SOURCE: Elephant Talk Communications

Elephant Talk Communications

November 16, 2010 21:11 ET

Elephant Talk Communications Inc. Reports Third Quarter 2010 Results and Provides Business Update

SCHIPHOL, THE NETHERLANDS--(Marketwire - November 16, 2010) - 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 third quarter of Fiscal Year 2010. Revenues for the quarter ended September 30, 2010 were $9.0 million. Elephant Talk achieved numerous key milestones throughout the first nine months of 2010 that management believes will position the company for future success and growth.

Since the beginning of 2010, Elephant Talk Communications has achieved the following:

--  Signed a framework hosting agreement with KPN Group Belgium NV.
    Elephant Talk will connect MVNO's in Belgium to its platform, making
    use of the mobile network of KPN in Belgium.
--  Completed an agreement with Your Card B.V., a new Mobile Virtual
    Network Operator (MVNO) serving the Dutch market, as part of Elephant
    Talk's global campaign to expand its Mobile Virtual Network Enabler
    (MVNE) platform services to new markets in Europe, Middle East and
    South America.
--  As part of its Mobile Virtual Network Operating (MVNO) hosting
    agreement with T-Mobile Netherlands BV (www.t-mobile.nl), one of the
    country's largest mobile operators, T-Mobile is launching new prepaid
    services under its own Ben brand (www.ben.nl) through multiple
    distribution channels, along with other increased functionalities to
    the Dutch consumer market.
--  Announced an agreement with PT (www.pt.com), a leading global provider
    of advanced network communications solutions.
    --  Under the agreement, PT (formerly known as Performance
        Technologies), will supply SEGway Signaling Transfer Points (STPs)
        for Elephant Talk's expanding global presence.
--  Completed the fourth and final closing of its private placement
    offering of units comprised of one share of common stock and warrants
    to purchase shares of Common Stock to accredited investors.
--  Announced that Orbitel, the first Mobile Virtual Network Operator
    (MVNO) hosted by Vizzavi España SL, a Vodafone Group Company, has
    significantly increased its customer database in Spain during the last
    few weeks using Elephant Talk's Mobile Virtual Network Enabling (MVNE)
    Platform.
--  Management believes that the Company's mobile platform will be
    operational on at least three continents with at least five operators
    by 2011 year end.
--  ValidSoft has been granted the European Privacy Seal in regards to its
    anti-fraud technology software, VALid-POS®, which is designed to
    detect and prevent card related fraud, a global multibillion dollar
    problem for financial institutions.
--  The Company launched VALid-SVP™ (Speaker Verification Platform), a
    voice biometric technology to improve secure authentication.
--  ValidSoft has filed applications for two new patents in the Card Not
    Present fraud prevention area.
--  ValidSoft announced an agreement with Cumberland Building Society
    (www.cumberland.co.uk), the 15th largest building society in the UK
    with assets exceeding £1.5 billion, to incorporate ValidSoft's VALid®
    solution technology into a new secure transaction service.

Subsequent Events following the 9 month period ended September 30, 2010

The Company improved its balance sheet via investors converting their debt into equity for the total amount of $9,824,353, additionally resulting in portions of the Warrant Liabilities to be reclassified to equity thus improving Elephant Talk's equity position.

Prior to conversion of the (related party) QAT notes and loans, the warrants attached to the notes (valued at $30 million) were accounted for as liabilities at fair value and will be reclassified into equity upon conversion.

The company estimates the impact of the conversion to be as follows:

--  Increase of issued common stock totaling $8.125 million
--  Reclassification into equity of associated warrant liabilities totaling
    $30 million
--  Immediate expense recognition of approximately $5 million due to the
    associated and un-accreted debt discount, deferred financing charges,
    and revaluations of warrant liabilities and conversion features through
    date of conversion.

"During the first nine months management successfully expanded our customer base, transitioned to our higher margin mobile business, and introduced ValidSoft's best in class anti-fraud technology to global banking institutions," commented Mr. Steven van der Velden, President and CEO. "The Company has successfully migrated over 50,000 users to our mobile platform and we expect that number to escalate going forward. During the fourth quarter we expect to continue to increase the number of users on our platform, sign additional MVNO contracts and assist ValidSoft in signing a major financial institution. We will continue to leverage our strong industry relationships and best in class technologies as we strive to increase earnings, augment service offerings, and improve overall shareholder value."

