Business and Operations

9 Months Ended

Sep. 30, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Pareteum Corporation, a Delaware corporation ("Pareteum"), along with its wholly owned and majority-owned subsidiaries (the “Company,” “we,” “us,” or “our”) is an experienced provider of communications platform as a service (“CPaaS”) solutions. The Company empowers enterprises, communications service providers, early-stage innovators, developers, Internet-of-things ("IoT"), and telecommunications infrastructure providers with the freedom and control to create, deliver, and scale innovative communications experiences. Our CPaaS solutions connect people and devices around the world using secure, ubiquitous, and highly scalable solutions to deliver data, voice, video, SMS/text messaging, media, and content enablement.

We have developed mobility, messaging, connectivity, and security services applications. Our platform hosts integrated information technology/back office and core network functionality for mobile network operators and other enterprises, which allows our customers to implement and leverage mobile communications solutions on a fully outsourced software as a service ("SaaS"), platform as a service ("PaaS"), and/or 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.

We deliver an operational support system (“OSS”) for channel partners, with application program interfaces 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.

Artilium plc (“Artilium”), a wholly owned subsidiary of Pareteum since October 2018, is a software development company active in the enterprise communications and core telecommunications markets delivering software solutions, which layer over disparate fixed, mobile, and intellectual property networks to enable the deployment of converged communication services and applications. iPass, Inc. ("iPass"), another wholly owned subsidiary of Pareteum since February 2019, is a cloud-based service provider of global mobile connectivity, offering Wi-Fi access on any mobile device through its SaaS platform.

Pareteum's common stock is quoted on the OTC Markets Group Inc.'s Pink Open Market and traded under the symbol "TEUM."

Liquidity

As reflected in the accompanying condensed consolidated financial statements, the Company reported net losses of $55,743 for the nine months ended September 30, 2019 and $18,024 for the year ended December 31, 2018, as reported in the Company's Amended Annual Report on Form 10-K/A, as filed with the SEC on December 20, 2020 (the "Amended 2018 Annual Report"), and had an accumulated deficit of $372,889 as of September 30, 2019. As of September 30, 2019, the Company's cash balance available for operations was $5,247.

On December 10, 2019, the Company’s Board of Directors designated 255 shares of preferred stock to be 8.0% Series C Redeemable Preferred Stock (the "Redeemable Preferred Stock") with a stated value of $100,000 per share. On various dates from December 24, 2019 through August 18, 2020, the Company issued 217.67 shares of Redeemable Preferred Stock in private placement transactions exempt from the registration requirements of the Securities Act of 1933, as amended ("the Securities Act"), with a stated value of $21,767 for an aggregate purchase price of $13,883, from which the Company received net proceeds of $13,057 after deducting legal fees of $826.

In May 2020, Pareteum received a $552 Payroll Protection Program ("PPP") loan (the "Pareteum PPP Loan") and iPass (as defined below) received an $819 PPP loan (the "iPass PPP Loan" and together with the Pareteum PPP Loan, the "PPP Loans") under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. The PPP Loans provide for a balloon payment of the outstanding principal balance at maturity, which is five years from the funding date, and bear interest at 1.0%, however, under the CARES Act, all or a portion of the PPP Loans may be forgiven. In December 2020, the Pareteum PPP Loan was fully forgiven and in June 2021, the iPass PPP Loan was fully forgiven.

On June 8, 2020, the Company issued a $17,500 Senior Secured Convertible Note (the “Senior Convertible Note”) for $14,000, of which $10,000 was maintained in one or more blocked accounts. The terms of the Senior Convertible Note and related documents require the Company to meet certain specified conditions and covenants to release the proceeds in the blocked accounts, some of which have not been satisfied. In July 2020, $3,000 was released when the Company received additional funding through the sale of Redeemable Preferred Stock. On December 1, 2020, December 23, 2020, February 1, 2021, and March 1, 2021, we entered into various agreements (the “Forbearance Agreements”), under which: (i) we admitted that we were in default of several obligations under the Senior Convertible Note and related agreements, (ii) the lender acknowledged such defaults and agreed not to exercise any right or remedy under the Senior Convertible Note or the related securities purchase agreement, warrant or security documents, including its right to accelerate the aggregate amount outstanding under the Senior Convertible Note, until the earlier of March 31, 2021 and the date of any new event of default or initiation of any action by the Company to invalidate any of the representations and warranties made in the Forbearance Agreements. As a result of the defaults, the interest rate paid on the principal outstanding under the Senior

Convertible Note increased to 18.0% per annum. On December 23, 2020, $1,000 was released to the Company from the blocked account and on April 8, 2021, the remaining $6,000 in the blocked account was removed by the lender in partial satisfaction of the Senior Convertible Note.

On May 24, 2021, the Company entered into a new forbearance agreement (the “New Forbearance Agreement”) with the holder of the Senior Convertible Note under which (i) the Company again admitted it was in default under several obligations under the Senior Convertible Note and related agreements, and (ii) the lender acknowledged such defaults and agreed not to exercise any right or remedy under the Senior Convertible Note or the related securities purchase agreement, warrant or security documents, including its right to accelerate the aggregate amount outstanding under the Senior Convertible Note, until the earlier of May 31, 2021 or any later date to which such date may be extended (the “Outside Date”), and the date of any new event of default or initiation of any action by the Company to invalidate any of the representations and warranties made in the New Forbearance Agreement. The Outside Date automatically extends for successive two-week periods unless on or before the then-applicable Outside Date the lender provides notice that the Outside Date is not being extended.

