NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
Note
1. 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 acquired Artilium plc (“Artilium”), 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 acquired iPass Inc. (“iPass”), 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.
Liquidity
As reflected in the accompanying consolidated financial statements,
the Company reported net loss of $226,770 and $18,024 for the years ended December 31, 2019 and 2018, respectively, and had negative
working capital of $31,272 and an accumulated deficit of $543,902 as of December 31, 2019. The cash balance, including restricted
cash, as of December 31, 2019, was $5,902.
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 Securities and Exchange Commission (“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 22, 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 (since extended
to February 28, 2021), 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 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.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
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 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.
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 U.S. (“U.S. GAAP”). All intercompany transactions
and account balances have been eliminated in consolidation.
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 U.S., 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 (expense), net”.
Contingent
Losses
The
Company records a provision for contingent losses when it is both probable that a liability will be incurred and the amount or
range of the loss can be reasonably estimated. An unfavorable outcome to any legal or regulatory matter, if material, could have
an adverse effect on the Company’s operations or its financial position, liquidity or results of operations. The Company
expenses legal fees as incurred.
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 through acquisitions.
Significant estimates include the bad debt allowance; revenue recognition; impairment of goodwill, intangible assets and
long-lived assets; valuation of financial instruments; realization of deferred tax assets; useful lives of long-lived assets;
share-based compensation and contingent losses. Actual results may differ from these estimates under different assumptions or
conditions.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
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.
Restricted
Cash
Restricted
cash as of December 31, 2019 and 2018 was $1,455 and $431, respectively, and consists primarily of cash deposited in blocked
accounts as bank guarantees for corporate credit cards and letters of credit issued to vendors related to contract
performance.
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 allowance, the Company would increase its general and administrative expenses and increase its reported net losses. Conversely,
if actual credit losses are significantly less than our reserve, this would eventually decrease the Company’s general and
administrative expenses and decrease its reported net losses. Allowances are recorded primarily on a specific identification basis.
See Note 3, Allowance for Doubtful Accounts to the Financial Statements for more information.
Leasing
Arrangements
The
Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”)
assets and lease liabilities in the Company’s Consolidated Balance Sheets. As of adoption of ASU No. 2016-02, “Leases
(Topic 842)” the Company was not party to finance lease arrangements.
ROU
assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s
obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement
date based on the present value of lease payments over the lease term. As the Company’s leases do not generally provide
an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining
the present value of lease payments. The implicit rate is used when it is readily determinable. The Company’s lease agreements
may have lease and non-lease components, which the Company accounts for as a single lease component. The Company’s lease
terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Lease expense for lease payments is recognized on a straight-line basis over the lease term and variable payments are recognized
in the period they are incurred. The Company’s lease agreements do not contain any residual value guarantees. Leases with
an initial term of 12 months or less are not recorded on the balance sheet.
Under
the available practical expedient, the Company accounts for the lease and non-lease components as a single lease component.
Revenue
Recognition
Our
revenues represent amounts earned for our mobile and CPaaS solutions. Our solutions take many forms but our revenue generally
consists of fixed and/or variable charges for services delivered monthly under a combined services and SaaS model. We also offer
discrete (one-time) services for implementation and for development of specific functionality to properly service our customers.
The
following table presents our revenues disaggregated by revenue source:
|
|
Years Ended
|
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Monthly Service
|
|
$
|
61,206
|
|
|
$
|
19,170
|
|
Installation and Software Development
|
|
|
843
|
|
|
|
1,088
|
|
Total revenues
|
|
$
|
62,049
|
|
|
$
|
20,258
|
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
Both
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,
|
|
|
|
2019
|
|
|
2018
|
|
Europe
|
|
$
|
39,957
|
|
|
$
|
18,753
|
|
United States
|
|
|
20,124
|
|
|
|
956
|
|
Other geographic areas
|
|
|
1,968
|
|
|
|
549
|
|
Total revenues
|
|
$
|
62,049
|
|
|
$
|
20,258
|
|
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.
Installation
and Software Development Revenues
The
Company’s other revenues consist generally of installation and software 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.
Contract
Assets and Liabilities
Given
the nature of the Company’s services and contracts, it has no contract assets.
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 were $2,529 and $227 as of December 31, 2019 and 2018, 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 control is
transferred or services are delivered to the customer.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
Cost
of Revenues
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
The
segment reporting guidance in ASC 280, Segments Reporting (“ASC 280”), defines operating segments as components
of an enterprise for which discrete financial information is available and that is evaluated regularly by the chief operating
decision maker (“CODM”) for purposes of allocating resources and in assessing performance. The Company has determined
its Chief Executive Officer, together with its Chief Financial Officer, to be the CODM. During the assessment of segment reporting
for the year ended December 31, 2019, the Company identified three operating segments. The three operating segments, Legacy Pareteum,
Artilium and iPass, have been aggregated into one reportable segment as they have similar economic characteristics in that they
provide communications connectivity through a communication-as-a-service platform to similar customers wishing to be connected
to everything mobile. The results of this assessment also consider the impacts of recent acquisitions of Artilium and iPass and
the way in which internally reported financial information is used by the CODM to make decisions and allocate resources.
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.
Nonrecurring
fair value measurements
The
Company’s nonfinancial assets measured at fair value on a nonrecurring basis include goodwill and intangible assets
acquired in business combinations as well as fair value measurements used when performing its annual impairment test. The
valuation methods used to determine fair value require a significant degree of management judgment to determine the key
assumptions which include projected revenues and appropriate discount rates. As such, the Company classifies nonfinancial
assets subjected to nonrecurring fair value adjustments at level 3 measurements. The Company hired a third-party valuation
expert to value the trade names, customer relationships and the technology acquired as part of the acquisition of Artilium
and iPass due to the expertise required to model the assumptions used. At December 31, 2019, goodwill and certain intangible
assets were impaired and written down to their fair value; see Note 8, Goodwill and Net Intangibles.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
Recurring
fair value measurements – Warrant Derivative Liabilities and Conversion Feature Derivative
In
cases where the Company needs to account for derivative liabilities, the Company uses the Monte Carlo valuation model and the
Black-Scholes option pricing 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 due to the expertise required to model the assumptions.
There were no derivative liabilities at December 31, 2019 and 2018.
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 for the exercise
or conversion of any outstanding warrants convertible notes during the previous reporting period.
Stock
Price at Valuation Date
The
closing stock price at re-measurement date being the last available closing price of the reporting period taken from www.nasdaq.com.
Exercise
Price
The
exercise price is fixed and determined under the terms of the financing facility it was issued.
Remaining
Term
The
remaining term is calculated by using the estimated term of the outstanding principal liability at the re-measurement date.
Expected
Volatility
Management
estimates expected cumulative volatility giving consideration to the expected term 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.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
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, including the 8% Series C Redeemable Preferred Stock, approximate their fair values, as interest approximates market rates
(Level 2). The Company’s unsecured convertible promissory note conversion feature, a derivative instrument in 2018, is recognized
in the balance sheet at its fair values with changes in fair market value reported in earnings (Level 3).
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.
In
periods prior to January 1, 2019, the Company accounted for the issuance of share-based compensation awards to contractors and
advisory board members in accordance with ASC 505-50 Equity-Based Payments to Non-Employees (“ASC 505-50”).
Under ASC 505-50, we determined 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. On January
1, 2019, the Company adopted Accounting Standards Update 2018-07, Improvements to Nonemployee Share-Based Payment Accounting
requiring the measurement of the share-based compensation awards granted to non-employees at the grant-date fair value, in
a manner consistently with equity-classified awards issued to employees.
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
Term
The
expected term represents the period that the stock option awards are expected to be outstanding. The Company uses the simplified
method for estimating the expected term of the option, by taking the average between time to vesting and the contract term of
the award.
Expected
Volatility
The
Company estimates expected cumulative volatility giving consideration to the expected term 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
term 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.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
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 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, 2019 and 2018, 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 the Company 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 recognized in the reporting period in which they
are determined.
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.
The Company uses 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.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
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. 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 primary indicators are the continuing losses and decline in the Company’s expected future cash flows. At December31,
2019 goodwill was impaired and written down to fair value; see Note 8, Goodwill and Net Intangibles.
Long-Lived
Assets and Intangible Assets
In accordance with ASC 30, long-lived assets, including intangible
assets subject to amortization, 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. Long-lived assets,
including intangible assets subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Impairment
is measured based on the amount of the carrying a that exceeds the fair value of the asset. At December31, 2019, certain intangible
assets were impaired and written down to their fair value; see Note 8, Goodwill and Net Intangibles.
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 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. There were no material impairment losses recognized in 2019 and 2018
related to property and equipment, internal use software and third-party software.
Recently
Adopted Accounting Pronouncements
In
June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07
expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees.
ASU2018-07became effective for the Company on January 1, 2019. The adoption of this standard did not have a material impact on
the Company’s consolidated financial statements.
In
July 2017, the FASB issued ASU No. 2017-11, Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic
480), Derivatives and Hedging (Topic 815)(“ASU 2017-11”). ASU 2017-11 consists of two parts. The amendments
in Part I of this update change the classification analysis of certain equity-linked financial instruments (or embedded
features) with down round features. When determining whether certain financial instruments should be classified as
liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the
instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for
equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option)
no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round
feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per
share (“EPS”) in accordance with Topic 260 to recognize the effect of the down round feature when it is
triggered. That effect is treated as a dividend and as a reduction of income available to common stockholders in basic EPS.
Convertible instruments with embedded conversion options that have down round features are now subject to the specialized
guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other
Options), including related EPS guidance (in Topic 260). The amendments in Part II of this update re-characterize the
indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a
scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of
this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the
amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes
that interim period. The amendments in Part II of this update do not require any transition guidance because those amendments
do not have an accounting effect. ASU2017-11became effective for the Company on January 1, 2019. The adoption of this
standard did not have a material impact on the Company’s consolidated financial statements.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). This new standard establishes
a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases
with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the
pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years. Early adoption is permitted. In July 2018, the FASB issued ASU No.
2018-11 which provides an alternative transition method that allows entities to apply the new leases standard at the adoption
date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company
has adopted the requirements of ASU 2016-02 on January 1, 2019, using the modified retrospective method. The Company took advantage
of the practical expedient options, which allows an entity not to reassess whether any existing or expired contracts contain leases.
Upon adoption of this standard on January 1, 2019, the Company recorded right of use assets and corresponding lease liabilities
of $1.8 million. The standard did not have a material impact on our consolidated income statements. We elected to apply the practical
expedient related to land easements, as well as the package of practical expedients permitted under the transition guidance in
the new standard, which allowed us to carryforward our historical lease classification.
In
February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). The ASU
allows entities to reclassify certain “stranded tax effects” resulting from the Tax Cuts and Jobs Act (the
“Tax Act”) from accumulated other comprehensive income (“AOCI”) to retained earnings. Under existing
guidance in ASC 740, Income Taxes, adjustments to deferred tax assets and liabilities resulting from a change in tax
laws or rates occur within the period that the enactment of these changes occur and any adjustments are included in income
from continuing operations. Deferred income taxes originally recognized through other comprehensive income were initially
measured at the previous income tax rate resulting in a disproportionate tax balance remaining in AOCI from recognizing the
tax rate adjustments from the Tax Act in income from continuing operations (i.e., “stranded tax effects”). The
amendments in the ASU have been applied under adoption of this standard for the 2019 tax year, and the effects of the change
resulted in an immaterial adjustment to accumulated deficit.
Recent
Accounting Pronouncements Not Yet Adopted
In
June 2016, the FASB issued 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, 2023, with early adoption permitted on January 1, 2019. The Company is currently evaluating the impact of
this ASU on its consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting
for goodwill impairments by eliminating Step 2 from the goodwill impairment test. If the carrying amount of a reporting unit exceeds
its fair value, an impairment loss shall be recognized in an amount equal to that excess, versus determining an implied fair value
in Step 2 to measure the impairment loss. ASU 2017-04 is effective for annual periods beginning after December 15, 2019. The Company
does not expect the provisions of ASU 2017-04 to have a material impact on the Company’s consolidated financial position,
results of operations and cash flows.
In
August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic
350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service
Contract (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs incurred in a
hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to
develop or obtain internal-use software (and hosting arrangements that include an internal use software license). ASU 2018-15
is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption
of the amendments is permitted including adoption in any interim period. The guidance can be applied either prospectively to
all implementation costs incurred after the date of adoption or retrospectively. The Company adopted this standard on January
1, 2020 on a prospective basis. The adoption of ASU 2018-15 did not have a material
impact on the Company’s financial condition, results of operations, cash flows, and financial statement
disclosures.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement, to modify the disclosure requirements for fair value measurements. The
standard adds, modifies, and removes previous disclosure requirements. Eliminated disclosures include items such as removing disclosures
for the valuation process for Level 3 measurements, policy for timing of transfers between levels of the fair value hierarchy
and changes in unrealized gains and losses included in earnings for recurring Level 3 measurements held at the reporting period.
The guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted. The
Company does not anticipate the adoption of ASU 2018-13 to have a material impact on the disclosures accompanying its consolidated
financial statement statements.
In
November 2019, the FASB issued ASU 2019-08, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts
with Customers (Topic 606): Codification Improvements – Share-Based Consideration Payable to a Customer. Under this
new guidance, share-based payment awards issued to a customer should be recorded as a reduction of the transaction price in revenue
with an amount measured under the grant-date fair value of the award. Changes in the measurement of the share-based payments after
the grant date that are due to the form of the consideration are not included in the transaction price and are recorded elsewhere
in the income statement. The award is measured and classified under ASC 718 for its entire term, unless the award is modified
after it vests and the grantee is no longer a customer. The new guidance is effective in fiscal years beginning after December
15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating
the impact of adoption of ASU 2019-08 on its financial statements.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU
2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes
certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve
consistent application. ASU 2019-12 is effective for the Company beginning in fiscal 2021. The Company is currently
evaluating the impact of adoption of ASU 2019-12 on its consolidated financial statements, financial condition or results of
operations.
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and
Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible
Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting
for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2)
convertible instruments with a beneficial conversion feature. Upon adoption, a convertible debt instrument will be accounted
for as a single liability at amortized cost unless (1) a convertible instrument contains features that require bifurcation as
a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a
substantial premium. These changes will reduce reported interest expense and increase reported net income for entities that
have issued a convertible instrument that was bifurcated according to previously existing rules. ASU 2020-06 also requires
the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be
no longer available. The new guidance is effective for public entities excluding smaller reporting companies in fiscal years
beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15,
2020. For public business entities that meet the definition of a smaller reporting company, the amendments in ASU 2020-06 are
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. ASU 2020-06 is
effective for us in our first quarter of fiscal 2024. The Company is currently evaluating the impact of adoption of ASU
2020-06 on its consolidated financial statements, financial condition or results of operations.
In
March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate
Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the burden in
accounting for (or recognizing the effects of) reference rate reform on financial reporting. This would apply to companies
meeting certain criteria that have contracts, hedging relationships and other transactions that reference LIBOR or another
reference rate expected to be discontinued because of reference rate reform. This standard is effective as of March 12, 2020
through December 31, 2022 and may be applied to contract modifications made and hedging relationships entered into from the
beginning of an interim period that includes or is subsequent to March 12, 2020. The Company is currently evaluating the
impact of adoption of ASU 2020-04 on its consolidated financial statements, financial condition or results of
operations.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period presentation.
Note
2. Acquisitions
Devicescape
Asset Purchase
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 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 based on our closing price
on April 22, 2019, of $4.23 per share.
The
Devicescape Purchase has been treated as an asset purchase under U.S. GAAP. Under an asset purchase, assets are recognized based
on their cost to the acquiring entity, which generally includes the transaction costs of
the asset acquired and is allocated to the individual assets acquired or liabilities assumed based on their relative fair values
and does not give rise to goodwill.
