ELEPHANT TALK COMMUNICATIONS CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements
Any forward looking statements made herein are based on current expectations of
the Company, involve a number of risks and uncertainties and should not be
considered as guarantees of future performance. The factors that could cause
actual results to differ materially include: interruptions or cancellation of
existing contracts, inability to integrate acquisitions, impact of competitive
products and pricing, product demand and market acceptance risks, the presence
of competitors with greater financial resources than the Company, product
development and commercialization risks, changes in governmental regulations,
and changing economic conditions in developing countries and an inability to
arrange additional debt or equity financing.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and notes
thereto and the other financial information included elsewhere in this document.
Elephant Talk Communications Corp. also referred to as "we", "us", "Elephant
Talk" and "the Company" is an international provider of mobile networking
software and services. Its mission is to provide a single service fully enabling
and securing the mobile cloud. The Company has substantial investments of
software development, infrastructure, deployment, licenses and connectivity in
place, supporting its customers through a whole range of managed services.
Elephant Talk empowers Mobile Network Operators (MNOs) and Mobile Virtual
Network Operators (MVNOs) by providing a cloud based mobile communications
infrastructure, operating software and managed services, based mostly on Company
developed and owned software. We enable these Mobile Operators and Virtual
Network Operators by offering a full suite of products, delivery platforms,
support services, superior industry expertise and high quality customer service
without substantial upfront investment for the customer.
As a specialized outsourcing partner, we provide operating software, managed
services, cloud and SaaS solutions and an integrated transaction and delivery
platform to the mobile telecommunications industry globally. Our products
include remote health care, credit card fraud prevention, mobile internet ID
security, secure remote file access management, loyalty and transaction
management services and a whole range of other emerging mobile services.
Elephant Talk can count several of the world's leading Mobile Operators amongst
their customers including Vodafone, T-Mobile and Zain, and most business efforts
are focused on tier 1 operators worldwide.
A number of more recent milestones include:
· In 2011 the company closed a contract with Zain KSA in Saudi Arabia to
provide its mobile platform which is now expected to start hosting
subscribers in the fourth quarter 2012.
· In November 2011 we executed a mass migration of SIMs on to our platform in
Spain. This live migration - without having to replace the SIM cards - was
believed to be a significant achievement and milestone for the Company.
· In February 2012 we acquired out of liquidation proceedings the assets of
Ensercom, a small MVNE in Germany giving us instant footprint in the German
Earlier this year, the Company entered into mobile telecom contracts with
a group of German MNVOs to provide mobile telecommunication services. In mid of
September 2012, the Company was informed that due to an evaluation of internal
procedures and practices within these German MVNOs, all these mobile telecom
contracts signed between the group and all external providers had been
temporarily placed on hold. As of the date of this quarterly report, there is
no further update to be reported.
ValidSoft - Fraud Prevention and Security Software Solutions
ValidSoft Limited has been a wholly owned subsidiary of Elephant Talk since
early 2010 and underpins our mobile/cloud security offering. ValidSoft is a
thought and technology leader in providing solutions to counter electronic fraud
relating to a variety of bank, card, internet and telephone channels.
ValidSoft's solutions are used to verify the authenticity of both parties to a
transaction (Mutual Authentication), the security of the relevant
telecommunication channel used (Secure Communications), and the integrity of
transactions itself (Transaction Verification) for the mass market, in a highly
cost effective and secure manner while being very easy to use.
ValidSoft's clients include leading worldwide service providers and institutions
who benefit from a very substantial reduction in false positives, thereby
freeing up resources to combat actual fraud, as well as a substantial
elimination of the fraud itself, all in real time.
ValidSoft is currently the only security software company in the world that has
been granted Privacy Seals from the European Community. Besides the two
previously awarded European Privacy Seals, a third Seal was also recently
awarded taking the number of privacy seals to three.
The key operational highlights:
· In September 2011 ValidSoft and Adeptra (www.adeptra.com), now part of the
FICO Corporation, formed a partnership to provide financial organizations
with best-in-class fraud detection and prevention functionality, as well as
total control over their customer communications.
