UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
000-30061
(Commission file No.)
ELEPHANT TALK COMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
| DELAWARE | 95-4557538 | |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) |
100 Park Avenue, New York City, NY 10017
USA
(Address of principal executive offices)(Zip Code)
+ 1 (212) 984-1096
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Common Stock, $0.00001 par value per share | NYSE MKT LLC | |
| (Title of Class) | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 CFR 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer¨ | Accelerated filerx | |
| Non-accelerated filer¨ | Smaller reporting company¨ | |
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ¨ Nox
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2014, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $118 million based on the closing sale price of the Company’s common stock on such date of U.S. $0.95 per share, as reported by the NYSE MKT LLC.
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of February 28, 2015, there were 155,112,785 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Proxy Statement for the 2015 Annual Meeting of Stockholders of the registrant is incorporated by reference into Part III of this Form 10-K.
EXPLANATORY NOTE
The purpose of this Amendment No. 1 to the Annual Report on Form 10-K of Elephant Talk Communications Corp. (the “Company”) for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission on April 1, 2015 (the “Form 10-K”), is solely to (i) file Exhibit 101 to the Form 10-K in accordance with rule 405 of Regulation S-T. Exhibit 101 to this report provides the financial statements and related notes from the Form 10-K formatted in XBRL (eXtensible Business Reporting Language): and (ii) correct a typo in first sentence of the second paragraph in Note 34 “Subsequent Event” to the financial statement included in the Form 10-K to indicate that the Company received a letter from Atalaya Capital Management LP on March 26, 2015, instead of March 24, 2015 as set forth in the Form 10-K.
No other changes have been made to the Form 10-K. This Amendment No. 1 to the Form 10-K speaks as of the original filing date of the Form 10-K, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update any disclosures made in the original Form 10-K.
PART IV
Item 15. Exhibits, Financial Statement Schedules
| (a) | Financial Statements |
ELEPHANT TALK COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
| 1 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Elephant Talk Communications Corp.
We have audited the accompanying consolidated balance sheet of Elephant Talk Communications Corp. (the “Company”) as of December 31, 2014, and the related consolidated statements of comprehensive loss, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Elephant Talk Communications Corp. as of December 31, 2014, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations, has accumulated deficit of $251 million and continues to generate negative operating cash flows. In addition, as more fully discussed in Note 34, the Company was notified by its lender effective March 18, 2015 that settlement discussions related to the pending termination of its contract with Iusacell constitute an event of default under the Credit Agreement. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Elephant Talk Communications Corp.'s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our report dated April 1, 2015 expressed an opinion that Elephant Talk Communications Corp. had not maintained effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013).
/s/ Squar, Milner, Peterson, Miranda & Williamson, LLP
Los Angeles, California
April 1, 2015
| 2 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Elephant Talk Communications Corp.
We have audited Elephant Talk Communications Corp.’s internal control over financial reporting as of December 31, 2014, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Elephant Talk Communications Corp.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in Item 9A, Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that(a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;(b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and(c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified a material weakness in internal controls over financial reporting relating to accounting for multiple-element revenue arrangements. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2014 financial statements, and this report does not affect our report dated April 1, 2015 on those financial statements.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Elephant Talk Communications Corp.has not maintained effective internal control over financial reporting as of December 31, 2014, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Elephant Talk Communications Corp. as of December 31, 2014, and the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for the year then ended and our report dated April 1, 2015 expressed an unqualified opinion.
SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP
/s/ Squar, Milner, Peterson, Miranda & Williamson, LLP
Los Angeles, California
April 1, 2015
| 3 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Elephant Talk Communications Corp.
We have audited the accompanying consolidated balance sheet of Elephant Talk Communications Corp. (“Company”) as of December 31, 2013 (restated) and the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2013 (restated) and the year ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Elephant Talk Communications Corp. at December 31, 2013 (restated), and the results of its operations and its cash flows for the year ended December 31, 2013 (restated) and the year ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 35 to the consolidated financial statements, the 2013 financial statements have been restated to correct a misstatement in the area of revenue recognition and reclassifications of financial statement line items.
The accompanying consolidated financial statements as of and for the year ended December 31, 2013 were prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements as of and for the year ended December 31, 2013, the Company had suffered recurring losses from operations, had an accumulated deficit as of December 31, 2013 of $225.4 million and continued to generate negative cash flows. These factors, among others discussed in Note 2 to the consolidated financial statements as of and for the year ended December 31, 2013 raised substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters were also described in Note 2 to the consolidated financial statements as of and for the year ended December 31, 2013.
The consolidated financial statements do not include any adjustments that might result from this uncertainty.
/s/ BDO USA, LLP
Los Angeles, California
March 31, 2014, except for Note 35 which is as of April 1, 2015
| 4 |
ELEPHANT TALK COMMUNICATION CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 2014 AND 2013
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| (restated) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 1,904,160 | $ | 1,252,315 | ||||
| Financing receivable | 2,000,000 | - | ||||||
| Restricted cash | 312,935 | 191,600 | ||||||
| Accounts receivable, net of an allowance for doubtful accounts of $0 and $7,693 at December 31, 2014 and December 31, 2013 respectively | 8,877,213 | 5,094,847 | ||||||
| Prepaid expenses and other current assets | 2,478,681 | 2,254,213 | ||||||
| Total current assets | 15,572,989 | 8,792,975 | ||||||
| NON-CURRENT ASSETS | ||||||||
| OTHER ASSETS | 1,600,335 | 1,412,408 | ||||||
| PROPERTY AND EQUIPMENT, NET | 19,319,202 | 19,786,122 | ||||||
| INTANGIBLE ASSETS, NET | 5,076,208 | 8,670,677 | ||||||
| GOODWILL | 3,352,264 | 3,773,226 | ||||||
| TOTAL ASSETS | $ | 44,920,998 | $ | 42,435,408 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Overdraft | $ | 433,366 | $ | 391,436 | ||||
| Accounts payable and customer deposits | 1,856,014 | 2,586,662 | ||||||
| Obligations under capital leases (current portion) | 1,831,050 | 1,302,838 | ||||||
| Deferred Revenue | 8,813,385 | 271,767 | ||||||
| Accrued expenses and other payables | 4,061,652 | 4,961,303 | ||||||
| Loans payable | 962,269 | 962,654 | ||||||
| 2014 10% + libor 3rd Party Loan (net of OID of $798,894 at December, 2014) | 11,201,106 | - | ||||||
| 10% Related Party Loan (net of Debt Discount of $1,719,585 at December 31, 2013) | - | 1,033,719 | ||||||
| Total current liabilities | 29,158,842 | 11,510,379 | ||||||
| LONG TERM LIABILITIES | ||||||||
| 10% 3rd Party Loan (net of Debt Discount of $726,695 at December, 2013) | - | 4,779,913 | ||||||
| Warrant liabilities | 2,087,992 | 1,973,534 | ||||||
| Non-current portion of obligation under capital leases | 272,460 | 845,529 | ||||||
| Other long term loan | 354,880 | - | ||||||
| Non-current portion of deferred revenue | 2,434,257 | 2,364,389 | ||||||
| Loan from joint venture partner | - | 602,047 | ||||||
| Total long term liabilities | 5,149,589 | 10,565,412 | ||||||
| Total liabilities | 34,308,431 | 22,075,791 | ||||||
| Commitments and Contingencies (See Notes) | ||||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Preferred Stock $0.00001 par value, 50,000,000 shares authorized, 0 issued and outstanding | - | - | ||||||
| Common Stock $0.00001 par value, 250,000,000 shares authorized, 154,671,258 issued and outstanding as of December 31, 2014 and 140,466,801 shares issued and outstanding as of December 31, 2013 | 264,359,674 | 248,712,321 | ||||||
| Accumulated other comprehensive income (loss) | (3,127,132 | ) | 269,869 | |||||
| Accumulated deficit | (250,629,296 | ) | (228,767,379 | ) | ||||
| Elephant Talk Communications, Corp. stockholders' equity | 10,603,246 | 20,214,811 | ||||||
| NON-CONTROLLING INTEREST | 9,321 | 144,806 | ||||||
| Total stockholders' equity | 10,612,567 | 20,359,617 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 44,920,998 | $ | 42,435,408 | ||||
The accompanying notes are an integral part of these consolidated financial statements
| 5 |
ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
| 2014 | 2013 | 2012 | ||||||||||
| restated | ||||||||||||
| Note 35 | ||||||||||||
| REVENUES | $ | 20,356,447 | $ | 19,451,804 | $ | 29,202,188 | ||||||
| COST AND OPERATING EXPENSES | ||||||||||||
| Cost of service | 6,688,674 | 9,389,297 | 23,002,961 | |||||||||
| Product development | 7,228,663 | 6,091,484 | 6,803,509 | |||||||||
| Sales and marketing | 2,393,676 | 3,139,015 | 3,706,975 | |||||||||
| General and administrative | 12,602,601 | 15,062,640 | 11,492,160 | |||||||||
| Depreciation and amortization of intangibles assets | 8,220,219 | 6,601,246 | 5,710,396 | |||||||||
| Total cost and operating expenses | 37,133,833 | 40,283,682 | 50,716,001 | |||||||||
| LOSS FROM OPERATIONS | (16,777,386 | ) | (20,831,878 | ) | (21,513,813 | ) | ||||||
| OTHER INCOME (EXPENSE) | ||||||||||||
| Interest income | 127,793 | 103,627 | 248,017 | |||||||||
| Interest expense | (1,240,590 | ) | (1,064,999 | ) | (780,852 | ) | ||||||
| Interest expense related to debt discount and conversion feature | (3,935,839 | ) | (2,069,649 | ) | (1,089,126 | ) | ||||||
| Change in fair value of conversion feature | - | 232,267 | 2,387,326 | |||||||||
| Impairment of related party loans | - | - | (1,060,784 | ) | ||||||||
| Net loss from joint venture | - | - | (501,776 | ) | ||||||||
| Changes in fair value of warrant liabilities | (114,458 | ) | 479,322 | - | ||||||||
| Gain / (Loss) on Extinguishment of Debt | 626,108 | (2,005,100 | ) | - | ||||||||
| Other income & (expense), net | 176,981 | (302,112 | ) | - | ||||||||
| Amortization of deferred financing costs | (507,595 | ) | (248,851 | ) | (531,792 | ) | ||||||
| Total other income (expense) | (4,867,600 | ) | (4,875,495 | ) | (1,328,987 | ) | ||||||
| LOSS BEFORE (BENEFIT) PROVISION FOR INCOME TAXES | (21,644,986 | ) | (25,707,373 | ) | (22,842,800 | ) | ||||||
| (Benefit) / provision for income taxes | 216,931 | (200,301 | ) | 289,136 | ||||||||
| NET LOSS | (21,861,917 | ) | (25,507,072 | ) | (23,131,936 | ) | ||||||
| OTHER COMPREHENSIVE (LOSS) INCOME | ||||||||||||
| Foreign currency translation gain (loss) | (3,397,001 | ) | 1,001,959 | 411,205 | ||||||||
| COMPREHENSIVE LOSS | $ | (25,258,918 | ) | $ | (24,505,113 | ) | $ | (22,720,731 | ) | |||
| Net loss per common share and equivalents - basic and diluted | $ | (0.15 | ) | $ | (0.20 | ) | $ | (0.21 | ) | |||
| Weighted average shares outstanding during the period - basic and diluted | 147,700,233 | 126,259,634 | 111,322,029 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 6 |
ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
| Description | Common Shares | Common Amount | Other comprehensive income (loss) | Accumulated Deficit | Total stock- holders Equity (Deficit) | |||||||||||||||
| Balance - December 31, 2011 | 110,525,231 | $ | 216,188,899 | $ | (1,143,295 | ) | $ | (180,128,371 | ) | $ | 34,917,233 | |||||||||
| Shares issued for warrant exercises | 595,000 | 650,000 | - | - | 650,000 | |||||||||||||||
| Shares issued for employee stock option exercises | 464,972 | 519,425 | - | - | 519,425 | |||||||||||||||
| Shares issued for board & management compensation | 499,121 | 1,144,498 | - | - | 1,144,498 | |||||||||||||||
| Shares issued for acquisitions | 134,046 | 300,272 | - | - | 300,272 | |||||||||||||||
| Shares returned by former CFO | (300,000 | ) | - | - | - | - | ||||||||||||||
| Shares to be issued | - | 50,100 | - | - | 50,100 | |||||||||||||||
| Amortization of Stock Options expense | - | 5,220,793 | - | - | 5,220,793 | |||||||||||||||
| Expenses attributable to share issuances | - | (79,642 | ) | - | - | (79,642 | ) | |||||||||||||
| Warrant solicitation fee | - | (28,438 | ) | - | - | (28,438 | ) | |||||||||||||
| Other comprehensive loss due to foreign exchange rate translation net of tax | - | - | 411,205 | - | 411,205 | |||||||||||||||
| Net Loss | - | - | - | (23,131,936 | ) | (23,131,936 | ) | |||||||||||||
| Balance - December 31, 2012 | 111,918,370 | $ | 223,965,907 | $ | (732,090 | ) | $ | (203,260,307 | ) | $ | 19,973,510 | |||||||||
| Shares issued for warrant exercises | 5,596,459 | 3,200,590 | - | - | 3,200,590 | |||||||||||||||
| Shares issued for employee stock option exercises | 809,737 | 529,648 | - | - | 529,648 | |||||||||||||||
| Shares issued for board & management compensation | 775,985 | 758,964 | - | - | 758,964 | |||||||||||||||
| Shares issued for acquisitions | 1,250,000 | 1,455,000 | - | - | 1,455,000 | |||||||||||||||
| Shares issued to consultants | 200,000 | 152,000 | - | - | 152,000 | |||||||||||||||
| Shares issued for rental termination settlement | 400,000 | 468,000 | - | - | 468,000 | |||||||||||||||
| Shares issued for 2013 SPA | 17,425,621 | 12,000,000 | - | - | 12,000,000 | |||||||||||||||
| Shares issued for Small SPA | 250,000 | 225,000 | - | - | 225,000 | |||||||||||||||
| Shares issued for conversion of cancelled loan | 1,840,631 | 1,306,848 | - | - | 1,306,848 | |||||||||||||||
| Shares to be issued | - | (323,987 | ) | - | - | (323,987 | ) | |||||||||||||
| Amortization of Stock Options expense | - | 7,764,830 | - | - | 7,764,830 | |||||||||||||||
| Expenses attributable to share issuances | - | (790,498 | ) | - | - | (790,498 | ) | |||||||||||||
| FMV warrants issued in relation to SPA closings and classified as Warrant Liability | - | (5,636,315 | ) | - | - | (5,636,315 | ) | |||||||||||||
| FMV of warrants issued classified as Debt Discount | - | 1,398,121 | - | - | 1,398,121 | |||||||||||||||
| FMV of Conversion Rights classified as Debt Discount | - | 1,105,809 | - | - | 1,105,809 | |||||||||||||||
| FMV of Beneficial Conversion Feature classified as Debt Discount | - | 1,132,404 | - | - | 1,132,404 | |||||||||||||||
| Other comprehensive loss due to foreign exchange rate translation net of tax | - | - | 1,001,959 | - | 1,001,959 | |||||||||||||||
| Net Loss | - | - | (25,507,072 | ) | (25,507,072 | ) | ||||||||||||||
| Balance - December 31, 2013 (restated) | 140,466,801 | $ | 248,712,321 | $ | 269,869 | $ | (228,767,379 | ) | $ | 20,214,811 | ||||||||||
| Shares issued for warrant exercises | 5,782,700 | 3,993,677 | - | - | 3,993,677 | |||||||||||||||
| Shares issued for employee stock option exercises | 621,638 | 469,208 | - | - | 469,208 | |||||||||||||||
| Shares issued for board & management compensation | 443,625 | 533,573 | - | - | 533,573 | |||||||||||||||
| Shares issued for acquisitions | - | - | - | - | - | |||||||||||||||
| Shares issued to consultants | 300,000 | 271,350 | - | - | 271,350 | |||||||||||||||
| Shares issued for conversion of the BM Note | 4,238,501 | 3,791,541 | - | - | 3,791,541 | |||||||||||||||
| Shares issued for conversion of the Saffelberg Note | 2,817,993 | 2,312,334 | - | - | 2,312,334 | |||||||||||||||
| Shares to be issued | - | (18,075 | ) | - | - | (18,075 | ) | |||||||||||||
| Amortization of Stock Options expense | - | 3,228,939 | - | - | 3,228,939 | |||||||||||||||
| Expenses attributable to share issuances | - | (206,340 | ) | - | - | (206,340 | ) | |||||||||||||
| FMV of warrants issued classified as Debt Discount | - | 1,271,146 | - | - | 1,271,146 | |||||||||||||||
| Other comprehensive loss due to foreign exchange rate translation net of tax | - | - | (3,397,001 | ) | - | (3,397,001 | ) | |||||||||||||
| Net Loss | - | - | (21,861,917 | ) | (21,861,917 | ) | ||||||||||||||
| Balance - December 31, 2014 | 154,671,258 | $ | 264,359,674 | $ | (3,127,132 | ) | $ | (250,629,296 | ) | $ | 10,603,246 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 7 |
ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
| 2014 | 2013 | 2012 | ||||||||||
| restated | ||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net loss | $ | (21,861,917 | ) | $ | (25,507,072 | ) | $ | (23,131,936 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation and amortization | 8,220,219 | 6,601,246 | 5,710,396 | |||||||||
| Provision for doubtful accounts | 17,410 | 22,005 | 117,394 | |||||||||
| Share-based compensation | 3,888,275 | 8,515,391 | 6,302,141 | |||||||||
| Change in fair value of conversion feature | - | (232,267 | ) | (2,387,326 | ) | |||||||
| Change in fair value of warrant liability | 114,458 | (479,322 | ) | - | ||||||||
| Amortization of deferred financing costs | 507,595 | 248,851 | 531,792 | |||||||||
| Interest expense relating to debt discount and conversion feature | 3,935,839 | 2,069,649 | 1,089,126 | |||||||||
| Unrealized foreign currency translation gain (loss) | (176,981 | ) | 302,112 | - | ||||||||
| (Profit) / Loss on Extinguishment of Debt | (626,108 | ) | 2,005,100 | - | ||||||||
| Net loss from joint venture | - | - | 501,776 | |||||||||
| Loans to related party impairment charge | - | - | 1,060,784 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Decrease (increase) in restricted cash | - | 1,052,257 | (1,040,074 | ) | ||||||||
| Decrease (increase) in accounts receivable | (4,464,754 | ) | 799,269 | 1,292,883 | ||||||||
| Decrease (increase) in prepaid expenses, deposits and other assets | (94,528 | ) | (465,026 | ) | (247,443 | ) | ||||||
| Increase (decrease) in accounts payable and customer deposits | (565,040 | ) | (3,415,032 | ) | 272,500 | |||||||
| Increase (decrease) in deferred revenue | 8,623,960 | 2,374,639 | 114,673 | |||||||||
| Increase (decrease) in accrued expenses and other payables | 378,637 | 140,514 | 1,014,042 | |||||||||
| Net cash (used in) operating activities | (2,102,935 | ) | (5,967,686 | ) | (8,799,272 | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Purchases of property and equipment | (7,851,460 | ) | (5,898,169 | ) | (2,224,923 | ) | ||||||
| Cash received from acquisition of subsidiary | - | - | 36,188 | |||||||||
| Impairment of related party loans | - | - | (1,060,784 | ) | ||||||||
| Loan to joint venture party | - | - | (146,496 | ) | ||||||||
| Cash paid for 100% acquisition of subsidiary | (36,465 | ) | - | (146,496 | ) | |||||||
| Loan to third party | (100,000 | ) | (163,542 | ) | (111,023 | ) | ||||||
| Net cash used in investing activities | (7,987,925 | ) | (6,061,711 | ) | (3,653,534 | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Proceeds from November 2014 10% + libor 3rd Party Loan, net of OID | 11,620,000 | - | - | |||||||||
| Proceeds from 12% Unsecured Loan from Related Party | - | 1,290,790 | - | |||||||||
| Proceeds from Share Purchase Agreement – Unregistered securities | - | 225,000 | - | |||||||||
| Proceeds from Share Purchase Agreement - Registered direct | - | 7,500,000 | - | |||||||||
| Proceeds from Share Purchase Agreement Related Party | - | 4,500,000 | - | |||||||||
| Proceeds from 10% Affiliate Loan | - | 2,652,600 | - | |||||||||
| (Repayments)/Proceeds from 10% 3rd Party Loan | (2,492,400 | ) | 5,305,200 | - | ||||||||
| Proceeds from 8% Convertible Note, net of OID | - | - | 8,000,000 | |||||||||
| Financing receivable | (2,000,000 | ) | - | (2,273,720 | ) | |||||||
| Financing related fees | (815,437 | ) | - | (543,437 | ) | |||||||
| (Payments on) proceeds from convertible note installment payments and interest | - | (8,642,149 | ) | 1,531,293 | ||||||||
| Exercise of warrants & options | 4,462,885 | 581,142 | 1,081,925 | |||||||||
| Cash from Escrow account for principal and interest payments on 8% Convertible Notes | - | 742,427 | - | |||||||||
| Trade note payable | - | (512,732 | ) | (315,000 | ) | |||||||
| Payment of placement & solicitation fees | - | (1,362,124 | ) | - | ||||||||
| Net cash provided by financing activities | 10,775,048 | 12,280,154 | 7,481,061 | |||||||||
| EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | (32,343 | ) | (231,710 | ) | 195,437 | |||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 651,845 | 19,047 | (4,776,308 | ) | ||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD | 1,252,315 | 1,233,268 | 6,009,576 | |||||||||
| CASH AND CASH EQUIVALENTS, END OF THE PERIOD | $ | 1,904,160 | $ | 1,252,315 | $ | 1,233,268 | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||||||
| Cash paid during the period for interest | $ | 954,123 | $ | 745,096 | $ | 504,718 | ||||||
| Increase in Share Capital due to Telnicity Acquisition | - | 1,180,000 | 578,357 | |||||||||
| Increase in Share Capital for third party settlement | 271,350 | 468,000 | 342,006 | |||||||||
| Cash paid during the period for income taxes | 56,881 | 45,930 | 15,858 | |||||||||
| Purchase of property and equipment under capital lease agreements | - | 2,620,182 | - | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 8 |
The Company underwent a transition process starting 2012 moving from the Landline business to the Mobile and Security services business. In 2014, the Company re-evaluated the composition of the Cost of revenues and Selling, General and Administrative function, reviewed all staff costs to determine which costs were directly attributable to the generation of revenue, and concluded that certain costs related to product development should be reclassified.
As a consequence, the Company has reclassified certain staff costs included in SG&A to Cost of Service, and also it disaggregated the function SG&A into Selling and Marketing, General and Administrative and Product Development. The reclassification of operating costs are material to the annual periods ended December 31, 2012, 2013, the interim periods therein, or to the interim periods within fiscal year 2014 and are included in the restatement in Note 35. These expenses have been reclassified in the Consolidated Statements of Operations for fiscal years 2013 and 2012 to conform to the current period presentation (See Note 35 for the restatement).
Note 2. Business and Summary of Significant Accounting Policies
Description of Business
As a mobile Software Defined Network Architecture (Software DNA®) vendor, Elephant Talk Communications Corp. and its subsidiaries (also referred to as “Elephant Talk”, “ET” and the “Company”) provide a one stop solution for a full suite of mobile, fixed and convergent telecommunications software services. The Company also provides layered security services for mission critical applications in the cloud, through its wholly owned subsidiary, ValidSoft UK Limited (“ValidSoft”).
Over the last decade, Elephant Talk has developed a comprehensive Mobile Enabling Platform, capable of hosting an integrated IT/BackOffice and Core Network for Mobile Network Operators (MNOs) and Mobile Virtual Network Operators (MVNOs), Enablers (MVNEs) and Aggregators (MVNAs) on a fully outsourced basis. The Company’s mobile enabling platform is either made available as an on premise solution or as a fully hosted service in ‘the cloud’, depending on the individual needs of its MNO and MVNO/MVNE/MVNA partners. The Company’s mobile security services supply telecommunications-based multi-factor mutual authentication, identity and transaction verification solutions for all electronic transaction channels. This integrated suite of security services provides mission critical applications in the cloud to customers in industries such as financial services, government benefits, and insurance, as well as electronic medical record providers and MNOs. The Company’s services provide customers with tools to combat a variety of electronic fraud while at the same time protecting consumer privacy.
Financial Condition
As reflected in the accompanying consolidated financial statements the Company incurred net losses of $21,861,917 and cash flow deficits from operations of $2,102,935 for the year ended December 31, 2014, and had an accumulated deficit of $250,629,296 as of December 31, 2014.
With cash and cash equivalents at December 31, 2014 of $1,904,160, proceeds from the financing receivable of $2,000,000 received in January 2015 and the improvement of net cash used in operating activities, the Company believes that it can carry out our operational plans for the coming 12 months. For the longer term growth of the Company it will need to continue to attract financing in order to finance or lease our capital expenditures.
In 2014 the Company improved its cash generating activities compared with the year before. However, due to the very strong buildup of accounts receivable in the fourth quarter with one of its customers the Company ultimately showed a net cash used in operating activities of $2.1 million instead of what would have been a positive cash flow for the year 2014.
