As filed with the Securities and Exchange Commission on October
16, 2017
Registration
No. 333-220754
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|
|
FORM S-1/A
Amendment No. 1
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
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PARETEUM CORPORATION
(Exact name of registrant as specified in its
charter)
Delaware
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4819
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95-4557538
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(State or other jurisdiction
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(Primary Standard Industrial
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(I.R.S. Employer
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of incorporation or organization)
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Classification Code Number)
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Identification Number)
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1185 Avenue of the Americas, 37
th
Floor
New York, NY 10036
(646) 810-2182
(Address, including zip code, and
telephone number, including area code, of registrant’s principal executive offices)
Robert H. Turner
Principal Executive Officer
1185 Avenue of the Americas, 37
th
Floor
New York, NY 10036
(646) 810-2182
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
With copies to:
Darrin M. Ocasio, Esq.
Sichenzia Ross Ference Kesner LLP
1185 Avenue of the Americas, 37th Floor
New York, NY 10036
(212) 930-9700
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|
Ralph V. De Martino
Cavas S. Pavri
Schiff Hardin LLP
901 K Street NW Suite 700
Washington, D.C. 20001
Telephone: (202) 778-6400
Facsimile: (202) 778-6460
|
Approximate date of commencement of proposed
sale to the public:
As soon as practicable after this Registration
Statement is declared effective.
If any of the securities
being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box:
x
If this Form is filed
to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the earlier effective registration statement for the
same offering.
¨
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement for the same offering.
¨
If this Form is a post-effective
amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement for the same offering.
¨
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
¨
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Accelerated filer
¨
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Non-accelerated filer (Do not check if a smaller reporting company)
¨
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Smaller reporting company
x
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Emerging growth company
¨
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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.
¨
CALCULATION OF REGISTRATION FEE
Title of Each Class of
Securities
to be Registered
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Proposed
Maximum
Aggregate
Offering
Price
(1)
$
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Amount
of
Registration
Fee
(2)
$
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Common stock, par value $0.00001 per share (3)
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13,800,000
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$
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1,718.10
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Representative’s common stock purchase warrants(4)
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-
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-
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Common stock underlying Representative’s warrants (5)
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750,000
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$
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93.38
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Total
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$
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14,550,000
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$
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1,811.48
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(6)
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(1)
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Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as amended (the “Securities
Act”), based on the proposed maximum aggregate offering price.
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(2)
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Pursuant to Rule 416 under the Securities Act, the securities being registered hereunder include
such indeterminate number of additional shares of common stock as may be issued after the date hereof as a result of stock splits,
stock dividends or similar transactions.
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(3)
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Includes
shares that may be issued upon exercise of the underwriter’s overallotment option,
if any.
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(4)
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In
accordance with Rule 457(g) under the Securities Act, because the shares of the Registrant’s
common stock underlying the warrants are registered hereby, no separate registration
fee is required with respect to the warrants registered hereby.
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(5)
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Estimated
solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under
the Securities Act. Represents the maximum aggregate offering price of the
shares of common stock underlying the warrants issuable to the underwriter, which is
equal to 5% of the securities sold in this offering, at an exercise price equal to 125%
of the public offering price per security issued in the offering.
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(6)
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$1,390.80 of
such amount previously paid. $420.68 paid herewith.
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The Registrant
hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS
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SUBJECT TO COMPLETION
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DATED
OCTOBER 16, 2017
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10,000,000 Shares of common stock
This is a firm commitment offering of
10,000,000 shares of common stock of Pareteum Corporation.
Our common stock is quoted on The
NYSE American under the symbol “TEUM”. On October 13, 2017, the closing bid price of our common stock on The NYSE American was $1.20 per share.
Investing in our securities involves risks. You should carefully
read and consider the “Risk Factors” beginning on page 7 of this prospectus before investing.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus.
Any representation to the contrary is a criminal offense.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discount (1)
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$
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$
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Proceeds, before expenses, to us(2)
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$
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$
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(1)
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The underwriter will receive compensation in addition to the underwriting
discount listed above. See “Underwriting” beginning on page 7 of this prospectus for a description of the compensation
payable to the underwriter.
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(2)
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We estimate the total expenses of this offering payable by us, excluding the underwriting discount, will be approximately $ .
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We have granted the
underwriter an option, exercisable one or more times in whole or in part, to purchase up to additional
shares of common stock from us at the public offering price per security, less the underwriting discounts and commissions, for
45 days after the date of this prospectus to cover over-allotments, if any.
The underwriter expects to deliver the shares
against payment therefor on or about , 2017.
DAWSON JAMES SECURITIES,
INC.
The date of this prospectus
is ______ , 2017
TABLE OF CONTENTS
You should rely only on the information contained
in this prospectus. We have not, and the underwriter has not, authorized anyone to provide you with any information other than
that contained in this prospectus. We are offering to sell, and seeking offers to buy, the securities covered hereby only in jurisdictions
where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or any sale of the securities covered hereby. Our business, financial condition, results
of operations and prospects may have changed since that date. We are not, and the underwriter is not, making an offer of these
securities in any jurisdiction where the offer is not permitted.
For investors outside the United States: We
have not, and the underwriter has not, taken any action that would permit this offering or possession or distribution of this prospectus
in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States
who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering
of the securities covered hereby the distribution of this prospectus outside the United States.
This prospectus includes statistical and other
industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties.
Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained
from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. We believe
that the data obtained from these industry publications and third-party research, surveys and studies are reliable. We are ultimately
responsible for all disclosure included in this prospectus.
We further note that the representations, warranties
and covenants made by us in any agreement that is filed as an exhibit to the registration statement of which this prospectus is
a part were made solely for the benefit of the parties to such agreement, including, in some cases, for the purpose of allocating
risk among the parties to such agreements, and should not be deemed to be a representation, warranty or covenant to you. Moreover,
such representations, warranties or covenants were accurate only as of the date when made. Accordingly, such representations, warranties
and covenants should not be relied on as accurately representing the current state of our affairs.
PROSPECTUS SUMMARY
This summary highlights certain information
contained elsewhere in this prospectus. This summary is not intended to be complete and does not contain all of the information
that you should consider in making your investment decision. You should carefully read this entire prospectus, including our consolidated
financial statements and the related notes and the information set forth under the headings “Risk Factors” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” contained in this prospectus before making an investment
decision.
Unless the context otherwise requires, references
to “we,” “our,” “us,” or the “Company” in this prospectus mean Pareteum Corp.,
and its subsidiaries where appropriate, on a consolidated basis.
Business Overview
Pareteum Vision
We believe that every
person, and everything, should be connected, and will be connected if our customers and users wish to be connected.
The way we connect
every person, and everything, is by being
the
company which can connect to all networks in the Cloud, on all layers
of the software development stack (OSI 7-layer model).
We achieve this by
delivering our Mobility, Messaging and Security Cloud Service Platforms which enable:
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Mobile Carriers, MNOs & MVNOs (mobile (virtual) network operators) to enter the Cloud-computing era, with a pay-as-you-grow business; to connect more people, in more creative and value-driven ways.
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Enterprises can connect their customers, their employees, their assets and derive more value from them.
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IoT (Internet of Things) Devices can connect to each other, and give control, with informational value, to their owners.
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Pareteum Solution
Pareteum has developed
a Communications Cloud Services Platform, providing (i) Mobility, (ii) Messaging and (iii) Security services and applications,
with a Single-Sign-On, Application Program Interfaces (“APIs”) and software development suite:
Our solution has proven
itself globally against much larger competitors and is installed in multiple companies in diverse countries around the world ranging
from small service providers to one of the world’s largest telecoms companies, Vodafone, based in Europe. We had more than
1,100,000 active subscribers on our platforms as of December 31, 2016.
The market and our
customers tell us that they need to find ways to reduce cost, they want to find ways to increase their revenues, and they want
to scale and grow their business, and all consider Cloud capabilities as a vital means to achieve these goals. As we’ve listened
to our customers and understood the business goals that they have, we believe Pareteum is well placed to help them achieve these
goals, drive value for customers and ultimately value for our own business.
We have designed a
solution that solves these problems. Each of these three platforms - mobility, messaging and security - can be marketed
and deployed independently, or they can be delivered as a single, integrated Cloud Service Platform, as illustrated in the figure
above.
The Pareteum platform
hosts integrated IT/Back Office and Core Network functionality for mobile network operators, and for enterprises implement and
leverage mobile communications solutions on a fully outsourced SaaS (Software as a Service), PaaS (Platform as a Service) and/or
IaaS (Infrastructure as a Service) 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, or OSS, for channel partners, with
APIs for integration with third party systems, workflows for complex application orchestration, customer support with branded portals
and plug-ins for a multitude of other applications. These features facilitate and improve the ability of our channel partners to
provide support and to drive sales.
Our integrated (or
modular) Cloud Platform solution includes, more specifically, functionality such as service design and control, Intelligent Networking,
subscriber provisioning, messaging, switching, real-time dynamic rating and pre- or post-paid charging and billing, call center
and customer care support, reporting, self-care web portal environments, change management in active systems, SIM Management, (Data)
Session Control Management, Voucher Management, Mobile Marketing systems, (Mobile) Payment Systems, Real Time Credit Checking Systems,
Interactive Voice Response Systems, Voicemail Systems, Trouble Ticketing Systems, Device Management Systems, Mass Customer Migrations,
life cycle management, database hardware and software, large scale real-time processing, and integrating, provisioning, all the
while managing and maintaining specific core network components.
Reverse Stock Split
On February 27, 2017, we affected a 1-for-25
reverse split of our common stock. All warrant, option, share and per share information in this prospectus supplement gives retroactive
effect for a 1-for-25 reverse split. All numbers in this prospectus gives effect to all financial information as if the reverse
split had occurred on the date reported, except as otherwise noted.
Recent Developments
On October 16, 2017, the Company entered
into a Strategic Alliance Agreement (the “
Strategic Alliance Agreement
”) with Artilium plc, a public limited
company incorporated
under the laws of England and Wales
(“
ARTA
”)
for the mutual pursuit of joint commercial opportunities. Pursuant to the Strategic Alliance Agreement, the parties may enter
into a contract to provide their technological solutions (the “
Solutions
”) to a customer (the “
Project
Agreement
”). The Project Agreement shall stipulate, among other things: (i) which Party will take the lead in preparing
and submitting any appropriate proposal, RFP and/or tender documentation; (ii) which Party will be the prime or principal contractor
and which Party will take a joint or sub-contracting responsibility; (iii) which Party is responsible for which aspects of which
of the Solutions or Project (in accordance with an Opportunity Registration Form, which is included as an Appendix to the Project
Agreement); (iv) commercial and financial provisions (in accordance with the Commercial Framework and the Opportunity Registration
Form, which are included as Appendices to the Project Agreement); (v) the standard terms and conditions of supply of Solutions
to the customer; as well as, if applicable (vi) a price list of Solutions and other terms and conditions governing the same.
Pursuant to the Project Agreement, the
parties shall submit a proposal in response to a customer’s Tender (the “
Proposal
”), which will define
the parties’ respective rights and obligations during the submission of the Proposal to the customer. If the parties receive
the contract award from such customer, the parties would be responsible for the Solutions in accordance with the Project Agreement
and the Strategic Alliance Agreement.
In conjunction with the Strategic
Alliance Agreement, on October 16, 2017, the Company entered into a Share Exchange Agreement (the “
Exchange
Agreement
”) with ARTA. Pursuant to the Exchange Agreement, ARTA agreed to issue and deliver to the Company an
aggregate of 27,695,177 of its newly issued ordinary shares (the “
ARTA Shares
”), in exchange for 3,200,332
restricted shares of the Company’s common stock, par value $0.00001. The ARTA Shares issued to the Company will, upon
issuance, constitute approximately 8% of ARTA’s issued and outstanding capital stock.
The closing of the transactions contemplated
under the Exchange Agreement is subject to certain closing conditions, including the accuracy, in all material respects, when
made and at the time of closing, of the representations and warranties of the parties contained in the Exchange Agreement.
Corporate Information
Our principal executive offices are located
at 1185 Avenue of the Americas, 37
th
Floor, New York City, NY 10036. Our telephone number is (646) 810-2182. Our corporate
website is
http://www.pareteum.com
. The information on our website is not a part of, or incorporated in, this prospectus.
Summary
of the Offering
Securities offered by us
|
|
shares
of common stock (assuming a public offering price of $ per share, the closing bid price
of our common stock on The New York Stock Exchange on ,
2017).
|
Common stock outstanding after this offering
|
|
shares (assuming a public offering price of $ per share, the closing bid price of our common stock on The New York Stock Exchange on , 2017) ( shares if the underwriter’s over-allotment option is exercised in full).
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Underwriters option to purchase additional shares
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We have granted the
underwriter an option, exercisable one or more times in whole or in part, to purchase up to
additional shares of common stock from us at the public
offering price per security, less the underwriting discounts and commissions, for 45 days
after the date of this prospectus to cover over-allotments, if any.
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Use of proceeds
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|
We intend to use the net proceeds received from this offering for working capital and general corporate purposes. See “Use of Proceeds” on page 18 of this prospectus.
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Risk factors
|
|
See “Risk Factors” beginning on page 7 of this
prospectus for a discussion of factors you should carefully consider before investing in our securities.
|
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Trading symbol
|
|
Our common stock is quoted on The NYSE American under the symbol “TEUM”.
|
The number of shares of common stock shown
above to be outstanding after this offering is based on 19,620,819 shares outstanding as of October 16, 2017, and excludes as
of that date:
● 3,277,281 shares of our common
stock issuable upon exercise of outstanding options under our equity incentive plans at a weighted-average exercise price of $
3.995 per share;
● 6,561,733 shares of our common
stock issuable upon exercise of outstanding warrants with a weighted-average exercise price of $1.67 per share;
● 3,500,000 shares of our common
stock that are reserved for equity awards that may be granted under our equity incentive plans.
Unless otherwise indicated, the information
in this prospectus gives effect to the 1 for 25 reverse split of our common stock effected on February 27, 2017 and assumes no
exercise by the underwriter of its overallotment option.
SUMMARY CONSOLIDATED FINANCIAL DATA
The following
table includes (i) summary consolidated statement of comprehensive loss for the years ended December 31, 2016 and 2015 and
the six months ended June 30, 2017 (unaudited) and 2016 (unaudited) and (ii) summary consolidated balance
sheet as of June 30, 2017 (unaudited), derived from our audited and unaudited consolidated financial statements and related
notes included elsewhere in this prospectus. Our financial statements are prepared and presented in accordance with
generally accepted accounting principles in the United States. The results indicated below are not necessarily indicative of
our future performance.
You should read this
information together with the sections entitled “Capitalization”, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations”, “Selected Consolidated Financial Data”, and
our consolidated financial statements and related notes included elsewhere in this prospectus.
|
|
Years Ended December 31,
|
|
|
Six Months Ended June 30
|
|
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2016
|
|
|
2015
|
|
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2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
REVENUES
|
|
$
|
12,855,811
|
|
|
$
|
31,015,453
|
|
|
$
|
6,034,118
|
|
|
$
|
6,540,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST AND OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (excluding depreciation and amortization)
|
|
|
3,658,667
|
|
|
|
5,926,291
|
|
|
|
1,787,590
|
|
|
|
2,104,427
|
|
Product development
|
|
|
3,543,590
|
|
|
|
4,543,492
|
|
|
|
558,206
|
|
|
|
2,098,902
|
|
Sales and marketing
|
|
|
1,340,959
|
|
|
|
2,633,958
|
|
|
|
690,282
|
|
|
|
887,673
|
|
General and administrative
|
|
|
11,708,151
|
|
|
|
11,649,914
|
|
|
|
3,856,226
|
|
|
|
5,680,885
|
|
Restructuring charges
|
|
|
1,638,049
|
|
|
|
1,254,598
|
|
|
|
588,106
|
|
|
|
-
|
|
Depreciation and amortization of intangibles assets
|
|
|
4,246,787
|
|
|
|
6,623,985
|
|
|
|
1,716,476
|
|
|
|
2,211,551
|
|
Impairment for assets held and used
|
|
|
850,985
|
|
|
|
2,681,407
|
|
|
|
-
|
|
|
|
-
|
|
Impairment of goodwill
|
|
|
3,228,930
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss on sale of assets
|
|
|
1,542,374
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total cost and operating expenses
|
|
|
31,758,492
|
|
|
|
35,313,645
|
|
|
|
9,196,886
|
|
|
|
12,983,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(18,902,681
|
)
|
|
|
(4,298,192
|
)
|
|
|
(3,162,768
|
)
|
|
|
(6,442,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
112,169
|
|
|
|
106,028
|
|
|
|
94,036
|
|
|
|
50,547
|
|
Interest expense
|
|
|
(1,228,201
|
)
|
|
|
(1,488,203
|
)
|
|
|
(923,184
|
)
|
|
|
(602,772
|
)
|
Interest expense related to debt discount and conversion feature
|
|
|
(6,041,607
|
)
|
|
|
(682,389
|
)
|
|
|
(1,342,598
|
)
|
|
|
(613,144
|
)
|
Changes in derivative liabilities
|
|
|
(3,316,199
|
)
|
|
|
299,948
|
|
|
|
1,920,881
|
|
|
|
659,936
|
|
(Loss) Gain on Extinguishment of Debt
|
|
|
(541,899
|
)
|
|
|
2,475,799
|
|
|
|
463,345
|
|
|
|
-
|
|
Other income and (expense), net
|
|
|
(220,927
|
)
|
|
|
(922,894
|
)
|
|
|
470,476
|
|
|
|
112,560
|
|
Amortization of deferred financing costs
|
|
|
(1,267,073
|
)
|
|
|
(513,557
|
)
|
|
|
(222,623
|
)
|
|
|
(282,295
|
)
|
Total other (expense)
|
|
|
(12,503,737
|
)
|
|
|
(725,268
|
)
|
|
|
460,333
|
|
|
|
(675,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE PROVISION FOR INCOME TAXES
|
|
|
(31,406,418
|
)
|
|
|
(5,023,460
|
)
|
|
|
(2,702,435
|
)
|
|
|
(7,117,914
|
)
|
Provision (Benefit) for income taxes
|
|
|
38,286
|
|
|
|
(17,225
|
)
|
|
|
(66,495
|
)
|
|
|
19,107
|
|
NET LOSS
|
|
|
(31,444,704
|
)
|
|
|
(5,006,235
|
)
|
|
|
(2,635,940
|
)
|
|
|
(7,137,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
703,073
|
|
|
|
(2,662,843
|
)
|
|
|
(10,651
|
)
|
|
|
(4,264
|
)
|
COMPREHENSIVE LOSS
|
|
$
|
(30,741,631
|
)
|
|
$
|
(7,669,078
|
)
|
|
$
|
(2,646,591
|
)
|
|
$
|
(7,141,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share and equivalents – basic
|
|
$
|
(4.67
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(1.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share and equivalents – diluted
|
|
$
|
(4.67
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(1.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the period – basic
|
|
|
6,738,971
|
|
|
|
6,328,082
|
|
|
|
11,132,580
|
|
|
|
6,530,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the period – diluted
|
|
|
6,738,971
|
|
|
|
6,328,082
|
|
|
|
11,132,580
|
|
|
|
6,530,513
|
|
|
|
June 30,
|
|
|
|
2017
(unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
741,941
|
|
Restricted cash
|
|
|
699,661
|
|
Accounts receivable, net of an allowance for doubtful accounts of $91,897 at June 30, 2017 and $88,528 at December 31, 2016
|
|
|
249,279
|
|
Prepaid expenses and other current assets
|
|
|
680,708
|
|
Total current assets
|
|
|
2,371,589
|
|
|
|
|
|
|
NON-CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
80,103
|
|
|
|
|
|
|
NOTE RECEIVABLE
|
|
|
1,021,561
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
7,735,945
|
|
|
|
|
|
|
INTANGIBLE ASSETS, NET
|
|
|
353,656
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
11,562,854
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
Accounts payable and customer deposits
|
|
$
|
2,782,781
|
|
Obligations under capital leases (current portion)
|
|
|
-
|
|
Net billings in excess of revenues
|
|
|
562,682
|
|
Accrued expenses and other payables
|
|
|
4,967,568
|
|
Senior Secured Loan - Short Term
|
|
|
1,750,000
|
|
Total current liabilities
|
|
|
10,063,031
|
|
|
|
|
|
|
LONG TERM LIABILITIES
|
|
|
|
|
Derivative liabilities
|
|
|
-
|
|
Other long term liabilities
|
|
|
177,139
|
|
Unsecured Convertible Promissory Note (net of Debt Discount and Debt Issuance)
|
|
|
75,338
|
|
Senior Secured Loan - Long Term (net of Debt Discount, and Debt Issuance)
|
|
|
5,038,644
|
|
Non-current portion of net billings in excess of revenues
|
|
|
97,489
|
|
Total long term liabilities
|
|
|
5,388,610
|
|
Total liabilities
|
|
|
15,451,641
|
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT
|
|
|
|
|
Preferred Stock $0.00001 par value, 50,000,000 shares authorized, 58 and 249 issued and outstanding as of June 30, 2017 and December 31, 2016, respectively
|
|
|
384,503
|
|
Common Stock $0.00001 par value, 500,000,000 shares authorized, 13,271,355 and 8,376,267 issued and outstanding as of June 30, 2017 and December 31, 2016, respectively
|
|
|
290,540,444
|
|
Accumulated other comprehensive loss
|
|
|
(5,097,560
|
)
|
Accumulated deficit
|
|
|
(289,716,174
|
)
|
Total stockholders’ deficit
|
|
|
(3,888,787
|
)
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
$
|
11,562,854
|
|
RISK FACTORS
Any investment in our securities involves
a high degree of risk. Investors should carefully consider the risks described below and all of the information contained in this
prospectus before deciding whether to purchase our securities. Our business, financial condition and results of operations could
be materially adversely affected by these risks if any of them actually occur. This prospectus also contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the risks we face as described below and elsewhere in this prospectus.
Risks Related to our Business
We are subject to significant restrictive debt covenants,
which limit our operating flexibility.
The Amended and Restated Credit Agreement
dated December 27, 2016 (further amended March 6, 2017 and August 9, 2017) entered into by and between the Company and
Atalaya Administrative LLC, as the administrative agent and collateral agent, and the lenders party thereto contains
covenants which impose significant restrictions on the manner we and our subsidiaries operate, including (but not limited to)
restrictions on the ability to:
|
·
|
incur debt and/or guarantees;
|
|
·
|
enter into transactions other than on
arm’s-length basis;
|
|
·
|
pay dividends or make certain distributions
or payments;
|
|
·
|
engage, in relation to the Company, in
any business activity or own assets or incur liabilities not authorized by the agreement;
|
|
·
|
sell certain kinds of assets;
|
|
·
|
impair any security interest on the assets
serving as collateral for the notes issued under the agreement;
|
|
·
|
enter into any sale and leaseback transactions;
|
|
·
|
make certain investments or other types
of restricted payments;
|
|
·
|
substantially change the nature of the
Company’s or the group’s business;
|
|
·
|
designate unrestricted subsidiaries; and
|
|
·
|
effect mergers, consolidations or sale
of assets.
|
These covenants could limit our ability to
finance our future operations and our ability to pursue acquisitions and other business activities.
The substantial and continuing losses, and significant operating
expenses incurred in the past few years may cause us to be unable to pursue all of our operational objectives if sufficient financing
and/or additional cash from revenues is not realized. This raises doubt as to our ability to continue as a going concern.
We have incurred net losses of
$2,635,940 and $7,137,021 for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017 and December
31, 2016, we had an accumulated deficit of $289,716,174 and $287,080,234, respectively.
Although we have previously been able to attract
financing as needed, such financing may not continue to be available at all, or if available, on reasonable terms as required.
Further, the terms of such financing may be dilutive to existing shareholders or otherwise on terms not favorable to us or existing
shareholders. If we are unable to secure additional financing, as circumstances require, or do not succeed in meeting our sales
objectives, we may be required to change or significantly reduce our operations or ultimately may not be able to continue
our operations. As a result of our historical net losses and cash flow deficits, and net capital deficiency, these conditions raise
substantial doubt as to the Company’s ability to continue as a going concern.
The current economic climate, especially
in Europe, may have an adverse effect in the markets in which we operate.
Much of our customers’ business is consumer
driven, and to the extent there is a decline in consumer spending, our customers could experience a reduction in the demand for
their services and consequently affect the demand for our services and a decrease in our revenues, net income and an increase in
bad debts arising from non-payment of our trade receivables. The potential adverse effects of an economic downturn include:
|
·
|
reduced demand for services,
resulting in increased price competition or deferrals of purchases, with lower revenues not fully compensated through reduced
costs; risk of financial difficulties or failures among our suppliers;
|
|
·
|
increased demand for
customer finance, difficulties in collection of accounts receivable and increased risk of counterparty default;
|
|
·
|
risk of impairment losses
related to our intangible assets as a result of lower forecasted sales of certain products;
|
|
·
|
increased difficulties
in forecasting sales and financial results as well as increased volatility in our reported results; and
|
|
·
|
end user demand could
also be adversely affected by reduced consumer spending on technology, changed operator pricing, security breaches and trust issues.
|
Uncertainties and risks associated with
international markets could adversely impact our international operations.
We have significant international operations
in Europe, and to a lesser extent in the US, Middle East and elsewhere. There can be no assurance that we will be able to obtain
the permits and operating licenses required for us to operate, obtain access to local transmission facilities on economically acceptable
terms, or market services in international markets. In addition, operating in international markets generally involves additional
risks, including unexpected changes in regulatory requirements, taxes, tariffs, customs, duties and other trade barriers, difficulties
in staffing and managing foreign operations, problems in collecting accounts receivable, political risks, fluctuations in currency
exchange rates, restrictions associated with the repatriation of funds, technology export and import restrictions, and seasonal
reductions in business activity. Our ability to operate and grow our international operations successfully could be adversely impacted
by these risks.
We operate in a complex regulatory environment,
and failure to comply with applicable laws and regulations could adversely affect our business.
Our operations are subject to a broad range
of complex and evolving laws and regulations. Because of our coverage in many countries, we must perform our services in compliance
with the legal and regulatory requirements of multiple jurisdictions. Some of these laws and regulations may be difficult to ascertain
or interpret and may change from time to time. Violation of such laws and regulations could subject us to fines and penalties,
damage our reputation, constitute a breach of our client agreements, impair our ability to obtain and renew required licenses,
and decrease our profitability or competitiveness. If any of these effects were to occur, our operating results and financial condition
could be adversely affected.
We may not be able to integrate new technologies
and provide new services in a cost-efficient manner.
The telecommunications industry is subject
to rapid and significant changes in technology, frequent new service introductions and evolving industry standards. We cannot predict
the effect of these changes on our competitive position, our profitability or the industry generally. Technological developments
may reduce the competitiveness of our networks and our software solutions and require additional capital expenditures or the procurement
of additional products that could be expensive and time consuming. In addition, new products and services arising out of technological
developments may reduce the attractiveness of our services. If we fail to adapt successfully to technological advances or fail
to obtain access to new technologies, we could lose customers and be limited in our ability to attract new customers and/or sell
new services to our existing customers. In addition, delivery of new services in a cost-efficient manner depends upon many factors,
and we may not generate anticipated revenue from such services.
We may not be able to develop and successfully
market our mobile telecommunications platform and services as planned.
Pareteum operates in an exceptionally competitive
environment where there is continuous innovation and new development. We are required to be a top performer in over a dozen highly
specialized domains to effectively compete with our competitors. Ongoing investments are required to stay ahead of the competition.
The sales process for our platform and the deployment process may be complicated and very slow. We are highly dependent on convincing
MNOs and MVNOs to believe that outsourcing their requirements to us is the most cost effective way to proceed. We are exposed to
business risks associated with turnkey projects and the scalability of our service and support organization. Although our policy
is to avoid or minimize risks, it cannot be ruled out that in certain cases events occur that may seriously impact us and our performance.
Some of ValidSoft’s security solutions
are dependent on mobile operators for network data access. Home-routing is sometimes preventing us from capitalizing on our capability.
It tends to be a slow process to enter into definitive contracts with mobile operators. In addition, it is difficult to obtain
network data access which is slowing our ability to timely address current market opportunities. The current market perception
about safeguarding privacy remains challenging. Both the regulatory regime and consumer awareness of privacy protection are developing
very slowly.
Implementation and development of our
software platform business depends on our ability to obtain adequate funding.
Our software platforms require ongoing funding
to continue the current development and operational plans. Failure to obtain adequate financing will substantially delay our development,
slow down current operations, result in loss of customers and adversely impact our results of operations.
Disruptions in our networks and infrastructure
may result in customer dissatisfaction, customer loss or both, which could materially and adversely affect our reputation and business.
Our systems are an integral part of our customers’
business operations. It is critical for our customers, that our systems provide a continued and uninterrupted performance. Customers
may be dissatisfied by any system failure that interrupts our ability to provide services to them. Sustained or repeated system
failures would reduce the attractiveness of our services significantly and could result in decreased demand for our services.
We face the following risks to our networks,
infrastructure and software applications:
|
·
|
our territory can have
significant weather events which physically damage access lines;
|
|
·
|
power surges and outages,
computer viruses or hacking, earthquakes, terrorism attacks, vandalism and software or hardware defects which are beyond our control;
and
|
|
·
|
unusual spikes in demand
or capacity limitations in our or our suppliers’ networks.
|
Disruptions may cause interruptions in service
or reduced capacity for customers, either of which could cause us to lose customers and/or incur expenses, and thereby adversely
affect our business, revenue and cash flow.
Integration of acquisitions ultimately
may not provide the benefits originally anticipated by management and may distract the attention of our personnel from the operation
of our business.
We strive to broaden our solutions offerings
as well as to increase the number of subscribers hosted on our platforms, volume of voice and data that we carry over our existing
global network in order to reduce transmission costs and other operating costs as a percentage of net revenue, improve margins,
improve service quality and enhance our ability to introduce new products and services. Strategic acquisitions in desired markets
play a part of our growth strategy, and we may pursue additional acquisitions in the future to further strengthen our strategic
objectives. Acquisitions of businesses and customer lists involve operational risks, including the possibility that an acquisition
may not ultimately provide the benefits originally anticipated by management. Moreover, we may not be successful in identifying
attractive acquisition candidates, completing and financing additional acquisitions on favorable terms, or integrating the acquired
business or assets into our own. There may be difficulty in integrating technologies and solutions, in migrating customer bases
and in integrating the service offerings, distribution channels and networks gained through acquisitions with our own. Successful
integration of operations and technologies requires the dedication of management and other personnel, which may distract their
attention from the day-to-day business, the development or acquisition of new technologies, and the pursuit of other business acquisition
opportunities. Therefore, successful integration may not occur in light of these factors.
Our revenue, earnings and profitability
are affected by the length of our sales cycle, and a longer sales cycle could adversely affect our results of operations and financial
condition.
Our business is directly affected by the length
of our sales cycle and strategic mobile partnership cycles with MNOs and other large enterprises. Our software platforms, outsourced
solutions and value added communication services are relatively complex and their purchase may involve a significant commitment
of mostly human capital, with attendant delays frequently associated with the allocation of substantial human resources and procurement
procedures within an organization. The purchase of these types of products typically also requires coordination and agreement across
many departments within a potential customer. Delays associated with such timing factors could have a material adverse effect on
our results of operations and financial condition. In periods of economic slowdown in the communications industry, which may recur
in the current economic climate, our typical sales cycle may lengthen, which means that the average time between our initial contact
with a prospective customer and the signing of a sales contract increases. The lengthening of our sales and strategic mobile partnership
cycle could reduce growth in our revenue in the future.
Because most of our business is conducted
outside the US, fluctuations in foreign currency exchange rates versus the US Dollar could adversely affect our (reported) results
of operations.
Currently most of our net revenue, expenses
and capital expenditures are derived and incurred from sales and operations outside the US, whereas the reporting currency for
our consolidated financial statements is the US Dollar (“USD”). The local currency of each country is the functional
currency for each of our respective entities operating in that country, where the Euro is the predominant currency. Considering
the fact that most income and expenses are not subject to relevant exchange rate differences, it is only at a reporting level that
the translation needs to be made to the reporting unit of USD. In the future, we expect to continue to derive a significant portion
of our net revenue and incur a significant portion of our operating costs outside the US, and changes in exchange rates have had
and may continue to have a significant, and potentially distorting effect (either negative or positive) on the reported results
of operations, not necessarily being the result of operations in real terms. Our primary risk of loss regarding foreign currency
exchange rate risk is caused by fluctuations in the following exchange rates: USD/Euro.
We historically have not engaged in hedging
transactions since we primarily operate in same currency countries, currently being the Euro (“EUR”). However, the
operations of affiliates and subsidiaries in non-US countries have been funded with investments and other advances denominated
in foreign currencies and more recently in USD. Historically, such investments and advances have been long-term in nature, and
we have accounted for any adjustments resulting from currency translation as a charge or credit to accumulate other comprehensive
loss within the stockholders’ deficit section of our consolidated balance sheets. Although we have not engaged in hedging
so far, we continue to assess on a regular basis the possible need for hedging.
We are substantially smaller than our
major competitors, whose marketing and pricing decisions, and relative size advantage, could adversely affect our ability to attract
and retain customers and are likely to continue to cause significant pricing pressures that could adversely affect our net revenues,
results of operations and financial condition.
Our services related to cloud-based communications
software and information systems, outsourced solutions and value added communication services are subject to competitive pressure,
and we expect competition to continue to increase. We compete with telecom solution providers, independent software and service
providers and the in-house IT and network departments of communications companies as well as firms that provide IT services (including
consulting, systems integration and managed services), software vendors that sell products for particular aspects of a total information
system, software vendors that specialize in systems for particular communications services (such as Internet, land-line and mobile
services, cable, satellite and service bureaus) and companies that offer software systems in combination with the sale of network
equipment. Also, in this more fragmented market, larger players exist with associated advantages described earlier which we need
to compete against.
We believe that our ability to compete depends
on a number of factors, including:
|
·
|
the development by others of software products that are competitive with our products and services,
the price at which others offer competitive software and services,
|
|
·
|
the ability to make use of the networks of mobile network operators,
|
|
·
|
the technological changes of telecommunication operators affecting our ability to run services over their networks,
|
|
·
|
the ability of competitors to deliver projects at a level of quality that rivals our own,
|
|
·
|
the responsiveness of our competitors to customer needs, and
|
|
·
|
the ability of our competitors to hire, retain and motivate key personnel.
|
A number of our competitors have long operating
histories, large customer bases, substantial financial, technical, sales, marketing and other resources, and strong name recognition.
Current and potential competitors have established, and may establish in the future, cooperative relationships among themselves
or with third parties.
Our positioning in the marketplace as
a smaller provider places a significant strain on our resources, and if not managed effectively, could result in operational inefficiencies
and other difficulties.
Our positioning in the marketplace may place
a significant strain on our management, operational and financial resources, and increase demand on our systems and controls. To
manage this position effectively, we must continue to implement and improve our operational and financial systems and controls,
invest in development & engineering, critical systems and network infrastructure to maintain or improve our service quality
levels, purchase and utilize other systems and solutions, and train and manage our employee base. As we proceed with our development,
operational difficulties could arise from additional demand placed on customer provisioning and support, billing and management
information systems, product delivery and fulfillment, sales and marketing and administrative resources.
For instance, we may encounter delays or cost
overruns or suffer other adverse consequences in implementing new systems when required. In addition, our operating and financial
control systems and infrastructure could be inadequate to ensure timely and accurate financial reporting.
We could suffer adverse tax and other
financial consequences if U.S. or foreign taxing authorities do not agree with our interpretation of applicable tax laws.
Our corporate structure is based, in part,
on assumptions about the various tax laws, including withholding tax, and other relevant laws of applicable non-US jurisdictions.
Foreign taxing authorities may not agree with our interpretations or reach different conclusions. Our interpretations are not binding
on any taxing authority and, if these foreign jurisdictions were to change or to modify the relevant laws, we could suffer adverse
tax and other financial consequences or have the anticipated benefits of our corporate structure materially impaired.
The current restructuring and reorganization
could result in significant disruption of our business and our relationships with our employees, suppliers and customers could
be adversely affected.
In 2015 and particularly in 2016 we undertook
significant restructuring and reorganization activities in order to improve operating efficiencies and reduce operating costs,
including changes in our executive team and Board of Directors, or Board. Such activities may require significant efforts, including
the integration, consolidation and rationalization of product development, sales and marketing efforts and general and administrative
activities. These activities could result in the disruption of our business including relationships with employees, suppliers and
customers, all of which could adversely affect our operating results. There can be no assurance that such activities would be successful
or reduce operating costs.
We have recently experienced several
changes in our management team and will need to re-align the organization and may need to recruit, hire and retain additional executive
talent which may cause disruption in our business
.
We recently had significant changes in
executive leadership. In November 2015, Mr. Steven van der Velden resigned as Chairman and Chief Executive Officer. In
connection with his resignation, Mr. Robert Hal Turner was appointed Executive Chairman, Mr. Gary Brandt was appointed as
interim Chief Restructuring Officer and Mr. Armin Hessler as Chief Operating Officer. In January 2016, Mr. Martin Zuurbier
resigned as Chief Technology Officer and Co-President Mobile Platform activities. Following the restructuring, Mr. Hessler
resigned as COO in November 2016 and Mr. Brandt as CRO. In November 2016, Mr. Victor Bozzo was appointed Chief
Executive Officer.
In addition to the foregoing management changes,
we commenced in the fourth quarter of 2015 a substantial restructuring and rationalization of our operations.
These changes and the short time interval in
which they have occurred have been disruptive to our employees and business and may add to the risk of control failures, including
a failure in the effective operation of our internal control over financial reporting or our disclosure controls and procedures.
Additionally, it may take time to hire new executives and for the new management team to become sufficiently familiar with our
business and each other to effectively develop and implement our business strategies. Accordingly, disruption to our organization
as a result of executive management transition could have a material adverse effect on our business, financial condition and results
of operations.
Changes to company strategy, which can often
occur with the appointment of new executives, can create uncertainty, may negatively impact our ability to execute quickly and
effectively, and may ultimately be unsuccessful. In addition, executive leadership transition periods are often difficult and tension
can result from changes in strategy and management style. Management transition inherently causes some loss of institutional knowledge,
which can negatively affect strategy and execution. Until we integrate new personnel, and unless they are able to succeed in their
positions, we may be unable to successfully manage and grow our business, and our results of operations and financial condition
could suffer as a result. In addition, uncertainty regarding the timing or effectiveness of our management transition process may
also harm our reputation and adversely affect the trading price of our common stock.
We must attract and retain skilled personnel.
If we are unable to hire and retain technical sales and operational employees, our business could be harmed.
Our ability to manage our reorganization and
growth will be particularly dependent on our ability to develop and retain an effective sales force and qualified technical and
managerial personnel. We need software development specialists with in-depth knowledge of a blend of IT and telecommunications
or with a blend of security and telecom. We intend to hire additional necessary employees, including software engineers, communication
engineers, project managers, sales consultants, employees and operational employees, on a permanent basis. The competition for
qualified technical sales, technical, and managerial personnel in the communications and software industry is intense in the markets
where we operate, and we may not be able to hire and retain sufficient qualified personnel. In addition, we may not be able to
maintain the quality of our operations, control our costs, maintain compliance with all applicable regulations, and expand our
internal management, technical, information and accounting systems in order to support our desired growth, which could have an
adverse impact on our operations. Volatility in the stock market and other factors could diminish our use, and the value, of our
equity awards as incentives to employees, putting us at a competitive disadvantage or forcing us to use more cash compensation.
If we are not able to use and protect
our intellectual property domestically and internationally, it could have a material adverse effect on our business.
Our ability to compete depends, in part, on
our ability to use intellectual property internationally. We rely on a combination of patents, copyright, trade secrets and confidentiality,
trademarks and licenses to protect our intellectual property. There is limited protection under patent law to protect the source
codes we developed or acquired on our platform. The copyright and know-how protection may not be sufficient. Our granted patents
and pending patent applications may be challenged. We are also subject to the risks of claims and litigation alleging infringement
of the intellectual property rights of others. The telecommunications industry is subject to frequent litigation regarding patent
and other intellectual property rights. We rely upon certain technology, including hardware and software, licensed from third parties.
The technology licensed by us may not continue to provide competitive features and functionality. Licenses for technology currently
used by us or other technology that we may seek to license in the future may not be available to us on commercially reasonable
terms or at all.
We are dependent on significant customers
for our businesses and the loss of this customer could have an adverse effect on our business, results of operations and financial
condition.
For the six months ended June 30, 2017,
we had two significant customers that accounted for 95.7% of our revenue. Although no other customer accounted for greater
than 10% of our net sales during this period, other customers may account for more than 10% of our net sales in future
periods. The loss, or reduction in services to, this significant customer or other discontinuation of their relationship with
us for any reason, or if either of this significant customer reduces or postpones purchases that we expect to receive, it
could have an adverse impact on our business, results of operations and financial condition.
Our success depends on our continued
investment in research and development, the level and effectiveness of which could reduce our profitability.
We intend to continue to make investments in
research and development and product development in seeking to sustain and improve our competitive position and meet our customers’
needs. These investments currently include streamlining our suite of software functionalities, including modularization and improving
scalability of our integrated solutions. To maintain our competitive position, we may need to increase our research and development
investment, which could reduce our profitability and cash flows. In addition, we cannot assure you that we will achieve a return
on these investments, nor can we assure you that these investments will improve our competitive position or meet our customers’
needs.
Product defects or software errors could
adversely affect our business.
Design defects or software errors may cause
delays in product introductions and project implementations, damage customer satisfaction and may have a material adverse effect
on our business, results of operations and financial condition. Our software systems are highly complex and may, from time to time,
contain design defects or software errors that may be difficult to detect and correct. Because our products are generally used
by our customers to perform critical business functions, design defects, software errors, misuse of our products, incorrect data
from external sources or other potential problems within or outside of our control may arise during implementation or from the
use of our products, and may result in financial or other damages to our customers, for which we may be held responsible. Although
we have license agreements with our customers that contain provisions designed to limit our exposure to potential claims and liabilities
arising from customer problems, these provisions may not effectively protect us against such claims in all cases and in all jurisdictions.
Our insurance coverage is not sufficient to protect against all possible liability for defects or software errors. In addition,
as a result of business and other considerations, we may undertake to compensate our customers for damages caused to them arising
from the use of our products, even if our liability is limited by a license or other agreement. Claims and liabilities arising
from customer problems could also damage our reputation, adversely affecting our business, results of operations and the financial
condition.
Risks Related to Our Industry
Changes in the regulation of the telecommunications
industry could adversely affect our business, revenue or cash flow.
We operate in a heavily regulated industry.
As a provider of communications technology, we are directly and indirectly subject to varying degrees of regulation in each of
the jurisdictions in which we provide our services. Local laws and regulations, and the interpretation of such laws and regulations,
differ significantly among the jurisdictions in which we operate. Enforcement and interpretations of these laws and regulations
can be unpredictable and are often subject to the informal views of government officials. Certain European, foreign, federal, and
state regulations and local franchise requirements have been, are currently, and may in the future be, the subject of judicial
proceedings, legislative hearings and administrative proposals. Such proceedings may relate to, among other things, the rates we
may charge for our local, network access and other services, the manner in which we offer and bundle our services, the terms and
conditions of interconnection, unbundled network elements and resale rates, and could change the manner in which telecommunications
companies operate. We cannot predict the outcome of these proceedings or the impact they will have on our business, revenue and
cash flow.
There can be no assurance that future regulatory
changes will not have a material adverse effect on us, or that regulators or third parties will not raise material issues with
regard to our compliance or noncompliance with applicable regulations, any of which could have a material adverse effect upon us.
Potential future regulatory, judicial, legislative, and government policy changes in jurisdictions where we operate could have
a material adverse effect on us. Domestic or international regulators or third parties may raise material issues with regard to
our compliance or noncompliance with applicable regulations, and therefore may have a material adverse impact on our competitive
position, growth and financial performance.
The market for communications services
is highly competitive and fragmented, and we expect competition to continue to increase.
We compete with independent software and service
providers and with the in-house IT and network departments of communications companies. Our main competitors include firms that
provide communications services and IT services (including consulting, systems integration and managed services), software vendors
that sell products for particular aspects of a total information system, software vendors that specialize in systems for particular
communications services (such as Internet, wire line and wireless services, cable, satellite and service bureaus) and network equipment
providers that offer software systems in combination with the sale of network equipment. We also compete with companies that provide
digital commerce software and solutions.
The telecommunications industry is rapidly
changing, and if we are not able to adjust our strategy and resources effectively in the future to meet changing market conditions,
we may not be able to compete effectively.
The telecommunications industry is changing
rapidly due to deregulation, privatization, consolidation, technological improvements, availability of alternative services such
as mobile, broadband, DSL, Internet, VOIP, and wireless DSL through use of the fixed wireless spectrum, and the globalization of
the world’s economies. In addition, alternative services to traditional land-line services, such as mobile, broadband, Internet
and VOIP services, have shown a competitive threat to our legacy land-line traffic business. If we do not continue to invest and
exploit our contemplated plan of development of our communications information systems, outsourced solutions and value added communication
services to meet changing market conditions, or if we do not have adequate resources, we may not be able to compete effectively
in providing technology solutions to our customers. The telecommunications industry is marked by the introduction of new product
and service offerings and technological improvements. Achieving successful financial results will depend on our ability to anticipate,
assess and adapt to rapid technological changes, and offer, on a timely and cost-effective basis, services including the bundling
of multiple services into our technology platforms that meet evolving industry standards. If we do not anticipate, assess or adapt
to such technological changes at a competitive price, maintain competitive services or obtain new technologies on a timely basis
or on satisfactory terms, our financial results may be materially and adversely affected.
If we are not able to operate a cost-effective
network, we may not be able to grow our business successfully.
Our long-term success depends on our ability
to design, implement, operate, manage and maintain a reliable and cost-effective network. In addition, we rely on third parties
to enable us to expand and manage our global network and to provide local, broadband Internet and mobile services.
Risks Related to Our Capital Stock
Our stock price has in the past not met,
and may in the future not meet, the minimum bid price for continued listing on the NYSE MKT. Our ability to publicly or privately
sell equity securities and the liquidity of our common stock could be adversely affected if we are delisted from the NYSE MKT.
We received a deficiency letter from the NYSE
MKT on December 6, 2016, indicating that our securities had been selling for a low price per share for a substantial period of
time and, pursuant to Section 1003(f)(v) of the NYSE MKT Company Guide (the “Company Guide”), our continued listing
on the NYSE MKT was predicated on our effecting a reverse split or otherwise demonstrating sustained price improvement. This notice
was in addition to a prior notice we received from NYSE MKT on May 26, 2016, as previously disclosed on a Current Report on Form
8-K we filed on June 2, 2016. The NYSE MKT indicated that we had an additional six months, or until June 6, 2017, to gain compliance
with Section 1003(f)(v) of the Company Guide.
On February 27, 2017, we completed a 1-for-25
reverse split of our issued and outstanding common stock. Although we believe we have regained compliance with Section 1003(f)(v)
of the Company Guide, there can be no assurance that our common stock will continue to satisfy this rule. If we were to fail to
comply with the Section 1003(f)(v) of the Company Guide again in the future and became subject to delisting, such delisting from
NYSE MKT would adversely affect our ability to raise additional financing through the public or private sale of equity securities,
would significantly affect the ability of investors to trade our securities and would negatively affect the value and liquidity
of our common stock. Delisting also could have other negative results, including the potential loss of confidence by employees,
the loss of institutional investor interest and fewer business development opportunities.
If we cannot meet the continued
listing requirements of the
NYSE MKT
, and specifically the stockholders’ equity standards, the
NYSE MKT
may
delist our common stock, which would have an adverse impact on the trading volume, liquidity and market price of our common stock.
On July 13, 2017, the Company received a notice from the NYSE
MKT indicating that the Company is not currently in compliance with the NYSE MKT’s continued listing standards as set forth
in Section 1003(a)(i), Section 1003(a)(ii), Section 1003(a)(iii), and Section 1003(a)(iv) of the Company Guide which denote the
stockholder’s equity requirements listed companies must abide by. The NYSE MKT has reviewed the Company’s most recent
updates and determined to extend the plan period for the Company to regain compliance with Section 1003(a)(iv) through November
27, 2017. The compliance date for Section 1003(a)(i), Section 1003(a)(ii), and Section 1003(a)(iii) remain November 27, 2017, as
was previously stated in the NYSE MKT’s notice dated January 5, 2017 and disclosed on a Current Report on Form 8-K filed
by the Company on January 9, 2017.
If the Company is not in compliance with the continued listing
standards of the Company Guide by November 27, 2017, the NYSE MKT could initiate delisting proceedings as appropriate. A delisting
of our common stock from the NYSE MKT would negatively impact us because it would: (i) reduce the liquidity and market price of
our common stock; (ii) reduce the number of investors willing to hold or acquire our common stock, which could negatively impact
our ability to raise equity financing; (iii) limit our ability to use a registration statement to offer and sell freely tradeable
securities, thereby preventing us from accessing the public capital markets; and (iv) impair our ability to provide equity incentives
to our employees.
We could issue additional common stock,
which might dilute the book value of our capital stock.
Our Board of Directors has authority, without
action or vote of our stockholders, to issue all or a part of our authorized but unissued shares of common stock. Any such stock
issuance could be made at a price that reflects a discount or a premium to the then-current trading price of our common stock.
In addition, in order to raise future capital, we may need to issue securities that are convertible into or exchangeable for a
significant amount of our common stock. These issuances, if any, would dilute your percentage ownership interest in the company,
thereby having the effect of reducing your influence on matters on which stockholders vote. You may incur additional dilution if
holders of stock options, whether currently outstanding or subsequently granted, exercise their options, or if warrant holders
exercise their warrants to purchase shares of our common stock. As a result, any such issuances or exercises would dilute your
interest in the company and the per share book value of the common stock that you owned, either of which could negatively affect
the trading price of our common stock and the value of your investment.
As a “thinly-traded” stock,
large sales can place downward pressure on our stock price.
Our stock experiences periods when it could
be considered “thinly traded”. Financing transactions resulting in a large number of newly issued shares that become
readily tradable, or other events that cause current stockholders to sell shares, could place further downward pressure on the
trading price of our stock. In addition, the lack of a robust resale market may require a stockholder who desires to sell a large
number of shares to sell the shares in increments over time to mitigate any adverse impact of the sales on the market price of
our stock.
Shares eligible for future sale may adversely
affect the market for our common stock.
As of October 13, 2017, there are 3,277,281
options and 6,561,733 warrants to purchase shares of our common stock outstanding. All of the shares issuable from exercise have
been registered and are freely traded. Options are exercisable at exercise prices between $1.00 and $9.85, the warrants are exercisable
at exercise prices between $0.64 and $5.375. If and when these securities are exercised into shares of our common stock, the number
of our shares of common stock outstanding will increase. Such increase in our outstanding shares, and any sales of such shares,
could have a material adverse effect on the market for our common stock and the market price of our common stock.
In addition, from time to time, certain of
our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions
in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations. In general, pursuant
to Rule 144, after satisfying a six month holding period: (i) affiliated stockholders (or stockholders whose shares are aggregated)
may, under certain circumstances, sell within any three month period a number of securities which does not exceed the greater of
1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks
prior to such sale and (ii) non-affiliated stockholders may sell without such limitations, provided that we are current in our
public reporting obligations. Rule 144 also permits the sale of securities by non-affiliates that have satisfied a one year holding
period without any limitation or restriction. Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any
resale prospectus may have a material adverse effect on the market price of our securities.
Because certain principal stockholders
own a large percentage of our voting stock, other stockholders’ voting power may be limited.
As of October 13, 2017, our four large
shareholders: Corbin Mezzanine Fund I, L.P., Saffelberg Investments N.V., Mr. Bernard Moncarey and Artilium plc owned or controlled
approximately 39.2% of our outstanding common stock. If those stockholders act together, they will have the ability to have a
substantial influence on matters submitted to our stockholders for approval, including the election and removal of directors and
the approval of any merger, consolidation or sale of all or substantially all of our assets. As a result, our other stockholders
may have little or no influence over matters submitted for shareholder approval. In addition, the ownership of such stockholders
could preclude any unsolicited acquisition of us, and consequently, adversely affect the price of our common stock. These stockholders
may make decisions that are adverse to your interests.
We have no dividend history and have no intention to pay dividends
in the foreseeable future.
We have never paid dividends on or in connection
with our common stock and do not intend to pay any dividends to common stockholders for the foreseeable future.
Risks Related to the Offering
You will experience immediate and substantial
dilution.
