TMCnet News
ELEPHANT TALK COMMUNICATIONS CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements Any forward looking statements made herein are based on current expectations of the Company, involve a number of risks and uncertainties and should not be considered as guarantees of future performance. The factors that could cause actual results to differ materially include: interruptions or cancellation of existing contracts, inability to integrate acquisitions, impact of competitive products and pricing, product demand and market acceptance risks, the presence of competitors with greater financial resources than the Company, product development and commercialization risks, changes in governmental regulations, and changing economic conditions in developing countries and an inability to arrange additional debt or equity financing. Overview The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and notes thereto and the other financial information included elsewhere in this document. Our Business Elephant Talk Communications Corp. also referred to as "we", "us", "Elephant Talk" and "the Company" is an international provider of mobile networking software and services. Its mission is to provide a single service fully enabling and securing the mobile cloud. The Company has substantial investments of software development, infrastructure, deployment, licenses and connectivity in place, supporting its customers through a whole range of managed services. Elephant Talk empowers Mobile Network Operators (MNOs) and Mobile Virtual Network Operators (MVNOs) by providing a cloud based mobile communications infrastructure, operating software and managed services, based mostly on Company developed and owned software. We enable these Mobile Operators and Virtual Network Operators by offering a full suite of products, delivery platforms, support services, superior industry expertise and high quality customer service without substantial upfront investment for the customer. As a specialized outsourcing partner, we provide operating software, managed services, cloud and SaaS solutions and an integrated transaction and delivery platform to the mobile telecommunications industry globally. Our products include remote health care, credit card fraud prevention, mobile internet ID security, secure remote file access management, loyalty and transaction management services and a whole range of other emerging mobile services. Elephant Talk can count several of the world's leading Mobile Operators amongst their customers including Vodafone, T-Mobile and Zain, and most business efforts are focused on tier 1 operators worldwide. A number of more recent milestones include: · In 2011 the company closed a contract with Zain KSA in Saudi Arabia to provide its mobile platform which is now expected to start hosting subscribers in the fourth quarter 2012. · In November 2011 we executed a mass migration of SIMs on to our platform in Spain. This live migration - without having to replace the SIM cards - was believed to be a significant achievement and milestone for the Company. · In February 2012 we acquired out of liquidation proceedings the assets of Ensercom, a small MVNE in Germany giving us instant footprint in the German market. Earlier this year, the Company entered into mobile telecom contracts with a group of German MNVOs to provide mobile telecommunication services. In mid of September 2012, the Company was informed that due to an evaluation of internal procedures and practices within these German MVNOs, all these mobile telecom contracts signed between the group and all external providers had been temporarily placed on hold. As of the date of this quarterly report, there is no further update to be reported. ValidSoft - Fraud Prevention and Security Software Solutions ValidSoft Limited has been a wholly owned subsidiary of Elephant Talk since early 2010 and underpins our mobile/cloud security offering. ValidSoft is a thought and technology leader in providing solutions to counter electronic fraud relating to a variety of bank, card, internet and telephone channels. ValidSoft's solutions are used to verify the authenticity of both parties to a transaction (Mutual Authentication), the security of the relevant telecommunication channel used (Secure Communications), and the integrity of transactions itself (Transaction Verification) for the mass market, in a highly cost effective and secure manner while being very easy to use. ValidSoft's clients include leading worldwide service providers and institutions who benefit from a very substantial reduction in false positives, thereby freeing up resources to combat actual fraud, as well as a substantial elimination of the fraud itself, all in real time. 23 ValidSoft is currently the only security software company in the world that has been granted Privacy Seals from the European Community. Besides the two previously awarded European Privacy Seals, a third Seal was also recently awarded taking the number of privacy seals to three. The key operational highlights: · In September 2011 