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Debt
 6 Months Ended
Jun. 30, 2020
Debt Disclosure [Abstract]  
Debt Debt
Senior Convertible Note
On June 8, 2020, the Company issued a $17.5 million Senior Convertible Note due April 1, 2025 to High Trail Investments SA LLC (“High Trail”) for $14.0 million (the “Proceeds”). The Company received $4.0 million of the Proceeds for working capital and the remaining $10.0 million was deposited into a blocked bank account based on the terms of a Control Agreement, and incurred approximately $0.5 million of legal fees. Under the terms of the Control Agreement, the Company can access the funds from the blocked account as follows:
•$3.0 million when the Company received $4.0 million in additional financing. The Company received the additional financing in July 2020 and the funds were released to the Company to be used for working capital purposes; and
•On or prior to October 31, 2020, $7.0 million when the Company met certain specified conditions (the “Specified Conditions”) as of any date and on each of the 20 previous trading days prior to such date as defined in the Senior Convertible Note; and
◦The Company can issue shares of its common stock upon conversion that are not subject to restrictions on resale;
◦Upon conversion, High Trail will not beneficially own in excess of 4.99% of the Company’s outstanding common stock;
◦At all times, the Company will have sufficient authorized and unissued shares of its common stock available for the issuance of common stock upon conversion of the outstanding principal amount of the Senior Convertible Note plus accrued interest;
◦The daily dollar trading volume of the Company’s common stock for at least 17 of the prior 20 trading days is not less than $0.8 million (as reported on Bloomberg);
◦The Company has obtained the requisite stockholder approval required by the Nasdaq Capital Market for the issuance of the shares of its common stock upon conversion;
◦The average daily volume-weighted average price per share of the Company’s common stock is not less than $0.85; and
◦There are no defaults or events of default that have occurred or are continuing.
The Senior Convertible Note contains customary events of default, as well as events of default if the Company fails to use reasonable efforts to obtain the approval of its stockholders for the issuance of the shares issuable upon conversion by October 31, 2020, the Company’s common stock ceases to be traded on the Nasdaq Capital Market, or the Company fails to restate its financial statements for the year ended December 31, 2018 and the quarters ended March 31, 2019 and June 30, 2019, in each case, prior to October 31, 2020 or fails to timely file its subsequent quarterly reports on Form 10-Q or its subsequent annual reports on Form 10-K with the SEC in the manner and within the time periods required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result of, among other things, the Company’s common stock no longer being traded on the Nasdaq Stock Market, the Company failing to restate its financial statements for the year ended December 31, 2018 and the quarters ended March 31, 2019 and June 30, 2019, in each case, prior to October 31, 2020, and its failure to timely file its subsequent quarterly reports on Form 10-Q or its subsequent annual reports on Form 10-K with the SEC in the manner and within the time periods required by the Exchange Act, the Company is currently in default.
The Senior Convertible Note is convertible into shares of the Company’s common stock, including any portion constituting an optional redemption payment amount, at High Trail's election. The conversion rate is equal to 1,666.667 shares of the Company’s common stock for every $1,000 of Senior Convertible Note principal outstanding, or $0.60 per share.
The Senior Convertible Note is secured by a first lien on substantially all of the assets of the Company and substantially all of the assets of its material domestic subsidiaries and the assets of Pareteum Europe BV, a subsidiary organized in the Netherlands. In addition, the Senior Convertible Note contains customary affirmative and negative covenants, including restrictions on indebtedness, equity securities, liens, dividends, distributions, acquisitions, investments, sale or transfer of assets, transactions with affiliates and maintenance of certain financial ratios.
See Note 11. Subsequent Events for additional information about the Senior Convertible Note, including events of default.
Derivative Liability
The Senior Convertible Note contains embedded features that are required to be bifurcated and recorded at fair value and then remeasured separately at each reporting date with the changes in fair value recognized in other income (expense), net in the Company’s condensed consolidated statements of operations and comprehensive loss under ASC 815. These embedded features include conversion features that allow for a change in the conversion rate in connection with certain equity issuances, payments based on a fundamental change feature, and payments based on certain events of defaults.
The Company estimated the fair values of the embedded derivatives using a Monte Carlo simulation, which utilizes inputs including the Company’s common stock price, probability assumptions, its historical volatility, risk-free rate, and time to maturity. The estimated fair values are a Level 3 measurement as defined by ASC 820, Fair Value Measurement, as they are based on significant inputs not observable in the market.
The following table presents the fair value of the derivative liability as of the issuance date of the Senior Convertible Note and June 30, 2020:
(In thousands)June 8, 2020Fair Value AdjustmentJune 30, 2020
Conversion features$153 $— $153 
Optional acceleration upon default588 54 642 
Fundamental change44 (8)36 
Derivative liability$785 $46 $831 
The initial fair value of the embedded derivatives was recorded as a debt discount in the condensed consolidated balance sheet as a direct deduction from the face amount of the Senior Convertible Note, and is being amortized using the straight-line method as the
redemption amounts are not fixed and, in addition, are contingent upon High Trail exercising the redemption amounts through April 1, 2025. The amortization of the initial fair value of the embedded derivatives is recorded to interest expense.
For the three and six months ended June 30, 2020, the Company recognized other expense of $46 thousand for the change in the estimated fair value of the derivative liability on the issuance date of the Senior Convertible Note and June 30, 2020.
