Company Quick10K Filing
Quick10K
Pareteum
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$2.17 111 $241
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-11-13 Regulation FD, Exhibits
8-K 2019-11-01 Officers, Other Events, Exhibits
8-K 2019-11-01 Enter Agreement, Officers, Other Events, Exhibits
8-K 2019-10-09 Leave Agreement, Officers
8-K 2019-09-26 Leave Agreement, Other Events, Exhibits
8-K 2019-09-20 Enter Agreement, Sale of Shares, Other Events, Exhibits
8-K 2019-08-22 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2019-08-06 Earnings, Exhibits
8-K 2019-07-17 Shareholder Vote, Other Events, Exhibits
8-K 2019-05-24 Officers
8-K 2019-05-07 Earnings, Exhibits
8-K 2019-03-12 Earnings, Exhibits
8-K 2019-02-26 Enter Agreement, Leave Agreement, Off-BS Arrangement, Sale of Shares, Regulation FD, Exhibits
8-K 2019-02-12 Enter Agreement, M&A, Off-BS Arrangement, Sale of Shares, Regulation FD, Exhibits
8-K 2018-11-28 Officers
8-K 2018-11-16 Officers, Other Events
8-K 2018-11-12 Enter Agreement, Other Events, Exhibits
8-K 2018-10-11 Exhibits
8-K 2018-10-01 Officers
8-K 2018-10-01 M&A, Sale of Shares, Officers, Other Events, Exhibits
8-K 2018-09-28 Other Events, Exhibits
8-K 2018-09-14 Other Events, Exhibits
8-K 2018-09-13 Shareholder Vote, Other Events, Exhibits
8-K 2018-08-06 Enter Agreement
8-K 2018-07-27 Other Events, Exhibits
8-K 2018-06-08 Other Events, Exhibits
8-K 2018-06-08 Regulation FD, Other Events, Exhibits
8-K 2018-06-07 Enter Agreement, Sale of Shares, Other Events, Exhibits
8-K 2018-06-06 Officers
8-K 2018-05-09 Enter Agreement, Sale of Shares, Other Events, Exhibits
8-K 2018-04-04 Officers
WDAY Workday 41,283
LXFT Luxoft Holding 1,286
VRTU Virtusa 1,082
FORTY Formula Systems 841
BCOV Brightcove 465
CPSI Computer Programs & Systems 305
PCYG Park City Group 111
VERI Veritone 90
WYY Widepoint 29
TSRI TSR 14
TEUM 2019-06-30
Part I - Financial Information
Item 1. Financial Statements
Note 1. Financial Condition
Note 2. Description of Business, Basis of Presentation and Use of Estimates
Note 3. Business Combinations
Note 4. Balance Sheet Information
Note 5. Equity
Note 7. Income Taxes
Note 8. Significant Customers and Geographical Information
Note 9. Revenues
Note 10. Credit Agreement
Note 11. Commitments and Contingencies
Note 12. Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 tv527119_ex31-1.htm
EX-31.2 tv527119_ex31-2.htm
EX-32.1 tv527119_ex32-1.htm
EX-32.2 tv527119_ex32-2.htm

Pareteum Earnings 2019-06-30

TEUM 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv527119_10q.htm FORM 10-Q

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q

 

x   Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2019

 

¨   Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from ______ to ______

 

000-30061

(Commission file No.)

 

PARETEUM CORPORATION

(Exact name of registrant as specified in its charter)

 

DELAWARE 95-4557538
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)  

 

1185 Avenue of the Americas, New York, NY 10036

USA

(Address of principal executive offices) (Zip Code)

 

+ 1 (212) 984-1096

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Trading Symbol(s)   Name of each exchange on which
registered
Common Stock   TEUM   NASDAQ

  

 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  x    No  ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes  x    No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large Accelerated filer  ¨ Accelerated filer  x  
  Non-Accelerated filer  ¨ Smaller reporting company  x  
    Emerging growth company  ¨  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  ¨    No  x

 

As of August 8, 2019, there were 111,903,762 shares of the Company’s common stock outstanding. 

 

 

 

   

 

  

PARETEUM CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

FORM 10-Q REPORT

June 30, 2019

 

PART I - FINANCIAL INFORMATION 3
   
Item 1. Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018 3
Condensed Consolidated Statements of Comprehensive (loss)/income for the three and six month periods ended June 30, 2019 and 2018 (unaudited) 4
Condensed Consolidated Statements of Changes in Stockholder’s Equity for the three and six month periods ended June 30, 2019 and June 30, 2018 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the six month period ended June 30, 2019 and 2018 (unaudited) 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 29
   
PART II -  OTHER INFORMATION 30
   
Item 1. Legal Proceedings 30
Item 1A. Risk Factors 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 3. Defaults upon Senior Securities 30
Item 4. Mine Safety Disclosures 30
Item 5. Other Information 30
Item 6. Exhibits 31
   
SIGNATURES 32

 

 2 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PARETEUM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   June 30,   December 31, 
   2019   2018 
ASSETS          
           
CURRENT ASSETS          
           
Cash and cash equivalents  $3,377,556   $6,051,709 
Restricted cash   1,104,757    430,655 
Accounts receivable, net of an allowance for doubtful accounts of $1,307,071 at June 30, 2019 and $1,021,179 at December 31, 2018, respectively   45,061,236    15,361,594 
Notes receivable, current   1,024,025    - 
Prepaid expenses and other current assets   3,385,842    2,083,950 
Total current assets   53,953,416    23,927,908 
           
NON-CURRENT ASSETS          
           
OTHER ASSETS   956,810    45,336 
           
RIGHT OF USE LEASE ASSETS   2,493,352    - 
           
NOTES RECEIVABLE, NON-CURRENT   2,819,200    1,082,436 
           
PROPERTY AND EQUIPMENT, NET   4,896,503    4,553,250 
           
INTANGIBLE ASSETS, NET   60,262,420    39,658,325 
           
GOODWILL   121,486,562    91,773,911 
           
TOTAL ASSETS  $246,868,263   $161,041,166 
           
LIABILITIES AND EQUITY          
           
CURRENT LIABILITIES          
Accounts payable and customer deposits  $28,183,711   $10,337,629 
Net billings in excess of revenues   1,330,757    927,780 
Accrued expenses and other payables   14,036,645    7,952,380 
Promissory note   671,165    681,220 
Lease liabilities, current   1,776,900    - 
9% Unsecured subordinate convertible promissory note (net of debt discount and debt issuance costs)   -    106,967 
Total current liabilities   45,999,178    20,005,976 
           
LONG TERM LIABILITIES          
Senior secured debt, net   22,077,767    - 
Lease liabilities, non-current   1,013,785    - 
Other long term liabilities   63,853    212,703 
Deferred tax liabilities   7,712,860    8,415,825 
Related party loan   342,000    341,998 
Total long term liabilities   31,210,265    8,970,526 
           
Total liabilities   77,209,443    28,976,502 
           
STOCKHOLDER’S EQUITY          
Preferred Stock $0.00001 par value, 50,000,000 shares authorized, none issued and outstanding as of June 30, 2019 and December 31, 2018, respectively   -    - 
Common Stock $0.00001 par value, 500,000,000 shares authorized, 111,652,349 issued and outstanding as of June 30, 2019 and 97,852,911 shares issued and outstanding as of December 31, 2018, respectively   494,803,176    450,990,827 
Accumulated other comprehensive loss   (6,224,649)   (6,300,780)
Accumulated deficit   (318,919,707)   (312,625,383)
Total equity   169,658,820    132,064,664 
           
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY  $246,868,263   $161,041,166 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 3 

 

  

PARETEUM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME

(UNAUDITED)

 

    Three months Ended June 30,     Six months Ended June 30,  
    2019     2018     2019     2018  
REVENUES   $ 34,148,396     $ 6,003,180     $ 57,188,310     $ 10,115,750  
                                 
COST AND OPERATING EXPENSES                                
Cost of service, excluding depreciation and amortization     15,293,244       1,779,882       25,361,468       2,974,405  
Product development     3,242,145       753,931       5,816,189       1,480,776  
Sales and marketing     2,769,065       652,442       5,709,747       1,341,440  
General and administrative     9,033,690       2,214,070       15,896,619       4,510,922  
Restructuring and acquisition charges     427,586       5,592       3,507,950       79,193  
Depreciation and amortization     3,224,027       994,318       6,067,430       1,959,609  
Total cost and operating expenses     33,989,757       6,400,235       62,359,403       12,346,345  
                                 
INCOME/(LOSS) FROM OPERATIONS     158,639       (397,055 )     (5,171,093)       (2,230,595 )
                                 
OTHER INCOME/ (EXPENSE)                                
Interest income     149,298       43,193       250,844       85,865  
Interest expense     (777,907)       (99,708 )     (1,326,767)       (163,467 )
Interest expense related to debt discount accretion and conversion feature     (199,224)       (30,272 )     (271,205)       (59,838 )
Changes in derivative liabilities     -       1,597,647         -     1,283,914  
Other (expense)/income     (194,354)       567,710       (241,485)       637,255  
Amortization of deferred financing costs     (101,664)       (6,209 )     (151,355)       (12,351 )
Total other (expense)/income     (1,123,851)       2,072,361       (1,739,968)       1,771,378  
                                 
