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.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Restatement
As previously disclosed in the Current
Report on Form 8-K filed by Pareteum Corporation (the “Company” or “Pareteum”) with the Securities
and Exchange Commission (the “SEC”) on October 21, 2019, the Board of Directors (the “Board”) of
the Company determined that the Company’s previously issued financial statements for the year ended December 31, 2018
and the interim periods contained therein (collectively, the “Non-Reliance Periods”) could no longer be relied upon.
As a result, the Company is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to amend and restate
the Company’s original Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the
SEC on March 18, 2019 (the “Original Form 10-K”).
The Board’s decision to restate
the Company’s financial statements is based on the Company’s conclusion that certain revenues and the corresponding
costs recognized during the year ended December 31, 2018, and in each of the quarters ended March 31, June 30,
and September 30, 2018 should not have been recorded during the periods. This Note 1 to the consolidated financial statements
discloses the nature of the restatement matters and their impact on the consolidated financial statements as of and for the year
ended December 31, 2018. Restated unaudited quarterly financial data for the interim periods in 2018 is presented in Note
27 – “Unaudited Quarterly Data (Restated)” and is, collectively with the restated annual information, referred
to as the “Restatement”.
This Amendment reflects the correction
of the following errors identified subsequent to the filing of the Original Form 10-K:
A. For the year ended December 31,
2018, the Company determined that it incorrectly recognized revenue prior to customers obtaining control of certain products or
customer acceptance requirement provisions in contracts, due to an ineffective review of information provided by the sales and
procurement teams. As a result, customers had not obtained control of the products in accordance with ASC 606-10-25-30. The primary
net effect of the corrections of these errors on the Consolidated Statement of Comprehensive Loss resulted in reductions in total
Revenues, Cost of revenues (excluding depreciation and amortization) and General and Administrative expenses of $11,970,649, $255,364
and $1,001,493, respectively. Additionally, the Company determined that its accounting for activation fees under ASC 606 was incorrect.
The Company had recognized the revenue upfront for activation fees versus being deferred and recognized over the life of the customer.
The effect of the correction of this error was a reduction in Revenue on the Consolidated Statement of Comprehensive Loss and
a corresponding increase in Net billings in excess of revenue on the Consolidated Balance Sheet of $197,223. See tables below
for the full impact of this matter on the Company’s consolidated financial statements.
B. The Company determined adjustments
were needed to correct the financial statement presentation due to immaterial accounting errors in the Company’s previously
reported consolidated financial statements for the year ended December 31, 2017. The Company made the following adjustments:
|
i.
|
The Company determined that it
had incorrectly recognized revenue on certain product sales prior to customers obtaining
control of the products in accordance with ASC 606-10-25-30; this was also due to an
ineffective review of information provided by the sales and procurement teams. Correction
of these immaterial errors resulted in reduction in Accounts receivable of $184,856;
and increases to Other comprehensive loss and Accumulated deficit of $8,192 and $176,664,
respectively as of January 1, 2018, to adjust for the cumulative impact of the errors
as of the beginning of the earliest period presented in the accompanying consolidated
financial statements.
|
|
ii.
|
Through
a review of its accounting for stock-based compensation, the Company identified immaterial
errors in its recording of stock-based compensation expense for equity-classified awards
granted to employees and non-employees in 2017. The employee awards were granted with
vesting provisions ratably over a one- or two-year period and thus, in accordance with
ASC 718, stock-based compensation expense is recognized over the requisite service period.
The Company incorrectly recognized the stock-based compensation expense related to these
awards at the time of grant. For awards granted to non-employees, stock-based compensation
which subsequently vests through-out the term of the agreement, the amount of stock-based
compensation recorded would be up to the vesting date. The Company incorrectly recognized
the stock-based compensation expense related to these awards at the time of grant. The
net effect of these immaterial errors resulted in reductions to Common Stock and Accumulated
Deficit of $504,305 as of January 1, 2018 to adjust for the cumulative impact of
the errors as of the beginning of the earliest period presented in the accompanying consolidated
financial statements.
|
The Company also determined that
at December 31, 2017 it incorrectly recorded equity-classified share-based awards as liability-classified awards and recorded
stock-based compensation expense of $256,609 to Accrued expenses and other payables instead of recording to Common Stock in the
Company’s Consolidated Balance Sheet and reflecting such amount in the Company’s Consolidated Statements Of Changes
in Stockholders’ Equity(Deficit). The effect of this immaterial error was an increase to Common Stock and a decrease to
Accrued expenses and other payables as of January 1, 2018.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
|
iii.
|
The Company incorrectly translated its property and equipment
balances at December 31, 2017 using a historical rate and not the current exchange rate at the balance sheet reporting date
in accordance with ASC 830, Foreign Currency Matters. Correction of these immaterial errors resulted in an increase in Property
and Equipment, net of $1,126,178 with a corresponding decrease to Accumulated other comprehensive loss as of January 1, 2018,
to adjust for the cumulative impact of the errors (matter “B”) as of the beginning of the earliest period presented
in the accompanying consolidated financial statements. During 2018, the Company continued to use the incorrect historical rate
to translate its property and equipment balances and not the current exchange rate at the balance sheet reporting date. The correction
of these errors at December 31, 2018 resulted in a decrease in Property and Equipment, net at December 31, 2018 of $235,652
and a corresponding increase in Accumulated other comprehensive loss by the same amount. In the tables presented below, the impact
of the error on the Company’s consolidated financial statements as of and for the year ended December 31, 2018 is included
in matter “E”.
|
In accordance with Staff Accounting Bulletin
(“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements, the Company evaluated the materiality of the errors from a
qualitative and quantitative perspective and concluded that the effect of the errors were not material to our previously issued
consolidated financial statements.
C.
The accounting errors in recording stock-based compensation expense
for the stock awards granted in 2017 discussed above impacted the Company’s results of operations in the current year. For
certain grants of equity-classified awards granted during the year ended December 31, 2018 to employees and non-employees,
the Company identified errors in recording stock-based compensation expense for the same reason noted above. The Company also determined
that stock-based compensation expense related to the grant of options in 2018 was not being expensed over the appropriate vesting
period. The impact of this error was isolated to the second and third quarter of 2018 with an offsetting effect between the two
quarters. The aggregate impact of the Company’s error in recording stock-based compensation expense for the year ended December 31,
2018 from this matter was a decrease in Loss from operations of $126,634. In addition, the Company identified incorrect accounting
for stock-based compensation expense related to cancelled awards. This error resulted in an increase in the Loss from Operations
of $327,107. Other immaterial errors in recording stock-based compensation expense was also identified by the Company. See tables
below for the full impact of this matter on the Company’s consolidated financial statements.
D. For the year ended December 31,
2018, the Company determined that it incorrectly accounted for extinguishments of accounts payables for which the Company issued
shares to settle the outstanding balances of accounts payable. In accordance with ASC 470-50-40-2, the difference between
the reacquisition price of the debt and the net carrying amount of the extinguished debt is recognized as a loss or gain in the
period of extinguishment. The reacquisition price includes the fair value of any assets transferred or equity securities issued.
The correction of these errors on the Consolidated Statement of Comprehensive Loss resulted in a loss on extinguishment of debt,
recorded in General and administrative expense, of $143,526 and a corresponding increase in Common stock on the Consolidated Balance
Sheet. See tables below for the full impact of this matter on the Company’s consolidated financial statements.
E. In addition to the matters described
above in A, B, C, and D the Company also corrected for immaterial misstatements, including misstatements in certain footnotes,
identified during an account review and analysis exercise.
F. The Company identified that it had
misstatements in its application of purchase accounting for its acquisition of Artilium plc in October 2018. In accordance
with ASC 805, Business Combinations, for a business combination achieved in stages the acquirer must measure its previously
held equity interests in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss, if any, in
earnings. The fair value of previously held equity interest in the acquiree is included in the calculation of goodwill. The Company
did not appropriately remeasure its previously held equity interest in Artilium at its acquisition-date fair value and record
its resulting gain. The correction of this error on the Consolidated Statement of Comprehensive Loss resulted in a gain on equity
investment of $6,370,787 and a corresponding increase in Goodwill on the Consolidated Balance Sheet. The Company also erroneously
wrote off its equity investment in Artilium of $3,230,208 by reducing Common stock versus applying it to the calculation of goodwill.
In addition, the Company identified errors in its preparation of the Consolidated Statement of Cash Flows to account for the net
of effect of the acquisition and adjusted the impact on the Consolidated Statement of Cash Flows for certain assets acquired and
liabilities assumed to appropriately account for cash flows for post-acquisition activity. See tables below for the full impact
of this matter on the Company’s consolidated financial statements.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
The
following table sets forth a summary of where the restatement adjustments had an effect on the Company's Consolidated Balance Sheet
as of December 31, 2018:
|
|
|
As reported
|
|
|
|
Adjustments
|
|
|
|
|
|
|
|
As restated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
15,361,594
|
|
|
$
|
(11,829,269
|
)
|
|
|
A
|
|
|
$
|
3,338,214
|
|
|
|
|
|
|
|
|
(184,856
|
)
|
|
|
B
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,255
|
)
|
|
|
E
|
|
|
|
|
|
Total current assets
|
|
|
23,927,908
|
|
|
|
(12,023,380
|
)
|
|
|
|
|
|
|
11,904,528
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
4,553,250
|
|
|
|
1,126,178
|
|
|
|
B
|
|
|
|
5,443,775
|
|
|
|
|
|
|
|
|
(235,653
|
)
|
|
|
E
|
|
|
|
|
|
GOODWILL
|
|
|
91,773,911
|
|
|
|
9,600,963
|
|
|
|
F
|
|
|
|
101,374,874
|
|
Total assets
|
|
$
|
161,041,166
|
|
|
$
|
(1,531,892
|
)
|
|
|
|
|
|
$
|
159,509,274
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and customer deposits
|
|
$
|
10,337,629
|
|
|
$
|
(2
|
)
|
|
|
A
|
|
|
$
|
10,337,627
|
|
Net billings in excess of revenues
|
|
|
927,780
|
|
|
|
(700,476
|
)
|
|
|
A
|
|
|
|
227,304
|
|
Accrued expenses and other payables
|
|
|
7,952,380
|
|
|
|
(361,963
|
)
|
|
|
A
|
|
|
|
7,740,828
|
|
|
|
|
|
|
|
|
14,954
|
|
|
|
C
|
|
|
|
|
|
|
|
|
|
|
|
|
135,457
|
|
|
|
E
|
|
|
|
|
|
Total current liabilities
|
|
|
20,005,976
|
|
|
|
(912,030
|
)
|
|
|
|
|
|
|
19,093,946
|
|
Deferred income tax liabilities
|
|
|
8,415,825
|
|
|
|
(30,077
|
)
|
|
|
E
|
|
|
|
8,385,748
|
|
Total long-term liabilities
|
|
|
8,970,526
|
|
|
|
(30,077
|
)
|
|
|
|
|
|
|
8,940,449
|
|
Total liabilities
|
|
|
28,976,502
|
|
|
|
(942,107
|
)
|
|
|
|
|
|
|
28,034,395
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
450,990,827
|
|
|
|
(611,824
|
)
|
|
|
B
|
|
|
|
453,995,240
|
|
|
|
|
|
|
|
|
190,074
|
|
|
|
C
|
|
|
|
|
|
|
|
|
|
|
|
|
143,526
|
|
|
|
D
|
|
|
|
|
|
|
|
|
|
|
|
|
52,461
|
|
|
|
E
|
|
|
|
|
|
|
|
|
|
|
|
|
3,230,176
|
|
|
|
F
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(6,300,780
|
)
|
|
|
144,186
|
|
|
|
A
|
|
|
|
(5,388,675
|
)
|
|
|
|
|
|
|
|
1,010,466
|
|
|
|
B
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,556
|
)
|
|
|
C
|
|
|
|
|
|
|
|
|
|
|
|
|
(237,991
|
)
|
|
|
E
|
|
|
|
|
|
Accumulated deficit
|
|
|
(312,625,383
|
)
|
|
|
(10,911,014
|
)
|
|
|
A
|
|
|
|
(317,131,686
|
)
|
|
|
|
|
|
|
|
542,680
|
|
|
|
B
|
|
|
|
|
|
|
|
|
|
|
|
|
(200,472
|
)
|
|
|
C
|
|
|
|
|
|
|
|
|
|
|
|
|
(143,526
|
)
|
|
|
D
|
|
|
|
|
|
|
|
|
|
|
|
|
(164,758
|
)
|
|
|
E
|
|
|
|
|
|
|
|
|
|
|
|
|
6,370,787
|
|
|
|
F
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
132,064,664
|
|
|
|
(589,785
|
)
|
|
|
|
|
|
|
131,474,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
161,041,166
|
|
|
$
|
(1,531,892
|
)
|
|
|
|
|
|
$
|
159,509,274
|
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
The following table sets forth a summary of where the restatement
adjustments had an effect on the Company's Consolidated Statement of Comprehensive Loss for the year ended December 31, 2018:
|
|
As
Reported
|
|
|
Adjustments
|
|
|
|
|
|
As
Restated
|
|
REVENUES
|
|
$
|
32,435,736
|
|
|
$
|
(12,167,872
|
)
|
|
|
A
|
|
|
$
|
20,257,605
|
|
|
|
|
|
|
|
|
(10,259
|
)
|
|
|
E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST AND OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (excluding depreciation
and amortization)
|
|
|
10,329,646
|
|
|
|
(255,364
|
)
|
|
|
A
|
|
|
|
10,054,030
|
|
|
|
|
|
|
|
|
(20,252
|
)
|
|
|
C
|
|
|
|
|
|
Product development
|
|
|
3,092,776
|
|
|
|
(9,820
|
)
|
|
|
C
|
|
|
|
3,082,956
|
|
Sales and Marketing
|
|
|
3,161,234
|
|
|
|
36,172
|
|
|
|
C
|
|
|
|
3,197,406
|
|
General and administrative
|
|
|
17,808,912
|
|
|
|
(1,001,493
|
)
|
|
|
A
|
|
|
|
17,329,163
|
|
|
|
|
|
|
|
|
194,373
|
|
|
|
C
|
|
|
|
|
|
|
|
|
|
|
|
|
143,526
|
|
|
|
D
|
|
|
|
|
|
|
|
|
|
|
|
|
183,845
|
|
|
|
E
|
|
|
|
|
|
Restructuring and acquisition
costs
|
|
|
7,258,831
|
|
|
|
730
|
|
|
|
E
|
|
|
|
7,259,561
|
|
Total cost
and operating expenses
|
|
|
47,078,428
|
|
|
|
(728,283
|
)
|
|
|
|
|
|
|
46,350,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(14,642,692
|
)
|
|
|
(11,449,848
|
)
|
|
|
|
|
|
|
(26,092,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (LOSS)
|
|
|
1,524,202
|
|
|
|
6,370,786
|
|
|
|
EF
|
|
|
|
7,894,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE BENEFIT FOR INCOME TAXES
|
|
|
(13,118,490
|
)
|
|
|
(5,079,062
|
)
|
|
|
|
|
|
|
(18,197,552
|
)
|
Income tax benefit
|
|
|
(143,840
|
)
|
|
|
(30,078
|
)
|
|
|
E
|
|
|
|
(173,918
|
)
|
NET LOSS
|
|
|
(12,974,650
|
)
|
|
|
(5,048,984
|
)
|
|
|
|
|
|
|
(18,023,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
loss
|
|
|
5,911
|
|
|
|
(205,882
|
)
|
|
|
E
|
|
|
|
(199,971
|
)
|
COMPREHENSIVE LOSS
|
|
$
|
(12,968,739
|
)
|
|
$
|
(5,254,866
|
)
|
|
|
|
|
|
$
|
(18,223,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share and
equivalents - basic
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.28
|
)
|
Net loss per common share and
equivalents - diluted
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.28
|
)
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
The
following table sets forth a summary of where the restatement adjustments had an effect on the Company's Consolidated Statement
of Cash Flows for the year ended December 31, 2018:
|
|
As Reported
|
|
|
Adjustments
|
|
|
|
|
As Restated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,974,650
|
)
|
|
$
|
(5,048,984
|
)
|
|
A
|
|
$
|
(18,023,634
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
-
|
|
|
|
31,361
|
|
|
A
|
|
|
137,352
|
|
|
|
|
|
|
|
105,991
|
|
|
E
|
|
|
|
|
Stock-based compensation
|
|
6,582,286
|
|
|
|
200,473
|
|
|
C
|
|
|
6,782,759
|
|
Shares issued for services
|
|
1,075,983
|
|
|
|
143,526
|
|
|
D
|
|
|
822,164
|
|
|
|
|
|
|
|
(397,345
|
)
|
|
E
|
|
|
|
|
Loss on disposal of assets
|
|
-
|
|
|
|
38,916
|
|
|
E
|
|
|
38,916
|
|
Gain on equity investment
|
|
-
|
|
|
|
(6,370,787
|
)
|
|
F
|
|
|
(6,370,787
|
)
|
Deferred income taxes
|
|
(225,218
|
)
|
|
|
(30,078
|
)
|
|
E
|
|
|
(255,296
|
)
|
Changes in
operating assets and liabilities, net of effects of acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable
|
|
(13,239,269
|
)
|
|
|
11,904,315
|
|
|
A
|
|
|
1,541,092
|
|
|
|
|
|
|
|
(96,736
|
)
|
|
E
|
|
|
|
|
|
|
|
|
|
|
2,972,782
|
|
|
F
|
|
|
|
|
(Increase) in prepaid expenses, deposits and other assets
|
|
(1,169,435
|
)
|
|
|
30,000
|
|
|
E
|
|
|
(628,745
|
)
|
|
|
|
|
|
|
510,690
|
|
|
F
|
|
|
|
|
Increase in accounts payable and customer deposits
|
|
5,110,007
|
|
|
|
1,306
|
|
|
A
|
|
|
4,649,913
|
|
|
|
|
|
|
|
(461,400
|
)
|
|
F
|
|
|
|
|
Increase in net billings in excess of revenues
|
|
677,191
|
|
|
|
(700,361
|
)
|
|
A
|
|
|
84,349
|
|
|
|
|
|
|
|
107,519
|
|
|
E
|
|
|
|
|
Increase (decrease) in accrued expenses and other payables
|
|
2,145,232
|
|
|
|
(362,121
|
)
|
|
A
|
|
|
(954,282
|
)
|
|
|
|
|
|
|
423,386
|
|
|
E
|
|
|
|
|
|
|
|
|
|
|
(3,160,779
|
)
|
|
F
|
|
|
|
|
Net cash used in operating activities
|
|
(7,661,739
|
)
|
|
|
(158,326
|
)
|
|
|
|
|
(7,820,065
|
)
|
Purchases of property, equipment and software development
|
|
(4,124,894
|
)
|
|
|
417,878
|
|
|
F
|
|
|
(3,707,016
|
)
|
Acquisition of Artilium plc, net of cash acquired
|
|
(7,331,584
|
)
|
|
|
13,918
|
|
|
F
|
|
|
(7,317,666
|
)
|
Net cash used in investing activities
|
|
(11,956,478
|
)
|
|
|
431,796
|
|
|
|
|
|
(11,524,682
|
)
|
Increase in short term loans
|
|
812,586
|
|
|
|
28,025
|
|
|
E
|
|
|
547,522
|
|
|
|
|
|
|
|
(293,089
|
)
|
|
F
|
|
|
|
|
Financing related fees
|
|
(700,817
|
)
|
|
|
67,917
|
|
|
E
|
|
|
(632,900
|
)
|
Net cash provided by financing activities
|
|
12,304,660
|
|
|
|
(197,147
|
)
|
|
|
|
|
12,107,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
58,246
|
|
|
|
(76,323
|
)
|
|
|
|
|
(18,077
|
)
|
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
|
|
(7,255,311
|
)
|
|
|
-
|
|
|
|
|
|
(7,255,311
|
)
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
|
|
13,737,675
|
|
|
|
-
|
|
|
|
|
|
13,737,675
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
|
|
6,482,364
|
|
|
$
|
-
|
|
|
|
|
$
|
6,482,364
|
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Note 2. Business and Summary of Significant Accounting
Policies
Description of Business
Pareteum is an experienced provider of Communications Platform
as a Service (“CPaaS”) solutions. Pareteum empowers enterprises, communications service providers, early stage innovators,
developers, IoT, and telecommunications infrastructure providers with the freedom and control to create, deliver and scale
innovative communications experiences. The Pareteum CPaaS solutions connect people and devices around the world using the secure,
ubiquitous, and highly scalable solution to deliver data, voice, video, SMS/text messaging, media, and content enablement.