As a result of the events described in the subsequent events footnote, including the associated buildup of accounts receivable the Company is in discussions with Atalaya Administrative LLC to discuss the AT&T/Iusacell settlement compensation, including payment of the receivables. The Company anticipates resolution in the near future. The Company has also initiated a reorganization plan in order to ensure that sufficient funds will be available for the Company to continue to carry out is business plans. However, there can be no assurance that the outcome will be successful as the Company expected. In case the outcome falls short of the Company’s expectations, the Company will need to conduct financing and/or further scale back its operations. Even though the Company has been successful in the past to arrange for sufficient liquidity for the Company, the above conditions raise substantial doubt as to Company’s ability to continue as a going concern.The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Elephant Talk Communications Corp. and its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”). All intercompany transactions and account balances have been eliminated in consolidation. The Company’s subsidiaries are:
| 9 |
| · | its wholly-owned subsidiary Elephant Talk Europe Holding B.V. and its wholly owned subsidiaries Elephant Talk Communications Luxembourg SA, Elephant Talk Communications Italy S.R.L., ET-Stream GmbH, Elephant Talk Business Services W.L.L., Guangzhou Elephant Talk Information Technology Limited, Elephant Talk Deutschland GmbH, Morodo Group Ltd., Elephant Talk Belgium BVBA, and the majority owned (51%) subsidiaries Elephant Talk Communications PRS U.K. Limited and (51%) ET-UTS NV; |
| · | Elephant Talk Europe Holding B.V.’s wholly-owned subsidiary Elephant Talk Communication Holding AG and its wholly-owned subsidiaries Elephant Talk Communications S.L.U., Elephant Talk Mobile Services B.V., Elephant Talk Telekom GmbH, Elephant Talk Communication Carrier Services GmbH, Elephant Talk Communication Schweiz GmbH, Elephant Talk Communication (Europe) GmbH and the subsidiary Elephant Talk Communications Premium Rate Services Netherlands B.V.; |
| · | Elephant Talk Telecomunicação do Brasil LTDA, is owned 90% by Elephant Talk Europe Holding B.V. and 10% by Elephant Talk Communication Holding AG; |
| · | Elephant Talk Europe Holding B.V.’s majority (100%) owned subsidiary Elephant Talk Middle East & Africa (Holding) W.L.L., its wholly owned (100%) subsidiaries Elephant Talk Middle East & Africa (Holding) Jordan L.L.C., and its majority owned (99%) Elephant Talk Bahrain W.L.L.; |
| · | its wholly-owned subsidiary Elephant Talk Limited (“ETL”) and its majority owned (50.54%) subsidiary Elephant Talk Middle East & Africa FZ-LLC and 100% owned Elephant Talk Communications France S.A.S.; |
| · | its wholly-owned subsidiary Elephant Talk North America, Corp; |
| · | its wholly-owned subsidiary ValidSoft Limited (Ireland) and its wholly-owned subsidiary ValidSoft UK Limited; |
| · | its wholly-owned subsidiary Elephant Talk Group International B.V., based in The Netherlands, and |
| · | Elephant Talk Europe Holding B.V.’s majority owned subsidiary (99,998%) ET de Mexico S.A.P.I. de C.V. and its majority owned subsidiary (99%) Asesores Profesionales ETAK S. de RL. de C.V. |
Business combinations:
On April 1, 2013, the Company, through its subsidiary Elephant Talk North America Corp, entered into an asset purchase agreement to acquire most of the assets of Telnicity LLC, a company established in the US (see Note 9). The assets and operations are consolidated into the financials of the Company as of April 1, 2013. All intercompany balances and transactions are eliminated in consolidation.
Foreign Currency Translation
The functional currency is Euros for the Company’s wholly-owned subsidiary Elephant Talk Europe Holding B.V. and its subsidiaries, Euros for its wholly-owned subsidiary Elephant Talk Global Holding B.V., the Hong Kong Dollar for its wholly-owned subsidiary ETL and the British Pound Sterling for its wholly-owned subsidiary ValidSoft. The financial statements of the Company were translated to USD using period-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses, and capital accounts were translated at their historical exchange rates when the capital transaction occurred. In accordance with ASC 830, Foreign Currency Matters, net gains and losses resulting from translation of foreign currency financial statements are included in the statement of stockholder’s equity as other comprehensive income (loss). Foreign currency transaction gains and losses are included in consolidated income/(loss), under the line item ‘Other income/(expense)’.
Use of Estimates
The preparation of the accompanying financial statements conforms with accounting principles generally accepted in the U.S. and requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Significant areas of estimates include bad debt allowance, valuation of financial instruments, useful lives and share-based compensation. Actual results may differ from these estimates under different assumptions or conditions.
| 10 |
Cash and Cash Equivalents
For purposes of the cash flow statements, the Company would normally consider all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. The Company has full access to the whole balance of cash and cash equivalents on a daily basis without any delay.
Financing Receivables
The financing receivables reported as per December 31, 2014 relate to the securitization of assets and transfers of certain contracts of the 2014 10% Term Loan Agreement (see Note 15), were still pending to be finalized as of December 31, 2014. The Company agreed with the lender to withhold $2,000,000 from the total financing until certain post-closing conditions were met by the Company. On January 12th, 2015 the Company fulfilled the post-closing conditions upon which the financing receivable was fully released to the Company.
Restricted Cash
Restricted cash as of December 31, 2014 and 2013 was $312,935 and $191,600 respectively, and consists of cash deposited in blocked accounts as bank guarantees for national interconnection, wholesale agreements with telecom operators and a bid offer guarantee.
Accounts Receivables, Net
The Company’s customer base consists of a geographically dispersed customer base. The Company maintains an allowance for potential credit losses on accounts receivable. The Company makes ongoing assumptions relating to the collectability of our accounts receivable. The accounts receivable amounts presented on our balance sheets include reserves for accounts that might not be collected. In determining the amount of these reserves, the Company considers its historical level of credit losses. The Company also makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations, and the Company assesses current economic trends that might impact the level of credit losses in the future. The Company’s reserves have generally been adequate to cover its actual credit losses. However, since the Company cannot reliably predict future changes in the financial stability of its customers, it cannot guarantee that its reserves will continue to be adequate. If actual credit losses are significantly greater than the reserves, the Company would increase its general and administrative expenses and increase its reported net losses. Conversely, if actual credit losses are significantly less than our reserve, this would eventually decrease the Company’s general and administrative expenses and decrease its reported net losses. Allowances are recorded primarily on a specific identification basis. See Note 3 of the Financial Statements for more information.
Leasing Arrangements
At the inception of a lease covering equipment or real estate, the lease agreement is evaluated under the criteria ofASC 840, Leases. Leases meeting one of the four key criteria are accounted for as capital leases and all others are treated as operating leases. Under a capital lease, the discounted value of future lease payments becomes the basis for recognizing an asset and a borrowing, and lease payments are allocated between debt reduction and interest. For operating leases, payments are recorded as rent expense. Criteria for a capital lease include (i) transfer of ownership during the lease term; (ii) existence of a bargain purchase option under terms that make it likely to be exercised; (iii) a lease term equal to 75 percent or more of the economic life of the leased equipment; and (iv) minimum lease payments that equal or exceed 90 percent of the fair value of the property. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that type of asset. The assets are amortized as per our accounting policy for property & equipment, and intangibles, as applicable.
Revenue Recognition and Deferred Revenue
Revenue represents amounts earned for (non-software) arrangements consisting of hosting subscriptions for mobile and security solutions. We also offer customer support and professional services related to implementing and supporting our suite of applications. Revenues generally are recognized net of any taxes collected from customers and subsequently remitted to governmental authorities.
| 11 |
Hosting subscriptions provide customers access to our software on a subscription basis, and support services (e.g. network operating costs and second line helpdesk) related to those arrangements. Hosting subscriptions are recognized ratably over the contract term commencing with the date our service is made available to customers and when all of the following conditions have been met: (i) there is persuasive evidence of an arrangement; (ii) delivery has occurred; (iii) the fee is fixed or determinable; and (iv) collectability of the fee is reasonably assured. Revenue is recorded as deferred revenue before all of the relevant criteria for revenue recognition are satisfied.
Beginning in 2013, when our business transitioned form the landline business to the mobile and security solutions business, the Company entered into multiple element arrangements which are accounted in accordance with ASC 605-25 “Revenue Recognition-Multiple Element Arrangements”
The elements in a multiple element arrangement are identified and are separated into separate units of accounting when both of the following criteria are met: The delivered item or items have value to the customer on a stand-alone basis, meaning the delivered item or items have value on a standalone basis if it sold separately by any vendor or the customer could resell the delivered item or items on a stand-alone basis. And if the arrangement includes a general right of return related to the delivered item, delivery or performance of the undelivered item or items are considered probably and substantially in the control of the Company. Total consideration of a multiple-element arrangement is then allocated using the relative selling price method using the hierarchy prescribed in ASC 605-25. In accordance with that hierarchy if fair value of the vendor specific objective evidence (VSOE) or, third-party evidence (TPE) does not exist for the element, then the best estimated selling price (BESP) is used. Since the Company does not have neither VSOE nor TPE the Company determines BESP for all deliverables in their Hosting arrangements. In determining the BESP, the Company considering multiple factors which include, and are not limited to, the following: i) gross margin objectives and internal costs for services; ii) pricing practices, market conditions, iii) competitive landscape and iv) growth strategy .
In accordance, management’s judgment is applied regarding, among other aspects, conformance with acceptance criteria and if delivery of services has occurred and the degree of completion.
In the paragraphs below we explain the revenue recognition policy for each element.
For the mobile solutions services the Company recognizes revenues fromcustomers accessing our cloud-based application suite intwo different service offerings, namely managed services and bundled services.
For managed services, revenues are recognized for network administration services provided to end users on behalf of Mobile Network Operators (MNO) and virtual Mobile Network Operators (MVNO’s). Managed service revenues are recognized monthly based on an average number of end-users managed and calculated on a pre-determined service fee per user. For bundled services, the Company provides both network administration as well as mobile airtime management services. Revenues for bundled services are recognized monthly based on an average number of end-users managed and mobile air time and calculated based on a pre-determined service fee. Technical services that meet the criteria to be separated as a separate unit of accounting is recognized as the services are performed. Otherwise they are deferred and recognized over the contract term.. Our arrangements with customers do not provide the customer with the right to take possession of the software supporting the cloud-based application service at any time.
For the security solutions we recognize revenues primarily from SIM (Subscriber Identity Module) lookup services using the VALid-SSD platform. Security solutions revenue is recognized based on the number of SIM lookups performed and calculated based on a pre-determined service fee per lookup. Other revenues recognized in the security business include consulting services which are recognized as the services are performed.
Telecommunication revenues were recognized when delivery occurred based on a pre-determined rate and number of user minutes and number of calls that the Company has managed in a given month.
Professional services and other revenue include fees from consultation services to support the business process mapping, configuration, data migration, integration and training. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Revenue for professional and consulting services in connection with an implementation or implantation of a new customer that are deemed not to have stand-alone value is recognized over the contractual period commencing when the subscription service is made available to the customer. Revenue from other professional services that provide added value such as new features or enhancements to the platform, are deferred and begin revenue recognition when the feature is activated over the longer of the estimated customer life or contract term
| 12 |
Our consideration of whether our hosted solutions and the associated professional services/consulting or other services are to be accounted separately or as one combined element of the arrangement includes the following:
| · | professional services/consulting for implementation and integration, are not deemed to have standalone value, or |
| · | professional services related to optional services engagements that are not essential to the functionality of our core platform and optional services arrangements, and are considered to have standalone value. |
Cost of Revenues and Operating Expenses
Cost of Service
Cost of service includes origination, termination, network and billing charges from telecommunications operators, costs of telecommunications service 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, data transmission services, and the Cost of professional services of staff directly related to the generation of revenues, consisting primarily of employee-related costs associated with these services, including share-based expenses and the cost of subcontractors. Cost of service excludes depreciation and amortization.
Research and Development Expense
Research and development expenditures are expensed in the period incurred, and these expenses are included within the operating expenses function Product Development.
Costs incurred during the application development stage of internal-use software projects, such as those used in the Company’s operations, are capitalized in accordance with the accounting guidance for costs of computer software developed for internal use in ASC 350-40. There are three main stages of computer software development. These stages are defined as (1) the preliminary project stage, (2) the application development stage, and (3) the post-implementation / operation stage. Only costs included in the application development stage are eligible for capitalization. Capitalization of costs begins once management authorizes and commits funding and the preliminary project stage is completed. Capitalized costs are amortized on a straight-line basis. When assigning useful lives to internal-use software, the Company considers the effects of obsolescence, competition, technology, and other economic factors.
Product Development costs for the period ended December 31, 2014, 2013 and 2012 were $7,228,663, $6,091,484 and $6,803,509, respectively. During the period ended December 31, 2014 and 2013, the Company capitalized $4,674,199, $3,505,742 and $1,731,341, respectively.
Reporting Segments
ASC 280, Segment Reporting (“ASC 280”), defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The business operates as one single segment and discrete financial information is based on the whole, not segregated; and is used by the chief decision maker accordingly.
Financial Instruments
The carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and customer deposits approximate their fair values based on their short-term nature. The recorded values of long-term debt approximate their fair values, as interest approximates market rates. The Company's conversion feature, a derivative instrument, is recognized in the balance sheet at its fair values with changes in fair market value reported in earnings.
| 13 |
Fair Value Measurements
In accordance with ASC 820, Fair Value Measurement (“ASC 820”), the Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level 2 – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments for which quoted prices are available but are traded less frequently, derivative instruments whose fair values have been derived using a model where inputs to the model are directly observable in the market and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level 3 – Instruments that have little to no pricing observability as of the reported date. These financial instruments are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
The degree of judgment exercised by the Company in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined by the lowest level input that is significant to the fair value measurement.
The Company has three asset groups that are valued at fair value categorized within Level 3: Warrant liabilities (recurring measurement), goodwill and intangibles (non-recurring measurements) for the impairment test. Below are discussions of the main assumptions used for the recurring measurements.
Recurring Measurement - Warrant Liabilities (see also Note 19)
Number of Outstanding Warrants
The number of outstanding warrants is adjusted every re-measurement date after deducting the exercise or exchange of any outstanding warrants during the previous reporting period.
Stock Price at Valuation Date
The closing stock price at re-measurement date being the last available closing price of the reporting period taken from www.nasdaq.com.
Exercise Price
The exercise price is fixed and determined under the terms - of the financing facility it was issued.
Remaining Term
The remaining term is calculated by using the contractual expiration date of the 8% Senior Secured Convertible Note at the moment of re-measurement.
| 14 |
Expected Volatility
Management estimates expected cumulative volatility giving consideration to the expected life of the note and calculated the annual volatility by using the continuously compounded return calculated by using the share closing prices of an equal number of days prior to the maturity date of the note (reference period). The annual volatility is used to determine the (cumulative) volatility of the Company´s common stock (= annual volatility * square root (expected life)).
Risk-Free Interest Rate
Management estimates the risk-free interest rate using the “Daily Treasury Yield Curve Rates” from the US Treasury Department with a term equal to the reported rate, or derived by using both spread in intermediate term and rates, up to the maturity date of the 8% Senior Secured Convertible Note.
Expected Dividend Yield
Management estimates the expected dividend yield by giving consideration to the Company´s current dividend policies as well as those anticipated in the future considering the Company´s current plans and projections.
Exchange Condition
The warrant holder has the option to do a cashless exchange of warrants at certain exchange conditions described in the warrants. The valuation for the exchange is based on a Black-Scholes calculation with pre-determined variables such asvolatility (135%),remaining term (5 years),risk-free rate (variable),dividend yield (0%),exercise price ($0.887) andmarket price (closing bid price one day prior to the exchange date).
Mandatory Exercise Condition
Management’s estimate for the likelihood of being able to force a mandatory exercise of the warrants prior to the maturity of the warrant agreement.
Share-based Compensation
The Company follows the provisions of ASC 718, Compensation-Stock Compensation, (“ASC 718”). Under ASC 718, share-based awards are recorded at fair value as of the grant date and recognized as expense with an adjustment for forfeiture over the employee’s requisite service period (the vesting period, generally up to three years). The share-based compensation cost based on the grant date fair value is amortized over the period in which the related services are received.
To determine the value of our stock options at grant date under our employee stock option plan, the Company uses the Black-Scholes option-pricing model. The use of this model requires the Company to make a number of subjective assumptions. The following addresses each of these assumptions and describes our methodology for determining each assumption:
Expected Life
The expected life represents the period that the stock option awards are expected to be outstanding. The Company uses the simplified method for estimating the expected life of the option, by taking the average between time to vesting and the contract life of the award.
Expected Volatility
The Company estimates expected cumulative volatility giving consideration to the expected life of the option of the respective award, and the calculated annual volatility by using the continuously compounded return calculated by using the share closing prices of an equal number of days prior to the grant-date (reference period). The annual volatility is used to determine the (cumulative) volatility of its Common Stock (= annual volatility x square root (expected life)).
Forfeiture rate
The Company is using the aggregate forfeiture rate. The aggregate forfeiture rate is the ratio of pre-vesting forfeitures over the awards granted (pre-vesting forfeitures/grants). The forfeiture discount (additional loss) is released into the profit and loss in the same period as the option vesting-date. The forfeiture rate is actualized every reporting period.
| 15 |
Risk-Free Interest Rate
The Company estimates the risk-free interest rate using the “Daily Treasury Yield Curve Rates” from the U.S. Treasury Department with a term equal to the reported rate, or derived by using both spread in intermediate term and rates, to the expected life of the award.
Expected Dividend Yield
The Company estimates the expected dividend yield by giving consideration to our current dividend policies as well as those anticipated in the future considering our current plans and projections. The Company does not currently calculate a discount for any post-vesting restrictions to which our awards may be subject.
Income Taxes
Current tax is based on the income or loss from ordinary activities adjusted for items that are non-assessable or disallowable for income tax purpose and is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax assets are recognized for the expected future tax benefit to be derived from tax losses and tax credit carry-forwards. Establishment of a valuation allowance is provided when it is more likely than deferred taxes will not be realized.
In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and reimbursement arrangements among related entities, the process of identifying items of revenue and expenses that qualify for preferential tax treatment and segregation of foreign and domestic income and expense to avoid double taxation.
The Company files federal income tax returns in the US, various US state jurisdictions and various foreign jurisdictions. The Company's income tax returns are open to examination by federal, state and foreign tax authorities, generally for the years ended December 31, 2008 and later, with certain state jurisdictions open for audit for earlier years. The Company's policy is to record estimated interest and penalties on unrecognized tax benefits as part of its income tax provision.
Comprehensive Income/ (Loss)
Comprehensive income/ (loss) include all changes in equity during a period from non-owner sources. For the years ended December 31, 2014 and 2013, the Company’s comprehensive income/ (loss) consisted of its net loss and foreign currency translation adjustments.
Business Combinations
The acquisition method of accounting for business combinations as per ASC 805, Business Combinations (“ASC 805”), requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date and to refine those estimates as necessary during the measurement period (defined as the period, not to exceed one year, in which the Company may adjust the provisional amounts recognized for a business combination).
Under the acquisition method of accounting, the identifiable assets acquired, the liabilities assumed, and any non-controlling interests acquired in the acquisition are recognized as of the closing date for purposes of determining fair value. The Company measures goodwill as of the acquisition date as the excess of consideration transferred, over the net of the acquisition date fair value of the identifiable assets acquired and liabilities assumed. Costs that the Company incurs to complete the business combination such as investment banking, legal and other professional fees are not considered part of consideration and the Company charges them to general and administrative expense as they are incurred.
During the measurement period, the Company adjusts the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Measurement period adjustments are reflected retrospectively in all periods being presented in the financial statements.
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Goodwill
The Company records goodwill when the fair value of consideration transferred in a business combination exceeds the fair value of the identifiable assets acquired and liabilities assumed. Goodwill and other intangible assets that have indefinite useful lives are not amortized, but the Company tests them for impairment annually during its fourth fiscal quarter and whenever an event or change in circumstances indicates that the carrying value of the asset is impaired.
The authoritative guidance for the goodwill impairment model includes a two-step process. First, it requires a comparison of the carrying value of the reporting unit to its fair value. If the fair value is determined to be less than the carrying value, a second step is performed. In the second step, the Company compares the implied fair value of goodwill to its carrying value in the reporting unit. The shortfall of the fair value below carrying value, if any, would represent the amount of goodwill impairment charge. We are using the criteria in ASU no. 2011-08 Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which permits the Company to make a qualitative assessment of whether it is more likely than not than not that a reporting unit’s fair value is less than the carrying amount before applying the two-step goodwill impairment test. If the Company concludes that it is not more likely than not that the fair value of a reporting unit is less that its carrying amount, it would not need to perform the two-step impairment test for that reporting unit.
The Company tests goodwill for impairment in the fourth quarter of each fiscal year, or sooner should there be an indicator of impairment as perASC 350, Intangibles – Goodwill and Other. The Company periodically analyzes whether any such indicators of impairment exist. Such indicators include a sustained, significant decline in the Company’s stock price and market capitalization, a decline in the Company’s expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, and/or slower growth rate, among others. In the Company’s case, the indicator is the continuing losses.
Long-lived Assets and Intangible Assets
In accordance with ASC 350, Intangibles – Goodwill and Other (“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 indefinite life intangible assets are reviewed for impairment in accordance with ASC 350, on an annual basis, 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 amortizing intangible assets that management expects to hold and use is tested for impairment when amounts may not be recoverable. Impairment is measured based on the amount of the carrying value that exceeds the fair value of the asset.
Property and Equipment, Internal Use Software and Third Party Software
Property and equipment are initially recorded at cost. Additions and improvements are capitalized, while expenditures that do not enhance the assets or extend the useful life are charged to operating expenses as incurred. Included in property and equipment are certain costs related to the development of the Company’s internally developed software technology platform.
The Company has adopted the provisions of ASC 350-40, Accounting for the Costs of Computer Software developed or obtained for internal use (former AICPA SOP 98-1, “ASC 350-40”), and therefore the costs incurred in the preliminary stages of development are expensed as incurred. The Company capitalizes all costs related to software developed or obtained for internal use when management commits to funding the project; the preliminary project stage is completed and when technological feasibility is established. Software developed for internal use has generally been used to deliver hosted services to the Company’s customers. Technological feasibility is considered to have occurred upon completion of a detailed program design that has been confirmed by documenting the product specifications, or to the extent that a detailed program design is not pursued, upon completion of a working model that has been confirmed by testing to be consistent with the product design. Once a new functionality or improvement is released for operational use, the asset is moved from the property and equipment category “construction in progress” (“CIP”) to a property and equipment asset subject to depreciation in accordance with the principle described in the previous sentence. In this account management also records equipment acquired from third parties, until it is ready for use. Capitalization of costs ceases when the project is substantially complete and ready for its intended use. Depreciation is applied using the straight-line method over the estimated useful lives of the assets once the assets are placed in service. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. There were no impairments to internal use software during the twelve month periods ended December 31, 2014, 2013 and 2012, respectively.
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Recent Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in US auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). For all entities, the new requirements are effective for annual periods ending after December 15, 2016. Early application is permitted. Management does not expect that the adoption of this standard will have a material effect on the Company´s financial statements.
In May 2014, as part of its ongoing efforts to assist in the convergence of US GAAP and International Financial Reporting Standards, the FASB issued a new standard related to revenue recognition. Under the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard will be effective for the Company beginning January 1, 2017 and early adoption is not permitted. . The adoption of this standard did not have had a material effect on the Company´s financial statements.
In April 2014, the FASB issued ASU-2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, which amends the definition of a discontinued operation in Accounting Standards Codification Topic 205-20 (Presentation of Financial Statements – Discontinued Operations) and requires entities to disclose additional information about disposal transactions that do not meet the discontinued operations criteria. The ASU redefines a discontinued operation as a component or group of components of an entity that (1) has been disposed of by sale or other than by sale or classified as held for sale and (2) represents a strategic shift that has (or will have) a major effect on an entity’s operations and results includes the disposal of a major geographic area, a major line of business, a major equity investment, or other major parts of an entity. The ASU is effective prospectively for disposals of components classified as held for sale in periods on or after December 15, 2014. The adoption of this standard did not have had a material effect on the Company´s financial statements.
Note 3. Allowance for Doubtful Accounts
Accounts receivable are presented on the balance sheet net of estimated uncollectible amounts. The Company records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses. Individual uncollectible accounts are written off against the allowance when collection of the individual accounts appears doubtful. The Company recorded an allowance for doubtful accounts of $0 and $7,693 as of December 31, 2014 and 2013, respectively.
Changes in the allowance for doubtful accounts are as follows:
| Allowance for doubtful accounts | Balance at the beginning of the period A | Currency revaluation B | Total Allowance for doubtful accounts A+B | Additions- allowance for doubtful accounts | Release for doubtful accounts | Balance at the end of the period | ||||||||||||||||||
| Year ended December 31, 2014 | $ | 7,693 | $ | (2,105) | $ | 5,588 | $ | 31,540 | $ | (37,128 | ) | $ | - | |||||||||||
| Year ended December 31, 2013 | $ | 559,120 | $ | 8,313 | $ | 567,433 | $ | 22,005 | (581,745) | $ | 7,693 | |||||||||||||
| Year ended December 31, 2012 | $ | 436,546 | 5,180 | $ | 441,726 | $ | 117,394 | $ | - | $ | 559,120 | |||||||||||||
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Note 4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets were recorded at $2,478,681 as of December 31, 2014, compared with $2,254,213 as of December 31, 2013. As of December 31, 2014, $742,782 of the prepaid expenses was related to prepaid Value Added Tax (“VAT”). On December 31, 2013, prepaid VAT represented $732,838.
Note 5. Other Assets
Other assets at December 31, 2014 and December 31, 2013 are long-term in nature, and consist of long-term deposits, deferred financing costs and loans to related parties amounting to $1,600,334 and $1,412,408, respectively, broken down as follows:
Long-term Deposit
As of December 31, 2014, there was $653,002 in long-term deposits made to various telecom carriers during the course of operations and a deposit to the French Tax Authorities, compared with $771,193 as of December 31, 2013. The deposits are refundable at the termination of the business relationship with the carriers.
Deferred Financing Costs
During 2014, the Company accounted for financing costs of $710,094 for legal, securitization and various other consultancy expenses, related to the issuance of the 2014 10% Credit Facility (refer to Note 14 and 15). These costs will be amortized and expensed using the effective interest method over the term of the facility. The net deferred financing cost balances was $682,878 as of December 31, 2014, compared with $477,673 as of December 31, 2013.
Loans to Third Parties
In 2013, the Company agreed to provide a loan to a third party at an interest rate of 5% per annum, with an option to acquire an equity interest. The loan was provided to fund the development and exploitation of applications using electronic medical health records. The loan will be repaid at the completion of the proof of concept, which is a prototype that is designed to determine feasibility of the application development, which will not occur before the end of 2015. The loan has been provided in a number of tranches, the last one was on April 7, 2014 for additional $50,000. The carrying value of the loan was $264,454 and $160,518 as of December 31, 2014 and December 31, 2013, respectively.