(LOSS)/INCOME BEFORE INCOME TAX (BENEFIT)/EXPENSE     (965,212)       1,675,306       (6,911,061)       (459,217 )
Income tax (benefit)/expense     (449,403)       18,842       (616,737)       18,424  
NET (LOSS)/INCOME     (515,809)       1,656,464       (6,294,324)       (477,641 )
                                 
OTHER COMPREHENSIVE (LOSS)/INCOME                                
Foreign currency translation gain/(loss)     435,935       (79,137)       76,131       25,266  
COMPREHENSIVE (LOSS)/INCOME   $ (79,874)     $ 1,577,327     $ (6,218,193)     $ (452,375 )
                                 
Net (loss)/income per common share and equivalents - basic   $ (0.00)     $ 0.03     $ (0.06)     $ (0.01 )
                                 
Net (loss)/income per common share and equivalents - diluted   $ (0.00)     $ 0.03     $ (0.06)     $ (0.01 )
                                 
Weighted average shares outstanding during the period – basic     111,074,977       53,348,376       107,341,105       51,714,482  
                                 
Weighted average shares outstanding during the period – diluted     111,074,977       64,741,232       107,341,105       51,714,482  

  

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 4 

 

  

PARETEUM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY

(UNAUDITED)

 

       Accumulated
other
       Total 
   Common Stock   comprehensive   Accumulated   Stockholder’s 
Description  Shares   Amount   Loss   Deficit   equity 
Balance – January 1, 2018   46,617,093   $321,271,437   $(6,306,691)  $(299,543,213)  $15,421,533 
                          
ASC 606 transition adjustment   -    -    107,520    -    107,520 
Warrant exercises   4,250,748    2,542,250    -    -    2,542,250 
Stock-based compensation   178,553    1,052,567    -    -    1,052,567 
Other comprehensive loss due to foreign exchange translation, net of tax   -    -    (3,118)   -    (3,118)
Net loss   -    -    -    (2,134,102)   (2,134,102)
Balance – March 31, 2018   51,046,394    324,866,254    (6,202,289)   (301,677,315)   16,986,651 
ASC 606 transition adjustment   -    -    (107,520)        (107,520)
Warrant exercises   1,663,522    841,720    -    -    841,720 
Shares issued in equity financing   2,453,400    5,467,100    -    -    5,467,100 
Stock-based compensation   447,970    697,448    -    -    697,448 
Services settled by issuance of shares   44,829    86,778    -    -    86,778 
Other comprehensive loss due to foreign exchange translation, net of tax   -    -    28,384    -    28,384 
Net loss   -    -    -    1,656,464    1,656,464 
Balance – June 30, 2018   55,656,115   $331,959,299   $(6,281,425)  $(300,020,851)  $25,657,023 
                          
Balance - January 1, 2019   97,852,911   $450,990,827   $(6,300,780)  $(312,625,383)  $132,064,664 
                          
Shares issued for acquisitions   9,865,412    29,253,287    -    -    29,253,287 
Warrant exercises   501,606    647,447    -    -    647,447 
Services settled by issuance of shares   420,514    1,522,636    -    -    1,522,636 
Shares issued to be cancelled   37,014    64,775    -    -    64,775 
Stock option exercises   68,083    69,567    -    -    69,567 
Shares in transit   -    1,451,700    -    -    1,451,700 
Stock-based compensation   594,475    3,713,614    -    -    3,713,614 
Shares issued to senior secured lender   425,000    956,500    -    -    956,500 
Other comprehensive loss due to foreign exchange rate translation, net of tax   -    -    (359,804)   -    (359,804)
Net loss   -    -    -    (5,778,515)   (5,778,515)
Balance - March 31, 2019   109,765,015   $488,670,353   $(6,660,584)  $(318,403,898)  $163,605,871 
Shares issued for acquisitions   1,105,000    1,692,000    -    -    1,692,000 
Warrant exercises   356,738    737,993    -    -    737,993 
Conversion of notes   84,220    147,385    -    -    147,385 
Services settled by the issuance of shares   233,282    756,602    -    -    756,602 
Stock option exercises   107,955    140,010    -    -    140,010 
Shares issued to be cancelled   139    -    -    -    - 
Stock-based compensation   -    2,008,833    -    -    2,008,833 
Shares issued to senior secured lender   -    650,000    -    -    650,000 
Other comprehensive income due to foreign exchange rate translation, net of tax   -    -    435,935    -    435,935 
Net loss   -    -    -    (515,809)   (515,809)
Balance – June 30, 2019   111,652,349   $494,803,176   $(6,224,649)  $(318,919,707)  $169,658,820 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 5 

 

  

PARETEUM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

   For the six months ended 
   June 30,   June 30, 
   2019   2018 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(6,294,324)  $(477,641)
Adjustments to reconcile net loss to net cash (used in) operating activities:          
Depreciation and amortization   6,067,430    1,959,609 
Provision for doubtful accounts   285,892    - 
Stock-based compensation   5,722,447    1,771,580 
Change in fair value of warrant liability   -    (1,283,914)
Amortization of deferred financing costs   151,355    12,351 
Interest expense related to debt discount accretion and conversion feature   271,205    59,838 
Payables settled by issuance of shares   2,279,238    86,778 
Changes in operating assets and liabilities:          
(Increase) in accounts receivable   (25,190,857)   (1,851,046)
Decrease/(Increase) in prepaid expenses, deposits and other assets   2,974,602    (351,046)
Increase in accounts payable and customer deposits   6,936,552    606,393 
(Decrease)/Increase in Net billings in excess of revenues and deferred revenue   (2,000,430)   22,627 
(Decrease) in accrued expenses and other payables   (1,644,320)   (1,508,005)
Net cash (used in) operating activities   (10,441,210)   (952,476)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchases of property and equipment, and capitalized software   (1,650,013)   (1,877,477)
Issuance of notes receivable   (2,760,789)   - 
Business combinations, net of cash acquired   (1,562,636)   - 
Net cash (used in) investing activities   (5,973,438)   (1,877,477)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Exercise of warrants and options   1,595,017    3,070,110 
Increase in short terms loans   141,639    - 
Proceeds from senior secured debt issued   25,000,000    - 
Repayments on other long term loans   -    (32,682)
Financing related fees   (623,555)   (653,000)
Gross proceeds from public offering   -    6,100,000 
Principal repayment Senior Secured Loan   (11,669,963)   - 
Net cash provided by financing activities   14,443,138    8,484,428 
           
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH   (28,541)   42,185 
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH   (2,000,051)   5,696,660 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF THE PERIOD   6,482,364    13,737,675 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF THE PERIOD  $4,482,313   $19,434,335 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:          
Cash (paid)/received during the period for interest, net  $(840,562)  $43,193 
Cash paid during the period for taxes   (56,201)   - 
NON-CASH FINANCING ACTIVITIES:          
Acquisitions paid for in common shares   (32,337,287)   - 
Conversions of convertible notes   (147,385)   (1,911,380)
Settlement of debt paid for in common shares   (2,279,238)   - 
Senior Secured Lender fees paid for in shares   (1,606,500)   - 
Amendment to warrants and convertible notes into common shares   -    313,733 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 6 

 

  

PARETEUM CORPORATION AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1. Financial Condition

 

As reflected in the accompanying condensed consolidated financial statements, Pareteum Corporation (“Pareteum,” the “Company,” “we,” “us,” or “our”) (NASDAQ: TEUM) reported a net loss of $6,294,324 for the six months ended June 30, 2019, and had an accumulated deficit of $318,919,707 as of June 30, 2019.

 

Note 2. Description of Business, Basis of Presentation and Use of Estimates

 

Business overview 

 

Pareteum has developed a Communications Cloud Services Platform, providing (i) Mobility, (ii) Messaging, and (iii) Security services and applications, with a Single-Sign-On, API and software development suite. The Pareteum platform hosts integrated IT/Back Office and Core Network functionality for mobile network operators, and for enterprises implement and leverage mobile communications solutions on a fully outsourced SaaS, PaaS and/or IaaS basis: made available either as an on-premise solution or as a fully hosted service in the Cloud depending on the needs of our customers. Pareteum also delivers an Operational Support System (“OSS”) for channel partners, with Application Program Interfaces (“APIs”) for integration with third party systems, workflows for complex application orchestration, customer support with branded portals and plug-ins for a multitude of other applications. These features facilitate and improve the ability of our channel partners to provide support and to drive sales.

  

Basis of Presentation of Interim Periods

 

The unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP,”) for interim financial information and in accordance with the instructions to Securities and Exchange Commission (“SEC”), Form 10-Q and Article 8 of SEC Regulation S-X. They do not include all the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2018, included in our 2018 Annual Report on Form 10-K filed with the SEC on March 18, 2019, referred to as our 2018 Annual Report.

