UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
001-35360
( Commission file No.)
PARETEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
95-4557538
(I.R.S. Employer Identification No.)
100 Park Avenue, New York City, NY 10017
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:
Common Stock, $0.00001 par value per share
(Title of Class)
NYSE MKT LLC
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨
No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨
No x
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 and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 CFR 229.405) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Accelerated filer ¨
Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ¨
No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2016, the last business day of the registrant’s most
recently completed second fiscal quarter, was approximately $29 million based on the closing sale price of the Company’s common stock on such date of U.S.
$4.44 per share, as reported by the NYSE MKT LLC.
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of March 23, 2017, there were
12,766,102 shares of common stock outstanding.
Pareteum Corporation
Form 10-K
For the fiscal year ended December 31, 2016
TABLE OF CONTENTS
Note on Forward-Looking Statements
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Description of Business.
Risk Factors.
Unresolved Staff Comments.
Description of Property.
Legal Proceedings.
Mine Safety Disclosure.
Market for Common Equity and Related Stockholder Matters.
Selected Financial Data.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Quantitative and Qualitative Disclosures about Market Risk.
Financial Statements.
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director Independence.
Principal Accountant Fees and Services.
Item 15.
Exhibits, Financial Statement Schedules.
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FORWARD LOOKING STATEMENTS
This Report, including the documents incorporated by reference in this Report, includes forward-looking statements. We have based these forward-looking
statements on our current expectations and projections about future events. Our actual results may differ materially from those discussed herein, or implied by,
these forward-looking statements. Forward-looking statements are generally identified by words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,”
“plan,” “project,” “should,” “will,” “would” and other similar expressions. In addition, any statements that refer to expectations or other characterizations of future
events or circumstances are forward-looking statements. The statements that contain these or similar words should be read carefully because these statements
discuss our future expectations, contain projections of our future results of operations or of our financial position, or state other “forward-looking” information.
Pareteum Corporation believes that it is important to communicate our future expectations to our stockholders. However, there may be events in the future that we
are not able to accurately predict or control. Forward-looking statements included in this Report or our other filings with the SEC include, but are not necessarily
limited to, those relating to:
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risks and uncertainties associated with the integration of the assets and operations we have acquired and may acquire in the future;
our possible inability to generate additional funds that will be necessary to expand our operations;
our potential lack of revenue growth;
our potential inability to maintain compliance with the listing standards of the NYSE MKT LLC (“the Exchange”)
our potential inability to continue as a going concern
our potential inability to add new products and services that will be necessary to generate increased sales;
our potential lack of cash flows;
our potential loss of key personnel;
the availability of qualified personnel;
international, national regional and local economic political changes;
general economic and market conditions;
increases in operating expenses associated with the growth of our operations;
the possibility of telecommunications rate changes and technological changes;
the potential for increased competition; and
other unanticipated factors.
The foregoing does not represent an exhaustive list of risks. Please see “Risk Factors” for additional risks which could adversely impact our business and financial
performance. Moreover, new risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all risks
on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements.
All forward-looking statements included in this Report are based on information available to us on the date of this Report. Except to the extent required by
applicable laws or rules, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future
events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their
entirety by the cautionary statements contained throughout this Report.
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AVAILABLE INFORMATION
We maintain a corporate website with the address www.pareteum.com . We intend to use our website as a regular means of disclosing material non-public
information and for complying with disclosure obligations under Regulation FD promulgated by the Securities and Exchange Commission (the “SEC”). Such
disclosures will be included on the website under the heading “News” and “Investors – Press Releases”. Accordingly, investors should monitor such portions of the
website, in addition to following the Company’s press releases, SEC filings and public conference calls and the webcasts.
We are not incorporating information contained in the website by reference into this Annual Report on Form 10-K. We make available, free of charge, through the
website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to these reports as soon as
reasonably practicable after electronically filing such material with, or furnishing such material to, the SEC.
Materials filed with the SEC can be read and copies made at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC
at 1 800 SEC 0330 for further information about the Public Reference Room. The SEC also maintains a website, www.sec.gov containing the reports, proxy and
other information filed with the SEC.
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Item 1. Business
Corporate Overview
a. Pareteum Vision
PART I
We believe that every person, and every thing, should be connected , and will be connected if our customers and users wish to be connected.
The way we connect every person, and every thing, is by being the company which can connect to all networks in the Cloud , on all layers of the software
development stack (OSI 7-layer model).
We achieve this by delivering our Mobility, Messaging and Security Cloud Service Platforms which enable:
Mobile Carriers, MNOs & MVNOs (mobile (virtual) network operators) to enter the Cloud-computing era, with a pay-as-you-grow business; to connect
more people, in more creative and value-driven ways.
Enterprises can connect their customers, their employees, their assets and derive more value from them.
IoT (Internet of Things) Devices can connect to each other, and give control, with informational value, to their owners.
b. Pareteum Solution
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:
Our solution has proven itself globally against much larger competitors and is installed in multiple companies in diverse countries around the world ranging from
small service providers to one of the world’s largest telecoms companies, Vodafone, based in Europe. We had more than 1,100,000 active subscribers on our
platforms as of December 31, 2016.
The market and our customers tell us that they need to find ways to reduce cost, they want to find ways to increase their revenues, and they want to scale and grow
their business, and all consider Cloud capabilities as a vital means to achieve these goals. As we’ve listened to our customers and understood the business goals
that they have, we believe Pareteum is well placed to help them achieve these goals, drive value for customers, and ultimately value for our own business.
We have designed a solution that solves these problems. Each of these three platforms - mobility, messaging and security - can be marketed and deployed
independently, or they can be delivered as a single, integrated Cloud Service Platform, as illustrated in the figure above.
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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 (Software as a Service) , PaaS (Platform as a Service) and/or IaaS (Infrastructure as a Service) 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.
Our integrated (or modular) Cloud Platform solution includes, more specifically, functionality such as service design and control, Intelligent Networking,
subscriber provisioning, messaging, switching, real-time dynamic rating and pre- or post-paid charging and billing, call center and customer care support,
reporting, self-care web portal environments, change management in active systems, SIM Management, (Data) Session Control Management, Voucher
Management, Mobile Marketing systems, (Mobile) Payment Systems, Real Time Credit Checking Systems, Interactive Voice Response Systems, Voicemail
Systems, Trouble Ticketing Systems, Device Management Systems, Mass Customer Migrations, life cycle management, database hardware and software, large
scale real-time processing, and integrating, provisioning, all the while managing and maintaining specific core network components.
c.
2016 Restructure
We made significant changes to the business in 2016 during a 3-phase restructuring, which saw headcount reduced from 253 at the end of 2015, to 62 at the start of
2017. In addition, end-2015/early-2016 saw significant changes to the Company’s management. In terms of product development, the Company also evolved its
managed-services technology offering, into a complementary scalable, rapidly deployable, Communications Cloud Services Platform.
d. Market Opportunity
Pareteum’s target communications markets consist of:
Retail mobile network operators (MNOs), or carriers, who own their own networks (such as existing customers Vodafone and ZAIN etc.).
Mobile Virtual Network Operators (MVNOs) who are marketing companies that own subscribers but don’t own their own networks.
Enterprises who are increasingly large businesses of any kind that understand that they can derive value and achieve success by taking control of and
harnessing communications (in the broadest sense) whether for employee or customer management, inventory management or other value-added services.
Over the Top application providers (OTT) such as Skype, WhatsApp, etc., who ride over the networks of the retail mobile carriers.
Internet of Things (IoT) markets, made up of wireless devices communicating wherever they are in the world.
Pareteum is a provider of mobile networking software and services to all of these markets. Pareteum’s Managed Service Platform (MSP) provides a platform for
SIM connectivity, Voice, SMS Messaging and Roaming solutions that MNOs and other large service providers can offer their MVNOs. The Global Cloud
Mobility Platform (GCMP) provides a complete turnkey (outsourced) solution for similar services to a wide array of service providers, enterprises and marketing
channels. Lastly, Pareteum has recently introduced its Exchange Platform and Service Bureau, which can be offered to thousands of smaller service providers,
application developers and Internet of Things solutions integrators.
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The MVNO market has grown in excess of 20% annually and with demand from application and IoT developers is expected to continue to grow 20% for the
foreseeable future. The MVNO market is estimated to be worth $89.25 billion by 2022, according to new research published by Global Market Insights, Inc .
HP Enterprise estimates that by 2020, some 30 billion IoT devices will be connected. This provides a substantial opportunity for businesses that are able to
address customer issues in this space. Just how integral the IoT will be is further reinforced by Gartner , who estimate that “By 2020 more than half of major new
business processes and systems will incorporate some element of the Internet of Things”.
According to the GSMA , data growth is driving revenues as operations and investments rise from $1.14 trillion in 2014 to $1.4 trillion by 2020. This reflects the
rapid scaling of the communication service provider industry with a total of 3.6 billion unique mobile subscribers at the end of 2014, with an additional one billion
subscribers predicted by 2020. Fueled by the growing range of new services and applications, data traffic is expected to see an almost ten-fold increase by 2019.
The figure below illustrates the three (3) combined addressable markets for the company:
Market share : The current MVNO market exceeds $40 billion. We estimate the MVNE market currently is 10% or $4 billion. At $12 million annualized revenue,
Pareteum’s market share is less than 1%. We believe our directly addressable market in the next 3 years exceeds $300 million as illustrated in the figure below:
Speed and nature of technological change : Cloud technologies and feature functionality demanded by MNOs, MVNOs, enterprises and developers are
continuously changing. Importantly, Pareteum offers MNOs the ability to meet the changing market needs more rapidly than in-house solutions which are typically
tied to vertical vendor solutions.
Timing of new products, product enhancements : Pareteum’s contract with Vodafone is one of constant feature development and upgrades. The company rolled
out its Exchange Platform & Service Bureau model in mere months. Future product enhancements in 2017 include:
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Ecommerce engine
WebRTC client and API
Session Border Controller
M2M IoT solutions
Mobile Payments
e. Existing Customers & Partners
Pareteum has two major mobile network/carrier customers, Vodafone and ZAIN, which together generate in excess of 88% of revenues. In addition, our Platforms
host mobile communication brands Lebara, SpeakUp and Lowi.es among others.
Pareteum also understands the importance of partnerships, and we are proud to have strong relationships with Cisco, Oracle, KPN, T-Mobile, Plusserver, Affirmed
Networks, Itconic, HP Enterprises, Sonus among others.
f.
Sales
Sales have historically been a highly technical function, but we are changing this. In the past there has been one dedicated sales person assigned to Zain and two
technical bid managers focused on Vodafone. Under new strategic sales leadership, Pareteum is deploying a sophisticated sales, marketing and account
management force around the world.
For sales and marketing purposes, four core territories have been established:
North America
EMEA
LATAM and Caribbean
APAC
Our current Global Sales Engineering resource will grow to manage individual Sales Engineers in each region. One Connectivity Specialist will focus on the
supply chain requirements, procurement of network for the Exchange Platform & Service Bureau as well as negotiate better rates and reduce operational expense
and technology cost. Prospective positions and some hires have been identified or engaged already to cover the above territories, which will focus on direct sales
and channel sales and will build teams below them.
With the recent addition of a new sales staff and a modern marketing approach and through the use of salesforce.com and various industry resources, conferences,
webinars and trade shows Pareteum has begun to touch significantly more qualified opportunities than before.
Sales Cycles : There are three (3) types of sales. The Managed Service Platform (MSP) offering is a software and solution sale and typically has a 6-month sales
cycle. The Global Cloud Mobility Platform (GCMP) solution is closer to a 3-month sales cycle. Our Exchange Platform & Service Bureau (EPSB) model, where
we are bringing carrier service providers together with our software or other partners, will have varying degrees between the first two scenarios but could also be
less than one month.
g. Growth Strategy: 2017 and beyond
Pareteum intends to grow through the continued recruitment of key sales executives and their deployment to major territories including North America, Latin
America, Europe, Middle East & Africa as well as the Asia-Pacific region.
There will be additional business rationalization such as additional closure of redundant foreign subsidiaries, and further consolidation of corporate and finance HQ
roles into the USA. Pareteum will also be expanding its product set and broadening the types of customers served in 2017.
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The first aspect of growth is to leverage its current customer relationships into new geographic markets and market segments. Pareteum also expects to respond to a
number large-scale Managed Service Platform (MVNE) RFPs in 2017. The second aspect of growth is to expand the Global Mobility Cloud to enable any type of
service provider and large enterprises to mobilize their customer or employee base. This market will require greater integration with traditional wireline and
communication services.
The third area of growth is the expansion of the exchange platform and service bureau enabling a wide array of specialized and Internet of Things connectivity
solutions across wired and wireless applications and services. This plug and play model will also require acquisition of assets and expertise as well as partnership
agreements already in place or currently being negotiated.
h. Competition
Pareteum is positioned as a cloud-based platform provider, delivering scalable, on-demand, SaaS and PaaS services, as well as managed services, integration, and
cloud communications infrastructure.
Pareteum has three (3) distinct types of competitors, including (i) large network infrastructure vendors, (ii) software solution providers and integrators and (iii)
small managed service SaaS/PaaS providers.
Competition in our multiple markets is based on price, breadth of offering and demonstrated performance. Both the recent restructuring and resilience of operations
for Vodafone in the face of that restructuring position the company well on all fronts. Effective direct sales and channel relationships are also extremely important,
and these are being significantly strengthened as major priorities in the Company’s growth plans.
We may need to accelerate the roll-out of our solutions to meet market demand. Telecommunications platforms and services will become more commoditized over
the next five to ten years.
The more we can offer a comprehensive one stop shop solution for providing cloud-based communications, the more sustainable our advantages will be against
multiple-point solutions and the additional integration and operational complexities they represent. As depth and breadth of solutions are important in addressing
the one-stop-shop needs of our customers, a whole range of services should be kept under one roof. Pareteum may need to further invest in such services in the
future, either with additional in-house development or through mergers and/or acquisitions.
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i. Employees
As of December 31, 2016, we employed 62 full time equivalent employees.
Each of our employees and independent contractors is bound by confidentiality and non-competition obligations. Our Spanish employees are represented by a work
council and subject to a certain type of collective bargaining agreement. We have not experienced any unilateral work stoppages and consider our relations with
our current employees to be good.
Having completed a major restructure in 2016, which saw headcount reduced from 253 on December 31, 2015, to 62 on December 31, 2016, which process
included voluntary and involuntary lay-offs, including the complete cessation of operations in Indonesia and China, the Company may face further labor-law
claims or similar severance or restructuring costs.
j.
Intellectual Property
Our intellectual property (“ IP ”) is protected by a combination of patent, trademark, copyright and trade secret laws in the United States and other jurisdictions.
We have two patents, granted in 2016 (in the UK and Hong Kong), for an important function of our mobile platform, concerning the migration of subscriber
populations from one network operator to another, without requiring a physical SIM card swap. As more and more network operators converge and merge, and as
other enterprises start to use and deploy communications services, this technical invention is likely to offer an important commercial advantage and provide a
competitive differentiation.
The majority of our IP subsists in our proprietary software, and Pareteum is the copyright holder of almost all key components in our software solutions. One
exception to this, is the ValidSoft technology suite. However, following our divestment of the ValidSoft business on September 30, 2016, we retained a worldwide
royalty-free perpetual license to use, sell and integrate ValidSoft’s security and voice biometrics platforms with our own communications platform.
Pareteum also owns a number of trademarks in the United States and elsewhere.
Although we take reasonable measures to safeguard our IP, through appropriate licenses and other contractual protections, unauthorized parties may attempt to
misappropriate our technology which could harm our business or damage our competitive position. Moreover, companies in our communications industries may
own significant portfolios of IP rights and could threaten litigation. We are currently subject to, and expect to face in the future, allegations that we have infringed
the intellectual property rights of third parties, including our competitors and non-practicing entities. At present, none of these allegations are material.
k. Regulation
We and our customers operate in a heavily regulated industry. As a multinational telecommunications company and provider of services to carriers and operators,
we are directly and indirectly subject to varying degrees of regulation in each of the jurisdictions in which we provide our services. Local laws and regulations, and
the interpretation of such laws and regulations, differ significantly among the jurisdictions in which we operate. Enforcement and interpretations of these laws and
regulations can be unpredictable and are often subject to the informal views of government officials. Certain European, foreign, federal, and state regulations and
local franchise requirements have been, are currently, and may in the future be, the subject of judicial proceedings, legislative hearings and administrative
proposals. Such proceedings may relate to, among other things, the rates we may charge for our local, network access and other services, the manner in which the
Company offers and bundle our services, the terms and conditions of interconnection, unbundled network elements and resale rates, and could change the manner
in which telecommunications companies operate. We cannot predict the outcome of these proceedings or the impact they will have on our business, our revenue
and our cash flow. Because global regulations change and evolve at a fast pace, it is possible that we may not have been, or may not be, compliant with each
applicable regulation or law at all times.
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l. Corporate History
Elephant Talk Communications, Inc. (“ ETCI ”) was originally formed in 2001 as a result of a merger between Staruni Corporation (USA, 1962) and Elephant
Talk Limited (Hong Kong, 1994). In January 2007, through our acquisition of Benoit Telecom (Switzerland), we established a foothold in the European
telecommunications market.
In March 2010, ETCI acquired the ValidSoft security and authentication business to complement its mobile telecommunications managed services solutions.
In September 2011, ETCI merged into Elephant Talk Communications Corporation (“ ETCC ”), a Delaware Corporation (the “Reincorporation”). The
Reincorporation was approved by the stockholders at the annual shareholder meeting on September 14, 2011. As a result of the Reincorporation, the Company
became a Delaware Corporation. ETCI ceased its corporate existence and ETCC became the surviving Corporation and continued to operate the business of the
Company as it existed prior to the Reincorporation.
In December 2011, we upgraded from our OTCBB listing to the NYSE MKT LLC (the “ Exchange ” or “ NYSE ”) and our stock began trading under the ticker
symbol “ETAK”.
In April 2013, the Company acquired most of the contractual assets of Telnicity LLC, a US-based MVNE/MVNO company headquartered in Oklahoma City,
Oklahoma, and formed Elephant Talk North America Corporation. The Telnicity acquisition sought to provide the Company with an in-market management team
with a view to leveraging existing relationships with certain major U.S. telecommunications companies.
On November 17, 2015, the Company announced the appointment of Robert H. Turner as Executive Chairman.
On September 30, 2016, Pareteum divested of the ValidSoft business, while retaining favorable perpetual, royalty-free, license rights to continue to exploit
ValidSoft’s technology.
Following approval at the 2016 annual shareholder meeting, on November 1, 2016, ETCC was renamed to Pareteum Corporation and on November 3, 2016,
started trading on the Exchange under ticker symbol “TEUM”.
On November 1, 2016, the Company also announced the appointment of a new Chief Executive Officer, Victor Bozzo, to work alongside Mr. Turner.
Item 1A. Risk Factors
An investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should carefully consider the risks and
uncertainties described below together with all of the other information included in this report. In addition to the risks and uncertainties described below, other
risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial
condition and results of operations. The value or market price of our common stock could decline due to any of these identified or other risks, and you could lose
all of your investment.
We are subject to significant restrictive debt covenants, which limit our operating flexibility.
The Amended and Restated Credit Agreement dated December 27, 2016 (further amended March 6, 2017) entered into by and between the Company and Atalaya
Administrative LLC, as the administrative agent and collateral agent, and the lenders party thereto contains covenants which impose significant restrictions on the
manner we and our subsidiaries operate, including (but not limited to) restrictions on the ability to:
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create certain liens;
incur debt and/or guarantees;
enter into transactions other than on arm’s-length basis;
pay dividends or make certain distributions or payments;
engage, in relation to the Company, in any business activity or own assets or incur liabilities not authorized by the agreement;
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sell certain kinds of assets;
impair any security interest on the assets serving as collateral for the notes issued under the agreement;
enter into any sale and leaseback transactions;
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· make certain investments or other types of restricted payments;
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substantially change the nature of the Company’s or the group’s business;
designate unrestricted subsidiaries; and
effect mergers, consolidations or sale of assets.
These covenants could limit our ability to finance our future operations and our ability to pursue acquisitions and other business activities.
The substantial and continuing losses, and significant operating expenses incurred in the past few years may cause us to be unable to pursue all of our
operational objectives if sufficient financing and/or additional cash from revenues is not realized. This raises doubt as to our ability to continue as a going
concern.
We have incurred net losses of $31,444,704 and $5,006,235 for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, and 2015,
we had an accumulated deficit of $287,080,234 and $255,635,531, respectively.
Although we have previously been able to attract financing as needed, such financing may not continue to be available at all, or if available, on reasonable terms as
required. Further, the terms of such financing may be dilutive to existing shareholders or otherwise on terms not favorable to us or existing shareholders. If we are
unable to secure additional financing, as circumstances require, or do not succeed in meeting our sales objectives, we may be required to change or significantly
reduce our operations or ultimately may not be able to continue our operations. As a result of our historical net losses and cash flow deficits, and net capital
deficiency, these conditions raise substantial doubt as to the Company’s ability to continue as a going concern.
The current economic climate, especially in Europe, may have an adverse effect in the markets in which we operate.
Much of our customers’ business is consumer driven, and to the extent there is a decline in consumer spending, our customers could experience a reduction in the
demand for their services and consequently affect the demand for our services and a decrease in our revenues, net income and an increase in bad debts arising from
non-payment of our trade receivables. The potential adverse effects of an economic downturn include:
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reduced demand for services, resulting in increased price competition or deferrals of purchases, with lower revenues not fully compensated through
reduced costs; risk of financial difficulties or failures among our suppliers;
increased demand for customer finance, difficulties in collection of accounts receivable and increased risk of counterparty default;
risk of impairment losses related to our intangible assets as a result of lower forecasted sales of certain products;
increased difficulties in forecasting sales and financial results as well as increased volatility in our reported results; and
end user demand could also be adversely affected by reduced consumer spending on technology, changed operator pricing, security breaches and trust
issues.
Uncertainties and risks associated with international markets could adversely impact our international operations.
We have significant international operations in Europe, and to a lesser extent in the US, Middle East and elsewhere. There can be no assurance that we will be able
to obtain the permits and operating licenses required for us to operate, obtain access to local transmission facilities on economically acceptable terms, or market
services in international markets. In addition, operating in international markets generally involves additional risks, including unexpected changes in regulatory
requirements, taxes, tariffs, customs, duties and other trade barriers, difficulties in staffing and managing foreign operations, problems in collecting accounts
receivable, political risks, fluctuations in currency exchange rates, restrictions associated with the repatriation of funds, technology export and import restrictions,
and seasonal reductions in business activity. Our ability to operate and grow our international operations successfully could be adversely impacted by these risks.
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We operate in a complex regulatory environment, and failure to comply with applicable laws and regulations could adversely affect our business.
Our operations are subject to a broad range of complex and evolving laws and regulations. Because of our coverage in many countries, we must perform our
services in compliance with the legal and regulatory requirements of multiple jurisdictions. Some of these laws and regulations may be difficult to ascertain or
interpret and may change from time to time. Violation of such laws and regulations could subject us to fines and penalties, damage our reputation, constitute a
breach of our client agreements, impair our ability to obtain and renew required licenses, and decrease our profitability or competitiveness. If any of these effects
were to occur, our operating results and financial condition could be adversely affected.
We may not be able to integrate new technologies and provide new services in a cost-efficient manner.
The telecommunications industry is subject to rapid and significant changes in technology, frequent new service introductions and evolving industry standards. We
cannot predict the effect of these changes on our competitive position, our profitability or the industry generally. Technological developments may reduce the
competitiveness of our networks and our software solutions and require additional capital expenditures or the procurement of additional products that could be
expensive and time consuming. In addition, new products and services arising out of technological developments may reduce the attractiveness of our services. If
we fail to adapt successfully to technological advances or fail to obtain access to new technologies, we could lose customers and be limited in our ability to attract
new customers and/or sell new services to our existing customers. In addition, delivery of new services in a cost-efficient manner depends upon many factors, and
we may not generate anticipated revenue from such services.
We may not be able to develop and successfully market our mobile telecommunications platform and services as planned.
Pareteum operates in an exceptionally competitive environment where there is continuous innovation and new development. We are required to be a top performer
in over a dozen highly specialized domains to effectively compete with our competitors. Ongoing investments are required to stay ahead of the competition. The
sales process for our platform and the deployment process may be complicated and very slow. We are highly dependent on convincing MNOs and MVNOs to
believe that outsourcing their requirements to us is the best way to go. We are exposed to business risks associated with turnkey projects and the scalability of our
service and support organization. Although our policy is to avoid or minimize risks, it cannot be ruled out that in certain cases events occur that may seriously
impact us and our performance.
Some of ValidSoft’s security solutions are dependent on mobile operators for network data access. Home-routing is sometimes preventing us from capitalizing on
our capability. It tends to be a slow process to enter into definitive contracts with mobile operators. In addition, it is difficult to obtain network data access which is
slowing our ability to timely address current market opportunities. The current market perception about safeguarding privacy remains challenging. Both the
regulatory regime and consumer awareness of privacy protection are developing very slowly.
Implementation and development of our software platform business depends on our ability to obtain adequate funding.
Our software platforms require ongoing funding to continue the current development and operational plans. Failure to obtain adequate financing will substantially
delay our development, slow down current operations, result in loss of customers and adversely impact our results of operations.
13
Disruptions in our networks and infrastructure may result in customer dissatisfaction, customer loss or both, which could materially and adversely affect our
reputation and business.
Our systems are an integral part of our customers’ business operations. It is critical for our customers, that our systems provide a continued and uninterrupted
performance. Customers may be dissatisfied by any system failure that interrupts our ability to provide services to them. Sustained or repeated system failures
would reduce the attractiveness of our services significantly and could result in decreased demand for our services.
We face the following risks to our networks, infrastructure and software applications:
·
·
·
our territory can have significant weather events which physically damage access lines;
power surges and outages, computer viruses or hacking, earthquakes, terrorism attacks, vandalism and software or hardware defects which are beyond our
control; and
unusual spikes in demand or capacity limitations in our or our suppliers’ networks.
Disruptions may cause interruptions in service or reduced capacity for customers, either of which could cause us to lose customers and/or incur expenses, and
thereby adversely affect our business, revenue and cash flow.
Integration of acquisitions ultimately may not provide the benefits originally anticipated by management and may distract the attention of our personnel from
the operation of our business.
We strive to broaden our solutions offerings as well as to increase the number of subscribers hosted on our platforms, volume of voice and data that we carry over
our existing global network in order to reduce transmission costs and other operating costs as a percentage of net revenue, improve margins, improve service
quality and enhance our ability to introduce new products and services. Strategic acquisitions in desired markets play a part of our growth strategy, and we may
pursue additional acquisitions in the future to further strengthen our strategic objectives. Acquisitions of businesses and customer lists involve operational risks,
including the possibility that an acquisition may not ultimately provide the benefits originally anticipated by management. Moreover, we may not be successful in
identifying attractive acquisition candidates, completing and financing additional acquisitions on favorable terms, or integrating the acquired business or assets into
our own. There may be difficulty in integrating technologies and solutions, in migrating customer bases and in integrating the service offerings, distribution
channels and networks gained through acquisitions with our own. Successful integration of operations and technologies requires the dedication of management and
other personnel, which may distract their attention from the day-to-day business, the development or acquisition of new technologies, and the pursuit of other
business acquisition opportunities. Therefore, successful integration may not occur in light of these factors.
Our revenue, earnings and profitability are affected by the length of our sales cycle, and a longer sales cycle could adversely affect our results of operations
and financial condition.
Our business is directly affected by the length of our sales cycle and strategic mobile partnership cycles with MNOs and other large enterprises. Our software
platforms, outsourced solutions and value added communication services, are relatively complex and their purchase may involve a significant commitment of
mostly human capital, with attendant delays frequently associated with the allocation of substantial human resources and procurement procedures within an
organization. The purchase of these types of products typically also requires coordination and agreement across many departments within a potential customer.
Delays associated with such timing factors could have a material adverse effect on our results of operations and financial condition. In periods of economic
slowdown in the communications industry, which may recur in the current economic climate, our typical sales cycle may lengthen, which means that the average
time between our initial contact with a prospective customer and the signing of a sales contract increases. The lengthening of our sales and strategic mobile
partnership cycle could reduce growth in our revenue in the future.
14
Because most of our business is conducted outside the US, fluctuations in foreign currency exchange rates versus the US Dollar could adversely affect our
(reported) results of operations.
Currently most of our net revenue, expenses and capital expenditures are derived and incurred from sales and operations outside the US, whereas the reporting
currency for our consolidated financial statements is the US Dollar (“USD”). The local currency of each country is the functional currency for each of our
respective entities operating in that country, where the Euro is the predominant currency. Considering the fact that most income and expenses are not subject to
relevant exchange rate differences, it is only at a reporting level that the translation needs to be made to the reporting unit of USD. In the future, we expect to
continue to derive a significant portion of our net revenue and incur a significant portion of our operating costs outside the US, and changes in exchange rates have
had and may continue to have a significant, and potentially distorting effect (either negative or positive) on the reported results of operations, not necessarily being
the result of operations in real terms. Our primary risk of loss regarding foreign currency exchange rate risk is caused by fluctuations in the following exchange
rates: USD/Euro.
We historically have not engaged in hedging transactions since we primarily operate in same currency countries, currently being the Euro (“EUR”). However, the
operations of affiliates and subsidiaries in non-US countries have been funded with investments and other advances denominated in foreign currencies and more
recently in USD. Historically, such investments and advances have been long-term in nature, and we have accounted for any adjustments resulting from currency
translation as a charge or credit to accumulate other comprehensive loss within the stockholders’ deficit section of our consolidated balance sheets. Although we
have not engaged in hedging so far, we continue to assess on a regular basis the possible need for hedging.
We are substantially smaller than our major competitors, whose marketing and pricing decisions, and relative size advantage, could adversely affect our ability
to attract and retain customers and are likely to continue to cause significant pricing pressures that could adversely affect our net revenues, results of
operations and financial condition.
Our services related to cloud-based communications software and information systems, outsourced solutions and value added communication services are subject
to competitive pressure, and we expect competition to continue to increase. We compete with telecom solution providers, independent software and service
providers and the in-house IT and network departments of communications companies as well as firms that provide IT services (including consulting, systems
integration and managed services), software vendors that sell products for particular aspects of a total information system, software vendors that specialize in
systems for particular communications services (such as Internet, land-line and mobile services, cable, satellite and service bureaus) and companies that offer
software systems in combination with the sale of network equipment. Also, in this more fragmented market, larger players exist with associated advantages
described earlier which we need to compete against.
We believe that our ability to compete depends on a number of factors, including:
·
·
·
·
·
·
the development by others of software products that are competitive with our products and services,
the price at which others offer competitive software and services,
the ability to make use of the networks of mobile network operators,
the technological changes of telecommunication operators affecting our ability to run services over their networks,
the ability of competitors to deliver projects at a level of quality that rivals our own,
the responsiveness of our competitors to customer needs, and
the ability of our competitors to hire, retain and motivate key personnel.
A number of our competitors have long operating histories, large customer bases, substantial financial, technical, sales, marketing and other resources, and strong
name recognition. Current and potential competitors have established, and may establish in the future, cooperative relationships among themselves or with third
parties.
Our positioning in the marketplace as a smaller provider places a significant strain on our resources, and if not managed effectively, could result in
operational inefficiencies and other difficulties.
Our positioning in the marketplace may place a significant strain on our management, operational and financial resources, and increase demand on our systems and
controls. To manage this position effectively, we must continue to implement and improve our operational and financial systems and controls, invest in
development & engineering, critical systems and network infrastructure to maintain or improve our service quality levels, purchase and utilize other systems and
solutions, and train and manage our employee base. As we proceed with our development, operational difficulties could arise from additional demand placed on
customer provisioning and support, billing and management information systems, product delivery and fulfillment, sales and marketing and administrative
resources.
15
For instance, we may encounter delays or cost overruns or suffer other adverse consequences in implementing new systems when required. In addition, our
operating and financial control systems and infrastructure could be inadequate to ensure timely and accurate financial reporting.
We could suffer adverse tax and other financial consequences if US or foreign taxing authorities do not agree with our interpretation of applicable tax laws.