Note 6. Property and Equipment
Property and equipment at December 31, 2014 and December 31, 2013 consisted of:
| Average Estimated | ||||||||||||
| Useful Lives | December 31, 2014 | December 31, 2013 | ||||||||||
| Furniture and fixtures | 5 | $ | 281,214 | $ | 314,686 | |||||||
| Computer, communication and network equipment | 3 – 10 | 23,904,494 | 24,287,111 | |||||||||
| Software | 5 | 4,556,364 | 8,473,042 | |||||||||
| Automobiles | 5 | 80,860 | 91,580 | |||||||||
| Construction in progress for internal use software | 4,044,932 | 2,603,731 | ||||||||||
| Total property and equipment | 32,867,864 | 35,770,150 | ||||||||||
| Less: accumulated depreciation and amortization | (13,548,662 | ) | (15,984,028 | ) | ||||||||
| Total property and equipment | $ | 19,319,202 | $ | 19,786,122 | ||||||||
Computers, communications and network equipment includes the capitalization of our systems engineering and software programming activities. Typically, these investments pertain to the Company’s:
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| · | Intelligent Network (IN) platform; | |
| · | CRM provisioning Software; | |
| · | Mediation, Rating & Pricing engine; | |
| · | ValidSoft security software applications; | |
| · | Operations and business support software; | |
| · | Network management tools. |
Construction in progress (“CIP”) for internal use software consists of software projects in developments that have not been completed, and equipment acquired from third parties but not yet ready for service.
The total amount of product development costs (internal use software costs) that are capitalized in Property & Equipment during the years ended December 31, 2014 and 2013 was $4,674,199 and $3,505,742, respectively.
Upon completion of development, the assets are reclassified from CIP to the appropriate Property and Equipment category, at which point the assets begin to depreciate or amortize. During the twelve month period ended December 31, 2014, the Company transferred $4,239,491 from CIP into Property and Equipment as follows: $3,465,620 in computer equipment, $773,871 in software and $138,869 of other transfers and projects cancelled. There is also an exchange rate translation effects amounting to approximately $226,635, because costs are incurred mostly in the functional currency Euro and translated to the reporting currency, US dollar. In 2013, we capitalized $3,338,808, of which $2,029,069 was included in software and $1,309,739 is classified as computer equipment.
The decrease in the balance of accumulated depreciation amounting to $2,435,366 is mainly due to the removal of fully depreciated computer and software assets in 2014, but it is also affected by the current year depreciation.
Note 7. Intangible Assets
Intangible assets include customer contracts, telecommunication licenses and integrated, multi-country, centrally managed switch-based interconnects as well as ValidSoft Intellectual Property, including but not limited to software source codes, applications, customer list & pipeline, registration & licenses, patents and trademark/brands.
Intangible assets as of December 31, 2014 and 2013 consisted of the following:
| Estimated | December 31, | December 31, | ||||||||
| Useful Lives | 2014 | 2013 | ||||||||
| Customer Contracts, Licenses , Interconnect & Technology | 5-10 | $ | 1,870,523 | $ | 13,005,460 | |||||
| ValidSoft IP & Technology | 1-10 | 14,344,604 | 16,246,291 | |||||||
| Total intangible assets | 16,215,127 | 29,251,751 | ||||||||
| Less: Accumulated Amortization | (1,165,856 | ) | (11,484,600 | ) | ||||||
| Less: Accumulated Amortization ValidSoft IP & Technology | (9,973,063 | ) | (9,096,474 | ) | ||||||
| Total intangible assets, Net | $ | 5,076,208 | $ | 8,670,677 | ||||||
During the twelve months ended December 31, 2014, intangible assets and related accumulated amortization decreased by $13,036,625 and $9,442,156, respectively. The decrease is due to the removal from the fixed assets ledger of fully depreciated intangibles. In fiscal 2014 and 2013, the Company did not record any impairment.
Estimated future amortization expense related to our intangible assets is:
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 and thereafter | |||||||||||||||||||
| Interconnect licenses and contracts | $ | 315,517 | $ | 240,094 | $ | 84,222 | $ | 64,834 | $ | - | $ | - | ||||||||||||
| ValidSoft IP & Technology | 1,837,594 | 1,793,777 | 521,378 | 97,241 | 97,241 | 24,310 | ||||||||||||||||||
| $ | 2,153,111 | $ | 2,033,871 | $ | 605,600 | $ | 162,075 | $ | 97,241 | $ | 24,310 | |||||||||||||
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Note 8. Goodwill
The carrying value of the Company’s goodwill as of December 31, 2014 and as of December 31, 2013 was as follows:
| Goodwill | December 31, 2014 | December 31, 2013 | ||||||
| Goodwill ValidSoft Ltd | $ | 2,964,423 | $ | 3,359,210 | ||||
| Goodwill Morodo Ltd. | 197,440 | 223,615 | ||||||
| Goodwill Telnicity | 190,401 | 190,401 | ||||||
| Total | $ | 3,352,264 | $ | 3,733,226 | ||||
The decrease in the carrying value of goodwill related to ValidSoft and Morodo in 2014, compared to 2013, is because the goodwill is recorded in Euro entities, while our reporting currency is the US dollar. There has been a significant decline in the foreign exchange rate between the US dollar and the Euro during fiscal 2014.
During the fourth quarter of 2014, the Company commenced its annual goodwill impairment test for 2014 and after considering qualitative factors including our market capitalization and the Company’s 2015 outlook, management concluded that a two-step goodwill impairment test was not required.
Goodwill represents the excess of cost over the fair value of assets. Goodwill is not amortized, but instead is evaluated for impairment using a discounted cash flow model and other measurements of fair value such as market comparable transactions. The authoritative guidance for the goodwill impairment model includes a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the reporting unit that have goodwill assigned to them. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of impairment. In the second step, a fair value for goodwill is estimated, based in part of the fair value of the reporting unit used in the first step, and is compared to its carrying value. The shortfall of the fair value below carrying value, if any, would represent the amount of goodwill impairment.
The Company assesses goodwill for impairment during the fourth quarter of each year, or sooner should there be an indicator of impairment. The Company periodically analyzes whether any such indicators of impairment exists. Such indicators include a sustained, significant decline in the Company’s stock price and market capitalization, a decline in the Company’s expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, and/or slower growth rate, among others. After considering qualitative factors including the Company’s market capitalization and the Company’s previously announced outlook for 2014, it concluded that, for the third quarter of 2014, a goodwill impairment test was required. In performing the first step of the two-step goodwill impairment test, the Company determined that the fair value of the Company as a single reporting unit, measured by the Company’s market capitalization, exceeded the carrying value by a significant amount indicating no impairment was necessary.
Note 9. The acquisition of assets of Telnicity
On April 1, 2013, the Company, through its subsidiary Elephant Talk North America Corp, entered into an asset purchase agreement to acquire most of the assets of Telnicity LLC, a company established in the U.S. The transaction was accounted for as a business combination. The assets provide access to the U.S. mobile telecommunications market through Telnicity’s relationships with several major U.S.-based mobile telecommunication companies as well as its complementary technological mobile capabilities.
On March 31, 2014, the Company completed the purchase price allocation of the acquisition. The net assets and operations were consolidated into the financial statements of the Company commencing April 1, 2013. The total purchase price for Telnicity was $1,180,000, which consisted of 1,000,000 shares of the Company’s common stock. The Company recorded originally $989,599 of identifiable intangible assets, based on the estimated fair values of the assets, and $190,401 of residual goodwill. In order to complete the allocation, the Company reviewed and adjusted accordingly the forecasts used for the valuation, and adjusted also the discount rate, which resulted in an reclassification of the values assigned to the intangible assets, with no consequence for the amount recorded as goodwill.
| Consideration paid | Total Consideration | |||
| Number of shares of Common Stock | 1,000,000 | |||
| Fair value of the share price at April 1, 2013 | $ | 1.18 | ||
| Total Consideration Paid | $ | 1,180,000 | ||
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Following the valuation of Telnicity, the Company allocated the above purchase price to the identifiable assets and liabilities. A summary of the assets acquired assumed for Telnicity are:
| Estimated fair values: | ||||
| Assets acquired | $ | 989,599 | ||
| Liabilities assumed | - | |||
| Net assets acquired | 989,599 | |||
| Consideration paid | 1,180,000 | |||
| Goodwill | $ | 190,401 |
Note 10. Accounts payable and Customer Deposits
As of December 31, 2014 and December 31, 2013, the accounts payable and customer deposits are accrued expenses were comprised of the following:
| December 31, 2014 | December 31, 2013 | |||||||
| Accounts payable | $ | 1,795,240 | $ | 2,538,479 | ||||
| Customer deposits | 60,774 | 48,183 | ||||||
| Total Accounts payable and Customer Deposits | $ | 1,856,014 | $ | 2,586,662 | ||||
The customer deposits relate to Dutch MVNOs, who must provide a deposit as a guarantee. The deposit is returnable upon termination of the relationship.
Note 11. Loans Payable
Loans payable at December 31, 2014 and 2013 are summarized as follows:
| December | December | |||||||
| 31, 2014 | 31, 2013 | |||||||
| Installment loan payable due December 24, 2006, secured by personal guarantees of two stockholders, a former director, and a third party | $ | 320,231 | $ | 320,358 | ||||
| Installment loan payable, monthly principal and interest payments of $2,798 including interest at bank’s prime rate plus 1.5% per annum, 8.25% at November 30, 2008, due December 24, 2011, secured by personal guarantees of three stockholders and a former director | 254,594 | 254,696 | ||||||
| Installment loan payable, monthly principal and interest payments of $1,729 including interest at bank’s prime rate plus 1.5% per annum, 8.25% at November 24, 2008, due June 28, 2009, secured by personal guarantees of three stockholders and a former director | 103,855 | 103,897 | ||||||
| Term loan payable, monthly payments of interest at bank’s prime rate, 7.0% at December 31, 2007 | 283,589 | 283,703 | ||||||
| Total | $ | 962,269 | $ | 962,654 | ||||
As of December 31, 2014 and 2013, the overdraft balance related to this loan amounted to $433,366 and $391,436, respectively.
In 2004, Elephant Talk Ltd, a subsidiary of the Company, executed a credit facility with a bank in Hong Kong pursuant to which Elephant Talk Ltd. borrowed funds. The interest rate and default payment interest rate were charged at 2% and 6% per annum respectively, above the lender’s Hong Kong Dollar Prime Rate quoted by the lender from time to time. The Company has not guaranteed the credit facility nor is it otherwise obligated to pay funds drawn upon it on behalf of Elephant Talk Ltd.
In December 2009 Chong Hing Bank Limited, formerly known as Liu Chong Hing Bank Limited, a foreign banking services company based in Hong Kong (Bank), commenced a lawsuit in the California Orange County Superior Court called Chong Hing Bank Limited v. Elephant Talk Communications, Inc., Case No. 30-2009-00328467.
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The Bank alleged that it entered into various installment and term loan agreements and an overdraft account with ETL, a wholly-owned Hong Kong subsidiary of the Company. Various former officers and directors of ETL personally guaranteed the loans and overdraft account.
The Bank alleged that ETL was in default on the loans and overdraft account, and that approximately $1,395,635 including interest and default interest was due. The Bank alleged that the Company was directly liable to repay the loans and overdraft account as a successor in interest to ETL or because the Company expressly or impliedly assumed direct liability for the loans and overdraft account. The Company denied the Bank’s allegations and asserted several affirmative defenses. The Company contended that it had no direct liability to the Bank, and that the Bank must pursue its recourse against ETL and its personal guarantors.
The Bank and the Company tried the case to the court without a jury between October, 5 and 12, 2011. The court found, among other things, that
| · | The Company The Company was not liable as a successor in interest or otherwise on the Bank loans and overdraft account to ETL; |
| · | The Company was not liable on the Bank’s claims because the Bank filed its action after the applicable California 4-year statute of limitations had expired; and |
| · | The Company was not liable to the Bank under the alternative theories of negligent or intentional misrepresentation. |
The court entered judgment in favor of Elephant Talk Communications Corp. and against the Bank on December 14, 2011, and awarded the Company $5,925 in costs. The judgment became final on February 16, 2012. The Company continues to accrue for the overdraft, the loans and related interest since its subsidiary ETL in Hong Kong, alleged by the Bank as the contractual party, may be still held liable for these loans.
Note 12. Deferred Revenue
As a result of the Company’s restatement described in Note 35 to the Financial Statements and in accordance with GAAP, revenue that had originally been recognized in 2013 is now being recognized ratably over an extended timeframe. The balance sheet reflects a significant increase in deferred revenue, which will be recognized in revenue over the service period of the contract, which management has estimated to be the greater of the expected life of the customer or the contract which for Iusacell 60 months (i.e. 5 years contract).
Because the Company recognizes revenue upon performance of services, deferred revenue represents amounts received from the customers for which either delivery has not occurred or against future sales of services. As of December 31, 2014, the balance of short term deferred revenue was $8,813,385 and long term portion was $2,434,257, totaling $11,247,642. For the corresponding period in 2013, the short term deferred revenue balance was $271,767 and the long term portion was $2,364,389, totaling $2,636,156.
Note 13. Accrued Expenses
As of December 31, 2014 and December 31, 2013, the accrued expenses were comprised of the following:
| December 31, 2014 | December 31, 2013 | |||||||
| Accrued Selling, General & Administrative expenses | $ | 1,863,020 | $ | 2,271,086 | ||||
| Accrued cost of service | 291,553 | 547,111 | ||||||
| Accrued taxes (including VAT) | 570,616 | 255,577 | ||||||
| Accrued interest payable | 1,184,418 | 1,300,101 | ||||||
| Other accrued expenses | 152,045 | 587,428 | ||||||
| Total accrued expenses | $ | 4,061,652 | $ | 4,961,303 | ||||
Within accrued taxes is income taxes payable as of December 31, 2014 amounting to $8,029. See Note 28 of the Financial Statements for more information.
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Accrued Selling, General and Administrative expenses include social security premiums, personnel related costs such as payroll taxes, provision for holiday allowance, accruals for marketing& sales expenses, and office related expenses.
Note 14. Conversion into Equity of the 2013 10% Related Party Convertible Note
The following table shows the composition of the 2013 10% Related Party Convertible Note as shown in the Consolidated Balance Sheets:
| December 31, 2013 | ||||
| 10% Convertible Note (principal amount) | € | 2,000,000 | ||
| Exchange rate December 31, 2013: EURO 0.7264=US$1 | ||||
| 10% Convertible Note | $ | 2,753,304 | ||
| Less: | ||||
| Debt Discount (Beneficial Conversion Feature) | (728,332 | ) | ||
| Debt Discount (Extended Warrants) | (849,453 | ) | ||
| Debt Discount (Warrants) | (141,800 | ) | ||
| 10% Related Party Convertible Note (Net of Debt Discount of $1,719,585 as per December 31, 2013) | $ | 1,033,719 | ||
On July 15, 2014, the Company entered into a certain note conversion letter agreement (the “Conversion Agreement”) and a certain warrant amendment letter agreement (the “Warrant Amendment”) with Mr. Moncarey (a related party and Director of QAT Investments S.A. and QAT II Investments S.A., affiliates of the Company) to, among other things,
| · | immediately convert the convertible note issued on August 17, 2013, due July 2, 2014 (the “Maturity Date”), pursuant to which the Company borrowed a principal amount of €2,000,000 ($2,723,000) as of July 15, 2014) at an interest rate of 10% per annum (“the 2013 10% Related Party Convertible Note”) into a number of shares of Common Stock. The 2013 10% Related Party Convertible Note permits conversion, in whole or in part, at the option of Mr. Moncarey, into a number of shares of Common Stock, par value $0.00001 of the Company (the “Common Stock”) equal to the quotient of the Outstanding Balance (as defined in the 2013 10% Related Party Convertible Note) divided by a Conversion Price of $0.70, modified from the original conversion price of $0.887 per share or 4,238,501 shares of the Company’s Common Stock, which amounted to $2,966,951 of principal including interest, plus $824,590 as value assigned to the reduced Conversion Price, totaling $3,791,541 of equity increase. |
| · | amend the warrant issued in conjunction with the issuance of the 2013 10% Related Party Convertible Note (“the 2013 Related Party Warrant”) to reduce the exercise price of the 2013 10% Related Party Warrant to $0.70 per share for the remainder of the term; and |
| · | issue a warrant to Mr. Moncarey to purchase 500,000 shares of restricted Common Stock (the “July Warrant” and together with the Conversion Agreement and the Warrant Amendment, collectively, the “Transaction”). |
The July Warrant is exercisable any time after January 15, 2015 at an exercise price of $0.9228 per share (the closing price of the Company’s Common Stock immediately preceding the date the July Warrant was issued). The term of the July Warrant expires on July 15, 2019.
The Audit and Finance Committee of the Company’s Board of Directors authorized the Transaction in order to immediately satisfy the Company’s obligations under the 2013 10% Related Party Convertible Note. The Transaction was subsequently ratified by the Company’s Board of Directors.
The securities underlying the Warrant Amendment, July Warrant and the shares of Common Stock issuable upon conversion of the 2013 10% Related Party Convertible Note pursuant to the Conversion Agreement have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), or any state securities laws, and were offered and sold only in Europe to an “accredited investor” (as defined in Rule 501(a) of the Securities Act) pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act and Regulation D promulgated pursuant thereto.
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In connection with the reduction of the conversion price of note and warrants from $0.887 to $0.70 and the additional 500,000 warrants issued, the Company recorded an expense amounting to $1,162,322 which is included in interest expense related to debt discount and conversion feature in the consolidated statement of comprehensive loss.
Note 15. The 2014 10% Term Loan Agreement
The following table shows the composition of the 2014 10% 3rd Term Loan Agreement as shown in the Consolidated Statement of Financial Position:
| December 31, 2014 | ||||
| 2014 10% Term Loan (principal amount) | $ | 12,000,000 | ||
| Less: | ||||
| Debt Discount – Original Issue Discount | $ | (365,231 | ) | |
| Less: | ||||
| Debt Discount – Warrants | (433,663 | ) | ||
| 2014 10% Term Loan (Net of Debt Discount) | $ | 11,201,106 | ||
On November 17, 2014, the Company and certain of its subsidiaries entered into a term loan credit agreement with Atalaya Administrative LLC, as the administrative agent and collateral agent, and the lenders party thereto (the “2014 10% Term Loan Agreement”). The 2014 10% Term Loan Agreement provides for a twelve million dollar term loan facility, with advances to be made on the Closing Date. Borrowings under the Term Loan Facility shall bear interest at the LIBOR rate plus an applicable margin per annum equal to ten percent (10.00%), such margin recently decreased by two percent (2%) from 12% upon the satisfaction of certain post-closing conditions. The Term Loan Facility will mature on December 31, 2017.
The Original Issue Discount (‘OID”) in the contract amounted to $380,000, and will be amortized over the life of the agreement. The balance of the OID as of December 31, 2014 is $365,231.
The 1,157,895 warrants (the Corbin warrants) were accounted for as equity and valued at $451,146, this value has been accounted for as debt discount and will be amortized during the life of the Credit Facility. The balance of the unamortized debt discount as of December 31, 2014 is $433,663.
A portion of the proceeds of the Credit Agreement has been used to repay 50% of the 2013 10% 3rd Party Convertible Note principal amount as well as all accrued interest, totaling $3,114,066 (€2,498,849) as per November 17, 2014. The remaining 50% of the principal amount of the Convertible Note has been converted into 2,817,993 shares of the Company’s common stock at the Closing Date, totaling approximately $2,499,951 (€2,000,000). The Company also issued a three year warrant to purchase 1,000,000 shares of the Company’s common stock, at an exercise price of $0.93 per share to the holder of the 2013 10% 3rd Party Convertible Note to facilitate the early repayment of the note.
The securities underlying the Corbin Warrant have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), or any state securities laws, and were offered and sold to an “accredited investor” (as defined in Rule 501(a) of the Securities Act) pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act and Regulation D promulgated pursuant thereto.
| 25 |
Note 16. 10% 3rd Party Loan and Convertible Note
The following table shows the composition of the 10% 3rd Party Loan and Convertible Note as shown in the Consolidated Statement of Financial Position:
| December 31, 2013 | ||||
| 10% Convertible Note (principal amount) | € | 4,000,000 | ||
| Exchange rate December 31, 2013: EURO 0.7264=US$1 | ||||
| 10% Convertible Note | $ | 5,506,608 | ||
| Less: | ||||
| Debt Discount (Warrants) | (726,695 | ) | ||
| 10% 3rd Party Loan and Convertible Note (Net of Debt Discount) | $ | 4,779,913 | ||
On November 17, 2014, in connection with the 2014 10% Term Loan Facility (see Note 15), the Company entered into a Note Conversion Letter Agreement (the “Conversion Agreement”) with Saffelberg Investments NV a third party investor of the Company with whom the Company had a Convertible Note agreement since August 28, 2013.
The Conversion agreement consisted of:
| · | repay 50% of the Convertible Note principal amount and accrued interest, totaling €2,498,849.32 ($3,114,066); |
| · | convert the remaining 50% of the Convertible Note into 2,817,993 shares of Common Stock; and |
| · | issue a three year warrant to Saffelberg Investment NV to purchase 1,000,000 shares of Common Stock (the “2014 Saffelberg Warrant”). |
The 2014 Saffelberg Warrant is exercisable any time after May 17, 2015 at an exercise price of $0.93 per share. The term of the 2014 Saffelberg Warrant expires on November 17, 2017. The 2013 Saffelberg Warrant remains outstanding, the terms of which remain unchanged.
The securities underlying the 2014 Saffelberg Warrant and the shares of Common Stock issued upon conversion of the Convertible Note pursuant to the Conversion Agreement have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), or any state securities laws, and were offered and sold to an “accredited investor” (as defined in Rule 501(a) of the Securities Act) pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act and Regulation D promulgated pursuant thereto.
The August 28, 2013 Convertible Note to Saffelberg Investments NV (“Saffelberg”) (a third party investor), was due August 28, 2015 (the “Maturity Date”), pursuant to which the Company borrowed a principal amount of €4,000,000 at an interest rate of 10% per annum (the “Convertible Note”). The Convertible Note permitted conversion, in whole or in part, at the option of Saffelberg, into a number of shares of Common Stock, equal to the quotient of the Outstanding Balance (as defined in the Convertible Note) under the Convertible Note by $0.887. In conjunction with the issuance of the Convertible Note, on August 28, 2013, the Company issued a warrant to Saffelberg to purchase 2,000,000 shares of restricted Common Stock (the “2013 Saffelberg Warrant”). The 2013 Saffelberg Warrant became exercisable at any time on or after February 28, 2014 at a price of $0.887 per share. The term of the 2013 Saffelberg Warrant expires on August 28, 2018.
The securities underlying the Warrant and the shares of Common Stock issuable upon conversion of the Convertible Note have not been registered under the Securities Act, as amended, or any state security laws.
The Company concluded that the Warrant, which is an embedded conversion feature, is not required to be separated, does not require liability classification and is considered an equity instrument. The Warrants is recognized at a relative fair value on the issue date of the Note as a debt discount which was amortized using the effective interest method from issuance to the maturity date of the Note. The Warrant was valued using the binomial model at $864,394 on date of issuance of the Note. The debt discount balance at December 31, 2014 was $0 as the relating note was fully extinguished after the conversion 50% of the principal in equity and the remaining 50% cash repayment including accumulated interest of the 10% convertible note.
Note 17. Conversion and Termination of the May 24, 2013 Loan Agreement
On May 24, 2013, the Company entered into a certain loan agreement with a member of its board of directors pursuant to which the Company borrowed a principal amount of €1,000,000 at an interest rate of 12% per annum (the “May 24, 2013 Loan Agreement”) and issued a warrant (the “May 24, 2013 Warrant”) to the director to purchase 1,253,194 restricted shares of the Company’s Common Stock, exercisable at $1.03 per share for a term of 5 years, with a mandatory cash exercise after 12 months in the event the average closing bid price is $1.55 or higher for 10 consecutive trading days. The Company used the proceeds from the May 24, 2013 Loan Agreement primarily for working capital. The securities were offered and sold only in Europe to “accredited investors” (as defined in Rule 501(a) of the Securities Act) pursuant to an exemption from registration under Section 4(2) and Regulation S of the Securities Act.
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Following ASC 470-20 Debt – Debt with Conversion and Other Options guidance, the Company allocated the fair market value, using the binomial valuation method, of the detachable warrants between equity and debt and accounted for the debt component separately, with the debt discount offset against paid-in capital. The debt discount was amortized using the effective interest method during the life of the loan.
On July 14, 2013, the Company entered into an amendment (the “Amendment”) to terminate the May 24, 2013 Loan Agreement and cancel the Warrant. In exchange for termination of the May 24, 2013 Loan Agreement and the cancellation of the May 24, 2013 Warrant, the Company entered into a Stock Purchase Agreement, dated July 15, 2013 (the “Purchase Agreement”) with the director pursuant to which the Company agreed to convert the principal amount of the loan into 1,840,631 restricted shares of the Company’s Common Stock, and resulting in gross proceeds amounting to $1,306,848 which were recorded in equity as of December 31, 2013. The conversion rate was calculated using the Euros (€) to USD ($) exchange rate as of July 12, 2013 which was $0.71 per share (the “Conversion”). The closing of the Conversion will occur upon satisfaction or waiver of the customary closing conditions set forth in the Purchase Agreement.
Upon conversion and termination of the loan agreement the Company accelerated the debt discount amortization, which resulted in a loss on extinguishment of debt of $44,506 in July 2013.
Note 18. 8% Senior Secured Convertible Note
On June 11, 2013, Elephant Talk Communications Corp. entered into a purchase agreement (together, the “2013 Purchase Agreements”) with each holder of the Company’s Senior Secured Convertible Notes issued on March 29, 2012 pursuant to which the Company purchased the Convertible Notes at the purchase price equal to 110% of the aggregate of the outstanding principal amount of the Convertible Notes and interest due. The aggregate purchase price paid to the holders of the Convertible Notes was $6,701,824 which was paid from the proceeds of the 2013 Share Purchase Agreements described in Note 20 of the Financial Statements.