Since the public offering price of the securities
offered pursuant to this prospectus is higher than the net tangible book value per share of our common stock, you will suffer substantial
dilution in the net tangible book value of the common stock you purchase in this offering. See “Dilution” in this prospectus
for a more detailed discussion of the dilution you will incur if you purchase securities in this offering. In addition, we
may have issued options and warrants to acquire common stock at prices below the expected public offering price of the shares of
common stock offered hereby, although no warrants at the present time are below the current offering price. To the extent outstanding
options, warrants or other derivative securities are ultimately exercised or converted, or if we issue restricted stock to our
employees under our equity incentive plans, there will be further dilution to investors who purchase shares in this offering.
Management will have broad discretion
as to the use of the net proceeds from this offering, and we may not use these proceeds effectively.
We have not designated any portion of the net
proceeds from this offering to be used for any particular purposes. Our management will have broad discretion in the application
of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance
the value of our common stock. Accordingly, you will be relying on the judgment of our management with regard to the use of these
net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being
used appropriately. Our failure to apply these funds effectively could have a material adverse effect on our business, delay the
development of our product candidates and cause the price of our common stock to decline.
You will experience future dilution as
a result of future equity offerings
We may in the future offer additional shares
of our common stock or other securities convertible into or exchangeable for our common stock. Although no assurances
can be given that we will consummate a financing, in the event we do, or in the event we sell shares of common stock or other securities
convertible into shares of our common stock in the future, additional and substantial dilution will occur. In addition,
investors purchasing shares or other securities in the future could have rights superior to investors in this offering.
Fluctuations in the price of our common stock, including
as a result of actual or anticipated sales of shares by stockholders, may make our common stock more difficult to resell.
The market price and trading volume of our
common stock have been and may continue to be subject to significant fluctuations due not only to general stock market conditions,
but also to a change in sentiment in the market regarding the industry in which we operate, our operations, business prospects
or liquidity or this offering. In addition to the risk factors discussed in our periodic reports and in this prospectus supplement,
the price and volume volatility of our common stock may be affected by actual or anticipated sales of common stock by existing
stockholders, including of shares purchased in this offering, whether in the market or in subsequent public offerings. Stock markets
in general have experienced extreme volatility recently that has at times been unrelated to the operating performance of particular
companies or industries. These broad market fluctuations may adversely affect the trading price of our common stock, regardless
of our operating results. As a result, these fluctuations in the market price and trading volume of our common stock may make
it difficult to predict the market price of our common stock in the future, cause the value of your investment to decline and
make it more difficult to resell our common stock.
We are not currently paying dividends
and will likely continue not paying cash dividends on our common stock for the foreseeable future.
We have never paid cash dividends on our capital
stock and do not anticipate paying any cash dividends on our common stock for the foreseeable future. While it is possible that
we may declare a dividend, investors should not rely on such a possibility, nor should they rely on an investment in us if they
require income generated from dividends paid on our capital stock. Any income derived from our common stock would only come from
rise in the market price of our common stock, which is uncertain and unpredictable.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements,
which reflect the views of our management with respect to future events and financial performance. These forward-looking statements
are subject to a number of uncertainties and other factors that could cause actual results to differ materially from such statements.
Forward-looking statements are identified by words such as “anticipates,” “believes,” “estimates,”
“expects,” “intends,” “plans,” “projects,” “targets” and similar expressions.
Readers are cautioned not to place undue reliance on these forward-looking statements, which are based on the information available
to management at this time and which speak only as of this date. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise. For a discussion of some of the factors that may
cause actual results to differ materially from those suggested by the forward-looking statements, please read carefully the information
under “Risk Factors.” Examples of our forward-looking statements include:
●Our need for additional capital to fund our operations;
●Our history of losses and our expectation of future
losses;
●The clinical development of our product candidates
and our expectations for the completion of associated clinical trials;
●Our expectations regarding the safety and efficacy
of our product candidates;
●The expected costs of our clinical trials;
●Our expectations regarding the use of our existing
cash and the expected net proceeds of this offering;
●Our expectations regarding our ability to obtain
regulatory approval for any of our product candidates and any requirements that may be imposed in connection with any regulatory
approval we receive;
●Our plans to commercialize any product candidate
that receives regulatory approval;
●Expectations regarding the willingness of doctors
to use any approved product and the availability and amount of any third party reimbursement for such use;
●Our expectations regarding the cost and effect
of ongoing regulatory oversight for any approved product;
●The effect of the loss of any of our executive
officers, directors and principal consultants on our business;
●Our expectations regarding the ability of our clinical
research organizations to properly oversee our clinical trials;
●Our expectations regarding the ability of our contract
manufacturers to manufacture sufficient amounts of product candidates to satisfy our needs in accordance with cGMP, including the
availability of raw materials and intermediates used to manufacture our product candidates;
●Our ability to obtain and enforce patents and other
proprietary rights to our technology; and
●The performance by third party collaborators of
their obligations under their agreements with us.
You should read this prospectus and the
documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely and
with the understanding that our actual future results may be materially different from what we expect. You should assume
that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only.
Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed
in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking
statements. These risks and uncertainties, along with others, are described above under the heading “Risk
Factors” beginning on page 7 of this prospectus. We qualify all of the information presented in
this prospectus, and particularly our forward-looking statements, by these cautionary statements.
USE OF PROCEEDS
We estimate that the net proceeds of
this offering will be approximately $10,655,000, or approximately $12.3 million if the underwriter exercise
its over-allotment option in full, assuming the sale of 10,000,000 shares of our common stock at an assumed public
offering price of $1.20 per share, the closing bid price of our common stock on The New York Stock Exchange
on October
13, 2017, after
deducting the estimated underwriting discount and estimated offering expenses payable by us.
A $0.25 increase (decrease) in the
assumed public offering price of $1.20 per share would increase (decrease) the expected net proceeds of this offering by
approximately $2.3 million, assuming the number of shares offered by us remains the same and after deducting the estimated
underwriting discount and estimated offering expenses payable by us. A 100,000 increase (decrease) in the assumed number of shares
of our common stock sold in this offering would increase (decrease) the expected net proceeds of this offering by approximately
$0.1 million, assuming the assumed public offering price per share remains the same.
We intend to use the net proceeds received
from this offering for working capital and general corporate purposes.
We have not yet determined the amount
of net proceeds to be used specifically for any of the foregoing purposes. Accordingly, we will retain broad discretion over the
use of these proceeds. Pending any use as described above, we intend to invest the net proceeds in high-quality, short-term,
interest-bearing securities.
PRICE RANGE OF COMMON STOCK
Since December 5, 2011, our common stock was
listed for quotation on the Exchange under the symbol “ETAK.” As of November 1, 2016, our common stock has begun trading
under the symbol “TEUM” on the Exchange. The following table sets forth the high and low closing prices
per share for each quarterly period from March 31, 2016 through September 30, 2017 as quoted on the Exchange and published by
www.nasdaq.com
.
These quotations reflect prices between dealers and do not include retail mark-ups, mark-downs or commissions and may not reasonably
represent actual transactions.
|
|
High
|
|
|
Low
|
|
2016
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2016
|
|
$
|
6.99
|
|
|
$
|
4.78
|
|
Quarter ended June 30, 2016
|
|
$
|
5.75
|
|
|
$
|
3.76
|
|
Quarter ended September 30, 2016
|
|
$
|
4.75
|
|
|
$
|
3.00
|
|
Quarter ended December 31, 2016
|
|
$
|
5.25
|
|
|
$
|
2.45
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2017
|
|
$
|
3.99
|
|
|
$
|
0.85
|
|
Quarter ended June 30, 2017
|
|
$
|
0.93
|
|
|
$
|
0.50
|
|
Quarter ended September 30, 2017 (through September 25, 2017)
|
|
$
|
1.76
|
|
|
$
|
0.50
|
|
On October 13, 2017, the closing bid price
of our common stock was $1.20.
As of October 13, 2017, there were 525
stockholders of record of our common stock.
Dividend Policy
We have never paid our stockholders cash dividends,
and we do not anticipate paying any cash dividends in the foreseeable future as we intend to retain any earnings for use in our
business. Any future determination to pay dividends will be at the discretion of our Board of Directors.
DILUTION
If you purchase shares of our common stock
in this offering, you will experience dilution to the extent of the difference between the price per share you pay in this offering
and the net tangible book value per share of our common stock immediately after this offering. The net tangible book value of
our common stock on June 30, 2017, was approximately $11,209,198, or approximately $0.84 per share. Net tangible book value per
share is equal to the amount of our total tangible assets, less total liabilities, divided by the aggregate number of shares of
our common stock outstanding.
After giving effect to the assumed
sale by us of 10 million shares of common stock in this offering at an assumed public offering price of $1.20 per
share (the closing bid price of our common stock on The New York Stock Exchange on October 13, 2017), and after deducting the
estimated underwriting discount and estimated offering expenses payable by us, our as adjusted net tangible book value as of June
30, 2017, would have been approximately $21.9 million, or approximately $0.94 per share. This represents an immediate
increase in net tangible book value of approximately $0.10 per share to existing stockholders and an immediate dilution
of approximately $0.26 per share to new investors purchasing shares of our common stock in this offering. The following table
illustrates this per share dilution:
Assumed public offering price per share
|
|
|
|
|
|
$
|
1.20
|
|
Pro forma net tangible book value per share as of June 30, 2017
|
|
$
|
0.84
|
|
|
|
|
|
Increase in net tangible book value per share attributable to this offering
|
|
|
0.10
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share after this offering
|
|
|
0.94
|
|
|
|
|
|
Dilution in pro forma net tangible book value per share to new investors
|
|
|
|
|
|
$
|
0.26
|
|
A $0.25 increase in the assumed
public offering price from $1.20 to $1.45 per share would increase our as adjusted net tangible book value after this
offering by approximately $2.3 million, or approximately $0.20 per share, and increase the dilution to new
investors by approximately $0.15 per share, assuming that the number of shares of common stock offered by us, as set
forth above, remains the same and after deducting the estimated underwriting discount and estimated offering expenses payable
by us. A $0.25 decrease in the assumed public offering price from $1.20 to $0.95 per share would decrease our
as adjusted net tangible book value after this offering by $2.3 million, or approximately $0.00 per share, and decrease
the dilution per share to new investors by approximately $0.15 per share, assuming that the number of shares of common
stock offered by us, as set forth above, remains the same and after deducting the estimated underwriting discount and
estimated offering expenses payable by us. We may also increase or decrease the number of shares of common stock
we are offering from the assumed number of shares set forth above. An increase (decrease) of 100,000 in the assumed number of
shares of common stock sold in this offering would increase (decrease) our as adjusted net tangible book value after this
offering by approximately $110,000 , or approximately $0.00 per share, and increase (decrease) the dilution per
share to new investors by approximately $0.00 per share, assuming that the public offering price of $1.20 per
share remains the same. The information discussed above is illustrative only and will adjust based on the actual public
offering price, the actual number of shares of common stock that we offer in this offering, and other terms of this offering
determined at pricing.
If the underwriters exercise in full
their option to purchase 1,500,000 additional shares in full at the assumed public offering price of $1.20 per share,
the as adjusted net tangible book value of our common stock after this offering would be $0.95 per share, representing an
immediate increase in net tangible book value of approximately $0.11 per share to existing stockholders and an immediate
dilution of $0.25 per share to the investors in this offering, after deducting the underwriting discount and estimated offering
expenses payable by us.
This table does not take into account
further dilution to new investors that could occur upon the exercise of outstanding options and warrants having a per share exercise
price less than the public offering price per share in this offering. In addition, we may choose to raise additional
capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future
operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the
issuance of these securities could result in further dilution to our stockholders.
The table and discussion above are based on 13,271,355 shares
outstanding as of June 30, 2017, and excludes as of that date:
●1,118,656 shares of our common stock issuable
upon exercise of outstanding options under our equity incentive plans at a weighted-average exercise price of $9.99 per share;
●6,561,733 shares of our common stock issuable
upon exercise of outstanding warrants with a weighted-average exercise price of $1.67 per share;
●308,124 shares of our common stock issuable
upon conversion of outstanding shares of our Series A Preferred Stock and Series A-1 Preferred Stock;
●1,332,000 shares of our common stock that
are reserved for equity awards that may be granted under our equity incentive plans.
CAPITALIZATION
The following table sets forth our capitalization as of June 30,
2017:
|
·
|
On a pro-forma
basis as adjusted to give effect to the receipt of $10,655,000 in net proceeds
assuming the issuance of 10,000,000 shares of common stock in this offering
at an assumed public offering price of $1.20 per share and after deducting the estimated
underwriting discount and estimated offering expenses payable by us.
|
You should consider this table in conjunction
with “Use of Proceeds”, “Description of Securities” and our financial statements and the notes to those
financial statements included elsewhere in this prospectus.
|
|
As of
June 30, 2017
|
|
|
|
Reported
|
|
|
Pro-Forma
As
Adjusted
for this
Offering
|
|
Total Liabilities
|
|
$
|
15,451,641
|
|
|
$
|
15,451,641
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
Preferred Stock $0.00001 par value, 50,000,000
shares authorized, 58 and 249 issued and outstanding as of June 30, 2017
|
|
$
|
384,503
|
|
|
$
|
384,503
|
|
Common stock, par value $0.00001; 500,000,000
shares authorized; 13,271,355 shares issued and outstanding as of June 30, 2017; 23,271,355 shares issued and outstanding
“Pro Forma as Adjusted For This Offering”
|
|
|
290,540,444
|
|
|
|
301,205,444
|
|
Accumulated other comprehensive loss
|
|
|
(5,097,560
|
)
|
|
|
(5,097,560
|
)
|
Accumulated deficit
|
|
|
(289,716,174
|
)
|
|
|
(289,716,174
|
)
|
Total Pareteum Corporation Stockholders’
deficit
|
|
$
|
(3,888,787
|
)
|
|
$
|
6,776,213
|
|
SELECTED CONSOLIDATED
FINANCIAL DATA
The following table includes (i)
consolidated statement of comprehensive loss for the years ended December 31, 2016 and 2015 and the six months
ended June 30, 2017 (unaudited) and 2016 (unaudited) and summary consolidated balance sheet data as of December 31, 2016 and
2015 and June 30, 2017 (unaudited), derived from our audited and unaudited consolidated financial statements and related
notes which are included elsewhere in this prospectus. Our financial statements are prepared and presented in
accordance with generally accepted accounting principles in the United States. The results indicated below are not
necessarily indicative of our future performance.
Certain operating
expenses in these financial statements have been reclassified to conform to the presentation in the current condensed consolidated
financial statements. These reclassifications had no impact upon the previously reported net losses.
You should read this
information together with the sections entitled “Capitalization”, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included
elsewhere in this prospectus.
|
|
Years Ended December 31,
|
|
|
Six Months Ended June 30
|
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
REVENUES
|
|
$
|
12,855,811
|
|
|
$
|
31,015,453
|
|
|
$
|
6,034,118
|
|
|
$
|
6,540,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
31,758,492
|
|
|
|
35,313,645
|
|
|
|
9,196,886
|
|
|
|
12,983,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(18,902,681
|
)
|
|
|
(4,298,192
|
)
|
|
|
(3,162,768
|
)
|
|
|
(6,442,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
112,169
|
|
|
|
106,028
|
|
|
|
94,036
|
|
|
|
50,547
|
|
Interest expense
|
|
|
(1,228,201
|
)
|
|
|
(1,488,203
|
)
|
|
|
(923,184
|
)
|
|
|
(602,772
|
)
|
Interest expense related to debt discount and conversion feature
|
|
|
(6,041,607
|
)
|
|
|
(682,389
|
)
|
|
|
(1,342,598
|
)
|
|
|
(613,144
|
)
|
Changes in derivative liabilities
|
|
|
(3,316,199
|
)
|
|
|
299,948
|
|
|
|
1,920,881
|
|
|
|
659,936
|
|
(Loss) Gain on Extinguishment of Debt
|
|
|
(541,899
|
)
|
|
|
2,475,799
|
|
|
|
463,345
|
|
|
|
-
|
|
Other income and (expense), net
|
|
|
(220,927
|
)
|
|
|
(922,894
|
)
|
|
|
470,476
|
|
|
|
112,560
|
|
Amortization of deferred financing costs
|
|
|
(1,267,073
|
)
|
|
|
(513,557
|
)
|
|
|
(222,623
|
)
|
|
|
(282,295
|
)
|
OTHER INCOME (EXPENSE)
|
|
|
(12,503,737
|
)
|
|
|
(725,268
|
)
|
|
|
460,333
|
|
|
|
(675,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE PROVISION FOR INCOME TAXES
|
|
|
(31,406,418
|
)
|
|
|
(5,023,460
|
)
|
|
|
(2,702,435
|
)
|
|
|
(7,117,914
|
)
|
Provision (Benefit) for income taxes
|
|
|
38,286
|
|
|
|
(17,225
|
)
|
|
|
(66,495
|
)
|
|
|
19,107
|
|
NET LOSS
|
|
|
(31,444,704
|
)
|
|
|
(5,006,235
|
)
|
|
|
(2,635,940
|
)
|
|
|
(7,137,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
703,073
|
|
|
|
(2,662,843
|
)
|
|
|
(10,651
|
)
|
|
|
(4,264
|
)
|
COMPREHENSIVE LOSS
|
|
$
|
(30,741,631
|
)
|
|
$
|
(7,669,078
|
)
|
|
$
|
(2,646,591
|
)
|
|
$
|
(7,141,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share and equivalents – basic
|
|
$
|
(4.67
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(1.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share and equivalents – diluted
|
|
$
|
(4.67
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(1.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the period – basic
|
|
|
6,738,971
|
|
|
|
6,328,082
|
|
|
|
11,132,580
|
|
|
|
6,530,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the period – diluted
|
|
|
6,738,971
|
|
|
|
6,328,082
|
|
|
|
11,132,580
|
|
|
|
6,530,513
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
June 30,
2017
(unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
931,189
|
|
|
$
|
369,250
|
|
|
$
|
741,941
|
|
Financing receivable
|
|
|
-
|
|
|
|
272,425
|
|
|
|
|
|
Restricted cash
|
|
|
564,018
|
|
|
|
246,151
|
|
|
|
699,661
|
|
Accounts receivable
|
|
|
614,670
|
|
|
|
1,112,032
|
|
|
|
249,279
|
|
Prepaid expenses and other current assets
|
|
|
1,084,994
|
|
|
|
2,016,236
|
|
|
|
680,708
|
|
Total current assets
|
|
|
3,194,871
|
|
|
|
4,016,094
|
|
|
|
2,371,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
129,037
|
|
|
|
473,893
|
|
|
|
80,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE RECEIVABLE
|
|
|
1,012,603
|
|
|
|
-
|
|
|
|
1,021,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
8,708,778
|
|
|
|
13,051,375
|
|
|
|
7,735,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTANGIBLE ASSETS, NET
|
|
|
-
|
|
|
|
258,630
|
|
|
|
353,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS HELD FOR SALE
|
|
|
-
|
|
|
|
4,564,972
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GOODWILL
|
|
|
-
|
|
|
|
3,027,422
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
13,045,289
|
|
|
$
|
25,392,386
|
|
|
$
|
11,562,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and customer deposits
|
|
$
|
2,316,768
|
|
|
$
|
2,639,863
|
|
|
$
|
2,782,781
|
|
Obligations under capital leases (current portion)
|
|
|
10,813
|
|
|
|
310,403
|
|
|
|
-
|
|
Net billings in excess of revenues
|
|
|
951,791
|
|
|
|
1,259,545
|
|
|
|
562,682
|
|
Accrued expenses and other payables
|
|
|
6,013,620
|
|
|
|
5,031,712
|
|
|
|
4,967,568
|
|
Senior Secured Loan - Short Term (Principal repayments coming 12 months)
|
|
|
4,000,000
|
|
|
|
5,580,277
|
|
|
|
1,750,000
|
|
Total current liabilities
|
|
|
13,292,992
|
|
|
|
14,821,800
|
|
|
|
10,063,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
4,265,829
|
|
|
|
945,618
|
|
|
|
-
|
|
Non-current portion of obligation under capital leases
|
|
|
-
|
|
|
|
5,621
|
|
|
|
|
|
Other long term liabilities
|
|
|
192,980
|
|
|
|
260,290
|
|
|
|
177,139
|
|
Unsecured Convertible Promissory Note (net of Debt Discount and Debt Issuance)
|
|
|
821,048
|
|
|
|
238,829
|
|
|
|
75,338
|
|
Senior Secured Loan - Long Term (net of Debt Discount, Debt Issuance and Principal repayments coming 12 months)
|
|
|
3,715,662
|
|
|
|
-
|
|
|
|
5,038,644
|
|
Non-current portion of net billings in excess of revenues
|
|
|
121,309
|
|
|
|
1,066,687
|
|
|
|
97,489
|
|
Total long term liabilities
|
|
|
9,116,828
|
|
|
|
2,517,045
|
|
|
|
5,388,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
22,409,820
|
|
|
|
17,338,845
|
|
|
|
15,451,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock $0.00001 par value
|
|
|
2,143,196
|
|
|
|
-
|
|
|
|
384,503
|
|
Common Stock $0.00001 par value
|
|
|
280,653,362
|
|
|
|
269,470,165
|
|
|
|
290,540,444
|
|
Accumulated other comprehensive loss
|
|
|
(5,086,902
|
)
|
|
|
(5,789,975
|
)
|
|
|
(5,097,560
|
)
|
Accumulated deficit
|
|
|
(287,080,234
|
)
|
|
|
(255,635,531
|
)
|
|
|
(289,716,174
|
|
Pareteum Corporation stockholders’ (deficit) equity
|
|
|
(9,370,578
|
)
|
|
|
8,044,659
|
|
|
|
(3,888,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CONTROLLING INTEREST
|
|
|
6,047
|
|
|
|
8,882
|
|
|
|
-
|
|
Total stockholders’ (deficit) equity
|
|
|
(9,364,531
|
)
|
|
|
8,053,541
|
|
|
|
(3,888,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
$
|
13,045,289
|
|
|
$
|
25,392,386
|
|
|
$
|
11,562,854
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis
of financial condition and results of operations should be read together with our consolidated financial statements and
accompanying notes appearing elsewhere in this Prospectus. This Management’s Discussion and Analysis contains
forward-looking statements that involve risks and uncertainties. Please see “Cautionary Note Regarding Forward-Looking
Statements” set forth on page 17 of this Prospectus, and see “Risk Factors” beginning on page 7 for a
discussion of certain risk factors applicable to our business, financial condition, and results of operations. Operating
results are not necessarily indicative of results that may occur in future periods.
Overview
Pareteum has developed
a Communications Cloud Services Platform, providing (i) Mobility, (ii) Messaging and (iii) Security services and applications,
with a Single-Sign-On, API and software development suite:
Our solution has proven
itself globally against much larger competitors and is installed in multiple companies in diverse countries around the world ranging
from small service providers to one of the world’s largest telecoms companies, Vodafone, based in Europe. We had more than
1,100,000 active subscribers on our platforms as of December 31, 2016.
The market and our
customers tell us that they need to find ways to reduce cost, they want to find ways to increase their revenues, and they want
to scale and grow their business, and all consider Cloud capabilities as a vital means to achieve these goals. As we’ve listened
to our customers and understood the business goals that they have, we believe Pareteum is well placed to help them achieve these
goals, drive value for customers, and ultimately value for our own business.
We have designed a
solution that solves these problems. Each of these three platforms - mobility, messaging and security - can be marketed
and deployed independently, or they can be delivered as a single, integrated Cloud Service Platform, as illustrated in the figure
above.
The Pareteum platform
hosts integrated IT/Back Office and Core Network functionality for mobile network operators, and for enterprises implement and
leverage mobile communications solutions on a fully outsourced SaaS, PaaS and/or IaaS basis: made available either as an on-premise
solution or as a fully hosted service in the Cloud depending on the needs of our customers. Pareteum also delivers an OSS for channel
partners, with APIs for integration with third party systems, workflows for complex application orchestration, customer support
with branded portals and plug-ins for a multitude of other applications. These features facilitate and improve the ability of our
channel partners to provide support and to drive sales.
Our integrated (or
modular) Cloud Platform solution includes, more specifically, functionality such as service design and control, Intelligent Networking,
subscriber provisioning, messaging, switching, real-time dynamic rating and pre- or post-paid charging and billing, call center
and customer care support, reporting, self-care web portal environments, change management in active systems, SIM Management, (Data)
Session Control Management, Voucher Management, Mobile Marketing systems, (Mobile) Payment Systems, Real Time Credit Checking Systems,
Interactive Voice Response Systems, Voicemail Systems, Trouble Ticketing Systems, Device Management Systems, Mass Customer Migrations,
life cycle management, database hardware and software, large scale real-time processing, and integrating, provisioning, all the
while managing and maintaining specific core network components.
The following discussion and analysis of our
financial condition and results of operations should be read in conjunction with our financial statements and notes thereto and
the other financial information included elsewhere in this report.
The Company’s financial operations were
influenced by several events that occurred through June 30, 2017:
|
·
|
the restructuring of Atalaya debt on March 6, 2017 and May 2, 2017;
|
|
·
|
25-1 reverse stock split;
|
|
·
|
the conversion of derivative debt;
|
|
·
|
an extension was granted by the NYSE for compliance with the listing requirements;
|
|
·
|
new director appointment;
|
|
·
|
Joseph Gunnar warrant exercise; and
|
|
·
|
proposal for a new employee stock option plan
|
Critical Accounting Policies and Estimates
The preparation of financial statements in
accordance with U.S. generally accepted accounting principles, or GAAP, requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue
and expenses in the reporting period. We regularly evaluate our estimates and assumptions related to revenue recognition, rebates,
allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, stock-based compensation
expense, long-lived asset valuations, strategic investments, deferred income tax asset valuation allowances, uncertain tax positions,
tax contingencies, self-insurance, restructuring costs, litigation and other loss contingencies. We base our estimates and assumptions
on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of
revenue, costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ
materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual
results, our future results of operations will be affected. There have been no
material changes in any of our critical accounting policies and estimates during the three months ended June 30, 2017.
Comparison
of six months ended June 30, 2017 and June 30, 2016.
Revenue
Revenue for the six months ended June 30, 2017,
was $6,034,118, a $506,574 or 8% decrease, compared to $6,540,692 for the comparable six months in 2016. The lower revenues can
partly be explained by the extinguishment of the former ValidSoft sales ($220,928), the restructured customer base in the Netherlands
($435,802) and ZAIN ($91,622) and off set against higher revenues for Vodafone $241,778.
|
|
Six months ended
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Variance
|
|
Revenues
|
|
$
|
6,034,118
|
|
|
$
|
6,540,692
|
|
|
$
|
(506,574
|
)
|
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
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Variance
|
|
Revenues
|
|
$
|
6,034,118
|
|
|
$
|
6,540,692
|
|
|
$
|
(506,574
|
)
|
Cost of service
|
|
|
1,787,590
|
|
|
|
2,104,427
|
|
|
|
(316,837
|
)
|
Margin
|
|
$
|
4,246,528
|
|
|
$
|
4,436,265
|
|
|
$
|
(189,737
|
)
|
Cost of service for the six-month period ended
June 30, 2017 was $1,787,590, a decrease of $316,837 or 15%, compared to $2,104,427 for the six-month period in 2016. The main
decrease in cost of service was the result of reductions in a combination of cash and non-cash stock based employee compensation
($57,394) and decreases in the cost of mobile bundled service business and network ($226,403).
Product Development
Product Development costs consist primarily
of salaries and related expenses, including share-based expenses, of employees involved in the development of the Company’s
services, which are expensed as incurred. Costs such as database architecture, and Pareteum BOSS & IN platform development
and testing are included in this function.
Product development costs for the six-month
periods ended June 30, 2017 and 2016 were $558,206 and $2,098,902, respectively, a decrease of $1,540,696 or 73%. The main decrease
for the six-month period was the net result of decreased development costs in conjunction with the reduction in management and
personnel expenses and non-cash stock based employee compensation in 2017 compared to 2016.
Sales and Marketing
Sales and Marketing expenses consist primarily
of salaries and related expenses, including share-based expenses, for our sales and marketing staff, including commissions, payments
to partners and marketing programs. Marketing programs consist of advertising, events, corporate communications and brand building.
Sales and marketing expenses for the six-month
periods ended June 30, 2017 and 2016 were $690,282 and $887,673, respectively, a decrease of $197,391 or 22%. The main decrease
was caused by reduced management, personnel expenses, non-cash stock based employee compensation and a decrease in marketing program
costs.
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-month period ended June 30, 2017 and 2016 were $3,856,226 and $5,680,885, respectively, a decrease of $1,824,659 or 32%. The
decrease was mainly caused by reduced employee costs and non-cash stock based employee compensation as well as other General and
administrative expenses.
Restructuring and Settlement costs
Restructuring and settlement costs for the
six months ended June 30, 2017 and 2016 were $588,106 and $-0-. The Plan was completed in the third quarter of 2016. The Plan which
commenced in the fourth quarter of 2015 was designed to align actual expenses and investments with current revenues as well as
introduce new executive management. During the second quarter of 2017, there were certain severance accruals and payments as well
as an arbitration award to TelSpace Holdings resulting in a charge of $380,311 in unpaid license fees, derivative work and tribunal
costs.
Share-based compensation
Share-based compensation is comprised of:
|
·
|
the expensing of the
options granted under the 2008 Plan to staff and management;
|
|
·
|
the expensing of the
shares issued under the 2006 and 2008 Plans to contractors, directors and executive officers in lieu of cash compensation; and
|
|
·
|
the expensing of restricted
shares issued for consultancy services.
|
For the six-month period ended June 30, 2017
and 2016, we recognized share-based compensation expense of $1,123,293 and $1,306,131, respectively, a decrease of $182,838 or
14%.
In the following table, we show the allocation
of share-based compensation according to functions in the Consolidated Statement of Comprehensive Loss:
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Cost of service
|
|
$
|
3,821
|
|
|
$
|
80,070
|
|
Product Development
|
|
|
17,143
|
|
|
|
366,906
|
|
Sales and Marketing
|
|
|
66,565
|
|
|
|
91,687
|
|
General and Administrative
|
|
|
1,035,764
|
|
|
|
767,468
|
|
Total
|
|
$
|
1,123,293
|
|
|
$
|
1,306,131
|
|
Depreciation and Amortization
Depreciation and amortization expenses for
the six-month period ended June 30, 2017 was $1,716,476, a decrease of $495,075 or 22%, compared to $2,211,551 for the same period
in 2016. This decrease is primarily the result of the impairment for assets held and used in 2016 and the termination of the depreciation
and amortization of the assets of ValidSoft.
Interest Income and Expense
Interest income for the six-month periods ended
June 30, 2017 and 2016, was $94,036 and $50,547, respectively, an increase of $43,489 or 86%. Interest income mainly consists of
interest accrued for the $1.0 million ValidSoft Promissory Note and interest charged to customers for extended payment terms.
Interest expense for the six-month periods
ended June 30, 2017 and 2016, was $923,184 and $602,772, respectively, an increase of $320,412 or 53%. Higher levels of interest
expense were the result of the increased outstanding Senior Secured Loan due to loan amendments during 2016 and the Unsecured Debt
which started in mid 2016.
Interest Expense Related to Debt Discount
Accretion
For the six months ended June 30, 2017 and
2016, interest expenses related to debt discount accretion were $1,342,598 and $613,144, respectively, an increase of $729,454
or 119%. This increase is mainly related to the accelerated amortization as a result of conversions into equity of the 9% Unsecured
Subordinated Convertible Promissory Note and the principal repayment of $1.75 million of the outstanding Senior Secured Loan.
Amortization of Deferred Financing Costs
Amortization of Deferred Financing Costs for
the six-month periods ended June 30, 2017 and 2016 was $222,623 and $282,295, respectively, a decrease of $59,672 or 21% as a result
of the debt restructuring in 2017.
Changes in derivative liabilities
Changes in derivative liabilities for the six-month
period ended June 30, 2017 was a gain of $1,920,881, an increase of $1,260,945 or 191%, compared to $659,936 for the same period
in 2016.
Change in Fair Value of Conversion Feature
During the first quarter of 2017, the Company
negotiated with all parties having a derivative instrument with conversion feature to eliminate any condition responsible for the
need of derivative accounting. This resulted in the calculation of the fair value as per the agreement date of the elimination
of such feature and the subsequent accounting for the allocation of the remaining liability value towards extinguishment of debt
and change in fair value of the conversion feature.
Change in Fair Value of Warrant Liabilities
During the first quarter of 2017, the Company
negotiated with all parties having a derivative warrant to eliminate any condition (mainly caused by anti-dilution protection conditions)
responsible for the need of the subsequent derivative accounting. This resulted in the calculation of the fair value as per the
agreement date of the elimination of such condition and the subsequent accounting for the allocation of the remaining liability
value towards change in fair value of the warrant liability.
The fair market value of the more complex conversion
feature and warrant liability was determined by a third-party valuation expert using a Monte-Carlo Simulation model.
Gain on extinguishment of debt
Gain on extinguishment of debt for the six-month
periods ended June 30, 2017 and 2016 were $463,345 and $-0-, respectively. The gain in 2017 is the result of the conversions of
the 9% Unsecured Subordinated Convertible Promissory Notes which were executed in the first quarter.
Other Income, net
Other income & (expense) for the six-month
periods ended June 30, 2017 and 2016 is income of $470,476 and $112,560 representing mainly the unrealized exchange rate gain mainly
related to the Senior Secured Loan against the primary functional currency (EURO) of the company.
Provision (Benefit) Income taxes
Income tax provision for the six-month period
ended June 30, 2017 was a benefit of $66,495, compared to an income tax provision of $19,107 for the same period in 2016.
Net Loss
Net loss for the six-month period ended June
30, 2017, was $2,635,940, a decrease of $4,501,081 or 63%, compared to the loss of $7,137,021 for the same period in 2016. The
decrease in Net Loss was primarily caused by the restructuring measures, executed in 2016, that significantly lowered cost and
operating expenses.
Other Comprehensive (Loss) Income
We record foreign currency translation gains
and losses as other comprehensive income or loss, which amounted to a loss of $10,651 and a loss of 4,264 for the six-month periods
ended June 30, 2017 and 2016, respectively. This change is primarily attributable to the translation effect resulting from the
fluctuations in the USD/Euro exchange rates.
Liquidity and Capital Resources
As reflected in the accompanying consolidated
financial statements, the Company reported net (loss) of $(2,635,940) for the period ended June 30, 2017 and had an accumulated
deficit of $(289,716,174) as of June 30, 2017.
The cash balance including restricted cash
of the Company at June 30, 2017 was $1,441,602.
Although we have previously been able to attract
financing as needed, such financing may not continue to be available at all, or if available, may not be on reasonable terms. Further,
the terms of such financing may be dilutive to existing shareholders or otherwise on terms not favorable to us or existing shareholders.
During the first six months of 2017, the Company
has been able to improve the shareholders’ deficit to $(3,888,787) as of June 30, 2017 from $(9,364,531) as of December 31,
2017, primarily, as a result of raising capital through the sale of common stock and the restructuring of certain common stock
equivalents. Additional capital could be raised during 2017 to cover working capital deficiencies and help to continue to improve
the shareholders’ deficit.
If we are unable to secure additional financing,
as circumstances require, or if we do not succeed in meeting our sales objectives, we may be required to change or significantly
reduce our operations or ultimately may not be able to continue our operations. As a result of our historical net losses and cash
flow deficits, and net capital deficiency, these conditions could raise substantial doubt as to the Company’s ability to
continue as a going concern.
Operating activities
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,635,940
|
)
|
|
$
|
(7,137,021
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
2,030,359
|
|
|
|
3,360,885
|
|
|
|
|
(1,740,767
|
)
|
|
|
(3,776,136
|
)
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
(205,535
|
)
|
|
|
2,405,333
|
|
Net cash used in operating activities
|
|
$
|
(811,116
|
)
|
|
$
|
(1,370,803
|
)
|
Net cash used in operating activities for the
period ended June 30, 2017 was adjusted for depreciation and amortization (1,716,476)(loss), provision for doubtful accounts (6,378)(loss),
stock based compensation ($1,123,293)(loss), change in fair value of warrant liability ($1,920,881)(gain), amortization of deferred
financing costs ($222,623)(loss), interest relating to debt discount and conversion feature ($1,342,598)(loss) unrealized foreign
currency gains ($470,476)(gain), Debt settled by issuance of shares ($473,692) and a gain on extinguishment of debt ($463,345)(gain)
and furthermore impacted by the increase of accounts payable and customer deposits ($466,013) and the decrease of accounts receivable
($359,013), prepaid expenses, deposits and other assets ($444,262), net billings in excess of revenue and deferred revenue ($412,929)
and accrued expenses and other payables ($1,061,893)
As a result of the above, cash used in operating
activities was $811,116 for the six months ended June 30, 2017 compared to net cash used in operating activities of $1,370,803
for the six months ended June 30, 2016.
Investing activities
Net cash used in investing activities for the
six months ended June 30, 2017 was $332,630 compared to $1,329,611 in the same period in 2016. This change is mainly the result
of the decrease in the purchases of property and equipment of $765,955 and the $450,000 of advance purchase payment on “Assets
held for Sale” during the second quarter of 2016. The cash used in investing activities for the six months ended June 30,
2017 includes capitalized software development costs, property and equipment.
Financing activities
Net cash provided by financing activities for
the six months ended June 30, 2017 and 2016 was $1,385,059 and $2,567,653, respectively, a decrease of $ 1,182,594.
Effect of exchange rates on cash and cash
equivalents
Effect of exchange rates on cash and cash equivalents
for the six-month period ended June 30, 2017 was $294,918, compared to $1,917 for the same period in 2016.
As a result of the above activities, for the
six months ended June 30, 2017 and 2016, we had cash, cash equivalents and restricted cash of $1,441,602 and $484,557, respectively.
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.
Comparison of Years Ended December 31,
2016 and 2015
Revenue
Revenue for the year ended December 31, 2016
was $12,855,811, a decrease of $18,159,642 or 59%, compared to $31,015,453 for the year ended December 31, 2015. This decrease
was mainly the result of the accelerated recognition of deferred revenue caused by the termination of a contract with customer
Iusacell in June 2015 of $11,571,458, decreases in the Company’s other mobile and security business revenue of $6,822,886
offset by a positive EUR vs. USD currency impact of $195,272.
In 2016, total billings were $11,772,475 of
which $11,517,711 was recognized as revenue with the remainder of $254,764 deferred over the remaining contract period in accordance
with ASC 605-25. In addition, $1,338,100 was released from the balance sheet line item Net billings in excess of revenues to revenue
Total revenue for 2016 was therefore 12,855,811.
In 2015, the total billings were $21,262,228
and $19,443,995 was recognized in revenue with the remainder deferred over the remaining contract period in accordance with ASC
605-25.
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.
Cost of service for the twelve-month period
ended December 31, 2016 was $3,658,667, a decrease of $ $2,267,624 or 38%, compared to $5,926,291 for the twelve-month period ended
December 31, 2015. The negative impact of the EUR versus USD exchange rate in 2016 was $102,963.
The decrease in costs of $2,267,624 was related
to a decrease in cost of mobile bundled service business and network of $1,236,915, decrease in cost of service related management
& personnel expenses of $986,771 and a $43,938 reduction of non-cash related expenses.
Product Development
Product Development costs consist primarily
of salaries and related expenses, including share-based expenses, of employees involved in the development of the Company’s
services, which are expensed as incurred. Costs such as database architecture, and Pareteum BOSS &IN platform development and
testing are included in this function.
Costs incurred during the application development
stage of internal-use software projects, such as those used in the Company’s operations, are capitalized in accordance with
the accounting guidance for costs of computer software developed for internal use. Capitalized costs are amortized on a straight-line
basis. When assigning useful lives to internal-use software, the Company considers the effects of obsolescence, competition, technology,
and other economic factors. During the twelve-month period ended December 31, 2016 and 2015, the Company capitalized $990,076 and
$4,142,089, respectively. As a result of the ongoing restructuring measures, that also impacted the development department, the
Company decided to suspend project capitalization during the third and fourth quarter of 2016.
Product development expenses for the twelve
months ended December 31, 2016 and 2015 were $3,543,590 and $4,543,492, a decrease of $999,902 or 22%.
The net effect of the cost reductions in headcount
of $4,101,426 along with the reduction in Non-cash compensation expense of $464,641 was offset by the requirement to expense costs
that had previously been capitalized but whose projects were suspended or eliminated. That charge was $3,566,165. A lower EUR vs.
USD exchange rate in 2016 negatively impacted the result by $49,132.
Sales and Marketing
Sales and Marketing expenses consist primarily
of salaries and related expenses, including share-based expenses, for our sales and marketing staff, including commissions, payments
to partners and marketing programs. Marketing programs consist of advertising, events, corporate communications and brand building.
Sales and Marketing expenses for the twelve
months ended December 31, 2016 and 2015 were $1,340,959 and $2,633,958, respectively, a decrease of $1,292,999 or 49%. Included
is the negative impact of the higher EUR versus USD exchange rate in 2015 of $74,210. The decrease included $568,983 attributable
to decreased staffing, $483,880 attributable to non-cash related compensation expenses and $240,136 resulting from reduced third
party PR and general marketing related expenses.
General and Administrative
General and administrative expenses are our
largest cost and consist primarily of salaries and related 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
twelve months ended December 31, 2016 and 2015 were $11,708,151 and $11,649,914, respectively, an increase of $58,237 being less
than 1%. The negative impact of the EUR versus USD exchange rate in 2016 was $405,230.
General and administrative expenses increased
by $58,237 as a result of increased stock based compensation of $1,328,180, General and Administrative related Management &
Personnel expenses decreased by $130,071. Office rent, office supplies, travel and car expenses, local entity expenses, automation
and communication, audit and accountancy, quality assurance, listing costs and other expenses decreased in total by $1,409,001.
Corporate & local legal advice, investor relations and regulatory expenses increased in total by $525,883. Prior year adjustments,
bad debt allowance, exchange rate expenses and other profit and losses decreased in total by $256,754.
Restructuring charges
Restructuring charges for the twelve months
ended December 31, 2016 and 2015 were $1,638,049 and $1,254,598, an increase of $383,451 or 31%. The Plan was completed in
the third quarter 2016. The Plan which commenced in the fourth quarter of 2015 was designed to align actual expenses and investments
with current revenues as well as introduce new executive management.
Share-based compensation
Share-based compensation is comprised of:
|
·
|
the expensing of the options granted under the 2008 Plan to staff and management;
|
|
·
|
the expensing of the shares issued under the 2006 and 2008 Plans to the directors and executive officers in lieu of cash compensation;
|
|
·
|
the expensing of restricted shares issued for consultancy services.
|
For the years ended December 31, 2016 and 2015,
we recognized share-based compensation expense of $3,897,437 and $3,481,908, respectively, an increase of $415,529 or 12%. In 2016
the Company granted various non-cash awards and incentives in order to make sure that key players and staff kept focused and motivated
to make the reorganization a success, this resulted in a substantial higher share-based compensation for the full year 2016. Contrary
compared to 2016, in 2015 certain executives and managers of the Company elected to participate in a stock in lieu of cash program
in order to preserve cash for the Company, which was the main reason for the increased share based expensing in previous year.
In the following table we show the allocation
of share-based compensation according to functions in the Consolidated Statement of Comprehensive Loss:
|
|
2016
|
|
|
2015
|
|
Cost of service
|
|
$
|
76,113
|
|
|
$
|
120,051
|
|
Product Development
|
|
|
183,072
|
|
|
|
647,713
|
|
Sales and Marketing
|
|
|
157,428
|
|
|
|
641,308
|
|
General and Administrative
|
|
|
3,480,824
|
|
|
|
2,072,836
|
|
Total
|
|
$
|
3,897,437
|
|
|
$
|
3,481,908
|
|
Depreciation and Amortization
Depreciation and amortization expenses for
the year ended December 31, 2016 was $4,246,787, a decrease of $2,377,198 or 36%, compared to $6,623,985 for the same period in
2015. Depreciation and amortization expenses adjusted for exchange rate effect decreased by $2,229,863. This decrease is primarily
the result of the impairment for assets held and used and the termination of the depreciation and amortization of the Assets Held
for Sale.
Impairment for assets held and used
In the Company’s review of the carrying
amounts of its assets it was determined that following the impact of the recent restructuring on the current project list, $367,268
of certain assets classified under Construction in Progress and Intangible assets needed to be impaired. As the result of the termination
of the Verizon contract the Telnicity LLC intangible assets that were acquired in January 2013 are impaired for a total amount
of $139,069. In September 2016, we ceased our Bandung, Indonesia operations. The closing of the local entity resulted in an impairment
loss of $344,648. The total impairment charge, recorded in 2016, is $850,985.
Impairment of goodwill
After the divestment of ValidSoft and renewed
strategy the Company decided to impair the carrying value of goodwill related to ValidSoft. Following the restructuring and rationalization
that commenced in the fourth quarter 2015 the Morodo and Telnicity related projects were cancelled and the related headcount phased
out. As a result the Company decided to fully impair the carrying value of goodwill related to Morodo and Telnicity. Total impact
of the impairment of goodwill was $3,228,930.
Loss on sale of assets
The sale of ValidSoft at the end of the third
quarter for the price of $3.0 million was completed and the Company received $2.0 million in cash and a $1.0 million promissory
note. The $2.0 million in cash was used to pay down part of the senior secured loan. The divestment of ValidSoft resulted in a
net loss of $ 1,542,374. In connection with the sale, the Company wrote off $4,577,908 of assets held for sale as of June 30, 2016.
Interest Income and Expense
Interest income for the twelve-month periods
ended December 31, 2016 and 2015 was $112,169 and $106,028, respectively. Interest income consists of interest received on bank
balances and interest charged to customers for extended payment terms.
Interest expense for the twelve month periods
ended December 31, 2016 and 2015, was $1,228,201 and $1,488,203, respectively, a decrease of $260,002 or 17%. The lower levels
of interest expense were the result of repaying the high interest bearing credit facility and substituting the need for liquidity
with the lower interest bearing 9% convertible notes.
Interest Expense Related to Debt Discount
and Conversion Feature
For the twelve-month periods ended December
31, 2016 and 2015, interest expenses related to debt discount and conversion feature were $6,041,607 and $682,389, respectively,
an increase of $5,359,218 or 785%.
The increase in the twelve-month periods ended
December 31, 2016 compared to 2015 was mainly due to the amendment of the third party credit agreement with higher repayment conditions
and additional warrants resulting in substantially higher charges compared to 2015.
Changes in Fair Value of Derivative liabilities
Change in Fair Value of Conversion Feature
In December 2015 and in the first quarter of
2016, we consummated twelve closings of our private placement offering, the 9% Unsecured Subordinated Convertible Promissory Note
(“the Promissory Note”). The Promissory Note contains elements which require liability accounting for the conversion
feature. We have calculated the fair market value for the conversion feature at issuance and performed a mark to market at each
quarter-end which resulted in a cumulative change in fair value during the twelve month period of 2016, the variance of which amounted
to a loss of $1,485,359 compared to the loss in 2015 of $44,804 were both accounted for through the profit and loss account during
the respective years.
Change in Fair Value of Warrant Liabilities
The mark to market adjustment for the warrant
liabilities can be broken down into the following origins.
The warrants issued as part of the offering
of the 9% Unsecured Convertible Note resulting in a positive variance of $776,771 (gain) compared to a negative variance of $51,153
(loss) in 2015.
Warrants issued to the lender of the Amended
and Restated Credit Agreement by and between the Company and Atalaya Administrative LLC, as the administrative agent and collateral
agent (“Atalaya”), and the lenders party thereto resulting in a negative variance of $2,702,178 (loss) compared to
$0 in 2015 as no position existed yet.
Warrants issued in relation to the “Saffelberg
Note” for investing in a 9% Unsecured Convertible Notes resulting in a negative variance of $8,687 (loss) compared to $0
in 2015 as no position existed yet.
Fair value movements of warrants issued to
fundraise agents resulted in a positive variance of $103,253.
The value of the more complex warrants was
determined by a third-party valuation expert using a Monte-Carlo Simulation model.
Gain/(Loss) on extinguishment of debt
The loss of $541,899 in 2016 is caused by the
$867,338 (loss) as a result of the extinguishment of debt entries relating to the amendment of the credit agreement with Atalaya,
$343,519 (gain) is the result of the conversion of the 9% notes held by various noteholders and $18,080 (loss) as a result of the
repayment in shares of the CRI loan which was paid as an advance for the acquisition of ValidSoft which was finally not effectuated.
The gain of $2,475,799 in 2015 is the result
of the extinguishment of debt related to the Chong Hing Bank debt of our subsidiary Pareteum Ltd. in Hong Kong following the expiration
of the statute of limitations in Hong Kong, as well as the verdict by California courts in 2011 that the Company was not liable
as a successor in interest or otherwise, on the bank loans and overdraft account to Pareteum Ltd. The amounts released from the
balance sheet were $433,480 (overdraft), $962,522 (loan payable) and $1,079,797 (accrued interest).
Other Income and (Expense)
Other income & (expense) for the twelve-month
period ended December 31, 2016 was a loss of $220,927 compared to a loss of $922,894 for the twelve-month period ended December
31, 2015. As to 2016, the majority is caused by the unrealized exchange rate losses related to the exchange rate variances caused
by the Atalaya Credit Agreement which is accounted for in the primary functional currency (EURO) of the company.
Amortization of Deferred Financing Costs
Amortization of debt issuance cost were $1,267,073
for the twelve-month period ended December 31, 2016, an increase of $753,516 or 147%, compared to $513,557 for the twelve-month
period ended December 31, 2015.
Provision (Benefit) Income taxes
Income tax provision for the twelve-month periods
ended December 31, 2016 was an income tax provision of $38,286, compared to an income tax benefit of $17,225 for the same period
in 2015.
Net Loss
Net loss for the twelve months’ period
ended December 31, 2016, was $31,444,704, an increase in loss of $26,438,469 or 528%, compared to the loss of $5,006,235 for the
same period in 2015. This increase was mainly caused by the full release in 2015 of deferred revenue of $11,571,458 related to
the termination of the contract with Iusacell as well as the net loss on sale of assets ($1,542,374), impairment of goodwill ($3,228,930),
impairment for assets held and used of ($850,985), changes in derivative liabilities ($3,316,199) as well as the interest expense
related to debt discount and conversion feature ($6,041,607).
Other Comprehensive (Loss) Income
We record foreign currency translation gains
and losses as part of other comprehensive (loss) income, which amounted to a gain as of December 31, 2016 of $703,073, compared
to a loss of $2,662,843 for the year ended December 31, 2015, an increase of $3,365,916 or 126%. This change is primarily attributable
to the translation effect resulting from the substantial fluctuations in the USD/Euro exchange rates in the reporting period, since
our balance sheets position are largely denominated in Euro and are translated on balance sheet date.
Liquidity and Capital Resources
As reflected in the accompanying consolidated
financial statements, the Company reported net (loss) of $(31,444,704) and $(5,006,235) for the years ended 2016 and 2015, respectively,
and had an accumulated deficit of $(287,080,234) as of December 31, 2016 and ($255,635,531) as of December 31, 2015.
The cash balance of the Company at December
31, 2016 was $ 931,189. Additional capital is required during the fourth quarter 2016 to cover working capital deficiencies. The
incremental loan during the third quarter provided vital liquidity in the short term and the Company is pursuing additional capital.
Although the Company has previously been able
to raise capital as needed, there can be no assurance that additional capital will be available at all, or if available, on reasonable
terms. Further, the terms of such financing may be dilutive to our existing stockholders or otherwise on terms not favorable to
us, or our existing stockholders. If we are unable to secure additional capital or unsuccessful in meeting our cash flow objectives
or the Lender takes steps to call the loan before new capital is attracted, the Company will be materially and negatively impacted,
and we may have to initiate cost reduction measures.
Operating activities
The net cash used in operating activities of
$3,657,831 for the year ended December 31, 2016 compared to net cash provided by operating activities of $8,979,835 in 2015 decreased
by $12,637,666. This increase in 2015 was largely the result of the termination settlement agreement with our customer Iusacell
(decreasing accounts receivable) and our control of expenses and deferred payments to suppliers and vendors (increasing accounts
payable and accrued expenses). The decrease in 2016 was largely the result of the disposition of Validsoft and continuing operating
losses.