 

The interim condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly our results of operations and financial position for the interim periods. The results of operations for the three and six month periods ended June 30, 2019, are not necessarily indicative of the results to be expected for future quarters or the full year. All intercompany transactions and account balances have been eliminated in consolidation. As of June 30, 2019, the Company’s subsidiaries are:

 

·its wholly owned subsidiary Pareteum North America Corp. with its wholly owned subsidiary, Pareteum UK Ltd.;
·its wholly owned subsidiary Pareteum Asia PTE. Ltd.;
·its wholly owned subsidiary TBR Inc. (special purpose vehicle for iPass acquisition);
·its wholly-owned subsidiary Pareteum Europe B.V. (fka Elephant Talk Europe Holding B.V.) and its wholly owned subsidiaries, Elephant Talk Mobile Services B.V., Elephant Talk PRS Netherlands BV, Elephant Talk Deutschland GmbH (dormant), Elephant Talk Middle East & Africa (Holding) W.L.L., Elephant Talk Luxembourg SA (dormant), Guangzhou Elephant Talk Information Technology Limited (dormant), Elephant Talk Communications Italy S.R.L. (dormant), Elephant Talk Business Services W.L.L., Elephant Talk Middle East & Africa (Holding) Jordan L.L.C. (dormant).;
·its wholly owned Elephant Talk Communications Holding AG and its wholly owned subsidiaries Pareteum Spain SLU and ETC Carrier Services GmbH.;
·Pareteum Europe B.V. majority-owned subsidiaries Elephant Talk Bahrain W.L.L. (99%), ET de Mexico S.A.P.I. de C.V. (99.998%), ET-UTS NV; (51%) and LLC Pareteum (Russia) (50%) Elephant Talk;
·Elephant Talk Telecomunicação do Brasil LTDA, is owned 90% by Pareteum Europe B.V. and 10% by Elephant Talk Communication Holding AG;

 

 7 

 

 

·its wholly-owned subsidiary Elephant Talk Limited (“ETL”) and its wholly owned ET Guangdong Ltd. And its majority owned (50.54%) subsidiary Elephant Talk Middle East & Africa FZ-LLC.;

  · Asesores Profesionales ETAK S. de RL. De C.V. is owned 99% by Pareteum Europe B.V.;

·its wholly owned subsidiary Artilium Group Ltd. And its wholly owned subsidiaries, Artilium UK Ltd., Artilium Trustee Company Limited, Artilium BV, Pareteum NV, Interactive Digital Media GMBH and United Telecom NV, and United Telecom NV’s wholly-owned subsidiary, ELLO Mobile BVVA;
·its wholly owned subsidiary iPass, Inc. and its wholly owned subsidiaries iPass (U.K.) Limited, iPass France SAS, iPass Deutschland GmbH, iPass Holdings Pty Ltd., iPass Asia Pte Ltd., iPass Japan, Inc., iPass India Private Limited, iPass Ltd., GoRemote Internet Communications, Inc., GoRemote International Corporation, Axcelerant, Inc., Worldwide Axcelerant Group, Mobile Automation, Inc. and Safe3W, Inc.; and
 ·its wholly-owned subsidiary Devicescape Holdings, Inc.

 

For a complete summary of our significant accounting policies, please refer to Note 1, “Business and Summary of Significant Accounting Policies,” in Item 8 of our 2018 Annual Report.

 

Use of Estimates

 

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and intangible assets acquired in our acquisitions of Artilium, iPass and Devicescape. Significant estimates include the bad debt allowance, revenue recognition, impairment of long-lived assets, valuation of financial instruments, useful lives of long-lived assets and share-based compensation. Actual results may differ from these estimates under different assumptions or conditions and those differences could be material. 

 

Reclassification

 

Certain reclassifications have been made to the Company’s consolidated financial statements for the prior period to conform to the current period presentation. Such reclassifications had no impact on net loss or net cash flows.

 

Note 3. Business Combinations

 

On November 12, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Purchaser, and iPass. Pursuant to the Merger Agreement, Purchaser, a wholly-owned subsidiary of the Company, commenced the offer for the “iPass Shares for the “Transaction Consideration, upon the terms and subject to the conditions set forth in the Prospectus/Offer to Exchange dated December 4, 2018 (together with any amendments and supplements thereto, the “Offer to Exchange”), and the related Letter of Transmittal. The Offer and withdrawal rights expired at 5:00 p.m. New York City time on February 12, 2019, and promptly following such time Purchaser accepted for payment and promptly paid for all validly tendered iPass Shares in accordance with the terms of the Offer. The Company acquired 100% of the voting shares of iPass.

 

On February 12, 2019, following acceptance and payment for the validly tendered iPass Shares and pursuant to the terms and conditions of the Merger Agreement, the Company completed its acquisition of iPass from the stockholders of iPass when Purchaser merged with and into iPass, with iPass surviving as a wholly owned subsidiary of the Company (the “Merger”). The Merger was governed by Section 251(h) of the Delaware General Corporation Law, as amended (the “DGCL”) with no stockholder vote required to consummate the Merger. At the effective time of the Merger, each iPass Share outstanding was converted into the right to receive the Transaction Consideration. The iPass Shares are no longer listed on the Nasdaq Capital Market.

 

As part of the acquisition, the Company issued 9,865,412 common shares to shareholders and 705,000 shares were granted to employees.

 

 8 

 

  

The allocation of the purchase price was as follows (in thousands):

 

Purchase consideration:     
Shares issued to shareholders  $29,253 
Shares issued to employees   1,401 
Total purchase consideration  $30,654 
      
      
Purchase price allocation:     
Assets:     
Cash and cash equivalents  $284 
Accounts receivable, net   4,344 
Property, plant and equipment, net   1,092 
Other assets   4,863 
Intangible assets   22,700 
Total assets   33,283 
      
Liabilities:     
Accounts payable   11,321 
Deferred revenue   1,701 
Loans outstanding   10,989 
Other liabilities   6,743 
Total liabilities   30,754 
Estimated fair value of net assets acquired   2,529 
Goodwill  $28,125 

 

The period ended June 30, 2019, consolidated financial statements included iPass and its subsidiaries from the closing date of February 12, 2019, through June 30, 2019.

 

The allocation of the purchase price for iPass’s intangible assets were as follows (in thousands):

 

   Estimated
Fair
Value
   Useful
 Life
(Years)
 
Developed Technology  $5,500    8 
Customer relationships   15,500    11 
Tradename   1,700    3 
Intangible assets  $22,700      

 

On April 22, 2019, the Company, together with Devicescape Holdings, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (the “Holdco” and together with the Company, the “Buyer”) entered into an asset purchase agreement (the “Purchase Agreement”) with Devicescape Software, Inc., a California corporation (“Devicescape”), whereby the Buyer acquired substantially all of the assets of Devicescape and assumed certain liabilities of Devicescape, such that Holdco shall continue as a surviving subsidiary of the Company holding all assets and assuming those certain liabilities of Devicescape (the “Devicescape Purchase”). In connection with the Devicescape Purchase, and pursuant to the terms and subject to the conditions set forth in the Purchase Agreement, the Company paid cash consideration of $2,000,000 and issued to the stockholders of Devicescape an aggregate of 400,000 shares of the Company’s common stock at a value of $1,692,000 based on our closing price on April 22, 2019, of $4.23 per share.

 

 9 

 

  

The allocation of the purchase price was as follows (in thousands):

 

Purchase consideration:     
  Cash consideration  $2,000 
  Shares issued to shareholders   1,692 
Total purchase consideration  $3,692 
      
      
Purchase price allocation:     
Assets:     
Cash and cash equivalents  $153 
Accounts receivable, net   451 
Intangible assets   1,588 
Total assets   2,192 
      
Liabilities:     
Accounts payable & other liabilities   88 
Total liabilities   88 
Estimated fair value of net assets acquired   2,104 
Goodwill  $1,588 

 

The June 30, 2019, consolidated financial statements included Devicescape and its subsidiaries from April 22, 2019, the acquisition date, through June 30, 2019 .

 

The allocation of the purchase price for Devicescape’s intangible assets were as follows (in thousands):

 

   Estimated   Useful 
   Fair   Life 
   Value   (Years) 
Developed Technology  $1,588    8 
Intangible assets  $1,588      

 

 10 

 

 

Note 4. Balance Sheet Information

 

The following tables present details of our unaudited condensed consolidated financial statements:

 

Prepaid expenses and other current assets  June 30,   December 31, 
   2019   2018 
Prepaid expenses  $2,960,148   $1,659,783 
VAT   425,694    424,167 
   $3,385,842   $2,083,950 

 

Property and equipment, net  June 30,   December 31, 
   2019   2018 
Furniture and fixtures  $561,858   $139,857 
Computer, communications and network equipment   17,341,035    17,520,435 
Software   4,911,585    4,716,816 
Automobiles   324,534    10,744 
Software development   3,589,731    1,656,739 
Accumulated depreciation and amortization   (21,832,240)   (19,491,341)
   $4,896,503   $4,553,250 

 

Intangible Assets, net  June 30,   December 31, 
   2019   2018 
Intangible assets:          
Developed technology  $27,687,821   $20,600,000 
Consumer relationships   32,300,000    16,800,000 
Tradename   5,100,000    3,400,000 
Accumulated amortization   (4,825,401)   (1,141,675)
   $60,262,420   $39,658,325 

 

 11 

 

   

Accrued expenses and other payables  June 30,   December 31, 
   2019   2018 
Accrued selling, general and administrative expenses  $3,987,888   $2,396,941 
Accrued restructuring & acquisition related costs   972,714    1,885,194 
Accrued cost of service   5,765,483    1,070,099 
Accrued taxes (including VAT)   2,980,801    2,283,999 
Accrued interest payable   184,415    67,613 
Other accrued expenses   145,344    248,534 
   $14,036,645   $7,952,380 

 

9% Unsecured Subordinated Convertible Promissory Note

(Matured between December 2018 and June 2019)

 

   Outstanding
June 30,
2019
   Regular
Amortizations
(during 2019)
   Conversions
(during
2019)
including
accelerated  
amortization
   10% Early
Repayment
Short Term
   Outstanding
December 31,
2018
 
Convertible Note Principal Amount  $-   $-   $105,000   $10,500   $(115,500)
Debt Discounts & Financing Costs   -    (8,533)   -    -    8,533 
Total 9% Unsecured Note  $-   $(8,533)  $105,000   $10,500   $(106,967)

 

During the six months ended June 30, 2019, the conversion feature was exercised at a price of $1.75 per share, and a total of 84,220 shares were exercised.