· Following a pilot project at a long-standing Adeptra client, one of the ten
largest international financial institutions implemented the SIM Swap
solution and has been in live production for several months. The
institution's adoption of the application is another step toward securing
all transaction channels, using leading edge technology and communications
to benefit its customers.
· ValidSoft successfully concluded the live-trials for a Self-Certification
project to an EU Government in the area of citizen benefit payments. The
proposed solution is based on ValidSoft's own IP and specialised technology
and incorporates ValidSoft's Speaker Verification Platform, VALid-SVP™ to
provide automation in the processing of citizen benefits with a view to
achieving cost reduction and efficiencies. We now await a decision to be taken by the EU Government in terms of next steps, including potential
deployment and timing.
· The Company launched VALid-SVP™ (Speaker Verification Platform), a voice
biometric technology to improve secure authentication.
· ValidSoft has filed applications for several new patents in the Card Not
Present fraud prevention area and the high end security area.
· ValidSoft successfully renewed 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
· ValidSoft was awarded its second European Privacy Seal for its VALid-4F™solution, an advanced security solution to provide multi-factor
authentication, including voice biometrics.
· ValisSoft was awarded its third European Privacy Seal for VALid-SIM, an
advanced "context aware" solution to counter the growing problem of SIM
Swap fraud. ValidSoft continues to be the only Security Software Company in
the world to be certified to the EuroPriSe standards. The European Privacy
Seal certifies IT products and IT-based services privacy compliance with
European data protection regulations.
Landline network outsourcing services
In addition to the mobile based services, the Company also provides traditional
landline services like Carrier Select and Carrier Pre-Select Services, Toll Free
and Premium Rate Services to the business market.through our fixed line telecom
infrastructure and our centrally operated and managed ET Boss and Infitel
Business Support and Operational Support System ("ET BOSS") and Intelligent
Network - IN - ("Infitel")
Through our European and Chinese development centers, we develop in-house
telecom and media related systems and software, related to companies'
proprietary platforms ET BOSS and IN
Electronic fraud prevention products: VALid-POS®, VALid®, VALid-SVP™ and
Our subsidiary ValidSoft has given us ownership of technology and intellectual
property to combat fraud relating to card, the internet, and telephone channels.
ValidSoft solutions are marketed under VALid-POS®, VALid® and VALid-4F®. For its
biometrics based product it trades under VALid-SVP™.
Telecom infrastructure & network
We currently operate a switch-based telecom network with national licenses and
direct fixed line interconnects with the Incumbents/National Telecom Operators
in seven (7) European countries and one (1) in the Middle East (Bahrain). To
this we have added mobile access coverage in order to cater for our mobile
services and solutions. Our first mobile partners are T-Mobile in the
Netherlands, Vodafone Enabler in Spain, KPN in Belgium and wholesale partner
Telekom Deutschland in Germany. In Saudi Arabia we partnered with Zain KSA to
provide our mobile platform services.
Application of Critical Accounting Policies and Estimates
Revenue Recognition and Deferred Revenue
The Company's revenue recognition policies are in compliance with ASC 605,
Revenue Recognition ("ASC 605") (formerly, Staff Accounting Bulletin (SAB) 104).
Revenue is recognized only when the price is fixed or determinable, persuasive
evidence of arrangement exists, the service is performed and the collectability
of the resulting receivable is reasonably assured. The Company derives revenue
from activities as a fixed-line and mobile services provider with its network
and its own switching technology. Revenue represents amounts earned for
telecommunication services provided to customers (net of value added tax and
inter-company revenue). The Company recognizes revenue from prepaid calling
cards as the services are provided. Payments received before all of the relevant
criteria for revenue recognition are satisfied are recorded as deferred revenue.
Deferred revenue represents amounts received from the customers against future
sales of services since the Company recognizes revenue upon performing theservices.