The Purchase Agreement with the note holders resulted in the regular and accelerated amortization expenses during the second quarter of $349,639 for the original issue discount (OID), $1,179,732 for the conversion feature (CF) and $311,048 for the remaining financing costs of the note. The release of the balance of the fair market value of the conversion feature resulted in a gain of $451,779. Furthermore the 10% prepayment fee of $607,539 on the purchase price compared to the net outstanding principal was recorded as a loss in the Consolidated Statement of Comprehensive Loss as part of the Loss of Extinguishment of Debt. The total Loss on Extinguishment of Debt related to this transaction was calculated at an amount of $1,960,594.
Note 19. Registered Direct Offering and Warrant Liabilities
In June 11, 2013, the “Company” entered into an Amendment No. 1 (the “Amendment to SPA”) to certain Securities Purchase Agreement (the “SPA”) dated June 3, 2013 with certain institutional and other investors (“DJ Investors”) placed by Dawson James Securities Inc. (the “Placement Agent”) and Mr. Steven van der Velden, the Chief Executive Officer and Chairman of the Board (“Affiliated Investors”), relating to a registered direct public offering by the Company (the “Offering”). The gross proceeds of this SPA were $12,000,000 and resulted in net proceeds of $11,292,500 after the deduction of $707,500 for fundraising related expenses to various parties involved. The majority of the net proceeds were used to pay off the outstanding Senior 8% Secured Convertible Notes issued in 2012.
The number of shares issued relating to this SPA amounted to 17,425,621, the number of warrants amounted to 7,841,537 and was covered by the registration statement filed in 2012 for an amount of $75,000,000 (S-3/A Amendment No. 2, File No. 333-181738 dated June 6, 2012). The Company determined the fair value of the remaining outstanding warrants, totaling 2,892,857 using a Monte-Carlo Simulation model, which as of December 31, 2014 amounted to $2,087,992.
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The SPA included the issuance of 7,841,537 investor warrants (“investor warrants”) and 183,284 warrants issued to the fund raise agent (“agent warrants” and together with the investor warrants, the “RD warrants”). The RD warrants have a five year term from the date of issuance, are exercisable at the price of $0.887 per share for the investor warrants and $0.853 per share for the agent warrants immediately from the date of issuance and include provisions governing the adjustments to the number of Warrant Shares issuable upon exercise of the RD warrants upon stock dividends, stock splits, and other events. The RD warrants may be transferred by a holder thereof in accordance with applicable securities laws.
In the event that among other things, the registration statement relating to the shares of Common Stock is not effective, a holder of RD Warrants will also have the right, in its sole discretion, to exercise its RD Warrants for a net number of RD Warrant Shares pursuant to the cashless exercise procedures specified in the RD Warrants. The RD Warrants may be exercised in whole or in part, and any portion of a RD Warrant not exercised prior to the termination date shall be and become void and of no value. The absence of an effective registration statement or applicable exemption from registration does not alleviate the Company’s obligation to deliver Common Stock issuable upon exercise of a RD Warrant.
Each RD Warrant also allows the holder the ability, at any time after 90 days from the issuance of the RD Warrant through its expiration, to exchange the RD Warrant with the Company for shares of Common Stock equal to the value of the RD Warrant at the time of the exchange based on a negotiated Black-Scholes formula. Under certain circumstances, the holder may receive cash in lieu of such shares of Common Stock.
Under certain circumstances after 90 days from the issuance of the RD Warrant, in the event that the Common Stock trades at a price that is 20% or more above the exercise price of the RD Warrants for a period of twenty consecutive trading days (with an average daily volume equal to or greater than $350,000), the Company may require the holder of the RD Warrants to exercise the RD Warrants for cash. After the 90 days waiting period some RD Warrant holders indeed did decide to use their right to exchange their RD Warrants, and subsequently, the Company did use its right to issue shares instead of paying cash. The number of RD Warrants exchanged amounted to 5,131,965 which resulted in the issuance of 4,102,792 shares of Common Stock. The exchange of the RD Warrants did not result in any cash inflow or cash outflow.
If, at any time a RD Warrant is outstanding, the Company consummates any fundamental transaction, as described in the RD Warrants and generally including any consolidation or merger into another corporation, or the sale of all or substantially all of our assets, or other transaction in which the Common Stock is converted into or exchanged for other securities or other consideration, the holder of any RD Warrants will thereafter receive the securities or other consideration to which a holder of the number of shares of Common Stock then deliverable upon the exercise or exchange of such RD Warrants would have been entitled upon such consolidation or merger or other transaction.
The exercisability or exchangeability of the RD Warrants may be limited in certain circumstances if, after giving effect to such exercise or exchange, the holder or any of its affiliates would beneficially own (as determined pursuant to Section 13(d) of the Securities Act, as amended, and the rules and regulations promulgated thereunder) more than 9.9% of the Common Stock issued and outstanding.
According to ASC 480-10 Distinguishing Liabilities from Equity, the accounting for an equity instrument with detachable warrants classified as a liability reflects the notion that the consideration received upon issuance must be allocated between the instruments issued. Proceeds from the issuance of an equity instrument with stock purchase warrants are allocated to the two elements based on the following: (i) the liability element has initially been recorded at fair market value; and (ii) the remaining portion of the consideration has been allocated to the equity element.
The liability instrument will be re-evaluated at each reporting period with changes in the fair value recognized through the applicable period Consolidated Statement of Comprehensive Loss.
Note 20. Obligations under Capital Leases
The Company has a number of financing arrangements with its vendors to acquire equipment and licenses. These trade arrangements contain maturity periods ranging from two to three years, and interest rates between 8.65% and Euribor (3M) +1.5% at different foreign exchange rates. The following is an analysis of the property & equipment acquired under capital leases, recorded in the Property & Equipment line item by major classes:
| 28 |
| December | December | |||||||
| 31, 2014 | 31, 2013 | |||||||
| Network equipment | $ | 1,449,343 | $ | 1,642,759 | ||||
| Software licenses | 1,611,507 | 874,174 | ||||||
| Other | 134,326 | 103,249 | ||||||
| Total | 3,195,176 | 2,620,182 | ||||||
| Less: accumulated depreciation and amortization | (527,841 | ) | (101,209 | ) | ||||
| Total | $ | 2,667,335 | $ | 2,518,973 | ||||
The current portion of the Capital Leases of $1,831,050 as of December 31, 2014 is included in Current Liabilities “Obligations under capital leases (current part)” in the accompanying balance sheet and the long term portion of $272,460 is reported as “Non-current portion of obligations under capital lease” as of December 31, 2014. Accrued interest is included in ‘Accrued expenses’ in the balance sheet. Depreciation of assets recorded under the capital leases is included in depreciation expense.
Note 21. Other long term payable
Other long term payable is summarized as follows:
| December | ||||
| 31, 2014 | ||||
| Arrangement with creditor (principal amount) | € | 366,313 | ||
| Exchange rate December 31, 2014: EURO 0.8227=US$1 | ||||
| Arrangement with creditor | $ | 445,257 | ||
| Less: | ||||
| Short-term portion (recorded in Accrued expenses) | (90,377 | ) | ||
| Total | $ | 354,880 | ||
This amount was recorded as an accrued expense until September 30, 2014. During the fourth quarter of 2014, the Company reached an agreement with regulatory authorities regarding a debt for telecom license fees from 2013. A total amount of € 366,313 ($445,257 as of December 31, 2014), which includes fines for late payment and interest, will be paid in 72 monthly installments, starting on February 28, 2015.
Note 22. Loan from Joint Venture Partner
The Company, through its subsidiary ET-UTS N.V, entered into a 51% owned joint venture agreement (the “Joint Venture Agreement”) on December 17, 2008 and received an unsecured loan with a principal amount of ANG (Netherlands Antillian Guilder) 724,264 ($402,424) at an interest rate of 8% per annum, from the 49% shareholder in the joint venture, United Telecommunication Services N.V. (“UTS NV”) that is the government owned incumbent telecom operator of Curaçao. The loan had no maturity date, and the agreed conditions were that repayment of the loan and accrued interest would only take place when the joint venture was in a cash flow positive situation.
Management decided to discontinue and liquidate the joint venture with UTS NV and the loan and accrued interest have been forgiven. Therefore the Company recognized a gain in extinguishment of debt in the amount of $626,534. The balance outstanding as of December 31, 2014 is $0.
Note 23. Fair Value Measurements
The following tables summarize fair value measurements by level at December 31, 2014 for financial assets and liabilities measured at fair value on a recurring basis:
| December 31, 2014 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Derivative Liabilities | ||||||||||||||||
| Conversion feature | $ | - | $ | - | $ | - | $ | - | ||||||||
| Warrant Liabilities | - | - | 2,087,992 | 2,087,992 | ||||||||||||
| Total Derivatives Liabilities | $ | - | $ | - | $ | 2,087,992 | $ | 2,087,992 | ||||||||
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The Company uses the Monte Carlo valuation model to determine the value of the remaining outstanding warrants from the Registered Direct Offering of June 2013, discussed in Note 19 under the title “Registered Direct Offering and Warrant Liabilities”. Since this model requires special software and expertise to model the assumptions to be used, the Company hired a third party valuation expert.
The following table summarizes fair value measurements by level at December 31, 2013 for financial assets and liabilities measured at fair value on a recurring basis:
| December 31, 2013 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Derivative Liabilities | ||||||||||||||||
| Conversion feature | $ | - | $ | - | $ | - | $ | - | ||||||||
| Warrant Liabilities | - | - | 1,973,534 | 1,973,534 | ||||||||||||
| Total Derivatives Liabilities | $ | - | $ | - | $ | 1,973,534 | $ | 1,973,534 | ||||||||
The Company has classified the outstanding warrants into level 3 due to the fact that some inputs are not published and not easily comparable to industry peers.
The Company determines the “Fair Market Value” using a Monte Carlo model by using the following assumptions:
Number of outstanding warrants
The number of outstanding exercise rights is adjusted every re-measurement date after deducting the number of exercised rights during the previous reporting period.
Stock price at valuation date
The closing stock price at re-measurement date being the last available closing price of the reporting period taken from www.nasdaq.com.
Exercise Price
The exercise price is fixed and determined in the warrant agreement.
Remaining Term
The remaining term is calculated by using the contractual expiration date of the warrant agreement at the moment of re-measurement. The remaining term for a warrant exercise using the exchange condition is fixed in the warrant agreement at five years.
Expected Volatility
We estimate expected cumulative volatility giving consideration to the expected life of the note and calculated the annual volatility by using the continuously compounded return calculated by using the share closing prices of an equal number of days prior to the maturity date of the note (reference period). The annual volatility is used to determine the (cumulative) volatility of our common stock (= annual volatility x SQRT (expected life)). The volatility for a warrant exercise using the exchange condition is fixed at 135% and determined in the warrant agreement.
Risk-Free Interest Rate
We estimate the risk-free interest rate using the “Daily Treasury Yield Curve Rates” from the U.S. Treasury Department with a term equal to the reported rate, or derived by using both spread in intermediate term and rates, up to the maturity date of the note.
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Expected Dividend Yield
We estimate the expected dividend yield by giving consideration to our current dividend policies as well as those anticipated in the future considering our current plans and projections.
Note 24. Stockholders’ Equity
(A) Common Stock
The Company is presently authorized to issue 250,000,000 shares Common Stock. The Company had 154,671,258 shares of common stock issued and outstanding as of December 31, 2014, an increase of 14,204,457 shares from December 31, 2013, largely due to the shares issued in connection with the exercise of various outstanding warrants which resulted in the issuance of a total of 5,782,700 shares; 4,238,501 shares were issued as a result of the note conversion with an affiliate investor; 2,817,993 shares were issued as a result of the partial note conversion of another note with an affiliate investor; 621,638 shares were issued to employees as a result of exercised employee stock options; 443,625 shares were issued as executive officers and directors compensation; 300,000 shares were issued as consideration for consultancy services.
Reconciliation with Stock Transfer Agent Records:
The shares issued and outstanding as of December 31, 2014 according to the stock transfer agent’s records are 154,917,158. The difference in number of issued shares recognized by the Company of 154,671,258 amounts to 245,900 and it is the result of the exclusion of the 233,900 unreturned shares from ‘cancelled’ acquisitions (pre-2006) and 12,000 treasury shares issued under the former employee benefits plan.
(B) Preferred Stock
The Company’s Certificate of Incorporation (“Articles”) authorizes the issuance of 50,000,000 shares of 0.00001 par value Preferred Stock. No shares of Preferred Stock are currently issued and outstanding. Under the Company’s Articles, the board of directors has the power, without further action by the holders of the Common Stock, subject to the rules of the NYSE MKT LLC, to designate the relative rights and preferences of the Preferred Stock, and issue the Preferred Stock in such one or more series as designated by the Board of Directors. The designation of rights and preferences could include preferences as to liquidation, redemption and conversion rights, voting rights, dividends or other preferences, any of which may be dilutive of the interest of the holders of the Common Stock or the Preferred Stock of any other series. The issuance of Preferred Stock may have the effect of delaying or preventing a change in control of the Company without further stockholder action and may adversely affect the rights and powers, including voting rights, of the holders of Common Stock. In certain circumstances, the issuance of Preferred Stock could depress the market price of the Common Stock.
During 2014 and 2013, the Company did not issue any shares of Preferred Stock, and 0 shares of Preferred Stock are outstanding.
(C) Warrants
Throughout the years, the Company has issued warrants with varying terms and conditions related to multiple funding rounds, acquisitions and other transactions. The warrants outstanding at December 31, 2014 have been recorded and classified as equity, except for 2,892,857 warrants as of December 31, 2014 which the Company has valued and recorded for an amount of $2,087,992 in the balance sheet for the warrant liabilities issued in connection with the Registered Direct Offering described in Note 19. The Weighted Average Exercise Price for the currently outstanding warrants in the table below is $1.20.
On November 17, 2014, pursuant to the terms of the Credit Agreement, the Company issued a warrant to Corbin Mezzanine Fund I, L.P., a Lender (the “Corbin Warrant”), to purchase 1,157,895 shares of the Company’s common stock, par value $0.00001 (the “Common Stock”), exercisable upon issuance, at a price of $0.95 per share. The term of the Corbin Warrant expires on November 17, 2016.
| 31 |
The below table summarizes the warrants outstanding as per the below reporting
| Outstanding Warrants | Exercise/ Conversion price(s) (range) | Expiring | 2014 | 2013 | 2012 | |||||||||||
| Warrants – Acquisitions | $0.63- $2.25 | 2013 | - | - | 3,437,953 | |||||||||||
| Warrants - Fundraising | $0.70- $2.00 | 2013 - 2018 | 29,610,206 | 37,229,230 | 46,322,101 | |||||||||||
| Warrants - Other | $2.21 | 2016 | 18,659 | 18,659 | 18,659 | |||||||||||
| 29,628,865 | 37,247,889 | 49,778,713 | ||||||||||||||
Note 25. Non-controlling Interest
The Company had non-controlling interests in several of its subsidiaries. The balance of the non-controlling interests as of December 31, 2014 and December 31, 2013 were as follows:
| Non-controlling interest Balance at | ||||||||||||
| Subsidiary | Non-controlling Interest % | December 31, 2014 | December 31, 2013 | |||||||||
| ETC PRS UK | 49 | % | $ | 9,321 | $ | 9,894 | ||||||
| ETC PRS Netherlands | 49 | % | - | 134,912 | ||||||||
| Total | $ | 9,321 | $ | 144,806 | ||||||||
Net losses attributable to non-controlling interests were insignificant for all the years presented.
Note 26. Basic and diluted net loss per share
Net loss per share is calculated in accordance with ASC 260, Earnings per Share (“ASC 260”). Basic net loss per share is based upon the weighted average number of common shares outstanding. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase Common Stock at the average market price during the period. The Company uses the ‘if converted’ method for its senior secured convertible notes. Weighted average number of shares used to compute basic and diluted loss per share is the same since the effect of dilutive securities is anti-dilutive.
The diluted share base for fiscal 2014, 2013 and 2012 excludes incremental shares related to convertible debt, warrants to purchase Common Stock and employee stock options as follows:
| Dilutive Securities | 2014 | 2013 | 2012 | |||||||||
| Convertible Notes | - | 9,635,838 | 2,957,855 | |||||||||
| Warrants | 29,628,865 | 37,247,889 | 49,778,713 | |||||||||
| Employee Stock Options | 40,056,080 | 34,479,773 | 12,181,130 | |||||||||
| 69,684,945 | 81,363,500 | 64,917,698 | ||||||||||
These shares were excluded due to their anti-dilutive effect on the loss per share recorded in each of the years presented. No additional securities were outstanding that could potentially dilute basic earnings per share.
| 32 |
Note 27. 2006 Non-Qualified Stock and Option Compensation Plan and 2008 Long Term Incentive Compensation Plan
2006 Non-Qualified Stock and Option Compensation Plan
The Company has a 2006 Non-Qualified Stock and Option Compensation Plan (the “2006 Plan”). Under the 2006 Plan, there are no stock options outstanding as of December 31, 2014; all remaining outstanding options expired in December 2013. There are 89,490 options that remain available for granting under the 2006 Plan. During 2014 a number of 13,960 shares were issued under the 2006 Plan as non-cash compensation to board members for services during the fourth quarter 2014.
These non-cash compensation shares are accounted for and valued using the share price and number of shares issued at issuance date, and they vest immediately when issued.
2008 Long-Term Incentive Compensation Plan
In 2008, the Company adopted the 2008 Plan. The 2008 Plan initially authorized total awards of up to 5,000,000 shares of Common Stock, in the form of incentive and non-qualified stock options, stock appreciation rights, performance units, restricted stock awards and performance bonuses. The amount of Common Stock underlying the awards to be granted remained the same after the 25 to one reverse stock-split that was effectuated on June 11, 2008.
In 2011, the stockholders approved an increase in the shares available under the 2008 Plan from 5,000,000 to 23,000,000 shares of Common Stock. As of December 31, 2013, 34,479,773 options and/or shares were issued and outstanding under the 2008 Plan, and there were 8,247,057 remaining shares available for issuance under the 2008 Plan.
In 2013, the Company’s stockholders approved the amendment and restatement of the 2008 Plan, which increased the number of authorized shares by 23,000,000 shares of Common Stock.
In 2014, the Company’s stockholders approved another amendment and restatement of the 2008 Plan, which increased the number of authorized shares by 10,000,000 shares.
During 2014, 429,665 shares were issued under the 2008 Plan as non-cash compensation granted to management and board members for services during the first, second and third quarter of 2014.
Reconciliation of registered and available shares and/or options as of December 31, 2014:
| Full Year 2014 | Total | |||||||
| Registered 2008 | - | 5,000,000 | ||||||
| Registered 2011 | - | 18,000,000 | ||||||
| Approved increase 2013 | - | 23,000,000 | ||||||
| Approved increase 2014 | - | 10,000,000 | ||||||
| Total Registered under this plan | 56,000,000 | |||||||
| Shares (issued to): | ||||||||
| Consultants | - | 325,000 | ||||||
| Directors and Officers | 429,665 | 1,626,031 | ||||||
| Options exercised | 621,638 | 2,373,442 | ||||||
| Options (movements): | ||||||||
| Issued and Outstanding | 40,056,080 | |||||||
| Available for grant at December 31, 2014: | 11,619,447 | |||||||
Shares issued to Directors and officers amount to 443,625, which is integrated by 429,665 shares available under the 2008 Plan plus 13,960 shares issued under the 2006 Plan.
| 33 |
Common Stock purchase options consisted of the following as of the years ended December 31, 2014, 2013 and 2012:
| Options: | Number of Options | Weighted Average Exercise Price | Initial Fair Market Value (Outstanding Options) | |||||||||
| Outstanding as of December 31, 2011 | 7,727,099 | $ | 2.03 | $ | 10,803,654 | |||||||
| Granted in 2012 | 6,205,354 | $ | 2.24 | $ | 6,803,965 | |||||||
| Exercised (with delivery of shares) | (431,972 | ) | $ | 1.00 | $ | (403,382 | ) | |||||
| Forfeitures (Pre-vesting) | (990,821 | ) | $ | 2.29 | $ | (1,327,277 | ) | |||||
| Expirations (Post-vesting) | (296,251 | ) | $ | 2.23 | $ | (417,475 | ) | |||||
| Exchanged for Cashless exercise | (32,279 | ) | $ | 1.66 | $ | (40,814 | ) | |||||
| Outstanding as of December 31, 2012 | 12,181,130 | $ | 2.15 | $ | 15,418,671 | |||||||
| Granted in 2013 | 24,496,741 | $ | 1.12 | $ | 14,107,008 | |||||||
| Exercised (with delivery of shares) | (809,737 | ) | $ | 0.66 | $ | (270,682 | ) | |||||
| Forfeitures (Pre-vesting) | (805,266 | ) | $ | 1.00 | $ | (807,662 | ) | |||||
| Expirations (Post-vesting) | (556,524 | ) | $ | 1.92 | $ | (648,529 | ) | |||||
| Exchanged for Cashless exercise | (26,571 | ) | $ | 0.60 | $ | (13,834 | ) | |||||
| Outstanding as of December 31, 2013 | 34,479,773 | $ | 1.47 | $ | 27,784,972 | |||||||
| Granted in 2014 | 8,251,685 | $ | 1.21 | $ | 5,187,826 | |||||||
| Exercised (with delivery of shares) | (621,638 | ) | $ | 0.75 | $ | (195,803 | ) | |||||
| Forfeitures (Pre-vesting) | (975,649 | ) | $ | 1.54 | $ | (872,761 | ) | |||||
| Expirations (Post-vesting) | (1,078,091 | ) | $ | 1.94 | $ | (1,166,981 | ) | |||||
| Exchanged for Cashless exercise | - | $ | NA | $ | - | |||||||
| Outstanding as of December 31, 2014 | 40,056,080 | $ | 1.39 | $ | 30,728,253 | |||||||
In 2014, options awarded had a weighted average exercise price of $1.21. The grant date fair market value of the options, in the aggregate, was $5,178,826.
The weighted average assumptions used for the options granted in 2014 using the Black-Scholes options model are: expected cumulative volatility of 150% based on calculated annual volatility of 86%, contractual life of 4.3 years, expected option life of 3.3 years (using the simplified method) and a Risk Free Interest Rate of 1.5%. The expected dividend yield is zero.
Following is a summary of the status and assumptions used of options outstanding as of the years ended December 31, 2014, 2013 and 2012:
| 2014 | 2013 | 2012 | ||||||||||
| Grants | ||||||||||||
| During the year | 8,251,685 | 24,496,741 | 6,205,354 | |||||||||
| Weighted Average Annual Volatility | 86 | % | 89 | % | 81 | % | ||||||
| Weighted Average Cumulative Volatility | 150 | % | 192 | % | 134 | % | ||||||
| Weighted Average Contractual Life of grants (Years) | 4.33 | 5.11 | 3.84 | |||||||||
| Weighted Average Expected Life of grants (Years) | 3.28 | 4.73 | 2.69 | |||||||||
| Weighted Average Risk Free Interest Rate | 0.9332 | % | 1.5017 | % | 0.4553 | % | ||||||
| Dividend yield | 0.0000 | % | 0.0000 | % | 0.0000 | % | ||||||
| Weighted Average Fair Value at grant-date | $ | 0.66 | $ | 0.58 | $ | 1.10 | ||||||
| Options Outstanding | ||||||||||||
| Total Options Outstanding | 40,056,080 | 34,479,773 | 12,181,130 | |||||||||
| Weighted Average Remaining Contractual Life (Years) | 3.71 | 4.68 | 5.34 | |||||||||
| Weighted Average Remaining Expected Life (Years) | 3.01 | 4.91 | 5.02 | |||||||||
| Weighted Average Exercise Price | $ | 1.39 | $ | 1.47 | $ | 1.73 | ||||||
| Aggregate Intrinsic Value (all options) | $ | (23,046,653 | ) | $ | (8,189,063 | ) | $ | (13,972,731 | ) | |||
| Aggregate Intrinsic Value (only in-the-money options) | $ | 1,342,659 | $ | 6,312,036 | $ | 100,611 | ||||||
| Options Exercisable | ||||||||||||
| Total Options Exercisable | 22,856,509 | 18,180,371 | 4,358,510 | |||||||||
| Weighted Average Exercise Price | $ | 1.58 | $ | 1.62 | $ | 1.96 | ||||||
| Weighted Average Remaining Contractual Life (Years) | 2.74 | 3.79 | 5.97 | |||||||||
| Aggregate Intrinsic Value (all options) | $ | (17,120,707 | ) | $ | (7,126,025 | ) | $ | (4,178,337 | ) | |||
| Aggregate Intrinsic Value (only in-the-money options) | $ | 581,485 | $ | 3,091,811 | $ | 100,465 | ||||||
| Unvested Options | ||||||||||||
| Total Unvested Options | 17,199,571 | 16,299,402 | 7,847,207 | |||||||||
| Weighted Average Exercise Price | $ | 1.18 | $ | 1.21 | $ | 2.25 | ||||||
| Forfeiture rate used for this period ending | 11.764 | % | 11.074 | % | 10.673 | % | ||||||
| Options expected to vest | ||||||||||||
| Number of options expected to vest corrected by forfeiture | 16,446,707 | 15,553,067 | 7,009,645 | |||||||||
| Unrecognized share-based compensation expense | $ | 9,655,125 | $ | 8,787,636 | $ | 3,014,397 | ||||||
| Weighted Average remaining contract life (Years) | 5.12 | 5.68 | 4.99 | |||||||||
| Exercises | ||||||||||||
| Total shares delivered/issued | 621,638 | 809,737 | 431,972 | |||||||||
| Weighted Average Exercise Price | $ | 0.75 | $ | 0.66 | $ | 1.00 | ||||||
| Intrinsic Value of Options Exercised | $ | 288,144 | $ | 306,883 | $ | 177,547 | ||||||
| 34 |
At December 31, 2014 the unrecognized expense portion of share-based awards granted to employees under the 2008 Plan was approximately $9,655,125, under the provisions of ASC 718. The future expensing takes place proportionally to the vesting associated with each stock-award, adjusted for cancellations, forfeitures and returns. The forfeiture rate was adjusted from 11.74% as per closing December 2013 to 11.8% as per closing December 2014 and the corresponding profit and loss effect has been accounted for in 2014.