Warrant Liability
In connection with issuance of the Senior Convertible Note, the Company granted High Trail a warrant to purchase 15,000,000 shares of its common stock at an exercise price of $0.58 per share expiring on June 8, 2025. The warrant is not indexed to the Company’s own stock and is classified as a liability and is subsequently measured at fair value with the changes in fair value recognized in other income (expense), net in the Company’s condensed consolidated statements of operations and comprehensive loss in accordance with ASC 815.
The fair value of the warrant at June 8, 2020, the issuance date of the warrant, and as of June 30, 2020 were estimated using the Black-Scholes option pricing model using the assumptions described below. At each date, the Company’s stock price and the exercise price of the warrant, the expected volatility based on the Company’s historical volatility over the remaining contractual term of the warrant and the risk-free interest rate, which was based on the U.S. Treasury yield curve over the remaining contractual term of the warrant.
The following table presents the fair value of the warrant liability and assumptions used in the Black-Scholes option pricing model used as of the issuance date of the Senior Convertible Note and June 30, 2020:
(Dollars in thousands)June 8, 2020Fair Value AdjustmentJune 30, 2020
Assumptions:
Expected volatility128.21 %128.94 %
Risk-free rate0.45 %0.29 %
Remaining contractual term (year)5.004.94
Expected dividend yield0.00 %0.00 %
Warrant liability$7,256 $688 $7,944 
The initial fair value of the warrant liability was recorded as a debt discount in the unaudited condensed consolidated balance sheet as a direct deduction from the face amount of the Senior Convertible Note, and is being amortized using the straight-line method through April 1, 2025 as interest expense.
For the three and six months ended June 30, 2020, the Company recognized other expense of $0.7 million for the change in the estimated fair value of the warrant liability on the issuance date of the Senior Convertible Note and June 30, 2020.
As of June 30, 2020, the net carrying amount of the Senior Convertible Note is as follows:
(In thousands)June 30, 2020
Principal$17,500
Unamortized debt discount and debt issuance costs(3,925)
Unamortized High Trail warrant(7,177)
Unamortized embedded derivatives(776)
Senior Convertible Note, net$5,622
The following table presents the components of noncash interest expense relating to the Senior Convertible Note for the three and six months ended June 30, 2020:
(In thousands)Three and Six Months Ended June 30, 2020
Amortization of debt discount$38
Amortization of debt issuance costs5
Amortization of the High Trail warrant79
Amortization of the embedded derivatives9
Noncash interest expense, Senior Convertible Note$131
Series C Redeemable Preferred Stock
During the six months ended June 30, 2020, the Company issued 70.2 shares of Redeemable Preferred Stock with a stated value of $7.0 million for gross proceeds of $6.0 million. The Company received net proceeds of $5.7 million after deducting transaction costs of $0.3 million. The Redeemable Preferred Stock requires mandatory redemption one year after the issuance date, together with an 8.0% dividend and a 12.5% premium on the stated value. As of June 30, 2020 and December 31, 2019 there were 175.53 and 105.33 shares of Redeemable Preferred Stock outstanding, respectively, with redemption dates ranging from December 24, 2020 to June 30, 2021.
The following table presents the components of the Redeemable Preferred Stock as of June 30, 2020 and December 31, 2019:
(In thousands)June 30,
2020		December 31, 2019
Stated value$17,253 $10,533 
Unamortized debt discount(4,231)(5,776)
Accretion of redemption premium904 25 
Accrued dividends576 16 
Redeemable Preferred Stock, net$14,502 $4,798 
The components of financing expense related to the Redeemable Preferred Stock were as follows for the three and six months ended June 30, 2020:
(In thousands)Three Months Ended
June 30, 2020		Six Months Ended
June 30, 2020
Amortization of debt discount$1,548 $2,742 
Accretion of redemption premium493 879 
Accrual of dividends308 555 
Noncash interest expense, Redeemable Preferred Stock$2,349 $4,176 
By their terms, the Redeemable Preferred Stock is not convertible into other securities of the Company. See Note 11. Subsequent Events for additional information about the Redeemable Preferred Stock.
Promissory Notes
The promissory notes are comprised of six bank notes secured by Artilium with varying original maturity dates ranging between 6 and 24 months with an average interest rate of 2.0%. The notes are not convertible. As of June 30, 2020 and December 31, 2019, the outstanding balance on the promissory notes was $1.0 million and $1.0 million, respectively.
Related Party Loan
The Company has a loan payable to Comsystems, a company owned by Gerard Derenbos. Prior to the Artilium acquisition, Mr. Derenbos held approximately 15% of the total outstanding common shares of Artilium, and was an Artilium board member. As of June 30, 2020 and December 31, 2019, the outstanding balance was $0.4 million and $0.4 million, respectively. The loan bears interest at 8.0% and matures on December 31, 2021. All principal and interest are due on the maturity date.
Paycheck Protection Program Loans
On May 4, 2020, Pareteum received a $0.6 million PPP loan and on May 8, 2020, iPass received an $0.8 million PPP loan under the CARES Act. The PPP Loans are administered by the U.S. Small Business Administration, mature two years from the funding date, and bear interest at 1.0%.
Pursuant to the terms of the CARES Act, the Company applied for and received forgiveness of the PPP Loans. See Note 11. Subsequent Events for additional information about the PPP Loans.