SOURCE: Elephant Talk Communications

Elephant Talk Communications

May 09, 2011 17:26 ET

Elephant Talk Communications, Inc. Reports First Quarter 2011 Financial Results and Provides Business Update

67% Increase in Higher Margin Mobile Revenue

SCHIPOL, THE NETHERLANDS--(Marketwire - May 9, 2011) - Elephant Talk Communications, Inc. (OTCBB: ETAK) (www.elephanttalk.com), an international provider of business software and services to the telecommunications and financial services industries, today announced the results of operations for the three month period ended March 31, 2011.

"Management is pleased that during the first quarter we increased our mobile and security solutions revenue by 67%, mostly as a result of initial fees in relation with contracting additional migrations in Spain and our mobile platform contract in the Middle East," stated Steven van der Velden, Chairman and CEO of Elephant Talk. "This is a major milestone as we have now begun to successfully transition to the higher margin customized mobile services. During the quarter we expanded our operations in the Middle East and expect our platform to be operational and producing revenue by the end of the second quarter. Additionally, we signed an agreement in Brazil with Cleartech that presents a significant opportunity for us to establish ourselves as a market leader in their rapidly growing mobile device industry that services 200 million users."

Mr. van der Velden continued, "Throughout 2011, ValidSoft continued to market its superior solutions to both the financial services and governmental sectors in the United Kingdom, Mainland Europe, and Asia. We have successfully completed trials with 2 international banks and commercial negotiations have commenced. Based on the initial results from the projects, we intend to begin mass commercialization of our anti-fraud technology during the current calendar year. With the recent achievements in both business segments and numerous opportunities before us, management intends to transition to a senior U.S. exchange. We believe this will be another key milestone, similar to our agreements with Vodafone, T-Mobile, KPN and Visa Europe, enabling us to garner greater exposure to the broader investment community."

First Quarter Operational Highlights:

-- Signed an agreement with Cleartech to become its Mobile Virtual Network
   Enabler (MVNE) partner in Brazil and provide infrastructure services to
   the growing marketplace.
   -- Cleartech, a clearinghouse of telecom companies that manages
      interconnections and services shared by telecom operators in the
      country.
-- Elephant Talk signed a contract in the Middle East to provide its mobile
   platform to assist a mobile operator to better position its various
   brands.
-- Targeted entry in mobile markets like Mexico, Colombia, and Turkey. The
   Company is strongly positioned in these markets and expects to create
   additional footholds as contracts further develop.
-- Announced Rijkman Groenink, former CEO of ABN Amro Bank, as our newest
   member of the Company's Board of Directors.
-- ValidSoft is working with a European governmental agency to improve the
   unemployment benefits systems through recipient verification.  Live
   trials of the service solution are expected to take place in the second
   quarter of 2011.
   -- Using our unique four-factor authentication model, that uses voice
      biometrics, with an automated dialer to authenticate the identity of
      each individual and anonymous Proximity Correlation Logic™ to
      verify that they are not outside the jurisdiction in order to
      qualify for receipt of payment.
   -- The self-certification approach generates significant cost savings
      and efficiencies to the agency.
-- ValidSoft's solution has attracted interest from a number of
   jurisdictions across Europe, where similar problems exist, many of which
   have a significantly larger problem. Discussions have begun and will
   continue through the second quarter for additional contracts.
-- Initial contracts with Mobile Network Operators have been executed to
   secure carrier grade access to signaling information required for the
   provisioning of the Anonymous Proximity Correlation services and a
   streamlined process of engagement has been devised and will be executed
   during Q2 and beyond.
-- ValidSoft has launched its VALid-SVP™ or speaker verification
   platform. VALid-SVP™ is the biometric voice verification solution
   utilized on the VALid® platform.
   -- The solution is based on a completely modular and plug and play
      architecture that allows organizations to integrate through existing
      or preferred biometric engines into the VALid® framework.
-- ValidSoft is engaged in commercial discussions with a major
   international financial institution concerning the provision of the
   VALid-POS® solution for card fraud prevention.
-- ValidSoft is in advanced discussions with a major financial institution
   in Mexico concerning the provision of the VALid® solution for internet
   banking. This is a significant opportunity and may result in a contract
   being executed by the end of the third quarter.