Share-Based Compensation Expense
The Company recorded for the twelve months ended December 31, 2014, $3,888,275 of share-based compensation, of which $3,744,437 relate to the 2008 Plan and $143,838 relates to the issuance of restricted securities as defined in Rule 144 of the Securities Act and not issued under the 2008 Plan . For the comparable period in 2013 the expensing was in total $8,515,391, $8,439,391 for shares issued under the 2008 Plan and $76,000 for restricted shares under the Rule 144 of the Securities Act. In case of grant of options, the Company utilized the Black-Scholes valuation model for estimating the fair value of the stock-options at grant and subsequent expensing until the moment of vesting. The main reason for the twelve month decrease is caused by the grant and immediate vesting and therefore expensing of bonus options granted to employees as well as the options granted to the executive officers during 2013 which did not occur in 2014. During 2014, the number of restricted shares issued to a non-affiliate consultancy firm under the Rule 144 amounted to 300,000 and were valued at issuance for an amount of $271,350 and will be recognized as an expense in the Consolidated Statement of Comprehensive Loss in the line “Selling, general and administrative expenses” during the 36 months when the Company receives the services. As of December 31, 2014, $67,838 has been recognized in the Consolidated Statement of Comprehensive Loss, the remaining $76,000 stock-based compensation expense during 2014 relates to restricted shares issued in 2013 for consultancy services covering both 2013 and 2014. The Company recorded for the twelve months ending December 31, 2012, $6,302,141 in stock-based compensation expense for the 2008 Long-Term Incentive Plan, consisting of shares issued to directors and officers and employee option expensing.
Share-based Compensation Expense
| 2014 | 2013 | 2012 | ||||||||||
| Consultancy services | $ | 143,838 | $ | 76,000 | $ | - | ||||||
| Directors and officers (shares and options) | 315,830 | 4,510,240 | 1,141,812 | |||||||||
| Employee (options) | 3,428,607 | 3,929,151 | 5,160,329 | |||||||||
| $ | 3,888,275 | $ | 8,515,391 | $ | 6,302,141 | |||||||
| 35 |
Note 28. Income taxes
For financial statement purposes, loss before the income tax provision is divided amongst the following;
| 2014 | 2013 | 2012 | ||||||||||
| Domestic | $ | (9,725,694 | ) | $ | (14,549,839 | ) | $ | (6,574,394 | ) | |||
| Foreign | (11,919,292 | ) | (11,157,534 | ) | (16,268,406 | ) | ||||||
| Total loss before income tax provision | $ | (21,644,986 | ) | $ | (25,707,373 | ) | $ | (22,842,800 | ) | |||
The Company files income tax returns in the US federal jurisdiction and various state and foreign jurisdictions. The applicable statutory tax rates vary between none (zero) and 34%. However, because the Company and its subsidiaries have incurred annual corporate income tax losses since their inception, management has determined that it is more likely than not that the Company will not realize the benefits of its US and foreign net deferred tax assets. Therefore, the Company has recorded a full valuation allowance to reduce the net carrying amount of the deferred taxes to zero. The Company’s 2014 provision for income taxes relates to current foreign income tax amounting to $216,931 for the twelve month period ended December 31, 2014.
In the ordinary course of business the Company is subject to tax examinations in the jurisdictions in which it files tax returns. The Company’s statute of limitations for tax examinations is four years for federal and state purposes and four to six years in the major foreign jurisdictions in which the company files.
Income tax benefit/(expense) for each year is summarized as follows:
| December 31, 2014 | December 31, 2013 | December 31, 2012 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | - | $ | - | $ | - | ||||||
| State | - | - | - | |||||||||
| Foreign | (216,931 | ) | 200,301 | (289,136 | ) | |||||||
| (216,931 | ) | 200,301 | (289,136 | ) | ||||||||
| Deferred: | ||||||||||||
| Federal | - | - | - | |||||||||
| State | - | - | - | |||||||||
| Foreign | - | - | - | |||||||||
| Income tax (benefit)/ expense | $ | (216,931 | ) | $ | 200,301 | $ | (289,136 | ) | ||||
The following is a reconciliation of the provision for income taxes at the US federal statutory rate (34%) to the foreign income tax rate for the years ended:
| December 31, 2014 | December 31, 2013 | December 31, 2012 | ||||||||||
| Tax expense (credit) at statutory rate federal | 34 | % | 34 | % | 34 | % | ||||||
| State tax expense net of federal tax | - | - | - | |||||||||
| Foreign income tax rate difference | (7 | )% | (10.1 | )% | (8.4 | )% | ||||||
| Change in valuation allowance | (25.5 | )% | (24.3 | )% | (25.6 | )% | ||||||
| Other | 0 | % | 1.2 | % | 1.3 | % | ||||||
| Income tax (benefit)/ expense | $ | 1.5 | % | 0.8 | % | 1.3 | % | |||||
The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, are as follows:
| 2014 | 2013 | |||||||
| Deferred tax assets: | ||||||||
| Net Operating Losses | $ | 39,804,723 | $ | 35,701,315 | ||||
| Total gross deferred tax assets | 39,804,723 | 35,701,315 | ||||||
| Less: valuation allowance | (39,804,723 | ) | (35,701,315 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
| 36 |
As of December 31, 2014 and 2013, the Company had significant net operating losses carryforwards. The deferred tax assets have been offset by a full valuation allowance in 2014 and 2013 due to the uncertainty of realizing any tax benefit for such losses. Releases of the valuation allowances, if any, will be recognized through earnings.
As of December 31, 2014 and 2013, the Company had net federal and state operating loss carryforwards of approximately $40 million and $36 million, respectively. Federal and state net operating loss carry forwards in the US start to expire in 2018. The net operating loss carryforwards for foreign countries amounts to approximately $141 million. Losses in material foreign jurisdictions will begin to expire in 2014.
Section 382 of the Internal Revenue Code limits the use of net operating loss and tax credit carry forwards in certain situations where changes occur in the stock ownership of a company. In the event the Company has a change in ownership, utilization of the carry forward could be restricted.
The Company files income tax returns in the US federal jurisdiction and various state and foreign jurisdictions. Due to the net operating loss, all the tax years are open for tax examination. As of December 31, 2014 and 2013, the Company accrued an ASC 740-10 tax reserve of $0 and $0, respectively, for uncertain tax (benefits)/liability including interest and penalties. This provision was released as of December 31, 2013 because the issue was effectively settled and management determined that a reserve was no longer required.
The Company does not currently anticipate recording any amount for unrecognized tax benefits within the next 12 months. The following table summarizes the 2012 and 2013 activity related to the unrecognized tax benefits and related tax carry forward:
| Balance at December 31, 2012 | $ | 289,136 | ||
| Increases related to prior year tax positions | - | |||
| Decreases related to prior year tax positions | (289,136 | ) | ||
| Balance at December 31, 2013 | - | |||
| Increases related to prior year tax positions | - | |||
| Decreases related to prior year tax positions | - | |||
| Increases related to current year tax positions | - | |||
| Balance at December 31, 2014 | $ | - |
Note 29. Contingencies
Rescission of the Purchase Agreement of March 31, 2004 of New Times Navigation Limited.
As previously described in the Company´s 2004 Annual Report on Form 10-K filed with the SEC on April 1, 2005, on May 24, 2004, the Company issued 5,100,000 shares of restricted Common Stock to four stockholders of New Times Navigation Limited ("New Times"), valued at $683,400 (the “2004 Purchase Transaction”). On December 10, 2004, New Times and the Company mutually agreed to terminate the 2004 Purchase Transaction. The Company returned the shares that were delivered to New Times to the Company´s shareholders and received back 90,100 of the 204,000 shares of its Common Stock that were issued under the 2004 Purchase Transaction. In addition, the Company had issued 37 unsecured convertible promissory notes for a total amount of $3,600,000 as part of the 2004 Purchase Transaction. At the Company´s request, 21 of the unsecured convertible promissory notes were returned to the Company for a total value of $2,040,000. On April 28, 2006, the Company instituted proceedings to seek relief from the High Court of the Hong Kong Special Administrative Region against the holders of the unreturned shares to return the remaining 113,900 common shares (valued at $381,565) and the remaining 18 unsecured convertible promissory notes, representing a total amount of $1,740,000, and to rescind the purchase agreement underlying the 2004 Purchase Transaction. Since the inception of the proceedings, the parties have undertaken discovery efforts in order to resolve this matter, which have included long periods of inactivity in the process. The outcome of this proceeding and the amount of any potential recovery, if any, cannot be predicted. Considering the significant costs associated with the proceeding and the inherent uncertainty in the outcome of the proceeding and the potential recovery, if any, management concluded that it is in the best interest of the Company not to pursue the matter further to avoid incurring additional fees and expenses.
Other.
The Company is involved in various claims and lawsuits incidental to our business. In the opinion of management, the ultimate resolution of such claims and lawsuits will not have a material effect on our financial position, liquidity, or results of operations.
| 37 |
Note 30. Geographic Information
Twelve months ended December 31, 2014
| Europe | Other foreign countries | Total | ||||||||||
| Revenues from unaffiliated customers | $ | 13,490,366 | $ | 6,866,081 | $ | 20,356,447 | ||||||
| Identifiable assets | $ | 36,867,194 | $ | 8,053,801 | $ | 44,920,998 | ||||||
Twelve months ended December 31, 2013
| Europe | Other foreign countries | Total | ||||||||||
| Revenues from unaffiliated customers (restated) | $ | 15,933,666 | $ | 3,518,138 | $ | 19,451,804 | ||||||
| Identifiable assets | $ | 31,948,966 | $ | 10,486,442 | $ | 42,435,408 | ||||||
Twelve months ended December 31, 2012
| Europe | Other foreign countries | Total | ||||||||||
| Revenues from unaffiliated customers | $ | 29,053,151 | $ | 149,037 | $ | 29,202,188 | ||||||
| Identifiable assets | $ | 35,682,490 | $ | 1,793,051 | $ | 37,475,541 | ||||||
Note 31. Concentrations
Financial instruments that potentially subject us to concentrations of credit risk consist of accounts receivable and unbilled receivables. Those customers that comprised 10% or more of our revenue, accounts receivable and unbilled receivables are summarized as follows:
For the year ended December 31, 2014, the Company had two customers that accounted for 50% and 25% of total revenue. For the year ended December 31, 2013, the Company had two customers that accounted for 50% and 9% of total revenue.
Note 32. Related Party Transactions
On March 17, 2014, a warrant holder affiliated with the Company exercised certain of its warrants to purchase an aggregate of 5,332,383 shares of the Company’s common stock at an exercise price of $0.70 per share, for gross proceeds to the Company of approximately $3.7 million. The warrants were originally issued in 2009 with an exercise price of $1.00 per share. A Special Committee of the Company’s board of directors authorized the reduction of the exercise price in order to induce the holder to immediately exercise the warrant for cash providing additional liquidity to the Company, which reduction was subsequently ratified by the Company’s board of directors.
On May 29, 2014, the Board appointed Yves van Sante to fill the vacancy created by the resignation of Mr. Dejager, effective as of June 1, 2014. Mr. van Sante is expected to stand for election with the other directors at the Company’s 2015 annual meeting. Mr. van Sante previously served as a director of the Company from October 2006 to July 2011. From July 2011 to May 2014, Mr. van Sante served as a Board observer of the Company. In 2013, Mr. van Sante was entitled to receive $80,000 for being a Board observer, a portion of which he received in shares of the Company’s common stock that was paid to QAT Investments (“QAT I”) and QAT II Investments SA (“QAT II”), with the remainder paid to QAT I and QAT II in cash. Mr. van Sante is Chief Executive Officer and a director of QAT I and QAT II. The Company is a party to consulting agreements with each of QAT I and QAT II.
On July 15, 2014, the Company entered into a Note Conversion Letter Agreement (the “Conversion Agreement”) and a Warrant Amendment Letter Agreement (the “Warrant Amendment”) with Moncarey to, among other things,
| · | immediately convert the Convertible Note into a number of shares of Common Stock equal to the quotient of the Outstanding Balance by a reduced Conversion Price of $0.70 per share or 4,238,501 shares of the Company’s Common Stock; |
| 38 |
| · | amend the Moncarey Warrant to reduce the Exercise Price to $0.70 per share for the remainder of the term; and |
| · | issue a warrant to Moncarey to purchase 500,000 shares of restricted Common Stock (the “July Warrant” and together with the Conversion Agreement and the Warrant amendment, collectively, the “Transaction”). |
The July Warrant is exercisable any time after January 15, 2015 at an exercise price of $0.9228 per share (the closing price of the Company’s Common Stock immediately preceding the date the July Warrant was issued). The term of the July Warrant expires on July 15, 2019.
The Audit and Finance Committee of the Company’s Board of Directors authorized the Transaction in order to immediately satisfy the Company’s obligations under the Convertible Note. The Transaction was subsequently ratified by the Company’s Board of Directors.
The securities underlying the Warrant Amendment, July Warrant and the shares of Common Stock issuable upon conversion of the Convertible Note pursuant to the Conversion Agreement have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), or any state securities laws, and were offered and sold only in Europe to an “accredited investor” (as defined in Rule 501(a) of the Securities Act) pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act and Regulation D promulgated pursuant thereto.
Note 33: Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data (unaudited) is as follows:
| Q1 2014 | Q2 2014 | Q3 2014 | Q4 2014 | |||||||||||||
| (Restated and reclassified) | (Restated and reclassified) | (Restated and reclassified) | ||||||||||||||
| REVENUES * | $ | 5,384,265 | $ | 5,072,440 | $ | 4,445,239 | $ | 5,454,503 | ||||||||
| COST AND OPERATING EXPENSES | ||||||||||||||||
| Cost of service (exclusive of depreciation and amortization shown separately below)** | 1,635,972 | 1,848,687 | 1,565,054 | 1,638,961 | ||||||||||||
| Product development** | 1,711,817 | 2,280,532 | 1,707,102 | 1,529,212 | ||||||||||||
| Sales and marketing** | 563,835 | 664,807 | 555,519 | 609,515 | ||||||||||||
| General and administrative** | 3,047,947 | 3,467,339 | 3,248,243 | 2,839,072 | ||||||||||||
| Depreciation and amortization of intangibles assets | 2,008,214 | 1,928,392 | 1,900,251 | 2,383,362 | ||||||||||||
| Total cost and operating expenses | 8,967,785 | 10,189,757 | 8,976,169 | 9,000,122 | ||||||||||||
| LOSS FROM OPERATIONS * | (3,583,520 | ) | (5,117,317 | ) | (4,530,930 | ) | (3,545,619 | ) | ||||||||
| OTHER INCOME (EXPENSE) | (1,502,748 | ) | (1,335,095 | ) | (760,695 | ) | (1,269,062 | ) | ||||||||
| NET LOSS * | (5,221,705 | ) | (6,450,203 | ) | (5,246,687 | ) | (4,943,322 | ) | ||||||||
| ACCOUNTS RECEIVABLE* | 5,033,667 | 6,924,756 | 5,847,424 | 8,877,213 | ||||||||||||
| TOTAL ASSETS* | 44,276,339 | 43,429,393 | 39,701,730 | 44,920,998 | ||||||||||||
| DEFERRED REVENUE* | 3,446,294 | 5,175,014 | 8,384,555 | 11,247,642 | ||||||||||||
| STOCKHOLDERS EQUITY* | 19,807,174 | 15,168,384 | 13,060,787 | 10,612,567 | ||||||||||||
* items restated
** items reclassified
| 39 |
| Q1 2013 | Q2 2013 | Q3 2013 | Q4 2013 | |||||||||||||
| (Restated and reclassified) | (Restated and reclassified) | (Restated and reclassified) | (Restated and reclassified) | |||||||||||||
| REVENUES * | $ | 6,240,114 | $ | 3,564,249 | $ | 4,123,794 | $ | 5,523,647 | ||||||||
| COST AND OPERATING EXPENSES | ||||||||||||||||
| Cost of service (exclusive of depreciation and amortization shown separately below)** | 3,960,803 | 2,144,899 | 1,548,576 | 1,735,019 | ||||||||||||
| Product development** | 1,349,623 | 1,819,480 | 1,354,105 | 1,568,276 | ||||||||||||
| Sales and marketing** | 722,952 | 882,418 | 623,644 | 910,002 | ||||||||||||
| General and administrative** | 3,422,873 | 4,091,492 | 2,996,718 | 4,551,557 | ||||||||||||
| Depreciation and amortization of intangibles assets | 1,319,988 | 1,836,231 | 1,543,687 | 1,901,340 | ||||||||||||
| Total cost and operating expenses | 10,776,239 | 10,774,520 | 8,066,730 | 10,666,194 | ||||||||||||
| LOSS FROM OPERATIONS * | (4,536,125 | ) | (7,210,271 | ) | (3,942,936 | ) | (5,142,547 | ) | ||||||||
| OTHER INCOME (EXPENSE) | (958,183 | ) | (1,912,186 | ) | (322,345 | ) | (1,682,781 | ) | ||||||||
| NET LOSS * | (5,494,308 | ) | (9,122,457 | ) | (4,306,781 | ) | (6,583,527 | ) | ||||||||
| ACCOUNTS RECEIVABLE* | 4,502,499 | 2,865,751 | 3,194,819 | 5,094,847 | ||||||||||||
| TOTAL ASSETS* | 34,479,340 | 39,557,150 | 45,474,367 | 42,435,408 | ||||||||||||
| DEFERRED REVENUE* | 637,922 | 1,726,136 | 2,317,364 | 2,636,156 | ||||||||||||
| STOCKHOLDERS EQUITY* | 15,827,867 | 17,407,605 | 21,046,942 | 20,359,617 | ||||||||||||
* items restated
** items reclassified
Note 34. Subsequent Events
On March 5, 2015 the Company filed an 8-K regarding discussions with regard to the five-year agreement between the Company and Grupo lusacell, S.A. (“Iusacell”) dated September 10, 2013 (the “Iusacell Agreement”). On March 18, 2015, the Company received a settlement proposal from Iusacell/AT&T in exchange for a certain amount of cash payment, consisting of outstanding payables and some additional compensation and the termination of the Iusacell Agreement. Management believes the proposal is due to the acquisition of Iusacell by AT&T, which wants to make use of their customary system solutions. Presently management is evaluating the settlement proposal of Iusacell/AT&T.
On March 26, 2015, the Company received a letter from Atalaya Capital Management LP (the “Agent”), the agent for Corbin Mezzanine Fund I, L. P. (the “Lender”) referencing that certain Credit Agreement by and among the Company, the Lender and the Agent dated November 17, 2014. The letter indicated that as a result of the termination of the Iusacell Agreement, certain events of default as defined in the Credit Agreement have occurred. The Agent notified the Company that effective March 18, 2015 and for so long as an event of default shall be continuing, interest shall accrue and be payable by the Company in cash at the default rate as defined in the Credit Agreement. The Agent and the Lender indicated in the letter that they will continue to monitor the default situation and reserve all their respective rights and remedies under the Credit Agreement.
As a result of the above the Company is in discussions with Atalaya to discuss the AT&T/Iusacell settlement – including payment of the receivables - together with the re-organization plan the Company has initiated in order ensure that sufficient funds will be available for the Company to continue to carry out is business plans. The company estimates to conclude on this in the near future.
Note 35. Restatement of previously issued financial statements and financial information
Background on the Restatement
The Company underwent a transition process starting in 2012 moving from the Landline business to the Mobile and Security services business. The revenue model associated with the Mobile and Security business often involves delivery of multi-element arrangements. At the end of 2014, when the transition was completed, a comprehensive review was started of the revenue recognition policies applicable to the Companies mobile and security business. The Company engaged professional advisors in such comprehensive review.
| 40 |
On March 31, 2015, the Audit Committee of the Board of Directors concluded that our historical financial statements for the fiscal year ended December 31, 2013, each of three quarters in 2013, and each of the first three quarters in 2014, should no longer be relied upon due to an error in the application of revenue recognition policies to our mobile and security business and should be restated.
The restatement is a result of the failure to identify all delivery obligations associated with multi-element revenue arrangements and an improper interpretation of standalone value of delivered elements. The revenue recognition errors identified by the Company, do not affect the total revenues ultimately earned or to be earned, or the amount or timing of cash received or to be received from individual customer arrangements.
As a result of our restatement and in accordance with GAAP, revenue that had originally been recognized in 2013 is now being recognized ratably over an extended timeframe. The amount of revenue earned or to be earned over the entire period of recognition essentially remains unchanged from the amount we historically recognized, however the timing of when and the amount of revenue recognized for those periods discussed above were restated and certain amounts of revenue were restated. There was neither change to the cash characteristics of the transactions being restated nor the Company’s liquidity directly relating to these transactions. As a result of the restatement, the balance sheet reflects a significant increase in deferred revenue, which will be recognized in revenue over a number of years.
Effects of the restatement
The net impact of the restatement decreased previously reported revenue of $22,827,261 by $3,375,457 or 15%, to $19,451,804, for the twelve month period ended December 31, 2013. In the same period of time, deferred revenue increased from $142,731 by $2,493,425 or 1,747% to $2,636,154 (split into short and long term portions in the face of the balance sheet). Deferred revenue will be amortized during the lifetime of the customer relationship, which has been defined to be five years. Accounts receivable decreased from $5,976,879 by $882,032 or 15%, to $5,094,847 in the same period in 2013. The restatement increased net loss by approximately $3.4 million for the year ended December 31, 2013.
Also, the Company has reclassified certain staff costs included in SG&A to Cost of Service, and it disaggregated the function SG&A into Selling and Marketing, General and Administrative and Product Development. The reclassification of operating costs are material to the annual periods ended December 31, 2012, 2013, the interim periods therein, and to the interim periods within fiscal year 2014. These expenses have been reclassified in the Consolidated Statements of Operations for fiscal years 2013 and 2012 to conform to the current period presentation.
The increase in the reported net loss before income taxes primarily consists of the deferred recognition of revenue under the associated Iusacell, Vodafone and Zain contracts.