As partial consideration for its agreement not to exercise any right or remedy under the Senior Convertible Note and related documents, the lender and the Company agreed to make certain changes to the documents. In this regard, the parties agreed to amend the “Event of Default Acceleration Amount” definition in the Senior Convertible Note so that the amount due and payable by the Company on account of an event of default would be an amount in cash equal to 125% of the then-outstanding principal and accrued and unpaid interest under the Senior Convertible Note. This represents an increase from 120% of the then-outstanding principal and accrued and unpaid interest, and removes the market-price-based alternative for such acceleration amount.

Additionally, the parties also agreed that the principal amount outstanding under the Senior Convertible Note would be increased by certain paid-in-kind amounts in full satisfaction of the Company’s obligation to make payments of interest to the lender on each of April 1, 2021 and May 1, 2021, which amounts were not paid by the Company in cash or common stock. In consideration of the lender’s agreement to enter into the New Forbearance Agreement and agree to the amendments to the Senior Convertible Note, the Company agreed to pay the lender a fee in the amount of $1,500. Accordingly, following these increases in the principal amount payable, but applying against the outstanding principal and such fee the $6,000 previously maintained in certain blocked account against that was foreclosed upon by the lender, the total amount of principal outstanding under the Senior Convertible Note as of the date of the New Forbearance Agreement was approximately $13,454.

On February 22, 2021, the Company issued a $2,400 Senior Second Lien Secured Convertible Note due April 1, 2025 (each such note, a “Junior Convertible Note”) to an institutional investor for $2,000.

On April 29, 2021, the Company entered into a securities purchase agreement, dated as of April 13, 2021, with two initial investors and other investors as may become party thereto from time to time (collectively, the “Second Lien Note Purchasers”) providing for the issuance and sale by the Company of up to $6,000 aggregate principal amount of Junior Convertible Notes and warrants (the “April 2021 Warrants”) to purchase up to 5,000,000 shares of its common stock. The Senior Second Lien Notes and accompanying April 2021 Warrants may be sold from time to time to one or more Second Lien Note Purchasers under the terms of the purchase agreement. On April 29, 2021, the Company closed on the initial sale of Senior Second Lien Notes in the aggregate principal amount of $1,788 and April 2021 Warrants to purchase 1,490,000 shares of common stock under the purchase agreement for an aggregate purchase price of $1,490.

On June 19, the Company entered the Second Omnibus Agreement, dated as of June 18, 2021 (the "Omnibus Agreement"), with holders of the previously outstanding Junior Convertible Notes, and sold $17,330 aggregate principal of Junior Convertible Notes for $5,000 and the surrender of 91.38 shares of Redeemable Preferred Stock. In connection with the sale of these Junior Convertible Notes, the Company issued a warrant for the purchase of 5,000,000 shares of its common stock at an exercise price of $0.37 per share.

Because of the limited nature of the relief provided under the New Forbearance Agreement, which does not lower the amounts payable in principal or interest, the Company believes that it will not have sufficient resources to fund its operations and meet the obligations specified in the Senior Convertible Note or to fund its operations for the next twelve months following the filing of this Quarterly Report on Form 10-Q (the "Report"). The Company’s software platforms require ongoing funding to continue the current development and operational plans and the Company has a history of net losses. The Company will continue to expend substantial resources for the foreseeable future in connection with the continued development of its software platforms. These expenditures will include costs associated with research and development activity, corporate administration, business development, and marketing and selling of the Company’s services. In addition, other unanticipated costs may arise. The Company believes that additional capital will be required to fund its operations and provide growth capital to meet the obligations under the Senior Convertible Note, the Junior Convertible Note, and the Redeemable Preferred Stock. Accordingly, the Company will have to raise additional capital in one or more debt and/or equity offerings and continue to work with its lenders to cure the defaults. However, there can be no assurance that the Company will be successful in raising the necessary capital or that any such offering will be available to the Company on terms acceptable to the Company, or at all. If the Company is unable to raise additional capital and with acceptable terms, this would have a material adverse effect on the Company. Furthermore, the recent decline in the market price of the Company’s common stock, coupled with the stock’s

delisting from the Nasdaq Stock Market, could make it more difficult to sell equity or equity-related securities in the future at a time and price that the Company deems appropriate. The factors discussed above raise substantial doubt as to the Company’s ability to continue as a going concern within one year after the date that these financial statements are issued.

Revision of Previously Issued Financial Statements

In finalizing the financial reporting close process for the year ended December 31, 2020, the Company identified certain immaterial errors impacting prior reporting periods beginning as of and for the three months ended December 31, 2018. Specifically, the Company identified that it incorrectly translated the foreign currency impact on goodwill and intangible assets related to an acquisition completed in the fourth quarter of 2018.

The Company assessed the materiality of this correction to the prior period financial statements in accordance with Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) 99, Materiality, and SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, and Accounting Standards Codification (“ASC”) 250, Presentation of Financial Statements (“ASC 250”). In accordance with ASC 250, the Company’s consolidated financial statements have been revised from the amounts previously reported to correct these immaterial errors as shown in the tables below and are reflected throughout the financial statements and related notes, as applicable.

The cumulative effect of adjustments required to correct the immaterial errors in the consolidated financial statements as of December 31, 2018 are reflected in the revised goodwill, intangible assets, net, accumulated other comprehensive income, and accumulated deficit balances as of December 31, 2018 as follows:


	As of December 31, 2018
	As reported		Adjustment		As revised
Goodwill	$	101,375	$	(947)	$	100,428
Intangible assets, net	39,658		(394)		39,264
Accumulated other comprehensive loss	(5,389)		(1,327)		(6,716)
Accumulated deficit	(317,132)		(14)		(317,146)