Pareteum has developed mobility, messaging, connectivity and
security services and applications. The Pareteum platform hosts integrated IT/Back Office and Core Network functionality for mobile
network operators and other enterprises, which allows our customers to implement and leverage mobile communications solutions
on a fully outsourced 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.
As of October 1, 2018, the Company now includes Artilium
plc, which operates as a wholly owned subsidiary of the Company. Artilium is a software development company active in the enterprise
communications and core telecommunications markets delivering software solutions which layer over disparate fixed, mobile and
IP networks to enable the deployment of converged communication services and applications.
As of February 12, 2019, the Company now includes iPass
Inc., which operates as a wholly owned subsidiary of the Company. iPass is a cloud-based service provider of global mobile connectivity,
offering Wi-Fi access on any mobile device through its SaaS platform.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Liquidity
As reflected in the accompanying consolidated
financial statements, the Company reported net loss of $18,023,634 and $12,462,979 for the years ended December 31, 2018
and 2017, respectively, and had an accumulated deficit of $317,131,686 as of December 31, 2018. The cash balance, including
restricted cash, as of December 31, 2018, was $6,482,364.
On June 8, 2020, the Company issued a $17.5 million
8% Senior Secured Convertible Note (the “High Trail Note”) to High Trail Investments SA LLC (“High
Trail”) due April 1, 2025 for an aggregate purchase price of $14 million, of which $7 million is currently
maintained in one or more blocked accounts. The terms of the High Trail Note and related documents require the Company to
meet certain specified conditions and covenants, some of which have not been satisfied by the dates required, including
(i) the Company filing its restated financial statements with the SEC for (a) the fiscal year ended
December 31, 2018, (b) the quarter ended March 31, 2019 and (c) the quarter ended June 30, 2019, in
each case on or prior to October 31, 2020, (ii) after October 31, 2020, the Company timely filing its
subsequent quarterly reports on Form 10-Q or its subsequent annual reports on Form 10-K with the SEC in the manner
and within the time periods required under the Exchange Act and (iii) the Company maintaining the listing of its common
stock on the Nasdaq Stock Market (see Note 28. Subsequent Events). As a result, on December 1, 2020, we entered into a
forbearance agreement (the “Forbearance Agreement”) with High Trail under which: (i) we admitted that we
were in default of several obligations under the High Trail Note and related agreements, (ii) High Trail acknowledged
such defaults and agreed not to exercise any right or remedy under the High Trail Note or the related securities purchase
agreement, warrant or security documents, including its right to accelerate the aggregate amount outstanding under the High
Trail Note, until the earlier of December 31, 2020, the date of any new event of default or initiation of any action by
the Company to invalidate any of the representations and warranties made in the Forbearance Agreement. As a result of the
defaults, the interest rate paid on the principal outstanding under the High Trail Note increased to 18% per annum. As
partial consideration for its agreement to not to exercise any right or remedy under the High Trail financing documents, we
agreed with High Trail to make certain changes to the High Trail Note and related agreements. In this regard, we agreed to
delete the “Floor Price” of $0.10 that had previously limited the number of shares of Company common stock into
which (i) the outstanding indebtedness could be converted upon default and (ii) payments of interest could be made.
We also agreed to increase the number of shares it was required to reserve for issuance upon conversion of the High Trail
Note and to decrease the exercise price of the related warrant from $0.58 to $0.37.
Because of the limited nature of the relief provided under
the Forbearance Agreement, which does not lower the amounts payable in principal or interest, the Company believes that it will
not have sufficient resources to fund its operations and meet the obligations specified in the note for the next twelve months
following the filing of this amended Annual Report. The Company’s software platforms require ongoing funding to continue
the current development and operational plans and the Company has a history of net losses. The Company will continue to expend
substantial resources for the foreseeable future in connection with the continued development of its software platforms. These
expenditures will include costs associated with research and development activity, corporate administration, business development,
and marketing and selling of the Company’s services. In addition, other unanticipated costs may arise.
As a result, the Company believes that additional capital will
be required to fund its operations and provide growth capital to meet the obligations under the High Trail Note. Accordingly,
the Company will have to raise additional capital in one or more debt and/or equity offerings and continue to work with High Trail
to cure the defaults. However, there can be no assurance that the Company will be successful in raising the necessary capital
or that any such offering will be available to the Company on terms acceptable to the Company, or at all. If the Company is unable
to raise additional capital that may be needed and with acceptable terms, this would have a material adverse effect on the Company.
Furthermore, the recent outbreak of the COVID-19 pandemic has significantly disrupted world financial markets, has negatively
impacted U.S. market conditions and may reduce opportunities for the Company to seek out additional funding. In particular, a
decline in the market price of the Company’s common stock, coupled with the stock’s delisting from the Nasdaq Capital
Market, could make it more difficult to sell equity or equity-related securities in the future at a time and price that the Company
deems appropriate. The factors discussed above raise substantial doubt as to the Company’s ability to continue as a going
concern within one year after the date that the financial statements are issued.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Dawson James Public Offering
On May 9, 2018, we entered into a
securities purchase agreement with select accredited investors relating to a registered direct offering, issuance and sale of
an aggregate of 2,440,000 shares of our common stock at a purchase price of $2.50 per share for gross proceeds before deducting
estimated offering expenses of approximately $6,100,000. The shares were issued pursuant to a Registration Statement on Form S-3
filed with the Securities and Exchange Commission on September 9, 2016, as amended October 21, 2016 and November 10,
2016 and declared effective November 14, 2016. Dawson James Securities, Inc. (the “Placement Agent”) acted
as placement agent on a best-efforts basis in connection with the offering, pursuant to a placement agency agreement that was
entered into on May 9, 2018. We also agreed to pay the Placement Agent a commission, to reimburse the Placement Agent’s
out-of-pocket expenses, to issue the Placement Agent, in a private transaction, a warrant to purchase 122,000 shares of common
stock at an exercise price equal to 125% of the offering price per share, and to indemnify the Placement Agent against certain
liabilities.
Artilium plc Acquisition
On October 1, 2018 we completed our
previously announced Artilium plc (“Artilium”) Acquisition. In connection with the Artilium Acquisition, the Company
issued an aggregate of 37,511,447 shares of the Company’s common stock to Artilium shareholders. At that time, the Company
cancelled 3,200,332 shares of common stock that were held by Artilium pre-acquisition. Following the Artilium Acquisition, Artilium
operates as a wholly owned subsidiary of the Company, and Artilium’s direct subsidiaries operate as indirect subsidiaries
of the Company, wholly owned by Artilium. Artilium is a software development company active in the enterprise communications and
core telecommunications markets delivering software solutions which layer over disparate fixed, mobile and IP networks to enable
the deployment of converged communications services and applications.
iPass Inc. Acquisition
On November 12, 2018, we entered
into the iPass Merger Agreement by and among iPass Inc. (“iPass”), and TBR, Inc., a wholly-owned subsidiary of
the Company (“TBR”). Pursuant to the iPass Merger Agreement, TBR commenced the iPass Offer for all of the outstanding
shares of iPass’ common stock, par value $0.0001 per share, for 1.17 shares of the Company’s common stock, together
with cash in lieu of any fractional shares, without interest and less any applicable withholding taxes. The iPass offer and withdrawal
rights expired at 5:00 p.m. New York City time on February 12, 2019, and promptly following such time TBR accepted for
payment and promptly paid for all validly tendered iPass shares in accordance with the terms of the iPass Offer. In aggregate,
the Company issued 9,867,041 shares of common stock to the iPass shareholders in March 2019. iPass is a leading provider
of global mobile connectivity, offering simple, secure, always-on Wi-Fi access on any mobile device.
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of Pareteum and its subsidiaries and have been prepared in accordance with accounting principles
generally accepted in the United States of America (“US GAAP”). All intercompany transactions and account balances
have been eliminated in consolidation. The Company’s subsidiaries are:
• its wholly owned subsidiary Pareteum
North America Corp. with its wholly owned subsidiary, Pareteum UK Ltd.;
• its wholly owned subsidiary Pareteum
Asia PTE. Ltd.;
• its wholly owned subsidiary TBR, Inc.
(special purpose vehicle for iPass acquisition);
• its wholly-owned subsidiary Pareteum
Europe B.V. (fka Elephant Talk Europe Holding B.V.) and its wholly owned subsidiaries, Elephant Talk Mobile Services B.V., Elephant
Talk PRS Netherlands BV, Elephant Talk Deutschland GmbH (dormant), Elephant Talk Middle East & Africa (Holding) W.L.L.,
Elephant Talk Luxembourg SA (dormant), Guangzhou Elephant Talk Information Technology Limited (dormant), Elephant Talk Communications
Italy S.R.L. (dormant), Elephant Talk Business Services W.L.L., Elephant Talk Middle East & Africa (Holding) Jordan L.L.C.
(dormant).;
• its wholly owned Elephant Talk
Communications Holding AG and its wholly owned subsidiaries Pareteum Spain SLU and ETC Carrier Services GmbH.;
• Pareteum Europe B.V. majority-owned
subsidiaries Elephant Talk Bahrain W.L.L. (99%), ET de Mexico S.A.P.I. de C.V. (99.998%), ET-UTS NV; (51%) and LLC Pareteum (Russia)
(50%) Elephant Talk;
• Elephant Talk Telecomunicação
do Brasil LTDA, is owned 90% by Pareteum Europe B.V. and 10% by Elephant Talk Communication Holding AG;
• its wholly-owned subsidiary Elephant
Talk Limited (“ETL”) and its wholly owned ET Guangdong Ltd. and its majority owned (50.54%) subsidiary Elephant Talk
Middle East & Africa FZ-LLC.;
• Asesores Profesionales ETAK S.
de RL. de C.V. is owned 99% by Pareteum Europe B.V.; and
• its wholly owned subsidiary Artilium
Group Ltd. and its wholly owned subsidiaries, Artilium NV, Speak UP BVBA, Ello Mobile BVBA, Artilium UK Ltd., Comsys Telecom &
Media BV, Portalis BV, Comsys Connect GmbH, United Telecom N.V., Talking Sense BVBA, Wbase Comm. V, Artilium Trustee Company Limited,
Comsys Connect BV, Livecom International BV, Comsys Connect AG and United Telecom BV.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Foreign Currency Translation
The Company’s consolidated financial statements were translated
into U.S. dollars in accordance with ASC 830, Foreign Currency Matters (“ASC 830”). The majority of the Company’s
operations are carried out in Euros. For all operations outside of the United States, assets and liabilities are translated into
U.S. dollars using the period end exchange rates and the 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, net gains
and losses resulting from translation of foreign currency financial statements are included in the Statement of Changes in Stockholders’
Equity as Other comprehensive income (loss). Foreign currency transaction gains and losses are included in the Consolidated Statements
of Comprehensive Loss, under the line item “Other income and (expense), net”.
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 and
intangible assets acquired in our acquisition of Artilium. Significant estimates include the bad debt allowance, revenue recognition,
impairment of intangible assets and long-lived assets, valuation of financial instruments, realization of deferred tax assets,
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. As of December 31, 2018, the
Company had no cash equivalents.
Restricted Cash
Restricted cash as of December 31,
2018 and 2017, was $430,655 and $199,776 respectively and consists of cash deposited in blocked accounts as bank guarantees for
corporate credit cards and a portion of the 2018 balance relates to a Letter of Credit issued to a vendor.
Accounts Receivables, net
The Company has 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 Consolidated
Balance Sheets include an allowance for accounts that might not be collected. In determining the amount of the allowance, 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 allowances 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 allowances 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 allowance, 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 3 of the
Financial Statements for more information.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
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.
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.
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 Revenue Recognition-Multiple Element Arrangements (“ASC
605”), as described in this section, for revenue recorded prior to the adoption of ASC Topic 606, Revenue from Contracts
with Customers which is discussed below. 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. 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.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Adoption of ASC Topic 606, Revenue
from Contracts with Customers
On January 1, 2018, we adopted
Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1,
2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior
period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
We recorded a net decrease to opening
accumulated deficit of $107,520 as of January 1, 2018 due to the cumulative impact of adopting Topic
606, with the impact primarily related to our installation revenues that were previously deferred for which the performance obligation
was determined to be complete as of the date of adoption. The impact of adopting Topic 606 as compared to revenue to be recognized
under Topic 605 for the year ended December 31, 2018 was a reduction in reported revenues of $107,520, relating
to the aforementioned installation revenues and an increase to the accumulated deficit.
Revenue Recognition under Topic 606
Our revenues represent amounts earned
for our mobile and security solutions. Our solutions take many forms, but our revenue generally consists of fixed and/or variable
charges for services delivered monthly under a combined services and SaaS model. We also offer discrete (one-time) services for
implementation and for development of specific functionality to properly service our customers.
The following table presents our revenues
disaggregated by revenue source:
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
|
|
|
|
(as restated)
|
|
|
2017 (1)
|
|
Monthly Service
|
|
$
|
19,170,276
|
|
|
$
|
12,540,377
|
|
Installation and Software Development
|
|
|
1,087,329
|
|
|
|
1,007,130
|
|
Total revenues
|
|
$
|
20,257,605
|
|
|
$
|
13,547,507
|
|
|
(1)
|
As noted above,
prior period amounts have not been adjusted under the modified retrospective method.
|
Monthly services revenues are recognized
over time and installation and software development revenues are recognized over time.
The following table presents our revenues
disaggregated by geography, based on the billing addresses of our customers:
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
|
|
|
|
(as
restated)
|
|
|
2017
(1)
|
|
Europe
|
|
$
|
18,752,751
|
|
|
$
|
12,428,942
|
|
Other geographic areas
|
|
|
1,504,854
|
|
|
|
1,118,565
|
|
Total revenues
|
|
$
|
20,257,605
|
|
|
$
|
13,547,507
|
|
|
(1)
|
As noted above,
prior period amounts have not been adjusted under the modified retrospective method.
|
Monthly Service Revenues
The Company’s performance obligations
in a monthly Software as a Service (SaaS) and service offerings are simultaneously received and consumed by the customer and therefore,
are recognized over time. For recognition purposes, we do not unbundle such services into separate performance obligations. The
Company typically bills its customer at the end of each month, with payment to be received shortly thereafter. The fees charged
may include a combination of fixed and variable charges with the variable charges tied to the number of subscribers or some other
measure of volume. Although the consideration may be variable, the volumes are estimable at the time of billing, with “true-up”
adjustments occurring in the subsequent month. Such amounts have not been historically significant.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Installation and Software Development
Revenues
The Company’s other revenues consist
generally of installation and development projects.
Installation represents the activities
necessary for a customer to obtain access and connectivity to the Company’s monthly SaaS and service offerings. While installation
may require separate phases, it represents one promise within the context of the contract.
Development consists of programming and other services which
adds new functionality to a customer’s existing or new service offerings. Each development project defines its milestones
and will have its own performance obligation.
Revenue is recognized over time if the
installation and development activities create an asset that has no alternative use for which the Company is entitled to receive
payment for performance completed to date. If not, then revenue is not recognized until
the applicable performance obligation is satisfied.
Arrangements with Multiple Performance
Obligations
The Company’s contracts with customers
may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation
based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices
charged to customers.
Net Billings in Excess of Revenues
The Company records net billings in excess
of revenues when payments are made in advance of our performance, including amounts which are refundable. Net billings in excess
of revenues was $227,304 and $242,986 as of December 31, 2018 and 2017, respectively.
Payment terms vary by the type and location
of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For
certain products or services and customer types, payment is required before the products or services are delivered to the customer.
Contract Assets
Given the nature of the Company’s
services and contracts, it has no contract assets.
Cost of Revenues and Operating Expenses
Cost of Revenues
Cost of revenues includes origination,
termination, network and billing charges from telecommunications operators, costs of telecommunications service providers, supplies
and materials, 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 revenues excludes depreciation and amortization.
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.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Financial Instruments
The carrying values of cash and cash equivalents,
restricted cash, accounts receivable, accounts payable, notes receivable, promissory notes (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 unsecured convertible promissory notes, 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 includes 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 assets 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
the following asset groups that are valued at fair value categorized within Level 3: Goodwill and intangibles (non-recurring measurements)
for the impairment test as well as for the Artilium acquisition. Below are discussions of the main assumptions used for the recurring
measurements.
The Company used the Monte Carlo valuation
model to determine the value of the outstanding warrants and conversion feature from the 2018 Offering (as defined below). Since
the Monte Carlo valuation model requires special software and expertise to model the assumption to be used, the Company hired
a third-party valuation expert. Because tradenames, customer relationships and the technology acquired as part of the acquisition
of Artilium required expertise to model the assumptions to be used, the Company hired a third-party valuation expert.
Recurring
Measurement - Warrant Derivative Liabilities and Conversion Feature Derivative (see also Note 12 and 16)
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.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
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 estimated life of the outstanding principal liability at the re-measurement date.
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.
Liquidity Event
We estimate the
expected liquidity event considering 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. Management currently does not believe that it
is in the best interest of the Company to pay dividends at this time.
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.
For
both contractors and advisory board members, we recognize the guidance for share-based compensation awards to non-employees in
accordance with ASC 505-50 Equity-Based Payments to Non-Employees (“ASC 505-50”). Under ASC 505-50, we determine
the fair value of the options or share-based compensation awards granted as either the fair value of the consideration received,
or the fair value of the equity instruments issued, whichever is more reliably measurable.
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 many 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.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
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.
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).
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.
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 various sources such as 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 not be fully 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 identification of revenue and expenses that qualify for preferential
tax treatment and assessment of the sustainability of tax positions based on several factors including changes in facts or circumstances,
changes in tax law, settled audit issues and new audit activity.
The Company files federal income tax returns in the U.S., various
U.S. 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 depends on local legislation, typically ranging from three to eight years. 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)
For the years ended December 31, 2018
and 2017, the Company’s comprehensive loss consisted of net losses 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.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED 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 year, or sooner should there be an indicator of impairment as per ASC 350, Intangibles –
Goodwill and Other (“ASC 350”). 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.
Long-Lived Assets and Intangible Assets
In accordance with 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, Internal-Use Software, 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 addition, 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 2018 and 2017, the Company did not record an impairment.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue
from Contracts with Customers (Topic 606). This update outlines a new, single comprehensive model for entities to use in accounting
for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific
guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized.
The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration a company expects to receive in exchange for those goods or services. In August 2015, the
FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,
which deferred the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for fiscal periods beginning after
December 15, 2017, including interim periods within that reporting period. Early adoption is permitted only as of annual
reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We
adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. This update requires expanded
disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
Additionally, qualitative and quantitative disclosures are required for customer contracts, significant judgments and changes
in judgments, and assets recognized from the costs to obtain or fulfill a contract.
In January 2016, the FASB issued 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. The Company adopted this standard on January 1, 2018 and there was
no material effect as a result of the adoption of ASU 2016-01 on our consolidated financial statements.