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(31,444,704
|
)
|
|
$
|
(5,006,235
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
25,065,690
|
|
|
|
12,400,001
|
|
|
|
|
(6,379,014
|
)
|
|
|
7,393,766
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
2,721,183
|
|
|
|
1,586,069
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(3,657,831
|
)
|
|
$
|
8,979,835
|
|
Investing activities
Net cash provided by investing activities for
year ended December 31, 2016 was $1,036,840 an increase of $8,746,812 or 113%, compared to $7,709,972 net cash used in investing
activities in 2015. This change is the result of the decrease in the capitalization of product development costs totaling $3,152,013,
decrease of lease installments $1,577,381 and less third party capital expenditures of $1,567,418. The proceeds of the sale of
ValidSoft, included in the net cash provided by investing activities for the nine months ended September 30, 2016, was $2,000,000. During
the first quarter of 2016 we received $450,000 of proceeds from the 9% Unsecured Subordinated Convertible Promissory Note and the
of advance purchase payment on “Assets held for Sale.”
Financing activities
Net cash provided by financing activities for
the year ended December 31, 2016 was $3,126,020, compared to net cash used in financing activities of $3,106,697 for the year ended
December 31, 2015. See Notes 14 and 16 of the Financial Statements for more information.
As a result of the above activities, we had
a cash and cash equivalents balance of $931,189 as of December 31, 2016 compared to $369,250 as of December 31, 2015, a net increase
in cash and cash equivalents of $561,939.
Recent Accounting Pronouncements
In May 2014,
the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which contains new accounting
literature relating to how and when a company recognizes revenue. Under ASU 2017-09, a company will recognize revenue when
it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects
to be entitled in exchange for those goods and services. ASU 2014-09 is effective for the Company’s fiscal year
beginning January 1, 2018, which reflects a one year deferral approved by the FASB in July 2015, and will be adopted by the Company
from January 1, 2018.
ASU 2015-14 defers the effective date of ASU
2014-09 by one year for all entities and permits early adoption on a limited basis. For public entities, ASU 2014-09 is effective
for fiscal years beginning after December 15, 2017, with early adoption permitted for fiscal years beginning after December 15,
2016, and is effective for interim periods in the year of adoption. We will adopt ASU 2014-09 on January 1, 2018 and we are evaluating
the application of the modified or full retrospective transition methods on our ongoing financial reporting. As part of our evaluation,
we are reviewing all our present revenue generating contracts. We will review our various revenue streams and their present categorization
to determine the impact of ASU 2014-09 on our revenue recognition. The Company does not anticipate that the ASU will materially
impact the amount and timing of consolidated revenues. However, there could be changes to the presentation of revenues on our
statements of operations and additional disclosures around the nature, amount, timing and uncertainty of our revenues and cash
flows arising from contracts with customers. We continue to actively monitor outstanding issues currently being addressed by the
American Institute of Certified Public Accountants’ Revenue Recognition Working Group and the Financial Accounting Standards
Board’s Transition Resource Group, since conclusions reached by these groups may impact our application of these ASUs.
In February 2016, the FASB issued ASU 2016-2,“Leases
(Topic 842).” This update will increase transparency and comparability by recognizing lease assets and lease liabilities
on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees will
be required to recognize the following for all leases (except for short-term leases) at the commencement date (i) a lease liability,
which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use
asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease
term. Under the new guidance, lessor accounting is largely unchanged, and it simplified the accounting for sale and leaseback transactions.
Lessees will no longer be provided with a source of off-balance sheet financing. Lessees (for capital and operating leases) and
lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases
existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The
modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative
period presented. Lessees and lessors may not apply a full retrospective transition approach. The standard is effective for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently in the process of
assessing what impact this new standard may have on our condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
“Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This
update includes multiple provisions intended to simplify various aspects of the accounting for share-based payment transactions
including accounting for excess tax benefits and tax deficiencies, classification of excess tax benefits in the statement of cash
flows and accounting for award forfeitures. This update is effective for annual and interim reporting periods of public entities
beginning after December 15, 2016, with early adoption permitted. The adoption of this new standard did not have a material
impact on our condensed consolidated financial statements.
In June 2016,
the FASB issued ASU No. 2016-13,
“
Financial Instruments—Credit Losses
(Topic326): Measurement of Credit Losses on Financial Instruments”. This ASU requires instruments measured at amortized
cost to be presented at the net amount expected to be collected. Entities are also required to record allowances for available-for-sale
debt securities rather than reduce the carrying amount. This ASU is effective for fiscal years beginning after December 15,
2019, including interim periods within those fiscal years.
We expect the adoption of this new standard will not have
a material impact on our condensed consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15
(“ASU 2016-15”), “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.”
The standard provides guidance on eight (8) cash flow issues: (1) debt prepayment or debt extinguishment costs; (2) settlement
of zero-coupon bonds; (3) contingent consideration payments after a business combination; (4) proceeds from the settlement of insurance
claims; (5) proceeds from the settlement of corporate-owned life insurance policies; (6) distributions received from equity method
investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application
of the predominance principle. ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in
the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2017 with early adoption permitted. We expect the adoption of this new standard will not have a material impact on
our condensed consolidated financial statements.
In August 2016,
the FASB issued ASU No. 2016-16,
“Income Taxes (Topic 740): Intra-Entity Transfers
of Assets Other Than Inventory.” This ASU requires the recognition of the income tax consequences of an intra-entity
transfer of an asset other than inventory when the transfer occurs. The amendments in this ASU should be applied on a modified
retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.
We
expect the adoption of this new standard will not have a material impact on our condensed consolidated financial statements.
In November 2016, the FASB issued Accounting
Standards Update 2016-18, “Statement of Cashflows – Restricted Cash a consensus of the FASB Emerging Issues Task Force”.
This standard requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of
cash flows under a retrospective transition approach. The guidance will become effective for fiscal years beginning after December
15, 2017 and interim periods within those fiscal years. The Company has adopted ASU 2016-18.
In January 2017,
the FASB issued ASU No. 2017-03,
“Accounting Changes and Error Corrections
(Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323).” This ASU amends the disclosure requirements
for ASU No. 2014-09,
“Revenue from Contracts with Customers (Topic 606),” ASU
No. 2016-02,
“Leases (Topic 842) and ASU No. 2016-13, Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU states
that if a registrant does not know or cannot reasonably estimate the impact that the adoption of the above ASUs is expected to
have on the financial statements, then in addition to making a statement to that effect, the registrant should consider additional
qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard
will have on the financial statements of the registrant when adopted. This ASU was effective upon issuance.
We expect
the adoption of this new standard will not have a material impact on our condensed consolidated financial statements.
In January 2017,
the FASB issued ASU No. 2017-04,
“Intangibles—Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment.” This ASU eliminates Step 2 from the goodwill impairment test. Instead,
an entity should recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair
value, not to exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for annual or any interim
goodwill impairment tests in fiscal years beginning after December 15, 2019.
We expect the adoption of this new
standard will not have a material impact on our condensed consolidated financial statements.
In January 2017,
the FASB issued ASU No. 2017-01,
“Business Combinations (Topic 805): Clarifying
the Definition of a Business.” This ASU clarifies the definition of a business with the objective of adding guidance
to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
This ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods.
We
expect the adoption of this new standard will not have a material impact on our condensed consolidated financial statements.
Management does not believe that any other
recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying
condensed consolidated financial statements.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements.
BUSINESS
Corporate Overview
We believe that every
person, and everything, should be connected, and will be connected if our customers and users wish to be connected.
The way we connect
every person, and everything, is by being
the
company which can connect to all networks in the Cloud, on all layers
of the software development stack (OSI 7-layer model).
We achieve this by
delivering our Mobility, Messaging and Security Cloud Service Platforms which enable:
|
|
Mobile Carriers, MNOs & MVNOs (mobile (virtual) network operators) to enter the Cloud-computing era, with a pay-as-you-grow business; to connect more people, in more creative and value-driven ways.
|
|
|
Enterprises can connect their customers, their employees, their assets and derive more value from them.
|
|
|
IoT (Internet of Things) Devices can connect to each other, and give control, with informational value, to their owners.
|
Pareteum has developed
a Communications Cloud Services Platform, providing (i) Mobility, (ii) Messaging and (iii) Security services and applications,
with a Single-Sign-On, API and software development suite:
Our solution has proven
itself globally against much larger competitors and is installed in multiple companies in diverse countries around the world ranging
from small service providers to one of the world’s largest telecoms companies, Vodafone, based in Europe. We had more than
1,100,000 active subscribers on our platforms as of December 31, 2016.
The market and our
customers tell us that they need to find ways to reduce cost, they want to find ways to increase their revenues, and they want
to scale and grow their business, and all consider Cloud capabilities as a vital means to achieve these goals. As we’ve listened
to our customers and understood the business goals that they have, we believe Pareteum is well placed to help them achieve these
goals, drive value for customers, and ultimately value for our own business.
We have designed a
solution that solves these problems. Each of these three platforms - mobility, messaging and security - can be marketed
and deployed independently, or they can be delivered as a single, integrated Cloud Service Platform, as illustrated in the figure
above.
The Pareteum platform
hosts integrated IT/Back Office and Core Network functionality for mobile network operators, and for enterprises implement and
leverage mobile communications solutions on a fully outsourced SaaS (Software as a Service), PaaS (Platform as a Service) and/or
IaaS (Infrastructure as a Service) 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 OSS for channel partners, with APIs for integration with third
party systems, workflows for complex application orchestration, customer support with branded portals and plug-ins for a multitude
of other applications. These features facilitate and improve the ability of our channel partners to provide support and to drive
sales.
Our integrated (or
modular) Cloud Platform solution includes, more specifically, functionality such as service design and control, Intelligent Networking,
subscriber provisioning, messaging, switching, real-time dynamic rating and pre- or post-paid charging and billing, call center
and customer care support, reporting, self-care web portal environments, change management in active systems, SIM Management, (Data)
Session Control Management, Voucher Management, Mobile Marketing systems, (Mobile) Payment Systems, Real Time Credit Checking Systems,
Interactive Voice Response Systems, Voicemail Systems, Trouble Ticketing Systems, Device Management Systems, Mass Customer Migrations,
life cycle management, database hardware and software, large scale real-time processing, and integrating, provisioning, all the
while managing and maintaining specific core network components.
We made significant
changes to the business in 2016 during a 3-phase restructuring, which saw headcount reduced from 253 at the end of 2015, to 62
at the start of 2017. In addition, end-2015/early-2016 saw significant changes to the Company’s management. In terms of product
development, the Company also evolved its managed-services technology offering, into a complementary scalable, rapidly deployable,
Communications Cloud Services Platform.
Pareteum’s target
communications markets consist of:
|
|
Retail mobile network operators
(MNOs), or carriers, who own their own networks (such as existing customers Vodafone and ZAIN etc.).
|
|
|
Mobile Virtual Network Operators
(MVNOs) who are marketing companies that own subscribers but don’t own their own networks.
|
|
|
Enterprises
who are increasingly large businesses of any kind that understand that they can derive value and achieve success by taking control of and harnessing communications (in the broadest sense) whether for employee or customer management, inventory management or other value-added services.
|
|
|
Over the Top
application providers (OTT) such as Skype, WhatsApp, etc., who ride over the networks of the retail mobile carriers.
|
|
|
Internet of Things
(IoT) markets, made up of wireless devices communicating wherever they are in the world.
|
Pareteum is a provider
of mobile networking software and services to all of these markets. Pareteum’s Managed Service Platform (MSP) provides a
platform for SIM connectivity, Voice, SMS Messaging and Roaming solutions that MNOs and other large service providers can offer
their MVNOs. The Global Cloud Mobility Platform (GCMP) provides a complete turnkey (outsourced) solution for similar services to
a wide array of service providers, enterprises and marketing channels. Lastly, Pareteum has recently introduced its Exchange Platform
and Service Bureau, which can be offered to thousands of smaller service providers, application developers and Internet of Things
solutions integrators.
The MVNO market has
grown in excess of 20% annually and with demand from application and IoT developers is expected to continue to grow 20% for the
foreseeable future. The MVNO market is estimated to be worth $89.25 billion by 2022, according to new research published by Global
Market Insights, Inc.
HP Enterprise estimates
that by 2020, some 30 billion IoT devices will be connected. This provides a substantial opportunity for businesses that are able
to address customer issues in this space. Just how integral the IoT will be is further reinforced by Gartner, who estimate
that “By 2020 more than half of major new business processes and systems will incorporate some element of the Internet of
Things”.
According to the GSMA,
data growth is driving revenues as operations and investments rise from $1.14 trillion in 2014 to $1.4 trillion by 2020. This reflects
the rapid scaling of the communication service provider industry with a total of 3.6 billion unique mobile subscribers at the end
of 2014, with an additional one billion subscribers predicted by 2020. Fueled by the growing range of new services and applications,
data traffic is expected to see an almost ten-fold increase by 2019. The figure below illustrates the three (3) combined addressable
markets for the company:
Market share
:
The current MVNO market exceeds $40 billion. We estimate the MVNE market currently is 10% or $4 billion. At $12 million annualized
revenue, Pareteum’s market share is less than 1%. We believe our directly addressable market in the next 3 years exceeds
$300 million as illustrated in the figure below:
Speed and nature
of technological change
: Cloud technologies and feature functionality demanded by MNOs, MVNOs, enterprises and developers are
continuously changing. Importantly, Pareteum offers MNOs the ability to meet the changing market needs more rapidly than in-house
solutions which are typically tied to vertical vendor solutions.
Timing of new products,
product enhancements
: Pareteum’s contract with Vodafone is one of constant feature development and upgrades. The company
rolled out its Exchange Platform & Service Bureau model in mere months. Future product enhancements in 2017 include:
|
|
Ecommerce engine
|
|
|
WebRTC client and API
|
|
|
Session Border Controller
|
|
|
M2M IoT solutions
|
|
|
Mobile Payments
|
|
e.
|
Existing Customers & Partners
|
Pareteum has two major
mobile network/carrier customers, Vodafone and ZAIN, which together generate in excess of 88% of revenues. In addition, our Platforms
host mobile communication brands Lebara, SpeakUp and Lowi.es among others.
Pareteum also understands
the importance of partnerships, and we are proud to have strong relationships with Cisco, Oracle, KPN, T-Mobile, Plusserver, Affirmed
Networks, Itconic, HP Enterprises, Sonus among others.
Sales have historically
been a highly technical function, but we are changing this. In the past there has been one dedicated sales person assigned to Zain
and two technical bid managers focused on Vodafone. Under new strategic sales leadership, Pareteum is deploying a sophisticated
sales, marketing and account management force around the world.
For sales and marketing
purposes, four core territories have been established:
|
|
North America
|
|
|
EMEA
|
|
|
LATAM and Caribbean
|
|
|
APAC
|
Our current Global
Sales Engineering resource will grow to manage individual Sales Engineers in each region. One Connectivity Specialist will focus
on the supply chain requirements, procurement of network for the Exchange Platform & Service Bureau as well as negotiate better
rates and reduce operational expense and technology cost. Prospective positions and some hires have been identified or engaged
already to cover the above territories, which will focus on direct sales and channel sales and will build teams below them.
With the recent addition
of a new sales staff and a modern marketing approach and through the use of salesforce.com and various industry resources, conferences,
webinars and trade shows Pareteum has begun to touch significantly more qualified opportunities than before.
Sales Cycles
:
There
are three (3) types of sales. The Managed Service Platform (MSP) offering is a software and solution sale and typically has a 6-month
sales cycle. The Global Cloud Mobility Platform (GCMP) solution is closer to a 3-month sales cycle. Our Exchange Platform &
Service Bureau (EPSB) model, where we are bringing carrier service providers together with our software or other partners, will
have varying degrees between the first two scenarios but could also be less than one month.
|
g.
|
Growth Strategy: 2017 and beyond
|
Pareteum intends to
grow through the continued recruitment of key sales executives and their deployment to major territories including North America,
Latin America, Europe, Middle East & Africa as well as the Asia-Pacific region.
There will be additional
business rationalization such as additional closure of redundant foreign subsidiaries, and further consolidation of corporate and
finance HQ roles into the USA. Pareteum will also be expanding its product set and broadening the types of customers served in
2017.
The first aspect of
growth is to leverage its current customer relationships into new geographic markets and market segments. Pareteum also expects
to respond to a number large-scale Managed Service Platform (MVNE) RFPs in 2017. The second aspect of growth is to expand the Global
Mobility Cloud to enable any type of service provider and large enterprises to mobilize their customer or employee base. This market
will require greater integration with traditional wireline and communication services.
The third area of
growth is the expansion of the exchange platform and service bureau enabling a wide array of specialized and Internet of Things
connectivity solutions across wired and wireless applications and services. This plug and play model will also require acquisition
of assets and expertise as well as partnership agreements already in place or currently being negotiated.
Pareteum is positioned as a cloud-based platform
provider, delivering scalable, on-demand, SaaS and PaaS services, as well as managed services, integration, and cloud communications
infrastructure.
Pareteum has three (3) distinct types of competitors,
including (i) large network infrastructure vendors, (ii) software solution providers and integrators and (iii) small managed service
SaaS/PaaS providers.
Competition in our
multiple markets is based on price, breadth of offering and demonstrated performance. Both the recent restructuring and resilience
of operations for Vodafone in the face of that restructuring position the company well on all fronts. Effective direct sales and
channel relationships are also extremely important, and these are being significantly strengthened as major priorities in the Company’s
growth plans.
We may need to accelerate the roll-out of our
solutions to meet market demand. Telecommunications platforms and services will become more commoditized over the next five to
ten years.
The more we can offer a comprehensive one stop
shop solution for providing cloud-based communications, the more sustainable our advantages will be against multiple-point solutions
and the additional integration and operational complexities they represent. As depth and breadth of solutions are important in
addressing the one-stop-shop needs of our customers, a whole range of services should be kept under one roof. Pareteum may need
to further invest in such services in the future, either with additional in-house development or through mergers and/or acquisitions.
As of October 13, 2017, we employed 63
full time equivalent employees.
Each of our employees and independent contractors
is bound by confidentiality and non-competition obligations. Our Spanish employees are represented by a work council and subject
to a certain type of collective bargaining agreement. We have not experienced any unilateral work stoppages and consider our relations
with our current employees to be good.
Having completed a major restructure in 2016,
which saw headcount reduced from 253 on December 31, 2015, to 62 on December 31, 2016, which process included voluntary and involuntary
lay-offs, including the complete cessation of operations in Indonesia and China, the Company may face further labor-law claims
or similar severance or restructuring costs.
Our intellectual property (“IP”)
is protected by a combination of patent, trademark, copyright and trade secret laws in the United States and other jurisdictions.
We have two patents, granted in 2016 (in the
UK and Hong Kong), for an important function of our mobile platform, concerning the migration of subscriber populations from one
network operator to another, without requiring a physical SIM card swap. As more and more network operators converge and merge,
and as other enterprises start to use and deploy communications services, this technical invention is likely to offer an important
commercial advantage and provide a competitive differentiation.
The majority of our IP subsists in our proprietary
software, and Pareteum is the copyright holder of almost all key components in our software solutions. One exception to this is
the ValidSoft technology suite. However, following our divestment of the ValidSoft business on September 30, 2016, we retained
a worldwide royalty-free perpetual license to use, sell and integrate ValidSoft’s security and voice biometrics platforms
with our own communications platform.
Pareteum also owns a number of trademarks in
the United States and elsewhere.
Although we take reasonable measures to safeguard
our IP, through appropriate licenses and other contractual protections, unauthorized parties may attempt to misappropriate our
technology which could harm our business or damage our competitive position. Moreover, companies in our communications industries
may own significant portfolios of IP rights and could threaten litigation. We are currently subject to, and expect to face in the
future, allegations that we have infringed the intellectual property rights of third parties, including our competitors and non-practicing
entities. At present, none of these allegations are material.
We and our customers operate in a heavily regulated
industry. As a multinational telecommunications company and provider of services to carriers and operators, we are directly and
indirectly subject to varying degrees of regulation in each of the jurisdictions in which we provide our services. Local laws and
regulations, and the interpretation of such laws and regulations, differ significantly among the jurisdictions in which we operate.
Enforcement and interpretations of these laws and regulations can be unpredictable and are often subject to the informal views
of government officials. Certain European, foreign, federal, and state regulations and local franchise requirements have been,
are currently, and may in the future be, the subject of judicial proceedings, legislative hearings and administrative proposals.
Such proceedings may relate to, among other things, the rates we may charge for our local, network access and other services, the
manner in which the Company offers and bundle our services, the terms and conditions of interconnection, unbundled network elements
and resale rates, and could change the manner in which telecommunications companies operate. We cannot predict the outcome of these
proceedings or the impact they will have on our business, our revenue and our cash flow. Because global regulations change and
evolve at a fast pace, it is possible that we may not have been, or may not be, compliant with each applicable regulation or law
at all times.
Elephant Talk Communications, Inc. (“ETCI”)
was originally formed in 2001 as a result of a merger between Staruni Corporation (USA, 1962) and Elephant Talk Limited (Hong Kong,
1994). In January 2007, through our acquisition of Benoit Telecom (Switzerland), we established a foothold in the European telecommunications
market.
In March 2010, ETCI acquired the ValidSoft
security and authentication business to complement its mobile telecommunications managed services solutions.
In September 2011, ETCI merged into Elephant
Talk Communications Corporation (“ETCC”), a Delaware Corporation (the “Reincorporation”). The Reincorporation was
approved by the stockholders at the annual shareholder meeting on September 14, 2011. As a result of the Reincorporation, the
Company became a Delaware Corporation. ETCI ceased its corporate existence and ETCC became the surviving Corporation and continued
to operate the business of the Company as it existed prior to the Reincorporation.
In December 2011, we upgraded from our OTCBB
listing to the NYSE MKT LLC (the “Exchange” or “NYSE”) and our stock began trading under the ticker symbol
“ETAK”.
In April 2013, the Company acquired most of
the contractual assets of Telnicity LLC, a US-based MVNE/MVNO company headquartered in Oklahoma City, Oklahoma, and formed Elephant
Talk North America Corporation. The Telnicity acquisition sought to provide the Company with an in-market management team with
a view to leveraging existing relationships with certain major U.S. telecommunications companies.
On November 17, 2015, the Company announced
the appointment of Robert H. Turner as Executive Chairman.
On September
30, 2016, Pareteum divested of the ValidSoft business, while retaining favorable perpetual, royalty-free, license rights to continue
to exploit ValidSoft’s technology.
Following
approval at the 2016 annual shareholder meeting, on November 1, 2016, ETCC was renamed to Pareteum Corporation and on November
3, 2016, started trading on the Exchange under ticker symbol “TEUM”.
On November
1, 2016, the Company also announced the appointment of a new Chief Executive Officer, Victor Bozzo, to work alongside Mr. Turner.
Strategic Alliance Agreement
On October 16, 2017, the Company entered
into a Strategic Alliance Agreement (the “
Strategic Alliance Agreement
”) with Artilium plc a public limited
company incorporated
under the laws of England and Wales
(“Artilium”)
for the mutual pursuit of joint commercial opportunities. Pursuant to the Strategic Alliance Agreement, the parties may enter
into a contract to provide their technological solutions (the “
Solutions
”) to a customer (the “
Project
Agreement
”). The Project Agreement shall stipulate, among other things: (i) which Party will take the lead in preparing
and submitting any appropriate proposal, RFP and/or tender documentation; (ii) which Party will be the prime or principal contractor
and which Party will take a joint or sub-contracting responsibility; (iii) which Party is responsible for which aspects of which
of the Solutions or Project (in accordance with an Opportunity Registration Form, which is included as an Appendix to the Project
Agreement); (iv) commercial and financial provisions (in accordance with the Commercial Framework and the Opportunity Registration
Form, which are included as Appendices to the Project Agreement); (v) the standard terms and conditions of supply of Solutions
to the customer; as well as, if applicable (vi) a price list of Solutions and other terms and conditions governing the same.
Pursuant to the Project Agreement, the
parties shall submit a proposal in response to a customer’s Tender (the “
Proposal
”), which will define
the parties’ respective rights and obligations during the submission of the Proposal to the customer. If the parties receive
the contract award from such customer, the parties would be responsible for the Solutions in accordance with the Project Agreement
and the Strategic Alliance Agreement.
In conjunction with the Strategic
Alliance Agreement, on October 16, 2017, the Company entered into a Share Exchange Agreement (the “
Exchange
Agreement
”) with ARTA. Pursuant to the Exchange Agreement, ARTA agreed to issue and deliver to the Company an
aggregate of 27,695,177 of its newly issued ordinary shares (the “
ARTA Shares
”), in exchange for 3,200,332
restricted shares of the Company’s common stock, par value $0.0001. The ARTA Shares issued to the Company will, upon
issuance, constitute approximately 8% of ARTA’s issued and outstanding capital stock.
The closing of the transactions contemplated
under the Exchange Agreement is subject to certain closing conditions, including the accuracy, in all material respects, when
made and at the time of closing, of the representations and warranties of the parties contained in the Exchange Agreement.
Atalaya Debt Restructuring
On March 6, 2017, Elephant Talk Europe Holding
B.V., an entity organized under the laws of the Netherlands (the “Borrower”), a wholly owned subsidiary of the Company,
as Borrower, the Company, Pareteum North America Corp., a Delaware corporation, Corbin Mezzanine Fund I, L.P. (“Lender”)
and Atalaya Administrative LLC, a New York limited liability company, as administrative agent and collateral agent for the Lender,
entered into an agreement to amend certain terms of the credit agreement among the parties, dated November 17, 2014, as has been
amended from time to time (as so amended, the “Amended and Restated Agreement”). On March 31, 2017, the relevant parties
entered into the formal amendment to the Amended and Restated Agreement (the “Amendment”). Capitalized terms used herein
but not otherwise defined shall have the meaning as set forth in the Amended and Restated Credit Agreement.
Pursuant to the Amendment, (i) the Maturity
Date was extended to December 31, 2018; (ii) the amortization schedule was amended as follows: Q1-2017: $1,500,000; Q2-2017: $1,500,000;
Q3-2017: $500,000; Q4-2017: $500,000; Q1-2018: $750,000; Q2-2018: $750,000; Q3-2018: $750,000; and (iii) inserting a new definition
of “2017 Equity Offering.” Additionally, the two warrants previously issued to the Lender (the “Corbin Warrant”)
and ACM Carry-I LLC (the “ACM Warrant” and, together with the Corbin Warrant, the “Warrants”) were amended
and treated as a modification to (a) increase the aggregate amount of shares of common stock underlying the Corbin Warrant to 1,229,100
and increase the aggregate amount of shares of common stock underlying the ACM Warrant to 216,900; (b) adjust the exercise price
of the Warrants to $1.305 per share; and (c) remove the anti-dilution sections (Sections 9(d) and 9(h)) of the Warrants.
On May 2, 2017, Elephant Talk Europe Holding
B.V., an entity organized under the laws of the Netherlands, a wholly owned subsidiary of the Company, as Borrower, the Company,
Pareteum North America Corp., a Delaware corporation, Corbin Mezzanine Fund I, L.P. and Atalaya Administrative LLC (“Atalaya”),
a New York limited liability company, as administrative agent and collateral agent for the Lender, executed a term sheet o amend
certain terms of that credit agreement among the parties, as amended via the Amended & Restated Credit Agreement dated December
27, 2016, and further amended on March 6, 2017.
On August 9, 2017, the parties entered the
Second Amendment (“Second Amendment”), among other items, to reduce the quarterly principal amortization payment amounts
and confirmed the maturity date of December 31, 2018. Further, the parties agreed on a revised repayment schedule, which reduces
the principal repayments to $250,000 for the second and third quarters of 2017 and $500,000 for the fourth quarter of 2017. The
quarterly principal repayments for 2018 have also been materially reduced from $750,000 per quarter to $500,000 per quarter with
a final payment due by December 31, 2018. The parties also agreed that the two warrants previously issued under prior amendments
will be revised to adjust the exercise price of $0.64. The Company also agreed to issue new warrants with a strike price of $0.64
for consideration received from the Lender and Atalya in the amounts of 793,900 and 140,100, respectively.
Reverse Stock Split
We received a deficiency letter from the NYSE
MKT on December 6, 2016, indicating that our securities had been selling for a low price per share for a substantial period of
time and, pursuant to Section 1003(f)(v) of the NYSE MKT Company Guide (the “Company Guide”), our continued listing
on the NYSE MKT was predicated on our effecting a reverse split or otherwise demonstrating sustained price improvement. This notice
was in addition to a prior notice we received from NYSE MKT on May 26, 2016, as previously disclosed on a Current Report on Form
8-K we filed on June 2, 2016. The NYSE MKT indicated that we had an additional six months, or until June 6, 2017, to gain compliance
with Section 1003(f)(v) of the Company Guide.
On February 27, 2017, we completed a 1-for-25
reverse split of our issued and outstanding common stock. Although we believe we have regained compliance with Section 1003(f)(v)
of the Company Guide, there can be no assurance that our common stock will continue to satisfy this rule.
Conversion of Convertible Preferred Stock
The Company’s Certificate of Incorporation
authorizes the issuance of 50,000,000 shares of Preferred Stock, $0.00001 par value per share. 58 shares of Preferred Stock are
issued and outstanding as of June 30, 2017 compared to 249 shares of Preferred Stock outstanding as of December 31, 2016, a decrease
of 191 shares. Under the Company’s Certificate of Incorporation, the Board of Directors has the power, without further action
by the holders of the Common Stock, subject to the rules of the NYSE MKT LLC, to designate the relative rights and preferences
of the Preferred Stock, and issue the Preferred Stock in such one or more series as designated by the Board of Directors. The designation
of rights and preferences could include preferences as to liquidation, redemption and conversion rights, voting rights, dividends
or other preferences, any of which may be dilutive of the interest of the holders of the Common Stock or the Preferred Stock of
any other series. The issuance of Preferred Stock may have the effect of delaying or preventing a change in control of the Company
without further stockholder action and may adversely affect the rights and powers, including voting rights, of the holders of Common
Stock. In certain circumstances, the issuance of Preferred Stock could depress the market price of the Common Stock.
On March 7, 2017, the Company received conversion
notices from holders of an aggregate of $1,910,000, or 191 shares of the Company’s Series A Preferred Stock and Series A-1
Preferred Stock. The Series A Preferred Stock and Series A-1 Preferred Stock converted into shares of common stock of the Company
at a 13% discount to a public offering and became effective upon the filing by the Company of a prospectus supplement disclosing
the terms of an offering. The closing of the public offering took place March 15, 2017 and the public offering price was set at
$1.50, therefore the discounted conversion price for the preferred shareholders was calculated at $1.305. The number of shares
of common stock issued was approximately 1,463,601.
Conversion on Unsecured Convertible Promissory
Note and Modification of Derivative Securities
On March 30, 2017, the Company entered into
an agreement (the “Saffelberg Agreement”) with Saffelberg Investments NV (the “Holder”) pursuant to which
the Company and the Holder amended the terms of, redeemed or effected conversion, as the case may be, of certain convertible promissory
notes (the “Saffelberg Note(s)”) and warrants (the “Saffelberg Warrant(s)”) previously issued by the Company
to the Holder.
Pursuant to the Saffelberg Agreement, the Company
and the Holder agreed to modify certain terms of the Saffelberg Notes whereby (i) the principal amount of one Saffelberg Note,
in the initial amount of $723,900, will be increased by ten percent (10%) and subsequently converted into 530,860 shares of common
stock of the Company and (ii) the Company will immediately repay in cash another Saffelberg Note in the principal amount of $350,000,
plus interest of $59,304.
On
September 7, 2017, having not yet made full payment, the Company and Holder agreed to a repayment plan for the payment of the Saffelberg
Note in the principal amount of $350,000. The Company shall pay an initial payment of $75,000 and then shall make all monthly payments
starting October 2017 (payable latest by the 15th day of each month) of $20,000 per month until the full $350,000 plus all accrued
and un-accrued interest is repaid, to Holder.
Joseph Gunnar & Co., LLC - Public Offering
On March 10, 2017, the Company entered into
an underwriting agreement (the “Underwriting Agreement”) with Joseph Gunnar & Co., LLC (the “Underwriter”),
relating to the issuance and sale of 2,333,334 shares of the Company’s common stock, par value $0.00001 per share, at a price
to the public of $1.50 per share together with five-year warrants to purchase an aggregate of 1,166,667 shares of Common Stock
at an exercise price of $1.87. The Underwriter agreed to purchase the shares from the Company pursuant to the Underwriting Agreement
at a price of $1.3949 per share. The gross proceeds to the Company from the offering were expected to be approximately $3.5 million,
before deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. Upon execution,
the final proceeds were $3,150,171. The offering closed on March 15, 2017. In addition, under the terms of the Underwriting Agreement,
the Company had granted the Underwriter a 45-day option to purchase up to (i) up to 350,000 additional shares of Common Stock (the
“Option Shares”) at a purchase price of $1.3949 per one Option Share, taking into account the Underwriter’s discount,
and/or (ii) warrants to purchase up to 175,000 additional shares of Common Stock (the “Option Warrants”), that option
expired at the end of 45 days. The Underwriter partially exercised their over-allotment option on 109,133 Option Warrants. No Option
Shares were exercised.
Extension Granted for Compliance with the
NYSE Listing Requirements
On July 13, 2017, the Company received a notice
from the Exchange indicating that the Company is not currently in compliance with the Exchange’s continued listing standards
as set forth in Section 1003(a)(i), Section 1003(a)(ii), Section 1003(a)(iii), and Section 1003(a)(iv) of the Company Guide. The
Company is now in compliance with Section 1003(f)(v). The Exchange has reviewed the Company’s most recent updates and determined
to extend the plan period for the Company to regain compliance with Section 1003(a)(iv) through November 27, 2017. The compliance
date for Section 1003(a)(i), Section 1003(a)(ii), and Section 1003(a)(iii) remain November 27, 2017, as was previously stated in
the Exchange’s notice dated January 5, 2017 and disclosed on a Current Report on Form 8-K filed by the Company on January
9, 2017.
If the Company is not in compliance with the
continued listing standards of the Company Guide by November 27, 2017, or if the Company does not make progress consistent with
the plan during the plan period, the Exchange will initiate delisting proceedings as appropriate. The Company may appeal a staff
delisting determination in accordance with Section 1010 and Part 12 of the Company Guide.
New Director Appointment
Effective July 25, 2017, the Company appointed
Laura Thomas as an independent director.
Joseph Gunnar & Co., LLC
-
Warrant
Exercise
On July 17, 2017, the Company entered into
Warrant Exercise Agreements (the “Exercise Agreements”) with certain holders (the “Exercising Holders”)
of outstanding warrants to purchase up to an aggregate of 1,150,000 shares of common stock of the Company at $1.87 per share (the
“Original Warrants”) whereby the Exercising Holders and the Company agreed that the Exercising Holders would, exercise
their Original Warrants at a reduced exercise price of $1.00 per share. The Company expects to receive aggregate gross proceeds
before expenses of approximately $1.15 million from the exercise of the Original Warrants by the Exercising Holders.
In consideration for the Exercising Holders
exercising their Original Warrants, the Company will issue to each Exercising Holder a new warrant (each, a “New Warrant”)
to purchase shares of the Company’s common stock equal to the number of shares of common stock received by such Exercising
Holder upon the cash exercise of such Exercising Holder’s Original Warrants. The terms of the New Warrants will be substantially
similar to the terms of the Original Warrants, except that the New Warrants will (i) have an exercise price equal to $1.39 per
share and (ii) be exercisable six months from first issuance of the New Warrants, for a period of five years.
The issuance of the New Warrants was not
registered under the Securities Act of 1933, or any state securities laws. The New Warrants were issued in reliance on the
exemption from registration provided by Section 4(a)(2) under the Securities Act and/or Regulation D promulgated thereunder.
Each Exercising Holder represented that it is an accredited investor, as defined in Rule 501 of Regulation D promulgated
under the Securities Act.
In connection with the Exercise Agreements,
the Company engaged Joseph Gunnar & Co., LLC to act as the Company’s placement agent. The Company agreed to pay Joseph Gunnar
& Co., LLC a cash fee equal to seven percent (7%) of the sum of the gross proceeds received by the Company from the exercise
of the Original Warrants.
New Employee Stock Option Plan
On June 8, 2017, the Board adopted the 2017
Pareteum Corp. Long-Term Incentive Compensation Plan (the “2017 Plan”), an omnibus equity incentive plan pursuant to
which the Company may grant equity and equity-linked awards to officers, directors, consultants and others. The Board adopted the
2017 Plan as a means to offer incentives and attract, motivate and retain and reward persons eligible to participate in the 2017
Plan. Accordingly, the Board unanimously approved and adopted the 2017 Plan, including authorization of the issuance of 6,500,000
shares of the Company’s common stock. The 2017 Plan obtained shareholder approval on September 12, 2017. On June 14, 2017,
the Company filed with the Securities and Exchange Commission a Registration Statement on Form S-8, registering 3,500,000 shares
under the 2017 Plan.
Corporate Information
Our principal executive offices are located
at 1185 Avenue of the Americas, 37
th
Floor, New York City, NY 10036. Our telephone number is (646) 810-2182. Our corporate
website is
http://www.pareteum.com
. The information on our website is not a part of, or incorporated in, this prospectus.
Properties
We do not own any properties, but lease office
space in the various countries for our shared service centers and lease data center locations for housing our equipment, applications
and network interconnections to our customers and telecommunication network providers.
Our main office is located at 1185 Avenue
of the Americas, 37
th
Floor, New York, NY. The Company rents this space at a monthly rent of $4,000. Our office in
The Netherlands is located at Wattstraat 52, 2171 TR, Sassenheim, wherefore the contract is automatically
renewed every month. The quarterly fee for this contract is $4,530. In Spain we currently rent office space at Paratge
Bujonis, 17220 Sant Feliu de Guixols, (Girona) Spain, at a monthly rent of $2,804. This contract is valid till April 2017. In
addition, the Company rents office space at Av. Dr. Severo Ochoa 36, 28100 Alcobendas, (Madrid) Spain for $1,618 per month, valid
till February 2018. The Company rents office space in Lehmedeh, Bahrain for $1,008 per month. The contract is valid till
December 2017.
We also rent space for our telecom switches,
servers and IT platforms at data centers (“co-locations”) at an aggregate monthly rent of $17,480. The various co-location
spaces include: Amsterdam, Madrid, Barcelona, and other locations where our telecommunications equipment is located.
We believe the facilities currently under rent
are adequate for our present activities and those additional facilities are available on competitive market terms to provide for
such future expansion of our operations as may be warranted.
Legal Proceedings
telSPACE -vs- Elephant Talk et al.,
AAA
Case No. 01-16-0003-8242
.
Claimant commenced this AAA arbitration on
or about September 7, 2016 by the filing of a statement of claim. Claimant asserted claims arising out of Software Licensing Agreements
(“Licensing Agreements”) entered into by Claimant and mCash Holdings LLC (together, “Licensors”), on the
one hand, and Telnicity LLC, on the other, which Telnicity subsequently assigned to the Company. Pursuant to the Licensing
Agreements, the Company obtained the license to use certain intellectual property in exchange for monthly payments to the Licensors.
Claimant alleged that the Company failed to make monthly payments from on or about November 2015, causing the Licensors to terminate
the Licensing Agreements, and continued using Licensors’ intellectual property after such termination. Based on these
allegations, Claimant asserted claims for breach of contract, misappropriation of trade secret, and copyright infringement. Claimant
seeks unspecified damages, specific performance, prejudgment interest, attorneys’ fees, and costs.
On October 31, 2016, the Company filed a
statement of answer denying Claimant’s claims. On January 5, 2017, the arbitration panel scheduled the hearing
for April 13, 2017. The Parties have conducted limited discovery, which concluded on February 28, 2017. On March
10, 2017, Claimant requested leave to move for a default judgment against the Company for failing to advance the AAA
administrative fees, and for sanctions based on alleged spoliation of evidence. On March 15, 2017, the Arbitration
Chair denied Claimant’s request for leave to move for default, and granted Claimant’s request for leave to move
for sanctions. The Arbitration commenced in Seattle, WA, on April 13, 2017.
On June 7, 2017, the Arbitration Panel issued an award in favor
of Claimant in the aggregate amount of $510,916.18, inclusive of forum and tribunal fees (“Award”). On August 3, 2017,
the parties executed a forbearance agreement pursuant to which Claimant would forebear from commencing any confirmation or enforcement
proceedings under the Award in exchange for the Company’s monthly installment payments on the Award.
MANAGEMENT
Officers and Directors
Set forth below are the Company’s
Directors and key Executive Officers as of October 13, 2017, together with an overview of their professional experience and expertise.
Name
|
|
Age
|
|
Position(s) Held
|
|
Director
Since
|
Robert H. Turner
|
|
67
|
|
Executive Chairman of the Board
|
|
2015
|
Yves van Sante (1) (2) (3)
|
|
55
|
|
Director
|
|
2014
|
Luis Jimenez-Tuñon (1) (2) (3)
|
|
37
|
|
Director
|
|
2017
|
Laura Thomas (1) (2) (3)
|
|
61
|
|
Director
|
|
2017
|
Victor Bozzo
|
|
49
|
|
Chief Executive Officer
|
|
N/A
|
Edward O’Donnell
|
|
51
|
|
Chief Financial Officer
|
|
N/A
|
Alexander Korff (4)
|
|
34
|
|
General Counsel, Secretary & Compliance Officer
|
|
N/A
|
|
(1)
|
Currently a member of the
Audit and Finance Committee.
|
|
(2)
|
Currently a member of the
Nominating and Corporate Governance Committee.
|
|
(3)
|
Currently a member of the
Compensation Committee.
|
Robert H. Turner
was appointed
Executive Chairman of the Board on November 16, 2015. Mr. Turner has 40 years’ experience, cultivating and growing “all
stage” global software, telecom and tech companies. He emphasizes strategy, sales, organizational leadership, and fundamental
financial results and leads with a culture that passionately serves the needs of valued constituents, while sustaining growth.
Mr. Turner launched his career at AT&T, where he rose to serve at the highest ranks in a broad spectrum of international, start-up,
and corporate firms, including (selected highlights): NeoNova Network Services, Inc.; Pac West; Telecom, Inc.; Panterra Networks;
PTT Telecom Netherlands, US Inc. (now KPN); and BellSouth Communications, Inc. (now AT&T). Mr. Turner is also an advisory board
member of The Capital Angels, affiliated with SC Angel Network. Mr. Turner earned a Bachelor of Science degree and a Master of
Business Administration from the University of South Carolina, where he was presented with a Distinguished Alumni award in 2010.
Mr. Turner is Guest Lecturer in the Darla Moore School of Business Professional MBA program
Yves van Sante
has been a director
since June 1, 2014. From July 2011 to May 2014, Mr. van Sante was a board observer for our Company, following his service on our
Board of Directors from October 2006 to July 2011. Mr van Sante (1960) studied Marketing, Communication and Commercial Management.
He started his career in 1982 as an advisor at United Brokers and became sales manager for Brinkers International, the market leader
in refining oil for the food industry, a year later. From 1987 until 1993 he served as Sales and Marketing manager Central Europe
at 3C Communications in Luxemburg, where he launched Credit Card Telephony across Europe. Following this position, he became a
business unit manager Public Telephony at Belgacom, the Belgium incumbent, where he managed a department of 650 employees and a
€ 40 million business. In 1994, together with Steven van der Velden, Yves van Sante co-founded InTouch Telecom. As its managing
director he was responsible for business development, sales and marketing. In 1999, when achieving a turnover of € 25 million
and having grown to 125 staff, InTouch was sold to GTS, a pan European Telecom operator. Mr. van Sante became vice-president Business
Services with GTS in London, where he consolidated acquisitions and turned the voice Telco around into an IP operator. In 2000
he became Managing Director of Eport, a call centre owned by the Port of Ostend. After six months Eport was sold to the Dutch call-centre
Call-IT, and Mr. van Sante became advisor to its Management Board. In 2002 he founded Q.A.T. Investments. Concurrently, he has
held various Management and Board functions in companies in the QAT portfolio. Mr. van Sante is a member of De Warande and member
of the Board of Directors of Festival of Flanders.
Luis Jimenez-Tuñon
has been
a director since March 1, 2017. Mr. Jimenez-Tuñon is a distinguished mobile telecommunications industry leader, having served
as CEO of the Company’s largest customer, Vodafone Enabler Spain S.L. (“Vodafone Enabler”) from July 2011 to
December 2016. In addition to his role at Vodafone Enabler, during a decade at Vodafone, Mr. Jimenez-Tuñon has also held
leadership positions at Vodafone Spain where he was responsible for business development and strategy of the group’s Mobile
Virtual Network Operators (MVNOs), enablers, roaming services, international carriers and wholesale fixed broadband business lines.
Mr. Jimenez-Tuñon is currently founder and CEO of Red Queen Ventures, S.L. (www.redqueen-ventures.com) a global high-tech
advisory and Investment Company focused on technology, telecom, MVNO/E, satellite and aerospace. As Chief executive of Vodafone
Enabler, he pioneered the Company’s innovative business model and powered the launch of Vodafone Spain’s second brand
Lowi.es which was awarded best Spanish MVNO in 2015 and 2016. Started in 2011, under his leadership, Vodafone enabler boosted its
revenue, profit and operational performance, and achieved internationalization. Previously, Luis held several executive positions
at Vodafone Spain, including Senior Vice President where he grew business to hundreds of millions of euros in yearly revenue. Mr.
Jimenez began his career in the satellite industry in 2002 holding various positions including Research engineer at the National
Space Institute of Denmark and later Deputy Commercial Director of INSA (today ISDEFE), Spain’s leading satellite operations
company managing NASA and ESA tracking stations. Luis has received several professional and academic awards at international and
national levels. Luis earned an Executive MBA from EOI Business School, a Master’s Degree in Satellite Communications from
Polytechnic University of Madrid, and an MSc in Telecommunications Engineering from the University of Zaragoza in cooperation with
the Technical University of Denmark. He also completed the Executive Management Program (SEP) from the Graduate School of business
at Stanford University in California, of which he is lifetime alumni. Along with his executive career, Luis has been guest speaker
at international business summits and has published several papers.
Laura Thomas
has been a director since
July 25, 2017. Ms. Thomas presently serves as the Chief Financial Officer of Towerstream, Inc. Ms. Thomas previously served on
the Board of Directors of Impact Telecom (“Impact”), a full service telecommunications company, from January 2016 through
December 2016, during which time she served as Chairman of the Board of Directors from January 2016 through June 2016. From December
2014 through December 2015 she served as the Chief Executive Officer of TNCI Operating Company, which acquired Impact in January
2016. From 2000 through 2014 she served in a variety of roles at XO Holdings, Inc. (now XO Communications), a telecommunications
services provider, including as Chief Financial Officer from May 2009 through April 2011 and again from December 2013 through August
2014, and as Chief Executive Officer from April 2011 through December 2013.
Victor Bozzo
was appointed Chief
Executive Officer on November 1, 2016. Mr. Bozzo served as Senior Vice President, Worldwide Sales and Marketing for Telarix Inc.,
a market leader in interconnect solutions for service providers. Under Mr. Bozzo’s sales and marketing leadership, sales
increased significantly and the company received numerous market leadership accolades, ultimately leading to a highly successful
exit for investors. Prior to joining Telarix, Mr. Bozzo served as President and General Manager of Pac-West’s Emerging Technologies
division after selling Pac-West his startup, Factor Communications, an innovative portfolio of cloud-based communications services.
He was also responsible for significant revenue and customer growth and investor returns at exTone Communications, ITXC Corporation,
and Voxware.
Edward O’Donnell
became our
Chief Financial Officer on January 9, 2017. Mr. O’Donnell has over 23 years of experience in investment banking, advertising,
private equity, investment, venture capital, technology, internet and other new media businesses. Prior to joining the Company,
Mr. O’Donnell served as the Chief Financial Officer of Ameri Holdings, Inc. (OTC: AMRH) from January 2016 through December
2016. Mr. O’Donnell has served as the Chief Operating Officer of Radbourne Property Group, Inc., an innovative operator of
family entertainment centers, where his primary responsibilities included raising capital, external reporting, outlining capital
structure and budgeting. From February 2013 until April 2015, Mr. O’Donnell served as chief financial officer of AudioEye,
Inc. (OTC: AEYE) From December 2010 until January 2013, Mr. O’Donnell served as Vice President of Finance for Augme Technologies,
Inc. (Previously OTC: AUGT), which provides strategic services and mobile marketing technology to leading consumer and healthcare
brands. From January 2007 until November 2010, Mr. O’Donnell served as Chief Financial Officer of Carlyle Capital Group LLC,
a venture capital and private equity firm. Previously, Mr. O’Donnell also served as Senior Vice President of Finance &
Investor Relations of ACTV, Inc. (previously NASDAQ: IATV), where he developed the investor relations department before the company
was purchased by OpenTV, a subsidiary of Liberty Media. Previously, Mr. O’Donnell was a member of Aloysius Lyons, LLC. Aloysius
Lyons, LLC filed for protection under Chapter 7 of the federal bankruptcy laws in 2007. Aloysius Lyons, LLC received a discharge
relating to the matter in 2009 and has been dissolved. Mr. O’Donnell is a Certified Public Accountant in New York and a member
of NYSSCPAs and AICPA. Mr. O’Donnell earned a B.S, degree in Accountancy from Villanova University in 1991 and an M.B.A.
from Columbia Business School in 2003. We believe that Mr. O’Donnell’s extensive education and background in accounting
and finance makes him qualified to serve as our Chief Financial Officer.
Alexander Korff
was appointed General
Counsel, Secretary and Chief Compliance Officer effective April 1, 2016. Mr. Korff oversees the legal affairs of the group, including
corporate, commercial and financial transactions, intellectual property, governance and regulatory compliance. Before joining Pareteum,
Mr. Korff worked at international law firms Clifford Chance (in their London, Amsterdam and Warsaw offices) and Bird & Bird
in London, specializing in contentious and non-contentious commercial, IT and intellectual property law – predominantly for
technology- and telecom-sector clients. He has also worked as in-house legal counsel to defense and aviation group EADS Airbus
at their European headquarters in France. He previously held commercial posts with technology companies WorldPay and Autonomy.
Mr. Korff read law (LL.B) at Durham University, England, and undertook post-graduate legal studies at the London College of Law.
He speaks English, Dutch, German and French.
Family Relationships
None of our Directors are related by blood,
marriage, or adoption to any other Director, executive officer, or other key employees.
Other Directorships
Other than as disclosed above, none of the
Directors of the Company are also directors of issuers with a class of securities registered under Section 12 of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) (or which otherwise are required to file periodic reports under
the Exchange Act).
Legal Proceedings
We are not aware of any of our directors or
officers being involved in any legal proceedings in the past ten years relating to any matters in bankruptcy, insolvency, criminal
proceedings (other than traffic and other minor offenses) or being subject to any of the items set forth under Item 401(f) of Regulation
S-K.
CORPORATE GOVERNANCE
Board Leadership Structure
The Board of Directors is currently chaired
by the Executive Chairman of the Company, Mr. Turner. The Company believes that dividing the positions of Chief Executive Officer
and Chairman of the Board of Directors helps to ensure that the Board of Directors and management can actually achieve all goals,
and with a common purpose. The positions of Chief Executive Officer and Chairman can clearly and effectively execute the Company’s
strategic initiatives. Key strategic initiatives and decisions involving the Company are discussed and approved by the entire Board
of Directors. In addition, meetings of the independent directors of the Company are regularly held, which Mr. Turner does not attend.
The Company believes that the current leadership structure and processes maintains an effective oversight of management and independence
of the Board of Directors as a whole without separate designation of a lead independent director. However, the Board of Directors
will continue to monitor its functioning and will consider appropriate changes to ensure the effective independent function of
the Board of Directors in its oversight responsibilities.
Role of the Board in Risk Oversight
One of the Board of Director’s key functions
is informed oversight of the Company’s risk management process. The Board of Directors does not have a standing risk management
committee, but rather administers this oversight function directly through the Board of Directors as a whole, as well as through
various Board of Directors standing committees that address risks inherent in their respective areas of oversight. In particular,
our Board of Directors is responsible for monitoring and assessing strategic risk exposure, including a determination of the nature
and level of risk appropriate for the Company. The Audit Committee considers and discusses with management the Company’s
major financial risk exposures and related monitoring and control of such exposures as well as compliance with legal and regulatory
requirements. The Nominating & Governance Committee monitors the effectiveness of our corporate governance guidelines. The
Compensation Committee assesses and monitors whether our compensation policies and programs have the potential to encourage excessive
risk-taking. Any findings regarding material risk exposure to the Company are reported to and discussed with the Board of Directors.
Independence of the Board of Directors and Its Committees
After review of all relevant transactions or
relationships between each director and nominee for director, or any of his or her family members, and the Company, its senior
management and its Independent Registered Public Accounting Firm, the Board of Directors has determined that all of the Company’s
directors and the Company’s nominees for director are independent within the meaning of under Section 803 of the NYSE MKT
rules, except Mr. Turner, the Executive Chairman of the Company.