The following presents the effects of the restatement adjustments and reclassifications on the Company’s previously reported consolidated balance sheet, statements of operations, and statement of cash flows for the quarters ended September 30, 2014, June 30, 2014, March 31, 2014, the fiscal year ended December 31, 2013, and the quarters ended September 30, 2013, June 30, 2013 and March 31, 2013.
| 41 |
ELEPHANT TALK COMMUNICATION CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2013
| December 31, | December 31, | December 31, | ||||||||||
| 2013 | 2013 | 2013 | ||||||||||
| As previously reported | Restatement adjustments | Restated | ||||||||||
| ASSETS | ||||||||||||
| CURRENT ASSETS | ||||||||||||
| Cash and cash equivalents | $ | 1,252,315 | $ | - | $ | 1,252,315 | ||||||
| Restricted cash | 191,600 | - | 191,600 | |||||||||
| Accounts receivable, net of an allowance for doubtful accounts of $7,693 at December 31, 2013 | 5,976,879 | (882,032 | ) | 5,094,847 | ||||||||
| Prepaid expenses and other current assets | 2,254,213 | - | 2,254,213 | |||||||||
| Total current assets | 9,675,007 | (882,032 | ) | 8,792,975 | ||||||||
| NON-CURRENT ASSETS | ||||||||||||
| OTHER ASSETS | 1,412,408 | - | 1,412,408 | |||||||||
| PROPERTY AND EQUIPMENT, NET | 19,786,122 | - | 19,786,122 | |||||||||
| INTANGIBLE ASSETS, NET | 8,670,677 | - | 8,670,677 | |||||||||
| GOODWILL | 3,773,226 | - | 3,773,226 | |||||||||
| $ | 43,317,440 | $ | (882,032 | ) | $ | 42,435,408 | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
| CURRENT LIABILITIES | ||||||||||||
| Overdraft | $ | 391,436 | $ | - | $ | 391,436 | ||||||
| Accounts payable and customer deposits | 2,586,662 | - | 2,586,662 | |||||||||
| Obligations under capital leases (current portion) | 1,302,838 | - | 1,302,838 | |||||||||
| Deferred Revenue | 142,731 | 129,036 | 271,767 | |||||||||
| Accrued expenses and other payables | 4,961,303 | - | 4,961,303 | |||||||||
| Loans payable | 962,654 | - | 962,654 | |||||||||
| 10% Related Party Loan (net of Debt Discount of $1,719,585 at December 31, 2013) | 1,033,719 | - | 1,033,719 | |||||||||
| Total current liabilities | 11,381,343 | 129,036 | 11,510,379 | |||||||||
| LONG TERM LIABILITIES | ||||||||||||
| 10% 3rd Party Loan (net of Debt Discount of $726,695 at December, 2013) | 4,779,913 | - | 4,779,913 | |||||||||
| Warrant liabilities | 1,973,534 | - | 1,973,534 | |||||||||
| Non-current portion of obligation under capital leases | 845,529 | - | 845,529 | |||||||||
| Non-current portion of deferred revenue | - | 2,364,389 | 2,364,389 | |||||||||
| Loan from joint venture partner | 602,047 | - | 602,047 | |||||||||
| Total long term liabilities | 8,201,023 | 2,364,389 | 10,565,412 | |||||||||
| Total liabilities | 19,582,366 | 2,493,425 | 22,075,791 | |||||||||
| STOCKHOLDERS' EQUITY | ||||||||||||
| Preferred Stock $0.00001 par value, 50,000,000 shares authorized, 0 issued and outstanding | - | - | - | |||||||||
| Common Stock $0.00001 par value, 250,000,000 shares authorized, 140,466,801 shares issued and outstanding as of December 31, 2013 | 248,712,321 | - | 248,712,321 | |||||||||
| Accumulated other comprehensive income (loss) | 269,869 | - | 269,869 | |||||||||
| Accumulated deficit | (225,391,922 | ) | (3,375,457 | ) | (228,767,379 | ) | ||||||
| Elephant Talk Communications, Corp. stockholders' equity | 23,590,268 | (3,375,457 | ) | 20,214,811 | ||||||||
| NON-CONTROLLING INTEREST | 144,806 | - | 144,806 | |||||||||
| Total stockholders' equity | 23,735,074 | (3,375,457 | ) | 20,359,617 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 43,317,440 | $ | (882,032 | ) | $ | 42,435,408 | |||||
| 42 |
ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
FOR THE YEAR ENDED DECEMBER 31, 2013
| Year end December 31, 2013 | ||||||||||||||||
| As previously reported | Restatement adjustments | Reclassifications | Restated | |||||||||||||
| REVENUES | $ | 22,827,261 | $ | (3,375,457 | ) | $ | - | $ | 19,451,804 | |||||||
| COST AND OPERATING EXPENSES | ||||||||||||||||
| Cost of service | 7,149,153 | - | 2,240,144 | 9,389,297 | ||||||||||||
| Product development | - | - | 6,091,484 | 6,091,484 | ||||||||||||
| Sales and marketing | - | - | 3,139,015 | 3,139,015 | ||||||||||||
| General and administrative | 26,533,283 | - | (11,470,643 | ) | 15,062,640 | |||||||||||
| Depreciation and amortization of intangibles assets | 6,601,246 | - | - | 6,601,246 | ||||||||||||
| Total cost and operating expenses | 40,283,682 | - | - | 40,283,682 | ||||||||||||
| LOSS FROM OPERATIONS | (17,456,421 | ) | (3,375,457 | ) | - | (20,831,878 | ) | |||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Interest income | 103,627 | - | - | 103,627 | ||||||||||||
| Interest expense | (1,064,999 | ) | - | - | (1,064,999 | ) | ||||||||||
| Interest expense related to debt discount and conversion feature | (2,069,649 | ) | - | - | (2,069,649 | ) | ||||||||||
| Change in fair value of conversion feature | 232,267 | - | - | 232,267 | ||||||||||||
| Changes in fair value of warrant liabilities | 479,322 | - | - | 479,322 | ||||||||||||
| Gain / (Loss) on Extinguishment of Debt | (2,005,100 | ) | - | - | (2,005,100 | ) | ||||||||||
| Other income & (expense), net | (302,112 | ) | - | - | (302,112 | ) | ||||||||||
| Amortization of deferred financing costs | (248,851 | ) | - | - | (248,851 | ) | ||||||||||
| Total other income (expense) | (4,875,495 | ) | - | - | (4,875,495 | ) | ||||||||||
| LOSS BEFORE (BENEFIT) PROVISION FOR INCOME TAXES | (22,331,916 | ) | (3,375,457 | ) | - | (25,707,373 | ) | |||||||||
| (Benefit) / provision for income taxes | (200,301 | ) | - | - | (200,301 | ) | ||||||||||
| NET LOSS | (22,131,615 | ) | (3,375,457 | ) | - | (25,507,072 | ) | |||||||||
| OTHER COMPREHENSIVE (LOSS) INCOME | ||||||||||||||||
| Foreign currency translation gain (loss) | 1,001,959 | - | - | 1,001,959 | ||||||||||||
| COMPREHENSIVE LOSS | $ | (21,129,656 | ) | $ | (3,375,457 | ) | $ | - | $ | (24,505,113 | ) | |||||
| Net loss per common share and equivalents - basic and diluted | $ | (0.17 | ) | $ | - | $ | - | $ | (0.20 | ) | ||||||
| Weighted average shares outstanding during the period - basic and diluted | 126,259,634 | - | - | 126,259,634 | ||||||||||||
| 43 |
ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2013
| Year ended December 31, 2013 | ||||||||||||
| As previously reported | Restatement adjustments | Restated | ||||||||||
| restated | ||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net loss | $ | (22,131,615 | ) | $ | (3,375,457 | ) | $ | (25,507,072 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation and amortization | 6,601,246 | - | 6,601,246 | |||||||||
| Provision for doubtful accounts | 22,005 | - | 22,005 | |||||||||
| Stock based compensation | 8,515,391 | - | 8,515,391 | |||||||||
| Change in fair value of conversion feature | (232,267 | ) | - | (232,267 | ) | |||||||
| Change in fair value of warrant liability | (479,322 | ) | - | (479,322 | ) | |||||||
| Amortization of deferred financing costs | 248,851 | - | 248,851 | |||||||||
| Interest expense relating to debt discount and conversion feature | 2,069,649 | - | 2,069,649 | |||||||||
| Unrealized foreign currency translation gain (loss) | 302,112 | - | 302,112 | |||||||||
| (Profit) / Loss on Extinguishment of Debt | 2,005,100 | - | 2,005,100 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Decrease (increase) in restricted cash | 1,052,257 | - | 1,052,257 | |||||||||
| Decrease (increase) in accounts receivable | (82,763 | ) | 882,032 | 799,269 | ||||||||
| Decrease (increase) in prepaid expenses, deposits and other assets | (465,026 | ) | - | (465,026 | ) | |||||||
| Increase (decrease) in accounts payable and customer deposits | (3,415,032 | ) | - | (3,415,032 | ) | |||||||
| Increase (decrease) in deferred revenue | (118,786 | ) | 2,493,424 | 2,374,638 | ||||||||
| Increase (decrease) in accrued expenses and other payables | 140,514 | - | 140,514 | |||||||||
| Net cash provided by (used in) operating activities | (5,967,686 | ) | - | (5,967,686 | ) | |||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Purchases of property and equipment | (5,898,169 | ) | - | (5,898,169 | ) | |||||||
| Loan to third party | (163,542 | ) | - | (163,542 | ) | |||||||
| Net cash used in investing activities | (6,061,711 | ) | - | (6,061,711 | ) | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Proceeds from 12% Unsecured Loan from Related Party | 1,290,790 | - | 1,290,790 | |||||||||
| Proceeds from Share Purchase Agreement – Unregistered securities | 225,000 | - | 225,000 | |||||||||
| Proceeds from Share Purchase Agreement - Registered direct | 7,500,000 | - | 7,500,000 | |||||||||
| Proceeds from Share Purchase Agreement Related Party | 4,500,000 | - | 4,500,000 | |||||||||
| Proceeds from 10% Affiliate Loan | 2,652,600 | - | 2,652,600 | |||||||||
| Proceeds from 10% 3rd Party Loan | 5,305,200 | - | 5,305,200 | |||||||||
| Payments on 8% convertible note installment payments and interest | (8,642,149 | ) | - | (8,642,149 | ) | |||||||
| Exercise of warrants & options | 581,142 | - | 581,142 | |||||||||
| Cash from Escrow account for principal and interest payments on 8% Convertible Notes | 742,427 | - | 742,427 | |||||||||
| Trade note payable | (512,732 | ) | - | (512,732 | ) | |||||||
| Payment of placement & solicitation fees | (1,362,124 | ) | - | (1,362,124 | ) | |||||||
| Net cash provided by financing activities | 12,280,154 | - | 12,280,154 | |||||||||
| EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | (231,710 | ) | - | (231,710 | ) | |||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 19,047 | - | 19,047 | |||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD | 1,233,268 | - | 1,233,268 | |||||||||
| CASH AND CASH EQUIVALENTS, END OF THE PERIOD | $ | 1,252,315 | $ | - | 1,252,315 | |||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||||||
| Cash paid during the period for interest | $ | 745,096 | $ | - | $ | 745,096 | ||||||
| Increase in Share Capital due to Telnicity Acquisition | 1,180,000 | - | 1,180,000 | |||||||||
| Increase in Share Capital for third party settlement | 468,000 | - | 468,000 | |||||||||
| Cash paid during the period for income taxes | 45,930 | - | 45,930 | |||||||||
| Purchase of property and equipment under capital lease agreements | 2,620,182 | - | 2,620,182 | |||||||||
| 44 |
Restated quarterly financial statements (Unaudited)
The prior period unaudited quarterly financial statements included below have been restated to correct the manner in which we recognize revenue related to our multiple-element arrangements are described above.
Condensed consolidated balance sheets (unaudited)
| September 30, | Restatement | September 30, | ||||||||||
| 2014 | adjustment | 2014 | ||||||||||
| (UNAUDITED) | Unaudited | Unaudited Restated | ||||||||||
| ASSETS | ||||||||||||
| CURRENT ASSETS | ||||||||||||
| Cash and cash equivalents | $ | 1,176,650 | $ | - | $ | 1,176,650 | ||||||
| Restricted cash | 169,536 | - | 169,536 | |||||||||
| Accounts receivable, net of an allowance for doubtful accounts of $0 at September 30, 2014 | 6,754,447 | (907,023 | ) | 5,847,424 | ||||||||
| Prepaid expenses and other current assets | 2,319,310 | - | 2,319,310 | |||||||||
| Total current assets | 10,419,943 | (907,023 | ) | 9,512,920 | ||||||||
| NON-CURRENT ASSETS | ||||||||||||
| OTHER ASSETS | 1,093,977 | - | 1,093,977 | |||||||||
| PROPERTY AND EQUIPMENT, NET | 19,603,707 | - | 19,603,707 | |||||||||
| INTANGIBLE ASSETS, NET | 6,000,884 | - | 6,000,884 | |||||||||
| GOODWILL | 3,490,242 | - | 3,490,242 | |||||||||
| TOTAL ASSETS | $ | 40,608,753 | $ | (907,023 | ) | $ | 39,701,730 | |||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
| CURRENT LIABILITIES | ||||||||||||
| Overdraft | $ | 425,144 | $ | - | $ | 425,144 | ||||||
| Accounts payable and customer deposits | 2,063,304 | - | 2,063,304 | |||||||||
| Obligations under capital leases (current portion) | 1,828,083 | - | 1,828,083 | |||||||||
| Deferred Revenue | 127,456 | 468,256 | 595,712 | |||||||||
| Accrued expenses and other payables | 5,804,999 | - | 5,804,999 | |||||||||
| Loans payable | 961,550 | - | 961,550 | |||||||||
| Total current liabilities | 11,210,536 | 468,256 | 11,678,792 | |||||||||
| LONG TERM LIABILITIES | ||||||||||||
| 2013 10% 3rd Party Loan (net of Debt Discount of $410,853 at September 30, 2014) | 4,663,227 | - | 4,663,227 | |||||||||
| Warrant liabilities | 2,248,169 | - | 2,248,169 | |||||||||
| Non-current portion of obligation under capital leases | 261,912 | - | 261,912 | |||||||||
| Non-current portion of deferred revenue | - | 7,788,843 | 7,788,843 | |||||||||
| Total long term liabilities | 7,173,308 | 7,788,843 | 14,962,151 | |||||||||
| Total liabilities | 18,383,844 | 8,257,099 | 26,640,943 | |||||||||
| Commitments and Contingencies | ||||||||||||
| STOCKHOLDERS' EQUITY | ||||||||||||
| Preferred Stock $0.00001 par value, 50,000,000 shares authorized, 0 issued and outstanding | - | - | - | |||||||||
| Common Stock $0.00001 par value, 250,000,000 shares authorized, 151,312,189 issued and outstanding as of September 30, 2014 | 260,616,570 | - | 260,616,570 | |||||||||
| Accumulated other comprehensive income (loss) | (2,003,871 | ) | - | (2,003,871 | ) | |||||||
| Accumulated deficit | (236,521,852 | ) | (9,164,122 | ) | (245,685,974 | ) | ||||||
| Elephant Talk Communications, Corp. stockholders' equity | 22,090,847 | (9,164,122 | ) | 12,926,725 | ||||||||
| NON-CONTROLLING INTEREST | 134,062 | - | 134,062 | |||||||||
| Total stockholders' equity | 22,224,909 | (9,164,122 | ) | 13,060,787 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 40,608,753 | $ | (907,023 | ) | $ | 39,701,730 | |||||
| 45 |
| For the three month | For the nine month | |||||||||||||||||||||||||||||||
| period ended | period ended | |||||||||||||||||||||||||||||||
| September 30, 2014 | Restatement adjustments | Re- classifications | Restated | September 30, 2014 | Restatement adjustments | Re- classifications | Restated | |||||||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||||||||||||||
| REVENUES | $ | 7,298,988 | $ | (2,853,749 | ) | $ | - | $ | 4,445,239 | $ | 20,690,609 | $ | (5,788,665 | ) | $ | - | $ | 14,901,944 | ||||||||||||||
| COST AND OPERATING EXPENSES | ||||||||||||||||||||||||||||||||
| Cost of service (exclusive of depreciation and amortization shown separately below) | 848,771 | - | 716,283 | 1,565,054 | 2,660,816 | - | 2,388,897 | 5,049,713 | ||||||||||||||||||||||||
| Product development | - | - | 1,707,102 | 1,707,102 | - | - | 5,699,451 | 5,699,451 | ||||||||||||||||||||||||
| Sales and marketing | - | - | 555,519 | 555,519 | - | - | 1,784,161 | 1,784,161 | ||||||||||||||||||||||||
| General and administrative | 6,227,147 | - | (2,978,904 | ) | 3,248,243 | 19,636,038 | - | (9,872,509 | ) | 9,763,529 | ||||||||||||||||||||||
| Depreciation and amortization | 1,900,251 | - | - | 1,900,251 | 5,836,857 | - | - | 5,836,857 | ||||||||||||||||||||||||
| Total cost and operating expenses | 8,976,169 | - | - | 8,976,169 | 28,133,711 | - | - | 28,133,711 | ||||||||||||||||||||||||
| LOSS FROM OPERATIONS | (1,677,181 | ) | (2,853,749 | ) | - | (4,530,930 | ) | (7,443,102 | ) | (5,788,665 | ) | - | (13,231,767 | ) | ||||||||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||||||||||
| Interest income | 36,684 | - | - | 36,684 | 93,840 | - | - | 93,840 | ||||||||||||||||||||||||
| Interest expense | (260,295 | ) | - | - | (260,295 | ) | (895,453 | ) | - | - | (895,453 | ) | ||||||||||||||||||||
| Interest expense related to debt discount and conversion feature | (1,287,717 | ) | - | - | (1,287,717 | ) | (3,197,749 | ) | - | - | (3,197,749 | ) | ||||||||||||||||||||
| Changes in fair value of warrant liabilities | (103,311 | ) | - | - | (103,311 | ) | (274,635 | ) | - | - | (274,635 | ) | ||||||||||||||||||||
| Gain / (Loss) on Extinguishment of Debt | 626,534 | - | - | 626,534 | 626,108 | - | - | 626,108 | ||||||||||||||||||||||||
| Other income & (expense), net | 301,199 | - | - | 301,199 | 372,597 | - | - | 372,597 | ||||||||||||||||||||||||
| Amortization of deferred financing costs | (73,789 | ) | - | - | (73,789 | ) | (323,246 | ) | - | - | (323,246 | ) | ||||||||||||||||||||
| Total other income (expense) | (760,695 | ) | - | - | (760,695 | ) | (3,598,538 | ) | - | - | (3,598,538 | ) | ||||||||||||||||||||
| LOSS BEFORE (BENEFIT) PROVISION FOR INCOME TAXES | (2,437,876 | ) | (2,853,749 | ) | - | (5,291,625 | ) | (11,041,640 | ) | (5,788,665 | ) | - | (16,830,305 | ) | ||||||||||||||||||
| (Benefit) / provision for income taxes | (44,938 | ) | - | - | (44,938 | ) | 88,290 | - | - | 88,290 | ||||||||||||||||||||||
| NET LOSS | (2,392,938 | ) | (2,853,749 | ) | - | (5,246,687 | ) | (11,129,930 | ) | (5,788,665 | ) | - | (16,918,595 | ) | ||||||||||||||||||
| OTHER COMPREHENSIVE (LOSS) INCOME | ||||||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | (2,273,740 | ) | - | - | (2,273,740 | ) | (2,424,192 | ) | - | - | (2,424,192 | ) | ||||||||||||||||||||
| COMPREHENSIVE LOSS | $ | (4,666,678 | ) | $ | (2,853,749 | ) | $ | - | $ | (7,520,427 | ) | $ | (13,554,122 | ) | $ | (5,788,665 | ) | $ | - | $ | (19,342,787 | ) | ||||||||||
| Net loss per common share and equivalents - basic and diluted | $ | (0.02 | ) | $ | - | $ | - | $ | (0.04 | ) | $ | (0.08 | ) | $ | - | $ | - | $ | (0.12 | ) | ||||||||||||
| Weighted average shares outstanding during the period - basic and diluted | 149,468,618 | - | - | 149,468,618 | 145,929,455 | - | - | 145,929,455 | ||||||||||||||||||||||||
| 46 |
| Nine month period | ||||||||||||
| ended September 30, 2014 | Restatement | Restated | ||||||||||
| Unaudited | Unaudited | |||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net loss | $ | (11,129,930 | ) | $ | (5,788,665 | ) | $ | (16,918,595 | ) | |||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||
| Depreciation and amortization | 5,836,857 | - | 5,836,857 | |||||||||
| Provision for doubtful accounts | (10,661 | ) | - | (10,661 | ) | |||||||
| Provision for income taxes | - | - | - | |||||||||
| Stock based compensation | 3,536,680 | - | 3,536,680 | |||||||||
| Change in fair value of conversion feature | - | - | - | |||||||||
| Change in fair value of warrant liability | 274,635 | - | 274,635 | |||||||||
| Amortization of deferred financing costs | 323,246 | - | 323,246 | |||||||||
| Interest expense relating to debt discount and conversion feature | 3,197,749 | - | 3,197,749 | |||||||||
| Unrealized foreign currency translation gain (loss) | (501,571 | ) | - | (501,571 | ) | |||||||
| Extinguishment of Debt | (626,108 | ) | - | (626,108 | ) | |||||||
| Changes in operating assets and liabilities: | - | - | ||||||||||
| Decrease (increase) in accounts receivable | (1,366,947 | ) | (2,468,434 | ) | (3,835,381 | ) | ||||||
| Decrease (increase) in prepaid expenses, deposits and other assets | (101,971 | ) | - | (101,971 | ) | |||||||
| Increase (decrease) in accounts payable and customer deposits | 362,685 | - | 362,685 | |||||||||
| Increase (decrease) in deferred revenue | (11,931 | ) | 8,257,099 | 8,245,168 | ||||||||
| Increase (decrease) in accrued expenses and other payables | 1,493,594 | - | 1,493,594 | |||||||||
| Increase (decrease) in non-cash accrued expenses related to extinguishment of Debt | (426 | ) | - | (426 | ) | |||||||
| Net cash provided by (used in) operating activities | 1,275,901 | - | 1,275,901 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Purchases of property and equipment | (5,611,023 | ) | - | (5,611,023 | ) | |||||||
| Loan to third party | - | - | - | |||||||||
| Net cash used in investing activities | (5,611,023 | ) | - | (5,611,023 | ) | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Financing related fees | (125,793 | ) | - | (125,793 | ) | |||||||
| Payments on 8% Senior Secured Convertible Note installment payments and interest | - | - | - | |||||||||
| Exercise of warrants and options | 4,286,576 | - | 4,286,576 | |||||||||
| Interest paid for property and equipment acquired under capital leases | (57,079 | ) | - | (57,079 | ) | |||||||
| Net cash provided by financing activities | 4,103,704 | - | 4,103,704 | |||||||||
| EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | 155,753 | - | 155,753 | |||||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (75,665 | ) | - | (75,665 | ) | |||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD | 1,252,315 | - | 1,252,315 | |||||||||
| CASH AND CASH EQUIVALENTS, END OF THE PERIOD | $ | 1,176,650 | $ | - | $ | 1,176,650 | ||||||
| 47 |
| June 30, | June 30, | |||||||||||
| 2014 | 2014 | |||||||||||
| (UNAUDITED) | restatement | Restated Unaudited | ||||||||||
| ASSETS | ||||||||||||
| CURRENT ASSETS | ||||||||||||
| Cash and cash equivalents | $ | 829,388 | $ | - | $ | 829,388 | ||||||
| Restricted cash | 191,703 | - | 191,703 | |||||||||
| Accounts receivable, net of allowance for doubtful accounts of $29,547 at June 30, 2014 | 8,223,963 | (1,299,207 | ) | 6,924,756 | ||||||||
| Prepaid expenses and other current assets | 2,619,882 | - | 2,619,882 | |||||||||
| Total current assets | 11,864,936 | (1,299,207 | ) | 10,565,729 | ||||||||
| NON-CURRENT ASSETS | ||||||||||||
| OTHER ASSETS | 1,288,246 | - | 1,288,246 | |||||||||
| PROPERTY AND EQUIPMENT, NET | 20,711,832 | - | 20,711,832 | |||||||||
| INTANGIBLE ASSETS, NET | 7,122,940 | - | 7,122,940 | |||||||||
| GOODWILL | 3,740,646 | - | 3,740,646 | |||||||||
| TOTAL ASSETS | $ | 44,728,600 | $ | (1,299,207 | ) | $ | 43,429,393 | |||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
| CURRENT LIABILITIES | ||||||||||||
| Overdraft | $ | 413,958 | $ | - | $ | 413,958 | ||||||
| Accounts payable and customer deposits | 2,305,933 | - | 2,305,933 | |||||||||
| Obligations under capital leases (current portion) | 1,898,346 | - | 1,898,346 | |||||||||
| Deferred revenue | 163,848 | 468,256 | 632,104 | |||||||||
| Accrued expenses and other payables | 6,592,945 | - | 6,592,945 | |||||||||
| Loans payable | 963,051 | - | 963,051 | |||||||||
| Total current liabilities | 12,338,081 | 468,256 | 12,806,337 | |||||||||
| LONG TERM LIABILITIES | ||||||||||||
| 10% 3rd Party Loan (net of Debt Discount of $518,463 at June 30, 2014) | 4,940,798 | - | 4,940,798 | |||||||||
| 10% Related Party Loan (net of Debt Discount of $17,786 at June 30, 2014) | 2,711,844 | - | 2,711,844 | |||||||||
| Warrant liabilities | 2,144,858 | - | 2,144,858 | |||||||||
| Non-current portion of obligation under capital leases | 487,728 | - | 487,728 | |||||||||
| Non-current portion of deferred revenue | - | 4,542,910 | 4,542,910 | |||||||||
| Loan from joint venture partner | 626,534 | - | 626,534 | |||||||||
| Total long term liabilities | 10,911,762 | 4,542,910 | 15,454,672 | |||||||||
| Total liabilities | 23,249,843 | 5,011,166 | 28,261,009 | |||||||||
| Commitments and Contingencies | ||||||||||||
| STOCKHOLDERS' EQUITY | ||||||||||||
| Preferred Stock $0.00001 par value, 50,000,000 shares authorized, 0 issued and outstanding | - | - | - | |||||||||
| Common Stock $0.00001 par value, 250,000,000 shares authorized, 146,525,302 issued and outstanding as of June 30, 2014 (unaudited) | 255,328,306 | - | 255,328,306 | |||||||||
| Accumulated other comprehensive income | 121,636 | - | 121,636 | |||||||||
| Accumulated deficit | (234,115,159 | ) | (6,310,373 | ) | (240,425,532 | ) | ||||||
| Elephant Talk Communications, Corp. stockholders' equity | 21,334,783 | (6,310,373 | ) | 15,024,410 | ||||||||
| NON-CONTROLLING INTEREST | 143,974 | - | 143,974 | |||||||||
| Total stockholders' equity | 21,478,757 | (6,310,373 | ) | 15,168,384 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 44,728,600 | $ | (1,299,207 | ) | $ | 43,429,393 | |||||
| 48 |
| For the three month | For the six month | |||||||||||||||||||||||||||||||
| period ended | period ended | |||||||||||||||||||||||||||||||
| June 30, 2014 | Restatement adjustments | Re- classifications | Restated | June 30, 2014 | Restatement adjustments | Re- classifications | Restated | |||||||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||||||||||||||
