Item 1. Consolidated Financial Statements
The financial information set forth below
with respect to the financial statements as of September 30, 2018 and 2017 and for the three and nine month periods ended September
30, 2018 and 2017 is unaudited. This financial information, in the opinion of our management, includes all adjustments consisting
of normal recurring entries necessary for the fair presentation of such data. The results of operations for the three and nine
month periods ended September 30, 2018 are not necessarily indicative of results to be expected for any subsequent period. Our
fiscal year end is December 31.
PARETEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
(Unaudited)
|
|
|
2017
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,434,576
|
|
|
$
|
13,537,899
|
|
Restricted cash
|
|
|
429,776
|
|
|
|
199,776
|
|
Accounts receivable, net of an allowance for doubtful accounts of $349,589 at September 30, 2018 and $90,173 at December 31, 2017
|
|
|
7,200,014
|
|
|
|
2,058,284
|
|
Prepaid expenses and other current assets
|
|
|
943,224
|
|
|
|
900,369
|
|
Total current assets
|
|
|
27,007,590
|
|
|
|
16,696,328
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
39,067
|
|
|
|
91,267
|
|
|
|
|
|
|
|
|
|
|
NOTE RECEIVABLE
|
|
|
587,695
|
|
|
|
594,520
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
3,944,659
|
|
|
|
4,713,710
|
|
|
|
|
|
|
|
|
|
|
LONG TERM INVESTMENTS
|
|
|
3,230,208
|
|
|
|
3,230,208
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
34,809,219
|
|
|
$
|
25,326,033
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable and customer deposits
|
|
$
|
2,795,981
|
|
|
$
|
1,978,726
|
|
Net billings in excess of revenues
|
|
|
122,906
|
|
|
|
242,986
|
|
Accrued expenses and other payables
|
|
|
3,891,454
|
|
|
|
5,250,130
|
|
9% Unsecured Subordinate Convertible Promissory Note (current portion net of Debt Discount and Debt Issuance)
|
|
|
90,308
|
|
|
|
66,000
|
|
Total current liabilities
|
|
|
6,900,649
|
|
|
|
7,537,842
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
-
|
|
|
|
1,597,647
|
|
Other long term liabilities
|
|
|
94,999
|
|
|
|
151,163
|
|
Unsecured Convertible Promissory Note (net of Debt Discount and Debt Issuance)
|
|
|
-
|
|
|
|
617,848
|
|
Total long term liabilities
|
|
|
94,999
|
|
|
|
2,366,658
|
|
Total liabilities
|
|
|
6,995,648
|
|
|
|
9,904,500
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (See Notes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock $0.00001 par value, 500,000,000 shares authorized, 61,120,240 issued and outstanding as of September 30, 2018 and 46,617,093 shares issued and outstanding as of December 31, 2017
|
|
|
341,157,837
|
|
|
|
321,271,437
|
|
Accumulated other comprehensive loss
|
|
|
(6,303,005
|
)
|
|
|
(6,306,691
|
)
|
Accumulated deficit
|
|
|
(307,041,261
|
)
|
|
|
(299,543,213
|
)
|
Total stockholders’ equity
|
|
|
27,813,571
|
|
|
|
15,421,533
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
34,809,219
|
|
|
$
|
25,326,033
|
|
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
PARETEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE
LOSS
(UNAUDITED)
|
|
Three Months Ended
September 30,
|
|
|
Nine months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
REVENUES
|
|
$
|
8,007,734
|
|
|
$
|
3,498,688
|
|
|
$
|
18,123,484
|
|
|
$
|
9,532,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST AND OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service
|
|
|
2,128,683
|
|
|
|
791,334
|
|
|
|
5,103,088
|
|
|
|
2,578,925
|
|
Product development
|
|
|
765,723
|
|
|
|
497,078
|
|
|
|
2,246,499
|
|
|
|
1,055,285
|
|
Sales and marketing
|
|
|
842,743
|
|
|
|
412,881
|
|
|
|
2,184,183
|
|
|
|
1,103,162
|
|
General and administrative
|
|
|
8,127,982
|
|
|
|
1,578,960
|
|
|
|
12,638,904
|
|
|
|
5,435,187
|
|
Restructuring and acquisition costs
|
|
|
1,994,511
|
|
|
|
253,014
|
|
|
|
2,073,704
|
|
|
|
841,120
|
|
Depreciation and amortization
|
|
|
998,857
|
|
|
|
1,432,712
|
|
|
|
2,958,466
|
|
|
|
3,149,188
|
|
Total cost and operating expenses
|
|
|
14,858,499
|
|
|
|
4,965,979
|
|
|
|
27,204,844
|
|
|
|
14,162,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) FROM OPERATIONS
|
|
|
(6,850,765
|
)
|
|
|
(1,467,291
|
)
|
|
|
(9,081,360
|
)
|
|
|
(4,630,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (EXPENSE) / INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
49,972
|
|
|
|
41,964
|
|
|
|
135,837
|
|
|
|
136,000
|
|
Interest expense
|
|
|
(111,311
|
)
|
|
|
(421,392
|
)
|
|
|
(274,778
|
)
|
|
|
(1,344,576
|
)
|
Interest expense related to debt discount and conversion feature
|
|
|
(115,414
|
)
|
|
|
(205,842
|
)
|
|
|
(175,252
|
)
|
|
|
(1,548,440
|
)
|
Changes in derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
1,283,914
|
|
|
|
1,920,881
|
|
(Loss) / Gain on Extinguishment of Debt
|
|
|
-
|
|
|
|
(299,511
|
)
|
|
|
-
|
|
|
|
163,834
|
|
Other income
|
|
|
35,452
|
|
|
|
216,002
|
|
|
|
672,706
|
|
|
|
686,478
|
|
Amortization of deferred financing costs
|
|
|
(8,757
|
)
|
|
|
(25,595
|
)
|
|
|
(21,108
|
)
|
|
|
(248,218
|
)
|
Total other (expense) / income
|
|
|
(150,058
|
)
|
|
|
(694,374
|
)
|
|
|
1,621,319
|
|
|
|
(234,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) BEFORE PROVISION FOR INCOME TAXES
|
|
|
(7,000,823
|
)
|
|
|
(2,161,665
|
)
|
|
|
(7,460,041
|
)
|
|
|
(4,864,101
|
)
|
Provision for income taxes
|
|
|
19,583
|
|
|
|
147,640
|
|
|
|
38,007
|
|
|
|
81,144
|
|
NET (LOSS)
|
|
|
(7,020,406
|
)
|
|
|
(2,309,305
|
)
|
|
|
(7,498,048
|
)
|
|
|
(4,945,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE (LOSS) / INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation (loss) /income
|
|
|
(21,580
|
)
|
|
|
2,139
|
|
|
|
3,686
|
|
|
|
(8,512
|
)
|
COMPREHENSIVE (LOSS)
|
|
$
|
(7,041,986
|
)
|
|
$
|
(2,307,166
|
)
|
|
$
|
(7,494,362
|
)
|
|
$
|
(4,953,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per common share and equivalents - basic
|
|
$
|
(0.12
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per common share and equivalents - diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the period – basic
|
|
|
59,314,867
|
|
|
|
14,304,340
|
|
|
|
54,275,784
|
|
|
|
12,201,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the period – diluted
|
|
|
59,314,867
|
|
|
|
14,304,340
|
|
|
|
54,275,784
|
|
|
|
12,201,452
|
|
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements
PARETEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(UNAUDITED)
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,498,048
|
)
|
|
$
|
(4,945,245
|
)
|
Adjustments to reconcile net loss to net cash (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,958,466
|
|
|
|
3,149,188
|
|
Provision for doubtful accounts
|
|
|
-
|
|
|
|
6,378
|
|
Stock based compensation
|
|
|
7,409,592
|
|
|
|
1,508,535
|
|
Change in fair value of warrant liability
|
|
|
(1,283,914
|
)
|
|
|
(1,920,881
|
)
|
Amortization of deferred financing costs
|
|
|
21,108
|
|
|
|
248,218
|
|
Interest expense relating to debt discount and conversion feature
|
|
|
175,252
|
|
|
|
1,548,440
|
|
Shares issued for services
|
|
|
249,548
|
|
|
|
524,465
|
|
(Gain) on extinguishment of debt
|
|
|
-
|
|
|
|
(163,834
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) / Decrease in accounts receivable
|
|
|
(5,077,689
|
)
|
|
|
272,928
|
|
(Increase) / Decrease in prepaid expenses and other current assets
|
|
|
(27,699
|
)
|
|
|
755,036
|
|
Increase in accounts payable and customer deposits
|
|
|
798,573
|
|
|
|
274,030
|
|
(Decrease) in net billings in excess of revenues and deferred revenue
|
|
|
(127,683
|
)
|
|
|
(639,550
|
)
|
(Decrease) in accrued expenses and other payables
|
|
|
(1,421,435
|
)
|
|
|
(2,027,324
|
)
|
Net cash (used in) operating activities
|
|
|
(3,823,929
|
)
|
|
|
(1,409,616
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, and capitalized software
|
|
|
(2,189,415
|
)
|
|
|
(538,245
|
)
|
Net cash (used in) investing activities
|
|
|
(2,189,415
|
)
|
|
|
(538,245
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Exercise of warrants and options
|
|
|
5,683,354
|
|
|
|
1,150,000
|
|
Repayments on other long term loans
|
|
|
(60,894
|
)
|
|
|
(10,813
|
)
|
Principal repayment Senior Secured Loan
|
|
|
-
|
|
|
|
(2,000,000
|
)
|
Financing related fees
|
|
|
(632,900
|
)
|
|
|
(592,590
|
)
|
Gross Proceeds from public offering
|
|
|
6,100,000