Meetings
Our Board of Directors met in person and telephonically
fourteen (14) times during 2016 and also acted by unanimous written consent eleven (11) times. Each of the then-members of our
Board of Directors was present at 75% or more of the Board of Directors meetings held in 2016.
In September 2017, Mr. Turner attended
the annual stockholder meeting. We have encouraged, but do not require, that all of our directors be in attendance at the
Annual Meeting either in person or by remote communication. In addition, we have encouraged, but do not require, our
directors to attend future annual stockholder meetings in person.
Board Committees
Our Board of Directors has established three
standing committees: (1) Audit and Finance, (2) Nominating and Corporate Governance, and (3) Compensation.
All committees operate under a charter that
has been approved by the Board of Directors and which is available on our website, www.pareteum.com.
Audit and Finance Committee
Our Board of Directors has an Audit and Finance
Committee, abbreviated to Audit Committee, composed of Messrs. van Sante (member since February 18, 2016) and Jimenez-Tuñon
(member since March 1, 2017) and Ms. Thomas (member since July 25, 2017, who became Chairwoman effective September 13, 2017). The
Audit and Finance Committee met four (4) times during 2016. Each of the then-current members was present at all of the Audit and
Finance Committee meetings held during 2016.
The Audit Committee oversees our corporate
accounting, financial reporting practices and the audits of financial statements. For this purpose, the Audit and Finance Committee
has a charter (which is reviewed annually) and performs several functions. The Audit and Finance Committee:
|
·
|
evaluates the independence
and performance of, and assesses the qualifications of, our independent auditor, and engages such independent auditor;
|
|
·
|
approves the plan and fees
for the annual audit, quarterly reviews, tax and other audit-related services, and approves in advance any non-audit service to
be provided by the independent auditor;
|
|
·
|
reviews and approves related-party
transactions;
|
|
·
|
monitors the independence
of the independent auditor and the rotation of partners of the independent auditor on our engagement team as required by law;
|
|
·
|
reviews the financial statements
to be included in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and reviews with management and the independent
auditors the results of the annual audit and reviews of our quarterly financial statements;
|
|
·
|
oversees all aspects our
systems of internal accounting control and corporate governance functions on behalf of the Board of Directors; and
|
|
·
|
provides oversight assistance
in connection with legal, ethical and risk management compliance programs established by management and the Board of Directors,
including Sarbanes-Oxley implementation, and makes recommendations to the Board of Directors regarding corporate governance issues
and policy decisions.
|
Nominating and Corporate Governance Committee
Our Board of Directors has a Nominating and
Corporate Governance Committee, abbreviated to Nominating Committee, presently composed of Messrs. van Sante (Chairman and member
since December 16, 2015) and Jimenez-Tuñon (member since March 1, 2017) and Ms. Thomas (member since July 25, 2017). The
Nominating Committee did not convene as such during 2016, preferring the affairs of the Committee to be addressed by the full Board.
The Nominating Committee is charged with
the responsibility of reviewing our corporate governance policies and with presenting new potential director-nominees to the
Board of Directors for consideration. The Nominating Committee has a charter which is reviewed annually. All members of the
Nominating Committee are independent directors as defined by the rules of the NYSE American. The Nominating Committee will
consider director nominees recommended by stockholders. To recommend a nominee, please write to the Nominating and Corporate
Governance Committee, c/o the General Counsel, Pareteum Corporation, 1185 Avenue of the Americas, 37
th
Floor, New
York City, NY 10036, USA. The Nominating Committee will assess all director nominees using the same criteria it applies
generally, described in this prospectus under the heading “Director and Officer Qualifications.” During 2016, we
did not pay any fees to any third parties to assist in the identification of nominees.
Compensation Committee
Our Board of Directors also has a Compensation
Committee composed of Messrs. Jimenez-Tuñon (Chairman, since July 25, 2017) and van Sante and Ms. Thomas (member since July
25, 2017). The Compensation Committee reviews or recommends the compensation arrangements for our management and employees and
also assists the Board of Directors in reviewing and approving matters such as Company benefit and insurance plans. The Compensation
Committee met two (2) times during 2016 and acted by Unanimous Written Consent one (1) time in 2016. Each of the then-committee
members was present at all of the Compensation Committee meetings held during 2016.
The Compensation Committee has the authority
to directly engage, at the Company’s expense, any compensation consultants or other advisers as it deems necessary to carry
out its responsibilities in determining the amount and form of employee, executive and director compensation. In 2016, the Compensation
Committee did not engage any such compensation consultants or advisers.
Director and Officer Qualifications
We have not formally established any specific,
minimum qualifications that must be met by each of our officers or directors or specific qualities or skills that are necessary
for one or more of our officers or members of the Board of Directors to possess. However, our Nominating Committee generally evaluates
and recommends candidates with a focus on the following qualities: educational background, diversity of professional experience,
knowledge of our industry and business, integrity, professional reputation, independence, wisdom and ability to represent the best
interests of our stockholders and other stakeholders.
Our Board of Directors and officers are composed
of a diverse group of leaders. In their prior positions they have gained experience in core management skills, such as strategic
and financial planning, public company financial reporting, compliance, risk management and leadership development. Most of our
officers and directors also have experience serving on boards of directors and board committees of other public companies or private
companies, and have an understanding of corporate governance practices and trends, which provides an understanding of different
business processes, challenges and strategies.
Code of Conduct
We have adopted a code of conduct that outlines
the principles, policies and laws that govern our activities and establishes guidelines for conduct in the workplace. The code
of conduct applies to all employees, as well as each member of our Board of Directors. All employees are required to read the code
of conduct and affirm in writing their acceptance of the code. Our code of conduct is posted on our website, www.pareteum.com.
We intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision
of our code of conduct by posting such information on our website, www.pareteum.com. A copy of our code of conduct is also available
in print, without charge, upon written request to Pareteum Corporation, 1185 Avenue of the Americas, 37
th
Floor, New
York, NY 10036, USA. Attn: General Counsel.
Director Nominations
There have been no material changes to the
procedures by which a stockholder may recommend nominees to the Board of Directors since our last disclosure of these procedures.
Section 16(A) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Exchange Act, requires
that our directors and executive officers and persons who beneficially own more than 10% of our common stock (referred to herein
as the “reporting persons”) file with the SEC various reports as to their ownership of and activities relating to our
common stock. Such reporting persons are required by the SEC regulations to furnish us with copies of all Section 16(a) reports
they file. Based solely upon a review of copies of Section 16(a) reports and representations received by us from reporting persons,
and without conducting any independent investigation of our own, in 2016, there were untimely filings of Forms 3, 4 and 5 as outlined
herein, specifically: (i) one report on Form 4 covering one transaction filed by Mark Nije; (ii) four reports on Form 4 covering
four transactions filed by Patrick M. Carroll; (iii) one report on Form 4 covering one transaction filed by Martin Zuuriber; (iv)
one report on Form 4 covering one transaction filed by Jaime Bustillo Velasco, (v) two reports on Form 4 covering two transactions
filed by Roderick de Greef; (vi) one report on Form 4 covering one transaction filed by Robert Skaff Jr; (vii) two reports on Form
4 covering two transactions filed by Francisco Ros; (vii) three reports on Form 4 covering three transactions filed by Yves Roger
van Sante; (viii) two reports on Form 4 covering two transactions filed by Gary G. Brandt; (ix) one report on Form 4 covering one
transaction filed by Robert Harold Turner, and (x) one report on Form 3 covering one transaction filed by Victor Bozzo.
EXECUTIVE COMPENSATION
2016 Summary Compensation Table
The following table sets forth, for the fiscal
years 2016 and 2015, compensation awarded or paid to, or earned by, our Chief Executive Officers, our Chief Financial Officer and
our other two executive officers at December 31, 2016 (the “Named Executive Officers” or “NEOs”).
Name and
principle
position
|
|
Year
|
|
Salary
($)(1)
|
|
|
Bonus
($)
|
|
|
Option
Awards
($)(2)
|
|
|
Option
Awards
(in
options)
|
|
|
All Other
Compensation
($)(3)
|
|
|
Total ($)
|
|
|
Total
Number
of
shares
|
|
|
Total
Number
of
options
|
|
Robert H. Turner (i)
|
|
2016
|
|
$
|
331,021
|
(a)
|
|
$
|
675,000
|
(f)
|
|
$
|
530,838
|
|
|
|
200,000
|
(h)
|
|
$
|
257,785
|
|
|
$
|
1,794,644
|
|
|
|
86,000
|
|
|
|
200,000
|
|
(Executive Chairman)
|
|
2015
|
|
$
|
40,628
|
(a)
|
|
$
|
|
|
|
$
|
661,437
|
|
|
|
100,000
|
(j)
|
|
$
|
-
|
|
|
$
|
702,065
|
|
|
|
-
|
|
|
|
100,000
|
|
Victor Bozzo (ii)
|
|
2016
|
|
$
|
54,457
|
(b)
|
|
$
|
50,000
|
(g)
|
|
$
|
394,213
|
|
|
|
120,000
|
(k)
|
|
$
|
-
|
|
|
$
|
498,671
|
|
|
|
-
|
|
|
|
120,000
|
|
(CEO & Chief Executive Officer)
|
|
2015
|
|
$
|
-
|
(b)
|
|
$
|
-
|
|
|
$
|
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Alex Korff (iii)
|
|
2016
|
|
$
|
153,676
|
(c)
|
|
$
|
|
|
|
$
|
-
|
|
|
|
-
|
(l)
|
|
$
|
186,870
|
|
|
$
|
340,546
|
|
|
|
49,807
|
|
|
|
-
|
|
(General Counsel, Secretary & Compliance Officer)
|
|
2015
|
|
$
|
125,349
|
(c)
|
|
$
|
|
|
|
$
|
15,656
|
|
|
|
1,500
|
|
|
$
|
(9,029
|
)
|
|
$
|
131,975
|
|
|
|
-
|
|
|
|
-
|
|
Edward O’Donnell (iv)
|
|
2016
|
|
$
|
-
|
(d)
|
|
$
|
|
|
|
$
|
-
|
|
|
|
-
|
(l)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Chief Financial Officer)
|
|
2015
|
|
$
|
-
|
(d)
|
|
$
|
|
|
|
$
|
-
|
|
|
|
-
|
(l)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Erik Kloots (v)
|
|
2016
|
|
$
|
139,925
|
(e)
|
|
$
|
|
|
|
$
|
-
|
|
|
|
-
|
(l)
|
|
$
|
134,262
|
|
|
$
|
274,186
|
|
|
|
44,791
|
|
|
|
-
|
|
(Vice President-Finance and Principal Accounting Officer)
|
|
2015
|
|
$
|
119,253
|
(e)
|
|
$
|
|
|
|
$
|
15,656
|
|
|
|
1,500
|
(l)
|
|
$
|
-
|
|
|
$
|
134,909
|
|
|
|
-
|
|
|
|
-
|
|
Notes:
|
(i)
|
Mr. Turner was appointed on November 16, 2015; compensation received in 2015 was pro-rated.
|
|
(ii)
|
Mr. Bozzo was appointed
on November 1, 2016; compensation received in 2016 was pro-rated.
|
|
(iii)
|
Mr. Korff was appointed
April, 1, 2016 and replacing Mr. A. Vermeulen who left the Company March 31, 2016.
|
|
(iv)
|
Mr. O’Donnell
was appointed January 8, 2017; compensation to be received in 2017 will be pro-rated.
|
|
(v)
|
Mr. Kloots was appointed
April 1, 2016; compensation received in 2016 was pro-rated.
|
|
(1)
|
These are the base salaries
before any bonus and or non-cash awards. The base salary is determined and paid on a monthly basis in euros; therefore, calculations
include exchange results from euros to U.S. dollars. Payment can be elected either in cash or in shares in lieu of salary and
bonus. When officers opt for payment in shares there is a 25% discount on the purchase price. The amounts, however, are shown
at fair market value by using the share price of the preceding month closing price. In principle, officers may earn up to approximately
33% more than the ‘agreed’ cash salary in the event they elect to receive 100% compensation in shares. Such beneficial
discount is included in “All Other Compensation” at the fair market value of the equity, reduced by the denominated
value in U.S. dollars of the cash salary used for this ‘exchange’ into non-cash compensation.
|
|
(2)
|
The amounts reported
in this column represent the aggregate grant date fair value of the stock option awards granted to the named executive officers
in 2016 and 2015, respectively. We estimate the fair value of awards on the grant date using the Black-Scholes option pricing
model. The assumptions made in calculating the grant date fair value amounts for stock option awards are incorporated herein by
reference to the discussion of those assumptions in Note 23 to the financial statements contained in the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2016. Note that the amounts reported in this column reflect the Company’s
accounting cost for the stock option awards, and do not correspond to the actual economic value that will be received by the named
executive officers from the award. Pursuant to SEC rules, the amounts in this column exclude the impact of estimated forfeitures
related to service-based vesting conditions. In case the options have not vested yet the company has expensed a pro-rata portion
until date of vesting. Expensing of performance based options will start after setting the performance targets.
|
|
(3)
|
With respect to 2016
this value relates to the non-cash bonus for the chairman of the Board and other officers granted in 2016 and issued in January
2017 and in case of 2015 the value represents the 25% purchase price discount the named executive officer received by way of electing
equity compensation in lieu of cash compensation adjusted for fair value at date of issuance.
|
|
(a)
|
These amounts have been
agreed in USD and amounts to an annual amount of USD 300,000. The total salary in 2016 amounts to $331,021 which includes the
employer part of the social securities.
|
|
(b)
|
These amounts have been
agreed in USD and amounts to an annual amount of USD 275,000. The total salary in 2016 amounts to $54,457 which includes the employer
part of the social securities and represents salary as of November 1, 2016.
|
|
(c)
|
These amounts have been
agreed in GBP. The amount for 2016 has been agreed upon GBP 110,700. The average exchange rate is $1.388 for 2016 and $1.440 in
2015. These averages are the average of the 4 exchange rates used during the respective year by using the exchange rate of the
first working day of each quarter.
|
|
(d)
|
No salary in 2015 and
2016; started in January 2016.
|
|
(e)
|
These amounts have been
agreed in euro. Amount for 2016 has been EUR 108,230 and for 2015 EUR 96,006. The average exchange rate is $1.114 for 2016 and
$1.133 for 2015. These averages are the average of the 4 exchange rates used during the respective year by using the exchange
rate of the first working day of each quarter.
|
|
(f)
|
Bonus amount granted
for an amount of USD 75,000 based on achievement of certain milestone. Bonus granted of $600,000 was granted and accrued in the
fourth quarter to be paid in the future.
|
|
(g)
|
Sign-in bonus for an
amount of USD 50,000.
|
|
(h)
|
Comprised of 200,000
of a total grant of 300,000 shares in total divided between the years 2016 and 2017, the 200,000 options which have
been granted with immediate effect represent an initial fair market value of $530,838, following the Black and Scholes calculation
method.
|
|
(j)
|
Comprised of 100,000
options with an exercise price of $8.25 and a total initial fair value of USD 661,437. In the years 2015, 2016, 2017 and 2018
equal tranches of 25,000 options will vest each year.
|
|
(k)
|
Comprised of 120,000
options with an exercise price of $4.3725 and a total initial fair market value of USD 394,213 using the Black and Scholes valuation
model. The options will annually vest in 4 equal tranches of 30,000 options and have a term of 7 years. The first tranche vested
in 2016, others will vest in 2017, 2018 and 2019. Expensing will be accounted for and spread over the period until vesting.
|
Narrative Disclosure to Summary Compensation Table
Consultancy and Employment Agreements
We currently have the following agreements
with our named executive officers:
Robert H. Turner, Executive Chairman –
We
entered into an employment agreement, effective as of November, 17 2015, with Mr. Turner, to serve as Executive Chairman of the
Company. Mr Turner is paid a base compensation of USD $300,000 gross per year. Mr. Turner receives no fees (cash or stock) for
serving on our Board of Directors. Mr. Turner has a number of granted options set at 2,500,000 carrying a 7 years exercise period
after granting; the options would vest in four equal annual installments, following the joining date. Mr. Turner is eligible to
a performance related bonus, depending on business performance by the Group performance. Such bonus shall be based solely upon
your achievement of Board-approved and mutually agreed upon performance targets. For 2016 the on-target bonus percentage is set
at 100% against the Base salary paid in that year, capped at 200% maximum on cash payment; performance over and above 200% is paid
in equity at the then-current value of the Company.
Additionally, On November 18, 2016, the Company
entered into an employment agreement Mr. Turner, the Company’s Executive Chairman and Principal Executive Officer (the “Employment
Agreement”). The Employment Agreement modifies and supplements the terms of the prior employment letter between the Company
and Mr. Turner dated November 2015 by providing for the following additional terms: (i) one-time bonuses of USD $300,000 for achieving
previously determined business and restructuring goals established by the Board and an extraordinary bonus of USD $300,000 for
Mr. Turner’s efforts on behalf of the Company during late 2015 and 2016 and to be paid as set forth in the Employment Agreement;
(ii) restricted common stock grants of 2,000,000 shares of the Company’s common stock; (iii) options to purchase up to 7,500,000
shares of the Company’s stock, which options shall vest over a period of three (3) calendar years, with 1,875,000 shares
vesting immediately, and the remaining 5,625,000 shares vesting in 3 equal installments of 1,875,000 each, on the first, second
and third anniversary of the option grant. The exercise price of the options is $.14 per share; and (iv) other customary allowances,
bonuses, reimbursements and vacation pay. The Employment Agreement also provides that if Mr. Turner’s employment with the
Company is terminated by the Company without “cause” or by Mr. Turner for “good reason” (as such terms
are defined in the Employment Agreement) the Company will pay Mr. Turner, 12 months’ salary at the rate of his salary as
of such termination, together with payment of the average earned bonuses (regular and extraordinary) since November 1, 2015.
Victor Bozzo, Chief Executive Officer
–
We entered into an employment agreement, effective as of November 1, 2016, with Mr. Bozzo, to server as Chief Executive Officer
of the Company. Mr. Bozzo is paid a base compensation of USD $275,000 gross per year. Mr. Bozzo received a signing bonus of USD
$50,000 gross, and has a total number of restricted common stock grants of shares with the equivalent value of USD $10,000. Additionally,
Mr. Bozzo received a restricted grant with the equivalent value of USD $15,000 within a reasonable time following the 6-month anniversary
of the Effective Date and USD $50,000 within the first calendar year anniversary date, with each of these grants being subject
to certain conditions set forth in the Employment Agreement. Additionally, Mr. Bozzo is entitled to purchase options up to 3,000,000
shares of the Company’s stock, of which options to purchase 750,000 shares of common stock will vest immediately, and the
remaining 2,250,000 shares shall vest in 3 installments of 750,000 each annually on the first, second and third anniversary of
the option grant. The exercise price of the options is $.1749 per share; and other customary allowances, bonuses, reimbursements
and vacation pay. The Employment Agreement also provides that if Mr. Bozzo’s employment with the Company is terminated by
the Company without “cause” or by Mr. Bozzo for “good reason” the Company will pay Mr. Bozzo 12 months’
salary at the rate of his salary as of such termination. Mr. Bozzo is also subject to customary non-competition, non-solicitation
and confidentiality requirements during and after the term of his employment.
Edward O’Donnell, Chief Financial
Officer
– The Company entered into an employment agreement, effective as of January 9, 2017 with Mr. O’Donnell,
to perform as Chief Financial Officer of the Company. Mr. O’Donnell is paid a base compensation of USD $175,000 gross, and
is entitled to an annual bonus of up to USD $75,000 gross. Additionally, Mr. O’Donnell received a signing bonus of 25,000
restricted common shares, and options to purchase up to 1,000,000 shares of the Company’s stock, subject to the Company’s
employee stock option plan including restrictions and vesting schedule. Mr. O’Donnell is also entitled to other customary
allowances, bonuses, reimbursements and vacation pay. The employment agreement between the Company and Mr. O’Donnell is an
“at will” agreement, which also provides that if Mr. O’Donnell’s employment with the Company is terminated
by the Company, then, subject to a mutual release, the Company will pay Mr. O’Donnell’s base salary for an additional
270 days after termination in accordance with customary payroll practices. Mr. O’Donnell is also subject to customary confidentiality
requirements during and after the term of his employment.
Alexander Korff, General Counsel and Chief
Compliance Officer
– During 2016, the Company’s Swiss subsidiary and Mr. Korff were parties to a consultancy
agreement with his consulting company Karkinos IP Consulting Ltd which was paid approximately GBP 110,700 in 2016. Effective February
2017, Mr. Korff was engaged as an employee of the Company under an employment agreement for a total of GBP 120,000 (USD $149,383)
gross per annum. Additionally, Mr. Korff received options to purchase up to 500,000 shares of the Company’s stock, subject
to the Company’s employee stock option plan including restrictions and vesting schedule. Additionally, Mr. Korff will also
be eligible for a bonus of up to fifty percent (50%) of his base salary above, where any such bonus is subject to the Company’s
achievement of its business plan targets. Mr. Korff is also entitled to other customary allowances, bonuses, reimbursements and
vacation pay. The employment agreement between the Company and Mr. Korff is an “at will” agreement, which also provides
that if Mr. Korff’s employment with the Company is terminated by the Company, then, subject to a mutual release, the Company
will pay Mr. Korff’s base salary for an additional 180 days after termination in accordance with customary payroll practices.
Mr. Korff is also subject to customary confidentiality requirements during and after the term of his employment.
Severance and Change of Control
The named executive officers (and certain former
executive officers) have individual severance terms as described below. In addition, outstanding equity awards made to our named
executive officers under the 2008 Plan are subject to acceleration of any unvested portion of such awards upon a change of control
unless the terms of a particular award state otherwise.
Other than as set out below, none of the agreements
with named executives include any provisions for severance benefits or other payments upon a change of control regardless of whether
a named executive officer’s employment is terminated by him with or without good reason, or whether the named executive officer
is terminated by the Company with or without cause.
Robert H. Turner -
The employment
agreement with Mr. Turner is for an indefinite term. Under the terms of the employment agreement, Mr. Turner is entitled to severance
if Mr. Turner’s employment with the Company is terminated by the Company without “cause” or by Mr. Turner for
“good reason” (as such terms are defined in the Employment Agreement) the Company will pay Mr. Turner, 12 months’
salary at the rate of his salary as of such termination, together with payment of the average earned bonuses (regular and extraordinary)
since November 1, 2015.
Victor Bozzo
– The employment
agreement with Mr. Bozzo is for an indefinite term. Under the terms of the employment agreement, Mr. Bozzo is entitled to a severance
if he is terminated by the Company without “cause” or by Mr. Bozzo for “good reason” the Company will pay
Mr. Bozzo 12 months’ salary at the rate of his salary as of such termination.
Edward O’Donnell
–
The employment agreement with Mr. O’Donnell is for an indefinite term. Under the terms of the employment agreement, Mr. O’Donnell
is entitled to a severance if he is terminated by the Company, then, subject to a mutual release, the Company will pay Mr. O’Donnell’s
base salary for an additional 270 days after termination in accordance with customary payroll practices.
Alexander Korff
– The employment
agreement entered on February 1, 2017 with Mr. Korff is for an indefinite term. Under the terms of the employment agreement, Mr.
Korff is entitled to a severance if he is terminated by the Company, then, subject to a mutual release, the Company will pay Mr.
Korff’s base salary for an additional 180 days after termination in accordance with customary payroll practices.
Erik Kloots
– The Company
entered into an employment agreement, effective as of January 1, 2007 with Mr. Kloots to serve as the Company’s European Business
Controller and then as the Company’s Global Director of Corporate Control & Finance, reporting directly to the Company’s Chief
Financial Officer. On April 1, 2016, Mr. Kloots was appointed as Principal Accounting Officer and paid a base compensation of Euro
121,289.41 (USD $137,728). Mr. Kloots is also entitled to other customary allowances, bonuses, reimbursements and vacation pay.
Mr. Kloots is also subject to customary confidentiality requirements during and after the term of his employment. Effective as
of March 31, 2017, Erik Kloots resigned from the Company as its Principal Accounting Officer. The Company has an agreement (the
“Settlement Agreement”) with Mr. Kloots to (i) make a lump sum severance payment of gross Euro 121,289.41 (USD $129,746)
gross no later than March 31, 2017, (ii) pay all unused holidays and pro-rata calculations of 2016 holiday allowance, (iii) keep
the Company laptop, and (iv) keep all past awarded stock-options through the life of the options. Mr. Kloots will not resign as
a result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.
Martin Zuurbier -
The consultancy agreement
with Mr. Zuurbier was for a term of two (2) years and three (3) months and commenced on January, 1 2015 and was due to end on March
31, 2017. On January 29, 2016, Mr. Martin Zuurbier entered into certain Severance and Independent Contractor Agreement pursuant
to which Mr. Zuurbier resigned, effective December 31, 2015, from the Chief Technology Officer and Co-President of Mobile Platform
Activities and other executive positions of the Company for personal reasons. Mr. Zuurbier did not resign as a result of any disagreement
with the Company on any matter relating to the Company’s operations, policies or practices. In connection with his severance, Mr.
Zuurbier received (i) a severance entitlement of Euro 100,000 (USD $109,096) and (ii) a grant of 500,000 restricted shares of the
Company’s common stock. On November 14, 2016, Mr. Zuurbier and the Company entered into an Equity Conversion and Settlement
Agreement, in which both parties agreed that the Company would issue to Mr. Zuuriber the total of 1,115,000 shares of common stock
that were included in the S-3, in order to settle an outstanding balance for the total of 115,00. Further, it was agreed between
the Company and Mr. Zuurbier that the Company would also pay in cash the total of Euro 19,500 (USD $21,274) before December 2,
2016 towards the outstanding liability, and the Company would also pay the remaining payment of Euro 50,000 (USD $54,548) before
March 31, 2017 to settle the payment liabilities as prescribed by the Severance and Independent Contractor Agreement.
Mark Nije -
The consultancy agreement
with Mr. Nije was for a term of three (3) years which commenced on January 1, 2015. Under the terms of the consultancy agreement,
Mr. Nije is entitled to severance if he is terminated by the Company without cause. In the event the agreement were terminated
by the Company without cause, the Company would be required to give two (2) month’s written notice of termination and pay
Mr. Nije severance in cash equal to four (4) months base-salary in addition to accrued but unpaid compensation and accrued vacation,
but only if, Mr. Nije and us execute a valid and comprehensive mutual release of any and all claims that they may have against
us in a form provided by us and they executes such form within seven (7) days of tender. Mr. Nije has an agreement with the Company
to resign from all positions that he holds with the Company as of March 31, 2016. For a more detailed description, see Item 9B,
“Other Information”. Effective on December 20, 2016, Mr. Nije and the Company entered into an Amendment of the Severance
Agreement, in which the Company agreed to make an initial cash payment to Mr. Nije of Euro 42,500 (USD $44,390) and beginning January
1, 2017 the Company shall pay to Mr. Nije the monthly amount of Euro 10,000 (USD $10,445) up to cover the total outstanding balance
of Euro 338,407 (USD $353,459) including the accrued statutory interest. In the event the Company fails to pay timely the monthly
invoiced amounts, the Company shall next to the monthly payment, without need of demand, make a penalty payment of in the amount
of Euro 5,000 (USD $5,222), plus interests thereon for each failure. In the event that the Company is able to raise additional
financing through the sale of equity or debt securities, from which the Company receives gross proceeds of not less than USD $3,000,000,
the Company shall, within 14 days thereof, make a lump sum payment to Mr. Nije in an amount equal to fifty percent (50%) of the
then outstanding balance of the obligation. The then outstanding balance, including accumulated interest over the declining balance,
is to be paid in equal monthly installments of no less than Euro 10,000 (USD $10,445) plus any amount due thereunder to satisfy
any value added taxes per month until the Obligation is repaid in full. The Company arranged for the removal, at the Company’s
sole expense, on or before December 29, 2016 (the “Removal Date”), of the trading restriction on the 692,785 shares
of stock issued to the Mr. Nije and the 141,910 shares of stock issued to the Management Entity (collectively, the “Shares”),
provided however that the Mr. Nije have complied with the applicable requirements under Rule 144 by the Removal Date and the required
broker’s rep letter and seller’s rep letter are provided to counsel engaged for purposes of issuing the opinion relating
to the removal of the trading restrictions on the Shares. Upon removal of such restrictions, the Company will be solely responsible
for arranging for the electronic delivery of the certificates evidencing the Shares, without restrictions, manner of sale or direct
resale requirements, to a broker designated by Mr. Nije. In the event that the Company fails to comply with the obligations set
out in clause 2 prior to the Removal Date, the Company shall, without need of demand, make a penalty payment in the amount of Euro
25,000 (USD $26,112). The Company removed Mr. Nije as a statutory director from Elephant Talk Communications SLU, Spain, including
the removal from the applicable registers at the chambers of commerce and tax authorities (the “Spain Removal”). In
the event that the Company is unable to complete the Spain Removal by the date set forth above, the Company shall make a payment
to Mr. Nije as penalty in the amount of Euro 10,000 (USD $10,455). The Company removed Mr. Nije as a statutory director from the
existing legal entities, including the removal from the applicable registers at the chambers of commerce and tax authorities.
In the event that the Company is unable to complete the Removal by the date set forth above, the Company shall make a payment to
M. Nije as penalty in the amount of Euro 5,000 (USD $5,222) for each entity Mr. Nije is still a registered statutory director.
Alex Vermeulen -
The consultancy
agreement with Mr. Vermeulen was for a term of three (3) years and commenced on January, 1 2015. Under the terms of the employment
agreement, Mr. Vermeulen was entitled to severance if he is terminated by the Company without cause. In the event the agreement
were terminated by the Company without cause, the Company would be required to give two (2) month’s written notice of termination
and pay Mr. Vermeulen severance in cash equal to four (4) months base salary in addition to accrued but unpaid Compensation and
accrued vacation, but only if, Mr. Vermeulen and the Company execute a valid and comprehensive mutual release of any and all claims
that they may have against in a form provided by the Company and they executes such form within seven (7) days of tender. Mr. Vermeulen
resigned from all positions that he held with the Company as of March 31, 2016. On October 20, 2016, it was agreed to a settlement
of liabilities between the Company and Mr. Vermeulen, and their respective officers and directors, under the severance agreement
of March 28, 2016, and it was also agreed that the Company would issue to Mr. Vermeulen 600,000 restricted shares of common stock
that would be included in the S-3 registration statement, in order to settle an outstanding balance for the amount of Euro 60,000
(USD $65,868). Further it is agreed that the Company would pay the remaining part of the outstanding debt in cash, being then Euro
24,857.14 (USD $27,288), before December 24, 2016.
Armin Hessler –
The employment
agreement with Mr. Hessler was for an indefinite term. Under the terms of the employment agreement, Mr. Hessler was entitled to
severance if he were terminated by the Company without cause. In the event the agreement were terminated by the Company before
July 1, 2017, the Company would be required to pay Mr. Hessler severance in cash equal to the greater of i) base salary for the
number of months between the date Mr. Hessler employment terminates and July 1, 2017; or ii) six (6) months’ base salary.
In the event the agreement is terminated by us after July 1, 2017, we would be required to pay Mr. Hessler severance in cash equal
to six (6) months’ base salary. Mr. Hessler submitted his resignation as the Company’s Chief Operations Officer effective
as of November 2, 2016. The Company agreed to make monthly cash severance payments to Mr. Hessler for a period of nine months
from the date of his resignation, equal to an aggregate gross amount of Euro 180,000 (USD $198,034). The Company also agreed
to allow Mr. Hessler to keep an aggregate of 2,200,000 vested stock options. Mr. Hessler did not resign as a result of any disagreement
with the Company on any matter relating to the Company’s operations, policies or practices.
GRANT
OF PLAN-BASED AWARDS
|
|
|
|
|
Estimated
Future Payouts
Under Non-Equity
Incentive Plan Awards
|
|
|
Estimated
Future Payouts
Under Equity
Incentive Plan Awards
|
|
|
All
Other
Stock
Awards:
|
|
|
All
Other
Stock
Option
Awards
:
|
|
|
|
|
|
|
|
Name
and
principle
position
|
|
Grant-
date
|
|
Threshold
($)
|
|
|
Target
($)
|
|
|
Maximum
($)
|
|
|
Threshold
(#)
|
|
|
Target
(#)
|
|
|
Maximum
(#)
|
|
|
Number
of
shares
of
Stocks
or
Units
(#)
|
|
|
Number
of
Securities
Underlying
Options
#
|
|
|
Exercises
or Base
Price of
Option
Awards
($/Sh)
|
|
|
Grant
Date
Fair Value
of Stock
and
Option
Awards
($)(1)
|
|
Robert H.
Turner
|
|
18-Nov-16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
$
|
3.50
|
|
|
$
|
530,838
|
|
(Executive
Chairman)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Victor Bozzo
|
|
1-Nov-16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,000
|
|
|
$
|
4,3725
|
|
|
$
|
394,213
|
|
(CEO
& Chief Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alex Korff
|
|
8-Aug-16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
140,100
|
|
(General
Counsel, Secretary & Compliance Officer)
|
|
28-Jul-16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,807
|
|
|
|
|
|
|
|
|
|
|
|
36,336
|
|
Erik Kloots
|
|
8-Aug-16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
140,100
|
|
Vice
President-Finance and Principal Accounting Officer
|
|
28-Jul-16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,791
|
|
|
|
|
|
|
|
|
|
|
|
17,751
|
|
Edward O’Donnell
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
(Chief
Finance Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
The Company issued the compensation shares
to the above executive officers from the shares authorized, under its Amended and Restated 2008 Long-Term Incentive Compensation
Plan (“2008 Plan”).
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table discloses information regarding
outstanding equity awards granted or accrued as of December 31, 2016 for each of our named executive officers.
Outstanding
Equity Awards
|
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
Name
|
|
Number
of Securities
Underlying
Unexercised (#)
Exercisable
|
|
|
Number
of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
|
Option
Exercise
Price ($)
|
|
|
Option
Expiration
Date
|
|
Number
of
Shares or
Units of
Stock that
have not
Vested (#)
|
|
|
Market
Value of
Shares or
Units of
Stock that
have not
Vested ($)
|
|
Robert H. Turner
|
|
|
25,000
|
(1)
|
|
|
|
|
|
$
|
8.25
|
|
|
16-Nov-22
|
|
|
|
|
|
$
|
|
|
(Executive Chairman)
|
|
|
25,000
|
(1)
|
|
|
|
|
|
$
|
8.25
|
|
|
16-Nov-22
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
25,000
|
(2)
|
|
$
|
8.25
|
|
|
16-Nov-22
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
25,000
|
(2)
|
|
$
|
8.25
|
|
|
16-Nov-22
|
|
|
|
|
|
$
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
$
|
3.50
|
|
|
18-Nov-23
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
$
|
3.50
|
|
|
18-Nov-23
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
$
|
3.50
|
|
|
18-Nov-23
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
$
|
3.50
|
|
|
18-Nov-23
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Victor Bozzo
|
|
|
30,000
|
|
|
|
|
|
|
$
|
4,3725
|
|
|
1-Nov-23
|
|
|
|
|
|
$
|
|
|
(CEO & Chief
Executive Officer)
|
|
|
|
|
|
|
30,000
|
|
|
$
|
4,3725
|
|
|
1-Nov-23
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
$
|
4,3725
|
|
|
1-Nov-23
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
$
|
4,3725
|
|
|
1-Nov-23
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alex Korff
|
|
|
1,000
|
|
|
|
|
|
|
$
|
62.50
|
|
|
1-Jan-21
|
|
|
|
|
|
$
|
|
|
(General Counsel,
Secretary & Compliance Officer)
|
|
|
1,000
|
|
|
|
|
|
|
$
|
62.50
|
|
|
1-Jan-21
|
|
|
|
|
|
$
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
$
|
62.50
|
|
|
1-Jan-21
|
|
|
|
|
|
$
|
|
|
|
|
|
500
|
|
|
|
|
|
|
$
|
28.75
|
|
|
15-Jan-17
|
|
|
|
|
|
$
|
|
|
|
|
|
500
|
|
|
|
|
|
|
$
|
28.75
|
|
|
15-Jan-17
|
|
|
|
|
|
$
|
|
|
|
|
|
500
|
|
|
|
|
|
|
$
|
28.75
|
|
|
15-Jan-17
|
|
|
|
|
|
$
|
|
|
|
|
|
500
|
|
|
|
|
|
|
$
|
38.00
|
|
|
15-Jan-18
|
|
|
|
|
|
$
|
|
|
|
|
|
500
|
|
|
|
|
|
|
$
|
38.00
|
|
|
15-Jan-18
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
500
|
|
|
$
|
38.00
|
|
|
15-Jan-18
|
|
|
|
|
|
$
|
|
|
|
|
|
3,072
|
|
|
|
|
|
|
$
|
22.00
|
|
|
15-Apr-17
|
|
|
|
|
|
$
|
|
|
|
|
|
500
|
|
|
|
|
|
|
$
|
20.50
|
|
|
16-Jan-19
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
500
|
|
|
$
|
20.50
|
|
|
16-Jan-19
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
500
|
|
|
$
|
20.50
|
|
|
16-Jan-19
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward O’Donnell
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
$
|
|
|
(Chief Finance Officer)
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erik Kloots
|
|
|
1,000
|
|
|
|
|
|
|
$
|
33.75
|
|
|
1-Jan-20
|
|
|
|
|
|
$
|
|
|
(Vice President-Finance
and Principal Accounting Officer)
|
|
|
1,000
|
|
|
|
|
|
|
$
|
33.75
|
|
|
1-Jan-20
|
|
|
|
|
|
$
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
$
|
62.50
|
|
|
1-Jan-21
|
|
|
|
|
|
$
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
$
|
62.50
|
|
|
1-Jan-21
|
|
|
|
|
|
$
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
$
|
62.50
|
|
|
1-Jan-21
|
|
|
|
|
|
$
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
$
|
62.50
|
|
|
1-Jan-21
|
|
|
|
|
|
$
|
|
|
|
|
|
500
|
|
|
|
|
|
|
$
|
28.75
|
|
|
15-Jan-17
|
|
|
|
|
|
$
|
|
|
|
|
|
500
|
|
|
|
|
|
|
$
|
28.75
|
|
|
15-Jan-17
|
|
|
|
|
|
$
|
|
|
|
|
|
500
|
|
|
|
|
|
|
$
|
28.75
|
|
|
15-Jan-17
|
|
|
|
|
|
$
|
|
|
|
|
|
500
|
|
|
|
|
|
|
$
|
38.00
|
|
|
15-Jan-18
|
|
|
|
|
|
$
|
|
|
|
|
|
500
|
|
|
|
|
|
|
$
|
38.00
|
|
|
15-Jan-18
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
500
|
|
|
$
|
38.00
|
|
|
15-Jan-18
|
|
|
|
|
|
$
|
|
|
|
|
|
2,505
|
|
|
|
|
|
|
$
|
22.00
|
|
|
15-Apr-17
|
|
|
|
|
|
$
|
|
|
|
|
|
500
|
|
|
|
|
|
|
$
|
20.50
|
|
|
16-Jan-19
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
500
|
|
|
$
|
20.50
|
|
|
16-Jan-19
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
500
|
|
|
$
|
20.50
|
|
|
16-Jan-19
|
|
|
|
|
|
$
|
|
|
(1) The
stock options vested on the grant date November 16, 2015, and have a term of seven years from the date of grant.
(2) The
stock options were granted on November 16, 2015, have a term of seven years from the date of grant and will vest in equal tranches
in the years 2016, 2017 and 2018.
(3) The
stock options vested on the grant date December 4, 2013, and have a term of five years from the date of grant.
(4) The
stock options vested on the grant date April 5, 2013, and have a term of three years from the date of grant.
(5) The
stock options vested on the grant date January 23, 2015, and have a term of three years from the date of grant.
(6) The
stock options vested on the grant date January 23, 2015, and have a term of three years from the date of grant.
(7) The
stock options were granted on January 29, 2015, have a term of four years from the date of grant and will vest in three equal tranches
in the years 2016, 2017 and 2018.
(8) The
stock options were granted on April 1, 2015, have a term of five years from the date of grant and will vest in four equal tranches
in the years 2016, 2017, 2018 and 2019.
OPTION EXERCISES AND STOCK VESTED
The following table represents stock options
that have been exercised and restricted stock awards that have vested as of December 31, 2016.
|
|
Option Awards
|
|
|
Stock Awards
|
|
Name
|
|
Number of Shares
Acquired on Exercise
(#)
|
|
|
Value Realized on
Exercise ($)
|
|
|
Number of
Shares
Acquired on
Vesting
(#)(a)
|
|
|
Value
Realized
on Vesting
($)
|
|
Robert H. Turner
|
|
|
0
|
|
|
$
|
-
|
|
|
|
86,000
|
|
|
$
|
257,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vic Bozzo
|
|
|
0
|
|
|
$
|
-
|
|
|
|
0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alex Korff
|
|
|
0
|
|
|
$
|
-
|
|
|
|
49,807
|
|
|
$
|
186,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward O’Donnell
|
|
|
0
|
|
|
$
|
-
|
|
|
|
0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erik Kloots
|
|
|
0
|
|
|
$
|
-
|
|
|
|
44,791
|
|
|
$
|
134,262
|
|
Our named executive officers did not participate
in, or otherwise receive any benefits under, any pension or retirement plan sponsored by us during 2016. In addition, our named
executive officers did not participate in, or otherwise receive any benefits under, a nonqualified deferred compensation plan during
2016.
|
(a)
|
The awards have been
granted and vested in 2016; however, some of the shares were only issued and delivered early 2017. The corresponding share-based
compensation expenses have been accounted for in 2016.
|
DIRECTOR COMPENSATION
The basic compensation for serving as a non-executive
director is USD $80,000 per year, with an additional USD $10,000 for non-executive directors serving in one committee and USD $20,000
paid to non-executive directors who serve on more committees of our Board of Directors, USD $30,000 for serving as chairman of
the Audit Committee and USD $5,000 for serving as a chairman of the other committees. Generally, during a non-executive director’s
first year of service, a minimum of 50% of such director’s compensation is paid through the issuance of common stock with
the remaining portion paid in cash. In subsequent years of service, a non-executive director gets to elect the method and proportion
of payment. Compensation was paid per quarter in arrears, whereby the conversion of cash in shares was done at the average closing
share price of the Company of the 10 days prior to the start of the quarter discounted by 25%. This is in line with our policy
to stimulate as much as possible conversion into shares to preserve our cash position.
The following table represents compensation
earned or paid in 2016 to our non-executive directors.
Name
|
|
Fees
Earned
or Paid
in
Cash
($)
|
|
|
Stock
Awards
($)(1)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
|
Non-
Qualified
Deferred
Compensation
Earnings
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Carl Stevens
|
|
$
|
-
|
|
|
$
|
18,131
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18,131
|
|
Yves van Sante (2)
|
|
$
|
-
|
|
|
$
|
140,428
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
140,428
|
|
Francisco Ros (3)
|
|
$
|
6,381
|
|
|
$
|
9,972
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,353
|
|
Roderick de Greef (4)
|
|
$
|
81,250
|
|
|
$
|
65,817
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
147,067
|
|
Robert Skaff (5)
|
|
$
|
52,170
|
|
|
$
|
71,059
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
123,229
|
|
|
(1)
|
The amounts included in these
columns are the aggregate fair values of the awards granted by the Company to the directors in the fiscal year in lieu of cash
fees, valued in accordance with FASB ASC Topic 718 for the fiscal year ended December 31, 2016. Pursuant to SEC rules, the amounts
in these columns exclude the impact of estimated forfeitures related to service-based vesting conditions. The share prices used
for the 2016 calculations in this table are the share prices of the last 10 trading days of the quarter covering the compensation
related period. Compensation to the directors can be elected by the directors, at the beginning of the quarter, either in cash
or in shares. When directors opt for payment in shares there is a 25% discount on the ‘purchase’ price. The amounts
however are shown at fair market value by using the closing share price at the last working day of the compensated quarter. In
principle non-executive officer directors might earn up to approximately 33% more than the standard director fees if they have
elected to receive 100% compensation in shares.
|
|
(2)
|
Mr. van Sante elected to
have his directorship fees paid in shares.
|
|
(3)
|
Mr. Ros earned cash directorship
fees of $6,381 in 2016, which have not yet been paid.
|
|
(4)
|
Mr. de Greef earned cash
directorship fees of $81,250 in 2016, of which $10,417 has not yet been paid.
|
|
(5)
|
Mr. Skaff earned cash directorship
fees of $52,170 in 2016, which have not yet been paid.
|
EQUITY COMPENSATION PLAN INFORMATION
Securities Authorized for Issuance under Equity Compensation
Plans
Plan Category
|
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
|
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
|
|
Number of securities
remaining available for
future issuance under
the equity compensation
plans (excluding
securities reflected in
column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity compensation plans approved by security holders
|
|
|
2006 Plan (1): 0
2008 Plan (2): 1,109,281
2017 Plan: 2,168,000
|
|
|
|
2006 Plan: n/a
2008 Plan: $9.85
2017 Plan: $1.00
|
|
|
|
2006 Plan: 0
2008 Plan: 0
2017 Plan: 4,332,000
|
|
Equity compensation plans not approved by security holders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
3,277,281
|
|
|
|
-
|
|
|
|
4,332,000
|
|
|
(1)
|
S-8 Filed July 21, 2006.
|
|
(2)
|
S-8 Filed July 11, 2008.
The stockholders approved the increase of the total number of shares of authorized to be issued under the 2008 Plan from 200,000
to 920,000, during 2013 the stockholders approved an increase from 920,000 to 1,840,000 and during 2014 an increase of the total
number of shares available under the Plan from 1,840,000 to 2,240,000.
|
(
|
3)
|
S-8 Filed June 14, 2017 for 3,500,000 shares. The shareholders approved 6,500,000 total number of
shares on September 12, 2017.
|
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets
forth certain information regarding beneficial ownership of our common stock as of October 13, 2017: (i) by each of our directors,
(ii) by each of the Named Executive Officers, (iii) by all of our executive officers and directors as a group, and (iv) by each
person or entity known by us to beneficially own more than five percent (5%) of any class of our outstanding shares.
As of October 13, 2017, there were ____________
shares of our common stock outstanding.
Name of Beneficial Holder
|
|
Number of Shares of
Common Stock
Owned(A)
|
|
|
Percent of Class as of
October 13, 2017
|
|
Saffelberg Investments N.V.
|
|
|
1,704,464
|
(1)
|
|
|
10.6
|
%
|
Corbin Mezzanine Fund I, L.P.
|
|
|
2,206,315
|
(2)
|
|
|
11.8
|
%
|
Bernard Moncarey
|
|
|
1,156,658
|
(3)
|
|
|
7.3
|
%
|
Artilium plc
|
|
|
3,200,332
|
(8)
|
|
|
16.3
|
%
|
|
|
|
|
|
|
|
|
|
Officers & Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yves Van Sante
|
|
|
375,882
|
|
|
|
1.9
|
%
|
Hal Turner
|
|
|
515,972
|
(4)
|
|
|
2.6
|
%
|
Luis Jimenez-Tuñon
|
|
|
100,000
|
|
|
|
1.0
|
%
|
Laura Thomas
|
|
|
0
|
|
|
|
*
|
|
Victor Bozzo
|
|
|
139,036
|
(5)
|
|
|
0.7
|
%
|
Edward O’Donnell
|
|
|
302,036
|
(6)
|
|
|
1.5
|
%
|
Alexander Korff
|
|
|
277,271
|
(7)
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
All Officers and Directors as a Group
|
|
|
1,829,185
|
|
|
|
8.9
|
%
|
* Less than one percent
(A) Calculated in accordance with Rule 13d-(3)(d)(1)
under the Exchange Act.
(1) Includes 226,172 shares underlying a warrant
exercisable at an exercise price of $1.87 and 90,812 shares underlying the 9% Note. Their address is in Gooik, Belgium.
(2) Includes 2,040,000 shares underlying a
warrants exercisable at $0.64 per share. Corbin Capital Partners, L.P., is an adviser to this entity, and Corbin Capital Partners
Management, LLC, the sole general partner of this entity, may be deemed to beneficially own the shares of Common Stock that may
be deemed beneficially owned by this entity. Their address is 590 Madison Avenue, 31st Floor, New York, New York 10022.
(3) Includes 601,571 shares underlying a warrant
exercisable at $3.50. His address is Rue Emile Lavandier, Luxembourg.
(4) Includes options to
purchase 400,000 shares of our Common Stock, all of which may be deemed to be beneficially owned, of which
75,000 options have an exercise price of $3.50 and 50,000 options have an exercise price of $8.25.
(5) Includes options to purchase 120,000
shares of our Common Stock, all of which may be deemed to be beneficially owned, and which have an exercise price of $4.3725.
(6) Includes options to purchase 290,000
shares of our Common Stock, all of which may be deemed to be beneficially owned, and which have an exercise price of $2.755.
(7) Includes options to purchase 15,072 shares
of our Common Stock, all of which may be deemed to be beneficially owned, of which 226,000 have an exercise price of $1.00.
(8) Their address is 9-13 Saint Andrew
Street London, England EC4A 3AF.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Management of the Company is not aware of a
material interest, direct or indirect, of any director or officer of the Company, any other informed person of the Company, or
any associate or affiliate of any such person, in any transaction since the commencement of the Company’s most recently completed
fiscal year or in any proposed transaction which has materially affected or would materially affect the Company or any of its subsidiaries,
except for (i) the sale of former subsidiary ValidSoft and (ii) the debt restructuring transactions with Atalaya Capital Management
and Corbin Mezzanine Fund I, L.P. – in each case as described elsewhere herein.
In the event of any future transactions between
us and our officers, directors or five percent stockholders, and respective affiliates will be on terms no less favorable than
could be obtained from unaffiliated third parties and will be approved by our independent directors.
DESCRIPTION OF SECURITIES
The following summary description of our
capital stock is based on the provisions of our amended and restated certificate of incorporation, or certificate of incorporation,
and amended and restated bylaws, or bylaws, and the applicable provisions of the Delaware General Corporation Law. This information
is qualified entirely by reference to the applicable provisions of our certificate of incorporation, bylaws and the Delaware General
Corporation Law. Copies of our certificate of incorporation and our bylaws, copies have been filed as exhibits to the
registration statement of which this prospectus is a part. See “Where You Can Find More Information.”
Authorized Capital Stock
Our authorized capital stock consists of
500,000,000 shares of common stock, $0.00001 par value, and 50,000,000 shares of preferred stock, $0.00001 par value. As of October
13, 2017, there were 19,620,819 shares of common stock outstanding.
Common Stock
Subject to preferential rights with respect
to any then outstanding preferred stock, all outstanding shares of common stock are of the same class and have equal rights and
attributes.
Dividend Rights
Holders of the common stock may receive dividends
when, as and if declared by our Board of Directors out of the assets legally available for that purpose and subject to the preferential
dividend rights of any other classes or series of stock of our Company. We have never paid, and have no plans to pay, any
dividends on our shares of common stock.
Voting Rights
Holders of the common stock are entitled to
one vote per share in all matters as to which holders of common stock are entitled to vote. Holders of not less than a majority
of the outstanding shares of common stock entitled to vote at any meeting of stockholders constitute a quorum unless otherwise
required by law.
Liquidation
In the event of any liquidation, dissolution
or winding up of the Company, holders of the common stock have the right to receive ratably and equally all of the assets remaining
after payment of liabilities and liquidation preferences of any preferred stock then outstanding.
Redemption
The common stock is not redeemable or convertible
and does not have any sinking fund provisions.
Preemptive Rights
Holders of the common stock do not have preemptive rights.
Other Rights
Our common stock is not liable to further calls
or to assessment by the registrant and for liabilities of the registrant imposed on its stockholders under state statutes.
Right to Amend Bylaws
The Board of Directors has the power to adopt,
amend or repeal the bylaws. Bylaws adopted by the Board of Directors may be repealed or changed, and new bylaws made, by
the stockholders, and the stockholders may prescribe that any bylaw made by them shall not be altered, amended or repealed by the
Board of Directors.
Preferred Stock
Our certificate of incorporation, as amended,
empowers our Board of Directors, without action by our shareholders, to issue up to 50,000,000 shares of preferred stock from time
to time in one or more series.
The Delaware General
Corporation Law provides that the holders of preferred stock will have the right to vote separately as a class on any proposal
involving fundamental changes in the rights of holders of that preferred stock. This right is in addition to any voting rights
provided for in the applicable certificate of designation.