Financial Results for Third Quarter 2010

Revenue for the three months ended September 30, 2010 was $9,040,396, a decrease of $2,415,092, compared to $11,455,488 for the three months ended September 30, 2009. The decrease was the result of the lower sales during the period as well as the unfavorable impact of a $1,043,001 currency translation effect arising from a higher USD/Euro exchange rate.

The decrease in the three months ended September 31, 2010 revenue of $1,372,091 over the three months ended September 30, 2009, in constant currency, was attributable to a decline in our premium rate services ("PRS") revenue of ($105,514), Mobile revenue of ($1,195,068) and Middle East pre-paid calling cards revenue of ($166,359) compared to the same period in 2009. Other revenue increased with $94,850.

Cost of service for the three months ended September 30, 2010 was $8,638,505, a decrease of $2,235,699, compared to $10,874,204 for the three months ended September 30, 2009. The decrease in cost of service was the result of lower sales volumes and a favorable impact of a $993,017 currency translation effect arising from a higher Euro exchange rate.

Selling, general and administrative ("SG&A") expense for the three months ended September 30, 2010 was $2,726,883, a decrease of $153,466 or 5.2% compared to $2,949,038 for the same period in 2009.

Net Loss for the three months ended September 30, 2010 was $25,846,225 or (0.36) per share, compared to $5,630,633 or (0.10) per share for the same period in 2009. Net Loss was impacted largely by derivative accounting rules reflected by non cash expensing of interest expense related to amortization of debt discount on promissory notes, change in fair value of warrant liabilities and amortization of deferred financing costs. Excluding the abovementioned non cash expenses, the Net loss came to $5,152,712 for September 30, 2010 and $3,781,924 for the same period in 2009. This Net loss of $5,152,712 was further impacted by increased amortizations following the acquisition of the Validsoft Ltd intangible assets as well as non-cash compensations; further details on non cash items are shown elsewhere in the earnings release under Adjusted EBITDA.

Financial Results for the Nine Month Period Ended September 30, 2010

Revenue for the nine months ended September 30, 2010 was $28,657,987, a decrease of $3,537,784 or (11.0%), compared to $32,195,771 for the nine months ended September 30, 2009. The decrease was the result of lower sales and to some extent the unfavorable impact of a $1,157,324 currency translation effect arising from a higher USD/Euro exchange rate.

The decrease in the first nine months of 2010 revenue of $2,380,460 over the first nine months of 2009, in constant currency, was attributable to a decline in our premium rate services ("PRS") of ($509,756), Mobile revenue of ($1,718,984) and Middle East pre-paid calling cards revenue of ($271,037) compared to the same period in 2009. Other revenue increased with $119,317. The roll-out of mobile managed services and MVNO customers was delayed and therefore could not compensate yet for the loss in revenue compared with the nine months in the previous year following the departure in 2009 of a mobile customer in financial disarray.

Cost of service for the nine months ended September 30, 2010 was $27,017,788, a decrease of $3,636,418 (or 11.9%), compared to $30,654,206 for the nine months ended September 30, 2009. The decrease in cost of service was the result of lower sales volumes and a favorable impact of a $1,104,944 currency translation effect arising from a higher USD/Euro exchange rate.

For the nine months ended September 30, 2010, SG&A expense was $6,780,281, an increase of $584,300 or 9.4%, compared to $6,195,981 in the same period in 2009.

Net Loss for the nine months ended September 30, 2010 was $52,542,944 or (0.83) per share, compared to $10,462,294 or (0.20) per share for the same period in 2009. Net Loss was impacted largely by derivative accounting rules reflected by non cash expensing of interest expense related to amortization of debt discount on promissory notes, change in fair value of warrant liabilities and amortization of deferred financing costs. Excluding the abovementioned non cash expenses, the Net loss came to $14,433,352 for March 31, 2010 and $8,613,586 for the same period in 2009. This Net loss of $14,433,352 was further impacted by increased amortizations following the acquisition of the ValidSoft Ltd intangible assets as well as non-cash compensations; further details on non-cash items are shown in the Adjusted EBITDA table below.