|
|
|
|
3,500,000
|
|
Net cash provided by financing activities
|
|
|
11,089,560
|
|
|
|
2,046,597
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
50,461
|
|
|
|
(195,643
|
)
|
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
5,126,677
|
|
|
|
(96,907
|
)
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF THE PERIOD
|
|
|
13,737,675
|
|
|
|
1,495,207
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF THE PERIOD
|
|
$
|
18,864,352
|
|
|
$
|
1,398,300
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received during the period for interest
|
|
$
|
109,265
|
|
|
$
|
136,000
|
|
Cash paid during the period for interest
|
|
|
96,030
|
|
|
|
906,590
|
|
Cash paid during the period for taxes
|
|
|
-
|
|
|
|
2,359
|
|
NON-CASH FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Conversion of preferred stock
|
|
|
-
|
|
|
|
2,143,196
|
|
Conversion of convertible notes
|
|
|
1,911,380
|
|
|
|
281,944
|
|
Amendment to warrants and convertible notes
|
|
|
-
|
|
|
|
2,704,574
|
|
The accompanying notes are an integral
part of the unaudited condensed consolidated financial statements.
PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
UNAUDITED
Note 1. Financial Condition
As reflected in the accompanying consolidated
financial statements, Pareteum Corporation (“Pareteum,” the “Company,” “we,” “us,”
or “our”) (Nasdaq: TEUM) reported a comprehensive loss of $7,494,362 for the nine-month period ended September 30,
2018 and had an accumulated deficit of $307,041,261 as of September 30, 2018.
The Company’s financial statements
through September 30, 2018 were materially impacted by several warrant exercises, stock-based compensation, and costs associated
with the Artilium plc acquisition that was finalized on October 1, 2018.
Warrant Exercises
From January 1, 2018 through September
30, 2018, 13,929,364 warrants were exercised on a cash and a cashless basis pursuant to which 10,428,047 shares of common stock
were issued and a gross total of $5,683,354 was received by the Company.
Public Offering
On May 9, 2018, the Company entered into
a securities purchase agreement with select accredited investors relating to a registered direct offering, issuance and sale of
an aggregate of 2,440,000 shares of the Company’s common stock, $0.00001 par value per share, at a purchase price of $2.50
per share.
The Shares are being issued pursuant to
the Company’s previously filed and effective Registration Statement on Form S-3 that was filed with the Securities and Exchange
Commission on September 9, 2016, as amended October 21, 2016 and November 10, 2016, and declared effective November 14, 2016 (File
No. 333-213575). The Company will file a prospectus supplement related to the registered direct offering dated May 9, 2018.
The gross proceeds to the Company from
the Offering, before deducting the Company’s estimated offering expenses, are expected to be approximately $6,100,000. Proceeds
from the Offering shall be used for working capital and general corporate purposes.
Dawson James Securities, Inc. acted as
placement agent on a best-efforts basis in connection with the Offering, pursuant to a placement agency agreement that was entered
into on May 9, 2018.
July 2018 Registration Statement
On July 31, 2018, the Company filed a prospectus,
following the filing of a registration statement on Form S-3, announcing the resale of an aggregate of 7,151,146 shares of common
stock, par value $0.00001 per share, issuable upon the exercise of warrants issued to investors in a private placement offering
conducted by the Company and closed on December 5, 2017. The selling stockholders may offer all or part of the shares for resale
from time to time through public or private transactions, at either prevailing market prices or at privately negotiated prices.
The Company has paid all of the registration expenses incurred in connection with the registration of the shares, but the Company
will not pay any of the selling commissions, brokerage fees or related expenses. Cash warrant exercises of $5,683,354 have been
received through September 30, 2018.
Acquisitions
On October 1, 2018 the Company completed its previously
announced acquisition (the “Acquisition”) of all of the outstanding shares of Artilium plc, a public limited company
registered in England and Wales (“Artilium”). Following the Acquisition, Artilium will operate as a wholly-owned subsidiary
of the Company. Artilium is a software development company active in the enterprise communications and core telecommunications
markets delivering software solutions which layer over disparate fixed, mobile and IP networks to enable the deployment of converged
communication services and applications.
Proposed Acquisition of iPass, Inc.
On November 12, 2018, the Company entered
into an Agreement and Plan of Merger (the “Merger Agreement”) with iPass, Inc., a Delaware corporation (“iPass”)
and TBR, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (the “Merger Sub”).
Upon the terms and subject to the conditions
of the Merger Agreement, Merger Sub will commence a tender offer (the “Offer”) for any and all outstanding shares of
common stock of iPass (the “iPass Common Stock”) for 1.17 shares of common stock of the Company per share of iPass
Common Stock (the “Exchange Ratio”) for an aggregate of approximately 9,861,410 shares of the Company’s common
stock (the “Offer Price”), without interest and subject to any required withholding for taxes, and Merger Sub will
subsequently merge with and into iPass (the “Merger”). The Merger Agreement contemplates that, subject to iPass’
stockholders tendering and not withdrawing a majority of the outstanding shares of iPass stock in the exchange offer, the Merger
will be effected pursuant to Section 251(h) of the Delaware General Corporation Law, and iPass, as the surviving corporation, will
become a wholly-owned subsidiary of the Company without any additional stockholder approval, and each issued and outstanding share
of iPass Common Stock will be converted into the right to receive the Offer Price. No fractional shares of the Company will be
issued to iPass stockholders; any fractional shares will be cancelled, and the balance paid to such stockholders in cash. The Company
intends to fund the balance required for any fractional shares with cash on hand.
The Company, Merger Sub and iPass have
made customary representations and warranties in the Merger Agreement and agreed to certain customary covenants, including covenants
regarding the operation of the business of iPass, and to a lesser extent the Company, prior to the closing.
The foregoing description of the Merger
Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety
by, the full text of the Merger Agreement, which, including all schedules, exhibits, attachments and annexes thereto, is attached
as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC as of November 13, 2018, and is incorporated
herein by reference.
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. As of October 1, 2018, the Company now includes
Artilium plc, which operates as a wholly-owned subsidiary of the Company. Artilium is a software development company active in
the enterprise communications and core telecommunications markets delivering software solutions which layer over disparate fixed,
mobile and IP networks to enable the deployment of converged communication services and applications.
Basis of Presentation of Interim Periods
The interim condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim
financial information and with the instructions to Securities and Exchange Commission, or SEC, Form 10-Q and Article 10 of SEC
Regulation S-X. They do not include all 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, 2017, included in our 2017 Annual Report on Form 10-K filed with the SEC on March 30, 2018, referred
to as our 2017 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 nine months ended September 30, 2018 are not necessarily indicative of the results to be expected
for future quarters or the full year.
For a complete summary of our significant
accounting policies, please refer to Note 1, “Business and Summary of Significant Accounting Policies,” of our 2017
Annual Report. There have been no material changes to our significant accounting policies during the nine months ended September
30, 2018.
