Five months ago, I discussed the ugly terms of controversial emerging Communications Platform as a Service (“CPaaS”) provider Pareteum Corporation’s (“Pareteum”) $17.5 million financing agreement with a subsidiary of hedge fund High Trail Capital.
After Nasdaq’s recent decision to delist the company’s shares on November 12, this latest financing might actually break the ailing company’s back as the delisting constitutes an event of default under the provisions governing the 8% senior secured convertible notes issued in June:
(a) Events of Default. “Event of Default” means the occurrence of any of the following:
(xi) the suspension from trading or failure of the Common Stock to be trading or listed on an Eligible Exchange for a period of three (3) consecutive Trading Days;
(xiv) after October 31, 2020 (a) the Company fails to timely file its quarterly reports on Form 10-Q or its annual reports on Form 10-K with the Commission in the manner and within the time periods required by the Exchange Act, or (b) the Company withdraws or restates any such quarterly report or annual report previously filed with the Commission (…);
(xv) the Company fails to file restated financial statements with the Commission for (a) the fiscal year ended December 31, 2018, (b) the quarter ended March 31, 2019 and (c) the quarter ended June 30, 2019, in each case on or prior to October 31, 2020 and in compliance with all requirements under the Exchange Act.
(ii) Optional Acceleration. If an Event of Default (other than an Event of Default set forth in Section 11(a) (xx) or (xxi) with respect to the Company and not solely with respect to a Subsidiary of the Company) occurs and is continuing, then the Holder, by notice to the Company, may declare this Note to become due and payable immediately for cash in an amount equal to the Event of Default Acceleration Amount.
Source: Convertible Notes Terms Page 48/49/50
Should the convertible notes holder indeed declare the note due and payable immediately for cash as set forth in the terms of the secured convertible notes, Pareteum might not have sufficient funds to satisfy the demand.
The company also missed out on the above quoted deadline to file restated financial statements with the SEC for FY2018 and Q1 and Q2/2019, thus constituting another event of default.
In addition, it seems that the company’s largest shareholder Hoving Partners did neither extend the redemption date of the Series C preferred stock by at least twelve months nor convert its holdings into common shares on or before October 1 as required under the terms of the convertible notes.
While management asserted that Pareteum’s cash position remains “adequate” with the company being “in close communications with its senior lender,” the company needs to come to terms with High Trail Capital to avoid being provided a near-term notice of default.
Keep in mind that at least in my opinion Pareteum is likely satisfying its monthly interest payment requirements under the convertible notes by issuing shares at a 15% discount to VWAP but with the stock soon to be traded on the OTC, trading volume is likely to dry up, thus making it more difficult to sell these shares or get short in advance of an interest payment date.
That said, management still targets to complete financial restatements on or before year-end and subsequently relist “on Nasdaq or another national securities exchange at the earliest opportunity,” so there’s still some hope left for common shareholders.
With no update on the company’s business performance for more than a year now, Pareteum essentially remains a black box.
As Pareteum’s pending delisting from Nasdaq constitutes an event of default under the provisions governing its convertible notes, the company will have to come to terms with High Trail Capital to avoid dire consequences.
While management promised the restatements to be completed by year-end and subsequently pursue a relisting of the company’s shares, all will depend on High Trail Capital’s course of action.
With the stock soon to be traded on the OTC, expect volume to dry up and the share price to move closer to zero over time.
With zero visibility into the company’s operational performance and the very real threat of High Trail Capital soon providing a notice of default to the company, investors would be well served to sell existing positions.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.