The
allocation of the purchase price was as follows:
Purchase consideration:
|
|
|
|
Cash consideration and transaction costs
|
|
$
|
2,137
|
|
Shares issued to stockholders
|
|
|
1,692
|
|
Total purchase consideration
|
|
$
|
3,829
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price allocation:
|
|
|
|
|
Assets:
|
|
|
|
|
Accounts receivable
|
|
$
|
71
|
|
Escrow receivable
|
|
|
200
|
|
Intangible assets
|
|
|
3,646
|
|
Total assets
|
|
|
3,917
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts payable & other liabilities
|
|
|
88
|
|
Total liabilities
|
|
|
88
|
|
Estimated fair value of net assets acquired
|
|
$
|
3,829
|
|
The
allocation of the purchase price for Devicescape’s intangible assets were as follows:
|
|
Estimated
|
|
|
Useful
|
|
|
|
Fair
|
|
|
Life
|
|
|
|
Value
|
|
|
(Years)
|
|
Developed technology
|
|
$
|
3,525
|
|
|
8
|
|
Customer relationships
|
|
|
121
|
|
|
8
|
|
Intangible assets
|
|
$
|
3,646
|
|
|
|
|
The
value of the developed technology intangible asset was calculated using the relief-from-royalty method, an income approach. The
relief-from-royalty method measures the fair value of an asset by identifying the avoided royalty costs of licensing an asset
of similar utility from a third party. The value of the customer relationships intangible asset was calculated using the excess
earnings method of the income approach. The excess earnings method calculates the present value of the residual after-tax cash
flows, or excess earnings, attributable to the subject intangible asset after certain deductions are applied for the use of the
other assets that contribute to the generation of the cash flows. The value of the tradename intangible asset was calculated using
the relief-from-royalty method.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
iPass,
Inc. Acquisition
On
November 12, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among
the Company, TBR, Inc., and iPass. Pursuant to the Merger Agreement, TBR, Inc., a wholly owned subsidiary of the Company, commenced
the offer for the “iPass Shares for the transaction consideration, upon the terms and subject to the conditions set forth
in the Prospectus/Offer to Exchange dated December 4, 2018 (together with any amendments and supplements thereto, the “Offer
to Exchange”), and the related Letter of Transmittal. The Offer and withdrawal rights expired at 5:00 p.m. New York City
time on February 12, 2019, and promptly following such time TBR, Inc. accepted for payment and promptly paid for all validly tendered
iPass Shares in accordance with the terms of the Offer. The Company acquired 100% of the voting shares of iPass.
On
February 12, 2019, 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 and TBR, Inc., a wholly owned subsidiary of the Company.
The Company paid Fortress a cash fee of $150 and issued to Fortress warrants to purchase an aggregate of 325,000 shares of common
stock.
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 TBR, Inc. merged with
and into iPass, with iPass surviving as a wholly owned subsidiary of the Company (the “Merger”). The Merger was governed
by Section 251(h) of the Delaware General Corporation Law, as amended (the “DGCL”) with no stockholder vote required
to consummate the Merger. At the effective time of the Merger, each iPass Share outstanding was converted into the right to receive
the transaction consideration. The iPass Shares are no longer listed on the Nasdaq Capital Market.
Based
on the terms of the Merger Agreement, the Company issued 9,865,412 shares of common stock to former stockholders of iPass. In
accordance with ASC 805, the Company recognized a settlement of a pre-existing relationship in the form of a software license
that the Company purchased from iPass on May 8, 2018, on the acquisition date, which is included in consideration transferred.
The aggregate consideration transferred totaled $30,141, which consisted of: i) 9,865,412 shares issued to the former stockholders
of iPass valued at $28,610 (based on the Company’s closing stock price of $2.90 per share on February 12, 2019) and ii)
non-monetary consideration relating to the settlement of the pre-existing relationship software license of $1,531, which approximates
the estimated fair value at the date of acquisition.
The
allocation of the purchase price was as follows:
Purchase price allocation:
|
|
|
|
Assets:
|
|
|
|
Cash and cash equivalents
|
|
$
|
860
|
|
Accounts receivable
|
|
|
4,344
|
|
Property, plant and equipment
|
|
|
873
|
|
Other assets
|
|
|
4,890
|
|
Intangible assets
|
|
|
11,106
|
|
Total assets
|
|
|
22,073
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
$
|
17,207
|
|
Deferred revenue
|
|
|
1,700
|
|
Loans outstanding
|
|
|
9,989
|
|
Other liabilities
|
|
|
857
|
|
Total liabilities
|
|
|
29,753
|
|
Estimated fair value of net assets acquired
|
|
|
(7,680
|
)
|
Goodwill
|
|
$
|
37,821
|
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
On
February 26, 2019, concurrently with the Company entering into a credit agreement with Post Road Administrative Finance, LLC
and its affiliate Post Road Special Opportunity Fund I LLP (see Note 12, Long-term Debt), the Company paid approximately
$11,000 for payment in full of the outstanding secured debt assumed in the acquisition of iPass owed to Fortress and recorded
a loss on extinguishment of debt of approximately $1,000.
The
consolidated financial statements for the year ended December 31, 2019, included iPass and its subsidiaries from the closing date
of February 12, 2019, through December 31, 2019.
The
allocation of the purchase price for iPass’s intangible assets were as follows:
|
|
Estimated
Fair
Value
|
|
|
Useful
Life
(Years)
|
|
Developed Technology
|
|
$
|
2,585
|
|
|
|
8
|
|
Customer relationships
|
|
|
8,378
|
|
|
|
5
|
|
Tradename
|
|
|
143
|
|
|
|
2
|
|
Intangible assets
|
|
$
|
11,106
|
|
|
|
|
|
The
weighted-average useful life of the intangible assets acquired is estimated at 5.7 years.
Artilium
plc. Acquisition
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.
In
October 2017, the Company entered into a Share Exchange Agreement (the “Exchange Agreement”) with Artilium. Prior
to the Exchange Agreement, the Company’s ownership of Artilium approximated 7% of Artilium’s issued and
outstanding equity securities. 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. The Company accounted for the Exchange Agreement as a cost method equity
investment in the amount of $3,230.
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 $2.55 (or 1.9 pence) in cash per Artilium share upon completion of the transaction. The acquisition
valued each Artilium share at $26.22 (or 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, stockholders 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 paid $8,142in cash and issued an aggregate of 37,511,447 shares of the Company’s common stock which included
4,107,714 shares issued to certain Artilium officers.
At
the time of the acquisition, the Company remeasured its previously held equity investment in Artilium with a carrying value of
$3,230 (3,200,332 shares) and recorded a gain on investment of $6,371 based on the Company’s stock price of $3.00 per share
on October1, 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.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
The allocation of the purchase price was as follows:
Purchase consideration:
|
|
|
|
Cash consideration
|
|
$
|
8,142
|
|
Shares issued to stockholders
|
|
|
112,535
|
|
Fair value of previously held equity investment
|
|
|
9,601
|
|
Total purchase consideration
|
|
$
|
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
|
|
The
consolidated financial statements for the year ended December 31, 2019 included Artilium and its subsidiaries from the closing
date of October 1, 2018 through December 31, 2019.
The
allocation of the purchase price for Artilium’s intangible assets were as follows:
|
|
Estimated
Fair
Value
|
|
|
Useful
Life
(Years)
|
|
Technology
|
|
$
|
20,600
|
|
|
|
6
|
|
Customer relationships
|
|
|
16,800
|
|
|
|
18
|
|
Tradename
|
|
|
3,400
|
|
|
|
5
|
|
Intangible
assets
|
|
$
|
40,800
|
|
|
|
|
|
The
weighted-average useful life of the intangible assets acquired is estimated at 10.9 years.
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 $1,546 and $514 as of December 31, 2019 and 2018, respectively.
Note
4. Prepaid Expenses and Other Current Assets
As
of December 31, 2019 and December 31, 2018, prepaid expenses and other current assets consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
Prepaid expenses and other current assets
|
|
2019
|
|
|
2018
|
|
Prepaid insurance and legal fees
|
|
$
|
762
|
|
|
$
|
219
|
|
Prepaid software license and support
|
|
|
890
|
|
|
|
619
|
|
Prepaid payroll taxes
|
|
|
214
|
|
|
|
-
|
|
Prepaid expenses-other
|
|
|
714
|
|
|
|
290
|
|
Valued added tax
|
|
|
591
|
|
|
|
609
|
|
Other receivables
|
|
|
451
|
|
|
|
|
|
Other assets
|
|
|
831
|
|
|
|
347
|
|
Prepaid expenses and other current assets
|
|
$
|
4,453
|
|
|
$
|
2,084
|
|
Note
5. Other Assets Non-Current
Other
assets at December 31, 2019 and December 31, 2018 was $752 and $45, respectively. Other assets consisted mainly of long-term deposits
to various telecom carriers, facility deposits, other deposits. The deposits are refundable at the termination of the business
relationship with the carriers or at the end of the lease term.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
Note
6. Note Receivable
The
Company’s notes receivable consisted of two promissory notes and totaled $512 and $1,082 at December 31, 2019 and 2018,
respectively.
The
third quarter 2016 sale of ValidSoft for the price of $3,000 was completed and the Company received $2,000 in cash and a $1,000
promissory note. The Principal amount of $1,000 together with all interest was originally required to be paid by on or before
September 30, 2018 bearing interest of 5% per annum. On July 22, 2018, an agreement was made to extend the maturity date of the
note to September 30, 2019. At December 31, 2018, the outstanding principal and accrued interest amount was $577. At December
31, 2019 the outstanding principal and accrued interest amount was $512.
In
June 2020, the Company amended the promissory note with ValidSoft and entered into a Replacement Note in the amount of $512 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 $54 in overdue fees in two installments
with the first installment of $27 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 for a principal amount of $500 from Yonder Media Mobile(“Yonder”),
an unrelated entity, with interest accruing at a simple rate of 12% per annum with a maturity date of May 26, 2020. On January
9, 2019, February 12, 2019 and February 28, 2019, the Company issued additional notes of $200, $500 and $2,000, respectively (the
“2019 Notes”). The 2019 Notes each bear an interest rate of 12% per annum and mature 18 months following the issuance
date. All principal and interest are due on the maturity date. In July 2019, the Company and Yonder became involved in a legal
dispute and the Company recorded a reserve of $3,355 representing the principal and accrued interest amount outstanding on the
promissory notes as of June 30, 2019. The aggregate outstanding amount of the notes are $3,355 and $505 at December 31, 2019 and
2018, respectively, with the balance outstanding on the notes at December 31, 2019 being fully reserved. In July 2020, the Company
settled all the principal amounts due under the promissory notes by conversion of the amounts outstanding into shares of Yonder.
Note
7. Property and Equipment, Net
As
of December 31, 2019 and December 31, 2018, property and equipment consisted of the following:
|
|
Average
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
December 31,
|
|
|
December 31,
|
|
Property and equipment
|
|
Lives
|
|
|
2019
|
|
|
2018
|
|
Furniture and fixtures
|
|
|
5
|
|
|
$
|
171
|
|
|
$
|
168
|
|
Computer, communication and network equipment
|
|
|
3 – 10
|
|
|
|
17,450
|
|
|
|
21,009
|
|
Software
|
|
|
5
|
|
|
|
4,150
|
|
|
|
5,311
|
|
Automobiles
|
|
|
5
|
|
|
|
13
|
|
|
|
13
|
|
Leasehold improvements
|
|
|
5
|
|
|
|
131
|
|
|
|
-
|
|
Software development
|
|
|
1
|
|
|
|
8,552
|
|
|
|
1,735
|
|
Total property and equipment
|
|
|
|
|
|
|
30,467
|
|
|
|
28,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
|
|
(24,205
|
)
|
|
|
(22,792
|
)
|
Total property and equipment, net
|
|
|
|
|
|
$
|
6,262
|
|
|
$
|
5,444
|
|
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.
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
The total amount of product development costs (internal use
software costs) that are capitalized in property and equipment during the years ended December 31, 2019 and 2018 was $6,363 and
$1,282, respectively.
During
the years ended December 31, 2019 and 2018, the Company amortized $3,269 and $901 of software development, respectively. Total
property and equipment depreciation and software development amortization expenses were $5,919 and $4,165 for the years ended
December 31, 2019 and 2018, respectively.
Note
8. Goodwill and Net Intangibles, Net
During
the fourth quarter ended December 31, 2019, the Company performed its annual impairment test for goodwill and intangible assets.
As a result of the deteriorating business conditions, the Company recorded an impairment charge of $160,989 during the year ended
December 31, 2019 related to goodwill and intangible assets associated with the Company’s acquisitions of iPass and Artilium.
The
Company operates in a single reportable segment. The impairment test indicated that the net book value of goodwill associated
with the Company’s acquisitions of iPass and Artilium exceeded their implied fair value. The Company estimated the fair
value of its reportable segment utilizing a discounted cash flow model. The intangible assets acquired in the iPass and Artilium
acquisitions also indicated an impairment as the carrying values exceeded the fair value determined in the impairment test. The
impairment charge for goodwill and finite-lived intangible assets represented the amount by which the carrying values exceed their
estimated fair values.
Changes in goodwill were as follows (As
restated):
Goodwill
|
|
|
|
|
Balance at December
31, 2017
|
|
$
|
-
|
|
Business
acquisition
|
|
|
101,375
|
|
Balance at December
31, 2018
|
|
$
|
101,375
|
|
Business acquisition
|
|
|
37,821
|
|
Impairment
|
|
|
(129,097
|
)
|
Balance
at December 31, 2019
|
|
$
|
10,099
|
|
The
Company utilized the income approach to determine the enterprise value of the Company in its goodwill impairment test. The fair
value was based on forecasted future cash flows discounted back to the present value; significant judgments related to the risk
adjusted discount rates, terminal growth rates and weighted-average cost of capital (“WACC”).
Net
intangibles consisted of the following amortizing intangibles:
|
|
As
of December 31, 2019
|
|
|
As
of December 31, 2018
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Impairment
|
|
|
Total
|
|
|
Amount
|
|
|
Amortization
|
|
|
Impairment
|
|
|
Total
|
|
Technology
|
|
$
|
25,971
|
|
|
$
|
(4,102
|
)
|
|
$
|
(15,369
|
)
|
|
$
|
6,500
|
|
|
$
|
20,720
|
|
|
$
|
(859
|
)
|
|
$
|
-
|
|
|
$
|
19,861
|
|
Customer relationships
|
|
|
25,066
|
|
|
|
(2,192
|
)
|
|
|
(14,803
|
)
|
|
|
8,071
|
|
|
|
16,800
|
|
|
|
(233
|
)
|
|
|
-
|
|
|
|
16,567
|
|
Trade names
|
|
|
3,374
|
|
|
|
(725
|
)
|
|
|
(1,720
|
)
|
|
|
929
|
|
|
|
3,400
|
|
|
|
(170
|
)
|
|
|
-
|
|
|
|
3,230
|
|
Net intangibles
|
|
$
|
54,411
|
|
|
$
|
(7,019
|
)
|
|
$
|
(31,892
|
)
|
|
$
|
15,500
|
|
|
$
|
40,920
|
|
|
$
|
(1,262
|
)
|
|
$
|
-
|
|
|
$
|
39,658
|
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
Impairment
charges related to finite lived intangible assets during the year ended December 31, 2019 were $31,892. There were no impairment
charges for the year ended December 31, 2018. The 2019 impairment charge by type of intangible asset was as follows:
|
|
Impairment
charge
|
|
|
Original useful
life (years)
|
|
Technology
|
|
$
|
15.369
|
|
|
6-8
|
|
Customer relationships
|
|
|
14,803
|
|
|
11-18
|
|
Trade names
|
|
|
1,720
|
|
|
3-5
|
|
Total impairment charge
|
|
$
|
31,892
|
|
|
|
|
The
Company utilized various methods to determine the fair value of the intangible assets for use in the impairment test. The fair
value of the trademarks intangible assets was calculated using the income approach relief-from-royalty method. The relief-from-royalty
method measures the fair value of an asset by identifying the avoided royalty costs of licensing an asset of similar utility from
a third party. The fair value of the technology intangible assets was calculated utilizing the relief-from-royalty method for
the iPass intangible asset and the excess earnings method of the income approach for Artilium’s intangible asset. The excess
earnings method calculates the present value of the residual after-tax cash flows, or excess earnings, attributable to the subject
intangible asset after certain deductions are applied for the use of the other assets that contribute to the generation of the
cash flows. Customer relationships were valued based on the distributor method, an income-based approach, and the cost approach
for Artilium and iPass, respectively. The distributor method uses a discounted cash flow model to calculate the present value
of a distributor’s expected profit margins to reflect the value of the distributor’s ability to provide products to
its customers. The cost approach measures the benefits related to an asset by the cost to reconstruct it or replace it with another
asset of similar utility.
At December 31, 2019, the Company’s estimated useful lives
of its intangible assets by category was 8 years, 5 to 6 years and 2 to 6 years for technology, customer relationships and trade
names, respectively. The change in the estimated useful lives from the estimates at the acquisition dates was due to diminished
expectations of the future periods that would benefit from our original estimates. At December 31, 2019, the weighted-average amortization
period for intangible assets was 6.2 years. At December 31, 2019, the weighted-average amortization periods for technology, customer
relationships, and trade names was 7.7 years, 5.1 years and 5.6 years, respectively.
Amortization
expense related to intangible assets for the years ended December 31, 2019 and 2018 was $7,019 and $1,262, respectively.