 

Outstanding numbers of Dilutive Securities

 

The outstanding number of dilutive securities for the six months ended June 30, 2019, can be seen below:

 

Number of underlying shares for
Warrants & Conversion Features
  Outstanding
June 30, 2019
   Agreement
Amendments
   Conversions   Outstanding
December 31, 2018
 
Fortress - iPass Loan Repayment Warrant   325,000    325,000    -    - 
2017 Registered Public Offering   110,912    -    (359,058)   469,970 
Investor Management Services   610,000    -    (100,000)   710,000 
9% Convertible Note Warrants   492,506    -    (27,867)   520,373 
2013 Convertible Notes   60,000    -    -    60,000 
Other 9% Convertible Note Warrants   96,520    -    -    96,520 
2017 Registered Public Offering Agent Warrants   21,500    -    (40,834)   62,334 
9% Convertible Note 7% Agent Warrants   66,230    -    -    66,230 
Nov-2017 Underwriter Agreement Agent Warrants   704,831    -    (205,756)   910,587 
Oct-2017 Shelf Take Down Agent Warrants   843    -    -    843 
May-2018 Public Offering Agent Warrants   6,700    -    (115,300)   122,000 
Preferred Share Conversion Warrants   639,844    -    (91,954)   731,798 
Preferred Share issuance 8% Agent Warrants   38,827    -    -    38,827 
Total Outstanding Warrants   3,173,713    325,000    (940,769)   3,789,482 

 

Cash and Restricted Cash

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to that sum to the total amounts shown in the Condensed Consolidated Statements of Cash Flows:

 

   June 30,   December 31, 
   2019   2018 
Cash and cash equivalents  $3,377,556   $6,051,709 
Restricted Cash   1,104,757    430,655 
 Total cash, cash equivalents and restricted cash reported in the Condensed Consolidated Statement of Cash Flows  $4,482,313   $6,482,364 

 

 12 

 

  

Notes Receivable

  

At June 30, 2019, and December 31, 2018, the Company had non-current notes receivable of $2,819,200 and $1,082,436, respectively, and the current portion amounted to $1,024,025 and $0 respectively.

 

The third quarter 2016 sale of ValidSoft for the price of $3,000,000 was completed and the Company received $2,000,000 in cash and a $1,000,000 promissory note, with an interest rate of 5% per annum. The maturity date of the note is September 30, 2019. At June 30, 2019, and December 31, 2018, the remaining outstanding principal amounts were $488,191 and $576,769, respectively.

 

On November 26, 2018, the Company executed a senior secured promissory note for $500,000 from Yonder Media Mobile (an unrelated entity), with interest accruing at a simple rate of 6% per annum with a maturity date of May 26, 2020. On January 9, 2019, February 12, 2019 and February 28, 2019, the Company issued additional notes of $500,000, $200,000, and $2,000,000, respectively (the “2019 Notes”). The 2019 Notes each bear an interest rate of 12% per annum and mature 18 months following the issuance date. All principal and interest are due on the maturity date. At June 30, 2019 and December 31, 2018, the remaining outstanding principal amounts were $3,355,034 and $505,667, respectively.

 

Related Party Loan

 

As of June 30, 2019 and December 31, 2018, there remained an outstanding related party loan to Comsys, a wholly-owned subsidiary of Artilium BV, from Comsystems (a company owned by Gerard Derenbos). Prior to the acquisition by Pareteum, Gerard Derenbos was a shareholder of Artilium PLC, with approximately 15% of the total shares of Artilium PLC, and a board member of Artilium PLC.

 

The total outstanding balance as of June 30, 2019 and December 31, 2018 was $342,000 and $341,998, respectively. The loan carries an 8% interest rate and a maturity date of December 31, 2021. All principal and interest are due on the maturity date.

 

Note 5. Equity

 

(A) Common Stock

 

The Company is presently authorized to issue 500,000,000 shares of common stock. The Company had 111,652,349 shares of common stock issued and outstanding as of June 30, 2019, an increase of 13,799,438 shares from December 31, 2018, were largely due to the iPass and Devicescape acquisitions (10,970,412), warrant exercises (858,344), shares issued to Senior Secured lender (425,000), and services settled by issuance of shares (653,796).

  

(B) Warrants

 

Throughout the years, the Company has issued warrants with varying terms and conditions related to multiple financing rounds, acquisitions and other transactions. The number of warrants outstanding at June 30, 2019 and December 31, 2018, have been recorded and classified as equity is 3,173,713 and 3,789,482, respectively. The weighted average exercise price for the currently outstanding warrants in the table below is $2.21. The table below summarizes the warrants outstanding as of June 30, 2019 and as of December 31, 2018:

  

 13 

 

  

Outstanding Warrants  Exercise/
Conversion
price(s)
(range)
  Expiring  June 30,
2019
   December 31, 2018 
Equity Warrants – Fundraising  $1.05 - $5.375  2019 - 2026   3,173,713    3,789,482 
          3,173,713    3,789,482 

 

Note 6.  Amended and Restated 2008 Long Term Incentive Compensation Plan, 2017 Long-Term Incentive Compensation Plan and 2018 Long Term Incentive Compensation Plan, As Amended

 

The Company maintains the following Long Term Incentive Compensation Plans (collectively, the “Plans”):

 

·Amended and Restated 2008 Long-Term Incentive Compensation Plan (“2008 Plan”)
·2017 Long-Term Incentive Compensation Plan (“2017 Plan”)
·2018 Long-Term Incentive Compensation Plan (“2018 Plan”)

  

On October 10, 2018, the Company filed an S-8 to register the remaining 8,000,000 shares of common stock of the 2018 Plan which was previously ratified by our stockholders on September 12, 2018 at our annual meeting of stockholders. This incentive plan provides for awards of up to 8,000,000 shares of common stock, in the form of options, restricted stock awards, stock appreciation rights (“SAR’s”), performance units and performance bonuses to eligible employees and the grant of nonqualified stock options, restricted stock awards, SAR’s and performance units to consultants and eligible directors.

 

Pursuant to the terms of the 2018 Plan, as amended, the number of shares available under the plan shall increase on the first day of each fiscal year in an amount equal to the lesser of (i) 15% of the total number of shares of common stock outstanding as of December 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.

 

Under the provisions of ASC 718, expensing takes place proportionally to the vesting associated with each stock-award, adjusted for cancellations, forfeitures and returns. If there are any modifications or cancellations of the underlying unvested awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.

 

 14 

 

  

As of June 30, 2019, the following shares were authorized under the Plans:

 

Reconciliation of registered and available shares
and/or options as of June 30, 2019:
     Total 
        
Approved by the Shareholders (annually 15% of outstanding shares)     
         
Registered 2008 (S-8 dated July 11, 2008)  2008 Plan   200,000 
Registered 2011 (S-8 dated October 6, 2011)  2008 Plan   720,000 
Registered 2017 (S-8 dated June 14, 2017)  2017 Plan   3,500,000 
Registered 2018 (S-8 dated April 13, 2018)  2017 Plan   3,000,000 
Registered 2018 (S-8 dated October 10, 2018)  2018 Plan   8,000,000 
Registered 2018 (S-8 dated June 28, 2019)  2018 Plan   7,500,000 

 

   2019 Activities     
Shares (issued to):        
Consultants   177,744    1,011,165 
Directors, Officers and staff   797,789    5,064,305 
Options exercised   176,038    330,542 
Total Shares issued:        6,406,012 
           
Available for issuance at June 30, 2019 (under the S- 8 registration statements)        16,513,988 
           
Outstanding rights (movements):          
Options   5,082,211    8,746,023 
Time Conditioned Share Awards / Other Awards   84,723    1,641,355 
Available for grant at June 30, 2019:        6,126,610 

  

The Company’s stockholders also approved an additional 920,000 shares and 400,000 shares under the 2008 Plan on December 17, 2013 and September 12, 2014, respectively. These approved shares have not been registered on Form S-8 as of June 30, 2019.

 

The following table summarizes the activities that occurred during the three months ended June 30, 2019:

 

Options:  Number of
Options
   Weighted
Average
Exercise Price
   Initial Fair
Market Value
(Outstanding
Options)
 
Outstanding as of March 31, 2019   8,981,608   $2.26   $11,465,952 
Granted in 2019   207,703    2.29    424,055 
Exercised (with delivery of shares)   (107,955)   1.30    (91,008)
Forfeitures (Pre-vesting)   (335,333)   2.28    (721,969)
Outstanding as of June 30, 2019   8,746,023   $2.21   $11,077,030 

 

The following table summarizes the activity that occurred during the six month period ended June 30, 2019:

 

Options:  Number of Options   Weighted Average Exercise Price   Initial Fair Market Value (Outstanding Options) 
Outstanding as of December 31, 2018   3,663,812   $2.26   $4,962,798 
Granted in 2019   5,440,103    2.18    6,661,232 
Exercised (with delivery of shares)   (176,038)   1.19    (127,518)
Forfeitures (Pre-vesting)   (158,552)   2.20    (226,849)
Expirations (Post-vesting)   (23,302)   8.32    (192,633)
Outstanding as of June 30, 2019   8,746,023   $2.21   $11,077,030 

 

 15 

 

  

Stock-based compensation expense totaled $5,722,447 and $1,771,580 for the six months ended June 30, 2019 and 2018, respectively. Stock-based compensation expense totaled $2,008,833 and $697,448 for the three months ended June 30, 2019 and 2018, respectively. At June 30, 2019, there was $6,280,777 of unrecognized expense for share-based awards granted under the Plans.