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 was effective for the Company’s annual and interim reporting
periods beginning January 1, 2017. The Company has evaluated the impact of ASU 2016-09 on its consolidated financial statements
and has determined that the impact of adopting of ASU 2016-09 did not have a material effect on its consolidated financial statements,
financial condition or results of operations.
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 became effective for fiscal years beginning after December 15, 2017
and interim periods within those fiscal years. Early adoption is permitted. The Company has retrospectively adopted this standard
and the effects of the adoption are reflected on the accompanying Consolidated Statement of Cash Flows.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU
No. 2016-02, “Leases (Topic 842)” (ASU 2016-02), which together with subsequent amendments, modified lessee accounting
guidance under Topic 840. This ASU requires the Company to recognize on the balance sheet the assets and liabilities for the rights
and obligations created by leases with terms of more than twelve months. This ASU also requires disclosures enabling the users
of financial statements to understand the amount, timing and uncertainty of cash flows arising from leases. This new standard
will become effective for annual periods beginning after December 15, 2018 (including interim reporting periods within those
periods). Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company will adopt the
new standard in the first quarter of its fiscal year 2019 using the optional transition method allowed by ASU 2018-11. The Company
will elect not to reassess whether any expired or existing contracts are or contain leases, not to reassess the lease classification
for any expired or existing leases, not to reassess initial direct costs for any existing leases, and not to separate non-lease
components from lease components and instead account for each separate lease component and the non-lease components associated
with that lease component as a single lease component for new or modified leases. The Company does not expect the adoption of
this standard to have a material effect on its financial statements for existing leases as of January 1, 2019. However, as
a result of the iPass acquisition, the Company expects to record a Right of Use asset and related liability for the existing iPass
leases subject to ASU 2016-02.
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 has not determined what impact the adoption will have on its consolidated financial statements,
financial condition or results of operations.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Reclassifications
Certain prior period amounts have been reclassified
to conform to the current period presentation.
Note 3. 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 $513,575 and $90,173 as of December 31,
2018 and 2017, respectively.
Note 4. Prepaid Expenses and
Other Current Assets
Prepaid expenses and other current assets
amounted to $2,083,950 and $900,369 as of December 31, 2018 and 2017, respectively. 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, 2018, $424,167 of the prepaid expenses was related to VAT. On December 31, 2017, prepaid VAT
represented $358,901.
Note 5. Other Assets
Other assets at December 31, 2018
and December 31, 2017, are long-term in nature and consist of long-term deposits to various telecom carriers and loans amounting
to $45,336 and $91,267, respectively. The deposits are refundable at the termination of the business relationship with the
carriers.
Note 6. Notes Receivable
The third quarter 2016 sale of ValidSoft
for the price of $3,000,000 was completed and the Company received $2,000,000 in cash and a $1,000,000 promissory note. The Principal
amount of $1,000,000 together with all interest was originally required to be paid by on or before September 30, 2018 bearing
interest of 5% per annum. During 2017 we accrued $21,639 for interest, credited $375,594 for Company liabilities assumed by ValidSoft
and credited $51,525 as a partial repayment on the principal which results in a remaining outstanding principal amount of $594,520.
On July 22, 2018, an agreement was made to extend the maturity date of the note to September 30, 2019. At December 31,
2018 we accrued $4,780 for interest which results in a remaining outstanding principal amount of $576,769.
In June 2020, the Company amended the
promissory note with ValidSoft and entered into a Replacement Note in the amount of $512,380 which represented the outstanding
principal and interest balance as of December 31, 2019. The amendment extended the maturity date of the promissory note to
March 31, 2021. In connection with the amendment, ValidSoft agreed to pay $53,769 in overdue fees in two installments with
the first installment of $26,885 paid at the time of the amendment and the remaining balance was paid in October 2020. The
amendment also contains a provision for a discount if ValidSoft prepays any or all amounts outstanding prior to their scheduled
due dates.
On November 26, 2018, the Company executed a senior
secured promissory note from Yonder Media Mobile (“Yonder”), an unrelated entity, with interest accruing at
a simple rate of 6% per annum with a maturity date of May 26, 2020. The principal amount is $500,000 and accumulated
interest for 2018 was $5,667 which results in a remaining outstanding amount of $505,667. All principal and interest are due
on the maturity date. In July 2020, the Company settled this promissory note, and subsequent notes entered into in 2019, by
conversion of the amounts outstanding into shares of Yonder.
The total notes receivable held by the Company
as of December 31, 2018 and 2017, was $1,082,436 and $594,520, respectively.
Note 7. Property and Equipment
Property and equipment at December 31, 2018 and December 31,
2017 consisted of:
|
|
Average
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
|
|
|
|
|
|
|
Lives
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
(in
years)
|
|
|
2018
|
|
|
2017
|
|
Furniture and fixtures
|
|
|
5
|
|
|
$
|
168,453
|
|
|
$
|
139,857
|
|
Computer, communication and network equipment
|
|
|
3 - 10
|
|
|
|
21,008,928
|
|
|
|
17,020,421
|
|
Software
|
|
|
5
|
|
|
|
5,310,767
|
|
|
|
2,899,794
|
|
Automobiles
|
|
|
5
|
|
|
|
12,944
|
|
|
|
10,744
|
|
Software development
|
|
|
1
|
|
|
|
1,734,866
|
|
|
|
398,654
|
|
Total property and
equipment
|
|
|
|
|
|
|
28,235,958
|
|
|
|
20,469,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated
depreciation and amortization
|
|
|
|
|
|
|
(22,792,183
|
)
|
|
|
(15,755,760
|
)
|
Total
property and equipment, net
|
|
|
|
|
|
$
|
5,443,775
|
|
|
$
|
4,713,710
|
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
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.
|
The total amount of product development costs
(internal use software costs) that are capitalized in Property and Equipment during the years ended December 31, 2018 and
2017 was $1,282,054 and $661,605, respectively.
During the years ended December 31,
2018 and December 31, 2017, the Company amortized $900,723 and $896,039 of software development, respectively.
Note 8. Long-Term Investments
As of December 31, 2018, the Company
no longer held any long-term investments. The long-term investment held by the Company as of the year ended December 31,
2017, of $3,230,208 was Artilium common shares, which the Company now owns 100% of and our investment in our subsidiary is eliminated
upon consolidation.
Note 9. 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, 2018, the balance of net billings in excess of revenues
was $227,304. For the corresponding period in 2017, the net billings in excess of revenues balance was $242,986.
Note 10. Accrued Expenses
As of December 31, 2018 and December 31,
2017, the accrued expenses were comprised of the following:
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
|
|
December 31,
|
|
|
December 31,
|
|
Accrued
expenses and other payables
|
|
2018
|
|
|
2017
|
|
Accrued selling, general
and administrative expenses
|
|
$
|
1,188,875
|
|
|
$
|
1,119,571
|
|
Accrued salaries and bonuses
|
|
|
1,596,212
|
|
|
|
1,178,856
|
|
Accrued employee benefits
|
|
|
-
|
|
|
|
1,165,373
|
|
Accrued restructuring & acquisition
related costs
|
|
|
1,885,194
|
|
|
|
-
|
|
Accrued cost of service
|
|
|
812,945
|
|
|
|
413,942
|
|
Accrued taxes (including VAT)
|
|
|
1,833,764
|
|
|
|
877,366
|
|
Accrued interest payable
|
|
|
67,613
|
|
|
|
96,801
|
|
Other accrued expenses
|
|
|
356,225
|
|
|
|
398,221
|
|
|
|
$
|
7,740,828
|
|
|
$
|
5,250,130
|
|
Accrued taxes include income taxes payable
as of December 31, 2018, amounting to $81,378. See Note 21 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 11. Promissory Notes and Unsecured
Convertible Promissory Notes
Promissory Notes
The Promissory Notes of $681,220 are 4 bank
notes secured through by Artilium with varying original maturity dates ranging between 6 and 18 months with an average interest
rate of 2%. The notes are not convertible and are not included in any of the tables in the remainder of this note 11.
9% Unsecured Convertible Promissory
Notes
The Unsecured Convertible Promissory Notes are split into a
long-term portion and a current portion, at December 31, 2018 only the current portion exists.
Breakdown of the Unsecured Convertible
Promissory Notes (net of debt discounts)
|
|
Outstanding
December
31, 2018
|
|
|
Long Term
to Short
Term re-
allocation
|
|
|
Regular
Amortizations
(during
2018)
|
|
|
Conversions
(during
2018)
including
accelerated
amortization
|
|
|
Outstanding
December
31, 2017
|
|
9% Unsecured Convertible Note (Private Offering Q4-2015 – Q1-2016)
|
|
$
|
-
|
|
|
$
|
40,967
|
|
|
$
|
(59,340
|
)
|
|
$
|
56,348
|
|
|
$
|
(37,975
|
)
|
9% Unsecured Convertible Note (Saffelberg)
|
|
|
-
|
|
|
|
-
|
|
|
|
(42,150
|
)
|
|
|
622,023
|
|
|
|
(579,873
|
)
|
Total Long-Term
|
|
|
-
|
|
|
|
40,967
|
|
|
|
(101,490
|
)
|
|
|
678,371
|
|
|
|
(617,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9% Unsecured Convertible Note (Private Offering Q4-2015 – Q1-2016)
|
|
|
(106,967
|
)
|
|
|
(40,967
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(66,000
|
)
|
Total Short Term
|
|
|
(106,967
|
)
|
|
|
(40,967
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(66,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unsecured Convertible Promissory Notes
|
|
$
|
(106,967
|
)
|
|
$
|
-
|
|
|
$
|
(101,491
|
)
|
|
$
|
678,372
|
|
|
$
|
(683,848
|
)
|
On December 18, 2015, the Company consummated
a closing and on March 14, 2016, the Company consummated the last of twelve closings of its private placement offering of
units (“Units”) to “accredited investors” (as defined in Rule 501(a) of the Securities Act as
part of a “best efforts” private placement offering of up to $4,200,000 consisting of up to 140 Units, each Unit consisting
of: (i) one 9% unsecured subordinated Note in the principal amount of $30,000, which is convertible into the Note Shares
of common stock of the Company 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 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.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
The Units were offered and sold pursuant
to an exemption from registration under Section 4(a)(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 a Registration Statement on Form S-3 registering the resale of the Note Shares and Warrant Shares that became
effective November 14, 2016.
In connection with the 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
were 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 2016 resulted in gross proceeds 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 offset against the liability
for the Notes. By doing this the Company followed 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 through March 21,
2019)
|
|
December
31, 2018
|
|
|
Regular
Amortizations
(during
2018)
|
|
|
Conversions
(during 2018)
including
accelerated
amortization
|
|
|
Outstanding
December
31, 2017
|
|
Convertible Note Principal Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
Amount
|
|
$
|
(105,000
|
)
|
|
$
|
-
|
|
|
$
|
60,000
|
|
|
$
|
(165,000
|
)
|
10% Early Repayment
|
|
|
(10,500
|
)
|
|
|
-
|
|
|
|
6,000
|
|
|
|
(16,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Discounts & Financing Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investor Warrants
|
|
|
1,719
|
|
|
|
(26,104
|
)
|
|
|
(5,149
|
)
|
|
|
32,972
|
|
Conversion Feature
value
|
|
|
1,237
|
|
|
|
(6,912
|
)
|
|
|
(1,412
|
)
|
|
|
9,561
|
|
7% Agent Warrants
|
|
|
534
|
|
|
|
(3,027
|
)
|
|
|
(609
|
)
|
|
|
4,170
|
|
Financing
Costs
|
|
|
5,043
|
|
|
|
(23,297
|
)
|
|
|
(2,482
|
)
|
|
|
30,822
|
|
|
|
$
|
(106,967
|
)
|
|
$
|
(59,340
|
)
|
|
$
|
56,348
|
|
|
$
|
(103,975
|
)
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Breakdown of the 9% Saffelberg Note (Unsecured Convertible)
(Maturing August 18, 2019)
|
|
December 31,
2018
|
|
|
Regular
Amortizations
(during 2018)
|
|
|
Conversions
(during 2018)
including
accelerated
amortization
|
|
|
Outstanding
December 31,
2017
|
|
Convertible Note Principal Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount (Long-Term)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
723,900
|
|
|
$
|
(723,900
|
)
|
Debt Discounts & Financing Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investor Warrants
|
|
|
-
|
|
|
|
(30,154
|
)
|
|
|
(73,900
|
)
|
|
|
104,054
|
|
Conversion Feature value
|
|
|
-
|
|
|
|
(11,996
|
)
|
|
|
(27,977
|
)
|
|
|
39,973
|
|
|
|
$
|
-
|
|
|
$
|
(42,150
|
)
|
|
$
|
622,023
|
|
|
$
|
(579,873
|
)
|
On June 29, 2018, the Company entered
into an agreement with Saffelberg Investments N.V. (“Saffelberg”) agreeing to (i) pay the balance and interest
of the September 7, 2017 repayment agreement, (ii) convert at $2.37 per share on July 11, 2018 the August 18,
2016 $723,900 convertible note and accrued interest into 387,913 common shares, (iii) adjust the strike price of the 96,250
warrants to a fixed amount of $2.37 on June 29, 2018 and (iv) register converted 387,913 common shares, the 96,250 warrant
and other shares held by Saffelberg in the next registration statement.
Breakdown of the conversion rights for
outstanding convertible notes:
Number of underlying shares for
Conversion of outstanding
unsecured convertible notes
|
|
Outstanding
December 31,
2018
|
|
|
Agreement
Amendments
/ Interest
effects
|
|
|
Exercises /
Conversions
/
Expirations
|
|
|
Outstanding
December
31, 2017
|
|
9% Convertible Note - Investors
|
|
|
39,500
|
|
|
|
763
|
|
|
|
(22,292
|
)
|
|
|
61,029
|
|
9% Convertible Note - Other Investor
|
|
|
-
|
|
|
|
(472,030
|
)
|
|
|
(387,913
|
)
|
|
|
859,943
|
|
Outstanding Conversion Features
|
|
|
39,500
|
|
|
|
(471,267
|
)
|
|
|
(410,205
|
)
|
|
|
920,972
|
|
Note 12. Warrant and Conversion Feature Liabilities
In the past the Company used equity instruments
to improve the yield of the Notes (Investors). During 2018, all of the outstanding derivative liabilities have either been renegotiated
or extinguished by other reasons.
Currently, the Company has identified the
following movements during 2018 for the number of rights owned by the holders for the following groups.
Number of underlying
shares for Liability
Warrants & Conversion
Features
|
|
Outstanding
December 31,
2018
|
|
|
Agreement
Amendments
/
Interest effects
|
|
|
Exercises/
Conversions
/
Expirations
|
|
|
Outstanding
December 31,
2017
|
|
9%
Convertible Note - Other Investor
|
|
|
-
|
|
|
|
(472,030
|
)
|
|
|
(387,913
|
)
|
|
|
859,943
|
|
Outstanding Liability
Conversion Features
|
|
|
-
|
|
|
|
(472,030
|
)
|
|
|
(387,913
|
)
|
|
|
859,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
9% Convertible Note Warrants
|
|
|
-
|
|
|
|
(96,520
|
)
|
|
|
-
|
|
|
|
96,520
|
|
Outstanding Liability
Warrants
|
|
|
-
|
|
|
|
(96,520
|
)
|
|
|
-
|
|
|
|
96,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
-
|
|
|
|
(568,550
|
)
|
|
|
(387,913
|
)
|
|
|
956,463
|
|
The Company has identified the following
fair market value for such derivative liabilities of outstanding rights owned by the holders for the following groups.
Fair Market Value
Liability Warrants &
Conversion Features
|
|
FMV as
of
December
31, 2018
|
|
|
Agreement
Amendments/
Conversions/
FX effect
|
|
|
Mark to
market
adjustment
Ytd-2018
|
|
|
FMV as
Of
December
31, 2017
|
|
9%
Convertible Note - Other Investor
|
|
$
|
-
|
|
|
$
|
(1,706,484
|
)
|
|
$
|
279,581
|
|
|
$
|
1,426,903
|
|
FMV Conversion
Feature Liability
|
|
|
-
|
|
|
|
(1,706,484
|
)
|
|
|
279,581
|
|
|
|
1,426,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other 9% Convertible
Note Warrants
|
|
|
-
|
|
|
|
(204,896
|
)
|
|
|
34,152
|
|
|
|
170,744
|
|
FMV Warrant Liabilities
|
|
|
-
|
|
|
|
(204,896
|
)
|
|
|
34,152
|
|
|
|
170,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
(1,911,380
|
)
|
|
$
|
313,733
|
|
|
$
|
1,597,647
|
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
On June 29, 2018, the Company amended
the Saffelberg convertible note dated August 18, 2016 with principal of $723,900 and amended the August 18, 2016
Warrant. These amendments removed the elements that generated the derivative liabilities and related expense from the convertible
note and warrant.
Note 13. Obligations
under Capital Leases
The Company had a financing arrangement with
one of its vendors to acquire equipment and licenses. This trade arrangement matured in January 2017.
Note 14. Other long-term payable
As of December 31, 2018, the other long-term
liabilities amounted to $212,703 compared to $151,163 as of December 31, 2017, respectively.
Note 15. Related Party Loan
As of December 31, 2018, Pareteum BV
has an outstanding loan to Comsystems (a company owned by Gerard Dorenbos). Prior to the acquisition by Pareteum, Gerard Dorenbos
was a shareholder of Artilium PLC, with approximately 15% of the total shares of Artilium PLC, and a board member of Artilium
PLC.
The loan has a maturity date of December 31,
2021. The total amount outstanding balance as of December 31, 2018 was $341,998 which carries an 8% interest rate and is
reflected as a related party loan in the accompanying consolidated balance sheet. All principal and interest are due on the maturity
date.
Note 16. Fair Value Measurements
In case the Company needs to account for
derivative liabilities, the Company uses the Monte Carlo valuation model and the Black-Scholes model to determine the value of
the outstanding warrants and conversion feature, in these situations, the Company hires a third-party valuation expert to prepare
such calculations.
The following table summarizes fair value
measurements by level at December 31, 2017 for financial assets and liabilities measured at fair value on a recurring basis:
|
|
December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion feature
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,426,903
|
|
|
$
|
1,426,903
|
|
Warrant Liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
170,744
|
|
|
|
170,744
|
|
Total Derivatives
Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,597,647
|
|
|
$
|
1,597,647
|
|
The Company has
classified the historical outstanding warrants into level 3 due to the fact that some inputs are not published and not easily
comparable to industry peers.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
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 17. Stockholders’ Equity
(A) Common Stock
The
Company is authorized to issue 500,000,000 shares of common stock. The Company had 97,852,911 shares of common stock issued by
the Company’s stock transfer agent and outstanding as of December 31, 2018, an increase of 51,235,818 shares from December 31,
2017, the increase has mainly been caused by the net issuance of shares relating to the acquisition of Artilium (37,511,447 shares
issued less shares cancelled in the acquisition of 3,200,332), warrant exercises (11,111,780), equity fund raises (2,453,400),
non-cash compensation for board and management (2,279,688), note conversions (410,205), settlement of debt (375,857), consultants
(234,553) and option exercises by staff (59,220). As of December 31, 2018 approximately 439,619 stock awards vested under
the Company’s non-cash compensation plans and the shares are reflected on the Consolidated Statement Of Changes In Stockholders’
Equity/Deficit as outstanding at December 31, 2018 for which the issuance of the shares from the Company’s stock transfer
agent are pending.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(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. No shares of preferred stock are
outstanding as of December 31, 2018 and 2017. 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 Exchange, to designate
the relative rights and preferences of the preferred stock, and issue 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.