Use of Estimates
The preparation of the accompanying consolidated
financial statements conforms with accounting principles generally accepted in the U.S. and requires management to make certain
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company
bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities. Significant areas
of estimates include revenue recognition, intangible assets, bad debt allowance, valuation of financial instruments, useful lives
of long lived assets and share-based compensation. Actual results may differ from these estimates under different assumptions or
conditions.
Reclassification
Certain reclassifications have been made
to the Company’s consolidated financial statements for the prior years to conform to the current year presentation. Such
reclassifications had no impact on net (loss) or net cash flows.
Recently Issued Accounting Standards
In May 2014, the FASB issued Accounting
Standards Update No. 2014-09 (Topic 606) "Revenue from Contracts with Customers." Topic 606 supersedes the revenue recognition
requirements in Topic 605 “Revenue Recognition” (Topic 605), and requires entities to recognize revenue when control
of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity
expects to be entitled to in exchange for those goods or services. We adopted Topic 606 as of January 1, 2018 using the modified
retrospective transition method. See Note 9 for further details.
Note 3. Supplemental Financial Information
The following tables present details of our condensed consolidated
financial statements:
Prepaid Expenses and Other Current Assets
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Prepaid Expenses - Other
|
|
$
|
556,595
|
|
|
$
|
576,277
|
|
VAT
|
|
|
386,629
|
|
|
|
324,092
|
|
|
|
$
|
943,224
|
|
|
$
|
900,369
|
|
Property and Equipment
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Furniture and fixtures
|
|
$
|
139,857
|
|
|
$
|
139,857
|
|
Computer, communications and network equipment
|
|
|
17,108,945
|
|
|
|
17,020,421
|
|
Software
|
|
|
4,101,293
|
|
|
|
2,899,794
|
|
Automobiles
|
|
|
10,744
|
|
|
|
10,744
|
|
Software development
|
|
|
1,232,108
|
|
|
|
398,654
|
|
Accumulated depreciation and amortization
|
|
|
(18,648,288
|
)
|
|
|
(15,755,760
|
)
|
|
|
$
|
3,944,659
|
|
|
$
|
4,713,710
|
|
Accrued Expenses and Other Payables
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accrued selling, general and administrative expenses
|
|
$
|
2,092,784
|
|
|
$
|
3,463,800
|
|
Accrued cost of service
|
|
|
318,477
|
|
|
|
413,942
|
|
Accrued taxes (including VAT)
|
|
|
1,354,286
|
|
|
|
877,366
|
|
Accrued interest payable
|
|
|
57,638
|
|
|
|
96,801
|
|
Other accrued expenses
|
|
|
68,269
|
|
|
|
398,221
|
|
|
|
$
|
3,891,454
|
|
|
$
|
5,250,130
|
|
|
|
Outstanding
September
30, 2018
|
|
|
Closing(s)
during
2018
|
|
|
Regular
Amortizations
(during
2018)
|
|
|
Conversions
(during
2018)
including
accelerated
amortization
|
|
|
December
31, 2017
|
|
9% Unsecured Convertible Note (Private Offering Q4- 2015 – Q1-2016
|
|
$
|
(90,308
|
)
|
|
$
|
-
|
|
|
$
|
(42,683
|
)
|
|
$
|
56,350
|
|
|
$
|
(103,975
|
)
|
9% Saffelberg Note (Unsecured Convertible)
|
|
|
-
|
|
|
|
-
|
|
|
|
(42,149
|
)
|
|
|
622,022
|
|
|
|
(579,873
|
)
|
|
|
$
|
(90,308
|
)
|
|
$
|
-
|
|
|
$
|
(84,832
|
)
|
|
$
|
678,372
|
|
|
$
|
(683,848
|
)
|
On June 29, 2018, the Company amended
the Saffelberg Investments N.V. (“Saffelberg”) convertible note dated August 18, 2016 with principal of $723,900
and amended the August 18, 2016 Warrant. These amendments removed the elements that generated the derivative liabilities and related
expense from the convertible note and warrant.
On June 29, 2018, the Company entered into an agreement with Saffelberg agreeing to (i) pay the
balance and interest of the September 7, 2017 repayment agreement, (ii) convert at $2.37 per share on July 11, 2018 the
August 18, 2016 $723,900 convertible note and accrued interest into 387,913 common shares, (iii) adjust the strike price of
the 96,250 warrants to a fixed amount of $2.37 on June 29, 2018 and (iv) register converted 387,913 common shares, the
96,250 warrant and other shares held by Saffelberg in the next registration statement.
Fair Market Value Warrants & Conversion Feature
|
|
FMV as of
September
30, 2018
|
|
|
Additional
closings
during
2018
|
|
|
Agreement
Amendments/
Conversions/
FX effect
|
|
|
Mark to
market
adjustment
Ytd-2018
|
|
|
FMV as of
December
31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9% Saffelberg Note (Unsecured Convertible)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,706,484
|
)
|
|
$
|
279,581
|
|
|
$
|
1,426,903
|
|
FMV Conversion Feature
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,706,484
|
)
|
|
$
|
279,581
|
|
|
$
|
1,426,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9% Convertible Note Warrants - Saffelberg
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(204,896
|
)
|
|
$
|
34,152
|
|
|
$
|
170,744
|
|
FMV Warrant Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(204,896
|
)
|
|
$
|
34,152
|
|
|
$
|
170,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,911,380
|
)
|
|
$
|
313,733
|
|
|
$
|
1,597,647
|
|
Outstanding Numbers of Warrants
The outstanding number of warrants and
activity for the nine months ended September 30, 2018 is listed in the schedule below.
Number of underlying
shares for Warrants &
Conversion Features
|
|
Outstanding
September 30, 2018
|
|
|
Agreement
Amendments /
Interest effects
|
|
|
Exercises / Conversions /
Expirations
|
|
|
Outstanding
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9% Convertible Note - Investors
|
|
|
39,321
|
|
|
|
584
|
|
|
|
(22,292
|
)
|
|
|
61,029
|
|
9% Convertible Note - Saffelberg
|
|
|
-
|
|
|
|
(472,030
|
)
|
|
|
(387,913
|
)
|
|
|
859,943
|
|
Outstanding Conversion Features
|
|
|
39,321
|
|
|
|
(471,446
|
)
|
|
|
(410,205
|
)
|
|
|
920,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13%+Eurodollar Senior Secured
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,400,000
|
)
|
|
|
2,400,000
|
|
2017 Registered Public Offering
|
|
|
508,970
|
|
|
|
-
|
|
|
|
(766,830
|
)
|
|
|
1,275,800
|
|
Investor Management `Services
|
|
|
710,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
710,000
|
|
9% Convertible Note Warrants
|
|
|
520,373
|
|
|
|
-
|
|
|
|
-
|
|
|
|
520,373
|
|
2013 Convertible Notes
|
|
|
60,000
|
|
|
|
-
|
|
|
|
(80,000
|
)
|
|
|
140,000
|
|
Other 9% Convertible Note Warrants
|
|
|
96,520
|
|
|
|
-
|
|
|
|
-
|
|
|
|
96,520
|
|
2017 Registered Public Offering Agent Warrants
|
|
|
23,334
|
|
|
|
-
|
|
|
|
(150,833
|
)
|
|
|
174,167
|
|
9% Convertible Note 7% Agent Warrants
|
|
|
66,230
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66,230
|
|
Oct-2017 Shelf take Down Agent Warrants
|
|
|
843
|
|
|
|
74,750
|
|
|
|
(73,907
|
)
|
|
|
-
|
|
Nov-2017 Underwriter Agreement Investor Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,838,496
|
)
|
|
|
2,838,496
|
|
Nov-2017 Underwriter Agreement Agent Warrants
|
|
|
910,587
|
|
|
|
-
|
|
|
|
(724,331
|
)
|
|
|
1,634,918
|
|
Dec-2017 SPA Investor Warrants
|
|
|
533,733
|
|
|
|
-
|
|
|
|
(6,617,413
|
)
|
|
|
7,151,146
|
|
Dec-2017 SPA Agent warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
(357,557
|
)
|
|
|
357,557
|
|
May-2018 Public Offering Agent Warrants
|
|
|
122,000
|
|
|
|
122,000
|
|
|
|
-
|
|
|
|
-
|
|
Preferred Share Conversion Warrants
|
|
|
731,798
|
|
|
|
-
|
|
|
|
-
|
|
|
|
731,798
|
|
Preferred Share issuance 8% Agent Warrants
|
|
|
38,827
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,827
|
|
Outstanding Warrants
|
|
|
4,323,215
|
|
|
|
196,750
|
|
|
|
(14,009,367
|
)
|
|
|
18,135,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,362,536
|
|
|
|
(274,696
|
)
|
|
|
(14,419,572
|
)
|
|
|
19,056,804
|
|
Note 4. Fair Value Measurements
In accordance with Accounting Standards
Update 820, Fair Value Measurement (“ASC 820”), the Company defines fair value as the price that would be received
from selling an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants
at the measurement date. ASC 820 establishes a fair value hierarchy for inputs used in measuring fair value that maximizes the
use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when
available.