ValidSoft and Adeptra (www.adeptra.com), now part of the FICO Corporation, formed a partnership to provide financial organizations with best-in-class fraud detection and prevention functionality, as well as total control over their customer communications. · Following a pilot project at a long-standing Adeptra client, one of the ten largest international financial institutions implemented the SIM Swap solution and has been in live production for several months. The institution's adoption of the application is another step toward securing all transaction channels, using leading edge technology and communications to benefit its customers. · ValidSoft successfully concluded the live-trials for a Self-Certification project to an EU Government in the area of citizen benefit payments. The proposed solution is based on ValidSoft's own IP and specialised technology and incorporates ValidSoft's Speaker Verification Platform, VALid-SVP™ to provide automation in the processing of citizen benefits with a view to achieving cost reduction and efficiencies. We now await a decision to be taken by the EU Government in terms of next steps, including potential deployment and timing. · The Company launched VALid-SVP™ (Speaker Verification Platform), a voice biometric technology to improve secure authentication. · ValidSoft has filed applications for several new patents in the Card Not Present fraud prevention area and the high end security area. · ValidSoft successfully renewed the European Privacy Seal in regards to its anti-fraud technology software, VALid-POS®, which is designed to detect and prevent card related fraud, a global multibillion dollar problem for financial institutions. · ValidSoft was awarded its second European Privacy Seal for its VALid-4F™solution, an advanced security solution to provide multi-factor authentication, including voice biometrics. · ValisSoft was awarded its third European Privacy Seal for VALid-SIM, an advanced "context aware" solution to counter the growing problem of SIM Swap fraud. ValidSoft continues to be the only Security Software Company in the world to be certified to the EuroPriSe standards. The European Privacy Seal certifies IT products and IT-based services privacy compliance with European data protection regulations. Landline network outsourcing services In addition to the mobile based services, the Company also provides traditional landline services like Carrier Select and Carrier Pre-Select Services, Toll Free and Premium Rate Services to the business market.through our fixed line telecom infrastructure and our centrally operated and managed ET Boss and Infitel platform. Support technology Business Support and Operational Support System ("ET BOSS") and Intelligent Network - IN - ("Infitel") Through our European and Chinese development centers, we develop in-house telecom and media related systems and software, related to companies' proprietary platforms ET BOSS and IN Electronic fraud prevention products: VALid-POS®, VALid®, VALid-SVP™ and VALid-4F® Our subsidiary ValidSoft has given us ownership of technology and intellectual property to combat fraud relating to card, the internet, and telephone channels. ValidSoft solutions are marketed under VALid-POS®, VALid® and VALid-4F®. For its biometrics based product it trades under VALid-SVP™. 24 Telecom infrastructure & network We currently operate a switch-based telecom network with national licenses and direct fixed line interconnects with the Incumbents/National Telecom Operators in seven (7) European countries and one (1) in the Middle East (Bahrain). To this we have added mobile access coverage in order to cater for our mobile services and solutions. Our first mobile partners are T-Mobile in the Netherlands, Vodafone Enabler in Spain, KPN in Belgium and wholesale partner Telekom Deutschland in Germany. In Saudi Arabia we partnered with Zain KSA to provide our mobile platform services. Application of Critical Accounting Policies and Estimates Revenue Recognition and Deferred Revenue The Company's revenue recognition policies are in compliance with ASC 605, Revenue Recognition ("ASC 605") (formerly, Staff Accounting Bulletin (SAB) 104). Revenue is recognized only when the price is fixed or determinable, persuasive evidence of arrangement exists, the service is performed and the collectability of the resulting receivable is reasonably assured. The Company derives revenue from activities as a fixed-line and mobile services provider with its network and its own switching technology. Revenue represents amounts earned for telecommunication services provided to customers (net of value added tax and inter-company revenue). The Company recognizes revenue from prepaid calling cards as the services are provided. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue. Deferred revenue represents amounts received from the customers against future sales of services since the Company recognizes revenue upon performing theservices. Stock-based Compensation Effective January 1, 2006, we adopted the provisions of ASC 718 "Compensation-Stock Compensation", using the prospective approach. As a result, we recognize stock-based compensation expense for only those awards that are granted subsequent to December 31, 2005 and any previously existing awards that are subject to variable accounting, including certain stock options that were exercised with notes in 2003, until the awards are exercised, forfeited, or contractually expire in accordance with the prospective method and the transition rules of ASC 718. Under ASC 718, stock-based awards granted after December 31, 2005, are recorded at fair value as of the grant date and recognized as expense over the employee's requisite service period (the vesting period, generally three years), which we have elected to amortize on a straight-line basis. Business Combinations We use the purchase method of accounting for business combinations and the results of the acquired businesses are included in the income statement from the date of acquisition. The purchase price includes the direct costs of the acquisition. However, beginning in fiscal 2009, acquisition-related costs will be expensed as incurred, in accordance with ASC 805 "Business Combinations" amounts allocated to intangible assets are amortized over their estimated useful lives; no amounts are allocated to in-progress research and development. Goodwill represents the excess of consideration paid over the net identifiable business assets acquired. Intangible Assets and Impairment of long Lived Assets In accordance with ASC 350, intangible assets are carried at cost less accumulated amortization and impairment charges. Intangible assets are amortized on a straight-line basis over the expected useful lives of the assets, between three and ten years. Other intangible assets are reviewed for impairment in accordance with ASC 360, "Property and Equipment", annually, or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Measurement of any impairment loss for long-lived assets and identifiable intangible assets that management expects to hold and use is based on the amount of the carrying value that exceeds the fair value of the asset. Goodwill Impairment On September 15, 2011, the FASB issued ASU 2011-08, Intangibles - Goodwill and Other, which simplifies how an entity is required to test goodwill for impairment. This ASU would allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under the ASU, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The ASU includes a number of factors to consider in conducting the qualitative assessment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this accounting standard in 2011 had no material impact on the Company's financial statements. 25 Results of Operations Our results of operations for the nine months ended September 30, 2012, consisted of the operations of Elephant Talk Communications Corp., its wholly-owned subsidiaries, Elephant Talk Limited and its subsidiaries, Elephant Talk Europe Holding BV and its subsidiaries, and ValidSoft Ltd and its subsidiaries. Although the vast majority of our business activities are carried out in Euros, we report our financial statements in US dollars ("USD"). The conversion of Euros and USD leads to period-to-period fluctuations in our reported USD results arising from changes in the exchange rate between the USD and the Euro. Generally, when the USD strengthens relative to the Euro, it has an unfavorable impact on our reported revenue and income and a favorable impact on our reported expenses. Conversely, when the USD weakens relative to the Euro, it produces a favorable impact on our reported revenue and income, and an unfavorable impact on our reported expenses. The above fluctuations in the USD/Euro exchange rate therefore result in currency translation effects (not to be confused with real currency exchange effects), which impact our reported USD results and may make it difficult to determine actual increases and decreases in our revenue and expenses which are attributable to our actual operating activities. In addition to reporting changes in our financial statements in USD as per the requirements of United States generally accepted accounting principles ("US GAAP"), we also highlight the impact of any material currency translation effect by providing a comparison between periods on a constant currency basis, where the most recent USD/Euro exchange rate is applied to previous periods. Management believes that this allows for greater insight into the trends and changes in our business for the reported periods. Also, since we carry out our business activities primarily in Euro's we do not currently engage in hedging activities. The constant currency analysis presented within the comparison of the nine month year-to-year results is calculated by using the average exchange rates over the nine months ended September 30, 2012. The same exchange rates are used in the income statement of the nine months ended September 30, 2012. The following table shows the USD equivalent of the major currencies for the nine months ended September 30, 2012: US Dollars equivalent