The
estimated annual amortization expense related to finite-lived intangible assets as of December 31, 2019, is as
follows:
Year
Ended December 31,
|
|
|
Amortization
|
|
2020
|
|
$
|
2,606
|
|
2021
|
|
2,606
|
|
2022
|
|
2,556
|
|
2023
|
|
2,556
|
|
2024
|
|
2,556
|
|
2025
and thereafter
|
|
2,620
|
|
|
|
$
|
15,500
|
|
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
customers for which either delivery has not occurred or against future sales of services. As of December 31, 2019 and 2018, the
balance of net billings in excess of revenues was $2,529 and $227, respectively.
Note
10. Accrued Expenses and Other Payables
As
of December 31, 2019 and December 31, 2018, accrued expenses and other payables were comprised of the following:
|
|
December
31,
|
|
|
December
31,
|
|
Accrued
expenses and other payables
|
|
2019
|
|
|
2018
|
|
Accrued selling, general and administrative expenses
|
|
$
|
2.720
|
|
|
$
|
1,189
|
|
Accrued salaries and bonuses
|
|
|
2,005
|
|
|
|
1,596
|
|
Accrued employee benefits
|
|
|
564
|
|
|
|
-
|
|
Accrued restructuring & acquisition related costs
|
|
|
-
|
|
|
|
1,885
|
|
Accrued cost of service
|
|
|
627
|
|
|
|
813
|
|
Accrued taxes (including VAT)
|
|
|
2,637
|
|
|
|
1,834
|
|
Accrued interest payable
|
|
|
53
|
|
|
|
68
|
|
Accrued customer credit
|
|
|
3,393
|
|
|
|
-
|
|
Other accrued expenses
|
|
|
1,617
|
|
|
|
356
|
|
Accrued expenses and other payables
|
|
$
|
13,616
|
|
|
$
|
7,741
|
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
Accrued
taxes include income taxes payable as of December 31, 2019 and 2018, amounting to $316 and $81 respectively. See Note 18 to 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 $993 at December 31, 2019 are comprised of six bank notes secured through by Artilium with varying original
maturity dates ranging between 6 and 24 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. The promissory notes were $681 at December 31, 2018.
9%
Unsecured Convertible Promissory Note
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
consisting of up to 140 Units, each Unit consisting of: (i) one 9% unsecured subordinated Note in the principal amount of
$30, 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. During 2016 and 2015, the Company sold an aggregate of $3,548 principal amount of Notes and delivered
Warrants to purchase an aggregate of 473,067 shares of common stock. In December 2016, the Company and the holders agreed
upon modification of the Warrants to remove certain anti-dilution protections in the note and offered an exercise price
adjustment to $3.75 and 10% bonus warrants (47,306 warrants) in return.
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, 33,115 warrants were issued with an exercise price of $11.25 and 33,115
warrants were issued with an exercise price of $7.50 along with a cash fee.
The
value of the Warrants and the conversion feature to the investors and the Placement Agent cash fees and warrants were capitalized
and off set against the liability for the Notes at the time of issuance and were amortized over the term of the Notes using the
effective interest method.
During
2019, the conversion feature was exercised at a price of $1.75 per share and 60,000 shares were issued for the outstanding principal
amount, 6,000 shares issued for the 10% early repayment and 18,220 shares issued for accrued interest on the promissory notes
(see table below).
Breakdown
of the 9% Unsecured Subordinated Convertible
Promissory
Note (Matured December 2018 through June 2019)
|
|
December
31,
2019
|
|
|
Regular
Amortizations
(during
2019)
|
|
|
Conversions
(during 2019)
including
accelerated
amortization
|
|
|
Outstanding
December 31,
2018
|
|
Convertible
Note Principal Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
Amount
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
105
|
|
|
$
|
(105
|
)
|
10%
Early Repayment
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Discounts
& Financing Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investor
Warrants
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
2
|
|
Conversion
Feature value
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
1
|
|
7%
Agent Warrants
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
1
|
|
Financing
Costs
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
5
|
|
|
|
$
|
-
|
|
|
$
|
(9
|
)
|
|
$
|
116
|
|
|
$
|
(107
|
)
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
At
December 31, 2019 there were 38,111,211 warrants outstanding from the accredited investors 4,818,269 warrants were exercised in
2019 and 1,488,973 outstanding from the Placement Agent.
Breakdown
of the conversion rights for outstanding convertible notes:
Number
of underlying shares for Conversion of
outstanding
unsecured convertible notes
|
|
Outstanding
December 31,
2019
|
|
|
Agreement
Amendments
/ Interest
effects
|
|
|
Exercises
/
Conversions
/ Expirations
|
|
|
Outstanding
December 31,
2018
|
|
9%
Convertible Note – Investors
|
|
|
-
|
|
|
|
44,720
|
|
|
|
(84,220
|
)
|
|
|
39,500
|
|
Outstanding
Conversion Features
|
|
|
-
|
|
|
|
44,720
|
|
|
|
(84,220)
|
|
|
|
39,500
|
|
In
the above table the exercise price at December 31, 2018 for the conversion of the promissory notes, including accrued interest,
into common shares was at $3.75 (39 shares) and converted in 2019 at an exercise price of $1.75 (84 shares) resulting in a difference
of 45 shares.
Note
12. Long-term Debt
Former
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 provided the Company with a secured loan of up to $50,000 (the “Loan”),
with an initial loan of $25,000 funded on February 26, 2019, and additional amounts in $5,000 increments as requested by the Company
before the 18-month anniversary of the initial funding date. No additional loan was to 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 were due on February 26, 2022.
Borrowings
under the Credit Agreement bore interest at a rate per year of Libor plus 8.5% provided, however, that upon an event of default
or if certain of the Consents were not delivered prior to May 1, 2019 or June 1, 2019, as applicable, borrowings under the credit
agreement were to bear interest at a rate per year of Libor plus 11.5% until the Consents were delivered. The interest was due
and payable monthly in cash in arrears, provided, however, that the Company could elect to pay any or all of the interest in the
form of Payment-in-Kind (“PIK”) interest due and payable at maturity at a maximum percentage per year equal to (a)
through and including the first anniversary of the initial funding date, 3%, (b) after the first anniversary of the initial funding
date through and including the second anniversary of the initial funding date, 2%, and (c) after the second anniversary of the
initial funding date, 1%.
The
Loan was subject to prepayment upon the receipt of proceeds outside the ordinary course of business in excess of $1,000 and payment
of a commitment fee of 1% per year on the unused portion of the Credit Agreement.
Permitted
use of proceeds for the initial $25,000 of the Loan included approximately $11,000 for payment in full of the outstanding secured
debt owed to Fortress incurred in connection with the Company’s previously disclosed acquisition of iPass on February 12,
2019, as well as the remaining amounts for permitted acquisitions and investments and for general working capital purposes. The
initial $25,000 loan was reduced by an original issue discount of (i) 0.75% of $25,000 and (ii) 1.25% of $50,000 and any additional
amounts borrowed were reduced by an original issue discount of 0.75% of the funded amounts. The aggregate original issue discount
was $813 and was amortized and reflected as interest expense initially over the term of the Credit agreement using the effective
interest method. The Company paid $867 of debt issuance costs which were recorded as a reduction of the loan balance and was amortized
and reflected as amortization expense initially over the term of the Credit Agreement using the effective interest method. The
debt discount and issuance costs resulted in a higher effective interest rate on the Credit Agreement.
On
February 26, 2019, concurrent with entering into the Credit Agreement, the existing loan and security agreement by and among iPass,
iPass IP LLC and Fortress (the “Existing iPass Loan”) was paid in full. Additionally, pursuant to the terms of the
Credit Agreement, the Company issued to Post Road 425,000 shares of its common stock valued at $1,607, based on the Company’s
closing stock price of $3.78 on February 26, 2019. The $1,607 was recorded as a debt issuance cost reducing the loan balance and
was amortized in the same manner as the original issue discount discussed above.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
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. The Company agreed to issue to Post Road 750,000 shares
of its common stock valued at $2,167, based on the Company’s closing stock price of $2.89 on August 22, 2019. The $2,167
was recorded as a debt issuance cost reducing the loan balance. The Company also incurred additional debt issuance costs of $140,
which was recorded as a reduction of the loan balance.
In
September 2019, the Company paid off the Credit Agreement from the proceeds received from the Securities Purchase Agreement (as
defined in Note 15, Stockholder’s Equity). As a result, the Company recognized a loss on extinguishment of debt of
$ 7,873 for the difference between the net carrying value of the loan, which includes the unamortized debt discount and issuance
costs of $4,926 and the reacquisition price of the loan, which includes the exit fee paid to the lender of $2,947.
During
the year ended December 31, 2019, costs of $494 and $174 were amortized and reflected on the Consolidated Statements of Comprehensive
Loss as “Interest expense related to debt discount and conversion feature” and “Amortization of deferred financing
costs”, respectively, as well as $1,659 of interest expense incurred on the loan, excluding loan fees. The weighted-average
interest rate was 11.08%.
Redeemable
Preferred Stock
On
December 24, 2019, the Company issued 105.33 shares of 8% Series C Redeemable Preferred Stock (the “Series C Redeemable
Preferred Stock”) with a stated value of $100.00 per share in a private placement transaction exempt from the registration
requirements of the Securities Act of 1933, as amended, for an aggregate purchase price of $5,033. The Company received net proceeds
of $4,479 after deducting legal fees of $361 and $193 of proceeds was remitted to an escrow account, recorded as “Prepaid
and other current assets” on the Consolidated Balance Sheet at December 31, 2019, and subsequently remitted to the Company
in January 2020. The Series C Redeemable Preferred Stock requires mandatory redemption on December 24, 2020, together with the
8% dividend and a 12.5% premium.
The
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 $10,533 equal to the stated value of the issued shares
and a debt discount of $5,500 representing the difference between the stated value and the gross proceeds of $5,033. The debt
discount is being amortized through the redemption date of December 24, 2020 using the effective interest rate method. The Company
incurred placement and legal fees totaling $361 which were also recorded as a debt discount and are being amortized over the same
period on a straight-line basis. Additionally, the 8% dividend is being accrued over the same period and the 12.5% redemption
premium is being accreted through the redemption date and recorded to “Interest expense related to debt discount and conversion
feature” on the Consolidated Statements of Operations and Comprehensive Loss.
As
of December 31, 2019, the components of the Series C Redeemable Preferred Stock liability consisted of the following:
|
|
|
|
December
31,
|
|
|
|
|
|
2019
|
|
Series
C Redeemable Preferred Stock, stated value
|
|
|
|
$
|
10,533
|
|
Unamortized
debt discount
|
|
|
|
|
(5,776
|
)
|
Accretion
of redemption premium
|
|
|
|
|
25
|
|
Accrued
dividend
|
|
|
|
|
16
|
|
Series
C Redeemable Preferred Stock, net
|
|
|
|
$
|
4,798
|
|
The following table details the amounts in the Consolidated
Statement of Operations and Comprehensive Loss in connection with Series C Redeemable Preferred Stock liability as of December
31, 2019:
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
2019
|
|
Location
|
|
|
Amortization
of debt discount
|
|
|
|
$
|
85
|
|
Interest
expense-debt discount / Amortization of deferred financing costs
|
|
|
Accretion
of redemption premium
|
|
|
|
|
25
|
|
Interest
expense-debt discount
|
|
|
Accrued
dividend
|
|
|
|
|
16
|
|
Interest
expense
|
|
|
Total
interest and amortization expense
|
|
|
|
$
|
126
|
|
|
|
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
By
their terms, those shares of Series C Redeemable Preferred Stock are not convertible into other securities of the Company. However,
on various dates from July 17, 2020 through October 1, 2020, the Company entered into Exchange Agreements with the holders of
those 105.33 shares of Series C Redeemable Preferred Stockholders (collectively, the “Series C Exchange Agreements”)
containing certain exchange provisions as described below.
Under
the Series C Exchange Agreements, the Company and the holders of the outstanding shares of the Series C Redeemable Preferred Stock
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 Series C Exchange 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 97 shares of Series C Redeemable Preferred
Stock in the aggregate is $0.70, while the conversion price for the holder of the other 8 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.
The
holders of the 97 shares of Series C Redeemable Preferred Stock were permitted to exchange their shares by December 31, 2020,
after which time an additional condition to such exchange was imposed that requires the average daily volume-weighted average
trading price of the Company’s common stock to be at least $0.60 per share, for the five consecutive trading days, before
an exchange. The same additional condition was also imposed on of holders of the other 8 shares of Series C Redeemable Preferred
Stock, if such holders held their shares after December 24, 2020.
Note
13. Related Party Transactions
As
of December 31, 2019 and 2018, Pareteum BV has an outstanding loan payable 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, 2019 and 2018 was $420 and $342,
respectively, which carries an 8% interest rate and is reflected as a related party loan in the accompanying consolidated balance
sheet. No repayments were made on the loan during the year ended December 31, 2019. All principal and interest are due on the
maturity date.
During
2019 and 2018, the Company retained Robert Turner of InTown Legal Services, who is the son of Robert H. Turner, the former Executive
Chairman of the Board. InTown Legal Services has a five thousand dollars per month minimum retainer with the Company and was paid
$278 in 2019 and $133 in 2018. The agreement between the Company and InTown Legal Services is an at will agreement.
Note
14. Lease Commitments
The
Company leases property under operating leases with varying expiration dates between 2020 and 2025. The Company also leases equipment
and automobiles under operating leases with expiration dates between 2021 and 2024. The Company determines if an arrangement is
a lease at inception. The Company presents the operating leases in long-term assets and current and long-term liabilities. Finance
lease assets are included in property and equipment, net, and finance lease liabilities are presented in current and long-term
liabilities in the accompanying consolidated balance sheet as of December 31, 2019.
As
of December 31, 2019, the Company had 10 leased properties with remaining lease terms that ranged from of 1.0 year
to 5.5 years. Two leases expired on December 31, 2019. The Company is also party to three equipment leases and 41 automobile
leases. Many of our leases include options to extend the term with several allowed to renew indefinitely.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
The
components of the lease expense recorded in the consolidated statement of operations were as follows:
|
|
|
|
|
|
Year
ended
December
31, 2019
|
|
Operating lease cost
|
|
$
|
2,313
|
|
Finance lease cost:
|
|
|
|
|
Amortization of assets
|
|
|
9
|
|
Interest on lease liabilities
|
|
|
2
|
|
|
|
|
|
|
Total net lease cost
|
|
$
|
2,324
|
|
Supplemental
balance sheet information related to leases was as follows:
Leases
|
|
Classification
|
|
As
of
December 31, 2019
|
|
Assets:
|
|
|
|
|
|
|
Operating lease assets
|
|
Operating right-of-use asset, net of accumulated amortization(1)
|
|
$
|
2,241
|
|
Finance lease assets
|
|
Property and equipment, net of accumulated depreciation(2)
|
|
|
133
|
|
Total leased assets
|
|
|
|
$
|
2,374
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Operating
|
|
Operating lease liability, current
|
|
$
|
2,376
|
|
Finance
|
|
Financing lease liability, current
|
|
|
46
|
|
Noncurrent
|
|
|
|
|
|
|
Operating
|
|
Operating lease liability, noncurrent
|
|
|
333
|
|
Finance
|
|
Finance lease liability, noncurrent
|
|
|
82
|
|
Total lease liabilities
|
|
|
|
$
|
2,837
|
|
(1)
Operating lease assets are recorded net of accumulated amortization of $2,006 as of December 31, 2019.
(2)
Finance lease assets are recorded net of accumulated depreciation of $9 as of December 31, 2019.
Supplemental
cash flow and other information related to leases was as follows:
|
|
Year
ended
December
31, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash outflows from operating leases
|
|
$
|
1,656
|
|
Operating cash outflows from finance leases (interest)
|
|
$
|
2
|
|
Financing cash outflows from finance leases
|
|
$
|
17
|
|
|
|
|
|
|
Weighted-average remaining lease term (in years):
|
|
|
|
|
Operating leases
|
|
|
1.64
|
|
Finance leases
|
|
|
2.67
|
|
|
|
|
|
|
Weighted-average discount rate:
|
|
|
|
|
Operating leases
|
|
|
9.22
|
%
|
Finance leases
|
|
|
5.00
|
%
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
Maturities
of lease liabilities were as follows:
|
|
|
As
of December 31, 2019
|
|
|
|
|
|
Operating
Leases
|
|
|
|
Finance
Leases
|
|
2020
|
|
|
$
|
2,524
|
|
|
$
|
51
|
|
2021
|
|
|
|
196
|
|
|
|
51
|
|
2022
|
|
|
|
54
|
|
|
|
34
|
|
2023
|
|
|
|
45
|
|
|
|
-
|
|
2024
|
|
|
|
45
|
|
|
|
-
|
|
Thereafter
|
|
|
|
22
|
|
|
|
-
|
|
Total lease payments
|
|
|
|
2,886
|
|
|
|
136
|
|
Less: imputed interest
|
|
|
|
(177
|
)
|
|
|
(8
|
)
|
Total lease liabilities
|
|
|
|
2,709
|
|
|
|
128
|
|
Less: current liabilities
|
|
|
|
(2,376
|
)
|
|
|
(46
|
)
|
Long-term lease liabilities
|
|
|
$
|
333
|
|
|
$
|
82
|
|
As
of December 31, 2019, the Company had additional operating lease obligations totaling $551 that had not yet commenced,
all of which commenced in 2020 and had lease terms ranging from of 3 to 4 years.