ADJUSTED EBITDA

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.

                                            Nine months ended
                                              September 30,
                               -------------------------------------------
                                                                2009 in
                                                               constant
                                   2010           2009         currency
                               -------------  -------------  -------------
                                (unaudited)    (unaudited)    (unaudited)
Net loss                       $ (52,542,880) $ (10,462,294) $ (10,307,292)
Provision for income taxes               800            800            800
Net loss attributable to
 noncontrolling interest               2,735          1,188           1188
Depreciation and
 amortization                      3,841,573      2,199,561      2,137,687
Stock-based compensation           4,033,208      1,272,387      1,272,387
Interest income and
 expenses                          1,414,956        485,233        483,696
Other non-cash financing
 charges                          38,109,526      1,848,709      1,848,709
                               -------------  -------------  -------------

Adjusted EBITDA                $  (5,140,082) $  (4,654,416) $ (4,562,825)
                               =============  =============  =============

     (Note to Adjusted EBITDA:  2010 figures include ValidSoft as of 1
      April 2010. In 2009 ValidSoft not in figures)

"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.


                                               September 30,  December 31,
                                                    2010          2009
                                                ------------  ------------

ASSETS

CURRENT ASSETS

Cash and cash equivalents                       $  1,632,748  $  1,457,900
Restricted cash                                      190,976       192,116
Accounts receivable, net of an allowance for
 doubtful accounts of $110,595 and $764,302 at
 September 30, 2010 and December 31, 2009
 respectively                                      6,691,010     5,071,293
Prepaid expenses and other current assets          2,115,050     2,657,019
                                                ------------  ------------
   Total Current Assets                           10,629,784     9,378,328

LONG TERM DEPOSITS                                   384,235       330,946

DEFERRED FINANCING COSTS                           1,550,589     3,033,277

PROPERTY AND EQUIPMENT, NET                        8,296,743     7,773,862

INTANGIBLE ASSETS, NET                            17,506,611     3,910,363

GOODWILL                                           3,319,925            --

                                                ------------  ------------
TOTAL ASSETS                                    $ 41,687,887  $ 24,426,776
                                                ============  ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
Overdraft                                       $    364,185  $    351,589
Accounts payable and customer deposits             4,709,375     6,475,074
Deferred revenue                                           -       132,205
Accrued expenses and other payables                5,275,001     2,738,998
Shares to be issued                                  351,788            --
Convertible 14% loan - related party (net of
 discount of $0 and $0)                            2,518,220            --
Advances from related parties                                       13,287
Loans payable                                        880,184       880,536
                                                ------------  ------------
   Total Current Liabilities                      14,098,753    10,591,689

LONG TERM LIABILITIES
Loan from related party                              459,505       437,161
Convertible 12% secured note (net of discount
 of $11,752,078 and $12,333,020 respectively)        294,942            --
Warrant liabilities                               38,587,322    16,626,126
Conversion feature                                16,353,793     2,899,801
                                                ------------  ------------
   Total Long term Liabilities                    55,695,562    19,963,088

                                                ------------  ------------
   Total Liabilities                              69,794,315    30,554,777
                                                ------------  ------------

STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value, 250,000,000 shares
 authorized, 73,367,458 issued and outstanding
 as of September 30, 2010 compared to
 53,695,984 shares issued and outstanding as of
 December 31, 2009                                86,202,663    54,880,778
Accumulated other comprehensive income (loss)        383,614     1,136,897
Accumulated deficit                             (114,877,217)  (62,335,076)
                                                ------------  ------------
   Elephant Talk Communications, Inc.
    Stockholders' Equity                         (28,290,940)   (6,317,401)
                                                ------------  ------------

NON-CONTROLLING INTEREST                             184,512       189,400
                                                ------------  ------------
   Total Stockholders' Equity                    (28,106,428)   (6,128,001)
                                                ------------  ------------

                                                ------------  ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 (DEFICIT)                                      $ 41,687,887  $ 24,426,776
                                                ============  ============