(C) Warrants
Throughout the years, the Company has issued
warrants with varying terms and conditions related to multiple financing rounds, acquisitions and other transactions. Often these
warrants could be classified as equity instead of a derivative. As of December 31, 2018, no warrants have been classified
as derivative warrants compared to 96,520 warrants outstanding as per December 31, 2017 (see note 12) with a total fair market
value of $170,744.
The table below summarizes the warrants
outstanding (in share amounts) as of December 31, 2018 and as of December 31, 2017:
Warrants:
|
|
Number
of Warrants
(in shares)
|
|
Outstanding
as of January 1, 2017
|
|
|
2,204,586
|
|
Issued
|
|
|
25,696,801
|
|
Exercised
|
|
|
(7,362,786
|
)
|
Expirations
|
|
|
(2,402,769
|
)
|
Outstanding as
of December 31, 2017
|
|
|
18,135,832
|
|
Issued
|
|
|
196,750
|
|
Exercised
|
|
|
(14,463,097
|
)
|
Expirations
|
|
|
(80,003
|
)
|
Outstanding
as of December 31, 2018
|
|
|
3,789,482
|
|
Outstanding
Warrants
|
|
Exercise/
Conversion
price(s)
(range)
|
|
|
Expiring
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Equity Warrants – Fundraising
|
|
|
$1.05
- $5.375
|
|
|
|
2019 -
2023
|
|
|
|
3,789,482
|
|
|
|
18,039,312
|
|
Liability Warrants
– Fundraising
|
|
$
|
0.8418
|
|
|
|
2019
|
|
|
|
-
|
|
|
|
96,520
|
|
|
|
|
|
|
|
|
|
|
|
|
3,789,482
|
|
|
|
18,135,832
|
|
The discussion below describes the warrant activity (in shares) during the year ended December 31, 2018.
Warrants - Issued
On May 9, 2018, Pareteum Corporation,
entered into a securities purchase agreement (the “Purchase Agreement”) with select accredited investors relating
to a registered direct offering, issuance and sale (the “2018 Offering”) of an aggregate of 2,440,000 shares (the
“Shares”) of the Company’s common stock, $0.00001 par value per share (the “Common Stock”), at a
purchase price of $2.50 per share for total gross proceeds of $6,100,002, with related financing fees totaling $700,817.
Dawson James Securities, Inc. (the
“Placement Agent”) acted as placement agent on a best-efforts basis in connection with the Offering, pursuant to a
placement agency agreement (the “Placement Agreement”) that was entered into on May 9, 2018. We agreed to issue
the Placement Agent, in a private transaction, a warrant to purchase 122,000 shares of Common Stock at an exercise price ($3.125)
equal to 125% of the offering price per share.
On October 10, 2017, Pareteum Corporation
closed on a public offering of common stock for gross proceeds of $1,569,750. The offering was a shelf takedown off of our registration
statement on Form S-3 and was conducted pursuant to a placement agency agreement (the “Agreement”) entered into
between us and Dawson James Securities, Inc., the placement agent on a best-efforts basis with respect to the offering (the
“Placement Agent”), that was entered into on October 5, 2017. The Company sold 1,495,000 shares of common stock
in the offering at a purchase price of $1.05 per share.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
Dawson James Securities, Inc. (the “Placement
Agent”) received as compensation for services rendered issued a warrant to purchase 74,750 shares of Common Stock at the
one five-year warrant to purchase such number of Shares equal to 5.0% of the Shares sold in this Offering at an exercise price
of $1.3125 (125% of the price per Share).
Warrants – Exercised
During 2018 several warrant holders
decided to exercise, some of the exercises have been made “cashless” as per the conditions stipulated in the
agreement in certain situations. In total 14,463,097 warrants were exercised, resulting in 11,111,870 shares issued,
8,826,567 of them were exercised cashless resulting in no cash collection by the Company and 5,636,530 warrants were
exercised at an average exercise price of $1.0847, with cash received of $6,114,083
during 2018.
Warrants – Expirations
During 2018 warrants totaling 80,003 expired
of which 80,000 were not exercised by the holder as the exercise price was higher than the actual share price on the stock market
and another 3 warrants were eliminated due to rounding as a result of the reversed-stock-split
Note 18. Non-controlling
Interest
As of December 31, 2018 and 2017, the
Company had non-controlling interests in its subsidiaries of zero dollars for both periods.
Note 19. 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 2018 and
2017 excludes incremental shares related to convertible debt, warrants to purchase Common Stock, stock-based compensation shares
waiting to be issued and employee awards and or stock options as follows:
Dilutive
Securities
|
|
2018
|
|
|
2017
|
|
Convertible Notes
|
|
|
39,500
|
|
|
|
920,972
|
|
Warrants
|
|
|
3,789,482
|
|
|
|
18,135,832
|
|
Shares “Pending to be issued”
|
|
|
-
|
|
|
|
620,056
|
|
Time Conditioned Share Awards
|
|
|
1,480,557
|
|
|
|
1,518,055
|
|
Employee Stock Options
|
|
|
3,663,812
|
|
|
|
3,028,184
|
|
|
|
|
8,973,351
|
|
|
|
24,223,099
|
|
Dilutive securities 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 20. Employee Benefit 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.
On September 14, 2011, the stockholders
approved an increase in the shares available under the 2008 Plan from 200,000 to 920,000 shares of Common Stock.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
On December 17, 2013, the Company’s
stockholders approved the amendment and restatement of the 2008 Plan, which increased the number of authorized shares by 920,000
to 1,840,000 shares of Common Stock.
On September 12, 2014, the Company’s
stockholders approved another amendment and restatement of the 2008 Plan, which increased the number of authorized shares by 400,000
to 2,240,000 shares of Common Stock.
During 2018, 120,529 shares were issued under
the 2008 Plan, all of them being non-cash compensation and or bonus granted to staff, management and board members for services
during 2018, no shares were issued under the plan as a result of employee option exercises.
During 2018, the board decided to revoke
the outstanding options of 786,697, the staff involved was compensated with awards from the 2018 plan, another 138,246 options
expired (post-vesting) and 175 options were forfeited (pre-vesting).
The current 2008 Plan is considered dormant
and in principle only exists of historically granted options which are mostly far out of the money as per December 31, 2018
and will have little chance in being exercised, the outstanding number of options is 203,266 at an average exercise price of $10.74
ranging between $3.705 and $62.50.
Reconciliation of registered and available shares and/or
options as of December 31, 2018:
|
|
Full Year
2018
|
|
|
Total
|
|
|
|
|
|
|
|
|
Registered 2008
|
|
|
-
|
|
|
|
200,000
|
|
Registered 2011
|
|
|
-
|
|
|
|
720,000
|
|
Approved increase 2013
|
|
|
-
|
|
|
|
920,000
|
|
Approved increase
2014
|
|
|
-
|
|
|
|
400,000
|
|
Total Approved
under this plan
|
|
|
|
|
|
|
2,240,000
|
|
Less shares (issued to):
|
|
|
|
|
|
|
|
|
Consultants
|
|
|
-
|
|
|
|
326,140
|
|
Directors, Officers and staff
|
|
|
120,529
|
|
|
|
771,529
|
|
Options exercised
|
|
|
-
|
|
|
|
95,284
|
|
Less options (movements):
|
|
|
|
|
|
|
|
|
Revoked/Expired
and Outstanding
|
|
|
925,118
|
|
|
|
203,266
|
|
Available for
grant at December 31, 2018:
|
|
|
|
|
|
|
843,781
|
|
Common Stock options related to the 2008
Long-Term Incentive Compensation Plan consisted of the following as of the years ended December 31, 2018 and 2017:
Options:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Initial Fair
Market Value
(Outstanding
Options)
|
|
Outstanding
as of December 31, 2016
|
|
|
1,040,211
|
|
|
$
|
13.35
|
|
|
$
|
8,836,640
|
|
Granted in 2017
|
|
|
213,700
|
|
|
|
2.10
|
|
|
|
293,720
|
|
Forfeitures (Pre-vesting)
|
|
|
15,024
|
|
|
|
3.72
|
|
|
|
(55,232
|
)
|
Expirations
(Post-vesting)
|
|
|
(140,551
|
)
|
|
|
27.65
|
|
|
|
(2,220,933
|
)
|
Outstanding
as of December 31, 2017
|
|
|
1,128,384
|
|
|
|
9.40
|
|
|
|
6,854,195
|
|
Revoked (cancelled)
in 2018
|
|
|
(786,697
|
)
|
|
|
6.33
|
|
|
|
(3,494,552
|
)
|
Forfeitures (Pre-vesting)
|
|
|
(175
|
)
|
|
|
3.07
|
|
|
|
(353
|
)
|
Expirations
(Post-vesting)
|
|
|
(138,246
|
)
|
|
|
25.60
|
|
|
|
(1,996,852
|
)
|
Outstanding
as of December 31, 2018
|
|
|
203,266
|
|
|
$
|
10.74
|
|
|
$
|
1,362,438
|
|
At December 31, 2018, the unrecognized
expense portion of share-based awards granted to employees under the 2008 Plan was $0.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
2017 Long-Term Incentive Compensation
Plan
On April 13, 2018, the Company filed
an S-8 to register the issuance and sale of the remaining 3,000,000 shares of common stock of the 2017 Long Term Incentive Compensation
Plan which was previously ratified by our stockholders on September 12, 2017 at our annual meeting. This incentive plan provides
for awards of up to 6,500,000 shares of common stock, in the form of options, restricted stock awards, stock appreciation rights
(“SAR’s”), performance units and performance bonuses to eligible employees and the grant of nonqualified stock
options, restricted stock awards, SAR’s and performance units to consultants and eligible directors.
During 2018, 1,141,172 shares of common stock
were issued to directors, officers and staff, 387,130 shares of common stock were issued to consultants for services provided
and 59,220 were issued to staff for exercising options, furthermore 480,557 shares of common stock are currently reserved for
time conditioned share awards for management (236,113) and board members (244,444) and 3,460,546 options were granted and are
reserved for management, board members and staff.
Reconciliation
of registered and available shares and/or rights as of December 31, 2018:
|
|
Total
|
|
|
|
|
|
Approved by the Shareholders
|
|
|
6,500,000
|
|
|
|
|
|
|
Registered 2017 (S-8 dated June 14, 2017)
|
|
|
3,500,000
|
|
Registered 2018 (S-8 dated April 13, 2018)
|
|
|
3,000,000
|
|
|
|
Movement
|
|
|
|
|
Less shares
(issued to):
|
|
2018
|
|
|
|
|
Consultants
|
|
|
387,130
|
|
|
|
507,281
|
|
Directors, Officers and staff
|
|
|
1,141,172
|
|
|
|
2,640,410
|
|
Options exercised
|
|
|
59,220
|
|
|
|
59,220
|
|
Total Shares
issued in 2018:
|
|
|
|
|
|
|
3,206,911
|
|
|
|
|
|
|
|
|
|
|
Available for
issuance at December 31, 2018 (under the S-8 registration statements)
|
|
|
|
|
|
|
3,293,089
|
|
|
|
|
|
|
|
|
|
|
Less outstanding rights (movements):
|
|
|
|
|
|
|
|
|
Options
|
|
|
1,560,746
|
|
|
|
3,460,546
|
|
Time Conditioned
Share Awards
|
|
|
(1,023,604
|
)
|
|
|
480,557
|
|
Available for
grant at December 31, 2018: (approved by shareholders)
|
|
|
|
|
|
|
(648,014
|
)
|
The
Company plans on filing an additional S-8 registration statement for issuances that have been approved by shareholders, but still
require registration. Due to administrative error, the Company issued options exercisable for 648,014 more shares of common
stock than were approved under the 2017 Plan. Accordingly, the Company expects to amend the 2017 Plan and register the issuance
of the excess shares with SEC prior to the exercise of such excess options.
Common Stock options related to the
2017 Long-Term Incentive Compensation Plan consisted of the following as of the years ended December 31, 2018:
Options:
|
|
|
Number
of Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Initial
Fair Market
Value
(Outstanding
Options)
|
|
Outstanding
as of December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Granted
in 2017
|
|
|
1,971,800
|
|
|
|
1.00
|
|
|
|
1,092,507
|
|
Forfeitures
(Pre-vesting)
|
|
|
(72,000
|
)
|
|
|
1.00
|
|
|
|
(39,681
|
)
|
Outstanding
as of December 31, 2017
|
|
|
1,899,800
|
|
|
|
1.00
|
|
|
|
1,052,826
|
|
Granted in 2018
|
|
|
1,999,685
|
|
|
|
2.51
|
|
|
|
3,356,202
|
|
Exercised (with
delivery of shares)
|
|
|
(59,220
|
)
|
|
|
1.00
|
|
|
|
(59,220
|
)
|
Forfeitures (Pre-vesting)
|
|
|
(374,663
|
)
|
|
|
1.59
|
|
|
|
(792,724
|
)
|
Expirations
(Post-vesting)
|
|
|
(5,056
|
)
|
|
|
1.00
|
|
|
|
(5,056
|
)
|
Outstanding
as of December 31, 2018
|
|
|
3,460,546
|
|
|
$
|
1.81
|
|
|
$
|
3,552,028
|
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Following is a summary of the status
and assumptions used of options outstanding as of the years ended December 31, 2018, and 2017:
|
|
Twelve
months period ended
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Option Grants
|
|
|
|
|
|
|
|
|
During the year
|
|
|
1,999,685
|
|
|
|
1,971,800
|
|
Weighted Average Annual Volatility
|
|
|
130
|
%
|
|
|
93
|
%
|
Weighted Average Cumulative Volatility
|
|
|
216
|
%
|
|
|
156
|
%
|
Weighted Average Contractual Life of grants (Years)
|
|
|
4.07
|
|
|
|
3.99
|
|
Weighted Average Expected Life of grants (Years)
|
|
|
2.79
|
|
|
|
2.84
|
|
Weighted Average Risk Free Interest Rate
|
|
|
2.6928
|
%
|
|
|
1.4906
|
%
|
Dividend yield
|
|
|
0.0000
|
%
|
|
|
0.0000
|
%
|
Weighted Average Fair Value at Grant-date
|
|
$
|
1.678
|
|
|
$
|
0.553
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
Total Options Outstanding
|
|
|
3,460,546
|
|
|
|
1,899,800
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
2.98
|
|
|
|
3.51
|
|
Weighted Average Remaining Expected Life (Years)
|
|
|
1.84
|
|
|
|
2.35
|
|
Weighted Average Exercise Price
|
|
$
|
1.81
|
|
|
$
|
1.00
|
|
Aggregate Intrinsic Value (in-the-money options)
|
|
$
|
1,723,086
|
|
|
$
|
2,032,786
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
Total Options Exercisable
|
|
|
841,053
|
|
|
|
-
|
|
Weighted Average Exercise Price
|
|
$
|
1.00
|
|
|
$
|
-
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
2.24
|
|
|
|
-
|
|
Aggregate Intrinsic Value
|
|
$
|
580,327
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Unvested Options
|
|
|
|
|
|
|
|
|
Total Unvested Options
|
|
|
2,619,493
|
|
|
|
1,899,800
|
|
Weighted Average Exercise Price
|
|
$
|
2.06
|
|
|
$
|
1.00
|
|
Forfeiture rate used for this period ended
|
|
|
11.247
|
%
|
|
|
3.651
|
%
|
|
|
|
|
|
|
|
|
|
Options expected to vest
|
|
|
|
|
|
|
|
|
Number of options expected to vest corrected by forfeiture
|
|
|
2,324,885
|
|
|
|
1,830,429
|
|
Unrecognized stock-based compensation expense
|
|
$
|
2,448,790
|
|
|
$
|
866,889
|
|
Weighting Average remaining contract life (Years)
|
|
|
2.86
|
|
|
|
3.38
|
|
|
|
|
|
|
|
|
|
|
Exercises
|
|
|
|
|
|
|
|
|
Total shares delivered/issued
|
|
|
59,220
|
|
|
|
-
|
|
Weighted Average Exercise Price
|
|
$
|
1.00
|
|
|
$
|
-
|
|
Intrinsic Value of Options Exercised
|
|
$
|
101,084
|
|
|
$
|
-
|
|
At December 31, 2018, the unrecognized
expense portion of the share-based option awards granted to management, directors and employees under the 2017 Plan was approximately
$1,985,465 adjusted for cancellations, forfeitures and returns during the preceding period.
2018 Long-Term Incentive Compensation
Plan
On October 10, 2018, the Company filed
an S-8 to register the issuance and sale of the remaining 8,000,000 shares of common stock of the 2018 Long Term Incentive Compensation
Plan which was previously ratified by our stockholders on September 12, 2017 at our annual meeting. This incentive plan provides
for awards of up to 8,000,000 shares of common stock, in the form of options, restricted stock awards, stock appreciation rights
(“SAR’s”), performance units and performance bonuses to eligible employees and the grant of nonqualified stock
options, restricted stock awards, SAR’s and performance units to consultants and eligible directors.
During 2018, 1,267,912 shares of common stock
were issued to certain officers under the 2018 Plan. This is included in the accompanying consolidated statement of changes in
stockholders’ equity (deficit) under vesting of restricted and common stock awards.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Reconciliation of registered and available
shares and/or rights as of December 31, 2018:
|
|
Total
|
|
Approved by the Shareholders
|
|
|
8,000,000
|
|
|
|
|
|
|
Registered 2018 (S-8 dated October 10, 2018)
|
|
|
8,000,000
|
|
|
|
Movement
|
|
|
|
|
Less shares (issued to):
|
|
2018
|
|
|
|
|
Consultants
|
|
-
|
|
|
-
|
|
Directors, Officers and staff
|
|
|
1,267,912
|
|
|
|
1,267,912
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
Total Shares issued:
|
|
|
|
|
|
|
1,267,912
|
|
|
|
|
|
|
|
|
|
|
Available for issuance
at December 31, 2018 (under the S-8 registration statement)
|
|
|
|
|
|
|
6,732,088
|
|
|
|
|
|
|
|
|
|
|
Less outstanding rights (movements):
|
|
|
|
|
|
|
|
|
Options
|
|
|
-
|
|
|
|
-
|
|
Time Conditioned Share Awards
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Available for grant at
December 31, 2018:
|
|
|
|
|
|
|
5,732,088
|
|
The outstanding Time Conditioned Share Awards
will be expensed at the fair market value on the date of grant. The current award will vest pro-rata during the 12 months of 2019.
Share-Based Compensation Expense
The Company recorded for the year ended December 31,
2018, $6,782,759 of share-based compensation for both equity and liability classified awards, of which $120,000 relate to the
2008 Plan, $2,977,834 to the 2017 Plan, $3,249,999 relate to the 2018 Plan and $434,926 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 or 2017 Plan. For
the comparable period in 2017 the expensing was in total $1,845,520 for shares issued under the 2008 Plan, $2,006,173 to the 2017
Plan and $437,340 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
Stock-Based Compensation Expense
|
|
Twelve
months ended
December 31,
2018
|
|
|
Twelve
months ended
December 31,
2017
|
|
Consultancy services
|
|
$
|
536,686
|
|
|
$
|
674,553
|
|
Directors and Officers (shares and options)
|
|
|
5,141,213
|
|
|
|
3,070,520
|
|
Employees (shares and options)
|
|
|
1,104,860
|
|
|
|
543,960
|
|
Total
|
|
$
|
6,782,759
|
|
|
$
|
4,289,033
|
|
Note 21. Income taxes
For financial statement purposes, loss before the income tax
(benefit) provision is generated by the following;
|
|
2018
|
|
|
2017
|
|
Domestic
|
|
$
|
(19,368,370
|
)
|
|
$
|
(11,993,500
|
)
|
Foreign
|
|
|
1,170,818
|
|
|
|
(362,274
|
)
|
Total loss before income tax
provision
|
|
$
|
(18,197,552
|
)
|
|
$
|
(12,355,774
|
)
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
The Company files income tax returns in the
U.S. federal jurisdiction and various state and foreign jurisdictions. The applicable statutory tax rates vary from none (zero)
to 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, in all jurisdictions where the Company has a net deferred tax asset, the Company has recorded
a full valuation allowance to reduce the net carrying amount of the deferred tax assets to zero. The Company’s 2018 income
tax benefit of $0.2 million relates to the benefit associated with the net losses in certain foreign jurisdictions offset by current
taxes in other foreign jurisdictions with taxable income.