Effective January 1, 2006, we adopted the provisions of ASC 718
"Compensation-Stock Compensation", using the prospective approach. As a result,
we recognize stock-based compensation expense for only those awards that are
granted subsequent to December 31, 2005 and any previously existing awards that
are subject to variable accounting, including certain stock options that were
exercised with notes in 2003, until the awards are exercised, forfeited, or
contractually expire in accordance with the prospective method and the
transition rules of ASC 718. Under ASC 718, stock-based awards granted after
December 31, 2005, are recorded at fair value as of the grant date and
recognized as expense over the employee's requisite service period (the vesting
period, generally three years), which we have elected to amortize on a
We use the purchase method of accounting for business combinations and the
results of the acquired businesses are included in the income statement from the
date of acquisition. The purchase price includes the direct costs of the
acquisition. However, beginning in fiscal 2009, acquisition-related costs will
be expensed as incurred, in accordance with ASC 805 "Business Combinations"
amounts allocated to intangible assets are amortized over their estimated useful
lives; no amounts are allocated to in-progress research and development.
Goodwill represents the excess of consideration paid over the net identifiable
business assets acquired.
Intangible Assets and Impairment of long Lived Assets
In accordance with ASC 350, intangible assets are carried at cost less
accumulated amortization and impairment charges. Intangible assets are amortized
on a straight-line basis over the expected useful lives of the assets, between
three and ten years. Other intangible assets are reviewed for impairment in
accordance with ASC 360, "Property and Equipment", annually, or whenever events
or changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Measurement of any impairment loss for long-lived assets and
identifiable intangible assets that management expects to hold and use is based
on the amount of the carrying value that exceeds the fair value of the asset.
On September 15, 2011, the FASB issued ASU 2011-08, Intangibles - Goodwill and
Other, which simplifies how an entity is required to test goodwill for
impairment. This ASU would allow an entity to first assess qualitative factors
to determine whether it is necessary to perform the two-step quantitative
goodwill impairment test. Under the ASU, an entity would not be required to
calculate the fair value of a reporting unit unless the entity determines, based
on a qualitative assessment, that it is more likely than not that its fair value
is less than its carrying amount. The ASU includes a number of factors to
consider in conducting the qualitative assessment. The ASU is effective for
annual and interim goodwill impairment tests performed for fiscal years
beginning after December 15, 2011. The adoption of this accounting standard in
2011 had no material impact on the Company's financial statements.
Results of Operations
Our results of operations for the nine months ended September 30, 2012,
consisted of the operations of Elephant Talk Communications Corp., its
wholly-owned subsidiaries, Elephant Talk Limited and its subsidiaries, Elephant
Talk Europe Holding BV and its subsidiaries, and ValidSoft Ltd and its
Although the vast majority of our business activities are carried out in Euros,
we report our financial statements in US dollars ("USD"). The conversion of
Euros and USD leads to period-to-period fluctuations in our reported USD results
arising from changes in the exchange rate between the USD and the Euro.
Generally, when the USD strengthens relative to the Euro, it has an unfavorable
impact on our reported revenue and income and a favorable impact on our reported
expenses. Conversely, when the USD weakens relative to the Euro, it produces a
favorable impact on our reported revenue and income, and an unfavorable impact
on our reported expenses. The above fluctuations in the USD/Euro exchange rate
therefore result in currency translation effects (not to be confused with real
currency exchange effects), which impact our reported USD results and may make
it difficult to determine actual increases and decreases in our revenue and
expenses which are attributable to our actual operating activities. In addition
to reporting changes in our financial statements in USD as per the requirements
of United States generally accepted accounting principles ("US GAAP"), we also
highlight the impact of any material currency translation effect by providing a
comparison between periods on a constant currency basis, where the most recent
USD/Euro exchange rate is applied to previous periods. Management believes that
this allows for greater insight into the trends and changes in our business for
the reported periods. Also, since we carry out our business activities primarily
in Euro's we do not currently engage in hedging activities.
The constant currency analysis presented within the comparison of the nine month
year-to-year results is calculated by using the average exchange rates over the
nine months ended September 30, 2012. The same exchange rates are used in the
income statement of the nine months ended September 30, 2012. The following
table shows the USD equivalent of the major currencies for the nine months ended
September 30, 2012:
Euro $ 1.2812
British Pound $ 1.5775
In order to provide investors additional information regarding our financial
results, we are disclosing Adjusted EBITDA, a non-GAAP financial measure. We
employ Adjusted EBITDA, defined as earnings before derivative accounting, such
as warrant liabilities and conversion feature expensing, income taxes,
depreciation and amortization and stock-based compensation, 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 the desired results. Accordingly, we believe that
Adjusted EBITDA provides useful information for investors and others, which
allows them to better understand and evaluate our operating results.