| REVENUES | $ | 6,911,768 | (1,839,328 | ) | $ | - | $ | 5,072,440 | $ | 13,391,621 | (2,934,916 | ) | $ | - | $ | 10,456,705 | ||||||||||||||||
| COST AND OPERATING EXPENSES | ||||||||||||||||||||||||||||||||
| Cost of service | 828,581 | - | 1,020,106 | 1,848,687 | 1,812,045 | - | 1,672,614 | 3,484,659 | ||||||||||||||||||||||||
| Product development | - | - | 2,280,532 | 2,280,532 | - | 3,992,349 | 3,992,349 | |||||||||||||||||||||||||
| Sales and marketing | - | - | 664,807 | 664,807 | - | 1,228,642 | 1,228,642 | |||||||||||||||||||||||||
| General and administrative | 7,432,784 | - | (3,965,446 | ) | 3,467,338 | 13,408,891 | - | (6,893,605 | ) | 6,515,286 | ||||||||||||||||||||||
| Depreciation and amortization | 1,928,392 | - | - | 1,928,392 | 3,936,606 | - | - | 3,936,606 | ||||||||||||||||||||||||
| Total cost and operating expenses | 10,189,757 | - | - | 10,189,757 | 19,157,542 | - | - | 19,157,542 | ||||||||||||||||||||||||
| LOSS FROM OPERATIONS | (3,277,989 | ) | (1,839,328 | ) | - | (5,117,317 | ) | (5,765,921 | ) | (2,934,916 | ) | - | (8,700,837 | ) | ||||||||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||||||||||
| Interest income | 29,545 | - | - | 29,545 | 57,156 | - | - | 57,156 | ||||||||||||||||||||||||
| Interest expense | (333,214 | ) | - | - | (333,214 | ) | (635,158 | ) | - | - | (635,158 | ) | ||||||||||||||||||||
| Interest expense related to debt discount and conversion feature | (1,025,292 | ) | - | - | (1,025,292 | ) | (1,910,032 | ) | - | - | (1,910,032 | ) | ||||||||||||||||||||
| Changes in fair value of warrant liabilities | 38,948 | - | - | 38,948 | (171,324 | ) | - | - | (171,324 | ) | ||||||||||||||||||||||
| Loss on Extinguishment of Debt | - | - | - | - | (426 | ) | - | - | (426 | ) | ||||||||||||||||||||||
| Other income and (expense), net | 68,008 | - | - | 68,008 | 71,398 | - | - | 71,398 | ||||||||||||||||||||||||
| Amortization of deferred financing costs | (113,090 | ) | - | - | (113,090 | ) | (249,457 | ) | - | - | (249,457 | ) | ||||||||||||||||||||
| Total other income (expense) | (1,335,095 | ) | - | - | (1,335,095 | ) | (2,837,843 | ) | - | - | (2,837,843 | ) | ||||||||||||||||||||
| LOSS BEFORE (BENEFIT) PROVISION FOR INCOME TAXES | (4,613,084 | ) | (1,839,328 | ) | - | (6,452,412 | ) | (8,603,764 | ) | (2,934,916 | ) | - | (11,538,680 | ) | ||||||||||||||||||
| Provision (benefit) for income taxes | (2,209 | ) | - | - | (2,209 | ) | 133,228 | - | - | 133,228 | ||||||||||||||||||||||
| NET LOSS | (4,610,875 | ) | (1,839,328 | ) | - | (6,450,203 | ) | (8,736,992 | ) | (2,934,916 | ) | - | (11,671,908 | ) | ||||||||||||||||||
| OTHER COMPREHENSIVE (LOSS) INCOME | ||||||||||||||||||||||||||||||||
| Foreign currency translation loss | (148,233 | ) | - | - | (148,233 | ) | (150,452 | ) | - | - | (150,452 | ) | ||||||||||||||||||||
| COMPREHENSIVE LOSS | $ | (4,759,108 | ) | (1,839,328 | ) | $ | - | $ | (6,598,436 | ) | $ | (8,887,444 | ) | (2,934,916 | ) | $ | - | $ | (11,822,360 | ) | ||||||||||||
| Net loss per common share and equivalents - basic and diluted | $ | (0.03 | ) | - | $ | - | $ | (0.04 | ) | $ | (0.06 | ) | - | $ | - | $ | (0.08 | ) | ||||||||||||||
| Weighted average shares outstanding during the period - basic and diluted | 146,482,547 | - | - | 146,482,547 | 144,130,543 | - | - | 144,130,543 | ||||||||||||||||||||||||
| 49 |
| For the six month period |
| |||||||||||
| ended June 30, 2014 | restatement | Restated | ||||||||||
| Unaudited | Unaudited | |||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net loss | $ | (8,736,992 | ) | $ | (2,934,916 | ) | $ | (11,671,908 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation and amortization | 3,936,606 | - | 3,936,606 | |||||||||
| Provision for doubtful accounts | 18,865 | - | 18,865 | |||||||||
| Share-based compensation | 2,674,261 | - | 2,674,261 | |||||||||
| Change in the fair value of the warrant liability | 171,324 | - | 171,324 | |||||||||
| Amortization of deferred financing costs | 249,457 | - | 249,457 | |||||||||
| Interest expense relating to debt discount and conversion feature | 1,910,032 | - | 1,910,032 | |||||||||
| Unrealized foreign currency translation gain/(loss) | (71,398 | ) | - | (71,398 | ) | |||||||
| Changes in operating assets and liabilities, net of acquired assets and assumed liabilities: | ||||||||||||
| Decrease (increase) in accounts receivable | (2,329,143 | ) | (2,076,250 | ) | (4,405,393 | ) | ||||||
| Decrease (increase) in prepaid expenses, deposits and other assets | (346,129 | ) | - | (346,129 | ) | |||||||
| Increase (decrease) in accounts payable, proceeds from related parties and customer deposits | 210,932 | - | 210,932 | |||||||||
| Increase (decrease) in deferred revenue | 16,994 | 5,011,166 | 5,028,160 | |||||||||
| Increase (decrease) in accrued expenses and other payables | 1,910,256 | - | 1,910,256 | |||||||||
| Net cash provided by (used in) operating activities | (384,935 | ) | - | (384,935 | ) | |||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Purchases of Property and Equipment | (3,922,724 | ) | - | (3,922,724 | ) | |||||||
| Net cash used in investing activities | (3,922,724 | ) | - | (3,922,724 | ) | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Fundraising fees | (90,000 | ) | - | (90,000 | ) | |||||||
| Exercise of warrants and Options | 4,283,033 | - | 4,283,033 | |||||||||
| Net cash provided by financing activities | 4,193,033 | - | 4,193,033 | |||||||||
| EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | (308,301 | ) | - | (308,301 | ) | |||||||
| NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS | (422,927 | ) | - | (422,927 | ) | |||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD | 1,252,315 | - | 1,252,315 | |||||||||
| CASH AND CASH EQUIVALENTS, END OF THE PERIOD | $ | 829,388 | $ | - | $ | 829,388 | ||||||
| 50 |
| March 31, | March 31, | |||||||||||
| 2014 | 2014 | |||||||||||
| (UNAUDITED) | restatement | Restated | ||||||||||
| Unaudited | Unaudited | |||||||||||
| ASSETS | ||||||||||||
| CURRENT ASSETS | ||||||||||||
| Cash and cash equivalents | $ | 3,918,046 | $ | - | $ | 3,918,046 | ||||||
| Restricted cash | 192,161 | - | 192,161 | |||||||||
| Accounts receivable, net of allowance for doubtful accounts of $11,307 at March 31, 2014 | 6,262,041 | (1,228,374 | ) | 5,033,667 | ||||||||
| Prepaid expenses and other current assets | 2,147,686 | - | 2,147,686 | |||||||||
| Total current assets | 12,519,934 | (1,228,374 | ) | 11,291,560 | ||||||||
| NON-CURRENT ASSETS | ||||||||||||
| OTHER ASSETS | 1,357,728 | - | 1,357,728 | |||||||||
| PROPERTY AND EQUIPMENT, NET | 19,954,703 | - | 19,954,703 | |||||||||
| INTANGIBLE ASSETS, NET | 7,903,149 | - | 7,903,149 | |||||||||
| GOODWILL | 3,769,199 | - | 3,769,199 | |||||||||
| TOTAL ASSETS | $ | 45,504,713 | $ | (1,228,374 | ) | $ | 44,276,339 | |||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
| CURRENT LIABILITIES | ||||||||||||
| Overdraft | $ | 402,234 | $ | - | $ | 402,234 | ||||||
| Accounts payable and customer deposits | 2,419,325 | - | 2,419,325 | |||||||||
| Obligations under capital leases (current portion) | 1,348,705 | - | 1,348,705 | |||||||||
| Deferred revenue | 203,623 | 468,256 | 671,879 | |||||||||
| Accrued expenses and other payables | 5,936,989 | - | 5,936,989 | |||||||||
| Loans payable | 962,269 | - | 962,269 | |||||||||
| 10% Related Party Loan (net of Debt Discount of $937,814 at March 31, 2014 | 1,812,506 | - | 1,812,506 | |||||||||
| Total current liabilities | 13,085,651 | 468,256 | 13,553,907 | |||||||||
| LONG TERM LIABILITIES | ||||||||||||
| 10% 3rd Party Loan (net of Debt Discount of $623,726 at March 31, 2014) | 4,876,914 | - | 4,876,914 | |||||||||
| Warrant liabilities | 2,183,806 | - | 2,183,806 | |||||||||
| Non-current portion of obligation under capital leases | 465,954 | - | 465,954 | |||||||||
| Non-current portion of deferred revenue | - | 2,774,415 | 2,774,415 | |||||||||
| Loan from joint venture partner | 614,169 | - | 614,169 | |||||||||
| Total long term liabilities | 8,140,843 | 2,774,415 | 10,915,258 | |||||||||
| Total liabilities | 21,226,494 | 3,242,671 | 24,469,165 | |||||||||
| Commitments and Contingencies | ||||||||||||
| STOCKHOLDERS' EQUITY | ||||||||||||
| Preferred Stock $0.00001 par value, 50,000,000 shares authorized, 0 issued and outstanding | - | - | - | |||||||||
| Common Stock $0.00001 par value, 250,000,000 shares authorized, 146,364,577 issued and outstanding as of March 31, 2014 | 253,383,860 | - | 253,383,860 | |||||||||
| Accumulated other comprehensive income | 267,650 | - | 267,650 | |||||||||
| Accumulated deficit | (229,518,039 | ) | (4,471,045 | ) | (233,989,084 | ) | ||||||
| Elephant Talk Communications, Corp. stockholders' equity | 24,133,471 | (4,471,045 | ) | 19,662,426 | ||||||||
| NON-CONTROLLING INTEREST | 144,748 | - | 144,748 | |||||||||
| Total stockholders' equity | 24,278,219 | (4,471,045 | ) | 19,807,174 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 45,504,713 | $ | (1,228,374 | ) | $ | 44,276,339 | |||||
| 51 |
| March 31, 2014 | Restatement adjustments | Re-classifications | Restated | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| REVENUES | $ | 6,479,853 | $ | (1,095,588 | ) | $ | - | $ | 5,384,265 | |||||||
| COST AND OPERATING EXPENSES | ||||||||||||||||
| Cost of service | 983,464 | - | 652,508 | 1,635,972 | ||||||||||||
| Product development | - | - | 1,711,817 | 1,711,817 | ||||||||||||
| Sales and marketing | - | - | 563,835 | 563,835 | ||||||||||||
| General and administrative | 5,976,107 | - | (2,928,159 | ) | 3,047,948 | |||||||||||
| Depreciation and amortization | 2,008,214 | - | - | 2,008,214 | ||||||||||||
| Total cost and operating expenses | 8,967,785 | - | - | 8,967,785 | ||||||||||||
| LOSS FROM OPERATIONS | (2,487,932 | ) | (1,095,588 | ) | - | (3,583,520 | ) | |||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Interest income | 27,611 | - | - | 27,611 | ||||||||||||
| Interest expense | (301,944 | ) | - | - | (301,944 | ) | ||||||||||
| Interest expense related to Debt Discount and Conversion Feature | (884,740 | ) | - | - | (884,740 | ) | ||||||||||
| Change in fair value of warrant liabilities | (210,272 | ) | - | - | (210,272 | ) | ||||||||||
| Loss on extinguishment of debt | (426 | ) | - | - | (426 | ) | ||||||||||
| Other income and (expense) | 3,390 | - | - | 3,390 | ||||||||||||
| Amortization of deferred financing costs | (136,367 | ) | - | - | (136,367 | ) | ||||||||||
| Total other income (expense) | (1,502,748 | ) | - | - | (1,502,748 | ) | ||||||||||
| LOSS BEFORE PROVISION FOR INCOME TAXES | (3,990,680 | ) | (1,095,588 | ) | - | (5,086,268 | ) | |||||||||
| Provision for income taxes | (135,437 | ) | - | - | (135,437 | ) | ||||||||||
| NET LOSS | (4,126,117 | ) | (1,095,588 | ) | - | (5,221,705 | ) | |||||||||
| OTHER COMPREHENSIVE (LOSS) INCOME | ||||||||||||||||
| Foreign currency translation (loss) | (2,219 | ) | - | - | (2,219 | ) | ||||||||||
| COMPREHENSIVE LOSS | $ | (4,128,336 | ) | (1,095,588 | ) | $ | - | $ | (5,223,924 | ) | ||||||
| Net loss per common share and equivalents - basic and diluted | $ | (0.03 | ) | - | $ | - | $ | (0.04 | ) | |||||||
| Weighted average shares outstanding during the period - basic and diluted | 141,752,128 | - | - | 141,752,128 | ||||||||||||
| 52 |
| For the three months ended | ||||||||||||
| ended March 31, 2014 | restatement | Restated | ||||||||||
| Unaudited | Unaudited | |||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net loss | $ | (4,126,117 | ) | $ | (1,095,588 | ) | $ | (5,221,705 | ) | |||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||
| Depreciation and amortization | 2,008,214 | - | 2,008,214 | |||||||||
| Provision for doubtful accounts | 611 | - | 611 | |||||||||
| Stock based compensation | 771,724 | - | 771,724 | |||||||||
| Changes in the fair value of the conversion feature | - | - | - | |||||||||
| Change in the fair value of the warrant liability | 210,272 | - | 210,272 | |||||||||
| Amortization of deferred financing costs | 136,367 | - | 136,367 | |||||||||
| Interest expense relating to debt discount and conversion feature | 884,740 | - | 884,740 | |||||||||
| Unrealized foreign currency translation gain/(loss) | (3,390 | ) | - | (3,390 | ) | |||||||
| - | ||||||||||||
| Changes in operating assets and liabilities, net of acquired assets and assumed liabilities: | ||||||||||||
| Decrease (increase) in accounts receivable | (293,435 | ) | (2,147,083 | ) | (2,440,518 | ) | ||||||
| Decrease (increase) in prepaid expenses, deposits and other assets | 165,627 | - | 165,627 | |||||||||
| Increase (decrease) in accounts payable, proceeds from related parties and customer deposits | 319,553 | - | 319,553 | |||||||||
| Increase (decrease) in deferred revenue | 59,946 | 3,242,671 | 3,302,617 | |||||||||
| Increase (decrease) in accrued expenses and other payables | 643,707 | - | 643,707 | |||||||||
| Net cash provided by (used in) operating activities | 777,819 | - | 777,819 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Purchases of Property and Equipment | (1,802,951 | ) | - | (1,802,951 | ) | |||||||
| Net cash used in investing activities | (1,802,951 | ) | - | (1,802,951 | ) | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Financing related fees | (90,000 | ) | - | (90,000 | ) | |||||||
| Exercise of warrants and Options | 4,093,480 | - | 4,093,480 | |||||||||
| Net cash provided by financing activities | 4,003,480 | - | 4,003,480 | |||||||||
| EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | (312,617 | ) | - | (312,617 | ) | |||||||
| NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS | 2,665,731 | - | 2,665,731 | |||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD | 1,252,315 | - | 1,252,315 | |||||||||
| CASH AND CASH EQUIVALENTS, END OF THE PERIOD | $ | 3,918,046 | $ | - | $ | 3,918,046 | ||||||
| 53 |
| September 30, | September 30, | |||||||||||
| 2013 | restatement | 2013 | ||||||||||
| (UNAUDITED) | Unaudited | Restated Unaudited | ||||||||||
| ASSETS | ||||||||||||
| �� | ||||||||||||
| CURRENT ASSETS | ||||||||||||
| Cash and cash equivalents | $ | 6,085,215 | $ | - | $ | 6,085,215 | ||||||
| Restricted cash | 495,983 | - | 495,983 | |||||||||
| Accounts receivable, net of allowance for doubtful accounts of $25,225 and $559,120 at September 30, 2013 | 4,173,398 | (978,579 | ) | 3,194,819 | ||||||||
| Prepaid expenses and other current assets | 2,531,602 | - | 2,531,602 | |||||||||
| Total current assets | 13,286,198 | (978,579 | ) | 12,307,619 | ||||||||
| NON-CURRENT ASSETS | ||||||||||||
| OTHER ASSETS | 1,382,857 | - | 1,382,857 | |||||||||
| PROPERTY AND EQUIPMENT, NET | 18,663,407 | - | 18,663,407 | |||||||||
| INTANGIBLE ASSETS, NET | 9,412,581 | - | 9,412,581 | |||||||||
| GOODWILL | 3,707,903 | - | 3,707,903 | |||||||||
| TOTAL ASSETS | $ | 46,452,946 | $ | (978,579 | ) | $ | 45,474,367 | |||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
| CURRENT LIABILITIES | ||||||||||||
| Overdraft | $ | 380,550 | $ | - | $ | 380,550 | ||||||
| Accounts payable and customer deposits | 4,905,101 | - | 4,905,101 | |||||||||
| Deferred Revenue | 428,473 | - | 428,473 | |||||||||
| Accrued expenses and other payables | 5,816,271 | - | 5,816,271 | |||||||||
| Loans payable | 962,418 | - | 962,418 | |||||||||
| 10% Related Party Loan (net of Debt Discount of $2,385,206) | 267,393 | - | 267,393 | |||||||||
| Total current liabilities | 12,760,206 | - | 12,760,206 | |||||||||
| LONG TERM LIABILITIES | ||||||||||||
| 10% 3rd Party Loan (net of Debt Discount of $827,421) | 4,477,780 | - | 4,477,780 | |||||||||
| Warrant liabilities | 4,116,480 | - | 4,116,480 | |||||||||
| Trade note payable | 593,903 | - | 593,903 | |||||||||
| Non-current portion of deferred revenue | - | 1,888,891 | 1,888,891 | |||||||||
| Loan from joint venture partner | 590,165 | - | 590,165 | |||||||||
| Total long term liabilities | 9,778,328 | 1,888,891 | 11,667,219 | |||||||||
| Total liabilities | 22,538,534 | 1,888,891 | 24,427,425 | |||||||||
| Commitments and Contingencies | ||||||||||||
| STOCKHOLDERS' EQUITY | ||||||||||||
| Preferred Stock $0.00001 par value, 50,000,000 shares authorized, 0 issued and outstanding | - | - | - | |||||||||
| Common stock, .00001 par value, 250,000,000 shares authorized, 134,440,221 issued and outstanding as of September 30, 2013 | 243,294,324 | - | 243,294,324 | |||||||||
| Accumulated other comprehensive income (loss) | (242,647 | ) | - | (242,647 | ) | |||||||
| Accumulated deficit | (219,316,384 | ) | (2,867,470 | ) | (222,183,854 | ) | ||||||
| Elephant Talk Communications, Corp. stockholders' equity | 23,735,293 | (2,867,470 | ) | 20,867,823 | ||||||||
| NON-CONTROLLING INTEREST | 179,119 | - | 179,119 | |||||||||
| Total stockholders' equity | 23,914,412 | (2,867,470 | ) | 21,046,942 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 46,452,946 | $ | (978,579 | ) | $ | 45,474,367 | |||||
| 54 |
| For the Three Months | For the Nine Months | |||||||||||||||||||||||||||||||
| Period ended | Period ended | |||||||||||||||||||||||||||||||
| September 30, 2013 | Restatement adjustments | Re- classifications | Restated | September 30, 2013 | Restatement adjustments | Re- classifications | Restated | |||||||||||||||||||||||||
| (uaudited) | (uaudited) | (uaudited) | (uaudited) | (uaudited) | (uaudited) | (uaudited) | (uaudited) | |||||||||||||||||||||||||
| REVENUES | $ | 5,204,982 | $ | (1,081,188 | ) | $ | - | $ | 4,123,794 | $ | 16,795,627 | $ | (2,867,470 | ) | $ | - | $ | 13,928,157 | ||||||||||||||
| COST AND OPERATING EXPENSES | ||||||||||||||||||||||||||||||||
| Cost of service | 1,080,174 | - | 468,402 | 1,548,576 | 6,093,968 | - | 1,560,310 | 7,654,278 | ||||||||||||||||||||||||
| Product development | - | - | 1,354,105 | 1,354,105 | - | - | 4,523,208 | 4,523,208 | ||||||||||||||||||||||||
| Sales and marketing | - | - | 623,644 | 623,644 | - | - | 2,229,013 | 2,229,013 | ||||||||||||||||||||||||
| General and administrative | 5,442,869 | - | (2,446,151 | ) | 2,996,718 | 18,823,614 | - | (8,312,530 | ) | 10,511,083 | ||||||||||||||||||||||
| Depreciation and amortization | 1,543,687 | - | - | 1,543,687 | 4,699,906 | - | - | 4,699,906 | ||||||||||||||||||||||||
| Total cost and operating expenses | 8,066,730 | - | - | 8,066,730 | 29,617,488 | - | - | 29,617,488 | ||||||||||||||||||||||||
| LOSS FROM OPERATIONS | (2,861,748 | ) | (1,081,188 | ) | - | (3,942,936 | ) | (12,821,861 | ) | (2,867,470 | ) | - | (15,689,331 | ) | ||||||||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||||||||||
| Interest income | 33,773 | - | - | 33,773 | 89,020 | - | - | 89,020 | ||||||||||||||||||||||||
| Interest expense | (181,074 | ) | - | - | (181,074 | ) | (612,970 | ) | - | - | (612,970 | ) | ||||||||||||||||||||
| Interest expense related to debt discount and conversion feature | (259,795 | ) | - | - | (259,795 | ) | (1,320,795 | ) | - | - | (1,320,795 | ) | ||||||||||||||||||||
| Change in fair value of conversion feature | - | - | - | - | 232,267 | - | - | 232,267 | ||||||||||||||||||||||||
| Loss on Extinguishment of Debt | (44,506 | ) | - | - | (44,506 | ) | (1,983,103 | ) | - | - | (1,983,103 | ) | ||||||||||||||||||||
| Changes in fair value of warrant liabilities | 173,333 | - | - | 173,333 | 519,349 | - | - | 519,349 | ||||||||||||||||||||||||
| Amortization of deferred financing costs | (44,076 | ) | - | - | (44,076 | ) | (116,482 | ) | - | - | (116,482 | ) | ||||||||||||||||||||
| Total other income (expense) | (322,345 | ) | - | - | (322,345 | ) | (3,192,714 | ) | - | - | (3,192,714 | ) | ||||||||||||||||||||
| LOSS BEFORE PROVISION FOR INCOME TAXES | (3,184,093 | ) | (1,081,188 | ) | - | (4,265,281 | ) | (16,014,575 | ) | (2,867,470 | ) | - | (18,882,045 | ) | ||||||||||||||||||
| Provision for income taxes | 41,500 | - | - | 41,500 | 41,500 | 41,500 | ||||||||||||||||||||||||||
| NET LOSS | (3,225,593 | ) | (1,081,188 | ) | - | (4,306,781 | ) | (16,056,075 | ) | (2,867,470 | ) | - | (18,923,545 | ) | ||||||||||||||||||
| OTHER COMPREHENSIVE (LOSS) INCOME | ||||||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | 489,443 | - | - | 489,443 | (807,208 | ) | - | - | (807,208 | ) | ||||||||||||||||||||||
| 489,443 | - | - | 489,443 | (807,208 | ) | - | - | (807,208 | ) | |||||||||||||||||||||||
| COMPREHENSIVE LOSS | $ | (2,736,150 | ) | $ | (1,081,188 | ) | $ | - | $ | (3,817,338 | ) | $ | (16,863,283 | ) | $ | (2,867,470 | ) | $ | - | $ | (19,730,753 | ) | ||||||||||
| Net loss per common share and equivalents - basic and diluted | $ | (0.02 | ) | $ | - | $ | - | $ | (0.03 | ) | $ | (0.13 | ) | $ | - | $ | - | $ | (0.16 | ) | ||||||||||||
| Weighted average shares outstanding during the period - basic and diluted | 134,440,221 | - | - | 134,440,221 | 122,038,045 | - | - | 122,038,045 | ||||||||||||||||||||||||
| 55 |
| For the nine months | ||||||||||||
| ended September 30, 2013 | restatement | Restated | ||||||||||
| Unaudited | Unaudited | |||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net loss | $ | (16,056,076 | ) | $ | (2,867,470 | ) | $ | (18,923,546 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation and amortization | 4,699,906 | - | 4,699,906 | |||||||||
| Provision for doubtful accounts | 22,131 | - | 22,131 | |||||||||
| Provision for income taxes | 41,500 | - | 41,500 | |||||||||
| Stock based compensation | 5,639,124 | - | 5,639,124 | |||||||||
| Change in fair value of derivative instruments | 2,668,764 | - | 2,668,764 | |||||||||
| Financial Investments in Joint Venture | - | - | ||||||||||
| Changes in operating assets and liabilities, net of acquired assets and assumed liabilities: | - | |||||||||||
| Decrease (increase) in accounts receivable | 1,054,452 | 978,579 | 2,033,031 | |||||||||
| Decrease (increase) in prepaid expenses, deposits and other assets | (666,991 | ) | - | (666,991 | ) | |||||||
| Increase (decrease) in accounts payable, proceeds from related parties and customer deposits | (2,030,393 | ) | - | (2,030,393 | ) | |||||||
| Increase (decrease) in deferred revenue | 177,635 | 1,888,891 | 2,066,526 | |||||||||
| Increase (decrease) in accrued expenses and other payables | 1,859,634 | - | 1,859,634 | |||||||||
| Increase (decrease) in non-cash accrued expenses related to extinguishment of Debt | (890,997 | ) | - | (890,997 | ) | |||||||
| Net cash used in operating activities | (3,481,311 | ) | - | (3,481,311 | ) | |||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Purchases of property and equipment | (4,108,507 | ) | - | (4,108,507 | ) | |||||||
| Loan to third party | (125,000 | ) | - | (125,000 | ) | |||||||
| Net cash used in investing activities | (4,233,507 | ) | - | (4,233,507 | ) | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Proceeds from 12% Unsecured Loan from Related Party | 1,290,790 | - | 1,290,790 | |||||||||
| Proceeds from Share Purchase Agreement - Unregistered securities | 225,000 | - | 225,000 | |||||||||
| Proceeds from Share Purchase Agreement - Registered direct | 7,500,000 | - | 7,500,000 | |||||||||
| Proceeds from Share Purchase Agreement Related Party | 4,500,000 | - | 4,500,000 | |||||||||
| Proceeds from 10% Affiliate Loan | 2,652,600 | - | 2,652,600 | |||||||||
| Proceeds from 10% 3rd Party Loan | 5,305,200 | - | 5,305,200 | |||||||||
| Fundraise fees | (1,362,124 | ) | - | (1,362,124 | ) | |||||||
| Payments on 8% convertible note installment payments and interest | (8,490,360 | ) | - | (8,490,360 | ) | |||||||
| Exercise of warrants & options | 78,971 | - | 78,971 | |||||||||
| Cash from Escrow account for principal and interest payments on 8% Convertible notes | 742,427 | - | 742,427 | |||||||||
| Net cash provided by financing activities | 12,442,504 | - | 12,442,504 | |||||||||
| EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | 124,261 | - | 124,261 | |||||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 4,851,947 | �� | - | 4,851,947 | ||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD | 1,233,268 | - | 1,233,268 | |||||||||
| CASH AND CASH EQUIVALENTS, END OF THE PERIOD | $ | 6,085,215 | $ | - | $ | 6,085,215 | ||||||
| 56 |
| June 30, | June 30, | |||||||||||
| 2013 | restatement | 2013 | ||||||||||
| (restated) | Unaudited | Restated Unaudited | ||||||||||
