2014

Elephant Talk Communications Reports Third Quarter 2013 Financial Results High-Margin Mobile and Security Business Comprises 96% of Total Revenue Achieving Total Company Margin of 79%

OKLAHOMA CITY, Nov. 12, 2013 /PRNewswire/ -- Elephant Talk Communications Corp. (NYSE MKT: ETAK), (www.elephanttalk.com), a leading international provider of proprietary Software Defined Network Architecture (Software DNA™) platforms and a market leader in providing cyber security solutions to counter electronic fraud in the cloud, today announced total revenue of $5.2 million for the third quarter ended September 30, 2013.  

(Logo: http://photos.prnewswire.com/prnh/20120917/MM75872LOGO)

Recent Company Highlights

  • FICO, a leading predictive analytics and decision management software company, recently announced the availability of a proximity correlation service for credit and debit card issuers aimed at improving the safety of payment card transactions utilizing ValidSoft's software.
    • Several UK banks are now developing deployment plans for the combined service offerings of FICO and ValidSoft.
    • Service compares phone and card data to reduce "false positives" by up to 70 percent.
  • ValidSoft and VEN Partner to Bring Advanced Cyber Security and Identity Theft Protection Solutions to Virtual Currencies. ValidSoft was selected by Ven, a leading global virtual currency managed by the Hub Culture Group, for its specialized purpose security architecture SMART™ (Secure Mobile Architecture for Real-Time Transactions™) to underpin its own advanced consumer offerings in social networking and virtual exchange.
  • Elephant Talk has started to recognize revenues from our five-year contract with Iusacell, our Mobile Network Operator partner in Mexico. 

Recent Financial Highlights

  • During the third quarter of 2013, Elephant Talk's margins* grew to 79%. 
    • For the nine months ended September 30, margins have improved from 8% in 2011 to 25% in 2012 to 64% in 2013.
  • Elephant Talk's higher margin mobile and security solutions business revenue sequentially increased 12% to $5 million when compared to $4.5 million in the second quarter of 2013.
    • Year-Over-Year mobile and security revenue increased 70% when compared to $2.9 million in the third quarter of 2012.
    • This monthly recurring revenue mobile and security business now accounts for approximately 96% of Elephant Talk's revenue base. 
  • Third quarter Adjusted EBITDA improved by $864,000 from a loss of $949,000 in the second quarter of 2013 for a loss of $85,000 in the third quarter due to the Company's growth.
    • Year-over-Year Adjusted EBITDA improved $2 million to a loss of $85,000 when compared to a $2.1 million loss during the third quarter of 2012.
  • The Company's Total margin sequentially increased 17% to $4.1 million during the third quarter compared to $3.5 million in the second quarter of 2013.
    • Year-Over-Year, Elephant Talk's Total margin increased 97% when compared to the $2.1 million that the company recorded during the third quarter of 2012.

Mr. Steven van der Velden, CEO of Elephant Talk Communications, stated, "The third quarter of 2013 has served as a time of significant progress.  We are excited with ValidSoft's successful development of an anti-fraud solution that was recently deployed by FICO.  We have reached a critical inflection point in the commercialization of ValidSoft's technology as FICO announced that several U.K. banks are now planning the deployment for our solution."

Mr. van der Velden continued, "The transition from our low margin landline business to our monthly recurring revenue mobile and security business successfully increased our margins and improved our Adjusted EBITDA from an approximate $1 million loss in the second quarter of 2013 to a loss of $85,000 in the third quarter of 2013. Going forward, we intend to leverage our contract with Iusacell in Mexico and our contract with Zain and Axiom in the Kingdom of Saudi Arabia for the deployment of our Software-DNA™ Platform more than doubling the amount of subscribers hosted on our platforms. The Vodafone, Iusacell and Zain and Axiom contracts combined with the integration of ValidSoft with multiple UK banks positions us for strong financial results going forward."

 

Mobile and Security (Unaudited) Reported Revenue % of Total

Quarter

($ in millions)

Company Revenue

2Q12

2.8

39.3

3Q12

2.9

43.9

4Q12

3.6

52.1

1Q13

3.9

58.5

2Q13

4.5

89.5

3Q13

5.0

95.9

                              


*Total Margin ($ in millions)

(Unaudited)

% of Total Quarter

Company Revenue

2Q12

1.9

26.8

3Q12

2.1

31.3

4Q12

2.7

39.4

1Q13

3.0

46.2

2Q13

3.5

70.7

3Q13

4.1

79.2

*Margin, -a non gaap measure- is defined by us as revenues minus cost of service

Selected financial results for the quarter ended September 30, 2013 and September 30, 2012.