A reconciliation of Adjusted EBITDA to net loss, the most directly comparable
measure under U.S. GAAP, for each of the fiscal periods indicated, is as
Nine months ended September 30,
EBITDA Adjusted 2012 2011 currency
Net loss $ (16,470,763 ) (18,705,754 ) (17,812,705 )
Provision for income taxes 192,175 800 800
Depreciation and amortization 3,766,494 3,993,900 3,663,684
Stock-based compensation 4,940,131 5,600,283 5,523,024
Other income & expenses (454,145 ) (408,377 ) (408,377 )
Equity in earnings of unconsolidated joint venture 356,667 - -
Adjusted EBITDA $ (7,669,441 ) (9,519,148 ) (9,033,574 )
Three months ended September 30,
EBITDA Adjusted 2012 2011 currency
Net loss $ (5,474,665 ) $ (7,271,107 ) $ (6,857,514 )
Provision for income taxes 94,887 - -
Depreciation and amortization 1,263,137 1,353,450 1,205,060
Non-cash compensation 1,709,403 2,432,317 2,397,897
Other income & expenses 117,012 (39,521 ) (36,528 )
Equity in earnings of unconsolidated joint venture 164,252 - -
Adjusted EBITDA $ (2,125,974 ) $ (3,524,861 ) $ (3,291,085 )
Comparison of Three and Nine months ended September 30, 2012 and September 30,
As our business is primarily Euro-based, the effects of the devaluation of the
Euro against the US Dollar have been substantial on the 2012 financials we
report. For purposes of comparison and clarification we have added 'constant
currency' calculations below in order to remove the reporting currency effects
from the revenues and results derived in the functional currencies. Explanations
for fluctuations or trends in our revenues and cost are provided principally in
the 'constant currency' sections.
Revenue for the three months ended September 30, 2012 was $6,699,381, a decrease
of $1,097,555 or 14.1%, compared to $7,796,936 for the three months ending
September 30, 2011. The landline services revenue for the three months ended
September 30, 2012 and 2011 was $3,763,140 and $6,388,824, respectively, a
decrease of $2,625,684. The decrease was due to two factors. The first is a
decision earlier this year by a landline client to discontinue their business
with us. The second is the overall global trend of communication moving away
from landline towards mobile and wireless. The mobile and security solutions
revenue for the three months ended September 30, 2012 was $2,936,241, an
increase of $1,528,129 from $1,408,112 for the same period 2011. The increase
was mainly due to increased subscriber base hosted on our platforms.
Revenue for the nine months ended September 30, 2012 was $22,365,318, a decrease
of $1,730,608 or 7.2%, compared to $24,095,926 for the nine months ended
September 30, 2011. This decrease of $1,730,608 was the result of an unfavorable
impact of the currency translation effect of $2,130,756 arising from a lower US
Dollar/Euro exchange rate.
Nine months ended September 30,
Revenues $ 22,365,318 $ 24,095,926
Cost of service 16,677,853 22,048,689
Mobile and security revenue increased as a percentage of total Company revenue
to 43.8% in the third quarter of 2012 from 18.1% in the prior year period.
Nine months ended September 30,
Revenue 2012 2011 2011 2011
Landline Services $ 14,217,650 $ 20,227,712 $ 18,440,459 $ (4,222,809 )
Mobile & Security Solutions 8,147,668 3,868,214 3,524,710 4,622,958
Total Revenue $ 22,365,318 $ 24,095,926 $ 21,965,169 $ 400,149
Revenue - constant currency
In constant currency, the revenue for the three months ended September 30, 2012
decreased by $172,721 or 2.5% compared to the same period 2011. In constant
currency, the revenue for the nine months ended September 30, 2012 increased by
$400,149 or 1.8% compared to the same period 2011. The increase in revenue for
the nine months ended September 30, 2012 was led by an increase of $4,622,958
(or 131.2%) in our revenues in the higher margin mobile and security solutions
business following the increased subscriber base hosted on our platforms. The
mobile revenue increase was however largely off-set by the expected continued
decrease in our lower margin legacy landline business by $4,222,809 (or 22.9%).