Our corporate structure is based, in part, on assumptions about the various tax laws, including withholding tax, and other relevant laws of applicable non-US
jurisdictions. Foreign taxing authorities may not agree with our interpretations or reach different conclusions. Our interpretations are not binding on any taxing
authority and, if these foreign jurisdictions were to change or to modify the relevant laws, we could suffer adverse tax and other financial consequences or have the
anticipated benefits of our corporate structure materially impaired.
The current restructuring and reorganization could result in significant disruption of our business and our relationships with our employees, suppliers and
customers could be adversely affected.
In 2015 and particularly in 2016 we undertook significant restructuring and reorganization activities in order to improve operating efficiencies and reduce
operating costs, including changes in our executive team and Board of Directors, or Board. Such activities may require significant efforts, including the integration,
consolidation and rationalization of product development, sales and marketing efforts and general and administrative activities. These activities could result in the
disruption of our business including relationships with employees, suppliers and customers, all of which could adversely affect our operating results. There can be
no assurance that such activities would be successful or reduce operating costs.
We have recently experienced several changes in our management team and will need to re-align the organization and may need to recruit, hire and retain
additional executive talent which may cause disruption in our business .
We recently had significant changes in executive leadership. In November 2015, Mr. Steven van der Velden resigned as Chairman and Chief Executive Officer. In
connection with his resignation, Mr. Robert Hal Turner was appointed Executive Chairman, Mr. Gary Brandt was appointed as interim Chief Restructuring Officer
and Mr. Armin Hessler as Chief Operating Officer. In January 2016, Mr. Martin Zuurbier resigned as Chief Technology Officer and Co-President Mobile Platform
activities. In November 2016, Victor Bozzo was appointed Chief Executive Officer.
In addition to the foregoing management changes, we commenced in the fourth quarter of 2015 a substantial restructuring and rationalization of our operations.
These changes and the short time interval in which they have occurred have been disruptive to our employees and business and may add to the risk of control
failures, including a failure in the effective operation of our internal control over financial reporting or our disclosure controls and procedures. Additionally, it may
take time to hire new executives and for the new management team to become sufficiently familiar with our business and each other to effectively develop and
implement our business strategies. Accordingly, disruption to our organization as a result of executive management transition could have a material adverse effect
on our business, financial condition and results of operations.
Changes to company strategy, which can often occur with the appointment of new executives, can create uncertainty, may negatively impact our ability to execute
quickly and effectively, and may ultimately be unsuccessful. In addition, executive leadership transition periods are often difficult and tension can result from
changes in strategy and management style. Management transition inherently causes some loss of institutional knowledge, which can negatively affect strategy and
execution. Until we integrate new personnel, and unless they are able to succeed in their positions, we may be unable to successfully manage and grow our
business, and our results of operations and financial condition could suffer as a result. In addition, uncertainty regarding the timing or effectiveness of our
management transition process may also harm our reputation and adversely affect the trading price of our common stock.
16
We must attract and retain skilled personnel. If we are unable to hire and retain technical, technical sales and operational employees, our business could be
harmed.
Our ability to manage our reorganization and growth will be particularly dependent on our ability to develop and retain an effective sales force and qualified
technical and managerial personnel. We need software development specialists with in-depth knowledge of a blend of IT and telecommunications or with a blend
of security and telecom. We intend to hire additional necessary employees, including software engineers, communication engineers, project managers, sales
consultants, employees and operational employees, on a permanent basis. The competition for qualified technical sales, technical, and managerial personnel in the
communications and software industry is intense in the markets where we operate, and we may not be able to hire and retain sufficient qualified personnel. In
addition, we may not be able to maintain the quality of our operations, control our costs, maintain compliance with all applicable regulations, and expand our
internal management, technical, information and accounting systems in order to support our desired growth, which could have an adverse impact on our operations.
Volatility in the stock market and other factors could diminish our use, and the value, of our equity awards as incentives to employees, putting us at a competitive
disadvantage or forcing us to use more cash compensation.
If we are not able to use and protect our intellectual property domestically and internationally, it could have a material adverse effect on our business.
Our ability to compete depends, in part, on our ability to use intellectual property internationally. We rely on a combination of patents, copyright, trade secrets and
confidentiality, trademarks and licenses to protect our intellectual property. There is limited protection under patent law to protect the source codes we developed
or acquired on our platform. The copyright and know-how protection may not be sufficient. Our granted patents and pending patent applications may be
challenged. We are also subject to the risks of claims and litigation alleging infringement of the intellectual property rights of others. The telecommunications
industry is subject to frequent litigation regarding patent and other intellectual property rights. We rely upon certain technology, including hardware and software,
licensed from third parties. The technology licensed by us may not continue to provide competitive features and functionality. Licenses for technology currently
used by us or other technology that we may seek to license in the future may not be available to us on commercially reasonable terms or at all.
We are dependent on one significant customer for our businesses and the loss of this customer could have an adverse effect on our business, results of
operations and financial condition.
For the year ended December 31, 2016, we had one significant customer which accounted for 82% of our revenue. Although no other customer accounted for
greater than 10% of our net sales during this period, other customers may account for more than 10% of our net sales in future periods. The loss, or reduction in
services to, this significant customer or other discontinuation of their relationship with us for any reason, or if either of this significant customer reduces or
postpones purchases that we expect to receive, it could have an adverse impact on our business, results of operations and financial condition.
Our success depends on our continued investment in research and development, the level and effectiveness of which could reduce our profitability.
We intend to continue to make investments in research and development and product development in seeking to sustain and improve our competitive position and
meet our customers’ needs. These investments currently include streamlining our suite of software functionalities, including modularization and improving
scalability of our integrated solutions. To maintain our competitive position, we may need to increase our research and development investment, which could
reduce our profitability and cash flows. In addition, we cannot assure you that we will achieve a return on these investments, nor can we assure you that these
investments will improve our competitive position or meet our customers’ needs.
17
Product defects or software errors could adversely affect our business.
Design defects or software errors may cause delays in product introductions and project implementations, damage customer satisfaction and may have a material
adverse effect on our business, results of operations and financial condition. Our software systems are highly complex and may, from time to time, contain design
defects or software errors that may be difficult to detect and correct. Because our products are generally used by our customers to perform critical business
functions, design defects, software errors, misuse of our products, incorrect data from external sources or other potential problems within or outside of our control
may arise during implementation or from the use of our products, and may result in financial or other damages to our customers, for which we may be held
responsible. Although we have license agreements with our customers that contain provisions designed to limit our exposure to potential claims and liabilities
arising from customer problems, these provisions may not effectively protect us against such claims in all cases and in all jurisdictions. Our insurance coverage is
not sufficient to protect against all possible liability for defects or software errors. In addition, as a result of business and other considerations, we may undertake to
compensate our customers for damages caused to them arising from the use of our products, even if our liability is limited by a license or other agreement. Claims
and liabilities arising from customer problems could also damage our reputation, adversely affecting our business, results of operations and the financial condition.
Risks Related to Our Industry
Changes in the regulation of the telecommunications industry could adversely affect our business, revenue or cash flow.
We operate in a heavily regulated industry. As a provider of communications technology, we are directly and indirectly subject to varying degrees of regulation in
each of the jurisdictions in which we provide our services. Local laws and regulations, and the interpretation of such laws and regulations, differ significantly
among the jurisdictions in which we operate. Enforcement and interpretations of these laws and regulations can be unpredictable and are often subject to the
informal views of government officials. Certain European, foreign, federal, and state regulations and local franchise requirements have been, are currently, and
may in the future be, the subject of judicial proceedings, legislative hearings and administrative proposals. Such proceedings may relate to, among other things, the
rates we may charge for our local, network access and other services, the manner in which we offer and bundle our services, the terms and conditions of
interconnection, unbundled network elements and resale rates, and could change the manner in which telecommunications companies operate. We cannot predict
the outcome of these proceedings or the impact they will have on our business, revenue and cash flow.
There can be no assurance that future regulatory changes will not have a material adverse effect on us, or that regulators or third parties will not raise material
issues with regard to our compliance or noncompliance with applicable regulations, any of which could have a material adverse effect upon us. Potential future
regulatory, judicial, legislative, and government policy changes in jurisdictions where we operate could have a material adverse effect on us. Domestic or
international regulators or third parties may raise material issues with regard to our compliance or noncompliance with applicable regulations, and therefore may
have a material adverse impact on our competitive position, growth and financial performance.
The market for communications services is highly competitive and fragmented, and we expect competition to continue to increase.
We compete with independent software and service providers and with the in-house IT and network departments of communications companies. Our main
competitors include firms that provide communications services and IT services (including consulting, systems integration and managed services), software
vendors that sell products for particular aspects of a total information system, software vendors that specialize in systems for particular communications services
(such as Internet, wire line and wireless services, cable, satellite and service bureaus) and network equipment providers that offer software systems in combination
with the sale of network equipment. We also compete with companies that provide digital commerce software and solutions.
18
The telecommunications industry is rapidly changing, and if we are not able to adjust our strategy and resources effectively in the future to meet changing
market conditions, we may not be able to compete effectively.
The telecommunications industry is changing rapidly due to deregulation, privatization, consolidation, technological improvements, availability of alternative
services such as mobile, broadband, DSL, Internet, VOIP, and wireless DSL through use of the fixed wireless spectrum, and the globalization of the world’s
economies. In addition, alternative services to traditional land-line services, such as mobile, broadband, Internet and VOIP services, have shown a competitive
threat to our legacy land-line traffic business. If we do not continue to invest and exploit our contemplated plan of development of our communications information
systems, outsourced solutions and value added communication services to meet changing market conditions, or if we do not have adequate resources, we may not
be able to compete effectively in providing technology solutions to our customers. The telecommunications industry is marked by the introduction of new product
and service offerings and technological improvements. Achieving successful financial results will depend on our ability to anticipate, assess and adapt to rapid
technological changes, and offer, on a timely and cost-effective basis, services including the bundling of multiple services into our technology platforms that meet
evolving industry standards. If we do not anticipate, assess or adapt to such technological changes at a competitive price, maintain competitive services or obtain
new technologies on a timely basis or on satisfactory terms, our financial results may be materially and adversely affected.
If we are not able to operate a cost-effective network, we may not be able to grow our business successfully.
Our long-term success depends on our ability to design, implement, operate, manage and maintain a reliable and cost-effective network. In addition, we rely on
third parties to enable us to expand and manage our global network and to provide local, broadband Internet and mobile services.
Risks Related to Our Capital Stock
Our stock price has in the past not met, and may in the future not meet, the minimum bid price for continued listing on the NYSE MKT. Our ability to publicly
or privately sell equity securities and the liquidity of our common stock could be adversely affected if we are delisted from the NYSE MKT.
We received a deficiency letter from the NYSE MKT on December 6, 2016, indicating that our securities had been selling for a low price per share for a substantial
period of time and, pursuant to Section 1003(f)(v) of the NYSE MKT Company Guide (the “Company Guide”), our continued listing on the NYSE MKT was
predicated on our effecting a reverse split or otherwise demonstrating sustained price improvement. This notice was in addition to a prior notice we received from
NYSE MKT on May 26, 2016, as previously disclosed on a Current Report on Form 8-K we filed on June 2, 2016. The NYSE MKT indicated that we had an
additional six months, or until June 6, 2017, to gain compliance with Section 1003(f)(v) of the Company Guide.
On February 27, 2017, we completed a 1-for-25 reverse split of our issued and outstanding common stock. Although we believe we have regained compliance with
Section 1003(f)(v) of the Company Guide, there can be no assurance that our common stock will continue to satisfy this rule. If we were to fail to comply with the
Section 1003(f)(v) of the Company Guide again in the future and became subject to delisting, such delisting from NYSE MKT would adversely affect our ability to
raise additional financing through the public or private sale of equity securities, would significantly affect the ability of investors to trade our securities and would
negatively affect the value and liquidity of our common stock. Delisting also could have other negative results, including the potential loss of confidence by
employees, the loss of institutional investor interest and fewer business development opportunities.
We could issue additional common stock, which might dilute the book value of our capital stock.
Our Board of Directors has authority, without action or vote of our stockholders, to issue all or a part of our authorized but unissued shares of common stock. Any
such stock issuance could be made at a price that reflects a discount or a premium to the then-current trading price of our common stock. In addition, in order to
raise future capital, we may need to issue securities that are convertible into or exchangeable for a significant amount of our common stock. These issuances, if
any, would dilute your percentage ownership interest in the company, thereby having the effect of reducing your influence on matters on which stockholders vote.
You may incur additional dilution if holders of stock options, whether currently outstanding or subsequently granted, exercise their options, or if warrant holders
exercise their warrants to purchase shares of our common stock. As a result, any such issuances or exercises would dilute your interest in the company and the per
share book value of the common stock that you owned, either of which could negatively affect the trading price of our common stock and the value of your
investment.
19
As a “thinly-traded” stock, large sales can place downward pressure on our stock price.
Our stock experiences periods when it could be considered “thinly traded”. Financing transactions resulting in a large number of newly issued shares that become
readily tradable, or other events that cause current stockholders to sell shares, could place further downward pressure on the trading price of our stock. In addition,
the lack of a robust resale market may require a stockholder who desires to sell a large number of shares to sell the shares in increments over time to mitigate any
adverse impact of the sales on the market price of our stock.
Shares eligible for future sale may adversely affect the market for our common stock.
As of March 23, 2017, there are 1,549,931 options and 4,292,403 warrants to purchase shares of our common stock outstanding. All of the shares issuable from
exercise have been registered and are freely traded. Options are exercisable at exercise prices between $1.32 and $23.25, the warrants are exercisable at exercise
prices between $1.875 and $23.25. If and when these securities are exercised into shares of our common stock, the number of our shares of common stock
outstanding will increase. Such increase in our outstanding shares, and any sales of such shares, could have a material adverse effect on the market for our common
stock and the market price of our common stock.
In addition, from time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage
transactions in the open market pursuant to Rule 144, promulgated under the Securities Act of 1933 (the “Securities Act”), subject to certain limitations. In general,
pursuant to Rule 144, after satisfying a six month holding period: (i) affiliated stockholders (or stockholders whose shares are aggregated) may, under certain
circumstances, sell within any three month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock
or the average weekly trading volume of the class during the four calendar weeks prior to such sale and (ii) non-affiliated stockholders may sell without such
limitations, provided that we are current in our public reporting obligations. Rule 144 also permits the sale of securities by non-affiliates that have satisfied a one
year holding period without any limitation or restriction. Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus may
have a material adverse effect on the market price of our securities.
Because certain principal stockholders own a large percentage of our voting stock, other stockholders’ voting power may be limited.
As of March 27, 2017, our three large shareholders: Corbin Mezzanine Fund I, L.P., Saffelberg Investments N.V., and Mr. Bernard Moncarey owned or controlled
approximately 27.3% of our outstanding common stock. If those stockholders act together, they will have the ability to have a substantial influence on matters
submitted to our stockholders for approval, including the election and removal of directors and the approval of any merger, consolidation or sale of all or
substantially all of our assets. As a result, our other stockholders may have little or no influence over matters submitted for shareholder approval. In addition, the
ownership of such stockholders could preclude any unsolicited acquisition of us, and consequently, adversely affect the price of our common stock. These
stockholders may make decisions that are adverse to your interests.
We have no dividend history and have no intention to pay dividends in the foreseeable future.
We have never paid dividends on or in connection with our common stock and do not intend to pay any dividends to common stockholders for the foreseeable
future.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We do not own any properties, but lease office space in the various countries for our shared service centers and lease data center locations for housing our
equipment, applications and network interconnections to our customers and telecommunication network providers.
20
Our office in The Netherlands is located at Wattstraat 52, 2171 TR, Sassenheim, wherefore the contract is automatically renewed every month. The quarterly fee
for this contract is $4,530. In Spain we currently rent office space at Paratge Bujonis, 17220 Sant Feliu de Guixols, (Girona) Spain, at a monthly rent of $2,804.
This contract is valid till April 2017. In addition, the Company rents office space at Av. Dr. Severo Ochoa 36, 28100 Alcobendas, (Madrid) Spain for $1,618 per
month, valid till February 2018. The Company rents office space in Lehmedeh, Bahrain for $1,008 per month. The contract is valid till December 2017.
We also rent space for our telecom switches, servers and IT platforms at data centers (“co-locations”) at an aggregate monthly rent of $17,480 The various co-
location spaces include: Amsterdam, Madrid, Barcelona, and other locations where our telecommunications equipment is located.
We believe the facilities currently under rent are adequate for our present activities and those additional facilities are available on competitive market terms to
provide for such future expansion of our operations as may be warranted.
Item 3. Legal Proceedings
telSPACE -vs- Elephant Talk et al., AAA Case No. 01-16-0003-8242 .
Claimant commenced this AAA arbitration on or about September 7, 2016 by the filing of a statement of claim. Claimant asserted claims arising out of Software
Licensing Agreements (“Licensing Agreements”) entered into by Claimant and mCash Holdings LLC (together, “Licensors”), on the one hand, and Telnicity LLC,
on the other, which Telnicity subsequently assigned to the Company. Pursuant to the Licensing Agreements, the Company obtained the license to use certain
intellectual property in exchange for monthly payments to the Licensors. Claimant alleged that the Company failed to make monthly payments from on or about
November 2015, causing the Licensors to terminate the Licensing Agreements, and continued using Licensors’ intellectual property after such termination. Based
on these allegations, Claimant asserted claims for breach of contract, misappropriation of trade secret, and copyright infringement. Claimant seeks unspecified
damages, specific performance, prejudgment interest, attorneys’ fees, and costs.
On October 31, 2016, the Company filed a statement of answer denying Claimant’s claims. On January 5, 2017, the arbitration panel scheduled the hearing for
April 13, 2017. The Parties have conducted limited discovery, which concluded on February 28, 2017. On March 10, 2017, Claimant requested leave to move for
a default judgment against the Company for failing to advance the AAA administrative fees, and for sanctions based on alleged spoliation of evidence. On March
15, 2017, the Arbitration Chair denied Claimant’s request for leave to move for default, and granted Claimant’s request for leave to move for sanctions. The
Arbitration will proceed in Seattle, WA, on April 13, 2017.
21
Other.
We are 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.
Item 4. Mine Safety Disclosures
Not applicable.
Part II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Since December 5, 2011, our common stock was listed for quotation on the Exchange under the symbol “ETAK.” As of November 1, 2016, our common stock has
begun trading under the symbol “TEUM” on the Exchange. The following table sets forth the high and low closing prices per share for each quarterly period from
March 31, 2015 through December 31, 2016 as quoted on the Exchange and published by www.nasdaq.com . These quotations reflect prices between dealers and
do not include retail mark-ups, mark-downs or commissions and may not reasonably represent actual transactions.
Quarter Ended
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
December 31, 2015
September 30, 2015
June 30, 2015
March 31, 2015
Common Stock
High
Low
$
$
$
$
$
$
$
$
5.2475 $
4.7500 $
5.7475 $
6.9975 $
12.2500 $
15.7500 $
12.0000 $
21.0000 $
2.4500
3.0000
3.7625
4.7750
5.7500
6.8750
8.5000
9.2500
As of March 29, 2017, we had approximately 4,137 record holders of our common stock.
Dividends
We have not declared any cash dividends since inception and do not anticipate paying any dividends in the foreseeable future. The payment of dividends is within
the discretion of our Board of Directors and will depend on our earnings, capital requirements, financial condition, and other relevant factors. There are no
restrictions that currently limit our ability to pay dividends on our common stock other than those generally imposed by applicable state law.
22
Securities Authorized for Issuance under Equity Compensation Plans
EQUITY COMPENSATION PLAN INFORMATION
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
2006 Plan (1): 0
2008 Plan (2):
1,040,211
-
1,040,211
Number of securities
remaining available for
future issuance under
the equity compensation
plans (excluding
securities reflected in
column (a))
(c)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
2006 Plan: n/a
2008 Plan: $13.25
-
-
2006 Plan: 0
2008 Plan: 586,636
-
586,636
(1) S-8 filed July 21, 2006.
(2) S-8 filed July 11, 2008. The stockholders approved the increase of the total number of shares of authorized to be issued under the 2008 Plan from 200,000 to
920,000, during 2013 the stockholders approved an increase from 920,000 to 1,840,000 and during 2014 an increase of the total number of shares available
under the 2008 Plan from 1,840,000 to 2,240,000.
Item 6. Selected Financial Data
We are a “smaller reporting company” as defined by Regulation S-K and as such, are not required to provide the information contained in this item pursuant to
Regulation S-K.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated
financial statements and related notes that appear elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial statements, the
following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. See “Risk Factors” in Part I, Item 1A of this Form 10-K.
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:
Our solution has proven itself globally against much larger competitors and is installed in multiple companies in diverse countries around the world ranging from
small service providers to one of the world’s largest telecoms companies, Vodafone, based in Europe. We had more than 1,100,000 active subscribers on our
platforms as of December 31, 2016.
The market and our customers tell us that they need to find ways to reduce cost, they want to find ways to increase their revenues, and they want to scale and grow
their business, and all consider Cloud capabilities as a vital means to achieve these goals. As we’ve listened to our customers and understood the business goals
that they have, we believe Pareteum is well placed to help them achieve these goals, drive value for customers, and ultimately value for our own business.
23
We have designed a solution that solves these problems. Each of these three platforms - mobility, messaging and security - can be marketed and deployed
independently, or they can be delivered as a single, integrated Cloud Service Platform, as illustrated in the figure above.
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.
Our integrated (or modular) Cloud Platform solution includes, more specifically, functionality such as service design and control, Intelligent Networking,
subscriber provisioning, messaging, switching, real-time dynamic rating and pre- or post-paid charging and billing, call center and customer care support,
reporting, self-care web portal environments, change management in active systems, SIM Management, (Data) Session Control Management, Voucher
Management, Mobile Marketing systems, (Mobile) Payment Systems, Real Time Credit Checking Systems, Interactive Voice Response Systems, Voicemail
Systems, Trouble Ticketing Systems, Device Management Systems, Mass Customer Migrations, life cycle management, database hardware and software, large
scale real-time processing, and integrating, provisioning, all the while managing and maintaining specific core network components.
Company Milestone Overview
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 document.
Operational Highlights:
Elephant Talk Communications Corp. was renamed Pareteum Corporation, effective November 1, 2016;
·
· We trade on the NYSE MKT under the ticker symbol: TEUM;
·
·
Pareteum derives from the words Pareto (referring to the Pareto Principle) and “team”;
Pareteum named its first CEO: Vic Bozzo, who brings 20+ years of experience in the communication arena and very successful sales executive roles over
the last 20 years;
The Company sold its subsidiary, ValidSoft, for $3 million, ($2 million cash and $1 million note), and eliminated negative EBITDA impact of over $2
million annualized;
·
· Decreased headcount or full time equivalents (“FTEs”) from 253 FTEs on December 31, 2015 to 62 FTEs on December 31, 2016;
·
·
·
Closed business units no longer core to operations and reduced suppliers, vendors, and services costs;
Raised $6 million ($3.5 million PIPE (March 2016) and $2.5 million from Preferred Share issuances in equity capital;
Borrowed additional $1.2 million (August 2016) and then subsequently paid $2 million to senior lender Atalaya, following the sale of ValidSoft
(December 31, 2016);
· NYSE Listing Compliance Plan accepted by the Exchange subject to monthly, then quarterly, reviews to ensure that the plan is on track;
·
·
Registration Statements: S-3 filed;
PIPE Unit Holder Conversions have begun and further conversions are underway, thereby boosting shareholder equity on the balance sheet.
24
Results of Operations
Although the majority of our cost base is carried out in Euros, we report our financial statements in U.S. dollars (“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.
The following table shows the USD equivalent of the major currencies for the years ended December 31, 2016 and 2015:
Euro
British Pound
Comparison of Years Ended December 31, 2016 and 2015
Revenue
USD
equivalent
2016
1.05356
1.23016
2015
1.09064
1.48017
Revenue for the year ended December 31, 2016 was $12,855,811, a decrease of $18,159,642 or 59%, compared to $31,015,453 for the year ended December 31,
2015. This decrease was mainly the result of the accelerated recognition of deferred revenue caused by the termination of a contract with customer Iusacell in June
2015 of $11,571,458, decreases in the Company’s other mobile and security business revenue of $6,822,886 offset by a positive EUR vs. USD currency impact of
$195,272.
In 2016, total billings were $11,772,475 of which $11,517,711 was recognized as revenue with the remainder of $254,764 deferred over the remaining contract
period in accordance with ASC 605-25. In addition, $1,338,100 was released from the balance sheet line item Net billings in excess of revenues to revenue Total
revenue for 2016 was therefore 12,855,811.
In 2015, the total billings were $21,262,228 and $19,443,995 was recognized in revenue with the remainder deferred over the remaining contract period in
accordance with ASC 605-25.
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.
Cost of service for the twelve-month period ended December 31, 2016 was $3,658,667, a decrease of $ $2,267,624 or 38%, compared to $5,926,291 for the twelve-
month period ended December 31, 2015. The negative impact of the EUR versus USD exchange rate in 2016 was $102,963.
The decrease in costs of $2,267,624 was related to a decrease in cost of mobile bundled service business and network of $1,236,915, decrease in cost of service
related management & personnel expenses of $986,771 and a $43,938 reduction of non-cash related expenses.
25
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 BOSS &IN platform development and testing are included
in this function.
Costs incurred during the application development stage of internal-use software projects, such as those used in the Company’s operations, are capitalized in
accordance with the accounting guidance for costs of computer software developed for internal use. Capitalized costs are amortized on a straight-line basis. When
assigning useful lives to internal-use software, the Company considers the effects of obsolescence, competition, technology, and other economic factors. During
the twelve-month period ended December 31, 2016 and 2015, the Company capitalized $990,076 and $4,142,089, respectively. As a result of the ongoing
restructuring measures, that also impacted the development department, the Company decided to suspend project capitalization during the third and fourth quarter
of 2016.
Product development expenses for the twelve months ended December 31, 2016 and 2015 were $3,543,590 and $4,543,492, a decrease of $999,902 or 22%.
The net effect of the cost reductions in headcount of $4,101,426 along with the reduction in Non-cash compensation expense of $464,641 was offset by the
requirement to expense costs that had previously been capitalized but whose projects were suspended or eliminated. That charge was $3,566,165. A lower EUR vs.
USD exchange rate in 2016 negatively impacted the result by $49,132.
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 twelve months ended December 31, 2016 and 2015 were $1,340,959 and $2,633,958, respectively, a decrease of $1,292,999
or 49%. Included is the negative impact of the higher EUR versus USD exchange rate in 2015 of $74,210. The decrease included $568,983 attributable to
decreased staffing, $483,880 attributable to non-cash related compensation expenses and $240,136 resulting from reduced third party PR and general marketing
related expenses.
General and Administrative
General and administrative expenses are our largest cost and consist primarily of salaries and related 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 twelve months ended December 31, 2016 and 2015 were $11,708,151 and $11,649,914, respectively, an increase of
$58,237 being less than 1%. The negative impact of the EUR versus USD exchange rate in 2016 was $405,230.
General and administrative expenses increased by $58,237 as a result of increased stock based compensation of $1,328,180, General and Administrative related
Management & Personnel expenses decreased by $130,071. Office rent, office supplies, travel and car expenses, local entity expenses, automation and
communication, audit and accountancy, quality assurance, listing costs and other expenses decreased in total by $1,409,001. Corporate & local legal advice,
investor relations and regulatory expenses increased in total by $525,883. Prior year adjustments, bad debt allowance, exchange rate expenses and other profit and
losses decreased in total by $256,754.
Restructuring charges
Restructuring charges for the twelve months ended December 31, 2016 and 2015 were $1,638,049 and $1,254,598, an increase of $383,451 or 31%. The
substantial three phase restructuring plan (the “Plan”) was completed in the third quarter 2016. The Plan which commenced in the fourth quarter of 2015 was
designed to align actual expenses and investments with current revenues as well as introduce new executive management.
26
Share-based compensation
Share-based compensation is comprised of:
·
·
·
the expensing of the options granted under the 2008 Plan to staff and management;
the expensing of the shares issued under the 2006 and 2008 Plans to the directors and executive officers in lieu of cash compensation;
the expensing of restricted shares issued for consultancy services.
For the years ended December 31, 2016 and 2015, we recognized share-based compensation expense of $3,897,437 and $3,481,908, respectively, an increase of
$415,529 or 12%. In 2016 the Company granted various non-cash awards and incentives in order to make sure that key players and staff kept focused and
motivated to make the reorganization a success, this resulted in a substantial higher share-based compensation for the full year 2016. Contrary compared to 2016,
in 2015 certain executives and managers of the Company elected to participate in a stock in lieu of cash program in order to preserve cash for the Company, which
was the main reason for the increased share based expensing in previous year.
In the following table we show the allocation of share-based compensation according to functions in the Consolidated Statement of Comprehensive Loss:
Cost of service
Product Development
Sales and Marketing
General and Administrative
Total
Depreciation and Amortization
2016
2015
76,113 $
183,072
157,428
3,480,824
3,897,437 $
120,051
647,713
641,308
2,072,836
3,481,908
$
$
Depreciation and amortization expenses for the year ended December 31, 2016 was $4,246,787, a decrease of $2,377,198 or 36%, compared to $6,623,985 for the
same period in 2015. Depreciation and amortization expenses adjusted for exchange rate effect decreased by $2,229,863. This decrease is primarily the result of the
impairment for assets held and used and the termination of the depreciation and amortization of the Assets Held for Sale.
Impairment for assets held and used
In the Company’s review of the carrying amounts of its assets it was determined that following the impact of the recent restructuring on the current project list,
$367,268 of certain assets classified under Construction in Progress and Intangible assets needed to be impaired. As the result of the termination of the Verizon
contract the Telnicity LLC intangible assets that were acquired in January 2013 are impaired for a total amount of $139,069. In September 2016, we ceased our
Bandung, Indonesia operations. The closing of the local entity resulted in an impairment loss of $344,648. The total impairment charge, recorded in 2016, is
$850,985.
Impairment of goodwill
After the divestment of ValidSoft and renewed strategy the Company decided to impair the carrying value of goodwill related to ValidSoft. Following the
restructuring and rationalization that commenced in the fourth quarter 2015 the Morodo and Telnicity related projects were cancelled and the related headcount
phased out. As a result the Company decided to fully impair the carrying value of goodwill related to Morodo and Telnicity. Total impact of the impairment of
goodwill was $3,228,930.
Loss on sale of assets
The sale of ValidSoft at the end of the third quarter for the price of $3.0 million was completed and the Company received $2.0 million in cash and a $1.0 million
promissory note. The $2.0 million in cash was used to pay down part of the senior secured loan. The divestment of ValidSoft resulted in a net loss of $ 1,542,374.
In connection with the sale, the Company wrote off $4,577,908 of assets held for sale as of June 30, 2016.
27
Interest Income and Expense
Interest income for the twelve-month periods ended December 31, 2016 and 2015 was $112,169 and $106,028, respectively. Interest income consists of interest
received on bank balances and interest charged to customers for extended payment terms.
Interest expense for the twelve month periods ended December 31, 2016 and 2015, was $1,228,201 and $1,488,203, respectively, a decrease of $260,002 or 17%.
The lower levels of interest expense were the result of repaying the high interest bearing credit facility and substituting the need for liquidity with the lower interest
bearing 9% convertible notes.
Interest Expense Related to Debt Discount and Conversion Feature
For the twelve-month periods ended December 31, 2016 and 2015, interest expenses related to debt discount and conversion feature were $6,041,607 and
$682,389, respectively, an increase of $5,359,218 or 785%.
The increase in the twelve-month periods ended December 31, 2016 compared to 2015 was mainly due to the amendment of the third party credit agreement with
higher repayment conditions and additional warrants resulting in substantially higher charges compared to 2015.
Changes in Fair Value of Derivative liabilities
Change in Fair Value of Conversion Feature
In December 2015 and in the first quarter of 2016, we consummated twelve closings of our private placement offering, the 9% Unsecured Subordinated
Convertible Promissory Note (“the Promissory Note”). The Promissory Note contains elements which require liability accounting for the conversion feature. We
have calculated the fair market value for the conversion feature at issuance and performed a mark to market at each quarter-end which resulted in a cumulative
change in fair value during the twelve month period of 2016, the variance of which amounted to a loss of $1,485,359 compared to the loss in 2015 of $44,804 were
both accounted for through the profit and loss account during the respective years.
Change in Fair Value of Warrant Liabilities
The mark to market adjustment for the warrant liabilities can be broken down into the following origins.