Note
15. Stockholders’ Equity
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 at a price of $1.76. Each common stock unit consisted of one share
of common stock, one Series A warrant and one Series B warrant to purchase shares of
common stock. The number of Series A warrants and Series B warrants that were issued
totaled 18,852,272 and 9,426,136, respectively.
|
|
(ii)
|
3,875,000
pre-funded warrants for the purchase of common stock units at price of $1.75 per share.
Upon the exercise of the pre-funded warrants at an exercise price of $0.01, the investor
is entitled to receive one unit which consists of one share of common stock (or 3,875,000
shares in the aggregate), 3,875,000 Series A warrants to purchase shares of common stock
and 1,937,500 Series B warrants to purchase shares of common stock.
|
The
Company received net proceeds of $37,680 after deducting expenses of $2,281. 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. All the warrants in this transaction are classified as equity and the Series
A and B warrants are participating securities for purposes of calculating basic loss per share.
The
Series A warrant provides for an exercise price of $2.25 per share, exercisable beginning September 2020 and expire in September
2024. The Series B warrant provides for an exercise price of $1.84, exercisable beginning September 2019 and expire 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 in the Company’s Statement
of Changes in Stockholders Equity (Deficit) as “Pre-funded warrants.” 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, net of shares surrendered
for payment of the exercise price.
On
May 9, 2018, we entered into a securities purchase agreement (the “2018 Offering”) 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 of $6,100 and offering expenses of $701. 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. The Company also agreed to pay a 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.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
Common
Stock
The Company is authorized to issue 500,000,000 shares of common
stock. The Company had 139,060,180 shares of common stock issued and outstanding as of December 31, 2019, an increase of 40,767,650
shares from December 31, 2018, mainly due to shares issued in the acquisitions of iPass and Devicescape (10,265,412), shares issued
in the Securities Purchase Agreement (18,852,272) and from the exercise of the pre-funded warrants issued in the Securities Purchase
Agreement (3,845,193). As of December 31, 2019, approximately 1,733,698 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, 2019, for which the issuance of the shares from the Company’s stock transfer agent are pending.
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. 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.
On
December 10, 2019, the Company’s Board of Directors designated 255 shares of Preferred Stock to be Series C Redeemable Preferred
Stock with 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. Under the terms of the certificate of designations for the Series
C Redeemable Preferred Stock, 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. However, as previously disclosed in Note 12, Long-term Debt to the
Financial Statements, the Company entered into the Series C Exchange Agreements with each holder of Series C Redeemable Preferred
Stock, under which the shares will remain outstanding.
There
were 105.33 shares of Series C Redeemable Preferred Stock outstanding as of December 31, 2019, see Note 12, Long-term Debt
for further information, and no preferred shares outstanding as of December 31, 2018.
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, 2019 and
2018, no warrants have been classified as derivative warrants.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
The
table below summarizes the warrants outstanding (in share amounts) as of December 31, 2019 and as of December 31, 2018:
Warrants:
|
|
|
Number
of Warrants
|
|
Outstanding as of January 1, 2018
|
|
|
|
18,135,832
|
|
Issued
|
|
|
|
196,750
|
|
Exercised
|
|
|
|
(14,463,097
|
)
|
Expirations
|
|
|
|
(80,003
|
)
|
Outstanding as of December 31, 2018
|
|
|
|
3,789,482
|
|
Issued
|
|
|
|
39,199,998
|
|
Exercised
|
|
|
|
(4,818,269
|
)
|
Expirations
|
|
|
|
(60,000
|
)
|
Outstanding as of December 31, 2019
|
|
|
|
38,111,211
|
|
Outstanding
Warrants
|
|
Exercise/
Conversion
price(s)
(range)
|
|
|
Expiring
|
|
|
December
31,
2019
|
|
December
31,
2018
|
|
Equity Warrants – Fundraising
|
|
|
$1.05 - $5.375
|
|
|
|
2019 – 2024
|
|
|
|
38,111,211
|
|
|
3,789,482
|
|
|
The
discussion below describes the warrant activity (in thousands of shares) during the year ended December 31, 2019.
Warrants
– Issued
In
connection with the September 2019 Securities Purchase Agreement, 38,874,998 warrants were issued, of which, 3,875,000 were pre-funded
and 909,091 warrants were issued to the placement agent.
In
February 2019, the Company issued warrants to purchase an aggregate of 325,000 shares of common stock pursuant to Fortress consenting
to the consummation of the Merger Agreement by and among the Company, iPass and TBR, Inc., a wholly owned subsidiary of the Company.
Warrants
– Exercised
During 2019, 4,818,269 warrants were exercised, out of which
800,235 were cash exercises resulting in proceeds of $1,394 received at an average exercise price of $1.74 and 4,018,034 warrants
were exercised cashless resulting in the delivery of 3,903,302 shares.
Warrants
– Expirations
During
2019, 60,000 warrants expired unexercised.
Note
16. 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. The Series A and B warrants issued in the Securities
Purchase Agreement are participating securities due to the warrant holder’s participation in dividends distributed by the
Company on a one-for-one basis with common stockholders thus requiring the application of the two-class method in computing basic
net income per share. For the year ended December 31, 2019, the Company was in a loss position and none of the loss was allocated
to the participating securities as they do not participate in the losses of the Company.
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.
The
diluted share base includes shares related to convertible debt, warrants to purchase Common Stock and employee awards and or stock
options as follows:
Dilutive
Securities
|
|
2019
|
|
|
2018
|
|
Convertible
Notes
|
|
|
-
|
|
|
|
39,500
|
|
Warrants
|
|
|
38,111,211
|
|
|
|
3,789,482
|
|
Time Conditioned Share
Awards
|
|
|
2,563,359
|
|
|
|
1,480,557
|
|
Employee
Stock Options
|
|
|
6,924,436
|
|
|
|
3,663,812
|
|
|
|
|
47,599,006
|
|
|
|
8,973,351
|
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
Weighted-average
number of shares used to compute basic and diluted loss per share is the same since the effect of the dilutive securities is anti-dilutive
due to the Company’s reported net loss for the years ended December 31, 2019 and 2018.
Note
17. Employee Benefit Plan
The
Company grants stock options and restricted stock awards under the 2017 Long-Term Incentive Compensation Plan (“2017
Plan”) and the 2018 Long-Term Incentive Plan (“2018 Plan”). The Company also maintains the 2008 Long-term
Incentive Plan (“2008 Plan”). There have been no new grants of share-based compensation under the 2008 Plan
during the years ended December 31, 2019 and 2018. Stock options under each long-term incentive plan are granted with an
exercise price equal to the fair market value of the Company’s common stock on the date of grant, and generally vest
from one to three years from the date of grant. Options are generally granted with a five-year term. The fair value of
each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model. The
fair value of restricted stock awards is based on the fair market value at the date of grant and expensed over the vesting period,
which generally range from one to three years from the date of the grant.
2008
Long-Term Incentive Compensation Plan
The
2008 Plan allowed for the grant of awards of up to 2,240,000 shares of common stock, after giving effect to a 1-for-25 reverse
stock-split in 2008, in the form of incentive and non-qualified stock options, stock appreciation rights, performance units, restricted
stock awards and performance bonuses. As of December 31, 2019, no further awards may be granted under the 2008 Plan and 131,268
awards remain outstanding in accordance with their terms. In addition, there are 62,180 previously granted restricted stock awards
that have vested for which shares have not been issued as of December 31, 2019.
The
stock option activity of the 2008 Plan for the years ended December 31, 2019 and 2018 follows:
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Initial
Fair
Market Value
(Outstanding
Options)
|
|
Outstanding
as of December 31, 2017
|
|
|
1,128,384
|
|
|
$
|
9.40
|
|
|
$
|
6,854
|
|
Revoked
(cancelled)
|
|
|
(786,697
|
)
|
|
|
6.33
|
|
|
|
(3,495
|
)
|
Forfeitures
|
|
|
(175
|
)
|
|
|
3.07
|
|
|
|
-
|
|
Expirations
|
|
|
(138,246
|
)
|
|
|
25.60
|
|
|
|
(1,997
|
)
|
Outstanding
as of December 31, 2018
|
|
|
203,266
|
|
|
|
10.74
|
|
|
|
1,381
|
|
Forfeitures
|
|
|
(71,998
|
)
|
|
|
7.72
|
|
|
|
(335
|
)
|
Outstanding
as of December 31, 2019
|
|
|
131,268
|
|
|
$
|
12.40
|
|
|
$
|
1,046
|
|
2017
Long-Term Incentive Compensation Plan
The
2017 Plan allows for the grant of 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. As of December 31, 2019, there were 57,155 shares available for grant under the 2017
Plan. As of December 31, 2019, there were 2,950,519 stock options outstanding under the 2017 Plan. In addition, there are
53,399 previously granted restricted stock awards that have vested for which shares have not been issued as of December 31,
2019.
The
remaining 57,155 shares available for grant under the 2017 Plan may be issued to former directors and staff. The Company plans
on filing a registration statement on Form S-8 for issuances that have been approved by stockholders, but still require registration.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
The
stock option activity of the 2017 Plan for the years ended December 31, 2019 and December 31, 2018 follows:
|
|
|
Number
of Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Initial
Fair Market
Value
(Outstanding
Options)
|
|
Outstanding
as of December 31, 2017
|
|
|
1,899,800
|
|
|
$
|
1.00
|
|
|
$
|
1,053
|
|
Granted
|
|
|
1,999,685
|
|
|
|
2.42
|
|
|
|
3,378
|
|
Exercised
|
|
|
(59,220
|
)
|
|
|
1.00
|
|
|
|
(59
|
)
|
Forfeitures
|
|
|
(374,663
|
)
|
|
|
1.55
|
|
|
|
(766
|
)
|
Expirations
|
|
|
(5,056
|
)
|
|
|
1.00
|
|
|
|
(5
|
)
|
Outstanding
as of December 31, 2018
|
|
|
3,460,546
|
|
|
$
|
1.76
|
|
|
$
|
3,601
|
|
Exercised
|
|
|
(177,678
|
)
|
|
|
1.19
|
|
|
|
(129
|
)
|
Forfeitures
|
|
|
(294,178
|
)
|
|
|
2.37
|
|
|
|
(442
|
)
|
Expirations
|
|
|
(38,171
|
)
|
|
|
1.09
|
|
|
|
(25
|
)
|
Outstanding
as of December 31, 2019
|
|
|
2,950,519
|
|
|
$
|
1.74
|
|
|
$
|
3,005
|
|
There
were no stock options granted under 2017 Plan during 2019. The key assumptions included in Black-Scholes option pricing model
for stock options granted in 2018 follows:
|
|
Year-ended
December
31, 2018
|
|
Expected
Volatility
|
|
|
130
|
%
|
Weighted-average
Expected Term (years)
|
|
|
2.79
|
|
Weighted-average
Risk-free Interest Rate
|
|
|
2.69
|
%
|
Dividend
yield
|
|
|
-
|
|
Weighted-average
Fair Value at Grant-date
|
|
$
|
1.68
|
|
Additional
information for stock options issued under the 2017 Plan follows:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Options
Outstanding
|
|
|
|
|
|
|
|
|
Total Options Outstanding
|
|
|
2,950,519
|
|
|
|
3,460,546
|
|
Weighted-average Remaining
Contractual Term (Years)
|
|
|
1.90
|
|
|
|
2.98
|
|
Weighted-average Remaining
Expected Term (Years)
|
|
|
1.04
|
|
|
|
1.84
|
|
Weighted-average Exercise
Price
|
|
$
|
1.74
|
|
|
$
|
1.81
|
|
Aggregate Intrinsic
Value (1)
|
|
$
|
-
|
|
|
$
|
1,723
|
|
|
|
|
|
|
|
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
|
Total Options Exercisable
|
|
|
2,066,506
|
|
|
|
841,053
|
|
Weighted-average Exercise
Price
|
|
$
|
1.61
|
|
|
$
|
1.00
|
|
Weighted-average Remaining
Contractual Term (Years)
|
|
|
1.70
|
|
|
|
2.24
|
|
Aggregate Intrinsic
Value (1)
|
|
$
|
-
|
|
|
$
|
580
|
|
|
|
|
|
|
|
|
|
|
Unvested
Options
|
|
|
|
|
|
|
|
|
Total Unvested Options
|
|
|
884,013
|
|
|
|
2,619,493
|
|
Weighted-average Exercise
Price
|
|
$
|
2.06
|
|
|
$
|
2.01
|
|
Forfeiture rate used
for this period ending
|
|
|
18.65
|
%
|
|
|
11.25
|
%
|
|
|
|
|
|
|
|
|
|
Options
expected to vest
|
|
|
|
|
|
|
|
|
Number of options expected
to vest corrected by forfeiture
|
|
|
719,109
|
|
|
|
2,324,885
|
|
Unrecognized share-based
compensation expense
|
|
$
|
1,412
|
|
|
$
|
2,449
|
|
Weighting Average remaining
contract Term (Years)
|
|
|
1.92
|
|
|
|
2.86
|
|
|
|
|
|
|
|
|
|
|
Exercises
|
|
|
|
|
|
|
|
|
Total shares delivered/issued
|
|
|
177,678
|
|
|
|
59,220
|
|
Weighted-average Exercise
Price
|
|
$
|
1.19
|
|
|
$
|
1.00
|
|
Intrinsic Value of Options
Exercised
|
|
$
|
363
|
|
|
$
|
101
|
|
|
(1)
|
Excludes
options with exercise prices that were greater than the average market price of our common
shares for the period.
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
2018
Long-Term Incentive Compensation Plan
On
October 10, 2018, the Company filed a registration statement on Form 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.
Pursuant to the terms of the 2018 Plan, as amended, the number
of shares available under the plan shall increase on the first day of each fiscal year in an amount equal to the lesser of (i)
15% of the total number of shares of common stock outstanding as of December 31st of the preceding fiscal year or (ii)
such number of shares of common stock determined by the Board of Directors (the “Evergreen Increase”). As a result
of the 2019 Evergreen Increase, the number of shares available under the 2018 Plan increased by 7,500,000 shares, such number determined
by the Board of Directors being the lesser of (i) and (ii) as described herein (the “2018 Plan Increase”). The 2018
Plan Increase took effect upon the filing of the Registration Statement on Form S-8 on June 28, 2019.
As
of December 31, 2019, there were 6,456,665 shares available for grant under the 2018 Plan. As of December 31, 2019, there
were 3,842,649 stock options and 1,447,780 unvested restricted stock units outstanding under the 2018 Plan. In addition,
there are 34,304 previously granted restricted stock awards that have vested for which shares have not been issued as of
December 31, 2019.