Cost of service
Cost of service for the three months ended September 30, 2012 was $4,603,588, a
decrease of $2,392,937 or 34.2%, compared to $6,996,525 for the three months
ending September 30, 2011. Cost of service for the nine months ended September
30, 2012 was $16,677,853, a decrease of $5,370,836 or 24.4%, compared to
$22,048,689 for the nine months ended September 30, 2011. This decrease is
related to the decline in landline revenue. Cost of service as a percentage of
the total revenue was 74.6% and 91.5% for the nine months ended September 30,
2012 and 2011, respectively.
Cost of service includes origination, termination, network and billing charges
from telecommunications operators, out payment costs to content and information
providers, network costs, data center costs, facility cost of hosting network
and equipment and cost in providing resale arrangements with long distance
service providers, cost of leasing transmission facilities, international
gateway switches for voice, and data transmission services.
Management expects cost of service to decline further as a percentage of revenue
as a greater proportion of future revenue is comprised of our mobile services
and security solutions, which have a substantially lower cost of service than
our traditional landline business.
Cost of service- constant currency
In constant currency, the cost of service for the three months ended September
30, 2012 decreased by $1,584,034 or 25.6% compared to the same period in 2011.
In constant currency, the cost of service for the nine months ended September
30, 2012 decreased by $3,422,919 or 17.0% compared to the same period in 2011.
The decrease was primarily as a result of lower levels of revenue in our
landline business and the lower cost of service associated with our mobileand
security solutions business.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expense for the three months ended
September 30, 2012 and 2011 were $4,221,767 and $4,325,272, respectively, a
decreased $103,505 (or 2.4%). Selling, general and administrative expense for
the nine months ended September 30, 2012 and 2011, were $13,356,906 and
$11,566,385, respectively. SG&A expenses increased by $1,790,521 (or 15.5%) in
the first nine months 2012 compared to the same period 2011.
Selling, general and administrative expenses - constant currency
In constant currency, SG&A for the three months ended September 30, 2012
increased by $246,202 (or 6.2%), compared to the same period in 2011 due to
higher staffing levels. In constant currency, SG&A for the nine months ended
September 30, 2012 increased by $2,458,935 (or 22.6%), compared to the same
period in 2011. Higher year-over-year SG&A for expenses in the nine months
September 30, 2012 were mainly the result of an 18.6% year-over-year increase in
staffing levels, largely European MNO operational support and commercial support
staff, as well as higher investor relations and sales, marketing & communication
related staffing and expenses.
Non-cash compensation to officers, directors, consultants and employees
Non-cash compensation for the three months ended September 30, 2012 was
$1,709,403, a decrease of $722,914 or 29.7%, compared to $2,432,317 for the
three months ended September 30, 2011. Non-cash compensation for the nine months
ended September 30, 2012 and 2011 was $4,940,131 and $5,600,283, respectively.
The decrease in the nine months ended September 2012 was of $660,152 (or 11.8%)
compared to the same period 2011. The decreases are caused by a number of
factors such as lower non-cash compensation for board and management, board and
management composition and reduced contractual terms of options granted under
the company incentive scheme resulting in a lower fair market value of the
Non-cash compensation is comprised of:
• the stock options expenses related to the companywide 2008 Long-Term
Incentive Compensation Plan;
• expenses related to shares of common stock that were issued to directors
and officers in lieu of cash compensation.
Depreciation and amortization
Depreciation and amortization expenses for the three months ended September 30,
2012 was $1,263,137, a decrease of $90,313 (or 6.7%), compared to $1,353,450 for
the three months ended September 30, 2011. Depreciation and amortization for the
nine months ended September 30, 2012 and 2011, was $3,766,494 and $3,993,900
respectively. Depreciation and amortization expenses decreased by $227,406 (or
5.7%) in the first nine months 2012 compared to the same period 2011.
Depreciation and amortization - constant currency
In constant currency, the depreciation and amortization expenses for the three
months ended September 30, 2012 decreased by $58,077 (or 4.8%) compared to the
same period in 2011. In constant currency, the depreciation and amortization
expenses for the nine months ended September 30, 2012 decreased by $102,810 (or
2.8%) compared to the same period in 2011. The decreases are caused by reduced
amortization expenses following certain intangible assets being fully amortized.