The Tax Cuts and Jobs Act, or the Act, was
enacted on December 22, 2017, which reduced the U.S. federal corporate tax rate from 35% to 21%, among other changes. Effective
in 2018, the Company is subject to global intangible low tax income ("GILTI") which is a tax on foreign income in excess
of a deemed return on tangible assets of foreign corporations. Due to the complexity of the GILTI tax rules, companies are allowed
to make an accounting policy choice of either (1) treating taxes due on future US inclusions in taxable income related to
GILTI as a current-period expense incurred or (2) factoring such amounts into a company's measurement of deferred taxes.
The Company is electing to treat taxes due on future US inclusions in taxable income related to GILTI as a current-period expense
when incurred and, therefore, there is no impact to the deferred tax rate in 2018.
Income tax (benefit) expense for each
year is summarized as follows:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
81,378
|
|
|
|
107,205
|
|
|
|
|
81,378
|
|
|
|
107,205
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
(255,296
|
)
|
|
|
-
|
|
|
|
|
(255,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense
|
|
$
|
(173,918
|
)
|
|
$
|
107,205
|
|
The following is a reconciliation of the
provision for income taxes at the US federal statutory rate (21%) and (34%) to the foreign income tax rate for the years ended:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Tax expense at statutory rate federal
|
|
|
21
|
%
|
|
|
34
|
%
|
Foreign income tax rate difference
|
|
|
-
|
|
|
|
(3
|
)%
|
Transaction costs
|
|
|
(7
|
)%
|
|
|
-
|
|
Compensation
|
|
|
(6
|
)%
|
|
|
-
|
|
GILTI
|
|
|
(1
|
)%
|
|
|
-
|
|
Non-operating gain on stock acquisition
|
|
|
8
|
%
|
|
|
|
|
Change in valuation allowance
|
|
|
(15
|
)%
|
|
|
(32
|
)%
|
Other
|
|
|
1
|
%
|
|
|
-
|
|
|
|
|
1
|
%
|
|
|
(1
|
)%
|
The tax effects of temporary differences
that gave rise to significant portions of deferred tax assets and liabilities at December 31, are as follows:
|
|
2018
|
|
|
2017
|
|
Deferred tax attributable to:
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
31,927,996
|
|
|
$
|
35,524,856
|
|
Stock-based compensation expense
|
|
|
301,831
|
|
|
|
-
|
|
Accrued liabilities and allowances
|
|
|
256,802
|
|
|
|
-
|
|
Other
|
|
|
65,758
|
|
|
|
-
|
|
Less: valuation allowance
|
|
|
(29,811,597
|
)
|
|
|
(35,524,856
|
)
|
Total deferred tax assets
|
|
|
2,740,790
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities attributable to:
|
|
|
|
|
|
|
|
|
Intangibles assets
|
|
|
(10,002,912
|
)
|
|
|
-
|
|
Deferred revenue
|
|
|
(1,123,626
|
)
|
|
|
-
|
|
Total deferred tax liabilities
|
|
|
(11,126,538
|
)
|
|
|
-
|
|
Net deferred tax liabilities
|
|
$
|
(8,385,748
|
)
|
|
$
|
-
|
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
As of October 1, 2018, the Company acquired
Artilium PLC, as a result of the purchase price allocation the company recorded a net deferred tax liability of $8.6 million for
basis difference on acquired intangible assets and tax attributes from the business combination.
As of December 31, 2018, and 2017, the
Company had net operating losses carryforwards of approximately $150 million and $109 million, respectively. Any net deferred
tax assets in a jurisdiction have been offset by a full valuation allowance in both 2018 and 2017 due to the uncertainty of realizing
any tax benefit for such losses. Releases of the valuation allowances in the future, if any, will be recognized through earnings.
As of December 31, 2018, and 2017, the
Company’s US based subsidiaries had net federal and state operating loss carryforwards of approximately $64 million and
$57 million, respectively. Federal and state net operating loss carry forwards in the US started to expire in 2018. At December 31,
2018, the net operating loss carryforwards for foreign countries amounts to approximately $86 million. Losses in material foreign
jurisdictions will expire in 2018 and forward.
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 limited.
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 assessment is three years for federal and three to four years for state purposes. The federal net operating loss carry forwards
remain open for adjustment until the net operating losses are fully utilized. The Company's statute of limitations is four to
six years in the major foreign jurisdictions in which the Company files.
The Company files income tax returns in the
US federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2018 and 2017, the Company accrued
a liability of $0 and $246,370, respectively, for an uncertain tax position, including interest and penalties. For the year ended December 31, 2018, there were no events that occurred that would cause the Company to record an uncertain tax position.
The uncertain tax position from the prior year was resolved by either settlement with the tax authorities within the jurisdiction or payment
resolution.
Note 22. Commitments and Contingencies
Ellenoff Grossman & Schole LLP, claimed legal fees.
On May 5, 2017, the Company’s
former legal counsel, Ellenoff Grossman & Schole LLP, commenced litigation proceedings in New York alleging breach of
contract and claiming $817,822 in unpaid legal fees for January 2015 through November 2016. On June 29, 2017, the
parties entered into a settlement agreement for the full $817,822 with agreed-upon monthly installment payments through August 31,
2019. As of December 31, 2018, the amount outstanding on the settlement agreement is $365,815.
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.
telSPACE v. Elephant Talk et al.
telSPACE,
LLC (“Claimant”) commenced arbitration on or about September 7, 2016, by the filing of a statement of
claim. telSPACE, LLC 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, 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.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
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.
After a two-day arbitration hearing in Seattle,
WA, the Arbitration tribunal, on or about June 9, 2017, issued an award for the benefit of Claimant in the amount of $510,916,
inclusive of AAA tribunal and administrative fees (the “Award”). On or about July 25, 2017, the parties entered
into a forbearance agreement, pursuant to which Claimant agreed to forbear from commencing any confirmation or enforcement proceedings
and from taking any collection efforts or discovery related to the Award in exchange for the Company’s agreement to pay
the Award in agreed-upon installment payments.
All remaining payment obligations to telSPACE were settled by
the Company in the year ended December 31, 2018 and is reflected in the financial statements.
Artilium Africa, LLC et al. v. Artilium,
PLC et al
Artilium
Africa, LLC et al. v. Artilium, PLC et al.; ICDR Case No. 01-19-0003-1680 and Artilium Africa, LLC and Tristar
Africa Telecom, LLC v. Pareteum Corporation are related matters arising out of the same dispute. The former matter is an arbitration
filed with the International Center for Dispute Resolution on October 1, 2019 alleging that Artilium Group Limited, a subsidiary
of Pareteum Corporation formerly known as Artilium PLC (“Artilium”), breached an Operating Agreement relating to a
joint venture called Artilium Africa formed by Artilium Green Globe Services LLC and Tristar Africa Telecom, LLC (“Tristar”)
to provide mobile data, cloud, and telecom services throughout Africa. The Claimants in the ICDR arbitration are seeking $30 million.
The latter matter is a civil case filed on October 10, 2019 in the United States District Court for the District of Delaware.
The Plaintiffs in the Delaware case allege that Pareteum Corporation tortuously interfered with Tristar’s contract with
Artilium in order to enter into the same type of agreement with Artilium. The Plaintiffs are seeking $150,000 in damages.
SEC Subpoenas and other proceedings
The Audit Committee of the Company’s board of directors
has conducted an internal investigation into the source of the accounting errors causing the restatement. As a result of this investigation,
the Company has instituted, and will continue to implement and evaluate, additional remedial measures and internal controls to
ensure that it has the right processes, people and discipline in place.
Sec Investigation. August 2019 and February 2020,
the SEC issued the Company subpoenas requiring the production of documents related to, among other things, the Company’s
recognition of revenue, practices with certain customers, and internal accounting controls. The SEC investigation is ongoing and
the Company and the SEC staff are engaged in preliminary discussions regarding a potential resolution of the investigation. We
express no opinion as to the outcome of this matter.
In re Pareteum Securities Litigation is the consolidation
of various putative class actions that were filed in the United States District Court for the Southern District of New York. The
court consolidated the actions on January 10, 2020 and named the Pareteum Shareholder Investor Group as the Lead Plaintiff.
The Lead Plaintiff is asserting claims on behalf of purported purchasers and/or acquirers of Company securities between December 14,
2017 and October 21, 2019. The defendants are the Company, Robert H. Turner, Edward O’Donnell, Victor Bozzo, Denis McCarthy,
Dawson James Securities Inc., and Squar Milner (“Defendants”). The Lead Plaintiff alleges that Defendants caused the
company to issue certain materially false or misleading statements in SEC filings and other public pronouncements in violation
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Sections 11, 12 and 15 of the Securities Act
of 1933. Lead Plaintiff seeks to recover compensatory damages with interest for itself and the other class members for all damages
sustained as a result of Defendants’ alleged wrongdoing and reasonable costs and attorney’s fees incurred in the case.
Douglas
Loskot v. Pareteum Corp. et al. is a putative class action that was filed in the Superior Court of California, County
of San Mateo, on May 29, 2020. It was brought on behalf of all former shareholders of iPass Inc. who received shares of Pareteum
common stock pursuant to a February 12, 2019 exchange tender offer. The Complaint alleges that the defendants caused the
Company to issue materially false or misleading statements in SEC filings submitted in connection with the tender offer in violation
of Sections 11 and 15 of the Securities Act.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Miller
ex rel. Pareteum Corporation v. Victor Bozzo, et al. was filed on February 28, 2020 in the Supreme Court for the
State of New York, New York County. It is a stockholder derivative suit brought by Plaintiff William Miller (“Plaintiff”),
derivatively on behalf of Nominal Defendant, the Company, against certain officers and directors of Pareteum, including Victor
Bozzo, Laura Thomas, Yves van Sante, Luis Jimenez-Tunon, Robert Lippert, Robert H. Turner, Edward O’Donnell, and Denis McCarthy
(the “Individual Defendants”). Plaintiff alleges that the Individual Defendants caused the company to issue false
or misleading statements in Securities Exchange Commission filings and other public pronouncements in violation of certain federal
securities regulations. Plaintiff alleges that as a result of their misconduct, the Individual Defendants are liable for violations
of Section 14(a) of the Securities Exchange Act, breach of fiduciary duty, unjust enrichment, abuse of control, gross
mismanagement, and waste of corporate assets. Plaintiff seeks a judgment awarding Pareteum damages with interest sustained as
a result of the Individual Defendants’ alleged misconduct, directing the Individual Defendants to take certain measures
to reform and improve Pareteum’s corporate governance and internal procedures, awarding Pareteum restitution from the Individual
Defendants, and awarding Plaintiff all costs and expenses incurred in pursuing the claims.
Zhang
ex rel. Pareteum Corporation v. Robert H. Turner, et al. was filed on May 26, 2020 in the Supreme Court for the
State of New York, New York County. It is a stockholder derivative suit brought by Plaintiff Wei Zhang (“Plaintiff”),
derivatively on behalf of Nominal Defendant, the Company, against certain officers and directors of Pareteum, including Robert
H. Turner, Edward O’Donnell, Denis McCarthy, Victor Bozzo, Rob Mumby, Luis Jimenez-Tunon, Robert Lippert, Laura Thomas,
and Yves van Sante (the “Individual Defendants”). Plaintiff alleges that the Individual Defendants caused the company
to issue false or misleading statements in Securities Exchange Commission filings and other public pronouncements in violation
of certain federal securities regulations. Plaintiff alleges that as a result of their misconduct, the Individual Defendants are
liable for violations of Section 14(a) of the Securities Exchange Act, breach of fiduciary duty, unjust enrichment,
abuse of control, gross mismanagement, and waste of corporate assets. Plaintiff seeks a judgment awarding Pareteum damages with
interest sustained as a result of the Individual Defendants’ alleged misconduct, directing the Individual Defendants to
take certain measures to reform and improve Pareteum’s corporate governance and internal procedures, awarding Pareteum restitution
from the Individual Defendants, and awarding Plaintiff all costs and expenses incurred in pursing the claim.
Shaw
ex. rel. Pareteum Corporation v. Luis Jimenez-Tunon, et al. was filed on July 10, 2020 in the Supreme Court for
the State of New York, New York County. It is a stockholder derivative suit brought by Plaintiff Michael Shaw (“Plaintiff”),
derivatively on behalf of Nominal Defendant, the Company, against certain officers and directors of Pareteum, including Luis Jimenez-Tunon,
Robert Lippert, Yves Van Sante, Robert H. Turner, Edward O’Donnell, Denis McCarthy, Victor Bozzo, and Laura Thomas (the
“Individual Defendants”). Plaintiff alleges that the Individual Defendants caused the company to issue false or misleading
statements in Securities Exchange Commission filings and other public pronouncements in violation of certain federal securities
regulations. Plaintiff alleges that as a result of their misconduct, the Individual Defendants are liable for violations of Section 14(a) of
the Securities Exchange Act, breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of
corporate assets. Plaintiff seeks a judgment awarding Pareteum damages sustained as a result of the Individual Defendants’
alleged misconduct, directing the Individual Defendants to take certain measures to reform and improve Pareteum’s corporate
governance and internal procedures, and awarding Plaintiff all costs and expenses incurred in the Shaw Action.
In
re Pareteum Corporation Stockholder Derivative Litigation (the “Delaware Derivative Action”) is a consolidated
action the was originally filed in the United States District Court for the District of Delaware and joins several related derivative
actions. Specifically, on April 3, 2020, the District Court consolidated related suits brought by stockholders Edward Hayes,
Juanita Silvera, and Brad Linton (“Plaintiffs”), derivatively on behalf of Nominal Defendant, the Company, against
certain officers and directors of Pareteum, including Robert H. Turner, Edward O’Donnell, Denis McCarthy, Laura Thomas,
Victor Bozzo, Luis Jimenez-Tunon, Robert Lippert, Rob Mumby and Yves Van Sante (the “Individual Defendants”). Plaintiffs
in the related actions have alleged that the Individual Defendants caused Pareteum to issue false or misleading statements in
Securities Exchange Commission filings and other public pronouncements in violation of certain federal securities regulations.
Plaintiffs allege that as a result of the Individual Defendants’ misconduct, they are liable for violations of Section 14(a) of
the Securities Exchange Act, breach of fiduciary duty, unjust enrichment, and gross mismanagement. Plaintiffs seek a judgment
(1) declaring that the Individual Defendants breached their fiduciary duties and/or aided and abetted the breach of their
fiduciary duties; (2) awarding Pareteum damages sustained as a result of the Individual Defendants’ breaches of fiduciary
duty and violations of federal securities laws; (3) ordering that the Individual Defendants disgorge any performance-based
compensation that was received during, or as a result of, the Individual Defendants’ breaches of fiduciary duty; (4) directing
the Individual Defendants to take certain measures to reform and improve Pareteum’s corporate governance and internal procedures;
(5) granting appropriate equitable or injunctive relief to remedy the Individual Defendants’ breaches of fiduciary
duties and other violations of laws; (6) awarding Pareteum restitution from the Individual Defendants; and (7) awarding
Plaintiff all costs and expenses incurred in the Related Suits and Delaware Derivative Action. On July 22, 2020, this action
was transferred to the United States District Court for the Southern District of New York. Since that transfer, a docket has not
yet been opened in the Southern District of New York and Plaintiffs have yet to file a complaint.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Sabby
Volatility Warrant Master Fund, Ltd. v. Pareteum Corp., et al., No. 19-cv-10460 (S.D.N.Y.) (the “Section 11
Action”), is an action brought under Section 11 of the Securities Act of 1933 by an investor, Sabby Volatility Master
Fund, Ltd. (“Plaintiff”), against the Company, Robert H. Turner, Edward O’Donnell, Denis McCarthy, Victor
Bozzo, Robert Lippert, Yves Van Sante, and Luis Jimenez Tunon (collectively, the “Defendants”). It was filed on Nov. 11,
2019. Plaintiff alleges that Defendants caused the company to issue false or misleading statements in a Registration Statement
filed with the Securities Exchange Commission. As a result of the alleged misconduct, Plaintiff claims that Defendants are liable
for violations of Section 11 of the Securities Act, breaches of a Securities Purchase Agreement (the “SPA”) entered
into between Plaintiff and Pareteum, and contractual indemnification allegedly owed to Plaintiff under the SPA. Plaintiff seeks
monetary damages and/or rescission of the SPA, and indemnification by Pareteum for any losses resulting from its alleged breach
of the SPA, including costs and expenses incurred in connection with the Section 11 Action.
Severance and Change of Control
Robert
H. Turner - The employment agreement with Mr. Turner is for an indefinite term. Under the terms of the employment
agreement, Mr. Turner is entitled to severance if Mr. Turner’s employment with the Company is terminated by the
Company without “cause” or by Mr. Turner for “good reason” (as such terms are defined in the Employment
Agreement) the Company will pay Mr. Turner, 12 months’ salary at the rate of his salary as of such termination, together
with payment of the average earned bonuses (regular and extraordinary) since November 1, 2015.
Victor
Bozzo – The employment agreement with Mr. Bozzo is for an indefinite term. Under the terms of the employment
agreement, Mr. Bozzo is entitled to a severance if he is terminated by the Company without “cause” or by Mr. Bozzo
for “good reason” the Company will pay Mr. Bozzo 12 months’ salary at the rate of his salary as of such
termination.
Edward
O’Donnell – The employment agreement with Mr. O’Donnell is for an indefinite term. Under the
terms of the employment agreement, Mr. O’Donnell is entitled to a severance if he is terminated by the Company, then,
subject to a mutual release, the Company will pay Mr. O’Donnell’s base salary for an additional 270 days after
termination in accordance with customary payroll practices.
Note 23. Geographic Information
Year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
Other
foreign
countries
|
|
|
Total
|
|
Revenues from unaffiliated customers
|
|
$
|
18,752,751
|
|
|
$
|
1,504,854
|
|
|
$
|
20,257,605
|
|
Identifiable assets
|
|
$
|
153,471,150
|
|
|
$
|
6,038,124
|
|
|
$
|
159,509,274
|
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
Other
foreign
countries
|
|
|
Total
|
|
Revenues from unaffiliated customers
|
|
$
|
12,428,942
|
|
|
$
|
1,118,565
|
|
|
$
|
13,547,507
|
|
Identifiable assets
|
|
$
|
7,214,217
|
|
|
$
|
18,111,816
|
|
|
$
|
25,326,033
|
|
Note 24. 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, 2018,
the Company had one customer that accounted for 64% of total revenue. For the year ended December 31, 2017, the Company had
two customers that accounted for 96.9% of total revenue.
As of December 31, 2018, the Company
had one customer that accounted for 10% of accounts receivable including unbilled revenue. As of December 31, 2017, the Company
had two customers that accounted for 49.7% and 23.9%, respectively, of accounts receivable including unbilled revenue.
Note 25. Business Combinations
Acquisition
of Artilium plc. Artilium plc ("Artilium") is an innovative software development company active
in the enterprise communications and core telecommunication markets delivering software solutions which layer over disparate fixed,
mobile and IP networks to enable the deployment of converged communication services and applications.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
In October 2017, the Company entered
into a Share Exchange Agreement (the “Exchange Agreement”) with Artilium. Pursuant to the Exchange Agreement, Artilium
agreed to issue and deliver to the Company an aggregate of 27,695,177 of its newly issued ordinary shares in exchange for 3,200,332
restricted shares of the Company’s common stock valued at $3,230,208 (the Company’s ownership was approximately 7%).