 

Note 7.  Income taxes

 

The following table presents details of income tax (benefit)/expense:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
Income tax (benefit)/expense  $(449,403)  $18,842   $(616,737)  $18,424 

 

As a result of our cumulative tax losses in the U.S. and certain foreign jurisdictions, and the full utilization of our loss carryback opportunities, we have concluded that a full valuation allowance should be recorded in such jurisdictions. In certain other foreign jurisdictions where we do not have cumulative losses, we had net deferred tax liabilities based upon an expected annual tax rate.

 

Note 8. Significant Customers and Geographical Information

 

During the three months ended June 30, 2019 and 2018, 19.7% and 75% of revenue, respectively, were made from two customers. For the three months ended June 30, 2019 and 2018, our largest customer represented 11.2% and 53.4% of revenues, respectively. Our second largest customer represented 8.5% and 21.6% of revenues for the three months ended June 30, 2019 and 2018, respectively.

 

During the six months ended June 30, 2019 and 2018, 20.4% and 79.3% of revenues, respectively, were made from two customers. For the six months ended June 30, 2019 and 2018, our largest customer represented 12.5% and 63.5% of revenues, respectively. Our second largest customer represented 7.9% and 15.8% of revenues for the six months ended June 30, 2019 and 2018, respectively.

 

The geographical distribution of our revenue, as a percentage of revenues, was as follows: 

  

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
Europe   52.7%   59.4%   57.7%   76.8%
All other (non-European) countries   47.3%   40.6%   42.3%   23.2%
    100%   100%   100%   100%

 

Note 9. Revenues

 

Our revenues represent amounts earned for our mobile and security solutions. Our solutions take many forms, but our revenues generally consist of fixed and/or variable charges for services delivered monthly under a combined services and SaaS model. We also offer discrete (one-time) services for implementation and for development of specific functionality to properly service our customers.

 

 16 

 

  

The following table presents our revenues disaggregated by revenue source:

 

   Three Months Ended   Six Months Ended 
   June 30,   June  30, 
   2019   2018   2019   2018 
Monthly service  $31,627,289   $4,277,289   $53,237,189   $7,772,831 
Installation and software development   2,521,107    1,725,891    3,951,121    2,342,919 
Total revenues  $34,148,396   $6,003,180   $57,188,310   $10,115,750 

 

Monthly services revenues are generally recognized over time and amounted to $31,627,289 and $53,237,189 for the three and six months ended June 30, 2019, respectively. Installation and software development revenues are recognized over time and amounted to $2,521,107 and $3,951,121 over for the three and six months ended June 30, 2019, respectively.

 

The following table presents our revenues disaggregated by geography, based on the billing addresses of our customers:

 

   Three Months Ended   Six Months Ended 
   June 30,   June  30, 
   2019   2018   2019   2018 
Europe  $17,978,271   $3,563,089   $33,015,300   $7,772,831 
Other geographic areas   16,170,125    2,440,091    24,173,010    2,342,919 
Total revenues  $34,148,396   $6,003,180   $57,188,310   $10,115,750 

 

Monthly Service Revenues

 

The Company’s performance obligations in a monthly SaaS and service offerings are simultaneously received and consumed by the customer and therefore, are generally recognized over time. For recognition purposes, we do not unbundle such services into separate performance obligations as their pattern of transfer does not differ. The Company typically bills its customer at the end of each month. The fees charged may include a combination of fixed and variable charges with the variable charges tied to the number of subscribers or some other measure of volume. Although the consideration may be variable, the volumes are easily estimable at the time of billing, with “true-up” adjustments occurring in the subsequent month. As such adjustments have not historically been material, no amounts of variable consideration are subject to constraint.

 

Installation and Software Development Revenues

 

The Company’s other revenues consist generally of installation and development projects.

 

Installation represents the activities necessary for a customer to obtain access and connectivity to the Company’s monthly SaaS and service offerings. While installation may require separate phases, it represents one performance obligation within the context of the contract.

 

Development consists of programming and other services to add new, additional or customized functionality to a customer’s existing service offerings. Each development activity is typically its own performance obligation.

 

Revenue is recognized over time if the installation and development activities create an asset that has no alternative use for which the Company is entitled to receive payment for performance completed to date. If not, then revenue is not recognized until the applicable performance obligation is satisfied.

 

Arrangements with Multiple Performance Obligations

 

The Company’s contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices charged to customers.

 

Net Billings in Excess of Revenues

 

The Company records net billings in excess of revenues when payments are made or due in advance of our performance, including amounts which are refundable.

 

Payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, payment is required before the products or services are delivered to the customer.

 

 17 

 

  

Contract Assets

 

Given the nature of the Company’s services and contracts, it has no contract assets. 

 

Note 10. Credit Agreement

 

On February 26, 2019, Pareteum Corporation and certain of its subsidiaries entered into a credit agreement (the “Credit Agreement”) with Post Road Administrative Finance, LLC and its affiliate Post Road Special Opportunity Fund I LLP (collectively, “Post Road”). Pursuant to the Credit Agreement, Post Road will provide the Company with a secured loan of up to $50,000,000 (the “Loan”), with an initial loan of $25,000,000 funded on February 26, 2019, and additional amounts in $5,000,000 increments as requested by the Company before the 18-month anniversary of the initial funding date. No additional loan shall be funded until the later of delivery of certain third-party consents (the “Consents”), the filing of Pareteum’s Quarterly Report on Form 10-Q for the first quarter of 2019, or June 1, 2019. All amounts owed under the Credit Agreement shall be due on February 26, 2022.

 

The unpaid principal amount of the Loan shall bear interest from the relevant funding dates at a rate per year of Libor plus 8.5% in effect from time to time, provided however, that upon an event of default or if certain of the Consents are not delivered prior to May 1, 2019 or June 1, 2019, as applicable, the unpaid principal amount of the Loan shall bear interest from the relevant funding dates at a rate per year of Libor plus 11.5% in effect from time to time until the Consents are delivered. The interest shall be due and payable monthly in cash in arrears, provided, however, that the Company may elect to pay any or all of the interest in the form of Payment-in-Kind (“PIK”) interest due and payable at maturity at a maximum percentage per year equal to (a) through and including the first anniversary of the initial funding date, 3%, (b) after the first anniversary of the initial funding date through and including the second anniversary of the initial funding date, 2%, and (c) after the second anniversary of the initial funding date, 1%.

  

Permitted use of proceeds for the initial $25,000,000 of the Loan include approximately $11,700,000 for payment in full of outstanding secured debt owed to Fortress Credit Corp. (together with its affiliates, “Fortress”) incurred in connection with the Company’s previously disclosed acquisition of iPass Inc. (“iPass”) on February 12, 2019, as well as remaining amounts for permitted acquisitions and investments, for general working capital purposes and paid $623,555 in transaction fees related to the Loan. Proceeds are to be used for permitted acquisitions and to fund growth capital expenditures and other growth initiatives.

 

The Loan is subject to prepayment upon the receipt of proceeds outside the ordinary course of business in excess of $1,000,000 and the Company must pay a commitment fee of 1% per year for an unfunded commitment. The initial $25,000,000 loan is reduced by an original issue discount of (i) 0.75% of $25,000,000 and (ii) 1.25% of $50,000,000, and any additional amounts borrowed will be reduced by an original issue discount of 0.75% of the funded amounts.

 

The Company’s obligations under the Credit Agreement are secured by a first-priority security interest in all the assets of the Company and guaranteed by certain subsidiaries of the Company. The Credit Agreement contains customary representations, warranties and indemnification provisions. The Credit Agreement also contains affirmative and negative covenants with respect to operation of the business and properties of the Company as well as financial performance, including requirements to maintain a minimum of $2,000,000 of unrestricted cash, certain maximum total leverage ratios, a debt to asset ratio, maximum churn rate and minimum adjusted EBITDA. The Credit Agreement further provides customary events of default and cure periods for certain specified events of default, and in the event of uncured default, the acceleration of the maturity date, an increase in the applicable interest rate with respect to amounts outstanding under the Loan and payment of additional fees.

 

On February 26, 2019, concurrently with entering into the Credit Agreement, the existing loan and security agreement by and among iPass, iPass IP LLC and Fortress (the “Existing iPass Loan”) terminated. Credit facilities under the Existing iPass Loan included a term loan A facility and a term loan B facility maturing on February 27, 2019.

 

On February 26, 2019, pursuant to the terms of the Credit Agreement, the Company issued to Post Road 425,000 shares of common stock at $1,606,500 and will issue an additional 200,000 shares of common stock upon the next subsequent funding, if any, under the Loan.

 

As of June 30, 2019, and December 31, 2018, the Company had outstanding senior secured debt of $22,077,767 and $0, respectively. For the three and six months ended June 30, 2019, the Company recorded interest expense of $747,245 and $1,054,120, respectively, related to the Loan. The interest rate at June 30, 2019 was 11%. The Company recorded $1,655,112 in deferred financing costs and other fees as a reduction of the outstanding loan balance through June 30, 2019. A total of $101,664 and $151,355 was amortized during the three and six months ended June 30, 2019. The remaining capacity under the Loan was $25,000,000 at June 30, 2019.

