were $5,816,189 and $1,480,776, respectively, an increase of $4,335,413 or 293%. The increase is
primarily due to the overall expansion of our lines of business year over year and the inclusion of product development costs of
$1,131,869 for Artilium and iPass for the six months ended June 30, 2019.
Sales and Marketing
Sales and Marketing expenses consist primarily
of salaries and related expenses, including stock-based compensation, for our sales and marketing staff, including commissions,
payments to partners and marketing programs. Marketing programs consist of advertising, events, corporate communications and brand
building.
Sales and marketing expenses for the six
months ended June 30, 2019 and 2018 were $5,709,747 and $1,341,440, respectively, an increase of $4,368,307 or 326%. This increase
is primarily a direct result of hiring new employees, the inclusion of the Artilium and iPass sales and marketing expenses of $2,752,546,
and other incremental costs incurred as the Company expands.
General and Administrative
General and administrative expenses are
our largest cost and consist primarily of overhead related salaries and expenses, including share-based compensation, for non-employee
directors, finance and accounting, legal, internal audit and human resources personnel, legal costs, professional fees and other
corporate expenses.
General and administrative expenses for
the six months ended June 30, 2019 and 2018, were $15,896,619 and $4,510,922, respectively, an increase of $11,385,697 or 252%.
Restructuring and Acquisition Charges
Acquisition charges for the six months
ended June 30, 2019 and 2018, were $3,507,950 and $79,193, an increase of $3,428,757 or 4,330%, as a result of costs related to
acquiring iPass and Artilium.
Stock-based compensation
Stock-based compensation is comprised of:
|
·
|
the expensing of the options granted under the 2008, 2017 and 2018 Plans to staff and management;
|
|
·
|
the expensing of the shares issued under the 2008, 2017 and 2018 Plans to contractors, directors and executive officers in lieu of cash compensation; and
|
|
·
|
the expensing of restricted shares issued for consultancy services under the 2018 Plan.
|
For the six months ended June 30, 2019
and 2018, we recognized stock-based compensation expense of $5,722,447 and $1,771,580, respectively, an increase of $3,950,867
or 223%.
In the following table, we show the allocation
of stock-based compensation according to functions in the Condensed Consolidated Statements of Comprehensive Loss:
|
|
Six months ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cost of service (excluding depreciation and amortization)
|
|
$
|
52,877
|
|
|
$
|
11,254
|
|
Product development
|
|
|
222,667
|
|
|
|
16,587
|
|
Sales and marketing
|
|
|
549,214
|
|
|
|
88,939
|
|
General and administrative
|
|
|
4,897,689
|
|
|
|
1,628,896
|
|
Restructuring
|
|
|
-
|
|
|
|
25,904
|
|
Total
|
|
$
|
5,722,447
|
|
|
$
|
1,771,580
|
|
Depreciation and Amortization
Depreciation and amortization expenses
for the six months ended June 30, 2019, was $6,067,430, an increase of $4,107,821 or 210%, compared to $1,959,609 for the same
period in 2018. This was increase was primarily due to amortization of intangible assets totaling $3,683,726 resulting from the
Artilium, iPass and Devicescape acquisitions that took place on October 1, 2018, February 12, 2019 and April 22,2019, respectively.
Interest Income and Expense
Interest income for the six months ended
June 30, 2019 and 2018, was $250,844 and $85,865, respectively, an increase of $164,979 or 192%. Interest income mainly consists
of interest accrued for the $503,000 and $3,200,000 promissory notes issued to ValidSoft and Yonder Media, respectively.
Interest expense for the six months ended
June 30, 2019 and 2018, was $1,326,767 and $163,467, respectively, an increase of $1,163,300 or 712%. Interest expense increased
mainly as the result of the Post Road Loan entered into in February 2019.
Interest Expense Related to Debt
Discount Accretion and Conversion Feature
For the six months ended June 30, 2019
and 2018, interest expense related to debt discount accretion were $271,205 and $59,838, respectively, an increase of $211,367
or 353%. This increase is mainly the result of the Post Road Loan entered into in February 2019.