There
were no stock options issued under the 2018 Plan during the year ended December 31, 2018. The stock option activity under the
2018 Plan follows:
Options:
|
|
|
Number
of Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Initial
Fair Market
Value
(Outstanding
Options)
|
|
Outstanding
as of December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
5,649,649
|
|
|
|
2.24
|
|
|
|
10,629
|
|
Forfeitures
|
|
|
(1,542,000
|
)
|
|
|
2.38
|
|
|
|
(2,927
|
)
|
Expirations
|
|
|
(265,000
|
)
|
|
|
3.07
|
|
|
|
(813
|
)
|
Outstanding
as of December 31, 2019
|
|
|
3,842,649
|
|
|
$
|
2.13
|
|
|
$
|
6,889
|
|
The
key assumptions included in Black-Scholes option pricing model for stock options granted in 2019 follows:
|
|
|
|
|
Year-ended
December
31, 2019
|
|
Expected
Volatility
|
|
|
|
|
|
|
121
|
%
|
Weighted-average
Expected Term (years)
|
|
|
|
|
|
|
3.19
|
|
Weighted-average
Risk-free Interest Rate
|
|
|
|
|
|
|
2.40
|
%
|
Dividend yield
|
|
|
|
|
|
|
-
|
|
Weighted-average Fair
Value at Grant-date
|
|
|
|
|
|
$
|
1.88
|
|
Additional
information for stock options issued under the 2018 Plan follows:
|
|
December
31, 2019
|
|
Options Outstanding
|
|
|
|
|
Total Options Outstanding
|
|
|
3,842,649
|
|
Weighted-average Remaining Contractual Term (years)
|
|
|
4.05
|
|
Weighted-average Remaining Expected Term (years)
|
|
|
2.39
|
|
Weighted-average Exercise Price
|
|
$
|
2.13
|
|
Aggregate Intrinsic Value (1)
|
|
$
|
-
|
|
|
|
|
|
|
Options Exercisable (1)
|
|
|
|
|
Total Options Exercisable
|
|
|
100,000
|
|
Weighted-average Exercise Price
|
|
$
|
0.36
|
|
Weighted-average Remaining Contractual Term (years)
|
|
|
3.83
|
|
Aggregate Intrinsic Value
|
|
$
|
8
|
|
|
|
|
|
|
Unvested Options
|
|
|
|
|
Total Unvested Options
|
|
|
3,742,649
|
|
Weighted-average Exercise Price
|
|
$
|
2.18
|
|
Forfeiture Rate Used for this Period Ending
|
|
|
28
|
%
|
|
|
|
|
|
Options expected to vest
|
|
|
|
|
Number of options Expected to Vest Corrected by Forfeiture
|
|
|
2,678,081
|
|
Unrecognized Share-based Compensation Expense
|
|
$
|
7,625
|
|
Weighting Average Remaining Contract Term (years)
|
|
|
2.90
|
|
|
|
|
|
|
Exercises
|
|
|
|
|
Total shares delivered/issued
|
|
|
-
|
|
Weighted-average Exercise Price
|
|
$
|
-
|
|
Intrinsic Value of Options Exercised
|
|
$
|
-
|
|
|
(1)
|
Excludes
options with exercise prices that were greater than the average market price of our common
shares for the period.
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
There
were 60,696 shares of restricted stock awarded to two officers in 2019 that remain unvested as of December 31, 2019. A rollforward
of restricted stock activity under the 2018 Plan follows:
|
|
|
Number
of Shares
|
|
|
Weighted-average
Grant Date
Fair
Value
|
|
Nonvested as of December 31, 2017
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
|
2,000,000
|
|
|
|
3.00
|
|
Vested
|
|
|
|
(1,000,000
|
)
|
|
|
3.00
|
|
Forfeited
|
|
|
|
-
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
|
|
1,000,000
|
|
|
$
|
3.00
|
|
Granted
|
|
|
|
345,000
|
|
|
|
2.56
|
|
Vested
|
|
|
|
(950,967
|
)
|
|
|
3.03
|
|
Forfeited
|
|
|
|
(333,337
|
)
|
|
|
2.28
|
|
Outstanding as of December 31, 2019
|
|
|
|
60,696
|
|
|
$
|
3.92
|
|
|
|
|
|
|
|
|
|
|
|
Share-Based
Compensation Expense
The Company recorded for the year ended December 31, 2019 and
2018, $11,236 and $6,783, respectively, of share-based compensation under all plans for both equity and liability classified awards.
At December 31, 2019, the unrecognized expense portion of the share-based compensation awards granted under all plans was approximately
$9,321 adjusted for cancellations, forfeitures and returns during the preceding period, which is expected to be recognized over
a weighted-average period of 1.2 years. The fair value of the time conditioned awards that vested during 2019 and 2018 was $2,884
and $3,708, respectively.
Note
18. Income taxes
Loss
before the income tax benefit consists of the following;
|
|
For the years ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
U.S.
|
|
$
|
(108,644
|
)
|
|
$
|
(19,369
|
)
|
Foreign
|
|
|
(126,421
|
)
|
|
|
1,171
|
|
Total loss before income tax provision
|
|
$
|
(235,065
|
)
|
|
$
|
(18,198
|
)
|
The
Company files income tax returns in the US 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 2019 income tax benefit of $8.4 million relates to $8.7 million of benefit associated with the net losses
in certain foreign jurisdictions offset by current taxes of $0.3 million in other foreign jurisdictions with taxable income.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
Income
tax (benefit) expense is summarized as follows:
|
|
For
the years ended
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
316
|
|
|
|
81
|
|
|
|
|
316
|
|
|
|
81
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
(8,611
|
)
|
|
|
(255
|
)
|
|
|
|
(8,611
|
)
|
|
|
(255
|
)
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense
|
|
$
|
(8,295
|
)
|
|
$
|
(174
|
)
|
The
following is a reconciliation of the provision for income taxes at the U.S. federal statutory rate (21%) to the foreign income
tax rate for the years ended:
|
|
For
the years ended
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Tax expense at statutory rate federal
|
|
|
21
|
%
|
|
|
21
|
%
|
Foreign income tax rate difference
|
|
|
1
|
%
|
|
|
-
|
|
Transaction costs
|
|
|
-
|
|
|
|
(7
|
)%
|
Compensation
|
|
|
-
|
|
|
|
(6
|
)%
|
GILTI
|
|
|
-
|
|
|
|
(1
|
)%
|
Non-operating gain on stock acquisition
|
|
|
-
|
|
|
|
8
|
%
|
Goodwill Impairment
|
|
|
(11
|
)%
|
|
|
-
|
|
Change in valuation allowance
|
|
|
(7
|
)%
|
|
|
(15
|
)%
|
Other
|
|
|
-
|
|
|
|
1
|
%
|
|
|
|
4
|
%
|
|
|
1
|
%
|
The
tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities are as follows:
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax attributable to:
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
55,859
|
|
|
$
|
31,928
|
|
Share-based compensation expense
|
|
|
666
|
|
|
|
302
|
|
Accrued liabilities and allowances
|
|
|
1,287
|
|
|
|
257
|
|
Fixed Assets
|
|
|
188
|
|
|
|
-
|
|
ROU lease liability
|
|
|
288
|
|
|
|
-
|
|
Other
|
|
|
69
|
|
|
|
66
|
|
Less: valuation allowance
|
|
|
(55,561
|
)
|
|
|
(29,812
|
)
|
Total deferred tax assets
|
|
|
2,796
|
|
|
|
2,741
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities attributable to:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(1,976
|
)
|
|
|
(10,003
|
)
|
ROU Asset
|
|
|
(194
|
)
|
|
|
-
|
|
Deferred revenue
|
|
|
(626
|
)
|
|
|
(1,124
|
)
|
Total deferred tax liabilities
|
|
|
(2,796
|
)
|
|
|
(11,127
|
)
|
Net deferred tax liabilities
|
|
$
|
-
|
|
|
$
|
(8,386
|
)
|
As
of December 31, 2019 and 2018, the Company had no unrecognized tax benefits and no related interest and penalties for the years
then ended.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
As
of December 31, 2019, and 2018, the Company had net operating losses carryforwards of approximately $258 million and $150 million,
respectively. Any net deferred tax assets in a jurisdiction have been offset by a full valuation allowance in both 2019 and 2018
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.
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,
2019 and 2018, the Company did not have any liabilities for uncertain tax positions.
Note
19. Commitments and Contingencies
Commitments
During
the year ended December 31, 2019, the Company entered into certain off–balance sheet commitments that require the future
purchase of goods or services (“unconditional purchase obligations”). The Company entered into the Strategic Connectivity
Agreement (the “Connectivity Agreement”) with Hutchison 3G UK Limited (“3UK”) on July 23, 2019. Under
the Connectivity Agreement, the Company is obligated to pay 3UK $0.7 million dollars for the implementation of a MVNO (the “3UK
MVNO”), and for monthly services provided, based on usage, after the 3UK MVNO is launched, which management anticipates
to be in the third quarter of 2021. As of December 31, 2019, $0.1 million was invoiced by 3UK and is recorded in Accrued expenses
and other payables in the Consolidated Balance Sheet as of December 31, 2019. Of the remaining unconditional purchase obligation
to 3UK outstanding as of December 31, 2019, management expects to remit $0.1 million in 2020 and the remainder in 2021.
Concurrent
with the execution of the Connectivity Agreement, the Company entered into the Agreement for the Sale and Purchase of Credit Voucher
(the “Credit Voucher Agreement”) with PCCW Global Limited (“PCCW”) under which the Company is obligated
to purchase a credit voucher for $33.0 million. The credit voucher will be used to offset certain monthly service charges incurred
under the Connectivity Agreement. As of December 31, 2019, $0.7 million of the purchase price has been recorded in Accrued expenses
and other payables in the Consolidated Balance Sheet. The remaining $32.3 million unconditional purchase obligation is due and
payable following the launch date of the 3UK MVNO, whereafter on a monthly basis, the Company is required to remit the amount
of the credit voucher used to offset monthly charges incurred under the Connectivity Agreement to PCCW.
Should
the aggregate of the monthly charges offset with the credit voucher from the Connectivity Agreement launch date through June 30,
2022 be less than $8.6 million, the Company is obligated to remit a make-up payment (the “2022 Make-up Payment”) for
the difference between $8.6 million and the aggregate monthly charges offset with the credit voucher. Should the aggregate of
the monthly charges offset with the credit voucher from the Connectivity Agreement launch date through June 30, 2023, plus any
2022 Make-up Payment, if applicable, be less than $15.2 million, the Company is obligated to remit a make-up payment (the “2023
Make-up Payment”) for the difference between $15.2 million and the aggregate monthly charges offset with the credit voucher,
plus any 2022 Make-up Payment. Should the aggregate of the monthly charges offset with the credit voucher from the Connectivity
Agreement launch date through June 30, 2024, plus any 2022 Make-up Payment and any 2023 Make-up Payment, if applicable, be less
than $23.1 million, the Company is obligated to remit a make-up payment (the “2024 Make-up Payment”) for the difference
between $23.1 million and the aggregate monthly charges offset with the credit voucher, plus the 2022 Make-up Payment and the
2023 Make-up Payment. Should the aggregate of the monthly charges offset with the credit voucher from the Connectivity Agreement
launch date through June 30, 2025, plus any 2022 Make-up Payment and any 2023 Make-up Payment and any 2024 Make-up Payment, if
applicable, be less than $32.3 million, the Company is obligated to remit a final make-up payment for the difference between $32.3
million and the aggregate monthly charges offset with the credit voucher, plus any 2022 Make-up Payment and any 2023 Make-up Payment
and any 2024 Make-up Payment.
The
following table presents the minimum amounts due under the Company’s unconditional purchase obligations as of December 31,
2019:
|
|
|
Connectivity
Agreement
|
|
|
Credit
Voucher
Agreement
|
|
|
Total
|
|
2020
|
|
|
$
|
132
|
|
|
$
|
-
|
|
|
$
|
132
|
|
2021
|
|
|
|
395
|
|
|
|
-
|
|
|
|
395
|
|
2022
|
|
|
|
-
|
|
|
|
8,571
|
|
|
|
8,571
|
|
2023
|
|
|
|
-
|
|
|
|
6,593
|
|
|
|
6,593
|
|
2024
|
|
|
|
-
|
|
|
|
7,911
|
|
|
|
7,911
|
|
Thereafter
|
|
|
|
-
|
|
|
|
9,230
|
|
|
|
9,230
|
|
Total
|
|
|
$
|
527
|
|
|
$
|
32,305
|
|
|
$
|
32,832
|
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
The
following table presents management’s estimate of the timing of amounts due under the Company’s unconditional purchase
obligations as of December 31, 2019:
|
|
|
Connectivity
Agreement
|
|
|
Credit
Voucher
Agreement
|
|
|
Total
|
|
2020
|
|
|
$
|
132
|
|
|
$
|
-
|
|
|
$
|
132
|
|
2021
|
|
|
|
395
|
|
|
|
360
|
|
|
|
755
|
|
2022
|
|
|
|
-
|
|
|
|
9,662
|
|
|
|
9,662
|
|
2023
|
|
|
|
-
|
|
|
|
7,894
|
|
|
|
7,894
|
|
2024
|
|
|
|
-
|
|
|
|
9,457
|
|
|
|
9,457
|
|
Thereafter
|
|
|
|
-
|
|
|
|
4,932
|
|
|
|
4,932
|
|
Total
|
|
|
$
|
527
|
|
|
$
|
32,305
|
|
|
$
|
32,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingencies
The
Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have
not been fully resolved. The outcome of litigation is inherently uncertain. If one or more legal matters were resolved
against the Company in a reporting period for amounts above management’s expectations, the Company’s financial
condition and operating results for that period could be materially adversely affected. In the opinion of management, the
ultimate resolution of such legal proceedings and claims will not have a material adverse effect on our financial position,
liquidity, or results of operations.
Ellenoff
Grossman & Schole LLP. On May 5, 2017, the Company’s former legal counsel, Ellenoff Grossman & Schole LLP, commenced
litigation proceedings in New York alleging breach of contract and claiming $0.8 million in unpaid legal fees for January 2015
through November 2016. On June 29, 2017, the parties entered into a settlement agreement for the full $0.8 million with agreed-upon
monthly installment payments through August 31, 2019. As of December31, 2019, the amount outstanding on the settlement agreement
is $0.1 million.
SEC
Investigation. In 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 staff has also interviewed and taken testimony from individuals previously employed by the Company in connection
with the investigation The Company is cooperating with the SEC staff in the SEC investigation and discussions with the SEC staff
regarding a potential resolution of the investigation are ongoing.
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 “Southern District Court”). The Southern District 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 LLP (“Defendants”). The Lead Plaintiff alleges that Defendants caused
the Company to issue certain materially false or misleading statements in SEC filings and other public pronouncements in violation
of Sections 10(b) and 20(a) of the Exchange Act, and Sections 11, 12 and 15 of the Securities Act. 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 Corporation, et al., is a putative class action pending in the Superior Court of California, County of
San Mateo. It was filed on May 29, 2020 on behalf of all former shareholders of iPass Inc. who received shares of the Company’s
common stock pursuant to a February 12, 2019 exchange tender offer. The defendants are the Company, Robert H. Turner, Edward O’Donnell,
Victor Bozzo, Yves van Sante, Robert Lippert and Luis Jimenez-Tunon. The Complaint alleges that the defendants caused the Company
to issue materially false or misleading statements in SEC filings submitted in connection with the tender offer in violation of
Sections 11 and 15 of the Securities Act.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
Miller
ex rel. Pareteum Corporation v. Victor Bozzo, et al. was filed on February 28, 2020 in the Supreme Court for the State of
New York, New York County. It is a stockholder derivative suit brought by Plaintiff William Miller (“Plaintiff Miller”),
derivatively on behalf of Pareteum, the Nominal Defendant, against certain officers and directors of Pareteum, including Victor
Bozzo, Laura Thomas, Yves van Sante, Luis Jimenez-Tunon, Robert Lippert, Robert H. Turner, Edward O’Donnell, and Denis McCarthy
(the “Individual Defendants”). Plaintiff Miller alleges that the Individual Defendants caused the Company to issue
false or misleading statements in SEC filings and other public pronouncements in violation of certain federal securities regulations.
Plaintiff Miller alleges that as a result of their misconduct, the Individual Defendants are liable for violations of Section
14(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement and waste of corporate
assets. Plaintiff Miller seeks a judgment awarding Pareteum damages with interest sustained as a result of the Individual Defendants’
alleged misconduct, directing the Individual Defendants to take certain measures to reform and improve Pareteum’s corporate
governance and internal procedures, awarding Pareteum restitution from the Individual Defendants, and awarding Plaintiff Miller
all costs and expenses incurred in pursuing the claims.
Zhang
ex rel. Pareteum Corporation v. Robert H. Turner, et al. was filed on May 26, 2020 in the Supreme Court for the State of New
York, New York County. It is a stockholder derivative suit brought by Plaintiff Wei Zhang (“Plaintiff Zhang”), derivatively
on behalf of Pareteum, the Nominal Defendant, against certain officers and directors of Pareteum, including Robert H. Turner,
Edward O’Donnell, Denis McCarthy, Victor Bozzo, Rob Mumby, Luis Jimenez-Tunon, Robert Lippert, Laura Thomas, and Yves van
Sante (the “Individual Defendants”). Plaintiff Zhang alleges that the Individual Defendants caused the Company to
issue false or misleading statements in SEC filings and other public pronouncements in violation of certain federal securities
regulations. Plaintiff Zhang alleges that as a result of their misconduct, the Individual Defendants are liable for violations
of Section 14(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement and waste
of corporate assets. Plaintiff Zhang seeks a judgment awarding Pareteum damages with interest sustained as a result of the Individual
Defendants’ alleged misconduct, directing the Individual Defendants to take certain measures to reform and improve Pareteum’s
corporate governance and internal procedures, awarding Pareteum restitution from the Individual Defendants, and awarding Plaintiff
Zhang all costs and expenses incurred in pursuing this 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 Shaw”),
derivatively on behalf of Pareteum, the Nominal Defendant, against certain officers and directors of Pareteum, including Luis
Jimenez-Tunon, Robert Lippert, Yves van Sante, Robert H. Turner, Edward O’Donnell, Denis McCarthy, Victor Bozzo, and Laura
Thomas (the “Individual Defendants”). Plaintiff Shaw alleges that the Individual Defendants caused the Company to
issue false or misleading statements in SEC filings and other public pronouncements in violation of certain federal securities
regulations. Plaintiff Shaw alleges that as a result of their misconduct, the Individual Defendants are liable for violations
of Section 14(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and
waste of corporate assets. Plaintiff Shaw seeks a judgment awarding Pareteum damages sustained as a result of the Individual Defendants’
alleged misconduct, directing the Individual Defendants to take certain measures to reform and improve Pareteum’s corporate
governance and internal procedures, and awarding Plaintiff Shaw all costs and expenses incurred in pursuing this claim.