 

As of June 30, 2019, the Company was in compliance with all covenants required by the Loan.

 

 18 

 

 

Note 11. Commitments and Contingencies

 

Lease Commitments

 

We have operating leases for our office space. Our leases have remaining lease terms of less than one year to 6 years, some of which include options to indefinitely extend the leases monthly. For our month to month leases, we determined the number of renewal periods we are reasonably certain to exercise and include these periods in our right of use asset and lease liability calculations. Lease expense was $487,850 and $970,398 for the three and six months ended June 30, 2019, respectively, and is included in general and administrative expense in the condensed consolidated statement of comprehensive loss. Lease expense was $39,393 and $81,506 for the three and six months ended June 30, 2018.

 

Operating Leases:  June 30, 2019 
     
Operating lease right-of-use assets  $2,493,352 
Operating lease liabilities  $2,790,685 
      
Weighted average remaining lease term     
Operating leases   1.9 years 
      
Incremental borrowing rate     
Operating leases   8.8%

 

The following represents maturities of operating lease liabilities as of June 30, 2019:

 

Remainder of 2019  $975,453 
2020   1,716,284 
2021   119,059 
2022   62,387 
2023   62,387 
Thereafter   98,779 
Total lease payments  $3,034,349 
Less: imputed interest   (243,664)
Lease liabilities, current   1,776,900 
Lease liabilities, non-current   1,013,785 
Total  $2,790,685 

 

Legal Proceedings

 

Ellenoff Grossman & Schole LLP, claimed legal fees.

 

On May 5, 2017, the Company’s former legal counsel, Ellenoff Grossman & Schole LLP, commenced litigation proceedings in New York alleging breach of contract and claiming $817,822 in unpaid legal fees for January 2015 through November 2016. On June 29, 2017, the parties entered into a settlement agreement for the full $817,822 with agreed-upon monthly installment payments through August 31, 2019. As of June 30, 2019, this transaction is reflected in the financial statements.

  

The Company is involved in various claims and lawsuits incidental to our business.  In the opinion of management, the ultimate resolution of such claims and lawsuits will not have a material effect on our financial position, liquidity, or results of operations. 

 

Note 12. Subsequent Events

 

None.

 

 19 

 

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

Any forward looking statements made herein are based on current expectations of the Company, involve a number of risks and uncertainties and should not be considered as guarantees of future performance. The factors that could cause actual results to differ materially include: interruptions or cancellation of existing contracts, inability to integrate acquisitions, impact of competitive products and pricing, product demand and market acceptance risks, the presence of competitors with greater financial resources than the Company, product development and commercialization risks, changes in governmental regulations, and changing economic conditions in developing countries and an inability to arrange additional debt or equity financing. 

 

Overview 

 

Pareteum Corporation (Nasdaq: TEUM) is a cloud software communications platform company with a mission – to connect every person and every(thing) ™.

 

Millions of people and devices are connected around the world using Pareteum’s global cloud software communications platform, enhancing their mobile experience. Pareteum unleashes the power of applications and mobile services, bringing secure, ubiquitous, scalable, and seamlessly available voice, video, SMS/text messaging, and data services to our customers, making worldwide communications services easily and economically accessible to everyone. By harnessing the value of our cloud communications platform, Pareteum serves enterprises, communications service providers, early stage innovators, developers, IoT, and telecommunications infrastructure providers. Pareteum envisions a new mobile communications experience imagining what will be and delivering now.

 

With estimates of up to 30 billion devices to be managed and connected the total available market is astoundingly large. Service Providers, Brand Marketing Companies, Enterprise and Internet of Things providers use Pareteum to energize their growth and profitability through cloud communication services and complete turnkey solutions featuring relevant content, applications, and connectivity worldwide. To achieve this, Pareteum has developed, and added through its acquisition of Artilium and iPass, patent pending software platforms which are connected to 59 mobile networks in 80 counties using multiple different communications channels including mobile telephony, data, SMS, VOIP, OTT services – all over the world. Pareteum integrates all these disparate communications methods and services and brings them to life for customers and application developers, allowing communications to become value-added. This is a major strategic target for many industries, from legacy telecommunications providers to the disruptive technology and data enterprises of today and the future.

 

The vast majority of our platform is comprised of our self-developed software and intellectual property, which provides our customers with a great deal of flexibility in how they use our products now and in the future and allows us to be market driven in our future. We have approximately 40 patents granted in relation to techniques and processes which support our cloud software and communications platform solutions.  Our platform services partners (technologies integrated into our cloud) include: HPE, IBM, Sonus, Oracle, Microsoft, NetNumber, Affirmed and other world class companies. As of October 1, 2018, the Company now includes Artilium plc, which operates as a wholly-owned subsidiary of the Company. Artilium is a software development company active in the enterprise communications and core telecommunications markets delivering software solutions which layer over disparate fixed, mobile and IP networks to enable the deployment of converged communication services and application technology providers. As of February 12, 2019, the Company now includes iPass Inc., which operates as a wholly-owned subsidiary of the Company. iPass is a cloud-based service provider of global mobile connectivity, offering Wi-Fi access on any mobile device through its SaaS platform.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto and the other financial information included elsewhere in this report. 

 

 20 

 

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. We regularly evaluate our estimates and assumptions related to revenue recognition, rebates, allowances for doubtful accounts, sales returns and allowances, warranty reserves, stock-based compensation expense, intangible assets acquired in connection with our business combinations, long-lived asset valuations, strategic investments, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, self-insurance, restructuring costs, litigation and other loss contingencies. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected. For a description of our critical accounting policies and estimates, please refer to the “Critical Accounting Policies and Estimates” section in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2018 Annual Report. There have been no material changes in any of our critical accounting policies and estimates during the six months ended June 30, 2019.

 

Comparison of three months ended June 30, 2019 and June 30, 2018

 

Revenues

 

Revenues for the three months ended June 30, 2019, were $34,148,396, a $28,145,216 or 469% increase compared to $6,003,180 for the comparable three months in 2018. Our deployments with existing customers continue to grow, new implementations are generating new revenues and new cloud based revenues were all factors in our revenue growth. Additionally, the three months ended June 30, 2019, includes revenues of $5,241,919 and $7,359,579 from our acquisitions of Artilium and iPass, respectively. The three months ended June 30, 2018, included no such corresponding revenues as these transactions were consummated in the fourth quarter of 2018 and first quarter of 2019, respectively.

 

   Three months ended June 30,     
   2019   2018   Change 
Revenues  $34,148,396   $6,003,180   $28,145,216 

 

Cost of Service, excluding depreciation and amortization

 

Cost of service includes origination, termination, network and billing charges from telecommunications operators, costs of telecommunications service providers, network costs, data center costs, facility cost of hosting network and equipment and cost in providing resale arrangements with long distance service providers, cost of leasing transmission facilities, international gateway switches for voice, data transmission services, and the cost of professional services of staff directly related to the generation of revenues, consisting primarily of employee-related costs associated with these services, including share-based compensation and the cost of subcontractors. Cost of service excludes depreciation and amortization. 

 

   Three months ended June 30,     
   2019   2018   Change 
Revenues  $34,148,396   $6,003,180   $28,145,216 
Cost of service (excluding depreciation and amortization)   15,293,244    1,779,882    13,513,362 
Margin (excluding depreciation and amortization)  $18,855,152   $4,223,298   $14,631,854 

  

Cost of service for the three months ended June 30, 2019, was $15,293,244, an increase of $13,513,362 or 759%, compared to $1,779,882 for the comparable three months in 2018. Cost of service for the three months ended June 30, 2019, includes costs for Artilium and iPass of $3,038,017 and $6,398,593, respectively due to their acquisitions. The remainder of the increase in cost of service is in line with the overall increase in revenue, which generates a corresponding increase in implementation costs for new clients.

 

 21 

 

  

Product Development

 

Product Development costs consist primarily of salaries and related expenses, including share-based compensation, of employees involved in the development of the Company’s services, which are expensed as incurred. Costs such as database architecture, and Pareteum business operating system network and intelligent network platform development and testing are also included in this function.

 

Product development costs for the three months ended June 30, 2019 and 2018, were $3,242,145 and $753,931, respectively, an increase of $2,488,214 or 330%. The increase in product development is due to acquisitions made by the company totaling $1,348,448. The remaining increases was due to continued development costs for legacy product lines.

  

Sales and Marketing

 

Sales and Marketing expenses consist primarily of salaries and related expenses, including share-based compensation, for our sales and marketing staff, including commissions, payments to partners and marketing programs. Marketing programs consist of advertising, events, corporate communications and brand building.

  

Sales and marketing expenses for the three months ended June 30, 2019 and 2018, were $2,769,065 and $652,442, respectively, an increase of $2,116,623 or 324%. Of this increase, $1,307,654 is attributable to the inclusion of iPass in the three month results. The remaining increase is the result of allocating additional resources to our growing business.

 

General and Administrative

 

General and administrative expenses are our largest cost and consist primarily of overhead related salaries and expenses, including share-based compensation, for non-employee directors, finance and accounting, legal, internal audit and human resources personnel, legal costs, professional fees and other corporate expenses.