The warrants issued as part of the offering of the 9% Unsecured Convertible Note resulting in a positive variance of $776,771 (gain) compared to a negative
variance of $51,153 (loss) in 2015.
Warrants issued to the lender of the Amended and Restated Credit Agreement by and between the Company and Atalaya Administrative LLC, as the administrative
agent and collateral agent (“Atalaya”), and the lenders party thereto resulting in a negative variance of $2,702,178 (loss) compared to $0 in 2015 as no position
existed yet.
Warrants issued in relation to the “Saffelberg Note” for investing in a 9% Unsecured Convertible Notes resulting in a negative variance of $8,687 (loss) compared
to $0 in 2015 as no position existed yet.
Fair value movements of warrants issued to fundraise agents resulted in a positive variance of $103,253.
The value of the more complex warrants was determined by a third-party valuation expert using a Monte-Carlo Simulation model.
Gain/(Loss) on extinguishment of debt
The loss of $541,899 in 2016 is caused by the $867,338 (loss) as a result of the extinguishment of debt entries relating to the amendment of the credit agreement
with Atalaya, $343,519 (gain) is the result of the conversion of the 9% notes held by various noteholders and $18,080 (loss) as a result of the repayment in shares
of the CRI loan which was paid as an advance for the acquisition of ValidSoft which was finally not effectuated.
28
The gain of $2,475,799 in 2015 is the result of the extinguishment of debt related to the Chong Hing Bank debt of our subsidiary Pareteum Ltd in Hong Kong
following the expiration of the statute of limitations in Hong Kong, as well as the verdict by California courts in 2011 that the Company was not liable as a
successor in interest or otherwise, on the bank loans and overdraft account to Pareteum Ltd. The amounts released from the balance sheet were $433,480
(overdraft), $962,522 (loan payable) and $1,079,797 (accrued interest).
Other Income and (Expense)
Other income & (expense) for the twelve-month period ended December 31, 2016 was a loss of $220,927 compared to a loss of $922,894 for the twelve-month
period ended December 31, 2015. As to 2016, the majority is caused by the unrealized exchange rate losses related to the exchange rate variances caused by the
Atalaya Credit Agreement which is accounted for in the primary functional currency (EURO) of the company.
Amortization of Deferred Financing Costs
Amortization of debt issuance cost were $1,267,073 for the twelve-month period ended December 31, 2016, an increase of $753,516 or 147%, compared to
$513,557 for the twelve-month period ended December 31, 2015.
Provision (Benefit) Income taxes
Income tax provision for the twelve-month periods ended December 31, 2016 was an income tax provision of $38,286, compared to an income tax benefit of
$17,225 for the same period in 2015.
Net Loss
Net loss for the twelve months’ period ended December 31, 2016, was $31,444,704, an increase in loss of $26,438,469 or 528%, compared to the loss of
$5,006,235 for the same period in 2015. This increase was mainly caused by the full release in 2015 of deferred revenue of $11,571,458 related to the termination
of the contract with Iusacell as well as the net loss on sale of assets ($1,542,374), impairment of goodwill ($3,228,930), impairment for assets held and used of
($850,985), changes in derivative liabilities ($3,316,199) as well as the interest expense related to debt discount and conversion feature ($6,041,607).
Other Comprehensive (Loss) Income
We record foreign currency translation gains and losses as part of other comprehensive (loss) income, which amounted to a gain as of December 31, 2016 of
$703,073, compared to a loss of $2,662,843 for the year ended December 31, 2015, an increase of $3,365,916 or 126%. This change is primarily attributable to the
translation effect resulting from the substantial fluctuations in the USD/Euro exchange rates in the reporting period, since our balance sheets position are largely
denominated in Euro and are translated on balance sheet date.
Liquidity and Capital Resources
As reflected in the accompanying consolidated financial statements, the Company reported net (loss) of $(31,444,704) and $(5,006,235) for the years ended 2016
and 2015, respectively, and had an accumulated deficit of $(287,080,234) as of December 31, 2016 and ($255,635,531) as of December 31, 2015.
The cash balance of the Company at December 31, 2016 was $ 931,189. Additional capital is required during the fourth quarter 2016 to cover working capital
deficiencies. The incremental loan during the third quarter provided vital liquidity in the short term and the Company is pursuing additional capital.
Although the Company has previously been able to raise capital as needed, there can be no assurance that additional capital will be available at all, or if available,
on reasonable terms. Further, the terms of such financing may be dilutive to our existing stockholders or otherwise on terms not favorable to us, or our existing
stockholders. If we are unable to secure additional capital or unsuccessful in meeting our cash flow objectives or the Lender takes steps to call the loan before new
capital is attracted, the Company will be materially and negatively impacted, and we may have to initiate cost reduction measures.
29
Operating activities
The net cash used in operating activities of $3,657,831 for the year ended December 31, 2016 compared to net cash provided by operating activities of $8,979,835
in 2015 decreased by $12,637,666. This increase in 2015 was largely the result of the termination settlement agreement with our customer Iusacell (decreasing
accounts receivable) and our control of expenses and deferred payments to suppliers and vendors (increasing accounts payable and accrued expenses). The
decrease in 2016 was largely the result of the disposition of Validsoft and continuing operating losses.
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Changes in operating assets and liabilities:
Net cash (used in) provided by operating activities
Investing activities
2016
2015
$ (31,444,704) $
25,065,690
(6,379,014)
(5,006,235)
12,400,001
7,393,766
2,721,183
(3,657,831) $
1,586,069
8,979,835
$
Net cash provided by investing activities for year ended December 31, 2016 was $1,036,840 an increase of $8,746,812 or 113%, compared to $7,709,972 net cash
used in investing activities in 2015. This change is the result of the decrease in the capitalization of product development costs totaling $3,152,013, decrease of
lease installments $1,577,381 and less third party capital expenditures of $1,567,418. The proceeds of the sale of ValidSoft, included in the net cash provided by
investing activities for the nine months ended September 30, 2016, was $2,000,000. During the first quarter of 2016 we received $450,000 of proceeds from the
9% Unsecured Subordinated Convertible Promissory Note and the of advance purchase payment on “Assets held for Sale.”
Financing activities
Net cash provided by financing activities for the year ended December 31, 2016 was $3,126,020, compared to net cash used in financing activities of $3,106,697
for the year ended December 31, 2015. See Notes 14 and 16 of the Financial Statements for more information.
As a result of the above activities, we had a cash and cash equivalents balance of $931,189 as of December 31, 2016 compared to $369,250 as of December 31,
2015, a net increase in cash and cash equivalents of $561,939.
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.
Application of Critical Accounting Policies and Estimates
Revenue Recognition and Net billings in excess of revenues
Revenue represents amounts earned for (non-software) arrangements consisting of hosting subscriptions for mobile and security solutions. We also offer customer
support and professional services related to implementing and supporting our suite of applications. Revenues generally are recognized net of any taxes collected
from customers and subsequently remitted to governmental authorities.
30
Hosting subscriptions provide customers access to our software on a subscription basis, and support services (e.g. Network operating costs and second line
helpdesk) related to those arrangements. Hosting subscriptions are recognized ratably over the contract term commencing with the date our service is made
available to customers and when all of the following conditions have been met: (i) there is persuasive evidence of an arrangement; (ii) delivery has occurred; (iii)
the fee is fixed or determinable; and (iv) collectability of the fee is reasonably assured. Revenue is recorded as net billings in excess of revenues before all of the
relevant criteria for revenue recognition are satisfied.
Beginning in 2013, when our business was transitions form the landline business to the mobile and security solutions business, the Company entered multiple
element arrangements which are accounted in accordance with ASC 605-25 “Revenue Recognition-Multiple Element Arrangements”.
The elements in a multiple element arrangement are identified and are separated into separate units of accounting when both of the following criteria are met: The
delivered item or items have value to the customer on a stand-alone basis, meaning the delivered item or items have value on a standalone basis if it sold separately
by any vendor or the customer could resell the delivered item or items on a stand-alone basis. And if the arrangement includes a general right of return related to
the delivered item, delivery or performance of the undelivered item or items are considered probably and substantially in the control of the Company. Total
consideration of a multiple-element arrangement is then allocated using the relative selling price method using the hierarchy prescribed in ASC 605-25. In
accordance with that hierarchy if fair value of the vendor specific objective evidence (VSOE) or, third-party evidence (TPE) does not exist for the element, then the
best estimated selling price (BESP) is used.
Since the Company has neither VSOE nor TPE, the Company determines BESP for all deliverables in their hosting arrangements. In determining the BESP, the
Company considers multiple factors which include, and are not limited to, the following: (i) gross margin objectives and internal costs for services; (ii) pricing
practices, market conditions; (iii) competitive landscape; and (iv) growth strategy.
Accordingly, management’s judgment is applied regarding, among other aspects, conformance with acceptance criteria and if delivery of services has occurred and
the degree of completion.
In the paragraphs below we explain the revenue recognition policy for each element.
For the mobile solutions services the Company recognizes revenues from customers accessing our cloud-based application suite in two different service offerings,
namely managed services and bundled services.
For managed services, revenues are recognized for network administration services provided to end users on behalf of Mobile Network Operators (MNO) and
virtual Mobile Network Operators (MVNO’s). Managed service revenues are recognized monthly based on an average number of end-users managed and
calculated on a pre-determined service fee per user. For bundled services, the Company provides both network administration as well as mobile airtime
management services. Revenues for bundled services are recognized monthly based on an average number of end-users managed and mobile air time and
calculated based on a pre-determined service fee. Technical services that meet the criteria to be separated as a separate unit of accounting are recognized as the
services are performed. Otherwise they are deferred and recognized over the contract term. Our arrangements with customers do not provide the customer with the
right to take possession of the software supporting the cloud-based application service at any time.
Telecommunication revenues were recognized when delivery occurred based on a pre-determined rate and number of user minutes and number of calls that the
Company has managed in a given month.
Professional services and other revenue include fees from consultation services to support the business process mapping, configuration, data migration, integration
and training. Amounts that have been invoiced are recorded in accounts receivable and in net billings in excess of revenues or revenue, depending on whether the
revenue recognition criteria have been met. Revenue for professional and consulting services in connection with an implementation or implantation of a new
customer that is deemed not to have stand-alone value is recognized over the contractual period commencing when the subscription service is made available to the
customer. Revenue from other professional services that provide added value such as new features or enhancements to the platform that are deemed to have
standalone value to the customer or are sold separately from the original hosting arrangement, are deferred and revenue recognition occurs when the feature is
activated.
31
Cost of service and Operating Expenses
Cost of service includes origination, termination, network and billing charges from telecommunications operators, costs of telecommunications service providers,
network costs, data center costs, facility cost of hosting network and equipment and cost in providing resale arrangements with long distance service providers, cost
of leasing transmission facilities, international gateway switches for voice, data transmission services, and the cost of professional services of staff directly related
to the generation of revenues, consisting primarily of employee-related costs associated with these services, including share-based expenses and the cost of
subcontractors. Cost of service excludes depreciation and amortization.
Share-based Compensation
Effective January 1, 2006, we adopted the provisions of ASC 718 “Compensation-Stock Compensation”, using the prospective approach. As a result, we recognize
share-based compensation expense for only those awards that are granted subsequent to December 31, 2005 and any previously existing awards that are subject to
variable accounting, including certain share options that were exercised with convertible notes in 2003, until the awards are exercised, forfeited, or contractually
expire in accordance with the prospective method and the transition rules of ASC 718. Under ASC 718, share-based awards granted after December 31, 2005, are
recorded at fair value as of the grant date and recognized as expense over the employee’s requisite service period (the vesting period, generally three years), which
we have elected to amortize on a straight-line basis.
For both the long term contractors and advisory board members, we recognize the guidance for share-based compensation awards to non-employees in accordance
with ASC 505-50 “Equity-Based Payments to Non-Employees” (“ASC 505-50”). Under ASC 505-50, we determine the fair value of the options or share-based
compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably
measurable.
Share-based compensation (cash and non-cash) related to equity plans for employees and non-employee directors are included within our cost of revenues and
operating expenses.
Business Combinations
We generally recognize the identifiable assets acquired, the liabilities assumed, and any non-controlling interests in an acquiree at their fair values as of the date of
acquisition, under the purchase method of accounting. We measure goodwill as the excess of consideration transferred, which we also measure at fair value, over
the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method of accounting requires us to exercise
judgment and make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition,
including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities related to uncertain tax positions, and contingencies.
This method also requires us to refine these estimates over a one-year measurement period to reflect new information obtained about facts and circumstances that
existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to retroactively
adjust provisional amounts that we have recorded for the fair value of assets and liabilities in connection with acquisitions, these adjustments could materially
decrease our operating income and net income and result in lower asset values on our balance sheet.
Significant estimates and assumptions that we must make in estimating the fair value of acquired technology, customer lists, and other identifiable intangible assets
include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business
activity change compared with the assumptions and projections used to develop these values, we could record impairment charges. In addition, we have estimated
the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives
change, depreciation or amortization expenses could be accelerated or slowed.
32
Intangible Assets and Impairment of long Lived Assets
In accordance with ASC 350, intangible assets are carried at cost less accumulated amortization and impairment charges. Intangible assets are amortized on a
straight-line basis over the expected useful lives of the assets, between three and ten years. Other intangible assets are reviewed for impairment in accordance with
ASC 350, on an annual basis, or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
Measurement of any impairment loss for long-lived assets and identifiable intangible assets that management expects to hold and use is based on the amount of the
carrying value that exceeds the fair value of the asset. This is a critical accounting policy because of the judgement and estimates involved.
Impact of Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” (“ASU 2016-13”) which requires measurement and recognition of expected versus
incurred credit losses for financial assets held. ASU 2016-13 is effective for the Company’s annual and interim reporting periods beginning January 1, 2020, with
early adoption permitted on January 1, 2019. The Company is currently evaluating the impact of this ASU on its consolidated financial statements; however at the
current time the Company does not know what impact the adoption will have on its consolidated financial statements, financial condition or results of operations.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting” (“ASU 2016-09”). The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including
the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The update to the
standard is effective for the Company’s annual and interim reporting periods beginning January 1, 2017, with early adoption permitted. The Company is currently
evaluating the impact of ASU 2016-09 on its consolidated financial statements; however at the current time the Company does not know what impact the adoption
of ASU 2016-09 will have on its consolidated financial statements, financial condition or results of operations.
In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting
Revenue Gross versus Net).” This update provides clarifying guidance regarding the application of ASU 2014-09 when another party, along with the reporting
entity, is involved in providing a good or a service to a customer. In these circumstances, an entity is required to determine whether the nature of its promise is to
provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party
(that is, the entity is an agent). In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations
and Licensing,” which clarifies the identification of performance obligations and the licensing implementation guidance. In May 2016, the FASB issued ASU No.
2016-11, “Revenue Recognition and Derivatives and Hedging: Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16
Pursuant to Staff Announcements at the March 3, 2016 Emerging Issues Task Force Meeting (“EITF”),” which rescinds SEC paragraphs pursuant to SEC staff
announcements. These rescissions include changes to topics pertaining to accounting for shipping and handling fees and costs and accounting for consideration
given by a vendor to a customer. In May 2016, the FASB also issued ASU No. 2016-12, “Revenue from Contracts with Customers: Narrow-Scope Improvements
and Practical Expedients,” which provides clarifying guidance in certain narrow areas and adds some practical expedients. The effective dates for these ASU’s are
the same as the effective date for ASU No. 2014-09, for the Company’s annual and interim periods beginning January 1, 2018. The Company is currently
evaluating the impact of these ASU’s on its consolidated financial statements; however at the current time the Company is determining the impact the adoption of
these ASU’s will have on its consolidated financial statements, financial condition or results of operations.
33
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a
lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or
operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and
operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical
expedients available. Management is currently assessing the impact of this pronouncement on the Company’s financial statements.
In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, “Financial Instruments – Overall
(Subtopic 825-10).” ASU 2016-01 enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful
information by addressing certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments simplify certain
requirements and also reduce diversity in current practice for other requirements. ASU 2016-01 is effective for public companies’ fiscal years beginning after
December 15, 2017, including interim periods within those fiscal years. Except for the early application guidance specifically allowed in ASU 2016-01, early
adoption is not permitted. We are currently evaluating the impact of our pending adoption of ASU 2016-01 on our consolidated financial statements and have not
yet determined the method by which we will adopt the standard.
On April 7, 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, which requires debt issuance costs related to a
recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. ASU 2015-
03 is effective for public companies’ fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted for
financial statements that have not been previously issued. The Company has elected for early adoption and included it in their Form 10-K for the year ended
December 31, 2015.
In January 2015, the FASB issued ASU 2015-01, Income Statement — Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement
Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”). ASU 2015-01 eliminates the concept of extraordinary items from GAAP but
retains the presentation and disclosure guidance for items that are unusual in nature or occur infrequently and expands the guidance to include items that are both
unusual in nature and infrequently occurring. ASU 2015-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015.
A reporting entity may apply ASU 2015-01 prospectively. A reporting entity may also apply ASU 2015-01 retrospectively to all periods presented in the financial
statements. We believe the adoption of ASU 2015-01 will not have a material effect on our consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update 2016-18, “Statement of Cash Flows - Restricted Cash a consensus of the FASB Emerging
Issues Task Force.” This standard requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of cash flows under
the retrospective transition approach. The guidance will become effective for fiscal years beginning after December 15, 2017 and interim periods within those
fiscal years. Early adoption is permitted. When adopted, the Company is expected to include restricted cash and cash equivalents with cash and cash equivalents on
the statement of the cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are a “smaller reporting company” as defined by regulation S-K and as such, are not required to provide the information contained in this item pursuant to
regulation S-K.
34
Item 8. Financial Statements and Supplementary Data
Pareteum Corporation
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2016 AND 2015
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER
31, 2016 AND 2015
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
36
37
38
39
40
41-75
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Pareteum Corporation
We have audited the accompanying consolidated balance sheets of Pareteum Corporation (formerly Elephant Talk Communications Corp. or the “Company”) as of
December 31, 2016 and 2015, and the related consolidated statements of comprehensive loss, changes in stockholders’ equity (deficit), and cash flows for the years
then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting as of December 31, 2016. Our audit included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pareteum Corporation as of
December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses from operations, has an accumulated deficit of $287,080,234 and has negative
working capital. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters also are
described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Squar Milner, LLP
Los Angeles, California,
March 29, 2017
36
Pareteum Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2016 AND 2015
December 31,
December 31,
2016
2015
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Financing receivable
Restricted cash
Accounts receivable, net of an allowance for doubtful accounts of $88,528 at December 31, 2016 and $269,608 at
December 31, 2015
Prepaid expenses and other current assets
Total current assets
$
931,189 $
-
564,018
614,670
1,084,994
3,194,871
369,250
272,425
246,151
1,112,032
2,016,236
4,016,094
NON-CURRENT ASSETS
OTHER ASSETS
NOTE RECEIVABLE
PROPERTY AND EQUIPMENT, NET
INTANGIBLE ASSETS, NET
ASSETS HELD FOR SALE
GOODWILL
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and customer deposits
Obligations under capital leases (current portion)
Net billings in excess of revenues
Accrued expenses and other payables
Senior Secured Loan - Short Term (Principal repayments coming 12 months)
Total current liabilities
LONG TERM LIABILITIES
Derivative liabilities
Non-current portion of obligation under capital leases
Other long term liabilities
Unsecured Convertible Promissory Note (net of Debt Discount and Debt Issuance)
Senior Secured Loan - Long Term (net of Debt Discount, Debt Issuance and Principal repayments coming 12 months)
Non-current portion of net billings in excess of revenues
Total long term liabilities
Total liabilities
Commitments and Contingencies (See Notes)
129,037
473,893
1,012,603
-
8,708,778
13,051,375
-
-
-
258,630
4,564,972
3,027,422
$
13,045,289 $
25,392,386
2,316,768
10,813
951,791
6,013,620
4,000,000
13,292,992
4,265,829
-
192,980
821,048
3,715,662
121,309
9,116,828
2,639,863
310,403
1,259,545
5,031,712
5,580,277
14,821,800
945,618
5,621
260,290
238,829
-
1,066,687
2,517,045
22,409,820
17,338,845
STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred Stock $0.00001 par value, 50,000,000 shares authorized, 249 issued and outstanding as of December 31, 2016
Common Stock $0.00001 par value, 500,000,000 shares authorized, 8,376,267 issued and outstanding as of December
31, 2016 and 6,455,055 shares issued and outstanding as of December 31, 2015
Accumulated other comprehensive loss
Accumulated deficit
Pareteum Corporation stockholders’ (deficit) equity
2,143,196
-
280,653,362
(5,086,902)
(287,080,234)
(9,370,578)
269,470,165
(5,789,975)
(255,635,531)
8,044,659
NON-CONTROLLING INTEREST
Total stockholders’ (deficit) equity
6,047
(9,364,531)
8,882
8,053,541
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
$
13,045,289 $
25,392,386
The accompanying notes are an integral part of these consolidated financial statements
37
Pareteum Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
REVENUES
COST AND OPERATING EXPENSES
Cost of service (excluding depreciation and amortization)
Product development
Sales and marketing
General and administrative
Restructuring charges
Depreciation and amortization of intangibles assets
Impairment for assets held and used
Impairment of goodwill
Loss on sale of assets
Total cost and operating expenses
LOSS FROM OPERATIONS
OTHER INCOME (EXPENSE)
Interest income
Interest expense
Interest expense related to debt discount and conversion feature
Changes in derivative liabilities
(Loss) Gain on Extinguishment of Debt
Other income and (expense), net
Amortization of deferred financing costs
Total other (expense)
LOSS BEFORE PROVISION FOR INCOME TAXES
Provision (Benefit) for income taxes
NET LOSS
OTHER COMPREHENSIVE LOSS
Foreign currency translation gain (loss)
COMPREHENSIVE LOSS
Net loss per common share and equivalents – basic
Net loss per common share and equivalents – diluted
Weighted average shares outstanding during the period – basic
Weighted average shares outstanding during the period – diluted
2016
12,855,811 $
2015
31,015,453
$
3,658,667
3,543,590
1,340,959
11,708,151
1,638,049
4,246,787
850,985
3,228,930
1,542,374
31,758,492
5,926,291
4,543,492
2,633,958
11,649,914
1,254,598
6,623,985
2,681,407
-
-
35,313,645
(18,902,681)
(4,298,192)
112,169
(1,228,201)
(6,041,607)
(3,316,199)
(541,899)
(220,927)
(1,267,073)
(12,503,737)
(31,406,418)
38,286
(31,444,704)
106,028
(1,488,203)
(682,389)
299,948
2,475,799
(922,894)
(513,557)
(725,268)
(5,023,460)
(17,225)
(5,006,235)
$
$
$
703,073
(30,741,631) $
(2,662,843)
(7,669,078)
(4.67) $
(4.67) $
(0.79)
(0.79)
6,738,971
6,328,082
6,738,971
6,328,082
The accompanying notes are an integral part of these consolidated financial statements.
38
Pareteum Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Description
Shares
Preferred Stock
Common Stock
Shares
Amount
- 6,186,850 $ 264,359,674 $
1,727,487
-
161,189
Other
comprehensive
loss
(3,127,132) $ (250,629,296) $ 10,603,246
1,727,487
Accum-
mulated
Deficit
-
-
Total stock-
holders
Equity
(Deficit)
Amount
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
346
5,861
106,668
-
-
1,150,678
-
-
-
-
-
24,305
1,814,531
(65,000)
-
452,629
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5,861
1,150,678
-
-
24,305
1,814,531
(65,000)
-
452,629
-
-
-
-
-
-
-
-
2
- 6,455,055 269,470,165
-
397,200
120,000
249 2,490,000
-
-
(2,662,843)
-
-
-
(5,006,235)
-
(5,789,975) (255,635,531)
-
-
-
-
-
-
-
-
-
-
-
104,671
-
-
408,257
- 1,009,373
46,315
-
160,000
-
39,166
-
33,427
-
668,642
1,418,505
5,238,329
153,305
711,900
106,232
77,105
-
-
(346,804)
-
-
-
669,908
1,674,247
(21,252)
-
-
89,076
(2,662,843)
(5,006,235)
-
8,044,659
2,490,000
397,200
668,642
1,418,505
5,238,329
153,305
711,900
106,232
77,105
669,908
1,674,247
(368,056)
-
-
-
-
-
-
-
-
-
-
-
-
89,076
-
-
-
-
-
-
-
-
-
-
-
Balance - December 31, 2014
Shares issued for warrant exercises
Shares issued for employee stock option
exercises
Shares issued for board and management
compensation
Shares issued for acquisitions
Shares issued to consultants
Shares to be issued to officers and
employees
Amortization of Stock Options expense
Costs attributable to share issuances
FMV of warrants issued classified as Debt
Discount
Other comprehensive loss due to foreign
exchange rate translation net of tax
Net Loss
Reverse Stock Split Rounding
Balance - December 31, 2015
Preferred Stock
Shares issued for warrant exercises
Shares issued for board and management
compensation
Shares issued for Settlement of Debt
Shares issued for Conversion of Notes
Shares issued for Loan Amendments
Stock awards issued to Management
Stock awards issued to Staff
Shares issued to consultants
Shares to be issued to officers and
employees
Amortization of Stock Options expense
Expenses attributable to share issuances
Repricing of warrants issued classified as
Debt Discount
Other comprehensive loss due to foreign
exchange rate translation net of tax
Net Loss
Reverse Stock Split Rounding
Balance - December 31, 2016
-
-
-
-
-
-
249 $ 2,143,196 8,376,267 $ 280,653,362 $
-
-
3
-
-
-
-
703,073
-
-
703,073
(31,444,703) (31,444,703)
-
-
(5,086,902) $ (287,080,234) $ (9,370,578)
The accompanying notes are an integral part of these consolidated financial statements.
39
Pareteum Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
2016
2015
$
(31,444,704) $
(5,006,235)
Depreciation and amortization
Provision for doubtful accounts
Stock based compensation
Change in fair value of warrant liability
Amortization of deferred financing costs
Interest expense relating to debt discount and conversion feature
Other (income) and expense, net
Loss (Gain) on Extinguishment of Debt
Impairment for assets held and used
Impairment of goodwill
Loss on sale of assets
Changes in operating assets and liabilities:
Decrease in accounts receivable
Decrease in prepaid expenses, deposits and other assets
Increase in accounts payable and customer deposits
Decrease in net billings in excess of revenues
Increase in accrued expenses and other payables
Net cash (used in) provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment
Advance Purchase Payment on “Assets held for Sale”
Proceeds from sale of assets
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Financing receivable
Exercise of warrants & options
Equity and Debt issuance costs paid
Principal payment on 2014 10% + Eurodollar 3rd Party Loan
Proceeds from convertible promissory note
Unsecured promissory note
Gross proceed from Preferred A and A-1 shares issuance
Net cash provided by (used in) financing activities
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD
CASH AND CASH EQUIVALENTS, END OF THE PERIOD
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest
Cash paid during the period for income taxes
NON-CASH INVESTING ACTIVITIES:
Note receivable from sale of assets
NON-CASH FINANCING ACTIVITIES:
Conversion of 9% unsecured convertible note
Shares issued for payables
4,246,787
(88,528)
3,897,437
3,316,199
1,267,073
6,041,607
220,927
541,899
850,985
3,228,930
1,542,374
621,532
1,637,006
80,520
(1,169,136)
1,551,261
(3,657,831)
6,623,985
269,608
3,481,908
(299,948)
513,557
682,389
922,894
(2,475,799)
2,681,407
-
-
6,566,499
759,275
2,627,745
(9,753,225)
1,385,775
8,979,835
(1,413,160)
450,000
2,000,000
1,036,840
(7,709,972)
-
-
(7,709,972)
355,000
-
(1,338,821)
(966,809)
2,273,000
350,000
2,490,000
3,162,370
20,560
561,939
369,250
931,189 $
1,645,000
5,861
(532,558)
(5,500,000)
1,275,000
-
-
(3,106,697)
301,924
(1,534,910)
1,904,160
369,250
909,637 $
15,581
1,136,021
14,771
1,000,000 $
5,238,329 $
700,425 $
-
-
-
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
40
Note 1. Business and Summary of Significant Accounting Policies
Description of Business
Pareteum has developed a Communications Cloud Services Platform , providing (i) Mobility, (ii) Messaging and (iii) Security services and applications, with a
Single-Sign-On, API and software development suite.
The Pareteum platform hosts integrated IT/Back Office and Core Network functionality for mobile network operators, and for enterprises implement and leverage
mobile communications solutions on a fully outsourced SaaS, PaaS and/or IaaS basis: made available either as an on-premise solution or as a fully hosted service
in the Cloud depending on the needs of our customers. Pareteum also delivers an Operational Support System (“OSS”) for channel partners, with Application
Program Interfaces (“APIs”) for integration with third party systems, workflows for complex application orchestration, customer support with branded portals and
plug-ins for a multitude of other applications. These features facilitate and improve the ability of our channel partners to provide support and to drive sales.
Liquidity
As reflected in the accompanying consolidated financial statements, the Company reported net (loss) of $(31,444,704) and $(5,006,235) for the years ended 2016
and 2015, respectively, and had an accumulated deficit of $(287,080,234) as of December 31, 2016. The cash balance of the Company at December 31, 2016 was $
931,189. Additional capital could be raised during 2017 to cover working capital deficiencies.
The Company’s financial statements through December 31, 2016 were materially impacted by a number of events:
· Divestiture of ValidSoft, on September 30, 2016, through a management buyout;
·
·
·
Financing activity related to issuance of preferred shares and increase in note payable with its senior secured lender;
Financing activity related to issuance of preferred shares and increase in note payable with its senior secured lender;
the settlement with Cross River Investments (“CRI”) to issue 176,000 common shares related to the previous advance paid to complete the
acquisition of ValidSoft; and
the restructuring of the Company.
·
The substantial three phase restructuring plan (the “Plan”) was completed in the third quarter 2016. The Plan which commenced in the fourth quarter of 2015, was
designed to align actual expenses and investments with current revenues as well as introduce new executive management.
The first and second phase of the Plan encompassed fourth quarter 2015 through second quarter 2016. The third and final phase of the Plan impacted third quarter
2016 results with a $0.6 million in workforce reduction expenses primarily related to employee severances. Total workforce related restructuring charges to-date is
$2.7 million including non-cash charges of $0.7 million.
The sale of ValidSoft at the end of the third quarter for the price of $3.0 million was completed and the Company received $2.0 million in cash and a $1.0 million
promissory note. The $2.0 million in cash was used to pay down the senior secured loan.
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Although the Company has previously been able to raise capital as needed, there can be no assurance that additional capital will be available at all, or if available,
on reasonable terms. Further, the terms of such financing may be dilutive to our existing stockholders or otherwise on terms not favorable to us, or our existing
stockholders. If we are unable to secure additional capital, and/or do not succeed in meeting our cash flow objectives or the Lender takes steps to call the loan
before new capital is attracted, the Company will be materially and negatively impacted, and we may have to significantly reduce our operations. As of December
31, 2016, these events raise substantial doubts about the Company’s ability to continue as a going concern. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
On December 31, 2016, we had $931,189 in cash and cash equivalents. Based on our current expectationswith respect to our revenue and expenses, we expect that
our current level of cash and cash equivalents will be sufficient to meet our liquidity needs for the next twelve months. If our revenues do not grow as expected and
if we are not able to manage expenses sufficiently, including required payments pursuant to the terms of the senior secured debt, we may be required to obtain
additional equity or debt financian. In additiona, we currently have an S-3 registration statement filed with the SEC to potentially raise more capital.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Pareteum Corporation and its subsidiaries and have been prepared in accordance with
accounting principles generally accepted in the United States (“US GAAP”). All intercompany transactions and account balances have been eliminated in
consolidation. The Company’s subsidiaries are:
·
·
·
·
·
·
·
·
its wholly-owned subsidiary Elephant Talk Europe Holding B.V. and its wholly owned subsidiaries, Elephant Talk Communications Italy S.R.L.,
Elephant Talk Business Services W.L.L., Guangzhou Elephant Talk Information Technology Limited, Elephant Talk Deutschland GmbH, Morodo Group
Ltd. (dissolved May 10, 2016), and the majority owned (51%) subsidiaries Elephant Talk Communications PRS U.K. Limited and (51%) ET-UTS NV;
Elephant Talk Europe Holding B.V.’s wholly-owned subsidiary Elephant Talk Communication Holding AG and its wholly-owned subsidiaries Elephant
Talk Communications S.L.U., Elephant Talk Mobile Services B.V., Elephant Talk Telekom GmbH, Elephant Talk Communication Carrier Services
GmbH, Elephant Talk Communication Schweiz GmbH and the subsidiary Elephant Talk Communications Premium Rate Services Netherlands B.V.;
Elephant Talk Telecomunicação do Brasil LTDA, is owned 90% by Elephant Talk Europe Holding B.V. and 10% by Elephant Talk Communication
Holding AG;
Elephant Talk Europe Holding B.V.’s majority (100%) owned subsidiary Elephant Talk Middle East & Africa (Holding) W.L.L., its wholly owned
(100%) subsidiaries Elephant Talk Middle East & Africa (Holding) Jordan L.L.C., and its majority owned (99%) Elephant Talk Bahrain W.L.L.;
its wholly-owned subsidiary Elephant Talk Limited (“ETL”) and its majority owned (50.54%) subsidiary Elephant Talk Middle East & Africa FZ-LLC.;
its wholly-owned subsidiary Pareteum North America, Corp; and
Elephant Talk Europe Holding B.V.’s majority owned subsidiary (99.998%) ET de Mexico S.A.P.I. de C.V. and its majority owned subsidiary (99%)
Asesores Profesionales ETAK S. de RL. de C.V.