The Company accounted for the Exchange Agreement as a cost method equity investment in the amount of $3,230,208.
On June 7, 2018, the Artilium Board
and the Pareteum Board announced that they had reached agreement regarding the terms of a recommended share and cash offer by
Pareteum to acquire the issued and to be issued ordinary share capital of Artilium not already owned by Pareteum. Under the terms
of the acquisition, each Artilium shareholder was entitled to receive 0.1016 Pareteum shares and 1.9 pence in cash per Artilium
share upon completion of the transaction. The acquisition valued each Artilium share at 19.55 pence and the entire issued and
to be issued ordinary share capital of Artilium at approximately $104.7 million (or £78.0 million), based on Pareteum’s
closing share price of $2.33 on June 6, 2018 and the exchange rate of US$1.3413: £1.
On September 13, 2018, shareholders
of Pareteum approved the proposed acquisition of the entire issued and to be issued ordinary shares of Artilium.
On October 1, 2018, The Pareteum completed
the acquisition of all of the outstanding shares of Artilium. In connection with the acquisition, the Company issued an aggregate
of 37,511,447 common shares of the Company’s stock which included 4,107,714 common shares issued to certain Artilium officers.
The Company also paid 6,248,184 pounds or $8,142,009 in cash.
At the time of the acquisition, the Company
remeasured its previously held equity investment in Artilium with a carrying value of $3,230,208 (3,200,332 shares) and recorded
a gain on investment of $6,370,787 based on the Company’s stock price of $3.00 per share on October 1, 2018. The shares
previously issued to Artilium were cancelled at the time of the acquisition. The acquisition-date fair value of the Company’s
equity investment is included in the purchase consideration.
The allocation of the purchase price was
as follows (in thousands):
Purchase consideration:
|
|
|
|
Cash consideration
|
|
$
|
8,142
|
|
Shares issued to shareholders’
|
|
|
112,535
|
|
Fair value of previously held equity investment
|
|
|
9,601
|
|
Purchase price allocation
|
|
|
130,278
|
|
|
|
|
|
|
Purchase price allocation:
|
|
|
|
|
Assets:
|
|
|
|
|
Current and long-term assets (including cash and cash equivalents of $825)
|
|
|
4,726
|
|
Intangible assets
|
|
|
40,800
|
|
Total assets
|
|
|
45,526
|
|
Liabilities:
|
|
|
|
|
Current and long-term liabilities
|
|
|
7,982
|
|
Deferred tax liabilities
|
|
|
8,641
|
|
Total liabilities
|
|
|
16,623
|
|
Estimated fair value of net assets acquired
|
|
|
28,903
|
|
Goodwill
|
|
$
|
101,375
|
|
For the year ended December 31, 2018,
the Company’s consolidated financial statements included Artilium and its subsidiaries from the acquisition date of October 1,
2018 through December 31, 2018.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
The allocation of the purchase price for
Artilium’s intangible assets were as follows (in thousands):
|
|
Estimated
Fair
Value
|
|
|
Useful
Life
(Years)
|
|
Technology
|
|
$
|
20,600
|
|
|
|
6
|
|
Customer relationships
|
|
|
16,800
|
|
|
|
18
|
|
Tradename
|
|
|
3,400
|
|
|
|
5
|
|
Intangible assets
|
|
$
|
40,800
|
|
|
|
|
|
Note 26. Related Party Transactions
During 2018 and 2017, the Company retained
Robert Turner of InTown Legal Services, who is the son of Robert H. Turner, Executive Chairman of the Board. InTown Legal Services
has a $5,000 per month minimum retainer with the Company and was paid $133,194 in 2018 and $66,114 in 2017. The agreement between
the Company and InTown Legal Services is an at will agreement.
As of December 31, 2018, Pareteum BV
has an outstanding loan to Comsystems (a company owned by Gerard Dorenbos). Prior to the acquisition by Pareteum, Gerard Dorenbos
was a shareholder of Artilium PLC, with approximately 15% of the total shares of Artilium PLC, and a board member of Artilium
PLC.
The loan has a maturity date of December 31,
2021. The total amount outstanding as of December 31, 2018 was $341,998 which carries an 8% interest rate and is reflected
as a related party loan in the accompanying consolidated balance sheet. All principal and interest are due on the maturity date.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Note 27. Unaudited Quarterly Data
(Restated)
Restatement information related to unaudited quarterly periods
The
following tables present the unaudited condensed consolidated interim financial statements for the quarters in 2018. A summary
of the effects of the prior period errors, as described in Note 1. Restatement, on the consolidated financial statements
are as follows:
Consolidated Condensed Balance Sheet
at March 31, 2018
|
|
As
reported
|
|
|
Adjustments
|
|
|
|
|
As
restated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable,net
|
|
$
|
1,954,495
|
|
|
$
|
(912,607
|
)
|
|
AB
|
|
$
|
1,041,888
|
|
Total current assets
|
|
|
19,096,882
|
|
|
|
(912,607
|
)
|
|
|
|
|
18,184,275
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
4,176,199
|
|
|
|
1,322,278
|
|
|
BE
|
|
|
5,498,477
|
|
Total assets
|
|
$
|
27,198,601
|
|
|
$
|
409,671
|
|
|
|
|
$
|
27,608,272
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and customer deposits
|
|
$
|
2,286,345
|
|
|
$
|
4,680
|
|
|
A
|
|
$
|
2,291,025
|
|
Net billings in excess of revenues
|
|
|
316,040
|
|
|
|
(265,000
|
)
|
|
A
|
|
|
51,040
|
|
Accrued expenses and other payables
|
|
|
4,841,163
|
|
|
|
(230,410
|
)
|
|
BE
|
|
|
4,610,753
|
|
Total current liabilities
|
|
|
7,562,361
|
|
|
|
(490,730
|
)
|
|
|
|
|
7,071,631
|
|
Total liabilities
|
|
|
10,211,950
|
|
|
|
(490,730
|
)
|
|
|
|
|
9,721,220
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
324,866,254
|
|
|
|
(724,814
|
)
|
|
BC
|
|
|
324,141,440
|
|
Accumulated other comprehensive loss
|
|
|
(6,202,289
|
)
|
|
|
1,206,271
|
|
|
AB
|
|
|
(4,996,018
|
)
|
Accumulated deficit
|
|
|
(301,677,314
|
)
|
|
|
418,944
|
|
|
ABCE
|
|
|
(301,258,370
|
)
|
Total stockholders’ equity
|
|
|
16,986,651
|
|
|
|
900,401
|
|
|
|
|
|
17,887,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
27,198,601
|
|
|
$
|
409,671
|
|
|
|
|
$
|
27,608,272
|
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Consolidated Condensed Statement of
Operations and Comprehensive Loss
Three Months ended March 31, 2018:
|
|
As
Reported
|
|
|
Adjustments
|
|
|
|
|
As
Restated
|
|
REVENUES
|
|
$
|
4,112,570
|
|
|
$
|
(462,457
|
)
|
|
A
|
|
$
|
3,650,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST AND OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (excluding depreciation and amortization)
|
|
|
1,194,523
|
|
|
|
4,986
|
|
|
A
|
|
|
1,199,509
|
|
Product development
|
|
|
726,845
|
|
|
|
922
|
|
|
C
|
|
|
727,767
|
|
Sales and marketing
|
|
|
688,998
|
|
|
|
15,156
|
|
|
C
|
|
|
704,154
|
|
General and administrative
|
|
|
2,296,852
|
|
|
|
(467,305
|
)
|
|
CE
|
|
|
1,829,547
|
|
Total cost and operating expenses
|
|
|
5,946,108
|
|
|
|
(446,241
|
)
|
|
|
|
|
5,499,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(1,833,538
|
)
|
|
|
(16,216
|
)
|
|
|
|
|
(1,849,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (LOSS)
|
|
|
(300,981
|
)
|
|
|
-
|
|
|
|
|
|
(300,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE PROVISION FOR INCOME TAXES
|
|
|
(2,134,519
|
)
|
|
|
(16,216
|
)
|
|
|
|
|
(2,150,735
|
)
|
Benefit for income taxes
|
|
|
(418
|
)
|
|
|
-
|
|
|
|
|
|
(418
|
)
|
NET LOSS
|
|
|
(2,134,101
|
)
|
|
|
(16,216
|
)
|
|
|
|
|
(2,150,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation income
|
|
|
104,402
|
|
|
|
88,284
|
|
|
E
|
|
|
192,686
|
|
COMPREHENSIVE LOSS
|
|
$
|
(2,029,699
|
)
|
|
$
|
72,068
|
|
|
|
|
$
|
(1,957,631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share and equivalents - basic
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
$
|
(0.04
|
)
|
Net loss per common share and equivalents - diluted
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
$
|
(0.04
|
)
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Consolidated Condensed Statement of
Cash Flows
Three Months ended March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
Reported
|
|
|
Adjustments
|
|
|
|
|
As
Restated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,134,101
|
)
|
|
$
|
(16,216
|
)
|
|
|
|
$
|
(2,150,317
|
)
|
Adjustements to reconcile
net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
1,077,625
|
|
|
|
(487,819
|
)
|
|
C
|
|
|
589,806
|
|
Changes in operating assets
and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable
|
|
|
110,684
|
|
|
|
727,752
|
|
|
A
|
|
|
838,436
|
|
Increase in accounts payable
and customer deposits
|
|
|
307,619
|
|
|
|
4,679
|
|
|
A
|
|
|
312,298
|
|
(Increase) decrease in net billings
in excess of revenues
|
|
|
54,885
|
|
|
|
(265,000
|
)
|
|
A
|
|
|
(210,115
|
)
|
Decrease
in accrued expenses and other payables
|
|
|
(383,139
|
)
|
|
|
36,900
|
|
|
E
|
|
|
(346,239
|
)
|
Net
cash provided by operating activities
|
|
|
28,571
|
|
|
|
296
|
|
|
|
|
|
28,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(433,749
|
)
|
|
|
-
|
|
|
|
|
|
(433,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
2,525,037
|
|
|
|
-
|
|
|
|
|
|
2,525,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS
AND RESTRICTED CASH
|
|
|
131,111
|
|
|
|
(296
|
)
|
|
|
|
|
130,815
|
|
NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED
CASH
|
|
|
2,250,970
|
|
|
|
-
|
|
|
|
|
|
2,250,970
|
|
CASH, CASH EQUIVALENTS AND
RESTRICTED CASH, BEGINNING OF PERIOD
|
|
|
13,737,675
|
|
|
|
-
|
|
|
|
|
|
13,737,675
|
|
CASH, CASH EQUIVALENTS
AND RESTRICTED CASH, END OF PERIOD
|
|
$
|
15,988,645
|
|
|
$
|
-
|
|
|
|
|
$
|
15,988,645
|
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Consolidated Condensed Balance Sheet
at June 30, 2018
|
|
As
reported
|
|
|
Adjustments
|
|
|
|
As
restated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable,net
|
|
$
|
3,852,866
|
|
|
$
|
(2,508,400
|
)
|
|
AB
|
$
|
1,344,466
|
|
Total current assets
|
|
|
24,461,818
|
|
|
|
(2,508,400
|
)
|
|
|
|
21,953,418
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
4,680,006
|
|
|
|
977,834
|
|
|
BE
|
|
5,657,840
|
|
Total assets
|
|
$
|
33,056,779
|
|
|
$
|
(1,530,566
|
)
|
|
|
$
|
31,526,213
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and customer
deposits
|
|
$
|
2,568,505
|
|
|
$
|
27,713
|
|
|
A
|
$
|
2,596,218
|
|
Net billings in excess of revenues
|
|
|
258,904
|
|
|
|
207,047
|
|
|
A
|
|
465,951
|
|
Accrued expenses
and other payables
|
|
|
3,697,831
|
|
|
|
(232,583
|
)
|
|
ABE
|
|
3,465,248
|
|
Total current
liabilities
|
|
|
6,659,253
|
|
|
|
2,177
|
|
|
|
|
6,661,430
|
|
Total liabilities
|
|
|
7,399,757
|
|
|
|
2,177
|
|
|
|
|
7,401,934
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
331,959,299
|
|
|
|
(447,055
|
)
|
|
BCD
|
|
331,512,244
|
|
Accumulated other comprehensive
loss
|
|
|
(6,281,426
|
)
|
|
|
922,778
|
|
|
AB
|
|
(5,358,648
|
)
|
Accumulated
deficit
|
|
|
(300,020,851
|
)
|
|
|
(2,008,466
|
)
|
|
ABCDE
|
|
(302,029,317
|
)
|
Total stockholders’
equity
|
|
|
25,657,022
|
|
|
|
(1,532,743
|
)
|
|
|
|
24,124,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
33,056,779
|
|
|
$
|
(1,530,566
|
)
|
|
|
$
|
31,526,213
|
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Consolidated Condensed Statement of
Operations and Comprehensive Loss
Three Months ended June 30, 2018:
|
|
As
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
REVENUES
|
|
$
|
6,003,180
|
|
|
$
|
(2,124,734
|
)
|
|
A
|
$
|
3,878,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST AND OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (excluding depreciation
and amortization)
|
|
|
1,779,882
|
|
|
|
56,539
|
|
|
AC
|
|
1,836,421
|
|
Product development
|
|
|
753,931
|
|
|
|
50,082
|
|
|
C
|
|
804,013
|
|
Sales and marketing
|
|
|
652,442
|
|
|
|
156,793
|
|
|
C
|
|
809,235
|
|
General and
administrative
|
|
|
2,214,070
|
|
|
|
39,260
|
|
|
CDE
|
|
2,253,330
|
|
Total cost
and operating expenses
|
|
|
6,400,235
|
|
|
|
302,674
|
|
|
|
|
6,702,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(397,055
|
)
|
|
|
(2,427,408
|
)
|
|
|
|
(2,824,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (LOSS)
|
|
|
2,072,361
|
|
|
|
-
|
|
|
|
|
2,072,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
|
|
|
1,675,306
|
|
|
|
(2,427,408
|
)
|
|
|
|
(752,102
|
)
|
Provision
for income taxes
|
|
|
18,842
|
|
|
|
2
|
|
|
E
|
|
18,844
|
|
NET INCOME (LOSS)
|
|
|
1,656,464
|
|
|
|
(2,427,410
|
)
|
|
|
|
(770,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation loss
|
|
|
(79,137
|
)
|
|
|
(283,493
|
)
|
|
E
|
|
(362,630
|
)
|
COMPREHENSIVE INCOME (LOSS)
|
|
$
|
1,577,327
|
|
|
$
|
(2,710,903
|
)
|
|
|
$
|
(1,133,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(loss) per common
share and equivalents - basic
|
|
$
|
0.03
|
|
|
|
|
|
|
|
$
|
(0.01
|
)
|
Net Income(loss) per common
share and equivalents - diluted
|
|
$
|
0.03
|
|
|
|
|
|
|
|
$
|
(0.01
|
)
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Consolidated Condensed Statement of
Operations and Comprehensive Loss
Six Months ended June 30, 2018:
|
|
As
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
REVENUES
|
|
$
|
10,115,750
|
|
|
$
|
(2,587,191
|
)
|
|
A
|
$
|
7,528,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST AND OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (excluding depreciation
and amortization)
|
|
|
2,974,405
|
|
|
|
61,525
|
|
|
AC
|
|
3,035,930
|
|
Product development
|
|
|
1,480,776
|
|
|
|
51,002
|
|
|
C
|
|
1,531,778
|
|
Sales and marketing
|
|
|
1,341,440
|
|
|
|
171,949
|
|
|
C
|
|
1,513,389
|
|
General and
administrative
|
|
|
4,510,922
|
|
|
|
(428,045
|
)
|
|
CDE
|
|
4,082,877
|
|
Total cost
and operating expenses
|
|
|
12,346,345
|
|
|
|
(143,569
|
)
|
|
|
|
12,202,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(2,230,595
|
)
|
|
|
(2,443,622
|
)
|
|
|
|
(4,674,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (LOSS)
|
|
|
1,771,378
|
|
|
|
1
|
|
|
|
|
1,771,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE PROVISION FOR INCOME TAXES
|
|
|
(459,217
|
)
|
|
|
(2,443,621
|
)
|
|
|
|
(2,902,838
|
)
|
Provision
for income taxes
|
|
|
18,424
|
|
|
|
2
|
|
|
E
|
|
18,426
|
|
NET LOSS
|
|
|
(477,641
|
)
|
|
|
(2,443,623
|
)
|
|
|
|
(2,921,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation income (loss)
|
|
|
25,266
|
|
|
|
(195,210
|
)
|
|
E
|
|
(169,944
|
)
|
COMPREHENSIVE LOSS
|
|
$
|
(452,375
|
)
|
|
$
|
(2,638,833
|
)
|
|
|
$
|
(3,091,208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share and
equivalents - basic
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
$
|
(0.06
|
)
|
Net loss per common share and
equivalents - diluted
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
$
|
(0.06
|
)
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Consolidated Condensed Statement of
Cash Flows
Six Months ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
As
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(477,641
|
)
|
|
$
|
(2,443,623
|
)
|
|
A
|
$
|
(2,921,264
|
)
|
Adjustements to reconcile
net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
1,771,580
|
|
|
|
(224,480
|
)
|
|
C
|
|
1,547,100
|
|
Shares issued for services
|
|
|
86,778
|
|
|
|
31,594
|
|
|
D
|
|
118,372
|
|
Changes in operating assets
and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts
receivable
|
|
|
(1,851,046
|
)
|
|
|
2,323,544
|
|
|
A
|
|
472,498
|
|
Increase in accounts payable
and customer deposits
|
|
|
606,393
|
|
|
|
27,873
|
|
|
A
|
|
634,266
|
|
Increase in net billings in excess
of revenues
|
|
|
22,627
|
|
|
|
207,046
|
|
|
A
|
|
229,673
|
|
Decrease
in accrued expenses and other payables
|
|
|
(1,508,005
|
)
|
|
|
17,552
|
|
|
A
|
|
(1,490,453
|
)
|
Net
cash used in operating activities
|
|
|
(952,476
|
)
|
|
|
(60,494
|
)
|
|
|
|
(1,012,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(1,877,477
|
)
|
|
|
-
|
|
|
|
|
(1,877,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
8,484,428
|
|
|
|
-
|
|
|
|
|
8,484,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
42,185
|
|
|
|
60,494
|
|
|
|
|
102,679
|
|
NET
INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
|
|
|
5,696,660
|
|
|
|
-
|
|
|
|
|
5,696,660
|
|
CASH,
CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
|
|
|
13,737,675
|
|
|
|
-
|
|
|
|
|
13,737,675
|
|
CASH,
CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
|
|
$
|
19,434,335
|
|
|
$
|
-
|
|
|
|
$
|
19,434,335
|
|
Pareteum
Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Consolidated Condensed Balance Sheet
at September 30, 2018
|
|
As
reported
|
|
|
Adjustments
|
|
|
|
|
|
As
restated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable,net
|
|
$
|
7,200,014
|
|
|
$
|
(6,488,064
|
)
|
|
|
AB
|
|
|
$
|
711,950
|
|
Total current assets
|
|
|
27,007,590
|
|
|
|
(6,488,064
|
)
|
|
|
|
|
|
|
20,519,526
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
3,944,659
|
|
|
|
987,077
|
|
|
|
BE
|
|
|
|
4,931,736
|
|
Total assets
|
|
$
|
34,809,219
|
|
|
$
|
(5,500,987
|
)
|
|
|
|
|
|
$
|
29,308,232
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and customer
deposits
|
|
$
|
2,795,981
|
|
|
$
|
261,692
|
|
|
|
A
|
|
|
$
|
3,057,673
|
|
Net billings in excess of revenues
|
|
|
122,906
|
|
|
|
(122,227
|
)
|
|
|
A
|
|
|
|
679
|
|
Accrued
expenses and other payables
|
|
|
3,891,454
|
|
|
|
(268,567
|
)
|
|
|
AB
|
|
|
|
3,622,887
|
|
Total current
liabilities
|
|
|
6,900,649
|
|
|
|
(129,102
|
)
|
|
|
|
|
|
|
6,771,547
|
|
Total liabilities
|
|
|
6,995,648
|
|
|
|
(129,102
|
)
|
|
|
|
|
|
|
6,866,546
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
341,157,837
|
|
|
|
(1,739,749
|
)
|
|
|
BCD
|
|
|
|
339,418,088
|
|
Accumulated other comprehensive
loss
|
|
|
(6,303,005
|
)
|
|
|
906,665
|
|
|
|
AB
|
|
|
|
(5,396,340
|
)
|
Accumulated
deficit
|
|
|
(307,041,261
|
)
|
|
|
(4,538,801
|
)
|
|
|
ABCDE
|
|
|
|
(311,580,062
|
)
|
Total stockholders’
equity
|
|
|
27,813,571
|
|
|
|
(5,371,885
|
)
|
|
|
|
|
|
|
22,441,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
34,809,219
|
|
|
$
|
(5,500,987
|