Three months ended September  30,


2013


2012


Variance

Revenues

$

5,204,982


$

6,699,381


$

(1,494,399)

Cost of service


1,080,174



4,603,588



3,523,414


$

4,124,808


$

2,095,793


$

2,029,015











Nine months ended September  30,


2013


2012


Variance

Revenues

$

16,795,627


$

22,365,318


$

(5,569,691)

Cost of service


6,093,968



16,677,853



(10,583,885)


$

10,701,659


$

5,687,465


$

5,014,194

 


Three months ended September  30,

Revenue

2013


2012


Variance

Landline Services

$

215,986


$

3,763,140


$

(3,547,154)

Mobile & Security Solutions


4,988,996



2,936,241



2,052,755

Total Revenue

$

5,204,982


$

6,699,381


$

(1,494,399)











Nine months ended September  30,

Revenue

2013


2012


Variance

Landline Services

$

3,478,769


$

14,217,650


$

(10,738,881)

Mobile & Security Solutions


13,316,858



8,147,668



5,169,190

Total Revenue

$

16,795,627


$

22,365,318


$

(5,569,691)

The table at the end of this press release includes a reconciliation of net loss to non-GAAP Adjusted EBITDA for the three months ended September 30, 2013 and 2012. An explanation of Adjusted EBITDA along with margin are included below under the heading "Non-GAAP Financial Measures."

We will file an Amendment to our Form 10-Q to restate and amend the Company's previously issued and unaudited interim financial statements and related financial information as of June 30, 2013 for the three and six months period, which was originally filed on August 9, 2013. The restatement adjusts the Company's unaudited Condensed Consolidated Balance Sheet ended June 30, 2013 for amounts related to warrant liabilities that were incorrectly valued and the Consolidated Statements of Operations and Comprehensive Loss for the three and six months periods ended June 30, 2013 for line item Changes in fair value of warrant liabilities. The impact on the original financial statements is shown in the final chart of this release. The restatement has no impact on the Company's previously reported total cash and cash equivalents, revenue, cost and operating expenses and the net cash used/ or provided from operating, investing and financing activities reported in the Consolidated Statements of Cash flows.

Conference call reminder
As a reminder, Elephant Talk Communications will host a Shareholder Update Conference Call on November 12, 2013 at 11:00 a.m. EST. Anyone interested in participating should dial 1-480-629-9713 approximately 5 to 10 minutes prior to the start of the call. Participants should ask for the Elephant Talk Shareholder Update conference call. This call is being webcast and can be accessed at Elephant Talk's website at www.elephanttalk.com. To listen to the playback, please utilize the webcast by visiting the Company's website.

Non-GAAP financial measures
To supplement the consolidated financial statements presented in accordance with generally accepted accounting principles, or GAAP, Elephant Talk uses measures of non-GAAP Adjusted EBITDA and margin. A reconciliation of the non-GAAP Adjusted EBITDA to the closest GAAP financial measure, is presented in the financial table below under the heading "Reconciliation of Non-GAAP Measures to GAAP." Margin is derived from the income statements by subtracting cost of service from revenues. These adjustments to the Company's GAAP results are made with the intent of providing both management and investors a more complete understanding of the Company's underlying operational results and trends and performance.

Management uses these non-GAAP measures to evaluate the Company's financial results, develop budgets, manage expenditures, and determine employee compensation. The presentation of additional information is not meant to be considered in isolation or as a substitute for or superior to net income (loss) or net income (loss) per share determined in accordance with GAAP.

For the three months ended September 30, 2013 and 2012, non-GAAP Adjusted EBITDA is defined as earnings before derivative accounting, such as warrant liabilities and conversion feature expensing, income taxes, depreciation and amortization and stock-based compensation. It is determined by taking net loss and adding back provision for income taxes, depreciation and amortization, stock-based compensation expense, other income and expenses, and equity in earnings of unconsolidated joint venture.