PT Elephant Talk Indonesia is owned by Elephant Talk Europe Holding B.V.
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Foreign Currency Translation
The functional currency is Euros for the Company’s wholly-owned subsidiary Elephant Talk Europe Holding B.V. and its subsidiaries. The financial statements of
the Company were translated to USD using period-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses, and
capital accounts were translated at their historical exchange rates when the capital transaction occurred. In accordance with ASC 830, Foreign Currency Matters,
net gains and losses resulting from translation of foreign currency financial statements are included in the statement of changes in stockholder’s equity as other
comprehensive income (loss). Foreign currency transaction gains and losses are included in consolidated income/(loss), under the line item ‘Other
income/(expense)’.
Use of Estimates
The preparation of the accompanying consolidated financial statements conforms with accounting principles generally accepted in the U.S. and requires
management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities. Significant estimates include the bad debt allowance, revenue recognition, impairment of long-lived
assets, valuation of financial instruments, useful lives of long-lived assets and share-based compensation. Actual results may differ from these estimates under
different assumptions or conditions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. The Company
has full access to the whole balance of cash and cash equivalents on a daily basis without any delay.
Financing Receivables
Financing receivables as of December 31, 2016 is $0. The financing receivables reported as of December 31, 2015 relate to a timing difference between the second
closing of the Offering and the actual receipt of the related proceeds. The funds were in the process of being transferred from the escrow account kept by the
placement agent and the company but were received on January 5, 2016. The net financing receivable amounted to $272,425 as of December 31, 2015.
Restricted Cash
Restricted cash as of December 31, 2016 and 2015 was $564,018 and $246,151 respectively, and consists of cash deposited in blocked accounts as bank guarantees
for national interconnection, wholesale agreements with telecom operators and a bid offer guarantee(s). In the August 15, 2016 second amendment of the 10%
+Eurodollar 3rd Party Loan it was agreed that $500,000 was deposited into an escrow account under the sole dominion and control of the Chief Restructuring
Officer.
Accounts Receivables, Net
The Company’s customer base consists of a geographically dispersed customer base. The Company maintains an allowance for potential credit losses on accounts
receivable. The Company makes ongoing assumptions relating to the collectability of our accounts receivable. The accounts receivable amounts presented on our
balance sheets include reserves for accounts that might not be collected. In determining the amount of these reserves, the Company considers its historical level of
credit losses. The Company also makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations, and the Company
assesses current economic trends that might impact the level of credit losses in the future. The Company’s reserves have generally been adequate to cover its actual
credit losses. However, since the Company cannot reliably predict future changes in the financial stability of its customers, it cannot guarantee that its reserves will
continue to be adequate. If actual credit losses are significantly greater than the reserves, the Company would increase its general and administrative expenses and
increase its reported net losses. Conversely, if actual credit losses are significantly less than our reserve, this would eventually decrease the Company’s general and
administrative expenses and decrease its reported net losses. Allowances are recorded primarily on a specific identification basis. See Note 2 of the Financial
Statements for more information.
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Leasing Arrangements
At the inception of a lease covering equipment or real estate, the lease agreement is evaluated under the criteria of ASC 840, Leases. Leases meeting one of the four
key criteria are accounted for as capital leases and all others are treated as operating leases. Under a capital lease, the discounted value of future lease payments
becomes the basis for recognizing an asset and a borrowing, and lease payments are allocated between debt reduction and interest. For operating leases, payments
are recorded as rent expense. Criteria for a capital lease include (i) transfer of ownership during the lease term; (ii) existence of a bargain purchase option under
terms that make it likely to be exercised; (iii) a lease term equal to 75 percent or more of the economic life of the leased equipment; and (iv) minimum lease
payments that equal or exceed 90 percent of the fair value of the property. Subsequent to initial recognition, the asset is accounted for in accordance with the
accounting policy applicable to that type of asset. The assets are amortized as per our accounting policy for property & equipment, and intangibles, as applicable.
Revenue Recognition and Net billings in excess of revenues
Revenue primarily represents amounts earned for our mobile and security solutions. Our mobile and security solutions are hosted software where the customer
does not take possession of the software and are therefore accounted for as subscriptions. We also offer customer support and professional services related to
implementing and supporting our suite of applications. Revenues generally are recognized net of any taxes collected from customers and subsequently remitted to
governmental authorities.
Hosting subscriptions provide customers access to our software on a subscription basis, and support services (e.g. network operations and second line helpdesk)
related to those arrangements. Hosting subscriptions for the use of our software generally include a usage-based license for which revenues are recognized
commensurate with the customer utilization (for example, the number of mobile users on the network) commencing with the date our service is made available to
customers and when all of the following conditions have been met: (i) there is persuasive evidence of an arrangement; (ii) delivery has occurred; (iii) the fee is
fixed or determinable; and (iv) collectability of the fee is reasonably assured. Revenue is recorded as deferred revenue before all of the relevant criteria for revenue
recognition are satisfied.
The Company enters into arrangements that include various combinations of hosting subscriptions and services, where elements are delivered over different
periods of time. Such arrangements are accounted for in accordance with ASC 605-25 “Revenue Recognition-Multiple Element Arrangements.” Revenue
recognition for multiple-element arrangements requires judgment to determine if multiple elements exist, whether elements can be accounted for as separate units
of accounting, and if so, the fair value for each of the elements.
The elements in a multiple element arrangement are identified and are separated into separate units of accounting at the inception of the arrangement and revenue
is recognized as each element is delivered. Delivered item or items are considered a separate unit of accounting when both of the following criteria are met: (i) the
delivered item or items have value to the customer on a stand-alone basis, meaning the delivered item or items have value on a standalone basis if it sold separately
by any vendor or the customer could resell the delivered item or items on a stand-alone basis, and (ii) if the arrangement includes a general right of return related to
the delivered item, delivery or performance of the undelivered item or items are considered probably and substantially in the control of the Company. Total
consideration of a multiple-element arrangement is allocated to the separate units of accounting at the inception of the arrangement based on the relative selling
price method using the hierarchy prescribed in ASC 605-25. In accordance with that hierarchy if vendor specific objective evidence (VSOE) of fair value or, third-
party evidence (TPE) does not exist for the element, then the best estimated selling price (BESP) is used. Since the Company does not have VSOE or TPE, the
Company uses BESP to allocate consideration for all units of accounting in our hosting arrangements. In determining the BESP, the Company considers multiple
factors which include, but are not limited to the following: (i) gross margin objectives and internal costs for services; (ii) pricing practices and market conditions;
(iii) competitive landscape; and (iv) growth strategy.
In the paragraphs below we explain the revenue recognition policy for each element.
For the mobile solutions services the Company recognizes revenues from customers accessing our cloud-based application suite in two different service offerings,
namely managed services and bundled services.
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For managed services, revenues are recognized for network administration services provided to end users on behalf of Mobile Network Operators (MNO) and
virtual Mobile Network Operators (MVNO’s). Managed service revenues are recognized monthly based on an average number of end-users managed and
calculated on a pre-determined service fee per user. For bundled services, the Company provides both network administration as well as mobile airtime
management services. Revenues for bundled services are recognized monthly based on an average number of end-users managed and mobile air time, calculated
based on a pre-determined service fee. Technical services that meet the criteria to be separated as a separate unit of accounting are recognized as the services are
performed. Services that do not meet the criteria to be accounted for as a separate unit of accounting are deferred and recognized ratably over the estimated
customer relationship. Our arrangements with customers do not provide the customer with the right to take possession of the software supporting the cloud-based
application service at any time.
Telecommunication revenues are recognized when delivery occurs based on a pre-determined rate and number of user minutes and calls that the Company has
managed in a given month.
Professional services and other revenue include fees from consultation services to support the business process mapping, configuration, data migration, integration
and training. Amounts that have been invoiced are recorded in accounts receivable and in net billings in excess of revenues or revenue, depending on whether the
revenue recognition criteria have been met. Revenue for professional and consulting services in connection with an implementation or implantation of a new
customer that is deemed not to have stand-alone value is recognized over the estimated customer relationship commencing when the subscription service is made
available to the customer. Revenue from other professional services that provide added value such as new features or enhancements to the platform that are deemed
to have standalone value to the customer are recognized when the feature is activated.
Cost of Revenues and Operating Expenses
Cost of Service
Cost of service includes origination, termination, network and billing charges from telecommunications operators, costs of telecommunications service providers,
network costs, data center costs, facility cost of hosting network and equipment and cost in providing resale arrangements with long distance service providers, cost
of leasing transmission facilities, international gateway switches for voice, data transmission services, and the Cost of professional services of staff directly related
to the generation of revenues, consisting primarily of employee-related costs associated with these services, including share-based expenses and the cost of
subcontractors. Cost of service excludes depreciation and amortization.
Research and Development Expense
Research and development expenditures are expensed in the period incurred, and these expenses are included within the operating expenses function Product
Development.
Costs incurred during the application development stage of internal-use software projects, such as those used in the Company’s operations, are capitalized in
accordance with the accounting guidance for costs of computer software developed for internal use in ASC 350-40. There are three main stages of computer
software development. These stages are defined as (1) the preliminary project stage, (2) the application development stage, and (3) the post-implementation /
operation stage. Only costs included in the application development stage are eligible for capitalization. Capitalization of costs begins once management authorizes
and commits funding and the preliminary project stage is completed. Capitalized costs are amortized on a straight-line basis. When assigning useful lives to
internal-use software, the Company considers the effects of obsolescence, competition, technology, and other economic factors.
Product Development costs for the period ended December 31, 2016 and 2015 were $3,543,590 and $4,543,492, respectively. During the period ended December
31, 2016 and 2015, the Company capitalized $990,076 and $4,142,089, respectively. As a result of the restructuring measures during 2016, that also impacted the
development department, the Company decided to suspend project capitalization during the second half of 2016.
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Reporting Segments
ASC 280, Segment Reporting (“ASC 280”), defines operating segments as components of an enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The business operates as one
single segment and discrete financial information is based on the whole, not segregated; and is used by the chief decision maker accordingly.
Financial Instruments
The carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and customer deposits approximate their fair values based
on their short-term nature. The recorded values of long-term debt approximate their fair values, as interest approximates market rates. The Company’s conversion
feature, a derivative instrument, is recognized in the balance sheet at its fair values with changes in fair market value reported in earnings.
Fair Value Measurements
In accordance with ASC 820, Fair Value Measurement (“ASC 820”), the Company defines fair value as the price that would be received from selling an asset or
paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value
hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the
most observable inputs be used when available.
Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the
Company. Unobservable inputs reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability developed
based on the best information available in the circumstances.
The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level 2 – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these
financial instruments include cash instruments for which quoted prices are available but are traded less frequently, derivative instruments whose fair values have
been derived using a model where inputs to the model are directly observable in the market and instruments that are fair valued using other financial instruments,
the parameters of which can be directly observed.
Level 3 – Instruments that have little to no pricing observability as of the reported date. These financial instruments are measured using management’s best
estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
The degree of judgment exercised by the Company in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to
measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which
the fair value measurement falls in its entirety is determined by the lowest level input that is significant to the fair value measurement.
The Company has three asset groups that are valued at fair value categorized within Level 3: Derivative liabilities (recurring measurement), goodwill and
intangibles (non-recurring measurements) for the impairment test. Below are discussions of the main assumptions used for the recurring measurements.
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Recurring Measurement - Warrant Derivative Liabilities and Conversion Feature Derivative (see also Note 13 and 14)
Number of Outstanding Warrants and/or Convertible Notes
The number of outstanding warrants and/or convertible notes is adjusted every re-measurement date after deducting the exercise or conversion of any outstanding
warrants convertible notes during the previous reporting period.
Stock Price at Valuation Date
The closing stock price at re-measurement date being the last available closing price of the reporting period taken from www.nasdaq.com.
Exercise Price
The exercise price is fixed and determined under the terms of the financing facility it was issued.
Remaining Term
The remaining term is calculated by using the contractual expiration date of the 9% Unsecured Subordinated Promissory Note at the moment of re-measurement.
Expected Volatility
Management estimates expected cumulative volatility giving consideration to the expected life of the note and/or warrants and calculated the annual volatility by
using the continuously compounded return calculated by using the share closing prices of an equal number of days prior to the maturity date of the note (reference
period). The annual volatility is used to determine the (cumulative) volatility of the Company´s common stock (= annual volatility * square root (expected life)).
Liquidity Event
We estimate the expected liquidity event giving consideration to the average expectation of the timing of fundraises and the need for those funds offset against
scheduled repayment dates and the costs and/or savings of the future steps in re-modelling the organization.
Risk-Free Interest Rate
Management estimates the risk-free interest rate using the “Daily Treasury Yield Curve Rates” from the US Treasury Department with a term equal to the reported
rate, or derived by using both spread in intermediate term and rates, up to the expected maturity date of the derivative involved.
Expected Dividend Yield
Management estimates the expected dividend yield by giving consideration to the Company´s current dividend policies as well as those anticipated in the future
considering the Company´s current plans and projections.
Mandatory Conversion Condition
The Monte Carlo model includes the likelihood of meeting the condition in which the company will be able to call such mandatory conversion of outstanding
convertible notes.
Mandatory Exercise Condition
The Monte Carlo model includes the likelihood of being able to force a mandatory exercise of the warrants prior to the maturity of the warrant agreement.
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Share-based Compensation
The Company follows the provisions of ASC 718, Compensation-Stock Compensation, (“ASC 718”). Under ASC 718, share-based awards are recorded at fair
value as of the grant date and recognized as expense with an adjustment for forfeiture over the employee’s requisite service period (the vesting period, generally up
to three years). The share-based compensation cost based on the grant date fair value is amortized over the period in which the related services are received.
To determine the value of our stock options at grant date under our employee stock option plan, the Company uses the Black-Scholes option-pricing model. The
use of this model requires the Company to make a number of subjective assumptions. The following addresses each of these assumptions and describes our
methodology for determining each assumption:
Expected Life
The expected life represents the period that the stock option awards are expected to be outstanding. The Company uses the simplified method for estimating the
expected life of the option, by taking the average between time to vesting and the contract life of the award.
Expected Volatility
The Company estimates expected cumulative volatility giving consideration to the expected life of the option of the respective award, and the calculated annual
volatility by using the continuously compounded return calculated by using the share closing prices of an equal number of days prior to the grant-date (reference
period). The annual volatility is used to determine the (cumulative) volatility of its common stock (= annual volatility x square root (expected life)).
Forfeiture rate
The Company is using the aggregate forfeiture rate. The aggregate forfeiture rate is the ratio of pre-vesting forfeitures over the awards granted (pre-vesting
forfeitures/grants). The forfeiture discount (additional loss) is released into the profit and loss in the same period as the option vesting-date. The forfeiture rate is
actualized every reporting period and due to the firm reorganization the forfeiture rate has been set to zero to reflect the current expectation of the number of
leavers.
Risk-Free Interest Rate
The Company estimates the risk-free interest rate using the “Daily Treasury Yield Curve Rates” from the U.S. Treasury Department with a term equal to the
reported rate, or derived by using both spread in intermediate term and rates, to the expected life of the award.
Expected Dividend Yield
The Company estimates the expected dividend yield by giving consideration to our current dividend policies as well as those anticipated in the future considering
our current plans and projections. The Company does not currently calculate a discount for any post-vesting restrictions to which our awards may be subject.
Income Taxes
Current tax is based on the income or loss from ordinary activities adjusted for items that are non-assessable or disallowable for income tax purpose and is
calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax assets are recognized for the expected future tax
benefit to be derived from tax losses and tax credit carry-forwards. Establishment of a valuation allowance is provided when it is more likely than not that deferred
taxes will be realized.
In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties
arise as a consequence of revenue sharing and reimbursement arrangements among related entities, the process of identifying items of revenue and expenses that
qualify for preferential tax treatment and segregation of foreign and domestic income and expense to avoid double taxation.
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The Company files federal income tax returns in the US, various US state jurisdictions and various foreign jurisdictions. The Company’s income tax returns are
open to examination by federal, state and foreign tax authorities, generally for 3 years but can be extended to 6 years under certain circumstances. In other
jurisdictions the period for examinations depend on local legislation. The Company’s policy is to record estimated interest and penalties on unrecognized tax
benefits as part of its income tax provision.
Comprehensive Income (Loss)
Comprehensive income (loss) include all changes in equity during a period from non-owner sources. For the years ended December 31, 2016 and 2015, the
Company’s comprehensive loss consisted of its net loss and foreign currency translation adjustments.
Business Combinations
The acquisition method of accounting for business combinations as per ASC 805, Business Combinations (“ASC 805”), requires us to use significant estimates and
assumptions, including fair value estimates, as of the business combination date and to refine those estimates as necessary during the measurement period (defined
as the period, not to exceed one year, in which the Company may adjust the provisional amounts recognized for a business combination).
Under the acquisition method of accounting, the identifiable assets acquired, the liabilities assumed, and any non-controlling interests acquired in the acquisition
are recognized as of the closing date for purposes of determining fair value. The Company measures goodwill as of the acquisition date as the excess of
consideration transferred, over the net of the acquisition date fair value of the identifiable assets acquired and liabilities assumed. Costs that the Company incurs to
complete the business combination such as investment banking, legal and other professional fees are not considered part of consideration and the Company charges
them to general and administrative expense as they are incurred.
During the measurement period, the Company adjusts the provisional amounts recognized at the acquisition date to reflect new information obtained about facts
and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.
Measurement period adjustments are reflected retrospectively in all periods being presented in the financial statements.
Goodwill
The Company records goodwill when the fair value of consideration transferred in a business combination exceeds the fair value of the identifiable assets acquired
and liabilities assumed. Goodwill and other intangible assets that have indefinite useful lives are not amortized, but the Company tests them for impairment
annually during its fourth fiscal quarter and whenever an event or change in circumstances indicates that the carrying value of the asset is impaired.
The authoritative guidance for the goodwill impairment model includes a two-step process. First, it requires a comparison of the carrying value of the reporting unit
to its fair value. If the fair value is determined to be less than the carrying value, a second step is performed. In the second step, the Company compares the implied
fair value of goodwill to its carrying value in the reporting unit. The shortfall of the fair value below carrying value, if any, would represent the amount of goodwill
impairment charge. We are using the criteria in ASU no. 2011-08 Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which permits
the Company to make a qualitative assessment of whether it is more likely than not than not that a reporting unit’s fair value is less than the carrying amount before
applying the two-step goodwill impairment test. If the Company concludes that it is not more likely than not that the fair value of a reporting unit is less that its
carrying amount, it would not need to perform the two-step impairment test for that reporting unit.
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The Company tests goodwill for impairment in the fourth quarter of each fiscal year, or sooner should there be an indicator of impairment as per ASC 350,
Intangibles – Goodwill and Other. The Company periodically analyzes whether any such indicators of impairment exist. Such indicators include a sustained,
significant decline in the Company’s stock price and market capitalization, a decline in the Company’s expected future cash flows, a significant adverse change in
legal factors or in the business climate, unanticipated competition, and/or slower growth rate, among others. In the Company’s case, the indicator is the continuing
losses.
After the divestment of ValidSoft and renewed strategy the Company decided to impair the carrying value of goodwill related to ValidSoft. Following the
restructuring and rationalization that commenced in the fourth quarter 2015 and continued during 2016 the Morodo and Telnicity related projects were cancelled
and the related headcount phased out. As a result, the Company decided to fully impair the carrying value of goodwill related to Morodo and Telnicity.
Long-lived Assets and Intangible Assets
In accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”), intangible assets are carried at cost less accumulated amortization and impairment
charges. Intangible assets are amortized on a straight-line basis over the expected useful lives of the assets, between three and ten years. Other indefinite life
intangible assets are reviewed for impairment in accordance with ASC 350, on an annual basis, or whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Measurement of any impairment loss for long-lived assets and amortizing intangible assets that
management expects to hold and use is tested for impairment when amounts may not be recoverable. Impairment is measured based on the amount of the carrying
value that exceeds the fair value of the asset.
Property and Equipment, Internal Use Software and Third Party Software
Property and equipment are initially recorded at cost. Additions and improvements are capitalized, while expenditures that do not enhance the assets or extend the
useful life are charged to operating expenses as incurred. Included in property and equipment are certain costs related to the development of the Company’s
internally developed software technology platform.
The Company has adopted the provisions of ASC 350-40, Accounting for the Costs of Computer Software developed or obtained for internal use, and therefore the
costs incurred in the preliminary stages of development are expensed as incurred. The Company capitalizes all costs related to software developed or obtained for
internal use when management commits to funding the project; the preliminary project stage is completed and when technological feasibility is established.
Software developed for internal use has generally been used to deliver hosted services to the Company’s customers. Technological feasibility is considered to have
occurred upon completion of a detailed program design that has been confirmed by documenting the product specifications, or to the extent that a detailed program
design is not pursued, upon completion of a working model that has been confirmed by testing to be consistent with the product design. Once a new functionality
or improvement is released for operational use, the asset is moved from the property and equipment category “construction in progress” (“CIP”) to a property and
equipment asset subject to depreciation in accordance with the principle described in the previous sentence. In this account management also records equipment
acquired from third parties, until it is ready for use. Capitalization of costs ceases when the project is substantially complete and ready for its intended use.
Depreciation is applied using the straight-line method over the estimated useful lives of the assets once the assets are placed in service.
Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could
impact the recoverability of these assets. In 2016, the Company impaired $850,985 for assets held and used.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” (“ASU 2016-13”) which requires measurement and recognition of expected versus
incurred credit losses for financial assets held. ASU 2016-13 is effective for the Company’s annual and interim reporting periods beginning January 1, 2020, with
early adoption permitted on January 1, 2019. The Company is currently evaluating the impact of this ASU on its consolidated financial statements; however, at the
current time the Company does not know what impact the adoption will have on its consolidated financial statements, financial condition or results of operations.
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In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting” (“ASU 2016-09”). The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including
the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The update to the
standard is effective for the Company’s annual and interim reporting periods beginning January 1, 2017, with early adoption permitted. The Company is currently
evaluating the impact of ASU 2016-09 on its consolidated financial statements; however at the current time the Company does not know what impact the adoption
of ASU 2016-09 will have on its consolidated financial statements, financial condition or results of operations.
In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting
Revenue Gross versus Net).” This update provides clarifying guidance regarding the application of ASU 2014-09 when another party, along with the reporting
entity, is involved in providing a good or a service to a customer. In these circumstances, an entity is required to determine whether the nature of its promise is to
provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party
(that is, the entity is an agent). In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations
and Licensing,” which clarifies the identification of performance obligations and the licensing implementation guidance. In May 2016, the FASB issued ASU No.
2016-11, “Revenue Recognition and Derivatives and Hedging: Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16
Pursuant to Staff Announcements at the March 3, 2016 Emerging Issues Task Force Meeting (“EITF”),” which rescinds SEC paragraphs pursuant to SEC staff
announcements. These rescissions include changes to topics pertaining to accounting for shipping and handling fees and costs and accounting for consideration
given by a vendor to a customer. In May 2016, the FASB also issued ASU No. 2016-12, “Revenue from Contracts with Customers: Narrow-Scope Improvements
and Practical Expedients,” which provides clarifying guidance in certain narrow areas and adds some practical expedients. The effective dates for these ASU’s are
the same as the effective date for ASU No. 2014-09, for the Company’s annual and interim periods beginning January 1, 2018. The Company is currently
evaluating the impact of these ASU’s on its consolidated financial statements; however at the current time the Company does not know what impact the adoption
of these ASU’s will have on its consolidated financial statements, financial condition or results of operations.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a
lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or
operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and
operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical
expedients available. Management is currently assessing the impact of this pronouncement on the Company’s financial statements.
In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, “Financial Instruments – Overall
(Subtopic 825-10).” ASU 2016-01 enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful
information by addressing certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments simplify certain
requirements and also reduce diversity in current practice for other requirements. ASU 2016-01 is effective for public companies’ fiscal years beginning after
December 15, 2017, including interim periods within those fiscal years. Except for the early application guidance specifically allowed in ASU 2016-01, early
adoption is not permitted. We are currently evaluating the impact of our pending adoption of ASU 2016-01 on our consolidated financial statements and have not
yet determined the method by which we will adopt the standard.
51
On April 7, 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, which requires debt issuance costs related to a
recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. ASU 2015-
03 is effective for public companies’ fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted for
financial statement that have not been previously issued. The Company has elected for early adoption and included it in their Form 10-K for the year ended
December 31, 2015.
In January 2015, the FASB issued ASU 2015-01, Income Statement — Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement
Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”). ASU 2015-01 eliminates the concept of extraordinary items from GAAP but
retains the presentation and disclosure guidance for items that are unusual in nature or occur infrequently and expands the guidance to include items that are both
unusual in nature and infrequently occurring. ASU 2015-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015.
A reporting entity may apply ASU 2015-01 prospectively. A reporting entity may also apply ASU 2015-01 retrospectively to all periods presented in the financial
statements. We believe the adoption of ASU 2015-01 will not have a material effect on our consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update 2016-18, “Statement of Cash Flows - Restricted Cash a consensus of the FASB Emerging
Issues Task Force.” This standard requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of cash flows under
the retrospective transition approach. The guidance will become effective for fiscal years beginning after December 15, 2017 and interim periods within those
fiscal years. Early adoption is permitted. When adopted, the Company is expected to include restricted cash and cash equivalents with cash and cash equivalents on
the statement of the cash flows.
Note 2. Allowance for Doubtful Accounts
Accounts receivable are presented on the balance sheet net of estimated uncollectible amounts. The Company records an allowance for estimated uncollectible
accounts in an amount approximating anticipated losses. Individual uncollectible accounts are written off against the allowance when collection of the individual
accounts appears doubtful. The Company recorded an allowance for doubtful accounts of $88,528 and $269,608 as of December 31, 2016 and 2015, respectively.
Changes in the allowance for doubtful accounts are as follows:
Balance
at the
beginning
of the
period A
Currency
revaluation
B
Total
Allowance
for
doubtful
accounts
A+B
Additions-
allowance
for
doubtful
accounts
Release
for
doubtful
accounts
Balance
at the end
of the
period
269,608 $
- $
9,542 $
- $
260,066 $
- $
88,528
269,608 $
260,066 $
- $
88,528
269,608
Allowance for doubtful accounts
Year ended December 31, 2016
Year ended December 31, 2015
$
$
Note 3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets were recorded at $1,084,994 as of December 31, 2016, compared with $2,016,236 as of December 31, 2015. Prepaid
expenses and other current assets consisted primarily of prepaid insurance, other prepaid operating expenses, prepaid taxes and prepaid Value Added Tax (“VAT”).
As of December 31, 2016, $592,445 of the prepaid expenses was related to VAT. On December 31, 2015, prepaid VAT represented $621,286.
Note 4. Other Assets
Other assets at December 31, 2016 and December 31, 2015 are long-term in nature, and consist of long-term deposits, certain R&D credits, and loans to third
parties amounting to $129,037 and $473,893, respectively.
52
As of December 31, 2016, there was $129,037 in long-term deposits made to various telecom carriers during the course of operations and office facilities in various
countries, compared with $285,404 as of December 31, 2015. The deposits are refundable at the termination of the business relationship with the carriers. The
primary decrease in long-term deposits was for $47,514 related to the divestment of ValidSoft, $18,585 termination of the Indonesian Office lease and $90,268 that
was mainly related to the termination of carrier contracts.
Note 5. Note Receivable
The sale of ValidSoft at the end of the third quarter for the price of $3.0 million was completed and the Company received $2.0 million in cash and a $1.0 million
promissory note. The Principal amount of $1,000,000 together with all interest must be paid by on or before September 30, 2018 bearing interest of 5% per annum.
During 2016 we accrued $12,603 for interest.
Note 6. Property and Equipment
Property and equipment at December 31, 2016 and December 31, 2015 consisted of:
Furniture and fixtures
Computer, communication and network
equipment
Software
Automobiles
Construction in progress for internal use
software
Total property and equipment
Less: accumulated depreciation and
amortization
Total property and equipment, net
Average
Estimated
Useful
Lives
5
December
31, 2016
December
31, 2015
December
31, 2015
(assets held
for sale)
$
155,197 $
283,387 $
29,605 $
December
31, 2015
(excl. Assets
held for sale)
253,782
3 – 10
5
5
19,079,117
3,209,318
11,897
22,991,043
5,906,917
37,428
63,216
2,255,695
-
22,927,827
3,651,222
37,428
786,897
23,242,426
1,299,993
30,518,768
395,585
2,744,101
904,408
27,774,667
(14,533,648)
(15,496,091)
8,708,778 $ 15,022,677 $
$
(772,799)
(14,723,292)
1,971,302 $ 13,051,375
Computers, communications and network equipment includes the capitalization of our systems engineering and software programming activities. Typically, these
investments pertain to the Company’s:
Intelligent Network (IN) platform;
CRM provisioning Software;
·
·
· Mediation, Rating & Pricing engine;
· ValidSoft security software applications;
· Operations and business support software; and
· Network management tools.
Construction in progress (“CIP”) for internal use software consists of software projects in developments that have not been completed, and equipment acquired
from third parties but not yet ready for service.
The total amount of product development costs (internal use software costs) that are capitalized in Property & Equipment during the years ended December 31,
2016 and 2015 was $990,076 and $4,142,089, respectively.
Upon completion of development, the assets are reclassified from CIP to the appropriate Property and Equipment category, at which point the assets begin to
depreciate or amortize. During the year ended December 31, 2016, the Company transferred $214,770 from CIP into Property and Equipment. In 2015, we
transferred $5,697,792 from CIP into Property and Equipment. Following the restructuring and rationalization that commenced in the fourth quarter of 2015 and
continued during 2016 the Company cancelled projects and impaired for an amount of $850,985 in 2016.
53
Note 7. Intangible Assets
Intangible assets include customer contracts, telecommunication licenses and integrated, multi-country, centrally managed switch-based interconnects as well as
ValidSoft Intellectual Property, including but not limited to software source codes, applications, customer list & pipeline, registration & licenses, patents and
trademark/brands.
Intangible assets as of December 31, 2016 and 2015 consisted of the following:
Useful
Lives
December 31,
2016
December
31,
2015
December
31,
2015
(assets held
for sale)
December
31,
2015
(excl.
Assets held
for sale)
5 - 10
1 - 10
$
315,610 $
-
315,610
688,963 $
13,257,272
13,946,235
- $
12,930,083
12,930,083
688,963
327,189
1,016,152
(315,610)
(430,333)
-
(430,333)
$
-
- $
(10,663,602)
2,852,300 $
(10,336,413)
2,593,670 $
(327,189
258,630
Customer Contracts, Licenses, Interconnect
& Technology
ValidSoft IP & Technology
Total intangible assets
Less: Accumulated Amortization
Less: Accumulated Amortization ValidSoft
IP & Technology
Total intangible assets, Net
During the year ended December 31, 2016, intangible assets were fully amortized.