In
re Pareteum Corporation Stockholder Derivative Litigation (the “Delaware Derivative Action”) is a consolidated
action that was originally filed in the United States District Court for the District of Delaware (the “Delaware District
Court”) and joins several related derivative actions (the “Related Suits”). On April 3, 2020, the Delaware District
Court consolidated related suits brought by stockholders Edward Hayes, Juanita Silvera, and Brad Linton (“Plaintiffs”),
derivatively on behalf of Pareteum, the Nominal Defendant, against certain officers and directors of Pareteum, including Robert
H. Turner, Edward O’Donnell, Denis McCarthy, Laura Thomas, Victor Bozzo, Luis Jimenez-Tunon, Robert Lippert, Rob Mumby and
Yves van Sante (the “Individual Defendants”). Plaintiffs in the related actions have alleged that the Individual Defendants
caused Pareteum to issue false or misleading statements in SEC filings and other public pronouncements in violation of certain
federal securities regulations. Plaintiffs allege that as a result of the Individual Defendants’ misconduct, they are liable
for violations of Section 14(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, and gross mismanagement. Plaintiffs
seek a judgment (1) declaring that the Individual Defendants breached their fiduciary duties and/or aided and abetted the breach
of their fiduciary duties; (2) awarding Pareteum damages sustained as a result of the Individual Defendants’ breaches of
fiduciary duty and violations of federal securities laws; (3) ordering that the Individual Defendants disgorge any performance-based
compensation that was received during, or as a result of, the Individual Defendants’ breaches of fiduciary duty; (4) directing
the Individual Defendants to take certain measures to reform and improve Pareteum’s corporate governance and internal procedures;
(5) granting appropriate equitable or injunctive relief to remedy the Individual Defendants’ breaches of fiduciary duties
and other violations of laws; (6) awarding Pareteum restitution from the Individual Defendants; and (7) awarding Plaintiffs all
costs and expenses incurred in the Related Suits and Delaware Derivative Action. On July 22, 2020, this action was transferred
to the United States District Court for the Southern District of New York.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
Sabby
Volatility Warrant Master Fund, Ltd. v. Pareteum Corp., et al., No. 19-cv-10460 (S.D.N.Y.) (the “Section 11 Action”),
is an action brought under Section 11 of the Securities Act by an investor, Sabby Volatility Master Fund, Ltd. (“Plaintiff
Sabby”), against the Company, Robert H. Turner, Edward O’Donnell, Denis McCarthy, Victor Bozzo, Robert Lippert, Yves
van Sante, and Luis Jimenez Tunon (collectively, the “Defendants”). It was filed on November 11, 2019. Plaintiff Sabby
alleges that Defendants caused the Company to issue false or misleading statements in a Registration Statement filed with the
SEC. As a result of the alleged misconduct, Plaintiff Sabby 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 Sabby and
Pareteum, and contractual indemnification allegedly owed to Plaintiff Sabby under the SPA. Plaintiff Sabby seeks monetary damages
and/or rescission of the SPA, and indemnification by Pareteum for any losses resulting from its alleged breach of the SPA, including
costs and expenses incurred in connection with the Section 11 Action.
Artilium
Africa, LLC et al. v. Artilium, PLC et al.; ICDR Case No. 01-19-0003-1680 and Artilium Africa, LLC and Tristar Africa Telecom,
LLC v. Pareteum Corporation are related matters arising out of the same dispute. The former matter is an arbitration filed
with the International Center for Dispute Resolution (“ICDR”) on October 1, 2019 alleging that Artilium Group Limited,
a subsidiary of Pareteum Corporation formerly known as Artilium PLC (“Artilium”), breached an Operating Agreement
relating to a joint venture called Artilium Africa formed by Artilium Green Globe Services LLC and Tristar Africa Telecom, LLC
(“Tristar” and together with Artilium, the “Delaware Plaintiffs”) to provide mobile data, cloud, and telecommunications
services throughout Africa. The Claimants in the ICDR arbitration are seeking $30 million. The latter matter is a civil case filed
on October 10, 2019 in the Delaware District Court. The Delaware Plaintiffs 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.
Reuben
Harmon, derivatively on behalf of Pareteum Corp. v. Robert H. Turner, et al. is a stockholder derivative lawsuit that was
filed in the Supreme Court for the State of New York, New York County, on January 27, 2021 by Reuben Harmon (“Plaintiff
Harmon”). This case was brought derivatively on behalf of Pareteum, the Nominal Defendant, against certain current and former
officers and directors of the Company, including Robert H. Turner, Edward O’Donnell, Denis McCarthy, Victor Bozzo, Rob Mumby,
Luis Jimenez-Tunon, Robert Lippert, Laura Thomas and Yves van Sante (the “Individual Defendants”). Plaintiff Harmon
alleges that the Individual Defendants caused Pareteum to issue false or misleading statements in SEC filings and other public
pronouncements in violation of certain federal securities statutes and regulations. Plaintiff Harmon further alleges that as a
result of their misconduct, the Individual Defendants are liable for breaches of their fiduciary duties as directors and/or officers
of Pareteum, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. Plaintiff Harmon seeks a
judgment awarding Pareteum damages with interest sustained as a result of the Individual Defendants’ alleged misconduct,
directing the Individual Defendants to take certain measures to reform and improve Pareteum’s corporate governance and internal
procedures, awarding Pareteum restitution from the Individual Defendants, and awarding Plaintiff Harmon all costs and expenses
incurred in pursing the claim.
Gregory
Lackey, derivatively on behalf of Pareteum Corp. v. Robert “Hal” Turner, et al., No. 1:21-mc-00070, is a shareholder
derivative suit that was filed on January 25, 2021 in the United States District Court for the Southern District of New York.
Plaintiff Gregory Lackey (“Plaintiff Lackey”) is a purported shareholder suing on behalf of Pareteum and alleging
that certain officers and directors of Pareteum, including Robert H. Turner, Edward O’Donnell, Denis McCarthy, Victor Bozzo,
Luis Jimenez-Tunon, Robert Lippert, Rob Mumby , Laura Thomas and Yves van Sante (the “Individual Defendants”) caused
Pareteum to issue false or misleading statements in SEC filings and other public pronouncements in violation of certain federal
securities statutes and regulations. Plaintiff Lackey alleges that as a result of their misconduct, the Individual Defendants
are liable for contribution and indemnification under Section 21D of the Exchange Act, breach of fiduciary duty, and unjust enrichment.
Plaintiff Lackey seeks a judgment (1) awarding Pareteum damages sustained as a result of the Individual Defendants’ breaches
of fiduciary duty; (2) directing the Individual Defendants to take certain measures to reform and improve Pareteum’s corporate
governance and internal procedures; (3) awarding Pareteum restitution from the Individual Defendants and disgorgement of all profits
obtained by the Individual Defendants; and (4) awarding Plaintiff Lackey all costs and expenses incurred in the action.
Deutsche Telekom A.G. (“DTAG”) is
both a supplier to, and customer of, the Company’s subsidiary, iPass. DTAG has initiated a lawsuit in Germany in the amount
of approximately USD $790,000 for non-payment for supply of services to iPass and/or insufficient delivery of services to DTAG.
iPass has reasonable grounds to net-off a significant proportion of the claimed sums and otherwise dispute the claims. iPass intends
to vigorously defend and/or set-off the DTAG claim.
Stephen Brown v. Elephant Talk North America Corporation
and Elephant Talk Communications Corp., Case No. 5:18-cv-00902-R in the Western District of Oklahoma. A former consultant,
Steve Brown (“Brown”) brought a lawsuit against Pareteum and its subsidiary claiming approximately five (5) years’
unpaid consulting fees in an amount equal to $780,000. The Company believes some or all of his claims are time-barred and/or frivolous.
The Company’s position is that Brown was dismissed for cause in 2013/14, and intends to defend itself in this matter vigorously.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
Note
20. 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, 2019, the Company had one customer that accounted for 20% of total revenue. For the year ended December
31, 2018, the Company had one customer that accounted for 64% of total revenue.
As
of December 31, 2019, the Company had one customer that accounted for 38% of accounts receivable including unbilled revenue. As
of December 31, 2018, the Company had one customer that accounted for 10% of accounts receivable including unbilled revenue.
Note
21. Unaudited Quarterly Data (Restated)
In
the opinion of management, the following unaudited quarterly data for the three months ended March 31, 2019 and three and six
months ended June 30, 2019 reflect all adjustments necessary for a fair statement of the results of operations.
On
October 21, 2019, the Board of Directors determined that the Company’s financial statements that were included in its
annual report for the year ended December 31, 2018 and quarterly reports for the quarters ended March 31, 2019 and June 30,
2019 (collectively, the “Non-Reliance Periods”) should no longer be relied upon.
The Company restated its financial statements for the Non-Reliance period that occurred in the year ended December 31, 2018,
including the interim periods within such year, in the previously filed Amendment No. 1 to our Annual Report for the year
ended December 31, 2018 on Form 10-K/A filed with the SEC on December 14, 2020. This Annual Report on Form 10-K for the year
ended December 31, 2019 contains the unaudited restated condensed consolidated financial statements for the Non-Reliance
Periods for the quarters ended March 31, 2019 and June 30, 2019.
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 within such
year, as well as in the first and second quarter of 2019 should not have been recorded during those periods. This Note 21, Unaudited
Quarterly Data (Restated) to the consolidated financial statements discloses the nature of the restatement matters and their
impact on the consolidated financial statements for the three months ended March 31, 2019 and the three and six months ended June
30, 2019, collectively referred to as the “Restatement”.
This
Annual Report reflects the corrections of the following errors identified subsequent to the filing of the original Quarterly Reports
on Form 10-Q for the periods ended March 31, 2019 and June 30, 2019 (the “Original Filing”):
|
A.
|
The
Company determined that it incorrectly recognized revenue prior to customers obtaining
control of certain products or customer acceptance requirement provisions in contracts.
As a result, customers had not obtained control of the products in accordance with ASC
606-10-25-27 to -29. The impact of the correction of this matter on the Company’s
condensed financial statements is as follows (in thousands):
|
|
|
Three
months
ended
March 31, 2019
|
|
|
Three
months
ended
June 30, 2019
|
|
|
Six
months
ended
June 30, 2019
|
|
Revenues
|
|
$
|
(9,993
|
)
|
|
$
|
(16,128
|
)
|
|
$
|
(26,121
|
)
|
Cost of revenues (excluding depreciation and amortization)
|
|
|
(1,634
|
)
|
|
|
(2,749
|
)
|
|
|
(4,383
|
)
|
General and administrative
|
|
|
(220
|
)
|
|
|
(542
|
)
|
|
|
(762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Accounts receivable, net
|
|
$
|
(8,476
|
)
|
|
$
|
(24,611
|
)
|
Net billings in excess of revenues
|
|
|
912
|
|
|
|
902
|
|
Accrued expenses and other payables
|
|
|
(1,488
|
)
|
|
|
(4,308
|
)
|
Accumulated other comprehensive loss
|
|
|
(239
|
)
|
|
|
(229
|
)
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
|
B.
|
The
Company determined that it had incorrectly accounted for share-based compensation expense
for awards granted to employees and non-employees over the appropriate requisite service
periods in accordance with ASC 718. The impact of the correction of this matter on the
Company’s condensed financial statements is as follows (in thousands):
|
|
|
Three
months
ended
March
31, 2019
|
|
|
Three
months
ended
June
30, 2019
|
|
|
Six
months
ended
June
30, 2019
|
|
General and administrative
|
|
$
|
(1,029
|
)
|
|
$
|
707
|
|
|
$
|
(322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Common stock
|
|
$
|
(1,029
|
)
|
|
$
|
(376
|
)
|
Accrued expenses and other payables
|
|
|
-
|
|
|
|
54
|
|
|
C.
|
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 impact of the correction of
this matter on the Company’s condensed financial statements is as follows (in thousands):
|
|
|
Three
months
ended
March
31, 2019
|
|
|
Three
months
ended
June
30, 2019
|
|
|
Six
months
ended
June
30, 2019
|
|
Product development
|
|
$
|
-
|
|
|
$
|
228
|
|
|
$
|
228
|
|
General and administrative
|
|
|
235
|
|
|
|
87
|
|
|
|
322
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Common stock
|
|
$
|
235
|
|
|
$
|
550
|
|
|
D.
|
The
Company determined that it incorrectly included a prepayment penalty liability associated
with the Fortress Credit Corp (“Fortress”) outstanding loan balance that
was assumed by the Company with the acquisition of iPass on February 12, 2019. The impact
of the correction of this matter on the Company’s condensed financial statements
is as follows (in thousands):
|
|
|
March
31,
|
|
|
June
30,
|
|
|
|
2019
|
|
|
2019
|
|
Goodwill
|
|
|
(1,000
|
)
|
|
$
|
(1,000
|
)
|
Long-term debt
|
|
|
(1,000
|
)
|
|
|
(1,000
|
)
|
|
E.
|
The
Company determined that it incorrectly accounted for the extinguishment of the Fortress
outstanding loan balance. Based on the terms of Fortress’s credit agreement, if
the loan is paid off before its stated maturity, the Company is required to pay a $1,000
prepayment penalty. On February 26, 2019, the Company paid off the outstanding loan balance
before maturity. The payment made by the Company included the outstanding loan balance
and $1,000 prepayment liability originally assumed by the Company. The Company recorded
the $1,000 prepayment to the prepayment liability assumed in the acquisition of iPass
(as discussed in letter D above). 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 impact of the correction of this matter on the Company’s condensed financial
statements is as follows (in thousands):
|
|
|
Three
months
ended
March
31, 2019
|
|
|
Three
months
ended
June
30, 2019
|
|
|
Six
months
ended
June
30, 2019
|
|
Other income/(loss)
|
|
$
|
(1,000
|
)
|
|
$
|
-
|
|
|
$
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
2019
|
|
|
2019
|
|
Long-term debt
|
|
|
|
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
|
F.
|
In
connection with the acquisition of iPass on February 12, 2019, the Company determined
that it had used incorrect revenue assumptions in valuing the intangible assets recognized
(technology, customer relationships and tradenames) in the purchase price allocation.
The impact of the correction of this matter on the Company’s condensed financial
statements is as follows (in thousands):
|
|
|
March
31,
|
|
|
June
30,
|
|
|
|
2019
|
|
|
2019
|
|
Intangibles
assets, net
|
|
$
|
(11,594
|
)
|
|
$
|
(11,594
|
)
|
Goodwill
|
|
|
11,594
|
|
|
|
11,594
|
|
As
a result of incorrectly valuing the intangible assets above acquired in the acquisition of iPass, the Company determined that
it incorrectly calculated amortization expense. The impact of the correction of this matter on the Company’s condensed financial
statements is as follows (in thousands):
|
|
Three
months
ended
March
31, 2019
|
|
|
Three
months
ended
June
30, 2019
|
|
|
Six
months
ended
June
30, 2019
|
|
Depreciation and amortization
|
|
$
|
(127
|
)
|
|
$
|
(221
|
)
|
|
$
|
(348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Intangible assets, net
|
|
$
|
127
|
|
|
$
|
348
|
|
|
|
|
|
|
|
|
|
|
|
G.
|
In
connection with the acquisition of iPass on February 12, 2019, the Company determined
that it incorrectly accounted for a settlement of the pre-existing relationship software
license and related maintenance agreement of $1,531 which approximates the estimated
fair value at the date of acquisition, which was purchased from iPass on May 8, 2018.
