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Brazilian Contract Could Move the Needle for Pareteum (TEUM)

05/19/2017
By Lisa Thompson

NYSE:TEUM

On May 17, 2017, the company (NYSE:TEUM) announced a new seven-year contract with a leading financial services and marketing company in Brazil. This SaaS agreement will enable the customer to provide mobile wireless services to a number of communications service providers and enterprises customers. The customer plans to use the platform for both communications and Internet of Things (IoT) applications. This Brazilian customer believes it can reach a minimum of 3 million subscribers and supported connected devices within three years and generate revenue in the 8-figure range. Pareteum expects to start on-boarding subscribers in Q4 2017, meaning we will likely see major revenues from this in 2018, this contract should show investors and lenders evidence of a means of significant growth. Between now and on-boarding the company will earn fees for setting up the service. 

The Cash Crunch Continues At Pareteum

Q1 results show a cleaned up balance sheet, declining revenues and declining losses. The continuing issue at the company is the cash crunch, which restricts its ability to invest in marketing and sales and pay its bills. This quarter there was a major restructuring of the balance sheet. Total debt was reduced from $8.5 million to $6.8 million. The company also raised $3.5 million in gross proceeds of equity. During the quarter Pareteum negotiated with all parties having a derivative instrument with conversion feature to eliminate any condition responsible for the need of derivative accounting, such as convertible notes and warrants. This resulted in the calculation of the fair value as per the agreement date of the elimination of such feature, and the subsequent accounting for the allocation of the remaining liability value towards extinguishment of debt and change in fair value of the conversion feature. This eliminated all derivative liabilities, which had been $4.3 million on December 31, 2016. 

Reported revenues for Q1 2017 were $2.8 million versus $3.3 million a year ago, a decline of 15%. This decline was the result of the sale of ValidSoft, combined with the seasonal churn of end user customers.

Gross margins however increased to 70% from 66% due to the reduction in staffing and other expenses. Ex the restructuring charges of $129,000 in the 2017 quarter, and $637,000 in the 2016 quarter, operating expenses were $3.8 million versus $5.8 million, a reduction of $2 million or 34%.

Interest expense was $517,000 versus $306,000 a year ago. Total other income was a positive $698,000 in 2017 versus a loss of $38,000. The net loss for Q1 2017 was $1.3 million versus $4.3 million. Given the company is running the business on EBITDA and debt concerns are the biggest issue, investors should focus on EBITDA. For the quarter the adjusted EBITDA, taking out one time restructuring costs was a negative $198,000 versus a negative $2.4 million a year ago. Adding to this cash interest of $316,000 yields cash burn of approximately $500,000 a quarter. 

The company plans an equity raise later in the year at potentially higher valuation to add cash.

During the quarter Pareteum added Pronto Telecommunications of Pittsburgh, PA as a new resale customer and entered a technology integration and revenue sharing partnership with AirFox, a Boston based startup, for its service enablement platform. AirFox’s technology allows Pareteum’s MNOs and MVNO customers create new business models and revenue streams through flexible application plans and mobile advertising. 

Also in the quarter the company strengthen the management team by adding Ted O’Donnell as CFO, Chris Hills as VP of Global Connectivity, Nick Barter as VP of EMEA and Luis Jimenez-Tuñon, Former CEO of Vodafone Enabler Spain S.L., as a new independent director. 

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