Note 8. Long Lived Assets held for Sale
In 2015, the Company committed to a plan to sell the subsidiaries ValidSoft Ireland Ltd and ValidSoft UK Ltd. (jointly ‘ValidSoft’) within a time period of less
than 12 months as of balance sheet date. Combined with other criteria as described in ASC 360-10-45-9 and ASC 360-10-45-11 we determined the long lived
assets related to ValidSoft should be classified as held for sale as of the fourth quarter of 2015.
On September 30, 2016, ValidSoft was divested through a management buyout.
Assets Held for Sale
Property & Equipment
Furniture and fixtures
Computer, communication and network equipment
Software
Automobiles
Construction in progress for internal use software
Less: accumulated depreciation
Total property and equipment, net
Intangible Assets
IP and Technology
Less: accumulated amortization
Total intangible Assets, net
Total Assets Held for Sale
Property & Equipment and Intangible Assets
Less: accumulated depreciation and amortization
Total Assets Held for Sale, net
Average
Estimated
Useful
Lives
December 31,
2016
December 31,
2015
5 $
3 – 10
5
5
$
- $
-
-
-
-
-
-
- $
29,605
63,216
2,255,695
-
395,585
2,744,101
(772,799)
1,971,302
3 – 10
-
12,930,083
$
$
-
- $
(10,336,413)
2,593,670
-
-
- $
15,674,184
(11,109,212)
4,564,972
54
Note 9. Goodwill
The carrying value of the Company’s goodwill as of December 31, 2016 and as of December 31, 2015 was as follows:
Goodwill
Goodwill ValidSoft Ltd
Goodwill Morodo Ltd.
Goodwill Telnicity
Total
December 31,
2016
December 31,
2015
- $
-
-
- $
2,659,866
177,155
190,401
3,027,422
$
$
After the divestment of ValidSoft and the renewed strategy the Company decided to impair the carrying value of goodwill related to ValidSoft. Following the
restructuring and rationalization that commenced in the fourth quarter 2015 the Morodo and Telnicity related projects were cancelled and the related headcount
phased out. As a result, the Company decided to fully impair the carrying value of goodwill related to Morodo and Telnicity.
Note 10. Accounts payable and Customer Deposits
As of December 31, 2016 and December 31, 2015, the accounts payable and customer deposits were comprised of the following:
Accounts payable
Customer deposits
Total Accounts payable and Customer Deposits
The customer deposits in 2015 relate to Dutch MVNOs of which the relationship was terminated during 2016.
Note 11. Net Billings in Excess of Revenues
December 31,
2016
December 31,
2015
$
$
2,316,768 $
-
2,316,768 $
2,574,425
65,438
2,639,863
Because the Company recognizes revenue upon performance of services, net billings in excess of revenues represents amounts received from the customers for
which either delivery has not occurred or against future sales of services. As of December 31, 2016, the balance of short term net billings in excess of revenues was
$951,791 and long term portion was $121,309, totaling $1,073,100. For the corresponding period in 2015, the short term net billings in excess of revenues balance
was $1,259,545 and the long term portion was $1,066,687, totaling $2,326,232.
Note 12. Accrued Expenses
As of December 31, 2016 and December 31, 2015, the accrued expenses were comprised of the following:
Accrued selling, general and administrative expenses
Accrued cost of service
Accrued taxes (including VAT)
Accrued interest payable
Other accrued expenses
Total accrued expenses
55
December 31,
2016
December 31,
2015
$
$
4,955,959 $
394,496
127,434
132,632
403,099
6,013,620 $
3,648,920
297,370
708,002
199,104
178,316
5,031,712
Accrued taxes include income taxes payable as of December 31, 2016 amounting to $9,442. See Note 24 of the Financial Statements for more information.
Accrued Selling, General and Administrative expenses include social security premiums, personnel related costs such as payroll taxes, provision for holiday
allowance, accruals for marketing and sales expenses, and office related expenses.
Note 13. Unsecured Convertible Promissory Notes
The Unsecured Convertible Promissory Notes can be split into two groups, the breakdown is as follows and we recognize the following events during the last
quarter.
Breakdown of the Unsecured Convertible Promissory
Notes (net of debt discounts)
9% Unsecured Convertible Note (Private Offering Q4-
2015 - Q1-2016)
9% Saffelberg Note (Unsecured Convertible)
Outstanding
December
31, 2016
Closing(s)
during
2016
Regular
Amortizations
(during
2016)
Conversions
(during
2016)
including
accelerated
amortization
December
31, 2015
$
$
$
(320,729) $
(500,319) $
(821,048) $
(453,176) $
(472,656) $
(925,832) $
(693,592) $
(27,662) $
(721,254) $
1,064,868 $
- $
1,064,868 $
(238,829)
-
(238,829)
On December 18, 2015, the Company consummated a closing (“Initial Closing”) and on March 14, 2016 the Company consummated the last of twelve closings of
its private placement offering (the “Offering”) of Units (as defined below) to “accredited investors” (as defined in Rule 501(a) of the Securities Act of 1933, as
amended, the “Securities Act”) (“Investors”). The closings have been part of a “best efforts” private placement offering of up to $4,200,000 (the “Maximum
Amount”) consisting of up to 140 units (the “Units”), each Unit consisting of: (i) one 9% unsecured subordinated convertible promissory note in the principal
amount of $30,000 (each a “Note” and collectively the “Notes”), which is convertible into shares (the “Note Shares”) of common stock of the Company, $.00001
par value, (the “Common Stock”) at the option of the holder at a conversion price of $7.50 per share, subject to certain exceptions; and (ii) a five-year warrant
(each a “Warrant” and collectively, the “Warrants”) to purchase one hundred thousand (4,000) shares of Common Stock (the “Warrant Shares”) at an exercise
price of $11.25 per share, subject to certain exceptions.
The Units were offered and sold pursuant to an exemption from registration under Section 4(2) and Regulation D of the Securities Act. During 2016 and 2015, the
Company sold an aggregate of $3,548,000 principal amount of Notes and delivered Warrants to purchase an aggregate of 473,067 shares of Common Stock.
The Warrants entitle the holders to purchase shares of Common Stock reserved for issuance thereunder for a period of five years from the date of issuance and
contain certain anti-dilution rights on terms specified in the Warrants. The Note Shares and Warrant Shares will be subject to full ratchet anti-dilution protection
for the first 24 months following the issuance date and weighted average anti-dilution protection for the 12 months period after the first 24 months following the
issuance date. In December 2016 the Company and the holders agreed upon modification of the Warrants to redeem the above anti-dilution protection and offered
an exercise price adjustment to $3.75 and 10% bonus warrants in return.
The Company filed an S-3 registration statement registering the Note Shares and Warrant Shares of the Offering which became effective November 14, 2016.
56
In connection with the Private Placement Offering, the Company retained a registered FINRA broker dealer (the “Placement Agent”) to act as the placement agent.
For acting as the placement agent, we agreed to pay the Placement Agent, subject to certain exceptions: (i) a cash fee equal to seven percent (7%) of the aggregate
gross proceeds raised by the Placement Agent in the Offering, (ii) a non-accountable expense allowance of up to one percent (1%) of the aggregate gross proceeds
raised by the Placement Agent in the Offering, and (iii) at the final Closing one five-year warrant to purchase such number of shares equal to 7% of the shares
underlying the Notes sold in this Offering at an exercise price of $7.50 and one five-year warrant to purchase such number of shares equal to 7% of the shares
underlying the Warrants sold in this Offering at an exercise price of $11.25. The total number of warrants earned by the Placement Agent are 33,115 warrants with
an exercise price of $11.25 and 33,115 warrants with an exercise price of $7.50.
The aggregate number of units sold during the offering period in 2015 and 2016 resulted in a gross proceed of $3,458,000 and a net proceed of $3,039,932. The
Company used the net proceeds from the Offering primarily for working capital.
The value of the warrants and the conversion feature to the investors and the Placement Agent cash fees and warrants have been capitalized and off set against the
liability for the Notes. By doing this the Company followed the new ASU 2015-03 guidelines to also offset the debt issuance costs against the liability of the
convertible notes. This resulted in a total initial debt discount of $2,395,290 and $467,568 of financing costs incurred in connection with the offering. The debt
discount and debt issuance costs are being amortized over the term of the Notes using the effective interest method.
Breakdown of the 9% Unsecured Subordinated Convertible
Promissory Note
(Maturing December
2018)
December
31, 2015
Additional
Closings
(during
2016)
Regular
Amortizations
(during
2016)
Conversions
(during 2016)
including
accelerated
amortization
10% Early
Repayment
Short Term
Outstanding
December
31, 2016
Convertible Note Principal
Amount
Principal Amount (Long Term) $
10% Early Repayment (Short Term)
(1,275,000) $
-
(2,273,000) $
-
- $
-
2,823,000 $
255,300
- $
(354,800)
(725,000)
(99,500)
Debt Discounts & Financing Costs
Investor Warrants
Conversion Feature value
7% Agent Warrants
Financing Costs
$
543,548
214,159
86,593
191,871
(238,829) $
1,105,059
296,414
144,158
274,193
(453,176) $
(346,454)
(133,988)
(63,284)
(149,866)
(693,592) $
(1,062,843)
(302,669)
(134,657)
(513,263)
1,064,868 $
-
-
-
354,800
- $
239,310
73,916
32,810
157,735
(320,729)
Breakdown of the 9% Saffelberg Note (Unsecured Convertible)
(Maturing August 18, 2019)
December 31,
2015
Closing during
2016
Regular
Amortizations
(during 2016)
Conversions
(during 2016)
including
accelerated
amortization
Convertible Note Principal Amount
Principal Amount (Long Term) $
Debt Discounts & Financing Costs
Investor Warrants
Conversion Feature value
Financing Costs
$
- $
-
-
-
- $
(723,900) $
- $
179,527
71,717
-
(472,656) $
(19,294)
(8,369)
-
(27,662) $
57
Outstanding
December 31,
2016
- $
-
-
-
- $
(723,900)
160,234
63,348
-
(500,319)
Note 14. Warrant and Conversion Feature Liabilities
The issuance of the 9% Convertible Note (Investors), the Saffelberg Note (Other Investor), the 13%+Eurodollar Senior Secured Credit Agreement (Lender) and
Placement Agent Fees (Agent) all resulted in rights to convert outstanding debt or exercise rights to buy common shares of the Company. The Company has
identified the following number of rights owned by the holders for the following groups.
Number of underlying shares for
Warrants & Conversion Feature issued
in relation with the 9% Unsecured
Subordinated Convertible Promissory
Note(s)
Outstanding
December 31,
2016
Additional
closings during
2016
Agreement
Amendments /
Shares issued
for Converted
Interest
Exercises /
Conversions
Outstanding
December 31,
2015
9% Convertible Note - Investors
9% Convertible Note - Other Investor
FMV Conversion Feature
Lender Warrants
Investor Warrants
Other Investor Warrants
7% Agent Warrants
8% Agent Warrants
FMV Warrant Liabilities
Total
212,667
134,679
347,346
1,273,018
520,374
96,520
66,229
68,445
2,024,586
303,067
134,679
437,746
-
303,067
96,520
42,429
-
442,016
748,973
-
748,973
1,273,018
47,307
-
-
68,445
1,388,770
(1,009,373)
-
(1,009,373)
-
-
-
-
-
-
170,000
-
170,000
-
170,000
-
23,800
-
193,800
2,371,932
879,762
2,137,743
(1,009,373)
363,800
Most of them initially contained certain conditions which resulted in the obligation to account for those elements as Derivative Liabilities. The Company has
identified the following derivatives in fair value amounts of outstanding rights owned by the holders for the following groups.
58
Fair Market Value Warrants &
Conversion Feature
FMV as of
December
31, 2016
Additional
closings
during
2016
Agreement
Amendments/
Conversions
Mark to
market
adjustment
Ytd-2016
FMV as
of
December
31, 2015
FMV Conversion Feature
FMV Warrant Liabilities
9% Convertible Note - Investors $
9% Convertible Note - Other Investor
$
Lender Warrants
Investor Warrants
Other Investor Warrants
7% Agent Warrants
8% Agent Warrants
$
- $
438,448
438,448 $
3,362,284
-
188,214
121,200
155,684
3,827,382 $
296,413 $
71,717
368,130 $
769,861
1,105,059
179,527
144,158
-
2,198,605 $
(1,675,439) $
-
(1,675,439) $
(109,756)
(919,760)
-
-
142,232
(887,284) $
1,118,628 $
366,731
1,485,359 $
2,702,178
(776,772)
8,687
(116,705)
13,452
1,830,840 $
260,398
-
260,398
-
591,473
-
93,747
-
685,220
Total
$
4,265,830 $
2,566,736 $
(2,562,723) $
3,316,199 $
945,618
Note 15. 2016 13%+Eurodollar Senior Secured Credit Agreement fka the 2014 10%+Eurodollar Third Party Loan Agreement
The following table shows the composition of the 13%+Eurodollar Senior Secured Credit Agreement reflected as the 2014 10% + Eurodollar 3rd Party Loan in the
Consolidated Balance Sheets:
2014 10% + Eurodollar 3rd Party Term Loan Agreement
(Extinguished due to the amendment in August 2016)
2014 10% Term Loan (principal amount)
Debt Discount - Repayment Premium
Deferred Exit Fee
Deferred Financing Costs
Debt Discount - Original Issue Discount
Debt Discount – Warrant
2016 13% + Eurodollar Senior Secured Credit Agreement
(Refinancing of 2014 10% + Eurodollar Loan)(Maturing December 2018,
including provisional extensions)
2016 13% + Eurodollar Senior Secured Credit Agreement (principal)
Debt Discount - 10% Warrants & Free Warrant shares
Debt Discount - Original Issue Discount
Deferred Financing Costs
Debt Discount - Repayment Premium
59
December 31,
December 31,
2016
$
$
- $
-
-
-
-
-
- $
2015
6,500,000
57,176
(343,130)
(132,567)
(501,202)
5,580,277
December 31,
2015
December 31,
2016
10,081,836 $
(422,202)
(6,596)
(164,731)
(1,772,645)
7,715,662 $
$
$
-
-
-
-
-
-
On November 17, 2014, the Company and certain of its subsidiaries entered into a term loan credit agreement with Atalaya Administrative LLC, as the
administrative agent and collateral agent, and the lenders party thereto (the “2014 10% Term Loan Agreement”). The 2014 10% Term Loan Agreement provides
for a twelve million dollar term loan facility (the “Term Loan Facility”), with advances to be made on the Closing Date. Borrowings under the Term Loan Facility
shall bear interest at the Eurodollar rate plus an applicable margin per annum equal to ten percent (10.00%), such margin decreased by two percent (2%) from 12%
upon the satisfaction of certain post-closing conditions. The Term Loan Facility will mature on December 31, 2017.
On July 9, 2015 the Company entered into a First Amendment to the Credit Agreement dated November 17, 2014 with Corbin Mezzanine Fund I, L.P. (‘Lender’)
and Atalaya Administrative LLC, as administrative agent and collateral agent for Corbin Mezzanine Fund I.
Leading up to the amendment of the credit agreement the Company paid $10,100,000 on June 22, 2015 to Atalaya, comprising of a $5,500,000 pre-payment, and a
$4,427,333 payment in anticipation of the conclusion of the amended credit agreement, totaling $9,927,333 which amount was debited against the outstanding
principal of $12,000,000, resulting in an outstanding balance at June 30, 2015 of $2,072,667. The remainder of the $10,100,000 was used for default interest and
prepayment charges. After closing of the First Amendment the Company received approximately $ 4.5 million from Atalaya/Corbin to bring the outstanding
principal to the agreed $6,500,000.
As of the third quarter of 2015 the Company has been in breach of certain covenants under the amended credit agreement and is therefore in default of the credit
agreement.
On August 15, 2016 the Company entered into the second amendment to the credit agreement dated November 17, 2014 with Corbin Mezzanine Fund I, L.P. and
Atalaya Administrative LLC, as administrative agent and collateral agent for Corbin Mezzanine Fund I. Under the second amendment, the senior secured lender
increased the loan facility by $1,202,447 of which $1,000,000 was paid to the Company and the remainder was offset against legal fees and other financing related
costs, the lender waived the Company’s existing defaults under the financial covenants, raised the applicable margin to 13% and reset the agreed maturity date to
December 31, 2016 with extended maturity options towards March 31, 2017 if certain conditions were met. Furthermore the amendment included additional
prepayment premium in the following cases, equal to: (a) twenty-five percent (25%) of the amount prepaid if such prepayment occurs on or before October 15,
2016, (b) fifty percent (50%) of the amount prepaid if such prepayment occurs on or after October 16, 2016 and on or before December 31, 2016, and (c) seventy-
five percent (75%) of the amount prepaid if such prepayment occurs on or after December 31, 2016. Considering the above amendments the Company concluded
that the amendments constitute an extinguishment of the debt compared to the terms before the amendment. As a result the outstanding debt discounts and deferred
financing costs have been accounted as extinguishment of debt.
On December 27, 2016, the Company agreed upon another amendment (the “Amendment”) of the credit agreement with Atalaya Administrative LLC as
administrative agent and Corbin Mezzanine Fund I, L.P. Pursuant to the Amendment, the Borrower is indebted in the amount of $5,562,778, and has agreed to add
the following amounts to the indebtedness: (i) the Additional Prepayment Premium (as agreed upon in the Amendment of August 15, 2016) of $4,149,893; (ii) the
Prepayment Premium (as defined in the Original Credit Agreement) of $69,165 and (iii) the Exit Fee (as defined in the Original Credit Agreement) of $300,000,
totaling $10,081,836 (the “Amended Term Loan Facility”).
The Amendment removes certain terms regarding the liquidation preference and the prepayment fee. In addition, the Amendment provides that credit agreement
shall bear interest at Eurodollar rate plus an applicable margin per annum equal to thirteen percent (13%). However, upon receipt by the Company of Net Equity
Proceeds (as defined in the Amendment) of $3,000,000 and applying such amount to certain obligations, the interest rate shall be reduced to 12% per annum.
60
Pursuant to the Amendment, the initial maturity date of the loan is June 30, 2017, which shall be automatically extended to December 31, 2017 (the “First
Extended Maturity Date”) upon a repayment of principal of at least $1,500,000 million by March 31, 2017 and another $1,500,000 by June 30, 2017, and no
default then exits. The First Extended Maturity Date shall be automatically extended to February 28, 2018 (the “Second Extended Maturity Date”) if the financial
statements required by the Amendment for the month ending November 30, 2017 have been delivered to Atalaya and the Lender, and as of December 31, 2017, the
total leverage ratio of the Company and its subsidiaries is less than or equal to 2.50 to 1.00, and no default then exits. The Second Extended maturity Date shall be
automatically extended to December 31, 2018 (the “Third Extended Maturity Date”) if the financial statements for the fiscal quarter ending December 31, 2017
have been delivered to Atalaya and the Lender, and as of December 31, 2017, the total leverage ratio of the Company and its subsidiaries is less than or equal to
2.50 to 1.00, and no default then exits.
In addition, pursuant to the Amendment, the Borrower agrees to respectively repay $250,000 by the end of each fiscal quarter of 2017 and $500,000 by the end of
each fiscal quarter of 2018. The Amendment also provides that the Borrower shall pay to Atalaya a quarterly installment of $15,000 as the administration fee,
which is $60,000 in total. Also, the Amendment updated the financial covenants.
Also on December 27, 2016, a Reaffirmation Agreement (the “Reaffirmation Agreement”) was entered by and among ET Europe, the Company, Pareteum North
America and Atalaya, pursuant to which, among other things, the Borrower reaffirmed its obligations to Lender under each of the Credit Agreement (as defined in
the Reaffirmation Agreement), the Security Agreement (as defined in the Reaffirmation Agreement) and the Pledge Agreement (as defined in the Reaffirmation
Agreement) and Deed of Pledge over Shares (as defined in the Reaffirmation Agreement).
Upon closing of the amendment, the Company performed an analysis to determine whether this amendment of the Credit Agreement constituted an extinguishment
to the existing credit agreement and concluded that such was not the case.
Note 16. Registered Direct Offering and Warrant Liabilities
In June 11, 2013, the “Company” entered into an Amendment No. 1 (the “Amendment to SPA”) to certain Securities Purchase Agreement (the “SPA”) dated June
3, 2013 with certain institutional and other investors (“DJ Investors”) placed by Dawson James Securities Inc. (the “Placement Agent”) and Mr. Steven van der
Velden, the Chief Executive Officer and Chairman of the Board (“Affiliated Investors”), relating to a registered direct public offering by the Company (the
“Offering”). The gross proceeds of this SPA were $12,000,000 and resulted in net proceeds of $11,292,500 after the deduction of $707,500 for fundraising related
expenses to various parties involved. The majority of the net proceeds were used to pay off the outstanding Senior 8% Secured Convertible Notes issued in 2012.
The number of shares issued relating to this SPA amounted to 697,025, the number of warrants amounted to 313,661 and was covered by the registration statement
filed in 2012 for an amount of $75,000,000 (S-3/A Amendment No. 2, File No. 333-181738 dated June 6, 2012).
According to ASC 480-10 Distinguishing Liabilities from Equity, the accounting for an equity instrument with detachable warrants classified as a liability reflects
the notion that the consideration received upon issuance must be allocated between the instruments issued. Proceeds from the issuance of an equity instrument with
stock purchase warrants are allocated to the two elements based on the following: (i) the liability element has initially been recorded at fair market value; and (ii)
the remaining portion of the consideration has been allocated to the equity element.
The liability instrument was re-evaluated at each reporting period with changes in the fair value recognized through the applicable period Consolidated Statement
of Comprehensive Loss.
During 2015 the last outstanding warrants relating to the Offering were exercised and exchanged in to common shares. Due to the conditions within the warrant
agreement, there was no additional cash proceed when the exercise took place.
61
Note 17. Obligations under Capital Leases
The Company has a financing arrangement with one of its vendors to acquire equipment and licenses. This trade arrangement matured in January 2017.
The current portion of the Capital Leases of $10,813 as of December 31, 2016 is included in Current Liabilities “Obligations under capital leases (current portion)”
in the accompanying balance sheet as of December 31, 2016.
Note 18. Other long term payable
Other long term payable is summarized as follows:
Arrangement with creditor
Less:
Short-term portion (recorded in Accrued Expenses and Other Payables)
Total long term
December 31,
2016
$
$
251,079
(58,099)
192,980
During the fourth quarter of 2014, the Company reached an agreement with regulatory authorities regarding a debt for telecom license fees from 2013. As of
December 31, 2016 the outstanding long term portion amounted to $192,980 compared to $260,290 as of December 31, 2015. The total current amount, long term
and short term, of $251,079 as of December 2016 will be repaid in 49 monthly installments.
Note 19. Fair Value Measurements
The following tables summarize fair value measurements by level at December 31, 2016 for financial assets and liabilities measured at fair value on a recurring
basis:
Derivative Liabilities
Conversion feature
Warrant Liabilities
Total Derivatives Liabilities
Level 1
Level 2
Level 3
Total
December 31, 2016
$
$
- $
-
- $
- $
-
- $
438,448 $
3,827,381
4,265,829 $
438,448
3,827,381
4,265,829
The Company uses the Monte Carlo valuation model and the Black-Scholes model to determine the value of the outstanding warrants and conversion feature. Since
the Monte Carlo valuation model requires special software and expertise to model the assumptions to be used, the Company hired a third party valuation expert.
The following table summarizes fair value measurements by level at December 31, 2015 for financial assets and liabilities measured at fair value on a recurring
basis:
Derivative Liabilities
Conversion feature
Warrant Liabilities
Total Derivatives Liabilities
Level 1
Level 2
Level 3
Total
December 31, 2015
$
$
- $
-
- $
- $
-
- $
260,398 $
685,220
945,618 $
260,398
685,220
945,618
The Company has classified the outstanding warrants into level 3 due to the fact that some inputs are not published and not easily comparable to industry peers.
62
The Company determines the “Fair Market Value” using a Monte Carlo or Black-Scholes model by using the following assumptions:
Number of outstanding warrants
The number of outstanding exercise rights is adjusted every re-measurement date after deducting the number of exercised rights during the previous reporting
period.
Stock price at valuation date
The closing stock price at re-measurement date being the last available closing price of the reporting period taken from www.nasdaq.com.
Exercise Price
The exercise price is fixed and determined in the warrant agreement.
Remaining Term
The remaining term is calculated by using the contractual expiration date of the warrant agreement at the moment of re-measurement. The remaining term for a
warrant exercise using the exchange condition is fixed in the warrant agreement at five years.
Expected Volatility
We estimate expected cumulative volatility giving consideration to the expected life of the note and calculated the annual volatility by using the continuously
compounded return calculated by using the share closing prices of an equal number of days prior to the maturity date of the note (reference period). The annual
volatility is used to determine the (cumulative) volatility of our common stock (= annual volatility x SQRT (expected life)).
Liquidity Event
We estimate the expected liquidity event giving consideration to the expectation of sale of assets held for sale and the current substantial reorganization.
Risk-Free Interest Rate
We estimate the risk-free interest rate using the “Daily Treasury Yield Curve Rates” from the U.S. Treasury Department with a term equal to the reported rate, or
derived by using both spread in intermediate term and rates, up to the maturity date of the note.
Expected Dividend Yield
We estimate the expected dividend yield by giving consideration to our current dividend policies as well as those anticipated in the future considering our current
plans and projections.
Note 20. Stockholders’ Equity
(A) Common Stock
The Company is presently authorized to issue 500,000,000 shares Common Stock. The Company had 8,376,267 shares of common stock issued and outstanding as
of December 31, 2016, an increase of 1,830,429 shares from December 31, 2015, largely due to the shares issued in connection with the conversion of $2,823,000
on convertible notes which resulted in the issuance of a total of 1,009,373 shares; 176,000 shares were issued as part of the settlement with Cross River Initiatives;
104,671 shares were issued as executive officers and directors compensation including 20,000 shares being part of a severance and independent contractor
agreement with one of the former officers of the company; 166,316 shares were issued as part of the negotiations to amend the credit agreement with the lender,
divided into 120,000 shares issued as a result of warrants exercise and 46,315 shares issued as debt discount; 199,166 shares were issued as special stock awards to
staff and consultants; 232,257 shares were issued as part of the agreement with suppliers to settle the outstanding debt or service fee in shares in lieu of cash;
33,427 shares were issued to consultants in lieu of cash.
63
Reconciliation with Stock Transfer Agent Records:
The shares issued and outstanding as of December 31, 2016 according to the stock transfer agent’s records are 8,386,104. The difference in number of issued
shares recognized by the Company of 8,376,267 amounts to 9,837 and it is the result of the exclusion of the 9,357 unreturned shares from ‘cancelled’ acquisitions
(pre-2006) and 480 treasury shares issued under the former employee benefits plan.
(B) Preferred Stock
The Company’s Certificate of Incorporation authorizes the issuance of 50,000,000 shares of Preferred Stock, $0.00001 par value per share. 249 shares of Preferred
Stock are issued and outstanding as per closing December 31, 2016. Under the Company’s Certificate of Incorporation, the Board of Directors has the power,
without further action by the holders of the Common Stock, subject to the rules of the NYSE MKT LLC, to designate the relative rights and preferences of the
Preferred Stock, and issue the Preferred Stock in such one or more series as designated by the Board of Directors. The designation of rights and preferences could
include preferences as to liquidation, redemption and conversion rights, voting rights, dividends or other preferences, any of which may be dilutive of the interest
of the holders of the Common Stock or the Preferred Stock of any other series. The issuance of Preferred Stock may have the effect of delaying or preventing a
change in control of the Company without further stockholder action and may adversely affect the rights and powers, including voting rights, of the holders of
Common Stock. In certain circumstances, the issuance of Preferred Stock could depress the market price of the Common Stock.
On September 2, 2016, the Company consummated a closing (a “Closing”) of its private placement offering (the “Offering”) of Series A Preferred Stock, par value
$0.00001 per share (the “Series A Preferred Stock”), to “accredited investors” (as defined in Rule 501(a) of the Securities Act of 1933, as amended, the “Securities
Act”) (the “Investors”). At the Closing, the Company sold 73 shares of Series A Preferred Stock for aggregate gross proceeds of $730,000.
On September 16, 2016, the Company consummated a Closing of the Offering of the “Series A Preferred Stock, to Investors. At the Closing, the Company sold 49
shares of Series A Preferred Stock for aggregate gross proceeds of $490,000.
From September 28 through September 30, 2016, the Company consummated Closings of the Offering of Series A Preferred Stock, to Investors. At the Closings,
the Company sold 27 shares of Series A Preferred Stock for aggregate gross proceeds of $270,000.
The above Closings are part of a “best efforts” private placement offering of up to $1,500,000 (the “Maximum Amount”) consisting of up to 150 shares of Series A
Preferred Stock. 149 shares of Series A Preferred Stock have been sold by the Company for gross proceeds to the Company of approximately $1.49 million.
On October 28, 2016, the Company entered into separate subscription agreements with certain Investors relating to the issuance and sale of 33 shares of the
Company’s Series A-1 Preferred Stock, for aggregate gross proceeds of $330,000.
On November 10, 2016, the Company entered into separate subscription agreements with certain Investors relating to the issuance and sale of 62 shares of the
Company’s Series A-1 Preferred Stock, for aggregate gross proceeds of $620,000.
On December 2, 2016, the Company entered into a subscription agreement with an Investor relating to the issuance and sale of 5 shares of the Company’s Series
A-1 Preferred Stock, for aggregate gross proceeds of $50,000.
64
The above closings have been part of a “best efforts” private placement offering conducted by the Company of up to $1,000,000 (the “Maximum Amount”),
consisting of up to 100 shares of Series A-1 Preferred Stock (the “Offering”). As of the date hereof the Company has sold a total of 100 shares of Series A-1
Preferred Stock for aggregate gross proceeds of $1,000,000.
Each share of the Series A and Series A-1 Preferred Stock is convertible, at the option of the holder, into 0.04% of the Company’s issued and outstanding shares of
common stock immediately prior to conversion. Combined the Series A (149) and Series A-1 (100) preferred shares will be convertible into 9.96% of the
Company’s issued and outstanding shares of common stock immediately prior to conversion.
The Company has the right, in its discretion, to compel holders of the Series A and Series A-1 Preferred Stock to convert the preferred stock into shares of the
Company’s common stock in the event that a change in control (as defined in the Certificate of Designation of Preferences, Rights and Limitations of the Series A
and Series A-1 Preferred Stock, or the “Certificate of Designation”) occurs within one year after issuance. Further, at any time after one year after the issuance, the
Company has the option to automatically convert the Series A-1 Preferred Stock into common stock.
The holders of the Series A and Series A-1 Preferred Stock are not entitled to receive any dividends and have no voting rights (except that the Company may only
take certain corporate actions with the approval of a majority of the outstanding shares of the Series A and Series A-1 Preferred Stock). Further, upon liquidation,
dissolution or winding up of the Company, the holders of the Series A and Series A-1 Preferred Stock will receive distributions on par with and on a pro rata basis
with the holders of the Company’s common stock as though the Series A and Series A-1 Preferred Stock had been converted at the time of such liquidation,
dissolution or winding up of the Company.
The Investors in the Offering have also received piggy-back registration rights with respect to the shares of common stock issuable upon conversion of the Series A
and Series A-1 Preferred Stock.
In connection with the Offering, the Company retained a placement agent. The Company agreed to pay the placement agent, subject to certain exceptions, a cash
fee equal to eight percent (8%) of the aggregate gross proceeds raised by the placement agent in the Offering plus the reimbursement of certain out-of-pocket
expenses not exceeding $15,000.
The Series A and Series A-1 Preferred Stock was offered and sold pursuant to an exemption from registration under Section 4(a)(2) and Regulation D of the
Securities Act.
During 2016, the Company issued 249 shares of Preferred Stock, compared to 0 shares of Preferred Stock outstanding as of December 31, 2015.
Preferred A & A-1 shares
Series A Preferred Stock (Initial Value)
Initial Fundraise Costs (Pref A)
Series A-1 Preferred Stock (Initial Value)
Initial Fundraise Costs (Pref A-1)
Total
Outstanding as per December 31,
2016
Number
Net Proceeds
Outstanding as per December 31,
2015
Number
Net Proceeds
149 $
100
1,490,000
(183,521)
1,000,000
(163,283)
249 $
2,143,196
65
- $
-
-
-
- $
-
-
-
-
-
The Initial Fundraise Costs are a combination of the 8% Placement Agent fee, Finder fee, Legal fee, Solicitation fee and Costs relating to the repricing of certain
outstanding warrants.