Financial Results for the Quarter Ended March 31, 2011

When we use the non-GAAP financial measurement term "constant currency" it means that we have translated financial data for a previous period into U.S. Dollars using the same foreign currency exchange rates that we used to translate financial data for the current period. We believe that this calculation is a useful measure, indicating the actual growth of our operations.

Revenue for the three months ended March 31, 2011 was $8,508,014, a decrease of $1,435,751 or 14.4%, compared to $9,943,765 for the three months ended March 31, 2010. In constant currency, the revenue decreased by $1,309,632 or 13.3% compared to the same period in 2010, and was attributable to a decrease of $1,947,397 of our Landline business, which was partly off-set by the increase of $637,765 in our higher margin Mobile & Security Solutions business compared to the same period in 2010.

Cost of service for the 3 months ended March 31, 2011 was $7,557,485, a decrease of $1,816,403 or 19.4%, compared to $9,373,888 for the three months ended March 31, 2010. $1,696,575 of the decrease was from the lower cost of service associated with the Mobile and Security solutions business combined with lower revenue contribution from the Landline business, $119,828 of the decrease was a result of a favorable impact of the currency translation effect arising from a lower USD/Euro exchange rate.

Cost of Service, as a percent of revenue, expressed in constant dollar terms was 88.8% and 94.3% for the three months ended March 31, 2011 and 2010, respectively. Management expects cost of service to decline as a percent of revenue as a greater proportion of future revenue is comprised of our Mobile & Security Solutions, which have a substantially lower cost of service than our traditional Landline business.


Revenue (in constant currency)
Q1 2010       Q1 2011        variance        %
$9,817,646    $   8,508,014 ($ 1,309,632)   (13.3%)
----------    ------------- ------------  --------

Margin* (in constant currency)

Q1 2010       Q1 2011        variance         %
  $563,586    $     950,529 $    386,943      68.7%
----------    ------------- ------------  --------

* Margin = Revenue less Cost of Service

Selling, general and administrative ("SG&A") expense for the three months ended March 31, 2011 and 2010 were $ 3,416,357 and $ 1,905,350, respectively. SG&A expenses increased by $1,511,007, or 79.3%, in 2011 compared to 2010.

In constant currency, SG&A increased by $1,534,044, or 81.5%, compared to the same period in 2009. This increase in expenses was split in 64.5% attributable to the inclusion of ValidSoft into our financials and in 17% attributable to increased staffing levels since 1 April 2010. Our Staffing levels increased with 21% being 24.8 FTE (March 31, 2011: 140.4 FTE versus April 1, 2010: 115.6 FTE).

Non-cash compensation for the three months ended March 31, 2011 and 2010 was $1,130,063 and $540,913, respectively. In addition to the increased staffing levels, the increase is primarily attributable to the fact that non-cash compensation for directors and executive officers related to first quarter 2010 was only accounted for as of the second quarter 2010.

Net Loss for the three months ended March 31, 2011 was $4,713,224 or (0.05) per share, compared to a loss of $12,338,995 or (0.22) per share for the same period in 2010.

Elephant Talk employs Adjusted EBITDA, defined as earnings before interest, taxes, depreciation and amortization as well as to market adjustments related to our warrant liabilities and conversion features which are accounted under derivative accounting rules as required by US GAAP, for several purposes, including as a measure of our operating performance. We use Adjusted EBITDA because it removes the impact of items not directly resulting from our core operations, thus allowing us to better assess whether the elements of our growth strategy are yielding positive results.