About Elephant Talk:
Elephant Talk Communications Corp. (NYSE MKT: ETAK), is a leading international provider of mobile proprietary Software Defined Network Architecture (Software DNA) platforms for the telecommunications industry that empower Mobile Network Operators (MNOs) and Mobile Virtual Network Operators (MVNOs), Enablers (MVNEs) and Aggregators (MVNAs) with a full suite of applications, Full OSS/BSS Systems, Delivery Platforms, Support and Managed Services, on-site, cloud, hybrid and S/PaaS solutions, including Network, Mobile Internet ID Solutions, Secure Remote Access Management, Loyalty Management and Transaction Processing Services, superior Industry Expertise and high quality Customer Service without substantial upfront investment. Elephant Talk counts several of the world's leading Mobile Operators amongst its customers including Vodafone, T-Mobile, Zain and Iusacell. Virtually all business is focused on tier 1 and tier 2 operators worldwide. Visit: www.elephanttalk.com.

About ValidSoft:
ValidSoft Limited has been a wholly owned subsidiary of Elephant Talk Communications since early 2010 and underpins its mobile/cloud security offering. The company is a market leader in providing solutions to counter electronic fraud and safeguarding consumer privacy 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. The company counts several leading worldwide service providers and institutions amongst its customers. ValidSoft is the only security software company in the world that has been granted three European Privacy Seals. 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.

*Margin is defined as revenue less cost of service. Cost of service includes charges from telecommunications operators, payments to content and information providers, network costs, data center costs, facility costs of hosting network and equipment, and costs of providing resale arrangements with long distance service providers, costs of leasing transmission facilities and international gateway switches for voice and data transmission services.

 

 

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS

(UNAUDITED)

 



 

 For the Three Months 



 

 For the Nine Months    



 Period ended 



 Period ended 



September 30, 2013



September 30, 2012



September 30, 2013



September 30, 2012













REVENUES

$

5,204,982


$

6,699,381


$

16,795,627


$

22,365,318













COST AND OPERATING EXPENSES












Cost of service


1,080,174



4,603,588



6,093,968



16,677,853

Selling, general and administrative expenses


4,209,704



4,221,767



13,184,491



13,356,906

Non cash compensation to officers, directors and employees 


1,233,165



1,709,403



5,639,124



4,940,131

Depreciation and amortization of intangibles assets


1,543,687



1,263,137



4,699,906



3,766,494

  Total cost and operating expenses


8,066,730



11,797,895



29,617,489



38,741,384













LOSS FROM OPERATIONS


(2,861,748)



(5,098,514)



(12,821,862)



(16,376,066)













OTHER INCOME (EXPENSE)












Interest income 


33,773



(85,364)



89,020



194,554

Interest expense 


(181,074)



(649,251)



(612,970)



(1,588,098)

Interest expense  related to debt discount and conversion feature


(259,795)



-



(1,320,795)



-

Change in fair value of conversion feature


-



617,603



232,267



1,847,689

Loss on Extinguishment of Debt          


(44,506)



-



(1,983,103)



-

Changes in fair value of warrant liabilities


173,333



-



519,349



-

Amortization of deferred financing costs


(44,076)



-



(116,482)



-

     Total other income (expense)


(322,345)



(117,012)



(3,192,714)



454,145













LOSS BEFORE PROVISION FOR INCOME TAXES


(3,184,093)



(5,215,526)



(16,014,576)



(15,921,921)

Provision for income taxes 


(41,500)



(94,887)



(41,500)



(192,175)

LOSS BEFORE EARNINGS OF UNCONSOLIDATED JOINT VENTURE


(3,225,593)



(5,310,413)



(16,056,076)



(16,114,096)

Equity in earnings of unconsolidated joint venture


-



(164,252)



-



(356,667)

NET LOSS


(3,225,593)



(5,474,665)



(16,056,076)



(16,470,763)













OTHER COMPREHENSIVE (LOSS) INCOME












Foreign currency translation gain (loss)


489,443



594,468



(807,208)



(315,226)



489,443



594,468



(807,208)



(315,226)













COMPREHENSIVE LOSS

$

(2,736,150)


$

(4,880,197)


$

(16,863,284)


$

(16,785,989)













Net loss per common share and equivalents - basic and diluted 

$

(0.02)


$

(0.05)


$

(0.13)


$

(0.15)













Weighted average shares outstanding during the period - basic and diluted 


134,440,221



111,558,485



122,038,045



111,129,222

 

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



September 30,



December 31,



2013



2012

ASSETS










CURRENT ASSETS












Cash and cash equivalents

$

6,085,215


$

1,233,268

Restricted cash


495,983



1,230,918

Accounts receivable, net of allowance for doubtful accounts of $25,225 and $559,120 at September 30, 2013 and December 31, 2012 respectively