Observable inputs are those that market
participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company.
Unobservable inputs reflect the Company’s assumptions about the inputs that market participants would use in pricing the
asset or liability developed based on the best information available in the circumstances.
The fair value hierarchy is categorized
into three levels based on the inputs as follows:
Level 1
– Quoted prices are
available in active markets for identical assets or liabilities as of the reported date.
Level 2
– Pricing inputs are
other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature
of these financial instruments includes cash instruments for which quoted prices are available but are traded less frequently,
derivative instruments whose fair values have been derived using a model where inputs to the model are directly observable in the
market and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level 3
– Instruments that
have little to no pricing observability as of the reported date. These financial instruments are measured using management’s
best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
The degree of judgment exercised by the
Company in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure
fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the
fair value hierarchy within which the fair value measurement falls in its entirety is determined by the lowest level input that
is significant to the fair value measurement.
The Company used
the Monte Carlo valuation model to determine the value of the outstanding warrants and conversion feature from the “Offering”.
Since the Monte Carlo valuation model requires special software and expertise to model the assumptions to be used, the Company
hired a third party valuation expert.
Note 5.
Stockholders’ Equity
(A) Common Stock
The Company is presently authorized to
issue 500,000,000 shares common stock. The Company had 61,120,240 shares of common stock issued and outstanding as of September
30, 2018, an increase of 14,503,147 shares from December 31, 2017, due to warrant exercises (10,428,047), equity fund raises (2,453,400),
non-cash compensation for board and management (918,988), conversion of notes (387,913), consultants (194,803) and settlement of
debt (119,996).
(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 September 30, 2018 (unaudited) and December 31, 2017 have been recorded and classified as equity is
4,362,536 and 19,056,804 respectively. The Company successfully renegotiated the terms of the related ‘liability warrants’
and such amended terms resulted in the elimination of the derivative conditions. The Weighted Average Exercise Price for the currently
outstanding warrants in the table below is $2.26. The table below summarizes the warrants outstanding as of September 30, 2018
and as of December 31, 2017:
Outstanding Warrants
|
|
Exercise/
Conversion
price(s)
(range)
|
|
|
Expiring
|
|
|
September
30, 2018
|
|
|
December 31, 2017
|
|
Equity Warrants - Fundraising
|
|
$1.05 - $5.375
|
|
|
|
2018 - 2023
|
|
|
|
4,323,215
|
|
|
|
18,039,312
|
|
Liability Warrants - Fundraising
|
|
$3.75
|
|
|
|
2021
|
|
|
|
-
|
|
|
|
96,520
|
|
|
|
|
|
|
|
|
|
|
|
4,323,215
|
|
|
|
18,135,832
|
|
Note 6. Amended and Restated 2008 Long Term Incentive
Compensation Plan and 2017 Long-Term Incentive Compensation Plan
Amended and Restated 2008 Long-Term Incentive Compensation
Plan (“2008 Plan”)
Total Authorized under the plan
|
|
|
2,240,000
|
|
Shares issued in prior years
|
|
|
1,074,824
|
|
Outstanding options
|
|
|
251,266
|
|
Available for grant at September 30, 2018 (Registered and Unregistered)
|
|
|
913,910
|
|
During the nine months ended September
30, 2018, no shares were issued or options granted under the 2008 Plan.
Stock option activity is set forth below
for the 2008 Plan:
Options:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding as of December 31, 2017
|
|
|
1,128,384
|
|
|
$
|
9.40
|
|
Cancelled January 1, 2018
|
|
|
(786,697
|
)
|
|
$
|
6.33
|
|
Forfeitures (Pre-vesting)
|
|
|
(175
|
)
|
|
$
|
3.07
|
|
Expirations (Post-vesting)
|
|
|
(90,246
|
)
|
|
$
|
25.60
|
|
Outstanding as of September 30, 2018
|
|
|
251,266
|
|
|
$
|
13.18
|
|
At September 30, 2018, due to all unvested
options being canceled as part of reorganization, the unrecognized expense portion of stock-based awards granted to employees under
the 2008 Plan was $0, compared to $224,853 for the same period in 2017.
2017 Long-Term Incentive Compensation Plan (“2017 Plan”)
Total Authorized under the plan (Shareholders)
|
|
|
6,500,000
|
|
Total Registered under the plan (S-8 dated September 14, 2017 and April 13, 2018)
|
|
|
6,500,000
|
|
Shares issued under the plan
|
|
|
2,405,413
|
|
Reserved for Time-conditioned share awards
|
|
|
787,504
|
|
Reserved for outstanding Options
|
|
|
3,294,890
|
|
Available for grant at September 30, 2018 (Registered & Unregistered)
|
|
|
12,193
|
|
During the nine months ended September
30, 2018, 853,318 shares were issued and 1,515,000 options were granted under the 2017 Plan.
Stock option activity is set forth below for the 2017 Plan:
Options:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding as of December 31, 2017
|
|
|
1,899,800
|
|
|
$
|
1.00
|
|
Granted in 2018
|
|
|
1,515,000
|
|
|
$
|
2.49
|
|
Forfeitures (Pre-vesting)
|
|
|
(117,577
|
)
|
|
$
|
1.10
|
|
Expirations (Post-vesting)
|
|
|
(2,333
|
)
|
|
$
|
NA
|
|
Outstanding as of September 30, 2018
|
|
|
3,294,890
|
|
|
$
|
1.68
|
|
At September 30, 2018 and 2017, the unrecognized expense portion of stock-based awards granted to employees
under the 2017 Plan was $2,347,236 and $673,921, respectively, which will be recognized over a three year vesting period.
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.
Note 7. Income Taxes
Income Taxes
The following table presents details of the net provision for
income taxes:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net Provision for income taxes
|
|
$
|
19,583
|
|
|
$
|
147,640
|
|
|
$
|
38,007
|
|
|
$
|
81,144
|
|
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 Customer and Geographical Information
Sales to our significant customers, as a percentage of net revenue
were as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Two largest customers
|
|
|
65.5
|
%
|
|
|
96.9
|
%
|
|
|
64.9
|
%
|
|
|
96.1
|
%
|
The geographical distribution of our revenue, as a percentage
of revenue, was as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Europe
|
|
|
71.3
|
%
|
|
|
95.5
|
%
|
|
|
82.8
|
%
|
|
|
94.2
|
%
|
All other (non-European) countries
|
|
|
28.7
|
%
|
|
|
4.5
|
%
|
|
|
17.2
|
%
|
|
|
5.8
|
%
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Note 9. Revenues
Adoption of ASC Topic 606, "Revenue
from Contracts with Customers"
On January 1, 2018, we adopted
Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1,
2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period
amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
We recorded a net increase to opening retained
earnings of $107,520 as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the
impact primarily related to our installation revenues that were previously deferred for which the performance obligation was determined
to be complete as of the date of adoption. The impact to revenues to be recognized for the nine months ended September 30,
2018 was a decrease of $107,520 as a result of applying Topic 606, relating to the aforementioned installation revenues
and an increase to the accumulated deficit.
Revenue Recognition
Our revenues represent amounts earned for
our mobile and security solutions. Our solutions take many forms but our revenue generally consists of fixed and/or variable charges
for services delivered monthly under a combined services and SaaS model. We also offer discrete (one-time) services for implementation
and for development of specific functionality to properly service our customers.