Our Board of Directors
may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or
other rights of the holders of our common stock. Preferred stock could be issued quickly with terms designed to delay or prevent
a change in control of our Company or make removal of management more difficult. Additionally, the issuance of preferred stock
could have the effect of decreasing the market price of our common stock.
Series A Preferred Stock
and Series A-1 Preferred Stock
The Board has designated 150 shares of
preferred stock as Series A Preferred Stock and 100 shares as Series A-1 Preferred Stock. As of the date of this prospectus,
there are 43 shares of Series A Preferred Stock outstanding and 15 shares of Series A-1 Preferred Stock outstanding. Each
share of Series A Preferred Stock and Series A-1 Preferred Stock is convertible into 0.04% of our issued and outstanding
shares of common stock immediately prior to conversion. The Series A Preferred Stock and Series A-1 Preferred Stock are
convertible at the option of the holder, except that (i) if there is a change in control (as defined in the certificate of
designation) before September 2, 2017 or (ii) any time after September 2, 2017, we have the option to automatically convert
the Series A Preferred Stock and Series A-1 Preferred Stock into common stock. The holders of Series A Preferred Stock and
Series A-1 Preferred Stock are not entitled to receive any dividends and have no voting rights (except that we may only take
certain corporate actions with the approval of a majority of the outstanding shares of Series A Preferred Stock and Series
A-1 Preferred Stock). Further, upon liquidation, dissolution or winding up of the Company, the holders of Series A Preferred
Stock and Series A-1 Preferred Stock will receive distributions on par with and on a pro rata basis with the common
stockholders as though the Series A Preferred Stock and Series A-1 Preferred Stock had been converted at the time of such
liquidation, dissolution or winding up of the Company.
Stock Options and Restricted Stock Units under Equity Plans
As of October 13, 2017, there were approximately
4,332,000 of common stock reserved for issuance under our stock option and equity plans. Approximately 3,277,281 shares are
reserved for issuance upon exercise of outstanding options and restricted stock units that have been granted under our equity
plans, and 4,332,000 shares may be granted in the future under our equity plans.
Anti-Takeover Effects of Provisions of Delaware
Law and Our Charter Documents.
Delaware Takeover Statute
. We are subject
to the provisions of Section 203 of the Delaware General Corporation Law, or the DGCL. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three
years after the date of the transaction in which the person became an interested stockholder, unless the business combination is
approved in a prescribed manner. For purposes of Section 203, a business combination includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder, and an interested stockholder is a person who, together
with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation’s voting stock.
Charter Documents
. The authorization
in our certificate of incorporation of undesignated preferred stock, which could be issued without stockholder approval in a manner
designed to prevent or discourage a takeover.
Together, these provisions may make the removal
of management more difficult and may discourage transactions that could otherwise involve payment of a premium over prevailing
market prices for our common stock. Delaware law and these charter provisions may have the effect of deterring hostile takeovers
or delaying changes in control of our management, which could depress the market price of our common stock.
Listing
Our common stock is listed on The
New York Stock Exchange under the symbol “TEUM.” On October 13¸ 2017, the last reported bid price for our common
stock on The New York Stock Exchange was $1.20 per share. As of October 13, 2017, we had approximatel 525 stockholders
of record.
Transfer Agent and Registrar
The transfer agent and registrar for our common
stock is Continental Stock Transfer and Trust Company. Its address is 1 State Street 30th Floor, New York, NY 10004 and its telephone
number is 212-509-4000.
UNDERWRITING
We have entered into an underwriting
agreement with Dawson James Securities, Inc. with respect to the common stock being offered. Subject to the terms and conditions
of the underwriting agreement, we have agreed to sell to the underwriter, and the underwriter has agreed to purchase from us on
a firm commitment basis, the number of shares of common stock set forth opposite its name in the table below.
Underwriter
|
|
Number of Shares
|
|
|
|
|
Dawson James Securities, Inc.
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
The underwriters are committed to purchase
all the common stock offered by us if they purchase any such securities. The underwriters are not obligated to purchase the common
stock covered by the underwriters’ over-allotment option described below. The underwriters are offering the common stock,
subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel,
and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officer’s certificates
and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders
in whole or in part. We have granted to the underwriters an option to purchase up to __ additional shares of common stock. The
underwriters may exercise this option for 45 days from the date of this prospectus solely to cover sales of common stock by the
underwriters in excess of the total number set forth in the table above. We will pay the expenses associated with the exercise
of the over-allotment option. Dawson James Securities, Inc., its officers and its registered representatives may participate in
this offering on the same terms and conditions as the investors participating in this offering.
Discounts and Commissions
The underwriter proposes to offer to
the public the common stock purchased pursuant to the underwriting agreement at the public offering price per share stated on
the cover page of this prospectus supplement. The underwriter may offer some of the common stock to other securities dealers at
such price less a concession of $__ per shares of common stock. The underwriter may also allow, and such dealers may reallow,
a concession not in excess of $__ share to other dealers. After the common stock is released for sale to the public, the underwriter
may change the offering price and other selling terms at various times.
The factors considered in determining
the public offering price included the recent market price of our common stock, the general condition of the securities market
at the time of this offering, the history of, and the prospects for, the industry in which we compete, our past and present operations
and our prospects for future revenues.
The following table shows the per share
and total underwriting discounts and commissions we will pay in connection with the sale of the common stock.
|
|
Per Share
|
|
|
Total Without Over-
Allotment Option
|
|
|
Maximum Total With
Over-Allotment Option
|
|
Public offering price
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Underwriting discounts and commissions
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Proceeds, before expenses, to us
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
We have also agreed to reimburse the
underwriter for its expenses in connection with this offering, up to $125,000, and to reimburse the underwriter for “blue
sky” expenses up to $25,000.
We estimate the total expenses of this
offering which will be payable by us, excluding the underwriting discount, will be approximately $__.
Underwriters’ Warrant
We have also agreed to issue to the
underwriters’ a warrant to purchase a number of our shares of common stock equal to 5% of the common stock sold in this
offering. The underwriters’ warrant will have an exercise price equal to 125% of the public offering price of the shares
set forth on the cover of this prospectus (or $[_] per share) and may be exercised on a cashless basis. The underwriters’
warrant is not redeemable by us. This prospectus also covers the sale of the underwriters’ warrant and the shares of common
stock issuable upon the exercise of the underwriters’ warrant. The underwriters’ warrant and the underlying securities
have been deemed compensation by FINRA, and are therefore subject to FINRA Rule 5110(g)(1). In accordance with FINRA Rule 5110(g)(1),
neither the underwriters’ warrant nor any securities issued upon exercise of the underwriters’ warrant may be sold,
transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction
that would result in the effective economic disposition of such securities by any person for a period of 180 days immediately
following the date of effectiveness or commencement of sales of the offering pursuant to which the underwriters’ warrant
is being issued, except the transfer of any security: (i) by operation of law or by reason of reorganization of our company; (ii)
to any FINRA member firm participating in this offering and the officers or partners thereof, if all securities so transferred
remain subject to the lock-up restriction described above for the remainder of the time period; (iii) if the aggregate amount
of our securities held by either an underwriter or a related person do not exceed 1% of the securities being offered; (iv) that
is beneficially owned on a pro-rata basis by all equity owners of an investment fund, provided that no participating member manages
or otherwise directs investments by the fund, and participating members in the aggregate do not own more than 10% of the equity
in the fund; or (v) the exercise or conversion of any security, if all securities received remain subject to the lock-up restriction
set forth above for the remainder of the time period. In addition, in accordance with FINRA Rule 5110(f)(2)(G), the underwriters’
warrant may not contain certain anti-dilution terms.
Lock-up Agreements
The underwriting agreement will provide
that our officers and our directors will agree, subject to limited exceptions, for a period of 90 days after the date of the underwriting
agreement, such period being referred to as the “Lock-Up Period”, not to offer, sell, contract to sell, pledge, grant
any option to purchase, make any short sale or otherwise dispose of, directly or indirectly any shares of common stock or any
securities convertible into or exchangeable for our common stock either owned as of the date of the underwriting agreement or
thereafter acquired without the prior written consent of the representative of the underwriters. The representative of the underwriters
may, in its sole discretion and at any time or from time to time before the termination of the Lock-Up Period, without notice,
release all or any portion of the securities subject to lock-up agreements.
Indemnification
We have agreed to indemnify the underwriter
and certain other persons against certain liabilities relating to or arising out of the underwriter’s activities under the
underwriting agreement. We have also agreed to contribute to payments that the underwriter may be required to make in respect
of such liabilities.
Price Stabilization, Short Positions and Penalty Bids
In order to facilitate the offering
of our common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our
common stock. In connection with the offering, the underwriters may purchase and sell our common stock in the open market. These
transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing transactions.
Short sales involve the sale by the underwriters of a greater number of shares of common stock than they are required to purchase
in the offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ option
to purchase additional shares of common stock in the offering pursuant to the exercise of their over-allotment option to purchase
additional shares. The underwriters may close out any covered short position by either exercising the over-allotment option or
purchasing common stock in the open market. In determining the source of common stock to close out the covered short position,
the underwriters will consider, among other things, the price of the common stock available for purchase in the open market as
compared to the price at which they may purchase common stock through the over-allotment option. “Naked” short sales
are sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing common
stock in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may
be downward pressure on the price of our common stock in the open market after pricing that could adversely affect investors who
purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriters
in the open market prior to the completion of the offering.
Similar to other purchase transactions,
the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or maintaining the market
price of our common stock or preventing or retarding a decline in the market price of our common stock. As result, the price of
our common stock may be higher than the price that might otherwise exist in the open market.
The underwriters have advised us that,
pursuant to Regulation M of the Securities Act, they may also engage in other activities that stabilize, maintain or otherwise
affect the price of our common stock including the imposition of penalty bids. This means that if the representative of the underwriters
purchases common stock in the open market in stabilizing transactions or to cover short sales, the representative can require
the underwriters that sold those shares as part of this offering to repay the underwriting discount received by them.
Electronic Offer
This prospectus supplement and the
accompanying prospectus may be made available in electronic format on Internet sites or through other online services maintained
by the underwriter or its affiliates. In those cases, prospective investors may view offering terms online and may be allowed
to place orders online. Other than this prospectus supplement and the accompanying prospectus in electronic format, any information
on the underwriter’s or its affiliates’ websites and any information contained in any other website maintained by
the underwriter or any affiliate of the underwriter is not part of this prospectus supplement, the accompanying prospectus or
the registration statement of which this prospectus supplement and the accompanying prospectus form a part, has not been approved
and/or endorsed by us or the underwriter and should not be relied upon by investors.
Other
The underwriter or its affiliates have
in the past and may in the future perform investment banking and advisory services for us in the ordinary course of their business
and for which they would receive customary fees and expenses. However, except as disclosed in this prospectus, for the past 180
days the underwriters have not provided us with any further services.
LEGAL MATTERS
The validity of the securities being offered
by this prospectus has been passed upon for us by Sichenzia Ross Ference Kesner LLP, New York, New York. Schiff Hardin, LLP, Washington,
D.C., is acting as counsel for the underwriters in connection with the securities offered hereby.
EXPERTS
The consolidated financial statements of
the Company as of December 31, 2016 and 2015, and for the years then ended appearing in this registration statement have been
included in reliance on the report of Squar Milner LLP, an independent registered public accounting firm,
and upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement
on Form S-1 under the Securities Act with respect to the securities offered hereby. This prospectus, which constitutes a part of
the registration statement, does not contain all of the information set forth in the registration statement or the exhibits filed
with the registration statement. For further information about us and the securities offered hereby, we refer you to the registration
statement and the exhibits filed with the registration statement. Statements contained in this prospectus regarding the contents
of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and
each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit
to the registration statement. A copy of the registration statement and the filed exhibits may be inspected without charge at the
public reference room maintained by the SEC, located at 100 F Street, NE, Washington, DC 20549, and copies of all or any part of
the registration statement may be obtained from that office at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further
information about the public reference room. The SEC also maintains a website that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the SEC. The address of the website is
www.sec.gov
.
We
are subject to the information and reporting requirements of the Exchange Act and, in accordance with this law, are required to
file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other
information are available for inspection and copying at the SEC’s public reference facilities and the website of the SEC
referenced above. We make available free of charge, on or through the investor relations section of our website, annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with,
or furnish it to, the SEC. The information found on our website is not part of this prospectus.
PARETEUM CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
June 30, 2017
PARETEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
741,941
|
|
|
$
|
931,189
|
|
Restricted cash
|
|
|
699,661
|
|
|
|
564,018
|
|
Accounts receivable, net of an allowance for doubtful accounts of $91,897 at June 30, 2017 and
$88,528 at December 31, 2016
|
|
|
249,279
|
|
|
|
614,670
|
|
Prepaid expenses and other current assets
|
|
|
680,708
|
|
|
|
1,084,994
|
|
Total current assets
|
|
|
2,371,589
|
|
|
|
3,194,871
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
80,103
|
|
|
|
129,037
|
|
|
|
|
|
|
|
|
|
|
NOTE RECEIVABLE
|
|
|
1,021,561
|
|
|
|
1,012,603
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
7,735,945
|
|
|
|
8,708,778
|
|
|
|
|
|
|
|
|
|
|
INTANGIBLE ASSETS, NET
|
|
|
353,656
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
11,562,854
|
|
|
$
|
13,045,289
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable and customer deposits
|
|
$
|
2,782,781
|
|
|
$
|
2,316,768
|
|
Obligations under capital leases (current portion)
|
|
|
-
|
|
|
|
10,813
|
|
Net billings in excess of revenues
|
|
|
562,682
|
|
|
|
951,791
|
|
Accrued expenses and other payables
|
|
|
4,967,568
|
|
|
|
6,013,620
|
|
Senior Secured Loan - Short Term
|
|
|
1,750,000
|
|
|
|
4,000,000
|
|
Total current liabilities
|
|
|
10,063,031
|
|
|
|
13,292,992
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
-
|
|
|
|
4,265,829
|
|
Other long term liabilities
|
|
|
177,139
|
|
|
|
192,980
|
|
Unsecured Convertible Promissory Note (net of Debt Discount and Debt Issuance)
|
|
|
75,338
|
|
|
|
821,048
|
|
Senior Secured Loan - Long Term (net of Debt Discount, and Debt Issuance)
|
|
|
5,038,644
|
|
|
|
3,715,662
|
|
Non-current portion of net billings in excess of revenues
|
|
|
97,489
|
|
|
|
121,309
|
|
Total long term liabilities
|
|
|
5,388,610
|
|
|
|
9,116,828
|
|
Total liabilities
|
|
|
15,451,641
|
|
|
|
22,409,820
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Preferred Stock $0.00001 par value, 50,000,000 shares authorized, 58 and 249 issued and outstanding as of June 30, 2017
and December 31, 2016, respectively
|
|
|
384,503
|
|
|
|
2,143,196
|
|
Common Stock $0.00001 par value, 500,000,000 shares authorized, 13,271,355 and 8,376,267 issued and outstanding as of
June 30, 2017 and December 31, 2016, respectively
|
|
|
290,540,444
|
|
|
|
280,653,362
|
|
Accumulated other comprehensive loss
|
|
|
(5,097,560
|
)
|
|
|
(5,086,902
|
)
|
Accumulated deficit
|
|
|
(289,716,174
|
)
|
|
|
(287,080,234
|
)
|
Pareteum Corporation stockholders’ deficit
|
|
|
(3,888,787
|
)
|
|
|
(9,370,578
|
)
|
|
|
|
|
|
|
|
|
|
NON-CONTROLLING INTEREST
|
|
|
-
|
|
|
|
6,047
|
|
Total stockholders’ deficit
|
|
|
(3,888,787
|
)
|
|
|
(9,364,531
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
$
|
11,562,854
|
|
|
$
|
13,045,289
|
|
The accompanying notes are an integral
part of the unaudited condensed consolidated financial statements.
PARETEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE
LOSS
(UNAUDITED)
|
|
Six months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
REVENUES
|
|
$
|
6,034,118
|
|
|
$
|
6,540,692
|
|
|
|
|
|
|
|
|
|
|
COST AND OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Cost of service
|
|
|
1,787,590
|
|
|
|
2,104,427
|
|
Product development
|
|
|
558,206
|
|
|
|
2,098,902
|
|
Sales and marketing
|
|
|
690,282
|
|
|
|
887,673
|
|
General and administrative
|
|
|
3,856,226
|
|
|
|
5,680,885
|
|
Restructuring and settlement costs
|
|
|
588,106
|
|
|
|
-
|
|
Depreciation and amortization of intangibles assets
|
|
|
1,716,476
|
|
|
|
2,211,551
|
|
Total cost and operating expenses
|
|
|
9,196,886
|
|
|
|
12,983,438
|
|
|
|
|
|
|
|
|
|
|
(LOSS) / INCOME FROM OPERATIONS
|
|
|
(3,162,768
|
)
|
|
|
(6,442,746
|
)
|
|
|
|
|
|
|
|
|
|
OTHER (EXPENSE) / INCOME
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
94,036
|
|
|
|
50,547
|
|
Interest expense
|
|
|
(923,184
|
)
|
|
|
(602,772
|
)
|
Interest expense related to debt discount and conversion feature
|
|
|
(1,342,598
|
)
|
|
|
(613,144
|
)
|
Changes in derivative liabilities
|
|
|
1,920,881
|
|
|
|
659,936
|
|
Gain on Extinguishment of Debt
|
|
|
463,345
|
|
|
|
-
|
|
Other income & (expense), net
|
|
|
470,476
|
|
|
|
112,560
|
|
Amortization of deferred financing costs
|
|
|
(222,623
|
)
|
|
|
(282,295
|
)
|
Total other (expense)
|
|
|
460,333
|
|
|
|
(675,168
|
)
|
|
|
|
|
|
|
|
|
|
(LOSS) BEFORE PROVISION FOR INCOME TAXES
|
|
|
(2,702,435
|
)
|
|
|
(7,117,914
|
)
|
(Benefit)/Provision for income taxes
|
|
|
(66,495
|
)
|
|
|
19,107
|
|
NET (LOSS)
|
|
|
(2,635,940
|
)
|
|
|
(7,137,021
|
)
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME / (LOSS)
|
|
|
|
|
|
|
|
|
Foreign currency translation income / (loss)
|
|
|
(10,651
|
)
|
|
|
(4,264
|
)
|
COMPREHENSIVE (LOSS)
|
|
$
|
(2,646,591
|
)
|
|
$
|
(7,141,285
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) per common share and equivalents - basic
|
|
$
|
(0.24
|
)
|
|
$
|
(1.09
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) per common share and equivalents - diluted
|
|
$
|
(0.24
|
)
|
|
$
|
(1.09
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the period – basic
|
|
|
11,132,580
|
|
|
|
6,530,513
|
|
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,
|
|
|
|
2017
|
|
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,635,940
|
)
|
|
$
|
(7,137,021
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,716,476
|
|
|
|
2,211,551
|
|
Provision for doubtful accounts
|
|
|
6,378
|
|
|
|
(279,740
|
)
|
Stock based compensation
|
|
|
1,123,293
|
|
|
|
1,306,131
|
|
Change in fair value of warrant liability
|
|
|
(1,920,881
|
)
|
|
|
(659,936
|
)
|
Amortization of deferred financing costs
|
|
|
222,623
|
|
|
|
282,295
|
|
Interest expense relating to debt discount and conversion feature
|
|
|
1,342,598
|
|
|
|
613,144
|
|
Unrealized foreign currency translation gain loss
|
|
|
(470,476
|
)
|
|
|
(112,560
|
)
|
Payables settled by issuance of shares
|
|
|
473,692
|
|
|
|
-
|
|
(Gain) on Extinguishment of Debt
|
|
|
(463,345
|
)
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable
|
|
|
359,013
|
|
|
|
668,599
|
|
Decrease in prepaid expenses, deposits and other assets
|
|
|
444,262
|
|
|
|
678,225
|
|
Increase in accounts payable and customer deposits
|
|
|
466,013
|
|
|
|
648,866
|
|
Decrease in Net billings in excess of revenues and deferred revenue
|
|
|
(412,929
|
)
|
|
|
(287,246
|
)
|
(Decrease) Increase in accrued expenses and other payables
|
|
|
(1,061,893
|
)
|
|
|
696,889
|
|
Net cash (used in) operating activities
|
|
|
(811,116
|
)
|
|
|
(1,370,803
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of property
and equipment, net and capitalized software
|
|
|
(332,630
|
)
|
|
|
(1,329,611
|
)
|
Net cash (used in) investing activities
|
|
|
(332,630
|
)
|
|
|
(1,329,611
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Financing receivable
|
|
|
-
|
|
|
|
355,000
|
|
Principal payment on 2014 10% + libor 3rd Part Loan
|
|
|
-
|
|
|
|
(415,098
|
)
|
Proceeds from 9% Unsecured Subordinated Convertible Promissory Note
|
|
|
-
|
|
|
|
2,273,000
|
|
Financing related fees
|
|
|
(364,941
|
)
|
|
|
(445,249
|
)
|
Unsecured promissory note
|
|
|
-
|
|
|
|
350,000
|
|
Advance Purchase payment on “Assets held for sale”
|
|
|
-
|
|
|
|
450,000
|
|
Gross Proceed from public offering
|
|
|
3,500,000
|
|
|
|
-
|
|
Principal repayment Senior Secured Loan
|
|
|
(1,750,000
|
)
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
1,385,059
|
|
|
|
2,567,653
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
(294,918
|
)
|
|
|
1,917
|
|
NET (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
(53,605
|
)
|
|
|
(130,844
|
)
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF THE PERIOD
|
|
|
1,495,207
|
|
|
|
615,401
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF THE PERIOD
|
|
$
|
1,441,602
|
|
|
$
|
484,557
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
336,193
|
|
|
$
|
459,470
|
|
Cash paid during the period for income taxes
|
|
|
895
|
|
|
|
-
|
|
Conversion of notes including accelerated amortization into common shares
|
|
|
801,549
|
|
|
|
-
|
|
Amendments to warrants and convertible notes into common shares
|
|
|
2,344,948
|
|
|
|
-
|
|
Conversions of convertible notes
|
|
|
774,424
|
|
|
|
-
|
|
The accompanying notes are an integral
part of the unaudited condensed consolidated financial statements.
PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
UNAUDITED
Note 1. Financial Condition
As reflected in the accompanying consolidated
financial statements, the Company reported net (loss) of $(2,635,940) for the period ended June 30, 2017 and had an accumulated
deficit of $(289,716,174) as of June 30, 2017.
The Company was influenced by several
events through June 30, 2017:
|
·
|
The
restructuring of Atalaya debt on March 6, 2017 and May 2, 2017;
|
|
·
|
A
25-1 reverse stock split;
|
|
·
|
the
conversion of derivative debt;
|
|
·
|
an
extension was granted by the NYSE for compliance with the listing requirements;
|
|
·
|
new
director appointment
|
|
·
|
Joseph
Gunnar warrant exercise; and
|
|
·
|
Proposal
for a new employee stock option plan
|
Atalaya Debt Restructuring
On March 6, 2017, Elephant Talk Europe
Holding B.V., an entity organized under the laws of the Netherlands (the “Borrower”), a wholly owned subsidiary of
Pareteum Corporation (the “Company”), as Borrower, the Company, Pareteum North America Corp., a Delaware corporation,
Corbin Mezzanine Fund I, L.P. (“Lender”) and Atalaya Administrative LLC, a New York limited liability company, as
administrative agent and collateral agent for the Lender, entered into an Agreement (the “Agreement”) to amend certain
terms of the credit agreement among the parties, dated November 17, 2014, as has been amended from time to time (as so amended,
the “Amended and Restated Agreement”). On March 31, 2017, the relevant parties entered into the formal amendment to
the Amended and Restated Agreement (the “Amendment”). Capitalized terms used herein but not otherwise defined shall
have the meaning as set forth in the Amended and Restated Credit Agreement.
Pursuant to the Amendment, (i) the Maturity
Date was extended to December 31, 2018; (ii) the amortization schedule was amended as follows: Q1-2017: $1,500,000; Q2-2017: $1,500,000;
Q3-2017: $500,000; Q4-2017: $500,000; Q1-2018: $750,000; Q2-2018: $750,000; Q3-2018: $750,000; and (iii) inserting a new definition
of “2017 Equity Offering.” Additionally, the two warrants previously issued to the Lender (the “Corbin Warrant”)
and ACM Carry-I LLC (the “ACM Warrant” and, together with the Corbin Warrant, the “Warrants”) were amended
and treated as a modification to (a) increase the aggregate amount of shares of common stock underlying the Corbin Warrant to
1,229,100 and increase the aggregate amount of shares of common stock underlying the ACM Warrant to 216,900; (b) adjust the exercise
price of the Warrants to $1.305 per share; and (c) remove the anti-dilution sections (Sections 9(d) and 9(h)) of the Warrants.
On May 2, 2017, Elephant Talk Europe Holding B.V., an entity organized under the laws of the Netherlands,
a wholly owned subsidiary of Pareteum Corporation, as Borrower, the Company, Pareteum North America Corp., a Delaware corporation,
Corbin Mezzanine Fund I, L.P. and Atalaya Administrative LLC, a New York limited liability company, as administrative agent and
collateral agent for the Lender, executed a Term Sheet (the “Term Sheet”) to amend certain terms of that credit agreement
among the parties, as amended via the Amended & Restated Credit Agreement dated December 27, 2016, and further amended on March
6, 2017.
On August 9, 2017, the parties entered
the Second Amendment (“Second Amendment), among other items, to reduce the quarterly principal amortization payment amounts
and confirmed the maturity date of December 31, 2018. Further, the parties agreed on a revised repayment schedule, which reduces
the principal repayments to $250,000 for the second and third quarters of 2017 and $500,000 for the fourth quarter of 2017. The
quarterly principal repayments for 2018 have also been materially reduced from $750,000 per quarter to $500,000 per quarter with
a final payment due by December 31, 2018. The parties also agreed that the two warrants previously issued under prior amendments
will be revised to adjust the exercise price of $0.64. The Company also agreed to issue new warrants with a strike price of $0.64
for consideration received from the Lender and Atalya in the amounts of 793,900 and 140,100, respectively.
Reverse Stock Split
We received a deficiency letter from the
NYSE MKT on December 6, 2016, indicating that our securities had been selling for a low price per share for a substantial period
of time and, pursuant to Section 1003(f)(v) of the NYSE MKT Company Guide (the “Company Guide”), our continued listing
on the NYSE MKT was predicated on our effecting a reverse split and other requirements or otherwise demonstrating sustained price
improvement. This notice was in addition to a prior notice we received from NYSE MKT on May 26, 2016, as previously disclosed
on a Current Report on Form 8-K we filed on June 2, 2016. The NYSE MKT indicated that we had an additional six months, or until
June 6, 2017, to gain compliance with Section 1003(f)(v) of the Company Guide.
On February 27, 2017, we completed a 1-for-25 reverse split of our issued and outstanding common stock
and regained compliance with Section 1003 (f)(v) of the company guide.
Conversion of Unsecured Convertible
Promissory Note and Modification of Derivative Securities
On March 30, 2017, Pareteum Corporation entered into an agreement (the “Agreement”) with Saffelberg
Investments NV (the “Holder”) pursuant to which the Company and the Holder amended the terms of, redeemed or effected
conversion, as the case may be, of certain convertible promissory notes (the “Note(s)”) and warrants (the “Warrant(s)”)
previously issued by the Company to the Holder.
Pursuant to the Agreement, the Company and the Holder agreed to modify certain terms of the Notes whereby
(i) the principal amount of one Note, in the initial amount of $723,900, will be increased by ten percent (10%) and subsequently
converted into 530,860 shares of common stock, par value $0.00001 per share, of the Company and (ii) the Company will immediately
repay in cash another Note in the principal amount of $350,000, plus interest of $59,304. As of August 14, 2017, the principal
and accrued interest remain unpaid.
Conversion of Preferred Shares
The Company’s Certificate of Incorporation
authorizes the issuance of 50,000,000 shares of preferred stock, $0.00001 par value per share. 58 shares of preferred stock are
issued and outstanding as of June 30, 2017 compared to 249 shares of preferred stock outstanding as of December 31, 2016, a decrease
of 191 shares. Under the Company’s Certificate of Incorporation, the Board of Directors has the power, without further action
by the holders of the Common Stock, subject to the rules of the NYSE MKT LLC, to designate the relative rights and preferences
of the preferred stock, and issue the preferred stock in such one or more series as designated by the Board of Directors. The designation
of rights and preferences could include preferences as to liquidation, redemption and conversion rights, voting rights, dividends
or other preferences, any of which may be dilutive of the interest of the holders of the Common Stock or the preferred stock of
any other series. The issuance of preferred stock may have the effect of delaying or preventing a change in control of the Company
without further stockholder action and may adversely affect the rights and powers, including voting rights, of the holders of Common
Stock. In certain circumstances, the issuance of preferred stock could depress the market price of the Common Stock.
On March 7, 2017, Pareteum Corporation received conversion notices from holders of an aggregate of $1,910,000,
or 191 shares, of the Company’s Series A Convertible Preferred Stock and Series A-1 Convertible Preferred Stock (the “Preferred
Shares”). The Preferred Shares have been converted into shares of common stock, $0.00001 par value per share, of the Company
at $1.305 (a 13% discount to the public offering) and shall become effective upon the filing by the Company of a prospectus supplement
disclosing the terms of an offering. Additionally, holders will be granted warrants to purchase 50% additional shares to what they
received upon conversion. The exercise price will be $1.87.
Joseph Gunnar & Co., LLC - Public
Offering
On March 10, 2017, Pareteum Corporation entered into an underwriting agreement (the “Underwriting
Agreement”) with Joseph Gunnar & Co., LLC (the “Underwriter”), relating to the issuance and sale of 2,333,334
shares of the Company’s common stock, par value $0.00001 per share, at a price to the public of $1.50 per share together
with five-year warrants to purchase an aggregate of 1,166,667 shares of Common Stock at an exercise price of $1.87. The Underwriter
agreed to purchase the shares from the Company pursuant to the Underwriting Agreement at a price of $1.3949 per share. The gross
proceeds to the Company from the offering were approximately $3.5 million, before deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company. The offering closed on March 15, 2017. In addition, under the terms of
the Underwriting Agreement, the Company had granted the Underwriter a 45-day option to purchase up to (i) up to 350,000 additional
shares of Common Stock (the “Option Shares”) at a purchase price of $1.3949 per one Option Share, taking into account
the Underwriter’s discount, and/or (ii) warrants to purchase up to 175,000 additional shares of Common Stock (the “Option
Warrants”), that option expired at the end of 45 days. The Underwriter partially exercised their over-allotment option on
109,133 Option Warrants. No Option Shares were exercised.
Extension Granted for Compliance with
the NYSE Listing Requirements
On July 13, 2017, Pareteum Corporation received a notice from the NYSE MKT LLC (the “Exchange”)
indicating that the Company is not currently in compliance with the Exchange’s continued listing standards as set forth in
Section 1003(a)(i), Section 1003(a)(ii), Section 1003(a)(iii), and Section 1003(a)(iv) of the NYSE MKT Company Guide. The Company
is now in compliance with Section 1003(f)(v). The Exchange has reviewed the Company’s most recent updates and determined
to extend the plan period for the Company to regain compliance with Section 1003(a)(iv) through November 27, 2017. The compliance
date for Section 1003(a)(i), Section 1003(a)(ii), and Section 1003(a)(iii) remain November 27, 2017, as was previously stated in
the Exchange’s notice dated January 5, 2017 and disclosed on a Current Report on Form 8-K filed by the Company on January
9, 2017.
If the Company is not in compliance with
the continued listing standards of the Company Guide by November 27, 2017, or if the Company does not make progress consistent
with the plan during the plan period, the Exchange will initiate delisting proceedings as appropriate. The Company may appeal
a staff delisting determination in accordance with Section 1010 and Part 12 of the Company Guide.
New Director Appointment
Effective July 25, 2017, Pareteum Corporation appointed Laura Thomas as an independent director of the
Company.
Ms. Thomas presently serves as the Chief
Financial Officer of Towerstream, Inc. Ms. Thomas previously served on the Board of Directors of Impact Telecom (“Impact”),
a full-service telecommunications company, from January 2016 through December 2016, during which time she served as Chairman of
the Board of Directors from January 2016 through June 2016. From December 2014 through December 2015 she served as the Chief Executive
Officer of TNCI Operating Company, which acquired Impact in January 2016. From 2000 through 2014 she served in a variety of roles
at XO Holdings, Inc. (now XO Communications), a telecommunications services provider, including as Chief Financial Officer from
May 2009 through April 2011 and again from December 2013 through August 2014, and as Chief Executive Officer from April 2011 through
December 2013.
Joseph Gunnar Warrant
Exercise
On July 17, 2017, Pareteum Corp. entered into Warrant Exercise Agreements (the “Exercise Agreements”)
with certain holders (the “Exercising Holders”) of outstanding warrants to purchase up to an aggregate of 1,150,000
shares of common stock of the Company at $1.87 per share (the “Original Warrants”) whereby the Exercising Holders and
the Company agreed that the Exercising Holders would, exercise their Original Warrants at a reduced exercise price of $1.00 per
share. The Company expects to receive aggregate gross proceeds before expenses of approximately $1.15 million from the exercise
of the Original Warrants by the Exercising Holders.
In consideration for the Exercising Holders
exercising their Original Warrants, the Company will issue to each Exercising Holder a new warrant (each, a “New Warrant”)
to purchase shares of the Company’s common stock equal to the number of shares of common stock received by such Exercising
Holder upon the cash exercise of such Exercising Holder’s Original Warrants. The terms of the New Warrants will be substantially
similar to the terms of the Original Warrants, except that the New Warrants will (i) have an exercise price equal to $1.39 per
share and (ii) be exercisable six months from first issuance of the New Warrants, for a period of five years.
The issuance of the New Warrants will
not be registered under the Securities Act of 1933, as amended (the “Securities Act”), or any state securities laws.
The New Warrants will be issued in reliance on the exemption from registration provided by Section 4(a)(2) under the Securities
Act and/or Regulation D promulgated thereunder. Each Exercising Holder has represented that it is an accredited investor, as defined
in Rule 501 of Regulation D promulgated under the Securities Act.
In connection with the Exercise Agreements,
the Company engaged Joseph Gunnar & Co., LLC to act as the Company’s placement agent. The Company has agreed to pay Joseph
Gunnar & Co., LLC a cash fee equal to seven percent (7%) of the sum of the gross proceeds received by the Company from the
exercise of the Original Warrants.
Proposed New Employee Stock Option
Plan
On June 8, 2017, the Board adopted the 2017 Pareteum Corp.
Long-Term Incentive Compensation Plan (the “2017 Plan”), an omnibus equity incentive plan pursuant to which the Company
may grant equity and equity-linked awards to officers, directors, consultants and others. The Board adopted the 2017 Plan as a
means to offer incentives and attract, motivate and retain and reward persons eligible to participate in the 2017 Plan. Accordingly,
the Board unanimously approved and adopted the 2017 Plan, including authorization of the issuance of 6,500,000 shares of the Company’s
common stock. The 2017 Plan is subject to shareholder approval. On June 14, 2017, the Company filed with the Securities and Exchange
Commission a Registration Statement on Form S-8, registering 3,500,000 shares under the 2017 Plan.
Based on our current expectations with respect
to our revenue and expenses, we expect that our current level of cash and cash equivalents could be sufficient to meet our liquidity
needs for the next twelve months. If our revenues do not grow as expected and if we are not able to manage expenses sufficiently,
including required payments pursuant to the terms of the senior secured debt, we may be required to obtain additional equity or
debt financing. Although we have previously been able to attract financing as needed, such financing may not continue to be available
at all, or if available, on reasonable terms as required. Further, the terms of such financing may be dilutive to existing shareholders
or otherwise on terms not favorable to us or existing shareholders. If we are unable to secure additional financing, as circumstances
require, or do not succeed in meeting our sales objectives, we may be required to change or significantly reduce our operations
or ultimately may not be able to continue our operations. As a result of our historical net losses and cash flow deficits, and
net capital deficiency, these conditions raise substantial doubt as to the Company’s ability to continue as a going concern.
The accompanying consolidated financial statements do not include any adjustments to reflect the possible effects on the recoverability
and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Note 2. Description of Business, Basis of Presentation
and Use of Estimates
Business overview
Pareteum has developed a Communications
Cloud Services Platform, providing (i) Mobility, (ii) Messaging and (iii) Security services and applications, with a Single-Sign-On,
API and software development suite.
The Pareteum platform hosts integrated
IT/Back Office and Core Network functionality for mobile network operators, and for enterprises implement and leverage mobile
communications solutions on a fully outsourced SaaS, PaaS and/or IaaS basis: made available either as an on-premise solution or
as a fully hosted service in the Cloud depending on the needs of our customers. Pareteum also delivers an Operational Support
System (“OSS”) for channel partners, with Application Program Interfaces (“APIs”) for integration with
third party systems, workflows for complex application orchestration, customer support with branded portals and plug-ins for a
multitude of other applications. These features facilitate and improve the ability of our channel partners to provide support
and to drive sales.
Basis of Presentation of Interim Periods
The interim condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim
financial information and with the instructions to Securities and Exchange Commission, or SEC, Form 10-Q and Article 10 of SEC
Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore,
these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto
for the year ended December 31, 2016, included in our 2016 Annual Report on Form 10-K filed with the SEC on March 29, 2017, referred
to as our 2016 Annual Report.
The interim condensed consolidated financial
statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion
of management, are necessary to present fairly our results of operations and financial position for the interim periods. The results
of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for
future quarters or the full year.
For a complete summary of our significant
accounting policies, please refer to Note 2, “Business and Summary of Significant Accounting Policies,” of our 2016
Annual Report. There have been no material changes to our significant accounting policies during the six months ended June 30,
2017.
Use of Estimates
The preparation of the accompanying consolidated
financial statements conforms with accounting principles generally accepted in the U.S. and requires management to make certain
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.
The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Significant areas of estimates include revenue recognition, valuation of goodwill and other intangible assets, bad debt allowance,
valuation of financial instruments, useful lives of long lived assets and share-based compensation. Actual results may differ
from these estimates under different assumptions or conditions.
Recently Issued Accounting Standards
In November 2016, the FASB issued Accounting
Standards Update 2016-18, “Statement of Cashflows – Restricted Cash a consensus of the FASB Emerging Issues Task Force”.
This standard requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of
cash flows under a retrospective transition approach. The guidance will become effective for fiscal years beginning after December
15, 2017 and interim periods within those fiscal years. The Company has adopted ASU 2016-18.
Accounting Standards Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09 Revenue
from Contracts with Customers (ASU 2014-09). ASU 2014-09 is a comprehensive new revenue recognition model that requires a company
to recognize revenue to depict the transfer of goods and services to customers in an amount that reflects the consideration to
which the company expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU 2015-14
Revenue from Contracts with Customers: Deferral of Effective Date (ASU 2015-14) to defer the effective date of the new revenue
recognition standard.
ASU 2015-14 defers the effective date of ASU 2014-09 by one year for all entities and permits early adoption
on a limited basis. For public entities, ASU 2014-09 is effective for fiscal years beginning after December 15, 2017, with early
adoption permitted for fiscal years beginning after December 15, 2016, and is effective for interim periods in the year of adoption.
We will adopt ASU 2014-09 on January 1, 2018 and we are evaluating the application of the modified or full retrospective transition
methods on our ongoing financial reporting. As part of our evaluation, we are reviewing all our present revenue generating contracts.
We will review our various revenue streams and their present categorization to determine the impact of ASU 2014-09 on our revenue
recognition. The Company does not anticipate that the ASU will materially impact the amount and timing of consolidated revenues.
However, there could be changes to the presentation of revenues on our statements of operations and additional disclosures around
the nature, amount, timing and uncertainty of our revenues and cash flows arising from contracts with customers. We continue to
actively monitor outstanding issues currently being addressed by the American Institute of Certified Public Accountants’
Revenue Recognition Working Group and the Financial Accounting Standards Board’s Transition Resource Group, since conclusions
reached by these groups may impact our application of these ASUs.
Note 3. Supplemental Financial Information
The following tables present details of our condensed consolidated
financial statements:
Prepaid expenses and other current assets
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Prepaid expenses
|
|
$
|
386,403
|
|
|
$
|
492,549
|
|
VAT
|
|
|
294,305
|
|
|
|
592,445
|
|
|
|
$
|
680,708
|
|
|
$
|
1,084,994
|
|
Property and equipment
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Furniture & fixtures
|
|
$
|
168,205
|
|
|
$
|
155,197
|
|
Computer, communications and network equipment
|
|
|
20,795,544
|
|
|
|
19,079,117
|
|
Software
|
|
|
3,486,825
|
|
|
|
3,209,318
|
|
Automobiles
|
|
|
12,919
|
|
|
|
11,897
|
|
Construction in progress
|
|
|
854,435
|
|
|
|
786,897
|
|
Acc. Depreciation Property & Equipment
|
|
|
(17,581,983
|
)
|
|
|
(14,533,648
|
)
|
|
|
$
|
7,735,945
|
|
|
$
|
8,708,778
|
|
Accrued expenses and other payables
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accrued Selling, General & Administrative expenses
|
|
$
|
2,904,841
|
|
|
$
|
4,955,959
|
|
Accrued cost of service
|
|
|
717,068
|
|
|
|
394,496
|
|
Accrued taxes (including VAT)
|
|
|
750,568
|
|
|
|
127,434
|
|
Accrued interest payable
|
|
|
150,862
|
|
|
|
132,632
|
|
Other accrued expenses
|
|
|
444,229
|
|
|
|
403,099
|
|
|
|
$
|
4,967,568
|
|
|
$
|
6,013,620
|
|
Intangible assets
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Capitalized development costs
|
|
$
|
369,032
|
|
|
$
|
-
|
|
Accumulated Amortization
|
|
|
(15,376
|
)
|
|
|
-
|
|
|
|
$
|
353,656
|
|
|
$
|
-
|
|
Breakdown of the Unsecured Convertible Promissory
Notes (net of debt discounts)
|
|
Outstanding
June
30, 2017
|
|
|
Closing(s)
during
2017
|
|
|
Regular
Amortizations
(during
2017)
|
|
|
Conversions
(during
2017)
including
accelerated
amortization
|
|
|
December
31, 2016
|
|
9% Unsecured Convertible Note (Private Offering
Q4- 2015 – Q1-2016
|
|
$
|
(75,338
|
)
|
|
$
|
-
|
|
|
$
|
(36,523
|
)
|
|
$
|
281,914
|
|
|
$
|
(320,729
|
)
|
9% Saffelberg Note (Unsecured Convertible)
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,316
|
)
|
|
|
519,635
|
|
|
|
(500,319
|
)
|
|
|
$
|
(75,338
|
)
|
|
$
|
-
|
|
|
$
|
(55,839
|
)
|
|
$
|
801,549
|
|
|
$
|
(821,048
|
)
|
Fair Market Value Warrants &
Conversion Feature
|
|
FMV as of
June
30, 2017
|
|
|
Additional
closings
during
2017
|
|
|
Agreement
Amendments/
Conversions
|
|
|
Mark to
market
adjustment
Ytd-2017
|
|
|
FMV as
of
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9% Saffelberg Note (Unsecured Convertible)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(400,631
|
)
|
|
$
|
(37,817
|
)
|
|
$
|
438,448
|
|
FMV Conversion Feature
|
|
|
-
|
|
|
|
-
|
|
|
|
(400,631
|
)
|
|
|
(37,817
|
)
|
|
|
438,448
|
|
Lender Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,610,060
|
)
|
|
|
(1,752,223
|
)
|
|
|
3,362,283
|
|
9% Saffelberg Note Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
(70,826
|
)
|
|
|
(117,388
|
)
|
|
|
188,214
|
|
7% Agent Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
(121,200
|
)
|
|
|
-
|
|
|
|
121,200
|
|
8% Agent Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
(142,231
|
)
|
|
|
(13,453
|
)
|
|
|
155,684
|
|
FMV Warrant Liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,944,317
|
)
|
|
|
(1,883,064
|
)
|
|
|
3,827,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,344,948
|
)
|
|
$
|
(1,920,881
|
)
|
|
$
|
4,265,829
|
|
Change in Fair Value of Conversion
Feature
During the first quarter of 2017, the
Company negotiated with all parties having a derivative instrument with conversion feature to eliminate any condition responsible
for the need of derivative accounting. This resulted in the calculation of the fair value as per the agreement date of the elimination
of such feature and the subsequent accounting for the allocation of the remaining liability value towards extinguishment of debt
and change in fair value of the conversion feature.
Number of underlying shares for
Warrants & Conversion
Feature
|
|
Outstanding
June 30,
2017
|
|
|
Additional
Closings
during 2017
|
|
|
Agreement
Amendments
/ Interest
effects
|
|
|
Exercises /
Conversions
|
|
|
Outstanding
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9% Convertible Note - Investors
|
|
|
61,116
|
|
|
|
-
|
|
|
|
92,013
|
|
|
|
(243,564
|
)
|
|
|
212,667
|
|
9% Convertible Note - Other Investor
|
|
|
-
|
|
|
|
-
|
|
|
|
396,181
|
|
|
|
(530,860
|
)
|
|
|
134,679
|
|
Underlying shares relating to outstanding Conversion
Features
|
|
|
61,116
|
|
|
|
-
|
|
|
|
488,194
|
|
|
|
(774,424
|
)
|
|
|
347,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13%+Eurodollar Senior Secured
|
|
|
1,446,000
|
|
|
|
-
|
|
|
|
172,982
|
|
|
|
-
|
|
|
|
1,273,018
|
|
2017 Registered Public Offering
|
|
|
1,166,667
|
|
|
|
1,166,667
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Investor Management Services
|
|
|
710,000
|
|
|
|
710,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
9% Convertible Note Warrants
|
|
|
520,373
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
520,373
|
|
2013 Convertible Notes
|
|
|
180,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
180,000
|
|
Other 9% Convertible Note Warrants
|
|
|
106,172
|
|
|
|
-
|
|
|
|
9,652
|
|
|
|
-
|
|
|
|
96,520
|
|
2017 Registered Public Offering Agent Warrants
|
|
|
641,667
|
|
|
|
641,667
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
9% Convertible Note 7% Agent Warrants
|
|
|
66,229
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66,229
|
|
Preferred Share Conversion Warrants
|
|
|
731,798
|
|
|
|
-
|
|
|
|
731,798
|
|
|
|
-
|
|
|
|
-
|
|
Preferred Share issuance 8% Agent Warrants
|
|
|
38,827
|
|
|
|
-
|
|
|
|
(29,618
|
)
|
|
|
-
|
|
|
|
68,445
|
|
Underlying shares relating to outstanding Warrants
|
|
|
5,607,733
|
|
|
|
2,518,334
|
|
|
|
884,814
|
|
|
|
-
|
|
|
|
2,204,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,668,849
|
|
|
|
2,518,334
|
|
|
|
1,373,008
|
|
|
|
(774,424
|
)
|
|
|
2,551,931
|
|
2016 13% + Eurodollar Senior Secured Credit Agreement
|
|
|
|
|
|
|
(Refinancing of 2014 10% + Eurodollar Loan) (Maturing
December 2018,
including provisional extensions)
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
2016 13% + Eurodollar Senior Secured Credit Agreement (principal)
|
|
$
|
8,331,836
|
|
|
$
|
10,081,836
|
|
Debt Discount - 10% Warrants & Free Warrant shares
|
|
|
(262,400
|
)
|
|
|
(422,202
|
)
|
Debt Discount – 2017 Warrants for Corbin & Atalaya
|
|
|
(41,809
|
)
|
|
|
-
|
|
Debt Discount - Original Issue Discount
|
|
|
(4,089
|
)
|
|
|
(6,596
|
)
|
Deferred Financing Costs
|
|
|
(110,021
|
)
|
|
|
(164,731
|
)
|
Debt Discount - Repayment Premium
|
|
|
(1,124,873
|
)
|
|
|
(1,772,645
|
)
|
|
|
$
|
6,788,644
|
|
|
$
|
7,715,662
|
|
Change in Fair Value of Warrant Liabilities
During the first quarter of 2017, the
Company negotiated with all parties having a derivative warrant to eliminate any condition (mainly caused by anti-dilution protection
conditions) responsible for the need of the subsequent derivative accounting. This resulted in the calculation of the fair value
as per the agreement date of the elimination of such condition and the subsequent accounting for the allocation of the remaining
liability value towards change in fair value of the warrant liability.
Note 4. Fair Value Measurements
In accordance with Accounting Standards
Update 820, Fair Value Measurement (“ASC 820”), the Company defines fair value as the price that would be received
from selling an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants
at the measurement date. ASC 820 establishes a fair value hierarchy for inputs used in measuring fair value that maximizes the
use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when
available.
Observable inputs are those that market
participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company.
Unobservable inputs reflect the Company’s assumptions about the inputs that market participants would use in pricing the
asset or liability developed based on the best information available in the circumstances.
The fair value hierarchy is categorized
into three levels based on the inputs as follows:
Level 1
– Quoted prices are
available in active markets for identical assets or liabilities as of the reported date.
Level 2
– Pricing inputs
are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The
nature of these financial instruments include cash instruments for which quoted prices are available but are traded less frequently,
derivative instruments whose fair values have been derived using a model where inputs to the model are directly observable in
the market and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level 3
– Instruments that
have little to no pricing observability as of the reported date. These financial instruments are measured using management’s
best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or
estimation.
The degree of judgment exercised by the
Company in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure
fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the
fair value hierarchy within which the fair value measurement falls in its entirety is determined by the lowest level input that
is significant to the fair value measurement.
The following table summarizes fair value
measurements by level as of June 30, 2017 and December 31, 2016 for and the Company’s liabilities measured at fair value
on a recurring basis:
|
|
December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion feature
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
438,448
|
|
|
$
|
438,448
|
|
Warrant Liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
3,827,381
|
|
|
|
3,827,381
|
|
Total Derivatives Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,265,829
|
|
|
$
|
4,265,829
|
|
The Company used
the Monte Carlo valuation model to determine the value of the outstanding warrants and conversion feature from the “Offering”.
Since the Monte Carlo valuation model requires special software and expertise to model the assumptions to be used, the Company
hired a third party valuation expert.
Note 5.
Stockholders’ Equity
(A) Common Stock
The Company is presently authorized to
issue 500,000,000 shares of Common Stock. The Company had 13,271,355 shares of Common Stock issued and outstanding as of June
30, 2017, an increase of 4,895,088 shares from December 31, 2016, largely due to the shares issued in connection with the public
offering described above, which closed on March 15, 2017. As per June 30, 2017 the Company has accrued a reserve for 976,249 shares
pending to be issued of which 530,860 are relating to the conversion of the Unsecured Convertible Promissory Note (see Note 1)
and various other non-cash compensation from previous quarters.
Reconciliation with Stock Transfer Agent Records:
The shares issued and outstanding as of
June 30, 2017 and December 31, 2016 according to the Company’s stock transfer agent’s records were 13,281,191 and
8,386,103, respectively. The difference in number of issued shares recognized by the Company of 13,271,355 amounts to 9,836 and
it is the result of the exclusion of the 9,356 unreturned shares from ‘cancelled’ acquisitions (pre-2006) and 480
treasury shares issued under the former employee benefits plan.
(B) Preferred Stock
The Company’s Certificate of Incorporation authorizes the issuance of 50,000,000 shares of preferred
stock, $0.00001 par value per share. 58 shares of preferred stock are issued and outstanding as of June 30, 2017 compared to 249
shares of preferred stock outstanding as of December 31, 2016, a decrease of 191 shares. Under the Company’s Certificate
of Incorporation, the Board of Directors has the power, without further action by the holders of the Common Stock, subject to the
rules of the NYSE MKT LLC, to designate the relative rights and preferences of the preferred stock, and issue the preferred stock
in such one or more series as designated by the Board of Directors. The designation of rights and preferences could include preferences
as to liquidation, redemption and conversion rights, voting rights, dividends or other preferences, any of which may be dilutive
of the interest of the holders of the Common Stock or the preferred stock of any other series. The issuance of preferred stock
may have the effect of delaying or preventing a change in control of the Company without further stockholder action and may adversely
affect the rights and powers, including voting rights, of the holders of Common Stock. In certain circumstances, the issuance of
preferred stock could depress the market price of the Common Stock.