                                Q1 2010         Q1 2011        variance
                            --------------  --------------  --------------
Net loss                    $  (12,314,900) $   (4,713,224) $    7,601,676

Provision for income taxes             800             800               -
Net loss attributable to
 noncontrolling interest               498              80            (418)
Depreciation and
 amortization                      837,078       1,302,675         465,597
Stock-based compensation           540,913       1,130,063         589,150
Interest income and
 expenses                          414,206          43,778        (370,428)
Other income & expenses                  -        (230,000)       (230,000)
Other non-cash financing
 charges                         9,202,676               -      (9,202,676)
Adjusted EBITDA             $   (1,318,728) $   (2,465,828) $   (1,147,100)
                            --------------  --------------  --------------

(Note to Adjusted EBITDA: 2010 figures are in constant currency and do not include ValidSoft, since ValidSoft was only consolidated as of 1 April 2010; with ValidSoft included in the Q1 2010 numbers, the increase in Adjusted EBITDA loss would have been limited to $ 239.407) "Other non-cash financing charges" above consist of non-cash Interest expense related to debt discount, Change in fair value of warrant liabilities & conversion feature, and Amortization of deferred financing costs.

Conference Call Reminder

As a reminder the Company will be hosting a conference call with investment community to discuss the first quarter 2011 financial results and provide an operational update.

Conference Call Details:

Date: Tuesday, May 10, 2011
Time: 11:00 a.m. ET
Dial-In Number: 1-877-941-8418
International Dial-In Number: 1-480-629-9809

It is recommended that participants dial in approximately 5 to 10 minutes prior to the start of the 11:00 a.m. call. A telephonic replay of the conference call may be accessed approximately two hours after the call through May 17, 2011, by dialing 1-877-870-5176 or 1-858-384-5517 for international callers and entering the replay access code 4438475.

There will also be a simultaneous audio feed webcast and archived recording of the conference call available at http://www.elephanttalk.com/ under the "Investor Relations" menu section or you may use the link audio feed and archived recording of the conference call available at http://viavid.net/dce.aspx?sid=000085CE.

            ELEPHANT TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
                       CONSOLIDATED BALANCE SHEET
                               (UNAUDITED)

                                                  March 31,   December 31,
                                                    2011          2010
                                                ------------  ------------

ASSETS

CURRENT ASSETS

Cash and cash equivalents                       $  4,167,266  $  2,245,697
Restricted cash                                      192,677       190,312
Accounts receivable, net of an allowance for
 doubtful accounts of $135,652 and $119,044 at
 March 31, 2011 and December 31, 2010
 respectively                                      6,515,512     5,600,562
Prepaid expenses and other current assets          3,014,249     2,337,914
                                                ------------  ------------
   Total Current Assets                           13,889,704    10,374,485

LONG TERM DEPOSITS                                   648,031       610,486

PROPERTY AND EQUIPMENT, NET                       10,804,800     8,452,588

INTANGIBLE ASSETS, NET                            16,498,694    16,253,587

GOODWILL                                           3,442,057     3,230,786

                                                ------------  ------------
TOTAL ASSETS                                    $ 45,283,286  $ 38,921,932
                                                ============  ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Overdraft                                       $    356,657  $    356,738
Accounts payable and customer deposits             5,098,658     4,703,875
Accrued expenses and other payables                3,818,517     3,843,938
Loans payable                                        876,748       877,357
                                                ------------  ------------
   Total Current Liabilities                      10,150,580     9,781,908

LONG TERM LIABILITIES
Loan from related party                              483,507       468,756
                                                ------------  ------------
   Total Long term Liabilities                       483,507       468,756

                                                ------------  ------------
   Total Liabilities                              10,634,087    10,250,664
                                                ------------  ------------


STOCKHOLDERS' EQUITY
Common stock, no par value, 250,000,000 shares
 authorized, 96,092,679 issued and outstanding
 as of March 31, 2011 compared to 88,660,848
 shares issued and outstanding as of December
 31, 2010                                        192,188,235   183,825,665
Accumulated other comprehensive income (loss)      1,800,544      (519,020)
Accumulated deficit                             (159,531,660) (154,818,436)
                                                ------------  ------------
   Elephant Talk Comunications, Inc.
    Stockholders' Equity                          34,457,119    28,488,209
                                                ------------  ------------

NON-CONTROLLING INTEREST                             192,080       183,059
                                                ------------  ------------
   Total Stockholders' Equity                     34,649,199    28,671,268
                                                ------------  ------------

                                                ------------  ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY      $ 45,283,286  $ 38,921,932
                                                ------------  ------------




            ELEPHANT TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
        CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
                                  (UNAUDITED)