The following table presents our revenues
disaggregated by revenue source:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
(1)
|
|
|
2018
|
|
|
2017
(1)
|
|
Monthly Service
|
|
$
|
7,357,365
|
|
|
$
|
3,218,191
|
|
|
$
|
15,130,195
|
|
|
$
|
8,859,811
|
|
Installation and Software Development
|
|
|
650,369
|
|
|
|
280,497
|
|
|
|
2,993,289
|
|
|
|
672,996
|
|
Total revenues
|
|
$
|
8,007,734
|
|
|
$
|
3,498,688
|
|
|
$
|
18,123,484
|
|
|
$
|
9,532,807
|
|
|
(1)
|
As noted above, prior period
amounts have not been adjusted under the modified retrospective method.
|
Monthly services revenues are recognized
at a point in time and amounted to $7,357,365 for the three-month period ended September 30, 2018. Installation and software development
revenues are recognized over time and amounted to $650,369 for the three-month period ended September 30, 2018.
Monthly services revenues are recognized
at a point in time and amounted to $15,130,195 for the nine-month period ended September 30, 2018. Installation and software development
revenues are recognized over time and amounted to $2,993,289 for the nine-month period ended September 30, 2018.
The following table presents our revenues
disaggregated by geography, based on the billing addresses of our customers
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
(1)
|
|
|
2018
|
|
|
2017
(1)
|
|
Europe
|
|
$
|
5,709,346
|
|
|
$
|
3,342,378
|
|
|
$
|
14,999,260
|
|
|
$
|
8,978,815
|
|
Other geographic areas
|
|
|
2,298,388
|
|
|
|
156,310
|
|
|
|
3,124,224
|
|
|
|
553,992
|
|
Total revenues
|
|
$
|
8,007,734
|
|
|
$
|
3,498,688
|
|
|
$
|
18,123,484
|
|
|
$
|
9,532,807
|
|
|
(1)
|
As noted above, prior period
amounts have not been adjusted under the modified retrospective method.
|
Monthly Service Revenues
The Company’s performance obligations
in a monthly Software as a Service (SaaS) and service offerings are simultaneously received and consumed by the customer and therefore,
are recognized over time. For recognition purposes, we do not unbundle such services into separate performance obligations. The
Company typically bills its customer at the end of each month, with payment to be received shortly thereafter. The fees charged
may include a combination of fixed and variable charges with the variable charges tied to the number of subscribers or some other
measure of volume. Although the consideration may be variable, the volumes are estimable at the time of billing, with “true-up”
adjustments occurring in the subsequent month. 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 promise 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 in advance of our performance, including amounts which are refundable. Net billings in excess
of revenues was $122,906 as of September 30, 2018, a decrease of $120,080 for the nine months ended September 30, 2018,
as compared to $242,986 for December 31, 2017.
Payment terms vary by the type and location
of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For
certain products or services and customer types, payment is required before the products or services are delivered to the customer.
Contract Assets
Given the nature of the Company’s
services and contracts, it has no contract assets.
Note 10. Subsequent Events
2018 Pareteum Corporation Long-Term Incentive Compensation
Plan
On October 10, 2018, the Company filed a registration statement
on Form S-8 to register the 8,000,000 shares of common stock, including 2,040,000 shares of common stock that were registered for
resale.
Subsequent Equity Issuances
On October 25, 2018, the company issued an aggregate of 1,308,914
shares of common stock, par value $0.00001 per share, of the Company to several key persons. The issued shares are pursuant to
the Company’s 2018 Long Term Incentive Compensation Plan (the “2018 Plan”), the Company’s 2017 Long Term
Incentive Compensation Plan (the “2017 Plan”) and the Company’s 2008 Long Term Incentive Compensation Plan (the
“2008 Plan”).
An aggregate of 269,164 shares were issued to Victor Bozzo,
Alexander Korff, Yves Van Sante and Luis Jimenez-Tunon; and 1,000,000 shares were issued to Robert H. Turner, pursuant to the Registration
Statement on Form S-8 as filed with the Securities and Exchange Commission for the 2018 Plan, the 2017 Plan and the 2008 Plan.
Additionally, 39,750 shares were issued to Martin Zuubier as pursuant to the Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission for the 2018 Plan, the 2017 Plan and the 2008 Plan.
Acquisition of Artilium plc
On October 1, 2018 the Company completed its previously
announced acquisition (the “Acquisition”) of all of the outstanding shares of Artilium plc, a public limited company
registered in England and Wales (“Artilium”). The Acquisition was effected by means of a court-sanctioned scheme of
arrangement between Artilium and shareholders of Artilium under Part 26 of the UK Companies Act 2006, as amended, as further described
below. In connection with the Acquisition, the Company issued an aggregate of 37,511,447 shares of the Company’s common stock.
Artilium held 3,200,332 shares of the Company’s common stock, which were cancelled as of the time of completion of the Acquisition.
Rule 2.7 Announcement
As previously disclosed, on June 7, 2018, the Company issued
an announcement (the “Rule 2.7 Announcement”) pursuant to Rule 2.7 of the United Kingdom City Code on Takeovers and
Mergers (the “Takeover Code”) disclosing the terms of a recommended offer (the “Offer”) by the Company
to acquire the entire issued and to be issued shares of Artilium in a cash and stock transaction. In connection with the Acquisition,
the Company and Artilium also entered into a Co-operation Agreement, dated June 7, 2018 (the “Co-operation Agreement”)
and, the Company entered into a management agreement, as described below.
Pursuant to the Offer under the Rule 2.7 Announcement, Artilium
shareholders are entitled to receive, for each Artilium ordinary share held by such shareholders, 0.1016 new shares of the Company’s
common stock and 1.9 pence in cash. The Acquisition was effected by means of a court-sanctioned scheme of arrangement between Artilium
and Artilium shareholders under Part 26 of the UK Companies Act 2006, as amended (the “Scheme”). As of September 28,
2018, the most recent practicable trading day prior to the date of this Report, each Artilium ordinary share would be valued at
25.29 pence, based on the Company’s closing share price of $3.00 as of that date and exchange rate of $1.3031:£1 as
of that date, representing an aggregate equity value for Artilium of approximately £100.9 million, or approximately
$131.5 million.
Management Services Agreement
As previously disclosed, in connection with the Offer, the Company
and Bart Weijermars (acting through Grootzande Management BV) entered into a Management Services Agreement, dated May 8, 2018
and as amended June 7, 2018 (the “Management Services Agreement”), setting out the terms on which Bart Weijermars
will be engaged as Chief Executive Officer of Pareteum Europe BV, a wholly owned subsidiary of the Company, effective upon completion
of the Acquisition, and the Company issued 537,271 shares of common stock to Grootzande Management BV at the closing.
Issuance of Unregistered Shares of Common Stock
As described above, the Company issued an aggregate of 37,511,447
shares of the Company’s common stock in connection with the Acquisition, consisting of: (i) 33,403,733 shares issued to Artilium
shareholders pursuant to the Offer in reliance on the exemption from registration provided by Section 3(a)(10) of the Securities
Act of 1933, as amended (the “Securities Act”); and (ii) 4,107,714 shares issued in reliance on the exemption from
registration provided by Section 4(a)(2) of the Securities Act, of which 537,271 shares were issued to Grootzande Management BV
in connection with the Management Services Agreement (as described above), and 3,570,443 shares issued in private placement transactions
pursuant to the Rule 15 Offer Letters (as described below). Rule 15 of the Takeover Code (“Rule 15”) requires that,
when an offer is made for voting equity share capital or for other transferable securities carrying voting rights and the offeree
company has any outstanding securities which are convertible into, or which comprise options or other rights to subscribe for,
securities to which the voting equity offer relates (the “Rule 15 Securities”), the offeror must make an appropriate
offer or proposal to the holders of those Rule 15 Securities. In accordance with the requirements of Rule 15, Artilium and the
Company entered into three separate offer letters (the “Rule 15 Offer Letters”), by and between Artilium and the Company,
and each of Mr. Rupert Hutton, Mr. Andreas Felke and Grootzande Management BV (on behalf of Bart Weijermars) (collectively, the
“Rule 15 Offerees”). Pursuant to the Rule 15 Offer Letters, each of the Rule 15 Offerees received the option to accept
the “Pareteum Proposal” wherein each of the Rule 15 Offerees’ option holdings in Artilium would be cancelled
and in exchange the Company would issue a certain number of the Company’s shares to each of the Rule 15 Offerees, or each
of the Rule 15 Offerees could reject the Pareteum Proposal and exercise their respective options to the extent vested in their
Artilium shares. Each of the Rule 15 Offerees accepted the terms of the Pareteum Proposal.