Changes in derivative liabilities
Changes in derivative liabilities for the
six-month period ended June 30, 2019, was $0, a decrease of $1,283,914 or 100%, compared to a gain of $1,283,914 for the same period
in 2018. This decrease is due to the elimination of the derivative liability in 2018.
Other (Expense) Income, net
Other expense for the six months
ended June 30, 2019 was $241,485, as compared to other income of $637,255 for the six months ended June 30, 2018, a decrease
of $878,740 or 138%. The 2018 amount represents the unrealized exchange rate gains and an adjustment to liabilities for no
longer deemed obligations. The 2019 amount represents foreign currency transaction losses.
Amortization of Deferred Financing
Costs
Amortization of deferred financing costs
for the six-months ended June 30, 2019 and 2018 was $151,355 and $12,351, respectively, an increase of $139,004 or 1,125%. This
increase is mainly the result of the Post Road Loan entered into in February 2019.
Income tax (benefit)/expense
Income tax benefit for the six months ended
June 30, 2019, was $616,737, compared to an income tax expense of $18,424, for the same period in 2018. The tax provision was calculated
based upon an expected annual tax rate.
Net Loss
Net loss for the six months ended June
30, 2019, was $6,294,324 an increase of $5,816,683 or 1,218%, compared to the loss of $477,641 for the same period in 2018. The
increase in net loss is due to lower margins and costs associated with acquiring new companies.
Other Comprehensive (Loss)/Income
We recorded foreign currency translation
gains as other comprehensive income or loss, which amounted to a gain of $76,131 and $25,266 for the six months ended
June 30, 2019 and 2018, respectively. This change is primarily attributable to the translation effect resulting from the fluctuations
in the USD/Euro exchange rates.
Liquidity and Capital Resources
As reflected in the accompanying condensed
consolidated financial statements, the Company reported net loss of $6,294,324 for the six months ended June 30, 2019, and had
an accumulated deficit of $318,919,707 as of June 30, 2019.
The cash balance including restricted
cash of the Company at June 30, 2019, was $4,482,313.
Operating activities
Net cash used in operating activities of
$10,441,210 for the six months ended June 30, 2019, due to an increase in accounts receivable of $25,190,857, offset by a decrease
in accounts payable and customer deposits of $6,936,552, a decrease in net billings in excess of revenues and deferred revenue
of $2,000,430 and a decrease in accrued expenses and other payables for $1,644,320.
As a result of the above, cash used in
operating activities was $10,441,210 for the six months ended June 30, 2019, compared to net cash used in operating activities
of $952,476 for the six months ended June 30, 2018, for an increase of $9,488,734 or 996%.
Investing activities
Net cash used in investing activities for
the six months ended June 30, 2019, was $5,973,438, an increase of $4,095,961, or 218% compared to $1,877,477 in the same period
in 2018. This change was mainly the result of the purchase of property, equipment and capitalized software of $1,650,013, the issuance
of notes receivable of $2,700,000 to Yonder Media and effect of the business combinations of $1,562,636.
Financing activities
Net cash provided by financing activities
for the six months ended June 30, 2019 and 2018, was $14,443,138 and $8,484,428, respectively, an increase of $5,958,710 or 70.2%.
This increase was primarily the result of the receipt of $25,000,000 in proceeds from the senior debt from Post Road Group, offset
by the repayment of $11,669,963 to Fortress in connection with the iPass transaction in February 2019.
Effect of exchange rates 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, 2019, was a loss of $28,541, compared to a gain of $42,185 for
the same period in 2018.
As a result of the above activities, for
the six months ended June 30, 2019, we had cash, cash equivalents and restricted cash of $4,482,313 a net decrease in cash, cash
equivalents and restricted cash of $2,000,051 since December 31, 2018.
Off- Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
that have or are reasonably likely to have either a current or future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors,
nor we have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special
purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes.