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Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
xQuarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2021
oTransition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
001-35360
(Commission file No.)

teum-20210331_g1.jpg

PARETEUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware95-4557538
(State or other jurisdiction of
incorporation or organization)
(I.R.S. employer identification no.)
1185 Avenue of the Americas, 2nd Floor, New York, NY 10036
(Address of principal executive offices) (Zip Code)
(646) 975-0400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act: 
Common Stock, $0.00001 par value per share
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  ¨    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ¨    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer
¨
Accelerated filer
¨
Non-Accelerated filer
Smaller reporting company
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  
As of August 20, 2021, there were 142,697,197 shares of the Company’s common stock outstanding.


Table of Contents
PARETEUM CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
For the Period Ended March 31, 2021

2

Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PARETEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
3

Table of Contents
(In thousands, except share and par values)
March 31,
2021
December 31,
2020
As revised
ASSETS
Current assets:
Cash and cash equivalents$2,098 $8,275 
Restricted cash6,459 6,479 
Accounts receivable, net of allowance for doubtful accounts of $2,213 and $2,077 as of March 31, 2021 and December 31, 2020, respectively
12,379 11,608 
Note receivable, net300 300 
Prepaid expenses and other current assets2,443 3,672 
Total current assets23,679 30,334 
Right-of-use assets, net754 1,044 
Property, equipment, and software development, net4,139 5,090 
Intangible assets, net12,187 12,998 
Goodwill10,560 11,043 
Other assets724 749 
TOTAL ASSETS$52,043 $61,258 
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERSDEFICIT
Current liabilities:
Accounts payable and customer deposits$33,218 $36,034 
Net billings in excess of revenues3,521 3,634 
Accrued expenses and other payables14,797 13,044 
Term loan241 242 
Current portion of promissory notes481 604 
Related party loan311 337 
Current portion of lease liabilities312 524 
Derivative liabilities3,601 6,163 
Senior Convertible Note, net7,521 6,655 
Total current liabilities64,003 67,237 
Junior Convertible Note, net54  
Lease liabilities, net of current portion512 601 
Promissory notes, net of current portion228 330 
Paycheck Protection Program loan826 824 
Warrant liability5,850 7,768 
TOTAL LIABILITIES71,473 76,760 
Commitments and contingencies
Redeemable Preferred Stock, $23,138 redemption value as of March 31, 2021 and
December 31, 2020
25,54124,899 
Stockholders’ deficit:
Preferred stock, $0.00001 par value: 49,995,966 shares authorized, 217.67 and 217.67 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively
  
Common stock and additional paid-in capital, $0.00001 par value: 500,000,000 shares authorized, 142,206,226 and 140,268,725 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively
555,491 552,852 
Accumulated other comprehensive loss(9,318)(8,660)
Accumulated deficit(591,144)(584,593)
TOTAL STOCKHOLDERS’ DEFICIT
(44,971)(40,401)
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS’ DEFICIT
$52,043 $61,258 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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Table of Contents
PARETEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended March 31,
(In thousands, except share and per share values)20212020
Revenue$15,466 $20,055 
Costs and operating expenses:
Cost of revenue, excluding depreciation and amortization10,247 14,445 
Product development1,999 2,991 
Sales and marketing1,277 1,922 
General and administrative9,721 7,048 
Depreciation and amortization2,393 2,645 
Total costs and operating expenses25,637 29,051 
Operating loss(10,171)(8,996)
Nonoperating expenses (income), net(3,572)525 
Loss before income taxes(6,599)(9,521)
Income tax benefit(48)(97)
Net loss(6,551)(9,424)
Dividends and accretion of redemption premium on Redeemable Preferred Stock647  
Net loss attributable to common equity$(7,198)$(9,424)
Loss per common share:
Net loss per share - basic and diluted$(0.05)$(0.07)
Weighted average shares outstanding during the period – basic and diluted141,095,174 138,257,442 
Net loss$(6,551)$(9,424)
Other comprehensive loss:
Foreign currency translation loss(658) 
Comprehensive loss$(7,209)$(9,424)
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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Table of Contents
PARETEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Three Months Ended March 31,
(In thousands)20212020
Redeemable Preferred Stock
Balance, beginning of period$24,899 $ 
Dividends and accretion of redemption premium on Redeemable Preferred Stock647 — 
Payment of dividends(5)— 
Balance, end of period$25,541 $ 
Common stock and additional paid-in capital
Balance, beginning of period$552,852 $547,948 
Share-based compensation770 2,395 
Warrants issued for settlement agreement— 653 
Shares issued for Senior Convertible Note interest788 — 
Junior Convertible Note conversion feature923 — 
BMF warrant805 — 
Dividends and accretion of redemption premium on Redeemable Preferred Stock(647)— 
Balance, end of period555,491 550,996 
Accumulated other comprehensive loss
Balance, beginning of period(8,660)(10,017)
Foreign currency translation loss, net of tax(658)— 
Balance, end of period(9,318)(10,017)
Accumulated deficit
Balance, beginning of period(584,593)(539,493)
Net loss(6,551)(9,424)
Balance, end of period(591,144)(548,917)
Total stockholders’ deficit$(44,971)$(7,938)
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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Table of Contents
PARETEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
(In thousands)20212020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss$(6,551)$(9,424)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization2,393 2,645 
Provision for doubtful accounts364 251 
Share-based compensation770 2,395 
Change in fair value of warrant and derivative liabilities(4,698) 
Amortization of deferred financing costs97 113 
Interest expense related to debt discount accretion and conversion feature921 1,466 
Warrants issued for settlement agreement 653 
Gain on settlement of rental agreement (469)
Changes in operating assets and liabilities:
Accounts receivable, net(1,536)421 
Prepaid expenses and other current assets1,449 2,553 
Accounts payable and customer deposits(2,571)(920)
Net billings in excess of revenues and deferred revenue(37)(193)
Accrued expenses and other payables2,521 (2,537)
Net cash used in operating activities(6,878)(3,046)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment, and software development(929)(1,898)
Net cash used in investing activities(929)(1,898)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loans(226)(239)
Financing related fees(151)(223)
Proceeds from issuance of Redeemable Preferred Stock 4,194 
Payment of dividends on Redeemable Preferred Stock(5) 
Proceeds from issuance of Junior Convertible Note2,000  
Net cash provided by financing activities1,618 3,732 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash(8)(69)
Decrease in cash, cash equivalents, and restricted cash(6,197)(1,281)
Cash, cash equivalents, and restricted cash, beginning of period14,754 5,902 
Cash, cash equivalents, and restricted cash, end of period$8,557 $4,621 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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Table of Contents
PARETEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business and Operations
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 (“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.
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 and the Company’s Annual Report on Form 10-K, as filed with the SEC on June 17, 2021 (the “2020 Annual Report”), the Company reported cash used in operating and investing activities of $7.8 million in the three months ended March 31, 2021 and $14.1 million in the year ended December 31, 2020, after considering the receipt of proceeds from the sale of assets of $12.2 million. As of March 31, 2021, the Company had cash balances available for operations of $2.1 million.
From the end of the fourth quarter of 2019 through the third quarter of 2020, the Company issued 217.67 shares of 8.0% Series C Redeemable Preferred Stock (the “Redeemable Preferred Stock”) in private placement transactions exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The Redeemable Preferred Stock has a stated value of $100,000 per share, or $21.8 million, and was issued for an aggregate purchase price of $13.9 million, from which the Company received net proceeds of $13.1 million after deducting legal fees of $0.8 million.
In April 2020, the Company executed a facility agreement with PCCW Global Limited (“PCCW”), under which the Company could draw up to $0.7 million through four draws through September 30, 2020. Proceeds from the facility agreement were to be used to pay an implementation fee for a mobile virtual network (“MVNO”). See Note 12. Commitments and Contingencies for additional information about the MVNO. Through September 30, 2020, the Company made one draw for $0.2 million under the facility agreement, bearing interest at 6.0%, with payments commencing in January 2021 and maturing in March 2021. As of March 31, 2021, no payments had been made and interest on the outstanding balance increased to 14.0%. In April 2021, the Company and PCCW executed a letter agreement under which the Company agreed to make monthly payments beginning in April 2021 with the final payment, including interest, due in November 2021.
In May 2020, the Company received two Paycheck Protection Program (“PPP”) loans aggregating to $1.4 million. Pareteum received $0.6 million (the “Pareteum PPP Loan”) and iPass received $0.8 million (the “iPass PPP Loan” and together with the Pareteum PPP Loan, the “PPP Loans”) under the Coronavirus Aid, Relief, and Economic Security (“CARES") Act. In December 2020, the Company was notified that the Pareteum PPP Loan had been fully forgiven, and in June 2021, the Company was notified that the iPass PPP Loan had been fully forgiven.
On June 8, 2020, the Company issued a $17.5 million Senior Secured Convertible Note (the “Senior Convertible Note”) for $14.0 million, of which $4.0 million was initially received and $10.0 million 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. Through December 2020, $4.0 million was released to the Company and in April 2021, the remaining $6.0 million was removed from the blocked accounts by the lender in partial satisfaction of the Senior Convertible Note. 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
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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 effective November 1, 2020.
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 of 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 Senior Convertible Note and related agreements. 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 $1.5 million. Accordingly, following these increases in the principal amount payable, but applying against the outstanding principal and such fee the $6.0 million previously maintained in certain blocked account 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 $13.5 million.
On August 16, 2021, the holder of the Senior Convertible Note provided notice to the Company that the Outside Date was not being extended, and accordingly, the holder's agreement to forbear taking any actions with respect to the Company’s defaults terminated on August 23, 2021. See Note 13. Subsequent Events for additional information about the Senior Convertible Note and the termination of the High Trail forbearance agreement.
On February 22, 2021, the Company issued a $2.4 million Senior Second Lien Secured Convertible Note due April 1, 2025 (the “Junior Convertible Note”) to an institutional investor for $2.0 million.
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 “Junior Convertible Note Purchasers”) providing for the issuance and sale by the Company of up to $6.0 million aggregate principal amount of Junior Convertible Notes and warrants to purchase up to 5,000,000 shares of its common stock. The Junior Convertible Notes and accompanying warrants may be sold from time to time to one or more Junior Convertible Note Purchasers under the terms of the purchase agreement. On April 29, 2021, the Company closed on the initial sale of Junior Convertible Notes in the aggregate principal amount of $1.8 million and accompanying warrants to purchase 1,490,000 shares of common stock under the purchase agreement for an aggregate purchase price of $1.5 million.
On June 19, 2021, 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 $17.3 million aggregate principal of Junior Convertible Notes for $5.0 million in cash 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.
In light of our cash position and indebtedness, the Company believes that it will not have sufficient resources to fund its operations and meet the obligations under the Senior Convertible Note, the Junior Convertible Notes, and the Redeemable Preferred Stock, 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 Notes, 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
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its lenders to cure the defaults, or otherwise seek other alternatives to addressing its liquidity and capital resources issues. 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.
Note 2. Financial Statement Presentation and Recent Accounting Updates
The accompanying unaudited condensed consolidated financial statements comprise the accounts of Pareteum and its wholly owned subsidiaries, and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and account balances have been eliminated in consolidation. The Company evaluates subsequent events through the date of filing this Report with the Securities and Exchange Commission (“SEC”). Operating results for the three months ended March 31, 2021 may not necessarily be indicative of the results that may be expected for the full year ending December 31, 2021. These interim period unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2020, which are included in the Company’s 2020 Annual Report.
For a complete summary of our significant accounting policies, please refer to Note 1. Business and Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements in Part I, Item 8 of our 2020 Annual Report.
Use of Estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and intangible assets acquired. Actual results may differ from these estimates under different assumptions or conditions and those differences could be material.
Reclassifications
Certain reclassifications have been made to the prior period condensed consolidated financial statements to conform to the current period presentation. Such reclassifications had no impact on net loss or net cash flows.
Accounting Standards Adopted in the Current Year
In December 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for the Company beginning in fiscal 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s consolidated financial statements.
Recent Accounting Standards Updates Issued - Not Yet Adopted
In June 2016, the FASB issued ASU 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 after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides optional guidance for a limited period of time to ease the burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. This would apply to companies meeting certain criteria that have contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022 and may be applied to contract modifications made and hedging relationships entered into from the beginning of an interim period that includes or is subsequent to March 12, 2020. The Company does not believe the adoption of ASU 2020-04 will have a material impact on its consolidated financial statements.
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In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entitys Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entitys Own Equity (“ASU 2020-06”), which simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. Upon adoption, a convertible debt instrument will be accounted for as a single liability at amortized cost unless (a) the convertible instrument contains features that require bifurcation as a derivative under ASC 815, Derivatives and Hedging (“ASC 815”), or (b) the convertible debt instrument was issued at a substantial premium. These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules. ASU 2020-06 also requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. ASU 2020-06 is effective for public entities excluding smaller reporting companies in fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. For public business entities that meet the definition of a smaller reporting company, the amendments in ASU 2020-06 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company meets the definition of a smaller reporting company and is currently evaluating the impact of adoption of ASU 2020-06 on its consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), DebtModifications and Extinguishments (Subtopic 470-50), CompensationStock Compensation (Topic 718), and Derivatives and HedgingContracts in Entitys Own Equity (Subtopic 815-40): Issuers Accounting for Certain Modification or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”), which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options due to a lack of explicit guidance in the FASB Codification. ASU 2021-04 provides guidance on modifications or exchanges of freestanding equity-classified written call options that are not within the scope of another Topic. Entities should treat a modification of the terms or conditions, or an exchange of a freestanding equity-classified written call option that remains equity-classified after modification or exchange, as an exchange of the original instrument for a new instrument. ASU 2021-04 provides further guidance on measuring the effect of such modifications or exchanges, and also provides guidance on the recognition of such modifications or exchanges on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration. Management is evaluating the effect of the adoption of ASU 2021-04 on the consolidated financial statements. ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, and early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2021-04 on its consolidated financial statements.
Note 3. Balance Sheet Information
The information that follows provides details about certain amounts reported in our unaudited condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020.
Note Receivable, Net
The following table presents details of the note receivable, net as of March 31, 2021 and December 31, 2020:
(In thousands)March 31,
2021
December 31,
2020
ValidSoft$516 $519 
Reserve(216)(219)
Note receivable, net$300 $300 
The ValidSoft note bears interest at 5.0% and, pursuant to an amendment dated June 2020, matured March 31, 2021. On April 6, 2021, the Company entered into an agreement with ValidSoft wherein the Company agreed to accept $0.3 million as payment in full. Consequently, the ValidSoft note receivable was written down to that amount as of December 31, 2020. The Company collected the entire $0.3 million in April 2021.
Prepaid Expenses and Other Current Assets
The following table provides details of the amounts comprising prepaid expenses and other current assets as of March 31, 2021 and December 31, 2020:
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(In thousands)March 31,
2021
December 31, 2020
Prepaid insurance and legal fees$392 $536 
Prepaid software license and support526 471 
Prepaid corporate taxes85 196 
Prepaid expenses-other406 1,337 
Valued added tax798 738 
Other receivables2 64 
Other assets234 330 
Prepaid expenses and other current assets$2,443 $3,672 
Property, Equipment, and Software Development, Net
The following table provides details of the amounts comprising property, equipment, and software development, net as of March 31, 2021 and December 31, 2020:

(In thousands)March 31,
2021
December 31, 2020
Furniture and fixtures$178 $186 
Computer, communications, and network equipment8,983 9,347 
Software4,028 4,207 
Automobiles13 14 
Leasehold improvements25 25 
Software development14,589 14,293 
Property, equipment, and software development, at cost27,816 28,072 
Accumulated depreciation and amortization(23,677)(22,982)
Property, equipment, and software development, net$4,139 $5,090 
For the three months ended March 31, 2021 and 2020 expenditures for property, equipment, and software development were $0.9 million and $1.9 million, respectively; and depreciation and amortization recognized on property, equipment, and software development was $1.7 million and $1.9 million, respectively.
Intangible Assets, Net
The following tables provide information about intangible assets, net as of March 31, 2021 and December 31, 2020:
As of March 31, 2021
(In thousands)Gross Carrying AmountAccumulated AmortizationAccumulated ImpairmentForeign Currency Translation AdjustmentsIntangible Assets, Net
Developed technology$26,829 $(6,049)$(14,651)$(572)$5,557 
Consumer relationships25,300 (4,369)(14,434)(483)6,014 
Trade names3,544 (1,097)(1,757)(74)616 
Intangible assets, net$55,673 $(11,515)$(30,842)$(1,129)$12,187 
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As of December 31, 2020
(In thousands)Gross Carrying AmountAccumulated AmortizationAccumulated ImpairmentForeign Currency Translation AdjustmentsIntangible Assets, Net
Developed technology$26,829 $(5,792)$(14,651)$(520)$5,866 
Consumer relationships25,300 (3,972)(14,434)(454)6,440 
Trade names3,544 (1,050)(1,757)(45)692 
Intangible assets, net$55,673 $(10,814)$(30,842)$(1,019)$12,998 
Amortization of intangible assets in the three months ended March 31, 2021 and 2020 was $0.7 million and $0.7 million, respectively.
The following table provides the estimated future amortization expense related to intangible assets held as of March 31, 2021:
(In thousands)
2021 (excluding the three months ended March 31, 2021)
$1,954 
20222,715 
20232,715 
20242,715 
20252,088 
Total$12,187 
Goodwill
The following table provides information about the carrying value of goodwill as of March 31, 2021 and December 31, 2020:
(In thousands)March 31,
2021
December 31, 2020
Balance, beginning of period$11,043 $10,099 
Foreign currency translation adjustments(483)944 
Balance, end of period$10,560 $11,043 
Other Assets
The following table provides details of the amounts comprising other assets as of March 31, 2021 and December 31, 2020:
(In thousands)March 31,
2021
December 31, 2020
Deposits $384 $382 
Income taxes receivable128 128 
Deferred tax assets96 96 
Other116 143 
Other assets$724 $749 
Accrued Expenses and Other Payables
The following table provides details of the amounts comprising accrued expenses and other payables as of March 31, 2021 and December 31, 2020:
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(In thousands)March 31,
2021
December 31, 2020
Accrued selling, general and administrative expenses$2,221 $4,246 
Accrued salary and bonus2,919 646 
Accrued employee benefits727 754 
Accrued cost of service1,187 1,566 
Accrued taxes (including VAT)3,685 4,193 
Accrued interest payable347 328 
Accrued customer credit879 77 
Other accrued expenses2,832 1,234 
Accrued expenses and other payables$14,797 $13,044 
Note 4.  Lease Commitments
The Company leases property, equipment and automobiles under operating leases with varying expiration dates between 2021 and 2025. The Company also leases equipment under a finance lease which expires in 2022. The Company determines if an arrangement is a lease at inception. The Company presents operating leases in right-of-use assets and lease liabilities, while finance leases are presented in property, equipment, and software development, net, and lease liabilities in the condensed consolidated balance sheets.
The following table presents information related to leases as of March 31, 2021 and December 31, 2020:
(In thousands)March 31, 2021December 31, 2020
Assets:
Operating leases
Right-of-use assets, net(1)
$754$1,044
Finance leases
Property, equipment, and software development, net(2)
97104
Total leased assets$851$1,148
Liabilities:
Current:
Operating leasesCurrent portion of lease liabilities$263$474
Finance leasesCurrent portion of lease liabilities4950
Current portion of lease liabilities312524
Noncurrent:
Operating leasesLease liabilities, net of current portion491567
Finance leasesLease liabilities, net of current portion2134
Lease liabilities, net of current portion512601
Total lease liabilities$824$1,125
Weighted average remaining lease term (in years):
Operating leases3.42.9
Finance leases1.41.7
Weighted average discount rate:
Operating leases4.57 %5.59 %
Finance leases5.00 %5.00 %
(1) Right-of-use assets are recorded net of accumulated amortization of $0.8 million and $1.6 million as of March 31, 2021 and December 31, 2020, respectively.
(2) Finance lease assets are recorded net of accumulated depreciation of $45 thousand and $38 thousand as of March 31, 2021 and December 31, 2020, respectively.
The following table presents maturities of lease liabilities as of March 31, 2021:
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(In thousands)Operating LeasesFinance Leases
2021 (excluding the three months ended March 31, 2021)
$250 $38 
2022244 34 
2023219  
2024138  
202525  
Total lease payments876 72 
Imputed interest(122)(2)
Total lease liabilities754 70 
Current portion of lease liabilities263 49 
Lease liabilities, net of current portion$491 $21 
Note 5. 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 a purchase price of $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 was to 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 $3.0 million was released to the Company to be used for working capital purposes.
On or prior to October 31, 2020, $7.0 million when the Company met certain 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, 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.
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The Senior Convertible Note contains embedded features that are required to be bifurcated and recorded at fair value 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. Additionally, 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 (since reduced to $0.37 per share). The warrant is not indexed to the Company’s own stock and is classified as a liability in the Company’s unaudited condensed consolidated balance sheets in accordance with ASC 815. The estimated fair values of the embedded derivatives and the warrant liability on June 8, 2020, the Senior Convertible Note issuance date, were $0.8 million and $7.3 million, respectively. These amounts were recorded as debt discounts in the unaudited condensed consolidated balance sheet as a direct deduction from the face amount of the Senior Convertible Note, and are being amortized using the straight-line method, which approximates the effective interest method, through April 1, 2025. The amortization of the initial fair value of the embedded derivatives and warrant liability are recorded to interest expense.
On August 16, 2021, High Trail provided notice to the Company that the Outside Date was not being extended, and accordingly, High Trail’s agreement to forbear taking any actions with respect to the Company’s defaults terminated on August 23, 2021. See Note 13. Subsequent Events for additional information about the Senior Convertible Note and the termination of the forbearance agreement.
See Note 7. Warrant and Derivative Liabilities for additional information about the Senior Convertible Note warrant and embedded derivatives.
As of March 31, 2021 and December 31, 2020, the net carrying value of the Senior Convertible Note was as follows:
(In thousands)March 31,
2021
December 31, 2020
Principal$17,500 $17,500 
Unamortized debt discount and debt issuance costs(3,297)(3,584)
Unamortized High Trail warrant(6,030)(6,552)
Unamortized embedded derivatives(652)(709)
Senior Convertible Note, net$7,521$6,655
The following table presents the components of noncash interest expense relating to the Senior Convertible Note for the three months ended March 31, 2021:
(In thousands)Three Months Ended
March 31, 2021
Amortization of debt discount and debt issuance costs$287 
Amortization of the High Trail warrant522 
Amortization of the embedded derivatives57 
Noncash interest expense, Senior Convertible Note$866
Junior Convertible Note
On February 22, 2021, the Company issued the $2.4 million Junior Convertible Note due April 1, 2025 for $2.0 million to B.M.F De Kroes-Brinkers (“BMF”). The Junior Convertible Note is a senior, secured obligation of the Company, but ranks junior to the Senior Convertible Note. Interest is payable monthly beginning April 1, 2021 at a rate of 8.0% per annum. The Junior Convertible Note is secured by a second lien on substantially all of the Company’s assets and substantially all of the assets of its material domestic subsidiaries. Interest may be paid, at the election of the Company, in cash or in shares of common stock of the Company; provided, that, so long as the Senior Convertible Note remains outstanding, such payments may only be made in shares. The number of shares of common stock to be issued to pay interest in shares of the Company’s common stock is determined by the application of a formula in which the amount of the interest due is divided by 85% of the lowest volume weighted-average price of the Company’s common stock on the principal market for the Company’s common stock over the 10 days preceding the date of such payment.