In accordance with ASC 805, Business Combinations, the settlement of a pre-existing relationship
is included in the consideration transferred. The impact of the correction of this matter
on the Company’s condensed financial statements is as follows (in thousands):
|
|
|
Three
months
ended
March
31, 2019
|
|
|
Three
months
ended
June
30, 2019
|
|
|
Six
months
ended
June
30, 2019
|
|
General and administrative
|
|
$
|
(185
|
)
|
|
$
|
-
|
|
|
$
|
(185
|
)
|
Depreciation and amortization
|
|
|
(25
|
)
|
|
|
(76
|
)
|
|
|
(101
|
)
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Property and equipment, net
|
|
$
|
(1,289
|
)
|
|
$
|
(1,229
|
)
|
Goodwill
|
|
|
1,531
|
|
|
|
1,531
|
|
Accumulated other comprehensive loss
|
|
|
(32
|
)
|
|
|
(16
|
)
|
|
H.
|
The
Company determined that it incorrectly included the 705,000 shares of its common stock
issued to iPass employees valued at $2,045 as part of the consideration transferred in
the acquisition of iPass on February 12, 2019. In connection with this issuance of shares
of common stock to iPass employees, the Company determined that it had incorrectly accounted
for share-based compensation expense based on its stock price on the grant dates as well
as recognizing share-based compensation over the appropriate requisite service periods
in accordance with ASC 718. The impact of the correction of this matter on the Company’s
condensed financial statements is as follows (in thousands):
|
|
|
Three months
ended
March 31, 2019
|
|
|
Three months
ended
June 30, 2019
|
|
|
Six months
ended
June 30, 2019
|
|
General and administrative
|
|
$
|
1,677
|
|
|
$
|
-
|
|
|
$
|
1,677
|
|
Restructuring and acquisition costs
|
|
|
677
|
|
|
|
|
|
|
|
677
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Goodwill
|
|
$
|
(2,045
|
)
|
|
$
|
(2,045
|
)
|
Common stock
|
|
|
309
|
|
|
|
309
|
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
|
I.
|
The
Company incorrectly translated its property and equipment balances using a historical
rate and not the current exchange rate at the balance sheet reporting date in accordance
with ASC 830, Foreign Currency Matters. The impact of the correction of this matter on
the Company’s condensed financial statements is as follows (in thousands):
|
|
|
March
31,
|
|
|
June
30,
|
|
|
|
2019
|
|
|
2019
|
|
Property
and equipment, net
|
|
$
|
(96
|
)
|
|
$
|
(28
|
)
|
Accumulated other
comprehensive loss
|
|
|
96
|
|
|
|
28
|
|
|
J.
|
The
Company determined that in incorrectly accounted for operating leases under ASC 842 on
January 1, 2019. The impact of the correction of this matter on the Company’s condensed
financial statements is as follows (in thousands):
|
|
|
Three months
ended
March 31, 2019
|
|
|
Three months
ended
June 30, 2019
|
|
|
Six months
ended
June 30, 2019
|
|
General and administrative
|
|
$
|
3
|
|
|
$
|
(31
|
)
|
|
$
|
(28
|
)
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Right of use lease assets
|
|
$
|
622
|
|
|
$
|
780
|
|
Other assets
|
|
|
385
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
-
|
|
|
|
36
|
|
Goodwill
|
|
|
(385
|
)
|
|
|
(385
|
)
|
Accrued expenses and other payables
|
|
|
-
|
|
|
|
(91
|
)
|
Lease liabilities, current
|
|
|
1,994
|
|
|
|
237
|
|
Lease liabilities, non-current
|
|
|
(1,369
|
)
|
|
|
257
|
|
|
K.
|
Through
a review of its accounting for warrants, the Company determined that it incorrectly accounted
for the 325,000 warrants issued to Fortress. The impact of the correction of this matter
on the Company’s condensed financial statements is as follows (in thousands):
|
|
|
Three months
ended
March 31, 2019
|
|
|
Three months
ended
June 30, 2019
|
|
|
Six months
ended
June 30, 2019
|
|
General and administrative
|
|
$
|
802
|
|
|
$
|
-
|
|
|
$
|
802
|
|
|
|
March
31,
|
|
|
June
30,
|
|
|
|
2019
|
|
|
2019
|
|
Common stock
|
|
$
|
802
|
|
|
$
|
802
|
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
|
L.
|
Through
a review of the acquisition of Devicescape that closed in April 2019, the Company determined
that it incorrectly accounted for the acquisition as a business combination instead of
an asset acquisition under ASC 805. The impact of the correction of this matter on the
Company’s condensed financial statements is as follows (in thousands):
|
|
|
Three
months
ended
March 31, 2019
|
|
|
Three
months
ended
June 30, 2019
|
|
|
Six
months
ended
June 30, 2019
|
|
General and administrative
|
|
$
|
-
|
|
|
$
|
(70
|
)
|
|
$
|
(70
|
)
|
Depreciation and amortization
|
|
|
-
|
|
|
|
38
|
|
|
|
38
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Cash and cash equivalents
|
|
$
|
-
|
|
|
$
|
(380
|
)
|
Accounts receivable, net
|
|
|
-
|
|
|
|
(12
|
)
|
Prepaid expenses and other current assets
|
|
|
-
|
|
|
|
74
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
2,020
|
|
Goodwill
|
|
|
-
|
|
|
|
(1,588
|
)
|
Accounts payable and customer deposits
|
|
|
-
|
|
|
|
52
|
|
Accrued expenses and other payables
|
|
|
-
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
M.
|
Through
review of the Company’s software projects performed by its personnel, the Company
determined that additional amounts should have be capitalized. The impact of the correction
of this matter on the Company’s condensed financial statements is as follows (in
thousands):
|
|
|
Three
months
ended
March 31, 2019
|
|
|
Three
months
ended
June 30, 2019
|
|
|
Six
months
ended
June 30, 2019
|
|
General and administrative
|
|
$
|
(433
|
)
|
|
$
|
(338
|
)
|
|
$
|
(771
|
)
|
Depreciation and amortization
|
|
|
36
|
|
|
|
136
|
|
|
|
172
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Property and equipment, net
|
|
$
|
395
|
|
|
$
|
602
|
|
Accumulated other comprehensive loss
|
|
|
2
|
|
|
|
(3
|
)
|
|
N.
|
Through
review of the Company’s accruals for usage of vendor network services, the Company
determined that certain accruals were overstated. The impact of the correction of this
matter on the Company’s condensed financial statements is as follows (in thousands):
|
|
|
Three
months
ended
March 31, 2019
|
|
|
Three
months
ended
June 30, 2019
|
|
|
Six
months
ended
June 30, 2019
|
|
Cost of revenues (excluding depreciation and amortization)
|
|
$
|
(559
|
)
|
|
$
|
(134
|
)
|
|
$
|
(693
|
)
|
General and administrative
|
|
|
18
|
|
|
|
(30
|
)
|
|
|
(12
|
)
|
Other income/(loss)
|
|
|
-
|
|
|
|
181
|
|
|
|
181
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Accounts payable and customer deposits
|
|
$
|
(541
|
)
|
|
$
|
(886
|
)
|
|
|
|
|
|
|
|
|
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
|
O.
|
The
Company determined that it was appropriate to adjust revenues related to a repricing
arrangement that impacted the previously recognized revenues. The impact of the correction
of this matter on the Company’s condensed financial statements is as follows (in
thousands):
|
|
|
|
Three
months
ended
March 31, 2019
|
|
|
Three
months
ended
June 30, 2019
|
|
|
Six
months
ended
June 30, 2019
|
|
Revenues
|
|
|
$
|
-
|
|
|
$
|
(1,133
|
)
|
|
$
|
(1,133
|
)
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Accounts receivable, net
|
|
$
|
-
|
|
|
$
|
(1,133
|
)
|
|
P.
|
Through
review of the Company’s allocation methodology and corrections to management and
personnel cost noted above, the Company adjusted certain allocations between the individual
functional line items of the Condensed Statement of Operations. The impact of the correction
of this matter on the Company’s condensed financial statements is as follows (in
thousands):
|
|
|
Three
months
ended
March
31, 2019
|
|
|
Three
months
ended
June
30, 2019
|
|
|
Six
months
ended
June
30, 2019
|
|
Cost of revenues (excluding depreciation and amortization)
|
|
$
|
151
|
|
|
$
|
194
|
|
|
$
|
335
|
|
Product development
|
|
|
312
|
|
|
|
(678
|
)
|
|
|
9
|
|
Sales and marketing
|
|
|
(4
|
)
|
|
|
250
|
|
|
|
(129
|
)
|
General and administrative
|
|
|
39
|
|
|
|
(446
|
)
|
|
|
343
|
|
Restructuring and acquisition costs
|
|
|
(488
|
)
|
|
|
(70
|
)
|
|
|
(558
|
)
|
|
Q.
|
The Company determined that it incorrectly accounted for various
severance packages within Restructuring and Acquisition Costs that did not meet the criteria identified in ASC 420, Exit or
Disposal Cost Obligations to be accounted for as restructuring costs. The impact of the correction of this matter on the Company’s
condensed financial statements is as follows (in thousands):
|
|
|
Three Months
Ended
March 31, 2019
|
|
|
Three Months
Ended
June 30, 2019
|
|
|
Six Months
Ended
June 30, 2019
|
|
Cost of revenues (excluding depreciation and amortization)
|
|
$
|
29
|
|
|
$
|
41
|
|
|
$
|
70
|
|
Product development
|
|
|
42
|
|
|
|
85
|
|
|
|
127
|
|
Sales and marketing
|
|
|
376
|
|
|
|
75
|
|
|
|
451
|
|
General and administrative
|
|
|
317
|
|
|
|
32
|
|
|
|
349
|
|
Restructuring and acquisition costs
|
|
|
(764
|
)
|
|
|
(234
|
)
|
|
|
(998
|
)
|
|
R.
|
In addition to the matters described above in A thru Q, the Company also corrected for immaterial misstatements, including misstatements in certain footnotes, identified during an account review and analysis exercise.
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
The
account balances labeled “As Reported” in the following tables as of the periods ended March 31, 2019 and June 30,
2019, for the three months ended March 31, 2019 and for the three and six months ended June 30, 2019 represent the previously
reported financial statements as presented in the Original Filing. A summary of where the restatement adjustments had an effect
on the Company’s consolidated financial statements are as follows:
Condensed
Consolidated Balance Sheet at March 31, 2019 – Unaudited
|
|
As reported
|
|
|
2018 Adjustments
|
|
|
Adjustments
|
|
|
As restated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
28,645
|
|
|
$
|
(12,024
|
)
|
|
$
|
(8,476
|
)
|
|
$
|
8,145
|
|
Prepaid expenses and other current assets
|
|
|
3,634
|
|
|
|
-
|
|
|
|
(92
|
)
|
|
|
3,542
|
|
Total current assets
|
|
|
43,683
|
|
|
|
(12,024
|
)
|
|
|
(8,568
|
)
|
|
|
23,091
|
|
OTHER ASSETS
|
|
|
576
|
|
|
|
-
|
|
|
|
385
|
|
|
|
961
|
|
RIGHT OF USE LEASE ASSETS
|
|
|
3,136
|
|
|
|
-
|
|
|
|
622
|
|
|
|
3,758
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
5,184
|
|
|
|
891
|
|
|
|
(991
|
)
|
|
|
5,084
|
|
INTANGIBLE ASSETS, NET
|
|
|
60,706
|
|
|
|
-
|
|
|
|
(11,466
|
)
|
|
|
49,240
|
|
GOODWILL
|
|
|
119,899
|
|
|
|
9,601
|
|
|
|
9,695
|
|
|
|
139,195
|
|
Total assets
|
|
|
236,947
|
|
|
$
|
(1,532
|
)
|
|
$
|
(10,323
|
)
|
|
|
225,092
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and customer deposits
|
|
|
25,081
|
|
|
$
|
-
|
|
|
$
|
(630
|
)
|
|
|
24,451
|
|
Net billings in excess of revenues
|
|
|
1,616
|
|
|
|
(700
|
)
|
|
|
892
|
|
|
|
1,808
|
|
Accrued expenses and other payables
|
|
|
12,567
|
|
|
|
(212
|
)
|
|
|
(1,597
|
)
|
|
|
10,758
|
|
Lease liabilities, current
|
|
|
-
|
|
|
|
-
|
|
|
|
1,994
|
|
|
|
1,994
|
|
Total current liabilities
|
|
|
39,780
|
|
|
|
(912
|
)
|
|
|
659
|
|
|
|
39,527
|
|
Lease liabilities, non-current
|
|
|
3,142
|
|
|
|
-
|
|
|
|
(1,369
|
)
|
|
|
1,773
|
|
Deferred tax liabilities
|
|
|
8,191
|
|
|
|
(30
|
)
|
|
|
-
|
|
|
|
8,161
|
|
Total liabilities
|
|
|
73,342
|
|
|
|
(942
|
)
|
|
|
(710
|
)
|
|
|
71,690
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
488,670
|
|
|
|
3,004
|
|
|
|
227
|
|
|
|
491,901
|
|
Accumulated other comprehensive loss
|
|
|
(6,661
|
)
|
|
|
912
|
|
|
|
263
|
|
|
|
(5,486
|
)
|
Accumulated deficit
|
|
|
(318,404
|
)
|
|
|
(4,506
|
)
|
|
|
(10,103
|
)
|
|
|
(333,013
|
)
|
Total stockholders’ equity
|
|
|
163,605
|
|
|
|
(590
|
)
|
|
|
(9,613
|
)
|
|
|
153,402
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
236,947
|
|
|
$
|
(1,532
|
)
|
|
$
|
(10,323
|
)
|
|
$
|
225,092
|
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
Condensed
Consolidated Statement of Operations and Comprehensive Loss – Unaudited
Three months ended March 31, 2019:
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
REVENUES
|
|
$
|
23,040
|
|
|
$
|
(9,971
|
)
|
|
$
|
13,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST AND OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (excluding depreciation and amortization)
|
|
|
10,068
|
|
|
|
(2,022
|
)
|
|
|
8,046
|
|
Product development
|
|
|
2,198
|
|
|
|
354
|
|
|
|
2,552
|
|
Sales & Marketing
|
|
|
2,565
|
|
|
|
372
|
|
|
|
2,937
|
|
General and administrative expenses
|
|
|
7,615
|
|
|
|
317
|
|
|
|
7,932
|
|
Restructuring and acquisition costs
|
|
|
3,080
|
|
|
|
226
|
|
|
|
3,308
|
|
Depreciation and amortization
|
|
|
2,843
|
|
|
|
(117
|
)
|
|
|
2,726
|
|
Total cost and operating expenses
|
|
|
28,369
|
|
|
|
(868
|
)
|
|
|
27,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(5,329
|
)
|
|
|
(9,103
|
)
|
|
|
(14,432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
(616
|
)
|
|
|
(1,000
|
)
|
|
|
(1,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE (BENEFIT) PROVISION FOR INCOME TAXES
|
|
|
(5,945
|
)
|
|
|
(10,103
|
)
|
|
|
(16,048
|
)
|
Income tax benefit
|
|
|
(167
|
)
|
|
|
-
|
|
|
|
(167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(5,778
|
)
|
|
|
(10,103
|
)
|
|
|
(15,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation loss
|
|
|
(360
|
)
|
|
|
263
|
|
|
|
(97
|
)
|
COMPREHENSIVE LOSS
|
|
$
|
(6,138
|
)
|
|
$
|
(9,840
|
)
|
|
$
|
(15,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share and equivalents - basic and diluted
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
$
|
(0.15
|
)
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
Consolidated
Condensed Statement of Cash Flows – Unaudited
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2019:
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,778
|
)
|
|
$
|
(10,103
|
)
|
|
$
|
(15,881
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,843
|
|
|
|
(117
|
)
|
|
|
2,726
|
|
Provision for doubtful accounts
|
|
|
286
|
|
|
|
(260
|
)
|
|
|
26
|
|
Stock based compensation
|
|
|
3,714
|
|
|
|
1,315
|
|
|
|
5,029
|
|
Shares issued for services
|
|
|
1,523
|
|
|
|
(485
|
)
|
|
|
1,038
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
1,000
|
|
|
|
1,000
|
|
Deferred tax
|
|
|
-
|
|
|
|
(525
|
)
|
|
|
(525
|
)
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accounts receivable
|
|
|
(9,225
|
)
|
|
|
8,621
|
|
|
|
(604
|
)
|
Decrease in prepaid expenses, deposits and other assets
|
|
|
2,816
|
|
|
|
(2,213
|
)
|
|
|
603
|
|
Increase in accounts payable and customer deposits
|
|
|
3,420
|
|
|
|
117
|
|
|
|
3,537
|
|
Decrease in net billings in excess of revenues
|
|
|
(1,237
|
)
|
|
|
1,120
|
|
|
|
(117
|
)
|
Decrease in accrued expenses and other payables
|
|
|
(3,098
|
)
|
|
|
1,427
|
|
|
|
(1,671
|
)
|
Net cash used in operating activities
|
|
|
(4,614
|
)
|
|
|
(103
|
)
|
|
|
(4,717
|
)
|
Purchases of property, equipment and software development
|
|
|
(765
|
)
|
|
|
(653
|
)
|
|
|
(1,418
|
)
|
Acquisition of iPass, Inc., net of cash acquired
|
|
|
(284
|
)
|
|
|
1,144
|
|
|
|
860
|
|
Net cash used in investing activities
|
|
|
(3,749
|
)
|
|
|
491
|
|
|
|
(3,258
|
)
|
Increase in short term loans
|
|
|
287
|
|
|
|
(287
|
)
|
|
|
-
|
|
Exercise of warrants & options
|
|
|
717
|
|
|
|
33
|
|
|
|
750
|
|
Financing related fees
|
|
|
(894
|
)
|
|
|
27
|
|
|
|
(867
|
)
|
Proceeds from issuance of loan
|
|
|
25,000
|
|
|
|
(976
|
)
|
|
|
24,024
|
|
Repayment on loans
|