Euro $ 1.2812 British Pound $ 1.5775 Adjusted EBITDA In order to provide investors additional information regarding our financial results, we are disclosing Adjusted EBITDA, a non-GAAP financial measure. We employ Adjusted EBITDA, defined as earnings before derivative accounting, such as warrant liabilities and conversion feature expensing, income taxes, depreciation and amortization and stock-based compensation, for several purposes, including as a measure of our operating performance. We use Adjusted EBITDA because it removes the impact of items not directly resulting from our core operations, thus allowing us to better assess whether the elements of our growth strategy are yielding the desired results. Accordingly, we believe that Adjusted EBITDA provides useful information for investors and others, which allows them to better understand and evaluate our operating results. A reconciliation of Adjusted EBITDA to net loss, the most directly comparable measure under U.S. GAAP, for each of the fiscal periods indicated, is as follows: Nine months ended September 30, 2011 in constant EBITDA Adjusted 2012 2011 currency Net loss $ (16,470,763 ) (18,705,754 ) (17,812,705 ) Provision for income taxes 192,175 800 800 Depreciation and amortization 3,766,494 3,993,900 3,663,684 Stock-based compensation 4,940,131 5,600,283 5,523,024 Other income & expenses (454,145 ) (408,377 ) (408,377 ) Equity in earnings of unconsolidated joint venture 356,667 - - Adjusted EBITDA $ (7,669,441 ) (9,519,148 ) (9,033,574 ) 26 Three months ended September 30, 2011 in constant EBITDA Adjusted 2012 2011 currency Net loss $ (5,474,665 ) $ (7,271,107 ) $ (6,857,514 ) Provision for income taxes 94,887 - - Depreciation and amortization 1,263,137 1,353,450 1,205,060 Non-cash compensation 1,709,403 2,432,317 2,397,897 Other income & expenses 117,012 (39,521 ) (36,528 ) Equity in earnings of unconsolidated joint venture 164,252 - - Adjusted EBITDA $ (2,125,974 ) $ (3,524,861 ) $ (3,291,085 ) Comparison of Three and Nine months ended September 30, 2012 and September 30, 2011 As our business is primarily Euro-based, the effects of the devaluation of the Euro against the US Dollar have been substantial on the 2012 financials we report. For purposes of comparison and clarification we have added 'constant currency' calculations below in order to remove the reporting currency effects from the revenues and results derived in the functional currencies. Explanations for fluctuations or trends in our revenues and cost are provided principally in the 'constant currency' sections. Revenue Revenue for the three months ended September 30, 2012 was $6,699,381, a decrease of $1,097,555 or 14.1%, compared to $7,796,936 for the three months ending September 30, 2011. The landline services revenue for the three months ended September 30, 2012 and 2011 was $3,763,140 and $6,388,824, respectively, a decrease of $2,625,684. The decrease was due to two factors. The first is a decision earlier this year by a landline client to discontinue their business with us. The second is the overall global trend of communication moving away from landline towards mobile and wireless. The mobile and security solutions revenue for the three months ended September 30, 2012 was $2,936,241, an increase of $1,528,129 from $1,408,112 for the same period 2011. The increase was mainly due to increased subscriber base hosted on our platforms. Revenue for the nine months ended September 30, 2012 was $22,365,318, a decrease of $1,730,608 or 7.2%, compared to $24,095,926 for the nine months ended September 30, 2011. This decrease of $1,730,608 was the result of an unfavorable impact of the currency translation effect of $2,130,756 arising from a lower US Dollar/Euro exchange rate. Nine months ended September 30, 2012 2011 Revenues $ 22,365,318 $ 24,095,926 Cost of service 16,677,853 22,048,689 5,687,465 2,047,237 27 Mobile and security revenue increased as a percentage of total Company revenue to 43.8% in the third quarter of 2012 from 18.1% in the prior year period. Nine months ended September 30, Constant currency Variance 2012 versus Revenue 2012 2011 2011 2011 Landline Services $ 14,217,650 $ 20,227,712 $ 18,440,459 $ (4,222,809 ) Mobile & Security Solutions 8,147,668 3,868,214 3,524,710 4,622,958 Total Revenue $ 22,365,318 $ 24,095,926 $ 21,965,169 $ 400,149 Revenue - constant currency In constant currency, the revenue for the three months ended September 30, 2012 decreased by $172,721 or 2.5% compared to the same period 2011. In constant currency, the revenue for the nine months ended September 30, 2012 increased by $400,149 or 1.8% compared to the same period 2011. The increase in revenue for the nine months ended September 30, 2012 was led by an increase of $4,622,958 (or 131.2%) in our revenues in the higher margin mobile and security solutions business following the increased subscriber base hosted on our platforms. The mobile revenue increase was however largely off-set by the expected continued decrease in our lower margin legacy landline business by $4,222,809 (or 