 

General and administrative expenses for the three months ended June 30, 2019 and 2018, were $9,033,690 and $2,214,070, respectively, an increase of $6,819,620 or 308%. This is largely the result of the inclusion of expenses totaling $2,505,129 and $1,087,345 for Artilium and iPass, respectively. The remaining increase is primarily the result of higher stock based compensation expense and increased travel, legal, accounting, and marketing costs.

  

Restructuring and Acquisition Charges

 

Restructuring and acquisition charges for the three months ended June 30, 2019 and 2018, were $427,586 and $5,592, an increase of $421,994 or 7,546%, as a result of costs related to the iPass acquisition and the Devicescape asset acquisition.

 

Stock-based compensation

 

Stock-based compensation is comprised of:

 

  · the expensing of the options granted under the 2008, 2017 and 2018 Plans to staff and management;

 

  · the expensing of the shares issued under the 2008, 2017 and 2018 Plans to contractors, directors and executive officers in lieu of cash compensation; and

 

  · the expensing of restricted shares issued for consultancy services under the 2018 Plan.

 

For the three months ended June 30, 2019 and 2018, we recognized stock-based compensation expense of $2,008,833 and $697,448, respectively, an increase of $1,311,385 or 188%.

 

In the following table, we show the allocation of stock-based compensation according to functions in the Condensed Consolidated Statements of Comprehensive Loss:

  

   Three months ended June 30, 
   2019   2018 
Cost of service (excluding depreciation and amortization)  $-   $(13,122)
Product development   128,336    (25,845)
Sales and marketing   227,426    (39,430)
General and administrative   1,653,071    775,845 
Total  $2,008,833   $697,448 

 

 22 

 

  

Depreciation and Amortization

 

Depreciation and amortization expenses for the three months ended June 30, 2019, was $3,224,027, an increase of $2,229,709 or 224%, compared to $994,318 for the three months ended June 30, 2018. This was primarily due to amortization of intangible assets totaling $2,031,895 resulting from the Artilium, iPass and Devicescape acquisitions that took place on October 1, 2018, February 12, 2019, and April 22, 2019, respectively.

 

Interest Income and Expense

 

Interest income for the three-months ended June 30, 2019 and 2018, was $149,298 and $43,193, respectively, an increase of $106,105 or 246%. Interest income mainly consists of interest earned on promissory notes issued to ValidSoft and Yonder Media.

 

Interest expense for the three-months ended June 30, 2019 and 2018, was $777,907 and $99,708, respectively, an increase of $678,199 or 680%. Interest expense increased mainly as the result of the Post Road Loan entered into in February 2019.  

 

Interest Expense Related to Debt Discount and Conversion Feature

 

For the three months ended June 30, 2019 and 2018, interest expense related to debt discount accretion were $199,224 and $30,272, respectively, an increase of $168,952 or 558%. This increase is mainly the result of the Post Road Loan entered into in February 2019.

 

Changes in derivative liabilities 

 

Changes in derivative liabilities for the three months ended June 30, 2019, was $0, a decrease of $1,597,647 or 100%, compared to a gain of $1,597,647 for the same period in 2018. This decrease is due to the elimination of the derivative liability in 2018.

 

Other Income, net

 

Other (expense)/income for the three months ended June 30, 2019 and 2018 was ($194,354) and $567,710, respectively, a decrease of $762,064. The other expense arises from foreign currency transaction losses incurred by iPass in the second quarter of 2019.

  

Amortization of Deferred Financing Costs

 

Amortization of deferred financing costs for the three months ended June 30, 2019 and 2018, was $101,644 and $6,209, respectively, an increase of $95,435 or 1,537%. This increase is mainly the result of the Post Road Loan entered into in February 2019.

 

Income tax (benefit)/expense

 

Income tax benefit for the three months ended June 30, 2019, was $449,403, compared to an income tax expense of $18,842 for the same period in 2018. The tax provision was calculated based upon an expected annual tax rate.  

 

Net Income (Loss)

 

Net loss for the three months ended June 30, 2019, was $515,809, an increase of $2,172,273 or 131%, compared to income of $1,656,464 for the same period in 2018. The increase in net loss was primarily due to lower margins at our newly acquired subsidiaries Artilium and iPass.

 

 23 

 

  

Other Comprehensive Income/(Loss)

 

We recorded foreign currency translation gains and losses as other comprehensive income or loss, which amounted to a gain of $435,935 and a loss of $79,137 for the three months ended June 30, 2019 and 2018, respectively. This change is primarily attributable to the translation effect resulting from the fluctuations in the USD/Euro exchange rates.

  

Comparison of six months ended June 30, 2019 and June 30, 2018

 

Revenues

 

Revenues for the six months ended June 30, 2019, were $57,188,310 a $47,072,560 or 465% increase compared to $10,115,750 for the comparable six months in 2018. Our deployments with existing customers continue to grow, new implementations are generating new revenues and new cloud based revenues were all factors in our revenue growth. Additionally, the six months ended June 30, 2019, revenues include Artilium revenues of $10,389,771. It also includes iPass revenues of $11,085,817 for the period from February 12, 2019, the date of its acquisition, through June 30, 2019. The remainder of the increase is due to growth in the Company’s existing business lines.

 

 24 

 

  

   Six months ended June 30,     
   2019   2018   Change 
Revenues  $57,188,310   $10,115,750   $47,072,560 

 

Cost of Service

 

Cost of service includes origination, termination, network and billing charges from telecommunications operators, costs of telecommunications service providers, network costs, data center costs, facility cost of hosting network and equipment and cost in providing resale arrangements with long distance service providers, cost of leasing transmission facilities, international gateway switches for voice, data transmission services, and the cost of professional services of staff directly related to the generation of revenues, consisting primarily of employee-related costs associated with these services, including share-based compensation and the cost of subcontractors. Cost of service excludes depreciation and amortization. 

 

   Six months ended June 30,     
   2019   2018   Change 
Revenues  $57,188,310   $10,115,750   $47,072,560 
Cost of service (excluding depreciation and amortization)   25,361,468    2,974,405    22,387,063 
Margin (excluding depreciation and amortization)  $31,826,842   $7,141,345   $24,685,497 

  

Cost of service for the six months ended June 30, 2019, was $25,361,468, an increase of $22,387,063 or 753%, compared to $2,974,405 for the comparable six month period in 2018. This 753% increase in cost of service is in line with our increase in revenue, as margins and additional costs associated from implementations for new clients have stayed relatively constant. This includes Artilium cost of service of $6,029,427 for the six months ended June 30, 2019, and iPass cost of service of $9,603,882 for the period from February 12, 2019 through June 30, 2019. Comparable costs were not reflected in the six months ended June 30, 2018, because these subsidiaries were acquired in subsequent periods. The remaining increase in costs of service is due to the overall growth in the business.

 

Product Development

 

Product Development costs consist primarily of salaries and related expenses, including share-based compensation, of employees involved in the development of the Company’s services, which are expensed as incurred. Costs such as database architecture, and Pareteum business operating system network and intelligent network platform development and testing are also included in this function.

 

Product development costs for the six months ended June 30, 2019 and 2018, were $5,816,189 and $1,480,776, respectively, an increase of $4,335,413 or 293%. The increase is primarily due to the overall expansion of our lines of business year over year and the inclusion of product development costs of $1,131,869 for Artilium and iPass for the six months ended June 30, 2019.

 

Sales and Marketing

 

Sales and Marketing expenses consist primarily of salaries and related expenses, including stock-based compensation, for our sales and marketing staff, including commissions, payments to partners and marketing programs. Marketing programs consist of advertising, events, corporate communications and brand building.

 

 25 

 

  

Sales and marketing expenses for the six months ended June 30, 2019 and 2018 were $5,709,747 and $1,341,440, respectively, an increase of $4,368,307 or 326%. This increase is primarily a direct result of hiring new employees, the inclusion of the Artilium and iPass sales and marketing expenses of $2,752,546, and other incremental costs incurred as the Company expands.

  

General and Administrative

 

General and administrative expenses are our largest cost and consist primarily of overhead related salaries and expenses, including share-based compensation, for non-employee directors, finance and accounting, legal, internal audit and human resources personnel, legal costs, professional fees and other corporate expenses.

 

General and administrative expenses for the six months ended June 30, 2019 and 2018, were $15,896,619 and $4,510,922, respectively, an increase of $11,385,697 or 252%.

  

Restructuring and Acquisition Charges

 

Acquisition charges for the six months ended June 30, 2019 and 2018, were $3,507,950 and $79,193, an increase of $3,428,757 or 4,330%, as a result of costs related to acquiring iPass and Artilium.

 

Stock-based compensation

 

Stock-based compensation is comprised of:

 

  · the expensing of the options granted under the 2008, 2017 and 2018 Plans to staff and management;

 

  · the expensing of the shares issued under the 2008, 2017 and 2018 Plans to contractors, directors and executive officers in lieu of cash compensation; and

 

  · the expensing of restricted shares issued for consultancy services under the 2018 Plan.

 

For the six months ended June 30, 2019 and 2018, we recognized stock-based compensation expense of $5,722,447 and $1,771,580, respectively, an increase of $3,950,867 or 223%.