Subject to an intercreditor agreement with the holder of the Senior Convertible Note, the Company may elect to redeem all or a portion of the then-outstanding principal amount outstanding under the Junior Convertible Note. The holder of such Junior Convertible Note or the Company may also elect for the Company to redeem the Junior Convertible Note at a 20% premium if the Company undergoes a fundamental change. The Junior Convertible Note is convertible into the Company’s common stock, in part or in whole, from time to time, at the election of the Purchaser. The conversion rate is equal to 1,666.667 shares of the Company’s common stock for each $1,000 of principal amount of the Junior Convertible Note, or $0.60 per share. The conversion rate is subject to customary anti-dilution adjustments in the event the Company issues stock dividends or effects a split or reverse split of the Company’s common stock.
In connection with issuance of the Junior Convertible Note, certain Series B warrants previously issued to BMF for the purchase of up to 258,523 shares of common stock at an exercise price of $1.84 per share were cancelled; such warrants had been issued on September 24, 2019, and the Company granted BMF a detachable warrant to purchase 2,750,000 shares of its common stock at an
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exercise price of $0.40 per share expiring on February 22, 2026. The warrants are exercisable any time after February 22, 2021. The warrant is indexed to the Company’s own stock and is classified as equity in the Company’s unaudited condensed consolidated balance sheets in accordance with ASC 815. Under ASC 470-20, Debt—Debt with Conversion and other Options (“ASC 470-20”), when debt is issued with equity-classified warrants, the proceeds from the issuance of the debt instrument are allocated to the warrants and the debt instrument based on their relative estimated fair values. The estimated fair value of the warrant is recorded as a discount to the debt instrument with a corresponding increase to additional paid-in capital. The Company estimated the fair value of the BMF warrant using the Black-Scholes option pricing model using the following assumptions: common stock price of $0.55; expected volatility of 130%, a risk-free rate of 0.61%, remaining contractual term of 5 years; and an expected dividend yield of 0%. As a result, the Company recorded a debt discount of $0.9 million and a corresponding increase to common stock and additional paid-in capital.
The Junior Convertible Note contains a beneficial conversion feature and under ASC 470-20, if the amount allocated to a convertible debt instrument results in an effective per share conversion price that is less than the fair value of a company's common stock on the commitment date, the intrinsic value of the beneficial conversion feature is recorded as a discount to the convertible debt with a corresponding increase to additional paid-in capital. The beneficial conversion discount is equal to the difference between the effective conversion price and the fair value of the Company’s common stock at the commitment date, limited to the amount of the proceeds allocated to the Junior Convertible Note. Upon issuance, the effective conversion price of the Junior Convertible Note was determined to be less than the fair value of the Company's common stock. As a result, the Company initially recorded a debt discount related to the beneficial conversion feature of $1.1 million with a corresponding increase to common stock and additional paid-in capital.
Additionally, the Junior Convertible Note contains embedded features that are required to be bifurcated and recorded at fair value under ASC 815. These embedded features include payments based on a fundamental change feature and payments based on certain events of defaults. The aggregate estimated fair values of the embedded derivatives on February 22, 2021, the Junior Convertible Note issuance date, was $0.2 million, and was were recorded a debt discount in the unaudited condensed consolidated balance sheet as a direct deduction from the face amount of the Junior Convertible Note, and is being amortized using the straight-line method, which approximates the effective interest method, through April 1, 2025. The amortization of the initial fair value of the embedded derivatives is recorded to interest expense.
The Company incurred $0.2 million of issuance costs, which were allocated on the basis of the relative fair values of the warrant and the Junior Convertible Note in accordance with the guidance in ASC 470-20. As a result, the Company initially allocated $0.1 million to the Junior Convertible Note, and $0.1 million to the BMF warrant. The amount allocated to the BMF warrant was recorded as a reduction to common stock and additional paid-in capital.
On the issuance date, the Company initially recorded a debt discount for the original issue discount of $0.4 million; and the estimated fair values of the compound derivative liability of $0.2 million, the BMF warrant of $0.9 million, the beneficial conversion feature of $1.1 million, and debt issuance costs of $0.1 million. As a result, the initial debt discount exceeded the principal balance of the Junior Convertible Note by $0.3 million. The Company wrote off the $0.1 million debt issuance costs as interest expense, and reduced the beneficial conversion feature by $0.2 million with a corresponding decrease in common stock and additional paid-in capital. The $2.4 million debt discount is being amortized using the straight-line method, which approximates the effective interest method, through April 25, 2025.
As of the issuance date and March 31, 2021, the net carrying value of the Junior Convertible Note was as follows:
(In thousands)Issuance DateMarch 31,
2021
Principal$2,400 $2,400 
Unamortized debt discount and debt issuance costs(400)(391)
Unamortized BMF warrant(859)(840)
Unamortized conversion feature(923)(902)
Unamortized embedded derivatives(218)(213)
Junior Convertible Note, net$ $54 
The following table presents the components of noncash interest expense relating to the Junior Convertible Note for the three months ended March 31, 2021:
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(In thousands)Three Months Ended
March 31, 2021
Amortization of debt discount and debt issuance costs$9 
Write-off of debt issuance costs97 
Amortization of the BMF warrant19 
Amortization of conversion feature21 
Amortization of the embedded derivatives5 
Noncash interest expense, Junior Convertible Note$151 
See Note 13. Subsequent Events for additional information about the Junior Convertible Note.