22.9%). Cost of service Cost of service for the three months ended September 30, 2012 was $4,603,588, a decrease of $2,392,937 or 34.2%, compared to $6,996,525 for the three months ending September 30, 2011. Cost of service for the nine months ended September 30, 2012 was $16,677,853, a decrease of $5,370,836 or 24.4%, compared to $22,048,689 for the nine months ended September 30, 2011. This decrease is related to the decline in landline revenue. Cost of service as a percentage of the total revenue was 74.6% and 91.5% for the nine months ended September 30, 2012 and 2011, respectively. Cost of service includes origination, termination, network and billing charges from telecommunications operators, out payment costs to content and information providers, network costs, data center costs, facility cost of hosting network and equipment and cost in providing resale arrangements with long distance service providers, cost of leasing transmission facilities, international gateway switches for voice, and data transmission services. Management expects cost of service to decline further as a percentage of revenue as a greater proportion of future revenue is comprised of our mobile services and security solutions, which have a substantially lower cost of service than our traditional landline business. Cost of service- constant currency In constant currency, the cost of service for the three months ended September 30, 2012 decreased by $1,584,034 or 25.6% compared to the same period in 2011. In constant currency, the cost of service for the nine months ended September 30, 2012 decreased by $3,422,919 or 17.0% compared to the same period in 2011. The decrease was primarily as a result of lower levels of revenue in our landline business and the lower cost of service associated with our mobileand security solutions business. Selling, general and administrative expenses Selling, general and administrative ("SG&A") expense for the three months ended September 30, 2012 and 2011 were $4,221,767 and $4,325,272, respectively, a decreased $103,505 (or 2.4%). Selling, general and administrative expense for the nine months ended September 30, 2012 and 2011, were $13,356,906 and $11,566,385, respectively. SG&A expenses increased by $1,790,521 (or 15.5%) in the first nine months 2012 compared to the same period 2011. Selling, general and administrative expenses - constant currency In constant currency, SG&A for the three months ended September 30, 2012 increased by $246,202 (or 6.2%), compared to the same period in 2011 due to higher staffing levels. In constant currency, SG&A for the nine months ended September 30, 2012 increased by $2,458,935 (or 22.6%), compared to the same period in 2011. Higher year-over-year SG&A for expenses in the nine months September 30, 2012 were mainly the result of an 18.6% year-over-year increase in staffing levels, largely European MNO operational support and commercial support staff, as well as higher investor relations and sales, marketing & communication related staffing and expenses. 28 Non-cash compensation to officers, directors, consultants and employees Non-cash compensation for the three months ended September 30, 2012 was $1,709,403, a decrease of $722,914 or 29.7%, compared to $2,432,317 for the three months ended September 30, 2011. Non-cash compensation for the nine months ended September 30, 2012 and 2011 was $4,940,131 and $5,600,283, respectively. The decrease in the nine months ended September 2012 was of $660,152 (or 11.8%) compared to the same period 2011. The decreases are caused by a number of factors such as lower non-cash compensation for board and management, board and management composition and reduced contractual terms of options granted under the company incentive scheme resulting in a lower fair market value of the options granted Non-cash compensation is comprised of: • the stock options expenses related to the companywide 2008 Long-Term Incentive Compensation Plan; • expenses related to shares of common stock that were issued to directors and officers in lieu of cash compensation. Depreciation and amortization Depreciation and amortization expenses for the three months ended September 30, 2012 was $1,263,137, a decrease of $90,313 (or 6.7%), compared to $1,353,450 for the three months ended September 30, 2011. Depreciation and amortization for the nine months ended September 30, 2012 and 2011, was $3,766,494 and $3,993,900 respectively. Depreciation and amortization expenses decreased by $227,406 (or 5.7%) in the first nine months 2012 compared to the same period 2011. Depreciation and amortization - constant currency In constant currency, the depreciation and amortization expenses for the three months ended September 30, 2012 decreased by $58,077 (or 4.8%) compared to the same period in 2011. In constant currency, the depreciation and amortization expenses for the nine months ended September 30, 2012 decreased by $102,810 (or 2.8%) compared to the same period in 2011. The decreases are caused by reduced amortization expenses following certain intangible assets