                   For the Three Months Period  For the Nine Months Period
                        ended, September 30        ended, September 30
                        2010          2009          2010          2009
                    ------------  ------------  ------------  ------------

REVENUES            $  9,040,397  $ 11,455,489  $ 28,657,987  $ 32,195,771

COST AND OPERATING
 EXPENSES
Cost of service        8,638,506    10,874,205    27,017,788    30,654,206
Selling, general
 and administrative
 expenses              2,795,572     2,949,038     6,780,281     6,195,981
Non cash
 compensation to
 employees,
 officers,
 consultants &
 directors               779,539       252,521     4,033,208     1,272,387
Depreciation and
 amortization of
 intangible  assets    1,481,451       861,616     3,841,573     2,199,561
                    ------------  ------------  ------------  ------------
  Total cost and
   operating
   expenses           13,695,068    14,937,380    41,672,850    40,322,135

LOSS FROM
 OPERATIONS           (4,654,671)   (3,481,891)  (13,014,863)   (8,126,364)

OTHER INCOME
 (EXPENSE)
Interest income           40,566        24,375       105,685        46,682
Interest expense        (538,214)     (323,976)   (1,520,641)     (531,915)
Other expenses                --            --            --            --
Interest expense
 related to
 amortization of
 debt discount on
 promissory notes     (1,796,203)   (1,299,365)   (9,342,026)   (1,299,365)
Change in fair
 value of warrant
 liabilities         (18,330,773)     (507,695)  (27,079,551)     (507,695)
Amortization of
 deferred financing
 costs                  (566,478)      (41,649)   (1,688,013)      (41,649)
                    ------------  ------------  ------------  ------------
     Total other
      income
      (expense)      (21,191,102)   (2,148,310)  (39,524,546)   (2,333,942)

LOSS BEFORE
 PROVISION FOR
 INCOME TAXES        (25,845,773)   (5,630,201)  (52,539,409)  (10,460,306)
Provision for
 income taxes                  -             -          (800)         (800)
                    ------------  ------------  ------------  ------------
NET LOSS BEFORE
 NONCONTROLLING
 INTEREST            (25,845,773)   (5,630,201)  (52,540,209)  (10,461,106)
Net (loss) income
 attributable to
 noncontrolling
 interest                   (452)         (432)       (2,735)       (1,188)
                    ------------  ------------  ------------  ------------
NET LOSS             (25,846,225)   (5,630,633)  (52,542,944)  (10,462,294)

OTHER COMPREHENSIVE
 (LOSS) INCOME
Foreign currency
 translation gain
 (loss)                2,937,463       543,061      (753,283)      345,802
                    ------------  ------------  ------------  ------------
                       2,937,463       543,061      (753,283)      345,802

COMPREHENSIVE LOSS  $(22,908,762) $ (5,087,572) $(53,296,227) $(10,116,492)
                    ============  ============  ============  ============

Net loss per common
 share and
 equivalents -
 basic and diluted  $      (0.36) $      (0.10) $      (0.83) $      (0.20)
                    ============  ============  ============  ============

Weighted average
 shares outstanding
 during the period
 - basic and
 diluted              72,141,821    54,373,240    63,212,715    53,422,421
                    ============  ============  ============  ============

SEC REGULATION G -- NON-GAAP INFORMATION

This press release includes non-GAAP revenues where reference is made to "constant currency." These non-GAAP financial measures exclude the impact of currency translation adjustments. We have reconciled these non-GAAP financial measures with the most directly comparable GAAP financial measures in the text of this release. We believe that these non-GAAP financial measures provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful evaluation of our quarterly and FY10 actual results.

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), 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 consumers and institutions (Mutual Authentication), and the integrity of transactions (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. 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; however, readers should review carefully reports or documents the Company files periodically with the Securities and Exchange Commission.

Contact Information

  • Contact:

    Elephant Talk Communications, Inc.
    Mr. Steven van der Velden
    Tel: + 31 20 653 59 16
    Email Contact

    Investors:
    Alliance Advisors, LLC
    Thomas P. Walsh
    Tel: + 1 212-398-3486
    Email Contact