| ASSETS | ||||||||||||
| CURRENT ASSETS | ||||||||||||
| Cash and cash equivalents | $ | 2,979,673 | $ | - | $ | 2,979,673 | ||||||
| Restricted cash | 483,120 | - | 483,120 | |||||||||
| Accounts receivable, net of allowance for doubtful accounts of $486,591 at June 30, 2013 | 3,408,278 | (542,527 | ) | 2,865,751 | ||||||||
| Prepaid expenses and other current assets | 2,194,320 | - | 2,194,320 | |||||||||
| Total current assets | 9,065,391 | (542,527 | ) | 8,522,864 | ||||||||
| OTHER ASSETS | 621,182 | - | 621,182 | |||||||||
| PROPERTY AND EQUIPMENT, NET | 17,065,123 | - | 17,065,123 | |||||||||
| INTANGIBLE ASSETS, NET | 9,966,563 | - | 9,966,563 | |||||||||
| GOODWILL | 3,381,418 | - | 3,381,418 | |||||||||
| TOTAL ASSETS | $ | 40,099,677 | $ | (542,527 | ) | $ | 39,557,150 | |||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
| CURRENT LIABILITIES | ||||||||||||
| Overdraft | $ | 369,859 | $ | - | $ | 369,859 | ||||||
| Accounts payable and customer deposits | 4,809,726 | - | 4,809,726 | |||||||||
| Deferred Revenue | 482,381 | - | 482,381 | |||||||||
| Accrued expenses and other payables | 6,566,324 | - | 6,566,324 | |||||||||
| Loans payable | 962,418 | - | 962,418 | |||||||||
| 12% Related Party Loan | 975,763 | - | 975,763 | |||||||||
| Total current liabilities | 14,166,471 | - | 14,166,471 | |||||||||
| LONG TERM LIABILITIES | ||||||||||||
| Warrant liabilities | 5,291,351 | - | 5,291,351 | |||||||||
| Trade note payable | 869,450 | - | 869,450 | |||||||||
| Non-current portion of deferred revenue | - | 1,243,755 | 1,243,755 | |||||||||
| Loan from joint venture partner | 578,518 | - | 578,518 | |||||||||
| Total long term liabilities | 6,739,319 | 1,243,755 | 7,983,074 | |||||||||
| Total liabilities | 20,905,790 | 1,243,755 | 22,149,545 | |||||||||
| STOCKHOLDERS' EQUITY | ||||||||||||
| Preferred Stock $0.00001 par value, 50,000,000 shares authorized, 0 issued and outstanding | - | - | - | |||||||||
| Common stock, no par value, 250,000,000 shares authorized, 133,139,900 issued and outstanding as of June 30, 2013 | 236,377,879 | - | 236,377,879 | |||||||||
| Accumulated other comprehensive loss | (1,266,977 | ) | - | (1,266,977 | ) | |||||||
| Accumulated deficit | (216,090,791 | ) | (1,786,282 | ) | (217,877,073 | ) | ||||||
| Elephant Talk Communications Corp. stockholders' equity | 19,020,111 | (1,786,282 | ) | 17,233,829 | ||||||||
| NON-CONTROLLING INTEREST | 173,776 | - | 173,776 | |||||||||
| Total stockholders' equity | 19,193,887 | (1,786,282 | ) | 17,407,605 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 40,099,677 | $ | (542,527 | ) | $ | 39,557,150 | |||||
| 57 |
| For the Three Months | For the Six Months | |||||||||||||||||||||||||||||||
| Period ended | Period ended | |||||||||||||||||||||||||||||||
| June 30, 2013 | Restatement adjustments | Re- classifications | Restated | June 30, 2013 | Restatement adjustments | Re- classifications | Restated | |||||||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||||||||||||||
| REVENUES | $ | 4,994,145 | $ | (1,429,896 | ) | $ | - | $ | 3,564,249 | $ | 11,590,645 | $ | (1,786,282 | ) | $ | - | $ | 9,804,363 | ||||||||||||||
| COST AND OPERATING EXPENSES | ||||||||||||||||||||||||||||||||
| Cost of service | 1,465,517 | - | 679,382 | 2,144,899 | 5,013,794 | - | 1,091,908 | 6,105,702 | ||||||||||||||||||||||||
| Product development | - | - | 1,819,480 | 1,819,480 | - | - | 3,169,103 | 3,169,103 | ||||||||||||||||||||||||
| Sales and marketing | - | - | 882,418 | 882,418 | - | - | 1,605,370 | 1,605,370 | ||||||||||||||||||||||||
| General and administrative | 7,472,772 | - | (3,381,280 | ) | 4,091,492 | 13,380,746 | - | (5,866,381 | ) | 7,514,365 | ||||||||||||||||||||||
| Depreciation and amortization | 1,836,231 | - | - | 1,836,231 | 3,156,219 | - | - | 3,156,219 | ||||||||||||||||||||||||
| Total cost and operating expenses | 10,774,520 | - | - | 10,774,520 | 21,550,759 | - | - | 21,550,759 | ||||||||||||||||||||||||
| LOSS FROM OPERATIONS | (5,780,375 | ) | (1,429,896 | ) | - | (7,210,271 | ) | (9,960,114 | ) | (1,786,282 | ) | - | (11,746,396 | ) | ||||||||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||||||||||
| Interest income | 21,527 | - | - | 21,527 | 55,247 | - | - | 55,247 | ||||||||||||||||||||||||
| Interest expense | (208,144 | ) | - | - | (208,144 | ) | (431,896 | ) | - | - | (431,896 | ) | ||||||||||||||||||||
| Interest expense related to debt discount and conversion feature | (502,972 | ) | - | - | (502,972 | ) | (1,061,000 | ) | - | - | (1,061,000 | ) | ||||||||||||||||||||
| Change in fair value of conversion feature | 372,059 | - | - | 372,059 | 232,267 | - | - | 232,267 | ||||||||||||||||||||||||
| Changes in fair value of warrant liabilities | 346,016 | - | - | 346,016 | 346,016 | - | - | 346,016 | ||||||||||||||||||||||||
| Loss on Extinguishment of Debt | (1,938,597 | ) | - | - | (1,938,597 | ) | (1,938,597 | ) | - | - | (1,938,597 | ) | ||||||||||||||||||||
| Amortization of deferred financing costs | (2,075 | ) | - | - | (2,075 | ) | (72,406 | ) | - | - | (72,406 | ) | ||||||||||||||||||||
| Total other income (expense) | (1,912,186 | ) | - | - | (1,912,186 | ) | (2,870,369 | ) | - | - | (2,870,369 | ) | ||||||||||||||||||||
| LOSS BEFORE PROVISION FOR INCOME TAXES | (7,692,561 | ) | (1,429,896 | ) | - | (9,122,457 | ) | (12,830,483 | ) | (1,786,282 | ) | - | (14,616,765 | ) | ||||||||||||||||||
| Provision for income taxes | - | - | - | - | - | - | ||||||||||||||||||||||||||
| NET LOSS | (7,692,561 | ) | (1,429,896 | ) | - | (9,122,457 | ) | (12,830,483 | ) | (1,786,282 | ) | - | (14,616,765 | ) | ||||||||||||||||||
| - | - | |||||||||||||||||||||||||||||||
| OTHER COMPREHENSIVE (LOSS) INCOME | ||||||||||||||||||||||||||||||||
| Foreign currency translation loss | (534,887 | ) | - | - | (534,887 | ) | (1,296,649 | ) | (1,296,649 | ) | ||||||||||||||||||||||
| (534,887 | ) | - | - | (534,887 | ) | (1,296,649 | ) | - | - | (1,296,649 | ) | |||||||||||||||||||||
| COMPREHENSIVE LOSS | $ | (8,227,448 | ) | $ | (1,429,896 | ) | $ | - | $ | (9,657,344 | ) | $ | (14,127,132 | ) | $ | (1,786,282 | ) | $ | - | $ | (15,913,414 | ) | ||||||||||
| Net loss per common share and equivalents - basic and diluted | $ | (0.06 | ) | $ | - | $ | - | $ | (0.08 | ) | $ | (0.11 | ) | $ | - | $ | - | $ | (0.13 | ) | ||||||||||||
| Weighted average shares outstanding during the period - basic and diluted | 118,686,598 | - | - | 118,686,598 | 115,734,177 | - | - | 115,734,177 | ||||||||||||||||||||||||
| 58 |
| For the six months | ||||||||||||
| ended June 30, 2013 | restatement | Restated | ||||||||||
| (restated) | unaudited | unaudited | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net loss | $ | (12,830,483 | ) | $ | (1,786,282 | ) | $ | (14,616,765 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | - | |||||||||||
| Depreciation and amortization | 3,156,219 | - | 3,156,219 | |||||||||
| Provision for doubtful accounts | (68,679 | ) | - | (68,679 | ) | |||||||
| Stock-based compensation | 4,405,959 | - | 4,405,959 | |||||||||
| Change in fair value of derivative instruments | 2,493,720 | - | 2,493,720 | |||||||||
| Financial Investments in Joint Venture | - | - | - | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Decrease (increase) in accounts receivable | 1,679,337 | 542,527 | 2,221,864 | |||||||||
| Decrease (increase) in prepaid expenses, deposits and other assets | (406,790 | ) | - | (406,790 | ) | |||||||
| Increase (decrease) in accounts payable, proceeds from related parties and customer deposits | (241,952 | ) | - | (241,952 | ) | |||||||
| Increase (decrease) in deferred revenue | 246,755 | 1,243,755 | 1,490,510 | |||||||||
| Increase (decrease) in accrued expenses and other payables | 476,333 | - | 476,333 | |||||||||
| Net cash used in operating activities | (1,089,581 | ) | - | (1,089,581 | ) | |||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Purchases of property and equipment | (2,262,540 | ) | - | (2,262,540 | ) | |||||||
| Net cash used in investing activities | (2,262,540 | ) | - | (2,262,540 | ) | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Proceeds from 12% Unsecured Loan from Related Party | 1,290,790 | - | 1,290,790 | |||||||||
| Proceeds from Share Purchase Agreement – Unregistered securities | 225,000 | - | 225,000 | |||||||||
| Proceeds from Share Purchase Agreement - Registered direct | 7,500,000 | - | 7,500,000 | |||||||||
| Proceeds from Share Purchase Agreement Related Party | 4,500,000 | - | 4,500,000 | |||||||||
| Fundraising fees | (707,500 | ) | - | (707,500 | ) | |||||||
| Payments on 8% convertible note installment payments and interest | (8,490,360 | ) | - | (8,490,360 | ) | |||||||
| Exercise of warrants & options | 60,394 | - | 60,394 | |||||||||
| Cash from Escrow account for principal and interest payments on 8% Convertible Notes | 742,427 | - | 742,427 | |||||||||
| Net cash provided by financing activities | 5,120,751 | - | 5,120,751 | |||||||||
| EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | (22,225 | ) | - | (22,225 | ) | |||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 1,746,405 | - | 1,746,405 | |||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD | 1,233,268 | - | 1,233,268 | |||||||||
| CASH AND CASH EQUIVALENTS, END OF THE PERIOD | $ | 2,979,673 | $ | - | $ | 2,979,673 | ||||||
| 59 |
| March 31, | March 31, | |||||||||||
| 2013 | restatement | 2013 | ||||||||||
| (UNAUDITED) | Unaudited | Restated Unaudited | ||||||||||
| ASSETS | ||||||||||||
| CURRENT ASSETS | ||||||||||||
| Cash and cash equivalents | $ | 570,579 | $ | - | $ | 570,579.00 | ||||||
| Restricted cash | 664,679 | 664,679 | ||||||||||
| Accounts receivable, net of an allowance for doubtful accounts of $558,438 at March 31, 2013 | 4,502,499 | - | 4,502,499 | |||||||||
| Prepaid expenses and other current assets | 2,342,762 | 2,342,762 | ||||||||||
| Total current assets | 8,080,519 | - | 8,080,519 | |||||||||
| OTHER ASSETS | 898,001 | - | 898,001 | |||||||||
| PROPERTY AND EQUIPMENT, NET | 12,674,383 | - | 12,674,383 | |||||||||
| INTANGIBLE ASSETS, NET | 9,495,999 | - | 9,495,999 | |||||||||
| GOODWILL | 3,330,438 | - | 3,330,438 | |||||||||
| TOTAL ASSETS | $ | 34,479,340 | $ | - | $ | 34,479,340 | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
| CURRENT LIABILITIES | ||||||||||||
| Overdraft | $ | 359,017 | $ | - | $ | 359,017 | ||||||
| Accounts payable and customer deposits | 5,738,518 | - | 5,738,518 | |||||||||
| Deferred Revenue | 281,536 | - | 281,536 | |||||||||
| Accrued expenses and other payables | 4,149,966 | - | 4,149,966 | |||||||||
| 8% Convertible Note | 4,701,714 | - | 4,701,714 | |||||||||
| Loans payable | 961,525 | - | 961,525 | |||||||||
| Total current liabilities | 16,192,276 | - | 16,192,276 | |||||||||
| LONG TERM LIABILITIES | ||||||||||||
| 8% Convertible Note | 1,083,932 | - | 1,083,932 | |||||||||
| Conversion feature | 451,779 | - | 451,779 | |||||||||
| Non-current portion of deferred revenue | - | 356,386 | 356,386 | |||||||||
| Loan from joint venture partner | 567,100 | - | 567,100 | |||||||||
| Total long term liabilities | 2,102,811 | 356,386 | 2,459,197 | |||||||||
| Total liabilities | 18,295,087 | 356,386 | 18,651,473 | |||||||||
| STOCKHOLDERS' EQUITY | ||||||||||||
| Preferred Stock $0.00001 par value, 50,000,000 shares authorized, 0 issued and outstanding | - | - | - | |||||||||
| Common stock, no par value, 250,000,000 shares authorized, 113,369,656 issued and outstanding as of March 31, 2013 | 225,902,751 | - | 225,902,751 | |||||||||
| Accumulated other comprehensive income (loss) | (1,493,852 | ) | - | (1,493,852 | ) | |||||||
| Accumulated deficit | (208,398,230 | ) | (356,386 | ) | (208,754,616 | ) | ||||||
| Elephant Talk Communications, Corp. stockholders' equity | 16,010,669 | (356,386 | ) | 15,654,283 | ||||||||
| NON-CONTROLLING INTEREST | 173,584 | - | 173,584 | |||||||||
| Total stockholders' equity | 16,184,253 | (356,386 | ) | 15,827,867 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 34,479,340 | $ | - | $ | 34,479,340 | ||||||
| 60 |
| March 31, 2013 | ||||||||||||||||
| (unaudited) | Restatement adjustments | Re- classifications | Restated | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| REVENUES | $ | 6,596,500 | $ | (356,386 | ) | $ | - | $ | 6,240,114 | |||||||
| COST AND OPERATING EXPENSES | ||||||||||||||||
| Cost of service | 3,548,277 | - | 412,526 | 3,960,803 | ||||||||||||
| Product development | - | - | 1,349,623 | 1,349,623 | ||||||||||||
| Sales and marketing | - | - | 722,952 | 722,952 | ||||||||||||
| General and administrative | 5,907,974 | - | (2,485,101 | ) | 3,422,873 | |||||||||||
| Depreciation and amortization | 1,319,988 | - | - | 1,319,988 | ||||||||||||
| Total cost and operating expenses | 10,776,239 | - | - | 10,776,239 | ||||||||||||
| LOSS FROM OPERATIONS | (4,179,739 | ) | (356,386 | ) | - | (4,536,125 | ) | |||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Interest income | 33,721 | - | - | 33,721 | ||||||||||||
| Interest expense | (223,752 | ) | - | - | (223,752 | ) | ||||||||||
| Interest expense related to debt discount and conversion feature | (558,028 | ) | - | - | (558,028 | ) | ||||||||||
| Change in fair value of conversion feature | (139,792 | ) | - | - | (139,792 | ) | ||||||||||
| Amortization of deferred financing costs | (70,332 | ) | - | - | (70,332 | ) | ||||||||||
| Total other income (expense) | (958,183 | ) | - | - | (958,183 | ) | ||||||||||
| LOSS BEFORE PROVISION FOR INCOME TAXES | (5,137,922 | ) | (356,386 | ) | - | (5,494,308 | ) | |||||||||
| Provision for income taxes | - | - | - | - | ||||||||||||
| NET LOSS | (5,137,922 | ) | (356,386 | ) | - | (5,494,308 | ) | |||||||||
| OTHER COMPREHENSIVE (LOSS) INCOME | ||||||||||||||||
| Foreign currency translation gain (loss) | (761,762 | ) | - | - | (761,762 | ) | ||||||||||
| (761,762 | ) | - | - | (761,762 | ) | |||||||||||
| COMPREHENSIVE LOSS | $ | (5,899,684 | ) | (356,386 | ) | $ | - | $ | (6,256,070 | ) | ||||||
| Net loss per common share and equivalents - basic and diluted | $ | (0.05 | ) | - | $ | - | $ | (0.05 | ) | |||||||
| Weighted average shares outstanding during the period - basic and diluted | 112,748,951 | - | - | 112,748,951 | ||||||||||||
| 61 |
| For the three months | ||||||||||||
| ended March 31, 2013 | restatement | Restated | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net loss | $ | (5,137,922 | ) | $ | (356,386 | ) | $ | (5,494,308 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | - | - | ||||||||||
| Depreciation and amortization | 1,319,988 | - | 1,319,988 | |||||||||
| Provision for doubtful accounts | 5,620 | - | 5,620 | |||||||||
| Stock based compensation | 1,410,910 | - | 1,410,910 | |||||||||
| Change in the fair value of the converiosn feature | 139,792 | - | 139,792 | |||||||||
| Amortization of deferred financing cost | 70,332 | - | 70,332 | |||||||||
| Interest expense related to debt discount and conversion feature | 558,028 | - | 558,028 | |||||||||
| Changes in operating assets and liabilities: | - | |||||||||||
| Decrease (increase) in accounts receivable | 479,823 | - | 479,823 | |||||||||
| Decrease (increase) in prepaid expenses, deposits and other assets | (548,584 | ) | - | (548,584 | ) | |||||||
| Increase (decrease) in accounts payable, proceeds from related parties and customer deposits | 758,072 | - | 758,072 | |||||||||
| Increase (decrease) in deferred revenue | 38,735 | 356,386 | 395,121 | |||||||||
| Increase (decrease) in accrued expenses and other payables | 602,395 | - | 602,395 | |||||||||
| Net cash used in operating activities | (302,811 | ) | - | (302,811 | ) | |||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Purchases of property and equipment | (604,029 | ) | - | (604,029 | ) | |||||||
| Net cash used in investing activities | (604,029 | ) | - | (604,029 | ) | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Exercise of warrants & options | 13,797 | - | 13,797 | |||||||||
| Cash from Escrow account for principal and interest payments on 8% Convertible notes | 556,757 | - | 556,757 | |||||||||
| Cash used for principal repayments on 8% Convertible notes payment | (405,000 | ) | - | (405,000 | ) | |||||||
| Net cash provided by financing activities | 165,554 | - | 165,554 | |||||||||
| EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | 78,598 | - | 78,598 | |||||||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | (662,689 | ) | - | (662,689 | ) | |||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD | 1,233,268 | - | 1,233,268 | |||||||||
| CASH AND CASH EQUIVALENTS, END OF THE PERIOD | $ | 570,579 | $ | - | $ | 570,579 | ||||||
| 62 |
| (b) | The following exhibits are filed with this Report. |
| Number | Description | |
| 2.1 | Agreement and Plan of Merger between Elephant Talk Communication Corp. a Delaware corporation and Elephant Talk Communications, Inc., a California corporation (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement filed dated July 26, 2011). | |
| 3.1 | Certificate of Merger (incorporated by reference to Exhibit 3.2 to the Company’s current report on Form 8-K dated October 4, 2011). | |
| 3.2 | Certificate of Incorporation of Elephant Talk Communication Corp., a Delaware corporation. (incorporated by reference to Exhibit 3.2 to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2013). | |
| 3.3 | By-Laws (incorporated by reference to Appendix C of the Company’s Definitive Proxy Statement on Schedule 14A dated July 26, 2011). | |
| 4.1 | Form of Corbin Warrant, dated November 17, 2014 between Elephant Talk Communications Corp. and Corbin Mezzanine Fund I, L.P. (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K filed on November 21, 2014) | |
| 4.2 | Form of Conversion Letter Agreement, dated November 17, 2014 between Elephant Talk Communications Corp. and Saffelberg Investments NV. (incorporated by reference to Exhibit 4.2 to the Company’s current report on Form 8-K filed on November 21, 2014) | |
| 4.3 | Form of Warrant, dated November 17, 2014 between Elephant Talk Communications Corp. and Saffelberg Investments NV. (incorporated by reference to Exhibit 4.3 to the Company’s current report on Form 8-K filed on November 21, 2014) | |
| 10.1 | Amendments to Loan Agreements dated January 27, 2009, February 15, 2009, March 4, 2009, March 31, 2009, May 4, 2009, and May 27, 2009 by and between QAT II Investments S.A. and the Company, dated June 29, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated July 2, 2009). | |
| 10.2 | Amendment to Loan Agreements dated January 27, 2009, February 15, 2009, March 4, 2009, March 31, 2009, May 4, 2009, May 27, 2009, July 1, 2009 and July 8, 2009 by and between QAT II Investments S.A. and the Company, dated July 15, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated July 21, 2009). | |
| 10.3 | Sale and Purchase Agreement, dated March 17, 2010, by and among the Company and the stockholders of ValidSoft Limited other than Enterprise Ireland (incorporated by reference to Exhibit 2.1 to the Company’s current report on Form 8-K dated March 23, 2010). | |
| 10.4 | Sale and Purchase Agreement, dated March 17, 2010, by and the Company and Enterprise Ireland (incorporated by reference to Exhibit 2.2 to the Company’s current report on Form 8-K dated March 23, 2010). | |
| 10.5 | Securities Purchase Agreement by and among the Company and certain purchasers, dated March 29, 2012 (incorporated by reference to Exhibit 10.28 to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011). | |
| 10.6 | Form of Senior Secured Convertible Note issued to certain purchasers, dated March 29, 2012 (incorporated by reference to Exhibit 10.29 to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011). | |
| 10.7 | Security Agreement by and among the Company and its subsidiaries and certain purchasers, dated March 29, 2012 (incorporated by reference to Exhibit 10.30 to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011). | |
| 10.8 | Form of Escrow Agreement by and among the Company, certain purchasers and The Wells Fargo Bank, National Association, dated March 29, 2012 (incorporated by reference to Exhibit 10.31 to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011). |
| 10.9 | Subsidiary Guaranty by and among the Company and its subsidiaries and certain purchasers, dated March 29, 2012 (incorporated by reference to Exhibit 10.32 to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011). | |
| 10.10 | Registration Rights Agreement by and among the Company and certain purchasers, dated March 30, 2012 (incorporated by reference to Exhibit 10.33 to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011). | |
| 10.11 | Contract between Vodafone Enabler Espana, S.L. and Elephant Talk Europe Holding, B.V., dated November 1, 2013.( incorporated by reference to Exhibit 10.11 to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2013). | |
| 10.12 | Credit Agreement, dated as of November 17, 2014, by and among Elephant Talk Europe Holding B.V., as the Borrower, Elephant Talk Communications Corp., as the Parent and Guarantor, the other Subsidiaries of the Parent, from time to time party hereto as Guarantors, the Lenders from time to time party hereto and Atalaya Administrative LLC, as Administrative Agent and Collateral Agent. (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on November 21, 2014) | |
| 10.13 | Security Agreement, dated as of November 17, 2014, by and among Elephant Talk Europe Holding B.V., Elephant Talk Communications Corp., the other Grantors from time to time party hereto, and Atalaya Administrative LLC, as Collateral Agent. (incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed on November 21, 2014) | |
| 10.14 | Trademark Security Agreement, dated as of November 17, 2014, between Elephant Talk Europe Holding B.V. and Atalaya Administrative LLC. (incorporated by reference to Exhibit 10.3 to the Company’s current report on Form 8-K filed on November 21, 2014). | |
| 21.1 | Subsidiaries of the Registrant.( (incorporated by reference to Exhibit 21.1 to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2013). | |
| 23.1 | Consent public accounting firm. Squar, Milner, Peterson, Miranda & Williamson, LLP * | |
| 31.1 | Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(*) | |
| 31.2 | Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(*) | |
| 32.1 | Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*) | |
| 32.2 | Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*) | |
| 99.1 | Amendment No. 2 to the Amended and Restated Elephant Talk Communications Corp. 2008 Long-Term Incentive Compensation Plan .( incorporated by reference to Annex A to the Company’s definitive proxy statement on Schedule 14 A filed on August 11, 2014). |
| 101.INS | XBRL Instance Document.(*) | |
| 101.SCH | XBRL Taxonomy Extension Schema Document.(*) | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document.(*) | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document.(*) | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document.(*) | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document.(*) |
| * | Filed Herewith |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ELEPHANT TALK | |||
| COMMUNICATIONS CORP. | |||
| By: | /s/ Steven van der Velden | ||
| Name: | Steven van der Velden | ||
| Title: | President and Chief Executive Officer | ||
| (Principal Executive Officer) | |||
| Date: April 3, 2015 | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Person | Capacity | Date | ||
| Chairman of the Board and Director | April 3, 2015 | |||
| /s/ Steven van der Velden | (Principal Executive Officer) | |||
| Steven van der Velden | ||||
| Chief Financial Officer | April 3, 2015 | |||
| /s/ Mark Nije | (Principal Financial and Accounting Officer) | |||
| Mark Nije | ||||
| /s/ Geoffrey Leland | Director | April 3, 2015 | ||
| Geoffrey Leland | ||||
| Director | April 3, 2015 | |||
| Carl Stevens | ||||
| /s/ Yves van Sante | Director | April 3, 2015 | ||
| Yves van Sante | ||||
| /s/ Francisco Ros | Director | April 3, 2015 | ||
| Francisco Ros | ||||
| /s/ Jaime Bustillo | Director | April 2, 2015 | ||
| Jaime Bustillo |