Intangible assets impairment charge
The September 30, 2012 consolidated balance sheet includes: $11.0 million of
intangible assets, net, and $3.1 million of goodwill. Management updated its
analysis of intangible assets and long-lived assets as of September 30, 2012 and
we determined that for the first nine months 2012 no asset impairment charges
We have acquired several companies in the last few years and our current
business strategy includes continuing to make additional acquisitions in the
future. These acquisitions may continue to give rise to goodwill and other
intangible assets which will need to be assessed for impairment from time to
Other Income and Expenses
Interest income for the three months ended September 30, 2012 was ($85,364),
consisting of $53,935 interest income for the period and an adjustment of
($139,299) related to previously reported periods. Interest income for the three
months ended September 30, 2011 was $74,988. The adjustment follows an
overstatement of both interest income ($139,299) as well as interest expense in
prior periods in 2012 resulting from certain intercompany interest charges that
were not eliminated. A similar adjustment (in opposite direction) was made in
interest expense ($139,288) for the three months ended September 2012. Interest
income was $194,554 and $122,119 for the nine months ended September 30, 2012
and 2011. Interest income was interest received on bank balances and interest on
loans provided to related and third parties.
Interest expense, amortization of debt discount and financing cost for the three
months ended September 30, 2012 and 2011 were $649,251 and $35,467,
respectively. The amount of $35,467 for the three months ended September 30,
2011 is entirely related to interest expenses, whereas the amount of $649,251
for the three months ended September 30, 2012 is composed of interest expenses
in the amount of $104,477, interest expenses related to debt discount in the
amount of $359,842 and of the amortization of deferred financing costs in the
amount of $184,932. Interest expense, amortization of debt discount and
financing cost for the nine months ended September 30, 2012 and 2011were
$1,588,098 and $173,742, respectively. The $173,742 for the nine months ended
September 30, 2011 is entirely related to interest expenses, whereas the amount
of $1,588,098 for the nine months ended September 30, 2012 is composed of
interest expenses in the amount of $555,723, interest expenses related to debt
discount in the amount of $697,112 and of the amortization of deferred financing
costs in the amount of $335,263. Interest expenses for the three and nine months
ended September 30, 2012 include the interest expenses on the 8% convertible
note of $168,867 and 344,092, respectively.
Other income was $0 and $460,000 for the nine months ended September 30, 2012
and 2011 respectively. The other income for 2011 was related to the release of
an accrual for a tax provision, following a successful abatement.
Change in fair value conversion feature
In the three and nine months ended September 30, 2012, the income related to the
fair value changes of the conversion feature of the convertible notes was
$617,603 and $1,847,689, respectively, compared to $0 in the first three and
nine months 2011.
Equity in earnings of unconsolidated joint venture
In the three and nine months ended September 30, 2012, the Company incurred
expenses of $164,252 and $356,667, respectively, as a result of the Company's
equity share in the losses of its financial investment in a joint venture.
Provision for Income Taxes
Provision for income taxes for the three and nine months ended September 30,
2012 was $94,887 and $192,175, respectively. In the ordinary course of the
Company's business there are transactions where the ultimate income tax
determination is uncertain, the Company believes that is has adequately provided
for income tax issues not yet resolved with federal, state, local and foreign
tax authorities. In the event that actual results differ from these estimates or
we adjust these estimates in future periods, an additional charge to expense
Net loss for the three months ended September 30, 2012 was $5,474,665, a
decrease of $1,796,442 (or 24.7%), compared to $7,271,107 for the three months
ending September 30, 2011. Net Loss was $16,470,763, a decrease of $2,234,991
(or 11.9%) compared to $18,705,754 for the nine months ended September 30, 2012
and 2011. The decreases in loss of $1,796,442 for the three months ended
September 30, 2012 and $2,234,991 for the nine months ended September 30, 2012
were led by the decrease in the loss from operations by $2,212,114 and
$2,737,265 for the three and nine months ended September 30, 2012. Loss from
operations reduced because of increased revenues from our higher margin mobile
and security business combined with a reduced non-cash compensation expenses.