On March 7, 2017, the Company received
conversion notices from holders of an aggregate of $1,910,000, or 191 shares of the Company’s Series A Convertible Preferred
Stock and Series A-1 Convertible Preferred Stock (the “Preferred Shares”). The Preferred Shares converted into shares
of common stock, $0.00001 par value per share, of the Company at a 13% discount to a public offering and became effective upon
the filing by the Company of a prospectus supplement disclosing the terms of an offering. The closing of the public offering took
place March 15, 2017 and the public offering price was set at $1.50, therefore the discounted conversion price for the preferred
shareholders was calculated at $1.305. The number of shares of common stock issued was approximately 1,463,601.
For the six month period ended June 30, 2017, the Company did not issue any additional shares of preferred
stock, and 58 shares of preferred stock are outstanding.
(C) Warrants
Throughout the years, the Company has issued
warrants with varying terms and conditions related to multiple financing rounds, acquisitions and other transactions. The number
of warrants outstanding at June 30, 2017 (unaudited) and December 31, 2016 have been recorded and classified as equity is 5,607,733
and 2,204,651 respectively. As of June 30, 2017, and December 31, 2016, the Company has classified 5,607,733 and 700,373, in the
balance sheet for the equity warrants issued and -0- and 1,504,278, in the balance sheet for the liability warrants issued in connection
with the various offerings in previous and current year. The Weighted Average Exercise Price for the currently outstanding warrants
in the table below is $1.69. The table below summarizes the warrants outstanding as of June 30, 2017 and as of December 31, 2016:
Outstanding Warrants
|
|
Exercise/
Conversion
price(s)
(range)
|
|
Expiring
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Equity Warrants - Fundraising
|
|
$1.305 - $5.375
|
|
2017 - 2023
|
|
|
5,607,733
|
|
|
|
700,373
|
|
Liability Warrants – Fundraising
|
|
$3.25 - $11.25
|
|
2019 - 2021
|
|
|
-
|
|
|
|
1,504,278
|
|
|
|
|
|
|
|
|
5,607,733
|
|
|
|
2,204,651
|
|
Note 6. Amended and Restated
2008 Long Term Incentive Compensation Plan
Amended and Restated 2008 Long-Term Incentive Compensation
Plan
Total Authorized under the plan
|
|
|
2,240,000
|
|
Shares issued in prior years
|
|
|
612,428
|
|
Shares issued during 2017
|
|
|
459,995
|
|
Options exercised during 2017
|
|
|
-
|
|
Outstanding options
|
|
|
1,118,656
|
|
Available for grant at June 30, 2017:
|
|
|
48,921
|
|
During the second quarter of 2017, the
Company issued 163,581 freely tradable shares to various members of staff, contractors, directors and officers under the 2008
Plan, either for non-cash awards or in conjunction with their willingness to receive all or part of their cash compensation or
fees in shares.
Stock option activity is set forth
below:
Options:
|
|
Number of Options
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding as of December 31, 2016
|
|
|
1,040,211
|
|
|
$
|
13.35
|
|
Granted in 2017
|
|
|
199,700
|
|
|
$
|
2.16
|
|
Forfeitures (Pre-vesting)
|
|
|
(1,142
|
)
|
|
$
|
20.47
|
|
Expirations (Post-vesting)
|
|
|
(120,113
|
)
|
|
$
|
25.94
|
|
Outstanding as of June 30, 2017
|
|
|
1,118,656
|
|
|
$
|
9.99
|
|
At June 30, 2017, the unrecognized expense
portion of stock-based awards granted to employees under the 2008 Plan was $843,467, compared to $918,749 for the same period
in 2016, under the provisions of ASC 718. The future expensing takes place proportionally to the vesting associated with each
stock-award, adjusted for cancellations, forfeitures and returns. If there are any modifications or cancellations of the underlying
unvested awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.
Note 7. Income taxes
Income Taxes
The following table presents details of the net provision for
income taxes:
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net Provision for income taxes
|
|
$
|
(66,495
|
)
|
|
$
|
19,107
|
|
As a result of our cumulative tax losses
in the U.S. and certain foreign jurisdictions, and the full utilization of our loss carryback opportunities, we have concluded
that a full valuation allowance should be recorded in such jurisdictions. In certain other foreign jurisdictions where we do not
have cumulative losses, we had net deferred tax liabilities.
Note 8. Significant Customer and Geographical Information
Sales to our significant customers, as a percentage of net
revenue were as follows:
|
|
Six Months Ended
|
|
|
|
June 30
|
|
|
|
2017
|
|
|
2016
|
|
Two largest customers
|
|
|
95.7
|
%
|
|
|
86.7
|
%
|
The geographical distribution of our revenue, as a percentage
of revenue, was as follows:
|
|
Six Months Ended
|
|
|
|
June 30
|
|
|
|
2017
|
|
|
2016
|
|
Europe
|
|
|
93.4
|
%
|
|
|
91.8
|
%
|
All other (non-European) countries
|
|
|
6.6
|
%
|
|
|
8.2
|
%
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Note 9. Subsequent Events
Joseph Gunnar Warrant Exercise
On July 17, 2017, the Company entered into the Exercise Agreements with the Exercising Holders of the
original warrants to purchase up to an aggregate of 1,150,000 shares of common stock of the Company at $1.87 per share (the “Original
Warrants”) whereby the Exercising Holders and the Company agreed that the Exercising Holders would, exercise their Original
Warrants at a reduced exercise price of $1.00 per share. The Company expects to receive aggregate gross proceeds before expenses
of approximately $1.15 million from the exercise of the Original Warrants by the Exercising Holders.
In consideration for the Exercising Holders
exercising their Original Warrants, the Company will issue to each Exercising Holder a New Warrant to purchase shares of the Company’s
common stock equal to the number of shares of common stock received by such Exercising Holder upon the cash exercise of such Exercising
Holder’s Original Warrants. The terms of the New Warrants will be substantially similar to the terms of the Original Warrants,
except that the New Warrants will (i) have an exercise price equal to $1.39 per share and (ii) be exercisable six months from first
issuance of the New Warrants, for a period of five years.
The issuance of the New Warrants will not
be registered under the Securities Act or any state securities laws. The New Warrants will be issued in reliance on the exemption
from registration provided by Section 4(a)(2) under the Securities Act and/or Regulation D promulgated thereunder. Each Exercising
Holder has represented that it is an accredited investor, as defined in Rule 501 of Regulation D promulgated under the Securities
Act.
Atalaya Debt Restructuring
On August 9, 2017, the parties entered into a Second Amendment among other items, to reduce the quarterly
principal amortization payment amounts and confirmed the maturity date of December 31, 2018. Further, the parties agreed on a revised
repayment schedule, which reduces the principal repayments to $250,000 for the second and third quarters of 2017 and $500,000 for
the fourth quarter of 2017. The quarterly principal repayments for 2018 have also been materially reduced from $750,000 per quarter
to $500,000 per quarter with a final payment due by December 31, 2018. The parties also agreed that the two warrants previously
issued under prior amendments will be revised to adjust the exercise price of $0.64. The Company also agreed to issue new warrants
with a strike price of $0.64 for consideration received from the Lender and Atalya in the amounts of 793,900 and 140,100, respectively.
Pareteum Corporation
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Report
of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Pareteum Corporation
We have audited the accompanying
consolidated balance sheets of Pareteum Corporation (formerly Elephant Talk Communications Corp. or the
“Company”) as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive loss,
changes in stockholders’ equity (deficit), and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting as of December
31, 2016. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Pareteum Corporation as of December 31,
2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial
statements, the Company has suffered recurring losses from operations, has an accumulated deficit of $287,080,234 and has negative
working capital. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in
regard to these matters also are described in Note 2. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ Squar Milner, LLP
Los Angeles, California,
March 29, 2017
Pareteum Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2016 AND 2015
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
931,189
|
|
|
$
|
369,250
|
|
Financing receivable
|
|
|
-
|
|
|
|
272,425
|
|
Restricted cash
|
|
|
564,018
|
|
|
|
246,151
|
|
Accounts receivable, net of an allowance for doubtful accounts of $88,528 at December 31, 2016 and $269,608 at December 31, 2015
|
|
|
614,670
|
|
|
|
1,112,032
|
|
Prepaid expenses and other current assets
|
|
|
1,084,994
|
|
|
|
2,016,236
|
|
Total current assets
|
|
|
3,194,871
|
|
|
|
4,016,094
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
129,037
|
|
|
|
473,893
|
|
|
|
|
|
|
|
|
|
|
NOTE RECEIVABLE
|
|
|
1,012,603
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
8,708,778
|
|
|
|
13,051,375
|
|
|
|
|
|
|
|
|
|
|
INTANGIBLE ASSETS, NET
|
|
|
-
|
|
|
|
258,630
|
|
|
|
|
|
|
|
|
|
|
ASSETS HELD FOR SALE
|
|
|
-
|
|
|
|
4,564,972
|
|
|
|
|
|
|
|
|
|
|
GOODWILL
|
|
|
-
|
|
|
|
3,027,422
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
13,045,289
|
|
|
$
|
25,392,386
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable and customer deposits
|
|
|
2,316,768
|
|
|
|
2,639,863
|
|
Obligations under capital leases (current portion)
|
|
|
10,813
|
|
|
|
310,403
|
|
Net billings in excess of revenues
|
|
|
951,791
|
|
|
|
1,259,545
|
|
Accrued expenses and other payables
|
|
|
6,013,620
|
|
|
|
5,031,712
|
|
Senior Secured Loan - Short Term (Principal repayments coming 12 months)
|
|
|
4,000,000
|
|
|
|
5,580,277
|
|
Total current liabilities
|
|
|
13,292,992
|
|
|
|
14,821,800
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
4,265,829
|
|
|
|
945,618
|
|
Non-current portion of obligation under capital leases
|
|
|
-
|
|
|
|
5,621
|
|
Other long term liabilities
|
|
|
192,980
|
|
|
|
260,290
|
|
Unsecured Convertible Promissory Note (net of Debt Discount and Debt Issuance)
|
|
|
821,048
|
|
|
|
238,829
|
|
Senior Secured Loan - Long Term (net of Debt Discount, Debt Issuance and Principal repayments coming 12 months)
|
|
|
3,715,662
|
|
|
|
-
|
|
Non-current portion of net billings in excess of revenues
|
|
|
121,309
|
|
|
|
1,066,687
|
|
Total long term liabilities
|
|
|
9,116,828
|
|
|
|
2,517,045
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
22,409,820
|
|
|
|
17,338,845
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (See Notes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Preferred Stock $0.00001 par value, 50,000,000 shares authorized, 249 issued and outstanding as of December 31, 2016
|
|
|
2,143,196
|
|
|
|
-
|
|
Common Stock $0.00001 par value, 500,000,000 shares authorized, 8,376,267 issued and outstanding as of December 31, 2016 and 6,455,055 shares issued and outstanding as of December 31, 2015
|
|
|
280,653,362
|
|
|
|
269,470,165
|
|
Accumulated other comprehensive loss
|
|
|
(5,086,902
|
)
|
|
|
(5,789,975
|
)
|
Accumulated deficit
|
|
|
(287,080,234
|
)
|
|
|
(255,635,531
|
)
|
Pareteum Corporation stockholders’ (deficit) equity
|
|
|
(9,370,578
|
)
|
|
|
8,044,659
|
|
|
|
|
|
|
|
|
|
|
NON-CONTROLLING INTEREST
|
|
|
6,047
|
|
|
|
8,882
|
|
Total stockholders’ (deficit) equity
|
|
|
(9,364,531
|
)
|
|
|
8,053,541
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
$
|
13,045,289
|
|
|
$
|
25,392,386
|
|
The accompanying notes are an integral part
of these consolidated financial statements
Pareteum Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND
2015
|
|
2016
|
|
|
2015
|
|
REVENUES
|
|
$
|
12,855,811
|
|
|
$
|
31,015,453
|
|
|
|
|
|
|
|
|
|
|
COST AND OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Cost of service (excluding depreciation and amortization)
|
|
|
3,658,667
|
|
|
|
5,926,291
|
|
Product development
|
|
|
3,543,590
|
|
|
|
4,543,492
|
|
Sales and marketing
|
|
|
1,340,959
|
|
|
|
2,633,958
|
|
General and administrative
|
|
|
11,708,151
|
|
|
|
11,649,914
|
|
Restructuring charges
|
|
|
1,638,049
|
|
|
|
1,254,598
|
|
Depreciation and amortization of intangibles assets
|
|
|
4,246,787
|
|
|
|
6,623,985
|
|
Impairment for assets held and used
|
|
|
850,985
|
|
|
|
2,681,407
|
|
Impairment of goodwill
|
|
|
3,228,930
|
|
|
|
-
|
|
Loss on sale of assets
|
|
|
1,542,374
|
|
|
|
-
|
|
Total cost and operating expenses
|
|
|
31,758,492
|
|
|
|
35,313,645
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(18,902,681
|
)
|
|
|
(4,298,192
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
112,169
|
|
|
|
106,028
|
|
Interest expense
|
|
|
(1,228,201
|
)
|
|
|
(1,488,203
|
)
|
Interest expense related to debt discount and conversion feature
|
|
|
(6,041,607
|
)
|
|
|
(682,389
|
)
|
Changes in derivative liabilities
|
|
|
(3,316,199
|
)
|
|
|
299,948
|
|
(Loss) Gain on Extinguishment of Debt
|
|
|
(541,899
|
)
|
|
|
2,475,799
|
|
Other income and (expense), net
|
|
|
(220,927
|
)
|
|
|
(922,894
|
)
|
Amortization of deferred financing costs
|
|
|
(1,267,073
|
)
|
|
|
(513,557
|
)
|
Total other (expense)
|
|
|
(12,503,737
|
)
|
|
|
(725,268
|
)
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE PROVISION FOR INCOME TAXES
|
|
|
(31,406,418
|
)
|
|
|
(5,023,460
|
)
|
Provision (Benefit) for income taxes
|
|
|
38,286
|
|
|
|
(17,225
|
)
|
NET LOSS
|
|
|
(31,444,704
|
)
|
|
|
(5,006,235
|
)
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
703,073
|
|
|
|
(2,662,843
|
)
|
COMPREHENSIVE LOSS
|
|
$
|
(30,741,631
|
)
|
|
$
|
(7,669,078
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share and equivalents – basic
|
|
$
|
(4.67
|
)
|
|
$
|
(0.79
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share and equivalents – diluted
|
|
$
|
(4.67
|
)
|
|
$
|
(0.79
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the period – basic
|
|
|
6,738,971
|
|
|
|
6,328,082
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the period – diluted
|
|
|
6,738,971
|
|
|
|
6,328,082
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Pareteum Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2016 AND
2015
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Other
comprehensive
|
|
|
Accum-
mulated
|
|
|
Total stock-
holders
Equity
|
|
Description
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
loss
|
|
|
Deficit
|
|
|
(Deficit)
|
|
Balance - December 31, 2014
|
|
|
-
|
|
|
$
|
-
|
|
|
|
6,186,850
|
|
|
$
|
264,359,674
|
|
|
$
|
(3,127,132
|
)
|
|
$
|
(250,629,296
|
)
|
|
$
|
10,603,246
|
|
Shares issued for warrant exercises
|
|
|
-
|
|
|
|
-
|
|
|
|
161,189
|
|
|
|
1,727,487
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,727,487
|
|
Shares issued for employee stock option exercises
|
|
|
-
|
|
|
|
-
|
|
|
|
346
|
|
|
|
5,861
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,861
|
|
Shares issued for board and management compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
106,668
|
|
|
|
1,150,678
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,150,678
|
|
Shares issued for acquisitions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Shares issued to consultants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Shares to be issued to officers and employees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,305
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,305
|
|
Amortization of Stock Options expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,814,531
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,814,531
|
|
Costs attributable to share issuances
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(65,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(65,000
|
)
|
FMV of warrants issued classified as Debt Discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
452,629
|
|
|
|
-
|
|
|
|
-
|
|
|
|
452,629
|
|
Other comprehensive loss due to foreign exchange rate translation net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,662,843
|
)
|
|
|
-
|
|
|
|
(2,662,843
|
)
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,006,235
|
)
|
|
|
(5,006,235
|
)
|
Reverse Stock Split Rounding
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance - December 31, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
6,455,055
|
|
|
|
269,470,165
|
|
|
|
(5,789,975
|
)
|
|
|
(255,635,531
|
)
|
|
|
8,044,659
|
|
Preferred Stock
|
|
|
249
|
|
|
|
2,490,000
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
2,490,000
|
|
Shares issued for warrant exercises
|
|
|
-
|
|
|
|
-
|
|
|
|
120,000
|
|
|
|
397,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
397,200
|
|
Shares issued for board and management compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
104,671
|
|
|
|
668,642
|
|
|
|
-
|
|
|
|
-
|
|
|
|
668,642
|
|
Shares issued for Settlement of Debt
|
|
|
-
|
|
|
|
-
|
|
|
|
408,257
|
|
|
|
1,418,505
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,418,505
|
|
Shares issued for Conversion of Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
1,009,373
|
|
|
|
5,238,329
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,238,329
|
|
Shares issued for Loan Amendments
|
|
|
-
|
|
|
|
-
|
|
|
|
46,315
|
|
|
|
153,305
|
|
|
|
-
|
|
|
|
-
|
|
|
|
153,305
|
|
Stock awards issued to Management
|
|
|
-
|
|
|
|
-
|
|
|
|
160,000
|
|
|
|
711,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
711,900
|
|
Stock awards issued to Staff
|
|
|
-
|
|
|
|
-
|
|
|
|
39,166
|
|
|
|
106,232
|
|
|
|
-
|
|
|
|
-
|
|
|
|
106,232
|
|
Shares issued to consultants
|
|
|
-
|
|
|
|
-
|
|
|
|
33,427
|
|
|
|
77,105
|
|
|
|
|
|
|
|
-
|
|
|
|
77,105
|
|
Shares to be issued to officers and employees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
669,908
|
|
|
|
-
|
|
|
|
-
|
|
|
|
669,908
|
|
Amortization of Stock Options expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,674,247
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,674,247
|
|
Expenses attributable to share issuances
|
|
|
-
|
|
|
|
(346,804
|
)
|
|
|
-
|
|
|
|
(21,252
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(368,056
|
)
|
Repricing of warrants issued classified as Debt Discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
89,076
|
|
|
|
-
|
|
|
|
-
|
|
|
|
89,076
|
|
Other comprehensive loss due to foreign exchange rate translation net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
703,073
|
|
|
|
-
|
|
|
|
703,073
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(31,444,703
|
)
|
|
|
(31,444,703
|
)
|
Reverse Stock Split Rounding
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance - December 31, 2016
|
|
|
249
|
|
|
$
|
2,143,196
|
|
|
|
8,376,267
|
|
|
$
|
280,653,362
|
|
|
$
|
(5,086,902
|
)
|
|
$
|
(287,080,234
|
)
|
|
$
|
(9,370,578
|
)
|
The accompanying notes are an integral part
of these consolidated financial statements.
Pareteum Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND
2015
|
|
2016
|
|
|
2015
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(31,444,704
|
)
|
|
$
|
(5,006,235
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,246,787
|
|
|
|
6,623,985
|
|
Provision for doubtful accounts
|
|
|
(88,528
|
)
|
|
|
269,608
|
|
Stock based compensation
|
|
|
3,897,437
|
|
|
|
3,481,908
|
|
Change in fair value of warrant liability
|
|
|
3,316,199
|
|
|
|
(299,948
|
)
|
Amortization of deferred financing costs
|
|
|
1,267,073
|
|
|
|
513,557
|
|
Interest expense relating to debt discount and conversion feature
|
|
|
6,041,607
|
|
|
|
682,389
|
|
Other (income) and expense, net
|
|
|
220,927
|
|
|
|
922,894
|
|
Loss (Gain) on Extinguishment of Debt
|
|
|
541,899
|
|
|
|
(2,475,799
|
)
|
Impairment for assets held and used
|
|
|
850,985
|
|
|
|
2,681,407
|
|
Impairment of goodwill
|
|
|
3,228,930
|
|
|
|
-
|
|
Loss on sale of assets
|
|
|
1,542,374
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable
|
|
|
621,532
|
|
|
|
6,566,499
|
|
Decrease in prepaid expenses, deposits and other assets
|
|
|
1,637,006
|
|
|
|
759,275
|
|
Increase in accounts payable and customer deposits
|
|
|
80,520
|
|
|
|
2,627,745
|
|
Decrease in net billings in excess of revenues
|
|
|
(1,169,136
|
)
|
|
|
(9,753,225
|
)
|
Increase in accrued expenses and other payables
|
|
|
1,551,261
|
|
|
|
1,385,775
|
|
Net cash (used in) provided by operating activities
|
|
|
(3,657,831
|
)
|
|
|
8,979,835
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(1,413,160
|
)
|
|
|
(7,709,972
|
)
|
Advance Purchase Payment on “Assets held for Sale”
|
|
|
450,000
|
|
|
|
-
|
|
Proceeds from sale of assets
|
|
|
2,000,000
|
|
|
|
-
|
|
Net cash provided by (used in) investing activities
|
|
|
1,036,840
|
|
|
|
(7,709,972
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Financing receivable
|
|
|
355,000
|
|
|
|
1,645,000
|
|
Exercise of warrants & options
|
|
|
-
|
|
|
|
5,861
|
|
Equity and Debt issuance costs paid
|
|
|
(1,338,821
|
)
|
|
|
(532,558
|
)
|
Principal payment on 2014 10% + Eurodollar 3rd Party
Loan
|
|
|
(966,809
|
)
|
|
|
(5,500,000
|
)
|
Proceeds from convertible promissory note
|
|
|
2,273,000
|
|
|
|
1,275,000
|
|
Unsecured promissory note
|
|
|
350,000
|
|
|
|
-
|
|
Gross proceed from Preferred A and A-1 shares issuance
|
|
|
2,490,000
|
|
|
|
-
|
|
Net cash provided by (used in) financing activities
|
|
|
3,162,370
|
|
|
|
(3,106,697
|
)
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
|
|
|
20,560
|
|
|
|
301,924
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
561,939
|
|
|
|
(1,534,910
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD
|
|
|
369,250
|
|
|
|
1,904,160
|
|
CASH AND CASH EQUIVALENTS, END OF THE PERIOD
|
|
$
|
931,189
|
|
|
$
|
369,250
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
909,637
|
|
|
$
|
1,136,021
|
|
Cash paid during the period for income taxes
|
|
|
15,581
|
|
|
|
14,771
|
|
NON-CASH INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Note receivable from sale of assets
|
|
$
|
1,000,000
|
|
|
$
|
-
|
|
NON-CASH FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Conversion of 9% unsecured convertible note
|
|
$
|
5,238,329
|
|
|
$
|
-
|
|
Shares issued for payables
|
|
$
|
700,425
|
|
|
$
|
-
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Note 1. Business and Summary of Significant Accounting
Policies
Description of Business
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.
Liquidity
As reflected in the accompanying consolidated
financial statements, the Company reported net (loss) of $(31,444,704) and $(5,006,235) for the years ended 2016 and 2015, respectively,
and had an accumulated deficit of $(287,080,234) as of December 31, 2016. The cash balance of the Company at December 31, 2016
was $ 931,189. Additional capital could be raised during 2017 to cover working capital deficiencies.
The Company’s financial statements through December 31,
2016 were materially impacted by a number of events:
|
·
|
Divestiture
of ValidSoft, on September 30, 2016, through a management buyout;
|
|
·
|
Financing
activity related to issuance of preferred shares and increase in note payable with its
senior secured lender;
|
|
·
|
Financing
activity related to issuance of preferred shares and increase in note payable with its
senior secured lender;
|
|
·
|
the
settlement with Cross River Investments (“CRI”) to issue 176,000 common shares
related to the previous advance paid to complete the acquisition of ValidSoft; and
|
|
·
|
the
restructuring of the Company.
|
The substantial three phase restructuring
plan (the “Plan”) was completed in the third quarter 2016. The Plan which commenced in the fourth quarter of 2015,
was designed to align actual expenses and investments with current revenues as well as introduce new executive management.
The first and second phase of the Plan
encompassed fourth quarter 2015 through second quarter 2016. The third and final phase of the Plan impacted third quarter 2016
results with a $0.6 million in workforce reduction expenses primarily related to employee severances. Total workforce related
restructuring charges to-date is $2.7 million including non-cash charges of $0.7 million.
The
sale of ValidSoft at the end of the third quarter for the price of $3.0 million was completed and the Company received $2.0 million
in cash and a $1.0 million promissory note. The $2.0 million in cash was used to pay down the senior secured loan.
Although the Company has previously been
able to raise capital as needed, there can be no assurance that additional capital will be available at all, or if available, on
reasonable terms. Further, the terms of such financing may be dilutive to our existing stockholders or otherwise on terms not favorable
to us, or our existing stockholders. If we are unable to secure additional capital, and/or do not succeed in meeting our cash flow
objectives or the Lender takes steps to call the loan before new capital is attracted, the Company will be materially and negatively
impacted, and we may have to significantly reduce our operations. As of December 31, 2016, these events raise substantial doubts
about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
On December 31, 2016, we had
$931,189 in cash and cash equivalents. Based on our current expectations with respect to our revenue and expenses, we expect
that our current level of cash and cash equivalents will be sufficient to meet our liquidity needs for the next twelve
months. If our revenues do not grow as expected and if we are not able to manage expenses sufficiently, including required
payments pursuant to the terms of the senior secured debt, we may be required to obtain additional equity or debt financing.
In addition, we currently have an S-3 registration statement filed with the SEC to potentially raise more capital.
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of Pareteum Corporation and its subsidiaries and have been prepared in accordance with accounting
principles generally accepted in the United States (“US GAAP”). All intercompany transactions and account balances
have been eliminated in consolidation. The Company’s subsidiaries are:
|
·
|
its wholly-owned subsidiary Elephant Talk Europe Holding B.V. and its wholly owned subsidiaries,
Elephant Talk Communications Italy S.R.L., Elephant Talk Business Services W.L.L., Guangzhou Elephant Talk Information Technology
Limited, Elephant Talk Deutschland GmbH, Morodo Group Ltd. (dissolved May 10, 2016), and the majority owned (51%) subsidiaries
Elephant Talk Communications PRS U.K. Limited and (51%) ET-UTS NV;
|
|
·
|
Elephant Talk Europe Holding B.V.’s wholly-owned subsidiary Elephant Talk Communication Holding
AG and its wholly-owned subsidiaries Elephant Talk Communications S.L.U., Elephant Talk Mobile Services B.V., Elephant Talk Telekom
GmbH, Elephant Talk Communication Carrier Services GmbH, Elephant Talk Communication Schweiz GmbH and the subsidiary Elephant Talk
Communications Premium Rate Services Netherlands B.V.;
|
|
·
|
Elephant Talk Telecomunicação do Brasil LTDA, is owned 90% by Elephant Talk Europe
Holding B.V. and 10% by Elephant Talk Communication Holding AG;
|
|
·
|
Elephant Talk Europe Holding B.V.’s majority (100%) owned subsidiary Elephant Talk Middle
East & Africa (Holding) W.L.L., its wholly owned (100%) subsidiaries Elephant Talk Middle East & Africa (Holding) Jordan
L.L.C., and its majority owned (99%) Elephant Talk Bahrain W.L.L.;
|
|
·
|
its wholly-owned subsidiary Elephant Talk Limited (“ETL”) and its majority owned (50.54%)
subsidiary Elephant Talk Middle East & Africa FZ-LLC.;
|
|
·
|
its wholly-owned subsidiary Pareteum North America, Corp; and
|
|
·
|
Elephant Talk Europe Holding B.V.’s majority owned
subsidiary (99.998%) ET de Mexico S.A.P.I. de C.V. and its majority owned subsidiary (99%) Asesores Profesionales ETAK S. de RL.
de C.V.
|
|
·
|
PT Elephant Talk Indonesia is owned by Elephant Talk Europe Holding B.V.
|
Foreign Currency Translation
The functional currency is Euros for
the Company’s wholly-owned subsidiary Elephant Talk Europe Holding B.V. and its subsidiaries. The financial statements
of the Company were translated to USD using period-end exchange rates as to assets and liabilities and average exchange rates
as to revenues and expenses, and capital accounts were translated at their historical exchange rates when the capital
transaction occurred. In accordance with ASC 830, Foreign Currency Matters, net gains and losses resulting from translation
of foreign currency financial statements are included in the statement of changes in stockholder’s equity as other
comprehensive income (loss). Foreign currency transaction gains and losses are included in consolidated income/(loss), under
the line item ‘Other income/(expense)’.
Use of Estimates
The preparation of the accompanying
consolidated financial statements conforms with accounting principles generally accepted in the U.S. and requires management
to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities. Significant 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.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with original maturities of three months or less at the time of purchase to be cash equivalents. The Company has full
access to the whole balance of cash and cash equivalents on a daily basis without any delay.
Financing Receivables
Financing receivables as of December
31, 2016 is $0. The financing receivables reported as of December 31, 2015 relate to a timing difference between the second closing
of the Offering and the actual receipt of the related proceeds. The funds were in the process of being transferred from the escrow
account kept by the placement agent and the company but were received on January 5,
2016. The net financing receivable
amounted to $272,425 as of December 31, 2015.
Restricted Cash
Restricted cash as of December 31, 2016
and 2015 was $564,018 and $246,151 respectively, and consists of cash deposited in blocked accounts as bank guarantees for national
interconnection, wholesale agreements with telecom operators and a bid offer guarantee(s). In the August 15, 2016 second amendment
of the 10% +Eurodollar 3rd Party Loan it was agreed that $500,000 was deposited into an escrow account under the sole dominion
and control of the Chief Restructuring Officer.
Accounts Receivables, Net
The Company’s customer base consists
of a geographically dispersed customer base. The Company maintains an allowance for potential credit losses on accounts receivable.
The Company makes ongoing assumptions relating to the collectability of our accounts receivable. The accounts receivable amounts
presented on our balance sheets include reserves for accounts that might not be collected. In determining the amount of these reserves,
the Company considers its historical level of credit losses. The Company also makes judgments about the creditworthiness of significant
customers based on ongoing credit evaluations, and the Company assesses current economic trends that might impact the level of
credit losses in the future. The Company’s reserves have generally been adequate to cover its actual credit losses. However,
since the Company cannot reliably predict future changes in the financial stability of its customers, it cannot guarantee that
its reserves will continue to be adequate. If actual credit losses are significantly greater than the reserves, the Company would
increase its general and administrative expenses and increase its reported net losses. Conversely, if actual credit losses are
significantly less than our reserve, this would eventually decrease the Company’s general and administrative expenses and
decrease its reported net losses. Allowances are recorded primarily on a specific identification basis. See Note 2 of the Financial
Statements for more information.
Leasing Arrangements
At the inception of a lease covering equipment
or real estate, the lease agreement is evaluated under the criteria of
ASC 840, Leases.
Leases meeting one of the four key
criteria are accounted for as capital leases and all others are treated as operating leases. Under a capital lease, the discounted
value of future lease payments becomes the basis for recognizing an asset and a borrowing, and lease payments are allocated between
debt reduction and interest. For operating leases, payments are recorded as rent expense. Criteria for a capital lease include
(i) transfer of ownership during the lease term; (ii) existence of a bargain purchase option under terms that make it likely to
be exercised; (iii) a lease term equal to 75 percent or more of the economic life of the leased equipment; and (iv) minimum lease
payments that equal or exceed 90 percent of the fair value of the property. Subsequent to initial recognition, the asset is accounted
for in accordance with the accounting policy applicable to that type of asset. The assets are amortized as per our accounting policy
for property & equipment, and intangibles, as applicable.
Revenue Recognition and Net billings
in excess of revenues
Revenue primarily represents amounts earned
for our mobile and security solutions. Our mobile and security solutions are hosted software where the customer does not take possession
of the software and are therefore accounted for as subscriptions. We also offer customer support and professional services related
to implementing and supporting our suite of applications. Revenues generally are recognized net of any taxes collected from customers
and subsequently remitted to governmental authorities.
Hosting subscriptions provide customers
access to our software on a subscription basis, and support services (e.g. network operations and second line helpdesk) related
to those arrangements. Hosting subscriptions for the use of our software generally include a usage-based license for which revenues
are recognized commensurate with the customer utilization (for example, the number of mobile users on the network) commencing with
the date our service is made available to customers and when all of the following conditions have been met: (i) there is persuasive
evidence of an arrangement; (ii) delivery has occurred; (iii) the fee is fixed or determinable; and (iv) collectability of the
fee is reasonably assured. Revenue is recorded as deferred revenue before all of the relevant criteria for revenue recognition
are satisfied.
The Company enters into arrangements that
include various combinations of hosting subscriptions and services, where elements are delivered over different periods of time.
Such arrangements are accounted for in accordance with ASC 605-25 “Revenue Recognition-Multiple Element Arrangements.”
Revenue recognition for multiple-element arrangements requires judgment to determine if multiple elements exist, whether elements
can be accounted for as separate units of accounting, and if so, the fair value for each of the elements.
The elements in a multiple element arrangement
are identified and are separated into separate units of accounting at the inception of the arrangement and revenue is recognized
as each element is delivered. Delivered item or items are considered a separate unit of accounting when both of the following criteria
are met: (i) the delivered item or items have value to the customer on a stand-alone basis, meaning the delivered item or items
have value on a standalone basis if it sold separately by any vendor or the customer could resell the delivered item or items on
a stand-alone basis, and (ii) if the arrangement includes a general right of return related to the delivered item, delivery or
performance of the undelivered item or items are considered probably and substantially in the control of the Company. Total consideration
of a multiple-element arrangement is allocated to the separate units of accounting at the inception of the arrangement based on
the relative selling price method using the hierarchy prescribed in ASC 605-25. In accordance with that hierarchy if vendor specific
objective evidence (VSOE) of fair value or, third-party evidence (TPE) does not exist for the element, then the best estimated
selling price (BESP) is used. Since the Company does not have VSOE or TPE, the Company uses BESP to allocate consideration for
all units of accounting in our hosting arrangements. In determining the BESP, the Company considers multiple factors which include,
but are not limited to the following: (i) gross margin objectives and internal costs for services; (ii) pricing practices and market
conditions; (iii) competitive landscape; and (iv) growth strategy.
In the paragraphs below we explain the revenue recognition policy
for each element.
For the mobile solutions services the Company
recognizes revenues from customers accessing our cloud-based application suite in two different service offerings, namely managed
services and bundled services.
For managed services, revenues are recognized
for network administration services provided to end users on behalf of Mobile Network Operators (MNO) and virtual Mobile Network
Operators (MVNO’s). Managed service revenues are recognized monthly based on an average number of end-users managed and calculated
on a pre-determined service fee per user. For bundled services, the Company provides both network administration as well as mobile
airtime management services. Revenues for bundled services are recognized monthly based on an average number of end-users managed
and mobile air time, calculated based on a pre-determined service fee. Technical services that meet the criteria to be separated
as a separate unit of accounting are recognized as the services are performed. Services that do not meet the criteria to be accounted
for as a separate unit of accounting are deferred and recognized ratably over the estimated customer relationship. Our arrangements
with customers do not provide the customer with the right to take possession of the software supporting the cloud-based application
service at any time.
Telecommunication revenues are recognized
when delivery occurs based on a pre-determined rate and number of user minutes and calls that the Company has managed in a given
month.
Professional services and other revenue
include fees from consultation services to support the business process mapping, configuration, data migration, integration and
training. Amounts that have been invoiced are recorded in accounts receivable and in net billings in excess of revenues or revenue,
depending on whether the revenue recognition criteria have been met. Revenue for professional and consulting services in connection
with an implementation or implantation of a new customer that is deemed not to have stand-alone value is recognized over the estimated
customer relationship commencing when the subscription service is made available to the customer. Revenue from other professional
services that provide added value such as new features or enhancements to the platform that are deemed to have standalone value
to the customer are recognized when the feature is activated.
Cost of Revenues and Operating Expenses
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 expenses and the cost of subcontractors. Cost of service excludes depreciation
and amortization.
Research and Development Expense
Research and development expenditures are
expensed in the period incurred, and these expenses are included within the operating expenses function Product Development.
Costs incurred during the application development
stage of internal-use software projects, such as those used in the Company’s operations, are capitalized in accordance with
the accounting guidance for costs of computer software developed for internal use in ASC 350-40. There are three main stages of
computer software development. These stages are defined as (1) the preliminary project stage, (2) the application development stage,
and (3) the post-implementation / operation stage. Only costs included in the application development stage are eligible for capitalization.
Capitalization of costs begins once management authorizes and commits funding and the preliminary project stage is completed. Capitalized
costs are amortized on a straight-line basis. When assigning useful lives to internal-use software, the Company considers the effects
of obsolescence, competition, technology, and other economic factors.
Product
Development costs for the period ended December 31, 2016 and 2015
were
$3,543,590 and $4,543,492, respectively. During the period ended December 31, 2016 and 2015, the Company capitalized $990,076 and
$4,142,089, respectively. As a result of the restructuring measures during 2016, that also impacted the development department,
the Company decided to suspend project capitalization during the second half of 2016.
Reporting Segments
ASC 280, Segment Reporting (“ASC 280”),
defines operating segments as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The business
operates as one single segment and discrete financial information is based on the whole, not segregated; and is used by the chief
decision maker accordingly.
Financial Instruments
The carrying values of cash and cash equivalents,
restricted cash, accounts receivable, accounts payable and customer deposits approximate their fair values based on their short-term
nature. The recorded values of long-term debt approximate their fair values, as interest approximates market rates. The Company’s
conversion feature, a derivative instrument, is recognized in the balance sheet at its fair values with changes in fair market
value reported in earnings.
Fair Value Measurements
In accordance with ASC 820, Fair Value Measurement
(“ASC 820”), the Company defines fair value as the price that would be received from selling an asset or paid to transfer
a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. ASC 820 establishes
a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use
of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are those that market participants
would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable
inputs reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances.
The fair value hierarchy is categorized into
three levels based on the inputs as follows:
Level 1
– Quoted prices are available
in active markets for identical assets or liabilities as of the reported date.
Level 2
– Pricing inputs are other
than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of
these financial instruments include cash instruments for which quoted prices are available but are traded less frequently, derivative
instruments whose fair values have been derived using a model where inputs to the model are directly observable in the market and
instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level 3
– Instruments that have
little to no pricing observability as of the reported date. These financial instruments are measured using management’s best
estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
The degree of judgment exercised by the Company
in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair
value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair
value hierarchy within which the fair value measurement falls in its entirety is determined by the lowest level input that is significant
to the fair value measurement.
The Company has three
asset groups that are valued at fair value categorized within Level 3: Derivative liabilities (recurring measurement), goodwill
and intangibles (non-recurring measurements) for the impairment test. Below are discussions of the main assumptions used for the
recurring measurements.
Recurring Measurement
- Warrant Derivative Liabilities and Conversion Feature Derivative (see also Note 13 and 14)
Number of Outstanding
Warrants and/or Convertible Notes
The number of outstanding
warrants and/or convertible notes is adjusted every re-measurement date after deducting the exercise or conversion of any outstanding
warrants convertible notes during the previous reporting period.
Stock Price at
Valuation Date
The closing stock
price at re-measurement date being the last available closing price of the reporting period taken from www.nasdaq.com.
Exercise Price
The exercise price
is fixed and determined under the terms of the financing facility it was issued.
Remaining Term
The remaining term
is calculated by using the contractual expiration date of the 9% Unsecured Subordinated Promissory Note at the moment of re-measurement.
Expected Volatility
Management estimates
expected cumulative volatility giving consideration to the expected life of the note and/or warrants and calculated the annual
volatility by using the continuously compounded return calculated by using the share closing prices of an equal number of days
prior to the maturity date of the note (reference period). The annual volatility is used to determine the (cumulative) volatility
of the Company´s common stock (= annual volatility * square root (expected life)).
Liquidity Event
We estimate the expected
liquidity event giving consideration to the average expectation of the timing of fundraises and the need for those funds offset
against scheduled repayment dates and the costs and/or savings of the future steps in re-modelling the organization.
Risk-Free Interest
Rate
Management estimates
the risk-free interest rate using the “Daily Treasury Yield Curve Rates” from the US Treasury Department with a term
equal to the reported rate, or derived by using both spread in intermediate term and rates, up to the expected maturity date of
the derivative involved.
Expected Dividend
Yield
Management estimates
the expected dividend yield by giving consideration to the Company´s current dividend policies as well as those anticipated
in the future considering the Company´s current plans and projections.
Mandatory Conversion
Condition
The Monte Carlo model
includes the likelihood of meeting the condition in which the company will be able to call such mandatory conversion of outstanding
convertible notes.
Mandatory Exercise
Condition
The Monte Carlo model
includes the likelihood of being able to force a mandatory exercise of the warrants prior to the maturity of the warrant agreement.
Share-based Compensation
The Company follows the provisions of ASC 718,
Compensation-Stock Compensation, (“ASC 718”). Under ASC 718, share-based awards are recorded at fair value as of the
grant date and recognized as expense with an adjustment for forfeiture over the employee’s requisite service period (the
vesting period, generally up to three years). The share-based compensation cost based on the grant date fair value is amortized
over the period in which the related services are received.
To determine the value of our stock options
at grant date under our employee stock option plan, the Company uses the Black-Scholes option-pricing model. The use of this model
requires the Company to make a number of subjective assumptions. The following addresses each of these assumptions and describes
our methodology for determining each assumption:
Expected Life
The expected life represents the period that
the stock option awards are expected to be outstanding. The Company uses the simplified method for estimating the expected life
of the option, by taking the average between time to vesting and the contract life of the award.
Expected Volatility
The Company estimates expected cumulative volatility
giving consideration to the expected life of the option of the respective award, and the calculated annual volatility by using
the continuously compounded return calculated by using the share closing prices of an equal number of days prior to the grant-date
(reference period). The annual volatility is used to determine the (cumulative) volatility of its common stock (= annual volatility
x square root (expected life)).
Forfeiture rate
The Company is using the aggregate forfeiture
rate. The aggregate forfeiture rate is the ratio of pre-vesting forfeitures over the awards granted (pre-vesting forfeitures/grants).
The forfeiture discount (additional loss) is released into the profit and loss in the same period as the option vesting-date. The
forfeiture rate is actualized every reporting period and due to the firm reorganization the forfeiture rate has been set to zero
to reflect the current expectation of the number of leavers.
Risk-Free Interest Rate
The Company estimates the risk-free interest
rate using the “Daily Treasury Yield Curve Rates” from the U.S. Treasury Department with a term equal to the reported
rate, or derived by using both spread in intermediate term and rates, to the expected life of the award.
Expected Dividend Yield
The Company estimates the expected dividend
yield by giving consideration to our current dividend policies as well as those anticipated in the future considering our current
plans and projections. The Company does not currently calculate a discount for any post-vesting restrictions to which our awards
may be subject.
Income Taxes
Current tax is based on the income or loss
from ordinary activities adjusted for items that are non-assessable or disallowable for income tax purpose and is calculated using
tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax assets are recognized for the
expected future tax benefit to be derived from tax losses and tax credit carry-forwards. Establishment of a valuation allowance
is provided when it is more likely than not that deferred taxes will be realized.
In the ordinary course of a global business,
there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as
a consequence of revenue sharing and reimbursement arrangements among related entities, the process of identifying items of
revenue and expenses that qualify for preferential tax treatment and segregation of foreign and domestic income and expense to
avoid double taxation.
The Company files federal income tax returns
in the US, various US state jurisdictions and various foreign jurisdictions. The Company’s income tax returns are open to
examination by federal, state and foreign tax authorities, generally for 3 years but can be extended to 6 years under certain circumstances.
In other jurisdictions the period for examinations depend on local legislation. The Company’s policy is to record estimated
interest and penalties on unrecognized tax benefits as part of its income tax provision.
Comprehensive Income (Loss)
Comprehensive income (loss) include all changes
in equity during a period from non-owner sources. For the years ended December 31, 2016 and 2015, the Company’s comprehensive
loss consisted of its net loss and foreign currency translation adjustments.
Business Combinations
The acquisition method of accounting for business
combinations as per ASC 805, Business Combinations (“ASC 805”), requires us to use significant estimates and assumptions,
including fair value estimates, as of the business combination date and to refine those estimates as necessary during the measurement
period (defined as the period, not to exceed one year, in which the Company may adjust the provisional amounts recognized for a
business combination).
Under the acquisition method of accounting,
the identifiable assets acquired, the liabilities assumed, and any non-controlling interests acquired in the acquisition are recognized
as of the closing date for purposes of determining fair value. The Company measures goodwill as of the acquisition date as the
excess of consideration transferred, over the net of the acquisition date fair value of the identifiable assets acquired and liabilities
assumed. Costs that the Company incurs to complete the business combination such as investment banking, legal and other professional
fees are not considered part of consideration and the Company charges them to general and administrative expense as they are incurred.
During the measurement period, the Company
adjusts the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances
that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that
date. Measurement period adjustments are reflected retrospectively in all periods being presented in the financial statements.
Goodwill
The Company records goodwill when the fair
value of consideration transferred in a business combination exceeds the fair value of the identifiable assets acquired and liabilities
assumed. Goodwill and other intangible assets that have indefinite useful lives are not amortized, but the Company tests them for
impairment annually during its fourth fiscal quarter and whenever an event or change in circumstances indicates that the carrying
value of the asset is impaired.
The authoritative guidance for the goodwill
impairment model includes a two-step process. First, it requires a comparison of the carrying value of the reporting unit to its
fair value. If the fair value is determined to be less than the carrying value, a second step is performed. In the second step,
the Company compares the implied fair value of goodwill to its carrying value in the reporting unit. The shortfall of the fair
value below carrying value, if any, would represent the amount of goodwill impairment charge. We are using the criteria in ASU
no. 2011-08 Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which permits the Company to make
a qualitative assessment of whether it is more likely than not than not that a reporting unit’s fair value is less than the
carrying amount before applying the two-step goodwill impairment test. If the Company concludes that it is not more likely than
not that the fair value of a reporting unit is less that its carrying amount, it would not need to perform the two-step impairment
test for that reporting unit.
The Company tests goodwill for impairment in
the fourth quarter of each fiscal year, or sooner should there be an indicator of impairment as per
ASC 350, Intangibles –
Goodwill and Other.
The Company periodically analyzes whether any such indicators of impairment exist. Such indicators include
a sustained, significant decline in the Company’s stock price and market capitalization, a decline in the Company’s
expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition,
and/or slower growth rate, among others. In the Company’s case, the indicator is the continuing losses.
After the divestment of ValidSoft and renewed
strategy the Company decided to impair the carrying value of goodwill related to ValidSoft. Following the restructuring and rationalization
that commenced in the fourth quarter 2015 and continued during 2016 the Morodo and Telnicity related projects were cancelled and
the related headcount phased out. As a result, the Company decided to fully impair the carrying value of goodwill related to Morodo
and Telnicity.
Long-lived Assets and Intangible Assets
In accordance with ASC 350, Intangibles –
Goodwill and Other (“ASC 350”), intangible assets are carried at cost less accumulated amortization and impairment
charges. Intangible assets are amortized on a straight-line basis over the expected useful lives of the assets, between three and
ten years. Other indefinite life intangible assets are reviewed for impairment in accordance with ASC 350, on an annual basis,
or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Measurement
of any impairment loss for long-lived assets and amortizing intangible assets that management expects to hold and use is tested
for impairment when amounts may not be recoverable. Impairment is measured based on the amount of the carrying value that exceeds
the fair value of the asset.
Property and Equipment, Internal Use
Software and Third Party Software
Property and equipment are initially recorded
at cost. Additions and improvements are capitalized, while expenditures that do not enhance the assets or extend the useful life
are charged to operating expenses as incurred. Included in property and equipment are certain costs related to the development
of the Company’s internally developed software technology platform.
The Company has adopted the provisions of ASC
350-40, Accounting for the Costs of Computer Software developed or obtained for internal use, and therefore the costs incurred
in the preliminary stages of development are expensed as incurred. The Company capitalizes all costs related to software developed
or obtained for internal use when management commits to funding the project; the preliminary project stage is completed and when
technological feasibility is established. Software developed for internal use has generally been used to deliver hosted services
to the Company’s customers. Technological feasibility is considered to have occurred upon completion of a detailed program
design that has been confirmed by documenting the product specifications, or to the extent that a detailed program design is not
pursued, upon completion of a working model that has been confirmed by testing to be consistent with the product design. Once a
new functionality or improvement is released for operational use, the asset is moved from the property and equipment category “construction
in progress” (“CIP”) to a property and equipment asset subject to depreciation in accordance with the principle
described in the previous sentence. In this account management also records equipment acquired from third parties, until it is
ready for use. Capitalization of costs ceases when the project is substantially complete and ready for its intended use. Depreciation
is applied using the straight-line method over the estimated useful lives of the assets once the assets are placed in service.
Management evaluates the useful lives of these
assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability
of these assets. In 2016, the Company impaired $850,985 for assets held and used.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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 January 1, 2020, with early adoption permitted on January 1, 2019. The Company is
currently evaluating the impact of this ASU on its consolidated financial statements; however, at the current time the Company
does not know what impact the adoption will have on its consolidated financial statements, financial condition or results of operations.
In March 2016, the FASB issued ASU No. 2016-09,
“Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU
2016-09”). The updated guidance changes how companies account for certain aspects of share-based payment awards to employees,
including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in
the statement of cash flows. The update to the standard is effective for the Company’s annual and interim reporting periods
beginning January 1, 2017, with early adoption permitted. The Company is currently evaluating the impact of ASU 2016-09 on its
consolidated financial statements; however at the current time the Company does not know what impact the adoption of ASU 2016-09
will have on its consolidated financial statements, financial condition or results of operations.
In March 2016, the FASB issued ASU No. 2016-08,
“Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus
Net).” This update provides clarifying guidance regarding the application of ASU 2014-09 when another party, along with the
reporting entity, is involved in providing a good or a service to a customer. In these circumstances, an entity is required to
determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal)
or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). In April
2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,”
which clarifies the identification of performance obligations and the licensing implementation guidance. In May 2016, the FASB
issued ASU No. 2016-11, “Revenue Recognition and Derivatives and Hedging: Rescission of SEC Guidance Because of Accounting
Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 Emerging Issues Task Force Meeting (“EITF”),”
which rescinds SEC paragraphs pursuant to SEC staff announcements. These rescissions include changes to topics pertaining to accounting
for shipping and handling fees and costs and accounting for consideration given by a vendor to a customer. In May 2016, the FASB
also issued ASU No. 2016-12, “Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients,”
which provides clarifying guidance in certain narrow areas and adds some practical expedients. The effective dates for these ASU’s
are the same as the effective date for ASU No. 2014-09, for the Company’s annual and interim periods beginning January 1,
2018. The Company is currently evaluating the impact of these ASU’s on its consolidated financial statements; however at
the current time the Company does not know what impact the adoption of these ASU’s will have on its consolidated financial
statements, financial condition or results of operations.
In February 2016, the FASB issued Accounting
Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record
a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified
as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new
standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into
after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients
available. Management is currently assessing the impact of this pronouncement on the Company’s financial statements.
In January 2016, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, “Financial Instruments –
Overall (Subtopic 825-10).” ASU 2016-01 enhances the reporting model for financial instruments to provide users of financial
statements with more decision-useful information by addressing certain aspects of recognition, measurement, presentation, and disclosure
of financial instruments. The amendments simplify certain requirements and also reduce diversity in current practice for other
requirements. ASU 2016-01 is effective for public companies’ fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. Except for the early application guidance specifically allowed in ASU 2016-01, early adoption
is not permitted. We are currently evaluating the impact of our pending adoption of ASU 2016-01 on our consolidated financial statements
and have not yet determined the method by which we will adopt the standard.
On April 7, 2015, the FASB issued ASU No. 2015-03,
“Simplifying the Presentation of Debt Issuance Costs”, which requires debt issuance costs related to a recognized debt
liability to be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt
discounts. ASU 2015-03 is effective for public companies’ fiscal years beginning after December 15, 2015 and interim periods
within those fiscal years. Early adoption is permitted for financial statement that have not been previously issued. The Company
has elected for early adoption and included it in their Form 10-K for the year ended December 31, 2015.
In January 2015, the FASB issued ASU 2015-01,
Income Statement — Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating
the Concept of Extraordinary Items (“ASU 2015-01”). ASU 2015-01 eliminates the concept of extraordinary items from
GAAP but retains the presentation and disclosure guidance for items that are unusual in nature or occur infrequently and expands
the guidance to include items that are both unusual in nature and infrequently occurring. ASU 2015-01 is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2015. A reporting entity may apply ASU 2015-01 prospectively.
A reporting entity may also apply ASU 2015-01 retrospectively to all periods presented in the financial statements. We believe
the adoption of ASU 2015-01 will not have a material effect on our consolidated financial statements.