Employment Agreement with Denis McCarthy
Effective October 1, 2018, the Company entered into an employment
agreement with Denis McCarthy, appointing him to serve as President of the Company. Mr. McCarthy commenced employment with the
Company as of January 1, 2018 in the capacity of SVP of Corporate Development. The agreement serves to expand Mr. McCarthy’s
responsibilities within the Company during his term of continued employment.
The agreement entered into by and between the Company and Mr.
McCarthy provides for the following:
|
-
|
annual salary of $225,000 per year;
|
|
-
|
annual bonus of up to 100% of base salary subject to the achievement of business plan targets;
|
|
-
|
other customary allowances, bonuses, reimbursements and vacation pay.
|
The agreement is an “at will” agreement, which also
provides that if Mr. McCarthy’s employment with the Company is terminated by the Company, then, subject to a mutual release,
the Company will pay Mr. McCarthy’s base salary for an additional 12 months after termination in accordance with customary
payroll practices. Mr. McCarthy is also subject to customary confidentiality requirements during and after the term of his employment.
Listing of the Common Stock on Nasdaq
On October 11, 2018, the Company, acting pursuant to authorization
from its Board of Directors, determined to voluntarily withdraw the principal listing of the Company’s common stock from
the New York Stock Exchange (“NYSE”) and transfer the listing to The Nasdaq Stock Market LLC (“Nasdaq”).
Listing and trading of the common stock on the NYSE ended at market close on October 22, 2018, and trading commenced on Nasdaq
at market open on October 23, 2018 under the stock symbol “TEUM.”
Proposed Acquisition of iPass, Inc.
On November 12, 2018, the Company entered into an Agreement
and Plan of Merger (the “Merger Agreement”) with iPass, Inc., a Delaware corporation (“iPass”) and TBR,
Inc., a Delaware corporation and wholly-owned subsidiary of the Company (the “Merger Sub”).
Upon the terms and subject to the conditions of the Merger Agreement,
Merger Sub will commence a tender offer (the “Offer”) for any and all outstanding shares of common stock of iPass (the
“iPass Common Stock”) for 1.17 shares of common stock of the Company per share of iPass Common Stock (the “Exchange
Ratio”) for an aggregate of approximately 9,861,410 shares of the Company’s common stock (the “Offer Price”),
without interest and subject to any required withholding for taxes, and Merger Sub will subsequently merge with and into iPass
(the “Merger”). The Merger Agreement contemplates that, subject to iPass’ stockholders tendering and not withdrawing
a majority of the outstanding shares of iPass stock in the exchange offer, the Merger will be effected pursuant to Section 251(h)
of the Delaware General Corporation Law, and iPass, as the surviving corporation, will become a wholly-owned subsidiary of the
Company without any additional stockholder approval, and each issued and outstanding share of iPass Common Stock will be converted
into the right to receive the Offer Price. No fractional shares of the Company will be issued to iPass stockholders; any fractional
shares will be cancelled, and the balance paid to such stockholders in cash. The Company intends to fund the balance required for
any fractional shares with cash on hand.
The Company, Merger Sub and iPass have made customary representations
and warranties in the Merger Agreement and agreed to certain customary covenants, including covenants regarding the operation of
the business of iPass, and to a lesser extent the Company, prior to the closing.
The foregoing description of the Merger Agreement and the transactions
contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the
Merger Agreement, which, including all schedules, exhibits, attachments and annexes thereto, is attached as Exhibit 2.1 to the
Company’s Current Report on Form 8-K filed with the SEC as of November 13, 2018, and is incorporated herein by reference.
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 is an award-winning global Cloud
Communications Platform company with a mission: “to connect every person and every thing”.™ Customers use Pareteum’s
award-winning Communications-Platform-as-a-Service (CPaaS) and software solutions to energize their growth and profitability through
cloud communication services and complete turnkey solutions featuring relevant content, applications, and connectivity worldwide.
We provide a single software solution, fully enabling and securing cloud communications, connections and transactions, regardless
of users’ location or network. With estimates of up to 30 billion devices to be managed, connected and intelligently leveraged,
there are numerous large addressable markets for our Communications-Platform-as-a-Service (CPaaS) solutions.
Pareteum’s customers include Enterprises
of all sizes, Communication Service Providers (CSPs), Internet of Things (IoT) and other software and application developers, manufacturers
and brand-marketing companies. These customers use Pareteum to energize their growth and profitability through cloud-based communication
services featuring relevant content, applications, and connectivity worldwide.
Our proprietary and patent-protected software
enablement platforms are connected to 53 international mobile networks in 76 countries using multiple different communications
protocols including IP, mobile telephony, data, SMS, VOIP, OTT services. We support 64+ million Wi-Fi hotspots in 180+ countries
through our strategic alliance with iPass. We also have over 1,200 GSMA and CDMA connectivity interconnect relationships - and
counting! Pareteum integrates all these disparate software enablement methods and services and brings them to life for customers
and application developers, allowing communications to become value-added, using simple Application Program Interfaces (APIs).
It is our strategy to enable open mobility, applications, software and developer exchange through our APIs. Our API toolkits allow
customers and developers to connect to previously hard to access networks and communications services. In other words, Pareteum’s
software enablement solutions remove the commercial and technical barriers to all forms of connectivity allowing our customers
to create new and interesting solutions and revenue opportunities all over the world. The simplicity of our “SuperAPI”
allows our customers and developers to iterate, test and refine new ideas and business cases on our Customer Success Platform.
Our strategy involves supporting “any device… any network… anytime” and for our customers a key advantage
is to “pay as you go @ The Speed of Need”, leveraging the advantages of scale and elasticity of cloud-computing, for
communications and connectivity. This represents a major strategic shift for many industries, from telecommunications providers
to the disruptive software and big data enterprises of today and the future.
Our software enablement solutions have
proven themselves globally against much larger competitors and are deployed in multiple companies in diverse countries around the
world ranging from small service providers to one of the world’s largest telecoms companies, Vodafone. We had more than 2.9
million active connections on our platforms as of September 30, 2018. We expect this number to grow rapidly through our own aggressive
sales growth, as well as through our acquisition strategy, which includes the planned close of our acquisition of Artilium plc
later this year.
Our integrated communications and software
enablement solutions increasingly leverage the latest developments in deep neural networks (DNN), predictive analytics and machine-learning
(ML) and artificial intelligence (AI) and we see this trend growing and are competing aggressively to bring the maximum commercial
value from these techniques. All this is complemented through enabling a new set of features such as distributed ledger (blockchain)
functionality and cashless settlements through cryptocurrencies – in all cases, positioning our customers’ business
ahead of market disruption and growth.
The Pareteum Cloud Communications Platform
and software increasingly also targets new and growing sectors from IoT (Internet of Things), Data Analytics, Smart Cities, and
Application-developer markets - each in need of mobile platforms, management and connectivity. These sectors need Communications-as-a-Service
(CaaS), which Pareteum delivers. Our solutions have received industry acclaim.
Pareteum is a mission focused company empowering
every person and every “thing” to be globally connected, applying our philosophy of ANY DEVICE, ANY NETWORK, ANYWHERE™.
On October 1, 2018 the Company completed
its previously announced acquisition (the “Acquisition”) of all of the outstanding shares of Artilium plc, a public
limited company registered in England and Wales (“Artilium”). Following the Acquisition, Artilium will operate as a
wholly-owned subsidiary of the Company. Artilium is a software development company active in the enterprise communications and
core telecommunications markets delivering software solutions which layer over disparate fixed, mobile and IP networks to enable
the deployment of converged communication services and applications.
The following discussion and analysis of
our financial condition and results of operations should be read in conjunction with our financial statements and notes thereto
and the other financial information included elsewhere in this report.