Term Loan
In April 2020, the Company executed a facility agreement with PCCW, under which the Company could draw up to $0.7 million through four draws through September 30, 2020. Proceeds from the facility agreement were to be used to pay an implementation fee for a MVNO. Through September 30, 2020, the Company made one draw for $0.2 million under the facility agreement, bearing interest at 6.0%, with payments commencing in January 2021 and maturing in March 2021. As of March 31, 2021, no payments had been made and interest on the outstanding balance increased to 14.0%. In April 2021, the Company and PCCW executed a letter agreement under which the Company agreed to make monthly payments beginning in April 2021 with the final payment, including interest, due in November 2021. See Note 12. Commitments and Contingencies for additional information about the MVNO.
Promissory Notes
The promissory notes are comprised of six bank notes secured by Artilium with varying original terms ranging between 12 and 36 months with an average interest rate of 2.19%, and are not convertible. As of March 31, 2021 and December 31, 2020, the outstanding balance on the promissory notes was $0.7 million and $0.9 million, respectively, with contractual maturities due within the next twelve months of $0.5 million and $0.6 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 15.0% of the total outstanding common shares of Artilium, and was an Artilium board member. All principal and interest was due and payable on June 30, 2020, the original maturity date, however, the Company requested, and was granted, an extension with equal principal payments due monthly beginning July 2020 with the final payment due in December 2021. The loan bears interest at 8.0%, and as of March 31, 2021 and December 31, 2020, the outstanding balance was $0.3 and $0.3, respectively.
Paycheck Protection Plan Loan
On May 8, 2020, iPass received an $0.8 million PPP loan under the CARES Act, which is administered by the U.S. Small Business Administration, matures two years from the funding date, and bears interest at 1.0%. As of March 31, 2021, an immaterial amount of accrued interest on the iPass PPP Loan is recorded in the unaudited condensed consolidated balance sheets.
Pursuant to the terms of the CARES Act, the Company applied for and received forgiveness of the iPass PPP Loan. See Note 13. Subsequent Events for additional information about the iPass PPP Loan.
Note 6. Redeemable Preferred Stock
From December 24, 2019 to August 18, 2020, the Company issued 217.67 shares of Redeemable Preferred Stock. By their terms, shares of Redeemable Preferred Stock were not convertible into or exchangeable for other securities of the Company. However, on various dates from July 17, 2020 through October 18, 2020, the Company entered into Exchange Agreements with all of the holders of Redeemable Preferred Stock (collectively, the “Exchange Agreements”) that modified certain terms of the Redeemable Preferred Stock as described below.
Under the terms of the Exchange Agreements, the mandatory redemption date was extended and an exchange feature was added. Under the terms of the exchange feature, the Redeemable Preferred Stock is exchangeable for shares of the Company’s common stock at either the option of the holder or the Company at any time prior to December 24, 2021, subject to the satisfaction of the following closing conditions:
a.the Company obtaining Nasdaq Capital Market approval for the issuance of the shares upon the exchange,
b.approval of the Company’s stockholders for the issuance of such common stock, and
c.the Company’s ability to issue shares of common stock not subject to restrictions on resale.
The foregoing conditions can be waived by the Company and the holder. Certain other conditions to the exchange relating to the Company’s common stock trading at a certain minimum price can only be waived by the holder, however, if the closing conditions are
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not met or waived by December 24, 2021, the Redeemable Preferred Stock is mandatorily redeemable in cash on December 25, 2021 at the stated value together with the 8% dividend and a 12.5% redemption premium.
The number of shares of the Company’s common stock issuable to the holders upon exchange of the Redeemable Preferred Stock is determined by the application of a formula in which (i) the stated value of the shares of Redeemable Preferred Stock being exchanged plus the value of any accrued and unpaid dividends plus, with respect to certain agreed-upon shares of the Redeemable Preferred Stock, a premium of 12.5% on the stated value, is divided by (ii) the “conversion price.” The conversion price for one holder that owns 62.0 shares of the Redeemable Preferred Stock is the lower of (i) $0.60 and (ii) the greater of (x) the average daily volume-weighted average price per share of common stock during the five trading days before the closing of the conversion or (y) $0.40. For the remaining holders the conversion price is $0.70.
As a result of modifying certain terms of the Redeemable Preferred Stock, which was classified as a liability prior to the execution of the Exchange Agreements, the Company accounted for the modification as an extinguishment because the exchange feature is substantive under the guidance provided by ASC 470-50, Debt—Modifications and Extinguishments. As a result of modifying the terms of the Redeemable Preferred Stock in connection with the Exchange Agreements, the Company determined that such Redeemable Preferred Stock should be presented as temporary equity in accordance with ASC 480-10-S99, Distinguishing Liabilities from Equity—Overall—SEC Materials.
Based on the terms of the Exchange Agreements, if the associated shares of Redeemable Preferred Stock are not convertible into shares of common stock upon satisfaction or waiver of the various closing conditions by December 24, 2021, such shares of Redeemable Preferred Stock are then mandatorily redeemable for cash on December 25, 2021 in an amount equal to the stated value plus all accrued dividends and a redemption premium of 12.5%. Accordingly, as of the execution dates of the Exchange Agreements, the Company reclassified the Redeemable Preferred Stock from a liability to temporary equity outside of permanent equity in its unaudited condensed consolidated balance sheets. The Company will continue to accrue the 8% dividends and accrete the 12.5% redemption amount through December 25, 2021. From the execution dates of the Exchange Agreements through March 31, 2021, the Company has recorded the accrued 8% dividends and the accretion of the 12.5% redemption amount, totaling $1.5 million, to common stock and additional paid-in capital.
The components of Redeemable Preferred Stock as of March 31, 2021 and December 31, 2020 consisted of the following:
(In thousands)March 31, 2021December 31, 2020
Stated value$21,767 $21,767 
Accretion of redemption premium1,923 1,705 
Accrued dividends1,851 1,427 
Redeemable Preferred Stock$25,541 $24,899 
Note 7. Warrant and Derivative Liabilities
Warrant Liabilities
In connection with the 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 (since reduced to $0.37 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 nonoperating expenses (income), net in the Company’s unaudited 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 each subsequent reporting date 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 estimated fair values are a Level 3 measurement as defined by ASC 820, Fair Value Measurement (“ASC 820”), as they are based on significant inputs not observable in the market.