(C) Warrants
Throughout the years, the Company has issued warrants with varying terms and conditions related to multiple funding rounds, acquisitions and other transactions.
Often these warrants could be classified as equity instead of a derivative. As of December 31, 2016, 1,504,278 warrants have classified as derivative warrants with
a total fair market value of $3,827,381. A number of 700,373 have been classified as non-derivative warrants. The warrants outstanding at December 31, 2015 have
been recorded and classified as non-derivative warrants, except for 170,000 warrants which the Company has valued and recorded for an amount of $685,220 in
the balance sheet for the warrant liabilities issued in connection with the Unsecured Subordinated Convertible Promissory Note Offering described in Note 13
including warrants to be issued to the placement agent. The Weighted Average Exercise Price for the currently outstanding warrants in the table below is $4.6075.
During December 2015 and first quarter of 2016, 66,229 warrants were issued as part of service provided by the placement agent for our offering of the 9%
Unsecured Convertible Note, these warrants are containing conditions which classify these warrants as a derivative liability.
On August 15, 2016, the Company amended the outstanding Credit Agreement, the 10%+Eurodollar 3 rd Party Loan. As part of the amendment the Company
exercised, free of charge, 166,316 warrants which were outstanding as per December 31, 2015. Additionally, the Company issued 1,273,018 warrants to the
lenders, these warrants are containing conditions which make it necessary for the Company to account for those as being derivative warrants.
Also, the Company formalized and issued the $723,900 convertible note and 96,520 warrants with respect to the initial agreement to settle the 2015 severance
agreement with the former CEO which were assigned to Saffelberg Investments NV. These 96,520 warrants have also conditions which forces the Company to
account for these warrants as derivate warrants.
During December 2016, the company engaged the placement agent also used for the issuance of the convertibles notes offered in December 2015 and Q1 2016, to
facilitate in the communication towards the note holders to persuade them to convert their notes, in combination with other incentives, in common shares. Their
services have been successful and the company committed to issue a variable number of warrants which have been determined to be 68,511 warrants as per closing
December 31, 2016.
The below table summarizes the warrants outstanding as per the below reporting:
Outstanding Warrants
Equity Warrants - Fundraising
Liability Warrants - Fundraising
Equity Warrants - Other
Exercise/ Conversion
price(s) (range)
$3.75 - $23.25
$3.25 - $11.25
NA
Expiring
2016 - 2021
2019 - 2021
NA
2016
2015
700,373
1,504,278
-
2,204,651
346,316
170,000
746
517,062
Note 21. Non-controlling Interest
The Company had no non-controlling interests in its subsidiaries.
Net losses attributable to non-controlling interests were insignificant for all the years presented.
66
Note 22. Basic and diluted net loss per share
Net loss per share is calculated in accordance with ASC 260, Earnings per Share (“ASC 260”). Basic net loss per share is based upon the weighted average number
of common shares outstanding. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised
at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase Common Stock at the average market
price during the period. The Company uses the ‘if converted’ method for its senior secured convertible notes. Weighted average number of shares used to compute
basic and diluted loss per share is the same since the effect of dilutive securities is anti-dilutive.
The diluted share base for fiscal 2016 and 2015 excludes incremental shares related to convertible debt, warrants to purchase Common Stock and employee stock
options as follows:
Dilutive Securities
Convertible Notes
Warrants
Employee Stock Options
2016
2015
212,667
2,204,651
1,040,211
3,457,529
170,000
517,062
1,434,563
2,121,625
These shares were excluded due to their anti-dilutive effect on the loss per share recorded in each of the years presented. Except for shares pending to be issued due
to compensation in lieu of cash and a certain warrant exercise, no additional securities were outstanding that could potentially dilute basic earnings per share.
Note 23. Option Compensation Plan and 2008 Long Term Incentive Compensation Plan
2008 Long-Term Incentive Compensation Plan
In 2008, the Company adopted the 2008 Plan. The 2008 Plan initially authorized total awards of up to 200,000 shares of Common Stock, in the form of incentive
and non-qualified stock options, stock appreciation rights, performance units, restricted stock awards and performance bonuses. The amount of Common Stock
underlying the awards to be granted remained the same after the 1-for-25 reverse stock-split that was effectuated on June 11, 2008.
In 2011, the stockholders approved an increase in the shares available under the 2008 Plan from 200,000 to 920,000 shares of Common Stock.
In 2013, the Company’s stockholders approved the amendment and restatement of the 2008 Plan, which increased the number of authorized shares by 920,000
shares of Common Stock.
In 2014, the Company’s stockholders approved another amendment and restatement of the 2008 Plan, which increased the number of authorized shares by 400,000
shares.
During 2016, 337,159 shares were issued under the 2008 Plan, of which 299,731 as non-cash compensation and or bonus granted to senior staff, management and
board members for services during the fourth quarter of 2015 and the first, second and third quarter of 2016, no shares were issued under the plan as a result of
employee option exercises.
67
Reconciliation of registered and available shares and/or options as of December 31, 2016:
Registered 2008
Registered 2011
Approved increase 2013
Approved increase 2014
Total Registered under this plan
Shares (issued to):
Consultants
Directors, Officers and staff
Options exercised
Options (movements):
Issued and Outstanding
Available for grant at December 31, 2016:
Common Stock options consisted of the following as of the years ended December 31, 2016 and 2015:
Full Year
2016
Total
-
-
-
-
33,428
299,731
-
200,000
720,000
920,000
400,000
2,240,000
46,428
471,441
95,284
1,040,211
586,636
Options:
Outstanding as of December 31, 2014
Granted in 2015
Exercised (with delivery of shares)
Forfeitures (Pre-vesting)
Expirations (Post-vesting)
Exchanged for Cashless exercise
Outstanding as of December 31, 2015
Granted in 2016
Exercised (with delivery of shares)
Forfeitures (Pre-vesting)
Expirations (Post-vesting)
Exchanged for Cashless exercise
Outstanding as of December 31, 2016
Number of
Options
Weighted
Average
Exercise
Price
Initial Fair
Market Value
(Outstanding
Options)
1,602,243 $
613,186
(347)
(527,825)
(252,694)
-
1,434,563
498,218
-
(240,107)
(652,463)
-
1,040,211 $
33.00 $
14.25
17.00
26.25
43.50
-
28.75
3.75
-
16.75
38.50
-
13.35 $
30,737,254
4,635,518
(2,451)
(9,425,694)
(4,730,900)
-
21,213,727
1,368,955
-
(2,751,204)
(10,994,838)
-
8,836,640
In 2016, options awarded had a weighted average exercise price of $3.75. The initial fair market value at grant date of these options, in the aggregate, was
$1,368,955.
The weighted average assumptions used for the options granted in 2016 using the Black-Scholes options model are: expected cumulative volatility of 214% based
on calculated annual volatility of 85%, contractual life of 7.04 years, expected option life of 6.49 years (using the simplified method) and a Risk Free Interest Rate
of 2.31%. The expected dividend yield is zero.
68
Following is a summary of the status and assumptions used of options outstanding as of the years ended December 31, 2016, and 2015:
Grants
During the year
Weighted Average Annual Volatility
Weighted Average Cumulative Volatility
Weighted Average Contractual Life of grants (Years)
Weighted Average Expected Life of grants (Years)
Weighted Average Risk Free Interest Rate
Dividend yield
Weighted Average Fair Value at Grant-date
Options Outstanding
Total Options Outstanding
Weighted Average Remaining Contractual Life (Years)
Weighted Average Remaining Expected Life (Years)
Weighted Average Exercise Price
Aggregate Intrinsic Value (all options)
Aggregate Intrinsic Value (only in-the-money options)
Options Exercisable
Total Options Exercisable
Weighted Average Exercise Price
Weighted Average Remaining Contractual Life (Years)
Aggregate Intrinsic Value (all options)
Aggregate Intrinsic Value (only in-the-money options)
Unvested Options
Total Unvested Options
Weighted Average Exercise Price
Forfeiture rate used for this period ending (staff only)
Options expected to vest
Number of options expected to vest corrected by forfeiture
Unrecognized stock-based compensation expense
Weighting Average remaining contract life (Years)
Exercises
Total shares delivered/issued
Weighted Average Exercise Price
Intrinsic Value of Options Exercised
Twelve month period ending:
December 2016
December 2015
498,218
613,186
85%
214%
7.04
6.49
2.3105%
0.0000%
$
2.75
1,040,211
4.47
4.92
13.35
-
0
643,153
17.86
3.76
-
0
$
$
$
$
$
$
81%
160%
4.42
3.97
1.3513%
0.0000%
7.55
1,434,563
2.83
2.31
28.75
-
52,500
866,457
36.75
1.93
-
-
397,058
6.04
$
0.000%
568,106
16.50
16.260%
397,058
1,802,691
6.33
$
498,048
3,636,518
4.26
0
-
-
$
$
346
17.00
1,052
$
$
$
$
$
$
$
$
$
$
$
At December 31, 2016, the unrecognized expense portion of share-based awards granted to employees under the 2008 Plan was approximately $1,802,691 with
each stock-award, adjusted for cancellations, forfeitures and returns. The forfeiture rate was adjusted from 16.3% as per closing December 2015 to 0% as per
closing December 2016 and the corresponding profit and loss effect has been accounted for in 2015.
Share-Based Compensation Expense
The Company recorded for the year ended December 31, 2016, $3,897,437 of share-based compensation, of which $3,654,369 relate to the 2008 Plan and
$243,068 relates to the expensing of shares issued as restricted securities as defined in Rule 144 of the Securities Act and not issued under the 2008 Plan. For the
comparable period in 2015 the expensing was in total $3,481,908, $3,368,783 for shares issued under the 2008 Plan and $113,125 for expensing of the issuance of
restricted shares under the Rule 144 of the Securities Act. In case of grant of options, the Company utilized the Black-Scholes valuation model for estimating the
fair value of the stock-options at grant and subsequent expensing until the moment of vesting.
69
Share-based Compensation Expense
Stock-Based Compensation Expense
Consultancy services
Directors and Officers (shares and options)
Employees (shares and options)
Total
Note 24. Income taxes
For financial statement purposes, loss before the income tax provision is divided amongst the following;
Domestic
Foreign
Total loss before income tax provision
Twelve
Twelve
months ended months ended
December 31,
2016
December 31,
2015
$
$
$
$
243,068 $
2,275,068
1,379,300
3,897,437 $
113,125
2,266,704
1,102,079
3,481,908
2016
(34,186,424) $
2,780,006
(31,406,418) $
2015
(6,939,848)
1,916,388
(5,023,460)
The Company files income tax returns in the US federal jurisdiction and various state and foreign jurisdictions. The applicable statutory tax rates vary between
none (zero) and 34%. However, because the Company and its subsidiaries have incurred annual corporate income tax losses since their inception, management has
determined that it is more likely than not that the Company will not realize the benefits of its US and foreign net deferred tax assets. Therefore, the Company has
recorded a full valuation allowance to reduce the net carrying amount of the deferred taxes to zero. The Company’s 2016 provision for income taxes of $38,286
relates to taxable income in some jurisdictions.
In the ordinary course of business, the Company is subject to tax examinations in the jurisdictions in which it files tax returns. The Company’s statute of
limitations for tax examinations is four years for federal and state purposes and four to six years in the major foreign jurisdictions in which the company files.
Income tax (benefit)/expense for each year is summarized as follows:
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Income tax (benefit)/ expense
December 31,
2016
December 31,
2015
$
$
- $
-
38,286
38,286
-
-
-
38,286 $
-
-
(17,225)
(17,225)
-
-
-
(17,225)
70
The following is a reconciliation of the provision for income taxes at the US federal statutory rate (34%) to the foreign income tax rate for the years ended:
Tax expense (credit) at statutory rate federal
State tax expense net of federal tax
Foreign income tax rate difference
Change in valuation allowance
Other
Income tax (benefit)/ expense
December 31,
2016
December 31,
2015
34%
-
(3)%
(33)%
0%
(2)%
34%
-
(7)%
(29.8)%
0%
(2.8)%
$
The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, are as follows:
Deferred tax assets:
Net Operating Losses
Total gross deferred tax assets
Less: valuation allowance
Net deferred tax assets
2016
2015
$
$
47,284,369 $
47,284,369
(47,284,369)
- $
41,191,934
41,191,934
(41,191,934)
-
As of December 31, 2016, and 2015, the Company had significant net operating losses carryforwards of approximately $143 million and $157 million,
respectively. The deferred tax assets have been offset by a full valuation allowance in 2016 and 2015 due to the uncertainty of realizing any tax benefit for such
losses. Releases of the valuation allowances, if any, will be recognized through earnings.
As of December 31, 2016, and 2015, the Company’s US based subsidiaries had net federal and state operating loss carryforwards of approximately $80 million and
$45 million, respectively. Federal and state net operating loss carry forwards in the US start to expire in 2018. At December 31, 2016, the net operating loss
carryforwards for foreign countries amounts to approximately $63 million. Losses in material foreign jurisdictions will begin to expire in 2016.
71
Section 382 of the Internal Revenue Code limits the use of net operating loss and tax credit carry forwards in certain situations where changes occur in the stock
ownership of a company. In the event the Company has a change in ownership, utilization of the carry forward could be restricted.
The Company files income tax returns in the US federal jurisdiction and various state and foreign jurisdictions. Due to the net operating loss, all the tax years are
open for tax examination. As of December 31, 2016, and 2015, the Company accrued an ASC 740-10 tax reserve of $0 and $0, respectively, for uncertain tax
(benefits)/liability including interest and penalties.
Note 25. Contingencies
telSPACE -vs- Elephant Talk et al., AAA Case No. 01-16-0003-8242 .
Claimant commenced this AAA arbitration on or about September 7, 2016 by the filing of a statement of claim. Claimant asserted claims arising out of Software
Licensing Agreements (“Licensing Agreements”) entered into by Claimant and mCash Holdings LLC (together, “Licensors”), on the one hand, and Telnicity LLC,
on the other, which Telnicity subsequently assigned to the Company. Pursuant to the Licensing Agreements, the Company obtained the license to use certain
intellectual property in exchange for monthly payments to the Licensors. Claimant alleged that the Company failed to make monthly payments from on or about
November 2015, causing the Licensors to terminate the Licensing Agreements, and continued using Licensors’ intellectual property after such termination. Based
on these allegations, Claimant asserted claims for breach of contract, misappropriation of trade secret, and copyright infringement. Claimant seeks unspecified
damages, specific performance, prejudgment interest, attorneys’ fees, and costs.
On October 31, 2016, the Company filed a statement of answer denying Claimant’s claims. On January 5, 2017, the arbitration panel scheduled the hearing for
April 13, 2017. The Parties have conducted limited discovery, which concluded on February 28, 2017. On March 10, 2017, Claimant requested leave to move for
a default judgment against the Company for failing to advance the AAA administrative fees, and for sanctions based on alleged spoliation of evidence. On March
15, 2017, the Arbitration Chair denied Claimant’s request for leave to move for default, and granted Claimant’s request for leave to move for sanctions. The
Arbitration will proceed in Seattle, WA, on April 13, 2017.
Saffelberg Investments N.V. unsecured $350,000 Promissory Note repayment
Following a mutually agreed extension of maturity of the Note from December 31, 2016, to March 31, 2017, the Company intends to repay to Saffelberg the
unsecured $350,000 Promissory Note on or before the new maturity date.
Other
The Company is involved in various claims and lawsuits incidental to our business. In the opinion of management, the ultimate resolution of such claims and
lawsuits will not have a material effect on our financial position, liquidity, or results of operations.
72
Note 26. Geographic Information
Year ended December 31, 2016
Revenues from unaffiliated customers
Identifiable assets
Year ended December 31, 2015
Revenues from unaffiliated customers (restated)
Identifiable assets
Note 27. Concentrations
Europe
Other foreign
countries
$
$
11,953,015 $
9,766,602 $
902,796 $
3,278,687 $
Total
12,855,811
13,045,289
Europe
Other foreign
countries
$
$
13,034,020 $
22,269,243 $
17,981,433 $
3,123,143 $
Total
31,015,453
25,392,386
Financial instruments that potentially subject us to concentrations of credit risk consist of accounts receivable and unbilled receivables. Those customers that
comprised 10% or more of our revenue, accounts receivable and unbilled receivables are summarized as follows:
For the year ended December 31, 2016, the Company had one customer that accounted for 82% of total revenue. For the year ended December 31, 2015, the
Company had two customers that accounted for 50% and 33% of total revenue.
The Company had two customers that accounted for 81% and 16% respectively of accounts receivable and unbilled revenue.
Note 28. Related Party Transactions
There were no related party transactions in 2016 or 2015, except for (i) the sale of former subsidiary ValidSoft; and (ii) the debt restructuring transactions with
Atalaya Capital Management and Corbin Mezzanine Fund I, L.P.
Note 29. Subsequent Events
March 2017 Underwritten Common Stock Offering
On March 10, 2017, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Joseph Gunnar & Co., LLC (the “Underwriter”),
relating to the issuance and sale of 2,333,334 shares of the Company’s common stock, par value $0.00001 per share (the “Common Stock”), at a price to the public
of $1.50 per share together with five-year warrants to purchase an aggregate of 1,166,667 shares of Common Stock at an exercise price of $1.87. The Underwriter
agreed to purchase the shares from the Company pursuant to the Underwriting Agreement at a price of $1.3949 per share. The gross proceeds to the Company from
the offering were approximately $3.5 million, before deducting underwriting discounts and commissions and offering expenses payable by the Company. The
offering closed on March 15, 2017. In addition, under the terms of the Underwriting Agreement, the Company granted the Underwriter a 45-day option to purchase
up to (i) up to 350,000 additional shares of Common Stock (the “Option Shares”) at a purchase price of $1.3949 per one Option Share, taking into account the
Underwriter’s discount, and/or (ii) warrants to purchase up to 175,000 additional shares of Common Stock (the “Option Warrants”). The Underwriter partially
exercised their over-allotment option on 109,133 Option Warrants.
The offering was made pursuant to the Company’s effective registration statement on Form S-3 (Registration Statement No. 333-213575) previously filed with and
declared effective by the SEC and a prospectus supplement and accompanying prospectus filed with the SEC.
The Underwriting Agreement contained customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification
obligations of the Company and the Underwriter, including for liabilities under the Securities Act of 1933, as amended, other obligations of the parties and
termination provisions. The representations, warranties and covenants contained in the Underwriting Agreement were made only for purposes of such agreement
and as of specific dates, were solely for the benefit of the parties to such agreement, and may be subject to limitations agreed upon by the contracting parties.
Conversion of Preferred shares into common stock
On March 7, 2017, the Company received conversion notices from holders of an aggregate of $1,950,000, or 195 shares of the Company’s Series A Convertible
Preferred Stock and Series A-1 Convertible Preferred Stock (the “Preferred Shares”). The Preferred Shares converted into shares of common stock, $0.00001 par
value per share, of the Company at a 13% discount to a public offering and became effective upon the filing by the Company of a prospectus supplement disclosing
the terms of an offering. The closing of the public offering took place March 15, 2017 and the public offering price was set at $1.50, therefore the discounted
conversion price for the preferred shareholders was calculated at $1.305. The number of shares to be issued was approximately 881,226.
73
Amendment 2016 13% + Eurodollar rate Senior Secured Credit Agreement
On March 6, 2017, Elephant Talk Europe Holding B.V., an entity organized under the laws of the Netherlands (the “Borrower”), a wholly owned subsidiary of the
Company, as borrower, the Company, Pareteum North America Corp., a Delaware corporation, Elephant Talk Group International B.V., an entity organized under
the laws of the Netherlands, Corbin Mezzanine Fund I, L.P. (“Lender”) and Atalaya Administrative LLC, a New York limited liability company, as administrative
agent and collateral agent for the Lender, entered into a Letter Agreement (the “Agreement”) to amend certain terms of the credit agreement among the parties,
dated November 17, 2014, as has been amended from time to time (as so amended, the “Amended and Restated Agreement”). Capitalized terms used herein but
not otherwise defined shall have the meaning as set forth in the Amended and Restated Credit Agreement.
Pursuant to the Agreement, (i) the Maturity Date will be extended to December 31, 2018; (ii) the amortization schedule will be as follows: Q1-17: $1,500,000; Q2-
17: $1,500,000; Q3-17: $500,000; Q4-17: $500,000; Q1-18: $750,000; Q2-18: $750,000; Q3-18: $750,000; Q4-18: Balloon; (iii) a new financial covenants
package shall be agreed upon by the parties by April 30, 2017; and (iv) the Warrants will be amended as follows: (a) the aggregate amount of shares of common
stock underlying the Warrants will be increased to 1,446,000 (post-reverse split); (b) the exercise price of the Warrants will be set at the lesser of (A) $3.25 per
share (post-reverse split) or (B) a 13% discount to the offering price of shares of common stock in an underwritten public offering (the “Equity Offering”) of the
Company; and (c) the anti-dilution sections (Sections 9(d) and 9(h)) of the Warrants shall be removed.
Reversed Stock-Split
On February 23, 2017, the Company filed a certificate of amendment to the Company’s certificate of incorporation (the “Certificate of Amendment”), effective
after the market closed on February 24, 2017 (the “Effective Date”), with the Secretary of State of the State of Delaware in order to effect the previously
announced 1-for-25 reverse stock split (the “Reverse Split”). Pursuant to the Reverse Split, every 25 shares of the Company’s issued and outstanding common
stock have been converted into one share of common stock. The Reverse Split took effect at 4:01 p.m., Eastern Time, on the Effective Date, and the common stock
began trading on a split-adjusted basis when the market opened on February 27, 2017. No fractional shares were issued if, as a result of the Reverse Split, a
stockholder would otherwise have been entitled to a fractional share. Instead, each stockholder was entitled to receive a cash payment which was based upon the
volume weighted average price for the five (5) days preceding the Effective Date.
74
The Reverse Split followed (i) the granting of authority to the Board of Directors of the Company (the “Board”), by the Company’s stockholders at the 2016
Annual Meeting of Stockholders held on August 16, 2016, in its discretion, to determine whether to proceed with the Reverse Split and to select and file the
Certificate of Amendment to the Company’s certificate of incorporation to effect the Reverse Split at a ratio to be determined by the Board and (ii) the subsequent
approval by the Company’s Board on February 14, 2017 of the enactment of the Reverse Split at the ratio of 1-for-25.
All warrant, option, share and per share information in these financial statements and footnotes give retroactive effect for the Reverse Split. All numbers in the
financial statements and footnotes included herein give effect to all financial information as if the Reverse Split had occurred on the date reported.
I tem 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to management, including our interim chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosures. Our management, with the participation of our principal executive officer and chief financial
officer (our principal financial officer), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 131-15(e) and
15d-15(e)) as of December 31, 2016. Based on that evaluation, our management concluded that our disclosure controls and procedures were effective as of
December 31, 2016.
75
(b) Management’s Annual Report on Internal Control over Financial Reporting .
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
and fair presentation of published financial statements in accordance with generally accepted accounting principles and includes those policies and procedures that:
·
·
·
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and
directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on our financial statements.
Internal control over financial reporting may not prevent or detect misstatements due to its inherent limitations. Management’s projections of any
evaluation of the effectiveness of internal control over financial reporting as to future periods are subject to the risks that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016 and in making this assessment used
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework) in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Based on the foregoing evaluation, our management
concluded that, as of December 31, 2016, our internal control over financial reporting was effective.
(c) Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2016 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Effective as of March 31, 2016, Mark Nije, through his management entity, LMI Europe B.V., resigned from the Company as its Chief Financial Officer.
The Company has an agreement with Mr. Nije to make monthly cash severance payments for twelve months to LMI Europe B.V. equal to an aggregate of Euro
240,000, plus VAT.
Effective as of March 31, 2016, Alex Vermeulen, through his management entity, Scere Company Italy S.R.I., resigned from the Company as its General
Counsel, Secretary and Compliance Officer. The Company has an agreement with Mr. Vermeulen to (i) make monthly cash severance payments for six months to
Scere Company Italy S.R.I. equal to an aggregate of Euro 81,000, (ii) grant to Mr. Vermeulen 4,000 restricted shares of the Company’s common stock and (iii)
allow 1,333 options which had not yet vested to vest immediately.
Effective as of December 31, 2016, it was mutually agreed with Gary Brandt and his management entity, Blue Ridge Consulting LLC, that the
restructuring consultancy services, including the services of Mr. Brandt as Chief Restructuring Officer would cease. This agreed cessation of services was not as a
result of any disagreement between Mr. Brandt and the Company.
Effective as of January 31, 2016, Timothy Payne, stepped down as Interim President of the Company’s North America subsidiary, ET North America
Corp. The Company has an agreement with Mr Payne to (i) pay severance equivalent to six monthly gross base salaries (US$ $105.000) less taxes; (ii) vest and
accelerate certain stock options (pursuant to 4,000 options which were granted on April 17, 2014). Mr Payne did not resign as a result of any disagreement with the
Company on any matter relating to the Company's operations, policies or practices.
Effective as of September 30, 2016, Patrick M. Carroll, resigned from all positions held at the Company, following the divestment and management-lead
buy-out of ValidSoft.
76
Effective as of March 31, 2017, Erik Kloots will resign from the Company as its Principal Accounting Officer. The Company has an agreement (the
“Settlement Agreement”) with Mr. Kloots to (i) make a lump sum severance payment of gross Euro 121,289.41 (USD $ 129,746) no later than March 31, 2017, (ii)
pay all unused holidays and pro-rata calculations of 2016 holiday allowance, (iii) keep the Company laptop, and (iv) keep all past awarded stock-options through
the life of the options. Mr. Kloots will not resign as a result of any disagreement with the Company on any matter relating to the Company’s operations, policies or
practices.
Effective as of November 2, 2016, Armin Gustav Hessler submitted his resignation as the Company’s Chief Operations Officer. The Company has agreed
to make monthly cash severance payments to Mr. Hessler for a period of nine months from the date of his resignation, equal to an aggregate gross amount of Euro
180,000 (USD $ 198,034). The Company has also agreed to allow Mr. Hessler to keep an aggregate of 88,000 vested stock options. Mr. Hessler did not resign as
a result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.
Item 10. Directors, Executive Officers and Corporate Governance.
Directors & Executive Officers
PART III
Set forth below are the Company’s Directors and key Executive Officers as at 31 March 2017, together with an overview of their professional experience and
expertise.
Name
Age
Position(s) Held
Robert H. Turner
Robert Skaff (1) (2) (3)
Roderick de Greef (1) (2) (3)
Yves van Sante (1) (2) (3)
Luis Jimenez-Tuñon (1) (2) (3)
Victor Bozzo
Edward O’Donnell (4)
Erik Kloots (5)
Alexander Korff (6)
67
47
56
55
37
49
51
52
34
Executive Chairman of the Board
Director
Director
Director
Director
Chief Executive Officer
Chief Financial Officer
Principal Accounting Officer
General Counsel, Secretary & Compliance Officer
(1)
(2)
(3)
(4)
(5)
(6)
Currently a member of the Audit and Finance Committee.
Currently a member of the Nominating and Corporate Governance Committee.
Currently a member of the Compensation Committee.
Chief Financial Officer since January 9, 2017
Principal Accounting Officer from April 1, 2016, through March 31, 2017
Significant employee
Director
Since
2015
2015
2015
2014
2017
N/A
N/A
N/A
N/A
Robert H. Turner was appointed Executive Chairman of the Board on November 16, 2015. Mr. Turner has 40 years’ experience, cultivating and growing “all
stage” global software, telecom and tech companies. He emphasizes strategy, sales, organizational leadership, and fundamental financial results and leads with a
culture that passionately serves the needs of valued constituents, while sustaining growth. Mr. Turner launched his career at AT&T, where he rose to serve at the
highest ranks in a broad spectrum of international, start-up, and corporate firms, including (selected highlights): NeoNova Network Services, Inc.; Pac West;
Telecom, Inc.; Panterra Networks; PTT Telecom Netherlands, US Inc. (now KPN); and BellSouth Communications, Inc. (now AT&T). Mr. Turner is also an
advisory board member of The Capital Angels, affiliated with SC Angel Network. Mr. Turner earned a Bachelor of Science degree and a Master of Business
Administration from the University of South Carolina, where he was presented with a Distinguished Alumni award in 2010. Mr. Turner is Guest Lecturer in the
Darla Moore School of Business Professional MBA program
77
Robert Skaff has been a director since December 16, 2015. Mr. Skaff is the founder of DiNotte Lighting Hampton which has developed world-class OEM and
recreational lighting products since 2005 and currently serves as a consultant for various manufacturing companies. Mr. Skaff was previously the president of ID
Control, a manufacturer of patented mobile video equipment for police vehicles and served as Vice President for Decatur Electronics. Mr. Skaff was a principal
and director of Management Information Systems at Johnson and Johnston Associates which was later acquired by Gould Electronics, a subsidiary of Japan
Energy.
Roderick de Greef has been a director since September 23, 2015. He previously served as a director of the Company from January 2008 to October 2011. Mr. de
Greef (1961) is Chief Financial Officer of BioLife Solutions, Inc, a publicly listed biotechnology company. He has over 25 years of public company CFO
experience with companies such as Cardiac Science, BioLife Solutions, Inc., and Cambridge Heart, Inc. Mr. de Greef has been extensively involved in numerous
financing transactions and several domestic international M&A transactions. Mr. de Greef has also been member of the board of directors of several public and
private companies over the past 15 years, including Endologix, Inc. He was a member of the Board and Chairman of the Audit Committee of Pareteum
Communications, Inc., from 2008 to 2011. Mr. de Greef received a BA in Economics and International Relations from San Francisco State University and an MBA
from the University of Oregon.
Yves van Sante has been a director since June 1, 2014. From July 2011 to May 2014, Mr. van Sante was a board observer for our Company, following his service
on our Board of Directors from October 2006 to July 2011. Mr van Sante (1960) studied Marketing, Communication and Commercial Management. He started his
career in 1982 as an advisor at United Brokers and became sales manager for Brinkers International, the market leader in refining oil for the food industry, a year
later. From 1987 until 1993 he served as Sales and Marketing manager Central Europe at 3C Communications in Luxemburg, where he launched Credit Card
Telephony across Europe. Following this position, he became a business unit manager Public Telephony at Belgacom, the Belgium incumbent, where he managed
a department of 650 employees and a € 40 million business. In 1994, together with Steven van der Velden, Yves van Sante co-founded InTouch Telecom. As its
managing director he was responsible for business development, sales and marketing. In 1999, when achieving a turnover of € 25 million and having grown to 125
staff, InTouch was sold to GTS, a pan European Telecom operator. Mr. van Sante became vice-president Business Services with GTS in London, where he
consolidated acquisitions and turned the voice Telco around into an IP operator. In 2000 he became Managing Director of Eport, a call centre owned by the Port of
Ostend. After six months Eport was sold to the Dutch call-centre Call-IT, and Mr. van Sante became advisor to its Management Board. In 2002 he founded Q.A.T.
Investments. Concurrently, he has held various Management and Board functions in companies in the QAT portfolio. Mr. van Sante is a member of De Warande
and member of the Board of Directors of Festival of Flanders.
Luis Jimenez-Tuñon has been a director since March 1, 2017. Mr. Jimenez-Tuñon is a distinguished mobile telecommunications industry leader, having served as
CEO of the Company’s largest customer, Vodafone Enabler Spain S.L. (“Vodafone Enabler”) from July 2011 to December 2016. In addition to his role at
Vodafone Enabler, during a decade at Vodafone, Mr. Jimenez-Tuñon has also held leadership positions at Vodafone Spain where he was responsible for business
development and strategy of the group’s Mobile Virtual Network Operators (MVNOs), enablers, roaming services, international carriers and wholesale fixed
broadband business lines. Mr. Jimenez-Tuñon is currently founder and CEO of Red Queen Ventures, S.L. (www.redqueen-ventures.com) a global high-tech
advisory and Investment Company focused on technology, telecom, MVNO/E, satellite and aerospace. As Chief executive of Vodafone Enabler, he pioneered the
Company’s innovative business model and powered the launch of Vodafone Spain’s second brand Lowi.es which was awarded best Spanish MVNO in 2015 and
2016. Started in 2011, under his leadership, Vodafone enabler boosted its revenue, profit and operational performance, and achieved internationalization.