)
|
|
|
|
|
|
$
|
29,308,232
|
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Consolidated Condensed Statement of
Operations and Comprehensive Loss
Three Months ended September 30,
2018:
|
|
As
Reported
|
|
|
Adjustments
|
|
|
|
|
|
As
Restated
|
|
REVENUES
|
|
$
|
8,007,734
|
|
|
$
|
(4,007,776
|
)
|
|
|
A
|
|
|
$
|
3,999,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST AND OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (excluding
depreciation and amortization)
|
|
|
2,128,683
|
|
|
|
150,600
|
|
|
|
AC
|
|
|
|
2,279,283
|
|
Product development
|
|
|
765,723
|
|
|
|
(60,822
|
)
|
|
|
C
|
|
|
|
704,901
|
|
Sales and marketing
|
|
|
842,743
|
|
|
|
(150,891
|
)
|
|
|
C
|
|
|
|
691,852
|
|
General and administrative
|
|
|
8,127,982
|
|
|
|
(1,417,052
|
)
|
|
|
ACDE
|
|
|
|
6,710,930
|
|
Restructuring
and acquisition costs
|
|
|
1,994,512
|
|
|
|
728
|
|
|
|
E
|
|
|
|
1,995,240
|
|
Total cost
and operating expenses
|
|
|
14,858,499
|
|
|
|
(1,477,437
|
)
|
|
|
|
|
|
|
13,381,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(6,850,765
|
)
|
|
|
(2,530,339
|
)
|
|
|
|
|
|
|
(9,381,104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (LOSS)
|
|
|
(150,058
|
)
|
|
|
-
|
|
|
|
|
|
|
|
(150,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE PROVISION FOR INCOME TAXES
|
|
|
(7,000,823
|
)
|
|
|
(2,530,339
|
)
|
|
|
|
|
|
|
(9,531,162
|
)
|
Provision
for income taxes
|
|
|
19,583
|
|
|
|
2
|
|
|
|
|
|
|
|
19,585
|
|
NET LOSS
|
|
|
(7,020,406
|
)
|
|
|
(2,530,341
|
)
|
|
|
|
|
|
|
(9,550,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation loss
|
|
|
(21,580
|
)
|
|
|
(16,113
|
)
|
|
|
E
|
|
|
|
(37,693
|
)
|
COMPREHENSIVE LOSS
|
|
$
|
(7,041,986
|
)
|
|
$
|
(2,546,454
|
)
|
|
|
|
|
|
$
|
(9,588,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share and
equivalents - basic
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.16
|
)
|
Net loss per common share and
equivalents - diluted
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.16
|
)
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Consolidated
Condensed Statement of Operations and Comprehensive Loss
Nine Months ended September 30,
2018:
|
|
As
Reported
|
|
|
Adjustments
|
|
|
|
|
|
As
Restated
|
|
REVENUES
|
|
$
|
18,123,484
|
|
|
$
|
(6,594,967
|
)
|
|
|
A
|
|
|
$
|
11,528,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST AND OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (excluding
depreciation and amortization)
|
|
|
5,103,088
|
|
|
|
212,125
|
|
|
|
AC
|
|
|
|
5,315,213
|
|
Product development
|
|
|
2,246,499
|
|
|
|
(9,820
|
)
|
|
|
C
|
|
|
|
2,236,679
|
|
Sales and marketing
|
|
|
2,184,183
|
|
|
|
21,058
|
|
|
|
C
|
|
|
|
2,205,241
|
|
General and administrative
|
|
|
12,638,904
|
|
|
|
(1,845,097
|
)
|
|
|
ACDE
|
|
|
|
10,793,807
|
|
Restructuring
and acquisition costs
|
|
|
2,073,705
|
|
|
|
728
|
|
|
|
E
|
|
|
|
2,074,433
|
|
Total cost
and operating expenses
|
|
|
27,204,844
|
|
|
|
(1,621,006
|
)
|
|
|
|
|
|
|
25,583,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(9,081,360
|
)
|
|
|
(4,973,961
|
)
|
|
|
|
|
|
|
(14,055,321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (LOSS)
|
|
|
1,621,319
|
|
|
|
2
|
|
|
|
|
|
|
|
1,621,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE PROVISION FOR INCOME TAXES
|
|
|
(7,460,041
|
)
|
|
|
(4,973,959
|
)
|
|
|
|
|
|
|
(12,434,000
|
)
|
Provision
for income taxes
|
|
|
38,007
|
|
|
|
4
|
|
|
|
|
|
|
|
38,011
|
|
NET LOSS
|
|
|
(7,498,048
|
)
|
|
|
(4,973,963
|
)
|
|
|
|
|
|
|
(12,472,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation income (loss)
|
|
|
3,686
|
|
|
|
(211,323
|
)
|
|
|
E
|
|
|
|
(207,637
|
)
|
COMPREHENSIVE LOSS
|
|
$
|
(7,494,362
|
)
|
|
$
|
(5,185,286
|
)
|
|
|
|
|
|
$
|
(12,679,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share and
equivalents - basic
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.23
|
)
|
Net loss per common share and
equivalents - diluted
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.23
|
)
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Consolidated Condensed Statement of
Cash Flows
Nine
Months ended September 30, 2018:
|
|
As
Reported
|
|
|
Adjustments
|
|
|
|
|
As
Restated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,498,048
|
)
|
|
$
|
(4,973,963
|
)
|
|
A
|
|
$
|
(12,472,011
|
)
|
Adjustements to reconcile
net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
7,409,592
|
|
|
|
(1,625,380
|
)
|
|
C
|
|
|
5,784,212
|
|
Shares issued for services
|
|
|
249,548
|
|
|
|
74,289
|
|
|
D
|
|
|
323,837
|
|
Changes in operating assets
and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in
accounts receivable
|
|
|
(5,077,689
|
)
|
|
|
6,303,208
|
|
|
A
|
|
|
1,225,519
|
|
Increase in accounts payable
and customer deposits
|
|
|
798,573
|
|
|
|
261,851
|
|
|
A
|
|
|
1,060,424
|
|
Decrease in net billings in excess
of revenues
|
|
|
(127,683
|
)
|
|
|
(122,227
|
)
|
|
A
|
|
|
(249,910
|
)
|
Decrease
in accrued expenses and other payables
|
|
|
(1,421,435
|
)
|
|
|
6,469
|
|
|
AE
|
|
|
(1,414,966
|
)
|
Net
cash used in operating activities
|
|
|
(3,823,929
|
)
|
|
|
(75,753
|
)
|
|
|
|
|
(3,899,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(2,189,415
|
)
|
|
|
-
|
|
|
|
|
|
(2,189,415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
11,089,560
|
|
|
|
-
|
|
|
|
|
|
11,089,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS
AND RESTRICTED CASH
|
|
|
50,461
|
|
|
|
75,753
|
|
|
|
|
|
126,214
|
|
NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED
CASH
|
|
|
5,126,677
|
|
|
|
-
|
|
|
|
|
|
5,126,677
|
|
CASH, CASH EQUIVALENTS AND
RESTRICTED CASH, BEGINNING OF PERIOD
|
|
|
13,737,675
|
|
|
|
-
|
|
|
|
|
|
13,737,675
|
|
CASH, CASH EQUIVALENTS
AND RESTRICTED CASH, END OF PERIOD
|
|
$
|
18,864,352
|
|
|
$
|
-
|
|
|
|
|
$
|
18,864,352
|
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Consolidated Condensed
Statement of Operations and Comprehensive Loss
Three
Months ended December 31, 2018:
|
|
As
Reported
|
|
|
Adjustments
|
|
|
|
|
As
Restated
|
|
REVENUES
|
|
$
|
14,312,252
|
|
|
$
|
(5,583,164
|
)
|
|
AE
|
|
$
|
8,729,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST AND OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (excluding
depreciation and amortization)
|
|
|
5,226,558
|
|
|
|
(487,741
|
)
|
|
A
|
|
|
4,738,817
|
|
Sales and marketing
|
|
|
977,051
|
|
|
|
15,114
|
|
|
C
|
|
|
992,165
|
|
General
and administrative
|
|
|
5,170,008
|
|
|
|
1,365,348
|
|
|
ACDE
|
|
|
6,535,356
|
|
Total cost
and operating expenses
|
|
|
19,873,586
|
|
|
|
892,721
|
|
|
|
|
|
20,766,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(5,561,334
|
)
|
|
|
(6,475,885
|
)
|
|
|
|
|
(12,037,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (LOSS)
|
|
|
(97,121
|
)
|
|
|
6,370,788
|
|
|
EF
|
|
|
6,273,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE BENEFIT FOR INCOME TAXES
|
|
|
(5,658,455
|
)
|
|
|
(105,097
|
)
|
|
|
|
|
(5,763,552
|
)
|
Income
tax benefit
|
|
|
(181,847
|
)
|
|
|
(30,082
|
)
|
|
E
|
|
|
(211,929
|
)
|
NET LOSS
|
|
|
(5,476,608
|
)
|
|
|
(75,015
|
)
|
|
|
|
|
(5,551,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation income
|
|
|
2,226
|
|
|
|
5,440
|
|
|
E
|
|
|
7,666
|
|
COMPREHENSIVE LOSS
|
|
$
|
(5,474,382
|
)
|
|
$
|
(69,575
|
)
|
|
|
|
$
|
(5,543,957
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share and
equivalents - basic
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
$
|
(0.06
|
)
|
Net loss per common share and
equivalents - diluted
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
$
|
(0.06
|
)
|
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Note 28. Subsequent Events
iPass Inc. Acquisition
On February 12, 2019, Pareteum Corporation
entered into the Consent with iPass SPV, and Fortress Credit Corp. (together with its affiliates, “Fortress”). Also,
on February 12, 2019 the Company entered into the Joinder to Security Agreement, the Joinder to Guarantee and the Pledge
Agreement, each for the benefit of or with Fortress, guaranteeing the Loan and granting a first-priority security interest in
all of the assets of the Company to Fortress.
Pursuant to the Consent, Fortress consented
to the consummation of the Merger Agreement by and among the Company, iPass Inc. (“iPass”) and TBR, Inc., a wholly
owned subsidiary of the Company. The Company paid Fortress a cash fee of $150,000 and issued to Fortress warrants to purchase
an aggregate of 325,000 shares of common stock.
The Fortress loan to iPass bears an annual
interest at a stated rate of 11.0% plus the greater of the following i) Federal Funds Rate plus 0.5%, ii) the Prime Rate, iii)
the sum of the LIBOR in effect plus 1.0%, or iv) 2.0%. During the first 18 months following the closing date, payments under the
Loan are interest-only, with iPass able to elect that up to 5.5% of the accrued interest to be paid in-kind by capitalizing and
adding such interest to the unpaid principal amount. The Loan provides that beginning in November 2019, iPass shall make
thirty monthly principal payments, plus any accrued and unpaid interest, and upon completion will fully payoff the Loan under
the terms of the Agreement. At the end of the term or upon earlier prepayment by iPass, iPass will pay a fee equal to 5.0% of
the principal of the term loan.
On November 12, 2018, the Company entered
into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Purchaser, and iPass. Pursuant
to the Merger Agreement, Purchaser commenced the Offer for the iPass Shares for the transaction consideration provided for under
the Merger Agreement, upon the terms and subject to the conditions set forth in the Prospectus/Offer to Exchange dated December 4,
2018 (together with any amendments and supplements thereto, the “Offer to Exchange”), and the related Letter of Transmittal.
The Offer and withdrawal rights expired at 5:00 p.m. New York City time on February 12, 2019, and promptly following
such time Purchaser accepted for payment and promptly paid for all validly tendered iPass Shares in accordance with the terms
of the Offer.
On February 12, 2019, following acceptance
and payment for the validly tendered iPass Shares and pursuant to the terms and conditions of the Merger Agreement, the Company
completed its acquisition of iPass from the stockholders of iPass when Purchaser merged with and into iPass, with iPass surviving
as a wholly owned subsidiary of the Company (the “iPass Merger”). The iPass Merger was governed by Section 251(h) of
the Delaware General Corporation Law, as amended with no stockholder vote required to consummate the iPass Merger. At the effective
time of the iPass Merger, each iPass Share outstanding was converted into the right to receive the iPass Merger consideration.
The iPass Shares are no longer be listed on The Nasdaq Capital Market as a result of the transaction.
The consideration paid to stockholders of
iPass by the Company was $30,654,194 which consisted of the issuance of 10,570,412 shares of its common stock at a stock price
of $2.90 per share.
Devicescape Holdings, Inc.
On April 22, 2019, the Company, together
with Devicescape Holdings, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (the “Holdco”
and together with the Company, the “Buyer”) entered into an asset purchase agreement (the “Purchase Agreement”)
with Devicescape Software, Inc., a California corporation (“Devicescape”), whereby the Buyer acquired certain
assets of Devicescape and assumed certain liabilities of Devicescape, such that Holdco shall continue as a surviving subsidiary
of the Company holding the acquired assets and assuming those certain liabilities of Devicescape (the “Devicescape Purchase”).
In connection with the Devicescape Purchase, and pursuant to the terms and subject to the conditions set forth in the Purchase
Agreement, the Company paid cash consideration of $2,000,000 and issued to the stockholders of Devicescape an aggregate of 400,000
shares of the Company’s common stock at a value of $1,692,000 based on our closing price on April 22, 2019, of $4.23
per share.
Post Road Group Debt Facility
On February 26, 2019, Pareteum Corporation
and certain of its subsidiaries entered into a credit agreement (the “Credit Agreement”) with Post Road Administrative
Finance, LLC and its affiliate Post Road Special Opportunity Fund I LLP (collectively, “Post Road”). Pursuant to the
Credit Agreement, Post Road will provide the Company with a secured loan of up to $50,000,000 (the “Loan”), with an
initial loan of $25,000,000 funded on February 26, 2019, and additional loans in increments of $5,000,000 as requested by
the Company before the 18 month anniversary of the initial funding date. No additional loan shall be funded until the later of
delivery of certain third party consents (the “Consents”), the filing of Pareteum’s Quarterly Report on Form 10-Q
for the first quarter of 2019, or June 1, 2019. All amounts owed under the Credit Agreement shall be due on February 26,
2022.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
The unpaid principal amount of the Loan shall
bear interest from the relevant funding dates at a rate per year of 8.5% plus Libor in effect from time to time, provided however,
that upon an event of default or if certain of the Consents are not delivered prior to May 1, 2019 or June 1, 2019,
as applicable, the unpaid principal amount of the Loan shall bear interest from the relevant funding dates at a rate per year
of 11.5% plus Libor in effect from time to time until the Consents are delivered. The interest shall be due and payable monthly
in cash in arrears, provided, however, that the Company may elect to pay any or all of the interest in the form of PIK interest
due and payable at maturity at a maximum percentage per year equal to (a) through and including the first anniversary of
the initial funding date, 3%, (b) after the first anniversary of the initial funding date through and including the second
anniversary of the initial funding date, 2%, and (c) after the second anniversary of the initial funding date, 1%.
Permitted use of proceeds for the initial
$25,000,000 of the Loan include approximately $11,000,000 for payment in full of outstanding secured debt owed to Fortress Credit
Corp. (together with its affiliates, “Fortress”) incurred in connection with the Company’s previously disclosed
acquisition of iPass Inc. (“iPass”) on February 12, 2019, as well as remaining amounts for permitted acquisitions
and investments, for general working capital purposes and to pay approximately $885,000 in transaction fees related to the Loan.
Proceeds from additional Loans, if any, are to be used for permitted acquisitions and to fund growth capital expenditures and
other growth initiatives.
The Loan is subject to prepayment upon the
receipt of proceeds outside the ordinary course of business in excess of $1,000,000 and the Company must pay a commitment fee
of 1% per year for an unfunded commitment. The initial $25,000,000 loan is reduced by an original issue discount of (i) 0.75%
of $25,000,000 and (ii) 1.25% of $50,000,000, and any additional loans will be reduced by an original issue discount of 0.75%
of the funded amounts.
The Company’s obligations under the
Credit Agreement are secured by a first-priority security interest in all of the assets of the Company and guaranteed by certain
subsidiaries of the Company. The Credit Agreement contains customary representations, warranties and indemnification provisions.
The Credit Agreement also contains affirmative and negative covenants with respect to operation of the business and properties
of the Company as well as financial performance, including requirements to maintain a minimum of $2,000,000 of unrestricted cash,
certain maximum total leverage ratios, a debt to asset ratio, maximum churn rate and minimum adjusted EBITDA. The Credit Agreement
further provides customary events of default and cure periods for certain specified events of default, and in the event of uncured
default, the acceleration of the maturity date, an increase in the applicable interest rate with respect to amounts outstanding
under the Loan and payment of additional fees.
On February 26, 2019, pursuant to the
terms of the Credit Agreement, the Company issued to Post Road 425,000 shares of common stock valued at $1,606,500 and recorded
the amount as a debt issuance cost and amortized it through February 26, 2022. The Company will issue an additional 200,000
shares of its common stock upon the next subsequent funding, if any, under the Loan.
On August 22, 2019, the Company and
Post Road entered into an agreement (the “Amendment”) to amend and waive certain provisions of the Credit Agreement.
Pursuant to the Amendment, Post Road agreed to waive terms of certain obligations and covenants in the Credit Agreement and fund
the Company an additional loan of $2,500,000. The Company agreed to issue to Post Road 550,000 shares of its common stock and
an additional 200,000 shares of its common stock on November 15, 2019.
In September 2019, the Company paid
off the Credit Agreement from the proceeds received from the Securities Purchase Agreement discussed below.
Other Financing
Securities Purchase Agreement
In September 2019, the Company entered
into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with institutional and accredited investors
and sold: (i) 18,852,272 common stock units. Each unit consisted one share of common stock, one Series A warrant to
purchase one share of common stock and one Series B Warrant to purchase one share of common stock at price of $1.76 per share
and (ii) 3,875,000 pre-funded warrants for the purchase of common stock units at price of $1.75 per share. These common stock
units consisted of one share of common stock, one Series A warrant to purchase one share of common stock and one Series B
Warrant to purchase one share of common stock at an exercise price of $0.01 per share. The Company received net proceeds of $37,658,167
after deducting expenses of $2,303,083.