Critical Accounting Policies and Estimates
The preparation of financial statements
in accordance with U.S. generally accepted accounting principles, or GAAP, requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue
and expenses in the reporting period. We regularly evaluate our estimates and assumptions related to revenue recognition, rebates,
allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, stock-based compensation
expense, long-lived asset valuations, strategic investments, deferred income tax asset valuation allowances, uncertain tax positions,
tax contingencies, self-insurance, restructuring costs, litigation and other loss contingencies. We base our estimates and assumptions
on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue,
costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially
and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our
future results of operations will be affected. 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 2017 Annual Report. There have been no material changes
in any of our critical accounting policies and estimates during the nine months ended September 30, 2018.
Comparison of three months ended
September 30, 2018 and September 30, 2017.
Revenues
Revenue for the three months ended September
30, 2018, was $8,007,734, a $4,509,046 or 129% increase compared to $3,498,688 for the comparable three months in 2017. Our deployments
with existing customers continues to grow, new implementations are generating new revenues and new cloud based revenues were all
factors in our revenue growth.
|
|
Three months ended
September 30,
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Variance
|
|
Revenues
|
|
$
|
8,007,734
|
|
|
$
|
3,498,688
|
|
|
$
|
4,509,046
|
|
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.
|
|
Three months ended
September 30,
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Variance
|
|
Revenues
|
|
$
|
8,007,734
|
|
|
$
|
3,498,688
|
|
|
$
|
4,509,046
|
|
Cost of service (excluding depreciation and amortization)
|
|
|
2,128,683
|
|
|
|
791,334
|
|
|
|
1,337,349
|
|
Gross Profit (excluding depreciation and amortization)
|
|
$
|
5,879,051
|
|
|
$
|
2,707,354
|
|
|
$
|
3,171,697
|
|
Cost of service excluding
depreciation and amortization for the three-month period ended September 30, 2018 was $2,128,683, an increase of $1,337,349
or 169%, compared to $791,334 for the three-month period in 2017. This 169% increase in cost of service as compared to 129%
increase in revenue, is expected as implementations have lower margins.
Product Development
Product development costs consist primarily
of salaries and related expenses, including share-based expenses, of employees involved in the development of the Company’s
services, which are expensed as incurred. Costs such as database architecture, and Pareteum business operating system network and
intelligent network platform development and testing are included in this function.
Product development costs for the three-month
periods ended September 30, 2018 and 2017 were $765,723 and $497,078, respectively, an increase of $268,645 or 54%. The increase
is due to the overall expansion of our lines of business year over year.
Sales and Marketing
Sales and marketing expenses consist primarily
of salaries and related expenses, including share-based expenses, for our sales and marketing staff, including commissions, payments
to partners and marketing programs. Marketing programs consist of advertising, events, corporate communications and brand building.
Sales and marketing expenses for the three-month
periods ended September 30, 2018 and 2017 were $842,743 and $412,881 respectively, an increase of $429,862 or 104%. This increase
is a direct result of hiring new employees and allocating resources to growing our 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-month period ended September 30, 2018 and 2017 were $8,127,982 and $1,578,960, respectively, an increase of $6,549,022
or 415%. This increase is primarily the result of increased share-based compensation, travel, legal, accounting, and marketing
costs.
Restructuring and Acquisition Costs
Restructuring and acquisition costs for
the three months ended September 30, 2018 and 2017 were $1,994,511 and $253,014, an increase of $1,741,497 or 688%, which was mainly
due to expenses related to the acquisition of Artilium.
Share-based Compensation
Share-based compensation is comprised of:
|
·
|
the expensing of the options granted under the 2008 and 2017 Plan to staff and management;
|
|
·
|
the expensing of the shares issued under the 2008 and 2017 Plans to contractors, directors and executive officers in lieu of cash compensation; and
|
|
·
|
the expensing of restricted shares issued for consultancy services.
|
For the three-month period ended September
30, 2018 and 2017, we recognized share-based compensation expense of $5,638,012 and $385,424, respectively, an increase of $5,252,588
or 1,363%. This was an expected increase as it was an incentive related to the approval of the Artilium acquisition.
In the following table, we show the allocation
of share-based compensation according to functions in the Consolidated Statement of Comprehensive Loss:
|
|
Three months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cost of Service (excluding depreciation and amortization)
|
|
$
|
78,988
|
|
|
$
|
26,750
|
|
Product Development
|
|
|
128,508
|
|
|
|
20,434
|
|
Sales and Marketing
|
|
|
320,261
|
|
|
|
53,347
|
|
General and Administrative
|
|
|
5,110,255
|
|
|
|
284,893
|
|
Total
|
|
$
|
5,638,012
|
|
|
$
|
385,424
|
|
Depreciation and Amortization
Depreciation and amortization expenses
for the three-month period ended September 30, 2018 was $998,857, a decrease of $433,855 or 30%, compared to $1,432,712 for the
three-month period ended September 30, 2017. This was due to a decrease in depreciation expense due to certain assets having been
fully depreciated in a prior period.
Interest Income and Expense
Interest income for the three-month periods ended September 30, 2018 and 2017, was $49,972 and $41,964,
respectively, an increase of $8,008 or 19%. Interest income mainly consists of interest accrued for the promissory note by ValidSoft
held by the Company and interest charged to customers for extended payment terms.
Interest expense for the three-month periods
ended September 30, 2018 and 2017, was $111,311 and $421,392, respectively, a decrease of $310,081 or 74%. Interest expense decreased
mainly as the result of paying off all Senior Secured Debt during December of 2017.
Interest Expense Related to Debt
Discount and Conversion Feature
For the three months ended September 30,
2018 and 2017, interest expenses related to debt discount and conversion feature were $115,414 and $205,842, respectively a decrease
of $90,428 or 44%. This decrease is mainly the result of paying off all Senior Secured Debt during December of 2017.
Other Income, net
Other income for the three-month periods
ended September 30, 2018 and 2017 were $35,452 and $216,002, respectively, a decrease of $180,550 or 84%. This represents the unrealized
exchange rate gains and an adjustment to liabilities that are no longer deemed obligations.
Amortization of Deferred Financing
Costs
Amortization of Deferred Financing Costs
for the three-month periods ended September 30, 2018 and 2017 was $8,757 and $25,595, respectively, a decrease of $16,838 or 66%.
This decrease is mainly the result of paying off all Senior Secured Debt during December of 2017.
Provision for Income taxes
Income tax provision for the three-month
period ended September 30, 2018 was $19,583, compared to $147,640 for the same period in 2017. The tax provision was calculated
based upon an expected annual tax rate.
Net Loss
Net loss for the three-month period ended
September 30, 2018, was $7,020,406, an increase of $4,711,101 or 204%, compared to the loss of $2,309,305 for the same period in
2017. The increase in Net Loss was primarily due to an increase General and Administrative expenses of $6,549,022, and an increase
of Restructuring and Acquisition Charges of $1,741,497.
Other Comprehensive (Loss) / Income
We record foreign currency translation
gains and losses as other comprehensive income or loss, which amounted to a loss of ($21,580) and a gain of $2,139 for the three-month
periods ended September 30, 2018 and 2017, respectively. This change is primarily attributable to the translation effect resulting
from the fluctuations in the USD/Euro exchange rates.
Comparison of nine months ended September
30, 2018 and September 30, 2017.
Revenues
Revenue for the nine months ended September
30, 2018, was $18,123,484, a $8,590,677 or 90% increase compared to $9,532,807 for the comparable nine months in 2017. Our deployments
with existing customers continues to grow, new implementations are generating new revenues and new cloud based revenues were all
factors in our revenue growth.
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Variance
|
|
Revenues
|
|
$
|
18,123,484
|
|
|
$
|
9,532,807
|
|
|
$
|
8,590,677
|
|
Cost of Service
Cost of service excluding
depreciation and amortization 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.
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Variance
|
|
Revenues
|
|
$
|
18,123,484
|
|
|
$
|
9,532,807
|
|
|
$
|
8,590,677
|
|
Cost of service (excluding depreciation and amortization)
|
|
|
5,103,088
|
|
|
|
2,578,925
|
|
|
|
2,524,163
|
|
Gross Profit (excluding depreciation and amortization)
|
|
$
|
13,020,396
|
|
|
$
|
6,953,882
|
|
|
$
|
6,066,514
|
|
Cost of service excluding
depreciation and amortization for the nine-month period ended September 30, 2018 was $5,103,088, an increase of $2,524,163 or
98%, compared to $2,578,925 for the nine-month period in 2017. This 98% increase in cost of service as compared to our 90%
increase in revenue is expected as implementations have lower margins.