Previously, Luis held several executive positions at Vodafone Spain, including Senior Vice President where he grew business to hundreds of millions of euros in
yearly revenue. Mr. Jimenez began his career in the satellite industry in 2002 holding various positions including Research engineer at the National Space Institute
of Denmark and later Deputy Commercial Director of INSA (today ISDEFE), Spain’s leading satellite operations company managing NASA and ESA tracking
stations. Luis has received several professional and academic awards at international and national levels. Luis earned an Executive MBA from EOI Business
School, a Master’s Degree in Satellite Communications from Polytechnic University of Madrid, and an MSc in Telecommunications Engineering from the
University of Zaragoza in cooperation with the Technical University of Denmark. He also completed the Executive Management Program (SEP) from the Graduate
School of business at Stanford University in California, of which he is lifetime alumni. Along with his executive career, Luis has been guest speaker at
international business summits and has published several papers.
78
Victor Bozzo was appointed Chief Executive Officer on November 1, 2016. Mr. Bozzo served as Senior Vice President, Worldwide Sales and Marketing for
Telarix Inc., a market leader in interconnect solutions for service providers. Under Mr. Bozzo’s sales and marketing leadership, sales increased significantly and
the company received numerous market leadership accolades, ultimately leading to a highly successful exit for investors. Prior to joining Telarix, Mr. Bozzo served
as President and General Manager of Pac-West’s Emerging Technologies division after selling Pac-West his startup, Factor Communications, an innovative
portfolio of cloud-based communications services. He was also responsible for significant revenue and customer growth and investor returns at exTone
Communications, ITXC Corporation, and Voxware.
Edward O’Donnell became our Chief Financial Officer, effective January 9, 2017. Mr. O’Donnell has over 23 years of experience in investment banking,
advertising, private equity, investment, venture capital, technology, internet and other new media businesses. Prior to joining the Company, Mr. O’Donnell served
as the Chief Financial Officer of Ameri Holdings, Inc. (OTC: AMRH) from January 2016 through December 2016. Mr. O’Donnell has served as the Chief
Operating Officer of Radbourne Property Group, Inc., an innovative operator of family entertainment centers, where his primary responsibilities included raising
capital, external reporting, outlining capital structure and budgeting. From February 2013 until April 2015, Mr. O’Donnell served as chief financial officer of
AudioEye, Inc. (OTC: AEYE) From December 2010 until January 2013, Mr. O’Donnell served as Vice President of Finance for Augme Technologies, Inc.
(Previously OTC: AUGT), which provides strategic services and mobile marketing technology to leading consumer and healthcare brands. From January 2007
until November 2010, Mr. O’Donnell served as Chief Financial Officer of Carlyle Capital Group LLC, a venture capital and private equity firm. Previously, Mr.
O’Donnell also served as Senior Vice President of Finance & Investor Relations of ACTV, Inc. (previously NASDAQ: IATV), where he developed the investor
relations department before the company was purchased by OpenTV, a subsidiary of Liberty Media. Previously, Mr. O’Donnell was a member of Aloysius Lyons,
LLC. Aloysius Lyons, LLC filed for protection under Chapter 7 of the federal bankruptcy laws in 2007. Aloysius Lyons, LLC received a discharge relating to the
matter in 2009 and has been dissolved. Mr. O’Donnell is a Certified Public Accountant in New York and a member of NYSSCPAs and AICPA. Mr. O’Donnell
earned a B.S, degree in Accountancy from Villanova University in 1991 and an M.B.A. from Columbia Business School in 2003. We believe that Mr. O’Donnell’s
extensive education and background in accounting and finance makes him qualified to serve as our Chief Financial Officer.
Erik Kloots was appointed as Principal Accounting Officer, effective April 1, 2016. Prior to his appointment, Mr. Kloots was employed as the Company’s
European Business Controller and then as the Company’s Global Director of Corporate Control & Finance, reporting directly to the Company’s Chief Financial
Officer since January 1, 2007. In these roles, Mr. Kloots has been fully accountable for the Global Corporate Control and Finance department of the Company,
preparing group budget and strategic plans, quarterly rolling forecasts, SEC filings and investor presentations. Prior to working at the Company, Mr. Kloots
worked as Business Controller for eighteen years in Martinair Holland N.V., a well-known Dutch airline company. At Martinair, Mr. Kloots was, as the business
controller of the Cargo Business Unit, responsible for the planning & control-cycle (strategic planning), preparing financial reporting and analysis, design of the
control framework involving the introduction of Business Balanced Scorecard, among other responsibilities. Mr. Kloots studied Business Economics at the
Hogeschool voor Economische Studies (HES), in Amsterdam and for Corporate Controller at the Financiele Academie in Den Bosch.
Alexander Korff was appointed General Counsel, Secretary and Chief Compliance Officer effective April 1, 2016. Mr Korff oversees the legal affairs of the
group, including corporate, commercial and financial transactions, intellectual property, governance and regulatory compliance. Before joining Pareteum, Mr Korff
worked at international law firms Clifford Chance (in their London, Amsterdam and Warsaw offices) and Bird & Bird in London, specializing in contentious and
non-contentious commercial, IT and intellectual property law – predominantly for technology- and telecom-sector clients. He has also worked as in-house legal
counsel to defense and aviation group EADS Airbus at their European headquarters in France. He previously held commercial posts with technology companies
WorldPay and Autonomy. Mr Korff read law (LL.B) at Durham University, England, and undertook post-graduate legal studies at the London College of Law. He
speaks English, Dutch, German and French.
79
None of our directors or executive officers has been involved in any legal proceeding enumerated in Regulation S-K Item 401 within the time periods described in
that regulation.
Board Committees
CORPORATE GOVERNANCE
Our Board of Directors has established three standing committees: (1) Audit and Finance, (2) Nominating and Corporate Governance, and (3) Compensation.
All committees operate under a charter that has been approved by the Board of Directors and which is available on our website, www.pareteum.com.
Audit and Finance Committee
Our Board of Directors has an Audit and Finance Committee, abbreviated to Audit Committee, composed of Messrs. de Greef (Chairman and member since
September 23, 2015), Skaff (member since February 18, 2016), van Sante (member since February 18, 2016) and Jimenez-Tuñon (member since March 1, 2017).
The Audit and Finance Committee met four (4) times during 2016. Each of the then-current members was present at all of the Audit and Finance Committee
meetings held during 2016.
The Audit Committee oversees our corporate accounting, financial reporting practices and the audits of financial statements. For this purpose, the Audit and
Finance Committee has a charter (which is reviewed annually) and performs several functions. The Audit and Finance Committee:
·
·
·
evaluates the independence and performance of, and assesses the qualifications of, our independent auditor, and engages such independent auditor;
approves the plan and fees for the annual audit, quarterly reviews, tax and other audit-related services, and approves in advance any non-audit service to
be provided by the independent auditor;
reviews and approves related-party transactions;
· monitors the independence of the independent auditor and the rotation of partners of the independent auditor on our engagement team as required by law;
·
·
·
reviews the financial statements to be included in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and reviews with management
and the independent auditors the results of the annual audit and reviews of our quarterly financial statements;
oversees all aspects our systems of internal accounting control and corporate governance functions on behalf of the Board of Directors; and
provides oversight assistance in connection with legal, ethical and risk management compliance programs established by management and the Board of
Directors, including Sarbanes-Oxley implementation, and makes recommendations to the Board of Directors regarding corporate governance issues and
policy decisions.
80
Nominating and Corporate Governance Committee
Our Board of Directors has a Nominating and Corporate Governance Committee, abbreviated to Nominating Committee, presently composed of Messrs. van Sante
(Chairman. Member since December 16, 2015), de Greef (member since September 23, 2015), Skaff (member since December 16, 2015) and Jimenez-Tuñon
(member since March 1, 2017). The Nominating Committee did not convene as such during 2016, preferring the affairs of the Committee to be addressed by the
full Board.
The Nominating Committee is charged with the responsibility of reviewing our corporate governance policies and with presenting new potential director-nominees
to the Board of Directors for consideration. The Nominating Committee has a charter which is reviewed annually. All members of the Nominating Committee are
independent directors as defined by the rules of the NYSE MKT. The Nominating Committee will consider director nominees recommended by stockholders. To
recommend a nominee, please write to the Nominating and Corporate Governance Committee, c/o the General Counsel, Pareteum Corporation, 100 Park Avenue,
Suite 1600, New York City, NY 10017, USA. The Nominating Committee will assess all director nominees using the same criteria it applies generally, described
in this Form 10-K under the heading “Director and Officer Qualifications.” During 2016, we did not pay any fees to any third parties to assist in the identification
of nominees.
Compensation Committee
Our Board of Directors also has a Compensation Committee composed of Messrs. Skaff (Chairman), de Greef, and van Sante. Before December 16, 2015, the
Compensation Committee was composed of Messrs. Bustillo, Stevens, De Greef and Ros. The Compensation Committee reviews or recommends the
compensation arrangements for our management and employees and also assists the Board of Directors in reviewing and approving matters such as Company
benefit and insurance plans. The Compensation Committee met two (2) times during 2016 and acted by Unanimous Written Consent one (1) time in 2016. Each of
the then-committee members was present at all of the Compensation Committee meetings held during 2016.
The Compensation Committee has the authority to directly engage, at the Company’s expense, any compensation consultants or other advisers as it deems
necessary to carry out its responsibilities in determining the amount and form of employee, executive and director compensation. In 2016, the Compensation
Committee did not engage any such compensation consultants or advisers.
Director and Officer Qualifications
We have not formally established any specific, minimum qualifications that must be met by each of our officers or directors or specific qualities or skills that are
necessary for one or more of our officers or members of the Board of Directors to possess. However, our Nominating Committee generally evaluates and
recommends candidates with a focus on the following qualities: educational background, diversity of professional experience, knowledge of our industry and
business, integrity, professional reputation, independence, wisdom and ability to represent the best interests of our stockholders and other stakeholders.
Our Board of Directors and officers are composed of a diverse group of leaders. In their prior positions they have gained experience in core management skills,
such as strategic and financial planning, public company financial reporting, compliance, risk management and leadership development. Most of our officers and
directors also have experience serving on boards of directors and board committees of other public companies or private companies, and have an understanding of
corporate governance practices and trends, which provides an understanding of different business processes, challenges and strategies.
Attendance at Board, Committee and Stockholder Meetings
Our Board of Directors met in person and telephonically fourteen (14) times during 2016 and also acted by unanimous written consent eleven (11) times. Each of
the then-members of our Board of Directors was present at 75% or more of the Board of Directors meetings held in 2016.
In 2016, Mr. Turner and Mr. De Greef attended the annual stockholder meeting. We have encouraged, but do not require, that all of our directors be in attendance
at the Annual Meeting either in person or by remote communication. In addition, we have encouraged, but do not require, our directors to attend future annual
stockholder meetings in person.
81
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires that our directors and executive officers and persons who
beneficially own more than 10% of our common stock (referred to herein as the “reporting persons”) file with the SEC various reports as to their ownership of and
activities relating to our common stock. Such reporting persons are required by the SEC regulations to furnish us with copies of all Section 16(a) reports they file.
Based solely upon a review of copies of Section 16(a) reports and representations received by us from reporting persons, and without conducting any independent
investigation of our own, in 2016, there were untimely filings of Forms 3, 4 and 5 as outlined herein, specifically: (i) one report on Form 4 covering one transaction
filed by Mark Nije; (ii) four reports on Form 4 covering four transactions filed by Patrick M. Carroll; (iii) one report on Form 4 covering one transaction filed by
Martin Zuuriber; (iv) one report on Form 4 covering one transaction filed by Jaime Bustillo Velasco, (v) two reports on Form 4 covering two transactions filed by
Roderick de Greef; (vi) one report on Form 4 covering one transaction filed by Robert Skaff Jr; (vii) two reports on Form 4 covering two transactions filed by
Francisco Ros; (vii) three reports on Form 4 covering three transactions filed by Yves Roger van Sante; (viii) two reports on Form 4 covering two transactions filed
by Gary G. Brandt; (ix) one report on Form 4 covering one transaction filed by Robert Harold Turner, and (x) one report on Form 3 covering one transaction filed
by Victor Bozzo.
Code of Conduct
We have adopted a code of conduct that outlines the principles, policies and laws that govern our activities and establishes guidelines for conduct in the workplace.
The code of conduct applies to all employees, as well as each member of our Board of Directors. All employees are required to read the code of conduct and affirm
in writing their acceptance of the code. Our code of conduct is posted on our website, www.pareteum.com. We intend to satisfy any disclosure requirement under
Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of our code of conduct by posting such information on our website,
www.pareteum.com. A copy of our code of conduct is also available in print, without charge, upon written request to Pareteum Corporation, 100 Park Avenue,
Suite 1600, New York, NY 10017, USA. Attn: General Counsel.
Item 11. Executive Compensation
Name and principle
position
Robert H. Turner (i)
(Executive Chairman)
Victor Bozzo (ii)
(CEO & Chief Executive Officer)
Alex Korff (iii)
(General Counsel, Secretary &
Compliance Officer)
Edward O’Donnell (iv)
(Chief Financial Officer)
Erik Kloots (v)
(Vice President-Finance and Principal
Accounting Officer)
Summary Compensation Table
Option
Awards
($)(2)
Option
Awards (in
options)
Bonus ($)
Year Salary ($)(1)
2016 $
2015 $
2016 $
2015 $
2016 $
-(b) $
153,676(c) $
331,021(a) $ 675,000(f) $ 530,838
40,628(a) $
$ 661,437
54,457(b) $ 50,000(g) $ 394,213
-
$
$
-
All Other
Compensation
($)(3)
Total ($)
257,785 $ 1,794,644
Total
Number
of shares
86,000
- $ 702,065 -
- $ 498,671 -
- -
- $
49,807
186,870 $ 340,546
200,000(h) $
100,000(j) $
120,000(k) $
-
$
-(l) $
2015 $
2016 $
2015 $
2016 $
125,349(c) $
-(d) $
-(d) $
139,925(e) $
$ 15,656
-
$
-
$
-
$
1,500
$
-(l) $
-(l) $
-(l) $
(9,029) $ 131,975
- $
- $
134,262 $ 274,186
-
- -
- -
44,791
2015 $
119,253(e) $
$ 15,656
1,500(l) $
- $ 134,909 -
82
Total
Number
of options
200,000
100,000
120,000
-
-
-
-
-
-
-
Notes:
(i) Mr. Turner was appointed on November 16, 2015, compensation received in 2015 was pro-rated.
(ii) Mr. Bozzo was appointed on November 1, 2016, compensation received in 2016 was pro-rated.
(iii) Mr. Korff was appointed April, 1, 2016 and replacing Mr. A. Vermeulen who left the Company March 31, 2016.
(iv) Mr. O’Donnell was appointed January 8, 2017, compensation to be received in 2017 will be pro-rated.
(v) Mr. Kloots was appointed April 1, 2016 compensation received in 2016 was pro-rated.
(1) These are the base salaries before any bonus and or non-cash awards. The base salary is determined and paid on a monthly basis in euros, therefore,
calculations include exchange results from euros to U.S. dollars. Payment can be elected either in cash or in shares in lieu of salary and bonus. When
officers opt for payment in shares there is a 25% discount on the purchase price. The amounts, however, are shown at fair market value by using the share
price of the preceding month closing price. In principle, officers may earn up to approximately 33% more than the ‘agreed’ cash salary in the event they
elect to receive 100% compensation in shares. Such beneficial discount is included in “All Other Compensation” at the fair market value of the equity,
reduced by the denominated value in U.S. dollars of the cash salary used for this ‘exchange’ into non-cash compensation.
(2) The amounts reported in this column represent the aggregate grant date fair value of the stock option awards granted to the named executive officers in
2016 and 2015, respectively. We estimate the fair value of awards on the grant date using the Black-Scholes option pricing model. The assumptions made
in calculating the grant date fair value amounts for stock option awards are incorporated herein by reference to the discussion of those assumptions in
Note 23 to the financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Note that the
amounts reported in this column reflect the Company’s accounting cost for the stock option awards, and do not correspond to the actual economic value
that will be received by the named executive officers from the award. Pursuant to SEC rules, the amounts in this column exclude the impact of estimated
forfeitures related to service-based vesting conditions. In case the options have not vested yet the company has expensed a pro-rata portion until date of
vesting. Expensing of performance based options will start after setting the performance targets.
(3) With respect to 2016 this value relates to the non-cash bonus for the chairman of the board and other officers granted in 2016 and issued in January 2017
and in case of 2015 the value represents the 25% purchase price discount the named executive officer received by way of electing equity compensation in
lieu of cash compensation adjusted for fair value at date of issuance.
(a) These amounts have been agreed in USD and amounts to an annual amount of USD 300,000. The total salary in 2016 amounts to $331,021 which
includes the employer part of the social securities.
(b) These amounts have been agreed in USD and amounts to an annual amount of USD 275,000. The total salary in 2016 amounts to $54,457 which includes
the employer part of the social securities and represents salary as of November 1, 2016.
(c) These amounts have been agreed in GBP. The amount for 2016 has been agreed upon GBP 110,700. The average exchange rate is $1.388 for 2016 and
$1.440 in 2015. These averages are the average of the 4 exchange rates used during the respective year by using the exchange rate of the first working day
of each quarter.
(d) No salary in 2015 and 2016, started in January 2016.
(e) These amounts have been agreed in euro. Amount for 2016 has been EUR 108,230 and for 2015 EUR 96,006. The average exchange rate is $1.114 for
2016 and $1.133 for 2015. These averages are the average of the 4 exchange rates used during the respective year by using the exchange rate of the first
working day of each quarter.
83
(f) Bonus amount granted for an amount of USD 75,000 based on achievement of certain milestone. Bonus granted of $600,000 was granted and accrued in
the fourth quarter to be paid in the future.
(g) Sign-in bonus for an amount of USD 50,000.
(h) Comprised of 200,000 of a total grant of 300,000 shares in total divided between the years 2016 and 2017, the 200,000 options which have been granted
with immediate effect represent an initial fair market value of $530,838, following the Black and Scholes calculation method.
(j) Comprised of 100,000 options with an exercise price of $8.25 and a total initial fair value of USD 661,437. In the years 2015, 2016, 2017 and 2018 equal
tranches of 25,000 options will vest each year.
(k) Comprised of 120,000 options with an exercise price of $4.3725 and a total initial fair market value of USD 394,213 using the Black and Scholes
valuation model. The options will annually vest in 4 equal tranches of 30,000 options and have a term of 7 years. The first tranche vested in 2016, others
will vest in 2017, 2018 and 2019. Expensing will be accounted for and spread over the period until vesting.
Narrative Disclosure to Summary Compensation Table
Consultancy and Employment Agreements
We currently have the following agreements with our named executive officers:
Robert H. Turner, Executive Chairman – We entered into an employment agreement, effective as of November, 17 2015, with Mr. Turner, to serve as Executive
Chairman of the Company. Mr Turner is paid a base compensation of USD $300,000 gross per year. Mr. Turner receives no fees (cash or stock) for serving on our
Board of Directors. Mr. Turner has a number of granted options set at 2,500,000 carrying a 7 years exercise period after granting; the options would vest in four
equal annual installments, following the joining date. Mr. Turner is eligible to a performance related bonus, depending on business performance by the Group
performance. Such bonus shall be based solely upon your achievement of Board-approved and mutually agreed upon performance targets. For 2016 the on-target
bonus percentage is set at 100% against the Base salary paid in that year, capped at 200% maximum on cash payment; performance over and above 200% is paid in
equity at the then-current value of the Company.
Additionally, On November 18, 2016, the Company entered into an employment agreement Mr. Turner, the Company’s Executive Chairman and Principal
Executive Officer (the “Employment Agreement”). The Employment Agreement modifies and supplements the terms of the prior employment letter between the
Company and Mr. Turner dated November 2015 by providing for the following additional terms: (i) one-time bonuses of USD $300,000 for achieving previously
determined business and restructuring goals established by the Board and an extraordinary bonus of USD $300,000 for Mr. Turner’s efforts on behalf of the
Company during late 2015 and 2016 and to be paid as set forth in the Employment Agreement; (ii) restricted common stock grants of 2,000,000 shares of the
Company’s common stock; (iii) options to purchase up to 7,500,000 shares of the Company’s stock, which options shall vest over a period of three (3) calendar
years, with 1,875,000 shares vesting immediately, and the remaining 5,625,000 shares vesting in 3 equal installments of 1,875,000 each, on the first, second and
third anniversary of the option grant. The exercise price of the options is $.14 per share; and (iv) other customary allowances, bonuses, reimbursements and
vacation pay. The Employment Agreement also provides that if Mr. Turner’s employment with the Company is terminated by the Company without “cause” or by
Mr. Turner for “good reason” (as such terms are defined in the Employment Agreement) the Company will pay Mr. Turner, 12 months’ salary at the rate of his
salary as of such termination, together with payment of the average earned bonuses (regular and extraordinary) since November 1, 2015.
84
Victor Bozzo, Chief Executive Officer – We entered into an employment agreement, effective as of November 1, 2016, with Mr. Bozzo, to server as Chief
Executive Officer of the Company. Mr. Bozzo is paid a base compensation of USD $275,000 gross per year. Mr. Bozzo received a signing bonus of USD $50,000
gross, and has a total number of restricted common stock grants of shares with the equivalent value of USD $10,000. Additionally, Mr. Bozzo received a restricted
grant with the equivalent value of USD $15,000 within a reasonable time following the 6-month anniversary of the Effective Date and USD $50,000 within the
first calendar year anniversary date, with each of these grants being subject to certain conditions set forth in the Employment Agreement. Additionally, Mr. Bozzo
is entitled to purchase options up to 3,000,000 shares of the Company’s stock, of which options to purchase 750,000 shares of common stock will vest
immediately, and the remaining 2,250,000 shares shall vest in 3 installments of 750,000 each annually on the first, second and third anniversary of the option grant.
The exercise price of the options is $.1749 per share; and other customary allowances, bonuses, reimbursements and vacation pay. The Employment Agreement
also provides that if Mr. Bozzo’s employment with the Company is terminated by the Company without “cause” or by Mr. Bozzo for “good reason” the Company
will pay Mr. Bozzo 12 months’ salary at the rate of his salary as of such termination. Mr. Bozzo is also subject to customary non-competition, non-solicitation and
confidentiality requirements during and after the term of his employment.
Edward O’Donnell, Chief Financial Officer – The Company entered into an employment agreement, effective as of January 9, 2017 with Mr. O’Donnell, to
perform as Chief Financial Officer of the Company. Mr. O’Donnell is paid a base compensation of USD $175,000 gross, and is entitled to an annual bonus of up to
USD $75,000 gross. Additionally, Mr. O’Donnell received a signing bonus of 25,000 restricted common shares, and options to purchase up to 1,000,000 shares of
the Company’s stock, subject to the Company’s employee stock option plan including restrictions and vesting schedule. Mr. O’Donnell is also entitled to other
customary allowances, bonuses, reimbursements and vacation pay. The employment agreement between the Company and Mr. O’Donnell is an “at will”
agreement, which also provides that if Mr. O’Donnell’s employment with the Company is terminated by the Company, then, subject to a mutual release, the
Company will pay Mr. O’Donnell’s base salary for an additional 270 days after termination in accordance with customary payroll practices. Mr. O’Donnell is also
subject to customary confidentiality requirements during and after the term of his employment.
Alexander Korff, General Counsel and Chief Compliance Officer – During 2016, the Company’s Swiss subsidiary and Mr. Korff were parties to a consultancy
agreement with his consulting company Karkinos IP Consulting Ltd which was paid approximately GBP 110,700 in 2016. Effective February 2017, Mr. Korff was
engaged as an employee of the Company under an employment agreement for a total of GBP 120,000 (USD $149,383) gross per annum. Additionally, Mr. Korff
received options to purchase up to 500,000 shares of the Company’s stock, subject to the Company’s employee stock option plan including restrictions and vesting
schedule. Additionally, Mr Korff will also be eligible for a bonus of up to fifty percent (50%) of his base salary above, where any such bonus is subject to the
Company’s achievement of its business plan targets. Mr. Korff is also entitled to other customary allowances, bonuses, reimbursements and vacation pay. The
employment agreement between the Company and Mr. Korff is an “at will” agreement, which also provides that if Mr. Korff’s employment with the Company is
terminated by the Company, then, subject to a mutual release, the Company will pay Mr. Korff’s base salary for an additional 180 days after termination in
accordance with customary payroll practices. Mr. Korff is also subject to customary confidentiality requirements during and after the term of his employment.
Erik Kloots, Principal Accounting Officer – The Company entered into an employment agreement, effective as of January 1, 2007 with Mr. Kloots to serve as the
Company's European Business Controller and then as the Company's Global Director of Corporate Control & Finance, reporting directly to the Company's Chief
Financial Officer. On April 1, 2016, Mr. Kloots was appointed as Principal Accounting Officer and paid a base compensation of Euro 121,289.41 (USD
$137,728). Mr. Kloots is also entitled to other customary allowances, bonuses, reimbursements and vacation pay. Mr. Kloots is also subject to customary
confidentiality requirements during and after the term of his employment. Effective as of March 31, 2017, Erik Kloots, will resign from the Company as its
Principal Accounting Officer. The Company has an agreement (the “Settlement Agreement”) with Mr. Kloots to (i) make a lump sum severance payment of gross
Euro 121,289.41 (USD $129,746) gross no later than March 31, 2017, (ii) pay all unused holidays and pro-rata calculations of 2016 holiday allowance, (iii) keep
the Company laptop, and (iv) keep all past awarded stock-options through the life of the options. Mr. Kloots will not resign as a result of any disagreement with
the Company on any matter relating to the Company's operations, policies or practices.
85
Severance and Change of Control
The named executive officers (and certain former executive officers) have individual severance terms as described below. In addition, outstanding equity awards
made to our named executive officers under the 2008 Plan are subject to acceleration of any unvested portion of such awards upon a change of control unless the
terms of a particular award state otherwise.
Other than as set out below, none of the agreements with named executives include any provisions for severance benefits or other payments upon a change of
control regardless of whether a named executive officer’s employment is terminated by him with or without good reason, or whether the named executive officer is
terminated by the Company with or without cause.
Robert H. Turner - The employment agreement with Mr. Turner is for an indefinite term. Under the terms of the employment agreement, Mr. Turner is entitled to
severance if Mr. Turner’s employment with the Company is terminated by the Company without “cause” or by Mr. Turner for “good reason” (as such terms are
defined in the Employment Agreement) the Company will pay Mr. Turner, 12 months’ salary at the rate of his salary as of such termination, together with payment
of the average earned bonuses (regular and extraordinary) since November 1, 2015.
Victor Bozzo – The employment agreement with Mr. Bozzo is for an indefinite term. Under the terms of the employment agreement, Mr. Bozzo is entitled to a
severance if he is terminated by the Company without “cause” or by Mr. Bozzo for “good reason” the Company will pay Mr. Bozzo 12 months’ salary at the rate
of his salary as of such termination.
Edward O’Donnell – The employment agreement with Mr. O’Donnell is for an indefinite term. Under the terms of the employment agreement, Mr. O’Donnell is
entitled to a severance if he is terminated by the Company, then, subject to a mutual release, the Company will pay Mr. O’Donnell’s base salary for an additional
270 days after termination in accordance with customary payroll practices.
Alexander Korff – The employment agreement entered on February 1, 2017 with Mr. Korff is for an indefinite term. Under the terms of the employment
agreement, Mr. Korff is entitled to a severance if he is terminated by the Company, then, subject to a mutual release, the Company will pay Mr. Korff’s base salary
for an additional 180 days after termination in accordance with customary payroll practices.
Erik Kloots – The employment agreement with Mr. Kloots is for an indefinite term. Under the terms of an additional agreement with the Board of Directors on
December 15, 2016, Mr. Kloots is entitled to severance if he is terminated by the Company without cause. In the event the agreement were terminated by the
Company without cause, the Company would be required to pay Mr. Kloots severance in cash equal to six (6) months base-salary in addition to accrued but unpaid
compensation and accrued vacation. Mr. Kloots has an agreement with the Company to resign from all positions that he holds with the Company as of March 31,
2017. For a more detailed description, see Item 9B, “Other Information.”
Martin Zuurbier - The consultancy agreement with Mr. Zuurbier was for a term of two (2) years and three (3) months and commenced on January, 1 2015 and was
due to end on March 31, 2017. On January 29, 2016, Mr. Martin Zuurbier entered into certain Severance and Independent Contractor Agreement pursuant to
which Mr. Zuurbier resigned, effective December 31, 2015, from the Chief Technology Officer and Co-President of Mobile Platform Activities and other executive
positions of the Company for personal reasons. Mr. Zuurbier did not resign as a result of any disagreement with the Company on any matter relating to the
Company's operations, policies or practices. In connection with his severance, Mr. Zuurbier received (i) a severance entitlement of Euro 100,000 (USD $109,096)
and (ii) a grant of 500,000 restricted shares of the Company’s common stock. On November 14, 2016, Mr. Zuurbier and the Company entered into an Equity
Conversion and Settlement Agreement, in which both parties agreed that the Company would issue to Mr. Zuuriber the total of 1,115,000 shares of common stock
that were included in the S-3, in order to settle an outstanding balance for the total of 115,00. Further, it was agreed between the Company and Mr.. Zuurbier that
the Company would also pay in cash the total of Euro 19,500 (USD $21,274) before December 2, 2016 towards the outstanding liability, and the Company would
also pay the remaining payment of Euro 50,000 (USD $54,548) before March 31, 2017 to settle the payment liabilities as prescribed by the Severance and
Independent Contractor Agreement.
86
Mark Nije - The consultancy agreement with Mr. Nije was for a term of three (3) years which commenced on January 1, 2015. Under the terms of the consultancy
agreement, Mr. Nije is entitled to severance if he is terminated by the Company without cause. In the event the agreement were terminated by the Company
without cause, the Company would be required to give two (2) month’s written notice of termination and pay Mr. Nije severance in cash equal to four (4) months
base-salary in addition to accrued but unpaid compensation and accrued vacation, but only if, Mr. Nije and us execute a valid and comprehensive mutual release of
any and all claims that they may have against us in a form provided by us and they executes such form within seven (7) days of tender. Mr. Nije has an agreement
with the Company to resign from all positions that he holds with the Company as of March 31, 2016. For a more detailed description, see Item 9B, “Other
Information”. Effective on December 20, 2016, Mr. Nije and the Company entered into an Amendment of the Severance Agreement, in which the Company agreed
to make an initial cash payment to Mr. Nije of Euro 42,500 (USD $44,390) and beginning January 1, 2017 the Company shall pay to Mr. Nije the monthly amount
of Euro 10,000 (USD $10,445) up to cover the total outstanding balance of Euro 338,407 (USD $353,459) including the accrued statutory interest. In the event the
Company fails to pay timely the monthly invoiced amounts, the Company shall next to the monthly payment, without need of demand, make a penalty payment of
in the amount of Euro 5,000 (USD $5,222), plus interests thereon for each failure. In the event that the Company is able to raise additional financing through the
sale of equity or debt securities, from which the Company receives gross proceeds of not less than USD $3,000,000, the Company shall, within 14 days thereof,
make a lump sum payment to Mr. Nije in an amount equal to fifty percent (50%) of the then outstanding balance of the obligation. The then outstanding balance,
including accumulated interest over the declining balance, is to be paid in equal monthly installments of no less than Euro 10,000 (USD $10,445) plus any amount
due thereunder to satisfy any value added taxes per month until the Obligation is repaid in full. The Company shall arrange for the removal, at the Company’s sole
expense, on or before December 29, 2016 (the “Removal Date”), of the trading restriction on the 692,785 shares of stock issued to the Mr. Nije and the 141,910
shares of stock issued to the Management Entity (collectively, the “Shares”), provided however that the Mr. Nije have complied with the applicable requirements
under Rule 144 by the Removal Date and the required broker’s rep letter and seller’s rep letter are provided to counsel engaged for purposes of issuing the opinion
relating to the removal of the trading restrictions on the Shares. Upon removal of such restrictions, the Company will be solely responsible for arranging for the
electronic delivery of the certificates evidencing the Shares, without restrictions, manner of sale or direct resale requirements, to a broker designated by Mr. Nije.