being fully amortized. Intangible assets impairment charge The September 30, 2012 consolidated balance sheet includes: $11.0 million of intangible assets, net, and $3.1 million of goodwill. Management updated its analysis of intangible assets and long-lived assets as of September 30, 2012 and we determined that for the first nine months 2012 no asset impairment charges are necessary. We have acquired several companies in the last few years and our current business strategy includes continuing to make additional acquisitions in the future. These acquisitions may continue to give rise to goodwill and other intangible assets which will need to be assessed for impairment from time to time. Other Income and Expenses Interest income for the three months ended September 30, 2012 was ($85,364), consisting of $53,935 interest income for the period and an adjustment of ($139,299) related to previously reported periods. Interest income for the three months ended September 30, 2011 was $74,988. The adjustment follows an overstatement of both interest income ($139,299) as well as interest expense in prior periods in 2012 resulting from certain intercompany interest charges that were not eliminated. A similar adjustment (in opposite direction) was made in interest expense ($139,288) for the three months ended September 2012. Interest income was $194,554 and $122,119 for the nine months ended September 30, 2012 and 2011. Interest income was interest received on bank balances and interest on loans provided to related and third parties. Interest expense, amortization of debt discount and financing cost for the three months ended September 30, 2012 and 2011 were $649,251 and $35,467, respectively. The amount of $35,467 for the three months ended September 30, 2011 is entirely related to interest expenses, whereas the amount of $649,251 for the three months ended September 30, 2012 is composed of interest expenses in the amount of $104,477, interest expenses related to debt discount in the amount of $359,842 and of the amortization of deferred financing costs in the amount of $184,932. Interest expense, amortization of debt discount and financing cost for the nine months ended September 30, 2012 and 2011were $1,588,098 and $173,742, respectively. The $173,742 for the nine months ended September 30, 2011 is entirely related to interest expenses, whereas the amount of $1,588,098 for the nine months ended September 30, 2012 is composed of interest expenses in the amount of $555,723, interest expenses related to debt discount in the amount of $697,112 and of the amortization of deferred financing costs in the amount of $335,263. Interest expenses for the three and nine months ended September 30, 2012 include the interest expenses on the 8% convertible note of $168,867 and 344,092, respectively. 29 Other income was $0 and $460,000 for the nine months ended September 30, 2012 and 2011 respectively. The other income for 2011 was related to the release of an accrual for a tax provision, following a successful abatement. Change in fair value conversion feature In the three and nine months ended September 30, 2012, the income related to the fair value changes of the conversion feature of the convertible notes was $617,603 and $1,847,689, respectively, compared to $0 in the first three and nine months 2011. Equity in earnings of unconsolidated joint venture In the three and nine months ended September 30, 2012, the Company incurred expenses of $164,252 and $356,667, respectively, as a result of the Company's equity share in the losses of its financial investment in a joint venture. Provision for Income Taxes Provision for income taxes for the three and nine months ended September 30, 2012 was $94,887 and $192,175, respectively. In the ordinary course of the Company's business there are transactions where the ultimate income tax determination is uncertain, the Company believes that is has adequately provided for income tax issues not yet resolved with federal, state, local and foreign tax authorities. In the event that actual results differ from these estimates or we adjust these estimates in future periods, an additional charge to expense would result. Net Loss Net loss for the three months ended September 30, 2012 was $5,474,665, a decrease of $1,796,442 (or 24.7%), compared to $7,271,107 for the three months ending September 30, 2011. Net Loss was $16,470,763, a decrease of $2,234,991 (or 11.9%) compared to $18,705,754 for the nine months ended September 30, 2012 and 2011. The decreases in loss of $1,796,442 for the three months ended September 30, 2012 and $2,234,991 for the nine months ended September 30, 2012 were led by the decrease in the loss from operations by $2,212,114 and $2,737,265 for the three and nine months ended September 30, 2012. Loss from operations reduced because of increased revenues from our higher margin mobile and security business combined with a reduced non-cash compensation expenses. Both the provision for income taxes of $94,887 and $192,175 for the three and nine months ended September 30, 