The Series A warrant provides for an exercise price of
$2.25 per share and expires in September 2024. The Series B warrant provides for an exercise of $1.84 and expires in
March 2021. The pre-funded warrants do not expire and are immediately exercisable except that the pre-funded warrants cannot
be exercised by the holder if, after giving effect thereto, the holder would beneficially own more than 9.99% of the Company’s
common stock, subject to certain exceptions. The pre-funded warrants are classified as equity in accordance with ASC 480, Distinguishing
Liabilities from Equity, and the fair value of the pre-funded warrants was recorded as a credit to common stock and is not
subject to remeasurement. In October 2019, all of the pre-funded warrants were exercised in a cashless transaction resulting in
the issuance of 3,845,193 shares of common stock.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
In connection with the Securities Purchase
Agreement, the Company issued warrants to a placement agent to purchase 909,091 shares of its common stock. These warrants have
exercise price of $3.00 per share and expire in September 2024. These warrants are classified as equity.
Redeemable Preferred Stock
From December 31, 2019 through July 2020, the Company
issued 221 shares of 8% Series C Redeemable Preferred Stock (the “Series C Redeemable Preferred Stock”)
in a series of private placement transactions exempt from the registration requirements of the Securities Act of 1933, as amended,
for an aggregate purchase price of $14,132,951.
The Series C Redeemable Preferred Stock is governed by
the terms of a Certificate of Designation, Preferences, and Rights of the Series C Redeemable Preferred Stock (the “Certificate
of Designation”) on file with the Secretary of State of the State of Delaware, which establishes and designates the rights,
powers and preferences of such securities. Under the Certificate of Designation, each share of Series C Redeemable Preferred
Stock has a stated value of $100,000 per share (the “Stated Value”). Non-cumulative dividends are required to be paid
on each share of the Series C Redeemable Preferred Stock at a rate of 8% per annum of the Stated Value. The Series C
Redeemable Preferred Stock ranks senior to our common stock with respect to dividend rights and rights upon liquidation, dissolution
or winding up of the Company. Upon any liquidation event, the holders of the Series C Redeemable Preferred Stock are entitled
to be paid out of the assets of the Company legally available for distribution to its stockholders a liquidation preference of
$0.00001 per share, plus an amount equal to any unpaid dividends to and including the date of payment, but without interest, before
any distribution of assets is made to holders of the Company’s common stock, or any other class or series of stock. The
Series C Redeemable Preferred Stock has no voting rights except as required by law. On the one-year anniversary of the date
of issuance of the Series C Redeemable Preferred Stock, the Company is required to redeem, out of legally available funds,
each such share of Series C Redeemable Preferred Stock at a price per share equal to 112.5% of the Stated Value.
The issuance of this Series C Redeemable Preferred Stock
was accounted for as a liability in accordance with ASC 480, Distinguishing Liabilities from Equity. Accordingly, the Company
recorded a liability of $22,066,951 equal to the stated value of the issued shares through July 2020 and a debt discount
of $7,934,000 for the difference between the stated value and the gross proceeds of $14,132,951. The Company incurred placement
and legal fees totaling $366,521. The debt discount is being amortized from the various issuance dates through to the various
redemption dates using the effective interest rate method. The placement and legal fees are being amortized from December 2019,
the date of the first issuance of such securities, through December 2020.
By their terms, the shares of Series C Redeemable Preferred
Stock are not convertible into other securities of the Company. However, the Company entered into Exchange Agreements as of various
dates from July 2020 through October 2020, with the Series C Redeemable Preferred Stock holders (collectively,
the “Agreements”). Under such Agreements, the Company and the holders agreed that (i) the Company may exchange
outstanding shares of Series C Redeemable Preferred Stock for shares of the Company’s common stock on the one-year
anniversary of the issuance date of those shares; and (ii) the holders may exchange outstanding shares of Series C Redeemable
Preferred Stock for shares of the Company’s common stock at any time prior to the one-year anniversary of the issuance date
of those shares. Such exchanges are subject to the satisfaction of certain conditions, including approval of the Company’s
stockholders of the issuance of such common stock and the Company’s ability to issue shares of common stock not subject
to restrictions on resale. The number of shares of common stock issuable upon exchange of the Series C Redeemable Preferred
Stock under the Agreements will determined by the application of a formula in which (i) the stated value of the shares of
Series C Redeemable Preferred Stock being converted plus the value of any accrued and unpaid dividends plus, with respect
to certain agreed upon shares of the Series C Redeemable Preferred Stock, a premium of 12.5% on the stated value is divided
by (ii) the conversion price. The conversion price for holders of 159 shares of Series C Redeemable Preferred Stock
in the aggregate is $0.70, while the conversion price for the holder of the other 62 shares of Series C Redeemable Preferred
Stock is the lower of (i) $0.60 and (ii) the greater of (x) the average daily volume-weighted average price per
share of Common Stock during the five trading days before the closing of the exchange and (y) $0.40.
Senior Convertible Note
On June 8, 2020, the Company issued an $17,500,000 in
principal amount of an 8% Senior Secured Convertible Note due April 1, 2025 (the “Senior Convertible Note” or
the “Note”) to High Trail Investments SA LLC (“High Trail”) for $14,000,000.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
On June 8, 2020, the Company received $4,000,000 of the
$14,000,000 and incurred legal fees of $332,546. The remaining balance $10,000,000 was received by the Company but was deposited
into a non-springing bank account based on terms of an Control Agreement. Under the terms of the Control Agreement, the Company
has no right or any other right or ability to control, access, pick up, withdraw or transfer, deliver or dispose of items or funds
from the non-springing account. Under the terms of the Senior Convertible Note, the remaining balance of $10,000,000 will be released
to the Company subject to the satisfaction of certain conditions as follows:
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·
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$3,000,000
when the Company receives $4,000,000 in additional financing. The Company received the
additional financing in July 2020 and the $3,000,000 was released to the Company
to be used for working capital purposes.
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·
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$7,000,000
when the Company meets certain specified conditions (the “Specified Conditions”)
on or prior to October 31, 2020 the “Specified Conditions Date”). The
$7,000,000 will be reported as restricted cash until the Specified Conditions are met
on the Specified Conditions Date.
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The Specified Conditions include satisfaction
of certain equity conditions and other conditions as of any date and on each of the 20 previous trading days prior to such date
as defined in the Senior Convertible Note. The satisfaction of the certain equity conditions includes:
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·
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the
Company’s being able to issue shares of its common stock upon conversion that are
not subject to restrictions on resale;
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·
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High
Trail not, upon conversion, beneficially owning in excess of 4.99% of the Company’s
outstanding common stock;
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·
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the
Company at all times having sufficient authorized and unissued shares of its common stock
available for the issuance of common stock upon conversion equal to the outstanding principal
amount plus accrued interest;
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·
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the
average daily volume-weighted average price per share of the Company’s common stock
being not less than $0.50 (for a common stock change event as defined in the Note) and
the daily dollar trading volume (as reported on Bloomberg) for the Company’s common
stock on such date and for at least 17 of the prior 20 trading days being not less than
$750,000;
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·
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there
being no defaults or events of a default that have occurred or are continuing;
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·
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the
Company having obtained the requisite stockholder approval required by the Nasdaq Stock
Market for the issuance of the shares of its common stock upon conversion;
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·
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the
average daily volume-weighted average price per share of the Company’s common stock
being not less than $0.85 (for a common stock change event as defined in the Note); and
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·
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the
absence of any defaults or events of default.
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The Note contains customary events of default,
as well as events of default if the Company fails to use reasonable efforts to obtain the approval of its stockholders of the
issuance of the shares issuable upon conversion by October 31, 2020, the Company’s shares cease to be traded on the
NASDAQ Stock Market, or the Company fails to restate its financial statements for the year ended December 31, 2018 and the
quarters ended March 31, 2019 and June 30, 2019, in each case, prior to October 31, 2020 or fails to timely file
its subsequent quarterly reports on Form 10-Q or its subsequent annual reports on Form 10-K with the SEC in the manner
and within the time periods required by the Exchange Act. The Company is currently in default.
Beginning October 1, 2020, and on the first day of each
calendar month thereafter, at the election of High Trail, the Company can be required to redeem a portion of the Note. The amount
of each redemption payment will be up to $3,500,000, provided, that in any case the amount of any redemption payment will not
exceed the principal amount then outstanding under the Notes.
If the Company elects the option to pay an optional redemption
payment in shares of its common stock on any optional redemption date, High Trail shall have the right to allocate all or any
portion of the applicable optional redemption payment (or applicable portion thereof) to one or more scheduled trading days during
the period beginning on, and including, the applicable optional redemption date and ending on, and including, the scheduled trading
day immediately before the subsequent optional redemption date or defer such optional redemption payment (or applicable portion
thereof) to any future optional redemption date selected by High Trail.
The Senior Convertible Note has a stated interest rate of 8.0% per
year, payable monthly in arrears at the Company’s option in cash or shares of its common stock or a combination of both cash
and shares of the Company’s common stock beginning on August 1, 2020. On December 8, 2020 the Company and High Trail
entered into a letter agreement whereby the Company agreed that High Trail would accept 1,093,750 shares of the Company’s
common stock in full satisfaction of the Company’s obligation to make an interest payment on December 1, 2020.
If the Company fails to pay any amount payable on this Note
on or before the due date as provided in the Note, then, regardless of whether such failure constitutes an event of default, or
a default or event of default occurs as set forth in the Note (such amount payable or the principal amount outstanding as of such
failure to pay or default or event of default, (as applicable, a “Defaulted Amount”), then in each case, interest
(“Default Interest”) will accrue on such Defaulted Amount at a rate per annum equal to 18.0%, from, and including,
such due date or the date of such default or event of default, as applicable, to, but excluding, the date such failure to pay
or default or event of default is cured and all outstanding Default Interest under the Note has been paid, as applicable. As a
result of the Company’s defaults under the terms of the High Trail Note, it is currently paying the Default Interest rate.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
If the Company elects to pay the stated interest (or any applicable
portion thereof) in shares of its common stock, High Trail shall have the right to allocate all or any portion of the applicable
payment of the stated interest (or applicable portion thereof) to one or more scheduled trading days as defined in the Senior
Convertible Note) during the period beginning on, and including, the applicable interest payment date and ending on, and including,
the scheduled trading day immediately before the subsequent interest payment date (or defer such payment of the stated interest
(or applicable portion thereof) to any future Interest payment date selected by High Trail.
The number of shares of common stock to be issued by the Company
for payment for both the optional redemption payment and the stated interest amounts are determined as set forth in the Note by
dividing each amount by 85% of the lowest average daily volume-weighted average price per share of the Company’s common
stock during the 10 trading day period ending on the trading day immediately prior to such interest payment or the optional redemption
payment payable in shares of common stock.
The Senior Convertible Note is convertible into shares of the
Company’s common stock including any portion constituting an optional redemption payment amount and other circumstances
as set forth in the Note at High Trail’s election. The initial conversion rate is equal to 1,666.667 shares of the Company’s
common stock per $1,000 principal amount of the Note, or $0.60 per share. However, when the Company receives the $4,000,000 in
additional financing and if the additional financing date conversion rate is lower than the initial current conversion rate, the
initial conversion rate shall be reduced to equal the additional financing date conversion rate; and, provided, further, that
on the Specified Conditions Date, if the Specified Conditions conversion rate is lower than the then current conversion rate,
the conversion rate at the time shall be reduced to equal the Specified Conditions conversion rate. The conversion rate is further
subject to changes based on subsequent equity issuances as defined in the Note.
The additional financing conversion rate is computed as follows:
per $1,000 principal amount of the Senior Convertible Note divided by the last reported stock price on the trading date prior
to the additional financing date multiplied by 105% (based on the last reported stock price prior to the Company receiving the
additional financing). In July 2020, the Company received the additional financing amount and the additional financing conversion
rate was higher than the initial conversion rate of 1,666.667, based on the last reported stock on the trading date prior to the
Company receiving the additional financing. As a result, the initial conversion rate remained the same.
The Specified Conditions conversion rate is computed as follows:
per $1,000 principal amount of the Senior Convertible Notes divided by the last reported stock price on the trading date prior
to the additional financing date multiplied by 105% on the weighted average price of the Company’s common stock in respect
of the period from the scheduled open of trading until the scheduled close of trading immediately before the Specified Conditions
Date, which the Company has not yet met.
The Note is secured by a first lien on substantially all assets
of the Company and substantially all assets of its material U.S. organized subsidiaries and the assets of Pareteum Europe BV,
a subsidiary organized in the Netherlands. In addition, the Note contains customary affirmative and negative covenants, including
restrictions on indebtedness, equity securities, liens, dividends, distributions, acquisitions, investments, sale or transfer
of assets, transactions with affiliates and maintenance of certain financial ratios.
All payments due under the Note rank senior to all other indebtedness
of the Company to the extent of the value of the Collateral and any Subordinated Indebtedness.
If the Company undergoes a fundamental change as set forth
in the Note, High Trail will have the right to require the Company to repurchase all or part of the Note in cash equal to of the
greater of (i) 120% of the then outstanding principal amount of the Note (or portion thereof) and (ii) 120% of the product
of (A) the conversion rate in effect as of the trading day immediately preceding the effective date of such fundamental change;
(B) the principal amount of this Note to be repurchased upon a fundamental change divided by $1,000; and (C) the highest
daily volume-weighted average price per share of the Company’s common stock occurring during the consecutive volume-weighted
average price per share of the Company’s common stock trading days ending on, and including, the daily volume-weighted average
price per share of the Company’s common stock on the trading day immediately before the effective date of such fundamental
change.
If the Company enters into a bankruptcy proceeding as set forth
in the Note, then the then-outstanding portion of the principal amount and all accrued and unpaid interest will immediately become
due and payable to High Trail. In addition, at High Trail’s option, the Note will become due and payable immediately for
cash equal to an default acceleration amount upon certain events of default as set forth in the Note, which includes, the Company
not filing its restated financial statements with the SEC for (A) the fiscal year ended December 31, 2018, (B) the
quarter ended March 31, 2019 and (C) the quarter ended June 30, 2019, in each case on or prior to October 31,
2020 and in compliance with all requirements under the Exchange Act and after October 31, 2020 (A) the Company timely
filing its subsequent quarterly reports on Form 10-Q or its subsequent annual reports on Form 10-K with the SEC in the
manner and within the time periods required by the Exchange Act.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
The default acceleration amount is equal to the greater of
(A) 120% of the then outstanding principal amount of this Note plus accrued and unpaid interest; and (B) 120% of the
product of (i) the conversion rate in effect as of the trading day immediately preceding the date such notice is delivered;
(ii) the total then outstanding principal portion of the Note plus accrued and unpaid interest; and (iii) the greater
of (x) the highest daily volume-weighted average price per share of the Company’s common stock occurring during the
30 consecutive volume-weighted average price per share of the Company’s common stock trading days ending on, and including,
the daily volume-weighted average price per share of the Company’s common stock on the trading day before the date the applicable
event of default occurred.
In connection with Senior Convertible Note, the Company granted
a warrant to purchase 15,000,000 shares of its common stock to High Trail at an exercise price of $0.58 per share expiring on
June 8, 2025. Under the Forbearance Agreement, the exercise price of the warrant was reduced to $0.37 per share.
Goodwill and Intangible impairment
(in thousands)
During the fourth quarter ended December 31, 2019, the
Company performed its annual impairment test for goodwill and impairment test of finite-lived intangible assets based on the existence
of certain triggering events. The results of the impairment tests are preliminary. As a result of the deteriorating business conditions,
the Company estimates an impairment charge of $123,168 related to the goodwill and finite-lived intangible assets associated with
the Company’s acquisition of Artilium. The Company hired a third-party valuation expert to value the assets due to the significant
judgements and expertise required to model the assumptions used. The Company operates in a single reporting unit. The Company estimated
the fair value of its reporting unit utilizing a discounted cash flow model. The Company utilized various income-based and cost-based
methods to determine the fair value of the intangible assets in the impairment test.
Changes in Executive Officers
On
November 1, 2019, the Company’s board of directors replaced Edward O’Donnell,
the Company’s previous chief financial officer. Mr. O’Donnell subsequently separated from the Company.
On November 22,
2019, the Company’s board of directors terminated Robert H. Turner from his positions as Executive Chairman and Chief Executive
Officer.
On October 9,
2019, the Company and Denis McCarthy, the Company’s former chief operating officer, entered into a settlement agreement
and release (the “McCarthy Separation Agreement”) pursuant to which Mr. McCarthy’s at-will employment agreement
with the Company was terminated and Mr. McCarthy ceased all positions with the Company and its subsidiaries, including as
the Company’s Chief Operating Officer. Pursuant to the McCarthy Separation Agreement, Mr. McCarthy received a severance
payment of $225,000, paid in equal monthly installments according to the Company’s payroll practices over a period of 12
months from the date of the McCarthy Separation Agreement, and agreed not to trade in the Company’s securities through October 1,
2021. Mr. McCarthy also agreed to forego earned and unearned bonuses and vested and unvested stock options will lapse. The
McCarthy Separation Agreement also includes customary provisions regarding nondisclosure of confidential information, non-disparagement,
release, representations and warranties, and the return of confidential information.
On June 9, 2020, the Company and
Victor Bozzo, the Company’s Chief Commercial Officer, entered into a separation agreement (the “Bozzo Separation Agreement”)
pursuant to which Mr. Bozzo resigned as Chief Commercial Officer of the Company, and from all other offices and positions
he held with the Company or any of its subsidiaries, effective as of June 9, 2020. Pursuant to the Bozzo Separation Agreement,
Mr. Bozzo received as severance pay: (i) an amount equal to his then-current salary, paid over time in accordance with
the Company’s normal payroll practices, for a period of four months beginning on the date of the Bozzo Separation Agreement;
and (ii) a continuation of Company-provided health insurance benefits during such four-month period on the same terms with
respect to sharing of premium costs as apply to active employees enrolled for the same coverage. The Company also agreed to award
Mr. Bozzo options to purchase up to 200,000 shares of the Company’s common stock. These stock options have an exercise
price equal to the closing price of the Company’s common stock on the grant date, vested immediately upon issuance and expire
three years from the date of the grant. Mr. Bozzo agreed to forego earned and unearned bonuses and unvested stock options
will lapse. The Bozzo Separation Agreement also includes customary provisions regarding the release of the Company for any claims
by Mr. Bozzo, nondisclosure of confidential information, non-disparagement and the return of confidential information. Following
his separation, Mr. Bozzo continues to be subject to certain restrictive covenants, including, non-competition and non-solicitation
covenants.
Pareteum Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Delisting of the Company’s Common
Stock
On November 5, 2020, the Company notified
the Nasdaq Hearings Panel that it would not be able to file its Quarterly Report on Form 10-Q for the period ended September 30,
2019, its amended Annual Report on Form 10-K/A for the year ended December 31, 2018, its Annual Report on Form 10-K
for the year ended December 31, 2019 or its Quarterly Reports on Form 10-Q for the periods ended March 31, 2020
and June 30, 2020 by November 9, 2020, the date by which the Hearing Panel had required the Company to make such filings
in order for the Company’s common stock to remain listed on Nasdaq. In response to the Company’s notice to Nasdaq
that it would not satisfy the conditions to the exception to the listing requirements granted by the Hearings Panel, Nasdaq notified
the Company by letter dated November 10, 2020 that the Company’s common stock would be delisted, and trading of the
Company’s common stock on Nasdaq’s Capital Market was suspended effective at the open of business on November 12,
2020. After the trading of the Company’s common stock was suspended by Nasdaq, prices for the Company’s common stock
began to be quoted on the OTC Markets Group Inc.’s Pink Open Market.