|
|
(11,670
|
)
|
|
|
681
|
|
|
|
(10,989
|
)
|
Net cash provided by financing activities
|
|
|
13,440
|
|
|
|
(522
|
)
|
|
|
12,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
(156
|
)
|
|
|
135
|
|
|
|
(21
|
)
|
NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
|
|
|
4,921
|
|
|
|
-
|
|
|
|
4,922
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
|
|
|
6,483
|
|
|
|
-
|
|
|
|
6,483
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
|
|
$
|
11,404
|
|
|
$
|
-
|
|
|
$
|
11,404
|
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
Consolidated
Condensed Balance Sheet at June 30, 2019 – Unaudited
|
|
As reported
|
|
|
2018 Adjustments
|
|
|
Adjustments
|
|
|
As restated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,378
|
|
|
$
|
-
|
|
|
$
|
(380
|
)
|
|
$
|
2,998
|
|
Accounts receivable, net
|
|
|
45,061
|
|
|
|
(12,024
|
)
|
|
|
(25,729
|
)
|
|
|
7,308
|
|
Prepaid expenses and other current assets
|
|
|
3,386
|
|
|
|
-
|
|
|
|
36
|
|
|
|
3,422
|
|
Total current assets
|
|
|
53,954
|
|
|
|
(12,024
|
)
|
|
|
(26,073
|
)
|
|
|
15,857
|
|
RIGHT OF USE LEASE ASSETS
|
|
|
2,493
|
|
|
|
-
|
|
|
|
780
|
|
|
|
3,273
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
4,897
|
|
|
|
891
|
|
|
|
(658
|
)
|
|
|
5,130
|
|
INTANGIBLE ASSETS, NET
|
|
|
60,262
|
|
|
|
-
|
|
|
|
(9,225
|
)
|
|
|
51,037
|
|
GOODWILL
|
|
|
121,487
|
|
|
|
9,601
|
|
|
|
8,107
|
|
|
|
139,195
|
|
Total assets
|
|
|
246,869
|
|
|
$
|
(1,532
|
)
|
|
$
|
(27,069
|
)
|
|
|
218,268
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and customer deposits
|
|
|
28,184
|
|
|
$
|
-
|
|
|
$
|
(875
|
)
|
|
|
27,309
|
|
Net billings in excess of revenues
|
|
|
1,331
|
|
|
|
(700
|
)
|
|
|
861
|
|
|
|
1,492
|
|
Accrued expenses and other payables
|
|
|
14,037
|
|
|
|
(212
|
)
|
|
|
(4,402
|
)
|
|
|
9,423
|
|
Lease liabilities, current
|
|
|
1,777
|
|
|
|
-
|
|
|
|
237
|
|
|
|
2,014
|
|
Total current liabilities
|
|
|
46,000
|
|
|
|
(912
|
)
|
|
|
(4,179
|
)
|
|
|
40,909
|
|
Lease liabilities, non-current
|
|
|
1,014
|
|
|
|
-
|
|
|
|
257
|
|
|
|
1,271
|
|
Deferred tax liabilities
|
|
|
7,713
|
|
|
|
(30
|
)
|
|
|
252
|
|
|
|
7,935
|
|
Total liabilities
|
|
|
77,211
|
|
|
|
(942
|
)
|
|
|
(3,670
|
)
|
|
|
72,599
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
494,803
|
|
|
|
3,004
|
|
|
|
1,213
|
|
|
|
499,020
|
|
Accumulated other comprehensive loss
|
|
|
(6,225
|
)
|
|
|
912
|
|
|
|
(194
|
)
|
|
|
(5,507
|
)
|
Accumulated deficit
|
|
|
(318,920
|
)
|
|
|
(4,506
|
)
|
|
|
(24,418
|
)
|
|
|
(347,844
|
)
|
Total stockholders’ equity
|
|
|
169,658
|
|
|
|
(590
|
)
|
|
|
(23,399
|
)
|
|
|
145,669
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
246,869
|
|
|
$
|
(1,532
|
)
|
|
$
|
(27,069
|
)
|
|
$
|
218,268
|
|
Consolidated
Condensed Statement of Operations and Comprehensive Loss – Unaudited
Three months ended June 30, 2019:
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
REVENUES
|
|
$
|
34,148
|
|
|
$
|
(17,272
|
)
|
|
$
|
16,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST AND OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (excluding depreciation and amortization)
|
|
|
15,293
|
|
|
|
(2,649
|
)
|
|
|
12,644
|
|
Product development
|
|
|
3,242
|
|
|
|
383
|
|
|
|
3,625
|
|
Sales and marketing
|
|
|
2,769
|
|
|
|
326
|
|
|
|
3,095
|
|
General and administrative
|
|
|
9,033
|
|
|
|
(666
|
)
|
|
|
8,367
|
|
Restructuring and acquisition costs
|
|
|
428
|
|
|
|
(304
|
)
|
|
|
124
|
|
Depreciation and amortization
|
|
|
3,224
|
|
|
|
(119
|
)
|
|
|
3,105
|
|
Total cost and operating expenses
|
|
|
33,989
|
|
|
|
(3,029
|
)
|
|
|
30,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
159
|
|
|
|
(14,243
|
)
|
|
|
(14,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
(1,124
|
)
|
|
|
180
|
|
|
|
(944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE PROVISION FOR INCOME TAXES
|
|
|
(965
|
)
|
|
|
(14,063
|
)
|
|
|
(15,028
|
)
|
Income tax benefit
|
|
|
(449
|
)
|
|
|
252
|
|
|
|
(197
|
)
|
NET LOSS
|
|
|
(516
|
)
|
|
|
(14,315
|
)
|
|
|
(14,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME/(LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation (loss)/income
|
|
|
436
|
|
|
|
(457
|
)
|
|
|
(21
|
)
|
COMPREHENSIVE LOSS
|
|
$
|
(80
|
)
|
|
$
|
(14,772
|
)
|
|
$
|
(14,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share and equivalents - basic and diluted
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
$
|
(0.13
|
)
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
Six months ended June 30, 2019:
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
REVENUES
|
|
$
|
57,188
|
|
|
$
|
(27,243
|
)
|
|
$
|
29,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST AND OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (excluding depreciation and amortization)
|
|
|
25,361
|
|
|
|
(4,671
|
)
|
|
|
20,690
|
|
Product development
|
|
|
5,816
|
|
|
|
361
|
|
|
|
6,177
|
|
Sales and marketing
|
|
|
5,710
|
|
|
|
322
|
|
|
|
6,032
|
|
General and administrative
|
|
|
15,897
|
|
|
|
402
|
|
|
|
16,299
|
|
Restructuring and acquisition costs
|
|
|
3,508
|
|
|
|
(76
|
)
|
|
|
3,432
|
|
Depreciation and amortization
|
|
|
6,067
|
|
|
|
(236
|
)
|
|
|
5,831
|
|
Total cost and operating expenses
|
|
|
62,359
|
|
|
|
(3,898
|
)
|
|
|
58,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(5,171
|
)
|
|
|
(23,345
|
)
|
|
|
(28,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
(1,740
|
)
|
|
|
(820
|
)
|
|
|
(2,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE PROVISION FOR INCOME TAXES
|
|
|
(6,911
|
)
|
|
|
(24,165
|
)
|
|
|
(31,076
|
)
|
Income tax benefit
|
|
|
(617
|
)
|
|
|
253
|
|
|
|
(364
|
)
|
NET LOSS
|
|
|
(6,294
|
)
|
|
|
(24,418
|
)
|
|
|
(30,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME/(LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation (loss)/income
|
|
|
76
|
|
|
|
(194
|
)
|
|
|
(118
|
)
|
COMPREHENSIVE LOSS
|
|
$
|
(6,218
|
)
|
|
$
|
(24,612
|
)
|
|
$
|
(30,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share and equivalents - basic and diluted
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
$
|
(0.29
|
)
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
Consolidated
Condensed Statement of Cash Flows – Unaudited
Six months ended June 30, 2019:
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,294
|
)
|
|
$
|
(24,418
|
)
|
|
$
|
(30,712
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,067
|
|
|
|
(236
|
)
|
|
|
5,831
|
|
Provision for doubtful accounts
|
|
|
286
|
|
|
|
(214
|
)
|
|
|
72
|
|
Stock based compensation
|
|
|
5,722
|
|
|
|
2,022
|
|
|
|
7,744
|
|
Shares issued for services
|
|
|
2,279
|
|
|
|
(926
|
)
|
|
|
1,353
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
1,000
|
|
|
|
1,000
|
|
Deferred tax
|
|
|
-
|
|
|
|
(522
|
)
|
|
|
(522
|
)
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accounts receivable
|
|
|
(25,191
|
)
|
|
|
24,296
|
|
|
|
(895
|
)
|
Decrease in prepaid expenses, deposits and other assets
|
|
|
2,975
|
|
|
|
(1,610
|
)
|
|
|
1,365
|
|
Increase in accounts payable and customer deposits
|
|
|
6,937
|
|
|
|
909
|
|
|
|
7,846
|
|
Decrease in net billings in excess of revenues
|
|
|
(2,000
|
)
|
|
|
1,564
|
|
|
|
(436
|
)
|
Decrease in accrued expenses and other payables
|
|
|
(1,643
|
)
|
|
|
(1,096
|
)
|
|
|
(2,739
|
)
|
Net cash used in operating activities
|
|
|
(10,440
|
)
|
|
|
769
|
|
|
|
(9,671
|
)
|
Purchases of property, equipment and software development
|
|
|
(1,650
|
)
|
|
|
(993
|
)
|
|
|
(2,643
|
)
|
Acquisition of iPass, Inc., net of cash acquired
|
|
|
(1,563
|
)
|
|
|
2,423
|
|
|
|
860
|
|
Investment in note receivables
|
|
|
(2,761
|
)
|
|
|
61
|
|
|
|
(2,700
|
)
|
Acquisition of assets from Devicescape, LLC
|
|
|
-
|
|
|
|
(2,137
|
)
|
|
|
(2,137
|
)
|
Net cash used in investing activities
|
|
|
(5,974
|
)
|
|
|
(646
|
)
|
|
|
(6,620
|
)
|
Increase in short term loans
|
|
|
142
|
|
|
|
(142
|
)
|
|
|
-
|
|
Financing related fees
|
|
|
(624
|
)
|
|
|
(243
|
)
|
|
|
(867
|
)
|
Proceeds from issuance of loan
|
|
|
25,000
|
|
|
|
(822
|
)
|
|
|
24,178
|
|
Repayment on loans
|
|
|
(11,670
|
)
|
|
|
681
|
|
|
|
(10,989
|
)
|
Net cash provided by financing activities
|
|
|
14,443
|
|
|
|
(526
|
)
|
|
|
13,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
(29
|
)
|
|
|
23
|
|
|
|
(6
|
)
|
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
|
|
|
(2,000
|
)
|
|
|
(380
|
)
|
|
|
(2,380
|
)
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
|
|
|
6,483
|
|
|
|
-
|
|
|
|
6,483
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
|
|
$
|
4,483
|
|
|
$
|
(380
|
)
|
|
$
|
4,103
|
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
Note
22. Subsequent events
The
Company has evaluated subsequent events through the filing of this Annual Report on Form 10-K and determined that there have been
no events that have occurred that would require adjustments to our disclosures in the consolidated financial statements except
for the transactions described below.
Senior
Second Lien Secured Convertible Note
On
February 22, 2021, the Company issued a $2.4 million in principal amount 8% Senior Second Lien Secured Convertible Note due
April 1, 2025 (the “Senior Second Lien Note”) to an institutional investor (the “Purchaser”) for $2.0
million.
The
Second Lien Note is a senior, secured obligation of the Company, but ranks junior to the High Trail Note (as defined below), issued
by the Company and held by High Trail (as defined below). Interest is payable monthly beginning April 1, 2021 at a rate of 8%
per annum. The Second Lien Note is secured by a second lien on substantially all assets of the Company and substantially all assets
of its material U.S.-organized subsidiaries. Interest may be paid, at the election of the Company, in cash or in shares of common
stock of the Company; provided, that, so long as the High Trail Note remains outstanding, such payments may only be made in shares.
The number of shares of common stock to be issued to pay interest in shares of the Company’s common stock is determined
by the application of a formula in which the amount of the interest due is divided by 85% of the lowest volume-weighted average
price of the Company’s common stock on the principal market for the Company’s common stock over the 10 days preceding
the date of such payment.
Subject
to an intercreditor agreement with the holder of the High Trail Note, upon notice by the Company, the Company may elect to redeem
all or a portion of the then-outstanding principal amount outstanding under the Second Lien Note. The Purchaser or the Company
may also elect for the Company to redeem the Second Lien Note at a 20% premium if the Company undergoes a fundamental change.
The Second Lien Note will be convertible into common stock of the Company, in part or in whole, from time to time, at the election
of the Purchaser. The initial conversion rate is equal to 1666.6667 shares of the Company’s common stock for each $1,000
of principal amount of the Second Lien Note or $0.60 per share. The conversion rate is subject to customary anti-dilution adjustments
in the event the Company issues stock dividends or effects a split or reverse split of the Company’s common stock.
In
connection with the Second Lien Note, the Company also granted a warrant to purchase 2,750,000 shares of its common stock to the
Purchaser at an exercise price of $0.40 per share expiring on February 22, 2026. The warrants are exercisable any time after February
22, 2021.
8%
Series C Redeemable Preferred Stock
On
various dates from February 21, 2020 through August 18, 2020, the Company issued an additional 116 shares of Series C Redeemable
Preferred Stock with a stated value of $11,600 for an aggregate purchase price of $9,100. By their terms, those shares are not
convertible into other securities of the Company. However, on various dates from July 17, 2020 through October 1, 2020, the Company
entered into the Series C Exchange Agreements with the holders of those 116 shares which allow either the Company or the holders
to convert amounts due in connection with those shares of Series C Redeemable Preferred Stock into shares of the Company common
stock.
Senior
Convertible Note
On
June 8, 2020, the Company issued an $17.5 million in principal amount of an 8% Senior Secured Convertible Note due April1,
2025 (the “High Trail Note” or the “Note”) to High Trail Investments SA LLC (“High
Trail”) for $14 million.
On
June 8, 2020, the Company received $4 million of the $14 million and incurred legal fees of $0.3 million. The remaining $10
million balance was received by the Company but was deposited into a non-springing bank account based on terms of a 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 High Trail Note, the remaining $10 million balance will be released to the Company subject to the satisfaction of
certain conditions as follows:
|
•
|
$3 million when the
Company receives $4 million in additional financing. The Company received the additional financing in July 2020 and the $3
million was released to the Company to be used for working capital purposes.
|
|
•
|
$7
million when the Company meets certain specified conditions (the “Specified Conditions”) on or prior to October
31, 2020 the “Specified Conditions Date”). The $7 million will be reported as restricted cash until the Specified
Conditions are met on the Specified Conditions Date.
|
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 High Trail Note. The satisfaction of the certain equity conditions
includes:
|
•
|
the Company’s
being able to issue shares of its common stock upon conversion that are not subject to restrictions on resale;
|
|
•
|
High Trail not, upon
conversion, beneficially owning in excess of 4.99% of the Company’s outstanding common stock;
|
|
•
|
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;
|
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
|
•
|
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;
|
|
•
|
there being no defaults
or events of a default that have occurred or are continuing;
|
|
•
|
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;
|
|
•
|
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
|
|
•
|
the absence of any defaults
or events of default.
|
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 $3.5 million, 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
High Trail 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 a $0.3 million 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.
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 High Trail 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.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except share and per share data and unless otherwise indicated)
The
High Trail 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 million 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 High Trail 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 High Trail 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.
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 High Trail 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.
Pareteum
Corporation and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share
and per share data and unless otherwise indicated)
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. The delisting became effective on February 12, 2021.