2012 and the equity in earnings of unconsolidated joint venture for the three and nine months ended September 30, 2012 of ($164,252) and ($356,667), respectively, had an adverse impact on the net loss. The change in income/(expense) of ($156,533) for the three months ended September 30, 2012 had a negative impact on the net loss of the third quarter 2012, while the increase of $45,768 in other income for nine months ended September 30, 2012 had a positive effect on the net loss for the nine months ended September 30, 2012. The decrease in loss from operations was primarily driven by the increase of our Mobile & Security business. Other Comprehensive Income (Loss) We record foreign currency translation gains and losses as other comprehensive income or loss. Other comprehensive Income (Loss) for the nine months ended September 30, 2012 and 2011 was ($315,226) and $931,961, respectively. This change is primarily attributable to the translation effect resulting from the substantial fluctuations in the US Dollars/Euro exchange rates. Liquidity and Capital Resources We have an accumulated deficit of $196,599,134 as of September 30, 2012. Historically, we have relied on a combination of debt and equity financings to fund our ongoing cash requirements. The Company's operations have not yet resulted in positive cash flow and accordingly, management may need to raise additional financing. In the third quarter we had an operational cash burn rate of between $900,000 and $600,000 per month, excluding working capital changes. We estimate our short term cash requirements including working capital requirements, losses and capital expenditures to be on average approximately $1,000,000 per month which we intend to cover using cash on hand of $4,344,438 at September 30, 2012, substantial additional revenues and margins and a commitment of up to $2 million from QAT Investments SA, an affiliate of the Company. We intend to monitor and reduce where necessary cash outflow by delaying capital expenditures and carefully use our resources and protect our strategic assets in order to strengthen our position in the mobile and security services industry. Lastly, our first twelve months convertible loan repayment obligations will be covered through the first quarter of 2013 using the restricted cash balance of $1,308,946 as described in Note 2 to these financial statements. 30 The Company anticipates that they may need additional financing to continue our operations for the longer term. Although we have previously been able to raise capital as needed, including our recent private placement of certain senior secured convertible notes in the principal amount of $8,800,000, such capital may not continue to be available to us at all, or if available, on reasonable terms as required. Further, the terms of such financing may be dilutive to our existing stockholders or otherwise on terms not favorable to us or our existing stockholders. If we are unable to secure additional capital, as circumstances require, or do not succeed in meeting our sales objectives we may be required to change or delay our operations. Operating activities Net cash used in operating activities for the nine months ended September 30, 2012 was $3,667,253 compared to $11,299,140 in the same period 2011, a decrease of $7,631,887. This decrease is primarily attributable to improvements in working capital due to tighter cash management and cost control, as well asto the lower net loss. Investment activities Net cash used in investment activities for the nine months ended September 30, 2012 was $5,051,228 a decrease of $1,498,477, (or 22.9%) compared to $6,549,705 in the same period 2011. The decrease was attributable to a lower level of purchases of property and equipment by $4,342,480, which was partly offset by the increase in loans to the third party Morodo Ltd. by $138,591, change in restricted cash by $1,597,205, as well as by loans to joint venture partner Modale B.V. (previously known as Elephant Security I B.V.) of $107,618 and by the loan to the related party Elephant Security B.V. of $1,000,589. Financing activities Net cash received by financing activities for the nine months ended September 30, 2012 was $7,381,675 compared to $24,966,433 for the nine months ended September 30, 2011. In the first nine months of 2012 we received a total of $8,000,000 in gross proceeds from the 8% convertible note and $969,714 from the exercise of warrants and options. After the deduction of deferred financing costs and expenses attributable to share issuances of ($623,081) the net proceeds from financing activities amounted to $8,346,633. In the first nine months of 2012 $964,958 was paid for installment payments and interest related the 8% convertible note. As a result of the above activities, the Company had the cash and cash equivalents balance of $4,344,438 as of September 30, 2012, a net decrease in cash and cash equivalents of $1,665,138 since December 31, 2011. Off- Balance Sheet Arrangements The Company did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. |