The accompanying notes are an integral part
of these consolidated financial statements
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
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:
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Divestiture
of ValidSoft, on September 30, 2016, through a management buyout;
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Financing
activity related to issuance of preferred shares and increase in note payable with its
senior secured lender;
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Financing
activity related to issuance of preferred shares and increase in note payable with its
senior secured lender;
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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
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the
restructuring of the Company.
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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 expectationswith 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 financian. In additiona, 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:
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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;
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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.;
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Elephant Talk Telecomunicação do Brasil LTDA, is owned 90% by Elephant Talk Europe
Holding B.V. and 10% by Elephant Talk Communication Holding AG;
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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.;
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its wholly-owned subsidiary Elephant Talk Limited (“ETL”) and its majority owned (50.54%)
subsidiary Elephant Talk Middle East & Africa FZ-LLC.;
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its wholly-owned subsidiary Pareteum North America, Corp; and
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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.
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PT Elephant Talk Indonesia is owned by Elephant Talk Europe Holding B.V.
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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.
Reversed 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 effect 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.