In November 2016, the FASB issued Accounting
Standards Update 2016-18, “Statement of Cash Flows - Restricted Cash a consensus of the FASB Emerging Issues Task Force.”
This standard requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of cash
flows under the retrospective transition approach. The guidance will become effective for fiscal years beginning after December
15, 2017 and interim periods within those fiscal years. Early adoption is permitted. When adopted, the Company is expected to include
restricted cash and cash equivalents with cash and cash equivalents on the statement of the cash flows.
Note 2. Allowance for Doubtful Accounts
Accounts receivable are presented on the balance
sheet net of estimated uncollectible amounts. The Company records an allowance for estimated uncollectible accounts in an amount
approximating anticipated losses. Individual uncollectible accounts are written off against the allowance when collection of the
individual accounts appears doubtful. The Company recorded an allowance for doubtful accounts of $88,528 and $269,608
as of December 31, 2016 and 2015, respectively.
Changes in the allowance for doubtful accounts
are as follows:
Allowance for doubtful accounts
|
|
Balance
at the
beginning
of the
period A
|
|
|
Currency
revaluation
B
|
|
|
Total
Allowance
for
doubtful
accounts
A+B
|
|
|
Additions-
allowance
for
doubtful
accounts
|
|
|
Release
for
doubtful
accounts
|
|
|
Balance
at the end
of the
period
|
|
Year ended December 31, 2016
|
|
$
|
269,608
|
|
|
$
|
9,542
|
|
|
$
|
260,066
|
|
|
$
|
88,528
|
|
|
|
260,066
|
|
|
$
|
88,528
|
|
Year ended December 31, 2015
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
269,608
|
|
|
$
|
-
|
|
|
$
|
269,608
|
|
Note 3. Prepaid Expenses and Other
Current Assets
Prepaid expenses and other current assets were
recorded at $1,084,994 as of December 31, 2016, compared with $2,016,236 as of December 31, 2015. Prepaid expenses and other current
assets consisted primarily of prepaid insurance, other prepaid operating expenses, prepaid taxes and prepaid Value Added Tax (“VAT”).
As of December 31, 2016, $592,445 of the prepaid expenses was related to VAT. On December 31, 2015, prepaid VAT represented
$621,286.
Note 4. Other Assets
Other assets at December 31, 2016 and December
31, 2015 are long-term in nature, and consist of long-term deposits, certain R&D credits, and loans to third parties amounting
to $129,037 and $473,893, respectively.
As of December 31, 2016,
there was $129,037 in long-term deposits made to various telecom carriers during the course of operations and office facilities
in various countries, compared with $285,404 as of December 31, 2015. The deposits are refundable at the termination of the
business relationship with the carriers. The primary decrease in long-term deposits was for $47,514 related to the divestment
of ValidSoft, $18,585 termination of the Indonesian Office lease and $90,268 that was mainly related to the termination of carrier
contracts.
Note 5. Note Receivable
The sale of ValidSoft at the end of the
third quarter for the price of $3.0 million was completed and the Company received $2.0 million in cash and a $1.0 million promissory
note. The Principal amount of $1,000,000 together with all interest must be paid by on or before September 30, 2018 bearing interest
of 5% per annum. During 2016 we accrued $12,603 for interest.
Note 6. Property and Equipment
Property and equipment at December 31, 2016 and December 31, 2015
consisted of:
|
|
Average
Estimated
Useful
Lives
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
December
31, 2015
(assets held
for sale)
|
|
|
December
31, 2015
(excl. Assets
held for sale)
|
|
Furniture and fixtures
|
|
5
|
|
$
|
155,197
|
|
|
$
|
283,387
|
|
|
$
|
29,605
|
|
|
$
|
253,782
|
|
Computer, communication and network equipment
|
|
3 – 10
|
|
|
19,079,117
|
|
|
|
22,991,043
|
|
|
|
63,216
|
|
|
|
22,927,827
|
|
Software
|
|
5
|
|
|
3,209,318
|
|
|
|
5,906,917
|
|
|
|
2,255,695
|
|
|
|
3,651,222
|
|
Automobiles
|
|
5
|
|
|
11,897
|
|
|
|
37,428
|
|
|
|
-
|
|
|
|
37,428
|
|
Construction in progress for internal use software
|
|
|
|
|
786,897
|
|
|
|
1,299,993
|
|
|
|
395,585
|
|
|
|
904,408
|
|
Total property and equipment
|
|
|
|
|
23,242,426
|
|
|
|
30,518,768
|
|
|
|
2,744,101
|
|
|
|
27,774,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
(14,533,648
|
)
|
|
|
(15,496,091
|
)
|
|
|
(772,799
|
)
|
|
|
(14,723,292
|
)
|
Total property and equipment, net
|
|
|
|
$
|
8,708,778
|
|
|
$
|
15,022,677
|
|
|
$
|
1,971,302
|
|
|
$
|
13,051,375
|
|
Computers, communications and network equipment
includes the capitalization of our systems engineering and software programming activities. Typically, these investments pertain
to the Company’s:
|
·
|
Intelligent
Network (IN) platform;
|
|
·
|
CRM
provisioning Software;
|
|
·
|
Mediation,
Rating & Pricing engine;
|
|
·
|
ValidSoft
security software applications;
|
|
·
|
Operations
and business support software; and
|
|
·
|
Network
management tools.
|
Construction in progress (“CIP”)
for internal use software consists of software projects in developments that have not been completed, and equipment acquired from
third parties but not yet ready for service.
The total amount of product development costs
(internal use software costs) that are capitalized in Property & Equipment during the years ended December 31, 2016 and 2015
was $990,076 and $4,142,089, respectively.
Upon
completion of development, the assets are reclassified from CIP to the appropriate Property and Equipment category, at which point
the assets begin to depreciate or amortize. During the year ended December 31, 2016, the Company transferred $214,770 from CIP
into Property and Equipment. In 2015, we transferred $5,697,792 from CIP into Property and Equipment.
Following
the restructuring and rationalization that commenced in the fourth quarter of 2015 and continued during 2016 the Company cancelled
projects and impaired for an amount of $850,985 in 2016.
Note 7. Intangible Assets
Intangible assets include customer contracts,
telecommunication licenses and integrated, multi-country, centrally managed switch-based interconnects as well as ValidSoft Intellectual
Property, including but not limited to software source codes, applications, customer list & pipeline, registration & licenses,
patents and trademark/brands.
Intangible assets as of December 31, 2016 and
2015 consisted of the following:
|
|
Useful
Lives
|
|
December 31,
2016
|
|
|
December
31,
2015
|
|
|
December
31,
2015
(assets held
for sale)
|
|
|
December
31,
2015
(excl.
Assets held
for sale)
|
|
Customer Contracts, Licenses, Interconnect & Technology
|
|
5 - 10
|
|
$
|
315,610
|
|
|
$
|
688,963
|
|
|
$
|
-
|
|
|
$
|
688,963
|
|
ValidSoft IP & Technology
|
|
1 - 10
|
|
|
-
|
|
|
|
13,257,272
|
|
|
|
12,930,083
|
|
|
|
327,189
|
|
Total intangible assets
|
|
|
|
|
315,610
|
|
|
|
13,946,235
|
|
|
|
12,930,083
|
|
|
|
1,016,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated Amortization
|
|
|
|
|
(315,610
|
)
|
|
|
(430,333
|
)
|
|
|
-
|
|
|
|
(430,333
|
)
|
Less: Accumulated Amortization ValidSoft IP & Technology
|
|
|
|
|
-
|
|
|
|
(10,663,602
|
)
|
|
|
(10,336,413
|
)
|
|
|
(327,189
|
|
Total intangible assets, Net
|
|
|
|
$
|
-
|
|
|
$
|
2,852,300
|
|
|
$
|
2,593,670
|
|
|
$
|
258,630
|
|
During the year ended December 31, 2016, intangible
assets were fully amortized.
Note 8. Long
Lived Assets held for Sale
In 2015, the Company
committed to a plan to sell the subsidiaries ValidSoft Ireland Ltd and ValidSoft UK Ltd. (jointly ‘ValidSoft’) within
a time period of less than 12 months as of balance sheet date. Combined with other criteria as described in ASC 360-10-45-9 and
ASC 360-10-45-11 we determined the long lived assets related to ValidSoft should be classified as held for sale as of the fourth
quarter of 2015.
On September 30, 2016,
ValidSoft was divested through a management buyout.
|
|
Average
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
Useful
|
|
December 31,
|
|
|
December 31,
|
|
Assets Held for Sale
|
|
Lives
|
|
2016
|
|
|
2015
|
|
Property & Equipment
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
5
|
|
$
|
-
|
|
|
$
|
29,605
|
|
Computer, communication and network equipment
|
|
3 – 10
|
|
|
-
|
|
|
|
63,216
|
|
Software
|
|
5
|
|
|
-
|
|
|
|
2,255,695
|
|
Automobiles
|
|
5
|
|
|
-
|
|
|
|
-
|
|
Construction in progress for internal use software
|
|
|
|
|
-
|
|
|
|
395,585
|
|
|
|
|
|
|
-
|
|
|
|
2,744,101
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
|
|
-
|
|
|
|
(772,799
|
)
|
Total property and equipment, net
|
|
|
|
$
|
-
|
|
|
$
|
1,971,302
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
IP and Technology
|
|
3 – 10
|
|
|
-
|
|
|
|
12,930,083
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated amortization
|
|
|
|
|
-
|
|
|
|
(10,336,413
|
)
|
Total intangible Assets, net
|
|
|
|
$
|
-
|
|
|
$
|
2,593,670
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets Held for Sale
|
|
|
|
|
|
|
|
|
|
|
Property & Equipment and Intangible Assets
|
|
|
|
|
-
|
|
|
|
15,674,184
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
-
|
|
|
|
(11,109,212
|
)
|
Total Assets Held for Sale, net
|
|
|
|
$
|
-
|
|
|
$
|
4,564,972
|
|
Note 9. Goodwill
The carrying value of the Company’s goodwill
as of December 31, 2016 and as of December 31, 2015 was as follows:
Goodwill
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Goodwill ValidSoft Ltd
|
|
$
|
-
|
|
|
$
|
2,659,866
|
|
Goodwill Morodo Ltd.
|
|
|
-
|
|
|
|
177,155
|
|
Goodwill Telnicity
|
|
|
-
|
|
|
|
190,401
|
|
Total
|
|
$
|
-
|
|
|
$
|
3,027,422
|
|
After the divestment of ValidSoft and the renewed
strategy the Company decided to impair the carrying value of goodwill related to ValidSoft. Following the restructuring and rationalization
that commenced in the fourth quarter 2015 the Morodo and Telnicity related projects were cancelled and the related headcount phased
out. As a result, the Company decided to fully impair the carrying value of goodwill related to Morodo and Telnicity.
Note 10. Accounts payable and Customer Deposits
As of December 31, 2016 and December 31, 2015,
the accounts payable and customer deposits were comprised of the following:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Accounts payable
|
|
$
|
2,316,768
|
|
|
$
|
2,574,425
|
|
Customer deposits
|
|
|
-
|
|
|
|
65,438
|
|
Total Accounts payable and Customer Deposits
|
|
$
|
2,316,768
|
|
|
$
|
2,639,863
|
|
The customer deposits in 2015 relate to Dutch
MVNOs of which the relationship was terminated during 2016.
Note 11. Net Billings in Excess
of Revenues
Because the Company recognizes revenue upon
performance of services, net billings in excess of revenues represents amounts received from the customers for which either delivery
has not occurred or against future sales of services. As of December 31, 2016, the balance of short term net billings in excess
of revenues was $951,791 and long term portion was $121,309, totaling $1,073,100. For the corresponding period in 2015, the short
term net billings in excess of revenues balance was $1,259,545 and the long term portion was $1,066,687, totaling $2,326,232.
Note 12. Accrued Expenses
As of December 31, 2016 and December 31, 2015, the accrued expenses
were comprised of the following:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Accrued selling, general and administrative expenses
|
|
$
|
4,955,959
|
|
|
$
|
3,648,920
|
|
Accrued cost of service
|
|
|
394,496
|
|
|
|
297,370
|
|
Accrued taxes (including VAT)
|
|
|
127,434
|
|
|
|
708,002
|
|
Accrued interest payable
|
|
|
132,632
|
|
|
|
199,104
|
|
Other accrued expenses
|
|
|
403,099
|
|
|
|
178,316
|
|
Total accrued expenses
|
|
$
|
6,013,620
|
|
|
$
|
5,031,712
|
|
Accrued taxes include income taxes payable
as of December 31, 2016 amounting to $9,442. See Note 24 of the Financial Statements for more information.
Accrued Selling, General and Administrative
expenses include social security premiums, personnel related costs such as payroll taxes, provision for holiday allowance, accruals
for marketing and sales expenses, and office related expenses.
Note 13. Unsecured Convertible Promissory Notes
The Unsecured Convertible Promissory Notes can be split into two
groups, the breakdown is as follows and we recognize the following events during the last quarter.
Breakdown of the Unsecured Convertible Promissory
Notes (net of debt discounts)
|
|
Outstanding
December
31, 2016
|
|
|
Closing(s)
during
2016
|
|
|
Regular
Amortizations
(during
2016)
|
|
|
Conversions
(during
2016)
including
accelerated
amortization
|
|
|
December
31, 2015
|
|
9% Unsecured Convertible Note (Private Offering Q4-2015 - Q1-2016)
|
|
$
|
(320,729
|
)
|
|
$
|
(453,176
|
)
|
|
$
|
(693,592
|
)
|
|
$
|
1,064,868
|
|
|
$
|
(238,829
|
)
|
9% Saffelberg Note (Unsecured Convertible)
|
|
$
|
(500,319
|
)
|
|
$
|
(472,656
|
)
|
|
$
|
(27,662
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
$
|
(821,048
|
)
|
|
$
|
(925,832
|
)
|
|
$
|
(721,254
|
)
|
|
$
|
1,064,868
|
|
|
$
|
(238,829
|
)
|
On December 18, 2015, the Company consummated
a closing (“Initial Closing”) and on March 14, 2016 the Company consummated the last of twelve closings of its private
placement offering (the “Offering”) of Units (as defined below) to “accredited investors” (as defined in
Rule 501(a) of the Securities Act of 1933, as amended, the “Securities Act”) (“Investors”). The closings
have been part of a “best efforts” private placement offering of up to $4,200,000 (the “Maximum Amount”)
consisting of up to 140 units (the “Units”), each Unit consisting of: (i) one 9% unsecured subordinated convertible
promissory note in the principal amount of $30,000 (each a “Note” and collectively the “Notes”), which
is convertible into shares (the “Note Shares”) of common stock of the Company, $.00001 par value, (the “Common
Stock”) at the option of the holder at a conversion price of $7.50 per share, subject to certain exceptions; and (ii) a five-year
warrant (each a “Warrant” and collectively, the “Warrants”) to purchase one hundred thousand (4,000) shares
of Common Stock (the “Warrant Shares”) at an exercise price of $11.25 per share, subject to certain exceptions.
The
Units were offered and sold pursuant to an exemption from registration under Section 4(2) and Regulation D of the Securities Act.
During 2016 and 2015, the Company sold an aggregate of $3,548,000
principal
amount of Notes and delivered Warrants to purchase an aggregate of 473,067 shares of Common Stock.
The Warrants entitle the holders to purchase
shares of Common Stock reserved for issuance thereunder for a period of five years from the date of issuance and contain certain
anti-dilution rights on terms specified in the Warrants. The Note Shares and Warrant Shares will be subject to full ratchet anti-dilution
protection for the first 24 months following the issuance date and weighted average anti-dilution protection for the 12 months
period after the first 24 months following the issuance date. In December 2016 the Company and the holders agreed upon modification
of the Warrants to redeem the above anti-dilution protection and offered an exercise price adjustment to $3.75 and 10% bonus warrants
in return.
The Company filed an S-3 registration statement
registering the Note Shares and Warrant Shares of the Offering which became effective November 14, 2016.
In connection with the Private Placement Offering,
the Company retained a registered FINRA broker dealer (the “Placement Agent”) to act as the placement agent. For acting
as the placement agent, we agreed to pay the Placement Agent, subject to certain exceptions: (i) a cash fee equal to seven percent
(7%) of the aggregate gross proceeds raised by the Placement Agent in the Offering, (ii) a non-accountable expense allowance of
up to one percent (1%) of the aggregate gross proceeds raised by the Placement Agent in the Offering, and (iii) at the final Closing
one five-year warrant to purchase such number of shares equal to 7% of the shares underlying the Notes sold in this Offering at
an exercise price of $7.50 and one five-year warrant to purchase such number of shares equal to 7% of the shares underlying the
Warrants sold in this Offering at an exercise price of $11.25. The total number of warrants earned by the Placement Agent are 33,115
warrants with an exercise price of $11.25 and 33,115 warrants with an exercise price of $7.50.
The aggregate number of units sold during the
offering period in 2015 and 2016 resulted in a gross proceed of $3,458,000 and a net proceed of $3,039,932. The Company used the
net proceeds from the Offering primarily for working capital.
The value of the warrants and the conversion
feature to the investors and the Placement Agent cash fees and warrants have been capitalized and off set against the liability
for the Notes. By doing this the Company followed the new ASU 2015-03 guidelines to also offset the debt issuance costs against
the liability of the convertible notes. This resulted in a total initial debt discount of $2,395,290 and $467,568 of financing
costs incurred in connection with the offering. The debt discount and debt issuance costs are being amortized over the term of
the Notes using the effective interest method.
Breakdown of the 9% Unsecured Subordinated Convertible
Promissory Note
|
|
|
|
|
|
|
|
|
|
|
|
|
(Maturing December
2018)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2015
|
|
|
Additional
Closings
(during
2016)
|
|
|
Regular
Amortizations
(during
2016)
|
|
|
Conversions
(during 2016)
including
accelerated
amortization
|
|
|
10% Early
Repayment
Short Term
|
|
|
Outstanding
December
31, 2016
|
|
Convertible Note Principal Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount (Long Term)
|
|
$
|
(1,275,000
|
)
|
|
$
|
(2,273,000
|
)
|
|
$
|
-
|
|
|
$
|
2,823,000
|
|
|
$
|
-
|
|
|
$
|
(725,000
|
)
|
10% Early Repayment (Short Term)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
255,300
|
|
|
|
(354,800
|
)
|
|
|
(99,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Discounts & Financing Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investor Warrants
|
|
|
543,548
|
|
|
|
1,105,059
|
|
|
|
(346,454
|
)
|
|
|
(1,062,843
|
)
|
|
|
-
|
|
|
|
239,310
|
|
Conversion Feature value
|
|
|
214,159
|
|
|
|
296,414
|
|
|
|
(133,988
|
)
|
|
|
(302,669
|
)
|
|
|
-
|
|
|
|
73,916
|
|
7% Agent Warrants
|
|
|
86,593
|
|
|
|
144,158
|
|
|
|
(63,284
|
)
|
|
|
(134,657
|
)
|
|
|
-
|
|
|
|
32,810
|
|
Financing Costs
|
|
|
191,871
|
|
|
|
274,193
|
|
|
|
(149,866
|
)
|
|
|
(513,263
|
)
|
|
|
354,800
|
|
|
|
157,735
|
|
|
|
$
|
(238,829
|
)
|
|
$
|
(453,176
|
)
|
|
$
|
(693,592
|
)
|
|
$
|
1,064,868
|
|
|
$
|
-
|
|
|
$
|
(320,729
|
)
|
Breakdown of the 9% Saffelberg Note (Unsecured Convertible)
|
|
|
|
|
|
|
|
|
|
(Maturing August 18, 2019)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
Closing during
2016
|
|
|
Regular
Amortizations
(during 2016)
|
|
|
Conversions
(during 2016)
including
accelerated
amortization
|
|
|
Outstanding
December 31,
2016
|
|
Convertible Note Principal Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount (Long Term)
|
|
$
|
-
|
|
|
$
|
(723,900
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(723,900
|
)
|
Debt Discounts & Financing Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investor Warrants
|
|
|
-
|
|
|
|
179,527
|
|
|
|
(19,294
|
)
|
|
|
-
|
|
|
|
160,234
|
|
Conversion Feature value
|
|
|
-
|
|
|
|
71,717
|
|
|
|
(8,369
|
)
|
|
|
-
|
|
|
|
63,348
|
|
Financing Costs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
(472,656
|
)
|
|
$
|
(27,662
|
)
|
|
$
|
-
|
|
|
$
|
(500,319
|
)
|
Note 14. Warrant and Conversion Feature Liabilities
The issuance of the 9% Convertible Note
(Investors), the Saffelberg Note (Other Investor), the 13%+Eurodollar Senior Secured Credit Agreement (Lender) and Placement Agent
Fees (Agent) all resulted in rights to convert outstanding debt or exercise rights to buy common shares of the Company. The Company
has identified the following number of rights owned by the holders for the following groups.
Number of underlying shares for
Warrants & Conversion Feature issued
in relation with the 9% Unsecured
Subordinated Convertible Promissory
Note(s)
|
|
Outstanding
December 31,
2016
|
|
|
Additional
closings during
2016
|
|
|
Agreement
Amendments /
Shares issued
for Converted
Interest
|
|
|
Exercises /
Conversions
|
|
|
Outstanding
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9% Convertible Note - Investors
|
|
|
212,667
|
|
|
|
303,067
|
|
|
|
748,973
|
|
|
|
(1,009,373
|
)
|
|
|
170,000
|
|
9% Convertible Note - Other Investor
|
|
|
134,679
|
|
|
|
134,679
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
FMV Conversion Feature
|
|
|
347,346
|
|
|
|
437,746
|
|
|
|
748,973
|
|
|
|
(1,009,373
|
)
|
|
|
170,000
|
|
Lender Warrants
|
|
|
1,273,018
|
|
|
|
-
|
|
|
|
1,273,018
|
|
|
|
-
|
|
|
|
-
|
|
Investor Warrants
|
|
|
520,374
|
|
|
|
303,067
|
|
|
|
47,307
|
|
|
|
-
|
|
|
|
170,000
|
|
Other Investor Warrants
|
|
|
96,520
|
|
|
|
96,520
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
7% Agent Warrants
|
|
|
66,229
|
|
|
|
42,429
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,800
|
|
8% Agent Warrants
|
|
|
68,445
|
|
|
|
-
|
|
|
|
68,445
|
|
|
|
-
|
|
|
|
-
|
|
FMV Warrant Liabilities
|
|
|
2,024,586
|
|
|
|
442,016
|
|
|
|
1,388,770
|
|
|
|
-
|
|
|
|
193,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,371,932
|
|
|
|
879,762
|
|
|
|
2,137,743
|
|
|
|
(1,009,373
|
)
|
|
|
363,800
|
|
Most of them initially contained certain conditions which resulted
in the obligation to account for those elements as Derivative Liabilities. The Company has identified the following derivatives
in fair value amounts of outstanding rights owned by the holders for the following groups.
Fair Market Value Warrants &
Conversion Feature
|
|
FMV as of
December
31, 2016
|
|
|
Additional
closings
during
2016
|
|
|
Agreement
Amendments/
Conversions
|
|
|
Mark to
market
adjustment
Ytd-2016
|
|
|
FMV as
of
December
31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9% Convertible Note - Investors
|
|
$
|
-
|
|
|
$
|
296,413
|
|
|
$
|
(1,675,439
|
)
|
|
$
|
1,118,628
|
|
|
$
|
260,398
|
|
9% Convertible Note - Other Investor
|
|
|
438,448
|
|
|
|
71,717
|
|
|
|
-
|
|
|
|
366,731
|
|
|
|
-
|
|
FMV Conversion Feature
|
|
$
|
438,448
|
|
|
$
|
368,130
|
|
|
$
|
(1,675,439
|
)
|
|
$
|
1,485,359
|
|
|
$
|
260,398
|
|
Lender Warrants
|
|
|
3,362,284
|
|
|
|
769,861
|
|
|
|
(109,756
|
)
|
|
|
2,702,178
|
|
|
|
-
|
|
Investor Warrants
|
|
|
-
|
|
|
|
1,105,059
|
|
|
|
(919,760
|
)
|
|
|
(776,772
|
)
|
|
|
591,473
|
|
Other Investor Warrants
|
|
|
188,214
|
|
|
|
179,527
|
|
|
|
-
|
|
|
|
8,687
|
|
|
|
-
|
|
7% Agent Warrants
|
|
|
121,200
|
|
|
|
144,158
|
|
|
|
-
|
|
|
|
(116,705
|
)
|
|
|
93,747
|
|
8% Agent Warrants
|
|
|
155,684
|
|
|
|
-
|
|
|
|
142,232
|
|
|
|
13,452
|
|
|
|
-
|
|
FMV Warrant Liabilities
|
|
$
|
3,827,382
|
|
|
$
|
2,198,605
|
|
|
$
|
(887,284
|
)
|
|
$
|
1,830,840
|
|
|
$
|
685,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,265,830
|
|
|
$
|
2,566,736
|
|
|
$
|
(2,562,723
|
)
|
|
$
|
3,316,199
|
|
|
$
|
945,618
|
|
Note 15. 2016 13%+Eurodollar Senior Secured Credit Agreement
fka the 2014 10%+Eurodollar Third Party Loan Agreement
The following table shows the
composition of the 13%+Eurodollar Senior Secured Credit Agreement reflected as the 2014 10% + Eurodollar 3rd Party
Loan in the Consolidated Balance Sheets:
2014 10% + Eurodollar 3rd Party Term Loan Agreement
|
|
December 31,
|
|
|
December 31,
|
|
(Extinguished due to the amendment in August 2016)
|
|
2016
|
|
|
2015
|
|
2014 10% Term Loan (principal amount)
|
|
$
|
-
|
|
|
$
|
6,500,000
|
|
Debt Discount - Repayment Premium
|
|
|
-
|
|
|
|
|
|
Deferred Exit Fee
|
|
|
-
|
|
|
|
57,176
|
|
Deferred Financing Costs
|
|
|
-
|
|
|
|
(343,130
|
)
|
Debt Discount - Original Issue Discount
|
|
|
-
|
|
|
|
(132,567
|
)
|
Debt Discount – Warrant
|
|
|
-
|
|
|
|
(501,202
|
)
|
|
|
$
|
-
|
|
|
$
|
5,580,277
|
|
|
|
|
|
|
|
|
|
|
2016 13% + Eurodollar Senior Secured Credit Agreement
|
|
|
|
|
|
|
(Refinancing of 2014 10% + Eurodollar Loan)(Maturing December 2018,
including provisional extensions)
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
2016 13% + Eurodollar Senior Secured Credit Agreement (principal)
|
|
$
|
10,081,836
|
|
|
$
|
-
|
|
Debt Discount - 10% Warrants & Free Warrant shares
|
|
|
(422,202
|
)
|
|
|
-
|
|
Debt Discount - Original Issue Discount
|
|
|
(6,596
|
)
|
|
|
-
|
|
Deferred Financing Costs
|
|
|
(164,731
|
)
|
|
|
-
|
|
Debt Discount - Repayment Premium
|
|
|
(1,772,645
|
)
|
|
|
-
|
|
|
|
$
|
7,715,662
|
|
|
$
|
-
|
|
On November 17, 2014, the Company and certain
of its subsidiaries entered into a term loan credit agreement with Atalaya Administrative LLC, as the administrative agent and
collateral agent, and the lenders party thereto (the “2014 10% Term Loan Agreement”). The 2014 10% Term Loan Agreement
provides for a twelve million dollar term loan facility (the “Term Loan Facility”), with advances to be made on the
Closing Date. Borrowings under the Term Loan Facility shall bear interest at the Eurodollar rate plus an applicable margin per
annum equal to ten percent (10.00%), such margin decreased by two percent (2%) from 12% upon the satisfaction of certain
post-closing conditions. The Term Loan Facility will mature on December 31, 2017.
On July 9, 2015 the Company entered into a
First Amendment to the Credit Agreement dated November 17, 2014 with Corbin Mezzanine Fund I, L.P. (‘Lender’) and Atalaya
Administrative LLC, as administrative agent and collateral agent for Corbin Mezzanine Fund I.
Leading up to the amendment of the credit agreement
the Company paid $10,100,000 on June 22, 2015 to Atalaya, comprising of a $5,500,000 pre-payment, and a $4,427,333 payment in anticipation
of the conclusion of the amended credit agreement, totaling $9,927,333 which amount was debited against the outstanding principal
of $12,000,000, resulting in an outstanding balance at June 30, 2015 of $2,072,667. The remainder of the $10,100,000 was used for
default interest and prepayment charges. After closing of the First Amendment the Company received approximately $ 4.5 million
from Atalaya/Corbin to bring the outstanding principal to the agreed $6,500,000.
As of the third quarter of 2015 the Company
has been in breach of certain covenants under the amended credit agreement and is therefore in default of the credit agreement.
On August 15, 2016 the Company entered
into the second amendment to the credit agreement dated November 17, 2014 with Corbin Mezzanine Fund I, L.P. and Atalaya
Administrative LLC, as administrative agent and collateral agent for Corbin Mezzanine Fund I. Under the second
amendment, the senior secured lender increased the loan facility by $1,202,447 of which $1,000,000 was paid to the Company
and the remainder was offset against legal fees and other financing related costs, the lender waived the Company’s
existing defaults under the financial covenants, raised the applicable margin to 13% and reset the agreed maturity date to
December 31, 2016 with extended maturity options towards March 31, 2017 if certain conditions were met. Furthermore the
amendment included additional prepayment premium in the following cases, equal to: (a) twenty-five percent (25%) of the
amount prepaid if such prepayment occurs on or before October 15, 2016, (b) fifty percent (50%) of the amount prepaid if such
prepayment occurs on or after October 16, 2016 and on or before December 31, 2016, and (c) seventy-five percent (75%) of the
amount prepaid if such prepayment occurs on or after December 31, 2016. Considering the above amendments the Company
concluded that the amendments constitute an extinguishment of the debt compared to the terms before
the amendment. As a result the outstanding debt discounts and deferred financing costs have been accounted as
extinguishment of debt.
On December 27, 2016, the Company agreed upon
another amendment (the “Amendment”) of the credit agreement with Atalaya Administrative LLC as administrative agent
and Corbin Mezzanine Fund I, L.P. Pursuant to the Amendment, the Borrower is indebted in the amount of $5,562,778, and has agreed
to add the following amounts to the indebtedness: (i) the Additional Prepayment Premium (as agreed upon in the Amendment of August
15, 2016) of $4,149,893; (ii) the Prepayment Premium (as defined in the Original Credit Agreement) of $69,165 and (iii) the Exit
Fee (as defined in the Original Credit Agreement) of $300,000, totaling $10,081,836 (the “Amended Term Loan Facility”).
The Amendment removes certain terms regarding
the liquidation preference and the prepayment fee. In addition, the Amendment provides that credit agreement shall bear interest
at Eurodollar rate plus an applicable margin per annum equal to thirteen percent (13%). However, upon receipt by the Company of
Net Equity Proceeds (as defined in the Amendment) of $3,000,000 and applying such amount to certain obligations, the interest rate
shall be reduced to 12% per annum.
Pursuant to the Amendment, the initial maturity
date of the loan is June 30, 2017, which shall be automatically extended to December 31, 2017 (the “First Extended Maturity
Date”) upon a repayment of principal of at least $1,500,000 million by March 31, 2017 and another $1,500,000 by June 30,
2017, and no default then exits. The First Extended Maturity Date shall be automatically extended to February 28, 2018 (the “Second
Extended Maturity Date”) if the financial statements required by the Amendment for the month ending November 30, 2017 have
been delivered to Atalaya and the Lender, and as of December 31, 2017, the total leverage ratio of the Company and its subsidiaries
is less than or equal to 2.50 to 1.00, and no default then exits. The Second Extended maturity Date shall be automatically extended
to December 31, 2018 (the “Third Extended Maturity Date”) if the financial statements for the fiscal quarter ending
December 31, 2017 have been delivered to Atalaya and the Lender, and as of December 31, 2017, the total leverage ratio of the Company
and its subsidiaries is less than or equal to 2.50 to 1.00, and no default then exits.
In addition, pursuant to the Amendment, the
Borrower agrees to respectively repay $250,000 by the end of each fiscal quarter of 2017 and $500,000 by the end of each fiscal
quarter of 2018. The Amendment also provides that the Borrower shall pay to Atalaya a quarterly installment of $15,000 as the administration
fee, which is $60,000 in total. Also, the Amendment updated the financial covenants.
Also on December 27, 2016, a Reaffirmation
Agreement (the “Reaffirmation Agreement”) was entered by and among ET Europe, the Company, Pareteum North America and
Atalaya, pursuant to which, among other things, the Borrower reaffirmed its obligations to Lender under each of the Credit Agreement
(as defined in the Reaffirmation Agreement), the Security Agreement (as defined in the Reaffirmation Agreement) and the Pledge
Agreement (as defined in the Reaffirmation Agreement) and Deed of Pledge over Shares (as defined in the Reaffirmation Agreement).
Upon closing of the amendment, the
Company performed an analysis to determine whether this amendment of the Credit Agreement constituted an extinguishment
to the existing credit agreement and concluded that such was not the case.
Note 16. Registered
Direct Offering and Warrant Liabilities
In June 11, 2013, the “Company”
entered into an Amendment No. 1 (the “Amendment to SPA”) to certain Securities Purchase Agreement (the “SPA”)
dated June 3, 2013 with certain institutional and other investors (“DJ Investors”) placed by Dawson James Securities
Inc. (the “Placement Agent”) and Mr. Steven van der Velden, the Chief Executive Officer and Chairman of the Board (“Affiliated
Investors”), relating to a registered direct public offering by the Company (the “Offering”). The gross proceeds
of this SPA were $12,000,000 and resulted in net proceeds of $11,292,500 after the deduction of $707,500 for fundraising related
expenses to various parties involved. The majority of the net proceeds were used to pay off the outstanding Senior 8% Secured Convertible
Notes issued in 2012.
The number of shares issued relating to this
SPA amounted to 697,025, the number of warrants amounted to 313,661 and was covered by the registration statement filed in 2012
for an amount of $75,000,000 (S-3/A Amendment No. 2, File No. 333-181738 dated June 6, 2012).
According to ASC 480-10 Distinguishing Liabilities
from Equity, the accounting for an equity instrument with detachable warrants classified as a liability reflects the notion that
the consideration received upon issuance must be allocated between the instruments issued. Proceeds from the issuance of an equity
instrument with stock purchase warrants are allocated to the two elements based on the following: (i) the liability element has
initially been recorded at fair market value; and (ii) the remaining portion of the consideration has been allocated to the equity
element.
The liability instrument was re-evaluated at
each reporting period with changes in the fair value recognized through the applicable period Consolidated Statement of Comprehensive
Loss.
During 2015 the last outstanding warrants relating
to the Offering were exercised and exchanged in to common shares. Due to the conditions within the warrant agreement, there was
no additional cash proceed when the exercise took place.
Note 17. Obligations under Capital Leases
The Company has a financing arrangement with
one of its vendors to acquire equipment and licenses. This trade arrangement matured in January 2017.
The current portion of the Capital Leases
of $10,813 as of December 31, 2016 is included in Current Liabilities “Obligations under capital leases (current portion)”
in the accompanying balance sheet as of December 31, 2016.
Note 18. Other long term payable
Other long term payable is summarized as follows:
|
|
December 31,
|
|
|
|
2016
|
|
Arrangement with creditor
|
|
$
|
251,079
|
|
Less:
|
|
|
|
|
Short-term portion (recorded in Accrued Expenses and Other Payables)
|
|
|
(58,099
|
)
|
Total long term
|
|
$
|
192,980
|
|
During the fourth quarter of 2014, the
Company reached an agreement with regulatory authorities regarding a debt for telecom license fees from 2013. As of December 31,
2016 the outstanding long term portion amounted to $192,980 compared to $260,290 as of December 31, 2015. The total current amount,
long term and short term, of $251,079 as of December 2016 will be repaid in 49 monthly installments.
Note 19. Fair Value Measurements
The following tables
summarize fair value measurements by level at December 31, 2016 for financial assets and liabilities measured at fair value on
a recurring basis:
|
|
December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion feature
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
438,448
|
|
|
$
|
438,448
|
|
Warrant Liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
3,827,381
|
|
|
|
3,827,381
|
|
Total Derivatives Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,265,829
|
|
|
$
|
4,265,829
|
|
The Company uses the Monte Carlo valuation
model and the Black-Scholes model to determine the value of the outstanding warrants and conversion feature. Since the Monte Carlo
valuation model requires special software and expertise to model the assumptions to be used, the Company hired a third party valuation
expert.
The following table summarizes fair value measurements
by level at December 31, 2015 for financial assets and liabilities measured at fair value on a recurring basis:
|
|
December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion feature
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
260,398
|
|
|
$
|
260,398
|
|
Warrant Liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
685,220
|
|
|
|
685,220
|
|
Total Derivatives Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
945,618
|
|
|
$
|
945,618
|
|
The Company has classified
the outstanding warrants into level 3 due to the fact that some inputs are not published and not easily comparable to industry
peers.
The Company determines
the “Fair Market Value” using a Monte Carlo or Black-Scholes model by using the following assumptions:
Number of outstanding
warrants
The number of outstanding
exercise rights is adjusted every re-measurement date after deducting the number of exercised rights during the previous reporting
period.
Stock price at
valuation date
The closing stock
price at re-measurement date being the last available closing price of the reporting period taken from www.nasdaq.com.
Exercise Price
The exercise price
is fixed and determined in the warrant agreement.
Remaining Term
The remaining term
is calculated by using the contractual expiration date of the warrant agreement at the moment of re-measurement. The remaining
term for a warrant exercise using the exchange condition is fixed in the warrant agreement at five years.
Expected Volatility
We estimate expected
cumulative volatility giving consideration to the expected life of the note and calculated the annual volatility by using the continuously
compounded return calculated by using the share closing prices of an equal number of days prior to the maturity date of the note
(reference period). The annual volatility is used to determine the (cumulative) volatility of our common stock (= annual volatility
x SQRT (expected life)).
Liquidity Event
We estimate the expected
liquidity event giving consideration to the expectation of sale of assets held for sale and the current substantial reorganization.
Risk-Free Interest
Rate
We estimate the risk-free
interest rate using the “Daily Treasury Yield Curve Rates” from the U.S. Treasury Department with a term equal to the
reported rate, or derived by using both spread in intermediate term and rates, up to the maturity date of the note.
Expected Dividend
Yield
We estimate the expected
dividend yield by giving consideration to our current dividend policies as well as those anticipated in the future considering
our current plans and projections.
Note 20. Stockholders’ Equity
(A)
Common Stock
The
Company is presently authorized to issue 500,000,000 shares Common Stock. The Company had 8,376,267 shares of common stock issued
and outstanding as of December 31, 2016, an increase of 1,830,429 shares from December 31, 2015, largely due to the shares issued
in connection with the conversion of $2,823,000 on convertible notes which resulted in the issuance of a total of 1,009,373 shares;
176,000 shares were issued as part of the settlement with Cross River Initiatives; 104,671 shares were issued as executive officers
and directors compensation including 20,000 shares being part of a severance and independent contractor agreement with one of the
former officers of the company; 166,316 shares were issued as part of the negotiations to amend the credit agreement with the lender,
divided into 120,000 shares issued as a result of warrants exercise and 46,315 shares issued as debt discount; 199,166 shares were
issued as special stock awards to staff and consultants; 232,257 shares were issued as part of the agreement with suppliers to
settle the outstanding debt or service fee in shares in lieu of cash; 33,427 shares were issued to consultants in lieu of cash.
Reconciliation with Stock Transfer Agent Records:
The shares issued and outstanding as of December
31, 2016 according to the stock transfer agent’s records are 8,386,104. The difference in number of issued shares recognized
by the Company of 8,376,267 amounts to 9,837 and it is the result of the exclusion of the 9,357 unreturned shares from ‘cancelled’
acquisitions (pre-2006) and 480 treasury shares issued under the former employee benefits plan.
(B) Preferred Stock
The Company’s Certificate of Incorporation
authorizes the issuance of 50,000,000 shares of Preferred Stock, $0.00001 par value per share. 249 shares of Preferred Stock are
issued and outstanding as per closing December 31, 2016. Under the Company’s Certificate of Incorporation, the Board of Directors
has the power, without further action by the holders of the Common Stock, subject to the rules of the NYSE MKT LLC, to designate
the relative rights and preferences of the Preferred Stock, and issue the Preferred Stock in such one or more series as designated
by the Board of Directors. The designation of rights and preferences could include preferences as to liquidation, redemption and
conversion rights, voting rights, dividends or other preferences, any of which may be dilutive of the interest of the holders of
the Common Stock or the Preferred Stock of any other series. The issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company without further stockholder action and may adversely affect the rights and powers,
including voting rights, of the holders of Common Stock. In certain circumstances, the issuance of Preferred Stock could depress
the market price of the Common Stock.
On September 2, 2016, the Company consummated
a closing (a “Closing”) of its private placement offering (the “Offering”) of Series A Preferred Stock,
par value $0.00001 per share (the “Series A Preferred Stock”), to “accredited investors” (as defined in
Rule 501(a) of the Securities Act of 1933, as amended, the “Securities Act”) (the “Investors”). At
the Closing, the Company sold 73 shares of Series A Preferred Stock for aggregate gross proceeds of $730,000.
On September 16, 2016, the Company consummated
a Closing of the Offering of the “Series A Preferred Stock, to Investors. At the Closing, the Company sold 49 shares of Series
A Preferred Stock for aggregate gross proceeds of $490,000.
From September 28 through September 30, 2016,
the Company consummated Closings of the Offering of Series A Preferred Stock, to Investors. At the Closings, the Company sold 27
shares of Series A Preferred Stock for aggregate gross proceeds of $270,000.
The above Closings are part of a “best
efforts” private placement offering of up to $1,500,000 (the “Maximum Amount”) consisting of up to 150 shares
of Series A Preferred Stock. 149 shares of Series A Preferred Stock have been sold by the Company for gross proceeds to the Company
of approximately $1.49 million.
On October 28, 2016, the Company entered into
separate subscription agreements with certain Investors relating to the issuance and sale of 33 shares of the Company’s Series
A-1 Preferred Stock, for aggregate gross proceeds of $330,000.
On November 10, 2016,
the Company entered into separate subscription agreements with certain Investors relating to the issuance and sale of 62 shares
of the Company’s Series A-1 Preferred Stock, for aggregate gross proceeds of $620,000.
On December 2, 2016, the Company entered into a subscription agreement with an Investor relating
to the issuance and sale of 5 shares of the Company’s Series A-1 Preferred Stock, for aggregate gross proceeds of $50,000.
The above closings
have been part of a “best efforts” private placement offering conducted by the Company of up to $1,000,000 (the “Maximum
Amount”), consisting of up to 100 shares of Series A-1 Preferred Stock (the “Offering”). As of the date hereof
the Company has sold a total of 100 shares of Series A-1 Preferred Stock for aggregate gross proceeds of $1,000,000.
Each share of the
Series A and Series A-1 Preferred Stock is convertible, at the option of the holder, into 0.04% of the Company’s issued and
outstanding shares of common stock immediately prior to conversion. Combined the Series A (149) and Series A-1 (100) preferred
shares will be convertible into 9.96% of the Company’s issued and outstanding shares of common stock immediately prior to
conversion.
The Company has the
right, in its discretion, to compel holders of the Series A and Series A-1 Preferred Stock to convert the preferred stock into
shares of the Company’s common stock in the event that a change in control (as defined in the Certificate of Designation
of Preferences, Rights and Limitations of the Series A and Series A-1 Preferred Stock, or the “Certificate of Designation”)
occurs within one year after issuance. Further, at any time after one year after the issuance, the Company has the option to automatically
convert the Series A-1 Preferred Stock into common stock.
The holders of the
Series A and Series A-1 Preferred Stock are not entitled to receive any dividends and have no voting rights (except that the Company
may only take certain corporate actions with the approval of a majority of the outstanding shares of the Series A and Series A-1
Preferred Stock). Further, upon liquidation, dissolution or winding up of the Company, the holders of the Series A and Series A-1
Preferred Stock will receive distributions on par with and on a pro rata basis with the holders of the Company’s common stock
as though the Series A and Series A-1 Preferred Stock had been converted at the time of such liquidation, dissolution or winding
up of the Company.
The Investors in the
Offering have also received piggy-back registration rights with respect to the shares of common stock issuable upon conversion
of the Series A and Series A-1 Preferred Stock.
In connection with
the Offering, the Company retained a placement agent. The Company agreed to pay the placement agent, subject to certain exceptions,
a cash fee equal to eight percent (8%) of the aggregate gross proceeds raised by the placement agent in the Offering plus the reimbursement
of certain out-of-pocket expenses not exceeding $15,000.
The Series A and Series A-1 Preferred Stock
was offered and sold pursuant to an exemption from registration under Section 4(a)(2) and Regulation D of the Securities Act.
During
2016, the Company issued 249 shares of Preferred Stock, compared to 0 shares of Preferred Stock outstanding as of December 31,
2015.
|
|
Outstanding as per December 31,
2016
|
|
|
Outstanding as per December 31,
2015
|
|
Preferred A & A-1 shares
|
|
Number
|
|
|
Net Proceeds
|
|
|
Number
|
|
|
Net Proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock (Initial Value)
|
|
|
149
|
|
|
$
|
1,490,000
|
|
|
|
-
|
|
|
$
|
-
|
|
Initial Fundraise Costs (Pref A)
|
|
|
|
|
|
|
(183,521
|
)
|
|
|
-
|
|
|
|
-
|
|
Series A-1 Preferred Stock (Initial Value)
|
|
|
100
|
|
|
|
1,000,000
|
|
|
|
-
|
|
|
|
-
|
|
Initial Fundraise Costs (Pref A-1)
|
|
|
|
|
|
|
(163,283
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
249
|
|
|
$
|
2,143,196
|
|
|
|
-
|
|
|
$
|
-
|
|
The Initial Fundraise Costs are a combination
of the 8% Placement Agent fee, Finder fee, Legal fee, Solicitation fee and Costs relating to the repricing of certain outstanding
warrants.
(C) Warrants
Throughout
the years, the Company has issued warrants with varying terms and conditions related to multiple funding rounds, acquisitions and
other transactions. Often these warrants could be classified as equity instead of a derivative. As of December 31, 2016, 1,504,278
warrants have classified as derivative warrants with a total fair market value of $3,827,381. A number of 700,373 have been classified
as non-derivative warrants. The warrants outstanding at December 31, 2015 have been recorded and classified as non-derivative warrants,
except for 170,000 warrants which the Company has valued and recorded for an amount of $685,220 in the balance sheet for the warrant
liabilities issued in connection with the Unsecured Subordinated Convertible Promissory Note Offering described in Note 13 including
warrants to be issued to the placement agent. The Weighted Average Exercise Price for the currently outstanding warrants in the
table below is $4.6075.
During December 2015 and first quarter of 2016,
66,229 warrants were issued as part of service provided by the placement agent for our offering of the 9% Unsecured Convertible
Note, these warrants are containing conditions which classify these warrants as a derivative liability.
On August 15, 2016, the Company amended
the outstanding Credit Agreement, the 10%+Eurodollar 3
rd
Party Loan. As part of the amendment the Company exercised,
free of charge, 166,316 warrants which were outstanding as per December 31, 2015. Additionally, the Company issued 1,273,018 warrants
to the lenders, these warrants are containing conditions which make it necessary for the Company to account for those as being
derivative warrants.
Also, the Company formalized and issued the
$723,900 convertible note and 96,520 warrants with respect to the initial agreement to settle the 2015 severance agreement with
the former CEO which were assigned to Saffelberg Investments NV. These 96,520 warrants have also conditions which forces the Company
to account for these warrants as derivate warrants.
During December 2016, the company engaged
the placement agent also used for the issuance of the convertibles notes offered in December 2015 and Q1 2016, to facilitate in
the communication towards the note holders to persuade them to convert their notes, in combination with other incentives, in common
shares. Their services have been successful and the company committed to issue a variable number of warrants which have been determined
to be 68,511 warrants as per closing December 31, 2016.
The
below table summarizes the warrants outstanding as per the below reporting:
Outstanding Warrants
|
|
Exercise/ Conversion
price(s) (range)
|
|
Expiring
|
|
2016
|
|
|
2015
|
|
Equity Warrants - Fundraising
|
|
$3.75 - $23.25
|
|
2016 - 2021
|
|
|
700,373
|
|
|
|
346,316
|
|
Liability Warrants - Fundraising
|
|
$3.25 - $11.25
|
|
2019 - 2021
|
|
|
1,504,278
|
|
|
|
170,000
|
|
Equity Warrants - Other
|
|
NA
|
|
NA
|
|
|
-
|
|
|
|
746
|
|
|
|
|
|
|
|
|
2,204,651
|
|
|
|
517,062
|
|
Note 21. Non-controlling Interest
The Company had no non-controlling interests in its subsidiaries.
Net losses attributable to non-controlling
interests were insignificant for all the years presented.
Note 22. Basic and diluted net loss per
share
Net loss per share is calculated in accordance
with ASC 260, Earnings per Share (“ASC 260”). Basic net loss per share is based upon the weighted average number of
common shares outstanding. Dilution is computed by applying the treasury stock method. Under this method, options and warrants
are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby
were used to purchase Common Stock at the average market price during the period. The Company uses the ‘if converted’
method for its senior secured convertible notes. Weighted average number of shares used to compute basic and diluted loss per share
is the same since the effect of dilutive securities is anti-dilutive.
The diluted share base for fiscal 2016 and
2015 excludes incremental shares related to convertible debt, warrants to purchase Common Stock and employee stock options as follows:
Dilutive Securities
|
|
2016
|
|
|
2015
|
|
Convertible Notes
|
|
|
212,667
|
|
|
|
170,000
|
|
Warrants
|
|
|
2,204,651
|
|
|
|
517,062
|
|
Employee Stock Options
|
|
|
1,040,211
|
|
|
|
1,434,563
|
|
|
|
|
3,457,529
|
|
|
|
2,121,625
|
|
These shares were excluded due to their anti-dilutive
effect on the loss per share recorded in each of the years presented. Except for shares pending to be issued due to compensation
in lieu of cash and a certain warrant exercise, no additional securities were outstanding that could potentially dilute basic earnings
per share.
Note 23. Option Compensation Plan
and 2008 Long Term Incentive Compensation Plan
2008 Long-Term Incentive Compensation Plan
In 2008, the Company adopted the 2008 Plan.
The 2008 Plan initially authorized total awards of up to 200,000 shares of Common Stock, in the form of incentive and non-qualified
stock options, stock appreciation rights, performance units, restricted stock awards and performance bonuses. The amount of Common
Stock underlying the awards to be granted remained the same after the 1-for-25 reverse stock-split that was effectuated on June
11, 2008.
In 2011, the stockholders approved an increase
in the shares available under the 2008 Plan from 200,000 to 920,000 shares of Common Stock.
In 2013, the Company’s stockholders approved
the amendment and restatement of the 2008 Plan, which increased the number of authorized shares by 920,000 shares of Common Stock.
In 2014, the Company’s stockholders approved
another amendment and restatement of the 2008 Plan, which increased the number of authorized shares by 400,000 shares.
During 2016, 337,159 shares were issued
under the 2008 Plan, of which 299,731 as non-cash compensation and or bonus granted to senior staff, management and board members
for services during the fourth quarter of 2015 and the first, second and third quarter of 2016, no shares were issued under the
plan as a result of employee option exercises.