The following table provides the assumptions used in the Black-Scholes option pricing model used to determine the estimated fair value of the warrant liability for the periods presented:
March 31, 2021December 31,
2020
Common stock price$0.46 $0.59 
Expected volatility133.72 %134.68 %
Risk-free rate0.64 %0.36 %
Remaining contractual term (years)4.194.44
Expected dividend yield0.00 %0.00 %
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For the three months ended March 31, 2021, the estimated fair value of the warrant liability decreased to $5.9 million from $7.8 million as of December 31, 2020, and the associated $1.9 million of other income is included in nonoperating expenses (income), net in the unaudited condensed consolidated statements of operations and comprehensive loss.
Derivative Liabilities
Senior Convertible Note
The Senior Convertible Note contains embedded features that are required to be bifurcated and recorded at fair value and then remeasured separately at each subsequent reporting date with the changes in fair value recognized in nonoperating expenses (income), net in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss in accordance with 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 estimates 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 as they are based on significant inputs not observable in the market.
For the three months ended March 31, 2021, the estimated fair value of the Senior Convertible Note derivative liability increased from $1.1 million as of December 31, 2020 to $1.5 million as of March 31, 2021, and the associated $0.5 million of expense is included in nonoperating expenses (income), net in the unaudited condensed consolidated statements of operations and comprehensive loss.
Junior Convertible Note
The Junior Convertible Note issued in February 2021 contains embedded features that are required to be bifurcated and recorded at fair value and then remeasured separately at each subsequent reporting date with the changes in fair value recognized in nonoperating expenses (income), net in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss in accordance with 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 estimates 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 as they are based on significant inputs not observable in the market.
For the three months ended March 31, 2021, the estimated fair value of the Junior Convertible Note derivative liability decreased $18 thousand from the issuance date.
Redeemable Preferred Stock
Based on the terms of the Exchange Agreements, the Redeemable Preferred Stock is a hybrid instrument that contains embedded conversion features, which meet the definition of a derivative. As a result, the embedded conversion features were bifurcated upon issuance as an embedded derivative and recorded at fair value and then remeasured separately at each subsequent reporting date with the changes in fair value recognized in nonoperating expenses (income), net in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss in accordance with ASC 815.
The Company estimated the fair value of the embedded conversion features at the execution dates of the Exchange Agreements to be $12.9 million using a Monte Carlo Simulation, which utilizes inputs including the Company’s common stock price, probability assumptions of the closing conditions being met or waived by both the Company and the holder, its historical volatility and risk-free rate and time to maturity. The estimated fair values are a Level 3 measurement as defined by ASC 820 as it is based on significant inputs not observable in the market.
For the three months ended March 31, 2021, the estimated fair value of the Redeemable Preferred Stock derivative liability decreased from $5.1 million as of December 31, 2020 to $1.9 million as of March 31, 2021, and the associated $3.2 million of income is included in nonoperating expenses (income), net in the unaudited condensed consolidated statements of operations and comprehensive loss.
The following table provides details of the activity related to the derivative liabilities for the three months ended March 31, 2021:
(In thousands)Senior Convertible NoteJunior Convertible NotesRedeemable Preferred StockTotal
Balance, December 31, 2020$1,053 $ $5,110 $6,163 
Issuance date fair value 218  218 
Change in fair value487 (18)(3,249)(2,780)
Balance, March 31, 2021$1,540 $200 $1,861 $3,601 
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See Note 5. Debt and Note 6. Redeemable Preferred Stock for additional information about the Senior Convertible Note, the Junior Convertible Note, and the Redeemable Preferred Stock.
Note 8. Stockholders’ Deficit
Preferred Stock
The Company is authorized to issue up to 49,995,966 shares of preferred stock. As of March 31, 2021 and December 31, 2020, there were 217.67 shares issued and outstanding. All of the outstanding shares of preferred stock as of March 31, 2021 and December 31, 2020 were Redeemable Preferred Stock and are classified as temporary equity. See Note 6. Redeemable Preferred Stock and Note 13. Subsequent Events for additional information about the Redeemable Preferred Stock.
Common Stock
The Company is authorized to issue up to 500,000,000 shares of common stock. As of March 31, 2021 and December 31, 2020, the issued and outstanding shares were 142,206,226 and 140,268,725, respectively.
The following table presents common stock activity for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31,
20212020
Common stock outstanding, beginning of period140,268,725 139,060,180 
Shares issued for interest on Senior Convertible Note1,864,584  
Vesting of restricted and common stock awards72,917 1,217,015 
Common stock outstanding, end of period142,206,226 140,277,195 
Warrants
The Company has issued warrants with varying terms and conditions related to multiple financing rounds, acquisitions and other transactions. The following table summarizes warrant activity for the three months ended March 31, 2021 and the year ended December 31, 2020:
Three Months Ended March 31, 2021Year Ended
December 31, 2020
Warrants outstanding, beginning of period54,298,850 38,111,211 
Issued2,775,000 17,000,000 
Expired(1,104,540)(812,361)
Warrants outstanding, end of period55,969,310 54,298,850 
As of March 31, 2021 and December 31, 2020, warrants for the purchase of 40,969,310 and 39,298,850 shares of common stock, respectively, have been recorded and classified as equity. As of March 31, 2021, exercise prices for the outstanding warrants range from $0.37 to $5.38; the weighted average exercise price for the outstanding warrants is $1.504; and the outstanding warrants expire from 2021 to 2026.