                                                 for the three months
                                                     period ended,
                                                March 31,      March 31,
                                                  2011           2010
                                              -------------  -------------

REVENUES                                      $   8,508,014  $   9,943,765

COST AND OPERATING EXPENSES
Cost of service                                   7,557,485      9,373,888
Selling, general and administrative expenses      3,416,357      1,905,350
Non cash compensation to officers, directors
 and employees                                    1,130,063        540,913
Depreciation and amortization of intangible
 assets                                           1,302,675        844,694
                                              -------------  -------------
  Total cost and operating expenses              13,406,580     12,664,845

LOSS FROM OPERATIONS                             (4,898,566)    (2,721,080)

OTHER INCOME (EXPENSE)
Interest income                                      22,986         32,599
Interest expense                                    (66,764)      (446,540)
Other income                                        230,000             --
Interest expense related to amortization of
 debt discount on promissory notes                       --     (1,326,919)
Change in fair value of warrant liabilities              --     (7,347,911)
Amoritization of deferred financing costs                --       (527,846)
                                              -------------  -------------
     Total other income (expense)                   186,222     (9,616,617)

LOSS BEFORE PROVISION FOR INCOME TAXES           (4,712,344)   (12,337,697)
Provision for income taxes                             (800)          (800)
                                              -------------  -------------
NET LOSS BEFORE NONCONTROLLING INTEREST          (4,713,144)   (12,338,497)
Net (loss) income attributable to
 noncontrolling interest                                (80)          (498)
                                              -------------  -------------
NET LOSS                                         (4,713,224)   (12,338,995)

OTHER COMPREHENSIVE (LOSS) INCOME
Foreign currency translation gain (loss)          2,319,564       (521,786)
                                              -------------  -------------
                                                  2,319,564       (521,786)

COMPREHENSIVE LOSS                            $  (2,393,660) $ (12,860,781)
                                              =============  =============

Net loss per common share and equivalents -
 basic and diluted                            $       (0.05) $       (0.22)
                                              =============  =============

Weighted average shares outstanding during
 the period - basic and diluted                  96,282,943     55,667,424
                                              =============  =============

About Elephant Talk Communications

Elephant Talk Communications, Inc. (OTCBB: ETAK) is an international provider of business software and services to the telecommunications and financial services industry. The company enables both mobile carriers and virtual operators to offer a full suite of products, delivery platforms, support services, superior industry expertise and high quality customer service without substantial upfront investments from clients. Elephant Talk provides global telecommunication companies, mobile network operators, banks, supermarkets, consumer product companies, media firms, and other businesses a full suite of products and services that enables them to fully provide telecom services as part of their business offerings. The company offers various dynamic products that include remote health care, credit card fraud prevention, mobile internet ID security, multi-country discounted phone services, loyalty management services, and a whole range of other emerging customized mobile services. For more information, visit (www.elephanttalk.com).

About ValidSoft

ValidSoft is a subsidiary of Elephant Talk Communications, Inc. (OTCBB: ETAK), (www.elephanttalk.com) and is a market leader in providing solutions to counter electronic fraud relating to card, the internet, and telephone channels. ValidSoft's solutions are at the cutting edge of the market and are used to verify the authenticity of both parties to a transaction (Mutual Authentication), and the integrity of the transaction itself (Transaction Verification) for the mass market, in a highly cost effective and secure manner, yet easy to use and intuitive. For more information, please visit (www.validsoft.com).

Forward-Looking Statements

Certain statements contained herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may include, without limitation, statements with respect to the Company's plans and objectives, projections, expectations and intentions. These forward-looking statements are based on current expectations, estimates and projections about the Company's industry, management's beliefs and certain assumptions made by management. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Because such statements involve risks and uncertainties, the actual results and performance of the Company may differ materially from the results expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Unless otherwise required by law, the Company also disclaims any obligation to update its view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made here. Additional information concerning certain risks and uncertainties that could cause actual results to differ materially from that projected or suggested is contained in the Company's filings with the Securities and Exchange Commission (SEC), copies of which are available from the SEC or may be obtained upon request from the Company.

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