Reconciliation of registered and available shares and/or options
as of December 31, 2016:
|
|
Full Year
2016
|
|
|
Total
|
|
|
|
|
|
|
|
|
Registered 2008
|
|
|
-
|
|
|
|
200,000
|
|
Registered 2011
|
|
|
-
|
|
|
|
720,000
|
|
Approved increase 2013
|
|
|
-
|
|
|
|
920,000
|
|
Approved increase 2014
|
|
|
-
|
|
|
|
400,000
|
|
Total Registered under this plan
|
|
|
|
|
|
|
2,240,000
|
|
Shares (issued to):
|
|
|
|
|
|
|
|
|
Consultants
|
|
|
33,428
|
|
|
|
46,428
|
|
Directors, Officers and staff
|
|
|
299,731
|
|
|
|
471,441
|
|
Options exercised
|
|
|
-
|
|
|
|
95,284
|
|
Options (movements):
|
|
|
|
|
|
|
|
|
Issued and Outstanding
|
|
|
|
|
|
|
1,040,211
|
|
Available for grant at December 31, 2016:
|
|
|
|
|
|
|
586,636
|
|
Common Stock options consisted
of the following as of the years ended December 31, 2016 and 2015:
Options:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Initial Fair
Market Value
(Outstanding
Options)
|
|
Outstanding as of December 31, 2014
|
|
|
1,602,243
|
|
|
$
|
33.00
|
|
|
$
|
30,737,254
|
|
Granted in 2015
|
|
|
613,186
|
|
|
|
14.25
|
|
|
|
4,635,518
|
|
Exercised (with delivery of shares)
|
|
|
(347
|
)
|
|
|
17.00
|
|
|
|
(2,451
|
)
|
Forfeitures (Pre-vesting)
|
|
|
(527,825
|
)
|
|
|
26.25
|
|
|
|
(9,425,694
|
)
|
Expirations (Post-vesting)
|
|
|
(252,694
|
)
|
|
|
43.50
|
|
|
|
(4,730,900
|
)
|
Exchanged for Cashless exercise
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of December 31, 2015
|
|
|
1,434,563
|
|
|
|
28.75
|
|
|
|
21,213,727
|
|
Granted in 2016
|
|
|
498,218
|
|
|
|
3.75
|
|
|
|
1,368,955
|
|
Exercised (with delivery of shares)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeitures (Pre-vesting)
|
|
|
(240,107
|
)
|
|
|
16.75
|
|
|
|
(2,751,204
|
)
|
Expirations (Post-vesting)
|
|
|
(652,463
|
)
|
|
|
38.50
|
|
|
|
(10,994,838
|
)
|
Exchanged for Cashless exercise
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of December 31, 2016
|
|
|
1,040,211
|
|
|
$
|
13.35
|
|
|
$
|
8,836,640
|
|
In
2016, options awarded had a weighted average exercise price of $3.75. The initial fair market value at grant date of these options,
in the aggregate, was $1,368,955.
The weighted average assumptions used for the
options granted in 2016 using the Black-Scholes options model are: expected cumulative volatility of 214% based on calculated annual
volatility of 85%, contractual life of 7.04 years, expected option life of 6.49 years (using the simplified method) and a Risk
Free Interest Rate of 2.31%. The expected dividend yield is zero.
Following
is a summary of the status and assumptions used of options outstanding as of the years ended December 31, 2016, and 2015:
|
|
Twelve month period ending:
|
|
|
|
December 2016
|
|
|
December 2015
|
|
Grants
|
|
|
|
|
|
|
|
|
During the year
|
|
|
498,218
|
|
|
|
613,186
|
|
Weighted Average Annual Volatility
|
|
|
85
|
%
|
|
|
81
|
%
|
Weighted Average Cumulative Volatility
|
|
|
214
|
%
|
|
|
160
|
%
|
Weighted Average Contractual Life of grants (Years)
|
|
|
7.04
|
|
|
|
4.42
|
|
Weighted Average Expected Life of grants (Years)
|
|
|
6.49
|
|
|
|
3.97
|
|
Weighted Average Risk Free Interest Rate
|
|
|
2.3105
|
%
|
|
|
1.3513
|
%
|
Dividend yield
|
|
|
0.0000
|
%
|
|
|
0.0000
|
%
|
Weighted Average Fair Value at Grant-date
|
|
$
|
2.75
|
|
|
$
|
7.55
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
Total Options Outstanding
|
|
|
1,040,211
|
|
|
|
1,434,563
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
4.47
|
|
|
|
2.83
|
|
Weighted Average Remaining Expected Life (Years)
|
|
|
4.92
|
|
|
|
2.31
|
|
Weighted Average Exercise Price
|
|
$
|
13.35
|
|
|
$
|
28.75
|
|
Aggregate Intrinsic Value (all options)
|
|
$
|
-
|
|
|
$
|
-
|
|
Aggregate Intrinsic Value (only in-the-money options)
|
|
$
|
0
|
|
|
$
|
52,500
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
Total Options Exercisable
|
|
|
643,153
|
|
|
|
866,457
|
|
Weighted Average Exercise Price
|
|
$
|
17.86
|
|
|
$
|
36.75
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
3.76
|
|
|
|
1.93
|
|
Aggregate Intrinsic Value (all options)
|
|
$
|
-
|
|
|
$
|
-
|
|
Aggregate Intrinsic Value (only in-the-money options)
|
|
$
|
0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Unvested Options
|
|
|
|
|
|
|
|
|
Total Unvested Options
|
|
|
397,058
|
|
|
|
568,106
|
|
Weighted Average Exercise Price
|
|
$
|
6.04
|
|
|
$
|
16.50
|
|
Forfeiture rate used for this period ending (staff only)
|
|
|
0.000
|
%
|
|
|
16.260
|
%
|
|
|
|
|
|
|
|
|
|
Options expected to vest
|
|
|
|
|
|
|
|
|
Number of options expected to vest corrected by forfeiture
|
|
|
397,058
|
|
|
|
498,048
|
|
Unrecognized stock-based compensation expense
|
|
$
|
1,802,691
|
|
|
$
|
3,636,518
|
|
Weighting Average remaining contract life (Years)
|
|
|
6.33
|
|
|
|
4.26
|
|
|
|
|
|
|
|
|
|
|
Exercises
|
|
|
|
|
|
|
|
|
Total shares delivered/issued
|
|
|
0
|
|
|
|
346
|
|
Weighted Average Exercise Price
|
|
$
|
-
|
|
|
$
|
17.00
|
|
Intrinsic Value of Options Exercised
|
|
$
|
-
|
|
|
$
|
1,052
|
|
At December 31, 2016, the unrecognized
expense portion of share-based awards granted to employees under the 2008 Plan was approximately $1,802,691 with each
stock-award, adjusted for cancellations, forfeitures and returns. The forfeiture rate was adjusted from 16.3% as per closing
December 2015 to 0% as per closing December 2016 and the corresponding profit and loss effect has been accounted for in
2015.
Share-Based Compensation Expense
The Company recorded for the year ended December
31, 2016, $3,897,437 of share-based compensation, of which $3,654,369 relate to the 2008 Plan and $243,068 relates to the expensing
of shares issued as restricted securities as defined in Rule 144 of the Securities Act and not issued under the 2008 Plan. For
the comparable period in 2015 the expensing was in total $3,481,908, $3,368,783 for shares issued under the 2008 Plan and $113,125
for expensing of the issuance of restricted shares under the Rule 144 of the Securities Act. In case of grant of options, the Company
utilized the Black-Scholes valuation model for estimating the fair value of the stock-options at grant and subsequent expensing
until the moment of vesting.
Share-based Compensation Expense
|
|
Twelve
|
|
|
Twelve
|
|
|
|
months ended
|
|
|
months ended
|
|
Stock-Based Compensation Expense
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Consultancy services
|
|
$
|
243,068
|
|
|
$
|
113,125
|
|
Directors and Officers (shares and options)
|
|
|
2,275,068
|
|
|
|
2,266,704
|
|
Employees (shares and options)
|
|
|
1,379,300
|
|
|
|
1,102,079
|
|
Total
|
|
$
|
3,897,437
|
|
|
$
|
3,481,908
|
|
Note 24. Income taxes
For financial statement purposes, loss before the income tax provision
is divided amongst the following;
|
|
2016
|
|
|
2015
|
|
Domestic
|
|
$
|
(34,186,424
|
)
|
|
$
|
(6,939,848
|
)
|
Foreign
|
|
|
2,780,006
|
|
|
|
1,916,388
|
|
Total loss before income tax provision
|
|
$
|
(31,406,418
|
)
|
|
$
|
(5,023,460
|
)
|
The Company files income tax returns in the
US federal jurisdiction and various state and foreign jurisdictions. The applicable statutory tax rates vary between none (zero)
and 34%. However, because the Company and its subsidiaries have incurred annual corporate income tax losses since their inception,
management has determined that it is more likely than not that the Company will not realize the benefits of its US and foreign
net deferred tax assets. Therefore, the Company has recorded a full valuation allowance to reduce the net carrying amount of the
deferred taxes to zero. The Company’s 2016 provision for income taxes of $38,286 relates to taxable income in some jurisdictions.
In the ordinary course of business, the Company
is subject to tax examinations in the jurisdictions in which it files tax returns. The Company’s statute of limitations
for tax examinations is four years for federal and state purposes and four to six years in the major foreign jurisdictions in
which the company files.
Income tax (benefit)/expense for each year
is summarized as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
38,286
|
|
|
|
(17,225
|
)
|
|
|
|
38,286
|
|
|
|
(17,225
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
Income tax (benefit)/ expense
|
|
$
|
38,286
|
|
|
$
|
(17,225
|
)
|
The following is a reconciliation of the provision
for income taxes at the US federal statutory rate (34%) to the foreign income tax rate for the years ended:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Tax expense (credit) at statutory rate federal
|
|
|
34
|
%
|
|
|
34
|
%
|
State tax expense net of federal tax
|
|
|
-
|
|
|
|
-
|
|
Foreign income tax rate difference
|
|
|
(3
|
)%
|
|
|
(7
|
)%
|
Change in valuation allowance
|
|
|
(33
|
)%
|
|
|
(29.8
|
)%
|
Other
|
|
|
0
|
%
|
|
|
0
|
%
|
Income tax (benefit)/ expense
|
|
$
|
(2
|
)%
|
|
|
(2.8
|
)%
|
The tax effects of temporary differences that
gave rise to significant portions of deferred tax assets and liabilities at December 31, are as follows:
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net Operating Losses
|
|
$
|
47,284,369
|
|
|
$
|
41,191,934
|
|
Total gross deferred tax assets
|
|
|
47,284,369
|
|
|
|
41,191,934
|
|
Less: valuation allowance
|
|
|
(47,284,369
|
)
|
|
|
(41,191,934
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2016, and 2015, the Company
had significant net operating losses carryforwards of approximately $143 million and $157 million, respectively. The deferred tax
assets have been offset by a full valuation allowance in 2016 and 2015 due to the uncertainty of realizing any tax benefit for
such losses. Releases of the valuation allowances, if any, will be recognized through earnings.
As of December 31, 2016, and 2015, the
Company’s US based subsidiaries had net federal and state operating loss carryforwards of approximately $80 million and $45
million, respectively. Federal and state net operating loss carry forwards in the US start to expire in 2018. At December 31, 2016,
the net operating loss carryforwards for foreign countries amounts to approximately $63 million. Losses in material foreign jurisdictions
will begin to expire in 2016.
Section 382 of the
Internal Revenue Code limits the use of net operating loss and tax credit carry forwards in certain situations where changes occur
in the stock ownership of a company. In the event the Company has a change in ownership, utilization of the carry forward
could be restricted.
The Company files income tax returns in the
US federal jurisdiction and various state and foreign jurisdictions. Due to the net operating loss, all the tax years are open
for tax examination. As of December 31, 2016, and 2015, the Company accrued an ASC 740-10 tax reserve of $0 and $0, respectively,
for uncertain tax (benefits)/liability including interest and penalties.
Note 25. Contingencies
telSPACE -vs- Elephant Talk et al.,
AAA Case No. 01-16-0003-8242
.
Claimant commenced this AAA arbitration on
or about September 7, 2016 by the filing of a statement of claim. Claimant asserted claims arising out of Software Licensing Agreements
(“Licensing Agreements”) entered into by Claimant and mCash Holdings LLC (together, “Licensors”), on the
one hand, and Telnicity LLC, on the other, which Telnicity subsequently assigned to the Company. Pursuant to the Licensing
Agreements, the Company obtained the license to use certain intellectual property in exchange for monthly payments to the Licensors.
Claimant alleged that the Company failed to make monthly payments from on or about November 2015, causing the Licensors to terminate
the Licensing Agreements, and continued using Licensors’ intellectual property after such termination. Based on these
allegations, Claimant asserted claims for breach of contract, misappropriation of trade secret, and copyright infringement. Claimant
seeks unspecified damages, specific performance, prejudgment interest, attorneys’ fees, and costs.
On October 31, 2016, the Company filed
a statement of answer denying Claimant’s claims. On January 5, 2017, the arbitration panel scheduled the hearing for
April 13, 2017. The Parties have conducted limited discovery, which concluded on February 28, 2017. On March 10, 2017,
Claimant requested leave to move for a default judgment against the Company for failing to advance the AAA administrative fees,
and for sanctions based on alleged spoliation of evidence. On March 15, 2017, the Arbitration Chair denied Claimant’s
request for leave to move for default, and granted Claimant’s request for leave to move for sanctions. The Arbitration
will proceed in Seattle, WA, on April 13, 2017.
Saffelberg Investments N.V. unsecured $350,000 Promissory
Note repayment
Following a mutually agreed extension of maturity of the Note
from December 31, 2016, to March 31, 2017, the Company intends to repay to Saffelberg the unsecured $350,000 Promissory Note on
or before the new maturity date.
Other
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 26. Geographic Information
Year ended December 31, 2016
|
|
Europe
|
|
|
Other foreign
countries
|
|
|
Total
|
|
Revenues from unaffiliated customers
|
|
$
|
11,953,015
|
|
|
$
|
902,796
|
|
|
$
|
12,855,811
|
|
Identifiable assets
|
|
$
|
9,766,602
|
|
|
$
|
3,278,687
|
|
|
$
|
13,045,289
|
|
Year ended December 31, 2015
|
|
Europe
|
|
|
Other foreign
countries
|
|
|
Total
|
|
Revenues from unaffiliated customers (restated)
|
|
$
|
13,034,020
|
|
|
$
|
17,981,433
|
|
|
$
|
31,015,453
|
|
Identifiable assets
|
|
$
|
22,269,243
|
|
|
$
|
3,123,143
|
|
|
$
|
25,392,386
|
|
Note 27. Concentrations
Financial instruments that potentially subject
us to concentrations of credit risk consist of accounts receivable and unbilled receivables. Those customers that comprised 10%
or more of our revenue, accounts receivable and unbilled receivables are summarized as follows:
For the year ended December 31, 2016, the Company
had one customer that accounted for 82% of total revenue. For the year ended December 31, 2015, the Company had two customers that
accounted for 50% and 33% of total revenue.
The Company had two customers that accounted
for 81% and 16% respectively of accounts receivable and unbilled revenue.
Note 28. Related Party Transactions
There were no related party transactions
in 2016 or 2015, except for (i) the sale of former subsidiary ValidSoft; and (ii) the debt restructuring transactions with Atalaya
Capital Management and Corbin Mezzanine Fund I, L.P.
Note 29. Subsequent Events
March 2017 Underwritten Common Stock
Offering
On March 10, 2017, the Company entered
into an underwriting agreement (the “Underwriting Agreement”) with Joseph Gunnar & Co., LLC (the “Underwriter”),
relating to the issuance and sale of 2,333,334 shares of the Company’s common stock, par value $0.00001 per share (the “Common
Stock”), at a price to the public of $1.50 per share together with five-year warrants to purchase an aggregate of 1,166,667
shares of Common Stock at an exercise price of $1.87. The Underwriter agreed to purchase the shares from the Company pursuant to
the Underwriting Agreement at a price of $1.3949 per share. The gross proceeds to the Company from the offering were approximately
$3.5 million, before deducting underwriting discounts and commissions and offering expenses payable by the Company. The offering
closed on March 15, 2017. In addition, under the terms of the Underwriting Agreement, the Company granted the Underwriter a 45-day
option to purchase up to (i) up to 350,000 additional shares of Common Stock (the “Option Shares”) at a purchase price
of $1.3949 per one Option Share, taking into account the Underwriter’s discount, and/or (ii) warrants to purchase up to 175,000
additional shares of Common Stock (the “Option Warrants”). The Underwriter partially exercised their over-allotment
option on 109,133 Option Warrants.
The offering was made pursuant to the Company’s
effective registration statement on Form S-3 (Registration Statement No. 333-213575) previously filed with and declared effective
by the SEC and a prospectus supplement and accompanying prospectus filed with the SEC.
The Underwriting Agreement contained customary
representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the
Company and the Underwriter, including for liabilities under the Securities Act of 1933, as amended, other obligations of the
parties and termination provisions. The representations, warranties and covenants contained in the Underwriting Agreement were
made only for purposes of such agreement and as of specific dates, were solely for the benefit of the parties to such agreement,
and may be subject to limitations agreed upon by the contracting parties.
Conversion of Preferred shares
into common stock
On March 7, 2017, the Company received
conversion notices from holders of an aggregate of $1,950,000, or 195 shares of the Company’s Series A Convertible Preferred
Stock and Series A-1 Convertible Preferred Stock (the “Preferred Shares”). The Preferred Shares converted into
shares of common stock, $0.00001 par value per share, of the Company at a 13% discount to a public offering and became effective
upon the filing by the Company of a prospectus supplement disclosing the terms of an offering. The closing of the public offering
took place March 15, 2017 and the public offering price was set at $1.50, therefore the discounted conversion price for the preferred
shareholders was calculated at $1.305. The number of shares to be issued was approximately 881,226.
Amendment 2016 13% + Eurodollar
rate Senior Secured Credit Agreement
On March 6, 2017, Elephant Talk Europe Holding
B.V., an entity organized under the laws of the Netherlands (the “Borrower”), a wholly owned subsidiary of
the Company, as borrower, the Company, Pareteum North America Corp., a Delaware corporation, Elephant Talk Group International
B.V., an entity organized under the laws of the Netherlands, Corbin Mezzanine Fund I, L.P. (“Lender”) and Atalaya Administrative
LLC, a New York limited liability company, as administrative agent and collateral agent for the Lender, entered into a Letter Agreement
(the “Agreement”) to amend certain terms of the credit agreement among the parties, dated November 17, 2014, as has
been amended from time to time (as so amended, the “Amended and Restated Agreement”). Capitalized terms used herein
but not otherwise defined shall have the meaning as set forth in the Amended and Restated Credit Agreement.
Pursuant to the Agreement, (i) the Maturity
Date will be extended to December 31, 2018; (ii) the amortization schedule will be as follows: Q1-17: $1,500,000; Q2-17: $1,500,000;
Q3-17: $500,000; Q4-17: $500,000; Q1-18: $750,000; Q2-18: $750,000; Q3-18: $750,000; Q4-18: Balloon; (iii) a new financial covenants
package shall be agreed upon by the parties by April 30, 2017; and (iv) the Warrants will be amended as follows: (a) the aggregate
amount of shares of common stock underlying the Warrants will be increased to 1,446,000 (post-reverse split); (b) the exercise
price of the Warrants will be set at the lesser of (A) $3.25 per share (post-reverse split) or (B) a 13% discount to the offering
price of shares of common stock in an underwritten public offering (the “Equity Offering”) of the Company; and (c)
the anti-dilution sections (Sections 9(d) and 9(h)) of the Warrants shall be removed.
Reverse Stock-Split
On February 23, 2017, the Company filed a
certificate of amendment to the Company’s certificate of incorporation (the “Certificate of Amendment”), effective
after the market closed on February 24, 2017 (the “Effective Date”), with the Secretary of State of the State of Delaware
in order to affect the previously announced 1-for-25 reverse stock split (the “Reverse Split”). Pursuant to
the Reverse Split, every 25 shares of the Company’s issued and outstanding common stock have been converted into one share
of common stock. The Reverse Split took effect at 4:01 p.m., Eastern Time, on the Effective Date, and the common stock began
trading on a split-adjusted basis when the market opened on February 27, 2017. No fractional shares were issued if, as a
result of the Reverse Split, a stockholder would otherwise have been entitled to a fractional share. Instead, each stockholder
was entitled to receive a cash payment which was based upon the volume weighted average price for the five (5) days preceding
the Effective Date.
The Reverse Split followed (i) the
granting of authority to the Board of Directors of the Company (the “Board”), by the Company’s stockholders at
the 2016 Annual Meeting of Stockholders held on August 16, 2016, in its discretion, to determine whether to proceed with the Reverse
Split and to select and file the Certificate of Amendment to the Company’s certificate of incorporation to effect the Reverse
Split at a ratio to be determined by the Board and (ii) the subsequent approval by the Company’s Board on February 14,
2017 of the enactment of the Reverse Split at the ratio of 1-for-25.
All warrant, option, share and per share
information in these financial statements and footnotes give retroactive effect for the Reverse Split. All numbers in the financial
statements and footnotes included herein give effect to all financial information as if the Reverse Split had occurred on the date
reported.
Shares of
common stock
Warrants to purchase shares of common stock
PROSPECTUS
, 2017
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13.
Other Expenses of Issuance and Distribution
The following table sets forth all expenses
to be paid by the Registrant, other than estimated underwriter fees and commissions, in connection with our public offering. All
amounts shown are estimates except for the SEC registration fee and the Financial Industry Regulatory Authority, Inc. (“FINRA”)
fee:
SEC registration fee
|
|
$
|
1,811.48
|
|
FINRA filing fee
|
|
$
|
*
|
|
Legal fees and expenses
|
|
$
|
*
|
|
Accounting fees and expenses
|
|
$
|
*
|
|
Transfer agent and registrar fees
|
|
$
|
*
|
|
Printing and engraving expenses
|
|
$
|
*
|
|
Miscellaneous fees and expenses
|
|
$
|
*
|
|
Total
|
|
$
|
*
|
|
*To be filed by amendment.
Item 14.
Indemnification of Directors and Officers
Subsection (a) of Section 145 of
the General Corporation Law of Delaware, or the DGCL, empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director,
employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’
fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action,
suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests
of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 of
the DGCL empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact
that such person acted in any of the capacities set forth above, against expenses (including attorneys’ fees) actually and
reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification
may be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.
Section 145 of the DGCL further provides
that to the extent a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in the
defense of any action, suit or proceeding referred to in subsections (a) and (b) or in the defense of any claim, issue
or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred
by him in connection therewith; that indemnification or advancement of expenses provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled; and empowers the corporation to purchase and maintain
insurance on behalf of a director, officer, employee or agent of the corporation against any liability asserted against him or
incurred by him in any such capacity or arising out of his status as such whether or not the corporation would have the power to
indemnify him against such liabilities under Section 145.
Reference is also made to Section 102(b)(7)
of the DGCL, which enables a corporation in its certificate of incorporation to eliminate or limit the personal liability of a
director for monetary damages for violations of a director’s fiduciary duty, except for liability (i) for any breach
of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL (providing
for liability of directors for unlawful payment of dividends or unlawful stock purchases or redemptions) or (iv) for any transaction
from which the director derived an improper personal benefit. Our amended and restated certificate of incorporation provides that
we must indemnify our directors to the fullest extent under applicable law. Pursuant to Delaware law, this includes elimination
of liability for monetary damages for breach of the directors’ fiduciary duty of care to the Company and its stockholders.
However, our directors may be personally liable for liability:
●for any breach of duty of loyalty to us or to our
stockholders;
●for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law;
●for unlawful payment of dividends or unlawful stock
repurchases or redemptions; or
●for any transaction from which the director derived
an improper personal benefit.
In addition, our amended and restated bylaws provide that:
●we are required to indemnify our directors and
executive officers to the fullest extent not prohibited by Delaware law or any other applicable law, subject to limited exceptions;
●we may indemnify our other officers, employees
and other agents as set forth in Delaware law or any other applicable law;
●we are required to advance expenses to our directors
and executive officers as incurred in connection with legal proceedings against them for which they may be indemnified; and
●the rights conferred in the amended and restated
bylaws are not exclusive.
Item 15.
Recent Sales of Unregistered Securities
2014 Corbin and Saffelberg Warrants &
Notes
On November 17, 2014, pursuant to the terms
of a credit agreement, the Company issued a warrant to Corbin Mezzanine Fund I, L.P., a Lender (the “Corbin Warrant”),
to purchase 1,157,895 shares of the Company’s common stock, exercisable upon issuance, at a price of $0.95 per share. The
term of the Corbin Warrant expired on November 17, 2016.
On November 17, 2014, the Company entered into
a Note Conversion Letter Agreement (the “Conversion Agreement”) with Saffelberg to, among other things, convert the
remaining 50% of a convertible note into 2,817,993 shares of common stock and issue a three year warrant to Saffelberg to purchase
1,000,000 shares of common stock (the “2014 Saffelberg Warrant”)
The 2014 Saffelberg Warrant is exercisable
any time after May 17, 2015 at an exercise price of $0.93 per share.
The term of the
2014 Saffelberg Warrant expires on November 17, 2017.
The securities underlying the Corbin Warrant,
the 2014 Saffelberg Warrant and the shares of common stock issued upon conversion of the convertible note pursuant to the Conversion
Agreement were not registered under the Securities Act, or any state securities laws, and were offered and sold to an “accredited
investor” (as defined in Rule 501(a) of the Securities Act) pursuant to an exemption from registration under Section
4(a)(2) of the Securities Act and Regulation D promulgated pursuant thereto.
2015 Atalaya Amendment
On July 9, 2015, Elephant Talk Europe Holding
B.V., an entity organized under the laws of the Netherlands, a wholly owned subsidiary of the Company, as Borrower, the Company,
Pareteum North America Corp., a Delaware corporation, Corbin Mezzanine Fund I, L.P. and Atalaya Administrative LLC, a New York
limited liability company, as administrative agent and collateral agent for the Lender, entered into an agreement to amend certain
terms of the credit agreement among the parties, dated November 17, 2014.
Pursuant to the terms of the amendment, the
Company issued two warrants to the Lender, one warrant to purchase two million shares of the Company’s common stock, exercisable
upon issuance with an expiration date of 30 months from the closing of the amendment, at a per share price of $0.02 in excess of
the closing bid price as of the date of execution of the amendment, and another warrant to purchase one million shares of common
stock exercisable upon issuance with an expiration date of 18 months from the closing of the amendment, at a per share price of
$0.02 in excess of the closing bid price as of the date of execution of the amendment.
The securities underlying the warrants have
not been registered under the Securities Act, or any state securities laws, and were offered and sold to an “accredited investor”
(as defined in Rule 501(a) of the Securities Act) pursuant to an exemption from registration under Section 4(a)(2) of the
Securities Act and Regulation D promulgated pursuant thereto.
2015 Private Placement of Units
On December 18, 2015,
the Company consummated a closing (“Initial Closing”) of its private placement offering of Units (as defined below)
to “accredited investors” (as defined in Rule 501(a) of the Securities Act) (“Investors”). The Initial
Closing was part of a “best efforts” private placement offering of up to $4,200,000 consisting of up to 140 units (the
“Units”), each Unit consisting of: (i) one 9% unsecured subordinated convertible promissory note in the principal amount
of $30,000, which is convertible into shares of common stock of the Company at the option of the holder at a conversion price of
$.30 per share, subject to certain exceptions; and (ii) a five-year warrant to purchase one hundred thousand (100,000) shares of
common stock at an exercise price of $.45 per share, subject to certain exceptions.
From December 31,
2015 through February 19, 2016, the Company consummated a series of closings of its private placement offering of Units to Investors
for aggregate gross proceeds of $1,367,000.
From February 22,
2016 through March 21, 2016, the Company consummated another series of closings of its private placement offering of Units to Investors
for aggregate gross proceeds of $1,231,000.
The Units were offered
and sold pursuant to an exemption from registration under Section 4(2) and Regulation D of the Securities Act.
2016 Private Placement of Series A Preferred
Stock
On September 2, 2016, the Company consummated
a closing of its private placement offering of Series A Preferred Stock, to Investors. At the closing, the Company sold 73 shares
of Series A Preferred Stock for aggregate gross proceeds of $729,968. The closing was part of a “best efforts” private
placement offering of up to $1,500,000 (the “Maximum Amount”) consisting of up to 150 shares of Series A Preferred
Stock.
Each share of Series A Preferred Stock is convertible
into 0.04% of the Company’s issued and outstanding shares of common stock immediately prior to conversion. Accordingly, if
the Maximum Amount was sold, the outstanding Series A Preferred Stock, in the aggregate, would be convertible into 6.0% of the
Company’s issued and outstanding shares of common stock immediately prior to conversion. The Series A Preferred Stock are
convertible at the option of the holder, except that (i) if there is a change in control (as defined in the Certificate of Designation
of Preferences, Rights and Limitations of Series A Preferred Stock) before September 2, 2017 or (ii) any time after September 2,
2017, the Company has the option to automatically convert the Series A Preferred Stock into common stock.
The holders
of Series A Preferred Stock are not entitled to receive any dividends and have no voting rights (except that we may only take certain
corporate actions with the approval of a majority of the outstanding shares of Series A Preferred Stock). Further, upon liquidation,
dissolution or winding up of the Company, the holders of Series A Preferred Stock will receive distributions on par with and on
a pro rata basis with the common stockholders as though the Series A Preferred Stock had been converted at the time of such liquidation,
dissolution or winding up of the Company. The Investors in the Offering have also received piggy-back registration rights with
respect to the shares of common stock issuable upon conversion of the Series A Preferred Stock.
On September
16, 2016, the Company consummated a closing of its private placement offering of Series A Preferred Stock, to Investors
pursuant to which it sold 49 shares of Series A Preferred Stock for aggregate gross proceeds of $490,000.
From September 28, 2016 through September 30,
2016,
the Company
consummated closings of its private placement offering of Series
A Preferred Stock to Investors, including the Executive Chairman of the Board of Directors and a director of the Company. At the
closings, the Company sold 27 shares of Series A Preferred Stock for aggregate gross proceeds of $270,000.
The Series
A Preferred Stock was offered and sold pursuant to an exemption from registration under Section 4(a)(2) and Regulation D of the
Securities Act.
2016 Private Placement of Series A-1 Preferred
Stock
On October 28, 2016,
the
Company
entered into separate subscription agreements with certain Investors relating to the issuance and sale of 33
shares of the Company’s Series A-1 Preferred Stock, for aggregate gross proceeds of $330,000. The closing was part
of a “best efforts” private placement offering conducted by the Company of up to $1,000,000 (the “A-1 Maximum
Amount”), consisting of up to 100 shares of Series A-1 Preferred Stock.
Each share of Series
A-1 Preferred Stock is convertible, at the option of the holder, into 0.04% of the Company’s issued and outstanding shares
of common stock immediately prior to conversion. Accordingly, if the Maximum Amount was sold, the outstanding Series A-1 Preferred
Stock, in the aggregate, would be convertible into 4.0% of the Company’s issued and outstanding shares of common stock immediately
prior to conversion.
The Company has the
right, in its discretion, to compel holders of the Series A-1 Preferred Stock to convert the preferred stock into shares of the
Company’s common stock in the event that a change in control (as defined in the Certificate of Designation of Preferences,
Rights and Limitations of Series A-1 Preferred Stock) occurs before October 28, 2017. Further, at any time after September 2, 2017,
the Company has the option to automatically convert the Series A-1 Preferred Stock into common stock.
The holders of Series
A-1 Preferred Stock are not entitled to receive any dividends and have no voting rights (except that the Company may only take
certain corporate actions with the approval of a majority of the outstanding shares of Series A-1 Preferred Stock). Further, upon
liquidation, dissolution or winding up of the Company, the holders of Series A-1 Preferred Stock will receive distributions on
par with and on a pro rata basis with the holders of the Company’s common stock as though the Series A-1 Preferred Stock
had been converted at the time of such liquidation, dissolution or winding up of the Company.
On December 2, 2016,
the
Company
entered into a subscription agreement with an Investor relating to the issuance and sale of 5 shares of the
Company’s Series A-1 Preferred Stock for aggregate gross proceeds of $50,000.
The Series
A-1 Preferred Stock was offered and sold pursuant to an exemption from registration under Section 4(a)(2) and Regulation D of the
Securities Act.
2016 Amendment to 2015 Private Placement
of Units
On December 16, 2016,
the Company entered into a letter agreement with certain holders of 9% Unsecured Subordinated Convertible Promissory Notes in the
aggregate amount of $3,548,000 and warrants previously issued by the Company pursuant to a private placement memorandum dated December
1, 2015, as amended.
Pursuant to the agreement,
the Company and the holders agreed to modify certain terms of the notes whereby the principal amount thereof will be increased
by ten percent (10%), which interest shall begin to accrue as of the date of the Agreement. In addition, the holders of the notes
were granted the right, exercisable at any time prior to the maturity date of the Note, to convert the principal amount then outstanding
into shares of the Company’s common stock, at a conversion price of fifteen cents ($0.15) per share. Upon a voluntary conversion
prior to the maturity date, 100% of the interest that would have been payable between the date of the voluntary conversion and
the maturity date (the “Unpaid Interest Amount”) shall be converted into such number of shares of common stock equal
to the Unpaid Interest Amount divided by the conversion price. Further, the parties have agreed to the removal of certain anti-dilution
protections granted under the note.
The Agreement also
provides for a ten percent (10%) increase in the number of shares of common stock issuable upon the exercise of the Warrants, as
well as a reduction in the exercise price for the Warrants to fifteen cents ($0.15) per share. Further, certain provisions contained
in the warrants granting the Holders full ratchet anti-dilution protection have also been deleted pursuant to the agreement.
The
issuance of the shares of the Company’s common stock under the agreement was pursuant to an exemption from registration under
Section 4(a)(2) and Regulation D of the Securities Act.
2016 Atalaya Amendment
On December 27, 2016, Elephant Talk Europe
Holding B.V., an entity organized under the laws of the Netherlands, a wholly owned subsidiary of the Company, as Borrower, the
Company, Pareteum North America Corp., a Delaware corporation, Corbin Mezzanine Fund I, L.P. and Atalaya Administrative LLC, a
New York limited liability company, as administrative agent and collateral agent for the Lender, entered into an agreement to amend
certain terms of the credit agreement among the parties, dated November 17, 2014, as previously amended.
Pursuant to the terms of the Amendment, the
Company issued two warrants to the Lender and ACM Carry-I LLC. The Corbin Warrant entitles the Lender to purchase from the Company
up to a total of 27,051,627 shares of common stock of the Company at an exercise price per share equal to $0.13 per share at any
time and from time to time on or after December 27, 2016 through December 27, 2019. The ACM Warrant entitles ACM Carry-I LLC to
purchase up to a total of 4,773,817 shares of common stock on the same terms as discussed. For so long as the debt under the Amended
Term Loan Facility remains outstanding, if at any time the aggregate amount of warrant shares into which the warrants may be exercised
is less than the number of 7.5% of the shares of outstanding common stock minus the aggregate number of shares of common stock
previously issued from time to time as a result of any exercise of the warrants (the “Minimum Percentage Amount”),
the warrant shares shall be adjusted to equal to the Minimum Percentage Amount.
The securities underlying both warrants have
not been registered under the Securities Act, or any state securities laws, and were offered and sold to an “accredited investor”
(as defined in Rule 501(a) of the Securities Act) pursuant to an exemption from registration under Section 4(a)(2) of the
Securities Act and Regulation D promulgated pursuant thereto.
2017 Saffelberg Amendment
On March 30, 2017, the Company entered into
an agreement with the Holder pursuant to which the Company and the Holder amended the terms of, redeemed or effected conversion,
as the case may be, of the Saffelberg Note and the Saffelberg Warrant previously issued by the Company to the Holder.
Pursuant to the Saffelberg Agreement, the Company
and the Holder agreed to modify certain terms of the Saffelberg Notes whereby (i) the principal amount of one Saffelberg Note,
in the initial amount of $723,900, will be increased by ten percent (10%) and subsequently converted into 530,860 shares of common
stock of the Company and (ii) the Company will immediately repay in cash another Saffelberg Note in the principal amount of $350,000,
plus interest of $59,304.
The
issuance of the shares of the Company’s common stock under the Saffelberg Agreement is pursuant to an exemption from registration
under Section 4(a)(2) and Regulation D of the Securities Act.
2017 Atalaya Amendment
On March 31, 2017, Elephant Talk Europe Holding
B.V., an entity organized under the laws of the Netherlands, a wholly owned subsidiary of the Company, as Borrower, the Company,
Pareteum North America Corp., a Delaware corporation, Corbin Mezzanine Fund I, L.P. and Atalaya Administrative LLC, a New York
limited liability company, as administrative agent and collateral agent for the Lender, entered into an agreement to amend certain
terms of the credit agreement among the parties, dated November 17, 2014, as previously amended.
Pursuant
to the Amendment, (i) the Maturity Date was extended to December 31, 2018; (ii) the amortization schedule was amended as follows:
Q1-17: $1,500,000; Q2-17: $1,500,000; Q3-17: $500,000; Q4-17: $500,000; Q1-18: $750,000; Q2-18: $750,000; Q3-18: $750,000; and
(iii) inserting a new definition of “2017 Equity Offering.” Additionally, the two warrants previously issued to the
Lender and ACM Carry-I LLC were amended to (a) increase the aggregate amount of shares of common stock underlying the Corbin Warrant
to 1,229,100 and increase the aggregate amount of shares of common stock underlying the ACM Warrant to 216,900; (b) adjust the
exercise price of the Warrants to $1.305 per share; and (c) remove the anti-dilution sections (Sections 9(d) and 9(h)) of the Warrants.
The issuance
of the shares of the Company’s common stock under the agreement is pursuant to an exemption from registration under Section
4(a)(2) and Regulation D of the Securities Act.
2017 Warrant Exercise Agreement
On July 17, 2017, the Company entered into
Exercise Agreements with the Exercising Holders of outstanding warrants to purchase up to an aggregate of 1,150,000 shares of common
stock of the Company at $1.87 per share whereby the Exercising Holders and the Company agreed that the Exercising Holders would,
exercise their Original Warrants at a reduced exercise price of $1.00 per share. The Company expects to receive aggregate gross
proceeds before expenses of approximately $1.15 million from the exercise of the Original Warrants by the Exercising Holders.
In consideration for the Exercising Holders
exercising their Original Warrants, the Company will issue to each Exercising Holder a New Warrant to purchase shares of the Company’s
common stock equal to the number of shares of common stock received by such Exercising Holder upon the cash exercise of such Exercising
Holder’s Original Warrants. The terms of the New Warrants will be substantially similar to the terms of the Original Warrants,
except that the New Warrants will (i) have an exercise price equal to $1.39 per share and (ii) be exercisable six months from first
issuance of the New Warrants, for a period of five years.
The issuance of the New Warrants were not registered
under the Securities Act of 1933, or any state securities laws. The New Warrants were issued in reliance on the exemption from
registration provided by Section 4(a)(2) under the Securities Act and/or Regulation D promulgated thereunder. Each Exercising Holder
represented that it is an accredited investor, as defined in Rule 501 of Regulation D promulgated under the Securities Act.
In connection with the Exercise Agreements,
the Company engaged Joseph Gunnar & Co., LLC to act as the Company’s placement agent. The Company agreed to pay Joseph Gunnar
& Co., LLC a cash fee equal to seven percent (7%) of the sum of the gross proceeds received by the Company from the exercise
of the Original Warrants.
Conversion of Preferred Shares
On September 28, 2017, the executive officers
of the Company authorized the mandatory conversion of certain Series A Preferred Stock and Series A-1 Preferred Stock currently
issued and outstanding. Pursuant thereto, the Company issued an aggregate of 338,419 shares of its common stock.
Strategic Alliance
On October 16, 2017, the Company entered
into a Share Exchange Agreement with Artilium plc, a public limited company incorporated
under
the laws of England and Wales
(“
ARTA
”). Pursuant to the Exchange Agreement, the Company issued an aggregate
of 3,200,332 restricted shares of the Company’s common stock, par value $0.00001.
Item 16.
Exhibits and Financial Statement Schedules
Number
|
|
Description
|
1.1**
|
|
Underwriting Agreement
|
|
|
|
2.1
|
|
Agreement and Plan of Merger between Pareteum Communication Corporation a Delaware Corporation and Pareteum Communications, Inc., a California Corporation (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement filed dated July 26, 2011).
|
|
|
|
2.2
|
|
Sale and Purchase Agreement, dated March 17, 2010, by and among the Company and the stockholders of ValidSoft Limited other than Enterprise Ireland (incorporated by reference to Exhibit 2.1 to the Company’s current report on Form 8-K dated March 23, 2010).
|
|
|
|
2.3
|
|
Sale and Purchase Agreement, dated March 17, 2010, by and the Company and Enterprise Ireland (incorporated by reference to Exhibit 2.2 to the Company’s current report on Form 8-K dated March 23, 2010).
|
|
|
|
3.1
|
|
Certificate of Merger (incorporated by reference to Exhibit 3.2 to the Company’s current report on Form 8-K dated October 4, 2011).
|
|
|
|
3.2
|
|
Certificate of Incorporation of Pareteum Communication Corporation, a Delaware Corporation (incorporated by reference to Exhibit 3.2 to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2013).
|
|
|
|
3.3
|
|
By-Laws (incorporated by reference to Appendix C of the Company’s Definitive Proxy Statement on Schedule 14A dated July 26, 2011).
|
|
|
|
3.4
|
|
Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s current report on Form 8-K dated August 29, 2016).
|
|
|
|
3.5
|
|
Certificate of Designation of Preferences, Rights and Limitations of Series A Preferred Stock as corrected (incorporated by reference to Exhibit 3.1 to the Company’s current report on Form 8-K dated September 9, 2016).
|
|
|
|
3.6
|
|
Certificate of Designation of Preferences, Rights and Limitations of Series A-1 Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s current report on Form 8-K dated November 3, 2016).
|
|
|
|
3.7
|
|
Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to the Company’s current report on Form 8-K dated November 3, 2016).
|
|
|
|
3.8
|
|
Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s current report on Form 8-K dated February 27, 2017).
|
|
|
|
4.1
|
|
Form of Warrant, dated November 17, 2014, issued to Corbin Mezzanine Fund I, L.P. (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K filed on November 21, 2014).
|
|
|
|
4.2
|
|
Form of Conversion Letter Agreement, dated November 17, 2014, issued to Saffelberg Investments NV (incorporated by reference to Exhibit 4.2 to the Company’s current report on Form 8-K filed on November 21, 2014).
|
|
|
|
4.3
|
|
Form of Warrant, dated November 17, 2014, issued to Saffelberg Investments NV (incorporated by reference to Exhibit 4.3 to the Company’s current report on Form 8-K filed on November 21, 2014).
|
|
|
|
4.4
|
|
Form of Warrant, dated July 9, 2015, issued to Corbin Mezzanine Fund I, L.P (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K filed on July 14, 2015).
|
|
|
|
4.5
|
|
Form of Warrant, dated July 9, 2015, issued to Corbin Mezzanine Fund I, L.P (incorporated by reference to Exhibit 4.2 to the Company’s current report on Form 8-K filed on July 14, 2015).
|
|
|
|
4.6
|
|
Form of Warrant issued in the 9% Unsecured Subordinated Convertible Promissory Note Financing (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K filed on December 24, 2015).
|
|
|
|
4.7
|
|
Corbin Warrant, dated December 27, 2016, issued to Corbin Mezzanine Fund I, L.P. (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K filed on December 29, 2016).
|
4.8
|
|
ACM Warrant, dated December 27, 2016, issued to ACM Carry-I LLC (incorporated by reference to Exhibit 4.2 to the Company’s current report on Form 8-K filed on December 29, 2016).
|
|
|
|
4.9
|
|
Amendment No. 1 to Corbin Warrant, dated March 31, 2017, issued to Corbin Mezzanine Fund I, L.P. (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K filed on April 6, 2017).
|
|
|
|
4.10
|
|
Amendment No. 1 to ACM Warrant, dated March 31, 2017, issued to ACM Carry-I LLC (incorporated by reference to Exhibit 4.2 to the Company’s current report on Form 8-K filed on April 6, 2017).
|
|
|
|
4.11
|
|
Form of New Warrant issued to exercising holders (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K filed on July 17, 2017).
|
|
|
|
5.1**
|
|
Opinion of Sichenzia Ross Ference Kesner LLP, as to the legality of the securities being registered
|
|
|
|
10.1
|
|
Amendments to Loan Agreements dated January 27, 2009, February 15, 2009, March 4, 2009, March 31, 2009, May 4, 2009, and May 27, 2009 by and between QAT II Investments S.A. and the Company, dated June 29, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated July 2, 2009).
|
|
|
|
10.2
|
|
Amendment to Loan Agreements dated January 27, 2009, February 15, 2009, March 4, 2009, March 31, 2009, May 4, 2009, May 27, 2009, July 1, 2009 and July 8, 2009 by and between QAT II Investments S.A. and the Company, dated July 15, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated July 21, 2009).
|
|
|
|
10.3
|
|
Contract between Vodafone Enabler Espana, S.L. and Pareteum Europe Holding, B.V., dated November 1, 2013 (incorporated by reference to Exhibit 10.11 to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2013).
|
|
|
|
10.4
|
|
Credit Agreement, dated as of November 17, 2014, by and among Pareteum Europe Holding B.V., as the Borrower, Pareteum Corporation, as the Parent and Guarantor, the other Subsidiaries of the Parent, from time to time party hereto as Guarantors, the Lenders from time to time party hereto and Atalaya Administrative LLC, as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on November 21, 2014).
|
|
|
|
10.5
|
|
Security Agreement, dated as of November 17, 2014, by and among Pareteum Europe Holding B.V., Pareteum Corporation, the other Grantors from time to time party hereto, and Atalaya Administrative LLC, as Collateral Agent (incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed on November 21, 2014).
|
|
|
|
10.6
|
|
First Amendment to Credit Agreement, dated as of July 9, 2015, by and among Pareteum Europe Holding B.V., as the Borrower, Pareteum Corporation, as the Parent and Guarantor, the other Subsidiaries of the Parent, from time to time party hereto as Guarantors, the Lenders from time to time party hereto and Atalaya Administrative LLC, as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on July 14, 2015).
|
|
|
|
10.7
|
|
Trademark Security Agreement, dated as of November 17, 2014, between Pareteum Europe Holding B.V. and Atalaya Administrative LLC (incorporated by reference to Exhibit 10.3 to the Company’s current report on Form 8-K filed on November 21, 2014).
|
|
|
|
10.8
|
|
Release and Settlement Agreement, dated as of June 12, 2015, by and between Pareteum de Mexico, S.A.P.I. de C.V., Pareteum Europe Holding BV, and Pareteum Corporation, and Iusacell, S.A., de C.V. (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on June 16, 2015).
|
10.9
|
|
Severance Agreement, dated as of November 16, 2015, between Pareteum Corporation and Steven van der Velden (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on November 17, 2015).
|
|
|
|
10.10
|
|
Form of Subscription Agreement issued in the 9% Unsecured Subordinated Convertible Promissory Note Financing (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on December 24, 2015).
|
|
|
|
10.11
|
|
Form of 9% Unsecured Subordinated Convertible Promissory Note issued in the 9% Unsecured Subordinated Convertible Promissory Note Financing (incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed on December 24, 2015).
|
|
|
|
10.12
|
|
Amended and Restated Pareteum Corporation 2008 Long-Term Incentive Compensation Plan (incorporated by reference to Annex A to the Company’s definitive proxy statement on Schedule 14 A filed on November 21, 2013).
|
|
|
|
10.13
|
|
Amendment No. 2 to the Amended and Restated Pareteum Corporation 2008 Long-Term Incentive Compensation Plan (incorporated by reference to Annex A to the Company’s definitive proxy statement on Schedule 14 A filed on August 11, 2014).
|
|
|
|
10.14
|
|
Subscription Agreement (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated September 9, 2016).
|
|
|
|
10.15
|
|
Form of Share Purchase Agreement dated September 30, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated October 6, 2016).
|
|
|
|
10.16
|
|
Promissory Note dated September 30, 2016 (incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K dated October 6, 2016).
|
|
|
|
10.17
|
|
License Agreement dated September 30, 2016 (incorporated by reference to Exhibit 10.3 to the Company’s current report on Form 8-K dated October 6, 2016).
|
|
|
|
10.18
|
|
Subscription Agreement (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated November 3, 2016).
|
|
|
|
10.19
|
|
Letter Agreement (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated December 21, 2016).
|
|
|
|
10.20
|
|
Amended and Restated Credit Agreement, dated as of December 27, 2016, by and among Elephant Talk Europe Holding B.V., as the Borrower, Pareteum Corporation, as the Parent and Guarantor, the other Subsidiaries of the Parent, from time to time party hereto as Guarantors, the Lenders from time to time party hereto and Atalaya Administrative LLC, as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated December 29, 2016).
|
|
|
|
10.21
|
|
Reaffirmation Agreement, dated as of December 27, 2016, by and among Elephant Talk Europe Holding B.V., as the Borrower, Pareteum Corporation, as the Parent and Guarantor Pareteum North America Corp., from time to time party hereto as Guarantors and Atalaya Administrative LLC, as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K dated December 29, 2016).
|
|
|
|
10.22
|
|
Letter Agreement, dated as of March 6, 2017, by and among Elephant Talk Europe Holding B.V., as the Borrower, Pareteum Corporation, as the Parent and Guarantor, the other Subsidiaries of the Parent, from time to time party hereto as Guarantors, the Lenders from time to time party hereto and Atalaya Administrative LLC, as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated March 7, 2017).
|
10.23
|
|
Agreement, dated as of March 30, 2017 between Saffelberg Investments N.V. and Pareteum Corporation (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated March 31, 2017).
|
|
|
|
10.24
|
|
First Amendment to Amended and Restated Credit Agreement, dated as of March 31, 2017, by and among Elephant Talk Europe Holding B.V., as the Borrower, Pareteum Corporation, as the Parent and Guarantor, the other Subsidiaries of the Parent, from time to time party hereto as Guarantors, the Lenders from time to time party hereto and Atalaya Administrative LLC, as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated April 6, 2017).
|
|
|
|
10.25
|
|
Form of Warrant Exercise Agreement, dated as of July 17, 2017, by and between Pareteum Corporation and holders thereto (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated July 17, 2017).
|
|
|
|
10.26*
|
|
Share Exchange Agreement dated October 16, 2017 between the Company and Artilium plc.
|
|
|
|
10.27*
|
|
Strategic Alliance Agreement and the Project Agreement dated October 16, 2017 between the
Company and Artilium plc.
|
|
|
|
23.1*
|
|
Consent of Independent Registered Public Accounting Firm
|
|
|
|
23.2**
|
|
Consent of Sichenzia Ross Ference Kesner LLP (included as part of Exhibit 5.1).
|
|
|
|
24.1*
|
|
Power of Attorney (set forth on the signature page of this Registration Statement on Form S-1).
|
*
|
|
Filed herewith
|
**
|
|
To be filed by amendment.
|
Item 17.
Undertakings
|
(a)
|
The undersigned registrant hereby undertakes:
|
|
(1)
|
To file, during any
period in which offers or sales are being made, a post-effective amendment to this Registration Statement:
|
|
(i)
|
To include any prospectus
required by Section 10(a)(3) of the Securities Act of 1933;
|
|
(ii)
|
To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
|
|
(iii)
|
To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
|
|
(2)
|
That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
|
|
(3)
|
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
|
|
(4)
|
That, for the purpose of determining liability
under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:
The undersigned registrant undertakes that
in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting
method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of
the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell
such securities to such purchaser:
|
|
(i)
|
Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 (§230.424 of this chapter);
|
|
(ii)
|
Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
|
|
(iii)
|
The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
|
|
(iv)
|
Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
|
(b) Insofar as indemnification
for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1)For purposes of determining any
liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared
effective.
(2)For the purpose of determining
any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York on the 16
th
day of October, 2017.
|
PARETEUM CORPORATION
|
|
|
|
By
|
/s/ Robert H. Turner
|
|
|
Robert H. Turner
|
|
|
Executive Chairman
(Principal executive officer)
|
|
|
|
|
|
/s/ Ted O’Donnell
|
|
|
Ted O’Donnell
|
|
|
Chief Financial Officer
|
|
|
(Principal financial and accounting officer)
|
POWER OF ATTORNEY
We, the undersigned officers and
directors of Pareteum Corp. hereby severally constitute and appoint Robert H. Turner and Ted O’Donnell, our true and
lawful attorney-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place and
stead, and in any and all capacities, to sign for us and in our names in the capacities indicated below any and all
amendments (including post-effective amendments) to this registration statement (or any other registration statement for the
same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended), and
to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as full to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities
Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Robert H. Turner
|
|
Executive Chairman
|
|
October 16, 2017
|
Robert H. Turner
|
|
(Principal executive officer)
|
|
|
|
|
|
|
|
/s/ Ted O’Donnell
|
|
Chief Financial Officer
|
|
October 16, 2017
|
Ted O’Donnell
|
|
(Principal financial and accounting officer)
|
|
|
|
|
|
|
|
/s/ Vic Bozzo
|
|
Chief Executive
|
|
October 16, 2017
|
Vic Bozzo
|
|
Officer
|
|
|
|
|
|
|
|
/s/ Yves van Sante
|
|
Director
|
|
October 16, 2017
|
Yves van Sante
|
|
|
|
|
|
|
|
|
|
/s/ Luis Jimenez-Tuñon
|
|
Director
|
|
October 16, 2017
|
Luis Jimenez-Tuñon
|
|
|
|
|
|
|
|
|
|
/s/ Laura Thomas
|
|
Director
|
|
October 16, 2017
|
Laura Thomas
|
|
|
|
|
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