In the event that the Company fails to comply with the obligations set out in clause 2 prior to the Removal Date, the Company shall, without need of demand, make
a penalty payment in the amount of Euro 25,000 (USD $26,112). The Company shall remove, on or before February 28, 2017, Mr. Nije as a statutory director from
Elephant Talk Communications SLU, Spain, including the removal from the applicable registers at the chambers of commerce and tax authorities (the “Spain
Removal”). In the event that the Company is unable to complete the Spain Removal by the date set forth above, the Company shall make a payment to Mr. Nije as
penalty in the amount of Euro 10,000 (USD $10,455). The Company shall remove, on or before March 31, 2017, Mr. Nije as a statutory director from the all
existing legal entities, including the removal from the applicable registers at the chambers of commerce and tax authorities. In the event that the Company is unable
to complete the Removal by the date set forth above, the Company shall make a payment to M. Nije as penalty in the amount of Euro 5,000 (USD $5,222) for each
entity Mr. Nije is still a registered statutory director.
Alex Vermeulen - The consultancy agreement with Mr. Vermeulen was for a term of three (3) years and commenced on January, 1 2015. Under the terms of the
employment agreement, Mr. Vermeulen was entitled to severance if he is terminated by the Company without cause. In the event the agreement were terminated
by the Company without cause, the Company would be required to give two (2) month’s written notice of termination and pay Mr. Vermeulen severance in cash
equal to four (4) months base salary in addition to accrued but unpaid Compensation and accrued vacation, but only if, Mr. Vermeulen and the Company execute a
valid and comprehensive mutual release of any and all claims that they may have against in a form provided by the Company and they executes such form within
seven (7) days of tender. Mr. Vermeulen resigned from all positions that he held with the Company as of March 31, 2016. For a more detailed description, see Item
9B, “Other Information.” On October 20, 2016, it has been agreed to a settlement of liabilities between the Company and Mr. Vermeulen, and their respective
officers and directors, under the severance agreement of March 28, 2016, and it was also agreed that the Company would issue to Mr. Vermeulen 600,000
restricted shares of common stock that would be included in the S-3 registration statement, in order to settle an outstanding balance for the amount of Euro 60,000
(USD $65,868). Further it is agreed that the Company would pay the remaining part of the outstanding debt in cash, being then Euro 24,857.14 (USD $27,288),
before December 24, 2016.
87
Armin Hessler – The employment agreement with Mr. Hessler was for an indefinite term. Under the terms of the employment agreement, Mr. Hessler was entitled
to severance if he were terminated by the Company without cause. In the event the agreement were terminated by the Company before July 1, 2017, the Company
would be required to pay Mr. Hessler severance in cash equal to the greater of i) base salary for the number of months between the date Mr. Hessler employment
terminates and July 1, 2017; or ii) six (6) months’ base salary. In the event the agreement is terminated by us after July 1, 2017, we would be required to pay Mr.
Hessler severance in cash equal to six (6) months’ base salary. Mr. Hessler submitted his resignation as the Company’s Chief Operations Officer effective as of
November 2, 2016. The Company has agreed to make monthly cash severance payments to Mr. Hessler for a period of nine months from the date of his
resignation, equal to an aggregate gross amount of Euro 180,000 (USD $198,034). The Company has also agreed to allow Mr. Hessler to keep an aggregate of
2,200,000 vested stock options. Mr. Hessler did not resign as a result of any disagreement with the Company on any matter relating to the Company’s operations,
policies or practices.
GRANT OF PLAN-BASED AWARDS
Estimated Future Payouts
Under Non-Equity
Incentive Plan Awards
Estimated Future Payouts
Under Equity
Incentive Plan Awards
Grant-
date
18-Nov-16
Threshold
($)
Target ($)
Maximum
($)
Threshold
(#)
Target (#)
Maximum
(#)
All
Other
Stock
Awards
:
Number
of
shares
of
Stocks
or Units
(#)
All
Other
Stock
Option
Awards
:
Number
of
Securities
Underlying
Options
#
200,000 $
Exercises
or Base
Price of
Option
Awards
($/Sh)
Grant Date
Fair Value
of Stock and
Option
Awards
($)(1)
3.50 $
530,838
1-Nov-16
8-Aug-16
28-Jul-16
8-Aug-16
28-Jul-16
120,000 $
4,3725 $
394,213
40,000
- $
- $
140,100
9,807
40,000
4,791
-
-
36,336
140,100
17,751
-
-
$
$
Name and principle
position
Robert H. Turner
(Executive Chairman)
Victor Bozzo
(CEO & Chief Executive
Officer)
Alex Korff
(General Counsel, Secretary &
Compliance Officer)
Erik Kloots
Vice President-Finance and
Principal Accounting Officer
Edward O’Donnell
(Chief Finance Officer)
The Company issued the compensation shares to the above executive officers from the shares authorized, under its Amended and Restated 2008 Long-Term
Incentive Compensation Plan (“2008 Plan”).
88
The following table discloses information regarding outstanding equity awards granted or accrued as of December 31, 2016 for each of our named executive
officers.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Name
Robert H. Turner
(Executive Chairman)
Victor Bozzo
(CEO & Chief Executive
Officer)
Alex Korff
(General Counsel, Secretary &
Compliance Officer)
Edward O’Donnell
(Chief Finance Officer)
Erik Kloots
(Vice President-Finance and
Principal Accounting Officer)
Outstanding Equity Awards
Option Awards
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
Option
Exercise
Price ($)
$
$
25,000(2) $
25,000(2) $
$
$
$
$
50,000
50,000
50,000
8.25
8.25
8.25
8.25
3.50
3.50
3.50
3.50
Option
Expiration
Date
16-Nov-22
16-Nov-22
16-Nov-22
16-Nov-22
18-Nov-23
18-Nov-23
18-Nov-23
18-Nov-23
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
30,000
30,000
30,000
500
500
500
500
500
500
4,3725
1-Nov-23
4,3725
4,3725
4,3725
1-Nov-23
1-Nov-23
1-Nov-23
62.50
1-Jan-21
62.50
62.50
28.75
28.75
28.75
38.00
38.00
38.00
22.00
20.50
20.50
20.50
1-Jan-21
1-Jan-21
15-Jan-17
15-Jan-17
15-Jan-17
15-Jan-18
15-Jan-18
15-Jan-18
15-Apr-17
16-Jan-19
16-Jan-19
16-Jan-19
33.75
1-Jan-20
33.75
62.50
62.50
62.50
62.50
28.75
28.75
28.75
38.00
38.00
38.00
22.00
20.50
20.50
20.50
1-Jan-20
1-Jan-21
1-Jan-21
1-Jan-21
1-Jan-21
15-Jan-17
15-Jan-17
15-Jan-17
15-Jan-18
15-Jan-18
15-Jan-18
15-Apr-17
16-Jan-19
16-Jan-19
16-Jan-19
Number of Securities
Underlying
Unexercised (#)
Exercisable
25,000(1)
25,000(1)
50,000
30,000
1,000
1,000
1,000
500
500
500
500
500
3,072
500
1,000
1,000
1,000
1,000
1,000
1,000
500
500
500
500
500
2,505
500
Stock Awards
Number of
Shares or
Units of
Stock that
have not
Vested (#)
Market
Value of
Shares or
Units of
Stock that
have not
Vested ($)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
89
(1) The stock options vested on the grant date November 16, 2015, and have a term of seven years from the date of grant.
(2) The stock options were granted on November 16, 2015, have a term of seven years from the date of grant and will vest in equal tranches in the years 2016,
2017 and 2018.
(3) The stock options vested on the grant date December 4, 2013, and have a term of five years from the date of grant.
(4) The stock options vested on the grant date April 5, 2013, and have a term of three years from the date of grant.
(5) The stock options vested on the grant date January 23, 2015, and have a term of three years from the date of grant.
(6) The stock options vested on the grant date January 23, 2015, and have a term of three years from the date of grant.
(7) The stock options were granted on January 29, 2015, have a term of four years from the date of grant and will vest in three equal tranches in the years
2016, 2017 and 2018.
(8) The stock options were granted on April 1, 2015, have a term of five years from the date of grant and will vest in four equal tranches in the years 2016,
2017, 2018 and 2019.
90
The following table represents stock options that have been exercised and restricted stock awards that have vested as of December 31, 2016.
OPTION EXERCISES AND STOCK VESTED
Option Awards
Stock Awards
Name
Robert H. Turner
Vic Bozzo
Alex Korff
Edward O’Donnell
Erik Kloots
Number of Shares
Acquired on Exercise
(#)
Value Realized on
Exercise ($)
Number of
Shares
Acquired on
Vesting
(#)(a)
Value
Realized
on Vesting
($)
257,785
86,000 $
-
-
0 $
-
-
49,807 $
186,870
-
0 $
-
-
44,791 $
134,262
0 $
0 $
0 $
0 $
0 $
Our named executive officers did not participate in, or otherwise receive any benefits under, any pension or retirement plan sponsored by us during 2016. In
addition, our named executive officers did not participate in, or otherwise receive any benefits under, a nonqualified deferred compensation plan during 2016.
(a) The awards have been granted and vested in 2016, however, some of the shares were only issued and delivered early 2017. The corresponding share-
based compensation expenses have been accounted for in 2016.
Director Compensation
The basic compensation for serving as a non-executive director is USD $80,000 per year, with an additional USD $10,000 for non-executive directors serving in
one committee and USD $20,000 paid to non-executive directors who serve on more committees of our Board of Directors, USD $30,000 for serving as chairman
of the Audit Committee and USD $5,000 for serving as a chairman of the other committees. Generally, during a non-executive director’s first year of service, a
minimum of 50% of such director’s compensation is paid through the issuance of common stock with the remaining portion paid in cash. In subsequent years of
service, a non-executive director gets to elect the method and proportion of payment. Compensation was paid per quarter in arrears, whereby the conversion of
cash in shares was done at the average closing share price of the Company of the 10 days prior to the start of the quarter discounted by 25%. This is in line with our
policy to stimulate as much as possible conversion into shares to preserve our cash position.
The following table represents compensation earned or paid in 2016 to our non-executive directors.
Fees
Earned or
Paid in
Cash
($)
Stock
Awards
($)(1)
Option
Awards
($)
Non-Equity
Incentive
Plan
Compensation
($)
Non-
Qualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)
$
$
$
$
$
- $
- $
6,381 $
81,250 $
52,170 $
18,131 $
140,428 $
9,972 $
65,817 $
71,059 $
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Total
($)
18,131
140,428
16,353
147,067
123,229
Name
Carl Stevens
Yves van Sante (2)
Francisco Ros (3)
Roderick de Greef (4)
Robert Skaff (5)
91
(1) The amounts included in these columns are the aggregate fair values of the awards granted by the Company to the directors in the fiscal year in lieu of cash
fees, valued in accordance with FASB ASC Topic 718 for the fiscal year ended December 31, 2016. Pursuant to SEC rules, the amounts in these columns
exclude the impact of estimated forfeitures related to service-based vesting conditions. The share prices used for the 2016 calculations in this table are the
share prices of the last 10 trading days of the quarter covering the compensation related period. Compensation to the directors can be elected by the directors,
at the beginning of the quarter, either in cash or in shares. When directors opt for payment in shares there is a 25% discount on the ‘purchase’ price. The
amounts however are shown at fair market value by using the closing share price at the last working day of the compensated quarter. In principle non-
executive officer directors might earn up to approximately 33% more than the standard director fees if they have elected to receive 100% compensation in
shares.
(2) Mr. van Sante elected to have his directorship fees paid in shares.
(3) Mr. Ros earned cash directorship fees of $6,381 in 2016, which have not yet been paid.
(4) Mr. de Greef earned cash directorship fees of $81,250 in 2016, of which $10,417 has not yet been paid.
(5) Mr. Skaff earned cash directorship fees of $52,170 in 2016, which have not yet been paid.
EQUITY COMPENSATION PLAN INFORMATION
Securities Authorized for Issuance under Equity Compensation Plans
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
2006 Plan (1): 0
2008 Plan (2): 1,040,211
-
1,040,211
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
2006 Plan: n/a
2008 Plan: $13.35
-
-
Number of securities
remaining available for
future issuance under
the equity compensation
plans (excluding
securities reflected in
column (a))
(c)
2006 Plan: 0
2008 Plan: 586,636
-
586,636
(1) S-8 Filed July 21, 2006.
(2) S-8 Filed July 11, 2008. The stockholders approved the increase of the total number of shares of authorized to be issued under the 2008 Plan from 200,000 to
920,000, during 2013 the stockholders approved an increase from 920,000 to 1,840,000 and during 2014 an increase of the total number of shares available
under the Plan from 1,840,000 to 2,240,000.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
BENEFICIAL OWNERSHIP OF PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS
The following table sets forth, based on 12,766,102 shares of our Common Stock outstanding as of March 27, 2017, certain information as to the stock ownership
of each person known by us to own beneficially five percent or more of our outstanding Common Stock, of each of the named executive officers and directors, and
of all the named executive officers and directors as a group. In computing the outstanding shares of Common Stock, we have excluded all shares of Common Stock
subject to options, warrants or other securities that are not currently exercisable or exercisable within 60 days and are therefore not deemed to be outstanding and
beneficially owned by the person holding the options, warrants or other securities for the purpose of computing the number of shares beneficially owned and the
percentage ownership of that person. Unless otherwise indicated, the address for each person listed below is c/o Pareteum Corporation, at 100 Park Avenue, Suite
1600, New York, NY 10017, USA.
92
Name of Beneficial Holder
Number of Shares of Common
Stock Owned(A)
Percent of Class as of March 27,
2017
Saffelberg Investments N.V.
Corbin Mezzanine Fund I, L.P.
Bernard Moncarey
Officers & Directors
Yves Van Sante
Hal Turner
Roderick de Greef
Robert Skaff
Luis Jimenez-Tuñon
Victor Bozzo
Edward O’Donnell
Erik Kloots
Alexander Korff
All Officers and Directors as a Group
* Less than one percent
1,263,844(1)
1,248,381(2)
1,140,840(3)
50,297
230,972(4)
18,078
72,167
0
41,036(5)
22,036(6)
55,797(7)
64,844(8)
555,227
9.9%
9%
8.7%
*
2.1%
*
*
*
*
*
*
*
4.3%
(A) Calculated in accordance with Rule 13d-(3)(d)(1) under the Securities Exchange Act of 1934.
(1) Includes 226,172 shares underlying a warrant exercisable at an exercise price of $1.87 and 90,812 shares underlying the 9% Note. Their address is in Gooik,
Belgium.
(2) Includes 1,082,066 shares underlying a warrant exercisable at $3.25 per share. Corbin Capital Partners, L.P., is an adviser to this entity, and Corbin Capital
Partners Management, LLC, the sole general partner of this entity, may be deemed to beneficially own the shares of Common Stock that may be deemed
beneficially owned by this entity. Their address is 590 Madison Avenue, 31st Floor, New York, New York 10022.
(3) Includes 410,000 shares underlying a warrant exercisable at $3.50. His address is Rue Emile Lavandier, Luxembourg.
(4) Includes options to purchase 125,000 shares of our Common Stock, all of which are exercisable on or before March 27, 2017, of which 75,000 options have an
exercise price of $3.50 and 50,000 options have an exercise price of $8.25.
(5) Includes options to purchase 30,000 shares of our Common Stock, all of which are exercisable on or before March 27, 2017, and which have an exercise price
of $4.3725.
(6) Includes options to purchase 10,000 shares of our Common Stock, all of which are exercisable on or before March 27, 2017, and which have an exercise price
of $2.755.
(7) Includes options to purchase 11,005 shares of our Common Stock, all of which are exercisable on or before March 27, 2017, of which 2,000 have an exercise
price of $33.75; 4,000 have an exercise price of $62.50; 1,500 have an exercise price of $38.00; 2,505 have an exercise price of $22.00; 1,000 have an exercise
price of $20.50.
(8) Includes options to purchase 15,072 shares of our Common Stock, all of which are exercisable on or before March 27, 2017, of which 3,000 have an exercise
price of $62.50; 1,500 have an exercise price of $28.75; 1,500 have an exercise price of $38; 3,072 have an exercise price of $22; 1000 have an exercise price of
$20.50; 5,000 have an exercise price of $2.8775. (Significant Employee).
Item 13. Certain Relationships, and Related Transactions, and Director Independence.
Transactions with Related Persons
Management of the Company is not aware of a material interest, direct or indirect, of any director or officer of the Company, any other informed person of the
Company, or any associate or affiliate of any such person, in any transaction since the commencement of the Company’s most recently completed fiscal year or in
any proposed transaction which has materially affected or would materially affect the Company or any of its subsidiaries, except for (i) the sale of former
subsidiary ValidSoft; and (ii) the debt restructuring transactions with Atalaya Capital Management and Corbin Mezzanine Fund I, L.P. – in each case as described
elsewhere herein.
In the event of any future transactions between us and our officers, directors or five percent stockholders, and respective affiliates will be on terms no less
favorable than could be obtained from unaffiliated third parties and will be approved by our independent directors.
93
Procedures for Approval of Related Party Transactions
Related party transactions are subject to the advance review and approval of the Audit and Finance Committee and/or the full Board of Directors, with advice from
the General Counsel & Chief Compliance Officer as well as outside Counsel. In its review, the Audit Committee and/or Board is provided with full disclosure of
the parties involved in the transaction, and considers the relationships amongst the parties and members of our Board of Directors and executive officers.
Independence Standards for Directors
There are no arrangements between our directors and any other person pursuant to which our directors were nominated or elected for their positions.
Four of our current directors, Roderick de Greef, Rob Skaff, Yves van Sante and Luis Jimenez-Tuñon are not related to each other and are “independent” under
Section 803 of the NYSE MKT rules. Each of Messrs. De Greef, Skaff, van Sante and Jimenez-Tuñon serve on the Audit and Finance Committee, the
Compensation Committee and the Nominating and Corporate Governance Committee. The Executive Chairman is not independent.
In addition, Messrs. de Greef, Skaff, van Sante and Jimenez-Tuñon qualify as “independent” under the standards established by the SEC for members of audit
committees. The Board of Directors has determined that Roderick de Greef is an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation
S-K. Stockholders should understand that this designation is a disclosure requirement of the SEC related to Mr. de Greef’s experience and understanding with
respect to certain accounting and auditing matters. The designation does not impose upon Mr. de Greef any duties, obligations or liability that are greater than those
generally imposed on him as a member of the Audit Committee and the Board of Directors, and his designation as an audit committee financial expert pursuant to
this SEC requirement does not affect the duties, obligations or liability of any other member of the Audit Committee or the Board of Directors. Our Board of
Directors also determined that Mr. de Greef has sufficient knowledge in reading and understanding financial statements to serve on the Audit Committee.
Item 14. Principal Accountant Fees and Services
The following table sets forth the aggregate fees billed by Squar Milner LLP (“Squar Milner”), our independent registered accounting firm for the fiscal years
ended December 31, 2015 and December 31, 2016. These fees are categorized as audit fees, audit-related fees, tax fees, and all other fees. The nature of the
services provided in each category is described in the table below.
Audit fees
Audit-related fees
Tax fees
All other fees
Total Fees
2016
2015
220,000 $
14,000 $
- $
- $
234,000 $
220,000
20,000
-
-
240,000
$
$
$
$
$
Audit fees. Consist of fees billed for professional services rendered for the audit of the consolidated financial statements and review of the quarterly interim
consolidated financial statements. These fees also include the review of registration statements and the delivery of consents in connection with registration
statements.
Audit-related fees. Consist of the review of SEC comment letters and management response.
Tax fees. There were no fees billed by Squar Milner for professional services rendered for tax compliance for the years ended December 31, 2016 and 2015.
All other fees. There were no fees billed by Squar Milner for professional services rendered for other compliance purposes for the years ended December 31, 2016
and 2015.
94
The Audit Committee of our Board of Directors has established its pre-approval policies and procedures, pursuant to which the Audit Committee approved the
foregoing audit and audit-related services provided by Squar Milner in 2016 and 2015 consistent with the Audit Committee’s responsibility for engaging our
independent auditors. The Audit Committee also considered whether the non-audit services rendered by our independent registered public accounting firm are
compatible with an auditor maintaining independence. The Audit Committee has determined that the rendering of such services is compatible with Squar Milner
maintaining its independence.
Item 15. Exhibits, Financial Statement Schedules
The following exhibits are filed with this Report.
PART IV
Number
2.1
Description
Agreement and Plan of Merger between Pareteum Communication Corporation a Delaware Corporation and Pareteum Communications,
Inc., a California Corporation (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement filed dated July 26,
2011). (**)
2.2
2.3
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
Sale and Purchase Agreement, dated March 17, 2010, by and among the Company and the stockholders of ValidSoft Limited other than
Enterprise Ireland (incorporated by reference to Exhibit 2.1 to the Company’s current report on Form 8-K dated March 23, 2010). (**)
Sale and Purchase Agreement, dated March 17, 2010, by and the Company and Enterprise Ireland (incorporated by reference to Exhibit
2.2 to the Company’s current report on Form 8-K dated March 23, 2010). (**)
Certificate of Merger (incorporated by reference to Exhibit 3.2 to the Company’s current report on Form 8-K dated October 4, 2011). (**)
Certificate of Incorporation of Pareteum Communication Corporation, a Delaware Corporation (incorporated by reference to Exhibit 3.2 to
the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2013). (**)
By-Laws (incorporated by reference to Appendix C of the Company’s Definitive Proxy Statement on Schedule 14A dated July 26, 2011).
(**)
Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s current report on
Form 8-K dated August 29, 2016). (**)
Certificate of Designation of Preferences, Rights and Limitations of Series A Preferred Stock as corrected (incorporated by reference to
Exhibit 3.1 to the Company’s current report on Form 8-K dated September 9, 2016). (**)
Certificate of Designation of Preferences, Rights and Limitations of Series A-1 Preferred Stock (incorporated by reference to Exhibit 3.1
to the Company’s current report on Form 8-K dated November 3, 2016). (**)
Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s current report on
Form 8-K dated November 3, 2016). (**)
Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s current report on
Form 8-K dated February 27, 2017). (**)
95
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
10.1
10.2
10.3
10.4
10.5
Form of Warrant, dated November 17, 2014, issued to Corbin Mezzanine Fund I, L.P. (incorporated by reference to Exhibit 4.1 to the
Company’s current report on Form 8-K filed on November 21, 2014). (**)
Form of Conversion Letter Agreement, dated November 17, 2014, issued to Saffelberg Investments NV (incorporated by reference to
Exhibit 4.2 to the Company’s current report on Form 8-K filed on November 21, 2014). (**)
Form of Warrant, dated November 17, 2014, issued to Saffelberg Investments NV. (incorporated by reference to Exhibit 4.3 to the
Company’s current report on Form 8-K filed on November 21, 2014). (**)
Form of Warrant, dated July 9, 2015, issued to Corbin Mezzanine Fund I, L.P (incorporated by reference to Exhibit 4.1 to the Company’s
current report on Form 8-K filed on July 14, 2014). (**)
Form of Warrant, dated July 9, 2015, issued to Corbin Mezzanine Fund I, L.P (incorporated by reference to Exhibit 4.2 to the Company’s
current report on Form 8-K filed on July 14, 2014). (**)
Form of Warrant issued in the 9% Unsecured Subordinated Convertible Promissory Note Financing (incorporated by reference to Exhibit
4.1 to the Company’s current report on Form 8-K filed on December 24, 2015). (**)
Corbin Warrant, dated December 27, 2016 issued to Corbin Mezzanine Fund I, L.P to purchase 27,051,627 shares of Common Stock
(incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K filed on December 29, 2016). (**)
ACM Warrant, dated December 27, 2016 issued to ACM Carry-I LLC. to purchase 4,773,817 shares of Common Stock (incorporated by
reference to Exhibit 4.2 to the Company’s current report on Form 8-K filed on December 29, 2016). (**)
Amendments to Loan Agreements dated January 27, 2009, February 15, 2009, March 4, 2009, March 31, 2009, May 4, 2009, and May 27,
2009 by and between QAT II Investments S.A. and the Company, dated June 29, 2009 (incorporated by reference to Exhibit 10.1 to the
Company’s current report on Form 8-K dated July 2, 2009). (**)
Amendment to Loan Agreements dated January 27, 2009, February 15, 2009, March 4, 2009, March 31, 2009, May 4, 2009, May 27,
2009, July 1, 2009 and July 8, 2009 by and between QAT II Investments S.A. and the Company, dated July 15, 2009 (incorporated by
reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated July 21, 2009).(**)
Contract between Vodafone Enabler Espana, S.L. and Pareteum Europe Holding, B.V., dated November 1, 2013 (incorporated by
reference to Exhibit 10.11 to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2013). (**)
Credit Agreement, dated as of November 17, 2014, by and among Pareteum Europe Holding B.V., as the Borrower, Pareteum
Corporation, as the Parent and Guarantor, the other Subsidiaries of the Parent, from time to time party hereto as Guarantors, the Lenders
from time to time party hereto and Atalaya Administrative LLC, as Administrative Agent and Collateral Agent (incorporated by reference
to Exhibit 10.1 to the Company’s current report on Form 8-K filed on November 21, 2014). (**)
Security Agreement, dated as of November 17, 2014, by and among Pareteum Europe Holding B.V., Pareteum Corporation, the other
Grantors from time to time party hereto, and Atalaya Administrative LLC, as Collateral Agent (incorporated by reference to Exhibit 10.2
to the Company’s current report on Form 8-K filed on November 21, 2014). (**)
96
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
First Amendment to Credit Agreement, dated as of July 9, 2015, by and among Pareteum Europe Holding B.V., as the Borrower, Pareteum
Corporation, as the Parent and Guarantor, the other Subsidiaries of the Parent, from time to time party hereto as Guarantors, the Lenders
from time to time party hereto and Atalaya Administrative LLC, as Administrative Agent and Collateral Agent (incorporated by reference
to Exhibit 10.1 to the Company’s current report on Form 8-K filed on July 14, 2014). (**)
Trademark Security Agreement, dated as of November 17, 2014, between Pareteum Europe Holding B.V. and Atalaya Administrative
LLC (incorporated by reference to Exhibit 10.3 to the Company’s current report on Form 8-K filed on November 21, 2014). (**)
Release and Settlement Agreement, dated as of June 12, 2015, by and between Pareteum de Mexico, S.A.P.I. de C.V., Pareteum Europe
Holding BV, and Pareteum Corporation, and Iusacell, S.A., de C.V. (incorporated by reference to Exhibit 10.1 to the Company’s current
report on Form 8-K filed on June 16, 2015). (**)
Severance Agreement, dated as of November 16, 2015, between Pareteum Corporation and Steven van der Velden (incorporated by
reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on November 17, 2015). (**)
Form of Subscription Agreement issued in the 9% Unsecured Subordinated Convertible Promissory Note Financing (incorporated by
reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on December 24, 2015). (**)
Form of 9% Unsecured Subordinated Convertible Promissory Note issued in the 9% Unsecured Subordinated Convertible Promissory
Note Financing (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on December 24, 2015).
(**)
Amended and Restated Pareteum Corporation 2008 Long-Term Incentive Compensation Plan (incorporated by reference to Annex A to
the Company’s definitive proxy statement on Schedule 14 A filed on November 21, 2013). (**)
Amendment No. 2 to the Amended and Restated Pareteum Corporation 2008 Long-Term Incentive Compensation Plan (incorporated by
reference to Annex A to the Company’s definitive proxy statement on Schedule 14 A filed on August 11, 2014). (**)
Subscription Agreement (incorporated by reference to Exhibit 3.1 to the Company’s current report on Form 8-K dated September 9, 2016).
(**)
Form of Share Purchase Agreement dated September 30, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s current report
on Form 8-K dated October 6, 2016). (**)
Promissory Note dated September 30, 2016 (incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K dated
October 6, 2016). (**)
License Agreement dated September 30, 2016 (incorporated by reference to Exhibit 10.3 to the Company’s current report on Form 8-K
dated October 6, 2016). (**)
Subscription Agreement (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated November 3,
2016). (**)
Letter Agreement (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated December 21, 2016).
(**)
97
10.20
10.21
10.22
21.1
23.1
31.1
31.2
32.1
32.2
Amended and Restated Credit Agreement, dated as of December 27, 2016, by and among Elephant Talk Europe Holding B.V., as the
Borrower, Pareteum Corporation, as the Parent and Guarantor, the other Subsidiaries of the Parent, from time to time party hereto as
Guarantors, the Lenders from time to time party hereto and Atalaya Administrative LLC, as Administrative Agent and Collateral Agent
(incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated December 29, 2016). (**)
Reaffirmation Agreement, dated as of December 27, 2016, by and among Elephant Talk Europe Holding B.V., as the Borrower, Pareteum
Corporation, as the Parent and Guarantor Pareteum North America Corp., from time to time party hereto as Guarantors and Atalaya
Administrative LLC, as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.2 to the Company’s current
report on Form 8-K dated December 29, 2016). (**)
Letter Agreement, dated as of March 6, 2017, by and among Elephant Talk Europe Holding B.V., as the Borrower, Pareteum Corporation,
as the Parent and Guarantor, the other Subsidiaries of the Parent, from time to time party hereto as Guarantors, the Lenders from time to
time party hereto and Atalaya Administrative LLC, as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit
10.1 to the Company’s current report on Form 8-K dated March 7, 2017). (**)
Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to the Company’s annual report on Form 10-K for the fiscal year
ended December 31, 2013). (**)
Consent public accounting firm Squar Milner, LLP (*)
Certification of the Company’s Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (*)
Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (*)
Certification of the Company’s Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (*)
Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (*)
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document. (*)
XBRL Taxonomy Extension Schema Document. (*)
XBRL Taxonomy Extension Calculation Linkbase Document. (*)
XBRL Taxonomy Extension Definition Linkbase Document. (*)
XBRL Taxonomy Extension Label Linkbase Document. (*)
XBRL Taxonomy Extension Presentation Linkbase Document. (*)
*
**
Filed Herewith
Previously Filed
98
Pursuant to the requirements of Section 13 or 15(d) 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
SIGNATURES
/s/ Hal Turner
By:
Name: Hal Turner
Title:
Executive Chairman
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Date: March 29, 2017
Person
/s/ Hal Turner
Hal Turner
/s/ Vic Bozzo
Vic Bozzo
/s/ Ted O’Donnell
Ted O’Donnell
/s/ Roderick de Greef
Roderick de Greef
/s/ Yves van Sante
Yves van Sante
/s/ Robert Skaff
Robert Skaff
/s/ Luis Jimenez-Tuñon
Luis Jimenez-Tuñon
Capacity
Chairman of the Board and Director
(Principal Executive Officer)
Chief Executive Officer
(Chief Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
99
Date
March 29, 2017
March 29, 2017
March 29, 2017
March 29, 2017
March 29, 2017
March 29, 2017
March 29, 2017
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We hereby consent to the incorporation by reference in Registration Statements on Form S-3 (Nos. 333-180977, 333-181320 and 333-181738) and Form S-8 (Nos.
333-135971, 333-152276 and 333-177205) of Pareteum Corporation and Subsidiaries of our report dated March 29, 2017 relating to our audit of the consolidated
financial statements (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Company’s ability to continue as a going
concern), which appears in this Annual Report on Form 10-K of Pareteum Corporation and Subsidiaries for the year ended December 31, 2016.
/s/ Squar Milner, LLP
Los Angeles, California
March 29, 2017
EXHIBIT 31.1
I, Robert H. Turner, certify that:
1.
I have reviewed this annual report on Form 10-K of Pareteum Corporation for the year ended December 31, 2016;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this interim report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over
financial reporting.
March 29, 2017
/s/ Robert H. Turner
Robert H. Turner
Executive Chairman
(Principal Executive Officer)
CERTIFICATION
EXHIBIT 31.2
I, Ted O’Donnell, certify that:
1.
I have reviewed this annual report on Form 10-K of Pareteum Corporation for the year ended December 31, 2016;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this interim report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over
financial reporting.
March 29, 2017
/s/ Ted O’Donnell
Ted O’Donnell
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of Pareteum Corporation (the “Company”) on Form 10-K for the fiscal year ended December 31, 2016 as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert H. Turner, Executive Chairman of the Company, certify, pursuant to 18
U.S.C. section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished
to the Securities and Exchange Commission or its staff upon request.
March 29, 2017
/s/ Robert H. Turner
Robert H. Turner
Executive Chairman
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual Report of Pareteum Corporation (the “Company”) on Form 10-K for the fiscal year ended December 31, 2016 as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Ted O’Donnell, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished
to the Securities and Exchange Commission or its staff upon request.
March 29, 2017
/s/ Ted O’Donnell
Ted O’Donnell
Chief Financial Officer
(Principal Financial and Accounting Officer)