Note 9.  Income Taxes
The following table presents details of income tax benefit for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31,
(In thousands)20212020
Income tax benefit$(48)$(97)
Our effective tax rates were 0.7% and 1.0% for the three months ended March 31, 2021 and 2020, respectively. Our effective tax rates were lower than the U.S. federal statutory rate primarily due to earnings in foreign jurisdictions.
The Company had no uncertain tax positions as of March 31, 2021 and December 31, 2020.
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Note 10. Supplemental Cash Flow Information
The following table provides supplemental cash flow information for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31,
(In thousands)20212020
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash received during the period for interest$7 $7 
Cash paid during the period for interest53 1 
Cash paid during the period for income taxes7 13 
Operating cash outflows from operating leases78 176 
Operating cash outflows from finance leases (interest)3 1 
Financing cash outflows from finance leases13 13 
NONCASH FINANCING ACTIVITIES:
Right-of-use lease assets and financing 45 
Warrants issued for settlement agreement 653 
Shares issued for payment of interest788  
Note 11. Segment and Geographic Information
Segment Information
Segment information is prepared on the same basis that our chief operating decision-makers (“CODMs”), who are our interim chief executive officer and interim chief financial officer, evaluate financial results, make key operating decisions, and for which discrete financial information is available. As of March 31, 2021, the Company has aggregated its three operating segments, which have similar economic characteristics and all provide their customers with communication connectivity services achieved through sales and marketing channels across all three operating segments through their CPaaS, into one reportable segment—Communication Connectivity Services. The measure of profitability our CODMs use to evaluate financial results for our reportable segment is operating income (loss).
The following table presents disaggregated revenue from external customers derived from Communication Connectivity Services for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31,
(In thousands)20212020
Monthly service$15,334 $19,919 
Installation and software development132 136 
Total revenue$15,466 $20,055 
Geographic Information
The following table provides information about our consolidated revenue for the three ended March 31, 2021 and 2020, based on customer location:
Three Months Ended March 31,
(In thousands)20212020
International$10,382 $11,277 
United States5,084 8,778 
Total revenue$15,466 $20,055 
Note 12. Commitments and Contingencies
Commitments
The Company has entered into certain off–balance sheet commitments that require the future purchase of goods or services (“unconditional purchase obligations”). The Company entered into the Strategic Connectivity Agreement (the “Connectivity Agreement”) with Hutchison 3G UK Limited (“3UK”) on July 23, 2019. Under the Connectivity Agreement, the Company is obligated to pay 3UK $0.7 million (the “Implementation Fee”) for the implementation of a MVNO (the “3UK MVNO”), and for monthly services provided, based on usage, after the 3UK MVNO is launched, which management anticipates to be in the third quarter of 2021. On February 19, 2021, the Company and 3UK amended the Connectivity Agreement to eliminate some of the invoicing
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functionality of the 3UK MVNO, which reduced the Implementation Fee to $0.5 million. The Implementation Fee is payable upon the satisfactory completion of certain agreed upon milestones. As of March 31, 2021, two of those milestones had been achieved.
Concurrent with the execution of the Connectivity Agreement, the Company entered into the Agreement for the Sale and Purchase of Credit Voucher (the “Credit Voucher Agreement”) with PCCW under which the Company is obligated to purchase a credit voucher for $34.4 million. The credit voucher will be used to offset certain monthly service charges incurred under the Connectivity Agreement. As of March 31, 2021, $0.4 million of the purchase price has been paid and $0.3 million of the purchase price has been recorded in accrued expenses and other payables in the unaudited condensed consolidated balance sheet. The remaining $33.7 million unconditional purchase obligation is due and payable following the launch date of the 3UK MVNO, where after the Company is required to remit the amount of the credit voucher used to offset monthly charges incurred under the Connectivity Agreement to PCCW each quarter.
Should the aggregate of the monthly charges offset with the credit voucher from the Connectivity Agreement launch date through June 30, 2022 be less than $8.9 million, the Company is obligated to remit a make-up payment (the “2022 Make-up Payment”) for the difference between $8.9 million and the aggregate monthly charges offset with the credit voucher. Should the aggregate of the monthly charges offset with the credit voucher from the Connectivity Agreement launch date through June 30, 2023, plus any 2022 Make-up Payment, if applicable, be less than $15.8 million, the Company is obligated to remit a make-up payment (the “2023 Make-up Payment”) for the difference between $15.8 million and the aggregate monthly charges offset with the credit voucher, plus any 2022 Make-up Payment. Should the aggregate of the monthly charges offset with the credit voucher from the Connectivity Agreement launch date through June 30, 2024, plus any 2022 Make-up Payment and any 2023 Make-up Payment, if applicable, be less than $24.1 million, the Company is obligated to remit a make-up payment (the “2024 Make-up Payment”) for the difference between $24.1 million and the aggregate monthly charges offset with the credit voucher, plus the 2022 Make-up Payment and the 2023 Make-up Payment. Should the aggregate of the monthly charges offset with the credit voucher from the Connectivity Agreement launch date through June 30, 2025, plus any 2022 Make-up Payment and any 2023 Make-up Payment and any 2024 Make-up Payment, if applicable, be less than $33.7 million, the Company is obligated to remit a final make-up payment for the difference between $33.7 million and the aggregate monthly charges offset with the credit voucher, plus any 2022 Make-up Payment and any 2023 Make-up Payment and any 2024 Make-up Payment.
The following table presents the minimum amounts due under the Company’s unconditional purchase obligations as of March 31, 2021:
(In thousands)Connectivity AgreementCredit Voucher AgreementTotal
2021 (excluding the three months ended March 31,2021)$103 $ $103 
2022103 8,948 9,051 
2023 6,883 6,883 
2024 8,260 8,260 
2025 9,637 9,637 
Total$206 $33,728 $33,934 
The following table presents management’s estimate of the timing of amounts due under the Company’s unconditional purchase obligations as of March 31, 2021:
(In thousands)Connectivity AgreementCredit Voucher AgreementTotal
2021 (excluding the three months ended March 31,2021)$103 $ $103 
2022103 10,096 10,199 
2023