Product Development
Product development costs consist primarily
of salaries and related expenses, including share-based expenses, of employees involved in the development of the Company’s
services, which are expensed as incurred. Costs such as database architecture, and Pareteum business operating system network and
intelligent network platform development and testing are included in this function.
Product development costs for the nine-month
periods ended September 30, 2018 and 2017 were $2,246,499 and $1,055,285, respectively, an increase of $1,191,214 or 113%. The
increase is due to the overall expansion of our lines of business year over year.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and
related expenses, including share-based expenses, for our sales and marketing staff, including commissions, payments to partners
and marketing programs. Marketing programs consist of advertising, events, corporate communications and brand building. Sales and
marketing expenses for the nine-month periods ended September 30, 2018 and 2017 were $2,184,183 and $1,103,162 respectively, an
increase of $1,081,021 or 98%. This increase is a direct result of hiring new employees and allocating resources to growing our
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 nine-month period ended September 30, 2018 and 2017 were $12,638,904 and $5,435,187, respectively, an increase of $7,203,717
or 133%. This increase is primarily the result of increased share-based compensation, travel, legal, accounting and marketing costs.
Restructuring and Acquisition Costs
Restructuring and acquisition costs for
the nine months ended September 30, 2018 and 2017 were $2,073,704 and $841,120, respectively, an increase of $1,232,584 or 147%,
primarily as a result of charges related to the acquisition of Artilium (see subsequent event footnote.)
Share-based Compensation
Share-based compensation is comprised of:
|
·
|
the expensing of the options granted under the 2008 and 2017 Plan to staff and management;
|
|
·
|
the expensing of the shares issued under the 2008 and 2017 Plans to contractors, directors and executive officers in lieu of cash compensation and awards; and
|
|
·
|
the expensing of restricted shares issued for consultancy services.
|
For the nine-month period ended September
30, 2018 and 2017, we recognized share-based compensation expense of $7,409,592 and $1,508,535, respectively, an increase of $5,901,057
or 391%. This increase was related to options and common shares grants.
In the following table, we show the allocation
of share-based compensation according to functions in the Consolidated Statement of Comprehensive Loss:
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cost of service (excluding depreciation and amortization)
|
|
$
|
60,738
|
|
|
$
|
30,571
|
|
Product Development
|
|
|
171,279
|
|
|
|
37,577
|
|
Sales and Marketing
|
|
|
412,519
|
|
|
|
119,913
|
|
General and Administrative
|
|
|
6,739,151
|
|
|
|
1,320,474
|
|
Restructuring
|
|
|
25,905
|
|
|
|
-
|
|
Total
|
|
$
|
7,409,592
|
|
|
$
|
1,508,535
|
|
Depreciation and Amortization
Depreciation and amortization expenses
for the nine-month period ended September 30, 2018 was $2,958,466, a decrease of $190,722 or 6%, compared to $3,149,188 for the
same period in 2017. This was due to a decrease in depreciation expense due to certain assets having been fully depreciated in
a prior period.
Interest Income and Expense
Interest income for the nine-month periods
ended September 30, 2018 and 2017, was $135,837 and $136,000, respectively, a decrease of $163 or 0.1%. Interest income mainly
consists of interest accrued for the promissory note by ValidSoft held by the Company and interest charged to customers for extended
payment terms.
Interest expense for the nine-month periods
ended September 30, 2018 and 2017, was $274,778 and $1,344,576, respectively, a decrease of $1,069,798 or 80%. Interest expense
decreased mainly as the result of paying off all Senior Secured Debt during December of 2017.
Interest Expense Related to Debt
Discount and Conversion Feature
For the nine months ended September 30,
2018 and 2017, interest expenses related to debt discount accretion were $175,252 and $1,548,440, respectively a decrease of $1,373,188
or 89%. This decrease is mainly the result of paying off all Senior Secured Debt during December of 2017.
Changes in Derivative Liabilities
Changes in derivative liabilities for the
nine-month period ended September 30, 2018 was $1,283,914, a decrease of $636,967 or 33%, compared to a change of $1,920,881 for
the same period in 2017. During 2017 the change was the result of renegotiating and elimination of the derivative feature of certain
outstanding warrants and convertible notes, also during 2018 we renegotiated terms of the remaining outstanding derivative liabilities,
the company accounted for any effects of the amended terms through the profit and loss account for the changes in the fair value
of the occurring this year and the remainder of the fair market value of the amendment on previous year derivative liability balance
through equity.
Our derivative liabilities as of September
30, 2018 are $0, so no quarterly calculations will need to be made, in the past these fair market valuations for the conversion
features and warrant liabilities were determined by a third-party valuation expert using a Monte-Carlo Simulation model.
Other Income, net
Other income for the nine-month periods
ended September 30, 2018 and 2017 were $672,706 and $686,478, respectively, a decrease of $13,772 or 2%. This represents the unrealized
exchange rate gains and an adjustment to liabilities for no longer deemed obligations.
Amortization of Deferred Financing
Costs
Amortization of Deferred Financing Costs
for the nine-month periods ended September 30, 2018 and 2017 was $21,108 and $248,218, respectively, a decrease of $227,110 or
91%. This decrease is mainly the result of paying off all Senior Secured Debt during December of 2017.
Provision for Income taxes
Income tax provision for the nine-month
period ended September 30, 2018 was $38,007, compared to $81,144 for the same period in 2017. The tax provision was calculated
based upon an expected annual tax rate.
Net Loss
Net loss for the nine-month period ended
September 30, 2018, was $7,498,048, an increase of $2,552,803 or 52%, compared to the loss of $4,945,245 for the same period in
2017. The increase in Net Loss was primarily due to an increase General and Administrative expenses of $7,203,717, and an increase
of Restructuring and Acquisition Charges of $1,232,584.
Other Comprehensive Income (Loss)
We record foreign currency translation
gains and losses as other comprehensive income or loss, which amounted to a gain of $3,686 and a loss of ($8,512) for the nine-month
periods ended September 30, 2018 and 2017, respectively. This change is primarily attributable to the translation effect resulting
from the fluctuations in the USD/Euro exchange rates.
Liquidity and Capital Resources
As reflected in the accompanying consolidated
financial statements, the Company reported net loss of $7,498,048 for the period ended September 30, 2018 and had an accumulated
deficit of $307,041,257 as of September 30, 2018.
The cash balance of the Company at September 30, 2018 was $18,434,576.
Operating Activities
Net cash used in operating activities of
$3,823,929 for the nine-month period ended September 30, 2018 was impacted by an increase in accounts payable and customer deposits
of $798,573, a decrease in accrued expenses and other payables of $1,421,435, and an increase in accounts receivable of $5,077,689.
As a result of the above, cash used in
operating activities was $3,823,929 for the nine months ended September 30, 2018 compared to net cash used in operating activities
of $1,409,616 for the nine months ended September 30, 2017 and increased $2,414,313 or 171%. This increase was due to an increase
in non-cash expenses and accounts payable and offset by an increase in accounts receivable.
Investing Activities
Net cash used in investing activities for
the nine months ended September 30, 2018 was $2,189,415, an increase of $1,651,170, or 307% compared to $538,245 in the same period
in 2017. This change was mainly the result of software purchases of $1,214,940 and capitalized software development of $833,453
in 2018.
Financing Activities
Net cash provided by financing activities
for the nine months ended September 30, 2018 and 2017 was $11,089,560 and $2,046,597, respectively, an increase of $9,042,963 or
442%. This increase was due to exercises of warrants and options, proceeds from public offerings and the absence of principal repayments
on senior secured debt that was paid off in December of 2017.
Effect of Exchange Rates on Cash and
Cash Equivalents
Effect of exchange rates on cash and cash
equivalents for the nine-month period ended September 30, 2018 was a gain of 50,461, compared to a loss of ($195,643) for the same
period in 2017.
As a result of the above activities, for
nine months ended September 30, 2018, we had cash, cash equivalents and restricted cash of $18,864,352, a net increase in cash,
cash equivalents, and restricted cash of $5,126,677 since December 31, 2017.
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.