  

In the following table, we show the allocation of stock-based compensation according to functions in the Condensed Consolidated Statements of Comprehensive Loss:

 

   Six months ended June 30, 
   2019   2018 
Cost of service (excluding depreciation and amortization)  $52,877   $11,254 
Product development   222,667    16,587 
Sales and marketing   549,214    88,939 
General and administrative   4,897,689    1,628,896 
Restructuring   -    25,904 
Total  $5,722,447   $1,771,580 

 

Depreciation and Amortization

 

Depreciation and amortization expenses for the six months ended June 30, 2019, was $6,067,430, an increase of $4,107,821 or 210%, compared to $1,959,609 for the same period in 2018. This was increase was primarily due to amortization of intangible assets totaling $3,683,726 resulting from the Artilium, iPass and Devicescape acquisitions that took place on October 1, 2018, February 12, 2019 and April 22,2019, respectively.

 

 26 

 

  

Interest Income and Expense

 

Interest income for the six months ended June 30, 2019 and 2018, was $250,844 and $85,865, respectively, an increase of $164,979 or 192%. Interest income mainly consists of interest accrued for the $503,000 and $3,200,000 promissory notes issued to ValidSoft and Yonder Media, respectively.

 

Interest expense for the six months ended June 30, 2019 and 2018, was $1,326,767 and $163,467, respectively, an increase of $1,163,300 or 712%. Interest expense increased mainly as the result of the Post Road Loan entered into in February 2019.

 

Interest Expense Related to Debt Discount Accretion and Conversion Feature

 

For the six months ended June 30, 2019 and 2018, interest expense related to debt discount accretion were $271,205 and $59,838, respectively, an increase of $211,367 or 353%. This increase is mainly the result of the Post Road Loan entered into in February 2019.

 

Changes in derivative liabilities 

 

Changes in derivative liabilities for the six-month period ended June 30, 2019, was $0, a decrease of $1,283,914 or 100%, compared to a gain of $1,283,914 for the same period in 2018. This decrease is due to the elimination of the derivative liability in 2018.

 

Other (Expense) Income, net

 

Other expense for the six months ended June 30, 2019 was $241,485, as compared to other income of $637,255 for the six months ended June 30, 2018, a decrease of $878,740 or 138%. The 2018 amount represents the unrealized exchange rate gains and an adjustment to liabilities for no longer deemed obligations. The 2019 amount represents foreign currency transaction losses.

 

Amortization of Deferred Financing Costs

 

Amortization of deferred financing costs for the six-months ended June 30, 2019 and 2018 was $151,355 and $12,351, respectively, an increase of $139,004 or 1,125%. This increase is mainly the result of the Post Road Loan entered into in February 2019.

  

Income tax (benefit)/expense

 

Income tax benefit for the six months ended June 30, 2019, was $616,737, compared to an income tax expense of $18,424, for the same period in 2018. The tax provision was calculated based upon an expected annual tax rate.  

  

Net Loss

 

Net loss for the six months ended June 30, 2019, was $6,294,324 an increase of $5,816,683 or 1,218%, compared to the loss of $477,641 for the same period in 2018. The increase in net loss is due to lower margins and costs associated with acquiring new companies.

 

Other Comprehensive (Loss)/Income

 

We recorded foreign currency translation gains as other comprehensive income or loss, which amounted to a gain of $76,131 and $25,266 for the six months ended June 30, 2019 and 2018, respectively. This change is primarily attributable to the translation effect resulting from the fluctuations in the USD/Euro exchange rates.

 

Liquidity and Capital Resources

 

As reflected in the accompanying condensed consolidated financial statements, the Company reported net loss of $6,294,324 for the six months ended June 30, 2019, and had an accumulated deficit of $318,919,707 as of June 30, 2019.

 

The cash balance including restricted cash of the Company at June 30, 2019, was $4,482,313.

 

 27 

 

 

Operating activities

 

Net cash used in operating activities of $10,441,210 for the six months ended June 30, 2019, due to an increase in accounts receivable of $25,190,857, offset by a decrease in accounts payable and customer deposits of $6,936,552, a decrease in net billings in excess of revenues and deferred revenue of $2,000,430 and a decrease in accrued expenses and other payables for $1,644,320.

 

As a result of the above, cash used in operating activities was $10,441,210 for the six months ended June 30, 2019, compared to net cash used in operating activities of $952,476 for the six months ended June 30, 2018, for an increase of $9,488,734 or 996%.

 

Investing activities

 

Net cash used in investing activities for the six months ended June 30, 2019, was $5,973,438, an increase of $4,095,961, or 218% compared to $1,877,477 in the same period in 2018. This change was mainly the result of the purchase of property, equipment and capitalized software of $1,650,013, the issuance of notes receivable of $2,700,000 to Yonder Media and effect of the business combinations of $1,562,636.  

 

Financing activities

 

Net cash provided by financing activities for the six months ended June 30, 2019 and 2018, was $14,443,138 and $8,484,428, respectively, an increase of $5,958,710 or 70.2%. This increase was primarily the result of the receipt of $25,000,000 in proceeds from the senior debt from Post Road Group, offset by the repayment of $11,669,963 to Fortress in connection with the iPass transaction in February 2019.

  

Effect of exchange rates on cash, cash equivalents and restricted cash

 

Effect of exchange rates on cash, cash equivalents and restricted cash for the six months ended June 30, 2019, was a loss of $28,541, compared to a gain of $42,185 for the same period in 2018.

 

As a result of the above activities, for the six months ended June 30, 2019, we had cash, cash equivalents and restricted cash of $4,482,313 a net decrease in cash, cash equivalents and restricted cash of $2,000,051 since December 31, 2018.

 

Off- Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have either a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors, nor we have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

 28 

 

  

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Foreign currency exchange rate

 

Although the majority of our business activities are carried out in Euros, we report our financial statements in USD. The conversion of Euros and USD leads to period-to-period fluctuations in our reported USD results arising from changes in the exchange rate between the USD and the Euro. Generally, when the USD strengthens relative to the Euro, it has an unfavorable impact on our reported revenue and income and a favorable impact on our reported expenses. Conversely, when the USD weakens relative to the Euro, it produces a favorable impact on our reported revenue and income, and an unfavorable impact on our reported expenses. The above fluctuations in the USD/Euro exchange rate therefore result in currency translation effects (not to be confused with real currency exchange effects), which impact our reported USD results and may make it difficult to determine actual increases and decreases in our revenue and expenses which are attributable to our actual operating activities. We carry out our business activities primarily in Euros, and we do not currently engage in hedging activities. As the clear majority of our business activities are carried out in Euros and we report our financial statements in USD, fluctuations in foreign currencies impact the total amount of assets and liabilities that we report for our foreign subsidiaries upon the translation of those amounts in USD. We are subject to interest rate risk through our Credit Agreement with Post Road Group, which bears interest at a rate of LIBOR plus 8.5%.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of June 30, 2019, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Principal Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on the evaluation, the Company’s Principal Executive Officer and Principal Accounting Officer have concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2019. In light of the previously issued material weakness described below, the Company has performed additional analysis and other remediation efforts, described below, to ensure the financial statements are prepared in accordance with GAAP.

 

Changes in Internal Control Over Financial Reporting

 

We previously identified and disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, a material weakness related to:

 

·Ineffective design, implementation and monitoring of information technology general controls pertaining to the Company’s change management process; and
·Inadequate and ineffective management assessment of internal control over financial reporting, including insufficient experienced resources to complete the documentation of internal control assessment.

 

To address ineffective design, implementation and monitoring of information technology general controls pertaining to the Company’s change management process, the Company has (i) removed all live access to all developers, internal and external, from being able to make coding changes directly in our reporting system; (ii) has continued to monitor and document all changes made in our reporting system and add additional layers of documented review of these changes; (iii) instituted monitoring controls and sample testing needs to be completed on our reporting system to ensure the documented policies are being followed and report the results of these tests to senior management in regular appropriate intervals; and (iv) enhanced our quarterly reporting on the remediation measures to the Audit Committee of the Board of Directors. Management believes the Company has taken significant steps towards the remediation of the identified material weaknesses, as of June 30, 2019.

 

We also continue to develop certain remediation steps to address the material weakness discussed above to improve our assessment of internal control over financial reporting. As of June 30, 2019, these efforts are ongoing.

  

We are committed to maintaining a strong internal control environment and believe that these remediation actions will represent significant improvements in our controls. However, the identified material weakness in internal control over financial reporting will not be considered remediated until controls have been designed and/or controls are in operation for a sufficient period of time for our management to conclude that the material weaknesses have been remediated. Additional remediation measures may be required, which may require additional implementation time. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting.

 

 29 

 

  

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company is not presently engaged in any active material litigation or regulatory proceedings and no such proceedings are contemplated. Nevertheless, from time to time, the Company may be subject to legal actions and claims in the ordinary course of business. We have previously received, and may in the future continue to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights. Future litigation may be necessary to defend ourselves or our customers or partners by determining the scope, enforceability and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the Risk Factors included in Part I, Item 1A. — “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018. These Risk Factors could materially impact our business, financial condition and/or operating results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely impact our business, financial condition and/or operating results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None. 

 

Item 3. Defaults upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

 30 

 

  

Item 6. Exhibits

 

  (a) Exhibits

 

31.1   Certification of the principal executive officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
     
31.2   Certification of the principal financial and accounting officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
     
32.1   Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2   Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS     XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

 31 

 

  

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  PARETEUM CORPORATION
   
Date: August 9, 2019 By   /s/ Robert H. Turner
    Robert H. Turner
    Executive Chairman
    (Principal Executive Officer)
     
Date: August 9, 2019 By   /s/ Edward O’Donnell
    Edward O’Donnell
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

 32