4,173,398



5,123,803

Prepaid expenses and other current assets


2,531,602



1,821,218

Total current assets


13,286,198



9,409,207







NON-CURRENT ASSETS












OTHER ASSETS


1,382,857



1,038,306







PROPERTY AND EQUIPMENT, NET


18,663,407



13,088,271







INTANGIBLE ASSETS, NET


9,412,581



10,503,026







GOODWILL


3,707,903



3,436,731







TOTAL ASSETS

$

46,452,946


$

37,475,541







LIABILITIES AND STOCKHOLDERS' EQUITY










CURRENT LIABILITIES






Overdraft

$

380,550


$

350,114

Accounts payable and customer deposits


4,905,101



5,139,292

Deferred Revenue


428,473



252,551

Accrued expenses and other payables


5,816,271



4,120,536

8% Convertible Note


-



3,067,416

Loans payable


962,418



963,051

10% Related Party Loan (net of Debt Discount of $2,385,206)


267,393



-

Total current liabilities


12,760,206



13,892,960







LONG TERM LIABILITIES






8% Convertible Note


-



2,565,202

10% 3rd Party Loan (net of Debt Discount of $827,421)


4,477,780



-

Warrant liabilities


4,116,480



-

Conversion feature


-



311,986

Trade note payable


593,903



-

Loan from joint venture partner


590,165



555,907

Total long term liabilities


9,778,328



3,433,095







Total liabilities


22,538,534



17,326,055













STOCKHOLDERS' EQUITY






Common stock, .00001 par value, 250,000,000 shares authorized, 134,440,221
issued and outstanding as of September 30, 2013 compared to 111,918,386 shares issued and outstanding as of December 31, 2012


243,294,324



223,965,907

Accumulated other comprehensive income (loss)


(242,647)



(732,090)

Accumulated deficit


(219,316,384)



(203,260,307)

Elephant Talk Communications, Corp. stockholders' equity


23,735,293



19,973,510







NON-CONTROLLING INTEREST


179,119



175,976

Total stockholders' equity


23,914,412



20,149,486







TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

46,452,946


$

37,475,541

 

 

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 



For the nine months ended



September 30, 2013



September 30, 2012

CASH FLOWS FROM OPERATING ACTIVITIES:






Net loss

$

(16,056,076)


$

(16,470,763)

Adjustments to reconcile net loss to net cash used in operating activities:






Depreciation and amortization


4,699,906



3,766,494

   Provision for doubtful accounts


22,131



309,429

   Provision for income taxes


41,500



0

   Stock based compensation


5,639,124



4,923,738

   Change in fair value of derivative instruments


2,668,764



0

   Financial Investments in Joint Venture


0



356,667

Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:






   Decrease (increase) in accounts receivable


1,054,452



1,728,467

   Decrease (increase)  in prepaid expenses, deposits and other assets


(666,991)



(129,937)

   Increase (decrease) in accounts payable, proceeds from related parties and customer deposits


(2,030,393)



938,142

   Increase (decrease) in deferred revenue


177,635



(35,352)

   Increase (decrease) in accrued expenses and other payables


1,859,634



945,862

   Increase (decrease) in non-cash accrued expenses related to extinguishment of Debt


(890,997)



0

Net cash used in operating activities


(3,481,311)



(3,667,253)







CASH FLOWS FROM INVESTING ACTIVITIES:






   Purchases of property and equipment


(4,108,507)



(2,096,026)

   Restricted cash


0



(1,597,168)

   Loans to related party


0



(1,000,589)

   Loans to joint venture partners


0



(107,618)

   Loan to third party


(125,000)



(249,827)

  Net cash used in investing activities


(4,233,507)



(5,051,228)







CASH FLOWS FROM FINANCING ACTIVITIES:






    Proceeds from 12% Unsecured Loan from Related Party


1,290,790



0

    Proceeds from Share Purchase Agreement - Unregistered securities


225,000



0

    Proceeds from  Share Purchase Agreement - Registered direct


7,500,000



0

    Proceeds from  Share Purchase Agreement Related Party


4,500,000



0

    Proceeds from 10% Affiliate Loan


2,652,600



0

    Proceeds from 10% 3rd Party Loan


5,305,200



0

   Fundraise fees


(1,362,124)