Both the provision for income taxes of $94,887 and $192,175 for the three and
nine months ended September 30, 2012 and the equity in earnings of
unconsolidated joint venture for the three and nine months ended September 30,
2012 of ($164,252) and ($356,667), respectively, had an adverse impact on the
net loss. The change in income/(expense) of ($156,533) for the three months
ended September 30, 2012 had a negative impact on the net loss of the third
quarter 2012, while the increase of $45,768 in other income for nine months
ended September 30, 2012 had a positive effect on the net loss for the nine
months ended September 30, 2012. The decrease in loss from operations was
primarily driven by the increase of our Mobile & Security business.
Other Comprehensive Income (Loss)
We record foreign currency translation gains and losses as other comprehensive
income or loss. Other comprehensive Income (Loss) for the nine months ended
September 30, 2012 and 2011 was ($315,226) and $931,961, respectively. This
change is primarily attributable to the translation effect resulting from the
substantial fluctuations in the US Dollars/Euro exchange rates.
Liquidity and Capital Resources
We have an accumulated deficit of $196,599,134 as of September 30, 2012.
Historically, we have relied on a combination of debt and equity financings to
fund our ongoing cash requirements. The Company's operations have not yet
resulted in positive cash flow and accordingly, management may need to raise
additional financing. In the third quarter we had an operational cash burn rate
of between $900,000 and $600,000 per month, excluding working capital changes.
We estimate our short term cash requirements including working capital
requirements, losses and capital expenditures to be on average approximately
$1,000,000 per month which we intend to cover using cash on hand of $4,344,438
at September 30, 2012, substantial additional revenues and margins and a
commitment of up to $2 million from QAT Investments SA, an affiliate of the
Company. We intend to monitor and reduce where necessary cash outflow by
delaying capital expenditures and carefully use our resources and protect our
strategic assets in order to strengthen our position in the mobile and security
services industry. Lastly, our first twelve months convertible loan repayment
obligations will be covered through the first quarter of 2013 using the
restricted cash balance of $1,308,946 as described in Note 2 to these financial
The Company anticipates that they may need additional financing to continue our
operations for the longer term. Although we have previously been able to raise
capital as needed, including our recent private placement of certain senior
secured convertible notes in the principal amount of $8,800,000, such capital
may not continue to be available to us at all, or if available, on reasonable
terms as required. Further, the terms of such financing may be dilutive to our
existing stockholders or otherwise on terms not favorable to us or our existing
stockholders. If we are unable to secure additional capital, as circumstances
require, or do not succeed in meeting our sales objectives we may be required to
change or delay our operations.
Net cash used in operating activities for the nine months ended September 30,
2012 was $3,667,253 compared to $11,299,140 in the same period 2011, a decrease
of $7,631,887. This decrease is primarily attributable to improvements in
working capital due to tighter cash management and cost control, as well asto
the lower net loss.
Net cash used in investment activities for the nine months ended September 30,
2012 was $5,051,228 a decrease of $1,498,477, (or 22.9%) compared to $6,549,705
in the same period 2011. The decrease was attributable to a lower level of
purchases of property and equipment by $4,342,480, which was partly offset by
the increase in loans to the third party Morodo Ltd. by $138,591, change in
restricted cash by $1,597,205, as well as by loans to joint venture partner
Modale B.V. (previously known as Elephant Security I B.V.) of $107,618 and by
the loan to the related party Elephant Security B.V. of $1,000,589.
Net cash received by financing activities for the nine months ended September
30, 2012 was $7,381,675 compared to $24,966,433 for the nine months ended
September 30, 2011. In the first nine months of 2012 we received a total of
$8,000,000 in gross proceeds from the 8% convertible note and $969,714 from the
exercise of warrants and options. After the deduction of deferred financing
costs and expenses attributable to share issuances of ($623,081) the net
proceeds from financing activities amounted to $8,346,633. In the first nine
months of 2012 $964,958 was paid for installment payments and interest related
the 8% convertible note.
As a result of the above activities, the Company had the cash and cash
equivalents balance of $4,344,438 as of September 30, 2012, a net decrease in
cash and cash equivalents of $1,665,138 since December 31, 2011.
Off- Balance Sheet Arrangements
The Company did not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
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