0

   Proceeds from 8% convertible note, net of original issue discount


0



8,000,000

   Payments on  8% convertible note installment payments and interest


(8,490,360)



(964,958)

   Deferred financing costs


0



(543,438)

   Exercise of warrants & options


78,971



969,714

   Payments for share issue costs


0



(79,643)

   Cash from Escrow account for principal and interest payments on 8% Convertible notes


742,427



0

  Net cash provided by financing activities


12,442,504



7,381,675







EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS


124,261



(328,332)

NET INCREASE IN CASH AND CASH EQUIVALENTS


4,851,947



(1,665,138)

CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD


1,233,268



6,009,576

CASH AND CASH EQUIVALENTS, END OF THE PERIOD

$

6,085,215


$

4,344,438









For the nine months ended

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING ACTIVITIES:


September 30, 2013



September 30, 2012







       Cash paid during the period for interest

$

(409,331)



348,383

   Purchases of property and equipment (delivered, not invoices yet)


(1,238,046)



0

       Trade note payable


593,903



0

   Increase in Share Capital due to Telnicity Acquisition


1,180,000



0

       Increase in Share Capital for third party settlement


468,000



0







Reconciliation of Net loss to Adjusted EBITDA
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, depreciation and amortization, non-operating income and expenses 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 follows:

 






Nine months ended September  30,

EBITDA Adjusted



2013


2012







Net loss – US GAAP



$

(16,056,076)


$

(16,470,763)

Provision for income taxes




41,500



192,175

Depreciation and amortization




4,699,906



3,766,494

Stock-based compensation




5,639,124



4,940,131

Interest income & expenses




523,950



1,393,544

Other income & expenses




2,668,764



(1,847,689)

Equity in earnings of unconsolidated joint venture




-



356,667

Adjusted EBITDA



$

(2,482,832)


$

(7,669,441)




















Three months ended September  30,

EBITDA Adjusted



2013


2012







Net loss – US GAAP



$

(3,225,593)


$

(5,474,665)

Provision for income taxes




41,500



94,887

Depreciation and amortization




1,543,687



1,263,137

Stock-based compensation




1,233,165



1,709,403

Interest income & expense




147,301



-

Other income & expenses




175,044



117,012

Equity in earnings of unconsolidated joint venture




-



164,252

Adjusted EBITDA



$

(84,896)


$

(2,125,974)

 

 

 

IMPACT RESTATEMENT Q2 2013

CONDENSED CONSOLIDATED BALANCE SHEETS







As previously reported

Adjustment

As restated

LONG TERM LIABILITIES






- Warrant liabilities



$        2,428,919

$   2,862,432

$        5,291,351

STOCKHOLDERS' EQUITY






- Common stock



$    238,813,861

$  (2,435,982)

$    236,377,879

- Accumulated deficit 



$  (215,664,341)

$     (426,450)

$  (216,090,791)







CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS


Three months ended June 30, 2013


As previously reported

Adjustment

As restated

- Changes in fair value of warrant liabilities


$           772,466

$     (426,450)

$           346,016

- Net loss



$      (7,266,111)

$     (426,450)

$      (7,692,561)

- Net loss per common share and equivalents - basic and diluted'

$                (0.06)

$           (0.01)

$                (0.07)







CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS


Six months ended June 30, 2013


As previously reported

Adjustment

As restated

- Changes in fair value of warrant liabilities


$           772,466

$     (426,450)

$           346,016

- Net loss



$    (12,404,033)

$     (426,450)

$    (12,830,483)

- Net loss per common share and equivalents - basic and diluted'

$                 (0.11)

$            (0.01)

$                (0.12)







CONSOLIDATED STATEMENTS OF CASH FLOWS




Cash Flows From Operating Activities


As previously reported

Adjustment

As restated

- Net loss



$    (12,404,033)

$     (426,450)

$    (12,830,483)

Adjustments to reconcile net loss to net cash used in operating activities



- Change in fair value of derivative instruments

$        2,067,270

$      426,450

$        2,493,720

Investor Relations:
Steve Gersten
Elephant Talk Communications
+1 813 926 8920
steve.gersten@elephanttalk.com

Thomas Walsh
Alliance Advisors
+ 1 212 398 3486
twalsh@allianceadvisors.net

SOURCE Elephant Talk Communications Corp.



RELATED LINKS
http://www.elephanttalk.com
http://www.validsoft.com

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